Len Nichols: Why Coverage Expansion Comes First
Some budget hawks argue that we must control health care costs before enacting coverage expansion. We can’t afford the latter without the former, they say. That sounds so sensible it should make anyone wonder why it isn’t. In a 24 February 2010 article in the New England Journal of Medicine, Len Nichols provides the answer (h/t Ezra Klein).
[T]he simple answer to the hawks … is that it is not feasible to tackle costs without tackling coverage. Our delivery system could not withstand the stress. Two thirds of hospitals lose money on Medicare now. Virtually all lose money because of Medicaid underpayment. To impose serious delivery reform and incentive realignment while leaving hospitals on the hook for the mounting billions of dollars in uncompensated care would bankrupt many and strain most to the breaking point. With expanded coverage, we’ll get absolutely essential hospital cooperation. Without expanded coverage, hospitals will have to protect themselves from change, and their local communities will want them to.
… Within a decade, we will face draconian health care price controls, massive benefit cuts in Medicare, Medicaid, and the private sector, or both. This credible threat of cost slashing without coverage expansion is one reason the powerful provider lobbies, such as the American Hospital Association, the American Medical Association, and PhRMA (Pharmaceutical Research and Manufacturers of America), have embraced comprehensive reform.
Backing up to the first sentence in that quote, in what sense is it “not feasible” to implement more severe cost controls without first expanding coverage? The answer includes some dire predictions about hospital bankruptcies. But the real answer, as Nichols makes plain at the end of the quote, is political. The powerful interest groups Nichols lists would resist cost control without coverage expansion. Like it or not, those interest groups must be on board for anything substantial in health policy to occur. That’s just reality.
Hence, proposed health reform is heavy on coverage expansion and light on cost control in the near term. If there is to be any real cost control it will come later, and gradually. To think it can be done first is fantasy.
A Bit More on Premium Increases
This post is jointly authored by Austin Frakt and Ian Crosby. It is a supplement to our Kaiser Health News (KHN) column, which I also posted on this site on Sunday. If you haven’t read that column yet, do so first. This post links back to many of our prior posts on related issues. Thus it serves as a portal to further reading.
In his recent NY Times opinion piece, Reich claimed that the current antitrust exemption for insurers “is why a handful of insurers have become so dominant in their markets.” As we wrote in our KHN column, this claim is extremely dubious. Moreover, it is far more likely that premium increases are largely due to factors other than insurer concentration.
As we’ve noted previously, the exemption (under the McCarran Ferguson Act) is very narrow, and does not apply to mergers, acquisitions, and most other kinds of conduct by which companies get big. We’ve also noted that there are some types of conduct by which insurers could defend and expand their market share that arguably do fall within the scope of the exemption, but they are sufficiently modest and theoretical that is unlikely they bear much responsibility for the current state of market concentration.
We’ve also made the larger point that even if repeal of the exemption or other forms of stepped up antitrust enforcement were to have a material impact on insurer market power, there is little reason to believe it would produce tangible benefits for consumers absent parallel efforts against providers. A recent paper by Berenson, Ginsburg, and Kemper in Health Affairs documents the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans, and other stakeholders in six California health care markets, the authors conclude that
[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.
… [P]roviders are developing increased leverage through single-specialty group formation and merger-and-acquisition strategies that do not involve integration. Nevertheless, given the push in Congress and elsewhere to restructure health care delivery with accountable care organizations, it is instructive that whatever their merits in improving quality and efficiency, California-style integrated care systems currently produce higher prices that undermine cost containment.
Other work by health economists, reviewed on this blog, indicates that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Diluting the insurance market may have small downward effects on insurer profit and administrative efficiency, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.
Therefore, concentration among providers, and in particular hospitals, must also be addressed. Unfortunately, permitting additional provider coordination and integration via accountable care organizations (ACOs), as envisioned in current health reform legislation, may not help matters. The bundling of payments ACOs would facilitate may save money, but only if the greater market power of additional provider integration does not act to offset those savings.
Taming health care costs will be hard. The job is made harder when we’re looking in the wrong place. Insurers may not deserve the special treatment they’ve received from the federal antitrust exemption. But they also do not deserve the level of blame they’ve received for health care costs.
Popular But Ineffective: Repealing Insurers’ Antitrust Exemption
This post is a slightly modified version of one by Austin Frakt and Ian Crosby that originally appeared at Kaiser Health News last week. Full references have been added for academic papers cited.
It is well known that concentration in the health insurance industry is to blame for rapidly rising premiums. Well known, but wrong. Taking political advantage of this common misconception, last week the House passed a bill to repeal insurers’ antitrust exemption. But even if that bill becomes law it won’t do much good, and politicians’ distraction could actually harm consumers. It’s far more likely that premium increases are largely due to other factors.
Those who claim that the antitrust exemption is the main reason a few insurers have substantial market power don’t understand the narrowness of that exemption’s scope. The law at issue, the McCarran-Ferguson Act, shields most aspects of “the business of insurance” from federal (but not state) antitrust oversight. This means that only those insurer activities dealing directly with providing insurance–think underwriting risk, setting rates, defining benefits, and the like–are not ordinarily subject to federal antitrust scrutiny.
There are exempt insurance practices that, at least in theory and under certain conditions, could help insurers defend and expand their market share against competitors. But the exemption simply does not shield the most straightforward kinds of conduct that make companies big.
Activities not connected with the basic risk-spreading function of insurance are deemed “the business of insurers” rather than “the business of insurance” under the law, and do not enjoy any federal antitrust exemption. Thus mergers and acquisitions among health insurers are as aggressively (or passively) scrutinized as those in any other industry by federal antitrust enforcers.
Health care reform advocates concerned about the high degree of concentration in today’s insurance market cite the more than 400 mergers among health plans allowed over the last 13 years. But repeal of the McCarran-Ferguson antitrust exemption would have literally no effect on this trend. Even if other forms of stepped-up antitrust enforcement or other means of encouraging competition were to have a material impact on insurer market power, there is little reason to believe it would produce tangible benefits for consumers absent parallel efforts targeting the provider side of the market.
While there is some evidence that insurers’ market concentration plays a role in premium increases, that role is small. For example, a National Bureau of Economic Research paper [1] found that only 2.1 percent of employer-sponsored health insurance premium increases between 1998 and 2006 were due to insurer concentration.
It is far more plausible that a high proportion of premium increases are due to a combination of concentration in the provider market and adverse selection, especially in the nongroup market. After all, most premium dollars are not kept by insurers and go toward payment of health care services [2]. Insurers take a little off the top, but not enough to be blamed for anything like the perennially large rate increases.
A recent Health Affairs paper [3] describes the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans and other stakeholders in six California health care markets, the authors conclude that “[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.” And we all know what those trends have looked like lately.
Perhaps counter-intuitively, large insurers can be bulwarks against high costs driven by provider consolidation. Two papers [4, 5] by health economists in the International Journal of Health Care Finance and Economics indicate that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Therefore, diluting the insurance market may have small downward effects on insurer profit and administrative costs, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.
That’s why those who understand our health care system know that costs will not be tamed by a focus on the insurance market alone. The Congressional Budget Office has scored the likely effect on premiums of health insurer antitrust repeal as insignificant. Therefore, concentration among providers, and in particular hospitals, must also be addressed.
Don’t get us wrong–we don’t think that the current antitrust exemption is good law or policy. But cracking down on insurer market power without doing the same against providers may well have the opposite of its intended effect. Taming health care costs will be hard. Attacking insurers is, by comparison, very easy, as well as popular. But in this case, what is popular will not be particularly effective.
References
[1] L Dafny, M Duggan, and S Ramanarayanan (2009). Paying a premium on your premium? Consolidation in the U.S. health insurance industry. NBER Working Paper 15434.
[2] L Dafny, K Ho, and M Varela. (2010). Let them have choice: Gains from shifting away from employer-sponsored health insurance and toward an individual exchange. NBER Working Paper 15687.
[3] R Berenson, P Ginsburg, and N Kemper. (2010). Unchecked provider clout in California foreshadows challenges to health reform. Health Affairs Web Exclusive, February 25.
[4] R Feldman and D Wholey. (2001). Do HMOs have monopsony power? International Journal of Health Care Finance and Economics 1(1).
[5] L Bates and R Santerre. (2008). Do health insurers possess monopsony power in the hospital services industry? International Journal of Health Care Finance and Economics 8(1).
Save Fewer Lives or Save Lives More Efficiently?
Let’s say the cost per saved life due to providing an additional individual with health insurance is X dollars (Tyler Cowen says X = $9 million; I say that’s an overestimate). If one thinks X is too high, what’s the right policy response? One answer is to extend insurance to fewer people. The other is to try to reduce the cost of care so that X is lower.
There is a huge difference between these two responses. I won’t go into all of them now. One important difference I want to highlight is that if we simply reduce the number who will become insured then the rest of us are still left paying exorbitant health care costs. Thus, two problems remain, many are left uninsured and health care costs are still too high.
On the other hand, if the policy response is to reduce the cost of care then we all win. More of the uninsured can be insured for some level of funding and the rest of us can benefit from lower health care costs. That’s a double victory.
That health reform is too expensive (*) is not a good argument for doing less of it. It is an argument to do more. The provision of health care will not become more efficient under the status quo. And the status quo (with perhaps minor tweaks to it) is what we will get if health reform does not pass this year. But if reform does pass it sets the stage for more reforms, and ones that focus on costs.
(*) I’m not saying I think it is too expensive. But if you do think it is I do not find that a convincing argument not to do it.
Is the Health Care System Too Expensive to Fix?
Tyler Cowen is not impressed with his best estimate of the cost per life saved of health reform.
If the Obama plan spends $90 billion extra a year on coverage and saves/extends 10,000 lives a year (a plausible estimate, in my view), that is $9 million a life, a rather underwhelming rate of return.
I agree that is an underwhelming return. But I don’t agree that 10,000 is necessarily the right number of lives saved. Roughly two to four times that value seems plausible. Nor do I agree that we should dismiss all the value of all the other returns. Those potentially include cost offsets due to better health, quality of life improvements, financial security from high health care expenses, reduction in the degree of job lock, among others.
However, even if considering all that one is still underwhelmed by the resulting net cost per life saved, whatever that may be, I still don’t accept that as an argument for not implementing reforms of the insurance market. (To be clear, I don’t think Cowen thinks so either.) Instead, I’d view that as an argument that we should reform the insurance market and work harder at efficient provision of care. Put another way, I don’t believe the uninsured should suffer the burden of high costs of our system. They should be insured and the high costs of our system should be addressed. Accepting defeat of the latter as an excuse for not addressing the former would be a double tragedy.
Labor Market Effects of Health Costs
A reader asked me to explain these sentences from a recent post by Jon Cohn:
Health care reform actually is a jobs program. A recent paper that David Cutler and Neeraj Sood published through the Center for American Progress suggested reform would generate between 250,000 and 400,000 jobs.
The Cutler and Sood paper draws on published literature that shows that as employers’ health costs rise, employment falls. Thus, if health costs fall, greater employment should result. That makes intuitive sense since an employer cannot afford to hire as many workers when the cost per worker goes up. But, as the reader pointed out, this doesn’t seem to make sense if the effect of higher health costs is translated into lower wages, as economists generally believe. How can a dollar increase in health costs be accounted for entirely by wages and there still be anything left to affect employment? Good question!
As with many things, there are nuances not revealed by high-level summaries. Let’s dig deeper. With a nod to one of my favorite Krugman rants I’ll note that one need go only as far as the Cutler and Sood paper itself for an answer.
But the wage offset is not dollar-for-dollar for all workers. Firms have little ability to reduce wages for workers at or near the minimum wage or for workers with fixed employment contracts. Rising health insurance premiums will thus lead to more job losses among these types of workers while falling premiums will increase employment. Similarly, not all workers value employer-provided health insurance at its cost—either because their overall income is low or because they have health insurance from another source (perhaps a spouse). For these workers, the lower wages that rising health insurance premiums necessitate induce them to leave the labor force or move into part-time jobs (with no health benefits).
Unpacking that a bit, it means that higher health costs do translate into lower wages when what is provided at those higher costs is of value to workers and wages are not already at the floor (minimum wage). If employers cannot reduce the wage (due to the floor) then jobs are cut. Or when what is provided at a higher premium is not highly valued, workers do not accept the compensating lower wage and, instead, lower employment results. That is, sometimes the wage required to offset the increase in health costs is too low.
In a 2006 article in the Journal of Labor Economics titled The Labor Market Effects of Rising Health Insurance Premiums, Katherine Baicker and Amitabh Chandra make essentially the same point.
In contrast to Gruber’s study and to the results in Gruber and Krueger (1991), we find effects on both hours and employment. These results may appear to be contradictory, but they are not: in Gruber’s study workers receive new maternity benefits, and in Gruber and Krueger they receive more generous workers compensation; both benefits are probably valued by workers, and the empirical finding of the full shifting of increased costs to wages with no effect on overall employment is consistent with the insights of Summers (1989). In our article, however, the increase in the price of health insurance premiums is driven by the medical malpractice crisis, a change that may not enhance the value of health benefits. It is therefore unsurprising that workers do not value this increase in costs as highly and that the labor market responds with decreased wages and labor utilization.
I suppose one can argue whether or not reduced employment is a wage effect. Economists would make a distinction between wage and employment. But unemployment is a pretty severe wage cut. So, I still think it is fair to say, in broad summary, that workers absorb increases in health care costs through wage reductions. But if one is being precise, one ought to say workers pay the price either in lower wages or in loss of work. Either way, higher health costs are shifted to workers, even when the employer ostensibly pays the premium.
A Frequently Overlooked Reason for High Health Care Costs
Last week I received a call from my physician’s billing office. They wanted to know why they hadn’t received my balance of $5. I explained that the answer was quite simple. I had only received the bill two weeks prior, and the balance wasn’t due for another two weeks. This is information they should have on file.
Nevertheless, I had already sent the check. Were they to patiently wait until it was actually due they would likely find that they had already received it.
Then I asked why they were bothering to follow up on a $5 payment. “Just procedure,” I was told, “We’ll send you another bill.”
And I will ignore it. If this is the effort taken to collect a balance that isn’t overdue, to what lengths, I wonder, will they go to collect $5 that hadn’t actually been paid. Now I almost wish I hadn’t mailed that check just to find out.
The perverse incentives of hospital bill collection…
Cost Control Politics
Signs of the big fight over how to control health care costs are already appearing. This will be a long, hard, politically wrought battle. Nobody likes to be paid less. Nobody likes to be penalized financially. Even pushing the pain off into the future for shorter-term political practicalities is not so easy. There are critics at every turn. And when policymakers try to do that, it doesn’t even help the ten-year budget projections much.
But if you think that the administration will simply give up on the excise tax — which does them virtually no good in the first 10 years anyway — why is it in there at all? It’s unpopular with their allies and wins them no friends among their enemies. Indeed, it’s easy to see why so few presidents attempt cost control: You get hammered by the people who usually like you and dismissed by the people who usually like cost controls but don’t fundamentally trust you. That leaves you with, well, virtually no one.
When everybody is in favor of more for them and less for everyone else it is hard to assemble a coalition to do what is in everyone’s best interest. What’s a plausibly successful strategy for running this gauntlet? Beats me. I’m impressed by anyone willing to try.
Medicare Savings We Can (Almost) Count On
I want to highlight a few ideas from yesterday’s post by Randall Brown and his Kaiser Family Foundation report upon which it is based. First of all, Medicare is going bankrupt so cost cuts are needed, and fast. Fortunately there is reason for optimism that some of the Medicare cuts and savings proposed in health reform legislation can be made and sustained. I’d be the first to admit such a thing won’t happen without a fight and considerable political will, but the evidence suggests it is at least possible provided the programs that produced that evidence are generalizable (another valid concern).
Much has been made lately about the extent to which the planned reforms will “bend the cost curve.” Some say not at all (e.g. Tyler Cowen) and others are more optimistic (Matt Yglesias and Kevin Drum cite a CBPP report to that effect; see also Ezra Klein’s interview with one of its authors). But that optimism is based on an historical analysis of congressional will to pass and uphold cost cutting reforms.
For a subset of potential reforms there is reason to be even more hopeful. That’s what we learned from Randall Brown. Empirical results from recent demonstrations and studies have shown that some types of efforts to cut costs in Medicare have actually worked. These may not be as sexy or receiving as much attention as electronic medical records, accountable care organizations, etc. (all of which hold some as of yet unproven promise for savings in the future), but they can be implemented far more quickly and have already demonstrated efficacy.
Randall cited studies and reports that have demonstrated cost savings due to payment incentives designed to encourage reductions in unnecessary hospital readmissions:
Randomized trials, the most rigorous and credible type of evidence, showed these programs reduced readmission rates by 18 to 35 percent, resulting in reductions in costs that substantially exceed the intervention costs…Furthermore, the effects on readmissions last well beyond the end of the intervention period.
He also cited work yielding evidence in reduced costs due to improved care coordination for beneficiaries with chronic illnesses:
For a subgroup of beneficiaries at high risk of near-term hospitalization—which comprises 18 percent of Medicare beneficiaries and 38 percent of Medicare expenditures …–[four] of the programs in the Medicare Coordinated Care Demonstration had significant and sizable reductions in hospitalizations over the 6-year life of the study.
To be sure, these two approaches alone will not yield all the savings some policymakers wish to wring out of Medicare. That’s why other methods are proposed, like accountable care organizations, electronic medical records, and the like. But there is no evidence to suggest that those other methods can yield cost savings quickly (if at all). Nevertheless, at least several proposed cost saving reforms have empirical support. If the approaches that provide that evidence are generalizable and if the reforms based on them are not squelched by political forces there is hope that Medicare in something like its current form can survive the crisis it faces.
Hard Evidence, Information, and Incentives—The Real Keys to Reducing Medicare Costs
The following is a guest post by Randall Brown, Vice President and Director of Health Research at Mathematica Policy Research, Inc. He is a nationally recognized expert in health care policy issues related to care for the chronically ill and Medicare populations, among other areas. He is also author of the Kaiser Family Foundation report Strategies for Reining In Medicare Spending Through Delivery System Reforms: Assessing the Evidence and Opportunities, upon which the following post is based.
Let’s cut straight to the point—despite the skepticism of many, it is possible to bend the cost curve for Medicare spending over the next 10 years, but not the way most people think. Electronic medical records and changes to the way providers organize will take many years. But recent scientific evidence and new tools suggest Medicare savings are available now and in far simpler ways.
Two primary factors account for much of the higher-than-necessary fee-for-service (FFS) Medicare costs: (1) people with complex chronic illnesses, who consume most of the resources, cost more than they should because they often do not receive the best evidence-based care for their condition; they have difficulty adhering to physicians’ recommendations; their multiple physicians do not communicate effectively with each other or with the patient; their problems are often not identified until it is too late to stave off a hospital admission; and exacerbation of these problems after a hospital discharge leads to high readmission rates; (2) many providers deliver care in a manner consistent with the current financial incentive, which is to provide more services, not more efficient care.
Improving chronic care. We need to create incentives for providers to follow the evidence about how to practice cost-efficient health care. This means paying hospitals with low readmissions rates slightly more for every admission, and paying those with high readmission rates a lot less (after accounting for differences in their case mix). Mary Naylor and Eric Coleman provide clear, rigorous evidence on how to reduce the appallingly high readmission rate (20 percent within 30 days) for Medicare patients discharged from a hospital. Their “transitional care” programs reduce the need for re-admissions by providing much closer attention to patients and their families as patients move from hospital to home. Randomized trials, the most rigorous and credible type of evidence, showed these programs reduced readmission rates by 18 to 35 percent, resulting in reductions in costs that substantially exceed the intervention costs [Naylor, M.D., et al. Transitional care of older adults hospitalized with heart failure: A randomized clinical trial. Journal of the American Geriatrics Society, 2004, 52(5): 675-684; Coleman EA, et al.The Care Transitions Intervention: Results of a Randomized Controlled Trial, Archives of Internal Medicine. 2006, 166: 1822-8]. Furthermore, the effects on readmissions last well beyond the end of the intervention period.
Following the evidence also means establishing a care coordination benefit for a well-defined high risk population of beneficiaries, and requiring that providers of this benefit follow the protocols of the few proven programs to date. If accountable care organizations or medical homes are implemented, as recommended in the health reform bills, they should be required to adopt these proven features and focus their care coordination efforts on the high risk population. Randomized trial studies of programs serving beneficiaries with chronic illnesses have found that targeting is critical. For a subgroup of beneficiaries at high risk of near-term hospitalization—which comprises 18 percent of Medicare beneficiaries and 38 percent of Medicare expenditures (those with congestive heart failure, coronary artery disease, or chronic obstructive pulmonary disease and a hospitalization in the past year)–4 of the programs in the Medicare Coordinated Care Demonstration had significant and sizable reductions in hospitalizations over the 6-year life of the study.
Giving physicians information and incentives to practice cost-efficient care. To reduce the widespread differences across physicians in practice patterns and costs, as documented by the Dartmouth group, we need to give physicians information on how the efficiency and quality of care they provide compare to that of their peers, locally and nationally, and then change payment methods and incentives to reflect those differences. The evidence suggests that more care does not yield better patient outcomes. Providers delivering efficient care of good quality should receive higher compensation per patient, and those who provide either inefficient or poor quality care should get much lower amounts. Reporting cost and quality information to the public, and to insurers, will provide additional pressure for providers to reduce excessive testing and imaging, overly aggressive referrals to specialists, and preventable hospital admissions and readmissions, while ensuring that high quality care is delivered. It also provides an incentive for them to work collaboratively with effective care coordination providers. While there is little evidence that public reporting alone affects provider behavior, there is ample evidence that medical providers respond strongly to financial incentives. CMS contractors have been developing the necessary tools for preparing fair report cards for Medicare physicians for several years, and a study currently in progress will be preparing reports for a large pilot sample of physicians. Several states are also implementing “peer-group” reports for physician groups. This approach is more attractive than, but not incompatible with, accountable care organizations, because it does not require individual physicians to give up their autonomy and does not depend on the voluntary formation of collaboratives to parcel out revenue shares.
The challenge. The primary barrier to implementing changes that could save money is the formidable opposition of hospitals and physicians, and Congress’s usual unwillingness to confront them. A problem with the current health reform strategies for Medicare is that they pay scant attention to who will lose—reducing health care expenditures means that some providers are going to lose revenue. The suggestions above are intended in part to reduce opposition to such changes by not just “taxing” the most inefficient providers but by sharing some of these savings with the efficient ones so they can further enhance their performance. Yet the suggestions preserve the autonomy so prized by physicians and hospitals, and do not require massive reorganizations of physicians into accountable care organizations, which seem to be essentially HMOs without any real authority. Physicians may be more amenable to the suggestions above if they are posed as the alternative to the sustainable growth rate (SGR) regulations that currently require annual reductions in fees paid to physicians if volume has increased. Congress and physicians should welcome an approach that provides a vehicle for cost control while eliminating the annual battles to roll back the fee reductions mandated by the SGR (calculated as 21 percent for 2010). While we should continue to invest in electronic health records for the future, we should not expect them to reduce costs in the next 5 to 10 years. We should also encourage medical homes as a potential vehicle for improving care coordination, provided they are required to build on the lessons above about what actually works. Creating incentives for providers to change practices in ways that have been proven in rigorous analyses, and giving them the information they need to succeed, yields the best opportunities for reducing the growth in Medicare costs.
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