Wednesday, January 25, 2012

Zeno's paradox of hospital prices

I apologize to my non-Massachusetts readers for having yet another column about the insurance company payment situation here in the Boston area, but I know there is a lot of interest around the country about the first state that put in place the kind of health care reform that was modeled at the national level.  Many things are local in the health care world, but the issue of market power is one that is of interest everywhere.  Indeed, there is substantial concern about whether the movement to accountable care organizations will lead to abuses of market power by providers and payers.  The market structure issues that exist in this state, therefore, are of broader interest.

A few days ago, I wrote about the falsity of so-called "rate reductions" negotiated between insurers and the state's dominant provider group.  (How dominant?  See here.)

Today WBUR's always thoughtful Martha Bebinger writes a story with unsubstantiated assertions by insurers that they are acting to reduce the disparity in rates between the provider "have's" and "have-not's."  Notes one, "[I]t will begin to narrow the gap."  Left unstated is how long it would take to end the gap.

Martha gives a potent example of how long it would take to narrow the gap for a particular procedure, based on some existing prices.  Answer:  Never.

Let me generalize this.  Let's assume that one system's overall hospital rates are 15% above another system's.  Let's assume that the higher paid one gets annual rate increases of 2.5%.  How long does it take for the other to catch up under three scenarios:  a 3% annual increase, a 4% annual increase, and a 5% annual increase?

Now, this is not the extreme example posited by Zeno, put this way by AristotleIn a race, the quickest runner can never overtake the slowest, since the pursuer must first reach the point whence the pursued started, so that the slower must always hold a lead.  Here, it takes virtually forever in the first case, eleven years in the second case, and "merely" seven years in the third case.

I know it is really difficult for insurance company folks to just fess up to the fact that they blinked.  But why should they admit that when even the Governor doesn't acknowledge the problem?  What's his analysis?  He falls back again on changing the rate structure, when it is clear that a changed rate structure based on existing differentials will perpetuate those differentials.  Here's an excerpt from his state of the state address a few days ago.

The market is moving in the right direction and that's very good news. But it is not enough.

. . . We need to put an end to the "fee-for-service" model. We need to stop paying for the amount of care, and start paying instead for the quality of care. We need to empower doctors to coordinate patient care and to focus on wellness rather than sickness. And we need medical malpractice reform.  .  .  .

I believe that with these tools and the right oversight, we can slow the growth in health care costs significantly. 
Martha ends her story:

I wonder if the insurers' efforts to close the gap between higher and lower paid hospitals is one more attempt to show legislators that the market is working without their intervention.  Just wondering.

I amend that slightly:

I wonder if the insurers' efforts at pretending to close the gap between higher and lower paid hospitals is one more attempt to show legislators that the market is working without their intervention.  Just wondering.


Nick Dawson said...

Are large employers playing a role too? Any sense they are pressuring providers to close the gap and using the payors as their proxy?

Paul Levy said...

Not much sign of that in this state.

Anonymous said...

Aren't health care providers or businesses strongly related to healthcare providers among the largest employers in this state - why would a business seek to do something that would "harm" it's operation - rather wouldn't it scramble to do what it takes to "protect" itself without really changing how it operates.

Anonymous said...

Anon 5:15; one might expect that behavior out of the hospitals, but the insurance companies are businesses too. How are they benefiting by paying one system way above the others?

Anonymous said...

because healthcare organizations are also "employers" purchasing insurance/negotiating insurance contracts to provide for their employees they are handcuffed to each other. The employers negotiate lesser benefits/cost-share with increased cost of insurance on behalf of their employees while at the same time negotiate higher payments for their services all with the same insurance company - seems like it might be a conflict of interest doesn't it. How does a health care provider advocate opposite sides with equal fervor I wonder

Anonymous said...

Clayton Christensen foresaw this situation in "The Innovator's Prescription":

'Achieving these disruptive changes to our hospital systems will be extraordinarily complicated......The tremendous political clout of academic medical centers and general hospitals, often among the largest employers in any community, will prove formidable.'