Skip to main content

Catching Up on a Lot of Health Care Research

By April 27, 2021Commentary

I normally would cover each of these in a separate daily post, but there is a lot to catch up on.  I will try to give some context to new readers.

This is an important paper on a significant issue in health care.  Medicare and Medicaid can dictate what they pay providers, subject to political constraints.  Private health plans have to negotiate prices and they are doing so with an increasingly concentrated provider system.  Therefore, private payers typically pay substantially more than government ones for the same service.  (NBER Paper)   (An interesting side note, one of the authors is our covid rationality friend Jay Battacharya.)  The authors used an all-payer database covering 38 states to compare actual payments for the same service.  Private payers on average paid 37% more for the five most common hospital inpatient services than did fee-for-service Medicare.  The Medicare Advantage part of Medicare, which contracts with private health plans, paid on average 10% more than fee-for-service Medicare rates.  Within those averages, there is significant variation in prices paid among private insurers.  An insurer with high market share pays less.  Having 10% more of market share led to about a 7% decrease in prices paid.  The only thing that holds costs back is the market share war between large market share health plans and large market share health systems.  In some oligopolistic markets, the insurers and health systems just declare a truce and pass the costs on to the customer.

Most Americans with health care coverage have their drug benefits managed by entities called pharmacy benefit managers, the largest of which are all co-owned with major health plan companies–UnitedHealth Group, CVS/Aetna, Prime Therapeutics by Blue Cross Plans, and Cigna.  These PBMS are controversial in terms of their actual effect on drug spending and use.  Each of the big four puts out annual “drug trend” reports, which break down the prices for and uses of different categories of drugs and changes in those over recent years.  Here is an example from Cigna’s PBM.  (EN Report)   What you will see in any of them is that while generic drugs are the vast majority of prescriptions, they don’t account for much spending.  Brand name drugs, and especially a category called specialty drugs, which are usually not pills, but drugs requiring injection or infusion, account for the vast majority of spending.  Specialty drugs often cost hundreds of thousands of dollars per year or course of treatment and are the major area for cost control efforts.  Here is a briefer description of issues around specialty drugs, from WillisTowersWatson, a large consultant and broker for employer health plans.  (WTW Article)

The Kaiser Family Foundation puts out a number of good research pieces.  Here is one also on drug costs.  (KFF Report)   The report deals with drug costs for Medicare and demonstrates again the significance of brand name and specialty drugs in driving spending.

Just briefly, this firm provides good reporting on employer health plans and this article gives a nice sense of how they provide those benefits.  Self-funding has grown rapidly, and the largest health plan companies, which dominate the provision of health insurance, also dominate self-funding.  (MFA Report)

I watch venture capital activity closely.  The cycle of business growth is that someone has an idea, has a little money, gets some from friends or contacts, and eventually gets larger amounts of capital from institutional firms like venture capital or private equity firms, then the business ideally grows rapidly and gets sold or goes public, the original capital and the hopefully huge gains get returned to the investors, and some or all of that gets reinvested in earlier stage companies.  It is hard to overstate the significance of this funding cycle and source to the US economy. The National Venture Capital Association provides regular reports on capital raised by venture and private equity firms, capital invested by those firms and exits.  Health care is a huge part of the economy and attracts a lot of this capital.  Here is the recent first quarter report.  (NVCA Report)   Normally I would summarize a lot of the data, but in the interest of catching up, I will shorten it.  The cycle is very robust right now.  People are having great exits, largely by initial public offerings, but with mergers and acquisition activity as well.  And a lot of capital is going into life science and health care services firms as well, too much in my opinion.  In these heated periods, a lot of bad ideas get funded along with the good ones.  Investments in the first quarter were up over 90% from the prior year, which is simply astounding.  Exits are similarly up at a far higher pace, as is the raising of new funds by the venture firms.


Join the discussion 5 Comments

  • James Zuck says:

    Charge rates for different groups in the medical field is interesting. Before retirement I worked at a large global manufacture of farm machinery and due to my job, periodically I received integrity training. Some of the training was interesting. Apparently in the nineties congress passed a big box store bill to protect the small mom and pop stores. Per my training manufactures could not give volume price discounts to large box stores. They could not sell products cheaper to the big box stores. Of course, there were ways around it like HP having a special Walmart Computer.
    I often wondered the legality of the pricing practices in the health care industry. It seems it is accepted to overcharge some to balance out the losses on other charges.

    • Kevin Roche says:

      I don’t know the extent to which they really need to do it, but providers have long claimed that Medicare and Medicaid underpay them so they have to charge private insurers more to make up for it.

  • ProviderCFO says:

    I have worked as a finance leader for a large midwest health care provider, annual revenue $1.8 billion, annual profit of $50 million. The need to receive more payment from private insurers is real. We analyzed what our profitability would have been if all of our patients were Medicare or Medicaid: our annual loss would have been $250 million. If all of our patients had been private insurance, our profits would have been $300 million. Confirms the finding that private payers pay 37% more (we actually were paid 65% more by private payers).

  • J. Thomas says:

    So another brilliant Biden (puppet handlers) idea to lower Medicare to age 50 … get Woke, go Broke !

  • Christopher Myles Foley says:

    PBM’s are “controversial” for a lot of other reasons than those mentioned. You can start with the fact that many are downright unethical in the way they manipulate formularies that generally have absolutely no interest in what is best for patients. And as far as the editorial about the “seediness” of discounts for people paying directly around the thir\d-party payers, the only “seediness” is in the third-party payers themselves. The reason we have ridiculous prices for many goods and services in healthcare largely stems from the fact that the third-party has been skimming for years. Administrative costs in 1985 averaged around 11% of each premium dollar. Now, it is well north of 28%. Where do those premium dollars go? Third-party administrators feel really good about spending them for spots on Minnesota Public Radio, e.g. Or ridiculous advertising in the usually left-wing media. Many of my colleagues over the years got burned out of the control exerted over there intellectual freedom and yielded to the appeal of wearing a suit and making more money as an administrator. I applaud direct pay discounts as it is a far more ethical relationship than having someone deny coverage arbitrarily for services that are often quite helpful. This is the problem with “first dollar coverage”. It’s like going to an all-inclusive resort. Step up to the bar and order an 18-year-old single malt and you will get diluted Cutty Sark. It’s the way it works.

Leave a comment