News is getting out that the conference committee tasked with reconciling the health care cost control bills in the House and the Senate has run into areas of gridlock, and is running out of time. One of the key areas of contention is whether the House bill’s proposal to prevent some hospitals from charging much higher prices than others for the same care should be included in the final bill.
The Globe has been a study in contrasts. On Sunday the news department published an article arguing that the market power of hospitals is a key cost driver, and the legislature abandons this problem at its own risk. On Monday the op-ed page ran the other way, editorializing that the conference committee should pass whatever it can and not overreach, while also publishing an op-ed from the President of the Mass. Hospital Association, predictably arguing that health reform will be ruined if the government over-regulates hospital reimbursement rates.
So here’s an interesting myth-buster question: is hospital market power actually a key driver of health care costs?
The answer is… no. It is a driver, but most evidence indicates it is not a large one.
Isn’t this answer contrary to the well-publicized, and carefully researched reports released by the AG’s office for two years running now? As stated in the Sunday Globe article: “Attorney General Martha Coakley blamed the leverage of the best-paid providers as a main driver of health care costs. She found that insurers pay some hospitals and doctors twice as much money as others for similar care, because they have name-brand recognition or geographic dominance.”
The confusion is due to a common statistical fallacy, whereby some observers think you can explain a group trend by comparing across members of the group. Take the average height of Americans for example. If we were to analyze why some Americans are taller than others, the overwhelming explanatory factor would be the height of their parents. However, this provides an obviously flawed explanation for why Americans as a group have been getting taller over the last few generations, or why Americans on average are taller than, say, Guatamalans. As it turns out, the height of our parents explains to a large extent the variation in height within the group of Americans, but totally different factors explain height trends for the whole group, or compared to other groups (mostly diet and nutrition).
The same is true for medical costs. In Massachusetts, the market power of providers is the primary factor explaining variation in the price of medical care across providers, but market power explains very little of why our health care costs are rising so rapidly, or why some states and countries have higher costs than others. A 2006 study published by the Robert Wood Johnson Foundation found that the wave of hospital consolidations in the 1990s probably increased hospital prices by 5% for the entire decade. This is actually logical when you think about it – provider consolidation has slowed considerably since the 1990s, but health care costs have risen more rapidly. Also, consolidation went much further in the South, where hospitals are not regulated as strictly, but most Southern states are characterized by lower costs compared to the Northeast.
Somebody please send a memo to Atul Gawande, whose phenomenally popular series of New Yorker articles (see The Cost Conundrum and The Cost Conundrum Redux for example) are all premised on this fallacy. Analyzing the vastly different Medicare costs in one Texas town compared to another, Gawande finds that the difference is due to utilization, or patients at some facilities receiving much more care than others. Applying this comparison of providers to our broad health care trends, however, immediately lands Gawande in the realm of factual inaccuracy. It has been definitely proven, over and over, that utilization is not the cause of America’s high and rising health care costs: our costs are not going up because of rising utilization, and we actually do not use more care than other countries (see the benchmark Health Affairs article explaining this finding, “It’s the Prices, Stupid“).
but here are three observations from personal experience
1. When I worked in nonprofit hospitals, they wasted a lot of money. When I worked in for profit hospitals they wasted less money. I assume both of them charged the patients the same.
2. When hospitals cry poor, (and the Globe has a story on this periodically) that only means they’re not making any money by some measure. They might still have a bunch of cash, and may actually be making money overall. Their financial statemetns (when available) aren’t transparent like corporate ones.
3. Beware of hospital groups. Cartias played this game. While the individual hospitals weren’t making money, the central office was busily overcharging for services (like collections) provided to them, which generated huge amounts of cash and allowed them to pay big salaries to execs.
So I don’t believe any of them.
Side note: I have BC/BS and go to MGH. I never see a bill after my co-pay so I have no idea what they charge, which is probably a bad thing.
I like your using height to explain statistical trends. It’s cool. One problem though.
Americans aren’t twice as tall as Guatemalans. Furthermore, if our health care costs were cut in half [keeping quality of care constant], we’d have the best health care value on the planet.
Twice as expensive is a lot more expensive. Clearly not every procedure or treatment is twice as expensive, but I don’t think it’s reasonable to minimize this portion of the driver of health care costs.
P.S. How much does billing drive costs? Every single freaking time I go to a doctor, a hospital, an ER, whatever, I always pay *at least* three times. I pay some co-pay or somesuch on the spot, I get a bill in the mail later and pay it, and then I always get yet another bill in the mail even later for even more, because of some insurance adjustment. I’ve had three different insurers in the past five years, same story. My treatments aren’t complicated or unusual. Travel vaccines, stomach bug, that sort of thing. Yet I always pay three times… and I always let the third time drag out like 9 months because, well, I already paid them twice, so I’m not in a rush to write yet another check.
Health insurance and health care providers perhaps unintentionally drive up costs by the “wallet biopsy”.
Here’s how it works: Dr. Derma is an independent dermatologist. She’s well-qualified, and her practice is about five years old. Sam Sunburn is in his mid-fifties and experienced lots of sunburns as a child. Dr. Derma has already removed a basal cell carcinoma from Sam’s back. Sam has “DeepBlue” insurance coverage, the dominant provider in the area.
Dr. Derma knows that Basal Cell Carcinoma is nearly always a VERY slow growing malignancy that has a VERY LOW complication rate. Patients with a history of BSC are also at higher risk for melanoma and other serious problems, so some level of concern is warranted. Dr. Derma also knows that DeepBlue covers the cost of biopsies, and also covers the cost of six-month dermatologist visits for patients with a history of BSC.
Dr. Derma therefore aggressively biopsies EVERY imperfection in Sam’s skin on each followup visit. Only a tiny fraction of those biopsies are positive, and only a tiny fraction of THOSE actually have any significant health consequence for Sam. Yet each biopsy costs about $150, each visit about $100. Dr. Derma spends about five minutes with Sam on each visit, and her office is always busy.
The effect is that Sam’s semi-annual dermatology visits cost about $500/year, and provide little or no actual health value.
Dr. Derma is a good doctor who does nothing wrong. At the same time, her overhead is high and her education expensive. It is the health insurance system itself that is broken. Dr. Derma is paid for each biopsy, whether or not the result is positive. She can therefore afford to be very aggressive in her case management. Sam feels better knowing he’s been closely monitored.
The result, multiplied by hundreds or thousands of specialties and millions of patients, is the most expensive health care system in the world providing 49th-rate outcomes. Our downtowns do benefit from lots of nice new insurance company skyscrapers, though.
You’ve hit on one of the main explanations for why U.S. health care costs are so much higher than other countries. We spend about twice as much per person as Canada, and administrative costs (billing and other things like marketing, executive salaries, etc) explain almost half of that difference.
You state that you don’t believe the thesis that market power is an important driver of total cost. Then you conclude by saying, “its the prices, stupid!” Prices are the whole point of the market power thesis–that certain providers have market power, which enables them to obtain higher prices that are not explained by other factors.
Sorry for the slow reply: yes, research shows that rising prices for essentially the same care are what’s driving our costs, it’s not because we’re using more and more care or that we use more care than other countries. As you can imagine, though, there are lots of ways to drive up prices – market power is one possible explanation, so is technology, so are physician/nurse salaries, administrative costs, case mix, and then drug and medical device prices have their own dynamics. The point being that when you actually look at where and when providers gain market power (through consolidation), this accounts for a fairly small percentage of actual price changes that follow in that area.