Providers with Clout Demand Double-Digit Increases

In Los Angeles, insurers view Cedars Sinai Medical Center as a “must have” hospital. If a health plan doesn’t have Cedars in its network, people won’t buy the insurance plan according to a study of  “Unchecked Provider Clout in California” published in Health Affairs online yesterday.

While other medical centers in northern California have gained market leverage by acquiring other hospitals, Cedars has felt no need to get into the merger and acquisition business.  As an executive from a nearby hospital explained to researchers from the Centers for Health System Change, “Cedars can say, ‘Screw it; we have a strong marketing arm and the [movie] actors, let’s grow on campus and they will come to us.’ As a result, according to another respondent, ‘Cedars has the highest rates in the world…. The hospitals down the street have no market power. They have to fight for every penny.’”

Note : no one quoted in the study claimed that Cedars delivers the best care in California. Or that patients are safer at Cedars. In fact, Cedars, like many other hospitals, has had its share of medical errors—notably the incident in November 2007 when the newborn twins of actor Dennis Quaid as well as another child, were given 1,000 times the intended dosage of a blood thinner. Then there was the mystery as to how more than 200 patients undergoing CT brain perfusion scans at Cedars received eight times the normal dose of radiation from February of 2008 through August of 2009. Each time, the dosage appeared on the technicians’ screen, yet somehow, for 18 months, no one noticed.

Nevertheless, Cedars is located just outside Beverly Hills; the world-famous medical center boasts a fabulous art collection, and as its website points out, “For more than 20 years, Los Angeles area residents have named Cedars-Sinai the ‘Most Preferred Hospital for All Health Needs’ in National Research Corporation's (NRC) annual Healthcare Market Guide survey.”

So Cedars can charge more—and it does.

But Cedars-Sinai is not the only hospital hiking the price of health care in California. While other hospitals may not enjoy its star-studded reputation (Frank Sinatra died at Cedars), many have the upper hand when negotiating with insurers simply because they are big— very big.

Throughout California, in the late 1990sand early 2000s,  “providers  formed larger hospital systems through mergers and acquisitions, and attempted to form tighter physician alliances,” Robert Berenson, Paul Ginsburg and Nicole Kemper explain. . “Medical groups and IPAs consolidated, and the weaker ones went out of business.”  No surprise,  since then, “hospitals and physicians have become increasingly sophisticated in developing organizational forms primarily to increase their negotiating clout with health plans.”  In the 1990s, health plans had the leverage, but now the tables have turned.

Payments to Hospitals Climbing By More than 10 Percent Annually

While some in Washington talk about the need to use anti-trust regulations to  break up large insurers, in California (as in some other markets) the providers are the ones pushing premiums higher. Berenson et. al. point to a recent study of California hospitals which shows that , “ after a downward trend in hospital prices for private-pay patients in the 1990s, a rapid upward trend began about 1999 that produced average annual increases of 10.6 percent over the period 1999–2005. “

Of course, the cost of caring for patients also was rising, but “analysis of national Medicare Cost Report data by the Medicare Payment Advisory Commission (MedPAC),  shows that inpatient costs per admission increased only 5.5 percent per year during that period.” Meanwhile, “public reporting of hospital payment  rates recently has drawn attention to large variations in hospital rates across the country, with specific University of California medical centers and Sutter Health hospitals, among others, establishing prices far above average.”

As one medical group executive told the researchers: "’We are making out hand over fist.’  In some cases, payment rates to hospitals and powerful physician groups approach and exceed 200 percent of what Medicare pays, with annual negotiated double-digit increases in recent years.” Insurers, in turn, pass these rate hikes on to customers in the form of higher premiums. Yet, the authors observe, no likes to suggest that providers are over-paid. : “in current health reform discussions and proposed legislation, providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room,’ that is rarely mentioned.”  Nevertheless, they argue: ”The trends in California suggest an urgent need for policy makers to address the issue of growing provider market strength.”

Berenson et. al. go on to report that “Some respondents described particular hospital systems, such as Sutter, as adopting an ‘all or none’ negotiating strategy, which means that a single contract defines the terms. The terms include all payment rates of all of the system’s hospitals, not just those hospitals that plans deem important to include in networks.

“Hospitals in the University of California system also now negotiate as a system rather than as individual entities. They realized only recently that the potential power of group negotiating trumped what some respondents described as bureaucratic inertia..In the words of one university hospital executive participating on the negotiating committee, ‘Contracting as a full [University of California] system is frightening to the payers…. These are contracts with big leverage.’"

“Originally,” the study’s authors explains, “physicians may have formed multispecialty groups and IPAs” with an eye to  “improving quality through clinical integration. But now they wield their considerable market clout to negotiate favorable payment rates and other contractual terms with HMOs.”

“One group’s medical director estimated,  ‘You can get 80 percent of Medicare [rates practicing independently]—or  twice that in our groups. That is the real incentive.’” 

Will Accountable Care Organizations Charge More?

Both the Senate and the House bills propose rewarding physicians who  join “accountable care organization” (ACOs). All of the available evidence suggests that these large, multi-specialty organizations can offer better, more efficient care. But, the study notes, “California-style integrated care systems currently produce higher prices that undermine cost containment.”  Will the ACOs of the future also use their size negotiate higher rates?

“Antitrust policy is generally viewed as a remedy for market power abuses.  However, the FTC and U.S. Department of Justice (DOJ) mostly have been unsuccessful in challenging hospital mergers.”  And Federal law does not guarantee that cost reductions achieved through an ACOs ability to improve quality and manage costs will be passed on to purchasers and consumers.

Berenson and his co-authors are concerned: “Unless market mechanisms can be found to discipline providers’ use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches, such as putting price caps on negotiated private-sector rates and  adopting all-payer rate setting.” (See these HealthBeat posts on how Maryland sets hospital rates for all payers here and here.

If we want to keep a lid on insurance premiums, Berenson conclude, regulating insurers may not be sufficient. Indeed, “some purchasers who believe strongly in the long-term merits of increased integration of care delivery believe that price regulation may be a prerequisite for payment reforms that encourage” Accountable Care Organizations.



34 thoughts on “Providers with Clout Demand Double-Digit Increases

  1. I’ll make two points on this.
    First, when Wellpoint, along with numerous other insurers, announced significant rate increases in their individual market insurance policies for quite legitimate reasons, little time was wasted in summoning Wellpoint CEO, Angela Braly, to appear before Congress to justify the rate increases which she did. I read her testimony and found it quite credible. Why haven’t similar invitations been extended to CEO’s of hospitals and large physician groups with significant local and regional market power? This isn’t rocket science.
    Second, it mystifies me why regulators don’t require disclosure of actual provider contract reimbursement rates paid to doctors and hospitals so both patients and referring doctors can see the often significant differences in rates paid for similar work. If they need to outlaw confidentiality agreements that currently prohibit disclosure of contract rates, they should pass legislation or new regulations that accomplish that. With real price transparency, supplemented by quality and outcomes data where meaningful data exists, referring doctors should be in a much better position to guide their patients toward more cost-effective healthcare decisions. If patients were required to pay more if they want to go to a high cost facility where quality is no better, perhaps they would make a different decision. Patients and their referring doctors need to care a lot more about costs even when insurance is paying. We need to provide referring doctors with price transparency and outcomes information tools and patients with appropriate financial incentives to help them make more cost-effective healthcare choices. If we are ever going to bend the medical cost growth curve, we need to better align incentives in the system. Better information accessible to referring doctors as well as patients plus differential coinsurance to use high cost facilities would cost very little money to implement.

  2. Barry:
    Could you share with us some of the more persuasive points made by Wellpoint to justify the premium increases?
    Don Levit

  3. Ed, Barry, Don
    Ed– I agree that the underlying cost of health care– the amounts we pay for medications, hospital care and some specialists’ services– are the primary cause driving health care inflation.
    Please see my reply to Barry
    Barry- Yes, it is frustrating that few people want to look at increases in what providers charge.
    Few legislators want to call CEO’s of hospitals and large physician groups to testify because few Americans want to believe that their hospitals and doctors might be overpaid.
    Quite understandably, most patients want to believe that their doctors and hospitals put them first; they don’t want to believe that money affects tproviders’ decisions.
    Barry, you ask why “regulators don’t require disclosure of actual provider contract reimbursement rates paid to doctors and hospitals so both patients and referring doctors can see the often significant differences in rates paid for similar work.”
    They don’t require disclosure becuase hopsitals and very large physican groups have great political power (they make large contributions to campaigns, and their patients trust their opinions. If the brand-name hopsitals in a city turn against a politician, he is in trouble.)
    I don’t think that “If patients were required to pay more if they want to go to a high cost facility where quality is no better” they “would make a different decision.”
    Most Americans sitll believe that more expenisve care is better care.
    80 percent of our heatlhcare dollars are spent on patients who are seriously, chronically ill.
    They want the best care possible, no matter how much they have to pay for it–even if out of pocket. Cancer patients are not shopping for bargains.
    I do agree, however, that “referring doctors need to care a lot more about costs even when insurance is paying,”
    Doctors need to think about the patients who won’t be able to get the care that they truly need if we over-pay some hospitals.
    Don– good question.
    I look forward to Barry’s answer.

  4. Hi Maggie: Is this post a reaction to the terrible reporting of the Anthem Blue Cross Blue Shield story?

  5. Excellent post. I think you have hit upon the core health care cost problem in this country: we pay too much for health care. Everything else (shifting demographics, overuse, etc.) complicate the problem but they are not the root cause.

  6. Maggie and Ed – Here’s the link to Ms. Braly’s testimony before the House Energy and Commerce Committee.
    See pages 9-11 for the discussion of the factors affecting insurance rates in the CA individual insurance market specifically.
    Martha – Wellpoint’s subsidiary in CA is Anthem Blue Cross. California Blue Shield is a completely separate, non-profit health insurer unrelated to Wellpoint.

  7. I think the high cost of US treatment has been well identified – surely it’s in your book, Maggie. This document from the International Federation of Health Plans shows the huge differences in prices between the US and elsewhere, especially in the high end hospitals:
    Gerard Anderson has published a lot on this, such as in ‘It’s The Prices, Stupid: Why The United States Is So Different From Other Countries’:
    and in ‘Health Spending in the United States and the Rest of the Industrialized World’
    where Anderson and co conclude:
    ‘The finding that litigation and waiting lists do not explain most of the higher U.S. health spending is perhaps not surprising considering previous research showing that the prices of care, not the amount of care delivered, are the primary difference between the United States and other countries. These higher prices are increasingly making health care unaffordable for many Americans. Equally troubling, the more-costly U.S. health care has not resulted in demonstrably better technical quality of care or better patient satisfaction with care. Future U.S. policies should focus on the prices paid for health services and on improving the quality of those services.’

  8. I do agree, however, that “referring doctors need to care a lot more about costs even when insurance is paying,”
    Referring doctors are not in a position to do this now because they don’t have the information they need available to them. Moreover, they generally don’t care because they have no incentive to care. They do not benefit financially if they care and they’re not penalized if they don’t care.
    Recently, Paul Levy, CEO of Beth Israel Deaconess Medical Center (BIDMC) in Boston, related a story about a recent appearance he made before a group of medical students. In the course of his remarks, he asked the students if they would be willing to have their own clinical outcomes publicly disclosed as well as those of their hospital. The answer was a near unanimous NO. Then he asked them to imagine you are a community based primary care doctor who needs to refer a patient to a hospital based specialist. How would you choose the best specialist for your patient? After a period of silence, one fellow jokingly answered: rumor and innuendo. Mr. Levy responded: Right. That’s all you have to go on in the absence of data. Point made.
    As for the politics and the power of interest groups as it relates to price and quality transparency, political dynamics have changed numerous times in our history though it usually takes a crisis to create a sense of urgency. Social Security benefits were cut over the long term following the Greenspan Commission recommendations in 1983. Excess military bases were closed through the 1990’s as a result of the package put together by the Base Realignment and Closure (BRAC) Commission. Welfare was reformed in 1996 cutting the rolls dramatically. At the state level, just within the last week, the Democratic controlled NJ State Assembly passed a bipartisan package of three bills to (1) limit the amount of sick leave that can be cashed out upon retirement to $15,000, (2) require county and local government employees, including teachers and police officers to contribute 1.5% of their salaries to the cost of their health insurance, and (3) not allow part timers to participate in the state pension plan going forward. Opposition from the unions was fierce. The final vote: 36-0. There is no reason why people’s attitudes toward doctors and hospitals can’t change as well as more of the population learns about these huge differences in reimbursement rates for no difference in quality.

  9. “80 percent of our heatlhcare dollars are spent on patients who are seriously, chronically ill.”
    According to UnitedHealth Group, their three most expensive categories of care are: (1) cardiac care, (2) orthopedic surgery, and (3) cancer care. These are very different from each other.
    Cardiac care involves everything from emergency surgery to long term management. Since I’m a cardiac patient, I know a bit about this. A significant piece of cardiac care is long term medical management. In my own case, I take five prescription drugs (four generics and one brand) and I’ll be taking them for life. If I had to self-pay, it would be easy to find out which pharmacy charges the lowest price and for which drugs generics are available. Periodic stress tests and checkups are also part of the treatment regimen. It wouldn’t be difficult to check price and quality information if it were available. Relatively little care is delivered under true emergency conditions when price and quality shopping is admittedly impossible.
    Orthopedic surgery can be postponed for considerable periods of time and is usually scheduled well in advance when it is performed. As you have written, this area lends itself well to shared decision making. If price and quality transparency tools were available to both patients and referring doctors, it would be an easy matter to investigate outcomes data and price differences.
    Cancer care is different. There is a lot we don’t know. There’s loads of research going on with many clinical trials in progress. The famous cancer centers are constantly trying to improve the state of the art. There is a lot of effort to customize treatments and to try to figure out which treatment will work best for a given individual. Most importantly, when the disease reaches an advance state, the patient is generally facing an end of life situation. Doctors are often less than forthright about leveling with the patient regarding the prognosis. While palliative care can help patients sort through their options and the quality of life implications of each, not every hospital has such a program and some oncologists and surgeons stand in the way when it is available. When patients opt to keep fighting, doctors often don’t fully explain what the patient is signing up for in terms of side effects, quality of life, etc. There is a completely different set of issues that need to be addressed here with price and quality transparency comparatively unimportant.
    As I recently learned from an article in Health Affairs, in hospitals, end of life care generally revolves around cancer patients whereas in a nursing home setting, they’re mostly dealing with Alzheimer’s and dementia patients. Again, a different set of issues arise for patients in the nursing home setting. The bottom line is that the issues are multi-factorial and need to be dealt with accordingly.

  10. Thanks Barry for the correction. The question still stands: is this post a reaction to the very poor reporting by most media on the *Anthem Blue Cross, a subsidiary of Wellpoint’s* premium increases?

  11. Martha–
    When writing this story, it did occur to me that spiralling provider payments might well help explain Anthem’s rate increases.
    See the link that Barry provides above to the CEO’s testimony.
    It turns out that rising payments to hospitals are part of the story. Also, in this recession healhy people have been dropping their insurance, leaving Anthem with a sicker pool of patients. And utilization of health care has been rising.
    Yes, I agree the reporting on Anthem has been terrible– a knee-jerk reaction: “insurers are greedy.”
    People just don’t want to believe that insurers like Anthem have very low profit margins (which they do) and that Anthem’s admnistrative costs have been falling (see chart in CEO’s testimony.
    Daniel & Marc Brown– As Karen Davis, president of the Commonwealth has pointed out, our health care costs are so high BOTH because we pay more for everything and because so many of us are overtreated.
    In “It’s the Prices STupid” Gerard Anderson points out that “U.S. hospital services are more expensive, AND patients are treated more intensively . . .”
    In the U.S. hospital stays are not as long as in some countries, but as Elliot Fisher puts it, “more happens to you when you’re there.”
    Similarlly, while the number of physicians visits per capita are lower int the U.S. than in some places, Anderson notes that in the U.S. many more of the visits are with specialists (who deliver and prescribe more intensive, more aggressive tests and procedures.)
    Anderson also points out that when compared to Canada: ” the
    U.S. system delivers four times as many coronary angioplasties per capita and about twice the number of kidney dialyses.”
    The second study that you cite focuses on whether fear of malpractice claims or shorter waiting lists explain higher costs in the U.S.– the answer is no.
    But that second paper doesn’t look at the question of over-treatment.
    In the U.S., treatment is more intensive and more aggressive. Americans undergo many more surgeries than the citizens of other countries. Specifically, in Japan physicians perform 1/10 as many surgeries
    Surgeries per capita are twice as high in the U.S. as in England; Mastectomies are performed three times as often here as there. (We now know that because U.S. women have been encouraged to go for frequent mammograms, often breast cancer is diagnosed when in fact the tiny tumor would have disappeared if it hadn’t been detected. For every one woman whose life is saved by a mammogram, 10 undergo an unnecessary mastectomy, lumpectomy or radiation.)
    A 2008 study shows that at least 10% of the increase in Medicare expenditures since the mid-1990s is due to increased rates of one type of elective surgery–angiopplasty– and many of the patients may not need it . . .Over the past decade the number of angioplasties done in the U.S. has tripled.
    Britain has only one-fourth as many CT scanners per capita as the U.S., and one-third as many MRI scanners. The rate at which the British provide coronary-bypass surgery or angioplasty to heart patients is only one-fourth the U.S. rate, and hip replacements are only two-thirds the U.S. rate.
    We also do more back sugery.
    Finally, higher prices tend to go hand in hand with over-treatment. When a treatment is particularly lucrative, fee-for-service payment encourages doctors to “do more.”
    Barry– thanks very much for the link to the Anthem testimony. Everyone should read it. .
    Barry — The most expensive cardiac care is delivered in emergencies–or at least the patient is made to feel that it is an emergency.
    Moroever, I would not be interested in comparing prices so that I could pick the cheapest surgeon to do my bypass — or the cheapest hospital
    I would have No way of knowing whether the cheaper doctor was as good. (AS Dartmouth’s Elliot Fisher points out, we have no way to compare the quality of care offered by individual doctors. We can compare hospitals– a much, much larger pool of patients– but not individual doctors.)
    Insurers already encourage patients to buy mediations at a discount by shopping by mail. (TRavelling to a pharmacy far from home just isn’t practical for most people.)
    As for orthopedic surgery, once again, people don’t want the cheapest surgeon, they want the best.
    (Complications following this surgery can lead to death.)
    And, as I noted above, there is no way to compare the quality of care offered by individual surgeons.
    Bottom line: this is why consumers (patients) cannot bring down the cost of physician care of hospital care. They don’t want discount surgery. People facing surgery are not hunting for a bargain: surgery is too dangerous. This is why, as the Health Affairs article I’m posting about says that if we want lower prices Government will have to regulate or set prices.
    One could compare the rate of infections in different hospitals, however, and this is important information that I think hospitals should be forced to reveal. (Though polls show that patients are more concerned about amenities than rate of infectoins. In general, people just don’t act in their own enlighted self-interest.
    Shared decision-making does work well for elective surgery– but this is not about discussing price or quality of care, it’s about discussing risks, benefits and odds for a particular patient. AS Don Berwick emphaizes in the film “Money-Driven Medicine” it’s not about the patient having a financial interst or “skin in the game.”
    Finally, when it comes to referrals, doctors will tend to refer to other doctors who they know. Social networks are important here, as they are in other professions.
    And of course, doctors, like the rest of us, tend to think that the people they know and like are good doctors (assuming that the doctor in question is average or above average. )

  12. Maggie,
    What I’m really after with respect to price and quality transparency is to get to the point where the referring doctor can incorporate the information into his or her referral decisions. Take heart surgery, for example. Suppose my cardiologist can refer me to one of say, six, heart surgeons, all of whom are roughly equal in experience and perceived competence. Perhaps these six doctors have privileges at three different hospitals each of which produce roughly similar outcomes with respect to mortality rates, infection rates and readmission rates. What if hospital A is typically reimbursed 40% less than hospital B and 20% less than hospital C? What if three of the surgeons are reimbursed 30% more than the other three because they are members of large groups with significant market power? With the right incentives, including shared savings, perhaps my cardiologist would refer me to the most cost-effective doctor and hospital instead of the guy who he plays the most rounds of golf with or the hospital with the best art collection and valet parking service. If the patient would be in good hands with any of the six surgeons and any of the three hospitals, cost should play a role in the referral decision but the doctor needs to have the appropriate information available in order to use it.
    As an aside, several years ago, I remember seeing ratings assigned to 54 heart surgeons in Boston. One star meant outcomes were worse than expected; two stars were awarded if results were as expected and three stars were assigned if outcomes were better than expected. Out of the 54 surgeons, 52 received two stars! One got three stars and one was rated one star. In effect, with one exception, the patient would be in good hands with any of them.

  13. Barry–
    You write: “perhaps my cardiologist would refer me to the most cost-effective doctor and hospital instead of the guy who he plays the most rounds of golf with . . .”
    Maybe he would, maybe he wouldn’t. Probably friendship would trump what he may suspect—-but doesn’t really know about the quality of care any of these surgeons provide.
    If his friend is an alcoholic, word has probably gotten around. Otheriwse–if his friend is just an average surgeon (somewhere in the middle of the bell curve) he’ll recommend him. He won’t care what the hospital charges.
    We have NO WAY to measure the quality of care that individaul doctors provide. Dartmouth’s Elliot Fisher–who would really like to find a way to do this– acknowledges that we haven’t found a way.
    First what counts as a good outcome? Simply surviving the surgery? What if the patient didn’t need the surgery in the first place and the surgeon operates on a lot of not-very sick patients who survive? (More than 50% of patients who undergo angioplasty derive no benefit. The same is true of bypass)
    What counts as a bad outcome? Winding up in a nursing home for the rest of your life? OR winding up dead? Which is worse? Could the bad outcome have been avoided? You can’t adjust for risk in the relatively small pool of patients that an individual surgeon sees.
    Asked about the 6 cariologists, probalby most referring doctors would say “they’re all good.” Or “different people are more comfortable with different doctors.” (Which is true– and yoru level of trust is important to recovery following surgery.)
    Finally, why would you want to let some hospitals charge 40 percent more than others?
    Because wildly arbitrary pricings suggests that a free market is at work?
    Healthcare is too important to be left to the irrationality and inefficiency of unfettered markets. (If the last ten years hasn’t put the “efficient market” theory to rest, I don’t know what will. Even Warren Buffet agrees: “the market” (any unregulated market) “is a casino.”)
    As for those one-star two-star ratings . . complete hogwash, much like U.S. News ratings of the best hospitals (Redding, the hosptial where so many people were killed and maimed by heart surgery they didn’t need was rated as tops for cardiology).
    People make money by assigning stars. Often they are paid by the folks they are rating. U.S. News makes a fortune on the issues that rate colleges, hospitals, etc. That’s why they do it. (Years ago, when I was at Money magainze, there was talk of rating colleges–long before U.S. News did it– becaue it would sell magazines. We knew that we weren’t in a position to really judge which colleges were best, and ultimately dropped the idea.)
    Finallly ,do you really want your referring doctor taking kickbacks (a.k.a. cost-sharing) from doctors who are willing to charge less in order to drum up more business?
    If I were a doctor, I wouldn’t want any part of that. And I wouldn’t want to be put in the postion of judging which of my colleagues should earn how much, or who is better.
    Unless I, too, were a surgeon and had operated with him many, many times, I would have no way of knowing.
    (The people who know which surgeons are best are surgical nurses–they see everything. But even they are influenced by personal likes and dislikes: if an arrogant male-chauvinist surgeon is constantly yelling at hte nurses, they won’t like him (and they may be right –volatility could get in the way of doing his job.) But they will like a charismatic, good-looking kind and polite young surgeon–even if, in fact, he is less skilled and less conscientious than some older, grumpier surgeons.
    Finally, it is much, much simpler to let government set rates for hosptial services– as Maryland has– adjusting as best it can, for hospitals in areas where wages are higher (an easy adjustement) and adjusting for hospitals who care for more very sick or very poor patieints (a harder adjustment.)
    I’m very impressed by the fact that, despite some grumbling, most physicians in Maryland seem to think that the process works pretty well. And it clearly saves money, provides better access for the poor, etc.

  14. Barry:
    Thanks for providing the testimony on the individual market rate increases.
    One of the more interesting points was that Blue Cross loses one-third of their clientele every year.
    That means, without generating new business, that Blue Cross would have few customers in 3 years.
    Now, if this was a grocery store, the owner would like high product turnover.
    But, customers are the bread and butter of an insurer.
    Having to replace one-third of your clientele every year is an expensive proposition.
    Why do so many people leave every year?
    A lot of people buy individual policies as a bridge between jobs.
    However, insurers typically price their products to discourage long-term clientele.
    They do this by closing off blocks, so that no new entrants coming into that particular pool.
    So, insurers create their own “adverse selection,” by design.
    As the healthier people leave, and no one is allowed to enter the pool, rates have to go up.
    Don Levit

  15. Dan – I just don’t know enough about the inner workings of the individual insurance market in CA to answer your questions. I don’t know what you mean by creating their own adverse selection by “closing off blocks” and not encouraging long term clientele. I agree that lots of people buy an individual market policy as a bridge between jobs and employer provided health insurance but I don’t know how many as a percentage of the total. My perception is that in an underwritten state like CA, you can buy a rated policy if you can pass an underwriting screen and your premium will gradually increase based on age as well as the insurer’s overall claims experience within your age group. Or, you can buy a COBRA policy if you lose your employer coverage, but that generally only lasts for 18 months. After that, you can buy a HIPPA policy. For limited number of people, 7,000 in CA as I understand it, you can buy into the high risk pool but at very high cost.
    Maggie – I think we are going to have to agree to disagree about the merits of transparency and market rate setting vs. government rate setting. I don’t think government rate setting as Medicare does it has worked all that well either, especially for primary care. Also, we keep hearing from doctors that more of them are no longer taking new Medicare patients and patients are having increasing difficulty finding doctors to treat them, at least in some markets. At the same time, Medicare pays quite well for certain procedures like heart surgery, orthopedic surgery and neurosurgery and we see hospitals continue to expand in those areas.
    One area where I would actually like to see government rate setting tried alongside the more traditional approach is with prescription drugs. In the drug space, rate setting really means government negotiating with drug companies with the inability to reach a satisfactory agreement leading to the drug being kept off the formulary. We keep hearing that seniors don’t like limited formularies, though this is the way the VA system works. Presumably a drug plan with a limited formulary would be priced lower than a drug plan with a more comprehensive formulary assuming deductibles and coinsurance provisions for covered drugs were similar. At some price differential, the cheaper alternative should be attractive to a significant number of people. Similarly, insurance plans that either didn’t include the high priced hospitals and physician groups in their networks or required patients to pay a higher co-pay to use them would be priced lower than more comprehensive plans that didn’t include such limits. At some differential, customers should start to gravitate toward the lower cost alternative. Let’s try it out with drugs first and see how it works.

  16. Good discussion.
    While we may use a few select interventions more frequently in US, like caths, it seems that the more routine studies that contribute to overall costs are the bulk of our, and OECD spending.
    Two nice papers from HA below. In particular, the Vladeck paper cites MD specialty consults per capita and we are not close to the top of the list.
    It is the prices we pay and the inefficiencies in our system, and probably not resource intensity for the most part (again, with some exceptions):

  17. Barry:
    Insurers typically close off blocks when they produce a new policy form.
    This is why renewal premiums are much higher than initial premiums, for people of the same demographics.
    For example, I have a client with Blue Cross in Texas, who applied for a new policy about 4 years ago with Blue Cross.
    The coverage was similar, although it was on a new policy form.
    His premium as a new customer was cut in half.
    Now, 4 years later, his premium has almost doubled again.
    We are applying for a new policy, in hopes of cutting his premium by about 40%.
    Bear in mind the initial premium, if he passes underwriting, is what a new customer would get, one who has never had an individual Blue Cross policy.
    Many people go through this reunderwriting process.
    My experience has been they do it through a new insurer.
    Whether one goes to a new insurer, or stays with the original one, closing off blocks is a death sentence for the remaining insureds.
    How long would a church last if it attracted no new participants?
    Don Levit

  18. Brad F–
    Thanks for commenting. And thank you for calling my attention to this Health Affairs study in the first place!
    But I have to disagree about whether the U.S. deliver more intensive, more aggressive care: when compared to other developed countries, we do many more bypasses, angioplasties, mastectomies, treatments for early-stage prostate cancer, Ceasarians, back surgeries, diagnostic tests looking for many diseases (which lead to diagnosis of pseudo-disease– and more treatments).
    We do more surgeries per capita than any other country in the world.(See Gawande, New Yorker, June 1)
    We take more drugs than the citizens of any country except Japan.
    We do more knee and hip transplants.
    We also put many more newborns in intensive care, and we put many more dying patients in ICUs.
    Finally, we prolong the process of dying (Steven Schroeder, Diane Meier)
    I’ve interviewed Bruce Vladeck and like him very much. (He was extremely generous with his time when I was writing Money-Driven Medicine)
    But Vladeck is totally fed up with doctors. He sees them as overpaid professional whiners, and this leads him to put more emphasis on how we overpay. . .
    If you compare diagnostic testing, surgeries, ICU stays, and the share of patients seeing 10 or more specialists in the U.S. to other countries, the evidence persuades me that care in the U.S. is more intensive, and more aggressive. (Though this is only for patiens who are well-insured or on Medicare. Uninsured and Medicaid patients receive fewer services.)
    But you are right, we also over-pay for virtually everything except primary care and nurses.
    Also, you are right when pointing to exceptions: the degree to which paying more and doing more contributes to higher costs varies, depending on which hospitals and regions you are looking at, and also depending on when you are looking at the data.
    In varous reigons of the country, sometimes insurers have had more market power; sometimes providers have had more clout.
    When providers have more clout, price becomes a more important factor. When insurers have more power, and keep a cap on fees, the research shows that doctors “do more” in order to make up for lower prices.

  19. Just to back up what Brad’s saying and my own thoughts too, yes overtreatment and the amount of healthcare consumed is of course a big issue. But let’s take say Cedars Sinai and compare it with say a big teaching hospital in Europe. Presumably, two equivalent size centers are not going to differ dramatically in the number of procedures if they are both working at near capacity.
    Cedars had 55,000 inpatients in 2008 and 350,000 outpatient visits, and 77,964 ER visits, and has 952 beds and 10,000 staff.
    A large London teaching hospital eg St Georges, has 65,141 inpatients, 460,714 outpatient appointments, 104,118 patients treated in ER, about 1000 beds and 6000 staff.
    I can’t find a turnover figure for Cedars – is it published? – but a hospital like St George’s turns over about $500 million a year. I suspect Cedars’s income is much much higher.
    The chief exec’s salary at Cedars I can find – in 2007 it was $1.8 million plus $335,356 in benefits and expenses. The St George CEO is not on anything like this – more like $200,000, but with a terrific pension scheme. The highest paid hospital trust CEO in the public sector in the UK is not on any more than about $350,000.
    From that International Federation of Health Plans survey we can see the average hospital stay charge at a high end US hospital is over $40,000. In the UK it is about $3300.
    The most significant difference in the raw numbers is the number of staff – Cedars has 4000 more than St George’s.
    There may also be big difference in the cost of the buildings and land, but as London is one of the most expensive cities in the world I doubt this is a key factor.
    All in all, Cedars is probably just raking in much more money for more or less the same amount of work. As a non-profit hospital, where is all this money going?

  20. Brad & Marc
    I understand that you weren’t conjecturing. And there definitely is good evidence that we over-pay for everything. I’m not questioning that.
    But there also is very concrete evidence that we practice more aggressive medicine than other countries. (I wasn’t guessing either.)
    The McKinsey report (like many McKinsey reports) is skewed by its faith in the free-market, and efficient markets. It begins by assuming that consumer demand is the problem and that we need to make consumers more “value conscious.”
    Virtually all health care economists– going back to Kenneth Arrow, the father of health care economics– agree that healthcare is supply-driven. The provider tells the consumer what he needs.
    McKinsey has an ideological commitment to the idea that health care is demand-driven; they would say that we should make consumers more price-sensitive by making sure that they have more skin in the game.. . .
    Other countries recognize that health care is supply-driven and to keep costs down they limit the supply of hi-tech equipment, the supply of specialists, the number of hospital beds, etc. In Canada, eye surgeons are allowed to do only a certain number of surgeries per year.
    The examples I gave in my reply are also well-referenced: when it comes to big-ticket items– surgeries, chemo, treatment in an ICU, and tests using multi-million dollar diagnostic equipment, we “do more” than any other country in the world.
    As Fisher points out, hospital stays here may be shorter than in some countries, but “more happens to you while you are there.”
    In addition the ratio of specialists to primary care docs is much higher than in many countries, and specialists are much more likely to “do something” or prescribe something, while primary care docs practice cognitive medicine (listening and talking to the patient.)
    Finally, with all of our testing, we detect diseases earlier (even if we’re sometimes only detecting pseudo-disease) and then aggressively set out to treat it.
    And then, of course, there is our end-of-life care. Too often, we prolong the process of dying. (See numbers on Cedars below)
    It’s interesting that for a long time, people seemed to agree that we do too much, but were reluctant to acknowledge that U.S. healthcare is over-priced.
    Now the pendulum has swung and people are eager to say “It’s the Prices!” and ignore over-utilization.
    In some cases, I think this is because some fear that reform will mean “doing less” –and that they won’t get a test or treatment that they think they need.
    It’s going to take a very, very long time to persuade American patients (and some doctors) that more care is not better care . . .
    Teaching hospitals in Europe are different from teaching hospitals here.
    For example, in Europe, residents are not allowed to work more than 48 hours a week (as of 2008–before that it was 56 hours) Here, they work an 80-hour week.
    As you noted, Cedars has many more workers on staff– and its residents work nearly twice as many hours.
    Meanwhile, it has fewer inpatients and fewer outpatients.
    What are all of those doctors and residents at Cedars doing?
    They’re “doing more” to fewer patients.
    I feel I need to keep repeating what Dartmouth’s Dr. Elliot Fisher says: “you may spend fewer days in a U.S. hospital (than in a European hospital) but more happens to you while you’re there.”
    More tests, more treatments. More prolonged and aggressive end of life care. (Dr. Steve Schroeder talks about visiting an ICU at a teaching hospital in the UK– it was nearly empty.)
    We “do more” in part because that’s our medical culture– we train most of our doctors to “do something!”
    But the fact that our hospitals are under pressure to make money also makes a difference.
    In the UK, hospitals are owned by the govt. They are on a budget, but they’re not expected to show profits.
    In the U.S. even “non-profit” hospitals have to turn a profit if they want a decent rating from the bond-rating agencies. (Our hospitals borrow money by issuing bonds– if they don’t get a good rating from bond rating agencies, they’ll have to pay a higher rate of interest on those bonds, and will have a harder time borrowing the money they want to borrow in order to build, renovate, invest and expand.
    That, by the way, is where Cedars money goes– to building. Last year, it started building a tower that will add 200,000 square feet 100 inpatient beds and an enormous parking garage. It was already in the process of expanding the med school.
    Then there was the $34 million Health IT system that Cedars installed in 2002. AFter only three months, a rebellion by doctors forced them to shelve it.
    Some Docs said it was clunky and slow. I interviewed docs there at the time. Tech-savvy younger docs claimed that older docs were just unwilling to take time away from their lucrative private practices to learn how to use it. . . .
    But very few docs were involved in the planning stages, which suggests that it may not have been hospital friendly.
    Two years later, they still didn’t have electronic medical records. That was 2005; I don’t know what has happened since then.
    I do know that if you look at the Dartmouth Atlas you’ll find that Cedars ranks near the very top of the hopsital care intensity index, with more than half of all patients seeing 10 or more specialist while in the hospital, a very high ratio of specialists to primary care beds, 40% dying in an ICU, only 19% enrolled in Hospice . . .
    And the high rate of doctors’ visits doesn’t include visits from residents. (Since they don’t bill Medicare, they’re not counted.)
    It’s pretty clear that these patients are getting very intensive care.
    I once broke my arm while in L.A. and wound up at Cedars. Very, very hectic. Lots of people running around. Yet it took a very long time for anyone to even give me a pain-killer. (It was a very bad break–had to be set. I was brought to the hospital by ambulance (I slipped and fell on the wet marble floor in the lobby of an office building); I didn’t just walk into the ER.
    So I would have expected that that someone would have taken a look at my arm sooner. Of course I wasn’t in mortal danger . . but I did want pain-killer!

  21. Over the years, I have worked in a number of hospitals that would probably be characterized as average to above average in quality. I have seen quite a variety of care – in the same hospital. In my opinion, quality of care is more likely to correlate with physician than with hospital, but of course these variables are not independent. For the most part, hospitals don’t have a good handle on the quality of care provided within their walls and people who are choosing a “good hospital” in order to ensure the quality of their care are mostly fooling themselves.
    But this problem is not unique to medicine or hospitals.
    – How good was the lawyer that represented you in your lawsuit? Do you know his/her winning percentage? Were his/her fees reasonable? Did he/she prolong your case to increase revenue?
    – How good were teachers at your college? I went to a “highly ranked” university. Some of my professors/teachers were excellent. Some were abysmal.
    – How good are the judges that sit in our courts? Judges have the power over people’s lives – are they wise and compassionate or are they hacks appointed by a patronage system. (Not that you have any control over which judge hears your case.)
    So people (who have a choice) who are operating in an information vacuum choose their lawyer based on “reputation”, their college based on “reputation” and their doctors based on”reputation”
    Cedars Sinai has spent years trying to build its reputation and has become Hollywood’s hospital of choice. Consequently it charges more (just like a prestigious law firm or college). Why does it do this – why does a dog lick himself ? Are Cedars Sinai’s rates less justified than Harvard’s tuition? — who knows
    As for the poor insurance companies – most of whom are in near monopoly positions in their local market – for years they have had tremendous power to set fees and to tell docs and hospitals: “take it or leave it”. It sure hurts, but “what is sauce for the goose is sauce for the gander”

  22. Legacy—
    This is a rare, but happy moment. I agree with virtually everything you say.
    Nice comment.
    P.S.– Okay, one caveat– I think that at hospitals where everyone is on salary– Mayo Clinic, Cleveland Clinic, Geisinger, etc. physician quality is more even. Because the doctors work for the hospital, the hopsital can decide who to hire, who to keep, who to promote and very good accountable care organizations hire very good physicians.
    But when doctors are in private practice, you are right, the hospital has very little control over quality.
    And if a hospital is primarily focused on reserach (as many academic medical centers are) clinical ability will be much less important in determining which doctors are rewarded and succeed.

  23. You may be right about places like Mayo, Cleveland Clinic, etc. Having never worked at a place like that, I don’t know. However, my intrinsically skeptical nature makes me doubtful. My experience with multi-specialty groups (at least in my specialty) is that they do NOT attract the best and brightest.
    Despite our differences about Maryland’s HSCRC, I think you and I agree on more than you realize. However at the risk of jeopardizing our blossoming love affair, I would like to point out something that, although it is off topic to the current post is very on topic to the blog and prior posts. Here is the LATEST from the CBO about the cost of malpractice.
    “CBO had previously estimated that enacting a common package of tort reform proposals would reduce federal deficits by $4 billion from 2010 to 2019, but CBO now estimates that those proposals would reduce federal deficits by about $54 billion during that period.”
    Please note: since the federal contribution to health care costs is approximately 50%, the above numbers should be doubled to around 100 billion for total cost or about 10 billion per year. That is not chump change.
    I love the precision of these estimates (never mind the accuracy), in the course of a year the number can go up BY A FACTOR OF 10! And in my opinion the revised number is still low. Maybe if we can be wait another year, it will go up by another factor of 10!

  24. The brother of one of my colleagues is a salaried neurosurgeon at Cedars Sinai. He also has the opportunity to earn bonus compensation based, in part, on how many surgeries he performs and how much revenue he generates for the hospital. Apparently, the culture of the institution is a more important factor in whether treatment patterns are aggressive or conservative than whether the physician payment model is salary (and bonus) or fee for service.

  25. I suspect that part of the motivation behind the timing of this article is the 21% decrease in Medicare reimbursement rate (based on the SGR) that takes effect today (3/1/), and the warnings by providers that this could impact access to providers for new and current Medicare patients. A reality check never hurts.
    The same trend was found in Massachusetts in a series in the Boston Globe last year, which found that Partners Healthcare (the parent of MGH, Brigham and Women’s, and others) has the clout to raise private insurance reimbursements by double digits, leading to insurance premium inflation across the state, and resulting in Massachusetts being the state with the highest family health insurance premiums in the country in 2009.
    So physicians and hospital systems have discovered the advantages in collective bargaining! What took so long? What’s sobering about this is that hospital administrators and Boards have strongly fought unionization by nurses and other staff over the years within their facilities (cf. Paul Levy’s ongoing battle with SEIU).

  26. According to T.R. Reid in his book The Healing of America, setting price
    controls and all-payer rate setting is what other wealthy industrialized countries with universal coverage, lower costs, and better health outcomes do,
    including those with single payer systems as well as mixed kinds of financing, forcing providers to compete for patients based on their extra
    services and patient outcomes, providing price transparency for patients, and removing the insurers from intervening in the decision-making relationship between patients and their caregivers.
    Advantage of a social insurance system like traditional (not privatized) Medicare: “As the dominant payer for the elderly and
    disabled, Medicare sets prices and is generally indifferent to providers’
    negotiating clout.”

  27. Brad F.–
    Thanks for your comment.
    But I’m puzzled that you ignore the many areas where we “do more” including mastectomies, invasive heart surgery, orthopedic surgery, virtually all diagnostic tests,chemo, treatments for early-stage prostate cancer, ICU care, dialysis, etc.
    (See my comment a few hours before your comment.)
    I spent close to half an hour looking up the data on utilizaion in the U.S. vs. other countries in those areas, so was surprised that jsut ignored it.
    On the other hand, I realizing that you have another day job–beyond responding to blog posts. So you probably didn’t have time.
    But the two papers you cite don’t address the data. Indeed, the second paper acknowledges that the “United States does have a comparatively high level of imaging units and inpatient surgeries.”
    Then it goes on to rely on the McKinsey study to say prices, not utilization is driving health care inflation in the U.S.
    Here the authors cite McKinsey as their source that “Americans consume fewer drugs.”
    That just isn’t true.
    See this study comparing consumption of drugs in the U.S. to consumption in the U.K. Germany, Canada, France, Italy, Mexico adn Japan. (Health Affairs, “Nine countries, 2003. )
    When it comes to consumption of older drugs (10 years old or more) our consumption is similar.
    When it comes to consumption of drugs launched in the past two years, consumption is at least 50% lower in all countries except Germany.
    If you look at drugs launched in the past 5 years, consumption is at least 50% lower in every country except Germany,France and Canada.
    In other words, we consume far more of the newest, most expensive drugs–which is in keeping with the overall assessment that U.S. health care inflation is driven to a very large degree by our much greater use of cutting-edge medical technologies–which includes cutting-edge drugs.
    Princeton economist Uwe Reinhardt has argued that medical technology is the primary factor.
    The folks at Dartmouth say that both utilzation and higher prices drive inflation. The Common wealth fund agrees.
    Your other citation is from Bruce Vladeck– the person you cited in your first comment.
    As I noted, Vladeck also acknowledges that we receive more intensive care. He emphasizes price because he thinks physician’s fees should be lowered.
    Vladeck also is something of a contrarian.-
    But he and McKinsey are pretty much alone in saying prices are the major driver.
    And when you look at individual tests and procedurs as well as consumption of new drugs, as I did, you can see how important volume is.
    Finally new cancer drugs now account for a huge amount of drug spending in the U.S.

  28. Barry, Don, Barry
    Barry–You report that doctors at Cedars Sinai are on salary but also receive bonsues based “in part, on how many surgeries he performs and how much revenue he generates for the hospital.”
    In most medical centers where doctors are on salary any bonsuses would be tied to quality, fewer complications, etc.
    Not how many surgeries they do and how much money they bring into the hospital.
    Accountable care organizations and places like Mayo that pay doctors on salary do not reward doctors for “doing more” or “bringing in money.”
    Cedars may have docs on salary but the hospitals bonus system makes it an old-fashioned fee-for service medical center that tells docs: we’ll pay you for doing more surgeries (whether the patients need them or not)
    Any institution that pays doctors that way is treating them as if they were factory workers, paying them “piecework” as Atul Gawande points out.
    And who are the “pieces”? You and I.
    Also, I have been told that the majority of docs practicing at Cedars are docs in private practice who have privileges –not salaried docs.(This was back in 2005– maybe it’s no longer true.
    You write: “However, insurers typically price their products to discourage long-term clientele.”
    This is very interesting.
    Non-profit insurers like Kaiser or Puegot Sound tend to try for long-term customers. Their goal is to keep them healthy, so if the insurers keeps them
    long-term, they reap the benfits of keeping them healthy.
    I don’t think we want two tiers of drug formularies–one that includes most drugs that anyone might think they want (for wealthier people) and another
    that includes only those drugs that pass the test of benefits outstripping risks for patients who fit a particular profile.
    We do not want to encourage the production of drugs that can’t pass evidence-based standards.
    And it’s not that primary care docs are refusing to take new Medicare patients— private insurers follow Medicare’s rate schedule, and many primary care docs are not willing ot take new patients with private insurance.
    Meanwhile, Medicare has done a better job than private insurers when it comes to keeping fees for specialists adn hospitals done. Private insurers are way over-paying many hospitals–paying 115% to 125% more than it costs the hospital to care for patients. (See an earlier, very well-documented health beat post by Dr. Pat S. about how Medicare pays hopsitals) We cannot afford to pay hospitals a 15% to 25% profit margin.