Thursday, February 4, 2010

Squeezing the Balloon on All Sides (the provider vs insurer smack-down)

DSCF1778After going back and reading my last post, I realized that my statement that Congress’ intent to repeal of health insurer’s anti-trust exemption was “much a-do about nothing” needed some clarification. I had planned to write a long narrative on the topic but thankfully, the St. Louis Dispatch and some fellow bloggers saved me some typing with their timely insight.

As an appetizer, the Dispatch’s article titled “Paying for Quality Health Care, But Not Getting It,” states:

A new report commissioned by the Massachusetts attorney general's office concludes that differences in hospital prices in that state aren't correlated to quality of care. They don't correlate with the severity of patients’ illnesses, or how many Medicaid and Medicare patients a hospital treats.

Price differences aren't even correlated with hospital costs, the report found. Facilities with the highest costs aren't necessarily those with the highest prices.

So what explains hospital price variations? Market leverage. Hospitals that had the most clout in the marketplace were able to charge the highest prices. And they did.

For the main course, Maggie Mahar has an excellent analysis over at the Health Beat blog (complete with a link to the Massachusetts report). And for desert, Austin Frakt has an excellent post, “Antitrust and Health Reform,”  over at the Incidental Economist blog.

In Maggie’s post, she rightly points out that today, we have behemoths (providers and insurers) battling it out through contract negotiations (hence, the rock’em sock’em robots in the picture). Many of these behemoths have near monopoly power in their geographic area and by weakening one side of the equation, the system will be out of balance. And when the system is out of balance – we all pay. So, what do we do?

Image10_thumb[3]Well, what we need to do is to squeeze the balloon on all sides. If we weaken one side, we also need to make sure the other side does not take advantage of this fact. This is exactly what they did in the State of Maryland.

Fun fact: Maryland is the only state where Medicare makes payments to acute-care hospitals at a rate other than the normal Medicare rate.

From Maggie’s post:

In Maryland, hospital prices have been regulated since 1977. An independent agency sets rates for all patients, including Medicare beneficiaries, at Maryland’s acute-care hospitals.

Adjustments are made for hospitals located in cities where the cost of labor is higher, as well as for hospitals that care for sicker patients and/or train medical students.

Private insurers, Medicare and Medicaid all must pay the prices set by the commission. Medicaid cannot underpay hospitals—and private insurers cannot over pay, or negotiate side deals and discounts with certain hospitals while paying others a premium for their brand name. Hospitals also cannot charge uninsured patients more.

In 1976, before regulation began, Maryland hospital costs were paid 25% more per case than the national average. By 2007 Maryland's costs were 2% less than the national average. And , according to a recent article in the Wall Street Journal Maryland’s hospitals are seeing small, but predictable profit margins.

Go figure, a standard rate for a procedure regardless of who pays the claim. This simplicity and transparency is refreshing. Yes, “price controls” are counter-intuitive to basic economic sense but as we have stated before, health care is not a well functioning market. Some hospitals in Maryland do not like the system because they feel it constrains their growth but all-in-all, the model works and has been in place for over 30 years. Let providers and insurers focus less on price negotiations and more on quality of care. That said, the only thing I would add to the Maryland model would be incentives for quality and the achievement of local public health objectives.

Maybe the various states dealing with serious budget shortfalls or access issues should give the Maryland model some consideration. The model may cause some shrinkage in hospital growth (i.e. jobs) but the price stability and improved business climate will lead to expansion of the other parts of the economy. ~BAA


Anonymous said...

Excellent post. I particularly appreciate the last line, "price stability and improved business climate will lead to expansion of the other parts of the economy." I think we sometimes loose sight of the fact that health care reform is about more than just health care.

I am a big believer in free markets, however even I must agree that in many ways health care does not act as a free market. Broken down to its barest level, a free market essentially requires three prerequisites. 1) Perfect information about a transaction 2) The lack of coercion and fraud, and 3) Enforceable contracts. The complexity of health care already immediately fails in the first point with an unequal knowledge gap between providers and patients. However, to add on the implicit "coercion" that accompanies monopoly or near-monopoly powers is more than enough to make a free market irrelevant.

Thanks again for the great post Brady, looking forward to future blogs.

Brady Augustine said...

Thank you for the insightful comment. In my post, I talked about the quasi-monopolies created by the continued consolidation of the health care industry but your point on asymmetric information is a very important and the psychology of these "credence" goods are described well at:

There is also two good working papers on the topic that were covered by the Economist magazine last year: and

Ed H said...

I agree we need health care reform but not because the insurance carriers have a monopoly. If that is the case, why do so many pull out?