New Research on the Balance of Bargaining Power Between Insurers and Providers
With the country poised for a new administration, Washington is talking health care –especially health-care costs.
At this point, no one really knows how – or even whether -- the Affordable Care Act will ultimately be changed and what those changes will mean for coverage and access to health care. But we can be sure that, no matter what we do with coverage, if we don’t address expenditures, the big problems will continue.
The anxiety over health care costs is real and immediate. Members of Congress hear about it from constituents, and so will the new administration. But this is a time for reasoned understanding. We can’t bend the health-care cost curve until we recognize what’s making it rise.
As we have noted before, pharmaceutical costs may get the headlines, but they represent only about one-eighth of health care spending. More important, if patients adhere to their prescriptions, drugs can reduce other health costs – the costs that consume a much higher proportion of spending.
Where the Money Is
It makes sense to focus on all of the costs to really save money. The most recent statisticsfrom the Centers for Disease Control show that the U.S. spends, in round numbers, $1 trillion on hospitals, $600 billion on physicians and other professionals, and $300 billion on prescription drugs (plus another $1 trillion or so on everything else: nursing facilities, dental, home health care and the like).
If we could cut hospital and out-patient spending by 5%, the total savings would be $80 billion a year. If we could cut pharmaceutical spending by the same proportion, the savings would be $15 billion. It makes sense to go where the money is.
That is why we were intrigued by an article on market concentration that appeared in the January issue of Health Affairs. Written by Eric Roberts, Michael Chernew and J. Michael Williams – all of the Harvard Medical School – the piece starts by pointing to “renewed concerns about the effects of market concentration on commercial health care prices” as the result of “proposed mergers among large US health insurers and growing consolidation among providers.” Four of the five largest insurers – Aetna, Anthem, Cigna, and Humana – have proposed mergers. And mergers have been sweeping the provider world, as well.
It stands to reason, the authors write, that insurers that can “channel a large number of patients to providers…negotiate lower prices with providers.” But, on the other hand, “a large body of research indicates that consolidation in the provider market leads to higher prices.”
So the authors took a close look at the effects of concentration (both from the insurer and provider sides) on prices – specifically on claims for office-based physician services. They found, first of all, that concentration gives insurers “substantial bargaining power” over providers:
Using multipayer claims for physician services provided in office setting, we estimated that – within the same provider group – 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.
Then, they looked at the providers themselves. The results showed that the large providers had far more market clout than smaller providers. For example, the price of a visit to a small practice was $72 for a patient insured by a company with a market share of 5 percent to 15 percent. But the price of such a visit to a large practice was $86, or 19 percent more.
It’s important to note that the trend in recent years has been for providers to get bigger and bigger, with hospitals swallowing up doctors’ practices. For example, a study by thePhysicians Advocacy Institute found that from July 2012 to July 2015, the number of physicians employed by hospitals jumped a stunning 48 percent. While the Roberts-Chernew-Williams study did not examine hospitals, previous research found that theaverage cost of the administration of an oncology drug is roughly twice as much in a hospital outpatient setting as in a physician’s office.
The Price Differences Are Enormous
The researchers write that “large provider groups have bargaining power that mitigates insurers’ ability to pay lower rates – or, equivalently, that requires greater insurer market power to counteract.”
Our findings suggest that mergers between large health insurers, such as those recently proposed, could lead to lower negotiated prices with health care providers.
The authors do warn that “mergers might not ultimately reduce the costs of care borne by consumers because the savings that insurers realize from negotiating lower prices might not accrue to consumers.”
The point, however, is that, if we want to control costs, we need to gather the data – as the three Harvard researchers have – and make informed policy decisions. In the case of office visits, what is so remarkable is the variance in costs, depending on the competitive situation.
For example, an insurer with a large market share (greater than 15 percent) can procure an average office-visit cost of just $70 from a small-practice provider (as defined by the researchers). But an insurer with a small market share (less than 5 percent) must pay an average of $97 when dealing with a large-practice provider. That is a huge difference. The latter visit costs 39 percent more!
Of course, we can’t automatically reorder the office-based physician-services universe to a large-insurer-small-provider norm. But policy-makers can use this information to develop smart policies. That makes a lot more sense than screaming about the price of a specialty drug that cures a disease or saves a life.
Doggie Health Care vs. Human:
Some Surprising Lessons
Veterinary health care has a disturbing similarity to human health care. And it’s not just the sophisticated care that’s given. It’s the cost.
This is the surprising finding of two researchers, Liran Einav, professor of economics at Stanford, and Amy Finkelstein, an MIT professor who won the prestigious John Bates Clark Medal. The Harvard Business Review last week published a synopsis of their recent National Bureau of Economic Research working paper, which was titled, “Is American Pet Health Care (Also) Uniquely Inefficient?”
The authors find that, over the past two decades, pet health care has followed “a similar trajectory” to human care, with a “rapid growth in spending, growing far more quickly than spending on, say, housing or entertainment.” What is odd about this is that it’s hard to blame the structure and the institutions, or suggest that the solution is government price intervention, as we do with human care. As Einav and Finkelstein write:
The usual scapegoats – an inefficient insurance system and onerous government regulation – are practically non-existent in the veterinary industry. Almost no pets have health insurance, and regulation (or government intervention more broadly) is much less prevalent in pet health care than in human health care.
The researchers wonder, then, whether something other than public policy is the cause of rising costs in human health care. “Something else is at work,” they write. But they aren’t sure what it is.
They speculate that the answer may be “the nature of technological progress” – we may be spending more on human health care (as in pet health care) because technology has so vastly improved treatment. They posit another explanation as well: in both human and animal health care, our decisions on whether to deploy heroic measures to save the life of a 95-year-old woman or a 15-year-old poodle are often driven by emotion. “The nature of the decision – trading off potential health improvements against money – may make coldly rational cost-benefit decisions unlikely.”
What’s important about all this is that it broadens the aperture of our search. If we want to understand health costs, we need to look not just at policy and politics but also at drivers that are embedded in our humanity. Perhaps we spend more on health care because health care gives us what few other products or services can: a longer, better life.
Policy Makers Should Pay Attention to a New JAMA Investigation That Finds Where the Money Goes and Why
When it comes to health care costs, there is not the slightest doubt about the most important question:
Why is it that the United States spends so much?
The U.S. spends more than one-sixth of its GDP on health care. No other country is even close. According to the latest figures from the OECD, among the world’s 34 most industrialized nations, the U.S. led by spending 16.9% of its economic output on health. Second was Switzerland at 11.5%; third was Japan at 11.2%. In fact, most countries similar to the U.S., such as Australia, France, Germany, the U.K., and Canada, are tightly grouped, spending around 10% or 11%. The United States is the outlier – by a mile.
But, when you consider what those countries are spending on social services, including elderly and family care and health care, the differences aren’t as stark. The U.S. spends around 19% of GDP on social services, where other developed countries spend closer to 30%. So when you add up healthcare plus social services, most developed countries are spending around 35% to 40% of GDP on the two combined, the U.S. is spending more on health and less on social services.
Unfortunately, too many discussions of U.S. health spending are distorted by focusing only on one particular aspect of spending. Lately, for instance, we hear criticism of the cost of particular medicines. But an investigation published on Dec. 27 by JAMA looked closely at where the money is being spent. The report makes the critical point that, despite the size of the spending, “little is known” about its make-up. The JAMA study tries to change that. “It is important we have a complete landscape when thinking about ways to make the health care system more efficient,” said its chief investigator, Joseph Dieleman of the University of Washington.
A Picture of Spending That Is Complex and Subtle
The study paints a picture of health spending that is complex and subtle. As Ken Thorpe, a professor of health policy at Emory University, said in an interview with the Washington Post:
“Data like this continues to draw attention to the fact that a lot of these proposals being discussed about controlling health-care costs really don’t address the underlying issue, which is rising disease prevalence. You see this rise in chronic disease spending. Much of it is potentially preventable.”
What Thorpe is saying is that Americans are sicker than people in other countries. That is a major reason we spend more on getting people well. A 2015 Commonwealth Fund study, for example, looked at 13 rich OECD countries and found that Americans had by far the highest proportion of seniors with two or more chronic diseases: 68%, compared with 33% for the U.K. and 49% for Germany. We also have the highest obesity rate – 20% above the OECD average.
But back to the JAMA research itself: The study found that diabetes had the highest health care spending in 2013 (the most recent year), at $101.4 billion. Ischemic heart disease (heart attack and stroke) was second, at $88.1 billion, with lower back and neck pain a close third at $87.6 billion. Those three diseases alone account for more than was spent on all diseases in the United Kingdom.
Expensive Diseases Are Also Preventable Diseases
If we want to reduce health care spending in the United States, we will have to focus on the diseases that are consuming the most dollars – especially when those diseases can be prevented or mitigated by changes in the way we live. We can reduce the occurrence and severity of all three of these diseases through diet, exercise, and smoking cessation.
The study includes a table of spending by public-health authorities on the top 20 conditions. Lower-back and neck pain received just $140 million (or a few tenths of a percent of the total costs incurred), smoking $340 million, and heart disease does not even show up among the top 20.
European and other OECD countries put emphasis on the kind of social spending that can reduce health costs considerably. One example is spending on “incapacity” – that is, disability cash benefits, including day care, home-help, and rehabilitation services. The U.S. spends 1.4% of GDP on incapacity, while the OECD average is one-third higher, at 2.1%. The Nordic countries spend 4%. Services that help a disabled person recover can reduce the time the patient is sick, racking up large inpatient and nursing-home costs.
Other OECD countries also have higher rates of spending on family benefits, such cash allowances for having children, subsidies for childcare, and public support for parental leave – all of which can reduce health care spending. The U.S. spends just 0.7% of GDP on family benefits, compared with an OECD average of 2.1%. The U.K. spends 3.8%; Australia, 2.8%; Ireland, 3.3%. Again, in the U.S., the health care system ends up being burdened with costs that could be reduced by grater investment in social services.
Then, there is the matter of compliance. Spending on diabetes, especially, rises sharply when it is left untreated by pharmaceuticals and instead leads to hospital care.
As we pointed out in our last newsletter, a 2005 study by Michael Sokol and his colleagues examined 137,000 patients with health insurance and found, “For diabetes and hypercholesterolemia, a high level of medication adherence was associated with lower disease-related medical costs. For these conditions, higher medication costs were more than offset by medical cost reductions, producing a net reduction in overall healthcare costs.”
Drivers of Costs Vary Considerably
A major reason for policy makers to focus on lifestyle issues and adherence is that it is so hard to draw simple conclusions from such a complicated health care system.
The JAMA study, as the Washington Post noted, found that “the primary drivers of health-care spending vary considerably.” For instance, while pharmaceuticals were responsible for about half of spending on diabetes, they were involved in just 4% of spending on lower-back and neck pain and were minimal costs for most neurological disorders and roughly zero for treatment of falls, which are the fifth-leading cause of health spending. For ischemic heart disease, pharmaceuticals represented only one-eighth of total spending; the costs of treating hypertension and high cholesterol have declined over the past decade.
A particularly dramatic chart, on page 2642, shows spending on five different categories of care. By far the highest spending is for inpatient or ambulatory (outpatient) care, with each at about the same level for 2013: around $700 billion. Prescribed retail pharmaceutical costs come in third, at about $300 billion, followed by nursing facilities at about $200 billion and emergency-room care at about $100 billion.
While medicines seem to get most of the attention in discussions of cost these days, they represent only about 10% of spending (when counting the physician administered drugs this grows to 13%), according to the JAMA chart.
Pharmaceuticals a Low Proportion of Total Health Spending in US vs. OECD
And we should also note that, in the latest OECD report, the U.S. ranks far below average in the proportion of total health care spending that is devoted to pharmaceuticals: 13% compared with an OECD average of 20%. In fact, only 4 of the 27 countries surveyed devote a lower share of their health dollars to prescription drugs than we do. This low proportion in the U.S. could be counter-productive. As we have pointed out in previous newsletters, drugs keep patients out of hospitals and doctors’ offices, where the largest share of spending occurs.
Also dramatic is a chart in the JAMA study (on page 2639) showing how much costs increase as Americans grow older and how those costs differ for men and women. The single largest spending cohort is women older than 85, where spending exceeds $100 billion. For men, spending in that cohort is less than half that for women – mainly because men die younger. Spending per person, the study finds, is greater for men than for women for ages 65 to 74 and for younger than 15 years. Otherwise, spending on women is greater.
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