Small Changes Can Have Drastic Impacts in Health Care

The U.S. health sector is a huge, sprawling, complicated network of providers, payors and policies that can seem hopelessly complex and stubbornly resistant to change. And while that is true in some respects, it is not to say that improving the system would be impossible. In fact, the U.S. health care sector is so mammoth, that even seemingly incremental fixes can have major impacts.

Carnegie Mellon University economist Martin Gaynor has identified some of those fixes.

“There are some very simple, straightforward things we can do that can really make a difference,” said Gaynor, the E. J. Barone University Professor Of Economics And Public Policy in the Heinz College of Information Systems and Public Policy.

On July 15, Professor Gaynor will be part of an expert panel on health care at Heinz College, moderated by Margot Sanger-Katz of The New York Times. Other panelists include Katherine Baicker from the University of Chicago, Zack Cooper from Yale University, and Shelley White-Means from the University of Tennessee. The panelists will discuss several major issues facing the American health system and propose solutions.

Gaynor has extensively studied competition and consolidation in the U.S. health care market, a growing problem nationwide. He has testified before Congress that in markets where there is greater consolidation and less competition (many places in the U.S. only have one or two large health systems that dominate the local market), prices tend to increase substantially, without any improvements in quality (and in some cases reductions in quality).

WATCH: Professor Gaynor recently testified before the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights.

Gaynor remarks that health care consolidation has accelerated in recent years, negatively affecting consumers. Consolidation between close competitors causes prices — and health care spending — to go up. When that happens, the premiums that insurers charge to employers also go up, and workers end up footing the bill, either through reduced wages, paying a higher share of premiums, reductions in insurance coverage or in some cases all three.

One solution he proposes is a relatively minor change to the way Medicare pays for physician services — something known as “site-specific billing.” Medicare pays physicians a certain rate for seeing patients in their practice. However, if that practice is owned by a hospital, the same fee gets paid to the physician, but Medicare also pays a “facility fee” to the hospital, which can double the cost for the same service.

“That can be very profitable. Site-specific billing is a major factor leading hospitals to acquire physician practices in recent years,” Gaynor said. “It’s a big contributor to market consolidation in health care, which drives up costs. Fixing it would just be a matter of removing this artifact in how Medicare pays.”

Gaynor also refers to a policy called the “340b program,” which subsidizes hospitals for physicians’ drug purchases, as a contributor to this problem.

“Even the most careful planning can have unintended consequences. Now that we know these problems exist, and how to fix them, they can be fixed,” Gaynor said.

Along with his colleague Zack Cooper from Yale University, Gaynor put forth several policy recommendations, which he recently shared with regulators and members of Congress. These policies, which Cooper and Gaynor estimate could amount to 2 percent of private health spending when taken together, include:

  1. Increasing funding for antitrust enforcement agencies: Gaynor notes that federal antitrust agencies, such as the Antitrust Division of the Department of Justice and the Federal Trade Commission, are under-resourced, and their level of funding has not kept pace with mergers.
  2. Amending the Federal Trade Commission Act to allow the FTC to take enforcement action against anticompetitive conduct by not-for-profits: Gaynor points out that the majority of hospitals in the United States are nonprofit firms, which prevents the FTC from taking action against anticompetitive practices that harm consumers.
  3. Introducing site-neutral billing in Medicare: As mentioned above, Medicare’s “site-specific” payment policies have inadvertently led hospitals to acquire physician practices, leading to an increase in vertical integration and less competition in local markets.
  4. Amending the 340b program so dollars follow the patients: Gaynor suggests that by having such a subsidy follow individual patients, rather than the purchaser or prescriber of the drug, it would further blunt the incentive for hospitals to acquire independent physician practices.
  5. Having states examine laws and regulations that unintentionally reduce or thwart competition: States have a number of laws, including licensing, certificate of need, scope of practice and certificates of public advantage, that, while well intended, act to thwart new competitors and harm competition. These laws and regulations should be reexamined and narrowly tailored to achieve their goals of protecting the public while not harming competition. 
  6. Strengthening existing antitrust enforcement laws: Gaynor said he believes lawmakers should enact legislation that strengthens existing antitrust laws. He says that current standards place too high a burden on plaintiffs, like DOJ and FTC, which can cause these agencies not to bring some antitrust cases at all. 
  7. Reporting requirements for small mergers and acquisitions: Gaynor suggests that all mergers should have reporting requirements, but presently deals under $50 million do not have reporting requirements. This causes many of the aforementioned acquisitions of physician practices to go unreported, which is problematic for antitrust monitoring and enforcement.
  8. Having the FTC and DOJ issue revised guidelines for antitrust enforcement in health care: These guidelines were issued in 1996. Gaynor says much has changed since that time, and a refreshed and revived set of health care guidelines will provide important guidance to market participants and courts.
  9. Establishing a national health care database that has comprehensive, publicly available data on US health care spending, utilization, prices, and ownership: Gaynor calls this a critical investment in our national infrastructure that will make vitally important information available to businesses, government, and citizens.

Professor Gaynor is quick to note that such solutions would not fix everything — health care is much more complicated than any one single issue. But that’s precisely why changes that seem small can make such a difference collectively.

“We spend $3 trillion on health care each year. Even if something saves you a fraction of a percent? I’ll take it,” Gaynor said.

“In the long term, the question of what health system would be best is a question we should engage with. In the meantime, we have a market-based system in the U.S., so making these markets work as well as they can is to the benefit of American citizens.”

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