Massachusetts Report on Provider Pricing Impact

Last week we posted on a Rhode Island report regarding variation in payer payments to different hospitals, with the primary finding being that hospitals with market power got paid more than other hospitals.  On the heels of that study, the Massachusetts Attorney General issues a preliminary report on research into what drives costs increases in that state.   (Mass. AG Report) (Yes, Martha Coakley may influence health reform after all!  Other than by losing!)    The research’s primary conclusion is that utilization is not the main driver of growing health insurance premiums and health costs; it is provider unit price increases, especially by hospitals.

The AG looked at data from five insurers, representing 70% of the Massachusetts market, and 15 health care providers, including hospitals and physician groups.  Notable findings include that the highest paid hospital receives more than 200% of the lowest paid, on a case mix adjusted basis;  the payment spread is the same for physician groups; quality of care is not correlated with nor does it explain the payment variation; the sickness or complexity of patients does not explain the payment variation, nor the variation in total medical expense per member across providers; treating a large number of Medicare or Medicaid patients does not correlate with the variation; being a teaching or research facility does not explain it either; nor do differences in hospitals’ internal costs of delivering care.  What does explain the payment variation?  Hospital market leverage–whether through size, geography, or brand name.  The report also finds that payment mechanism, i.e. global versus fee-for-service, is not correlated with differences in total member medical expenses.  Finally, the report concludes that unit price increases are responsible for 80% of the total medical cost increases and 75% of health insurance premium increases.

The importance of this report cannot be overstated.  It verifies what most of us have known for years–a primary cause of health care insurance price increases is unit cost inflation, not higher utilization.  The report should lead to thoughtful reconsideration of what reforms are really necessary.  As the Massachusetts Attorney General notes, global payment is not likely to be a solution.  Hospital systems need to be prevented from gaining additional market power and probably should be broken up and precluded from acquiring physician practices and other ancillary service units.

Another very clear implication of this report is that hospitals raise their internal costs to match the revenue they can command.  Go into most large systems and you will see fancy wood and stone, executives earning high six or even seven-figure salaries and a lot of relatively unused and expensive equipment.  This is as true, maybe more true, at “not-for-profit” hospitals as at for-profit ones.  It may be time to put limits on salaries non-profit hospitals can pay, what kind of bloated administrative structures they can create and how much they spend on expensive aspects of facilities that add nothing to patient care.  Similar steps should be considered to rein in the internal costs of highly paid physicians and physician groups.  Controlling internal costs should lead to lower payment demands.

The most important lesson of the report, however, is that there is an enormous opportunity to reduce health care coverage costs and total health expenditures by stopping the incessant cycle of unit price increases, particularly by hospitals.  An analysis of the Massachusetts data suggests that it would not be difficult to imagine being able to hold the rise in health care costs to the general rate of inflation.

A final note concerns the massive and still growing body of research related to Medicare spending variation by geography.  Medicare pays a relatively fixed price to everyone, so price can only account for a small fraction of the variation.  But the Rhode Island and Massachusetts reports show that in the commercial insurance world, it is unit pricing which is driving cost increases.  The underlying commonality is that physicians and hospitals will use whatever mechanism is available to them to increase revenue–if they are dealing with a fixed price payer like Medicare, they will increase utilization; if they are dealing with a commercial payer with whom they can negotiate over price, but which likely has much stricter utilization management than does Medicare, they will demand higher prices.  So the Medicare geographic spending variation research likely doesn’t tell us much about the drivers of health cost growth in the commercial market.