• Economics even I understand

    There’s an article up at Newsweek on how the Massachusetts health care reform plan has not only dropped the rate of uninsurance, but also held costs steady:

    But despite an influx of patients, total hospital costs haven’t grown more than usual. New efficiencies probably helped: thousands fewer patients now use the ER for routine care or show up because of a preventable condition. And the average length of a hospital stay is down an hour per person. But University of Pennsylvania economist John Kolstad, who coauthored the study, speculates that the real heroes could have been insurers, who bargained with hospitals. If the same clout is exercised nationally, optimists may be right about reform’s cost savings.

    I’m not the economist around here, but even I get this.  Groups with more market share have more negotiating power.  If insurers control more of the population, then they can negotiate harder with providers for lower costs.  It’s also one of the reasons that single-payer systems cost less in general.  As a monopsony, that payer has a lot of power and can push costs way down.

    Conversely, as hospitals and physisians merge and group, they have a lot more negotiating power.  They can demand more money, and this drives costs up.  Austin and Uwe Reinhardt had posts on this recently.

    This is also one of the reasons I’m skeptical about the consumer-driven idea that leaving the negotiating in the hands of individuals will bring costs down.  If individual patients are up against providers and their groups, who do you think will win?  And which way do you think that will drive costs?

    (h/t Wonkbook, and here’s the full manuscript)

    • “thousands fewer patients now use the ER for routine care”

      I’ve always wanted to know why a primary care office was not set up right next to the ER, so that non-emergencies could be referred to it, and then they just walk 50 feet. Isn’t this what triage is for?

      ER Nurse to patient: It’s not an emergency. Please walk to that door that says “Routine care”.

    • Primary care’s strength and ability to cut costs lies in managing patients they know. Faced with the same patients and problems, costs would probably be similar.


    • There is another dimension to the negotiating power of insurers. Insurers are hindered by the fact that they can’t credibly threaten to remove large systems from their network. The reason they can’t threaten to do so is driven in part by large and medium-sized employers who want products with large networks in order to make sure as many of their employees as possible have “their” doctor in the network. Employers hear about it when they aren’t, and it causes friction.

      This matters in a reform context because of the exchange. More people are getting insurance through the exchange, and these people can pick the plan that’s right for them. They don’t need to get the one-size-fits-all network. They can spend $200 less and get a smaller network if they don’t expect to use much care, or if their doctor happens to be in the smaller network, or if they don’t care about switching. Folks who want or need the “premium” network will increasingly pay a premium on their premium.

      This lets many people keep their cost-sharing relatively low while lowering their insurance cost, and insurers have a better position two ways: they can sell more products that exclude the highest cost providers, and they have more clout in negotiating with those highest cost providers by threatening to exclude them from some (not all) of their products.

      Watch: the small network EPO and non-referral HMO will make a comeback.

    • On PBS News Hour last night, they began a series on reform. First episode was on Mass and progress. Latter third of report features ER’s and how they are flooded with new patients and how numbers of visitors going up.

    • I think Newsweek piece is misleading the public.


      Not only costs have risen, but doctors have dramatically decreased access because they are refusing to take on new patients.

      “If individual patients are up against providers and their groups, who do you think will win?”- Have you thought about reversing the question… why should individual patients be up against large groups and monopolized physicians? Why do we assume more power is better in health economics but in everything else we say more competition is better?

      Check out this journal article on market power and healthcare in the Netherlands

      • @Aaron – A summary of that Netherlands paper is already in the queue. See it Thursday I think.

        As for market power. It’s a very complicated thing. My most recent paper summarizes the complexity but doesn’t go deep into it. Suffice it to say, it won’t ever entirely go away in health care (it’s the nature of the thing itself and a consequence of famous “market failures”). Also, health economists do not yet have a handle on how to measure it or deal with it. http://nihcm.org/pdf/EV_Frakt_FINAL.pdf

    • @Frakt

      I would enjoy reading your comments on that paper. I have been looking for some commentary on it.

      • @Aaron – You’ll probably be disappointed. My post is light on commentary. Sometimes I just extract results and lit reviews for my own future reference. That’s pretty much what the post is. If I ever publish a full-length paper in this area (not likely, but possible) I’ll have more to say.