Thursday, February 11, 2010

Pi is not equal to 3

Our Governor has made proposals to limit the increase in insurance rates, especially those paid by small businesses. Here's the story in the Boston Globe. A quick summary:

A 40-page bill filed by the governor yesterday proposes to give the insurance commissioner the power to essentially cap health care price increases.

Rates hospitals and other health providers charge insurers would be “presumptively disapproved as excessive’’ if they increased faster than the level of medical inflation, and they could be rejected after a public hearing.

Similarly, for health insurance plans sold to employers with 50 or fewer workers, premium increases that exceed one and a half times the level of medical inflation would be considered excessive and could be turned down.

Just a few weeks ago, the Attorney General issued a report, after months of study, that explained that insurance price increases in the state were the result of two factors, the underlying increase in health care costs and a disparity of reimbursement rates that paid some providers substantially more than other providers.

What is the connection between the two actions? None that I can see. The Governor's ideas fail to take account of the Attorney General's findings. Further, they fail to understand the structure of the industry.

The editorial writers at the Boston Herald have grasped the issue, here. You cannot, by administrative fiat, impose the kind of price controls proposed by the Governor without undesirable consequences.

What happens if we force the insurance rate increase to certain subscribers to be less than a certain percent per year? Either insurance companies modify their plan designs to include less extensive benefits or to require higher copays by those subscribers. Or, they meet the pricing target for that customer group by raising insurance premiums for other subscribers to cover this subsidy.

What does it mean to limit the amounts that providers charge insurance companies? This suggests that providers determine the rates that insurance companies pay them. Check the returns earned by Massachusetts hospitals. In a typical year, half have negative margins, and most earn returns that are not sufficient to renew and replace plant and equipment. For the majority of hospitals and doctors, the rates are set by the insurers, not "charged" by the providers. (Of course, as noted by the AG, there are some providers with the market clout to do better.)

The Governor's proposals remind me of the apocryphal state legislature that decided that the value of pi was inconvenient, mandating it to be 3.0 instead of 3.1415. You can't change irrationality by wishing it to be rational.

In this case, I would urge the Governor to use his existing authority or seek new authority to mandate total transparency of insurer-provider reimbursement rates to shine sunshine on the current payment system; to do likewise for measures of clinical performance; and to increase payments to primary care doctors to move them out of their triage mode and reduce the use of higher paid specialists. Those actions would help alleviate the concerns noted by the Attorney General, the ones based on the actual market conditions in the state.


Anonymous said...

A thoughtful approach, Paul.
In MA, we have a distortion of the health care payments based upon Partners and Blue Cross having near monopoly power. So both command a premium that disadvantages everyone else.

But the real culprit is a reimbursement system that incents doctors and hospitals toward providing high cost specialty care, rather than parsimonious basic care. People, like white rats, will do what you reinforce them for doing.

If you flattened the payment schedule so that the net margin on a psychiatry or primary medicine admission was the same as a cardiac surgery admission, what would the hospital look like? How would we practice medicine?

Anonymous said...

Looking from the outside, I think the limit on rates charged to insurers by providers is a swipe at Partners, however ineffective it may prove.
However, I am slowly coming to the conclusion that true competition is the only measure that will bring down prices in health care. Everyone acts as if the massive inflation caused by expensive new technologies is inevitable and uncontrollable. Well, this is only because that is what is CHARGED by suppliers for their new defibrillators, drugs, etc., because there is no true price competition. And providers have no incentive and little power to bargain for order of magnitude discounts due to insurer- or government-determined reimbursement. Or they make up deficits by volume, like the California CFO who recently pled guilty to recruiting homeless people for unnecessary tests to bill Medicare/MediCal.
The entire system is massively distorted. Although I never wanted healthcare to be like consumer electronics, I say let the competition begin, messy as it may be. Wrong-headed efforts by well-meaning but ignorant government officials have
only made things worse.


Anonymous said...

Paul is absolutely correct, the healthcare cost problem is caused by paying too much for fragmented highly specialized services at the expense of rewarding the comprehensive care (including preventive, chronic disease management, and coordination of services) provided by primary care physicians. Compared to other developed countries we get very poor value for the enormous health care expenditures we make. Until we change the way care is paid for (global budgets with transparent quality measures) and invest in the infrastructure needed to coordinate and streamline our care, we will continue to see costs spiral out of control. The governor's plan merely attempts to lock in place the already enormous price differentials paid to certain name brand provider institutions. If everyone increases prices the same 3-4% per year, providers at the top will always be at the top and the real drivers of excess cost, unnecessary utilization and fragmentation of services, will never be addressed.

Margie Arons-Barron said...

Let the market decide? Check out yesterday's NY times note re: the Anthem Blue Cross (California) plan to raise rates as much as 39 percent for individual coverage. As for hospital pricing, at a time of medical crisis, where is the evidence that patients are going to comparison shop for the most cost-effective appendectomy?

76 Degrees in San Diego said...


I wonder how many Massachusetts residents are actually insured through healthplans that are sold and regulated in neighboring states...(and celebrate March 14th!)

Medical Quack said...

Reform, it's complicated. In California we made national news thanks to Anthem Blue Cross and the rate increases. Certainly they sold their pharmacy benefit manager that brought in a few billion in 2009, but that along with other items still leave an open door when calculating and justifying a need for large policy increases.

I agree on transparency and have often said that insurers, like like EHR software companies need to be certified on the algorithms they run to calculate payment so we know they are honest and up front. One side has rules and the other side does not.

Granted there's another part to the circle too with pharma expenditures that have some off the wall prices too, and like the rest of us, somehow I guess the rest of the world needs to perhaps come to terms you can still make a profit but the huge dollar amounts are a thing of the past. This is why were are seeing constant patent battles in court, there's a lot of them with generic companies wanting to get in there and make a generic equivalent, Teva and Singular for one example.

There's also this issue with being able to interpret what are the rules and codes. This creates battle grounds where they should not exist. You almost wonder if we are down to "heads" we pay and "tails" we don't.

Whatever form all of this takes the heat is on for sure. I started blogging almost 2 years ago that we might need a Department of Algorithms and shoot it might be coming to that in some shape or form in the name of transparency. At Davo this year they were even discussing how algorithms are running our lives today too.

New and emerging technologies also fit in here too, with having to create an annual budget to include things that don't exist today, but may appear tomorrow.

I had that conversation with the CFO of Miller's Children s hospital here in Long Beach California when we talked about how many revision and changes were made in the course of 5 years to build, there were many. When new technology appeared and they deemed it was needed in the new facility, back to the drawing board they went, many times:) It worked out well with their new facility with state of the art technologies and systems, but they said they had to keep that door open constantly while building.

We do need access to information today though for decisions and know how some calculations are made. It's a mess that very few of us are going to be able to afford at some point in time.

Seigs said...


Great post. I enjoy your blog.

Quick question for you. I am not following your logic here: "To increase payments to primary care doctors to move them out of their triage mode and reduce the use of higher paid specialists."

Will you elaborate on how increasing payments to PC doctors will lead to a reduction in referrals to specialists?

Anonymous said...

I just can't get over how much outrage Partners generates for using the fact that patients demand to go there as leverage. In EVERY other community in the US, the insurers do the same thing: they say we control X% of the patients in this area so we demand you accept lower payments. And yet there is no outcry over this, no demand that insurance reimbursement rates be decoupled from their market leverage over providers. Nobody is ever saying it's unfair for BCBS to use their market dominance to pay you less.

But the very second a doctor or hospital uses the fact that patients want to go there to demand to be paid more -- woah nelly. That's crazy talk.

Barry Carol said...


I completely agree with your comments regarding insurer-provider reimbursement rate transparency and the hospitals’ clinical outcomes data would be helpful as well. I also think insurers should be able to require patients who want to use high cost facilities to pay enough more for the privilege to get their attention if the higher cost hospitals do not provide demonstrably better care. This tiering approach is successful in the prescription drug space and I don’t see why it can’t work with hospitals if it is made clear to patients that the hospitals that are in the high cost tier are there not because they provide better care but because they have significant local or regional market power which allows them to command higher payments from insurers than their peers and competitors.

As I understand it, the GIC, which insures public employees in Massachusetts, uses this approach but, apparently, the extra coinsurance to use a high cost facility is so low that most people ignore it. According to Bruce Bullen, CEO of Harvard-Pilgrim Healthcare, the extra coinsurance charge is limited by state law. This makes absolutely no sense, at least to me. When I asked Uwe Reinhardt about this tiering concept at a recent conference, he said it was a sensible idea and was proposed as long as 20 years ago in California but never taken up. Tiering could help to provide insurers with the countervailing power they need to mitigate the power amassed by certain hospitals as a result of market consolidation.

State and federal politicians seem to be good at bashing insurers and drug companies but no so good at implementing common sense ideas that might help to make healthcare work more like a normal market. With the exception of care delivered under emergency conditions, there is no reason why it can’t if we provide both referring doctors and individual patients with appropriate information and incentives.

Anonymous said...

Dear Seigs,

The rate paid to PCPs for a visit is so low that hey are forced to see a lot of patients each day just to make a living. The result is that they often do not have time to do a proper work-up. So the default becomes, "Let's send you to a GI doctor" or the like, when with some extra time and analysis they might be able to treat the patient's problem right then and there. Specialists almost inevitably conduct extra tests (and often procedures). For these functions, they get paid more than PCPs.

Anonymous said...


Well put as always. My theory with regard to the GIC is that the ideas you suggest never become law because the public employee unions use their political influence in the State House to kill changes that would result in a perceived reduction of benefit levels.

Sheila said...

On the question of disclosing your support of Charlie Baker...your decision may be different than others, say in the media or other blogs, simply because disclosure and transparency are the essence of your leadership and at the core of BIMDC's cultural transformation. While those who are enlightened by your blog and others who travel in similar intellectual and leadership circles may have embraced the value of transparency, there are too many healthcare institutions and practitioners who, in a paternalistic fashion, continue to resist the notion of "nothing about the patient without the patient." Whatever you can do in your blog, and through your leadership decision, to promote the value and necessity of transparency--be it in running a hospital or your political persuasion--will be useful.

Ron Newman said...

Doesn't all of this sidestep the real problem -- that private insurance companies are 100% parasitic entities that produce nothing of value to either patients or health care providers? To reform health care, we need to put them out of business.

John Greenbaum said...

The govenor's bill distubingly evidences his lack of understanding the health-care system in the US, and even more so the local market dynamic. He seems to have taken a cue from some other developed nation, say Germany or France where price controls have been a part of the landscape since Bismarck. He can't enter the process mid-stream and seek to regulate two parties to the transaction and expect that this will produce lower health care costs.

Anonymous said...

Barry, Just want to point out that I think the comparison between tiered copayments for generic and brand drugs is not quite the same as tiered cost-sharing for hospital services. In the case of drugs, generics and brand names are really almost perfect substitute goods--it's the same product (bioequivalence although individual patients might react differently occasionally to the ingredients in a certain generic). And there’s a regulatory agency—the FDA-- that makes sure that this is the case. It's also a very simple product to understand and compare. So this makes it easy for most consumers to understand the trade-off and accept the substitution. In the case of most other types of medical care, particularly hospital care, the service is much more complex and, even with the best risk adjustment and quality measurement that we have, it’s much more difficult—if not impossible—for consumers to compare one service with another, and to feel confident that one is really comparing and getting equivalent products. I am much more comfortable substituting a generic drug for a brand name than I am substituting a CABG or cancer care at one hospital, let alone care from one surgeon or oncologist for another, based on price, even if I look at the quality measures that are available, which are pretty sparse. My guess is that most other people would be too. Not to mention that the approach you’re suggesting raises serious issues of access and equity for low and moderate income people, as well as for people who don’t have any reasonable choice of provider where they live and/or when they are getting urgent or emergency care and so can’t really “shop” in that moment. To me, a better way to use price as a way to create incentives for better value was the one developed in Minnesota by the Buyers Health Care Action Group (BHCAG). In that model, consumers were required to pick a health system—like an accountable care organization-- once a year, based on quality and price information. Provider systems were put into different tiers based on price and quality. If I wanted to use a system that was higher cost but not higher value, I would have to pay a higher premium. But the cost-sharing didn’t vary at the point of care, when, for most medical services, I as a consumer can’t reasonably exercise choice very well because I don’t really determine demand—my doctor does—and I don’t have enough knowledge to assess the trade-offs. BHCAG tried to develop a similar model here many years ago but was thwarted by certain providers (and maybe by certain insurers as well).

Nancy Turnbull

Anonymous said...

Barry, you got me going so I ran out of is the second part of my posting:

I fully support transparency of payment rates, not because I think it should, or would, change consumer behavior, but because I think it’s necessary to create the kind of knowledge and outrage that will lead to changing the payment system in positive ways that will promote more equity and affordability and quality. Consumers don’t make most care decisions—doctors do—and until we create rational payment systems that create systems of care and accountability for use of resources by physicians, and other providersr we won’t control costs. Given fragmented financing, dominant provider systems in much of the state, and the lack of resolve of most employers and insurers to take on these issues (and I suspect limited ability of most of them to do so even if they wanted to), government is the only entity that can make this happen in health care. So I commend the AGO for its report shedding a bright light on provider payment differentials ( along with the troubling provisions in health plan-provider contracts that hinder innovation), and Governor Patrick for giving some shock therapy to the health care system this week. The Governor’s proposal may not be perfect but at least it’s an attempt to begin to talk seriously about how we’re going to actually do something quickly, and something more substantial and nuanced in the longer-term, to stop the unremitting increases in medical care costs that are chocking individuals, particularly those with low and moderate (and stagnant) incomes, small employers, consuming so many resources with little or no additional value in too many instancese, and sucking money away from vital public services, like education and public health and housing, services where more spending would actually improve the health of the state much more than more medical spending.

Nancy Turnbull

Barry Carol said...


I really appreciate your detailed and informative (two part) response. I certainly accept and agree with your point about the significant difference, as it relates to coinsurance tiering, between generic vs. brand name drugs and differences among hospitals and doctors. I also agree that most patients would not be in a position to make good decisions about care provider selection even with good price and quality transparency tools. Finally, I recognize that comparison shopping is impossible for care delivered under emergency conditions.

However, I do think it is important to get patients to care a lot more about costs even when insurance is paying. I am really looking to referring doctors to use the transparency tools to help patients do that. Doctors are in a much better position to assess quality and outcomes differences among hospitals, surgeons and other specialists. When they need help to make medical choices for themselves, family members, friends or colleagues, they are in a much better position to do so than the average person. Transparency tools would put them in an even better position and I think they could use that knowledge to help guide their patients toward more cost-effective medical decisions and provider choices.

To be a bit more specific, if I need heart bypass surgery, which I’ve had, I would like my cardiologist to have knowledge about local hospital mortality rates, infection rates, and readmission rates and to refer me to a well qualified surgeon. If there are significant differences among these providers in how much they are paid by insurers, I would like him to be able to take that into account in deciding where to refer me. If I need hip or knee replacement surgery, the same applies. If I need cancer treatment, I want him to refer me to a treatment center that will take into account how aggressively I want to be treated and will thoroughly review the options and the quality of life implications of each so I understand exactly what I’m signing up for. Again, I also would like to see cost taken into account. If I’m facing an end of life situation, I would like to ensure that I’m referred to a hospital that has a robust palliative care program as opposed to one with a culture of aggressive treatment to the end because “that’s the way we do it here.”

Physicians’ decisions to order tests, admit patients to the hospital, prescribe drugs, consult with patients and perform procedures themselves drive the bulk of healthcare costs. If they have solid price and quality transparency tools, they should be in a position to make their decisions more cost-effective. To the extent that they are successful in helping to control utilization by minimizing the use of high cost hospitals and other providers that do not provide demonstrably better care, they should be financially rewarded for doing so. If Accountable Care Organizations are the best way to do that, that’s fine by me.

Anonymous said...

Superbly put, Barry. I met with a group of medical students the other day and asked if they would feel comfortable having clinical outcomes for themselves or their hospitals made public. The answer was almost a unanimous "no."

So then I asked them to imagine being a community based primary care doctor needing to refer a patient to a hospital-based specialist. "How would you choose the best one for your patient?" was my question.

Silence ensued. Until one fellow jokingly answered, "Rumor and innuendo?" I said, "Right, that is all you have to go on in the absence of data." Point made.

76 Degrees in San Diego said...

Your question "How would you choose the best one for your patient?" is out of context. Primary care physicians should know the specialists to whom they are referring patients and should have good clinical reasons for the choices. These reasons should include, but certainly not be limited to, outcomes data. Systems, and even outcomes, can be "gamed". In a stable and inquisitive medical culture, you begin to learn how your colleagues think in approaching clinical issues, and, you have the experience of seeing the outcomes of your patients over time. Caring and responsibility within a hospital/community culture is one of the great values that can derive from graduate medical education within the partnership.

Unknown said...

There are a ton of inequities in the current system. There is one thing that has not been mentioned and that is the rate differential. If you or your small business is in the community pool, not only is the premium you pay based on the average age of your employees but it is substantially higher than the larger business next door - on average 58% higher. That differential is kept by the insurance company, not passed on to the provider. Not only is MA mandating age discrimination but it is tacitly encouraging insurance companies to charge small businesses a much higher premium.