• Reinhardt on cost shifting and all payer

    For reasons not worth explaining, I have to write most posts in advance. After writing this one and inserting it in the queue, Uwe Reinhardt blogged on his paper. I recommend reading his post.

    So, this is a week late, but still I want to highlight a few points from Uwe Reinhardt’s Health Affairs paper published last week. In it, he runs the argument from price discrimination/cost shifting to all payer rate setting. The dots, as he connects them, go through my recent cost shifting review paper. I’m grateful for the citation.

    Reinhardt is a master at asking penetrating questions, the type I imagine might make private market advocates or the leadership of certain industries (usually insurers or hospitals) squirm. For example, citing health care inflation data from Oregon, he asks,

    [W]hy did the ten largest private health insurers in that state […] not resist the steep price increases during 2005–09, in the midst of one of the deepest recessions befalling the United States since the Great Depression? This question is relevant to any strategy that relies heavily on private health insurers as agents of cost control.

    Similarly, if hospitals can make up for public payment shortfalls by shifting costs to private insurers, it implies that those private insurers have very little bargaining leverage or market power. But,

    if private insurers have insufficient market power with providers and therefore the cost-shift theory is valid, it raises the question to what extent the nation can rely on private health insurers as agents of cost control.

    Noting that prices paid by insurers for various procedures are all over the map, Reinhardt raises another good question.

    If the argument is that the private market sets prices for health care appropriately, and that government should adapt the prices it pays to those private-sector norms, then the question is how exactly one would determine these price norms, given the huge variation of prices for identical services within the private market.

    Moving on to all-payer rate setting, Reinhardt ticks off the advantages. It would

    • “reduce the cost of the administratively complex current system.”
    • “make it possible to constrain the overall annual growth of health spending so that it does not outpace overall economic growth.” (This may be a bit of an oversell. That’s possible, but not guaranteed. It depends on the style of all payer and political will.)
    • make it so that “the perceived value of a health care provider’s work, signaled through prices paid, would no longer be a function of the socioeconomic status of the patient.”

    Finally, as should not be surprising to those familiar with his writing, Reinhardt is not impressed with market-based proposals for health reform.

    None of various proposed market-driven consumer-choice models, however, adequately addresses the uneven allocation of market power between payers and providers, especially hospitals, which appear to have kept private insurers relatively weak partners at the bargaining table.

    There’s more. All in all, it’s a paper worth reading. Unfortunately, I’m unaware of an ungated version. There seems to be an ungated version. You can hear Reinhardt discuss his paper at the recent Health Affairs briefing. I don’t recall exactly where in the long program he speaks. It’s at least 2.5 hours into the nearly 4 hour program. You can just keep fast forwarding until you hear his German accent. Stick around, or fast forward, to the Q&A at the roughly 2’46” mark. I found it very entertaining, and not only because of his mention of my work. (H/t Brad F)

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    • As I have mentioned previously, I participated during the 80s in the all payer Hospital Experiemental Payment Program (HEP) in Rochester, New York . The HEP hospital revenue formula was projected from a base year using inflation factors that accounted for the increase in the cost of goods and services used in hospital operations. In other words, rate development was predicated on something other than market power. The result was similar to Reinhardt’s mentioning that Germany (I think) provides guidance that helps to control the impact of rate negotiations. HEP controlled hospital expenses which led to premiums, according to the GAO, 1/3 less than the national average and an uninsured rate half the national average.

      Sarah Liebschutz’s new book “Communities and Health Care: The Rochester, New York Experiment” explores the forces driving the creation of HEP. Her chapter “Sprinting Toward the Mean” explains the post HEP period.

    • Fascinating.

      The unstated major premise is that the primary end of health reform is controlling costs as opposed to, say – optimizing clinical efficacy, and the mechanism proposed is old-fashioned price controls. Once again – it’s not clear to me that many people engaged in this policy debate understand the distinction between prices and costs.

      As the growing drug shortage debacle shows once again (not to mention the shortage of primary care docs courtesy of the RBRVS), you can control prices for specific outputs but it’s beyond the power of any bureaucratic system to control the real cost of the underlying inputs. Once the gap between them opens up – you have a shortage or a windfall/glut, and you’ve completely lost the capacity to coordinate supply and demand.

      How about we try this with all payer pricing scheme with simple industrial commodities like, say, oil before we engaged in a far more dangerous experiment against reality in an infinitely more complicated market?

      • But isn’t Reinhardt’s point that most developed countries do control prices in some way and it seems to work for them. I suspect that once you put pressure on prices, those who charge those prices will put pressure on their suppliers to lower underlying costs rather than just passing those costs on.

        Remember that price does not always have much to do with underlying costs.

    • -Both I and everyone that understands the concept of marginal utility would agree that prices don’t always have much to do with underlying costs. Market prices have other important functions that help coordinate supply and demand and influencing resource allocation. Artificially increase or decrease them and they cease to serve those functions very well and you get things like the shortage of injectable chemo generics, etc.

      -It seems to work for them in that it doesn’t show up on metrics that are relatively insensitive to variations in clincial efficacy and access, like the ratio of life expectancy to GDP ratios. The evidence is much less clear and compelling when you compare how well folks with complex diseases that require care involving significant expertise, diagnostics, etc. Nevermind attempts to compare morbidity,

      If the goal is to optimize life expectancy relative to GDP, the way forward is very simple. Just outlaw spending on anything other than sanitation, vaccinations, and antibiotics and you capture ~ 90% of the life expectancy gains that medicine has been able to deliver since the 40’s.

      I’m not sure if Professor Reinhardt touched on this topic in his paper or not, but since spending = price * volume, savings on price can easily be overwhelmed by increases in volume unless you have a mechanism to restrict consumption. No third party payor system has managed to put a lid on demand, so even if the all-payer approach could be proven to be necessary to restrict spending, it’s not at all clear that it’s sufficient.

    • I get the impression that the problem with injectible chemo drugs is that the industry is not motivated to supply first line injectible chemo drugs that have low profit margins. According to reporting, they would prefer to focus on newer, more profitable drugs particularly in an environment where one drug can generate most of a company’s profit.

      With respect to putting a lid on demand, I think that T. R. Reid’s analysis of health systems in other nations shows that some adjust price based on volume which has served to deter providers from running up volume.

      Obviously this is a complicated subject which generates many opinions on the effectiveness of markets. Joseph White’s paper “Markets and Medical Care: The United States, 1993-2005 and the supplementary “Markets and Medical Care: Supplementary Analysis” has been a resource that help me to try to understand the issues. White concludes that competition has shown little ability to rationalize health care systems because it goals do not resemble those of the health care system that most people want.

      Have a nice day.

    • -Thanks for the suggested reading Al and Austin.

      -Al, the margins are indeed low. That makes them especially sensitive to price controls that constrain their ability to respond to increases in demand, as well as increasing production and compliance costs. The reason most often cited for shortages 75% of shortages are due to quality issues (~50%), and inadequate capacity – both of which require increased capital investment to fix. If there’s no financial incentive to do so (higher marginal returns elsehwere), it won’t happen.

      Perhaps the authors of this blog have or will consider this issue in depth.