Announcement of Public Workshop, "Examining Health Care Competition" ("Health Care Workshop") Project No. P13-1207 #00130

Submission Number:
Mike Vaughan
New York
Initiative Name:
Announcement of Public Workshop, "Examining Health Care Competition" ("Health Care Workshop") Project No. P13-1207
Price Transparency Background As ever increasing attention is given to rapidly growing healthcare costs, efforts to understand and address causes of that growth have become crucial policy concerns at a national level 1, 7. One fundamental issue generally accepted as a major driver of costs is the imperfectly competitive nature of healthcare markets 2. Attempts to address this issue have been numerous, from those policies that were adopted, such as the Affordable Care Act, to other policies which held promise, but ultimately were not enacted, such as The Transparency in Medical Device Pricing Act 3, 4. Even where policies have been effected, the fact remains that even the best of these have been only mildly successful to this point. As such, the underlying concern continues to exist, largely uncorrected. It is essential that investigation of causes continues, and that where necessary, regulations are enacted to eliminate undue barriers to competition. Evidence A search of relevant literature concerning understandings of competitiveness in healthcare generally, price transparency more specifically, and theorized approaches to increasing price transparency was carried out. This was accomplished using Google Scholar and Pubmed, employing the following search terms in various combinations and derivations: "healthcare," "competition," "price transparency," and "medical devices." Problem Significant price variation for a given service is both a significant outcome and cause of an imperfectly competitive healthcare market. The reasons for this variation are many and complex, and somewhat incompletely understood. One major driver of this problem is that suppliers/providers have little market-driven incentive to price services competitively, and in the case of providers, actually face many pressures to do precisely the opposite 3, 5. In addition to competing or even perverse incentives, many stakeholder categories in the healthcare industry actively engage in practices that may be understood to perpetuate or augment environments in which price variation can occur, in order to potentiate profit earning behaviors 3, 4, 6, 8. Central to this type of environment is a lack of price transparency, engendering uncertainty about various factors, the most basic of which may be actual value of services, and appropriateness of prices for those services. These uncertainties result in poorly functioning healthcare markets, limit entry into many facets of those markets, and ultimately deny access for some to a portion of the products of those markets, all as an outcome of causes that do not stem from competition. As of 2011, regulations governing price transparency in healthcare exist to some degree in thirty-four states, but are all significantly limited in both scope and efficacy, as evidenced by the largely unchanged variability of prices, even within small geographic regions 1. As indicators of unchanged price transparency issues continue to grow in number, it becomes increasingly clear that the healthcare market cannot be expected to correct for the effects of these anti-competitive environments absent some regulatory intervention to alter current market structures. Further, feedback from providers, consumers, and other interest groups increasingly demands that this issue be given primacy of consideration in further attempts to address healthcare costs more generally. At this point, these ongoing issues, which are essentially market failures arising from information asymmetries, represent a pivotal opportunity to enact regulatory policy to markedly increase competition and eliminate behaviors which contribute much of the impetus for current poorly contained increases in healthcare costs. Policy Options 1. Generally, implement regulations requiring readily available fee sheets for patient use 5. This would require FTC action to emplace the relevant mandates, with the main burden of implementation to be borne by insurers and hospitals/healthcare systems. More specifically, there are two broad paths along which this type of policy might be directed. First, these regulations might hold that the fee sheet would represent end costs to the patient per episode, enumerated per insurance plan, specific to each potential provider of care 1. Along with the immediate consequence of enabling informed consumer decision making relative to price, and subsequently driving reductions in provider/supplier price, this option also has a secondary effect that addresses one of the fundamental mechanisms underlying an imperfectly competitive healthcare market 7. Where significant variations in price for the same services are a major driver and result of imperfect competition, by holding insurers responsible for the work of fairly presenting prices for each plan on a per-provider, per-episode basis, insurers are incentivized to reduce variation in pricing/reimbursement agreements they reach with providers, in order to reduce costs incurred from maintaining said fee sheets. This path must be concerned with potential hindrances, mainly in the form of insurance industry resistance, as a result of the large majority of cost of implementation being borne by that industry. Also of concern are considerations related to enforcement and oversight, and what body will bear the responsibility for those functions. Finally, one must consider the potential that providers will seek to blur the lines between quality and cost by eliminating certain aspects of care for a given episode, in order to increase profits in a newly competitive market. As a second option, the fee sheet might be the basis for a reference pricing system, as discussed by Reinhardt 2. In this type of system, the fee sheet would represent two factors for patient consideration: insurer contribution for a given episode, and fully disclosed cost of care at various providers within a given region. Insurer contribution would be set to the lower end of the price range for a given service in a given market region. This not only increases informed consumer decision making (and incentive to limit personal care costs) by more directly exposing consumers to costs beyond their coverage, but also strongly incentivizes providers to not overly exceed coverage rates, as an outcome of simple economic interests introduced by resulting increases in market competition 2, 9, 10. The most predictable drawback to this path is the expected pushback. Both insurers and hospitals/healthcare systems will resist the model. Additionally, the significant percentage of the general population (and policymakers) with a somewhat idealized understanding of free markets will resist this regulation. 2. Generally, remove medical device purchasing from a contracted rate system 3, 6. Instead, implement regulations requiring medical device purchase reimbursement to reflect incurred cost. This type of regulation would require FTC action, and while not revolutionary, would represent a significant shift from away from current practices, such that serious, extended consideration must be given to the specifics of any model before implementation is attempted. One such rough, original model is suggested in the following. Implement this change by creating a scaling system of reimbursement rates which reflect a relationship between highest percentage of total cost per device(s) per episode borne by hospitals and rate of reimbursement, set on a log curve. This would have a number of theoretical effects. First, the increase in price borne by hospitals to move from poor quality to mid quality device would be minimal, assuming price reflects perceived quality. From mid quality to upper levels of quality, price increases would grow more significantly as percentage of total costs per device continues to increase. The costs incurred by hospitals to provide the very highest quality device (again, where price reflects perceived quality) would be an extremely significant increase from the next highest quality device. The immediate question one may have on seeing this model refers to the above mentioned assumption. However, this model also strongly incentivizes device manufacturers and suppliers to engage in more open competition for a given market space by reducing the probability that an extremely expensive device that is perceived as only marginally superior will be chosen over another high quality, significantly less expensive device. Further, this model also strongly discourages the production of low quality devices, by making purchase of significantly higher quality devices easily affordable to hospitals. On net, economic theory regarding increased competition in this market holds that this model should also result in a shift of the entire price spectrum toward lower prices. Finally, patient health outcomes should improve. This result is predicted as a result of the understanding that medical device choices are made between physician and patient, and that currently, perceptions of affordability and financial burden are a limiting factor in achieving optimal health outcomes. As this model would open up more devices to select from with regard to personal finance, the range of quality which a given patient may expect to choose from will increase as well, allowing for the upper end of that increased range to contribute to better health outcomes. Additionally, this model eliminates the incentives hospitals face under the contracted reimbursement rate model to limit quality of selected device in order to have that limitation manifest as a cost reduction measure. It is important to note that additional regulation would necessarily need to accompany this rough model, in order to prevent hospitals from manipulating representation of total incurred costs in order to affect reimbursement. While this represents a major sticking point in the feasibility of this model, the general policy option the model serves may be better accomplished when addressed with a more comprehensive model, and as such its potential merits should not be summarily dismissed. 3. Move to regulate against the permissibility of Most Favored Nation (MFN) agreements in healthcare 1. The effect of these agreements is highly anti-competitive, especially where only those party to the agreements have knowledge of said agreements. This option would also require FTC action. The elimination of this type of agreement would immediately have an enabling impact on the ability of current market participants to engage in competitive negotiation, and would also significantly reduce the barriers currently faced by potential new entrants to the market 1. Again, one may anticipate strong resistance to this option from those currently in a position that benefits from MFN agreements. Recommendation While all three of the above-described options have much to recommend them, in the interest of effecting real increases in the level of price transparency in healthcare in a way that increases competitiveness, policy decisions must focus heavily on feasibility. That understanding in mind, it seems apparent that the option calling for an end to contract payment models for medical devices is markedly more difficult and resource-intensive than either of the other two options. The policy option which seeks to regulate against MFN agreements, while theoretically impactful, is marred by anticipable difficulties and subsequent high costs related to enforcement, and also by predictable well-funded pushback from effected interest groups. The option which offers the greatest chance of achieving the intended outcome is one of the two potential forms of fee sheets designed for patient use. As a result of practical concerns about the effect of shifting costs almost entirely to only one stakeholder class, the variation of fee sheet policy option which seeks to enact a system of reference pricing is the overall best choice for increasing price transparency in healthcare. Regulations enacted in support of this model would have the benefits mentioned in the preceding discussion of this policy, while splitting the cost of implementation between healthcare systems and insurance providers. Beyond implementation, the more direct nature of cost-sharing as borne by the consumer in this model serves to move toward a long-theorized method of reducing poorly controlled increases in national healthcare expenditures, by encouraging decreases in overuse of healthcare services at the individual patient level. Success of this model will require several actions from the FTC. First, the market area/region by which insurer coverage is determined must be defined. Next, hospital/healthcare systems must be assigned to one of these regions, ideally not by physical location, but by understandings of population served. Further, an oversight body must be created, staffed, and funded, in order to ensure compliance and monitor outcomes. Finally, consideration must be given to how consumers will attain these fee sheets, as consumer knowledge is perhaps the most crucial element of this policy option. It will be necessary to mandate their production, and regulations will also need to be enacted governing permissible timing of changes to prices/costs and resultant potential for inaccuracies in the information provided to consumers. References 1 David Cutler, Ph.D. and Leemore Dafny, Ph.D. "Designing Transparency Systems for Medical Care Prices." N Engl J Med 2011; 364: 894-895. 2 Reinhardt, Uwe, PhD. "The Disruptive Innovation of Price Transparency in Health Care." JAMA. 2013; 310(18): 1927-1928. 3 Hahn, Robert, Keith Lovers, and Hal Singer. "The Need for Greater Price Transparency in the Medical Device Industry: An Economic Analysis." Health Affairs. 2008; 27(6): 1554-1559. 4 Lerner, Jeffrey, Daniel Fox, Todd Nelson, and John B. Reiss. "The Consequences of Secret Prices: The Politics of Physician Preference Items." Health Affairs. 2008; 27(6): 1560-1565. 5 Vaughan, David, M.D. Personal correspondence. 2014. 6 Robinson, James and Annemarie Bridy. "Confidentiality and Transparency for Medical Device Prices: Market Dynamics and Policy Alternatives." 2009. 7 Sinaiko, Anna, Ph.D. and Meredith Rosenthatl Ph.D. "Increased Price Transparency in Health Care- Potential Effects." N Engl J Med 2011; 364: 891-894 8 Pauly, Mark and Lawton Burns. "Price Transparency for Medical Devices." Health Affairs. 2008; 27(6): 1544-1553. 9 Robinson, James and Kimberly MacPherson. "Payers Test Reference Pricing and Centers of Excellence to Steer Patients to Low-Price and High-Quality Providers." Health Affairs. 2012; 31(9): 2028-2036. 10 Lechner, Amanda, Rebecca Gourevitch, and Paul Ginsburg. "The Potential of Reference Pricing to Generate Healthcare Savings: Lessons from a California Pioneer." 2013. HSC Research Brief No. 30.