The Incidental Economist

Historically, I’ve been  a very quantitative and multivariate thinker. That explains my undergraduate and graduate interest in physics and engineering, my fascination with the game of Go, and my professional focus on econometric techniques for causal inference in health care. But lately I’ve been paying a lot more attention to qualitative and descriptive evidence in the health services research literature.

It’s not that I suddenly think qualitative and descriptive analyses answer questions any more definitively than do the complex multivariate approaches I normally consider. It’s that qualitative and descriptive analyses are incredibly helpful in revealing potential relationships, suggesting hypotheses, and relatively quickly and easily revealing the possible broad nature of and context for an issue.

Moreover, less econometrically or statistically complex analyses are more easily communicated to thinkers outside the field, like policymakers, journalists, and beekeepers. That’s important, and I have no problem using results of simpler analytical techniques for policy advocacy so long as the qualitative conclusions they suggest are consistent with more rigorous, but complex and less broadly accessible, approaches.

But be on guard! How can non-practitioners tell when qualitative or descriptive analyses are “telling the truth” and when they’re just wrong? Oh boy, is that a thorny issue. For now I”ll just say, roughly speaking, they can’t. They need the guidance of experts. (Perhaps I’ll come back to this issue another time.)

With that as backdrop, here are two very good passages from just one of many qualitative/descriptive papers published by researchers with the Center for Studying Health System Change. The paper, by Devers et al., appeared in a 2003 issue of Health Services Research. First, on market power:

Market power is defined as the degree of control or influence an organization has over another organization (Scott 1987; Emerson 1962). Control or influence is shaped by the willingness and ability of one organization to sanction (i.e., punish or reward) another organization that it interacts with to attain key goals, such as survival, growth, or increased margins. The origin of market power is the dependency one organization has on the resources controlled by another….

This sociological definition highlights why and how an organization exercises market power, as well as the outcome (i.e., increased control or influence over another organization in a key area). As such, this definition of market power is broader than those used in economics, which focus primarily on the ability of an organization to influence price. For example, Carlton and Perloff (1994) define market power as the ability of a firm to charge a price above that which would prevail under perfect competition, usually taken to be marginal cost.

Next up, some commentary that relates market power (or “negotiating leverage,” which the authors take to be a synonymous moniker) to arrangements that may be encouraged by an accountable care organization (ACO) payment model.

Another key change [between 1996 and 2001] was the level of hospitals’ vertical integration with physicians (e.g., physician practice acquisition, formation of intermediary organizations such as physician–hospital organizations). Greater hospital-physician alignment strengthened hospitals’ negotiating leverage and weakened plans’ options. Many hospitals had implemented a range of physician-integration strategies, becoming a critical gateway for plans to physicians in the market. In many of the contract disputes noted above, plans were negotiating with hospital-physician organizations for physician professional services as well.

That pretty much sums up my concerns about ACOs, and those of others in my field. I think the qualitative ideas suggested–that vertical integration encouraged by ACOs may increase provider market power and consumer prices–are consistent with rigorous quantitative studies of hospital and provider market power. (I’ve cited about a bazillion of such studies in prior posts; or, you can just trust me.) So, I have no problem making some policy suggestions based on these concerns. Here goes:

First, let me be clear, I’m not saying ACOs are bad. I’m saying I have concerns about the implications for private-sector costs of such organizations, which will be encouraged under new Medicare and Medicaid, ACO-like payment schemes. What this means is that policymakers and regulators need to tread carefully in this area, think things through, and come up with public-side cost control approaches that don’t exacerbate private-side problems. (I suggested one idea, though without substantial detail. If someone were to pay me to study it–you know, rigorously, quantitatively–I’d have more to say. Meanwhile, back to thinking about ideas I’m actually paid for …)

Reader Ryan Stevens encouraged me to take a closer look at what the ACA legislation actually says about ACOs. Fortunately, the job is made dramatically easier by HealthReformGPS. In two separate posts the amazingly thorough staff of that blog cover the nitty-gritty on ACO provisions as they pertain to Medicare and Medicaid.

I encourage interested readers to check out the posts themselves. I’m not going to attempt to summarize them because, frankly, it’s too boring. However, in the very lengthy section on open questions, the following part jumped out at me:

How will federal antitrust enforcers view the establishment of ACOs? Will ACOs be insulated from potential antitrust claims to the extent that the ACO providers collectively negotiate payments with private third-party payers outside of Medicare? Will ACO certification include a determination that ACO are “clinically integrated” and thus fall within the federal antitrust exception? Will the federal government create an express safe-harbor from antitrust scrutiny for ACO activities under certain conditions?

I’d love to know the answers to those questions.

I’ve narrowly critiqued Representative Paul Ryan’s Medicare voucher plan on the grounds that it is too similar to an expansion of the Medicare Advantage (MA) program, which itself is more costly per beneficiary than traditional fee-for-service (FFS) Medicare. The basis for my understanding of Rep. Ryan’s plan is his own staff, with whom I’ve spoken. The basis for my understanding of MA is my own career studying and publishing on it. So, I’m quite confident in my ability to accurately compare the two and draw policy conclusions.

However, I like to be constructive, and there is a Medicare voucher program I would support, but it must include at least all the elements I list below. Rep. Ryan’s does not. I would, by the way, also support expansion of FFS Medicare under certain conditions as well. How can I simultaneously support annihilating FFS Medicare and expanding it? It’s easy. I support whatever demonstrably works. Read the rest and you’ll see what I mean.

I would support a Medicare voucher proposal that included at least the following provisions:

• Begins with a multi-year MA competitive bidding pilot. If the pilot reveals that MA plans competing on price can reduce risk-adjusted per beneficiary costs to a level below that of FFS with no degradation in health outcomes then I’m interested in a larger competitive bidding based voucher program, otherwise I am not. The pilot should include enough geographic diversity to reveal variations across market types. It is conceivable that vouchers work well in some markets and not others, which itself suggests that a FFS option might need to exist, at least where MA can’t beat it. (Implementation of MA bidding is, itself, politically challenging. Rep. Ryan’s plan calls for MA competitive bidding during a transition period. But the ultimate voucher program under his plan would not include competitive bidding.)
• Isolates the voucher program from political meddling. Under MA, Congress establishes plan payment rules. I’ve already explained why that’s a problem. Under Rep. Ryan’s plan the HHS secretary would have the discretion to adjust the size of vouchers. That’s not any better. My view is that the details of how plan subsidies (voucher levels) are set should be controlled by an independent board, like the Independent Payment Advisory Board (IPAB) that will be established under the ACA. Until politics are more fully removed from the setting of subsidy levels I will not support further expansions of MA. Also, as mentioned, voucher levels should be based on competitive bids. So, the IPAB-like entity would just control the bidding rules and procedures.
• Includes income-related subsidies. Low income individuals should not face the same premium and cost sharing burden as those who are better off. (It is my understanding that Rep. Ryan’s plan has some accommodation for income, as does the current MA program.)
• Establishes a minimum benefit standard or a set of standardized plans. The whole point of a market-based system is to harness the power of consumer choice. But consumers can’t send meaningful signals if the market has an incomprehensible structure. One of the conditions for a competitive market is fully informed participants. The notion that seniors–or anyone–can meaningfully shop in a market with an unlimited number of plans that vary in all possible ways is ludicrous. (There is already evidence that beneficiaries don’t optimally select among the scores of Part D plans available now and that reducing the number of available plans would increase welfare.) The Medicare supplement (Medigap) market is a good model of competition within standardization. Making products more similar encourages competition. Allowing them to vary along a small number of dimensions helps consumers make sensible comparisons consistent with individual preference. Isn’t that the point? (Rep. Ryan’s proposal doesn’t call for the establishment of standardized plans.)
• A fall-back mechanism for highly concentrated markets or ones with poor quality. It is possible that too few firms will participate in some markets, raising premiums well above competitive levels or reducing quality. Some markets could be dominated by a small number of hospitals, driving hospital service prices and/or volume up, which also translate into higher premiums. The plan has to have some way of dealing with such cases. One idea is a fall-back federal option, triggered by some measure of market concentration or beneficiary harm from insufficient competition or low quality. (Rep. Ryan’s plan is silent on this issue, as far as I know.)
• Access to utilization data for research. MA plans do not provide the same level of utilization data that is available for FFS Medicare. This limits our ability to understand how private plans work, what they provide, and what the consequences are for health outcomes. If taxpayers are funding them, or successor voucher-based plans, all utilization data paid for with such funds should be available for research. This would allow qualified research organizations to independently verify the merits of or discover the problems with a market-based insurance system for Medicare beneficiaries. If we’re to move away from FFS Medicare and lose the research data associated with it, I absolutely insist on a greater level of access to private plan data than exists today. This is a serious issue that gets very little attention, despite my efforts.

That’s a minimum set of requirements. I may think of more in the future, as will others with whom I may agree. Also, for me to take any voucher plan seriously it has to be clearly politically viable. I think it’s a pretty tough sell to Medicare beneficiaries. Though MA plans are available everywhere, about three-quarters of beneficiaries opt for FFS Medicare. Thus, an overwhelming majority are voting with their feet for the cheaper option. We taxpayers should be happy about that! Maybe we should just expand FFS Medicare, getting rid of MA altogether? The evidence on cost and beneficiary satisfaction supports it.

Of course FFS Medicare has a cost problem too, though it’s less severe than MA. (Yes, MA plans offer more benefits, but taxpayers still pay for them and beneficiaries don’t value them at anything close to their cost. That’s not a good argument for expanding the program.)

My preference for FFS will strengthen if the provisions of ACA designed to lower FFS costs actually work (ACOs, bundled payments, IPAB, etc.). So, this is all about evidence. I say, do an MA competitive bidding pilot, implement the ACOs, payment bundling, and the like. Let’s see what works. Today, FFS is winning, but it will still bankrupt the country. That’s a Pyrrhic victory in which I have little interest.

PS. One could make an argument that the current arrangement, with MA and FFS Medicare coexisting, is optimal. Maybe the argument would hinge on countervailing forces of rent seeking or on the fact that MA offers models of innovation while FFS Medicare serves to mitigate market power in concentrated insurance and hospital industries. The current arrangement also appears to be a political equilibrium. I’m not making this argument here because I haven’t fully fixed it in my mind. Maybe another time.

After our e-mail exchange about the doc fix, Arnold Relman was kind enough to send me his book about his vision for a U.S. health system makeover, A Second Opinion. It’s a book worth reading, full of insight and well-supported arguments.  I liked it, agree with much of it, but not with every nuance of every idea in it.

Relman argues that corporate interests have overtaken health care provision and insurance. Dominated by a drive for income maximization and return on investment rather than high quality patient care, provider and insurer organizations are failing us, he says. The high costs for mediocre outcomes (relative to other OECD countries) that we observe are a natural consequence.

Relman’s proposed solution has two parts. One is a move to a global budget based single-payer system overseen by a National Medical Care Agency (similar to the SEC, the FTC, and the Fed–accountable to Congress but with independent regulatory authority). That cuts the insurers out of the picture. The other part is to pay provider organizations on a capitated basis–a fixed payment for each individual, risk-adjusted but not directly tied to specific services rendered. He suggests that salaried physicians organized as non-profit multi-specialty medical groups that receive such capitated payments would eliminate the perverse incentives of fee-for-service arrangements that are pervasive today. That cuts many current medical businesses out of the picture (they’d have to reorganize and tell investors to take a hike).

There are obvious political obstacles with Relman’s ideas, which he acknowledges. However, he also believes they will be overcome relatively soon. The book was published in 2007, and throughout most of  of it he writes that major reform in the direction he suggests might occur within ten or more years but in at least one place he writes that it might occur in five to ten years. My view is that if we ever eliminate insurers and for-profit medical businesses it will be many decades from now. I don’t expect major changes unless and until the path established by the Affordable Care Act (ACA) is proven ineffective. That will take a minimum of 20 years (recall the Cadillac tax doesn’t begin to bite until 2018). I also think “never” is a good estimate. We’re talking insurers and medical providers here! They’ve got a wee bit of clout.

Normally when someone argues strongly for a politically moribund idea I dismiss it quickly. Why contemplate the impossible? But Relman’s ideas are worth more consideration. He’s on to something (a few things, actually), and they can be separated from the politically unlikely package and contemplated independently.

He makes a very good argument, citing many studies, that the profit (or income) motive in health care is a problem. It’s not the drive for profit alone that is an issue. (If it were, we’d be trying to remove the profit incentive from every industry. Bad idea!) The problem with health care is that when the profit motive is combined with fee-for-service and third-party payment, information asymmetry that promotes provider induced demand, and life-and-death decisions it is far too easy–even individually rational if socially inefficient–to spend too much for too little.

The question is, what can be done? Different people propose different solutions that focus on different facets of the problem. Advocates of consumer directed health plans (CDHPs) argue that it’s principally the degree third-party payment that should be adjusted. If consumers directly pay more for their care they’ll make better decisions about what care to buy and how much it is worth. There is something to this notion. It’s not obviously wrong. It’s not obviously right either. There are potential problems, to which Relman devotes a chapter. Problems aside, the CDHP concept is being tested in the commercial market, and more will be learned about the degree to which it works over time.

Rather than targeting third-part payment, Relman’s focus is on the fee-for-service nature of payment. His proposal is to compensate providers with capitated payments. It’s a good idea, but isn’t obviously right or wrong either. I can see some merits and some problems. Fortunately, it has some similarity to the accountable care organization (ACO) concept that will be tested in Medicare and Medicaid. Thus, we’ll learn more about what such a payment system can do as well. CDHPs or ACOs, what are the strengths and weaknesses of each? We can speculate, but we won’t know for sure until we try them. So, it’s an empirical question and in time we’ll know a lot more.

But neither CDHPs nor ACOs are tied to single payer. They can exist apart or along side it. So, progress can be made without a single payer system. (In an earlier draft of this post I wrote that single payer is dead. Aaron Carroll is not so sure and points to recent events in Vermont. I still cannot imagine insurers and for-profit medical providers being legislated out of existence nationally. But I’ll hold off declaring singe payer dead in this post out of respect for Aaron.)

My final thought about A Second Opinion is that Relman is too hard on health economists, suggesting we’re partially responsible for the market-based system he blames as the source of our health care problems. If only health economists had so much power! I’m not sure what body of literature suggests health economists are strong and persuasive advocates for “corporate health care.” Some may be. Some may not be. About most policy issues, I’d say we’re mixed (on these very points see the Victor Fuchs article that Relman himself cited in his book). But, more than that, I’d say we largely keep our mouths shut about how things should be and focus on how things are and how they might turn out under proposals for change. As a community, we’ve diagnosed the problems Relman points to and analyzed suggested solutions to them. I consider that a service worthy of praise. (I’m biased though.)

In conclusion, Relman is right to put the focus on how physicians and hospitals are paid. I think most health economists would agree with him.  But physicians and the hospital industry won’t. That’s the problem. Relman’s book doesn’t solve it, nor could it. I’m not sure anything can.

This is interesting:

The NHS in England is to undergo a radical reorganisation, with GPs commissioning most services and the abolition of primary care trusts and strategic health authorities.

The government’s white paper contains far reaching proposals that devolve power from central government to patients and doctors. Reaction to the proposals has been mixed, with one concern being whether GPs will be given enough support to take on their new expanded role. Another worry is that such large scale change is risky at a time when huge efficiency savings have to be made.

A key plank of the white paper is that all general practices must join a consortium that will commission the majority of care for their patients. It is anticipated that GP consortiums will hold around 80% of the total NHS budget. The white paper states that the new model is “neither a recreation of GP fundholding nor a complete rejectionof practice-based commissioning.”

I’m far from an expert on the NHS, but this sounds similar to a primary care physician based ACO concept.

The time has come to dig a bit deeper into the current vision for the future of health care in America: accountable care organizations (ACOs). ACOs represent a new model (or a new-ish version of familiar ideas) of health provider organization and payment and are the current best hope for controlling health care costs, at least for public programs. Plans for Medicare and Medicaid ACO pilot projects are included in the new health reform law. If successful, they may be implemented widely. Someday we may all receive care from ACOs.

In brief, an ACO is a group of health care providers and institutions that are collectively responsible for (and held accountable to measures of) the health of a population. An ACO has an organizational structure that permits the encouragement of improvements in quality and lower costs through payment incentives. If that was a bunch of mumbo-jumbo to you, then read my earlier post on ACOs or Michelle Andrews’ NY Times’ Prescriptions post on the topic.

There are two key elements to an ACO, one pertains to its structure the other to how it is paid. Since an ACO is responsible for the health of a population it must include a set of health care providers such that individuals seeing those providers (mostly) don’t receive care outside the ACO. This is most easily understood by counter-example. If you see three providers–X, Y, and Z–but only providers X and Y are in the ACO then that ACO isn’t accountable for all the care you receive. Some of your care, that given by provider Z, is outside the ACO. That violates the ACO concept. You can imagine that ACOs must therefore be quite large.

The reason ACOs need to include all providers caring for a population relates to the second element of an ACO, how it is paid. In contrast to the fee for service model of payment, which encourages provision of care independent of its need or quality, ACOs would receive a bundled payment based only partially on services provided. Some portion of the payment would be based on the achievement of quality and cost performance goals. The incentives of the payment system would be designed to lower costs and improve quality.

The bundled incentive payments received by an ACO would be distributed to particular providers within that ACO according to its internal governance. Given this, you can imagine that whatever entity manages the ACO would wield considerable power. Currently hospitals are the most powerful of provider entities so one might expect they would be the source of ACO management. As I’ll argue below, that’s probably a bad idea.

Abstracting from the details, ACOs include two important economic concepts: (1) provider organization and (2) incentive payments. While the first is necessary for the second it also raises the possibility of increased market power on the part of providers. If providers consolidate as they organize into ACOs–and some are already doing just that–they may gain increased market power that could be used to negotiate higher prices from insurers, seek additional rents from legislators, and game the payment system.

In this sense, the organization necessary for payment reform may offset its intended effects. This brings us back to my favorite graph that relates health care premiums (a stand in for costs in general) to concentration in the health insurance market. (Other posts that use this graph are found under the “health care market theory” tag.)

Recall that this graph is drawn for a fixed level of provider market concentration. While provider payment reform (via ACOs) may lower public costs, additional provider market power will push the system further toward the left along this curve (toward the point “A”). Private costs and premiums could rise. (Note, this is not the standard cost shifting argument. Private costs don’t rise because public payments fall. They rise due to changes in the balance of market power between providers and insurers.)

That’s no good. But there is a way around this problem. The key is to recognize that a great deal of cost in the health care system is for hospital based services while relatively little is for primary care services. Suppose primary care doctors, not hospitals, are permitted to manage ACO-like entities. That is primary care doctors could be made to be the gateway to non-emergent specialty and hospital care (sounds familiar).

The advantage of such an arrangement is that additional market power of primary care doctors would not itself drive costs up much since the services they directly provide don’t cost very much. Yet if the primary care doctor organizations were held accountable for the care their patients receive they would be responsive to the incentives of the payment system. They would refer their patients to higher quality, lower cost specialists and hospitals. One could expect costs to come down under payment reform without substantial upward pressure due to increased primary care physician market power.

The key to all of this is wrestling control out of the hands of hospitals. I can think of a few political problems with this idea.

In a comment, steve makes a good point, “[T]he rumor is that my hospital is going to buy up practices in anticipation of an ACO model.” This is consistent with what I blogged several days ago. Providers and insurers are consolidating now in anticipation of Medicare payment system reform that will reward integrated delivery systems.

This is interesting because we don’t yet know for sure what the new payment system reform will be. Whether it really rewards consolidation or not, consolidation is what we’re getting.

The 2010 AcademyHealth Annual Research Meeting has concluded. Over the coming weeks to months I’ll post on some things I learned, starting with this post. (I also hope to include in future posts some very nice figures I saw in talks and on posters, assuming I can get my hands (er, mouse) on them.)

My main questions about health reform at the moment are: (1) What form will accountable care organizations (ACOs) take? And (2) how will the market power effects of provider integration ACOs may encourage be handled on the private side?

This will be a short post because the answers to those two questions are both, “Nobody knows.” A new office at CMS will be formed next year to test and roll out ACO-related ideas. There are a lot of them and no clear winner. That’s not a bad thing. Running demos and pilots to evaluate the effects of different models is exactly the right thing to do at this stage.

Many economists and health policy experts at the conference expressed concern over provider market power (mostly hospitals), which is generally seen as the source of health care cost growth. But what’s to be done about it? Some ACO models might exacerbate it. That isn’t a problem for Medicare or Medicaid since they can set prices. But it is a problem for private insurers and those of us who buy their products.

Antitrust enforcement isn’t necessarily a complete solution if it solves the private-side problem only by undoing a public-side solution.

As I learn and think of ideas I’ll post them.

Kaiser Health News anticipates the consolidation in insurer and provider markets due to the new health law.

Bloomberg Businessweek reports that … health insurers are “moving towards an oligopoly” accelerated by the new law. … The health-care overhaul is likely to push at least 100 insurers with 200,000 members or less out of the business ‘as the plans are increasingly unable to invest in the infrastructure and technology to effectively manage care.’ …

In the meantime, doctors are being driven together in practice by health reform and “solo practices could be on the way out,” National Journal reports. …

Doctors are increasingly looking to band together in ACOs to reduce costs and put themselves in line for the Medicare money such organizations are likely to see after health reform is implemented. “The big question now is not whether accountable care organizations are the future, but who will control that future.”

We saw this coming, right? How the money will flow from Medicare through the new provider organizations is the trillion dollar question.Whether hospitals or primary care doctors (or some other entity) controls how its distributed will determine if and how this whole experiment will work.

The other big issue is that provider integration under ACOs (or otherwise) are fine and good for Medicare, but somebody needs to think through the consequences for the private side of the market. Which way will the insurer-provider market power battle push premiums? I’ve been asking this question, reading and posting on literature relevant to it, and thinking about it for a year now.

With all that work, you’d think I’d have made some progress in addressing it. Actually, I have, but only a little. More to come.

Jenn Abelson and Todd Wallack report in today’s Boston Globe that the attempt by Massachusetts Governor Deval Patrick to hold down insurance rate increases has been overturned.

In a blow to the Patrick administration, an insurance appeals board yesterday overturned the state’s cap on health premium increases for small business and individual customers covered by Harvard Pilgrim Health Care.

The three-member administrative panel — which consists of attorneys who work for the state Division of Insurance — found that rate increases Harvard Pilgrim initially sought in April are reasonable given what it must pay to hospitals and doctors.

The administration is considering an appeal. Rulings on the rate cap for other insurers are pending.

This seems like a fight between regulators and insurers–and it is. But it’s all about hospital and doctor prices. Are they reasonable or not? An economist should be tempted to say that the market tells us what is a reasonable price. Yet this is not a competitive, efficient market. Prices are strongly related to hospital market power, which is high (recall the AG’s report). The market is broken and something must be done.

I’d rather see efforts to reduce hospital market power or the effects of it. If we’re going to rely on market-based health care we should insist on a market that doesn’t harm consumers. Capping insurance hikes is an indirect and short-term approach to battling hospital clout. On the other hand, there was some evidence that insurers were reacting to lower premiums by attempting to stick it to the hospitals. Would that have worked? We may not get to find out.

If we’re not willing to break up the hospitals then price regulations are the only other solution. But if regulators can’t cap insurance prices, what’s left? I can only think of one solution, which has two components: (1) capitated payments to integrated providers to cover a long duration of care (that solves the public payment side) and (2) an all-payer rate system so large hospitals can’t dominate the market (that transfers the public solution to the private side).

Nationally, and in Massachusetts, I’ve heard a lot of talk about the first part of this two-step solution. The buzzwords are “bundling” and “accountable care organizations” (ACOs). Those are fine ideas for public payers that have the force of law to set prices and contracting arrangements. Put what are private payers–that’s the rest of us non-poor working folks via our insurance carriers–to do? There’s nothing inherent in bundled payments and the ACO model that reduces provider market power. It could increase it.

That’s where all-payer rates come in. If insurers are free to collude on price they negotiate as a block. Proponents of a public option should see something to like here. Advocates of a free market need to explain how else to address the imbalance of market power that exists. This seems to me to be about as free a market as we can afford.