Sunday, July 03, 2011

Creating the Right Kind of Competition in Healthcare

The prospect of a “divorce” between the region’s largest health insurer (Highmark) and the region’s largest hospital system (UPMC) has caused concern for many residents of the region. Will they have to switch doctors or change insurance? Many community leaders have called on Highmark and UPMC to settle their differences and return to business as usual.

However, business “as usual” isn’t good enough anymore. The high cost of healthcare is hurting businesses and families, both nationally and in southwestern Pennsylvania. We need to find ways to make health insurance more affordable without denying patients the care they need.

Contrary to popular belief, the reason health insurance costs are increasing is not lack of competition among health plans. There is growing evidence nationally that a major cause of high costs is high prices charged by large health systems.

For example, last year, an investigation by the Massachusetts Attorney General found that some of the larger hospitals and physician groups in that state charged twice as much or more than others for the same services. The higher-priced facilities did not provide higher quality of care, nor were they paid more because they treated more complex patients or had teaching programs. The only explanation was that big hospitals and physician groups had the power to demand and receive higher prices. Moreover, the report found that “price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts.”

Last month, the Massachusetts Division of Health Care Finance and Policy issued a new report with even more detail on price variations. In 2009, some hospitals in Massachusetts were paid an average of $25,000 for knee joint replacements while others were paid an average of only $14,000 for similar cases, a nearly 80% difference. Payments for Cesarean sections ranged from under $5,000 to over $10,000, payments for appendectomies ranged from just over $6,000 to just under $12,000, and there were similar variations for other procedures. There was no correlation at all between cost and quality across a wide range of procedures.

High prices are not just a problem in Massachusetts. The Health Insurance Commissioner in Rhode Island found that large health systems in that state were being paid 50% more than smaller hospitals for the same procedures. The Medicare Payment Advisory Commission (MedPAC) issued a report last month which showed that in many regions of the country, some hospitals and physician groups are paid twice as much or more than others.

In the Pittsburgh Region, the amount that hospitals are paid by health plans is a closely guarded secret, but several years ago, the Pennsylvania Health Care Cost Containment Council (PHC4) revealed what our hospitals are actually paid by commercial health plans. While some hospitals in southwestern Pennsylvania were paid an average of $18,000 to perform heart bypass surgery, others were paid as much as $35,000 for the same procedure. Similarly, payments for heart valve surgery ranged from a low of $24,000 to a high or $54,000. Moreover, the lowest priced hospitals (Jefferson Regional, Butler Memorial, and St. Clair Hospitals) actually had lower mortality and readmission rates (i.e., better quality) than the highest-priced hospitals (UPMC Presbyterian/Shadyside Hospitals, Mercy Hospital (then an independent hospital), and Washington Hospital).

What all of this means is that we could be spending 30%-50% less on hospital care than we are today, without sacrificing quality, if the highest price hospitals would reduce their costs. And since hospital care represents 40% of typical commercial insurance costs, cost reductions there could make health insurance policies 10-20% cheaper than they are today – saving thousands of dollars per year on a typical family health insurance plan.

Tougher negotiations between health plans and hospitals aren’t the answer. Each side just tries to get bigger to gain more leverage, and patients and businesses are the losers. The answer isn’t getting more or different health insurance companies, either.

The problem is the type of health plans insurance companies offer. Under most health insurance plans, hospitals don’t have much incentive to reduce their costs, because it doesn’t matter to patients how much the hospital charges.

For example, suppose you need knee surgery and you have a choice of two high-quality hospitals; Hospital #1 charges $15,000 and Hospital #2 charges $30,000. If you were paying on your own, you’d likely choose Hospital #1. But under a typical individual health plan, you would only be responsible for a 10% co-insurance payment up to an overall annual $1,500 limit on out-of-pocket expense. So it would cost you $1,500 to get your knee replaced at Hospital #1 and $1,500 to have it done at Hospital #2 – exactly the same amount.

It would be no different under a high-deductible plan, because the cost of the surgery is well above most deductibles. You might think twice about whether you need the knee surgery at all, given that it will cost you more than under the low-deductible plan, but once you decide to go for the surgery, it won’t matter to you how much the hospital actually charges.

On the surface, this sounds like a pretty good deal – go wherever you want without regard to cost. The health insurance company, not you, would pay the $15,000 difference if you choose Hospital #2. However, the insurance company has to charge you a higher premium for the privilege of choosing more expensive hospitals without regard to cost. The more members of your health plan who choose higher-cost hospitals, the faster your premiums will increase. Even if you’re healthy and you don’t need a hospital at all, you’re paying to give everyone else the freedom to choose without regard to cost. It would be as if your neighbor decided to buy a Ferrari instead of a Ford, and you had to help them pay for it.

Other regions have different kinds of health plans that give patients more responsibility for choosing hospitals and doctors based on cost as well as quality. For example, Blue Cross Blue Shield of Massachusetts now offers a health plan where members pay less if they choose lower-cost hospitals. Employers in Minnesota created a tiered network plan called Patient Choice where employees pay lower premiums and lower copayments if they choose to get their care from lower-cost health systems.

Not surprisingly, the biggest resistance to these types of health plans comes from large, high-priced health systems, since the plans give consumers an incentive to use hospitals and doctors that offer high-quality care at a lower price. In some regions, large non-profit hospitals have refused to contract with a health insurance company at all if it offers such a health plan. That’s not only anti-competitive behavior, but counter to the mission of a charitable institution.

So instead of going back to the old system where cost doesn’t matter or creating “narrow network” health plans that limit patient choice, Pittsburgh’s health insurance companies and health systems should be creating health plans that (1) give patients full choice of which doctors and hospitals to use, (2) better information about the cost and quality of care that they provide, and (3) greater responsibility for deciding whether a higher-priced provider is worth the extra cost. That would encourage health providers to compete on both cost and quality, resulting in better and more affordable healthcare for the entire region.

(A shorter version of this post appeared as the "Regional Insights" column in the Sunday, July 3, 2011 Pittsburgh Post-Gazette.)


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