Below, a guest-post by David Spero, R.N. Spero is the author of Diabetes: Sugar-Coated Crisis — Who Gets It, Who Profits and How to Stop It, a book that Thomas Bodenheimer MD, Professor of Family and Community Medicine, University of California, San Francisco describes as “a hard-hitting and beautifully written look at the social causes and cures of chronic illness… illuminates the true reality of diabetes and provides cutting-edge ideas on prevention and treatment.” (Bodenheimer’s recommendation puts it on my “to-read” list.)
In this post, Spero explains why “free market competition” doesn’t work to bring us affordable health care. Quite simply, the seller has too much power. Drug-makers and device-makers set their own prices, with little push-back from public-sector or private sector payers. Lobbyists have managed to push through a law stipulating that Medicare cannot negotiate for lower drug prices. As for private insurers, they have found that if they don’t cover all of the drugs advertised on TV, they lose customers. So for the past ten years they have been shelling out whatever the manufacturer demands, while passing the cost on in the form of higher premiums.
In the case of doctors and hospitals the situation is more complicated. As I explain in a note following Spero’s post, total reimbursements to providers have been spiraling–though some physicians and medical centers have enjoyed the lion’s share of the gains, while others have watched their income drop.
Why Health Care Markets Can Never Work
By David Spero (This post originally appeared on Dissident Voice)
Suppose I want to buy a used car, and imagine there’s no Cars.com or Craig’s List, and professional used car salesmen are the normal way to buy. So I go to a dealer ask him about maybe a 1998 Honda, thinking that’s what I can afford.
“Oh, no,” says the dealer. “That would be totally wrong for you. You need a 2009 Lexus.”
“But I can’t afford that. I’ve only got $4000.”
“Look. If you don’t get that Lexus, you could die. Or have a terrible accident. Or at the very least, you would have to stop driving after two or three years. Yes, it’s expensive. But this is your future we’re talking about.”
“Well, I guess you’re the expert. If I really need it, I’ll sign the papers and worry about paying for it later.”
Of course, this conversation would be insane. The seller can’t decide what the buyer pays for. That would be the ultimate sellers’ market, in which prices would spiral endlessly upward, and everyone would be driving around in much more car than they needed or could afford. Soon, many buyers would go bankrupt and stop driving entirely, and the system of car-based transportation would collapse. Besides, nobody would allow a car salesman’s opinion to override their own in the first place.
But substitute “doctor” for “car dealer” and “treatment” for “Lexus,” and you have the exact situation that exists in American medicine now. The sellers – physicians, hospitals, drug companies, medical equipment makers – tell the buyers – us and our insurance providers – what we need. We can say no, but the professionals are the experts. They know far more than we do. (Or at least we think they do.) Sometimes they bully and threaten (“You could die!”) So the sellers have more input into the final purchase decision than the buyers do. And as a result, costs are spiraling upward, people are being over-treated and going bankrupt, and the system is collapsing.
Markets are good for things like cars. The buyer looks for what he wants. When he finds something close, the seller makes an offer and the buyer decides whether the price is acceptable. Eventually they agree on a price, or they don’t, in which case there’s no sale.
But health care is completely different. The sellers are in control. They’re steering purchase decisions. With or without “health care reform,” it makes no difference. Prices will keep going up; unnecessary services will keep proliferating. Individuals, companies, and governments will continue to be bankrupted. Millions will be denied care for lack of funding. And free market advocates will keep saying the market is the answer to our health care crisis.
Our society can decide that everyone is entitled to appropriate medical care, or not. But we can’t provide care to any except the very rich under this topsy-turvy anti-system. Costs will continue to spiral if sellers set the prices and make the purchasing decisions. Eventually we will run out of money, and eventually came about twenty years ago in the US. We’ve been paying medical bills on credit ever since.
A sellers’ market can’t control costs. Instead, costs should be controlled, as they are in Europe, with rational, evidence-based decisions on what treatments are effective and affordable, and what they should cost. Of course, such a system will be open to corruption and abuse, but, unlike the present system, at least we would have a chance to do things rationally.
Alternatively, we can deny care to ever-larger sections of the population who can’t pay the escalating prices. Either way, we should stop pretending that the ultimate seller’s market will fix itself. It can’t.
David Spero RN writes books, columns, and blogs about the social dimensions of health. He edited the paper Green Consensus for the California Greens. He can be reached at: firstname.lastname@example.org. Read other articles by David, or visit David's website.
A Note on Hospitals and Doctors
As Spero argues, a seller’s market cannot control costs.
We are the only nation in the developed world that has chosen to turn health care into a largely unregulated laissez-faire marketplace—and it isn’t working.
But doesn’t Medicare “set” prices for hospitals and doctors? We are often told that Medicare pays providers too little. How is that a seller’s market?
The truth is that while Medicare has tried to rein in health care inflation, the price of an overnight stay in a U.S. hospital has been mounting—up roughly 6 percent a year for the past decade. Meanwhile, after adjusting for inflation, the actual costs of producing hospital services climbed by just 4.4 percent a year. In other words, on average, hospitals have been ratcheting up their prices faster than their own expenses have risen.
The most recent numbers available show that in 2008, U.S. community hospitals billed insurance companies and Federal and State programs $1.2 trillion for inpatient care. This represents a 28 percent increase over the $900 billion, adjusted for inflation that they charged just four years earlier, in 2004.
When the Medicare Payment Advisory Commission (MedPAC) breaks out Medicare’s payments to hospitals, it reports that from 1998 to 2008, Medicare fee-for service reimbursements to hospitals for outpatient services shot up 85%. Payments for inpatient services rose by more than 40%. Granted, during this time hospitals were treating more patients, but reimbursements outstripped growth in the number of patients served. From 1998 to 2008, total outpatient visits rose by just 32% while inpatient admissions crept up by just 12%. This suggests that hospitals were “doing more” to each patient. Yet there is no evidence that patient outcomes were better.
In other countries the government regulates what hospitals charge. But in the U.S. Medicare’s hands have been tied by Congress, and the lobbyists who fund Congressional campaigns. As a result, we spend far more, per day, and per operation than in any other country in the developed world. As Jane Sarasohn-Kahn has argued on HEALTHPopuli, in the U.S., hospital care has become a “luxury good.”
Meanwhile, some hospitals—particularly public hospitals that care for large numbers of Medicaid and uninsured patients—are operating in the red, while “brand-name” hospitals charge twice as much for simple procedures. Medicare also pays academic medical centers in some cities far more than it pays others. Traditionally, particularly powerful Congressmen have had the leverage to demand a premium for hospitals in their district.
Just as hospital prices vary, so do profit margins. Contrary to the conventional wisdom, many institutions make a nice profit on Medicare reimbursements. For example, MedPAC reports, in 2008, 25 percent of U.S. hospitals turned a profit of 6.5 percent—or more—on Medicare inpatients, while another 25 percent reported margins that were 20.3 percent below the cost of caring for patients. It is worth noting that during the 1990s the average hospitals saw Medicare profit margins that ran as high as 18 percent. This was, indeed, a “sellers’ market.” Profits didn’t begin to sink until 2004. And even then, in 2008 thirty-seven percent of hospitals boasted positive profit margins while caring for Medicare patients—and 2008 was the toughest year hospitals had seen in fourteen years.
Finally, MedPAC’s research points out that when hospitals are under some financial pressure—either because they have fewer patients, a larger share of Medicaid patients, or because private insurers are paying less—many manage to become more efficient, and profit margins on Medicare patients improve. Indeed MedPAC’s analysis reveals that, on average, institutions feeling pinched turned a 3.7% profit on Medicare patients, while those under no financial pressure lost an average 12.7% on seniors.
This should come as no surprise. Like most other organizations, hospitals tend to spend lavishly when feeling flush, investing in hotel-like amenities, new construction, higher salaries for executives, and pricey, if not fully tested cutting-edge equipment. On the other hand, when money is tight, the same institutions are more likely to concentrate on avoiding waste. And in most cases, when hospitals make that effort, the quality of care also improves. Patients do not benefit from waste.
As for physicians, while Medicare underpays many who provide primary care, total Medicare fee-for-service reimbursements to doctors grew by 75 percent from 1998 to 2008. Over the same span, private insurers’ payments to doctors rose even faster.
Most of the 75 percent increase can be traced to higher volume: doctors have been “doing more” as they prescribe more tests, and recommend more procedures. In particular, they’ve been ordering more diagnostic tests, MRIs and CT Scans. From 2003 to 2006 Medicare reimbursements to physicians for imaging services climbed an eye-popping 11 percent a year.
As the MedPAC chart below indicates, from 2003 to 2008, the total volume of services that physicians offered to Medicare patients rose by 22 percent Did seniors suddenly need that many more procedures? Probably not. But as Spero points out, when it comes to health care, the seller steers purchase decisions. Very few physicians consciously over-treat, but there are many grey areas in medicine, and in recent years, residents at most academic medical centers have been taught to practice more aggressive medicine.
Not All Physicians Have Seen Incomes Rise
Of course, over the years, the cost of keeping a practice afloat also has grown. As a result, some doctors who are working solo or in a small group have suffered a drop in net pay—particularly if they are located in an area where the cost of labor and real estate is high. And in some sub-specialties, malpractice insurance premiums have climbed.
But doctors in the most lucrative specialties have watched their incomes mount. Even in the recession, a few specialties stood out. Modern HealthCare’s annual survey shows, for example, that from 2008 to 2009, average compensation for dermatologists jumped by 12 percent, rising 6.7 percent in 2008 and another 5.3% the following year. Meanwhile, orthopedic surgeons topped the list both years, though in 2009, total compensation, including bonuses, crept up by only 1.9 percent—to an average of $485,000.
Will Health Care Reform Create a Buyers’ Market?
Going forward, the Affordable Care Act will boost Medicare payments to primary care physicians and nurse practitioners. At the same time, the Secretary of Health and Human Services (HHS) will have the authority to lower the fees that Medicare pays for services that are “over-valued.” Under the ACA, Congress will not have the power to second-guess these changes and MedPAC has suggested that policy-makers take a close look at particularly lucrative services. Often, they will find that volume is very high—and growing. If they lower fees, volume may well level off, as it did when Medicare trimmed fees for diagnostic imaging.
Meanwhile, Medicare will be re-aligning financial incentives, rewarding physicians for managing chronic diseases—and keeping patients out of hospitals. This should mean fewer hospitalizations.
But health care will never become a buyers’ market. Patients need to be “steered” by health care providers. We rely on their expertise to diagnose what ails us, and prescribe appropriate treatments. But under reform, hospitals and doctors will be paid more to talk to and listen to patients. They will be encouraged to share decision-making, giving patients the information about risks and benefits. Research shows that when patients have this opportunity, they tend to make more conservative decisions than either hospitals or doctors, leading to fewer elective surgeries.
Finally, when it comes to end-of-life care, as more patients are offered palliative and hospice care, they will have a chance to decide how much treatment they want. Some will ask doctors to do everything possible; others will not. The goal of palliative care is to let patients die “in character.” Palliative care specialist Diane Meier elaborates: “There are people who have used denial all their life; they will most likely die in a state of denial. There are people who have been fighters and rebels all their life, and by golly, they want to die that way. And to those patients, we have to help them, to say it’s okay. . . ”
The goal of both palliative and hospice care is “to support the person to stay within his or her own compass,” says Meier. The caregiver is not selling death; she is not attempting to persuade the patient to accept death. Nor is she trying to lengthen life. Whether the patient dies sooner or later is not what is at stake: what is important is how she dies.
That, I think, is the hallmark of a “buyers’ market” in health care.