Controlling rising health costs
US health spending per capita is twice that of virtually every other developed nation. Health costs are a function of price multiplied by use (utilization). Our use of health care services is on the low side as compared to most other nations, while our prices are on the very high side. To top it off, we don't get very good (in fact comparatively poor) outcomes on a range of health indicators from life expectancy to infant mortality.
Our hospital costs are high; our doctor fees are high (particularly so for specialists); our prescription drug prices are high; our medical equipment costs are high; our health care salaries from administrators and executives through nurses are high as well. The medical associations, hospital associations, drug manufacturers, durable medical equipment manufacturers, etc. are each in turn highly protective of their high prices.
We have three major payers: private insurance, Medicare and Medicaid. Our fourth is out of pocket from individuals. Each payer is somewhat different in the ways it pays providers.
Medicaid is the most cost effective (or cheapest depending on your perspective). MediCal (California’s version of Medicaid) has a small but expensive fee for service component for some very ill subscribers and a very large managed care enrollment. In fee for service, hospital rates are negotiated between the state and individual hospitals, and their doctor’s fees are set by the state. In managed care, the health plan negotiates the hospital rates and negotiates physician reimbursement, often with local IPA’s (Independent Practice Associations) who represent a group of doctors. Managed care more frequently uses capitation (all inclusive flat monthly fees) arrangements to pay providers. The managed care plan rates are set by the state and negotiated with the plan. Depending on the county, there may be one plan (County Organized Health System), two plans (Two Plan model) or more health plans (Geographic Managed Care) for subscribers to choose from. The plans being offered are a mix of public plans (county operated) and commercial plans (both non-profits like Kaiser and Blue Shield and for profit plans like Anthem Blue Cross and Centene Health Net). The state of California has historically had tight controls over utilization and reimbursement in Medi-Cal, largely because the state legislature decides the program’s annual budget. MediCal has no or nominal copays and no deductibles. Medi-Cal covers most long-term care (nursing homes and in home care). The federal Medicaid programs pays a match for most covered services and subscribers, and it sets parameters (floors and ceilings) on who can be covered, what benefits can be covered and sets a limit on how much providers can be paid (not more in aggregate than Medicare).
Medicare is the next most cost effective – i.e. its rates are higher than Medicaid and lower than private insurance. It offers subscribers both a fee for service and a managed care option. The federal government sets the rates for hospitals (Part A), doctors and other providers (Part B). It does not set the rates for prescription drugs, which are instead competitively negotiated by Part D prescription health plans. It also contracts with competing health plans, known as Part C or Medicare Advantage, that offer a package of services (A, B and D). About 40% of California’s seniors and disabled choose to enroll Medicare Advantage Plans. Traditional Medicare is a fee for service plan, where the federal government sets the rates based on cost or usual and customary fees; there is broad choice of providers and very little federal control over utilization. Part C plans may be fee for service or may be capitated managed care plans (HMOs). The Part C plans have a more limited provider network with stronger controls over utilization which allows them to offer more benefits and lower out of pocket co-insurance, copays and deductibles to subscribers. Medicare does have co-insurance, copays and deductibles for its covered benefits. Medicare covers some long-term care.
Private insurance is bought by large and small employers and by individuals (including those enrolled in Covered California); they have less purchasing leverage and therefore often pay higher prices than either Medicare or Medicaid. Large employers negotiate their premiums with plans or they self-insure (meaning the employer bears the insurance risk and typically uses a third party administrator to pay the bills). Small employers have little bargaining leverage unless they choose to use Covered California to negotiate for them. About half of California’s private insurance subscribers are enrolled in HMOs (Health Maintenance Organizations), and about half are in fee for service PPOs (Preferred Provider Organizations). The PPOs negotiate fee for service reimbursement rates with hospitals and physician groups; those who agree to the negotiated rates are “in network”; those who do not agree are “out of network”. In network providers can only charge the negotiated rate; out of network providers can bill for their charges, which are an arbitrary figure, typically three to five times as high as their costs. PPO plans often have hefty copays, co-insurance and deductibles to reduce the costs of their premiums; these leave the subscriber with high out of pocket when they become seriously ill. In non-competitive markets with provider monopolies or oligopolies, the insurance plans have little bargaining leverage, which results in high provider reimbursements and high premiums. HMO’s like Kaiser own their own hospitals and hire their own doctors; they are able to offer more affordable premiums with much lower out of pocket obligations. Subscribers, however, are limited to the Kaiser system except in an emergency. Other HMOs contract with selected hospitals and physician groups, using capitation models and negotiated fee for service reimbursement. Use of out of network providers for anything other than emergency care results in a hefty bill, based on the fiction of “charges”.
Covered California offers private individual insurance. Typically between two and six plans participate depending on the county and the competitive markets; a few are county health plans, but the market is dominated by three large plans: Kaiser, Blue Shield and Centene/Health Net. Large commercial plans such as Anthem Blue Cross dropped out and are now seeking to get back into California markets. Individual purchasers are clustered among the bronze and silver plans that offer the lowest premiums but the very highest exposure to out of pocket costs. Governor Newsom and the California legislature have recently approved extra premium assistance for middle-income subscribers and extra help with cost sharing for moderate-income subscribers.
The Affordable Care Act made a number of improvements in reimbursement methodologies and cost controls that were designed to improve health outcomes, provide better value to subscribers and slow the growth in health spending. Some examples are: expenditure caps, ACO’s, non-payment for treatment errors known as “never events”, medical homes, reducing overpayments to plans and provider, value-based purchasing and bundled payment reimbursements.
For example, the expenditure cap for the growth in Medicare spending would have resulted in regulatory reforms in payment methodologies to keep the growth in spending inside the cap. The “Cadillac benefits” tax would have taxed the most costly private employer on their premiums above a certain very high threshold, and thus created strong financial incentives to say under the threshold. Both have been repealed by Congress, due to the pressures from providers, business and labor interests. This is instructive on exactly how difficult it is to rein in US health spending.
Accountable Care Organizations (ACO’s) are collaborative agreements among doctors and hospitals to share risk in reducing the incidence, the hospitalization rates and emergency department visits of treatable high cost conditions, such as diabetes, hypertension, depression, etc. These have mostly been successful.
Bundled payments are agreements among hospitals, doctors and nursing homes to take a bundled or consolidated payment to better integrate and coordinate their patient care to reduce hospital readmissions of elderly and disabled patients who otherwise may ping pong back and forth between the hospital and nursing homes. These have driven down costly hospital readmissions.
“Never” events are for example when they cut off your healthy right leg for gangrene instead of your infected left leg. The ACA said in that case, don't pay the hospital or the doctor and they cannot collect from the patient. There are also financial penalties for excessive rates of hospital acquired infections and excessive hospital readmission rates, which have reduced the incidence of each.
Medical homes are a fancy name for the primary care doctor. The ACA authorized a series of pilots so that physician practices, community clinics and group practices could improve their practices and be better paid if they reduced unnecessary and avoidable hospitalizations and emergency room visits. A large number of these pilots have been authorized, and they are reportedly reducing ER visits and hospitalization rates as expected and sharing in the cost savings with public payers.
Hospital payment rates and plan reimbursements for Medicare were both reduced to more accurately reflect actual hospital costs and plan expenditures. Their participation in Medicare has been unaffected.
The Sanders/Warren “Medicare for All” plan would cut out the middle man (in this case, the insurers and the state Medicaid agencies); it would pay hospitals on a global budget; doctors would be paid on fee for service; prescription drugs would be reimbursed based on a negotiated rate for Medicare. Consumer copays, deductibles and co-insurance would be eliminated and participating providers would be barred from balance billing their patients. Fee for service and no consumer cost sharing are highly inflationary and are poorly designed to improve health outcomes or to better integrate and coordinate the delivery of care. Global budgets for hospitals and negotiated rates for prescription drugs are good ideas that can help reduce rising health costs. Getting rid of private insurance produces a one-time savings of about 7-8% of health spending. Single payer saves doctors and hospitals from the costs of multiple different programs and reimbursement systems.
Senator Harris’ Medicare for All with a private option would allow those citizens who want to keep a private insurance plan to do so, albeit with no consumer cost sharing. Allowing the private option could increase flexibility, innovation and testing of different models of care delivery and reimbursement reforms.
Vice President Biden plan attacks prescription drug over pricing in the following ways: Negotiate prescription drug prices for Medicare; Allow importation of prescription drugs from other countries with lower prices; Limit drug price increases; Eliminate tax deductibility for pharmaceutical advertising and Improve the availability of lower cost generics. He seeks to break provider’s monopoly and oligopoly pricing powers with anti-trust enforcement and offering the “public option/Medicare buy-in” to employers, employees and individuals purchasing through the Exchanges (Covered California). He does not restrict consumer’s copays and deductibles, but he does propose to give purchasers through Exchanges significant extra financial assistance to reduce both their cost sharing and their premiums.
Prepared by: Lucien Wulsin
Dated: 8/22/19