The US healthcare finance system pays a lot per unit of service. More accurately, the private employer sponsored insurance side of the market pays a wicked lot per unit of service. Medicare and Medicaid pay hospitals and clinicians rates that are within the realm of reasonable when compared to other rich industrial and post-industrial countries. Why is this the case?
In a new paper in the American Journal of Managed Care, Eisenberg et al look at employer group concentration to assess if there is enough local mass to force the negotiation to be in the favor of the local employers.
Results: Large self-insured employers had concentrated market power in very few MSAs in 2016. The mean value of our employer market power measure was 62 for 2016, compared with the mean value of 5410 for hospital market power in the United States. Regression analyses find a slight relationship: A 1-point increase in employer market power was associated with a $6.61 decrease in the hospitalization price (mean = $20,813), but this result becomes statistically insignificant once the models control for hospital wages.
Hospitals have leverage. That leverage is used to get higher prices from disjointed groups.
We need to get a little bit deeper into the institutional details to really understand this paper. There are two basic types of health insurance. We think of “fully insured” products as common. This is the situation where the covered entity pays a monthly premium and the insurer takes on the risk of something bad happening. This is how the ACA individual market works. This is how Medicare Advantage works. This is how some small and rarely large employer group market health insurance works. This is how my auto-insurance works as well as my home-owners’ policy. The insurer gets all the downside of bad luck and high costs and all the upside of good luck and low costs. Insurers in a fully insured system have an incentive to cherry pick as well as drive down claims costs through either health improvement activities or getting really good pricing.
The other type of insurance is “self-insured” where the insurance company has an “Administrative Services Only” (ASO) contract with a large employer group like a university or a bank or a manufacturer. The insurer runs the front-end by setting up networks and negotiating payment rates and claim payment rules. However the insurer takes on no risk. The large employer group writes a big check to the insurer every month to pay for the actual claims that are incurred. If claims come in below expectations, the employer pockets the difference. If claims come in high, the employer is paying.
ASO contracts have the employer groups bear all the risk. Employer groups have a “scream minimization” principal-agent problem between HR trying to get a good price and also trying to minimize on a local power weighed basis the number of powerful people screaming at them because their cardiologist, chiropractor or primary care physician is out of network. Employer groups benefit when insurers are able to leverage rates downwards but insurers don’t get as strong of a benefit when they share lower payment levels with ASO contracts. Employer groups, except in the rarest of situations don’t have the mass to credibly negoatiate directly with hospitals and doctors to get better rates. Some large union groups may have the mass to do so (SEIU 32BJ in NYC does this to great success) but most single employers are too fragmented to have power. Other research has found that insurers get lower prices for their fully-insured lines of business than their ASO lines of business.
So what can be done?
Consolidation of employers is a bad thing! I also think that direct price regulation is extremely unlikely.
We can either start redesigning ASO contracts so that insurers get some of the upside of driving down prices as they can credibly bundles hundreds of employers into a group. We could find ways to make large employer groups bundle together with other large employers to get better pricing. We could also expect that some groups may adapt ICHRA (Individual Contribution Health Reimbursement Accounts) where they give employees a defined contribution and tell them to go shop on the fully-insured ACA exchanges. But we should not expect fragmented, non-expert power to win against concentrated expertise all that often.
Belafon
Mass is energy. Mass per unit time is power.
Joe Falco
I wonder how that would look. Is it more likely for large employers in a given area or region to bundle together? Would it better work for employers of the same industry or similar to bundle together?
Spanky
@Belafon: God, yes! I (a physicist more or less) screeched at the screen when I read that. Everyone should know that power is work over elapsed time.
But mass times velocity is momentum, so we’ve got that rolling for us
ETA: You should expect this sort of thing from this band by now, David.
Another Scott
@Spanky: Anger is an Energy, also too.
Cheers,
Scott.
Villago Delenda Est
What is the solution? Remove the profit motive from every aspect of health care.
Barbara
@Villago Delenda Est: Right. Physicians should be volunteers only.
L85NJGT
I think you greatly over-estimate the degree to which corporate decision makers grasp the choices and trade-offs.
Villago Delenda Est
@Barbara:
Simplistic interpretation of my comment. Defend the greed of the parasite middlemen.
Feathers
@Barbara: People still get paid, and paid handsomely, at non-profits. The difference is that there is not the motivation to steal everything not nailed down in order to create huge piles of FU money for investors.
gene108
David, if we successfully reduce healthcare spending, what impact will it have on the ability of healthcare providers to provide services?
Even with all the money we pay in healthcare costs, hospitals still go under because they do not seem to be able to support themselves on Medicare and Medicaid level payments.
Pete Mack
There’s another fascinating example–
A few years back, the GoodRX app appeared on smartphones. It acts–or acted–as a buying club for the uninsured and catastrophic plan membera when buying medicine. The effective list price drop by 2/3 for those who used the app. There was some rigamarole, but it saved huge amounts of money. A few years later the app has broken the list cost of generic medicine: pharmacies charge tue goodRX price as a matter of course–chronic drugs that cost $75/month now often list at $25–essentially the cost of a copay.
Kent
Isn’t there a 3rd model for insurance represented by HMOs like Kaiser Permanente? Where the insurance company and the hospital are essentially the same organization?
Anonymous At Work
So, essentially, either we let Walmazon complete its merger and then gobble up all small businesses in order to gain the necessary leverage over hospitals, or we use the pre-existing connection of all American employees…the government…to use its leverage. I don’t think the current Supreme Court would validate government regulations of private businesses in terms of hospital-ASO contracts. They wouldn’t use “substantive due process” as a phrase but would resurrect the logic.
lowtechcyclist
Move the qualifying age for Medicare down to 60 or 55. Then in a few years, move it down some more. Lather, rinse, repeat until only those people who really really want private insurance aren’t on Medicare.
TomatoQueen
And a fourth model, Federal Employees Health Benefits, which was insane 20 years ago and is slightly less crazy now, owing to the unexpected ACA side effects, but it is not a bargain at all. Congress is not eligible for FEHB and must buy on ACA, and oh my there’s a portion of them who have screeming meemies about this, and a portion who grin and bear it, especially those with kids approaching age 26 who also have Type 1 Diabetes (the price of insulin is sickening).
Too damn many models, too much fiddling, give me the freaking universal coverage. FFS.
Barbara
@Villago Delenda Est: Nope. It’s your comment that reduces a problem to a slogan that yields zero forward progress. It’s not intermediaries per se that are the problem, it’s intermediaries that are trustworthy and disinterested.
Kent
Medicare is actually a really good model. Those who want straight single payer can get the regular Medicare. Those who want to buy some sort of private insurance can go through Medicare Advantage and select whatever private plan they want.
Roger Moore
@Another Scott:
I’m pretty sure anger can be power. At least that’s what Joe Strummer said.
Roger Moore
@gene108:
We aren’t going to be able to reduce healthcare costs very much without eventually cutting into the earnings of practitioners. That’s where the real fight is going to be. IMO, the big thing is to move toward MDs being employees on a salary rather than independent contractors who earn depending on how many patients they treat.
Roger Moore
@lowtechcyclist:
There are problems with expanding Medicare, which is one of the reasons actually knowledgeable people have objected to talking about single payer as “Medicare For All”. The biggest one is that Medicare is really designed around the needs of older people, which means it winds up leaving out a lot of services that younger people need, e.g. reproductive services. Extending Medicare to younger populations is going to require us to completely revamp it as we go.
germy
Lindsey Graham drooling over the situation in Cuba:
germy
Psaki is great, as usual.
lowtechcyclist
@Roger Moore:
Sure, some services that old folks don’t need would have to be added to the menu. But it’s hard to see that as a big problem, given that younger people have, on average, way fewer health problems, and are way cheaper to cover.
Kent
@lowtechcyclist: Agreed. The biggest fundamental difference between Medicare and all the other proposals is that your health insurance would be paid for by tax dollars. Everyone would automatically be enrolled. I expect they would keep open private sector options like Medicare Advantage so you could go out and buy private insurance. But you’d be doing it with your Medicare tax dollars, not with money out of your pocket.
Plus it would completely disengage health care from employment which would be a huge deal. I expect the transition to having to deal with pediatrics, women’s health, OB/GYN services etc. would be easy enough to deal with.
Clem Fandango
Another example of ways that smart purchasers have held down costs is the state of Connecticut for its employees and retirees. As expected the insurance companies and their Republican toadies hate it
Ted Doolittle
One thing we have never tried that could be worth doing: in both ASO and fully-insured environments, tie insurer C-Suite and other personnel compensation to reducing or holding stable unit price (not volume). Could be done by annual selection of a well-curated random basket of hospital or other provider services, then compare to previous year’s pricing for the same basket, and reward accordingly.
Also could be applied to hospital execs and personnel. Again, would need to make sure the exercise was measuring PRICE, not costs and/or volume.