Big Payer vs. Big Provider in the Bay State

The Boston Globe is reporting on some very interesting news:

The state agency that spends more than $2 billion a year to provide health coverage to 436,000 public employees, retirees, and their families is pushing changes that would allow it to slash what it pays the most expensive hospitals, a drastic move to try to rein in health care costs.

The Group Insurance Commission voted unanimously last week to support capping its payments to health care providers at 160 percent of the rates paid by Medicare, the federal government’s insurance program for seniors….

The limits would hit a “really small number of providers who are at the high end” of the pay scale, such as Partners HealthCare, UMass Memorial Health Care, Dana-Farber Cancer Institute, and others, Herman said….

This can be modeled in two ways. The first will be the large hospitals near the Charles River screaming socialism. The other will be the state screaming capitalism.

One of my first posts at Balloon Juice was modeling the HHI interactions on pricing.

If the ratio of ratios is close to one, the providers and payers are evenly matched. If the ratio is significantly above one, providers have a market power advantage as the largest provider groups control a significant chunk of sub-markets that the payers need access to. If the ratio is significantly below one, the payers have market power. They can pressure providers to take low rates.

A good paper * just came out in Health Affairs by Roberts, Chernew and McWilliams that looks at the impact of a market power dynamics on pricing. They found the intuitively expected (when providers have power rates are high, when insurers have power, rates drop). More importantly, they were able to quantify the effect:

Using multipayer claims for physician services provided in office settings, we estimated that—within the same provider groups—insurers with market shares of 15 percent or more (average: 24.5 percent), for example, negotiated prices for office visits that were 21 percent lower than prices negotiated by insurers with shares of less than 5 percent. Analyses stratified by provider market share suggested that insurers require greater market shares to negotiate lower prices from large provider groups than they do when negotiating with smaller provider groups. For example, office visit prices for small practices were $88, $72, and $70, for insurers with market shares of <5 percent, ≥5 to <15 percent, and ≥15 percent, respectively, whereas prices for large provider groups were $97, $86, and $76...

What does this mean?

The simplest model is that the Massachusetts state employee plan is one of the largest concentrated buyers of services in Massachusetts. It covers almost half a million lives. That is a big pool of people who pay on average, commercial based rates. It is one of the most attractive sub-markets for healthcare providers to service. The state employee plan is making a declaration that it will offer a single maximum price on a take it or leave it basis. The gamble is that the providers who are currently getting rates above that price will look at their next best alternative to fill their beds and realize that 160% of Medicare that gets paid quickly for a significant fraction of their beds is still much better than the next best alternative.

This is as much a political fight as an economics fight. My bet is that at least some of the high cost hospitals will make concessions and drop their rate significantly (remember the high cost hospitals already get significant upward bumps in their Medicare base rate compared to community hospitals a few miles away). One or two of the hospitals will hold out and run a parade of very sympathetic crying parents and sad looking kids in front of the media every five to ten days as well as running millions of dollars in TV ads.

But if we want to get healthcare cost growth under control much less hold spending constant as a fraction of GDP, reducing the relative prices of care will be a major effort. And that means driving more and more price points to lower multipliers of the Medicare base rate in addition to public health improvements and delivery reform efforts that lead to lower quantities of expensive services needed and consumed.

* Eric T. Roberts, Michael E. Chernew and J. Michael McWilliams “Market Share Matters: Evidence Of Insurer And Provider Bargaining Over Prices” Health Affairs 36, no.1 (2017):141-148 doi: 10.1377/hlthaff.2016.0479

19 replies
  1. 1
    sherparick1 says:

    I prefer the old name for economics, “political economy” for this very reason. It reminds people that economics is not just about efficiency and growth, but who gets what, e.g. how the product labor, resources, and capital gets distributed, which is usually a function of power, not merit.

    Dana Millbank, who use to once exemplify Village Media, but apparently got bitched slap by reality notes that while the Media has focused on the apparent meltdown Benito Freeto over imaginary voter fraud, he, Mike Pence, and the vandals coming into Government from the Kochtopus think tanks (Heritage, Competitive Enterprise, Cato, etc.) are busy destroying and sequestering decades of taxpayer funded research data that is convenient to their “drill baby, drill” ideology. And of course destroying Family Planning across the globe, Can’t forget the anti-woman, as well as anti-nature animus of these people.

  2. 2
    dr. bloor says:

    Is there any data available as to how many state employees the affected hospitals actually treat? Shit’s gonna get real if, say, Dana-Farber isn’t an option for state employees when their kid is diagnosed with leukemia, and those employees are going to direct their anger toward the state, not the hospital.

  3. 3
    RepubAnon says:

    Is price alone the proper metric? I just changed doctors from a low-cost per visit doctor to a higher cost per visit doctor. My annual spend dropped as a result, because the first doctor didn’t take the time to see what was really happening, and ordered lots of care that the higher per-visit cost doctor found was not needed.

  4. 4

    @dr. bloor: I know the state employee health plan has that data. I have not seen it. And I agree, the anger will be directed at the insurer and not the hospital (we’re always the evil bastards, always!)

  5. 5
    Patricia Kayden says:

    This is great news. Hospital costs shouldn’t be exorbitant in the first place.

  6. 6
    Wag says:

    I would be interested in seeing an analysis using the same techniques of the most expensive insurance market in the country, Eagle and Pitkin Counties, in Colorado. These two counties are home to Vail and Aspen, respectively, and have had the highest insurance premiums of anywhere in the country. Combine that with a single dominant employer in each of the ski towns, a single hospital in each ski town, and, at least in Eagle County, a single dominant primary care medical group , and you set up an interesting dynamic.

  7. 7
    Gin & Tonic says:

    @Wag: Not sure how relevant, but in at least some US ski towns, the hospital/clinic that treats on-site orthopedic issues for visitors takes *no* insurance of any kind. Make sure your credit limit is high.

  8. 8
    ArchTeryx says:

    Relatively OT, but I wanted to thank you for featuring my comment the other night, even if the post quickly got buried in the avalanche that night.

    My own situation just took a turn for the worse. I was rediagnosed after a routine J-pouch scoping. I no longer have ulcerative colitis.

    I have Crohn’s Disease.

    And that, truly, is a terminal condition without treatment. Even the treatments themselves carry a fairly high risk of death, since most of them involve knocking out almost your entire cellular immunity with drugs that average about $20,000 a dose. They swat a fly with a nuclear weapon, because we just don’t have any better tools right now. There are no painless, low-risk options if you have Crohn’s.

  9. 9
    Wag says:

    @Gin & Tonic: Interesting point, but not applicable to Vail Vally Medical Center, at least for US insurance policies. My 26 year old daughter fractured her tibia this season and had surgery at VVMC, and her California ACA Medicaid expansion insurance took care of her bill.

  10. 10
    Wag says:

    @ArchTeryx:

    There are absolutely excellent treatment options for Crohns, and whoever is telling you that it is a death sentence is lying as loudly as Trump. Crohns is a more complicated disease than UC, but is definitely treatable. Get a second opinion from a different gastroenterologist.

  11. 11
    Barbara says:

    @dr. bloor: One alternative is to adopt the reference pricing model that CalPers did. Basically, CalPers pays a set price for a set of commonly provided services (let’s say, joint replacement or cardiac bypass) that is set at some kind of average/median for all providers. Hospitals will receive that amount. Members have to pick up the difference if they really want to use a hospital that charges more. There were some hold outs — UCLA’s Cedars Sinai took longer to come around, but most hospitals capitulated when it became clear that most CalPers members were voting with their feet. They almost never wanted to pay out of pocket more than they had to.

    So there are two important things here: you can make a very large dent in costs even without including every service in a payer model, and you do not have to foreclose someone from going to any provider. Many super sophisticated and expensive providers are making most of their revenue by charging for services that community hospitals also provide, and charge far less for. There is an implicit claim (and perhaps an implicit bias on the part of customers) that these providers are better at everything, something that is rarely borne out with evidence, assuming it even exists. This model (or a variant) can be tailored so that someone with a rare form of cancer can get access to services that really are better provided at academic medical centers. However, there is a real and pressing need in a state like Massachusetts not to let academic medical centers use their superior ability to treat rare diseases as a basis for charging sky high rates for services that are provided by many other providers.

  12. 12
    liberal says:

    But if we want to get healthcare cost growth under control much less hold spending constant as a fraction of GDP, reducing the relative prices of care will be a major effort.

    Nope. Price signals in health care provision don’t work well. The best way to control costs is to socialize medicine, a la the NHS.

  13. 13
    Sebastian says:

    @Barbara:

    Cedars Sinai is not UCLA, otherwise great points

  14. 14
    ArchTeryx says:

    @Wag: It isn’t so much that the disease is terminal so much that it is terminal *without treatment*. I’m on Expanded Medicaid. That goes away, so does my ability to treat the disease.

    And the biologic therapies may be good but they cone with some flagarant risks, same as any major immune suppressor.

  15. 15
    Jacel says:

    Oops, I placed the following comment under an earlier Anderson/Mayhew post by mistake.

    Have you looked at the current situation in California where a large provider (Palo Alto Medical Foundation) and large customer bases (including Pacific Gas & Electric employees/retirees) are at loggerheads, with a contract not finalized going into the new year? That sounds similar to the Massachusetts case you described.

  16. 16
    Barbara says:

    @Sebastian: It is not part of UCLA, but it is one of UCLA’s major teaching hospitals.

    There is a large staff of full-time physicians who have academic faculty appointments from the UCLA School of Medicine and 1,700 community-based specialty board certified physicians. As a major teaching hospital for the David Geffen School of Medicine at UCLA, second, third and fourth year medical students are assigned to Cedars-Sinai Medical Center on a regular basis in the Departments of Medicine, Obstetrics and Gynecology, Pediatrics, Psychiatry, Radiology and Surgery.

  17. 17
    burnspbesq says:

    @liberal:

    I’m willing to bet a substantial chunk of my net worth that you’ve never resided in the UK.

  18. 18

    @liberal: I am not saying price signals, I am saying relative prices — we need to get the cost per unit of stuff done down.

  19. 19
    stinger says:

    I still freak out on a regular basis post 11/9 (is it a coincidence that the date is a palindrome for 9/11?), but posts such as these — reasoned, fact-based — are quite calming, especially the final paragraph. Thanks!

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