Tuesday, May 18, 2010

Dislodging the anchor

A well-established technique in negotiation is to "set an anchor." The idea is to be the first person to put out an offer in a negotiation in which price is the main issue. Many people think, incorrectly, that you are better off if you let the other party make the first offer. But, no. An anchor, once set, has a powerful impact on the negotiation, causing the final price to settle in its vicinity -- even if the anchor has no substantive basis.

I fear that we are seeing this phenomenon happening in Massachusetts. Many of you have followed our current controversy regarding insurance rates for individuals and small businesses. Lots of people with these kind of insurance policies found themselves with large premium increases this year.

The state legislature is engaged in dealing with this problem, and one idea pending is that the hospitals should contribute $100 million to help alleviate these premium increases. I am not gong to comment here on whether that source of funds is the right or wrong one. But I am going to comment on a dynamic surrounding the current negotiations.

Several weeks ago, the Partners Healthcare System volunteered to donate $40 million to this problem. On the one hand, this could appear generous. On the other hand, as noted by Boston Globe columnist Yvonne Abraham, it can be viewed as less than generous.

But the point is that PHS set an anchor with its offer, one that now leads some legislators to think that PHS has "done its share" and that the other hospitals should come up with the remaining $60 million. The usual dynamic that we could expect at this point is for the remaining hospitals to squabble among themselves as to who will pay what portion of this. That puts individual legislators in difficult positions, as many of the hospitals are the major employers in their districts.

The real point, though, is that the PHS anchor has no legitimacy. This collection of academic medical centers, community hospitals, and about 4000 physicians in the state has received excess insurance rates that produced billions of dollars in extra revenue over the last decade. The system has used those funds to recruit physicians, direct care to its network, and build new facilities throughout the region, further building its market influence and ability to demand higher reimbursement rates. Who is to say that a one-time offer of $40 million is anywhere near a fair contribution to this problem?

Another lesson of negotiation theory is that an illegitimate anchor needs to be dislodged. The Attorney General has prepared a report showing the disparity in reimbursements received by systems in the state. The Legislature might consider drawing on that research to decide if the Partners anchor has dropped in the wrong part of the sea floor.

12 comments:

Anonymous said...

So are you saying that Partners should pay more? shouldn't have supported Therese Murray's idea, at least not with dollars right away? or are you saying the idea is bad altogether?

Paul Levy said...

I'm saying that if part of the solution is to tax hospitals to help pay for this problem, you need to decide on the right metric and not rely on an arbitrary offer from PHS.

Paul Roemer said...

It is good to be the king, especially if you happen to be the firm charging the high premiums. Greed is good—especially when you can get someone else to fund it. I am a firm believer that the payors’ attitude towards healthcare reform echoes that of Brer Rabbit shouting, “Don’t throw me in the briar patch.”

Under reform, payors are given 30 million new customers. How’s that for taking the edge off the marketing department? Instead of having to spend money to attract the customers they really don’t want, they are simply handed all of them. Now the marketing department can get their MBAs focused on figuring out how to make an outrageous profit off those people they don’t really intend to cover. Sure, they will send those people an insurance card to carry around in their wallets—that way everyone can pretend those people are covered. What the MBAs will figure out, if they have not already, is they can charge either really high premiums, or deductibles that are so high that nobody will be able to ever use their insurance.

Payors landed exactly where they hoped to land, only the Massachusetts story does them even one better. It sounds like in Massachusetts the payors have figured out a way to charge high premiums and then get the legislature to get other parties to fund the mess. The government gets what it wants—fewer uninsured and Brer Rabbit gets what he wants.

For some reason this reminds me of when the US simultaneously sold arms to both Iran and Iraq creating a zero sum game.

Under the old system of healthcare, in Massachusetts the hospitals would have provided care to the uninsured. Under the proposed solution, it sounds like hospitals will now be forced to play the same game but with different rules. Instead of paying for an uninsured patient’s treatment, they are now being asked to pay the payor—in advance—for the treatment they will provide for the newly “insured”. Under either system, the hospital is being shortchanged.

Try and follow the dollar and see in whose pocket it lands. Follow the benefit and see who receives it.

I understand things better when I have an example; permit me to offer one. Let us say the government decides carmakers must pay an expensive tax to rebuild roads and bridges with each SUV and truck they sell. GM and its MBAs play golf with the legislatures and out pops new legislation stating that the drivers and firms like GEICO and NAPA—the auto parts company, not the wineries—will help offset poor GM’s burden. The government gets what it wants—new roads and bridges, and Brer Rabbit (GM) gets what he wants.

Keith said...

This is one I can fully agree with you on. The institution that is charging and collecting the bulk of the health care dollars, and thus actually contributing most to the crisis, should not be able to make what is potentially a low ball offer and thrust the rest of the responsibility on its lower paid competitors. One way to make this senario more fair is to cap the charges that a hospital can obtain so as to even the playing field. Those hospitals that have been leveraging higher charges would then balance the budgetary hole by costing the system less money, and those that are getting lower payments would not have to cough up anything. This would seem a better solution than having the funds pass to the hospitals and then return to this fund. It would also place some cost containment on hospitals and create a more long term stable insurance system and a more competittive market where hopefully quality will be rewarded over reputation. More true competition will result in a better health care system.

Anonymous said...

Paul - If you want to talk about reforming the system, you've got to get off your soapbox about Partners and start commenting on the entire system of all providers in the state. It's an ecosystem, where MGH and BWH are often sent the transfers and difficult cases the other hospitals don't want to or don't have the ability to take care of. Yours and other comments that paint them as arbitrarily charging high costs and driving healthcare costs in the state are misguided. Besides, PHS already disclosed that their $40M offer and Ms. Murray's $100M proposal was just a temporary measure, so you're only blogging about obvious statements someone else has already made.

Do you accept with finality the conclusions in the AG report? Do you believe the report's claim that all hospitals provide essentially the same quality of care? On it's face, it seems very unlikely that tens of thousands of physicians deliver care so similarly, especially when there's such divergence of the use of technology, best practices, and many other operational aspects to how different providers and different systems operate.

Martha's been known to get it wrong on occasion you know...

Paul Levy said...

"Do you believe the report's claim that all hospitals provide essentially the same quality of care?" Let me reframe the question: Do you believe that the quality of care provided by the doctors in the Partners system is appreciably different from that provided by others?

Let's take that sector by sector. Start with the community primary care doctors and local specialists like GI doctors. Is there any evidence that PHS doctors do systematically better by established metrics than doctors in other networks and therefore deserve higher payments on those grounds?

Now let's take the community hospitals. Is there any evidence that Newton-Wellesley and North Shore provide better care than their counterparts in other less-well-paid systems?

Finally, let's look at the academic centers, MGH and the Brigham. Find me published data that supports the proposition that their quality of care generally exceeds that of Tufts and BIDMC. Tufts, by the way, has a higher case mix index than all of us, so they are also recipients of cases with high degrees of difficulty.

The burden of proof lies with PHS to demonstrate that the actual clinical quality of care in all parts of their system merits the exceptionally large payment they get from the insurers. (And please, let's not refer to US News and other such reputation-based surveys.)

Anonymous said...

I'm not Anon 3:03pm.

Paul, you asked:
"Do you believe that the quality of care provided by the doctors in the Partners system is appreciably different from that provided by others?"
(my take, sector by sector)
Community docs and specialists: with regard to in the office care etc, Partners is probably the same as everyone else.
Community hospitals: I'll speak for the North Shore since that's where I live, and I answer yes, yes North Shore is the best care you can get on the North Shore, the only one close in quality is Beverly and they are distant.
Academic medical centers: I have no metrics to support if they are better than BIDMC or not, but their reputation is, and in business, reputation means something.

Much of the problem lies however in that the state, and at times you, lump the academic medical centers with the community hospitals, with the doctor networks which is comparing apples to bananas to oranges. Academic centers provide so much more wrt technology and even staff on duty to deal with complicate cases. Academic medical centers do provide more services and therefore do deserve higher reimbursement. And if you're Partners, your community hospitals and clinics are indeed better if for no other reason you have quick access to advanced technologies. BMC can't offer that. Tufts can't offer that. BIDMC would have a hard time with that comparison. Not to mention the Partners doctor network is at the very least a giant market share for the insurance companies involved.

"The burden of proof lies with PHS"... why? Why does this need to only be based on quality metrics? Let's assume their quality is the same, their market share and diversity across sectors of healthcare (ie. they are a physicians network, a loose group of community hospitals, a group of ambulatory centers, and a group of academic medical centers), based on the things I studied in business classes should allow them to get a better rate if they choose to be aggressive with their business plan.

Anonymous said...

Anon 3:03;

Your first paragraph says, "our patients are sicker."
If I had a nickel for every time I've heard that excuse, I'd be as rich as Partners right now. It is used every time a complacent, status quo-maintaining hospital or physician's practices are challenged. It has long ago been debunked - get over it.

Your second paragraph says "we're better."
This is breathtaking in its arrogance, complete with snide inferences that only Partners has the best technology, best practices, and best operations.

Your city is spoiled rotten with many academic medical centers of great reputation. I have worked with physicians trained at all of them. I have seen Partners do absolutely nothing to provide any public evidence that their particular reputation is sufficiently differentiated from the others to deserve the large reimbursement disparity. Apparently the feds feel the same way.

If you want Paul Levy to get off his soapbox, it's time for you all to get off your duff and start proving you CARE for patients, for reasons other than their money and your power.

nonlocal MD

Paul Levy said...

I'm sorry, but you are grossly misinformed with regard to the availability of advanced technologies in the academic medical centers. While each one might have some special piece of advanced equipment that another won't have, there is no basis for generalizing the way you have.

I don't know what basis there is for measuring quality than actually measuring it. Anecdotal evidence does not prove the case.

I don't disagree with you about the excellent execution of the PHS business plan and the resulting higher reimbursement rates. They did it really well. That's not the issue right now, though. The issue is who should pay what share of the tax to help solve the pending insurance issue.

nasov said...

We need more from Brer Rabbit. Yes, he begged not to be thrown into the briar patch ("Roast me! Hang me! Drown me! But please don't throw me into that briar patch!) because he was in fact born and raised there. Brer Fox, ignorant of that, of course threw him into the briar patch. It took two seconds for Brer Rabbit to escape.

There's a lesson there somewhere!

Shereef Elnahal said...

While Mr. Levy honorably recuses himself from the discussion over whether hospitals should be responsible for alleviating these premiums, I won't. Hospitals are not to blame for the bulk of rising costs. Rather, overutilization in the outpatient setting is the primary contributor. Instead of looking for someone to "plug up the hole," state regulators should make a proper diagnosis themselves regarding the source of these costs and curtail them with sensible reimbursement reform. We should have seen this with the national health care bill as well- one can only imagine that similar financial woes will plague payers nationally after that kicks in.

Please visit my blog on the business of health care in America:

http://www.shereefelnahal.com

Cetus said...

Aren't there ongoing federal (anti-trust) and state (collusion) investigations into PHS and BCBS?

Point being it seems quite possible that $40 million won't be the end of PHS's liability.