Tuesday, May 20, 2014

Time to break up Standard Oil

What's striking about the Mass. AG's deal with Partners Healthcare System is what it does not do.  Although it puts some restrictions on the organization, it leaves in place a colossus with a common bottom line that can shift costs among its component parts.  And, the actual restrictions will not make any appreciable difference in the pricing differential for this system relative to others.

As noted on WBUR's Commonhealth blog:

If Partners prices rise 2 percent a year, and prices for similar Boston hospitals go up 3.6 percent, the gaps narrow, Boros says.

“Specifically, our 2012 data shows that Brigham and Women’s prices are 24 to 33 percent higher than Beth Israel Deaconess Medical Center and 26 to 59 percent higher than Tufts Medical Center. After six years, these gaps close to 13 to 21 percent higher for BIDMC and 15 to 45 percent higher for Tufts,” Boros said.

What was the alternative to this give-away?  Well, a similar set of circumstances arose in the United Kingdom, where one set of privately owned hospitals was found to have had excessive market power in the central London area. Last month, the government regulator, the Competition and Markets Authority, decided that the remedy should include divestiture of assets of HCA hospitals:

The CMA has found that many private hospitals face little competition in local areas across the UK and that there are high barriers to entry. This leads to higher prices for self-pay patients in many local areas – and for both self-pay and insured patients in central London, where HCA, which owns over half of the available overnight bed capacity, charges significantly higher prices to insured patients than its closest competitor.

The CMA will also require HCA to sell the London Bridge and Princess Grace hospitals or alternatively the Wellington hospital including the Wellington Hospital Platinum Medical Centre (PMC). 

Why did the AG blink at this possible remedy?

It's time to break up Standard Oil.  Of course, back then, the Supreme Court did the job.  Here, clearly the AG made a deal with the US Department of Justice to obtain primary jurisdiction for the case.  The problem with that is that the AG just has too many local affiliations to effectively regulate this massive employer. There's a reason we need Federal oversight from time to time.  The DOJ erred in allowing otherwise in this matter.

By the way, I also don't see anything in this agreement that would limit PHS' ability to establish its own insurance company.  As I have noted:

What will happen in markets like Boston where there is a dominant health care provider with dramatically higher costs than the rest of the market?  Is it possible for insurance companies to create commercially viable limited networks comprising the lower costs doctors and hospitals? They may try, but the day may also come when that provider group, to save its position, will create the insurance entity that will focus business towards itself.  Once it does, it will be able to manipulate internal transfer pricing to optimize profitability.


Anonymous said...

It's very interesting to me that both the state (expected; they rolled over long ago) and the feds capitulated on this one. What would be the federal motivation for letting go such an obvious case of anti-trust? Perhaps PHS threatened to use its vast resources to prolong any lawsuit by the DOJ and they decided it wasn't worth it. Or, even more worrisome, perhaps PHS's political reach is even further than we realized.
Neither bodes well for the MA taxpayer who is supporting all of this. The taxpayer's (and, potential patient, as all taxpayers are) inability to recognize his own self interest here boggles the mind. Barry Carol is right - time to put PHS on the highest expense tier that requires big skin in the game from the consumer; only then will things change - maybe. You have a dictator on your hands.

nonlocal MD

Barry Carol said...

I think an insurance company owned by PHS could be an interesting concept in a state where most or all of the conventional insurers are non-profit entities including one with a dominant market share. Large insurers elsewhere that provide clinical services and pharmacy benefit management (PBM) services, also play the transfer pricing game. For example, an insurer like UnitedHealth Group that owns a PBM within its Optum segment might buy a generic drug directly from a manufacturer for five cents per pill and sell it to its sister subsidiary that sells and operates the drug benefit plan for 25 cents. It’s the 25 cent figure that counts when it comes to meeting minimum medical cost ratio regulations.

If PHS had its own insurer and manipulated transfer prices to optimize its profitability, what counts to insured members is the insurance premium and out-of-pocket coinsurance payments as opposed to prices charged for each service, test or procedure per se. If PHS’ costs are also well above market, it has to charge a premium that covers its costs including a reasonable profit margin no matter what transfer prices it uses internally. Since other insurers in MA have comparatively low administrative costs, PHS’ competitive advantage would have to come from charging itself much lower prices than it can extract from other insurers. Those transfer prices would likely be considerably closer to prices received by other academic medical centers in the market.

With respect to perceived quality, people may be willing to pay a premium price for PHS facilities up to a point. For example, if PHS offers a much higher percentage of single inpatient rooms than competitors, patients would probably find that attractive. If wait times for appointments are shorter or if electronic medical records and web portals are more robust, those may be attractive to patients as well. Higher quality food and free valet parking also add to both costs and services available to patients and their families.

Just as some wealthy towns are willing to pay higher property taxes to support a high cost school district with lots of amenities including top of the line athletic facilities even if test scores are no better than in nearby lower cost districts, PHS could command a price premium in the 10%-15% range for similar non-outcomes based amenities.

Paul Levy said...

All good points, Barry, but let's remember that the goal of a monopolist is to maximize revenue -- P X Q -- and these folks are very, very good at estimating the price elasticity in the marketplace so as to do so.

Anonymous said...

Strictly speaking, monopolists (and all firms) maximize profits, not revenue. They maximize [(P X Q) - COST].

Paul Levy said...

Argh, you are right of course. I guess I didn't deserve that degree in economics!

Tim said...

PHS ALREADY has its own insurer called Neighborhood Health although it is quite small for now. If you are one Medicaid or Obamacare though and you want a PHS physician already your ONLY choice is through a PHS/Neighborhood plan.

Anonymous said...

Interesting that the Atty. Gen. was the only candidate among five who did not appear at today's Dem. gubernatorial candidates event sponsored, in part, by MassInc/Commonwealth Magazine. I believe she would have been hard pressed to defend the giveaway deal she helped to concoct.

akhan13 said...

Although all firms are profit maximizers, for most firms profit maximization and revenue maximization both come from increasing Q, because they are price takers. As price setters, monopolists have the advantage of looking at both p and q to maximize profits rather than revenue, resulting in a deadweight loss of total utility for society.