On Feb. 18, the Santa Monica-based RAND Corporation published a report entitled “Setting Hospital Prices Can Achieve Greater Savings Than Increasing Competition or Price Transparency.” The press release posted to the research organization’s website on that date stated that, “Among strategies to curb hospital prices among the commercially insured population in the United States, direct price regulations such as setting rates are likely to achieve greater savings than other approaches like increasing competition or improving price transparency, according to a new RAND Corporation study. But price regulations face the greatest political obstacles and historically have been strongly opposed by medical providers, according to the report.”
Further, the press release stated, “Setting prices for all commercial health care payers could reduce hospital spending by $61.9 billion to $236.6 billion annually if the rates were set as high as 150% to as low as 100% of the amounts paid by the federal Medicare program, a change that would cut overall national health spending by 1.7% to 6.5%, according to the analysis. Researchers estimate that improving health care price transparency could reduce U.S. spending by $8.7 billion to $26.6 billion per year. Meanwhile, increasing competition by decreasing hospital market concentration could reduce hospital spending by $6.2 billion to $68.9 billion annually, depending on the magnitude of the change and how sensitive hospital prices are to market concentration.”
And the press release quoted Jodi Liu, the study’s lead author and a RAND policy researcher, as stating that “Improving markets through increased price transparency and competition could help reduce prices, but would not reduce hospital spending to the extent that aggressively regulating prices could. Direct price regulation could have the largest impact on hospital spending, but this approach faces the biggest political challenges,” Liu stated.
But leaders at the Chicago- and Washington, D.C.-based American Hospital Association (AHA) immediately took issue with the report and its findings. As Managing Editor Rajiv Leventhal wrote in his Feb. 22 article, “Responding to the report, the American Hospital Association (AHA) Hospitals expressed dissatisfaction with RAND’s revelations, noting that ‘hospitals are doing their part to contain costs, as evidenced by the 1.9 percent increase in price growth per year on average over the last decade, according to the U.S. Bureau of Labor Statistics.’ AHA’s President and CEO Rick Pollack added, ‘Many have also struggled financially during the COVID-19 pandemic, with an estimated $320 billion in lost revenue in 2020 alone. And yet, hospitals and health systems continue to be there for their communities no matter what and are the only sector that provide life-saving 24/7 care to everyone who needs it. This is reflected in the $660 billion in uncompensated care provided to patients since 2000 and $100 billion in community benefits in 2017.’”
What’s more, Leventhal added, “The association, which represents thousands of hospitals and other patient care providers, contends that RAND ignores the unique role of hospitals and health systems, and dismisses rising costs and market concentration in the commercial health insurance industry, which is earning record profits during the public health emergency while spending less on actual care. Pollack stated, ‘RAND continues to regurgitate older and flawed ‘studies,’ which may be why they land on a poorly-reasoned proposal to have the government regulate prices. Despite claims otherwise, it is widely acknowledged that Medicare and Medicaid – the two largest public programs – pay below the cost of delivering care. Price-setting would only enrich commercial health insurers at the expense of innovations in care that truly benefit patients.’”
The leaders of the American Hospital Association are not alone in their objections to the RAND study’s conclusions. One industry leader who agrees entirely with their objections is Michael Abrams, co-founder and managing partner of the Numerof & Associates consulting firm, based in St. Louis. Abrams spoke recently with Editor-in-Chief Mark Hagland regarding his perspectives on the issues involved. Below are excerpts from their interview.
Do you agree with the RAND study’s conclusions that a lot of money could be saved through hospital price regulation?
There are so many examples worldwide of the destructive impact of price regulation, that I found it astounding that any serious research organization would propose this. Government programs already account for over half of healthcare spending. So we already have some level of price controls. But it’s like squeezing a balloon on one end. Healthcare providers have adapted to the control of public-sector prices by charging private payers more. And the nominal margins for most healthcare organizations come from being able to charge private payers more for elective procedures. As of 2015, two-thirds of providers lost money on Medicare and Medicaid patients, and one-quarter lost money overall. And the pandemic has blown a hole in most healthcare organizations’ finances precisely because they’ve relied on elective procedures to survive.
Could price regulation put providers out of business?
Absolutely. A good portion of providers were in critical condition before, and it doesn’t take much imagination to imagine to see that regulation of private-payer prices would lead to a wave of healthcare organizations closing their doors.
One example that comes to mind is children’s hospitals, which typical operate with around 50 percent of their revenues coming via the Medicaid program. Intensive price regulation could shutter some children’s hospitals.
Yes, exactly.
If the answer is not price regulation, what is it?
First of all, I think we can dismiss the idea that government price regulation—whose net result would be the creation of healthcare deserts in areas across the U.S., or huge corporate takeovers and consolidation. But the AHA and the rest of the healthcare lobby has been massively successful in blocking nearly every healthcare reform that’s been proposed, because healthcare organizations are the biggest employers now in many communities. So the idea that price regulation has any hope of happening is farfetched.
And they also mentioned the idea of increasing competition by unwinding over a decade’s worth of consolidation. But that option is even less possible, because it would also entail breaking up insurance companies. That would rival Roosevelt’s trust-busting of the 1940s. That option has no chance of happening, either.
So what’s left? That third option. They looked at whether increasing the transparency of hospital pricing is an option. Just making the negotiated prices of insurers and providers—by itself doesn’t seem likely to rattle the foundations of our healthcare oligopoly. But that’s only if you look at the situation through a very narrow lens. I see the disclosure of what has been secret up until now as the first step in a process. Price transparency is the first step to enabling market forces to act.
I’m hopeful that by opening up these secret agreements, we will start a process that will force these healthcare providers to become more accountable to the marketplace. You can get a knee replacement for $6,000 or $60,000—how can you defend that? Making these prices accessible to the public will force hospitals either to reduce what they’re charging to be more competitive in the marketplace, or explain to consumers why they’re charging what they’re charging. Until now, with prices being secret, price setting depended more on the market power of payers and providers. Making prices public changes all that. And this is something that the RAND study didn’t take into consideration. I expect that application developers will come out of the woodwork with applications that will help consumers make sense of the complexity of healthcare pricing. And that will put consumers more in charge.
Are we finally going to see the emergence of the informed, aware, empowered consumers whose emergence has been predicted for years now?
Well, not overnight. First, the Boomer generation has been educated to not question what’s going on and to just say yes to whatever the doctor or administrator has to say, and just move on. Younger generations are much more adept at shopping; and it’s a much smaller leap to imagine that some of them will in fact shop around, because, hey, that’s what they do now. And the extraordinary thing is that we shop for everything but healthcare. But younger consumers don’t have the same obstacles.
When will the healthcare market transform through consumer empowerment?
This is a process that will evolve over time, and I think we’ll see some changes within five years. When I talk to clinicians, they’re telling me that consumers are asking in advance what the costs of their procedures will be. That’s different. And a couple of years ago, we did some mystery shopping, and we called around and the responses ranged from geez, you’ve got a lot of nerve, to, gee, we have no idea.
One well-known example is Geisinger Health’s development of their ProvenCare program, which links clinical standardization and pricing transparency. Would you agree that clinical transformation as a foundation to pricing transparency, could provide one path forward?
Absolutely. I’m glad you brought up the example of ProvenCare. Numerof does an annual survey of hospitals across the country, to gather data on the penetration of population health and its principles. And we have a section where we ask about the use of care paths. Roughly a third of the surveyed organizations have developed care paths for expensive procedures like knee replacement. We’ve done this now for five years, and we’ve seen virtually no change in attempts to standardize the clinical side of care delivery. And the fact that they almost uniformly have order entry systems and EHRs, creates the opportunity monitor whether those care paths are being followed; but hardly any of them do. If you don’t have any control over the main driver of costs in the hospital, you can’t ever create any predictability in your costs or the cost to consumers. When those hospitals forced to defend the premiums they charge, will either have to explain it or reduce costs; and to do that, they’ll need some clinical transformation.
What about the ongoing issue of the “arms war” between health plans and providers over size? They both keep getting bigger, in order to try to dominate contract negotiations.
CMS [the Centers for Medicare and Medicaid Services] has largely been a bystander, and nothing they’ve done has made much of a difference. Oddly enough, they’ve looked at this consolidation and basically said, ‘not my job.’ That’s how we got to where we are, and the FTC [Federal Trade Commission] has largely been asleep at the switch. I don’t see anybody unwinding any of the consolidation that’s taken place. And unfortunately, without some intervention by CMS, my nightmare scenario is that we end up with a handful of provider organizations that have become too big to fail and too big to care, and the government owns them all. That’s an ugly scenario, and I would not want to see that. We’re close to having a pretty narrowly defined oligopoly on the payer side and are rapidly leading to the same thing happening on the provider side.
What I would like to see is for CMS to make some bold moves to address the situation by forcing value-based pricing. I think that requiring healthcare organizations to be accountable for managing both the cost of care and delivering on quality is what’s been missing for 30 years. DRGs were the last bold move to contain costs, but in the end, they failed to do so because there was no connection to quality or outcomes. CMS has been tiptoeing towards this, but it’s time to head towards capitation. CMS is the only payer with the power to do this; none of the other payers will do this except in isolated markets. The commercial payers won’t drive it, and the hospitals won’t opt into it if they don’t have to.
