I published this article on KevinMD on 1/9/25, but I want a record of it here as well since this is my central repository for all of my healthcare writing.
For regular followers of this blog, the principles discussed in that article are not new. But the framing for how I’m putting some of them together is new, so I hope it helps give people a more rounded understanding of the futility of many of CMS’s alternative payment model programs. Their outcomes are just what I predicted in my 2016 article.
It’s amazing how predictive a theory can be when it’s based on an accurate understanding of the principles at play.
After thinking and writing about healthcare for so long, I don’t often learn new things that turn out to be a big part of the puzzle. But this is one of them. I hope you can follow my thought flow as I explain.
First, I was thinking about something I’ve directly experienced a number of times. In talking to the upper-level managers of healthcare providers about their pricing, increasingly often they’re creating a list of cash-pay prices, which they use to determine how much to charge patients who either don’t have insurance or who, for whatever other reason, want to pay out of pocket for a service. But they’re almost never willing to have those price lists shared publicly.
Why?
Quick sidenote: The fact that providers are doing this so much more, and as pushed by some of the government transparency initiatives as well, is huge! Before, providers would use the chargemaster price when a patient wanted to self-pay. And since chargemaster prices aren’t even close to grounded in reality (for reasons that I’ve discussed before and won’t rehash here), it was a major ripoff if you didn’t purchase through insurance.
Anyway, the answer is that they worry that it will get them in trouble with insurers, presumably because if a cash price turns out to be less than the negotiated price with even one insurer, if the insurer finds out about it, the insurer will refuse to pay their previous (higher) price, so the provider will lose bigtime during the next round of contractual price updates.
Essentially, this means that providers’ attempts to create self-pay price lists (in an attempt not to screw over uninsured patients) could cost them a lot of revenue from insurers. So they keep them mostly secret.
And I suspect this is such an issue because of gag clauses in provider-insurer contracts. Gag clauses prevent either party from divulging the agreed-upon prices, which probably also indirectly prevent providers from being willing to share any prices publicly.
So that’s where my mind was at, thinking about this whole issue of price opacity and the fact that prices between private parties in healthcare are set through bargaining power-based negotiations between insurers and providers. And it led me to start thinking harder about the upsides and downsides of negotiated pricing versus standard pricing. Here is the definition I’m using for each of those terms:
Negotiated pricing is setting prices based on the relative bargaining power between the buyer and the seller.
Standard pricing is a seller setting their price wherever they want, and the buyer has a choice to buy from that seller or not.
The big realization I’m making–which also has big implications on why our healthcare system performs the way it does (as I’ll describe at the end of this post)–is that negotiated pricing kills a ton of value-sensitive decisions. Even worse, opaque negotiated pricing kills even more value-sensitive decisions.
The effect of something preventing a large chunk of value-sensitive decisions is that it weakens the link in that market between (1) delivering high-value products and services and (2) earning more profit. So the value delivered by that market no longer rises over time like it otherwise would because competitors are too busy competing over the new things (rather than value) that determine how much profit they will win. New things like market share, which empowers them to negotiate up prices. And we wonder why the healthcare market has rolled up (i.e., become consolidated into a small number of very large companies) like it has. How else can you earn more profits when prices are set mostly based on bargaining power-based negotiations?
Another side note: For those interested in business strategy, I’ve never heard anyone talk about this as a factor that pushes an industry to consolidate, but it’s probably a major factor in many industry roll-ups. Another factor, more well know, is if there are significant economies of scale to be had, that will also push an industry to consolidate.
So how does negotiated pricing kill value-sensitive decisions?
I’ve tried several times to explain this part, and I’m still failing to some degree, which means I haven’t pieced everything together well enough yet. So here’s my best shot, which might still be confusing.
When all the prices between insurers and providers are set through negotiated pricing, they aren’t as closely connected to what is truly valued in the market. This relates to the importance of prices in a free market and how they are the most important thing that conveys the value of something. Hayek wrote about this. So the prices don’t connect to what the true market price would be, which makes for an inefficient market when people are trying to determine and choose the highest-value options. There would still be a link between value and profit, it would just be a lot weaker. But, make it even worse by adding in the propensity for negotiated prices to be opaque, and now you’ve taken away the ability for individuals to know relative prices at all (assuming the prices are opaque to the decision maker), so you’ve completely killed value-sensitive decisions.
Related:
What I’m saying is that negotiated prices have caused two problems in our healthcare system: (1) The person making the decision on where they will receive care (i.e., the patient) no longer has any idea of the price of things, and they usually don’t care anyway because they usually pay the same amount regardless (through a flat co-pay, for example). (2) Sellers are unwilling to make any other prices public–including self-pay prices–for fear of it interfering with their gag clause or costing them money in the future when others demand that same price if it ends up being lower than a negotiated price.
The overall effect of shifting our healthcare system from its original standard pricing to negotiated pricing is that it eliminated a ton of value-sensitive decisions. And, once you hit a critical mass of non-value-sensitive decisions, the sometimes harsh incentive of the market for competitors to improve value (or else go out of business) gets significantly weaker.
So how did we come to have negotiated pricing in our healthcare system?
We had some amount of it even from the 1930s with Blue Cross and Blue Shield plans, although the details of these arrangements suggest that they didn’t get translated into taking away the ability of patients to identify the price of their different options and choose accordingly.
But what really caused the shift was the Health Maintenance Organization Act of 1973.
Here’s some context for that Act: Healthcare innovation was increasing how much providers could do for patients, and some of those new things were very expensive. Consequently, the price of insurance was rising fast enough that people were trying to come up with new ways to lower healthcare spending. The big idea that took hold was to try to reduce the number of unnecessary services provided by providers by having insurers review proposed services and approve or deny them. It makes sense–fee-for-service providers get paid more when they do more, so they have an incentive to do more things for patients, including things that could be of dubious value. The solution worked, to an extent–the insurance companies were able to prevent a lot of questionable-value services from being performed.
This caused problems, too. The usual big complaints about HMOs is that (1) they would inappropriately deny things and delay services and (2) they caused a ton more administrative costs. All this is true. But possibly the biggest drawback is that it started us down this road of shifting to negotiated pricing.
When insurance companies starting forming HMO plans, they needed to have a limited provider network so that they could restrict their beneficiaries from receiving care outside of an HMO contract. Limited provider networks based on contracts between the insurer and the providers opened up another possibility for insurers: If a big insurer has a lot of market power by virtue of insuring a large percentage of the people in the region, they could start requiring providers to accept lower payments from them as a condition of being included in the HMO network. The providers were often willing to agree to that because of the additional volume it would bring them. But the insurer would also require the provider not to tell anyone else how much less they were getting paid by that insurer (a gag clause), which helped the insurer in a lot of ways, such as by preventing its competitors from finding out just how little they were paying, thus preventing competitor insurance companies from shifting their negotiation anchor regarding what kind of prices they could expect to have to pay.
So, overall, what I’m saying here is that an unanticipated side effect of HMOs is that they led to our healthcare system shifting from standard pricing to negotiated pricing, which eliminated a large chunk of the value-sensitive decisions in the market. And negotiated pricing through limited-network insurer-provider contracts remains even after the most aggressive versions of HMOs have gone away.
Now, what’s the big implication from this that I referenced above?
What would you expect to see if an entire industry of a country loses a ton of value-sensitive decisions in a relatively short period of time? Especially if this happens through a big shift toward opaque prices for the people who are choosing between different competitors, prices would no longer be constrained by the market, so they will start rising rapidly. There would also be an impact on quality–it would stop rising as fast as it was rising before.
If you wanted to take a more formal analytical approach to this, you could use a difference-in-differences approach by looking at how that country’s results change over time (before and after the change that reduced value-sensitive decisions) and compare that to how other countries’ results change over that same time period. Specifically, you would want to use as comparators countries whose markets didn’t go through that same change.
I’m not going to do a formal analysis like that right now. But, as you take a look at this graph, keep in mind that even though the HMO law was signed in 1973, HMOs didn’t really gain a ton of uptake until the 1980s:
Here’s another one showing the same thing but with more countries. It just doesn’t go back as far in time:
I couldn’t find a longer-term graph to show, but I’ve seen them many times that show that the U.S. was middle of the pack for decades before 1980, and then something changed in the 1980s, and I could never figure out why.
And for those of you who think that it’s because the U.S. started becoming way more wealthy than others around that time, take a look at this:
It looks like our rise in GDP per capita probably has some impact on why our spending increased as much as it has, but we don’t see Norway and the others becoming outliers like we have, so that implies the GDP issue is not the main factor here.
And on the topic of quality, it’s harder to compare country to country, especially when we don’t have universal coverage, so I won’t try to get into that in detail. Even looking at life expectancy is unreliable because a country’s healthcare system has such a small impact on that compared to the country’s culture surrounding diet and exercise.
So, that’s where I’ll leave it. I know there’s some uncertainty in this, but I am fairly confident that I finally have the answer to why the U.S. diverged in its healthcare spending in the 1980s–because we shifted from standard pricing to negotiated pricing as a result of HMOs.
And I have new evidence that is very consistent with my theory about how value-sensitive decisions are central to determining how much the value of goods and services provided by a market increase over time.
Update: I haven’t yet looked into how much the Price Transparency Act is likely to help with all of this. I’ll have to weigh in after I’ve analyzed it more thoroughly.
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.
“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.
It’s a market. Photo by Mark Stebnicki on Pexels.com
This is the last part of the Fundamentals of U.S. Health Policy series! And it’s a super interesting one. Michael Chernew, Ph.D., wrote about the role of market forces in U.S. health care. Since this is squarely in my area of focus, I have a lot of thoughts. Thus, this week I’ll stick to summarizing Dr. Chernew’s article, and then next week I’ll provide some commentary.
Forewarning, I’m following the paper’s logic flow, which, to my brain, is a little meandering, so it’s easy to lose one’s place, but I’ll clarify as much as I can now and then attempt to provide additional insight next week.
Remember how Total Healthcare Spending = Price x Quantity? (Well, actually, it’s the sum of the price x quantity of all the different services being provided in our healthcare system.) Dr. Chernew is basically using that equation when he starts out by saying that our challenge is to reduce the quantity of low-value services provided and to lower prices.
And then the big question . . .
What role should markets play in doing that?
He finally gets to the answer at the end, which is that markets and government should both be used to complement each other. Markets can be leveraged inasmuch as they will help, and this should be paired with the government regulations needed to help them work as well as they can.
I won’t list his specific recommendations quite yet about how we could do that because first I need to review what he says in the rest of the article about markets and how they work.
First, he says that markets are the “foundation of our economy,” and they promote efficient production and cost-reducing innovation. He doesn’t exactly give the step-by-step explanation of how they do that, but you can gather it from his next several paragraphs. Markets create competition, which is when consumers (in this case, patients) have “the ability and incentives . . . to seek low-price, high-quality providers. . . .” And because of that competitive pressure to win consumers, the players in a market are forced to innovate in ways that make production more efficient.
Great, so a good healthcare market will help patients choose low-price, high-quality providers. Unfortunately, healthcare markets are more imperfect than other markets. Want a big piece of evidence for this? Look at the extent of unwarranted price variations that exist in healthcare. It’s way more than in other markets.
But why is the healthcare market so bad?
“Competition in health care fails for several fundamental reasons. First, patients often lack the information needed to assess both their care needs and the quality of their care. Second, illness and health care needs are inherently difficult to predict, exposing people to financial risks that they must insure against. This risk gives rise to an insurance system that shields patients from the price of care, dampening their incentive to use care judiciously and to seek care from providers offering high-quality care at affordable prices. The information problem, amplified by insurance, reduces the ability and incentives for patients to seek low-price, high-quality providers and impedes well-functioning markets. This problem has been magnified lately by consolidation of health care providers.”
So, basically, it’s difficult for patients to really know what care they need, they have a hard time assessing quality of care, they’re shielded from prices because of insurance, and consolidation has limited their options. The result of all that is they have neither the ability nor the incentives to choose low-price, high-quality providers.
This, by the way, sounds almost exactly like what I’ve written (or linked to) a thousand times before, which is that patients need to start making value-sensitive decisions, and to do that they need (1) multiple options, (2) the ability to identify the value of each option, and (3) the incentive to choose the highest-value option.
Regarding consolidation, he gives some interesting data, which show that only 51% of markets have 3 or more hospital systems.
Based on all of that, many would conclude that we should abandon markets altogether in healthcare. But he says, “The weaknesses associated with market-based health care systems are severe, but that does not mean the market should be abandoned.”
And then he proceeds to give a few examples of beneficial things that have come from markets already, such as new payment models, telemedicine, a shift from inpatient to outpatient care, and narrow networks (which allows for lower prices).
Those, however, end up being overshadowed by the list of ways we’ve tried and failed to bolster market function by providing patients with better information about quality and prices and by changing insurance benefit designs.
The summary of this section of the paper is that giving patients better information about quality and prices have had very little success because . . .
Patients rarely use price- and quality-transparency tools
These sorts of decisions are complex
Patients fear disrupting their relationships with their physicians
Changing benefit designs to get patients to directly pay for more of their care (e.g., implementing high deductibles) has had a larger effect on utilization, but it hasn’t significantly impacted the market because . . .
What tends to happen is higher-value and lower-value care both decrease
Not enough patients end up getting steered toward higher-value providers to actually impact market prices.
He provides his explanation for all these failures: “The core problem is that for markets to work, patients must face the economic consequences of their choices, but labor-market concerns dampen employers’ enthusiasm for adopting plans that impose such consequences.”
In the realm of getting patients to choose higher-value insurance plans, there’s been a little bit of headway with insurance exchanges, although there are many drawbacks to those, too . . .
Beneficiaries make poor plan choices
Insurance exchanges induce more price sensitivity, which leads people to choose lower-premium plans that impose greater financial risk on them, which they often cannot bear
And, to make things worse, many of the downsides of insurance exchanges can worsen inequity.
Dr. Chernew is not exactly giving a glowing review of market-based reform attempts, is he? His comments are all accurate though.
Next, though, he says that “in evaluating their merits, we need to compare them with other systems, such as government-run models.” And government-run models have their own set of limitations.
Luckily, we are not facing an either-or decision. The important question is how government and markets can complement one another. “We do not need to abandon markets–we can make them better.”
Finally, getting to his recommendations about how to use markets and government to complement each other, he says we could work to increase the effectiveness of transparency initiatives, limit provider consolidation, and impose gentle regulations to prevent the most severe market failures (like limits on surprise billing and instituting price caps on the most excessive prices).
Dr. Chernew’s conclusion is that, “If we fail to improve market functioning, stronger government involvement will most likely be needed.” Agreed.
This next part in The New England Journal of Medicine’s fundamentals of health policy series is written by my favorite health policy writing duo–Drs. Baicker and Chandra. They both do amazing research independently, but when they work together to write an article, it seems to be extra insightful and interesting.
Their task with this article is to help people think deeper than the simplistic sentiment, “The U.S. spends way more than every other country on healthcare; we need to cut back, and any increase in spending is wasteful!”
Key insight: Only looking at the aggregate number obscures many important facts about our healthcare spending; digging a little deeper totally changes the conversation.
Here are my favorite examples of this from their article:
As nations grow richer, they spend more on healthcare. So, based on that alone, the U.S. would be expected to spend more than nearly every other country. Of course, this doesn’t explain all the difference between our spending compared to other countries, but it explains a lot of it, and it’s not a bad thing. A related side point they make about this is that it “highlights the challenge of putting all Americans, with very disparate incomes, into a single insurance plan.”
Studies that conclude our higher spending is purely due to higher prices (rather than higher quantity) aren’t able to account for all the inter-country differences in quality or intensity of care. This one was news to me, and you’ll see in my prior writings that I didn’t know this. You see, I thought that if a study shows that we generally have the same number of hospitalizations, doctor visits, prescriptions, imaging studies, etc., they would have controlled for differences in what kind of doctor visits (primary care vs. specialist) and scans (a 0.5-Tesla MRI vs. a 3-Tesla MRI) and such were being delivered. But that’s wrong–researchers don’t always have the data they would need to be able to do that. This means we need to look closer at exactly what we’re getting when we are paying a higher price than other nations, which will help us distinguish if it’s just plain overpriced in the U.S. or if it’s a substantially better service.
If we look at specific health outcome domains, we find out that we overspend on some of them and actually underspend on others. This means that sometimes increasing spending is actually a good thing, like for vaccines or other preventive care. When we look at spending this way, we can start to evaluate whether reforms’ spending impacts are effective not based on whether they increase or decrease aggregate spending, but instead we can base our assessments on how well they do at reducing overspending on the low-value care and increasing spending on the high-value care.
I hope that helps you think a little differently about (i.e., be a little more critical of) aggregate health spending references like it did for me.
And, to close, here’s a thought-provoking statement they drop in the middle of their article: “The debate about whether health care is a right sidesteps the more difficult and important question of how much health care is a right that should be ensured through public programs.”
A couple weeks ago, I wrote about an experience I had at work with a patient wanting to stay in the hospital for two extra days just so he could spend a few hours with his daughter from out of town before going to a skilled nursing facility where no visitors would be allowed. The cost of staying in the hospital those couple extra days was probably at least $4,000 total, but the patient and his family were (rationally) ignoring that cost because they weren’t going to have to pay for any of it directly themselves.
The solution I proposed to such system-level irrational spending was to have the person making the purchase decision bear at least part of the cost of that decision. That way, if they choose something more expensive, it will be done with a consideration for the additional cost that choice entails.
As context for my proposed solution to such a problem, remember three things: (1) every system is perfectly designed to get the results it gets, (2) the design of a system generates a set of incentives, and (3) incentives are what drive the results of every system. So does no one have an incentive to get the people making purchase decisions to bear at least part of the price differential?
This is how I look at it:
Anything that lowers the total cost of care (while at least holding quality constant) is desirable for whoever is bearing the burden of that total cost of care. And the parties who bear that burden are the insurer and the patient, to varying degrees.
But since the patient typically doesn’t have much of an idea about what their out-of-pocket cost will be or how those costs will be impacted by choosing a different procedure or a different provider, they are not in a position to do anything about it.
The insurer, on the other hand, has the capacity to know–or at least give a reasonable estimate of–the cost of something. Therefore, we need to look to insurers for the necessary changes.
But think about this proposal from an insurer’s perspective . . .
The young energetic intern pitches such a plan to the executives, “Hey, how about we offer a new and innovative insurance plan that gets rid of the typical deductible and instead makes enrollees pay a 50% coinsurance on each service they receive (subject to their out-of-pocket max, of course). We could set the total price of each service (and, therefore, their coinsurance portion) at our negotiated rates with each provider. And we’ll make an app that will allow them to compare prices beforehand.”
The room’s executives would immediately see all the problems with such a plan. “This is too complicated for people! They will hate it and never want to get an insurance plan from us again.” “We can’t divulge our negotiated rates, all the providers who find out they are getting paid less will be angry and demand more from us.” “What about things that are not shoppable?” “If a single bad publicity event comes out of this experiment, it will severely damage our reputation and we’ll lose market share as a result, so we stand to lose more than we could gain.” “We’re going to have to make premiums extra low for such a plan to be able to convince people to try it out, but there’s no way to easily communicate how this plan is different, so a lot of people will just choose it because it’s cheap and says it has a $0 deductible and then they won’t be prepared to pay all their coinsurance costs.” “What about out-of-network coinsurance rates?” “Nobody’s ever done something like this before, so it’s too crazy to try unless we are likely to make a killing on it, which we aren’t.”
I talked about these same issues in my Why Insurers Don’t Innovate post a year ago. And not all of them are immediately solveable. But if we could address at least a majority of those executives’ concerns, I believe we would start seeing some enterprising insurers try this out.
The big thing would be solving the novel complexities that such a plan would create and then finding a way to convey this information to potential enrollees, either in the health insurance marketplace or in employer benefits explanations. And we would have to hope that many people would be willing to use an app to check healthcare prices in compensation for paying a much lower premium.
There would be lots of challenges to solve, and apparently no insurer has yet determined that the potential benefits are worth the potential harms. But I have hope that this will happen and be successful sooner or later. Maybe if the first enterprising insurer to try it can identify some first-mover advantages and create some barriers to imitation, they would stand to gain a lot more.
Also, remember there’s the static-world benefits to patients making value-sensitive decisions (they get better deals on the care they buy), and then there’s the dynamic-world benefits (the market starts to evolve toward delivering higher value). This kind of insurance plan design change, as it starts and then spreads, will enact a big change in providers’ incentives. In other words, the system will be fundamentally changed, which will result in much higher value care being delivered as it evolves in response to that change.
This week’s post is a little later than usual, but next week will be back on track with a Tuesday post about Hayek’s book about socialism, The Road to Serfdom, and how it fits into my framework for categorizing governments.
Something I have noticed for many years now is that many good and important healthcare reforms are touted by experts for the wrong reasons. Supporting a good reform for the wrong reason may seem harmless, but without a clear understanding of the principles behind why the reform is important, the implementation may undermine much of the benefit of the reform, or it may not be evaluated based on the right expected impact (and, therefore, cause the reform to be incorrectly judged as a failure). Either one of these mistakes could ruin the reform.
Example 1 – Quality metrics reporting: This refers to making providers track and report a variety of quality metrics, which are then usually used to give quality-contingent bonuses. These quality metrics are also often reported publicly with hopes that it will add some accountability to providers and motivate the lower-quality ones to improve.
What many experts don’t realize is that quality-contingent bonuses are not going to make a big dent in our healthcare problems. They also don’t realize that the main purpose for quality metrics should be to help people make value-sensitive decisions, which means the tracked and reported metrics need to enable people to do this. Commonly used metrics these days, such as aggregate mortality numbers and overall patient satisfaction scores, aren’t super useful at achieving this goal.
Example 2 – High deductibles: Some experts say that if people have high deductibles, they’ve got some “skin in the game” and will therefore stop being such spendthrifts, which will decrease overutilization and total healthcare spending.
It’s true that a high deductible will reduce healthcare spending;, although, unfortunately, people tend to decrease unnecessary AND necessary care. That’s what the classic Rand Health Insurance Experiment demonstrated. But lowering spending is not the main purpose of high deductibles. The primary benefit of them is that they make people actually consider price when they are choosing where they will get care, which allows people to start preferentially choosing higher-value providers (i.e., make value-sensitive decisions). Of course, this only applies to services that cost less than the deductible.
Example 3 – Bundled payments: These are seen as a way to get providers to integrate more and, through that integration, “trim the fat” (what’s with all the flesh metaphors?). Usually the reduction in total episode costs comes from providers becoming less likely to discharge people to skilled nursing facilities.
Bundled payments do get providers to send fewer patients to nursing facilities and to find other superficial ways to decrease total episode costs, but the primary benefit is that they allow people to compare, apples to apples, the total cost of a care episode. Again, it’s all about removing barriers to value-sensitive decisions. This will lead to complete care process transformations as providers become motivated to improve value relative to competitors and are assured they will win greater profit as a result. So implementing bundled payments with a single provider in a region will likely result in only very modest benefits, which will come from those superficial low-hanging-fruit types of changes.
That’s enough examples for this week! Merry Christmas, and may everyone do good things for the right reasons.
Bundled payments are a proven strategy in non-healthcare industries, only we call them by different names. We say we’re paying for a “hotel room” when really we’re paying for the use of the room, the cleaning of the room, the “free” wifi, the “free” continental breakfast, access to the concierge, etc. We say we’re paying for a “cruise” when really we’re paying for the cabin, the unlimited food, the port fees, the access to the shows, use of the onboard pools, etc. These terms (“hotel room” and “cruise” are just two examples) are shorthand terms that refer to the bundle of goods and services you get when you pay that single price. That’s how it works in every industry.
Except healthcare. When we get a bill for a knee replacement, it only contains the surgeon’s cost (okay okay, including the hardware). But there’s also a bill for the anesthesiologist. And for the operating room. And for the hospitalization if you need to stay.
Why would all those things be listed individually if you know you will need a surgeon, an anesthesiologist, and an operating room every single time you get a knee replacement?
Enter bundled payments. They finally turn healthcare a little bit more into a normal industry by allowing patients to pay a single price for the bundle of services that should always be included in that one upfront price.
Sidenote: yes, healthcare is and should always be different from other industries in many important ways. For more details on that, read Arrow’s seminal article on the topic. None of this is incompatible with those insights.
When I see a paper like that, I appreciate the effort to summarize the evidence, but I cringe thinking about all the headlines and misinterpretations and misconceptions that it will perpetuate. People are going to start saying that our large-scale efforts to implement bundled payments are a waste of money . . . and they have evidence to back them up!
But that’s totally the wrong conclusion. This is how I interpret this study: I first think about the overall purpose of bundled payments. When you put their role into the context of the Healthcare Incentives Framework, their purpose is to allow patients to know up front the full price for accomplishing the job they have (get their knee functional again). This enables the patient to compare the price of different options. If they also have quality information of those options, now patients have the ability to shop for the best value (Value = Quality / Price). And when patients start choosing which provider to do their knee replacement based on value, market share starts to shift to the higher-value providers, thus forcing the lower-value providers to change in ways that either raise their quality, lower their price, or (hopefully) both! This is the potential benefit of bundled payments–it is an essential component in stimulating a newfound evolution toward higher quality and lower prices in the market for that specific service.
Compare that to how these studies evaluated the utility of bundled payments: They implemented them for a single procedure and usually with just one of many insurers a provider contracts with. Thus, in most cases the providers were still reimbursed the old fashioned way by all their other insurers. And I would guess that very few competitors in any given region were participating in the same bundled payment program. Therefore, there was no way providers were going to completely shift how they deliver the service because of the narrow scope, a lack of uniform incentives, and a lack of any strong financial imperative to do so (their biggest risk was only of losing a percentage of revenue on small portion of their patients–enough to motivate them to try to do some things a little differently but not to completely redesign how they deliver care–and the risk of losing market share to their competitors due to low value was almost nil). In short, these studies did not get even close to creating the environment for an evolution toward higher value.
With this as context, it’s a surprise to me that any of these bundled payment studies found any benefit at all!
Now, if I could perform my dream study (the design details here and here), that would make a splash. It would get us much closer to the true estimation of how impactful bundled payments could be in healthcare. And until a study like that is done, remember the importance of context, and take any evidence on the impacts of bundled payments with a large grain of salt.
Next week I’ll start looking at Joe Biden’s healthcare plans, so look forward to that!
This is the paper that generated the most media attention, much of which incorrectly asserted that the ACP endorsed “Medicare for All.” So let me, at the outset, clear this up: The ACP doesn’t endorse Medicare for All in this paper. It endorses a couple different options to achieve universal coverage, one of which is a single-payer system. There are many ways to achieve a single-payer system, and Medicare for All is just one way to do that. Maybe this sounds like semantics, but I think it’s important to be accurate here because the term “Medicare for All” carries with it a lot of specific ideas about how a single-payer system should be implemented, and it also carries with it specific political affiliations. The ACP was not committing to any of those specific ideas or political affiliations; the writers were only endorsing the general single-payer system approach as one of two options for how to increase insurance coverage.
Now, on to assessing the details of the paper.
Part 1 of this paper reviews the state of insurance coverage and healthcare spending, which sets the stage for Parts 2 and 3 to talk about ways to expand coverage and lower care costs.
Part 2 is mostly what I want to talk about. First, it asserts unabashedly that the ACP feels that universal health insurance coverage is essential. And since having insurance coverage is pointless if its spending requirements are not affordable or if providers are unavailable, it adds those access details in as also being essential.
Then it lists two options that it sees as being able to achieve that goal: a “single-payer financing approach” and a “publicly financed coverage option.” Let’s look at each one.
Single-payer financing approach. This means a single government-run insurance company provides insurance for everyone in the country. It doesn’t necessarily prevent people from purchasing private supplemental insurance, but it would cover everything considered to be essential. The paper then discusses some of the well-known benefits and concerns that come along with having a single-payer system. The interesting part to me, which makes sense coming from a physician organization, is their particular concern about how this would affect physicians. It could decrease administrative burden and uncompensated care, but it could also decrease autonomy. And the big concern is that if it relies on “Medicare’s flawed payment system,” it would perpetuate a few undesirable things, including bad incentives (such as an over-reliance on fee for service), the overvaluing of certain services (procedures), and unsustainably low reimbursements (that would make some providers go bankrupt). Any prior “Medicare for All” proposal I’ve seen relies on Medicare’s payment system, so this is a good example of why the ACP is not endorsing Medicare for All specifically.
Publicly financed coverage option. Another name for this is a “public option.” Basically it’s a government-run insurance plan that will be offered alongside private insurance plans. It would be available for employees to opt into rather than use their employer-sponsored insurance as well. An essential part of this insurance plan is that it would have premium and cost-sharing subsidies (so that, again, lower-income people don’t end up with useless coverage). Later on in this paper, they say that no matter which option is chosen, it needs to have included with it a mandatory or automatic enrollment component. I’m not sure how premiums would be paid for by people auto-enrolled into the public option plan–possibly through filing their taxes–but isn’t this looking more and more like the Affordable Care Act? Require people to have insurance coverage and subsidize lower-income people to be able to buy it? Yes, that’s the ACA. The one difference is that one of the insurance plans people can select from will be run by the government (which, incidentally, was originally part of the ACA plan).
So those are the two options the ACP supports. They also mention another approach: convert all insurers to non-profits and require everyone to have health insurance (another variation of the ACA, but this time there’s no public option and instead all the insurers are non-profits). But they say there is not enough information on how such a system could be applied to the U.S., so they don’t endorse it. And all the other options for reform that are out there (such as “market-based approaches”) would not achieve universal coverage, so they were eliminated from consideration.
Even though the ACP is politically neutral, you can see that their foundational beliefs and priorities line up much more closely with modern liberal thinking rather than conservative thinking/beliefs/priorities. This is what I expected, and I discussed it in my intro to this series.
Part 3 discusses strategies they support to lower healthcare costs. There are 5 of them: invest more in primary and comprehensive care, reduce excessive pricing and improve efficiency, reduce low-value care, rely more on global budgets and all-payer rate setting, and use more reference pricing.
Rather than get into the merits and drawbacks of these different policies here, lets finish this series with a brief discussion about whether the two options they endorse to attain universal coverage will get in the way of the ideas we talked about in Part 2.
If you will recall, the second ACP paper we discussed gave 6 different recommendations, the two main ones being to (1) give patients price and quality information to help them choose higher-value providers and (2) getting providers to shift to value-based purchasing arrangements (especially different forms of capitation) with insurers.
With a single-payer system, usually the implementation involves setting a uniform nationwide price for each service (adjusted by region for cost of living). This would completely ruin their idea of getting patients to choose providers based on value because the price would be the same for all providers. I will not get into detail on how, but setting a price floor like that completely distorts providers’ innovation incentives. It would kill pretty much any cost-lowering innovation that results in slightly reduced quality, even if the innovation could result in drastically lower cost.
But, on the upside, since there’s only one insurer to deal with, a single-payer system would allow for perfectly uniform incentives for any provider that chooses to enter a VBP arrangement!
With a public option like they have described, there is the exact same problem with distorted/ruined incentives due to uniform pricing, but at least the extent of the problem is limited to the number of patients who are on the public option plan. And, as for providers’ efforts to enter into VBP arrangements, it would probably make it slightly easier to get uniform incentives because I assume VBP arrangements would be harmonized between Medicare and this public option. But any provider who wants to design their own VBP arrangement is going to have to have an even harder time attaining uniform incentives because I suspect they would have to convince the plan administrators of Medicare and the public option independently, which means they’re trying to win over yet another public payer to be able to move forward with their idea.
Am I saying that the ACP’s efforts to accomplish universal coverage will interfere with their efforts to improve the care delivery system? Yes. The two options they endorse don’t necessarily need to be implemented in a way that does that, but I see nothing in what they’ve written that specifies that they should be implemented in a way that mitigates those problems. (For details on how this could be done, see what an optimal single-payer system would look like here and what an optimal ACA-type system would look like here.)
I think different groups of people were working on each paper, and even though they were reporting their findings and recommendations to the same group of ACP leaders for approval, it’s quite a difficult task as one of those ACP leaders to be presented with complex recommendations from two different groups and figure out exactly how they might conflict with each other.
Well, there we have it. The ACP endorsed some things that would be very beneficial, but they fell into the same trap of not thinking about these things from a complete system perspective, so their efforts to get more people into the system will interfere with the changes the system needs to deliver better value over time. This is why any healthcare reformer first needs to have a firm understanding of the core causes of low value and how those can be resolved before deciding on the details of how to enact universal coverage.
But I am happy the ACP jumped directly into this arena. It shows that powerful physician groups are also interested in figuring out how to fix the healthcare system. Maybe the biggest benefit from their efforts of researching and releasing these papers (and then having them critiqued) is that it will make the ACP and other provider groups more likely to recognize and support policies that will truly move us closer to fixing our healthcare system.
Clear Thinking on Healthcare 