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.