1. Provider Monopolies: Choking Off our Ability to Improve the Competitiveness of the Health Care Sector Robert Murray March 1, 2013 The American Enterprise Institute RMurray@GlobalHealthPayment.Com 1

2. Topics to Cover Catalyst for Payment Reform – Background Framing the Problem Evidence finally catching up with reality – we have a significant Provider-based Monopoly Problem in our Health Sector Recent trends mask underlying implications of consolidation and the Accountable Care Act will exacerbate the Problem Profound economic and social implications for Americans Current tools to improve the Competitiveness of the Health Care Market are being Choked off by Dominant Providers A case of “Dumb and Dumber” Possible Approaches 2

3. Paper Commissioned by Catalyst for Payment Reform (CPR) CPR formed in 2009 Independent non-profit led by health care purchasers Identifying & coordinating workable solutions to improve how we pay for health care Mission to accelerate reforms to promote the IOM’s 6 aims Creating a national framework for payment reform along with tools that catalyze change & align public/private strategies 3 http://www.catalyzepaymentreform.org/uploads/Market_Power_Paper.pdf Co-Author Suzanne Delbanco:

4. Framing the Problem Per capita health care spending has been twice that of most other industrialized countries; 18% of GDP; unsustainable growth, yada yada Early 2000s – growing realization that Unit Prices were a major factor differentiating the U.S. from other OECD countries Trend in Health Care charges and pricing correlated with business strategies of hospitals and health systems to consolidat e Increasing use of local and regional market power by providers to extract larger prices increases from private insurer Exacerbated by employers distaste for narrow provider networks 4 Health Affairs Journal May/June 2003 Post Managed Care Era

5. Source: American Hospital Association statistics 1980 - 2009 5 Hospitals nationally mark up their charges 200% above cost In 2009 Seen Evidence of this for a while: Hospitals Charge Master Mark-ups

6. It’s the Prices! 6 What Accounts for the Difference between U.S. and German Spending on Health Care Offset each other McKinsey Global Institute: Decomposition of spending Germany vs. U.S. (taken from Reinhardt U.E. 2012. Journal of Economics) Our Unit Prices are Much Higher!

7. And it is Getting Worse 7 Growth in Prices Paid by Private Payer for Hospital Inpatient Care vs. Growth in the Hospital Market Basket Index 1992-2010 Sommers AC, White, Ginsburg PB. Addressing hospital pricing leverage through regulation: state rate setting. NIHCR Policy Analysis No. 9, 2012.

8. Consolidation Trends 1990 - 2006 8 Consolidation Trends: change in HHIs 1990 vs. 2006. Taken from Gaynor M. 2011. Testimony before House Subcommittee on Health.

9. Trends in Charges and Pricing Coincide with Dramatic increases in Provider Concentration (based on HHIs) 9 Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)

10. Industry Highly Concentrated in 2009 10 Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)

11. And Yet, Health Care Costs are Finally Under Control! (really?) “Growth in U.S. health spending remains slow in 2010 at 3.9%” US health spending growth in 2009 - 2011 were the lowest in the 51-year history of tracking National Health Expenditures “the tectonic plates underlying the health system are beginning to shift in anticipation of new incentives under health reform” The Wall Street Journal: The Myth of Runaway Health Spending 11 Centers for Medicare and Medicaid Services, January 9, 2012 Karen Davis, Commonwealth Fund, January 18, 2012 J.D. Klein, American Enterprise Institute, February 17, 2012 “ The moderation has been driven by cumulative improvements in medical care and by insurers, and by marketplace disciplines on the demand for medical care. Consumers are finally getting more involved in managing and paying for their own care.”

12. Need a Longer-Term Perspective on Health Costs National Health Expenditures (NHE) = GDP +2% “excess cost growth” Trend line for NHE appears to be declining We haven’t reduced “Excess cost growth” and prices are primary driver 12 Source: CMS Office of the Actuary 2012 & U. Reinhardt Economix Blog - The New York Times Excess Cost Growth still Appears to be 1.5 to 2.5% But so is GDP Trend line

13. Sad History of Health Reform in One Chart Tempting to view more recent favorable trends as a sign we’ve “broken the back of the health care cost monster” But we’ve seen this dynamic before “no approach our nation has tried to control costs has had a lasting impact” – Drew Altman Current efforts to control costs – largely voluntary 13 Or Too soon to break out the Champagne and celebrate? 1965 enactment Medicare/Medicaid Wage/Price Controls “Voluntary” Effort vs. Carter All-Payer Proposal Medicare IPPS Managed Care Broken The Back Of the Health Care Inflation Monster?

14. Facing up to Reality – We have a Significant Monopoly Problem in our Health Care Sector Evidence finally catching up with reality – we have a significant Provider-based Monopoly Problem in our Health Sector: The changing effects of competition on nonprofit and for-profit hospital pricing behavior (Melnick 1999) It’s the prices stupid (Anderson 2003) How has hospital consolidation affected the price and quality of hospital care? (Vogt and Town 2006) Accounting for the cost of Health Care in the U.S. (McKinsey 2007) High and rising health care costs: demystifying U.S. Health Care Spending (Ginsburg 2008) The effects of multi-hospital systems on hospital prices (Melnick 2010) Wide variation in hospital and physician payment rates evidence of provider market power (Ginsburg 2010 – CPR) Massachusetts AG reports on provider pricing (2010, 2011) More evidence of of the association between hospital market concentration and higher prices and profits (Robinson 2011) The Provider Monopoly Problem in Health Care (Havighurst & Richman 2011) Growing power of providers to win steep payment increases from insurers suggests policy remedies may be needed (Berenson 2012) Overcoming the pricing power of hospitals (Kocher 2012) Bitter Pill: Why medical bills are killing us (Time Magazine, Brill 2013) 14

15. Despite Slowing of Health Care Cost Growth – Prices are still Primary Drivers 15 Massachusetts Spending Growth by Cost- Driver Category (2007-2008 and 2008-2009) Factors Accounting for Growth in Personal Health Care Spending, 1980- 2009 Martin A, Lassman D, Whittle L, Catlin A. Recession contributes to slowest annual rate of increase in health spending in five decades. Health Aff (Milbank) 2011;30(1): 11- 22. Schoenman, J.A., N. Chockley. 2012. Understanding U.S. Health Care Spending. National Institute for Health Care Management (NICHM) Webinar. February 2, 2012. Available from: Their analysis showed that “prices accounted for more than 60% of the increase in overall spending in 2010” “prices to explain nearly all of the increase in expenditures”

16. Consolidation Drives Higher Prices and Distorted Pricing Importance of the Pricing Mechanism in Competitive Markets Means by which millions of decisions made each day between consumers and producers to determine the proper allocation of resources Serves an important “signaling” function to express preferences Invisible hand by which markets remain dynamic and efficient By contrast prices in the US Health Care Market characterized as a “Byzantine mélange of different bases & different payment rates” Substantial recent evidence of this from CA, NJ, NH, and MA & Time Magazine article discusses the “madness of MD Anderson” Private payers pay on the basis of these distorted Charge Masters Fragmented pricing system with no relationship to cost, sends the wrong signals, does not encourage efficient/effective outcomes Not consistent with what one would view as a competitive result 16

17. Hospitals Pursuing other Tactics to Lock Up the Market Also – more subtle factors that are firmly “tilting” the advantage in negotiations toward providers (Berenson/Ginsburg 2012) “ Must have” Hospitals/Specialized Services Geographic Isolation Ability to negotiate one contract for constituent facilities across a broad area “Most Favored Nation” clauses (Michigan Blue Cross) Private payers acquiescing - wishing only to be “just better than their competing health plans” but passing on double digit increases ACA may be providing increased “cover” for further integration (both horizontal and vertical) “Consumer Risks Feared as Health Law Spurs Mergers” New York Times 2010 “Rising hospital employment of physicians: better quality, higher cost?” (Urban Institute 2011) 17

18. Merger Activity appears to be Ticking Up 18

19. Hospitals Buying up Physician Practices 19 Taken from Gaynor, Statement before the Committee on Ways and Means, Health Subcommittee. Washington DC. September 9, 2011. “Hospitals are trying to wrap themselves in a physician employment blanket, but the cost per square inch of that blanket is very high. This is an effort to lock up the game before it even starts (i.e., preclude PCMH and other market-based approaches, incentivize docs based on billings and increase negotiating leverage with payers” Anonymous CEO Major Hospital System

20. Massive Engine for Reallocating Income Health Care Market is Uncompetitive Fragmented Payer Sector and Provider Concentration creates a fundamental power imbalance between buyers and sellers We’ve created a “massive engine for the redistribution of resources from households, tax payers and employers to the organizations who provide care” (Vladeck/Rice 2009) 20 $ $ $ $ $ $ $ $ $ $ $ Reinhardt, U. 2012. Divide Et Impera: Protecting the Growth of Health Care Incomes (costs). Health Economics. 21:41-54

21. Implications for the Health Sector Substantial evidence consolidation drives up health care expenditures (numerous studies) Little evidence that consolidation results in improved provider efficiency (lower costs) Evidence that consolidation is either neutral or negative in terms of health quality Little evidence that current consolidation is resulting in improved clinical integration Consolidation is not for better care management it is to enhance Market Power under a predominant FFS system 21 Prevailing Literature supports these conclusions:

22. Implications for Wage Earners Employers believe they foot the bill for nearly 60% of individuals enrolled in employer sponsored insurance plans (21% of spending) Tax deductibility of health insurance and other factors hide the fact that employees and consumers foot the bill for increased spending on health care – through near zero real wage growth, layoffs and increases in product prices Providers counter that “the Health Sector has been an engine of economic growth” in recent years Recent RAND study quantifies increase in “excess health spending” results in job losses (121,00 for every 0.1% above GDP growth) From these data, calculated that for every job we add to the health sector, we sacrifice 0.85 jobs in the rest of the economy At best a “wildly inefficient jobs program” (Baicker & Chandra NEJM) 22

23. Implications for the Economy Spending 18%+ of GDP crowds out needed investment in infrastructure, education and defense (hospital spending > defense spending now) “We don’t have an overall spending problem in the U.S. We have a humongous health spending problem” (Blinder, Wall Street Journal 2011) “This collision [between increased spending and inability to raise taxes] cannot be avoided by borrowing. Debt to GDP ratios of 80-90% raise the risk of a viscous downward cycle” (Newhouse 2010) U.S. currently at 70-75% Debt to GDP Dollar as Reserve currency and other factors – U.S. can likely have Debt to GDP ratio far in excess of these levels (we are on track to go much higher) Real concern is we have no more “economic space” to weather another financial crisis (and we’ve had two in the past 12 years) Health care spending will be a significant drag on long-term economic growth 23

24. Two-Tiered Health Care System? Real danger that current and planned Government spending cuts may precipitate further consolidation and higher prices to the private sector May lead to a diminishment of access and increasing lack of affordability of private insurance Will the <65 middle class increasingly be left out of the system? 24 Source: American Hospital Association Chart Book 2011 Middle Class ? Payments as a Percentage of Hospital Cost

25. Public-Private Divide (could this happen)? 25 Is it plausible that Medicare payments to hospitals can dip down to half those of private health insurers by 2035 without creating enormous problems for hospitals and the patients they serve? (CBO estimates 2012 – Incidental Economist blog, Austin Frakt)

26. Study looked at Three Categories of Potential Solutions 26 Market-Based Approaches Coordinated Public-Private Approaches Regulatory Approaches

27. Study looked at Three Categories of Potential Solutions 27 Market-Based Regulatory/Policy Coordinated Public/Private Improve the accuracy of the Medicare Physician Fee Schedule Modify Medicare IPPS and OPPS (Volume adjustments) State Department of Insurance efforts to oversee payer- provider contracting Baseball-style arbitration Establish limits on price- gouging: “Maximum Price Obligations” for insurers Health Insurance Exchanges pursuit of Active Purchasing Strategies All Payer Rate Setting Eliminate Preferential Tax treatment of health benefits Improve the accuracy of the Medicare Physician Fee Schedule Modify Medicare IPPS and OPPS (Volume adjustments) State Department of Insurance efforts to oversee payer- provider contracting Baseball-style arbitration Establish limits on price- gouging: “Maximum Price Obligations” for insurers Health Insurance Exchanges pursuit of Active Purchasing Strategies All Payer Rate Setting Eliminate Preferential Tax treatment of health benefits Promote Consumer- Directed Health Plans Utilize value-based insurance design Implement Reference and Value Pricing Establish Tiered, Narrow and high performance Networks Utilize Centers of Excellence Provide Oversight over ACOs Reconsider benefits of Manage Care and Managed Competition Concept Encourage entry of Low-cost Competitors Promote new technologies that enhance competition Promote Consumer- Directed Health Plans Utilize value-based insurance design Implement Reference and Value Pricing Establish Tiered, Narrow and high performance Networks Utilize Centers of Excellence Provide Oversight over ACOs Reconsider benefits of Manage Care and Managed Competition Concept Encourage entry of Low-cost Competitors Promote new technologies that enhance competition Expand Transparency Develop state or national All- payer claims data bases More vigorous Anti-Trust (post merger) activity Align public and private payment strategies and purchasing power Promote development of more effective payment structures (Global Budget based mechanisms) Increased investment in Primary Care and Primary Care Work force Incentivize Primary Care Physicians to be sensitive to Hospital Prices (PCHM) Expand Transparency Develop state or national All- payer claims data bases More vigorous Anti-Trust (post merger) activity Align public and private payment strategies and purchasing power Promote development of more effective payment structures (Global Budget based mechanisms) Increased investment in Primary Care and Primary Care Work force Incentivize Primary Care Physicians to be sensitive to Hospital Prices (PCHM)

28. Market Failures & Monopoly Power Choke off many of these Alternatives 28 Market-Based Regulatory/Policy Coordinated Public/Private Improve the accuracy of the Medicare Physician Fee Schedule Modify Medicare IPPS and OPPS (Volume adjustments) State Department of Insurance efforts to oversee payer- provider contracting Baseball-style arbitration Establish limits on price- gouging: “Maximum Price Obligations” for insurers Health Insurance Exchanges pursuit of Active Purchasing Strategies All-payer Rate Setting Eliminate Preferential Tax treatment of health benefits Improve the accuracy of the Medicare Physician Fee Schedule Modify Medicare IPPS and OPPS (Volume adjustments) State Department of Insurance efforts to oversee payer- provider contracting Baseball-style arbitration Establish limits on price- gouging: “Maximum Price Obligations” for insurers Health Insurance Exchanges pursuit of Active Purchasing Strategies All-payer Rate Setting Eliminate Preferential Tax treatment of health benefits Promote Consumer- Directed Health Plans Utilize value-based insurance design Implement Reference and Value Pricing Establish Tiered, Narrow and high performance Networks Utilize Centers of Excellence Provide Oversight over ACOs Reconsider benefits of Manage Care and Managed Competition Concept Encourage entry of Low-cost Competitors Promote new technologies that enhance competition Promote Consumer- Directed Health Plans Utilize value-based insurance design Implement Reference and Value Pricing Establish Tiered, Narrow and high performance Networks Utilize Centers of Excellence Provide Oversight over ACOs Reconsider benefits of Manage Care and Managed Competition Concept Encourage entry of Low-cost Competitors Promote new technologies that enhance competition Expand Transparency Develop state or national All- payer claims data bases More vigorous Anti-Trust (post merger) activity Align public and private payment strategies and purchasing power Promote development of more effective payment structures (Global Budget based mechanisms) Increased investment in Primary Care and Primary Care Work force Incentivize Primary Care Physicians to be sensitive to Hospital Prices (PCHM) Expand Transparency Develop state or national All- payer claims data bases More vigorous Anti-Trust (post merger) activity Align public and private payment strategies and purchasing power Promote development of more effective payment structures (Global Budget based mechanisms) Increased investment in Primary Care and Primary Care Work force Incentivize Primary Care Physicians to be sensitive to Hospital Prices (PCHM) Clear Limits to Cost-Shift to Consumers & do we think patients can be powerful shoppers? Going “Direct” is positive (COE) But very small impact Dominant Providers have been Successful in Choking off many of These efforts: Preferred Networks, Efforts by payers to steer patients (Just look at the Boston Market) Expanded Transparency may help But patients need more than just Posted prices. We need legitimate comparisons/rankings and assistance from physicians in making informed decisions ACOs are largely hospital-driven And don’t prescribe an effective Non-FFS internal financing system Low Cost competitors like “Steward” in New England a positive development – but most just “Shadow price” the big boys Anti-trust laws are not vigorous enough – and the “cows are all out of the barn.” Impossible to do retro-cases New Technology Development Holds some promise but very slow To develop (reg. barriers) All-Payer rate setting at the state level is to complex and subject to Regulatory Capture

29. Primary Focus should be on Pushing Back on Existing Market Power, Rationalizing Public Payment Strategies and Empowering Physicians 29 Market-Based Regulatory/Policy Coordinated Public/Private Improve the accuracy of the Medicare Physician Fee Schedule Modify Medicare IPPS and OPPS (Volume adjustments) State Department of Insurance efforts to oversee payer- provider contracting Baseball-style arbitration Establish limits on price- gouging: “Maximum Price Obligations” for insurers Health Insurance Exchanges pursuit of Active Purchasing Strategies All Payer Rate Setting Eliminate Preferential Tax treatment of health benefits Improve the accuracy of the Medicare Physician Fee Schedule Modify Medicare IPPS and OPPS (Volume adjustments) State Department of Insurance efforts to oversee payer- provider contracting Baseball-style arbitration Establish limits on price- gouging: “Maximum Price Obligations” for insurers Health Insurance Exchanges pursuit of Active Purchasing Strategies All Payer Rate Setting Eliminate Preferential Tax treatment of health benefits Promote Consumer- Directed Health Plans Utilize value-based insurance design Implement Reference and Value Pricing Establish Tiered, Narrow and high performance Networks Utilize Centers of Excellence Provide Oversight over ACOs Reconsider benefits of Manage Care and Managed Competition Concept Encourage entry of Low-cost Competitors Promote new technologies that enhance competition Promote Consumer- Directed Health Plans Utilize value-based insurance design Implement Reference and Value Pricing Establish Tiered, Narrow and high performance Networks Utilize Centers of Excellence Provide Oversight over ACOs Reconsider benefits of Manage Care and Managed Competition Concept Encourage entry of Low-cost Competitors Promote new technologies that enhance competition Expand Transparency Develop state or national All- payer claims data bases More vigorous Anti-Trust (post merger) activity Align public and private payment strategies and purchasing power Promote development of more effective payment structures (Global Budget based mechanisms) Increased investment in Primary Care and Primary Care Work force Incentivize Primary Care Physicians to be sensitive to Hospital Prices (PCHM) Expand Transparency Develop state or national All- payer claims data bases More vigorous Anti-Trust (post merger) activity Align public and private payment strategies and purchasing power Promote development of more effective payment structures (Global Budget based mechanisms) Increased investment in Primary Care and Primary Care Work force Incentivize Primary Care Physicians to be sensitive to Hospital Prices (PCHM) 1) Establish limits on Price- Gouging: “Maximum Price Obligations for Insurers and Self-responsible patients 2) Rationalize RBRVS, Modify IPPS/OPPS (adopt a volume adjustment mechanism) to shut down providers’ incentive to do unnecessary services 3) Public/Private efforts to incentivize physicians (PCPs) to be more sensitive to hospital/specialist prices and relative efficiency 5) Then other Market- Based activities will have More of a chance to succeed 4) Increase investments Substantially – in Primary Care (workforce/support)

30. Maximum Price Obligation Concept Some strong evidence from MedPAC that Medicare Advantage plans pay substantially lower rates to dominant providers Fallback Theory: Medicare paid fee schedule if they can’t negotiate This substantially reduces provider leverage in the negotiation process One alternative is to focus on areas where Hospitals have complete monopoly power (Emergency Services) MPO for ER services 125-150% of Medicare would apply to all Consistent with “Implied Contract” concept discussed by Richman/Hall in NEJM 2012 Uninsured & out-of-network patients completely price gouged; payers completely emasculated if 15-20% of patients to through ER 30

31. Maximum Price Obligation Concept (continued) In an ideal world, MPO concept should be applied to everyone (both privately insured and self-responsible patients) for all hospital services National legislation – not possible at the State level (political capture) Leading States have been ineffective at cost control (Massachusetts, Maryland and others) Dominant providers have significant political sway and are able to hold off meaningful legislation and/or enter into arrangements (Like ACOs) that buy them several years In the mean time – consolidation continues and as the economy improves health care costs will rise once again in dramatic fashion 31

32. “Former Centers for Medicare and Medicaid Services (CMS) administrator Tom Scully described Medicare as a “dumb price fixer.” Perhaps so. Yet, one would be hard put, to defend the current bizarre private-sector price system that produces data such as those shown in the tables as any less dumb. “Dumber might be the more appropriate word” At least Medicare gets the “relatives” closer to being right and Medicare payment levels do approximate the cost of efficient and effective hospital care (Stensland et. al. Health Affairs 2009) Over the short-term: My suggestion - Empower the Private sector by establishing a series of Max price ceilings to level the playing field in negotiations Empower PCPs (align their incentives with patients and payers) Rationalize and align Public payer payment methodologies (RVRBS/Volume adjustments for IPPS/OPPS) Then strongly pursue activities designed to make the market more competitive 32 Uwe Reinhardt: Health Affairs blog. “A modest proposal” September 2009 Government as a “Dumb Price Fixer”

33. 33 Discussion/Questions? Thanks!

34. National Summit on Provider Market Power June 11, 2013 Washington, DC Catalyst for Payment Reform invites you to attend our National Summit on Provider Market Power on June 11, 2013 in Washington, DC. Sponsored by Health Affairs, this day-long event will provide the opportunity to delve into the double-edged issue of provider consolidation with the nation’s top experts.National Summit on Provider Market Power on June 11, 2013 in Washington, DC. Sponsored by Health Affairs, this day-long event will provide the opportunity to delve into the double-edged issue of provider consolidation with the nation’s top experts. Speakers include HCCI's Marty Gaynor, The Urban Institute's Bob Berenson, MEDPAC's Mark Miller, representatives from the FTC and DOJ, leaders from prominent provider systems, key employers like Wal-Mart Stores, Inc and GE, and Thomas O'Brien, Massachusetts' Assistant Attorney General. Topics include: * Consolidation trends * Impact on cost and quality * How health care providers are thinking * Market-based approaches to enhancing provider competition * The role of price transparency * The employer’s perspective * Public policy and regulatory responses * Creating a utility to monitor impact * Balancing care fragmentation with too big to fail 34