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Nancy Kane
Nancy Kane

The future of healthcare: Finance

In pursuit of value: Financial strategies need to include greater transparency on cost, quality


By Nancy Kane
Posted: July 25, 2011 - 12:01 am ET
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A comprehensive analysis of 2007-09 healthcare spending growth recently released by the Massachusetts Division of Health Care Finance and

Policy found that growth in spending by private payers was largely the result of increasing prices, while for public payers, spending growth was predominantly because of growth in per capita use of services.

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These results epitomize the natural outcome of successful provider financial strategies nationwide dating to the managed-care backlash of the mid-1990s. Providers (hospitals and physicians) have consolidated to gain market power, which they used to obtain major price concessions from private insurers. By 2003, roughly 90% of the population in larger metropolitan areas faced highly concentrated markets of two to three large health systems, down from six to 12 independent hospitals two decades ago.

Economists have estimated that hospital prices for privately insured patients have increased by as much as 50% more in highly consolidated markets than in highly competitive markets, with a mixed impact on quality. At the same time, providers have maximized revenue from administered pricing systems (especially Medicare) through excessive use of imaging, testing, specialty care, aggressive end-of-life interventions and other discretionary services. For instance, Medicare per capita spending for physician services increased by 60% from 2000 to 2009; increases in per capita service use accounted for almost 90% of that growth. It was no surprise that Congress inserted alternative payment systems opportunities into the Patient Protection and Affordability Act; as the Medicare Payment Advisory Commission and others have concluded, the fee-for-service system rewards volume over quality or value. Payment systems need to change toward more bundled and accountable units of service.

However, everyone recognizes that bundled payment alternatives will take a while to be fully implemented nationwide, because of the fragmented, uncoordinated nature of many local provider markets and the lack of provider expertise and infrastructure necessary to effectively manage care and financial risk. A recent analysis of provider payment methods in Massachusetts, for instance, showed that 95% of payments to physicians were still fee for service as late as 2009, despite the fact that three-quarters of physicians in the state report belonging to larger entities for purposes of contracting and potentially for risk-sharing, and more than half of private insurer payments are to seven very large, well-organized physician groups with the resources, if not always the will, to build an accountable infrastructure. Movement into integrated delivery systems has been slow, even in a state where reform has already been implemented.

A number of changes short of global budgets and fully functioning ACOs could do a lot to alter provider financial strategies and effective market functioning in the nearer term. These include significantly greater transparency of pricing and quality, combined with patient incentives to pay the “last dollar” rather than the “first dollar” for their provider choices; and greater investment into comparative effectiveness research coupled with patient shared decisionmaking tools and incentives to use them. Each of these initiatives can move the markets closer to informed and “value-based purchasing,” with or without a change in the basic payment method.

In terms of transparency, state and national studies of private-sector pricing for hospitals and physicians have found substantial price disparities across and within metropolitan statistical areas, with between two-fold and four-fold differences in payment rates nationally.

Such differences are not explained by patient characteristics or quality measures; however, differences in market leverage of providers and insurers does explain some of the variation. These differences have historically not been transparent to employers buying health coverage or to employees choosing providers; traditional benefit designs using copays and deductibles do not vary for higher-priced providers that cannot demonstrate superior quality of care.

An approach some insurers are taking is to design benefit structures that encourage patients to select higher-value providers, either at point of service (tiered products) or when selecting a specific insurance plan (tiered networks). These new insurance products are experiencing rapid enrollment as the limits of merely cost-shifting to employees has been reached for many employers.

Measuring effectiveness

Comparative effectiveness and patient-shared decisionmaking also promise to transform a historically dysfunctional healthcare market through better understanding of treatment alternatives and patient involvement. The CMS' Center for Innovation is expected to assist providers in developing and using decision-support tools that help patients make informed decisions about their medical options, and the Affordable Care Act is also authorized to develop these tools.

Comparative effectiveness research on the effectiveness of treatments should greatly expand the number of conditions for which evidence-based decision-support tools can be useful and appropriate. For conditions that already have evidence-based decision-support tools, various studies have shown that informed patients are much more likely to decide to not undergo a discretionary procedure, test or medication. The model has particular promise for end-of-life care decisions for which the Medicare program currently spends $55 billion in the last two months of life.

As these innovations inform and improve healthcare markets, providers still focused on high-cost, high-volume care without regard to evidence, outcome or affordability, will eventually lose market share to those focused on patient-centered, high-value care. While the more gradual shift from fee-for-service to increasingly bundled payment units will internalize value-oriented care, a much faster revolution that can take place even within the fee-for-service environment is rapidly approaching.

Nancy Kane is a professor of management at the Harvard School of Public Health.



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