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.

The Cheapest Way to Own a Car

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

medicare.gov/care-compare

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

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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

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“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.

PBMs Are Using the Same Strategy as Credit Card Companies

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Do you know how credit card companies can give you 2% or more cash back? They charge merchants 1-3% processing fees! Plus they earn interest when people carry credit card debt.

Why do merchants put up with these 1-3% fees? Because the credit card companies provide them with a valuable service. It makes getting payments from people easier, especially in the days of fewer people carrying cash. This expands their sales and more than makes up for the 1-3% fees they’re being charged by the credit card companies, although they’d rather not get charged such high fees, especially when many companies’ profits are not much more than 3%.

This is a tricky game the credit card companies are playing. They’ve found that to get more people to use their cards, they need to give rewards like cash back. And there’s this delicate balance created. They want to get the most people using their cards by offering the most generous rewards, but they can’t charge merchants too much to fund those rewards or else merchants will stop accepting those cards. Except that the biggest credit card companies are too important to stop accepting, so they can get away with charging even higher fees. It rewards size. The bigger companies are rewarded with even more market share. It tends toward monopoly, or at least oligopoly, which means the middle men will be empowered to take an even larger share of the total price paid.would make their cards’ usefulness lower and maybe not worth the more generous rewards.

Let’s look at what is happening in the market in aggregate. Merchants, to cover the added expense of high credit card fees, end up charging higher prices. And then the credit card companies are passing some of that money on to the consumer. It’s all because credit card companies are creatively finding ways to leverage their market power to win more customers.

Wouldn’t this all be simpler if credit card companies couldn’t give rewards? Then consumers would be faced with true prices from merchants rather than having to guess at the net price of things after accounting for rewards, and they’d probably lose less of the total price to extra profits for the middle men. With decreased complexity comes greater market transparency, which makes hiding extra profits in the shadows of complexity much more difficult.

Can you see how this is exactly the role pharmacy benefit managers (PBMs) play? They’re a middle man that gets the drug manufacturer to give them a bunch of money (“rebates”), and then they pass a portion of it on to the insurer in an attempt to win as many insurer contracts as possible. Instead of simply competing by offering the best service and charging reasonable fees to win insurer contracts, they’ve expanded into these strange (but ingenious) complexity-increasing strategies. I described the evolution of PBMs into this complicated middle man position here.

In business school, I didn’t learn about this middle man game of leveraging market power to take extra money from suppliers and pass some of it directly on to their customers. Maybe this is a well-understood phenomenon and there’s a term for it and I just have been unaware. But whatever we call it, I don’t like it because of the additional complexity it creates and how it rewards size with even more size (tending toward fewer market competitors). I haven’t noticed any other examples of this, but I’d be interested to hear if anyone has one.

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

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Ok I’ve got a couple more posts I wrote on pharmacy benefit managers (PBMs) to complete my efforts to work through what they are and how they work . . .

What do you think to yourself when you are at the supermarket and you see a toddler throwing a tantrum—clearly because he wants a chocolate bar—and then the mom, exasperated and embarrassed, finally agrees to buy him one just to shut him up?

Do you think, “What a bratty child! I’m glad she finally got him to be quiet.”

Or do you (correctly) think, “I can’t believe she just gave in to that! She’s teaching him that if he wants something, he should throw a tantrum until he gets it. That’s probably why he still throws tantrums.”

This child’s behavior makes sense. Not that it’s desirable behaviour! But you have to give him credit for rationally responding to bad incentives–he’s found a way to get what he wants, and he’s leveraging that.

Applying this to pharmacy benefit managers (PBMs), they definitely have some undesirable behaviours, but they also have bad incentives. I’m not here to be a PBM apologist, but I’m also not here to misdiagnose the source of the issues. If we understand the incentives and then work to get them changed, the behaviours will change accordingly.

So, how are we giving PBMs the proverbial chocolate bar?

The normal incentive of a business is to maximize profit. In a well-functioning market, businesses achieve that by delivering better value (Value = Quality / Price) to customers than their competitors. Problems arise when customers are unable to determine the value of their various options. This is where the bad behaviour sneaks in: the company can get away with charging more or delivering less than a well-functioning market would dictate, and the customers don’t know.

In a prior post, I talked a little bit about how the PBM market is competitive as long as insurers have enough knowledge and expertise at their disposal to accurately identify the true quality and cost of their PBM options. My guess is that insurers often do not have this knowledge and expertise at their disposal, either in house or by not contracting with a consultant who really knows their stuff. Or maybe sometimes the issue is that insurers remain with a PBM for too long, so they are no longer getting a competitive deal. Either way, it leads to insurers (i.e., the customers) not being actively aware of the value of their various options, and PBMs are acting accordingly.

Example: A friend of mine used to run a private health insurance company, and he told me they were getting 5% of rebates from their PBM. He asked for more, and the PBM responded by giving him double! There was lots more on the table apparently.

Another example: An auditor frequently hired by insurers to audit their PBMs’ performance said that, in more than 400 audits, “we have never found a single situation where something wasn’t wrong.”

How bad are PBMs acting? Or, in other words, how much are they taking advantage of this contracting complexity/lack of transparency?

You would expect it to show up in their profits. The trouble is, PBM profitability is incredibly difficult to ascertain. But here’s an elegant visual estimation of how many dollars each link in the supply chain takes from a $100 drug expenditure. PBMs are estimated to account for about $7 of those $100. I think the important point isn’t the amount so much as that $7 is more than it could be.

In summary, insurers often are not getting the best deals from PBMs. The business relationship with their PBM is governed by an incredibly complex contract, and this complexity leads to insurers not knowing what they are leaving on the table. So PBMs surreptitiously scoop it off the table and into their pockets. They are responding totally rationally to bad incentives.

In my mind, the implied solution here is either to (1) legislate/standardize these insurer-PBM contracts so that they’re simpler or (2) encourage insurers to be much more proactive about making sure they’re getting the best deal possible from their PBM (which would probably cost a lot of money in consulting fees or in developing that knowledge in house).

One more related point: When insurers have medical loss ratio policies governing how much money they have to spend on care vs. non-care expenses (the “medical loss” is the amount of premiums received that they spend on care for patients), they are going to be less aggressive in trying to pursue cost containment, which would include worrying less about the excess money going to their PBM.

Blog Updates Again

This is me last summer. To put a face to a brain.

Ok I’m back! I never stopped thinking or researching about health policy in the 10 months since I stopped posting weekly. And I only published one post on The Incidental Economist (TIE) in that time. Here’s the brief explainer and update.

In short, I am going to be blogging primarily here again. There was some discussion with the editors of TIE about what would work for me to post, and they felt my proposed content wouldn’t fit well enough with what they’re looking for (their distinctive TIE brand that they’ve built). I felt that this was perfectly reasonable, and while I was sad that I would miss out on their much larger audience and the possible impact opportunities that would offer, it’s also a little bit of a relief to me to be back here with the flexibility and freedom to write about what I want and in the way I want to write about it. Because much of the purpose of this blog is for me to have an opportunity to synthesize what I’m learning, and when the form interferes with the synthesis itself, the learning process becomes much more difficult and time consuming.

So, moving forward here, I’m going to get back to writing like I did before–using fairly informal language, writing concise posts as much as possible, and writing on the things I am interested in. Basically, my posts will simply be my notes and thoughts about what I’m reading and figuring out.

In the last 10 months, I have saved up a lot of blog post ideas–some to complete my series on pharmacy benefit managers (exciting, right?), and some about a variety of other topics. After I get through those, I want to start a long-term series of basically going through my own health econ/health policy education from scratch again, but sharing the articles I’m reading and the insights gained from each one along the way. More on that when I get to it.

I still believe the way to grow a blog (as well as the way to keep me from getting lazy) is to have regular content, so I’ll be back to posting weekly on Tuesdays as often as my schedule allows. Ganbarimashou! (That’s Japanese for “Let’s keep going/try hard!”)

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

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

A few more blog changes

This week, I have some significant life events going on, so it’s a rare week when there won’t be an official blog post. But I also want to announce that some changes are coming to this blog, starting now. I will be blogging over at The Incidental Economist (TIE) for a while!

Ever since I got into health policy and discovered that there are smart people writing about it online, TIE has been my absolute favourite health policy blog. It is one of the main hubs on the internet that is facilitating the ongoing international conversation about understanding and improving healthcare systems.

So, I’m going to try out blogging over there for a while and see how it goes. In the meantime, I will share on this blog the link to each of my posts, but definitely TIE is worth following if you are at all interested in health policy. I will continue to be blogging weekly (but maybe not on Tuesdays every time), and my topics and post lengths and writing style will probably be pretty much how they’ve been here. Onward!