Sunday, November 15, 2009

Market failure --> New entrants?

This story by Rob Weisman in today's Boston Globe is about large insurance rate increases being faced by small businesses in Massachusetts. But, it is really about the lack of effective competition in the Massachusetts health care market, both on the provider side and the insurer side.

Although there are many contributors to rising health care costs in the state, one major one is the fact that the largest provider system is paid rates that far exceed the rest of the industry. This is the result of its market power and leverage over the insurance companies during rate negotiations. Yes, part of the problem is a fee-for-service payment regime that encourages overuse; but that is compounded when the dominant system's FFS rates are very high relative to the market. Why? Because it enables that system to recruit community physicians into its network at higher salaries, away from other systems. Those local doctors, in turn, refer their patients to the higher priced hospitals in that same network. This is a vicious cycle of higher rates, leading to network growth, leading to still more bargaining power, leading to higher rates.

Why do the insurers put up with this? Because there is a public perception, unsupported by clinical outcomes data, that the dominant provider must be part of any insurance plan's network. The plans, therefore, are afraid to leave those hospitals out of their insurance products. They also seem reluctant to create a market for insurance products that would charge customers a higher co-pay or add other features that would encourage the patients to go to lower-priced facilities.

The result: Utilization in the network served by the dominant provider grows at a rate exceeding the regional average. And because that utilization is reimbursed at a higher differential rate, the insurance company sees a huge cash outflow, and feels it necessary to raise rates -- especially to the market segment that has the fewest choices.

The second problem is a similar lack of competition in the insurance market itself. In any other industry, a competitor would enter the market and create a niche product -- a plan for small businesses and individuals, based on a limited high-quality, low-cost provider network.

National insurance companies have had a very small market presence in our state. Those who have thought about expanding their share of the Massachusetts market are probably concerned about the relative costs of doing so or about the ability of the insurers in this state to simply underprice their products. Well, we now see evidence that even the dominant insurer might feel it cannot afford to respond competitively to a new market entrant. That insurer, along with the others, is so persuaded of the market power of the dominant provider that it has been reluctant to take on that provider by leaving it out of its product mix or by including it at the premium price necessary to cover its costs.

A new entrant might feel differently and focus its efforts on a vulnerable market segment, one that would find a high-quality, low-cost network attractive. When you are fighting for your financial life as a small business or individual purchaser of insurance, you are more willing to make different kinds of choices. And, as a small business, you can more easily explain to your employees why you have done so.

To me, this seems like an opportunity for competition.


Martin said...

Is your hospital part of that dominant network?

If so, do you benefits for patients in that situation?

If not, have you directly approached insurers about alternatives?


Anonymous said...

We are not part of that network.

I don't understand your other two questions, sorry.

Anonymous said...

I have never understood this very well, but that sounded like a logical analysis. Would the current ideas about removing state restrictions on the insurance companies help bring in large competitors in this situation? I would think the Mass. market would be attractive.....


Eric said...

Fully agree that there is a lack of competition, but I think we have to conclude that other insurers have decided that the barriers to entry are too high. Government action to foster more competition is probably needed.

Massachusetts is characterized by:
• dominant market power by one provider network
• dominant market power by one insurer
• enforced absence of transparency, i.e; rates are proprietary by contract
• almost all providers and all insurers are charitable not-for-profit corporations, under the supervision of the Commonwealth and the Attorney General.

Since this enormous imbalance has arisen under this regime, one would have to conclude that state government, by commission and omission, has created it.

Rate transparency would be a good first antidote. Rate setting by a public body in the full light of day would be even better. Market forces are not going to fix this problem by themselves.

Martin said...

I meant to ask (English is not my native tongue): if you were part of the dominant, would you take the opportunity of the higher revenues to offer better care for the patients, ie. would there be a significant advantage for the patients for the higher costs to insurers?

By the second question, I meant to ask if you had proposed some solutions to the fees imbalance to the insurers, or directly to the patients?

As a large regional provider, could you find a way to take advantage from that imbalance to benefit your institution and your patients?

Anonymous said...

Thank you, Martin, for clarifying.

The premise of your first question is not correct. The quality of care offered is not proportional to revenues. We demonstrate that every day, with lower revenues than the dominant provider and quality and safety that are comparable and perhaps better.

On the second question, of course we have raised this with insurers. Not to patients directly, as they do not get to set rates.

On the third question, our business strategy is to be the low-cost, high quality provider. We would like to have that mean something in the marketplace for insurance products. To date, it really has not had value in that regard for the reasons discussed in this post.

Anonymous said...


I agree totally on the transparency point. This could be accomplished by state action at the legislative or regulatory level.

That should be a priority as the Legislature considers payment reform.

Arthur said...

Excellent piece, Paul. Nobody wants to confront the 800lb gorilla and yet we see increases of up to 47% for some small businesses??? This is unsustainable in the long run.

Evan Falchuk said...

Terrific post, Paul. I've been writing about this problem for some time on my blog (for example here:

The BI is one of the best hospitals - and has some of the best doctors - in the world.

It is ironic that in its own home state it is given a lower status than its competitor across the street. It's another of the many distortions created by our deeply uncompetitive system of health insurance.


Evan Falchuk
Best Doctors, Inc.

Anonymous said...

The Globe article understates the problem, because employers are also passing along a higher percentage of the health insurance costs to the employees.

As employees, our health plan premium increase is over 60% for next year, with no changes in coverage. Other plans we could choose from have premium increases of 90% or more from last year.

I'm wondering why BIDMC, for example, does not offer a plan directly to individuals and small businesses. We've certainly noticed that the most important part of our insurance plan is the negotiated rates. If you charged patients like us 5% over your lowest negotiated rates, and took a deposit so that payment was guaranteed, we could afford to pay for care directly and you wouldn't have to deal with insurance billing for those patients.

Anonymous said...

We are not an insurance company. We do not have the cash reserves required to be one, which are needed to cover actuarial risks. We also do not have the expertise.

Anonymous said...

Interestingly for anon 4:57 there is evidence or at least the suggestion that large employers who are self insured may start dealing directly with hospitals and Drs. themselves and eliminate the middleman....Paul any comment or experience on this?


Anonymous said...

Disintermediation can potentially save money in that situation, if the employer is wiling to bear the actuarial risk of the arrangement, or purchase stop-loss insurance for unexpectedly large claims.

Ralf said...

Transferred from Facebook:

Same pattern over here in Germany, the small businesses struggle with increase in insurance, the big ones are bailed-out and helped with state money (to help a deadly ill gorilla survive a bit longer;-( )

Anonymous said...

I believe last year you said to not blame a company for a business plan well executed.

I have been covered by those national insurance companies from outside Massachusetts from previous employs. They could not compete with our native plans. Their lack of customer service and overall BS with billing and crappy service would not help them here.

In my travels through my current hospital, it is evident that the medical professionals do not want the current type of Insurance/care method to change. In my last hospital this was the case also.

While ObamaCare may not be what we want, we need a drastic change in the system.

I use to work for your hospital. I know work for the Jumbo System you refer to. I got tired of worrying for my job every time you complained about competition and business.

Anonymous said...

You confuse commentary with complaints. Things are fine at our place. I wish you well at yours.

Barry Carol said...

I wonder if Partners’ market power is so great that its contracts with insurers preclude them from offering lower cost insurance products that exclude the Partners system. If such products were offered, would employees and individuals accept them and how great would the discount from the broad network product need to be to induce them to accept the limited network product?

It seems that even if there is general agreement that lower cost hospitals may be just as good if not better for most medical care, if one needs what Don Berwick calls “rescue care” like an organ transplant, CABG, hip replacement or neurosurgery or cancer treatment, he or she wants access to MGH or The Brigham because of their perceived reputation. Perhaps insurance contracts could be developed that would give members access to a given hospital for medical conditions that the hospital has earned a Center of Excellence designation to treat but not for other conditions unless they are delivered under emergency conditions.

HCA, which owns almost 5% of the nation’s hospital beds, in a financial report last year, indicated that fully 37% of its hospital revenue is from outpatient services including ER treatment that does not result in an inpatient admission. Of the remaining 63% from inpatient care, fully 69% of that was categorized as medical and only 31% was surgical. Perhaps there is room to educate people as to risk adjusted outcomes, mortality rates, five year survival rates, etc. for the handful of medical conditions that scare people because they’re life threatening.

Finally, for all the handwringing from MA state policymakers about rising healthcare costs, why haven’t they moved via legislation or regulation to bring price transparency to the marketplace by eliminating the confidentiality agreements that preclude it today? I think payers, employers and individual members and, especially, the uninsured have a right to know how much hospitals, doctors, imaging centers and labs actually accept as full payment from insurers, including Medicare, for the care they provide.

Anonymous said...

Paul you would have been the 700lb gorilla in the room had Caregroup not fallen apart. A while back Caregroup was looking for the same type increases as the so-called 800lb gorilla. Caregroup was close to being just that. Let's face it, nobody on the hospital side or the insurance side will survive by losing money every year.

Anonymous said...

Paul - Your hospital and BIDPO have been ACTIVELY pursuing local physicians (especially PCPs) to join your network from other networks so it sounds like sour grapes when you complain about Partners growing their network because of their better rates. When you decided to dismantle the PSN you lost the network size and clout that would have given you the same (or close to the same) rates Partners was able to get. Funny how you make no mention of your own physician recruitment from other networks while complaining about Partners' efforts in this area.

Anonymous said...

I don't think CareGroup ever would have matched Partners in size, with their 6000 doctors. In any event, during its heydey, the CG group never had rates close to Partners'. And to your point, of course we are trying to expand our network, as is Tufts and Caritas Christi. Now, with Accountable Care Organizations on the horizon, that appears to be what the government wants us to do, by the way.

But, once again, you misstate my commentary. I am not complaining about their execution of a great business strategy. I am stating that it results in a very skewed market dynamic, and I am further suggesting that this might create an opening for a creative insurance company.

Odd that you read this as complaint versus the market opportunity that is my main point.

76 Degrees in San Diego said...

The percentage of market share seems to be the primary issue for both the health system and the insurer. There is the appearance of monopolistic practices, therefore, this seemingly merits the attention of the F.T.C.

Anonymous said...

Paul - I don't think any level of government wants the high priced networks like Partners and BIDPO using their better contracts to add physicians and drive overall prices up even higher. That is not the idea behind Accountable Care Organizations as you suggest. Government would rather see lower cost community networks grow their physician membership and keep costs down by delivering care outside of the tertiary networks like BIDPO and Partners. They don't want to see the downtown tertiary networks delivering community level care at their more expensive downtown facilities.

Anonymous said...

We have no interest in receiving patients who should get their care in the community. We do have an interest in being part of a network that delivers the right care in the right place, and coordinates that care across the spectrum. That does not have to be an owned and operated netowrk like Partners. Our model, instead, is to create affiliation agreements with like-minded community hospitals and multi-specialty groups.

See the announcement from a few days ago about our affiliation with Atrius, along these very lines. We don't own Atrius, and they don't own us, and we each have separate contracts with the insurers. The affiliation is actually likely to decrease costs to insurers and the state.

Anonymous said...

Well, here's an article from Medscape with their interpretation of accountable care organizations:

"The second compensation experiment funded by HR 3200 is the so-called accountable care organization (ACO). As described by MEDPAC, an ACO is a collection of primary care and specialist physicians and at least 1 hospital that takes joint responsibility for meeting performance measures for quality and cost. Quality measures might include preventable hospital readmissions; clinical outcomes, such as blood-pressure control; and patient satisfaction. A cost measure might be keeping medical expenditures under a certain growth rate. ACOs would either earn bonuses or incur pay cuts depending on how they perform as a group.

To Philadelphia cardiologist Alfred Bove, MD, president of the American College of Cardiology (ACC), ACOs seem to be a promising alternative to pure fee-for-service medicine. However, accountability might be painful for individual members, said Dr. Bove. "The ACO would have the right to kick somebody out if they weren't performing well. Or you could reimburse the poor performers so badly that they'd learn how to do their job right."

ACOs, he said, would resemble integrated health systems that own hospitals and physician practices. In an ACO, however, hospitals shouldn't be allowed to run the show, warned Dr. Bove. "Their outcome goals are different from physicians," he said."

So it doesn't appear an ACO formed by Partners (or anyone else) would just be allowed to engraft its high prices onto its patients - IF this works as advertised......
And I like the part about hospitals not being the controlling agents. Shared power is essential. Will be interesting to see how Atrius and BIDMC address this issue.

nonlocal MD

Anonymous said...

Well, first of all, there is no clear definition of ACOs. They remain clear mainly in the imagination of each person. And the reimbursement regime that would be in effect likewise has not been determined.

But, my view is the same as yours: Hospitals cannot be the controlling agent if this is to work. Our goal with Atrius is to serve their primary care doctors, who are the people closest to the patients -- not to act as a separate tertiary care facility with our own view of patient management. That was an essential, and mutually understood, component that helped lead to our new affiliation with Atrius.

Other key components include a commitment to quality and safety and other process improvement, and transparency as to progress on that front.

Amy Lischko said...

Paul, While I agree with your post here I think there's another underlying problem for small businesses. They are choosing a single insurance lan for all their employees and we knmow one size doesn't fit all. The reason they need to contribute almost 100% of the premium is to get all their eligibles enrolled. A single age-rated composite premium doesn't really work well for small employers. When a small business hires one older employee the premium for all the others rises dramtically too. So, my solution is this. Small employers should drop coverage for their employees (they'll need to pay the $295 per employee for doing so, raise their employee salaries accordingly, and send their employees to the Connector for pre-tax purchase of health insurance. Maybe on the way, these employees can talk about the type of network plan they'd be wiiling to sign up for so the Connector can innnovate around this. It's time the small employer get out of this business altogether.

Anonymous said...

I'm not sure I agree. If you consider each employer as a stand-alone, maybe yes; but if you consider the group of small employers as a portfolio of risk and characteristics, there should be a market for that product.