When they talk about healthcare cost reductions, our politicians mostly focus on drug prices and insurance companies. Drug prices have been under the summit’s microscope for several years. This year’ summit shifted focus to medical providers, especially hospitals. In his introductory talk, Steve Forbes remarked that hospitals are the largest component of U.S. healthcare spend [and they employ over 50% of doctors]. He asked, “How can we address costs if we leave hospitals out?”
Industry leaders on-stage at the 2019 Forbes Healthcare Summit
Photo credit: Todd Hixon
Seema Verma, the Administrator (top executive) of CMS (the Center for Medicare Services, the federal organization that administers Medicare and Medicaid) spoke, tying her remarks tightly to the outlook and goals of President Trump. Regarding healthcare costs, her key points were:
· The U.S. has some of the best health technology in the world, but prices are very high. She aims to use free market forces that work elsewhere in the economy to put price pressure on high-price providers and make the system easier for consumers to navigate. CMS has recently promulgated regulations that force hospitals to disclose the real prices they charge to different payers for about 300 services; hospitals will be fined if they do not comply. [Most hospital charges to commercial payers are based on negotiated prices that have been kept confidential.]
· Drug price escalation has slowed, even stopped: premiums for the Medicare prescription drug program are coming down. [Pfizer CEO Albert Bourla also remarked that Pfizer’s U.S. prices declined overall in 2018 and 2019.]
· Verma is not excited about Medicare for all: she does not want to put the other half of the U.S. healthcare system into what she characterized as a sluggish federal bureaucracy.
On the “Value Based Care” panel three CEOs of provider organizations talked about their vision for driving reductions in the cost of healthcare. The panelists were Michael Dowling, CEO of Norwell Health, New York state’s largest integrated health system, Dr. Laurie Glimcher, CEO of Dana-Farber Cancer Institute, a highly-regarded cancer treatment and research hospital in Boston, and Dr. Farzad Mostashari, CEO of Aledade, company that helps primary care providers operate as Accountable Care Organizations (ACOs) that take financial responsibility for the cost of care for their customers.
Glimcher believes that the biggest cost reductions will come from technology-based cures developed by academic medical centers. She points to Alzheimer’s disease as a tidal wave of cost that will swamp the healthcare system within 20 years unless a cure is found. And she believes that Medicare-For-All will kill academic medical centers by transforming higher-paying commercially insured patients into lower-paying Medicare patients, starving the search for urgently needed cures.
Dowling warns that it would be unwise to squeeze hospital revenue: hospitals would be forced to cut services, such as mental health, that lose money but are important to community health. And he criticizes the regulation recently issued by CMS that forces hospitals to disclose the prices they charge to different payers. He argues that the data is too complex for outsiders to understand, and that once every hospital knows what other hospitals charge, the low-price providers will raise to equal what the high-price providers are getting.
Mostashari brought a fresh perspective. His company, Aledade, works with primary care providers that take financial responsibility for the full cost of care of their customers. Aledade providers have been able to reduce total cost of care significantly, e.g., by reducing emergency room visits by 25%. When asked how Aledade providers can take full responsibility for $5 billion of healthcare cost, he responded that he likes responsibility for all of that cost: “It’s easier to cut cost when the cost you cut is not your own revenue.” [This is why it’s hard for hospitals to cut cost: it is mostly their revenue.] As a buyer of hospital services, he is in favor of transparency: “The thing that makes me believe transparency will reduce costs is the degree to which hospitals resist it.”
Dowling’s argument that price transparency will cause low-price hospitals to raise prices sheds light on the healthcare cost problem. In a competitive market, information about who is the low-price supplier (for equal value) causes customers to move their business to the low-price provider, and high-priced providers must match price or lose revenue. In a market lacking effective competition (a monopoly or oligopoly), providers can and often do charge all that the traffic will bear. And in a regulated market, regulators do not allow providers to raise prices when they realize they are not charging all that the customer will tolerate. Dowling’s remark indicates that the market for hospital services is not competitive enough to discipline prices, and not regulated enough to prevent providers from exploiting their pricing power, and he predicts providers can and will raise price at will. Mostashari said as much: “Hospitals raise prices charged to commercial patients (the unregulated part of their business) because they can.”
Although Verma’s transparency initiative is well-meant, the main good that increased price transparency will do is make the problem of provider pricing power more visible. And although Glimcher’s argument that cures drive cost reduction has merit, it is incomplete. Some cures, notably the Hepatitis C drugs Harvoni and Sovaldi have driven demonstrable reduction in total healthcare costs. But tech-based cures can also drive costs up, such as the extraordinarily expensive T-cell therapies that save the lives of people who would otherwise have died quickly. These therapies extend lives, but they drive total cost up. So, it’s questionable that technology alone will bend the cost curve down. Medical economics continue to be dominated by price negotiation clout.
Entrepreneurs and leaders of established businesses, who buy medical services when they sponsor health benefit plans, have two high-level options to control costs. They can continue to water down the benefits of their plans, but that undermines their goal of using health benefits to attract employees and keep them productive. Or they can push back at the regional provider oligopolies by working with the best large, efficient health insurer/plan administrator they can find [large plans aggregate buying power to create clout in price negotiations with providers], and/or by reducing business with high-price providers: for example, excluding from health plans providers whose prices are out of line with demonstrated value, or sending major procedures out of region to specialized providers that offer bundled pricing.
The U.S. is a long way from a solution to its healthcare cost problem. But at least we are starting to talk about the most important parts of the problem.