Harish Mandyam has a good question from yesterday’s post on competition and out of pocket limits:
I read this article in Washington Monthly:
The article implies that private insurance companies are extremely bad at negotiating provider prices. But, that seems odd to me. Aren’t insurance companies supposed to have the expertise and bargaining power to negotiate on price?
And… if this is true, then it shouldn’t apply to HMOs (who have the providers in-house)? But, when I look at exchange prices, I don’t see that much different between Kaiser-style HMOs and regular insurance plans (I might be incorrect on this).
Insurers only have as much power to negotiate as they have the power to say no and walk away. Insurers get good rates in Medicare Advantage because federal regulations put a price cap of out of network rates for Medicare beneficiaries at ~110% to 115% normal fee schedule so providers can either sign and get paid reasonably quickly at close to 100% Medicare OR not sign and chase people for 110%-115% Medicare.
In the commercial group market, there are two sets of considerations that influence leverage. The first is whether or not there are enough locally available options. If there are seventy three primary care physician practices in a city, and the insurer can build a network that will be readily sellable to HR reps who face both budget and scream constraints with only forty practices, the insurer will get a pretty decent rate. However if there is one hospital chain in the target county and no competing hospital system within thirty miles, the hospital is going to get paid. The second major factor is how much is the insurer willing to go narrow and invite a lot of employee screaming to save a couple of dollars per member per month? Insurers that have a small, local footprint might be able to credibly walk away from expensive deals that insurers which want a national footprint have to take.
Now moving onto the HMO point, lets make a big assumption first: Premiums are fundamentally tied to the amount of money flowing out of the insurer (or insurer side of the corporate parent) and thus they reflect what the risk bearing entity pays.
Kaiser and other integrated delivery networks (IDN) like my former employer, UPMC Health Plan, have some medical costs that have no plausibly good reason to vary because of the IDN’ness of a system such as the cost, net of rebates, of specialty drugs. At the same time, they have costs that could plausibly vary as they employ a lot of doctors, nurses, pharmacists and every other type of medical professional. Perhaps an IDN is able to squeeze clinical expenses by paying their staff a lot less? But if they squeeze too tightly, the clinical staff can readily quit and get hired relatively quickly by entities that contract with insurer that are not IDNs. These non-IDN clinical services firms are setting their rates based on what they can get from other insurers who are negotiating on leverage and power. IDN labor costs are linked to the next best alternative that their critical staff possess, and that next best alternative to working at an IDN/HMO is working at a clinical firm that gets paid by external non-risk bearing entities.
An IDN can play transfer pricing games to manipulate MLR and move money from one floor of the office tower to another but as long as we believe that premiums are fundamentally linked to the cost of medical care, and that the cost of medical care is fundamentally linked to what the next best alternative available to all the resources and people involved in care provision, an IDN is only going to have a big, sustained pricing advantage if they have a much better way of delivering care or a willingness to forego some profitability.
JaneE
I have been with Kaiser for over 40 years. Since 2000, we have been paying our premiums through the retiree medical benefit program offered by my husband’s last employer. Originally there were more than two options (the same insurers as the current employees get, but the policies are Medicare coordinated group policies, not individual private policies). For the last decade or more, there have been two options, one Kaiser Senior Advantage and one PPO policy. This year we did not get a packet with multiple choices, but for the last 3 or 4 years the PPO policy premium was not quite triple the Kaiser premium. We have to live in a Kaiser area for coverage, but the one time we needed an emergency room out of area, the provider said they never had a problem with Kaiser covering anything, and we only had to pay our normal co-pay.
I don’t know what the regular individual policy rates would be – we were told they might be lower, but the co-pays are higher. It takes a lot of co-pays to make up a $500/month difference in premiums between Kaiser and the PPO.
Ruckus
I wonder about the doctor costs. Kaiser has a medical school now. Not sure if it’s open yet but it was only 3 or 4 blocks from where I lived a year ago and was in the mid construction phase at the time. I wonder about the costs for someone to attend and if there is a cost reduction for someone going there who becomes a doc and works at Kaiser for some period of time. Would be a good way to insure they have a supply of docs at a better price as well as increasing the number of docs by having an additional school.
Ruckus
@JaneE:
I pay copays at the VA because of income level. Yes I’m still working at going on 71 yrs old. One year my copay was $4100. Now that was a very unusual yr as my normal year is about $1000-1200. But that is at VA copay rates which are very reasonable and consistent across the board. I would expect that the reason the PPO option is no longer available to you is your ages because we use the system more as we get older and the PPO system would, on average cost you a lot more.
profdamatu
This is interesting context in which to think about the situation in my area. We don’t have Kaiser or any other IDN, but I feel like Sentara is getting close to that – they own the hospital and many of the clinic-type facilities in my town and a couple of others in the area, and they also own Optima health insurance. It’s not quite the same thing, as Optima pretty much has to cover providers outside of the Sentara group (there are specialties that Sentara doesn’t have), but whenever I have something done at the local hospital, for instance, it’s just “money going from one floor to another,” as you put it. :-)
I wonder if perhaps the shift towards multiple networks with Optima are a move to shift to an IDN or something more similar to it – the more expensive network is the one that has more non-Sentara providers (namely the ones at the UVA medical center). And as to the effects on bargaining and cost….food for thought.
Zelma
Dave, I wonder what you think about UPMC? My son-in-law is a doctor (surgeon) at Shadyside. And my granddaughter is a resident at Pitt. Both are increasingly unhappy with the quality of care that is provided. There’s a sense that as UPMC was moving into the IDN model, there was a desire to insure that care was competitive with any place else. But now that their IDN is going strong, there is greater motivation to squeeze on the care side to increase the profit on the insurance side.
As far as I’m concerned, UPMC is the monster that swallowed health care in Pittsburgh and it hasn’t been pretty.
Harish Mandyam
Thanks for the analysis, David. I’m taking away a few things here:
This indicates a complete market failure with regard to health care pricing for providers. If we were to regulate health care pricing across the board, that might work to cut health care costs generally. You say that Medicare limits out-of-network to 115%, and the plan in the linked article limits to twice Medicare rates, so something along those lines might be a partial solution to health insurance issues.
Do you know if any states regulate private provider pricing across the board in this manner? It might be something useful to put on a ballot proposition in California or something similar.
This doesn’t solve the under-insurance or lack of insurance problems that M4A would solve, but it could work as a stop gap to push insurance rates down generally. What are your thoughts? Thanks.