Competitiveness and Innovation

Competition: the Wonder Drug for Health Care

12 Jul 2013  

Bubble chartOne broad goal for US health care that most of us can agree on is the need to rationalize and reduce overall costs. As a society, we can meet this goal — but only if we ensure that the health care industry remains competitive in each of its component sectors.

Competition update

Unfortunately, in key sectors this goal remains distant — one that in some cases we are even moving away from. Here’s some of what’s happening in three of the largest sectors:

Pharmaceuticals. Most of the profits here are made in branded drugs, where prices are significantly higher than in the corresponding generics.  Some of these drugs generate revenues in the tens of billions of dollars each year.  When a period of patent protection expires, these revenues typically fall drastically (the ‘patent cliff’).

Certain pharma companies have begun to pay generics manufacturers not to produce a generic version, which presumably would erode the branded version’s profitability.  Such ‘pay for delay’ seems on the face of it to be designed to discourage competition, and has the net effect of keeping drug prices relatively high.  The US Supreme Court has apparently reached the same conclusion, and on June 17 ruled that these agreements could be pursued by the Federal Trade Commission as anti-competitive. Whether or not FTC enforcement will follow through remains to be seen, but it’s a step in the right direction.

Hospitals and doctors. There is a consolidation wave under way in the medical provider market.  Small medical practices are being bought by larger ones, which in turn are being bought by hospital systems.  Small hospital systems are being bought by larger ones.  The really large ones can grow by accessing the capital markets.  According to research conducted by The Knowledge Agency®, there are at least seven publicly-traded hospital systems in the US, two of which (HCA and Community Health Systems) each manage more than 100 hospitals. Two others (Tenet and Vanguard) have just announced an intention to merge.

Several studies have concluded that the more concentrated a local health care market becomes, the less competition there is, and the higher provider prices tend to go.  This is the natural consequence of having monopoly or oligopoly ‘pricing power’ in a given marketplace.

Accountable Care Organizations (ACO), a key element in the Affordable Care Act’s quality initiatives, involve creating alliances between medical practices and hospitals.  Some observers believe this too will cause these provider sectors to in effect become more concentrated, further reducing competition and pushing costs higher.

Health insurance. Here the news is somewhat better for consumers.  On May 30 the White House released an initial analysis showing that when the health insurance exchanges open in January 2014, individual policy holders in many states will have more choices than they do currently.  This, coupled with the feature and price transparency promised by these electronic ‘marketplaces’, should create greater competition and resulting downward pressure on prices.

With competition reduced or just being introduced, most health sectors do not experience the natural downward pressure on prices that more rigorous competition would create. As a result, US personal health expenses have risen an average 5.6% more than general inflation annually during the past decade.

The buck stops…where?

Where does the ultimate market-based control of health costs lie? Theoretically the money trail ends with the payers — the government and private insurers.  This implies that they will act as the ‘guardians of value’ to keep provider costs down and quality up.

And to some extent insurers try to do this.  But too often they reach limits in negotiating with doctors and hospitals, especially ‘must-have’ ones without whom a given health plan is less saleable.

Consequently, private insurers have tended to pass along many provider cost increases in the form of higher plan premiums.  United Health, the largest private insurer, recently announced 2014 increases of 25-50% on small groups, and more than 100% on individuals.  State regulators have in some states negotiated these increases downward, and the US Department of Health and Human Services has said that it will review any annual increase in excess of 10%.  However such negotiations and reviews are largely non-binding.

That leaves the government itself, mostly Medicare for seniors (federal) and Medicaid for the needy (federal and state). Reimbursement rates here are the benchmarks against which private-plan costs are judged. These were cut by 2% in April as part of the federal budget ‘sequester’, and the trends are toward even lower payments.

Employers to the rescue

Since more than half the US population (170 million people) are covered under employer-sponsored health plans, employers represent perhaps the best non-government hope of slowing the upward cost spiral. Some have been making significant moves in this direction.  Recently the Catalyst for Payment Reform (CPR, get it?) was organized by a group of large employers to address this issue. Among other things, CPR publishes an annual scorecard as we begin to move toward value- or results- based payments (now at 11% of all health payments.)

Regrettably, employers have options other than fighting for lower health insurance premiums. Some of these involve shifting a growing portion of the financial burden back to their employees through higher deductibles, higher co-payments, and innovations like co-insurance (where the insured is responsible for a percentage of the cost, not just a fixed co-pay).  One large pension system (Calpers) has begun a program of paying fixed amounts for a given test or procedure, with employees responsible for the balance.

Trump card

One option open to employers is potentially even more disruptive of the status quo. While many employers remain committed in principle to offering health insurance to their employees, a key test of their commitment will come in 2014. That’s when businesses will begin to have the option of no longer offering insurance, and instead letting their employees buy individual policies on the new state exchanges.

Greater ‘consumer engagement’ in health care and how it’s paid for are here to stay, and consumer price resistance may in the end be the whip that drives costs lower. But this will be more difficult to achieve without a public policy that consistently fosters free, transparent competition as a foundation.

CHART:  TKA analysis from US Center for Medicare and Medicaid Services data

Addendum 7/31/13:  My biggest challenge in originally drafting this post was that with each iteration, new information had to be integrated.    I had no reason to think this would stop when I hit ‘publish’.  Yesterday the two largest US hospital systems Community Health Systems (CYH) and Health Management Associates (HMA) announced their intention to merge, creating the first US hospital chain with more than 200 hospitals.  As noted above, we expect this wave of consolidation to continue, and possibly accelerate.

Leave a Reply

Your email address will not be published. Required fields are marked *

Recent Comments

  • Tim Powell on A brief pause: “Thanks, Les. My frequent conversations with you over the past year or two has helped my thinking a lot in…Jan 15, 13:07
  • Les on A brief pause: “Excellent advice thank you for your terrific reflection piece Tim!Jan 15, 09:40
  • Glenroy London on Knowledge Erosion: How to Avoid It: “Hi Tim I am knoco caribbean. About to join the global km family. Exploring km frameworks for design, development, implementation,…Jul 12, 08:52
  • Tim Powell on War of the Words: “Glad to oblige TJ — and thanks for your note — but I do encourage to try it for yourself…Jun 23, 08:10
  • T J Elliott on War of the Words: ““Chat credited me with founding and/or leading 20 different companies and writing 13 books. In fact, I founded one company…Jun 22, 22:42