Want to Lower Healthcare Costs? Start by Fostering Competition

By Shareef Ghanem

Over the last few months we’ve written about the persistent increases in total healthcare costs. We’ve pointed out a key, often overlooked, culprit — unit price increases in the cost of discreet healthcare services. In this post, we’ll unpack this discussion further to understand the reasons for these increases in cost, and what we can do about them.

First, we need to separate reality from rhetoric.

Here is the reality — prices for routine healthcare services vary dramatically within a given region, and patients are unaware and ill-equipped to navigate this price conundrum. For example, patients and insurers stand to save $1,000s of dollars on every MRI or CT scan by being more judicious about where to receive that care. To take this one step further, there is a clear price distinction in the market — large, vertically integrated hospital systems represent the most expensive locations in the market for these routine services. The rhetoric is that hospital systems are embarking on a shift from fee-for-service to fee-for-value, and using vertical integration to improve care coordination. While there are many progressive systems who are truly embarking on this shift, I hope to dispel some of this rhetoric. As it turns out, the evidence shows the exact opposite — this consolidation actually reduces value in the system by increasing prices without a demonstrable change in quality.

Peter Ubel, a thought leader in the space of cost-of-care conversations, wrote in Forbes about a year ago explaining this dynamic. In his post, entitled “Here’s What Happens to Your Medical Bills When Your Doctor Joins Forces with a Hospital,” Peter points to evidence that shows that, following acquisition of a medical group by a hospital, outpatient spending increases but utilization of services remains flat. In other words, unit prices for services increase. Absent improvements in quality (which I’ll discuss later in this post), the result is a decrease in value (where value is a function of cost and quality).

Mechanics of the Problem

There are two reasons why this consolidation leads to price increases — the first applies to government programs (in particular, Medicare) and the second is purely competitive dynamics in the commercial market (I use the term “commercial market” loosely to encompass most forms of privatized insurance, including Medicare Advantage).

In Medicare, providers are paid differently depending on where they perform a service. For example, two identical services performed in a physician office versus an outpatient hospital setting can garner different payment amounts, and, by extension, different out-of-pocket costs for the beneficiary. For years, hospitals exploited this payment differential by buying physician groups who typically billed as physician offices (i.e., at a lower payment level) and changing the physician’s billing attribution to fall under the hospital (i.e., a higher payment level). The existence of these payment differentials is well-understood — so much so that the Medicare program has a term for this billing phenomenon — “provider-based designation”. Furthermore, recent studies from the Physician Advocacy Institute (PAI) highlight the pace of provider consolidation and the resulting 3X price difference in the cost of the procedure that can result from this billing practice. The Medicare program has recently taken steps to remove this billing incentive, and remove the incentive to purchase physician practices for the sole purpose of reassigning billing rights. Here’s the kicker — the Office of the Inspector General (the group tasked with investigating areas of concern for Medicare) identified the potential for abuse in these billing practices…in 1999.

The second cause of these price increases is tied to negotiating leverage. This topic has been written about extensively, but some recent research on the topic is worth discussing. The Health Care Pricing Project crunches data from Aetna, Humana, and UnitedHealth to understand and report on the variation and growth of healthcare spending. They were able to show that markets where a single or a handful of hospital systems dominate are more expensive than markets where there is significant competition. Furthermore, when you look in a single market, for example Philadelphia, you see that these imbalances in negotiating power result in a 6X price difference between the lowest cost and highest cost hospital MRI. This price variability almost certainly grows when you layer on even lower-cost freestanding or physician office-based MRIs.

Consolidation, more precisely the loss of competition, increases the cost of healthcare.

How Did We Get Here?

There are a lot of reasons why the pace of consolidation has increased in recent years. Before we dive in, it’s important to remember that these trends occur in cycles — this isn’t the first time in recent memory that hospitals have tried to vertically integrate.

Much of this consolidation came under the guise of providers preparing for “the shift to value.” The gold standard for a provider entity that has successfully aligned incentives to manage cost growth and improve the value of care is Kaiser Permanente. Many believed (and still believe) that the key to these aligned incentives is vertical integration of the care continuum. I believe the Kaiser model works, but it isn’t easy to do. The key to the model is two things: (1) clinical integration and (2) aligned incentives. Vertical integration is one (of many) ways to achieve clinical integration, but without also aligning incentives the model doesn’t work. In fact, clinical integration without aligned incentives is simply a loss of competition. It is fascinating to consider whether the system-level push to move from fee-for-service to fee-for-value has actually exacerbated our healthcare spending problem, not improved it. Providers who are capable of making the full shift (i.e., aligning incentives by sharing in the burden of managing cost of care) can do remarkably well, but most providers are not equipped or not serious about making this full shift. Instead, they leverage their new size to negotiate better reimbursement from insurers.

Peter Ubel (cited above) noted in his article that,

“the Federal government hopes that promoting hospital/physician integration will lower healthcare expenses. That is probably wishful thinking.”

Myth: Higher Cost Care = Higher Quality Care

Critics of this commentary might question my fixation on the cost-of-care. Surely higher prices are because of higher quality care. Again, we find that the reality is that spending has no demonstrable impact on quality. Two recent Harvard studies — one published in Health Affairs and one published in JAMA — suggest a weak relationship between the price of healthcare services and the quality of that care. In addition, there is new research suggesting that hospital-based primary care physicians are more likely to refer for low-value services. This is not surprising considering the inherent conflict when two providers share a common owner.

Elizabeth Rosenthal, editor-in-chief of Kaiser Health News, put it best,

“What we see in research over and over again is that the cities that have the most hospital consolidation tend to have the highest prices for health care without any benefit for patient results. So consolidation, which started as a good idea in many places, has evolved to a point where it’s not benefiting patients anymore, it is benefiting profits.”

What This Means for Patients

These trends are disheartening, to say the least. Increases in total cost-of-care come right back to patients. There is research showing that premium increases mirror increases in spending. In addition, there are logical ties between cost-of-care and patient adherence to treatment. Moreover, there are links between lack of price transparency in the cost-of-care and treatment adherence. Patients are apprehensive to commit to procedures when they have little visibility into the out-of-pocket costs.

Where Do We Go from Here?

The first step is empowering progressive providers to be transparent with patients. This, in turn, empowers patients to make better decisions about where to receive care. At Markit, we are focused on partnering with insurance companies and physicians to give patients the information they need when they need it. This means showing patients their available options for a referral inclusive of their expected out-of-pocket costs.

In addition, we need to promote competition in the market. Recently three prominent healthcare policy experts Farzad Mostashari, Paul Ginsburg, and Martin Gaynor spearheaded the release of policy recommendations for improving competition in healthcare. I encourage everyone to take a look at their work. They start by pointing out something I hope I’ve convinced you of in this post:

“There is a growing understanding that comprehensive efforts to control health care costs and improve the quality of care must address the functioning of the markets that undergird the health care system and the prices paid to providers.”

They go on to synthesize a handful of policy recommendations focused on increasing price transparency, supporting independent providers, and preventing anticompetitive behavior.

Accountability for spending falls on all of us. Patients need to be more proactive about staying healthy and finding the best value care when they are sick. Providers and hospitals need to care as much about a patient’s financial health as they do about their physical health. Health insurers need to provide physicians with the tools and data they need to take action in support of patients and remove unnecessary administrative burdens that take providers away from their patients. At Markit, we know that everyone’s role is intertwined. That’s why we are working to forge stronger ties between patients, physicians, and insurers.