Over at Kevin M.D., Kevin Pho has raised the possibility that health care reformers who are calling for more “large integrated health systems like the Mayo Clinic or Kaiser Permanente” may wind up creating monopolies that have the market clout to charge more—raising the total cost of health care.
Kevin notes that “according to the Dartmouth Atlas” these large integrated health systems “lead to better patient care and improved cost control. . . To that end, [the idea of ]Accountable Care Organizations has become a major part of health reform . . . But,” he warns, “the creation of these large, integrated physician-hospital entities that progressive policy experts espouse comes with repercussions.
“To prepare for the new model of health care delivery, physician practices have been consolidating. In many cases, they’re being bought by hospitals. Last year, I wrote how this is leading to the death of the private practice physician.
“And with consolidation comes a tilt in market power. Health insurers, desperate to control costs, are finding it more difficult to negotiate with hospital-physician practices that dominate a market. And patients are going to side with the hospital — insurers that leave out popular doctors and medical facilities face a backlash from patients. Witness the power that Partners Healthcare has in the Boston market that’s mostly driven by patient demand for big-reputation, high-cost Massachusetts General Hospital and Brigham and Women’s Hospital.”
[Note: I wrote about how brand-name hospitals in Massachusetts were over-charging for simple procedures that could be done just as well at hospitals that charged lower rates here on HealthBeat.]
Kevin continues: “Merrill Goozner notes how consolidation in California actually raised prices:
“‘A national study conducted for the Robert Wood Johnson Foundation found that after the merger wave between 1990 and 2003, 90 percent of large metropolitan area hospitals wielded excessive market power as defined by the Federal Trade Commission. The study suggested the mergers raised prices by anywhere from 5 to 40 percent (depending on how close the merged facilities were to each other) and probably led to lower quality.’”
[Note: In California, market power has shifted back and forth between insurers and health care providers. In the past, in some places insurers enjoyed great market clout—and paid providers less. In other cases, as Goozner notes, hospital consolidation gave providers the power to charge more. I wrote about this in Money-Driven Medicine—MM]
“The fear now is that ‘ACOs could make an existing problem marginally worse,’ said Robert Berenson, a senior fellow at the Urban Institute, who conducted the California survey. ‘The issue is market power.’
“Progressives face a conundrum,” Kevin concludes. “They want doctors to practice in integrated health systems so that economies of scale can lead to better health IT integration, cost control, and better quality — or so says the Dartmouth Atlas data.
“But in doing so, they’re promoting monopolies, where medical providers and hospitals can then dictate prices and have a greater say in health care pricing. That is antithetical to progressive health policy dogma.
“So, ironically, it may be because of health reformers’ zeal to integrate doctors and hospitals that may be the biggest impediment to cost control going forward.”
When he posted on this topic, Kevin e-mailed me to ask what I thought about consolidation. I replied in a comment on his blog. Below, an edited version of what I said:
“Under health care reform, most people in the insurance industry agree that there will be a ‘shake-out’– many insurers just won’t be able to return the profit shareholders expect. The fact that they can’t ‘cherry-pick’ healthy customers, combined with the rule that when covering large groups, they can keep only 15% of premiums to cover their own costs and profits, paying out 85% (80% when covering small groups) will force them out of business.
“In addition, insurers who, in the past, made their money selling high-deductible ‘Swiss cheese’ plans (filled with holes) also will go under.”
The Shakeout is Likely to Begin This Year
It is hard to say how quickly consolidation will happen in the insurance industry. But Weiss Ratings (the one independent group that rates the financial health of these insurers) predicts that smaller insurers will be going out of business beginning this year. (Close to half of the insurers they rate in terms of financial health already are getting a “C” to “D” rating.)
Weiss lists just 16 large insurers who get ratings ranging from “A” to “B”, and based on what I know, I can see four of those 16 getting out of the business. Everything turns on how they made their money in the past. If they did it by selling stripped-down insurance, they are in trouble.
Standard & Poor’s also predicts that “mid-tier players” will be knocked out of the business starting this year. Because so many people think that insurers got a “sweet deal” from the administration–and don’t understand how insurers make money– they don’t realize how tough the new rules are.
Only large insurers who enjoy efficiencies of scale are likely to survive. They will gobble up some of the smaller companies, and we’ll be left with many fewer large insurers. Meanwhile, if Accountable Care Organizations are successful, health care providers also will be consolidating.
Large Insurers Will Be Pushing Back
But under reform, even large insurers will not be able to afford the sky-high fees that some large brand name hospitals have been demanding because it will no longer be so easy for insurers to simply pass the cost along in the form of higher premiums. In most states, regulators are going to be taking a close look at requests to hike premiums. And even if insurers receive permission to lift their prices they will be able to keep only 15 cents out of each $1 increase—85 cents will have to go to medical care. (If they don’t spend 85% on care, the Affordable Care Act requires that insurers rebate what they didn’t spend to their customers.)
Insurers know this, and they are beginning to push back against very expensive hospitals. Today, I received an e-mail from the Corporate Research Group explaining that “Blue Cross Blue Shield of Massachusetts (Boston) is reporting unprecedented interest in a new health plan that jacks up member co-pays for procedures at 15 hospitals on its list of “high-cost” facilities.
“According to a spokeswoman, nearly 30% of BCBS-MA’s small business and individual clients renewing in January 2011 signed up for the Hospital Choice Cost-Share plan. Typically, a new plan option attracts just 1% to 2% of BCBS-MA businesses in the first year. A separate BCBS-MA tiered network product called Blue Options – launched in 2007 – has 95,000 members.
“HCCS offers average premium savings of about 5% compared to traditional plans. However, member co-pays in six key areas are far higher. For example, inpatient co-pays at one HCCS plan are $1500 for high-cost hospitals versus $500 in low-cost hospitals (see chart). Outpatient day surgery co-pay is $1250 at high-cost facilities versus $250 a low-cost facilities.
“Among the hospitals on the high-cost list are major academic centers like Brigham and Women’s Hospital and specialty facilities like Children’s Hospital Medical Center . . .”
In general, I don’t favor lifting co-pays: too often, this means that middle-income patients cannot afford the care they need. In this case, I would be concerned that a cancer patient facing a particularly difficult surgery might not be able to afford Brigham (where Atul Gawande might be her surgeon, and all of the cancer teams are highly experienced). Instead, she might wind up at a small hospital where surgical teams do many fewer complicated surgeries.
But if BCBS charged patients higher co-pays if they went to pricey hospitals for routine, fairly simple procedures that could be done just as well—and just as safely—at a small community hospital, this would make sense.
In any case, BCBS’ action—and the fact that the insurance is popular—does suggest that even if health care providers consolidate, they will not have unlimited market power.
Medicare Will Lower Fees If Care Is Over-Priced
Meanwhile, under reform, Medicare will be much tougher. Under the Affordable Care Act, the Secretary of HHS has the power to lower physicians’ fees for “overvalued services” while raising fees for “undervalued services.” Private insurers have said that if Medicare provides political cover they will follow suit. Already private insurers are paying less for some diagnostic testing.
Bottom-line: we’ll wind up in a world where both large private sector insurers and Medicare are rewarding doctors and hospitals for value (providing better care for less) while penalizing them for inefficiency, overtreatment and attempting to over-charge.
At the same time, large provider systems will have their own market power. As Kevin points out, patients will want them in their insurers’ network.
Monopoly power is not necessarily bad if it is balanced–and if insurers are regulated. The 85/15 rule is a good one, and the government was quite tough in deciding what counts as part of the 85%. The fact that all insurers will have to provide “essential benefits” also is crucial. This will make it very difficult to refuse to cover a treatment just because it is very expensive.
Finally “consolidation” is not, in and of itself, a bad thing. Our health care system is too fragmented, and this adds to the costs and waste.
We need more collaboration (not more competition which causes hospitals to over-spend on cutting edge equipment, rather than sharing it.) One reason care is less costly in other countries is because their health care systems tend to be less fragmented.
And we know, from experience in this country, that large, collaborative organizations that encourage doctors and hospitals to work together can provide better care for less. This doesn’t mean that small practices will disappear. In some parts of the country, they will be needed. But I suspect that they, too, will begin to work together in “virtual networks” that let them share resources as well as information.