Commoditizing medical care to counter “socialization”

Good piece out this week by Reed Abelson in The New York Times indirectly spotlighting the sharp policy divide between the Trump administration and Democratic presidential contenders seeking a larger government role in controlling the cost of medical care and prescription medications. To the Trump administration that’s anathema. Its response to what it terms the Democratic “socialization” of medical care is to commoditize medical care and prescription drug prices — with price tags attached — so people can shop for it like they might a product on Amazon.

That’s highly disruptive to both the sell and buy sides of the market. The sell side is pushing back and wants to keep business as usual. As Abelson reports, the American Hospital Association is taking the administration to court over an administrative rulemaking that will take effect in about a year requiring they post prices online for at least 300 hospital procedures contending the rule lacks statutory authority.

Also generating opposition, Abelson reports, is a proposed rule that would blow up the confidentiality payers and providers have traditionally enjoyed by requiring them to make public contracted reimbursement rates. Payers and providers also dislike proposals by Democratic presidential candidates that would cover more people under Medicare, including expansive “Medicare for All” proposals such as those by Senators Bernie Sanders and Elizabeth Warren. To them, “Medicare for All” means “Medicare reimbursement rates for all” that would pull billions of dollars off the table: more generous reimbursement rates for employer sponsored medical benefit plans. Those rates are double or more that of government determined Medicare reimbursement rates.

As for the buy side, the Trump administration’s hope is consumers will wield market power to force down the cost of care and drugs. Seema Verma, administrator for the Centers for Medicare and Medicaid Services, wrote this in an op-ed this week:

For too long, the health care system has catered to the demands of powerful vested interests led by hospitals and insurers. The decades long norm of price obscurity is just fine for those who get to set the prices with little accountability and reap the profits, but that stale and broken status quo is bleeding patients dry. The price transparency delivered by these rules will put downward pressure on prices and restore patients to their rightful place at the center of American health care.

Verma complains people don’t know in advance what it they will ultimately pay for an episode of care or prescription until after they receive it. In making it a shoppable commodity, her thinking goes, people can know the price for what they need or desire and make an informed buying decision. That’s disruptive because it requires consumers to alter ingrained behavior in how they interact with medical care, when the cost is generally dealt with after care is received.

Commoditization might work for prescription drug prices and web sites such as GoodRx post comparative price information and offer discounts. But medicine is still regarded as an art and practice. No two patients are alike or will necessarily require the same care even with standard best practice protocols for common complaints and treatments.

Moreover, it’s been decades since Americans customarily paid out of pocket for ordinary care. From the 1940s to the late 1970s, “major medical” indemnity insurance as it was called covered only catastrophic care events. Managed care plans and health maintenance organizations followed, removing incentive to shop for lower cost care by creating an expectation that plans should function as all-inclusive medical bill protection or require only nominal out of pocket cost sharing.

Shifting political tides portend big changes in 2020s and beyond

Concern about the cost of medical care and prescription drugs is leading to increasingly more aggressive policy stances by both progressives and conservatives that would have been considered too radical a decade ago. In 2009, the idea of a “public option” payer for the non-group and small group markets didn’t advance as the Patient Protection and Affordable Care Act was being drafted. The fear was a publicly operated payer would work against the market-based principles of the Affordable Care Act, intended to shore up these distressed markets and boost their enrollment and actuarial viability. A public plan without the need to earn a return on investment and pay income tax might end up outcompeting and “crowding out” the private payer non-group and small group markets the law aimed to bolster. Now among candidates seeking the Democratic presidential nomination, revising the Affordable Care Act to include a public option is considered a more moderate position compared to expanding eligibility for Medicare to the late middle aged. Or all Americans – Medicare for All — as favored by the left leaning wing of the party.

Conservatives are turning to market-based approaches that similarly would have been considered too radical and disruptive in 2009 such as importing prescription medications from other countries. The Trump administration has issued a rulemaking effective in 2021 designed to shine a bright light of transparency on hospital pricing in the hope that informing people what hospitals pay health plans for 300 common procedures that can be scheduled in advance, they will shop among hospitals for the best price. Traditional conservative ideology favors freedom of markets and the ability to contract. But hospital and payer interests argue the proposed rule would disrupt markets and violate the sanctity of their contracts.

At the voter level, the political sentiment is shifting. Conventional wisdom has held proposals to expand Medicare to cover Americans under age 65 won’t fly. Most working age Americans are covered by employee medical benefit plans and are largely satisfied with them, the thinking goes, and thus aren’t inclined to support Medicare expansion to working age families. That may no longer be the case as employee plans become less generous and workers must pay more out of pocket for medical care and prescriptions. This recent report illustrates:

Californians who get health insurance through their jobs are having to spend a greater share of their paychecks on health care costs, according to a new analysis of employer-sponsored health plans to be released Thursday by the Commonwealth Fund, a nonprofit foundation that researches health industry trends. California workers went from spending 8% of their income on health insurance premiums and deductibles in 2008, about $4,100, to nearly 12% of their income on premiums and deductibles in 2018, about $6,900. That is a 68% jump in employees’ health care spending over the past decade — which far outpaces wage growth during the same period. Between 2008 and 2018, median household income in the state grew just 16%, from about $52,000 to $60,000, according to the report. Workers in California went from paying on average $2,600 in premiums in 2008 to paying $4,100 in premiums in 2018. Their deductible costs went up $1,450 to nearly $2,800 during the same period.

While employee “major medical” plans providing only catastrophic coverage might have been acceptable in the 1950s-1970s, they are less so now as more generous managed care medical plans appeared and then dominated in the following decades. That created an expectation that medical plans should cover utilization at the point of care (increasing due to demographics and declining population health) and not provide insurance against bankruptcy. That rationale has been turned on its head. Now people with employee medical benefit plans with high out of pocket cost sharing are forced into bankruptcy protection from medical bills. At the same time, employers must devote more of employee compensation to medical benefit plans, taking dollars away from direct compensation.

These trends point to big change in the 2020s with the primary policy questions being 1) Whether the role of the public sector in medical care finance and delivery should be expanded and 2) To what extent should the government regulate the cost of care and medications.

Given the dominant role of employee medical benefit plans, if Medicare is expanded it likely will be done so gradually over at least a decade, rolling up Medicaid and commercial non-group and small group. Expect large employers of 500 or more to continue to be permitted to provide medical benefit plans as “private option” with a greater emphasis on value.

Trump administration’s reform policy principle based on flawed assumptions

The Trump administration’s efforts to reform how medical care is delivered and financed in the United States is based on the dubious assumption that medical care is not much different from any other market-based consumer service. The administration’s fundamental reform policy is better quality and value can be had by creating a more competitive market by arming consumers with more information on cost and value so they can be more discerning “shoppers.” It also presumes most any type of medical care that can be scheduled in advance is “shoppable” and therefore buy side market forces can be brought to bear to act as a natural check on prices and to promote higher value care and outcomes.

There are several inherent problems with that assumption.

  • Simply because medical care can often be scheduled in advance unlike emergency care, with the exception of some elective procedures, it isn’t a discretionary purchase like other consumer goods and services. No one really wants medical care unless they need it – and often tend to put it off — regardless of whether it can be scheduled in advance. Hence, few people will be diligent shoppers.
  • Because medical care is for the most part not a discretionary purchase, demand for it tends to be inflexible. Inflexible demand strengthens the sell side for providers and conversely weakens buy side purchasing power for individuals and families. A competitive market requires relatively equal market power on both the sell and buy sides.
  • Aside from personal services not covered by payer plans like elective cosmetic surgery, individuals and families who receive medical care do not directly select among providers and bargain for services since their medical benefit plans — and not them — bargain for the cost of procedures. Also, their ability to choose among providers is limited to increasingly narrow provider networks.
  • Patients’ heavy reliance on trusted relationships with their doctors to recommend both medical care and the provider, substantially diminishing their exercise of choice.
  • More costly medical procedures are performed in hospitals and surgery centers. High staffing, equipment and staffing and patient safety regulation create high cost barriers to competitor entry. Those high costs tend to incentivize provider consolidation and create oligopolistic market conditions in most areas, increasing sell side market power.
  • Much of American medical care lies largely outside of competitive market forces in government programs on the payer side – Medicare and Medicaid – as well as integrated providers such as the Veterans Administration and programs for military members and their families.

It’s the prices, stupid. Real debate over public option is over Medicare reimbursement rates.

“If there could be an L.A. Care in every county … that would be an improvement, but it certainly wouldn’t be transforming our health-care system overall,” she said. “A national public option that pays providers Medicare rates would have much more dramatic effects on the overall health-care system.”

But many private insurance companies, with some reason, fear that a public option operating on such a reimbursement system would set the country on a path to a government-run, single-payer system. If a public option paid providers that much less, private insurers reason, it could charge much less than they do in premiums and ultimately siphon away most of the insurance market.

Source: What Democrats Can Learn from L.A.’s Public Option – The Atlantic

Why Doctors Still Offer Treatments That May Not Help | The Incidental Economist

“Only a fraction of unproven medical practice is reassessed,” said Dr. Prasad, who is co-author of a book on medical reversals, along with Adam Cifu, a University of Chicago physician.

Dr. Prasad’s work is part of a growing movement to identify harmful and wasteful care and purge it from health care systems. The American Board of Internal Medicine’s Choosing Wisely campaign identifies five practices in each of dozens of clinical specialties that lack evidence, cause harm, or for which better approaches exist. The organization that assessed the value of treatments in England has identified more than 800 practices that officials there feel should not be delivered.

It’s an uphill battle. Even when we learn something doesn’t make us better, it’s hard to get the system to stop doing it. It takes years or even decades to reverse medical convention. Some practitioners cling to weak evidence of effectiveness even when strong evidence of lack of effectiveness exists.

This is not unique to clinical medicine. It exists in health policy, too. Much of what we do lacks evidence; and even when evidence mounts that a policy is ineffective, our political system often caters to invested stakeholders who benefit from it.

Source: Why Doctors Still Offer Treatments That May Not Help | The Incidental Economist

“Priced out” or “fleeing the market.” Whatever the preferred terminology, the economic upshot is the same: market failure.

The non-group market has functioned as a remainder market, a market of last resort for those who don’t qualify for government and employer medical benefit plans that cover about 90 percent of those with coverage. Non group plan issuers have thus labored with comparatively lower economic clout when it comes to negotiating the price of medical care with its providers, additionally hindered by high turnover among plan members that might be expected in a market of last resort.

Historically, that has meant relatively higher premiums and cost sharing that makes non-group particularly vulnerable to adverse selection and its dreaded “death spiral.” The market entered this troubled state starting in the early 2000s as premiums rose and threatened to circle the drain if the adverse selection trend wasn’t quickly reversed. The Patient Protection and Affordable Care Act came to the rescue with a mix of incentives and disincentives to preserve the viability of the non-group market with state health benefit exchanges, a ban on medical underwriting like that employed by life insurers, modified community-based rating, and advance premium tax credit (APTC) subsidies. The latter two reforms however only partially succeeded. Modified community-based rating allowed age to be used in setting premiums, though narrowing the differential between younger and older people. The tax credit subsidies didn’t apply to the entire market, but only for households earning less than four times the federal poverty limit. That exposed a portion of the non-group market to market failure, particularly the demographic aged 50-64 likelier to be in their high earning years and who also face higher premiums by virtue of their years.

The U.S. Centers for Medicare & Medicaid Services (CMS) has issued a report Trends in Subsidized and Unsubsidized Enrollment Report. According to CMS, the most recent year of enrollment data shows average monthly enrollment across the entire individual market decreased by seven percent nationally between 2017 and 2018 at the same time premiums increased by 26 percent. It attributed the drop entirely to those ineligible for APTC subsidies, noting unsubsidized enrollment declined by 24 percent, compared to a four percent increase in APTC subsidized enrollment.

“The report shows that people who do not qualify for APTC continue to be priced out of the market,” CMS stated in a news release today.  CMS reported an enrollment drop of 1.3 million unsubsidized people in 2017 and another 1.2 million unsubsidized people leaving the market in 2018. The declines among unsubsidized enrollees coincided with increases in average monthly premiums of 21 percent in 2017 and 26 percent in 2018, according to CMS.

“As President Trump predicted, people are fleeing the individual market. Obamacare is failing the American people, and the ongoing exodus of the unsubsidized population from the market proves that Obamacare’s sky-high premiums are unaffordable,” said CMS Administrator Seema Verma.  

“Fleeing the market” or “priced out.” Whatever the preferred terminology, the economic upshot is the same: market failure. When any product or service is priced above a level that’s affordable by its intended market, there can be no sustainable market unless prices fall or incomes or subsidies rise — or some combination thereof. The federal tax code allows self employed taxpayers to deduct premiums for non-group plans. That provides some benefit, but doesn’t help with affordability.

California with its larger non-group population is attempting to prop up the weak plank of insufficient subsidies by expanding eligibility limits to households earning 600 percent of federal poverty levels starting in plan year 2020, supported by state income tax penalties levied on those without some form of commercial or government coverage. If it has a meaningful impact on affordability in the challenging older subset of the non-group market, federal candidates in the 2020 election cycle who favor keeping the Affordable Care Act’s reforms of the non-group market intact and/or boosting tax credit subsidies won’t be able to point to the state’s success since the results won’t be in until after the election.

Ultimately, market failure in the older age cohort of the non-group segment may lead federal policymakers to conclude it makes better sense to move forward with proposals to bring that population into Medicare via an early “buy in” option rather than tie themselves in knots trying to create a viable market for a relatively small number of Americans.

Proposed rule mandating public disclosure of negotiated hospital reimbursement rates: deflationary or inflationary?

A rulemaking proposed this week by the Trump administration that would require hospitals to make public reimbursement rates for certain medical procedures is ostensibly intended to help consumers shop around for the best deal. The administration states the rule is needed as deductibles for commercial insurance plans are increasing, requiring consumers to spend more of their own dollars for care. But that’s not likely the true purpose since as a practical matter, many procedures will exceed plan deductibles. And once plan members reach their annual out of pocket maximums all costs are paid by their plan. The proposed rule might make sense if people procured hospital services like others on a fully cash paid basis. But most are not and covered by health plans.

The apparent intent of the proposed rule is to drive down the price of hospital delivered procedures by creating deflationary expectations. Here’s how it might happen: payors and employers could cite the lowest price for a given procedure or procedures and pressure other hospitals to charge the same or less, asking them why they should be paid more for the same procedure. It would blow open the black box of how hospital procedure costs are determined in the context of confidential commercial negotiations between payors and hospitals to establish reimbursement rates in a given metro market.

Both are pushing back. Reformers contend the high cost of medical care in the United States compared to other nations is baked in because payors merely pass along medical costs to employers and plan members, growing their revenues as the cost of care rises. Moreover, a major medical plan trade group, America’s Health Insurance Plans, believes rather than exerting downward pressure on hospital procedure costs, the proposed rule could actually have an inflationary effect, ratcheting up prices of procedures:

“Publicly disclosing competitively negotiated, proprietary rates will reduce competition and push prices higher – not lower – for consumers, patients, and taxpayers…Posting privately negotiated rates will make it harder to bargain for lower rates, creating a floor — not a ceiling — for the prices that hospitals would be willing to accept.”

Under that reasoning, payors could be compelled to pay a premium in order to attract and retain desired hospitals into their provider networks.

However the microeconomics play out if the rule is adopted, it won’t likely impact hospital prices nationwide since there’s no meaningful competition among hospitals in less densely populated regions where there is often only a single hospital — or even none — nearby.

Trump administration, Democrats offer sharply contrasting approaches to curbing medical costs

With the recent increase of high deductible health plans – known as “major medical” insurance before the debut of all-inclusive managed care plans in the 1970s – the Trump administration hopes that development will spur individuals and employers to purchase hospital medical procedures on an a la carte basis. The goal is to increase competition to drive down prices. “Shoppable services make up a significant share of the healthcare market, which means that increasing transparency among these services will have a broad effect on increasing competition in the healthcare system as a whole,” asserts an executive order issued June 24.

A key element of the order requires the U.S. Department of Health and Human Services to propose administrative law within 60 days requiring hospitals to “publicly post standard charge information, including charges and information based on negotiated rates and for common or shoppable items and services.” The order states the following rationale for hospital price transparency:

“One study, cited by the Council of Economic Advisers in its 2019 Annual Report, examined a sample of the highest-spending categories of medical cases requiring inpatient and outpatient care. Of the categories of medical cases requiring inpatient care, 73 percent of the 100 highest-spending categories were shoppable. Among the categories of medical cases requiring outpatient care, 90 percent of the 300 highest-spending categories were shoppable. Another study demonstrated that the ability of patients to price-shop imaging services, a particularly fungible and shoppable set of healthcare services, was associated with a per-service savings of up to approximately 19 percent.”

The Trump administration is effectively attempting to upend how major medical care has been obtained and purchased over the past four decades, with inpatient and outpatient hospital services bundled into pre-paid plans, their prices negotiated in advance by the plans. Given how well established this scheme is, it’s unlikely the market can be transformed quickly enough to produce significant downward pressure on prices over the near term.

The nature of the market and consumer behavior also poses a challenge. Hospital care is typically consumed unexpectedly, not as a planned purchase that lends itself to price shopping. In addition, hospital services are likely to exceed most plan deductibles, reducing incentive to price shop since individuals will be out of pocket for that amount regardless of where care is obtained. It’s also uncertain to what extent hospitals can or will accept pre-negotiated cash payment for services for employers and individuals seeking discounts off posted reimbursement rates negotiated by their plans.

In any given metro area, hospitals are not as numerous as other service providers such as home improvement contractors, auto body shops or landscapers. That naturally lowers competition and reduces incentive to compete on price. In less populated areas, there is often only one hospital.

The administration’s policy direction stands in sharp economic contrast to proposals by Democrats in Congress and the current presidential election cycle to reduce medical costs. The Trump administration’s strategy favors a “many buyers” competitive market model. By contrast, many Democrats support expanding public coverage in order to leverage the government’s monopsony purchasing power to drive down prices.

Why market forces unlikely to bend medical cost curve

U.S. Health and Human Services Agency Secretary Alex Azar appears to desperately desire to harness market forces to bend what he and many inside and outside of America’s fragmented “system” of medical care finance and delivery call an unsustainable upward cost trend. No matter how well intended, Azar fundamentally misunderstands the market for medical care, describing it as if it were consumer discretionary market. True, individuals and families who receive medical treatment are the ultimate consumers of it. But they don’t purchase it like they might a smart TV, a manicure or new piece of Ikea furniture. Because demand for most medical care is inelastic, competitive market forces can’t fully come into play.

The economic principle of price elasticity is a great tool to balance out demand and supply in markets and hold down prices when there’s plenty of supply and prevent overutilization and shortages when there isn’t. But price elasticity – which holds demand moves inversely with prices – requires elastic demand that largely doesn’t exist for medical services. For the simple fact people don’t choose to get hurt or sick – they just do, no will to purchase required. And they’re certainly not inclined to shop for care in that condition, even if they could meaningfully do so. That’s why the consumer directed medical plans Azar touts as a means of corralling medical spending are unlikely to achieve the triple aim of:

  • Improving the patient experience of care (including quality and satisfaction);
  • Improving the health of populations; and
  • Reducing the per capita cost of health care.

Hospitals push back as state employee plans index reimbursement rates to Medicare

States. They’re just as perplexed as the rest of us over the ever-rising cost of health care premiums. Now some states are moving to control costs of state employee health plans. And it’s triggering alarm from the hospital industry. The strategy: Use Medicare reimbursement rates to recalibrate how they pay hospitals. If the gamble pays off, more private-sector employers could start doing the same thing. “Government workers will get it first, then everyone else will see the savings and demand it,” said Glenn Melnick, a hospital finance expert and professor at the University of Southern California. “This is the camel’s nose. It will just grow and grow.”

Source: Health Plans For State Employees Use Medicare’s Hammer On Hospital Bills | California Healthline

If this trend picks up as some here predict, it would upset a well established hospital financing scheme. It’s based on supplementing Medicare and Medicaid care reimbursements with commercial employer group medical benefit plans to balance out revenues to cover costs. So it’s no surprise hospitals are pushing back, particularly given the prospect that large private sector employer plans that provide the bulk of those revenues could follow the lead of state employee benefit plans.