Gaming the system: Integration of healthcare services can just raise costs, not quality

My last blog post addressed the promises, and challenges, posed by the creation of integrated health care plans (or their new incarnation,Accountable Care Organizations, or ACOs, as defined by the Affordable Care Act, ACA), I summarized some of the good and the bad aspects of health care integration. The good often relate to the efficiency that can arise from a single organization which, in theory, can result in financial savings to both individuals and the health “system” as a whole. Unfortunately, this does not always happen, as demonstrated in the article “A hospital war reflects a bind for US doctors”, New York Times, December 1, 2012 (Nov 30 “online”; while in the “Business Pages” online, it is front page, even continued in the first section, in the print edition).

The article, by Julie Creswell and Reed Abelson, begins by focusing on the “picturesque” city of Boise, ID, where the two hospital systems in town have been buying up physician practices in order to more effectively “compete” with each other. St. Luke’s Health System, the larger, has been doing much more of the buying, so much so that the other, St. Alphonsus Regional Medical Center, is suing to prevent them “…from buying another physician practice group, arguing that the hospital’s dominance in the market was enabling it to drive up prices and to demand exclusive or preferential agreements with insurers.” Yes, driving up prices. They noted that the charge for colonoscopy has quadrupled and the charge for laboratory services is much higher. 

The CEO of St. Luke’s argues that not all prices have gone up, and, anyway, the ones that did were “underpriced” previously. This, of course, is hard to demonstrate in an industry where pricing is largely a fiction, where there are no “posted” prices and the charge to different payers varies enormously.  It is not like buying a car, where the dealer pays a certain amount to the manufacturer and you, as a customer, try to get them to charge you as close to what they paid as possible. Nor is it like buying a video game online as described in another Times article (“Retail frenzy: prices on the web change hourly”) in which you can find out if, for example, Target will respond to Amazon’s price cut by dropping its price even lower.

In health care, the “cost” to a provider (hospital or health system) includes both the “marginal cost” (what it actually costs to run that one more lab test or do that one more colonoscopy) and some percentage of their “fixed cost” for running the entire operation. Thus, ironically, by integrating and consolidating into a larger organization with a larger fixed cost, that overhead built into the price increases. The single lab test done by the health system lab has to pay part of the cost of that new MRI scanner and the technician that runs it and the super new invasive radiologist, while the price charged by the independent laboratory does not. Of course, the overall actual cost, in total, to all organizations may be going down, but the amount that the patient or their insurer pays for a low-cost test goes up!

This, as should be obvious, is not an issue limited to Boise. The Federal Trade Commission (FTC) has also gotten involved in investigations of pricing at St. Luke’s and other hospitals and health systems. The Times article quotes Jeffrey Perry, an assistant director in the FTC’s Bureau of Competition: “We’re seeing a lot more consolidation than we did 10 years ago….Historically, what we’ve seen with the consolidation in the health care industry is that prices go up, but quality does not improve.” Higher prices and the same (or lower) quality. Not exactly what we want to hear.

“Hospitals,” says Steve Messinger, president of ECG Management Consultants, an organization the Times indicated advises on physician acquisitions, “are constructing compensation in ways that are based on productivity and performance.”  Sadly, the “performance” piece only sometimes is tied to either quality of care for the patient or cost-effectiveness for the payer, but much more often to “productivity”, and particularly in how it increases revenues for the hospital. One of the ways that this can happen is by “churning” patient – increasing the number of admissions, for which hospitals get paid, but not keeping them too long because (since hospitals are paid by Medicare, at least, a fixed amount for a given diagnosis, based on a system called “DRGs”) shorter stays cost less and thus make the hospital more money. On the front end, the Office of the Inspector General of the Department of Health and Human Services is investigating whether hospitals are tying reimbursement of emergency physicians to how many patients they see per hour and the increasing the percent of ER patients who are admitted. Regarding “productivity”, one hospital noted that patients expect to be seen in a timely manner; of course, patients also expect to get appropriate and thorough care once seen, which can be inhibited by having to increase throughput. On the back end, there are several lawsuits from physicians charging that they receive bonuses if their patients are out of the hospital in less than 3 days. Now, no one wants to be in the hospital longer than necessary, and in fee-for-service payment structures there is financial incentive for doctors to keep their patients in longer as they can bill for each day, but no one wants to be rushed out of the hospital before they are well enough in order to meet a certain target length of admission.

Many of the worst “abuses” come from for-profit hospital or health care companies, such as some of those mentioned in the Times article. This is obvious; their incentive is to make money for shareholders, not to provide quality care except to the extent that it is necessary to make profits, and given the arcane nature of health care reimbursement, the association is not all that strong. Integrated health systems that have done a better job of decreasing costs and increasing quality, such as Kaiser, are usually not-for-profit. However, not-for-profit status is not a guarantee; especially when such hospitals have to compete with for-profits, they end up playing by the same rules. In addition, the Boards of Directors of non-profits are still looking at the bottom line, and are certainly not interested in losing money.

The key problem is the patchwork of rules and reimbursement systems that govern healthcare, and the opportunity for healthcare providers (hospitals, health systems, and even doctors – although they are, as the article points out, increasingly employees of those hospitals) to “game” the system, to find the holes, legal (or sometimes not) that permit them to make the most money. More admissions? Fewer readmissions? Shorter stays? More procedures? Higher prices for colonoscopies and lab tests? Whatever works for the bottom line, not for the highest quality of care of individual patients or communities.

This is nonsense. The goal should be to provide excellent health care, that which is needed by the patient and not more, at a reasonable price – and a price that can be identified. Our current payment system discourages that, and this is not right. The big, arguably necessary, step to a solution, is a single-payer (or highly regulated multi-payer) health system that provides hospitals with global budgets, not reimbursing per service item, while holding them responsible for providing quality health care to the patients in a particular community. Similarly, global (capitation) payments to physicians can permit them to rationally assign their time, staff, and resources to meeting patient needs in the most appropriate and effective manner. If a telephone call is all that is needed, why should someone take off a half-day of work to come in? Well, because that’s the only way doctors get paid, the current answer, goes away. If these global payments are combined into an integrated health system, perhaps we can have more results like Kaiser’s.

This would not solve all problems but it is the necessary if not sufficient starting point. And certainly, the profit driver is a major negative toward enhancing quality and limiting cost in healthcare.

Just thought I'd add this picture: