By MATTHEW HOLT

Last week Jeff Goldsmith wrote a great article in part explaining why health care costs in the US went up so much between 1965 and 2010. He also pointed out that health care has been the same portion of GDP for more than a decade (although we haven’t had a major recession in that time other than the Covid 2020 blip when it went up to 19%). However, it’s worth remembering that we are spending 17.3% of GDP while the other main OECD countries are spending 11-12%. Now it’s true that the US has lots of social problems that show up in heath spending and also that those other countries probably spend more on social services, but it’s also clear that we don’t actually deliver a lot more in services. In fact probably the most famous health economics paper of the last 50 years was Anderson & Rienhardt’s “It’s the Prices, Stupid”, which shows we just pay more for the same things. Anyone who’s looked at the price of Ozempic in the US versus in Denmark knows that’s true.

But suspend disbelief and say we actually wanted to do something about health care costs, what would we do?

There are 4 ways to cut health care costs

1. Cut prices
2. Cut overall use of services
3. Reduce only unnecessary services
4. Replace higher priced services with lower priced ones

Number 3 or reducing only unnecessary services is the health policy wonks dream.

The Dartmouth school, originating with Jack Wennberg, has done a pretty good job convincing the health policy establishment that there is massive practice variation across the nation (and even within cities and individual hospitals), and that while this leads to higher costs, it doesn’t result in better outcomes. In fact outcomes where there are more services and spending tend to be worse. Dartmouth does have its critics like Buzz Cooper, and maybe all the explanation of variables in health care spending is caused by well meaning doctors ministering to the inner city poor, but it’s not hard to find overuse bordering on fraud. There have been a ton of well meaning attempts to both educate patients to choose wisely and to get doctors to behave better (or at least report their data), but there’s a new report out showing that Dartmouth had it roughly right every day. (This recent NYTimes one is about cutting babies’ tongues to make them breastfeed more easily).

Overall there have been some reductions in some measures, like hospital admissions but many of those have been replaced with other services, and in general practice variation has not gone away. Could it happen? Maybe, but 50 years of evidence makes it look unlikely. Don’t forget that the Obamacare authors were faithful disciples of Dartmouth but not much of that philosophy ended up in CMS policy.

Number 4 or replacing higher priced services with lower priced ones is the Silicon Valley health tech dream cross-bred with the Dartmouth school’s love of primary care. I will admit to being a fan of this movement. If we can replace higher priced people (doctors) with lower priced people or non-people (AI) we should be able to deliver the same things we are doing today at a lower cost. For example, in the field of psychotherapy there’s currently a great shortage of therapists. One thing that’s being done is replacing therapists with lower qualified coaches. But the end game is to use AI-powered chatbots and avatars to do the same thing. 

A related attempt is to deliver preventative services using technology. This is now paid for by Medicare – it’s called remote physiological monitoring (RPM). While its introduction has been a tad bumpy, it intuitively makes sense. If you can start tracking the care of relatively sick people while they are at home and relatively healthy, surely you can pick up issues before they get worse, intervene with medication changes and other services in their homes, and therefore prevent hospital admissions and improve outcomes. In fact, given how cheap tracking technology is, and the advances in AI, can’t you monitor everyone (based on their level of acuity) and give them a personal AI health coach? I call this the “continuous clinic” and it’s a great idea if I say so myself. The problem is that it’s not going to happen easily in a medical world that manages its process in terms of office visits and hospital admissions and gets paid on those metrics. We simply don’t have the right type of new organizations to put this together. And if you believe John Glaser and Sara Vaezy’s recent piece in the HBR called Why the Tech Industry Won’t Disrupt Health Care, we’re unlikely to get them. (I think John & Sara hope that the incumbents will reform themselves, but they would say that, wouldn’t they!)

Which leaves us with 1, cutting prices, and 2, reducing overall use of services. 1 & 2 are what the rest of the OECD does. 

Virtually every country in the OECD has some form of central price controls. Even if they have multiple paying entities, like Germany, there’s one agreed price schedule. Or, as in the UK and Scandinavia, there’s a regional or national budget. The US also has such a national price control, but only for some people over 65, given that Medicare Advantage now covers half of that population, and only for some services. Notably it doesn’t cover drugs, although that will slightly change in the near future given CMS’ new ability to negotiate the prices of some drugs. 

To this point in the US, any attempt to squeeze down on Medicare prices produces two effects. One is violent disagreement on behalf of provider organizations, which spend more money lobbying than basically any other industry in America. Almost always this means that Congress balks at imposing any real cuts. The other is that providers find ways to transfer those costs onto patients unable to negotiate. You’d think that the patients’ representatives (insurers and employers) would resist that but RAND has shown that they are basically price takers, paying more than double what Medicare pays for the same thing. Again this could change, and there’s some recent legislative activity that has a few people very excited, and has spurred some lawsuits about fiduciary responsibility – ironically one from an employee of a drug company. But we remain a long long way from a German/Japanese/French style price schedule.

Which leave us with 2, reducing overall use of services. The name for this in US health political  (if not policy) circles begins with another R, rationing. The stories of Canadians flooding across the border to access American health care were always basically bullshit, but like today’s stories of critical race theory, transgender drag queens corrupting our youth, and millions of migrants invading the southern border, it doesn’t take much to wind up the Fox News crowd as the Democrats found out. In 2009 the very wonky issue of when women should get mammograms became death panels very quickly. (BTW if you want to read a lot more about Canada, here’s a classic THCB piece I wrote in 2003. Not that much has changed)

This all means that obviously and transparently reducing services, presumably by creating a UK style cost-benefit analysis commission, is unlikely to happen. We have tried outsourcing that to the private sector, particularly in Medicare Advantage. But the combination of naked greed and stupidity from the MA plans and the use of scary AI, will probably put paid to that soon enough now the trial attorneys have got hold of it.

So to summarize, we pay about double what most other countries pay in $$ terms and about 50% more as a share of our (much bigger) GDP. And of course we lead the league (still) in the number of uninsured people and those who are practically uninsured, or facing bankruptcy from medical bills. There are four ways we could fix it, but none of them seem that promising.

And I don’t see a way this changes any time soon.

Matthew Holt is the publisher of The Health Care Blog

One of the greatest pleasures of running THCB has been to get to know and host the writings of some of my health policy heroes. This week I have already published work from Jeff Goldsmith, and Ian Morrison & Michael Millenson among others will be featured next week (as the party won’t quite stop). Perhaps one of the most amazing things was that the doyen of health economists, Uwe Reinhardt, offered to write some original pieces for THCB…prodded by former editor John Irvine. This is one of my favorites, riffing on a talk I heard him give in (I think) 1993 about how HCFA was like the Kremlin and how free market Reaganite Republicans had made it so. This piece is from Jan 2017 and Uwe sadly died that November.–Matthew Holt

Although, unlike most other nations, the U.S. has only two parties worth the name, their professed doctrines compared with their actions strikes me as more confusing than the well-known Slutsky Decomposition which, as everyone knows, can be derived simply from a straightforward application of Kramer’s rule to a matrix of second partial derivatives of a multivariable demand function.

The leaders of the drug industry, for example, probably are now breaking out the champagne in the soothing belief that their aggressive pricing policies for even old drugs are safe for at least the next eight years from the allegedly fearsome, regulation-prone, price-controlling Democrats. My advice to them is: Cool it! Follow me through a brief history of Republican health policy, to learn what Republicans will do to the health-care sector when it ticks them off.

Republicans like to tar Democrats over allegedly socialist policy instruments such as price controls, global budgets and deficit-financed government spending. Democrats usually roll over to take that abuse, almost like hanging onto their posteriors signs that says “Kick me.”  I say “abuse,” because Republicans have never shied away from using the Democrats’ allegedly left-wing tactics when health care chews up their budgets or turns voters against them.

Think of the early 1970s. Like most other economies in the world, the U.S. economy then suffered very high inflation, led by health spending widely judged to be out of control. So Republican President Richard Nixon thought nothing of slapping price controls onto the entire U.S. economy, keeping them longest on the health care sector. (I cannot imagine Democrats ever having the guts to do that or, for that matter, to sojourn to China, there to pay court to Mao Tse Tung, the self-anointed Communist Emperor of the Middle Kingdom).

Think of the 1980s. Ticked off by the ever increasing grab for taxpayers’ money triggered by Medicare’s retrospective reimbursement of hospitals then in place, Republican President Ronald Reagan thought nothing of slapping onto that sector a set of centrally administered Medicare prices for the whole country. That new pricing scheme, based on the Diagnosis Related Groupings (DRGs), reminds one of nothing so much as Soviet style pricing, to cite the mournful, subsequent mea culpa of one of the former bureaucrats tasked with implementing that system between 1983 and 1986.

I recall making in the early 1990s a presentation to the Missouri Hospital Association, where I opened up with the following slide:

(I actually wore that uniform at the podium. I had been bought by my wife, in 1989, from a Russian at the Brandenburg Gate in Berlin, immediately after the fall of the Berlin Wall. The photo was taken in 1990 by our son Mark, at the tank museum of the Aberdeen Proving Grounds in Maryland, before a WWII Russian T-62 tank.)

Evidently enchanted by the price-controlling, cost-containment power of President Reagan’s Soviet pricing scheme for hospitals, President George Herbert Walker Bush imposed, in 1992, a similar scheme on physicians treating Medicare patients. Known as Medicare Fee Schedule (MFS), it was based on the Resource-Based Relative Value Scale (RBRVS), a pseudo-scientific design that seeks to base relative Medicare fees for particular services on their relative cost of production. A problem with that approach, of course, is that relative costs do not coincide with relative values. It would set the fees for, say, a hypothetical transurethral tonsillectomy as much higher than that of the traditional transoral one, simply because the transurethral approach is more time consuming.

Anticipating that physicians would game the new Medicare Fee Schedule by responding to lowered fees with commensurate increases in the volume of services recommended and delivered to patients, the Bush Sr. Administration coupled the new fee schedule with Volume Performance Standards (VPS), a fancy euphemism for nationwide global budgets, one for surgical and the other for non-surgical physician services delivered to Medicare patients. Democrats may dream of global budgets. Republicans do them. That anyone seriously thought a global budget for as large an entity as the entire U.S. could ever work – that it was productive to punish conservatively practicing physicians in Duluth, Minnesota for huge volume increases in Dade Country, Florida — is a testimony to the far reaches of the human mind.

Predictably disenchanted with the non-performance of the Volume Performance Standards, a Republican House in 1997 morphed it into Medicare’s Sustainable Growth Rate (SGR). The SGR became law. It was global budgeting still for the entire nation, but so stringent that Congress dared apply it in only one year, otherwise kicking it down the road unused, for eventual resolution.

That resolution came in 2015, with the so-called “Doc Fix,” the still controversial Medicare Access and CHIP Reauthorization Act (MACRA). That act was sponsored and introduced to the Republican House of Representatives by a Republican Congressman from Texas who is also a physician. It was promptly signed into law by President Obama, after it was passed with a bi-partisan vote in both chambers. The MACRA quite sensibly seeks to establish a direct link between Medicare payments to a physician and the quality of the services delivered by that physician. Alas, once packaged by the bureaucracy into concrete regulations for operation in the trenches, the resulting complexity of measuring quality in practice and even the validity of these operational metrics now predictably has physicians all over the country up in arms. 

And so it goes, to plagiarize Kurt Vonnegut.

So it is prudent to wonder just what health policy will come down in the years ahead from the Republican Mount Olympus ruled by President Trump. Republican Presidents, members of Congress and Governors may like playing golf with the leaders of the health-care industry and share a Bourbon or two with them; but they don’t like it when that industry’s endless, energetic search for mammon chews up their budgets, and they do not hesitate to react to that fiscal hemorrhaging with fury, often resorting to the allegedly socialist tactics they usually ascribe to the Democrats.

What can be said about health policy also applies to U.S. fiscal policy. Democrats have never been able to shake off the label that they are the party of deficit-financed government spending – that they practice the much maligned, socialist Keynesian economics — in spite of plenty of history to the contrary. Consider, for example, the graph below published by the non-partisan Congressional Budget office (CBO).

The time paths of federal tax revenues and spending clearly show what former Vice President Dick Cheney reportedly explained to an amazed then Secretary of the Treasury Paul O’Neill: “Reagan taught us that deficits don’t matter.”

Deficit financed government spending and tax cuts are usually considered the very core of Keynesian economics, aimed at shoring up the demand side of the economy. It is based on the idea that there is not enough demand to buy the products the supply side could deliver. It is a policy much decried by Republicans and the media supporting them, e.g., The Wall Street Journal or the anchors and talking heads on Fox News TV. It stands in contrast to so-called supply side economics, which seeks to rev up the economy by changing the financial incentives  (mainly taxes) and regulatory burden faced by the supply side of the economy, assuming that the barrier to faster economic growth lies on the supply side of the economy.

Although during the election campaign in 1980 President Reagan had promised to balance the federal budget by 1984 and rev up the economy just with tax cuts that, through faster economic growth, would be self-financing, in fact his administration coupled the huge cuts in the individual tax rates it got swiftly passed by Congress with huge increases in defense spending and even farm support, driving up federal deficits to levels easily three times as high as the previously much decried, relatively puny deficits registered by President Carter (see chart below). By the end of President Reagan’s eight-year term in office, the public federal debt had tripled. By the time President Bush Sr. left office, it had quadrupled.

Had President Reagan really tried his hand at supply side economics, he would have lowered substantially the corporate tax rate from the statutory level of 35% to closer to 20% or even below, to keep U.S. capital and investments at home. Instead he left the high statutory corporate tax rate in place and even increased the tax take from the corporate sector by closing some loop holes. Reagan’s tax policy – especially his second-term efforts to close loop holes and broaden the tax base — actually seemed to slouch toward policies many Democratic economists would and did support. The point here is that overall, one can fairly argue that Reagan’s fiscal policy slouched much more toward the much maligned Keynesian policy of driving economic growth, rather than to solid supply side economics.

Seemingly paradoxically, corporate executives tend to go along with cuts in individual rather than corporate tax rates. It is so because they all manage two companies: one owned by shareholders, and the other, increasingly large company owned by their families. When given a choice between tax cuts for either or the other of the two entities, they naturally lobby for the second, which is what Republican presidents – Reagan, Bush Sr., Bush Jr. — have always faithfully delivered. We shall see what President Trump will do in that regard.

The CBO graph above also shows the eventual decline in the federal deficit and emergence of a federal budget surplus under Democratic President Clinton (although in fairness it must be said that then House Speaker Newt Gingrich gave him a helping hand). When President George W. Bush ascended to the White House, he actually inherited a federal surplus and the prospect of shrinking public debt. His fiscal policy frittered away both.

President George W. Bush, starting in 2001, basically repeated the rather reckless Reagan strategy of trying to goose the economy through increased government spending coupled with massive cuts in individual income-tax rates, all financed with large deficits and rapid increases in the federal debt. Under his reign the federal public debt rose from $5.6 trillion to close to $10 trillion.  With the Medicare Prescription Drug, Improvement and Modernization Act of 2003, he even put a brand new future entitlement – heavily subsidized drug purchases by Medicare recipients – on the federal tab. That even after that action deficit financing of large future entitlements can so easily be hung around the neck of Democrats attests to the political power of the Republican oral tradition.

Finally, the CBO chart clearly shows that it would be unfair to impute the huge budget deficits and run-ups in the federal debt after fiscal 2009 to President Obama. In the wake of the global financial crisis of 2007-2009 – not of either President Bush’s or President Obama’s making —  government revenues plummeted and much of the increased spending came from the so-called automatic stabilizers – mainly entitlements such as Medicaid, unemployment compensation, food stamps etc. – long ago baked into federal law. Neither of the two presidents had any control over these trends. Indeed, according to the CBO’s Budget Projections of January 2009 – published before President Obama had moved into the White House – the projected deficit in President Bush’s last budget, submitted in October 2008 for fiscal 2009 (October 2008 to September 2009), was close to $1.2 trillion. Surely that did not conform to the President’s idea of sound fiscal policy.

With this brief historical background, one can just see what might happen to fiscal policy under the reign of President Trump.

My hunch is that, to win a second term, he will heed Vice President Cheney’s dictum and, once again, practice the good old Keynesian economics that the American public loves so much: large tax cuts combined with massive, job-creating increases in federal spending on defense and on infrastructure projects, including, perhaps, sparkling new elementary- and high schools and perhaps even new health-care facilities in inner cities, to own up visibly to the folks living there to whom he had promised help, and all debt financed as good investments to make America grow and great again. Why not?

The alternative, asking the private sector to finance these infrastructure projects, may seem attractive to Republicans at first blush, but one must wonder how folks in the so-called “fly-over” country will react when all of a sudden their hitherto free roads and bridges are converted to toll-charging facilities, with tolls set on Wall Street by rapacious private equity firms beholden only to their equity investors in the US and abroad. It might not be a vote getter.

Keynesian economics has worked well for Republicans, because voters love it, as they seem to get something for nothing, federal debt and future taxpayers be damned. And in a world financial market awash in capital with nothing to do, safe U.S. government bonds will find many eager buyers.

It is all quite confusing, even to a Ph. D., and perhaps especially to a Ph. D., because, as I noted in the introduction, U.S. politics are ever so much more intellectually taxing than is the good old Slutsky Decomposition.

By BOB HERTZ

We Need Legal Assaults On The Greediest Providers!

When a patient is hospitalized, or diagnosed with a deadly disease, they often have no choice about the cost of their treatment.

They are legally helpless, and vulnerable to price gouging.

Medicare offers decent protection — i.e. limits on balance billing, and no patient liability if a claim is denied.

But under age 65, it is a Wild West — especially for emergency care, and drugs and devices. The more they charge, the more they make. Even good health insurance does not offer complete financial insulation.

We need more legal protection of patients. In some cases we need price controls.

‘Charging what the market will bear’ is inadequate, even childish, when ‘the market’ consists of desperate patients. Where contracts are impossible and there is no chance for informed financial consent, government can and should step in.

This series describes the new laws that we need. Very little is required in tax dollars….but we do require a strong will to protect.

Assault Phase One: Outlaw surprise billing

This rule must become universal:

If a hospital is ‘in-network’, then any doctor who practices in that hospital is ‘in-network.’

To enforce this, we should adopt Connecticut’s law on surprise billing and balance billing for the entire nation.

Connecticut’s law No.15-146, which took effect July 1, 2016. states the following:

“If a patient receives a “surprise bill” from a health insurer for Out-of-Network services provided at an In-Network facility – the patient will only be responsible to pay the co-insurance, co-payment, deductible, or other out of pocket expense that would apply – if the services had been provided by an In-Network provider.  The physician is reimbursed at the in-network rate, unless the patient and provider agree upon something else in advance.”

In addition:

• Patients who see Out-of-Network providers for emergency services can only be required to pay the equivalent of In-Network costs. This includes Out-of-Network hospitals, transportation services, and providers who are Out-of-Network practicing within In-Network facilities.

In addition:

• It is illegal in Connecticut for any provider to request extra payment from a patient who is covered by insurance — as the entire purpose of insurance is to negotiate prices for you.
• It is also an unfair trade practice for a health care provider to report a patient’s unpaid surprise medical bill to a credit reporting agency.

Other Connecticut rules include:

• A patient who still receives a surprise bill from an out of network provider in excess of what the patient would owe under the plan’s in-network rate can seek actual damages, punitive damages, and injunctive relief based on the Connecticut Unfair Trade practices Act.

• Connecticut also prohibits health plans from imposing a facility fee for outpatient visits at an off-campus site of a hospital. In fact,  billing statements to patients must include a notice that the costs might have been less if they had had the procedure performed at a facility not owned or operated by the hospital or hospital system, and that the patient has the right to request a reduction in the fee.

• For uninsured patients, Connecticut providers may not charge more than the applicable Medicare rate.

Only six states have laws that are even close to this level of patient protection. Let’s establish the Connecticut standard nationwide.

Assault Phase Two:  Regulate the fees of emergency rooms and ambulances.

 Any  hospital   ‘contract’ that is signed upon an emergency admission is legally flawed. Such contracts are in fact procedurally unconscionable — because the only way for the weaker party to acquire the services is to agree to the terms dictated by the stronger party. Signed admission forms, which include a promise to pay, absolutely do not constitute mutual assent.

Here is the solution:

• If an ER patient is insured, then the hospital must accept ‘mandatory assignment ‘ of benefits –

i.e. if the insurer pays $500, then that closes the account. (as long as the insurer pays at least as much as Medicare.) No balance billing would be allowed for emergencies. As described in Connecticut law, a patient who received a balance bill could sue for damages.

• ER doctors would be barred from billing separately for emergency, ancillary, and hospitalist services. The hospital would once again be responsible for paying them, and for collecting reimbursement from insurance networks.

Of course hospitals will complain. Many of them have been ambushing emergency patients with huge out-of-network bills, basically to put pressure on insurers to raise their payment rates. Patients are caught in the middle of the power struggle, and this must cease.

Hospitals are supposed to fight emergencies, not cause them. They must be forced  to stop abusing their monopoly position toward emergency patients.

Important note:

 Hospitals do deserve lump-sum federal subsidies for uncompensated emergency care. The EMTALA act (which mandates that all patients must be stabilized, whether or not they can pay) was totally unfunded. That was a mistake that can be corrected now.

For the insured  population:

Emergency care must be exempt from the deductible in all health insurance plans. (ER Co-pays up to $250 are acceptable.)

The ridiculous HSA plans  (where absolutely nothing is covered until a high deductible is met) must be legally amended.

In addition:

Ambulances should be fully funded by the federal government, including air ambulances. The cost would be from $14 to $18 billion a year, which is about ten days worth of Medicare spending.

 It is far better for us all to pay a few dollars a year in extra taxes, versus a tiny number of us to be stuck with a huge ambulance bill. Medical transport should be a public service, instead of another industry on the take.

Note: We could allow a $100 user fee, in order to discourage the  use of ambulances for non-urgent transport to drugstores or to doctors’ appointments. There could be a $500 user fee for air ambulances.

Stay tuned for the next article in the series in which I discuss Big Pharma.

Bob Hertz is a retired insurance broker. He learned about health care from Uwe Reinhardt, Joseph White, Dr. Robert Evans, and George Halvorson a fellow Minnesotan.

Ultimately, spending less on health care is a relatively easy task: We either need to consume fewer services, or spend less on the services that we consume. But much like we teach our Kellogg students about maximizing profits, the devil is in the details.

It’s certainly tempting to ask the government to swoop in on a white stallion and solve the all our problems by fiat. For example, we could have the government simply exploit its monopsony power and set prices, but an artificially low price will lead to an inefficiently low quantity of services and future innovation (stay tuned, we will have more to say about this next week).

Similarly, we could explicitly ration quantities (as opposed to implicitly doing it through a large uninsured population). But how could we hope to determine the right level of care? Ultimately, if we ask the government to unilaterally fix this problem, instead of a white stallion we could behold a pale horse and all that it entails.

The good part, perhaps the best part, about the Affordable Care Act is that it attempts to address this problem using market forces. The question is whether we are ready for what these market forces will entail.

We will focus today on the role of market forces in the insurance market to control prices in the newly established ACA exchanges.

This month the Obama administration announced that it would allow insurers to use “reference pricing” for insurance programs in the exchanges. Under a reference pricing system, insurers set the maximum price they will pay for a specific set of services and if patients go to a facility that costs more than that amount they are required to pay the difference.

This system has recently been implemented by the California Public Employee Retirement System (CalPERS) and there were two main effects: (1) surgical volumes decreased at high price facilities and increased at low price facilities, and (2) the prices paid by individuals covered by CalPERS decreased at high price facilities but were essentially unchanged at low price facilities.

While this is only one study for a single insurance system, it does provide the pattern that we would expect following a reference pricing system and is therefore provides encouragement.

In many ways, reference pricing is a close cousin of the narrow network systems that we previously described. Under narrow networks, insurance companies choose a limited set of facilities that are willing to accept their prices. Patients who want more choices can pay higher premiums for plans with wider networks. Under reference pricing, patients can go to a wider range of providers but they bear more of the cost of these choices.

The organizing principal is the same for both systems: if patients want choice they are going to have to pay for the privilege.

The theory behind reference pricing is fairly clear. But will it work in practice? That is less clear. There are two main threats that we can see: (1) poor implementation and (2) political backlash. When it comes to implementation there are several important points to consider.

Perhaps most important, reference pricing is not a panacea. It is most applicable for encounters with the medical system which involve a defined episode with relatively easy to understand quality measures. Think knee replacements and MRIs and not the management of Type II diabetes. This system is not well suited for managing chronic conditions.

In addition, reference pricing is only as effective as the level of competition in the marketplace. Without a robust and competitive local provider market, patients lack sufficient options to shop around and this system won’t lead to reduced prices. Finally, price competition in the absence of good information about quality can create a race to the bottom, in which providers skimp on quality (e.g., reduced staffing and training, shorter therapy sessions, etc.) in order to drive down costs and, as a result, compete better on price.

Patients must have sufficient information to make choices across providers based on price and quality. Obviously the first step here is some form of price transparency – a feature that is generally absent from today’s health care system. A recently announced partnership between major health insurers and the independent Health Care Cost Institute could go far to fix this problem.

Perhaps more difficult is that reference pricing requires readily identifiable quality metrics (that can’t be easily gamed by providers or lead to perverse outcomes) that can be easily communicated to patients. For this, we need to think beyond standard outcomes like infection rates and incorporate important patient reported measures of quality such as pain reduction, ability to perform activities of daily living, and perhaps some measure of customer service.

Given the experiences on the exchanges, where narrow network plans have been unable to accurately communicate information on which providers are in their networks, we have some fears as to whether these firms are ready to provide this type of critical quality information. Without a good quality reporting system, patients might end up choosing solely on price – an outcome that few would herald as a success.

Beyond the potential problems of implementation, we fear that the bigger threat to reference pricing will ultimately be politics. We first note that these systems are very similar to the HMO systems of the 1990s, which appeared to limit the growth of health spending before they were stamped out by a combination of a consumer protests and political handcuffs.

Much like the backlash to HMOs and the more recent narrow network plans, it will only take a few patients being “forced” to pay high bills in order to get access to their preferred provider before the complaints will surface. Or perhaps it will happen before the first bill is even sent. Expect that the nation’s priciest providers will band together and speak out on “behalf” of consumers.

Either way, it will take some national courage to stand up to these august providers and their feigned concerns for consumer welfare.

In the end it boils down to the proverbial lack of free lunches. It we want to lower health care spending we have to give up something. If we don’t accept some market based solutions, we will find a lunch menu filled with far worse options.

David Dranove, PhD (@DavidDranove) is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.”

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

Dranove and Garthwaite are the authors of the blog, Code Red, where this post originally appeared.

The recent Medicare report on variation in hospital “prices” is not exactly news. In fact, I wonder why anyone (including the NY Times and NPR) covered it, let alone make it a lead story.

As you probably know, Medicare reported that hospital charges for specific treatments, such as joint replacement surgery, greatly vary from one hospital to another. (This includes charges for all services during the hospitalization, including room charges, drugs, tests, therapy visits, etc.) Everyone in the healthcare business knows that charges do not equal the actual prices paid to hospitals, no more than automobile sticker prices equal the prices that car buyers actually pay. Except that for the past thirty years, the gap for hospitals greatly exceeds (in percentage terms) the gap for cars. This is not just a nonstory, it is an old nonstory.

So reporters tried to give it a new spin. One angle concerns the uninsured, who may have to pay full charges. I will write about this in a future blog. Another angle is that by publishing these charges, Medicare will encourage patients to shop around. That is the subject of this blog.

I suppose it is okay to tell patients that the amount they might have to pay out of their own pockets may vary from one hospital to the next. But the published charge data is useless for computing out of pocket payments; in fact, it may be worse than useless. As even the NY Times noted, insured patients make copayments based on prices that their insurers negotiate with hospitals. These prices are essentially uncorrelated with charges. So a patient who visits a hospital with low charges may well make higher out-of-pocket payments than a patient who visits a high charge hospital. It is a crap shoot.

Even if charges did correlate with prices, a simple comparison of charges for a given treatment is useful only if hospital care is a commodity. You can compare the prices of a Toyota Prius or my latest book from one seller to another because they are selling identical products. But the cost of treating a patient, and therefore the price of treatment, depends a lot on the severity of the patient’s condition. This can make for very misleading comparisons.

Here is a simple example. Suppose there are two types of patients receiving joint replacements – those with simple problems and those with complications. Suppose that Community General Hospital and Doctors Township Hospital both set prices of $20,000 for simple cases and $40,000 for complicated cases – they have identical prices. But suppose further than 25 percent of CGH’s cases are simple, whereas 75 percent of DTH’s cases are simple. We would report that CGH’s “price” for joint replacement is $25,000, while DTH’s “price” is $35,000. The failure to control for complexity makes the pricing comparison all but useless.

To make matters worse, publishing prices without publishing information about quality may encourage patients to pretend that hospital care is a commodity and choose providers that skimp on quality. As I showed in a 20 year old paper with Mark Satterthwaite, this can also encourage a disastrous race-to-the-bottom where hospitals deliberately disinvest in quality in order to bring down their prices. Medicare has published hospital quality report cards, but these receive little media attention, certainly not like the lavish attention given to this new report on charges. Most consumers remain unaware of Medicare’s hospital quality ratings and, those who do take a look may find the data-filled tables too much to handle. Many consumers will be tempted to shop only on the basis of price.

So what is a consumer to do? It is all but impossible for individuals to comparison shop for the best hospital price; with rare exceptions hospitals cannot and will not tell anyone their prices in advance of admission. (They will tell you their charges.) Fortunately, market forces may be coming to the rescue. As more consumers enroll in health plans with high deductibles and large copayments, there is demand for information about actual prices. And where there is demand, supply usually follows. Some private insurers are beginning to post pricing comparisons on their websites, allowing consumers to determine which hospital is likely to offer lower out-of-pocket costs. Insurers are naturally reluctant to disclose the actual amounts they have contracted to pay hospitals, so this information is somewhat sketchy. Several consulting firms have sprung up to work with self-funded employer-sponsored health plans. They use employers’ own data to help employees find the best prices. To my knowledge, these insurers and consultants are not doing much in the way of risk adjustment; the real world equivalents of my fictional CGH will come off poorly in such comparisons when, in fact, they may offer very good deals. But it is still early days and such refinements to the data are sure to follow.

By intelligently shopping around, employees can save hundreds or even thousands of dollars in copayments for costly hospitalizations. But in order to shop around they require valid data. Employees should demand this information from their employers. A nascent market for pricing data has already formed. It only needs an extra nudge.

And, with apologies to the late Paul Harvey, that is the rest of the story about hospital pricing.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

If consumers could review and shop for health care coverage as easily as they do television sets, costs would decline and we wouldn’t have as large a health care crisis. At least that’s what some folks would lead us to believe. But the picture isn’t that clear.

A recent article in The Wall Street Journal reports how companies are using private health insurance exchanges to lower costs and give employees more flexibility. The exchanges are similar in nature to those mandated by the Patient Protection and Affordable Care Act (a.k.a. Obamacare)—the difference being a private company is overseeing the exchange and not the federal government or states. Employees are able to log on to a site, review coverage plans with different benefits and a range of deductibles, and choose what works best for their budget.

A consultant running one such exchange was enthusiastic about its progress thus far. “When people are spending their own money, they tend to be more consumeristic,” Ken Sperling, national health exchange strategy leader for Aon Hewitt, a unit of AON Plc, told the Journal. (Aon itself, as well as Sears Holdings Inc. and Darden Restaurants are using a new Aon run exchange.) Benefits consultants Mercer (part of Marsh & McLennan Cos.) and Buck (part of Xerox) are rolling out similar private exchanges.

There’s no doubt that consumers are more astute, on average, regarding price for benefit when directly paying for goods and services.

With insurance companies acting as the middleman and cutting deals with providers as they see fit, consumers rarely even know the actual cost of a medical service. That lack of knowledge has fostered a world of outrageous price discrepancies– for instance, an ankle MRI can run you anywhere from $400 to $1861 in a mere two mile radius of Washington, D.C.. Such discrepancies are particularly egregious since higher prices do not necessarily equate to better quality of care.

However, the notion that access to prices alone will enable consumers to choose suitable coverage makes two big assumptions about consumers:

(1) that they are in a position to accurately identify and predict their healthcare needs.

(2) that they won’t be inclined to value the short term (i.e., more money in their pocket each month due to lower health insurance premiums for higher deductible plans) over the long term (i.e., access to health care treatment they can actually afford when they most need it ).

The stark reality is that both of these assumptions are wrong.

And affordable access is key since research shows that the underinsured aren’t that much more protected than the uninsured, and thus exhibit much of the same behavior that over the long term leads to higher healthcare spending when they can least afford it. As the Healthcare Hacks blog reported few years ago:

“…53% of underinsured people (compared to 68% of uninsured ones) do not see the doctor when they are sick, do not fill their prescriptions and do not get recommended tests or treatments because of the high out-of-pocket costs that they have to incur. That means that they are foregoing or delaying needed medical care. Moreover, 45% of them have difficulty paying their medical bills, have been contacted by collection agencies for unpaid bills and have changed their lifestyles to pay their bills. In fact, a 2005 study by Harvard University showed that 75% of medically-related bankruptcies occur for people who have health insurance, i.e. the underinsured.”

This isn’t to say that health care exchanges offer no benefit to the consumer. More flexibility in plan choice can give consumers access to services that are important to them. And clearly defined plans (as the Affordable Care Act envisions) can ensure they are educated about what exactly they are paying for and how best they can use those plans. But exchanges are not a panacea and, frankly, can do more harm than good by accelerating the number of underinsured without also protecting the consumers from literally gambling with their health. And that’s a gamble not even the House wins. We all lose.

Author’s note: John S. Wilson analyzes health policy for a state Medicaid agency. The views expressed here are personal and are not those of the state.

John S. Wilson is a health policy analyst focused on long term care and digital health. His work frequently appears in Forbes, CNN, Black Enterprise and the Huffington Post. He is also a Digital Health advisor to the NewMe Accelerator, a start-up tech incubator for minority entrepreneurs. John may be reached on Twitter: @johnwilson. This post originally appeared in Forbes.

A recent article in Time magazine by Steven Brill, “Bitter Pill: Why Medical Bills Are Killing Us,” is a brilliantly written expose of the excesses and outrages of health care pricing. In reaction to the story, some have suggested the price controls are the appropriate (or the only) way to rectify the situation. A recent story in the Washington Post’s Wonkblog, “Steven Brill’s 26,000-word health-care story, in one sentence,” suggests that US health care costs and cost growth are so high because we do not use rate setting, i.e., price controls.

In fact, I think it’s not easy to establish whether that is indeed the case. We don’t get to use randomized controlled trials for health policies or systems, so it’s difficult to figure out how effective a policy like rate setting is. Let me start with some simple examinations of patterns in data to see if something jumps out that strongly supports (or contradicts) the assertion that price controls reduce health care costs.

Starting at the most aggregate level, we can compare the growth rates of spending across countries that use price controls for health care with those that don’t. The figure below shows the growth rates of health spending for OECD countries from 2000-2009. The US is the main country with a substantial part of its health sector not subject to price controls. Spending by the privately insured in the US is about 50% of the total, so about one-half of our health spending is not subject to price controls. The Netherlands deregulated prices in their hospital sector starting at 10% in 2005 and moving to 34% in 2009, and also for many physician practices, although it’s not clear whether the 2000-2009 growth rate reflects any effects.

There does not appear to be a revealing pattern here — there are some countries that use rate setting, such as Australia, France, Israel, and Italy that have lower growth rates than the US, and some such as Canada, Finland, and the UK that have higher growth rates. The US is below the OECD average, whereas Finland is above, as is The Netherlands. While I wouldn’t put much weight on anything we see in cross-country differences (there are way too many differences across countries besides price controls), nonetheless nothing striking emerges from these numbers.

Another possible source of information on the effect of price controls on spending is the Medicare program. Medicare fixes the prices it pays doctors and hospitals, so it controls prices. The figure below shows per enrollee growth rates for personal health care expenditures from 1970-2011, as calculated by CMS for services covered both by Medicare and by private insurance (Source here, Table 21).

While examining this figure is clearly not a scientific test (there are many other things undoubtedly driving growth rates of spending), nonetheless, if we see Medicare growth rates consistently lower than private growth rates that would lend at least some preliminary support for the notion that rate setting controls costs. As can be seen, sometimes Medicare spending per enrollee grows faster than private spending, and sometimes the opposite. In particular, Medicare spending slowed dramatically in the mid-1980s after the introduction of the Prospective Payment System for hospitals. Private spending growth fell below Medicare in the early to mid-1990s, most likely due to managed care. More recently Medicare spending has grown more slowly than private spending. Over the entire period the average Medicare growth rate is 8.02%, while private is 9.34%. The patterns here are mixed, but the long run average growth rate for Medicare is lower.

The US does have quite a bit of experience with price controls for medical care at the state level, so we can look at evidence on the effectiveness of these programs. Many states used all-payer rate regulation for hospitals during the 1970s and 1980s. The evidence from these state hospital rate regulation programs indicates a mixed pattern of success. The setup and administration of the program played a large role in whether they were effective. Nonetheless, there is evidence that fi nds that mandatory rate regulation program in a number of states did reduce the rate of growth of hospital expenses (by a little more than 1%). I provide a few references here, for those who are interested. While a 1% reduction in spending growth rates isn’t very dramatic, if such an effect occurred and was sustained over time it would lead to a substantial decrease in spending over time.This is probably the most relevant evidence, since if rate setting were to be revived it would almost certainly happen at the state level.

This effect of rate-setting pales, however, compared to the estimates of the impact of managed care from a prominent study, “How Does Managed Care Do It?,” which found 30-40% lower expenditures (not growth rates) due to managed care in Massachusetts in the mid 1990s. Another prominent study, “Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition,” finds that hospital markups fell substantially in California in the 1980s, primarily due to the growth of managed care.

So what do we conclude? My answer is that we don’t know what the impact of rate setting (price controls) would be on health care spending in the US. It’s possible that rate setting could prevent some of the most egregious practices recorded in the Brill article, but that depends on what’s enacted and how it’s enforced. Whether rate setting would substantially slow the rate of growth of health care spending isn’t clear. Further, the question that must be asked is what is the alternative? There’s evidence to suggest that robust price competition, such as we had with managed care during the 1990s, can perform very well in controlling costs. Unfortunately there has been a tremendous amount of consolidation in health care markets since the 1990s, raising serious challenges to competition. Whether the US decides to go with competition or with regulation, we have some serious work to do to make the system we choose work effectively.

Martin S. Gaynor is a professor of economics and health policy at Carnegie Mellon University’s Heinz College. He blogs regularly at Compassionate Economics, where this post originally appeared.

If there is anything about economics that has been proven over and over, it is that price controls do not work. The unintended consequences are usually worse than the problem that led to the solution in the first place.

Massachusetts legislators, feeling the frustration of higher insurance premiums, are now considering a bill to limit doctor and hospital reimbursement payments to 110% of Medicare rates, or perhaps some other percentage of Medicare rates. The problem with this is that Medicare rates are not fully compensatory to doctors and hospitals and have contributed to the increase in private insurance company rates. This was one of the conclusions reached by the Attorney General in her extensive investigation of these matters.

An unreported fact in Massachusetts is that Tufts Health Plan, at the request of the Group Insurance Commission (the agency that manages the state employees’ health plan), recently sent out a request for proposals for a new insurance contract for the tens of thousands government employees covered by the GIC. The main provision was that the doctors and hospitals would have to agree to rates set at 110% of Medicare.

The result: It was a bust. Hospitals and doctors did not express interest in the contract because they knew that they could not cover their costs with it — even though they could have been included in a limited network and have an effective monopoly to serve this large group of customers.

If today legislators adopt price controls over hospital and doctors’ rates, tomorrow they will have to deal with layoffs and closures in the Commonwealth’s strongest economic sector. These organizations are not for-profit enterprises with shareholders who can absorb losses.

It is interesting to me that a state in which many people decry the idea of rate-setting would consider the idea of picking a certain price target by fiat for the medical sector. If we are going to move towards government supervision of reimbursement levels, please instead set up a regulatory body to determine the appropriate level of rates based on best medical practices and true underlying costs of hospitals. Anevidentiary hearing in which all those factors are considered by qualified administrative law judges would do more to provide a sound basis for determining rates than the price control approaches being raised.

Paul Levy is the President and CEO of Beth Israel Deconess Medical Center in Boston. Paul recently became the focus of much media attention when he decided to publish infection rates at his hospital, despite the fact that under Massachusetts law he is not yet required to do so. For the past three years he has blogged about his experiences in an online journal, Running a Hospital, one of the few blogs we know of maintained by a senior hospital executive.