The Incidental Economist

Austin and I have been up and back this morning on the odd ways people have misinterpreted this post.  Avik Roy weighs in by talking about the fact that while health care is different from other markets, in that it does involve life-or-death decisions, that those aren’t as common as we think:

It turns out that the true range of life or death decisions in health care is rather narrow. If a poor woman gets hit by a bus and is sent to the ER, we all agree that America should come together and pay for that woman’s care: and, in fact, we do pay for it. If a physician makes a mistake, causing a patient to die or suffer disability, we have malpractice litigation for that—i.e., this is a problem upon which government-subsidized health care has no impact.

It would benefit those who believe that health care is incompatible with the free market to refine their arguments. A stronger liberal argument for socialized medicine would be: let’s let the free market reign in those areas of health care that are most like the rest of the market economy (i.e., non-catastrophic and elective care), and instead focus on socializing the aspects of the system that are most unlike the rest of the economy (i.e., catastrophic care).

I don’t disagree on his initial point – as a pediatrician I rarely have to deal with life-or-death decisions with my patients.  I do, however, need to deal with significant quality-of-life issues.  All the time.

When Avik calls for a stronger liberal argument, he’s ignoring the fact that many have been making it for a while.  I, for instance, have no problem with using the free market for some things.  I said this just two weeks ago:

I come down somewhere in the middle.  I’d say that for the stuff we agree everyone should get, that comprises the base set of quality health care, you ignore the moral hazard.  We want people to get that, and we should make it as easy as possible.  But for stuff that is unnecessary – and there is a lot of it – we let people get additional insurance to cover that.  Or we cost-share that.  Or we make them pay for it themselves.

I don’t think, for instance, that insurance should pay for elective plastic surgery.  I don’t think it should pay for Lasik.  I don’t think it should pay for more expensive drugs when equally efficacious generics are available.  I don’t think it should pay for full body CAT scans or unnecessary screening tests.  I don’t think it has to pay for single rooms or fancy food or satellite TV.

All of those things – cost share away.  Free the markets.

But for things which do work and yet still are not life-or-death decisions, like asthma medications, diabetes check-ups, appropriately recommended colonoscopies and mammograms, and so on, I think that we should avoid the free market.  We want people to get that stuff, even need them to.  And even small increases in cost-sharing have been shown to dissuade them from it, resulting in bad outcomes and sometimes increased cost.

Avik and I don’t disagree in principle, we disagree on the details.  And I think if Avik looked closely, he would see that many people arguing the more “liberal” side have been making strong arguments in this fashion for some time.

In preparation for that talk I’m giving, here are some graphs I’m considering using as motivation. Click to enlarge any of them. This first figure illustrates what will happen to the budget deficit if we continue along current trend in our health care spending (yellow line) vs. adopt (somehow) a rate of spending increase equal to that of OECD countries (blue line). The figure is from the Health Care Budget Deficit Calculator, produced by the Center for Economic and Policy Research.

Much of that projected increase in spending is Medicare + Medicaid. See the next figure (from the Tax Policy Center, though I believe it originates from the CBO). This doesn’t even count tax subsidies and other government health spending (VA, military, etc). Try not to let that Social Security band in the graph distract you!

And yet, Americans are mostly interested in cutting spending in other areas, like foreign aid. And this is after a year-long public dialog on health care and its cost. How much sense does this make? See the next figure (source: Ezra Klein via Bruce Bartlett via Harris).

What happens if we don’t rein in spending? The following (from Joe Newhouse) tells the frightening tale. If health spending increases at just 2 percentage points above GDP (which is low by historical standards), government spending on non-health goods and services must plummet (yellow line) unless we increase taxes or take on more debt. Taxes would have to more than double to keep up.

Debt levels are already high and headed into the stratosphere. Here’s a nice historical graph of debt from the CBO.

Just in case you’re wondering, CBO’s “alternative fiscal scenario” (the mortifying dotted blue line projection) is not based on anything terribly radical.

CBO also developed an alternative fiscal scenario, in which most of the tax cuts originally enacted in 2001 and 2003 are extended (rather than allowed to expire at the end of this year as scheduled under current law); the alternative minimum tax is indexed for inflation (halting its growing reach under current law); Medicare’s payments to physicians rise over time (which would not happen under current law); tax law evolves in the long run so that tax revenues remain at about 19 percent of GDP; and some other aspects of current law are adjusted in coming years.

Bottom line: government and its services run on money. We can’t expect to extract too much more (some more yes, but not too much more) from taxation and debt. Health care is consuming government budgets (federal and state) at an accelerating rate. Are we interested in government doing anything else? If so, the rate of health care spending increases must come down.

Oh, and finally, this is not just a government problem. Private costs are increasing just as fast and, no, incomes are not keeping up, as shown below (source: Kaiser Family Foundation).

Since seeing Joe Newhouse’s suggestion of an all-payer health system and recalling Uwe Reinhardt’s advocacy and Maryland’s implementation of one, I’ve been trying to figure out what “all-payer” really means. What are the variations in all-payer systems? How do they work? To what extent do they reduce costs, enhance access, affect quality, etc.? In recent days, I’ve found answers to some of those questions.

From a 2009 Health Affairs article by Robert Murray, it’s clear that one Maryland-style all-payer system is an administrative pricing one. Regulators pour over hospital cost reports and, based on them, set prices. But the implication of Newhouse’s brief mention of all-payer is that he preferred it to a single-payer system because it included price signals. So there must be more to it!

A very old, 1992 Health Affairs paper by Paul Ginsburg and Ken Thorpe does reveal a little more. It’s about how to make the difficult transition from the current price-discriminatory system to an all-payer one, while maintaining price competition. There seem to be two key elements. One is that prices still vary across hospitals. So there’s a little price competition in that sense. However, a single hospital cannot vary its price for a given service across payers. That’s what all-payer means.

Ginsburg and Thorpe also suggest the possibility of insurers negotiating discounts from an administratively set cap on a given service. That permits competition and is a big price signal, but doesn’t sound like it belongs in the all-payer category. It’s just price caps. Maybe I misunderstand their ideas.

This brings me to Reinhardt’s 2009 Health Affairs blog post on the subject. (Aside: I overlooked this initially because Health Affairs blog posts don’t show up in database searches of the academic literature, or not prominently anyway, since they don’t get cited in other papers. This strikes me as a real problem for the research blog model that Health Affairs is promoting. I think they should consider bundling  a subset of their blog posts–maybe the ones with the most links, tweets, and comments–into occasional or periodic special issues.)

For starters, one could use the diagnosis-related groups (DRGs) and resource-based relative value scale (RBRVS) now used by Medicare as the first-stage relative value scales, which could be refined over time on the basis of either cost or imputed value.

If price competition among providers were desired, one would allow each individual provider to set their own monetary conversion factor for their relative value scale and compete on that simple, one-dimensional price indicator. …

One could also, however, have these conversion factors negotiated between associations of providers and associations of insurers with a region (e.g. a state) and make them binding on all providers and insurers in the region, as is now done in some European countries — notably Germany — which operate all-payer systems within regions.

Thus, to do away with the unwieldy and unseemly price discrimination now prevalent in American health care, a physician or a hospital would charge all insurance carriers or patients the same price for identical procedures. The system would work best if there were not a large number of uninsured people and if the public insurance programs — Medicare, Medicaid, and the Children’s Health Insurance Program, or CHIP — were part of the arrangement.

Very clear! I get it now. I can see the dimensions in which an all-payer system can vary to build in price competition. In the rest of Reinhardt’s post he describes the various benefits of an all-payer system and how it can serve as a transition to bundled payments.

One should not be too optimistic about what an all-payer system can do. It’s principally a system for purging price discrimination from the system, which would also eliminate cost shifting, to the extent it exists. Beyond that it would aid in the goal of price transparency, a necessary condition for a well- functioning market, and it would enormously simplify billing and reimbursement. All good stuff.

But will all-payer bend the cost curve? I think one can’t be certain without pinning down the details. With prices that are administered in some fashion, the curve can be bent by fiat. Under a competitive model, the curve does whatever the market allows. As I like to say, “The market does what the market is.”

Finally, since price discrimination currently exists between public and private payers–the former pay far less than the later, per admission or service–movement to an all-payer system means higher prices for Medicare and Medicaid. Isn’t that a problem for federal and state budgets? That’s got to be addressed before policymakers can really get behind this idea.

But you’d be wrong:

More than a quarter of Americans who take prescription drugs have skipped doses, split pills or cut other corners to save money in the last year, according to a new study by Consumer Reports…

This telephone survey, of 1,154 adults who currently take at least one prescription drug, found that 27% “failed to comply” with their prescriptions in some way during the past year. Most commonly that involved skipping a prescription fill, taking an expired medication, skipping a dose, splitting pills or sharing a prescription with someone else.

That kind of cutback was most common among people who were under age 65 and didn’t have prescription-drug coverage.

For 64% of respondents, the first they heard about the cost of a prescription was when they picked it up from a pharmacist. About half agreed with the notion that doctors don’t consider a patient’s ability to pay when they prescribe a drug.

Much like malpractice reform, the problem with pharmaceuticals in this country is two-sided.  Yes, we hear all the time from critics of the pharmaceutical industry that too many people are on drugs or that we care encouraging more and more people to take pharmaceuticals.  But we shouldn’t forget the many, many people who need those medications can’t get them.

Notice that most of the people who are not getting their drugs are below 65.  This isn’t a Medicare problem.  Nor is this a “choice”.  People can’t afford drugs.

This is one of those instances when I do agree that we’ve got moral hazard problems.  If people were told, in the office, that they could have a pricy brand-name drug or a much cheaper generic drug, which often are the same molecule, people should choose the cheaper drug.  Right?  So why aren’t they given that option?

70% of those surveyed agreed, to some extent, with the notion that pharma companies have too much influence on physicians’ prescription decisions. (It should be noted that with this type of question, phrasing is everything.)

Some 47% agreed with the idea that physicians’ prescription choices are influenced by pharma-industry gifts; they were also concerned about the practice of rewarding physicians who write a lot of prescriptions for a given drug (81%) and paying doctors for testimonials or as spokespersons (72%).

Consumers themselves aren’t immune from pharma-industry influence: 20% reported requesting from a doctor a drug they’d heard about via direct-to-consumer advertising. Of those, nearly 59% came away with a prescription. Two-thirds have received free samples from their physician — and people with high incomes and prescription drug coverage were the most likely to get them.

I know that this is just people’s opinions.  It’s not fact.  But it’s backed up by fact, and if enough of you demand those papers, I will dig them out.  Doctors are influenced by pharma and that’s a big reason why they continue to prescribe the most expensive drugs.

This is an area where we (1) spend a lot of money, (2) there are easy ways to save money without sacrificing outcomes, and (3) people aren’t getting what they need because of the cost.  This is a perfect example of hte low-hanging fruit that almost everyone should agree should be solvable.  Think it will happen?

Here’s an actual, not hypothetical, moral hazard story. This past year my family has used a lot more health care than in any prior year. I’m not talking about big ticket items. I’d estimate the total cost to our insurer is in four figures. We could have afforded to pay for the care entirely out of pocket, but we didn’t have to. Insurance picked up most of the tab.

Had we had to pay OOP, we’d have used a lot less of this care, maybe none of it. Nothing was urgent. Nothing was life threatening. None of it pertains to serious chronic illnesses. So is this an example of moral hazard? Yes it is, or arguably so.

Yet, the fact is, we’re far better off for the care, though not in typically measurable ways. None of it prevented hospitalization or ER visits. None of it decreased mortality. But much of it made us happier, more comfortable, better able to enjoy life, and work.

So, it’s care I’m glad I had, but not care I’d have been willing to pay for at full cost up front. Knowing its benefits after the fact, I might have paid more for it. If I could go back and talk to myself a year ago I’d say, “Get this care, even if it costs $5,000. Pay it. You’ll be happy.” But that’s not how it works. I have to decide not knowing the outcome. That it seems like my insurer pays for all but a tiny bit of it (and I do so with copays and indirectly and largely invisibly through payroll deducted premiums that are connected to aggregate use, not these specific services), removes the financial disincentive for care. Thus, I got more of it.

So, I’ve admitted to moral hazard. I’ve said I’d not have gotten some or all of this care if I had had to pay a lot more OOP. What if our doctors, not me, not my insurer, were at risk for the cost of that care (e.g., an ACO model)? Would we have received it? Maybe not as much.

Do I want our incentives to use this care expunged from our system, either because I or my doctors are at greater risk for its cost? Would I be happier getting less and costing the system less? That’s a very hard question. I have to reconcile the personal with the systemic.

Here’s what it comes down to: I like what I get today, but I don’t like the long-term consequences of the system that permits me (and all of us) to get what we get the way we get it and pay for it. The fundamental reason I support changes to health care use incentives so I’m more likely to get less is that I like other stuff too. I want our government and society to be able to do more than pay for health care. Put more simply, this graph frightens me (see prior post for details).

I don’t think we’ll let ourselves get into the situation that the yellow line illustrates. We like health care, but not at the complete expense of all other things. There will be a correction. The point of worrying about it is that it matters how the system is corrected. All policy has implications. None is ideal. Hence, the debate, and my job.

What to do about moral hazard? I don’t have a perfect answer. But something will be done.

Austin writes me at the crack of dawn about my post:

I agree with the conclusion of this post, but the set-up bothers me in one way. When care is free or cheap people get more not because they want it per se (colonoscopies is a good example), but because their doctors prescribe it. If my doc says, “An XYZ might help a bit,” and it is free to me, I’ll do it. If my doc says, “An XYZ might help a bit,” and it cost me $1,000 I’m going to ask WAY more questions and am much more likely not to get XYZ.

This is when I wish I had an html tag for kidding on the square.  I agree my example was hyperbolic.  But the point remains the same.  When people talk about how the moral hazard results in more care consumption, it’s always in hypotheticals.  You can make an argument (and a compelling one at that) with straw men that seem to make sense.  I see very few concrete examples that happen in the real world.

In practice, I can remember almost no instances where I told a patient what to do and then had a discussion of what it will cost.  And you will have to trust me that almost everyone I see is very, very poor.  You can blame me for that, but that’s how clinicians are trained.  Fix it if you want, but it has nothing to do with consumers.  I look at a set of clinical symptoms and history, and the patient, and decide based on that what the best therapy is.  The only thing I ever really bring up in terms of cost has to do with pharmaceuticals.  I will tell patients that the generic is often just as good and much cheaper, but you’d be surprised how few docs do even that.

These arguments for the moral hazard as a major problem in health care also ignore the fact that something like 80% of health care spending is consumed by 20% of people.  Those people are not like the rest of us.  How much of that is spending is likely moral hazard related?  I’d guess little.

I’m not denying that the moral hazard exists.  It does.  I’m denying that trying to limit it through brute force is a good idea.  That’s what the research shows, and I will always take research over theory and arguments.

Austin continues:

I believe there is provider induced demand, as the example illustrates (this goes way back; one can cite Arrow; invoke information asymmetry). There are two ways to combat it being discussed today: (1) on the public side, ACOs and related bundling/capitation and (2) on the private side CDHPs. I think we’re going to see more of both. The writing is on the wall. They can both work to limit care (ration!!!). Which is better and for whom?

CDHPs make some sense for younger, healthier, non-poor, and not cognitively impaired folks (most of the working-age population). I’d support a CDHP model if it had income-related cost sharing and, moreover, included value-based design (a la Chernew).

However, for the elderly, chronically ill, very poor, cognitively impaired (e.g., most of the public program population), CDHPs make no sense. For them, ACOs are sensible. Put the risk on the provider and manage quality.

Moral hazard is real. Providers and patients play a role. It is all about money. But how the risk should be allocated depends on which population you’re dealing with.

Well, sure, as I said in the original post, brute force reducing the moral hazard for healthy people is great.  But how do you differentiate?  And, as John Nyman argues, some people who are previously healthy get really sick and the fact that a moral hazard exists may make them more likely to get care – which is a good thing.

I think that one of the biggest differences between liberals (with a little l) and conservatives (with a little c) is where they want the push to come from.  Many conservatives believe that the lever should be the consumer, that by increasing cost-sharing, you use the individual to drive the cost of the system.  Thus medical savings accounts and high deductible health care plans.  Many liberals believe that the lever should be the system.  You should limit money into the whole thing and force the many moving parts providing care to do so more efficiently.  Thus single payer systems.

I come down somewhere in the middle.  I’d say that for the stuff we agree everyone should get, that comprises the base set of quality health care, you ignore the moral hazard.  We want people to get that, and we should make it as easy as possible.  But for stuff that is unnecessary – and there is a lot of it – we let people get additional insurance to cover that.  Or we cost-share that.  Or we make them pay for it themselves.

I can already hear the howling.  Yes, that is “rationing”.  But we have to get over the idea that rationing is a four letter word.  We should want to ration stuff that is not really necessary.  And we should start to get used to the idea that a lot of what we do falls into that category.

UPDATE: I’m not saying this last thing would be easy. It would be very complicated and politically unpopular.  But it has to be done.

This summer has been crazy.  I’ve written something like five manuscripts.  My next book is due in two weeks.  We’re starting to write our next round of grants.  Oh – and I moved blogs this week.

So I’m going to take the time to review a topic that is one my pet peeves, one you hear bandied about all the time in discussions of more consumer directed health care.  It’s a topic I came back to repeatedly on my old blog – the moral hazard.

Basically, the moral hazard is the idea that people insulated from risk behave differently than people exposed to risk.  For instance, once you have good car insurance, you may drive less carefully, because you are more protected.  In health care, some apply to moral hazard to posit that once you have good insurance, you are more likely to use health care – even if you don’t need it.  In my favorite example of this (because I find it amusing, not because I agree), if we all had employer paid grocery insurance, we would demand filet mignon instead of hamburger.  This would evidently lead to skyrocketing food costs, the end of sales, and mass starvation.

It’s important to understand that people who apply the moral hazard to health care believe that people are using too much, and that’s why our costs are too high.  They believe that if we somehow changed health care, and exposed people to the true costs, they would become better consumers, and the whole system would cost less.  Knowing that more than 45 million people have no health insurance, and tens of millions more are underinsured, I tend to think the biggest problem – and the one that most people feel – is because they’re not getting enough good care.

But let’s take the moral hazard argument seriously.  I believe it fails, both in a theoretical sense, and in an empirical one.

As a theory, the moral hazard in health care was first described only about 40 years ago in a seminal paper by Mark Pauly.  And it’s still just a theory.  Like many theories, it has its good points and bad; it’s not an undisputed law.  For instance, recent work by John Nyman explains that the moral hazard may actually do good in health care by encouraging people who otherwise would not seek care to do so.  We want sick people to get care.

And think about it.  That supermarket example isn’t even remotely comparable.  If I made colonoscopies free tomorrow, no one would start picking them up by the dozen.  If I declared no one would ever have to pay for chemotherapy again, you wouldn’t ask for extra.  If surgeons refused to accept payment for appendectomies anymore, would anyone go and get one just for the hell of it?  We have a hard enough time getting people to do the things we want them to do to be healthy without having to expose them to more hardship to get them.

I love filet mignon.  No one loves going to the doctor.

Moreover, this argument assumes that we have no skin in the game.  Really?  The average employer provided family health care policy in the United States is over $13,000.  And they still have co-pays and co-insurance.  I have phenomenal health insurance through my job and it still costs me $100 to take my kid to the ER.  I feel that.  My prescriptions have co-pays, sometimes up to $25 dollars.  That’s money.  Many, many people have it much worse.  People with insurance, too many of them, go bankrupt every year from medical expenses.  They aren’t shielded from the costs.

But you know I like evidence, and it’s available here as well.  The most comprehensive health policy study ever performed was the RAND health insurance experiment:

The HIE was a large-scale, randomized experiment conducted between 1971 and 1982. For the study, RAND recruited 2,750 families encompassing more than 7,700 individuals, all of whom were under the age of 65. They were chosen from six sites across the United States to provide a regional and urban/rural balance. Participants were randomly assigned to one of five types of health insurance plans created specifically for the experiment. There were four basic types of fee-for-service plans: One type offered free care; the other three types involved varying levels of cost sharing — 25 percent, 50 percent, or 95 percent coinsurance (the percentage of medical charges that the consumer must pay). The fifth type of health insurance plan was a nonprofit, HMO-style group cooperative. Those assigned to the HMO received their care free of charge. For poorer families in plans that involved cost sharing, the amount of cost sharing was income-adjusted to one of three levels: 5, 10, or 15 percent of income. Out-of-pocket spending was capped at these percentages of income or at $1,000 annually (roughly $3,000 annually if adjusted from 1977 to 2005 levels), whichever was lower. The 95 percent coinsurance plan in the study closely resembled the high-deductible catastrophic plans being discussed today.

I could write volumes on the meaning of the results, and the good and bad things about this study.  It has been interpreted and misinterpreted too many times to count.  But here’s the gist of that they found: People in the high deductible plans – those most exposed to health care costs – did spend significantly less and consumed less health care.  And, yes, much of that care was unnecessary, as healthy people did not suffer negative consequences  from forgoing care.  BUT, and this is important, poorer participants with hypertension avoided necessary care, and saw their mortality rates rise significantly.

Removing the moral hazard did no harm in the majority of patients (which is touted often as the result of the study) because they were healthy.  And, of course, getting less care when you’re healthy leads to few short term negative results.  But for those who were unhealthy, who comprised a minority of patients in the study, removing the moral hazard led to significant and dangerous consequences.

And that’s the most important lesson from all of this.  Removing the moral hazard as it relates to health insurance is fine for most people.  Yes, if we make it more expensive to seek care, if we demand more “skin in the game”, if we remove the moral hazard, people will seek less care.  That’s fine for healthy people; it’s terrible for those who are ill.  But for whom is the health care system intended?

Today in the Washington Post, Alec MacGillis has an article about the Carilion Clinic’s provider network in Roanoke, Virginia (h/t Ezra Klein’s Wonkbook).

Carilion owns the two hospitals in town and six others in the region, employs 550 doctors and has set off a bitter local debate: Is its dominance a new model for health care or a blatant attempt to corner the market?

Carilion says it represents an ideal envisioned by the nation’s new health-care law: a network that increases efficiency by bringing more doctors and hospitals onto one team, integrating care from the doctor’s office to the operating room. The name for such networks, which the new law strongly promotes with pilot programs, is accountable care organizations, or ACOs — providers joining together to be “accountable” for the total care of patients, with incentives from insurers to keep people healthy and costs down. …

But skeptics apply a more old-fashioned term to networks like Carilion: monopolies, which they say will make health care even more expensive.

The article goes on to speculate about implications of provider integration for costs, quality, and prices. Turns out Cory Capps, economist and published expert on the implications of hospital consolidation, recently shared a working paper with me that pertains to these issues, at least with respect to hospital consolidation. He has authorized me to use its content in blog post.

Let’s begin with some history. Capps takes us back to 1997.

By the standards outlined by the DOJ and FTC in the Horizontal Merger Guidelines, most MSAs were already highly concentrated [HHI > 1,800] by 1997, when the simple average [hospital] HHI within a MSA was over 4,000. By 2006, the average HHI rose an additional 299 points. Weighting MSAs by admissions, the average 1997 HHI was still over 2,000 and rose by 253 points by 2006.

(For the uninitiated: link to the definition of “MSA“; link to the definition of “HHI“; for anything else, Google it.)

The figure below (click to enlarge) illustrates hospital consolidations over time (number of mergers and acquisitions or M&A, red line, right-hand-side scale) and yearly change in hospital inpatient spending (blue line, left-hand-side scale).

The figure shows that the hospital industry experienced a wave of mergers in the 1990s and the rate of inpatient expenditures increased thereafter. A common explanation for these phenomena is managed care. As managed care peaked in the 1990s, hospital price competition intensified, pushing hospital costs and prices downward. Hospitals responded by merging to achieve economies of scale and scope while increasing bargaining power. After the managed care backlash, price competition was lower because of looser networks and increased hospital market concentration following the period of mergers.

Vogt and Town conducted a survey of literature on the relationship between hospital consolidation and concentration and costs,quality, and pricing. Capps summarizes the findings in each of these dimensions.

Costs. “Overall, Town and Vogt’s conclusion from their survey of the cost literature as follows: ‘[t]he balance of the evidence indicates that hospital consolidation produces some cost savings and that these cost savings can be significant when hospitals consolidate their services more fully.’”

Quality. “The majority of studies to date, however, conclude that hospital mergers and acquisitions have either no effect or a modest negative effect on quality, with the former finding being the more common.”

Pricing. “There is substantial evidence that hospitals compete within a fairly narrow geographic area, often smaller than a city or an MSA. Mergers within such a narrow area can lead to substantial price increases. Increases are most likely if the consolidation combines hospitals that, from the perspectives of insurers assembling provider networks, are close substitutes.”

If hospital mergers have such a significant effect on prices, why didn’t antitrust regulators do something? Well, they tried and failed, until they gave up. Capps:

From 1993 through 1998, the FTC and DOJ lost six consecutive hospital merger challenges; in 2001, the State of California lost a seventh. In the decade after the last of these losses, 1998 to 2008, neither the FTC nor DOJ challenged a prospective hospital merger in court. Over the 15 years spanning 1993–2008, antitrust policy likely had little restraining effect on hospital mergers over this period.

Capps estimates the consequence of hospital concentration in areas where the population is large enough to support multiple hospitals (i.e. a less concentrated market) is to increase national health expenditures by $10-$12 billion annually, which is only 0.4-0.5% of national health expenditures.

In an e-mail Capps explained to me that he was deliberately conservative in his estimate, both in its calculation and in its presentation. There are reasons to think the increase in health care costs due to hospital concentration is higher and more significant:

• Medicare and Medicaid prices are set administratively so are not directly influenced by market power. Only the 43% of total spending that is private spending could be affected by market power. Relative to that smaller base of health spending the increase in hospital market power raises prices by 1.2%, not 0.5%.
• If you focus further on private hospital spending, the price effect of market power goes up to 5%.
• In order to be conservative, he drew a pretty tight line for defining MSAs that could support a less concentrated hospital industry. He thinks that it is reasonable to expand the definition and, based on that, he argues his figures may be as much as 70% too low. That could push the price effect to 7% of private hospital spending.
• Consolidation for physician services arguably had an equivalent effect, doubling the impact of provider market power.
• Also, it’s worth noting that the distribution these costs is likely not uniform but focussed on a subset of Americans in highly concentrated markets.

Bottom line, hospital consolidation matters, increasing health care costs by tens of billions per year and, in general, not delivering higher quality. It’s not the only factor in health care prices, and it may not be the most important one. But it is arguably pushing hospital prices for private payers up by at least 5% nationally.

Will wider integration of hospitals and non-hospital based physician groups, such as that achieved by Carilion, improve quality without increasing prices? It remains to be seen.

A rebroadcast of my latest Kaiser Health News column.

There’s good news and bad news. The good news is that if cost-saving provisions of the new health reform law work, Medicare solvency will be extended by 12 years, according to the program’s trustees. The bad news is that the new law will only extend Medicare solvency by 12 years: it’s still predicted to go bust, in 2029.

Worse yet, the Senate has reached such a level of dysfunction that it requires 60 votes under normal procedure to pass any significant bill or amendment (as George Packer documented in The New Yorker last week). The new health law that promises just a dozen more years of Medicare solvency only passed the Senate because Democrats had those 60 votes last December. They no longer do and likely won’t for the foreseeable future. Under these legislative conditions, can more health cost control legislation pass?

This is not just about Medicare. States, business and family budgets are also straining from the high costs of care. Public and private health care costs are linked. In a recent article in Health Affairs, Harvard University health economist Joe Newhouse argued that there are limits to how far Medicare payments to providers can fall below those of the private-sector ones. If they are too low, providers may turn away Medicare patients, creating problems for beneficiaries’ access to necessary care. Given the political power of the Medicare constituency, that’s not something politicians are likely to get away with.

Thus, Medicare’s cost problems will not be solved without solving those of the entire system, which will involve paying providers less. It’s a daunting technical challenge and a politically difficult one. Nobody likes a pay cut. Can government be part of the solution?

Notice the sense of this question.  I am not questioning whether government should be part of the solution. I am not asking whether government can propose solutions. I am considering our government’s apparent inability to address serious, long-term problems (except in cases of historically rare levels of single-party control), and asking whether it can pass a solution, or part thereof.

If not, this leaves a vacuum for private-sector approaches. Employers and individuals are not going to stand for double-digit percentage premium increases for much longer. Gradually, they will begin to demand that something be done. Just as Americans turned toward managed care in the 1990s after Congress failed to vote on Clinton’s proposed reforms to the system, they will again seek innovative health plan designs that promise lower premiums.

The hottest trend in health plan design is the consumer-directed health plan, higher deductible plans sometimes coupled with a health savings account. Among the 700 firms that participated in a recent PriceWaterhouseCoopers survey, the proportion for which high deductible plans were the most popular plan type offered more than doubled from six percent in 2008 to 13 percent in 2010. In theory, shifting greater risk of health care costs from insurers to policyholders in exchange for lower premiums should lower those costs. When you have to pay out-of-pocket for something, you buy less and seek good deals.

Will this theoretical expectation work and, if so, for whom and for how long? To date the evidence is encouraging but not conclusive. Questions remain about long-term implications and the extent to which such plans can really control costs for severe and costly acute care (for which prices far exceed the deductible), whether they make sense for low-income individuals or whether they will lead persons with chronic illnesses or disabilities to forgo necessary care.

Equally important, however, is whether these consumer-directed plans (or whatever private-sector innovations that fill the cost control policy void) will enjoy a long-term embrace by Americans. Remember, managed care worked too, until it became intolerably rigid for many people.

It’s clear that the private sector, unencumbered by a requirement to overcome a filibuster, can implement changes. So, when it comes to the thorny problem of health care costs and with the Senate in seemingly endless deliberation, do we, must we, say, “In the private sector we trust?” If you find that unappealing, good luck trying to fix the Senate.

My interest in the filibuster, as manifest by my 2010 summer blog project on it, wasn’t idle curiosity. Legislative function, or dysfunction, is directly related to making progress on major problems, including health care costs. I connect the dots in a Kaiser Health News column that appears today. Here’s a choppy summary:

[T]he Senate has reached such a level of dysfunction that it requires 60 votes under normal procedure to pass any significant bill or amendment. … The new health law that promises just a dozen more years of Medicare solvency only passed the Senate because Democrats had those 60 votes last December. They no longer do and likely won’t for the foreseeable future. Under these legislative conditions, can more health cost control legislation pass? …

If not, this leaves a vacuum for private-sector approaches. Employers and individuals are not going to stand for double-digit percentage premium increases for much longer. Gradually, they will begin to demand that something be done. …

The hottest trend in health plan design is the consumer-directed health plan, higher deductible plans sometimes coupled with a health savings account. …

Will [such plans reduce costs] … and, if so, for whom and for how long? To date the evidence is encouraging but not conclusive. …

Equally important, however, is whether these consumer-directed plans (or whatever private-sector innovations that fill the cost control policy void) will enjoy a long-term embrace by Americans. Remember, managed care worked too, until it became intolerably rigid for many people. …

So, when it comes to the thorny problem of health care costs and with the Senate in seemingly endless deliberation, do we, must we, say, “In the private sector we trust?” If you find that unappealing, good luck trying to fix the Senate.

See the rest at KHN.

I left a few things out of the column. One is that though the private sector can and will come up with possible solutions to the health care cost problem that doesn’t make the private sector a replacement for a functioning government. Some problems, even in health care, require some  government involvement. A good example, not in health care, is global warming. The private sector can’t solve that on its own. In fact, our government alone can’t either, but it can play a major role. Without it, we’re toast (burnt, boiled, or even deep fried).

Second, if the federal government doesn’t seriously address health care costs, private firms aren’t the only actors that could fill the vacuum. State governments could act. But the problem isn’t necessarily a whole lot easier at the state level. Massachusetts is still struggling with cost control, for instance. Maryland’s all-payer system seems to have kept costs down there. Your results may vary.

Third, I ignored the fact that legislation can pass the Senate without influence of filibuster via the budget reconciliation process. But that process has constraints so not everything can be done that way. In general, the Senate has important work to do that requires a filibuster-busting 60 votes.

Finally, I want to make one thing very clear. My column neither advocates for private-sector solutions, like consumer directed health plans, nor for government-dominated solutions, like single-payer. I may (or, actually, may not) have strong opinions on such things but they are not relevant to the column. My point, my only point, is that if the Senate cannot pass significant legislation to solve a problem like health care costs, the private sector will act. Like it or not, that’s just a fact.