Seven Burning Questions Related To Commercial Prices For Health Care Services

Health Affairs: Leading Publication Of Health Policy Research & Insight

Source: Health Affairs, by Michael E. Chernew and Victoria Berquist

Almost two decades ago, Gerard Anderson and colleagues published the seminal paper ‘It’s the Prices, Stupid’, identifying why health care spending in the US was so much higher than other developed countries.  Spoiler alert: it’s the prices. Twenty years on, this conclusion has continued to be affirmed over time and in greater detail.

Yet, the many differences between national health care systems make it difficult to conclude that transplanting other countries’ prices to the US would be ‘right’ for the US.  Nevertheless, the observation that prices are a significant determinant of high US health care spending motivates examination of American health care prices.

The price issue is most salient in the commercial sector, where prices set using market mechanisms are considerably higher than in the public sector. A Congressional Budget Office review suggests commercial prices for inpatient care are 182 percent of Medicare prices, commercial outpatient prices are 240 percent of Medicare prices, and commercial physician fees are 129 percent of Medicare fees. Price growth has also been rapid in the commercial sector, far beyond public sector growth and beyond what is likely attributable to increases in input costs or quality improvement.

The wide differential between commercial and Medicare prices has led some to claim that Medicare prices are too low, rather than commercial prices being too high.  On one hand, Medicare payments are higher than public payments in several other countries and often sit at about the 20th percentile of commercial prices, suggesting Medicare prices are not completely out of line with the market.  On the other hand, although evidence suggesting that lower public prices cause higher commercial ones is inconclusive at best, high commercial prices may improve access to care and quality for individuals insured through public programs.  If commercial hospital prices were set at Medicare levels, hospital revenue would drop about 35 percent, undoubtedly causing some institutions to reduce quality-enhancing activities and other institutions to close.  Moreover, price trajectories in Medicare are set to rise at a rate below inflation, potentially further reducing the adequacy of public fees over time.  Regardless of whether one thinks Medicare price are too low or not, however, it is clear that the core problem in public programs in the US is not that prices are too high, and thus we focus on commercial prices.

The reason for high commercial prices is clear: It’s the market power, stupid.  Well-functioning markets should not have the amount of price variation observed within and between commercial markets in the US, particularly when it comes to services with minimal quality differences. Studies of mergers, both within sectors (e.g. hospitals) and between sectors (e.g. hospitals acquiring physician practices) demonstrate the connection between market power and prices: consolidation leads to higher prices and little improvement in quality. Importantly, while market power is often treated as synonymous with market concentration, factors beyond concentration also generate market power. For example, providers in less concentrated markets may wield market power due to insensitivity of patients to the price of care and hesitancy of employers to steer patients to lower price/higher quality providers.

Widespread acknowledgement of market failures has created growing interest in examining how commercial health care prices are established in the US.  Much energy has been devoted to measuring prices, assessing the impact of consolidation, and proposing policy solutions, including price transparency, increased antitrust enforcement, and price caps. These issues continue to be important, but there are several under-explored burning questions in the price debate that we think deserve attention.  Here are our top seven:

1. Do Poorly Set Public Prices Distort Commercial Prices?

Our current systems for setting prices in public programs are flawed.  For example, Medicare pays different amounts for the same service delivered in different settings.  Providers are often paid more if they prescribe more expensive drugs.  Relative value units for physician services are often inaccurate.  If prices are set too high, or not adjusted when they should be, incentives are created to overuse care.  Underpricing, though less common, discourages service use.  While these issues clearly affect Medicare, understanding the extent to which they spillover to commercial prices is important.  Although there is some evidence that higher Medicare prices lead to higher commercial prices (the opposite of cost shifting), more evidence on the extent to which relative prices in the commercial sector follow relative prices in Medicare is needed.

2. How Should Services Be Defined?

Prices are integrally related to how we define services.  Many of our payment systems rely on very granular service definitions.  For example, there are now ten Current Procedural Terminology (CPT) codes for office visits, varying based on visit intensity and whether a patient is new or established.  Detailed service definitions can help ensure minimal variation in delivery costs within any given service category.  However, having many codes creates opportunities for providers to choose more lucrative codes.  The sheer number of codes and continual updating of code definitions generates administrative costs (including training and program integrity activities as well as the need to employ specialized coding staff) to ensure codes are used appropriately.  This is all exacerbated by the fact that not all payers use the same coding systems.

Broader service categories may be desirable, including those used in payment methodologies such as partial capitation.  However, broader payment systems may also encourage stinting and selection of patients with fewer health care needs, though evidence of these problems is scant.  Our sense is that our system has erred on the side of too many service codes and too little standardization, but more attention to this point is needed.

3. How Does Quality Respond To Changes In Pricing?

The relationship between price and quality is central to the policy debate. What will we give up if we adopt policies that lower prices? Some evidence suggests that more expensive providers offer better care, indicating higher prices may mean higher quality.  However, cross-national evidence suggests countries paying lower prices do not suffer significantly worse quality of care.  These cross-sectional examinations do not imply causality; yet, studies of the relationship between mergers and prices suggest antitrust activities may lower prices but not degrade quality, supporting the position that policies intended to lower heath care prices do not necessarily impact quality adversely.

Addressing this issue is challenging for several reasons. First, the relationship between price and quality may not be linear, and reductions in the price of high-priced providers may have a different effect than reductions in the price of low-price providers. Second, quality is multidimensional and different people may weigh different dimensions differently, making broad conclusions elusive.  Finding natural experiments that shed light on this issue is important, but so is conducting longer-run studies because quality impacts may play out over time.  Investigating how infrastructure investments, innovation, and specialty choice respond to financial rewards may provide useful long-run insights about how price changes affect health.

4. How Should We Price New Digital Services?

Health care in the US is experiencing a digital revolution. A wide array of new digital tools and services and new ways to digitally communicate have been recently introduced, including portal messages between patients and their care team, artificial intelligence-enabled algorithms to support diagnosis and treatment, remote patient monitoring, web-based care support tools, and digital therapeutics.  Questions of how these services should be paid for have not been resolved. Given the fee-for-service chassis of the US health system, the instinct is often to create codes for these services then assign prices, but that is problematic. For many interventions, there is limited evidence about their appropriate use.  Low unit costs and limited barriers to access for digital and virtual services are appealing but raise the potential for overuse.  Bundling digital tools into broader service packages might be valuable, but more work must be devoted to assessing how that might be accomplished.

Moreover, expansion of these services may have spillover effects on the availability of traditional services, requiring broader consideration of prices.  Understanding the impacts these tools have on the broader system is a first-order challenge that would benefit from the best available evidence.

5. How Much Spending Is Flowing Outside Of The Claims System?

Most pricing research is based on claims data, a valuable but flawed resource. Increasingly, funds are flowing from payers to providers outside of the claims system via infrastructure or other fixed payments, quality bonuses, or shared savings from alternative payment models.  These payments are often not a traditional ‘price’ as they do not change with service volume.  But their use may lead to underestimates of what is being paid to providers in the commercial sector, mask market power by distorting observed revenues per service delivered, and may complicate enforcement of price regulation.  Understanding how much revenue is flowing through non-claims channels, and how it is structured, may give a more complete picture of how markets are functioning and what is rewarded in health care.

6. Are Pay For Performance Systems Worth It?

Many payment systems (in commercial and public sectors) pay providers partly based on quality metrics. These systems strive to incentivize value, not volume, but are only justified if payments lead to better quality.  There is a growing body of evidence suggesting this is not the case.  Quality measures are often not closely enough tied to health outcomes to merit additional payments.  In addition, operating these models is expensive and may distract from other activities.  Understanding costs and benefits of pay for performance programs (whether stand-alone or part of an alternative payment model) is critical given the investment we have in them. Based on available evidence, we believe it would be reasonable to conclude that some of these systems should at least be scaled back, maybe even abandoned, until better, more targeted approaches to eliminating substandard care and improving quality can be designed.

7. To What Extent Do High Prices Reflect Higher Costs Of Production In The US, And Why?

Prices reflect, in part, the costs of production. Production costs in the US may be higher than in other countries for several reasons. First, health care prices likely reflect high labor costs in the US.  While these high labor costs in health care may reflect details of the American health care system, they may also reflect a broadly different structure of the labor market.  Reforming only the health care sector may not alter wage profiles more broadly, and efforts to lower incomes in the health care sector may, over time, create an imbalance between health care and other sectors.  Relatively little is known about these dynamics.

Second, while the US uses more of some technologies and less of others compared to other countries, in general, prices of technologies (including drugs and devices) are higher in the US compared to other nations. These technology prices may be associated with higher quality (or innovation), but more work is needed in that area.

Additionally, the complexity and fragmentation of the American health care system create higher administrative costs, driving higher prices.  While we know market power is an important determinant of higher prices in the US, further understanding of production costs of health care services in the US, and how and why these differ from other systems, would be valuable.

Conclusion

With health spending high and rising in the US, attention to health care prices – particularly in the commercial sector – will only continue to grow.  Policy solutions will involve tradeoffs between spending, access, and quality, so understanding the impacts of various policy options on these tradeoffs will be central to better decision-making.

The December Omnibus Bill’s Little Secret: It Was Also A Giant Health Bill

Opinion | Does America Have Too Much Debt? - The New York Times

Source: The New York Times, by Margot Sanger-Katz

The giant spending bill passed by Congress last month kept the government open. But it also quietly rewrote huge areas of health policy: Hundreds of pages of legislation were devoted to new health care programs.

The legislation included major policy areas that committees had been hammering away at all year behind the scenes — like a big package designed to improve the nation’s readiness for the next big pandemic. It also included items that Republicans had been championing during the election season — like an extension of telemedicine coverage in Medicare. And it included small policy measures that some legislators have wanted to pass for years, like requiring Medicare to cover compression garments for patients with lymphedema.

Though the bill was primarily designed to fund existing government programs, a lot of health policy hitched a ride.

Big, “must-pass” bills like the $1.7 trillion omnibus often attract unrelated policy measures that would be hard to pass alone. But the scope of the health care legislation in last month’s bill is unusual. At the end of 2022, congressional leaders decided to do something that staffers call “clearing the decks,” adding all the potentially bipartisan health policy legislation that was ready and written. There turned out to be a lot to clear.

The midterm election also played a role. Many lawmakers saw that the incoming Republican House majority would be far less likely to pass another big spending bill, and so the omnibus was widely viewed as a last legislative hurrah.

In fact, the new House leadership has pledged to avoid this sort of omnibus legislation in the future. House Speaker Kevin McCarthy has agreed to move smaller spending bills one at a time, and to allow lawmakers to propose amendments to each on the House floor. That process would make it much more difficult to combine future spending bills with unrelated policy measures, like a package in the bill that aims to modernize the country’s mental health system.

The coming change made the omnibus bill a critical opportunity to pass pieces of legislation that might have withered in the new Congress. Many of the health measures weren’t controversial enough to stop the omnibus from passing as one big bill. They might not have all succeeded on their own, however.

Several retiring senators were eager to use the bill to pass favored measures and cement their legacies. Among departing senior Republicans were Richard Burr of North Carolina, who was the ranking member of the Senate Health, Education, Labor and Pensions Committee; Roy Blunt of Missouri, a Republican who was ranking member on the Senate Appropriations health subcommittee; and Richard Shelby of Alabama, vice chairman of the Senate Appropriations Committee. Legacies were also meaningful for the retiring Democrat Patrick Leahy, who was the chairman of Appropriations, as well as Nancy Pelosi, who was giving up her position as the top House Democrat.

Mr. Burr had been working all year with his Democratic counterpart to develop a pandemic preparedness package known as the Prevent Pandemics Act. That legislation passed as part of the spending bill.

Mitch McConnell, the Senate minority leader, had signaled earlier in the year that he hoped for a relatively modest spending bill. But he did not stand in the way of the giant bill in the end.

“Probably a lot of the driver was, ‘Let’s resolve it and accept the reality of a lot of stagnation we’ll see in the next Congress,’” said Drew Keyes, a senior policy analyst at the Paragon Health Institute and a former staffer on the Republican Study Committee. He was critical of the size and scope of the bill, especially given the limited debate on many of its provisions. But he said he understood why it came together: “We saw a lot of pieces that felt like this is the last opportunity.”

Some convoluted budget math made it possible for lawmakers to pass expansions of Medicaid without appearing to cost much money, an opportunity that was likely to disappear over time. By scheduling an end date for an expensive pandemic policy, Congress could then use the projected savings to pay for expanded Medicaid benefits for children, postpartum mothers and residents of U.S. territories.

The bill requires states to keep children signed up for at least a year at a time, and extends funding for the Children’s Health Insurance Program. It also sets up a series of policies meant to discourage states from automatically dumping large numbers of adult enrollees after the end of an emergency policy that protected enrollments during the pandemic. The provisions reflected a longstanding interest by Ms. Pelosi in broadening health coverage through the Affordable Care Act and other means.

In addition to the expiring funding sources, there was a “time-limited coalition behind some of those policies,” said Matthew Fiedler, a senior fellow at the Brookings Institution, who was tracking the Medicaid provisions.

Crucially, most of the bill’s health measures had bipartisan support in Congress. Even though Democrats held majorities in both the House and Senate, the bill needed 10 Republican Senate votes to overcome a legislative filibuster. It got far more — the omnibus passed the Senate by a 68–29 margin. (In the House, where Republicans were less involved in negotiations over the bill since their votes were not needed, a greater share voted against it. The final vote was 225–201.)

The consequence of all this deck clearing is that it may be a quiet Congress for new health legislation. There are a few health funding programs that will need to be renewed, including funding for programs to combat opioid addiction and overdoses, and one to subsidize hospitals that treat uninsured patients.

But beyond those must-pass items (which may or may not pass in the end), don’t expect too much.

Democrats already achieved much of their health care agenda earlier in the year, when they passed legislation to allow Medicare to limit the prices of some prescription drugs, expanded subsidies for Americans who buy their own insurance, and added new health benefits for veterans.

Mr. McCarthy did have some plans for modest health care measures with a chance of becoming law, including extended Medicare coverage for telemedicine. But that passed in the omnibus, leaving him without a lot of concrete health policy goals beyond oversight into the performance of pandemic programs.

The remaining wish list for Democrats includes measures to broaden Medicare benefits and to expand abortion rights — things they could not pass even when they controlled the House. As part of concessions with right-wing lawmakers to secure the speakership, Mr. McCarthy has promised Republicans in the House will propose substantial spending cuts to balance the budget in a decade, a goal that would be impossible without cuts to some or all of the major health programs — Medicare, Medicaid and Obamacare. But those would never advance with Democrats controlling the Senate and White House.

That means the omnibus was an unexpectedly meaty health care bill. There may not be another one for a while.

Becerra Renews COVID-19 Public Health Emergency Another 90 Days, Possibly For Last Time

HHS renews COVID-19 public health emergency another 3 monthsSource: Fierce Healthcare, by Robert King

Department of Health and Human Services (HHS) Secretary Xavier Becerra renewed Wednesday the COVID-19 public health emergency (PHE) for another 90 days, extending with it key waivers and regulatory flexibilities.

 
 

The PHE—which has been in place since Jan. 31, 2020—will now run for another 90 days. Becerra has agreed, though, to give stakeholders a 60-day heads-up when the emergency will not be extended again.

 
 

Once the PHE ends, so do flexibilities and waivers that have been frozen in place for several years.

There has been clarity, however, on key parts of the PHE such as flexibilities to make it easier for providers to get reimbursed by Medicare for telehealth services. Congress passed a law late last year that extended through 2024 flexibilities such as waivers of originating site requirements.

The extension will give the Centers for Medicare & Medicaid Services time to determine what flexibilities should become permanent. The law also extended a waiver to keep in place hospital-at-home programs for another two years.

 

The end-of-year spending package gave key clarity on another part of the PHE: the end of the continuous coverage requirement for Medicaid.

At the start of the pandemic, the federal government boosted the matching rate for Medicaid payments to states, but only if the state would not drop anyone off Medicaid’s rolls for the duration of the PHE. The spending package, however, enabled states to start Medicaid eligibility redeterminations April 1.

The law phases out the 6.2% boost to Medicaid payments for the rest of the year.

It may also be the last time that the PHE gets renewed. A report in Politico earlier this week cited administration officials’ intent to possibly end the PHE this spring.

Key Trends For Payers And Providers In 2023

Healthcare stakeholders offer their 2023 predictions | Modern Healthcare

Source: Healthcare Dive, by Samantha Liss

Providers will be forced to navigate a challenging year as they try to rein in expense growth fueled by pandemic-driven labor shortages.

This year’s outlook for a large chunk of the healthcare sector remains negative as inflation and pricier labor create difficult operating conditions for nonprofit providers, Moody’s Investor Service said.

As a result, health systems and hospitals are likely to clash with insurers over desired rate increases to offset higher expenses and providers will look to increase their revenue as much as possible by bargaining for higher rates.

Even though insurers have fared better than their provider counterparts, companies are still expected to face some headwinds this year. Still, Fitch Ratings says the 2023 outlook for the insurance sector is neutral.

A recession could also take a bite out of enrollment at the same time the government is poised to roll back consumer protections that kept millions enrolled in government-sponsored plans during the COVID-19 pandemic.

Losing members could put downward pressure on both the top and bottom line for insurers, analysts said.

Providers likely to push for rate increases

How much will healthcare prices increase in 2023?

“That’s by far and away the number one thing that we all want to know about,” said Kevin Holloran, senior director of U.S. Public Finance at Fitch Ratings.

Providers feeling the pinch are going to fight for rate increases in contracts that come due this year, Holloran said, adding that the two sides are “wildly apart” so far, according to his discussions with providers.

This year will be contentious as providers may opt to play hardball in bargaining for better prices and may walk away during negotiations, leading to out-of-network periods for patients, he said.

“It’s going to be very bumpy, very contentious this year,” Holloran said, characterizing 2022 as a terrible year for most providers.

Unlike other industries, many healthcare providers were unable to raise rates as inflation soared to record highs. Providers are locked into multi-year payment deals with insurers, bolstering their desire for higher rates in coming years.

Labor pains continue

Labor shortages and pricey contract rates are continuing to strain providers, contributing in large part to mounting financial pressures.

High labor costs have made it harder for hospitals to post positive margins, Erik Swanson of hospital consultancy Kaufman Hall recently said in the firm’s latest flash report.

“The big push is to get the agency contract labor costs out,” said Suzie Desai, senior director at S&P Global Ratings.

Some of the nation’s most recognized health systems were dragged into the red last year, weighed down by increased labor costs, including Mass General BrighamCleveland Clinic and Intermountain Healthcare.

The shortage is driven in part by burned out nurses who have left the bedside for other positions — or the industry entirely. Providers have had to turn to staffing firms to help fill the gap, with agencies commanding high rates amid demand to fill openings.

Hospitals are not the only facilities short on workers. Effects of nursing home shortages are rippling throughout the sector. Patient hospital stays are unnecessarily longer as nursing homes struggle to take on more patients without more staff, serving as an added financial burden for hospitals.

Eyes on utilization and commercial enrollment as possible recession looms

Some eonomists are expecting a recession to squeeze the U.S. economy this year and potentially spur job losses.

As a result, insurers may see a dip in enrollment, leading patients to think twice about seeking out healthcare services.

Health insurance coverage in the U.S. is tightly linked to employment, so job losses could pose a financial headwind for insurers if they result in coverage losses.

Patients may be reluctant to spend money on copays and deductibles for healthcare services as the threat of a recession looms, especially as record-high inflation grabs a larger chunk of American paychecks.

“Healthcare dollars are getting squeezed out of peoples’ budgets,” Jefferies Analyst Brian Tanquilut said.

Consumer confidence will also influence healthcare utilization, he added.

At one of the largest hospital chains, HCA Healthcare, volumes for this year are expected to be lower than historical averages, Tanquilut said.

However, the so-called tridemic — RSV, the flu and COVID-19 — could inflate volumes, especially if outbreaks are more severe.

Medicaid enrollment expected to drop after pandemic protections end

Pandemic protections shielded millions from losing health insurance at the onset of the COVID-19 pandemic.

As a result, enrollment in Medicaid soared, increasing 27% to cover more than 90 million people, with states barred from removing people from the program due to the public health emergency.

Those pandemic protections are set to end in 2023, threatening to cut off access to care for millions. An estimated 5 million to 14 million are expected to lose coverage as states resume eligibility checks, according to the Kaiser Family Foundation.

For insurers like Centene and Molina, prior revenue gains, as a result of the pause on eligibility checks, are expected to deflate.

Analysts are keeping a close eye on how many members insurers will be able to convert from the Medicaid program to Affordable Care Act exchange plans.

Home health push continues

Health insurers continued to place bets on the home health sector, an area that will remain a key focus in 2023.

“The crux of health insurance is keeping costs down,” said Dean Ungar, an analyst at Moody’s Investors Service.

Home health aides have a unique advantage to temper costs by working in a member’s home, enabling them to ensure people are taking needed medications and checking on other factors that influence a person’s health.

“They can identify things that can prevent emergency room visits by just being proactive,” Ungar said.

Some of the largest payers placed big bets on home health in 2022.

UnitedHealth Group signed a $5.4 billion deal to acquire home health provider LHC Group. The transaction is expected to close early this year.

CVS signed an $8 billion deal to acquire home health provider Signify, beating out other potential acquirers, including Amazon.

These moves follow Humana’s bid for home health giant Kindred. Humana acquired the remaining stake of Kindred in 2021 for $5.7 billion.

Medicare Advantage expected to surpass enrollment milestone

Medicare Advantage enrollment is expected to reach a milestone this year, exceeding 50% of the total Medicare population in 2023.

This change impacts providers too, as reimbursements rates can vary.

Enrollment in MA plans has more than doubled since 2007, according to the Kaiser Family Foundation. Still, the program has faced continued criticism over financial incentives to make members appear sicker in order to increase monthly capitation rates.

“I think the reason this is important is because it’s really a restructuring of the Medicare program,” said Jeannie Fuglesten Biniek of Kaiser Family Foundation. “As Medicare Advantage Plans play a bigger role, we see that there’s just a lot more variation introduced into what it means to have Medicare coverage.”

Last Updated 01/25/2023

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