Price transparency: Hospitals in 2021
Principle: collusion isn't durable
Introduction
General equilibrium theory requires for perfect competition: infinite suppliers and consumers, with infinitesimal market influence. Israel Kirzner would describe this as a condition where..
each and every participant lacks any power.
It is obvious no such market condition applies anywhere or anytime. Yet policy engineers aim for this as a condition that should be sought. For example have a conversation with any person on the street about employment economics and the conversation of power dynamics will quickly come into play.
Price Transparency: Hospitals in 2021
Starting January 2021, hospitals will be required to make public their prices. The Center for Medicare and Medicare Services (CMS), the federal agency that administers the Medicare program, opened for comments in 2019, CMS reported “wide agreement” that price transparency was a noble objective.
CMS reported that many comments pointed to patients having a right to know what is purchased and its price. This spirit can be found in most sectors. Typically, contracts require a stated price. The Uniform Commercial Code provides Open Pricing Terms which seek resolution through Good Faith or a reasonable price. But how can these be discovered if there is market manipulation?
CMS revealed notable insights. Hospital representatives challenged the usefulness of charge-information and the burden being placed on hospitals - the argument being that insurance payers should inform their policyholders. CMS recognized that charge-alone information would not be useful, but as if to say “we have to start somewhere” CMS used their authority to make a change. To advance the matter future hospitals are required to list payer-specific rates. Charge rates would not address potential out of pocket costs - such as those who have reached their deductible and now must pay coinsurance. CMS, an insurance payer, stated they disagreed that this burden should fall on insurers alone. Because some times, insured people and uninsured people want cash prices - ie, all healthcare purchases do not utilize an intermediary health insurance.
Market manipulation was not central to comments - that would be faux pas - but rather hospital representatives admitted that online chargemasters were already available and were accessed more by insurances, competitors and reporters than consumers this rule would assist them more than consumers.
Why be Opaque?
Being opaque is not a choice, per se, it simply is not a consideration. I would guess that 90% of patients (a little more than the non-insured population) don’t bother asking for 90% of their healthcare costs (a little more than the primary care portion of healthcare transactions). When a third party pays for services, patients become insensitive to price, price effects become too distant. From the patient’s perspective it costs $25 - their co-pay. (nevermind the future increases of insurance premiums).
A facility may establish their rates by assuming a certain payer mix, such as 40% Medicare, 50% Medicaid, 5% commercial, 5% non/under-insured. Chargemasters set the highest charge settings in a company’s profile. Then each insurance payer brings down the price according to their negotiated rates. Some commercial plans simply ask for a straight 5-15% discount; others tie their rates to Medicare allowables (such as “140% of Medicare PFS”). Medicare and Medicaid simply mandate their rates. Usually medicaid pays the least, commercial plans pay more, and non/under-insured pay the most.
The strategy becomes a game of weighted averages. This game has no direct tie to supply and demand, but of cost accounting. If a payer will not pay for “services and supplies ‘incidental to’” then the required payment for a physician's examination must be increased - unless you can make it up in the x-ray machine’s use - the technical component.
So when you ask the receptionist in your doctor’s office, “how much will this cost me?” there really could be only 1 person in that office that would know - the biller. Then, if you do get the biller, the biller has to put their neck on the line and assume that it is known what level of complexity your visit will be, and somehow communicate clearly and effectively, that this excludes any injections or billable education provided; nor if you have met your deductible and have coinsurance to pay - it can get complicated very quickly.
Path to Transparency
It can get complicated:
Does this conflict with EMTALA?
The insurance company should be informing their clients.
This is too much to ask the hospital to bear.
Rates are viewed more by payers and competition than patients.
The Emergency Medical Treatment and Labor Act (EMTALA) are mandates that hospitals are required to follow, one provision is to treat a patient regardless of their ability to pay. Any process or behavior that would have a dissuading effect to receive care is not allowed- such as posting signs about fees and prices - a sticker shock that may cause someone not to seek medical care.
Some hospitals already post their rates. Some rates can be inferred through public information ,such as Medicare’s Dataset, then there’s good ol’fashion asking someone for their EOBs.
A competing healthcare facility, or insurance payer, may set their own rates, or use the sources mentioned, to set their payment/pricing policies - as some shared during the 2019 Price Transparency Requirements for Hospitals To Make Standard Charges Public comment period.
The Price
According to the Health Care Cost Institute, 2014-2018 healthcare expenses steadily increased. The largest price increase occurred in prescription drugs and outpatient care. Total costs increased by 18%, while utilization grew by a mere 3%.
An increase of market prices are a product of an increase in demand (“3%”) and/or a decrease in supply (coordinated price collusion?). Monopolies typically increase their profits by a decrease in production (minimizing marginal cost) and an increase in price so that marginal cost equals marginal revenue.
A group of producers could create monopoly-like conditions through collusion. How could a group create these monopolistic conditions in healthcare?
Collusion
Collusion is notably unstable. The closer prices approach the maximizing monopolistic price the greater the pressure working against the collusion. The Washington Times has a good summary of what healthcare collusion could look like - here.
So, who is colluding?
A joint statement by 4 major associations seem to be promoting price transparency, but their stance is very specific - the objective is not price transparency but patient price transparency, namely patient out of pocket costs. 3 hospital associations and 1 physician association prefer this patient-focus.
If, according to the Health Care Cost Institute, 15% or less of healthcare dollars are sensitive to patient out of pocket costs and there are millions of individuals, you could calculate their market influence to be very low. It might be more beneficial to assess if the larger players have more to gain. Health care providers and health insurance carriers would be a better place to start.
A comparison is being made between dutch concrete market conditions and the US healthcare system. The problem with the comparison is in the number of providers and geographic dynamics. The number of providers are not a few and geographically the market is the size of West Virginia with the population of Texas.
Market conditions in the US have increasingly become unfavorable for independent primary care offices. The administrative burden is growing and the reimbursement for physicians services is not growing relative to, for example, prescriptions and diagnostic equipment. Annualized, professional services have grown 1% or less, 1999-2018. While the American Hospital Association, reports a steady percentage of total healthcare expenditures for Physician services at 20%. The hospital portion was declining.
The participants in the market are patients, insurance companies, hospitals, and physicians. Producers are the hospitals and Physicians. Consumers are the patients and insurance companies are intermediaries. The cost of healthcare is not a factor in insurance operational success, regulation impact would be a better driver. In 2020, many health insurances saw elective procedures and healthcare utilization decrease which increased operational performance.
If we are looking for collusion, the decrease in supply would be found in hospitals and or physicians. The coordination of market factors could also involve insurance company’s as well. Consider the following:
The number of independent practices has been decreasing, -15% over the past 10 years
Providers in hospital see 19% less patients than private practice
Many cite reduction of risk and compliance burdens as factors from independence to employed-practice
As a tactical defense, independent physicians are merging to larger groups
AAMC is cited as estimating a 50% increase in physician shortages from 2020 to 2025
Physicians report 21% of their time is on non-clinical paperwork
Insurance companies are risk mitigation organizations. Revenue is invested to align to meet their needs. There is a momentum to pay healthcare through value-based compensation. There are developments for risk-based arrangements. CMS innovation center recent programs such as Comprehensive Primary Care Plus require the ability to absorb downside risks, and have access to patients to meet panel thresholds; and the Direct Contracting Model was accessible to particular regions of the country that were tied to networks of providers and particular governing structures - ie, smaller groups could not participate.
Insurance companies are willing to pay to control risks. This ‘improvement’ of healthcare is driven by information and system development rather than improvement by evidence. MIPS, for example, rewards providers by weighted scores. 30% is based on cost savings; 40% is based on advancing information and quality improvement activities; and 30% is based on “quality” - Quality, includes if the patient makes health improving decisions (outcomes that are not predominantly part of the providers duties);
For example:
% of patients receiving influenza vaccine
% of patients who quit smoking
It is not overlooked that many other clinical quality measurements exist, but the measures that produce the most income given variance will be selected; a clinical Sharpe ratio. Clinical measures that are overused and plateau will be removed; measurements that will remain are those that would help CMS and payers manage their risk through information or actual health outcomes. Health outcomes are not solely the duty of insurance and providers, patients have a duty to participate - patient participation can not be incentivized (at least not in a meaningful way, by law).
Conclusion
There is a coordination between insurance carriers and those large enough to assist insurance carriers in mitigating their risk. The trade-off is in increased reimbursement, which is ultimately passed on to patients through premiums or taxpayers. Hospitals, with greater access to capital, invest in high cost machines and seek reimbursement for these machines. High cost administrative burdens are rendered more efficient in their environment. In trade, hospitals subdue one tier of payments, physician reimbursement which is a factor in wage baskets which subdue a whole market basket.
There is likely a collusion of sorts, whether men with long mustaches speaking in shaded rooms or simply the zeitgeist that propagates centralized planning, centralized information and reduced options… or rather variance. As with many other examples of mandated and coordinated markets shortages will develop and the system will fail to reset.
Hospitals and hospital-employed physicians don’t represent all providers. There will be a point where the collusion will unravel, it may not be from ‘cheating’ but it may come from systemic failure. Like preparing for the next business cycle, physicians positioned well for this turning could benefit… hopefully it will come from ‘cheating’ and not a systemic failure, but the zeitgeist need for centralized information will either continue into greater government controls (to prevent failure) or we will have to let go of our need for information and trust on individual providers and their traditional patient-provider relationships.
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