Integrated Health Systems and Cost: The Price is the thing!

When the Affordable Care Act (ACA) was being developed, much emphasis was put on the effectiveness of integrated health systems as a way to save money but still deliver quality health care. Many studies from various research centers had looked at cost to Medicare and found that places – usually smaller cities – with large integrated health systems spent less on Medicare without noticeable decrements to quality. These systems can have a single provider of both inpatient and outpatient care (such as the Mayo Clinic) or close collaborations, including shared electronic medical records (as in Grand Junction, CO). The presumption of policy makers creating ACA was that Medicare spending, which is much easier to track, would reflect overall spending. However, a recent article from the National Bureau of Economic Research by Zack Cooper, Stuart Craig, Martin Gaynor and John Van Reenen, The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured, demonstrates that this assumption was incorrect. Reviewing overall costs in the 306 Hospital Referral Regions (HRRs, developed by the Dartmouth Atlas of Health Care) in the US, they discovered wide discordance between Medicare costs and overall healthcare costs. Indeed, many of the places that were highly-touted for lower-Medicare-costs-but-still-high-quality, notably Grand Junction, CO (which was, for example, cited as a success story by Atul Gawande in his June, 2009 New Yorker article “The Cost Conundrum”) have far higher than average costs overall. (Dr. Gawande has just had a new piece in the New Yorker discussing the implications of this new article.)

The New York Times coverage of this study, by Kevin Quealy and Margot Sanger-Katz, The Experts Were Wrong About the Best Places for Better and Cheaper Health Care (December 15, 2015), includes a terrific feature that allows interactive access to the data collected by Cooper and his colleagues. You can put in a town (really, HRR) and find out where it ranks in terms of both Medicare and private costs. Grand Junction, for example, while ranking 3^rd lowest of the 306 HRRs for per-capita Medicare spending, was the 42^nd most expensive for private insurance spending. Rochester, MN, home of the Mayo Clinic, is another city lauded for its low Medicare costs (14^th lowest), but its private spending is 10^th highest! McAllen, TX, cited by Gawande in 2009 for being #1 in Medicare spending (and now still #4) is only 140^th in private insurance spending. Tucson, AZ, on the other hand, while only in the lower middle (82^nd from the bottom) in Medicare spending, is 7^th lowest for overall costs. The Kansas City region, where I live, was atypically near the middle for both, 142^nd lowest for Medicare and 82^nd  lowest for private costs. New York City is high in both, but it is 2^nd for Medicare and 34^th (quite a bit lower) for private insurance. The map in the article depicts HRRs as low, middle or high for both Medicare and private insurance.

So, what’s up? Were the experts trying to fool us? No, but the flaw  was the assumption that Medicare spending reflected overall spending. The data in this article demonstrates that it does not. It also reveals something about integrated health systems, especially those that dominate their smaller cities, given that some of the “top performers” for Medicare, like Grand Junction and Rochester, MN, were so high for private insurance. The integrated nature of these plans allows them to save money on patients by a variety of methods – they can be seen in ambulatory settings rather than in hospitals or ERs, and they share electronic medical record systems, and thus the information recorded therein, saving money by not having to repeat tests, x-rays, etc. This lower utilization is good for these health systems because Medicare is a relatively low payer, and because they can’t negotiate these rates – Medicare pays what it pays (it is a single-payer system, with minor regional variations). However, the same characteristic – being the dominant player in town – allows such integrated health systems to negotiate much higher rates with private insurers. Thus the mismatch; overall cost is a multiple of price for each service times the number of services delivered. These systems decrease the number of services for people insured by Medicare, for whom they cannot control the price (whether this does or does not decrease quality is a separate question) but they raise the price for services to people with private insurance. That places like Tucson and Kansas City have relatively lower prices for private insurance reflects the absence of a single large dominant system in those cities.

‘“Price has been ignored in public policy,” said Dr. Robert Berenson, a fellow at the Urban Institute, who was unconnected with the research’, in the Times article. Other health policy experts, such as Princeton’s Uwe Reinhardt, have been warning about this for decades. In the effort to pass the ACA, and please both providers and insurers, this point was in fact ignored, and it is the source of most of the common legitimate criticism of the ACA – that in many places decent health insurance policies bought through the health exchanges are unaffordable. With higher prices in these regions, insurers pass on the cost to their customers.  This is illustrated in the NPR story “Obamacare Deadline Extended As Demand For Health Insurance Rises” on December 18, 2015, which documents both the success of ACA measured by the large increase in the number of people signing up for coverage and their frustration at the frequently-high cost of this coverage. Of course, this is completely unrelated to the criticisms leveled at ACA by the Republican candidates for President and their allies in Congress, whose “solution” – abolish ACA – is Marie Antoinette-like. While the French queen is reputed to have said, in response to being told that the peasants had no bread, “then let them eat cake!”, Republicans, hearing that many people cannot afford health insurance on the exchanges even with subsidies, or get Medicaid in states (that they control) which have not expanded it, respond “let them pay out of their own pocket!”

The issues and solutions are clearly laid out by the reliably insightful Dr. Don McCanne is his “Quote of the Day” on this topic. A solution cannot come from a jerry-rigged program that allows either insurers or health systems or both to maximize their profit. It needs to come from a system that starts with price controls, most effectively by a single-payer system such as Medicare. There are, as he notes, still risks – mainly that health systems may under-utilize services when they cannot make profit, leading to lower quality of care. But we can guard against this both on the regulatory end, by measuring quality outcomes and holding providers responsible, and through the market because the incentive to not provide services to Medicare patients because they can be more profitably provided to the privately -insured (the “opportunity cost”) goes away.

The infatuation of both policy makers and providers for integrated health systems is not entirely misplaced. The potential savings from shared data and not repeating tests, and more importantly for caring for people in the most clinically appropriate setting (inpatient, ER, outpatient surgery center, primary care, long-term care) is a real positive feature of these systems. But to the extent that these providers are allowed to use their market muscle to raise prices to insurers which are passed on to beneficiaries, it becomes a real negative.

The key feature of a good health system is that it is not focused on balancing the financial interests of big insurers and big providers, but that it puts the benefits to patients, to the people’s health, first.