Are Efforts to Reduce Health Care Costs Misplaced?

December 14, 2018

Dean Celia

If you asked Americans where Washington should concentrate its efforts to control health care spending, it is more than likely that most would want to see drug prices come down. This sentiment makes sense, given recent headlines about out-of-control drug price increases.

In a recent Kaiser Health Tracking Poll, more than half of respondents said that passing legislation to bring down the drug costs should be the top legislative priority. The Kaiser poll also reports that nearly three-quarters believe that pharmaceutical companies have too much influence in Washington. In contrast, only 36% of respondents believe the same can be said about hospitals and 30% about physician groups.

Hospital care comprises more than 30% of US health care expenditures and physician and clinical services follow with 20%. Meanwhile, prescription drugs account for 10% of US health care costs. This raises an important question about efforts to lower health care costs: are our priorities misplaced?

Among physicians, hospitals, and drug companies, pharmaceutical manufacturers garner the least public sympathy, explained Melissa Andel, vice president of health policy at Applied Policy in Washington, DC. “It is a high-profile issue for Americans, and it is the one area where there appears to be potential collaboration between democrats and the Trump administration.” 

David Marcus, director of employee benefits at the National Railway Labor Conference in Washington, DC noted, “The administration has already laid out framework for addressing drug costs, so I suspect the focus will remain there. Drug costs have the public eye. Provider cost increases are subtler and driven by a variety of factors.” 

Barney Spivack, MD, national medical director, Medicare case & condition management at OptumHealth, New York, agreed that the public is “clearly engaged” and succeeds at making its voice heard. “There is more likely to be bipartisan agreement because the public is aware that higher drug prices in the United States drive high out-of-pocket costs,” particularly as it relates to large price hikes for previously approved drugs. 

In fact, pharma’s complex business model appears to be experiencing a shift, another reason the focus is likely to stay on drug prices, noted Dr Art Shinn, PharmD, president, Managed Pharmacy Consultants, Palm City, FL. Dr Shinn referred to Express Scripts’ recent announcement that beginning in 2019 it will offer a new formulary that favors generics over brand-name medications. The option is free of rebates that drive the traditional pharmacy benefits manager (PBM) model. Dr Shinn said he expects other PBMs to follow suit.

While this new approach from PBMs may be a sign that they are adapting to new realities as Congress and the administration seem poised to work together on the issue of drug costs, Ms Andel warned, “Extreme focus on drug pricing is problematic, because even dramatic declines may not result in drastically lower overall [health care] costs.”

Addressing Provider-Driven Costs

At the same time, the consensus among experts is that little, if anything, will be done at the national level to address rising costs related to hospital and physician/clinical services. Logic would seem to dictate that hospital and provider costs move to the head of the line, regardless of public sentiment, but according to our experts, that is not likely to happen for several reasons. 

For one, physicians and provider services are highly valued. “It costs a lot of money to educate physicians,” offered Ms Andel. “They have high status in the American social hierarchy, which means they command high salaries, [which makes] reducing physician payments difficult.” Norm Smith, a principle payer market research consultant in Philadelphia added, “All of these providers have high value services or products; they deserve to get paid.”

Physicians are also viewed as being on the side of their patients. “They have face-to-face interactions with patients, and if they complain about payments or new rules, patients take their side,” explained Ms Andel. For this reason, Ms Andel went on to say that no one “wants to be the person to take on physician payments.” In contrast, she said, hospitals and drug manufacturers are faceless entities and are easier to blame.

Payers say hospitals have grown too large and cite multiple studies proving that consolidation leads to higher costs. To counter, the hospital industry says that mergers produce operational efficiencies, improve quality, and expand services, basing these claims on an industry-funded study. 

Gary Owens, MD, president of Gary Owens Associates in Ocean View, DE said taking on hospital growth and consolidation is a two-sided coin. “Hospital systems are among the largest employers in some areas, and congressional representatives recognize that.” Ms Andel put it this way: “We need to be aware that reducing spending on hospital and physician services will also likely mean that jobs will be lost.” Thus, elected officials need to tip-toe through this mine field of reducing costs without costing jobs, which is more challenging than launching an all-out assault on pharmaceutical companies.

When it comes down to it, there is a high level of consumer demand for health care services. “Americans have made it abundantly clear that they like to spend money on health care,” said Ms Andel. “They complain about costs, but as the GOP has discovered, if you threaten to take [access to health care services] away, they get very angry. They don’t like health plans or the government telling them what they should or shouldn’t have access to.”

Continued partisanship in Washington continues to be a barrier as well. In the current environment, having a meaningful dialogue about the complexities of hospital and physician spending is unlikely. Even if Washington tries to step in, history shows it’s difficult to make a dent, said Dr Owens. “[Centers for Medicare & Medicaid Services] is able to control the amount it pays to hospitals and physicians, yet costs continue to rise even in that sector. The incentives continue to be misaligned. ‘Do more and get paid more’ is still the major mode of operation, despite attempts at alternative reimbursement systems.”

Potential Solutions

It is clear that efforts to address escalating provider-driven costs to the health care system could have an impact on overall spending. Experts are ready with several ideas of what these efforts could look like. 

“Congress and/or the administration could push CMS to overhaul some payment policies,” said Ms Andel. She pointed to the CMS recent reinstatement of bundled payment demonstrations that were discontinued early in the Trump administration.  In October 2018, CMS announced 1299 entities have signed agreements to participate in the model. CMS site states: The participating entities will receive bundled payments for certain episodes of care as an alternative to fee-for-service payments that reward only the volume of care delivered.  

“As Medicare Advantage enrollment continues to grow, it will be interesting to see what influence these plans [can] assert on hospitals,” said Ms Andel.

Mr Smith said he would encourage the formation of more integrated delivery networks. “Combining the insurer and provider roles may be the answer, rather than trying to stimulate competition. Competition is overrated when it comes to purchasing health care.” The idea of merging insurer and provider roles has long  been a topic of conversation and is not uncommon. 

One of the most signifcant, current mergers is that of CVS and Aetna, which finally closed November 30. A partnership of this scale has the capability to use its size to advance technologically and innovate the relationship between providers and payers. CVS Health said that this merger will build value with “development of products and services that provide the opportunity to generate significant new growth opportunities aimed at reducing medical costs, growing membership, and enhancing revenues.”

Dr Spivak noted that “the Trump administration has a stated goal of increasing hospital competition and decreasing the hospital/health system dominance that exists in many markets.” 

In a report released in early 2018, the administration blamed the Affordable Care Act (ACA) and stated a need to unwind certain regulations that it believes stifle competition. The administration
continues to unravel the ACA and make adjustments to the requirements of insurance markets. Many of these rollbacks could mean more expensive,
 difficult-to-aqcuire coverage for those that need it.

F Randy Vogenberg, PhD, RPh, principal of the Institute for Integrated Healthcare in Greenville, SC, offers a counter point and sees value in such rollbacks. “Government rarely is a solution.
Allowing the market to change, adjust, or evolve has proven to be faster and fairer to all concerned given the large diverse US market.” Dr Vogenberg has a point that competition can often lead to better pricing options. 

Mr Marcus suggested that large employers and group health plans might be able to exert pressure to lower costs. “In areas with multiple payers, large plans can demand better pricing from their current payer or simply move to a payer with a better pricing arrangement. Large plans can also move toward a narrow network design, which could include parameters that exclude providers with less favorable pricing arrangements.” He added, however, that contractual restrictions can prevent such plan designs. 

Indeed, even employer behemoths such as Walmart and Home Depot have been thwarted in efforts to address the issue. Walmart wanted to remove from its network the bottom 5% of providers in quality score rankings. Home Depot sought to create a more limited network of physicians and hospitals who offered the lowest cost for services and highest quality care. In both instances, payers said no, citing restrictive contracts with hospitals and providers. 

Dr Owens is not surprised that these giant employers had to bow to the system. “The fact is many large hospital systems have either an actual or a reputational monopoly in many communities. If they won’t negotiate with a regional plan with a 70% market share in the region why do they need to negotiate even with a large employer who has much less of a presence in any region?”

Other Sources of Increasing Costs

Meanwhile, there are other players within the health care system making their own contributions
to rising health care costs due to many factors.

“I don’t think it is fair to blame either side more than the other,” said Dr Owens. “Hospitals have become 800-pound gorillas, [but most] insurers are in the business to be profitable. They have incentives to make margins on health care
spending. The system is fragmented, and everyone is out to make money.”

Ms Andel said she agreed and that patients are also to blame. “It seems as if there is something of an arms race where hospitals are competing against one another to build new wings, offer the newest, most expensive technology and services, and provide conveniences like those you may see in luxury hotels. They are doing that in part because patients are demanding it.”

Dr Vogenberg added, “Both hospitals and payers are facing market driven role changes due to unsustainable cost trends for care—payers for lack of effective management and hospitals for lack of efficiencies that reduce costs of care post consolidation.”

Mr Marcus reminded us of one of the reasons hospitals moved to consolidate—insurance company mergers. “You cannot blame hospitals for consolidating. It enables them to negotiate more favorable terms with large payers.” They have taken full advantage of that leverage, making it next-to-impossible for insurers to limit anticompetitive contractual provisions. 

In light of this, Ms Andel said she wondered if payment disputes might someday be settled by an arbitration system. “Other than that, I am not really sure how the government can, or should, intervene in the market. Congress doesn’t have jurisdiction over intra-state commerce.”

Predicting the Next Move

Dr Shinn said it might be instructive to look at the moves PBMs are making today to predict what hospital systems might need to do in several years. “There needs to be a new business model before there are any substantial improvements in hospital costs.” Citing the recent move by Express Scripts, he asked, “What if one of the big hospital systems came out with an alternative pricing program option of its own?”

Why would the hospital industry consider such a thing, considering the leverage it now enjoys? The same was being asked about PBMs offering rebate-free programs several years back, said Dr Shinn. “Keep in mind that PBMs have been working their new model for years,” explained Dr Shinn. “They’ve known that sooner or later the current one would not be acceptable,
and they needed to come up with an alternative option.”  

The focus on pharmaceutical pricing will eventually shift toward a look at overall costs, he added. “At that point, it’s possible one of the hospital systems will take the lead the way Express Scripts recently did. In fact, they may already be working on it.”