Saturday, May 18, 2013

Why it is called the Affordable Care Act?

Sometimes when something is right in front of you, you don't see it.

A friend who serves on a Boston hospital board writes:

Great cover story in the New York Times today on how the new private owners of Bayonne Hospital made it for-profit and canceled their insurance contracts.  By becoming out-of-network they were able to jack up their prices and make a lot of money. Talk about gaming the system!

The writers of the story, "New Jersey Hospital has the Highest Billing Rates in the Country," missed the major point. My friend did, too, but less so.

This is not about the relative prices in the hospital's chargemaster, nor is it about gaming the system.  It is the system.

The name of the game is to have sufficient market power in a geographic area that you can demand higher than market prices from the insurance companies.

In recent years, Bayonne Medical put up digital billboards highlighting the short waits in its emergency rooms in an effort to attract more patients. Insurers complained that the hospital was seeking to take advantage of the higher rates it could charge. 

Community leaders in Bayonne, fearing the hospital could close, said the buyers were always candid about the methods they intended to use to make the hospital a profitable enterprise.  

In 2009, Horizon Blue Cross Blue Shield of New Jersey filed an injunction in New Jersey Superior Court saying Bayonne Medical’s owners had “flatly rejected” and refused to negotiate an in-network hospital contract with Horizon. When the existing agreement expired in early 2009, Horizon said Bayonne sharply increased its prices. Bayonne’s in-network charges to Horizon averaged $13,000 a day in 2008. A year later, when it was out of network, the charges soared to $29,000, the insurer said in a spring 2009 news release. 

The two eventually settled in 2011, and Horizon became an in-network insurance provider. A spokesman for Horizon declined to comment on Bayonne Medical’s charges, citing terms of the settlement agreement.

Still, many other large insurance companies, including Cigna, United Healthcare and Aetna, remain out of network at Bayonne and are paying the higher bills. 

Aetna’s internal data showed that Bayonne Medical’s emergency room charges jumped again in 2012 and are running 6 to 12 times as high as those of surrounding hospitals.

Now, Aetna is one of the largest insurance companies in America.  But in the Bayonne area, that size means squat.  Bayonne Medical Center, by an accident of geography, is viewed as an essential medical center by patients.  The hospital's owners are extracting monopoly-like profits as a result.

Unusual?  No.  In Boston, we have had a larger variant on this, as the Partners Healthcare System, dominant in the region, has extracted above-market prices from the insurers in town.  PHS proved its ability to do so well over a decade ago, when Tufts Health Plan objected to paying the high rates PHS was demanding.  Partners threatened to drop THP from its network, and the health plan folded within 72 hours.  That set the stage for rate deals that have generated (my guess) an extra $200 million per year for this large system.  Other hospitals were left to fight over the scraps.  PHS used the extra money to expand further, enhancing its market power year by year.  (The only company that could have taken PHS on, Blue Cross Blue Shield of MA, which has corresponding market power on the insurer side of the ledger, chose to be complicit.)

And it will be more common over the coming years.  The impetus coming out of the so-called Affordable Care Act (aka, Obamacare) is for hospital systems to consolidate into accountable care organizations to become dominant in their market area.  Ostensibly, this is to better manage care across the spectrum of care.  Part of the reason, too, is to have a broader pool of patients as pricing moves to more of a risk basis.

The Federal Trade Commission has determined that it does not have the authority to deal with these increases in market power.  An FTC commissioner said:

“The net result” of ACOs, says Rosch, “may therefore be higher costs and lower quality health care—precisely the opposite of its goal.”

As in Bayonne, we can expect continued upward price pressure across the country as these large systems hold a hammer over the head of insurers.  So why it is called the Affordable Care Act?

By the way, let's review this quote:  The two eventually settled in 2011, and Horizon became an in-network insurance provider. A spokesman for Horizon declined to comment on Bayonne Medical’s charges, citing terms of the settlement agreement.

With all this fuss about the chargemaster, reporters and some patient advocates are again missing the point.  Let's make public the actual rates charged by hospitals and physician groups. 


Khan said...

Paul, I like your blog, but you are getting very political these days and may alienate some of your readers that want transparency and improvement in healthcare regardless of political affiliation. Before you criticize Obamacare let me remind you that a) ACO's are just another idea that will fail but they are an attempt to change the system- provider consolidation and coordination of care are hard to balance, as they go hand in hand b) the chargemaster does matter to the uninsured and underinsured which is a lot of people c) 99% of problems in our healthcare system, including the ones CMS refuses to tackle, are a result of political pressure from provider and payor groups. Guess what- conservatives supported the Citizens United ruling and this is the price we are paying. I am a libertarian myself, but I recognize where problems stem from and how much the blame goes all around. Healthcare will be handicapped until we address these political realities, noone in healthcare is ignorant of the effect of provider power on pricing, we just don't have any means to address it within the current system. I hate to say it, but Medicare and Medicaid have prevented us from making meaningful reforms to healthcare, as they cater to some of the most influential voting blocks with reckless disregard for the state of the union.

Anonymous said...

What matters is how accountable care organization develop - into oligopolies or into true competitors.

To take the boston example. If Partners is charging 600 per life per month in an aco and other lower cost groups can charge something much less, say 400, Partners ends up with much more income. But also with a competitive challenge.

Will individuals and firms want to pay so much more if care is not shown to be significantly better at the high cost hospital(s)?

Quality information must be transparent for competition to succeed.


If ACO's become a series of oligopolies eventually we will all have to move towards a European or maryland model of price controls to control health costs.

If true local markets can develop that would be the best outcome, in my view, to limit an over concentration of power in society. As Barron Acton, so eloquently stated about absolute power corrupting, we must be vigilant as a society about concentrated power in any institution.

[Note: We might be seeing a corollary in the IRS and other recent scandals. If the press, doesn't function with vigor an administration might begin to feel a degree of power that is dangerous in a democracy. Even an administration with the best of intentions can fall into the trap "power corrupting" and believing its own actions are justified by noble goals.]

Paul Levy said...


If you think this is "getting political," I plead guilty. But please don't confuse this with "getting partisan." The comments I have been making have no relationship to which party people happen to be in. Please don't paint me with that brush.

As your own comments demonstrate, you can't discuss a sector that is 1/6 of the economy without getting into political considerations.

Khan said...

Fair enough- you are being political, and I guess that is hard to avoid, but you cannot be accused of being partisan.

Khan said...

To anonymous: the problem with the ACO concept, at least for the CMS based ACOs, is that such cost pressures wont necessarily be seen by individuals, because patients are not 'members' of ACOs in the way that they may be with HMOs. An ACO is assigned responsibility for the health of patient populations that make the majority of their medical visits to providers affiliated with the ACO, but they can go where they want when they want i.e. no gatekeepers. The other huge problem is that ACO savings and penalties are a complement to traditional fee for service (axcept for a handful of pioneer ACOs that have taken a capitation track early on), and thus each individual providers financial incentive is still to maximize utilization.

Paul Levy said...

A very good point. Congress will never act to restrict the elderly population's ability to choose the MDs and hospitals they would like; so they cannot be captive in the same way private insurers can demand.

Barry Carol said...


Thanks for giving the NYT article highlighting Bayonne Medical Center additional exposure through your blog and for your support for disclosing actual contract reimbursement rates.

As for rates hospitals bill to out-of-network insurers for emergency care, I see three possible solutions. They are (1) an all payer system like Maryland’s but that would require both Medicare and Medicaid to pay more than they do now so private insurers can pay less. That’s unlikely to happen anytime soon. (2) Allow private insurers to band together and negotiate with providers as a group like they do in Switzerland and, I think, Germany, but that would require an anti-trust exemption and the larger insurers are not enthusiastic about the idea because they think they can negotiate better deals than their smaller competitors. (3) An arbitrary legislated cap on how much providers can bill as a percentage of Medicare for any set of services that costs more than, say, $500 or so. 140% of Medicare is the rate New York State uses for out-of-network physician services. That might be a reasonable limit. Balance billing must also be prohibited for emergency care.

In the meantime, perhaps CHIA in MA can lead the way toward true price and quality transparency in healthcare so both patients and referring doctors can much more easily identify the most cost-effective high quality providers and steer their business to them.

Thomas Pane said...

One purpose of the questionably named ACA is to put a saddle on the system, which is running away with an ever increasing percentage of public expenditures. No argument there.

But how did this come about? Why do we hear so little about the effects of arbitrary price-setting? This starts with Medicare and filters down through the rest of the system. Participants realize that they must adapt to the system (hospitals are in some position to influence it) as best they can. The net result is the size of the healthcare market grows beyond the size it would if it were more directly funded by patients.

There is no easy solution to this problem.

Anonymous said...

There is another issue which hasn't been discussed in a while by the Patrick administration.

During the health care analysis done last year it became clear that wealthier suburbs were subsidized by poorer ones.

Let me explain since it is counter intuitive. Say we all pay a premium of 400 per month. I live in newton, which has a Partners hospital, Newton-Wellesley which is more expensive than hospitals in Lowell or Brockton where on average somewhat poorer residents reside. Since everyone pays the same premium, the patients who has more expensive doctors and goes to a more expensive hospital, costs more. Therefore the poor subsidize the wealthier in this circumstance.

Compounding this is the fact that residents of wealthier locales are more likely to use healthcare resources because they are less concerned about co-pays.

What is needed is much greater used of tiered and limited networks. Tufts Health Plan and Fallon both had approximately 35% of their commercial members in these plans compared to only 15% for Harvard Pilgrim and 12% of Blue Cross in 2012.

The use of tiered and limited networks shifts costs to patients if they want to use more expensive hospitals or doctors or excludes those doctors/hospitals.

In the case above, members would have to pay more out of pocket to use Newton-wellesly or have to use another lower cost hospital nearby, such as metrowest, BID-Needham or Norwood.

Blue Cross and Harvard Pilgrim need to be encouraged to developed more tiered and limited networks as do all insurers in Mass.

Barry Carol said...

Anonymous 8:05 PM –

While patients in the wealthier towns may incur higher charges per service, test or procedure than patients in lower income areas as they access more expensive providers, they may also use fewer services because they are healthier. Fewer high income people smoke and fewer are obese, I suspect. There is most likely less alcohol and drug abuse and less mental illness among the higher income population. There are also probably fewer births per thousand women of childbearing age. To the extent that higher income people live longer than lower income people, they may incur higher lifetime costs as they live long enough to get Alzheimer’s, dementia and certain cancers but lower income people most likely cost insurers more PER YEAR because they are less healthy. Any healthcare cost savings that come from earlier deaths among the lower income population accrues primarily to taxpayers who fund Medicare and Medicaid and a very high percentage of income taxes at both the federal and state levels are paid by high income people.

That all said, I’m a big fan of tiered insurance networks primarily as a way to steer patients toward the most cost-effective high quality doctors and hospitals and to create some countervailing power against large health systems with significant local or regional market power. Everyone including hospitals, doctors and patients all need to become more cost conscious in the future.

Anonymous said...

When the analysis was done by Mass State Researchers last year it was FACTUALLY (health care cost trends & drivers analysis) shown that zip codes with higher incomes had HIGHER costs for the same plans.

If you look at the CHIA site you will find this information. There were also news articles published about it.

I am not talking about speculation that zip codes with wealthier residents might cost more. It was a factual result. I have not heard anything about this since last year, which frankly surprises me. I would think our press would be on this like catnip.

Anonymous said...

The study by the state referenced above (comparing health care cost trends by zip codes) was not statewide for all residents. If memory serves, I think the data primarily came from Blue Cross (or just a few health insurers since they had the most complete data). I believe it compared people in different zips codes who had the same or similar types of insurance to see who cost more. I think the results surprised the researchers maybe for reasons you cite.

So some of the poorest residents, for instance people covered by mass health or commonwealth care were not included in the study, again if memory serves. So you might be right on a statewide basis.

Maybe Paul remembers the study I am referencing?

Anonymous said...

This is a chart from a CHIA report showing TME is higher for higher income communities. .....

The original report is in there somewhere, but my links were all moved by CHIA set up and changed the data web sites.

Anonymous said...

attorney generals report showing higher health spending in higher income communities

hipparchia said...

If ACO's become a series of oligopolies eventually we will all have to move towards a European or maryland model of price controls to control health costs.

i think we're long past the point where we've proven that neither "markets" nor "competition" work, and that govt-imposed price controls (of any sort - single payer, all-payer rate setting, or national health service) are necessary.

Anonymous said...


We have NOT tried true markets or competition!

For many years people had no reason to try to find "Value" in healthcare. We have not had a competitive market we have had a system of subsidies, which any economist will tell you distorts markets to create overuse and misuse of resources. That is why we spend almost 20% of GDP on healthcare when most of the developed worlds spends 8% to 12% - and they have universal care, we do not and their quality is higher than ours.

If health systems work off of a budget per patient - a cap system - then it will be clear which health providers cost more. If the additional spending of higher cost providers is borne by patients and there is no added benefit (or commensurate benefit) for the added costs - many will move to lower cost providers. This is the situation we face today, at least in massachusetts and we have statistics to validate it. (See the Attorney Generals report and health care cost trends analysis mentioned earlier.)

Conversely there is limited reason to believe that government controls on spending will work . (Though this might be the only alternative if competition can not be made to work).

Nurses unions, SEIU etc have every incentive to continue to bloat healthcare spending to the benefit of their members. If healthcare is completely managed it will become a part of the government. Public employee unions have gotten their members higher salaries and benefits than the private sector using the same log rolling political process than is supposed to control healthcare spending. Salaries of doctors, nurses, etc make up most of the cost of healthcare.

The best chance we have of lowering healthcare spending is real healthcare market place if this can be made to work.

We might even have high cost elective surgeries & procedures done is high quality hospitals in other countries with much lower costs, but still high quality healthcare. This would help pressure our providers to find ways to reduce costs.

Healthcare spending not only needs to be brought under control - not increasing as a share of GDP - but needs to be reduced to the international standard of 8 to 12%. The additional 10% of GDP we are now paying is being borne by our job creators, making them less competitive, reducing jobs for people.

The years of America being dominant in technology are receding. For the American Dream with plentiful jobs at good wages to continue we must have a competitive healthcare system with the rest of the world, not an anchor around the ankle of our job creators.

True healthcare market competition is our best opportunity to get there.

hipparchia said...


Conversely there is limited reason to believe that government controls on spending will work .

this is demonstrably false. plus, a semantic quibble - i said "price controls" not "spending controls" though govts do use both.

all those oecd countries in those charts have much greater govt control of prices than does the u.s.

If healthcare is completely managed it will become a part of the government.

like the national health service in the u.k.? the country with universal, free-at-the-point-of-service health care for only 10% or so of gdp?

The best chance we have of lowering healthcare spending is real healthcare market place if this can be made to work.

that's a big if.

in 2006, the netherlands decided to introduce "competition" into their largely public insurance program. spending zoomed upwards. you can read about it here: or go take another look at those oecd charts. in 2007, healthcare spending in the netherlands was 9.8% of gdp; in 2010, it was 12% of gdp.

you might have heard the saying "if you can't beat 'em, join 'em"... competition isn't the only strategy in the universe if you're a business looking to make money...

Anonymous said...


I agree price controls have worked for most of the developed world. But that is not enough, because our situation is different. We spend much more than they do almost 20% of GDP, vs 8% to 12% for most of the rest of OECD.

We need a means to drive cost from our healthcare market to reduce spending to the 8% to 12% prevalent in the rest of the world.

In massachusetts we started doing what you suggest, basically limiting the growth of healthcare spending to match the growth of the state's economy. This is a new law just now being implemented and has no teeth, there is no penalty if hospitals, doctors groups etc exceed the spending goal.

This could be a good short term step. (If a competitive healthcare market can not be made to work it might be necessary as an intermediate or long term measure).

But holding the U.S. health systems share of GDP at a little less than 20% will not be good enough. It needs to be reduced - almost by half - to help American firms be competitive in world markets serviced from the United States. Having American firms saddled with a boat anchor of 10% of GDP, to mix metaphors, makes it more difficult for them to grow and create jobs in the U.S. That is what we need now and in the future - domestic jobs.

I see no evidence that our political system can cut the cost of healthcare by 50%. That would be cutting salaries for important political constituencies. Our political systems has difficulty "reducing the rate of growth" of spending - the interminable political battles of the last two years between democrats and republicans - let alone reducing spending by half.

I also believe that markets, "if they can be made to work", are much better than managed markets at finding value. The modern world has found unimagined prosperity because of capitalism. Markets work at reducing cost and improving quality. (Command and control economies have not work nearly as well, see Soviet Union, China pre-1978. Cuba today etc. The question becomes can we make markets work in healthcare.

The Dutch case you mention is disappointing. With luck we will do better. But it is not guaranteed that we will succeed. Until we get there having price controls in Massachusetts is smart to prevent the type of spiral you describe in the Dutch case.

To look at how difficult it would be to cut spending by about 10% of GDP....

By way of comparison, the sequester spending cuts of this year reduced spending growth. The amount cut was equivalent to three tenths of one percent of GDP for this year. To cut healthcare spending by 10% of GDP is over thirty times as difficult. And that is an absolute cut not a reduction of growth.

Do you think our political system has any chance of that?

* As an side note, I have lived in Canada, and had OHIP health coverage, much like the NHS in england. It worked with long waits for doctors appointments etc. I do believe that universal health coverage made those waits acceptable.

But I also believe that the U.S. can do better. Our leaders created a republican democracy, free public education, prosperity in much of the western world and beyond, a degree of respect for human dignaty and much else that seemed impossible at the time before we began.

I think we have the smarts to create a real price competitive market in healthcare.

Don't you think it would be a good thing if we did?