Health Care's Actual Costs Versus Their Reasonable Costs: Insights From the New England Journal

You can't fight City Hall, the State Capital or Washington. Not when it's not 'reasonable.'

Right after an embarrassingly self-promoting and one-sided political treatise by Senator Max Baucus (the link is undeserved, that's how awful this is), there is a far more telling November 5 New England Journal of Medicine article by Wendy Parmet titled 'Litigation Amidst Reform - The Boston Medical Center Case.' It reviews how BMC elected to go to court even as Massachusetts' ballyhooed health reforms were being implemented.

BMC, unlike its more profitable neighbor hospitals, has a mission of treating the poor, the uninsured and, by extension, those with Medicaid. When the State altered the safety net hospitals' payment methodology as part of its reform, BMC decided to sue. It used several arguments: 1) safety net funds that had been previously authorized were still owed, 2) demanding services without just compensation is akin to the taking of property and 3) there is legal precedent that requires that the State meet the hospitals' financial requirements.

Not so says Massachusetts. Its filings in response to the suit indicate that the funds that have been authorized have been paid in full. What's more, they argue that BMC has long agreed to accept Medicaid payment rates - period. What really caught the Disease Management Care Blog's eye, however was another novel arugment from the State: the law only requires that hospitals be paid their reasonable costs, not their actual costs.

Ms. Parmet suggests BMC has an uphill fight on its hands. State courts have been generally deferential to their health agencies in these matters. Many scholars have pointed out that the Constitutional prohibition against the unreasonable seizure of property does not extend to 'services.' Finally, while there was a part of Federal law that required 'reasonable and adequate' payment rates under the 'Boren Admendment,' that inconvenience was repealed years ago.

The distinction between reasonable and actual has been enough to give the DMCB a head cramp. If a course of treatment for cancer 'costs' $100,000, should the reasonable cost or the actual cost be covered? While commerical insurers and their slim 3.3% profit margins may pay a negotiated payment for $100,000 services (which essentially boils down to an actual cost), should a government with sovereign immunity be allowed to define reasonable payment levels? If the government deems a hospital bill as 'unreasonable,' should commerical insurers have the same option? What precisely is the definition of 'reasonable' anyway? Cost of capital and labor plus a small profit margin (like 3.3%)? Or, anything that results in an extension of life at a price equal to or less than consensus opinion? If many insurer-provider contracts are based on a percent of prevailing Medicare rates, what happens if the AMA Relative Value Scale Update Committee turns from being 'fair and accurate' to being 'reasonable?' While the current legislation before Congress has the proposed Public Plan negotiating rates with providers, is there any chance that elements of that will be repealed like the Boren Amendment?

While the DMCB was struggling with this, it turned again to the DMCB spouse for her always unique insights. Pointing out that the DMCB has needs, it asked if its actual or reasonable needs should be met.

Her unhelpful response: there is an important difference between 'needs' and 'wants' and both are only sometimes reasonable.

Medicare For All, i.e., the Public Option Can Cause Cost Shifting. It Is Possible.

Commercial health insurers are arguing that a government run ‘public option,’ if included in health reform, will force a take-it-or-leave-it’ low-ball fee schedule on hospitals and physicians. This, in turn, will lead the providers to recoup their losses by charging the competing private insurers correspondingly more for the same services. This phenomenon is known as ‘cost shifting.’

Various luminaries have dismissed this as pernicious (former Secretary of Labor Robert Reich) a misrepresentation (Nobel Prize winning Paul Krugman) and taxing credulity (Princeton health care economist Uwe Reinhardt). Absent any data that prove that this really happens, critics of the evil, recessioning, care-denying and robber baron health insurers charge there they go again: they’re trying to pull a fast one on the unsuspecting public.

In its past life in the managed care industry, the Disease Management Care Blog remembers hospital administrators repeatedly arguing that they needed the commercial insurers to pay their institutions higher rates than Medicare to remain in business. Since Robert, Paul and Uwe suggest this was just a negotiating ploy, the DMCB did what it usually does when it’s confused. It looked at some peer-reviewed literature.

It didn’t take much to find three articles in a health policy journal named Health Affairs that is not known for excess partisanship or biased authors.

This 2003 article by Lee and colleagues points out that when Medicare’s DRG payment system ‘gets it right,’ by correctly paying hospitals, there is no need for hospitals to cost shift. The authors seem to imply that when Medicare underpays hospitals, they turn to cost shifting to make up the difference.

In this 2003 article, Paul Ginsburg argues that there is a lack of evidence of the phenomenon but, on theoretical grounds, it is quite possible to assemble a ‘conceptual basis’ for cost shifting. He shows it can certainly happen in geographic areas where one health care provider has market dominance and the health insurers have no choice but to agree to their terms. In the DMCB’s experience, this monopolistic behavior is common in rural areas where there is only one hospital per county, or anywhere when a medical specialty’s services (like high end cardiology) are otherwise not available.

In this 2006 article Jack Zwanziger and Anil Bamezai examined the relationship between Medicare and Medicaid rates versus private insurance rates in California and found an inverse financial correlation in rates to the tune of a 0.17% increase for every 1% decrease by Medicare. While the relationship is not necessarily causal, the association suggests that the phenomenon of cost shifting is real. It's not dollar for dollar, but the 'signal' was out there.

The DMCB concludes that cost shifting is quite possible under the public option. It also wonders if it is missing something and why such smart people are so dismissive of any likelihood that it could happen.

A Public Plan Worst Case Scenario

President Obama has "steadfastly" favored a public plan because it’s supposed to keep “the insurance companies honest.” The Disease Management Care Blog needs to better understand what our Chief Executive means by ‘honest.’ It suspects he means not gouging unsuspecting consumers with low quality and high premiums.

Quality? Years back, the DMCB recalls dealing with a large employer group that ended up buying a competing plan. The difference was that my company pitched a plan with first dollar coverage of colon cancer screening with some other preventive care benefits, while the competition offered a more stripped down insurance plan without any meaningful coverage for cancer screening.

We lost out over price. The cheaper plan won out over a few dollars per member per month.

That’s why the DMCB thinks amount of the monthly premium level is the first, the second and the third most important factors used by consumers when it comes to buying health insurance. So, whether the President knows it or not, the competition between the proposed public plan option and the private insurers is very likely to hinge on price.

Which may be what he and the other proponents of the public plan want all along. After all, a public plan will be able to dictate terms to providers, carry far less administrative overhead and not have to worry about additional cost shifting to the private insurers.

A worse case scenario? Competing private insurers will retrench by:

a) looking for other complex regulatory loopholes and cozy relationships that permit continuing bad behavior: even stricter interpretation of the medical benefit (denials), tougher contracting with providers (low ball fee schedules) and more aggressive underwriting whenever they can get away with it. Think the arms race, gamesmanship and bombast between the politicians and private insurers will cease with the passage of an HR 3200? Think again.

b) additional consolidation by health insurers into polyglot multi-state behemoths that have the kind of huge surpluses, investment income and other lines of business that generate the cash flow necessary to fight back against a low cost public insurer. Many small not-for-profit regional insurance plans will be assimilated by the too-big-to-fail insurance Borg.

c) offering a benefit package that is similar to the public plan. Private insurers won’t be able to get away with offering a poorer benefit (no one will buy it if the public plan offers more coverage) or offering a richer benefit (because it will be more expensive and priced out of contention). Health insurance consumers will have a choice of any benefit plan they want, so long as it’s patterned after the vanilla public plan.

An Examination of the Public Plan Option

The Disease Management Care Blog really liked this efficiently written Wall Street Journal piece on healthcare reform. While it didn't agree with everything, the inspiration led this humble blogger to review the main arguments in favor of the public plan, which are paraphrased below.

A public plan will keep the private insurers honest.

Given the prior Administration’s failures, it seems comforting to believe that a change in leadership means the Federal government’s track record in healthcare is destined for change. Yet, Veterans and American Indians have been disappointed by broken promises from both sides of the aisle for decades. Alternatively, if we agree that the D.C. mandarins are imperfect, it’s hard to understand how they are necessarily less so than many smaller and honorable not-for profit plans that remain largely unmentioned by the national media.

Private insurers have broken the public trust

While we can thank some incredibly tone-deaf plans for introducing the word ‘rescission’ into the popular vocabulary, buying insurance only when its needed and driving up premium rates for those of us who play by the rules has a more familiar word to describe it: fraud. The specter of coverage denials is also understandably frightening to healthcare consumers/voters, but the other side of the story is our collective sense of boundless entitlement and unwillingness to read and grasp the small print in a binding contract, especially when it's too good to be true. Yet somehow, we’ve been led to decide between these two extremes by abdicating a huge slice of our economy to a dysfunctional political club that relies on bombast, political expediency and unread legislation to govern.

Public insurance has a lower overhead, which means savings for consumers

The notion that government can do anything more efficiently strains credulity. What’s more, comparing Medicare and commercial insurance is like comparing the alternative universes of Nancy Pelosi and Sarah Palin. While commercial insurance has its own set of issues, the truth is that government-run programs like Medicare rely on an arcane thicket of Federal regulations subject to desultory retroactive IRS-like enforcement by the underfunded Office of the Inspector General, which is only spurred to action when the problem becomes ‘staggering.’ Add this 10% waste factor to CMS' considerable hidden overhead and the transfer of many expenses to the providers and the government doesn't look like such a good deal anymore.

The public option will control costs

The logic here is that the Federal government will be able to use its purchasing power to force a better deal for healthcare consumers. A better possibility is that the long-standing pattern of underpayment to hospitals and physicians by Medicare and Medicaid will spread to new sector of the healthcare market, leaving hospitals and doctors with nowhere else to go to recoup their costs. The end result will be price controls, which are economically indistinguishable from queues and rationing.

If you have insurance you like, you can keep it.

The insurance you like now won’t disappear overnight, but its demise in the coming years, thanks to inevitable crowd-out, hostile tax policies, clumsy regulations, Congressional meddling and unintended consequences will likely lead to a three tier system: underfunded Medicaid at the bottom, the one-size-fits-all middle public plan and the gold plated plans only available to our highest paid elites with the best benefits. Care to guess which one will be used by our political leaders?

The Option of a Public Insurance Plan and the Specter of More Cost Shifting

Advocates for healthcare reform that includes the creation of a publically funded insurance plan are delighting in news that both AHIP (America’s Health Insurance Plans, the trade group that represents health insurers) and Blue Cross Blue Shield (a federation that represent 39 insurers that sport the Blues ‘brand’) have publically thrown in the towel over guaranteed issue in exchange for an individual mandate. Regular readers of the Disease Management Care Blog, however, know this is old news. This issue was examined by the DMCB back in November of 2008. What’s different this time around is that a) guaranteed issue and b) mandates are being mixed up with the c) option of a publicly funded insurer. Reactions seem to range from ‘this is precisely the kind of cudgel we need to bring these obstructionist insurers to the table’ to ‘aha, we have those evil corporate pirates on the run.’

To get to the bottom of this, the DMCB dared tread where few seem to want to go. It actually read the Aetna’s CEO Ron William’s March 24 statement to the US Senate Health, Education, Labor and Pensions Committee. Go ahead, call them obstructionist, evil, the Devil’s Spawn or [gasp, and this is the worst!] for profit, but when health insurers like Aetna speak, we should listen. Aetna, for example, insures 36.5 million persons with $42 billion in assets and a market cap that exceeds $10 billion. There’s no way Congress is going to marginalize these guys by simply passing a law sometime in the next six months.

What does Mr. Williams have to say? Health insurers figured out years ago that their business is no longer about just collecting premiums and paying doctors and hospitals. Their customers are demanding additional value, such as covering medical innovations and technologies, having inclusive provider networks, promoting transparency and offering chronic disease care, wellness and prevention programs. Examples include Aetna’s $1.8 billion investments in Active Health management and their Care Engine. And while the uninsured are a pressing problem, remember employers are successfully supporting health insurance for a whopping 177 million Americans, many of whom appear to be quite happy with the arrangement. The rising cost of their insurance is less a function of companies like Aetna and more a function of the underlying cost of health care. Employers and insurers have been working together on this for years and have had some notable successes in improving healthcare quality, dampening cost trends, increasing consumer choice, promoting transparency and covering wellness and prevention.

And here’s a telling quote.

“An enforceable individual coverage requirement, combined with subsidies and other changes to make coverage affordable, is the best way to ensure that all Americans have continuous access to insurance coverage and high-quality health care. Since 2005, we at Aetna have been speaking out in support of an individual coverage requirement, as we believe it is the critical step for achieving universal coverage.” (year bolded by the DMCB)

So what is the link to the public plan? If there is guaranteed issue and an individual mandate, Mr. Williams suggests a public plan option would be unnecessary. He may or may not have a point about that, but he then raises a critically important issue that has conveniently gone unmentioned by the anti-insurer cognoscenti.

A public plan would probably set provider payment rates akin to those used in Medicare and Medicaid. That’s because the government has the leverage to squeeze low pricing from providers. That in turn would force the providers to engage in even more cost shifting (estimated to already be as high as $88 billion nationwide) from the public insurance plans to the private insurance plans.

There you have it. The private insurers don't fear a public plan would be more honest, just, quality driven, administratively efficient, cost effective or consumer friendly. They think a public plan will simply build on its long history of what amounts to government supported 'heads I win' (non-negotiable fee schedules), 'tails you lose' (hospitals and doctors will make up for it in the private sector) predatory pricing. That's not keeping the private insurer's honest, that's crushing them.

The DMCB has a lot of admiration for care management programs, agile use of information technology, prevention, wellness, consumerism, novel insurance benefit designs, pay-for-performance, the medical home and the electronic record, but NONE of that will help private insurers - even with billions in the bank - compete against that kind of dynamic.

Or maybe that's the intention?