A new study by Paul Ginsburg at the Center for Health System Change reveals what we on the inside of the insurance industry have long ‘known’:
The balance of power in rate negotiations has moved decisively from payers to providers
and
Payers without market share have higher medical costs and little chance of improving their position.
Let’s focus on the second point.
According to Ginsburg, “Average inpatient payment rates in the eight market areas varied widely, ranging from 147 percent of Medicare rates in Miami to 210 percent in San Francisco…San Francisco had the highest average rate across the four insurers, it was the highest-priced market for only two insurers. Presumably, this reflects such factors as health plans’ differing market shares…”
The implication is clear – the dominant payers in San Francisco were able to negotiate reimbursement deals that were much more favorable than those payers with little share.
What does this mean?
If competition is to flourish, there has to be some way for new entrants to compete effectively. In the health insurance business, success is largely driven by price; payers with lower cost structures win and grow; payers with higher cost structures shrink and disappear. If a payer doesn’t have enough share in a market – defined as membership – then providers will find little need to give them significant discounts, to comply with onerous utilization review processes, to provide quality data and vary their treatment, scheduling, and billing practices to accommodate an insurer that delivers few patients to their office/imaging facility/hospital.
One of the flaws of the ACA (health reform bill) was it did little to address this fundamental problem. The ‘free’ market hasn’t solved the problem, so some form of regulatory intervention is necessary if new competitors are going to have a chance to compete with the big health plans.
Nov
18
Don’t often agree with you, Joe, but you hit the nail on the head today with your comments about the infamous “cost shift” whereby hospitals and docs shift costs from underpaying government payers to private insurance payers. Much as I recoil at the thought of government intervention here. we may indeed need just that to keep a competitive marketplace both between large and small private payers, and between public and private payers.
How about instead of more regulation we try less regulation for a change? I would argue that things like requiring “Certificates of Need”, selective tax breaks/credits for some and not others have allowed established Facilities to keep necomers out of the market, all with the cooperation of the government.
It’s preceisely due to the fact that the established providers have been able to control supply that they can contol (aka negotiate) price.
Open it up. Increase the supply; let the losers fall by the wayside and prices will begin to drop. It’s as inevitable as gravity. Only when a third-party gets involved (with the unintended consequences) do these fundamental laws get screwed up.
On behalf of seniors and their physicians, the AMA is urging Congress to act before a Medicare meltdown begins on December 1. Congressional action this month is the only way to stop the Medicare cut. Congress needs to keep Medicare strong for our senior patients and ensure that baby boomers will have access to physicians when they begin receiving their Medicare cards for the first time this January.
Allen – welcome back to MCM.
On what do you base your contention that more providers = lower cost?
That’s completely contradictory to experience in many areas including Maryland and Florida, along with examinations of the impact of technology such as MRI.
I’ve been in the business for 27 years and have never seen research that supports your assertion.
As Jack Wennberg and others have conclusively demonstrated multiple times, the more supply there is in health care, the more demand created. That’s precisely the reasoning behind the Stark laws, laws in several states prohibiting physician dispensing, and other self-referral regulations.
Furthermore, the argument makes no sense as payers that dominate a market – and providers that dominate a market – control pricing. Unlike most other economic goods, health care does not follow supply-demand laws.
Joe
Couldnt find the study at the Center For Health site. Is it somewhere else?
Steve
the concept of provider bargaining power includes physicians as well as hospitals
“On behalf of seniors and their physicians, the AMA is urging Congress to act before a Medicare meltdown begins on December 1”
ama is fighting to preserve the high wages of their members
the provider portion of health care is a major cost driver
comparisons with other countries consistently show US providers are paid substantially more
the number of medical residencies was frozen in the balance budget act
while US population grows the supply of physicians does not
at present rate the number of residencies will not replace retirements
increasing the supply of doctors would be good for patient care and good for health care costs
Joe:
All supply creates demand. That’s part of Say’s Law; something known to economists as far back as the early 19th century, way before Jack Wennberg, et al.
The only reason that health care does not follow classical supply & demand laws is becuase of third-party, non-market participant intervention; i.e. the government.
There’s nothing “magical” about health care that makes it immune to economic laws. Anyone who says so has an adjenda to support.
Allen
Says law is a gross generality. When it comes to health care services it is settled fact that more supply drives increased demand. In fact a robust CON process reduces utilization and cost.
Please provide citations to support your assertions that deregulation reduces cost in health care. I have provided numerous citations to refute that view here on MCM.
Joe
I majored in economics and healthcare is a complex and fascinating topic to me from that perspective. It’s been a while since I’ve studied the specific theories, but to my simple minded perspective, price and necessity normally dictates healthcare utilization. To reduce provider costs, I favor less regulation, but I’m always open to hear opinions from those who like regulations. It fascinates me how similar the cost drivers in health care are similar to university tuition. It may be an oversimplification, but the bigger these hospital systems get, the more expensive they tend to be by adding all these fancy things to attract patients who think they will be covered by insurance companies. Universities keep building fancy buildings and services to attract students. The funny, ironic thing about healthcare and education is that the competition will compete based on a higher cost structure. There’s no incentive to control costs because of unique consumer expectations from the service being offered. I work for an insurance company and I know we do alot to reduce costs through Case/Disease Management. I think the regulation of insurance companies has been on overkill. Let’s hope health care systems can get decentralized with the help of technology and better collaboration between payers and providers.