It’s the use rate and prices, stupid – take 2

Since the “it’s the prices” discussion continues to pop up in the news media, we thought we’d take a moment and do a quick follow up to our recent blog: It’s the use rate and prices, stupid!

There are several simultaneous equations going on in our complex healthcare system. One set of which corresponds to the two dominant FFS payment models – Government and Private. The two are often conflated together as though they are one, when in fact, they fluctuate in opposite directions. What do we mean by that? For example: Total spending (TS) is a function of line item prices (for services, pharmaceuticals, devices, etc.) and volume of those items.

So, TS = Price x Utilization.

Here is how this equation plays out for Medicare vs Private insurance:

  • Medicare FFS has spent 30+ years setting prices with limited attention to volume. And because Medicare prices for physician time have gotten so low, physicians tend to order more tests to make sure that a symptom or ailment is not missed. So, therein lies the opportunity for utilization to compensate for low price. Thus, for Medicare TS = lower prices x higher utilization.
  • In contrast, on the price side, private payers must negotiate with providers, BUT they can do a better job at managing utilization (and in fact, a follow up study on the privately insured population of McAllen and El Paso showed exactly that). So, their equation might initially seem to look like this: TS = higher prices based on negotiations with providers x ability to manage utilization (managed care). However, even though some economist and politicians who believe in magic would spin circles in their desk chairs to hear this, price/cost shifting has been going on for years, as highlighted in a recent presentation by the Maryland Health Services Cost Review Commission (see slide 7). In fact, if providers had not been quietly shifting costs, regular Medicare would have likely died years ago. Thus the equation for private insurers (including employers) looks like this: TS = (negotiated prices + cost shifting)  x ability to manage utilization (managed care).

So, the pricing parameter is either set by government or determined by negotiation. The utilization side is determined by the clinical practice and the degree of oversight exerted by the payor. None of this should be new to anyone, but it is amazing how often people simply say it is all the prices. That statement might be partially true for commercial insurance and for employers, but is not true for government price-controlled programs.

The fundamental problem, however, continues to this day. Namely, all parties resist directly linking payments to value. And further resist setting the payment amount based on real costs of care obtained by the highest value providers (those who get the best results at the lowest costs). Fortunately, we are starting to see a slow movement in the right direction with bundles, capitation, Medicare/Medicaid Advantage and provider owned health plans. Without a clear vision and leadership drive for a high value healthcare system, the rest is nothing but smoke and mirrors.