One Reason Insurance Companies Still Reimburse Procedures That Are Considered “Waste”

Photo by Leonid Danilov on

Have you ever read about the waste in our healthcare system and wondered why insurers cover so many apparently wasteful services in the first place? You’d think they could just refuse to cover those things and save themselves and the entire system a lot of money.

In Wendy K. Mariner’s Rationing Health Care and the Need for Credible Scarcity: Why Americans Can’t Say No, published in Health Law and Ethics in 1995, she discusses this issue. Even though the article is from 1995, I think her insights still apply.

“When the media report that a woman is dying of advanced breast cancer and her insurer will not pay for high dose chemotherapy and autologous bone marrow transplantation because it considers the procedure experimental or unsuitable for her, the insurer is widely viewed as depriving the woman of a chance at life to which she is entitled. Insurers may argue that the insurance policy expressly excludes such procedures and that the woman agreed to its limits. Such arguments, even when correct, do little to assuage feelings that the insurer is depriving people of care to which they should be entitled. This feeling is exacerbated by the suspicion that the insurer could pay for the treatment if it chose, that it has enough money to buy services that are readily available. Thus, what looks to the insurer as sensible budgeting may appear to the patient as unnecessary and unfair rationing.”

If the insurer chooses to refuse coverage, it saves the cost of that service, but it risks losing a whole lot of its good reputation and future enrollees if the woman goes to the media with her story. I’m sure she could find a journalist willing to jump on that story and write it in a way that convincingly makes the insurer seem like the villain.

So, insurers are rationally covering things that could be considered wasteful. This is just one more example of how parties in the healthcare system respond so rationally to incentives. Which means if we can fix the incentives, we can fix the behaviours in the healthcare system.

Using Philosophy to Form Opinions

Image credit:

I’m still going through old half-written posts and deciding which ones are worth completing before I move on to my new project. The thoughts in this one are things I haven’t really shared on here, so here you go.

As a disclaimer, I am not a philosopher. But I do try to be thoughtful, and I’ve done a fair amount of reading about politics and policy and philosophy over the last couple decades, and this is how I currently see philosophy fitting into my interests.

I see philosophy as the deeper thinking about what’s important and what’s good or bad. Without having a personal philosophical understanding of these things, I have no way of evaluating government or society for myself. I will be subject to others’ opinions about those things, allowing them to decide for me. Or maybe I will form my own opinions, but I will have nothing to base it on other than what superficially or intuitively seems best.

So that’s the overview. But getting a little more specific, I believe there are different layers of knowledge we need if we are to have well-founded opinions about governmental and societal issues.

The deepest layer is moral philosophy. This is what helps you define what your overall goals are for human life and society. The absolute Truths you believe in and their priority relative to each other. What is justice? What is liberty? How do you obtain fulfillment? Your answers to these questions shape your core values, which guide your opinions on everything.

I used to think moral philosophy wasn’t very interesting, but when I started to analyze how I was forming my own opinions, I realized moral philosophy is the pre-requisite that informs every other aspect of opinion making, and it has since become very interesting to me.

The next layer up is political philosophy, which I think of as an attempt to figure out an idealized organization of society and government that achieves my core values. It’s the theory of government and society.

So when you are deciding where you would place your ideal government on each of the 5 spectra that I use to categorize governments, you are using your knowledge of political philosophy to do that.

And then the next layer up is policy, which is the attempt to implement those ideal structures. I notice a lot of writers about healthcare skip straight to this level without first stopping to analyze or at least clarify the moral and political philosophy they are applying.

And then the top layer is politics, which comprises the efforts to turn those policies into law and implement them. I know the political process is where the rubber meets the road, but I am content to focus on the three deeper layers and then help advise politicians on them so they can focus on the messy work of getting things enacted in the real world.

In summary, we form our core beliefs through moral philosophy, which then guides our political philosophy efforts to define a preferred ideal structure of government and society, which leads to supporting specific policies, which are then run through the gauntlet of politics to finally be implemented in the real world.

I write primarily for myself–to help synthesize my ideas. But I also write with a desire to be persuasive. I want all countries to implement better policies so their healthcare systems can deliver better value. And I believe the only way to do that is to have a solid foundation at the deeper philosophical levels. They are what inform every opinion I share about specific policies. This is probably why I write so much about what could be considered “theory,” maybe sometimes to my detriment in our data-driven world. And the fact is, we need both. The theory and the data. Optimally, the theories are informed by and tested against the data. I need to write more about that data since I’ve read it but not stored it in an easily accessible and easy-to-cite way, which is why I’ll soon be spending a lot more time doing that.

Bungled Payments

Image credit: Joshua Jenkins

I write regularly about the need for patients to be able to make “value-sensitive decisions.” It means they make decisions about where they receive care (and also which insurance plans they choose) while considering both price and quality. One important step to helping patients do this is enabling them to know beforehand what the total price of the care episode will be.

That’s where bundled payments comes in. Their most important function is to give patients an apples-to-apples comparison of the total price of the care episode because they set a single price that includes all the things that might be needed in the care episode.

But when you start trying to turn bundled payments into pay for performance programs, that’s when they should be called bungled payments.

Which brings me to Medicare’s bundled payment models. There was a great article in JAMA recently by Joynt Maddox, Shashikumar, and Ryan, entitled Medicare’s Payment Models–Progress and Pitfalls.

Here’s an issue they wrote about regarding benchmarks: “Continuing to base benchmarks on historical costs will lead to a feedback loop disadvantaging participants with low spending. Those who reduce spending will have lower historical spending in future years and will receive lower benchmarks. They may find it more difficult to meet progressively lower benchmarks and will thus eventually pay penalties, despite being efficient.”

This sounds like what I wrote a few weeks ago: “Sure, this incentive has gotten us better quality for more money, and yeah eventually we’ll probably have higher quality overall, but it’s going to be at the cost of a lot of consternation of providers as we repeatedly take away their quality bonuses when we raise standards. Overall, this quality bonuses idea is just a frustrating and generally ineffective way to improve value.”

They suggest defining an “efficiency floor” that exempts anyone who meets that threshold from penalties. That’s reasonable for sure, but I suggest getting rid of the bonuses/penalties thing altogether.

Another thing they wrote in the article: “Second, the current benchmark method permits payout of large reward, offsetting any savings that the models achieve for CMS. . . . While the BPCI-A, OCM, and CJR payment models are associated with reductions in clinical spending, the bonuses these programs have paid have far exceeded the spending reductions they have incented.”

This sounds, again, like what I wrote a few weeks ago in the same blog post: “If our goal is to improve value, what we’ve just done is taken the higher-value providers and increased their price, which means their value has dropped back down to everyone else’s.”

They suggest creating a “stop-gain” provision to limit potentially excessive bonus payouts. That’s reasonable for sure, but I suggest getting rid of the bonuses/penalties thing altogether.

But wait! If we get rid of these administratively determined price adjustments (bonuses and penalties), how do we reward providers who deliver higher value?

We need, instead, to do a few things all at the same time. First, providers need the freedom to offer lower prices. Second, prospective patients need to be able to easily find those prices (and, preferably, patient-relevant quality information as well!). Third, patient’s insurance plans need to be designed such that patients end up paying less out of pocket when they choose a lower-priced provider.

If that could all happen, more people would start choosing the providers who offer better value. And what does that mean? It means the better-value providers would get more patients and more profit! And the lower-value providers would get less profit. So what we have is the same general outcome of rewarding the better providers and penalizing the worse ones, but instead of trying to do it administratively with all sorts of inefficiencies and distortions (all while not enabling more people to receive higher-value care), we have instead brought to bear on this challenge the dispersed preference information from the market. It will very effectively reward the ones who are truly worthy of being rewarded, penalize the ones who have lower value, AND more patients will get higher-value care immediately, which I would argue is our overall goal with these programs in the first place (you know, “value-based care“).

What Is “Competition” Anyway?

You know the word “travesty”? People who want to sound smart sometimes use it instead of tragedy, as if it’s the smart person’s version of tragedy. But it’s not. They use the word even though they don’t know what it actually means.

People do the same thing with “competition.” Many think it’s either the solution to everything or the cause of all evil . . . even though they don’t seem to know clearly what it means.

It turns out, I can’t fault them. This is a longstanding issue. Maybe I’m just ignorant of some classic economics textbook that has the grand master definition in it (you’d think they would have covered it in the econ classes I took), but man is it hard to find a definition of this word! I was especially hoping to find one from at least one of the classic economic thinkers. This is the best I could come up with . . .

Adam Smith didn’t use the word very much. Here’s the main example of how he thought of it, taken from The Wealth of Nations, Book IV: “The competition of producers who, in order to undersell one another, have recourse to new divisions of labour, and new improvements of art, which might never otherwise have been thought of.” So, in his mind, competition was simply improving manufacturing processes to undersell competitors?

And Joseph Schumpeter, who even still has a type of competition named after him (“Schumpeterian competition”), didn’t offer up a definition that I could find either. The closest thing is what he wrote in Capitalism, Socialism, and Democracy: “But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” He’s taking the term as a given and focusing on a specific type of it–the type related to how new innovations impact competition.

Even Michael Porter, in his book Redefining Healthcare, never provides a definition. He says things like this though: “The way to transform health care is to realign competition with value for patients. Value in health care is the health outcome per dollar of cost expended. If all system participants have to compete on value, value will improve dramatically.” He felt the need to define value, but never competition, and, like the others, took the term as a given.

And I’m completely skipping over all the definitions of “perfect competition,” which describes everything around a special case of competition without actually defining it either.

How about Wikipedia? It at least offered a definition! In the article Competition (economics), it says, “Competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place.”

Competition is a scenario? And the main focus is that firms are trying to obtain goods? This one sounds really smart, but I disagree with it. I also believe it doesn’t facilitate a clear understanding of the concept.

So it’s time I offer up my own definition. Maybe I’ll change it over time as I learn more. But for now, this is what I’ve got:

Competition is a state in a market where there are multiple companies trying to win more profit by convincing potential customers to choose their product or service because it will meet their needs in a higher-quality and/or lower-priced (i.e., higher-value) way than other companies’ offerings.

I’ll unpack that.

First, it’s a state of being. Markets can exist in a state of competition or not. Really, it’s a continuum from no competition at one end to perfect competition at the other end. But the bare minimum needed for it to exist is for there to be multiple companies fighting for limited profits, which are the prize. If this is a non-profit environment, then we’ll call profits “surpluses.” Same idea. And to win those profits, they need to convince potential customers to choose them over their competitors. There’s always a mix of strategies–high-profit low-quantity vs. low-profit high-quantity–but the end goal with all of them is to win the most profit. I recognize that more and more companies are “mission driven” rather than “profit driven.” That’s great and all–I guess they’re willing to give up some profit to achieve their mission. But the stark reality is that they need to earn enough money to continue achieving their mission, which means they still have a strong profit motive if they want to sustain and grow.

I’m deliberately not defining which companies count as being in a market because it depends on the needs of people. For example, Ford’s new F-150 Lightning (an electric vehicle that can even use its battery to power your house) technically is filling the same need as people shopping for an emergency back-up generator, which means for that customer segment Ford is competing with generator companies. Competition often spans the traditional boundaries of markets.

And I said “convince” potential customers because people make a purchase decision based on the information they have. It’s not enough to be objectively better in every respect. It only matters if you convince people who are looking for a solution to fill their need. Long-term, yeah, you generally need to actually be higher-value to keep customers, at least if there’s enough information available to potential customers to make the market somewhat transparent.

So there you go. An actual attempt at a definition of competition. And, thinking about it now, isn’t it a wonderfully desirous state to strive for? I hope this definition is useful in helping you think about what you are meaning when you use the word.

Quotes from Pharmacists about Pharmacy Benefit Managers

Photo by Ingo Joseph on

There are a few more papers on pharmacy benefit managers (PBMs) that I want to read at some point so I can complete this area of study (for now). But today I want to share a few quotes about PBMs that anonymous pharmacists wrote when I was having some of my pharmacist friends ask their other pharmacist friends:

“Just let him know every pharmacy has an AWFUL relationship with PBMs.”

Multiple pharmacists used the same word, “theft,” when describing PBMs.

“All I can say is I don’t know directly how PBMs make their money other than charging companies high prices and negotiating pharmacies to make very little in comparison.”

“I don’t remember the exact details as far as $$ amounts but this example is true. We had a Tricare patient come into our pharmacy upset after looking over his health statement from his insurance company and seeing if we really charged his insurance $200 for a product.  We looked over everything on our end and learned the product cost was $20 and our profit was $7, so the total collected was $27.  This means that the PBM chose to charge the government $200 and kept $173. Again the $$ may be a little skewed but I recall the  dollar amount the PBM paid itself was significant. Adding more middle men doesn’t decrease costs it increases them.”

“Seriously, and they are not transparent! They don’t give the pharmacy access to those numbers, they don’t give us access to the contracted costs. When contracted costs change, we aren’t notified. Then there’s DIR fees to add into the mix. They try to put gag orders on pharmacies, threatening to throw them out of network if they communicate about any of it. They just want us to sit down, shut up, and take whatever they give us. And they don’t even tell us what they’re giving to us! There’s no negotiating.”

Clearly there are some pretty adversarial relationships between pharmacies and PBMs! But remember that this doesn’t reflect all pharmacists’ opinions on the topic, so don’t use it to adjust your prior too much, but my sampling of friends (and friends’ friends) had pretty uniform negative responses about PBMs. This may be a reflection of pharmacists who run independent pharmacies feeling powerless against PBMs because they have almost no bargaining power when they are up against these juggernaut PBMs. This is how bargaining power works–the bigger guy on one side of the table can command the lion’s share of the profit when negotiating with the little guy sitting across from him.

The Cheapest Way to Own a Car

I published this article last month on the White Coat Investor blog, and I decided to share it on here as well for two reasons: (1) it’s a really fun analysis with a surprising conclusion and (2) I don’t usually don’t get to share my quantitative efforts as much on here.

My favourite comments on it were these ones:

“After reading the article, I went back to see what the author did for a living. I was sure he must be an engineer or CPA. I had always assumed the correct answer was buy used and keep it forever. Thanks for writing it.”

“I don’t read many posts that on their own will change some of my behavior for the rest of my life. But this one will. Thank you.”

Back to our usual programming tomorrow . . .

Helping Patients Choose Higher-Value Providers

Last week, I wrote about how quality metrics are misused by healthcare reformers. They’re almost exclusively tied to bonuses or penalties from insurers. In other words, they’re used to increase or decrease the price providers get paid. This is a form of administrative pricing, which is a super economically inefficient way to set prices. And I proposed the alternative use of quality metrics–to help patients choose higher-value providers.

We give people quality metrics and they seem to generally do a good job shopping for the best value in pretty much every other industry, which drives competition over value. So why do we fail so miserably in healthcare?

The first problem is that healthcare is missing the thing that motives people to shop around for the best value: their money is on the line. I wrote about this a couple weeks ago. We need people to pay a little more if they choose a higher-priced provider. But when prices are opaque or unknowable beforehand, or when their insurance plan makes them pay the same regardless of the provider’s price (or if the insurance plan is complex enough that the patient doesn’t understand that they’ll have to pay more if they choose a higher-priced provider), people don’t perceive that their money is on the line. In that last sentence, I just listed four issues preventing people from actually caring what the price is!

And then there are the issues of having only one option (like in a rural area) and non-shoppable services (like during emergencies) and non-shopping-when-you’re-already-established-with-a-provider. Yeah, there are a lot of reasons people don’t shop for prices in healthcare! But in spite of all that, there are some good studies that show that people will actually shop for services when all the stars align.

I know that even if people have a hard time knowing prices beforehand, they theoretically could still shop just as vigorously for the highest quality.

But I think there’s something that happens when people can’t shop for price that sorta stops them from thinking about shopping for quality too. I haven’t seen any studies that prove this, but I suspect it’s a thing.

So let’s talk about the people who say, “Well if I don’t know what I’m going to pay, I might as well try to find the best quality option.” They use a variety of sources since there isn’t one single well-known and useful quality source out there. Usually they rely on recommendations from their doctor or their friends and family. If that person had a good experience, that’s a reliable indicator of quality, right?

Or maybe they decide to be brave and try Googling quality metrics. They’ll find something, certainly. But chances are they’ll find quality metrics that aren’t super relevant to what they actually care about. For example, maybe they’ll discover Medicare’s Care Compare website. What does 3 stars even mean? Even drilling down, how useful is it to know that a hospital’s safety is “below the national average” in 2 out of 8 metrics? How does that get weighed against a high recommendation of the hospital from a family member? Or, is that quality rating ignored because the hospital’s lobby is spacious and it advertises meals prepared by well-known chefs?

Compare the relative uselessness of those quality metrics to the example of Seattle’s Virginia Mason Health System when they were redesigning their low-back pain care pathway. They figured out that people care most about how soon they can get back to work (it’s expensive to live in Seattle, if you didn’t know) and, among other changes, made same-day appointments available. This was the quality metric people cared about, and their low-back-pain market share doubled.

After reading all these barriers to people shopping for the best value in healthcare, I hope you can see that (1) this problem is perfectly explainable and (2) it’s totally fixable. Can someone please tell the Medicare administrators that most of their current efforts at “value-based purchasing” are going to be close to useless? And tell them to look at getting rid of some of these barriers to patients choosing high-value providers instead.

Pharmacy Benefit Managers – Index of Posts

I’ve written enough posts about PBMs that I’m adding this index so they’re all easy to find.

Pharmacy Benefit Managers: Kind of a Mystery to Me

Why Does GoodRx Exist, and How Does It Work

I’m Still Confused by PBMs But Trying to Fix That

Maybe This Is How PBMs Started Getting Kickbacks?

Is the pharmacy benefit manager market competitive?

A Brief History of Pharmacy Benefit Managers (How They Became the “Shady Middle Men” in the Drug Market)

How Pharmacy Benefit Managers Are Getting Away with More than They Should (And a Solution?)

PBMs Are Using the Same Strategy as Credit Card Companies

Quotes from Pharmacists About PBMs

The True Usefulness of Quality Reporting Is Misunderstood

Photo by Darius Bright on

Last week I wrote about how cost sharing is misunderstood. This week I’ll continue in the same vein and talk about the same thing but related to quality measurement and reporting.

Quality measurement and reporting is becoming a pretty big thing. Just look at all the different Medicare programs (the big ones being MIPS and APMs) trying to achieve this thing they call “value-based purchasing” (which, in their estimation, seems to mean pretty much anything other than straight fee-for-service reimbursements). These programs involve lots of quality reporting requirements, and then compensation is directly tied to those quality metrics, usually through bonuses for high performers.

But this is the wrong way to use quality metrics.

Before I explain why I believe this is the wrong way, I need to clarify what my goal is with healthcare reform. I am interested in improving the value (Value = Quality / Price) our healthcare system delivers.

This is usually the part where people say, “If you want to improve value, you’ll make a lot more progress by preventing people from getting sick in the first place, so you should focus your efforts on public health initiatives!” Or, others will say, “You need to work on getting more people access to the healthcare system. Solve this issue first, then you can figure out how to improve the system’s value!”

I agree that those are very important issues. And I believe we need to work on both of them as well as this one of improving the value the system delivers at the same time. So I’ll keep writing about these things and figuring out how to fix our healthcare system in all these ways.

Anyway, let’s think about what is going on when a provider does a great job and has really high quality metrics and gets paid bonuses (say, 5% or so on top of what Medicare would otherwise have paid them) as a reward.

If our goal is to improve value, what we’ve just done is taken the higher-value providers and increased their price, which means their value has dropped back down to everyone else’s. Sure, this incentive has gotten us better quality for more money, and yeah eventually we’ll probably have higher quality overall, but it’s going to be at the cost of a lot of consternation of providers as we repeatedly take away their quality bonuses when we raise standards. Overall, this quality bonuses idea is just a frustrating and generally ineffective way to improve value. But I understand why it’s so popular–it’s an obvious way to encourage value.

Is there an alternative? Of course. We need to find some way to reward providers for providing extra quality. But how we do that, that’s the question.

What if we could find a way to get more patients to choose those higher-value providers? This would reward them with more profit, and now the providers with lower value are losing out on money because they’re losing market share. There would be no administrators at fault when a provider makes less money. No top-down program decisions to blame. PLUS, more patients would be getting higher-quality care immediately. That’s a pretty great system.

So, instead of using quality reporting to give administratively determined bonuses, we need to use them to help patients identify the best-quality providers so they can choose to receive care from them. This would involve measuring very different quality metrics–ones that patients actually care about.

Can we do it? I believe we can. There’s a lot to how we could make this happen, and I’ll talk more about that next week.

The True Usefulness of Cost Sharing Is Misunderstood

Photo by Karolina Grabowska on

“Cost sharing” refers to people paying money out of their own pocket to receive healthcare services. There are lots of forms of cost sharing—the most common ones are deductibles, copays, and coinsurance.

When healthcare reformers talk about cost sharing, they are often arguing that we should increase cost sharing so that people will stop overutilizing health services (especially low value ones). They call it getting consumers to have some “skin in the game.” The Rand Health Insurance Experiment found that this works, although people decrease their utilization of high-value services as well.

But this isn’t the thing we need cost sharing to do for us. What we need it to do is get people to start considering prices when they choose where to get care.

If people don’t care what the price of a procedure is, there’s no reason they would go out of their way to find one that is less expensive (while being of at least equivalent quality). In fact, they probably wouldn’t bother checking prices at all.

But when they are forced to pay at least some part of the price, they will start asking questions to find out the price of their options. Not everyone will, of course. But some will start doing that, especially when they discover that they could potentially pay thousands of dollars less for no worse quality.

Trying to find prices is a frustrating endeavor in our healthcare system because prices are still hard to come by. And often even the quoted price is an estimation, or it doesn’t include the same bundle of services as another provider’s quoted price.

But if people can successfully find prices and choose ones that are lower priced, do you know what happens? Providers start to see that their prices actually do impact how many patients choose to receive care from them. And then the market actually starts to function because competition (at least over prices) has begun.

To summarize, we don’t need cost sharing for the sake of skin in the game; we need it so patients can be put to work searching for the best deals (trying to save their hard-earned money) because this searching effort is the main prerequisite for competition.

By the way, I am not saying people need to pay the full price of every service. The key is that they pay at least some amount of the price differential between options. So if one provider quotes $4,000 and another quotes $5,000, all we need is for them to pay is a little more if they choose the $5,000 one. This could be through reference pricing, where they pay the full $1,000 difference. Or through other methods that only have them pay part of that $1,000, such as high coinsurance or tiered networks. There are many ways to achieve this.

%d bloggers like this: