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Weekly UpdatesSpecialty hospitals have engendered much controversy. Community hospitals claim that specialty hospitals are taking away the more lucrative patients and that community hospitals will no longer be able to cross subsidize other services. A major issue is whether the Medicare prospective payment system in which certain procedures are profitable and others are not encouraged the development of specialty hospitals. Further, Medicare does not pay based on severity of the case which has led to additional cross subsidies. Cross subsidies can not exist in a competitive market and thus Medicare needs to fix its reimbursement system, and allow competition to take place on a level playing field. The market issue is whether specialty hospitals can survive under a correct Medicare reimbursement system especially since hospitals have responded by building specialty units within hospitals.
There are some real economic issues concerning the effects of self-referrals and the Stark Law with respect to specialty hospitals. Doctors referring patients to a hospital in which they have a financial issue creates a conflict of interest. A search of the literature reveals that self-referrals lead to increased utilization. Kwiecinski states "Numerous studies have confirmed the assertions of critics, demonstrating a dramatic increase in the frequency and expense of services when self-referral agreements exist" (Kwiecinski 2004, p. 414). The passage of the Stark Act in 1989 attempted to resolve the issue of self-referrals. The Stark Law which exempts whole hospitals from self-referrals made sense in the context that it was passed. However, specialty hospitals should not be given a blanket exemption from Stark. The Stark Law must be revised to put some restrictions on the possibility of self-referral abuse. Thus despite all the rhetoric self-referrals are a real public policy issue that must be addressed.
Preventative Care
Some claim that the best way to lower health care costs is to keep people healthy. Statistics show that those who have regular check-ups and are current with health risk screenings find diseases or problems earlier and thus their care is less costly in the long run. For example, women who get mammograms regularly find problems earlier which decreases the overall cost of medical treatment when and if a problem is found. Thus, health care needs to move more towards preventative services and disease management instead of treating the problem once it has developed. It is much more cost effective to treat disease at its early stages than at a later stage. Disease management and preventative care have been shown to be effective but the current system pays to treat not to keep patients healthy, and consultations are undervalued as compared to procedures. Some insurance has appropriately moved to not charging subscribers for health risk screening for certain preventative procedures to charging higher premiums for not getting them. The intent is to curtail spending in the long run by increasing some cost in the short run. Although appropriate, this has not been common practice in health care.
Disease Management
Disease management can decrease cost and improve the quality of life. It is most effective when started early which shows the importance of risk screening for diseases. "Disease management is especially important for chronic conditions which represent as much as 75% of total health care expenditures" [Porter 2006, p. 255]. Around 45% of the population has at least one chronic disease which accounts for 69% of hospital admissions, 80% of hospital days and 55% of emergency visits [Porter 2006, p. 255]. Disease management should be able to have a major impact in decreasing Medicare and Medicaid costs.
Most studies of return on investment for disease management have shown positive results even though they have not taken into account indirect cost savings such as lower absenteeism (Goetzel et al. 2005). A Blue Cross Blue Shield of Minnesota study of disease management compared subscribers in a disease management program with a control group. The disease management program yielded better outcomes and about $500 lower costs per member or $36 million total savings in the first year. This included a 14% decrease in the rate of hospital admissions, an 18% decrease in emergency room visits, and a return of $2.90 for each dollar invested in the program [Porter 2006, p.254].
Historically many health plans did not cover disease management programs because the costs are incurred in the short run whereas benefits may occur in the long run. Also, health plans are leery of gaining a reputation as excellent in supporting members with chronic disease since they may attract these patients [Porter 2006, p. 63]. Traditionally, these patients are high cost and thus the potential for adverse selection could increase the cost to the insurance company and negatively affect profits. Given the insurance companies' short run myopia, long term benefits are not being encouraged [Porter 2006, p. 63].
Other Issues
Besides increasing the emphasis upon performance, other elements of health care merit some consideration. In particular, providers like nurse-practitioners who have less training and are less costly than physicians have assumed increased roles. This development should help constrain rising health care prices by increasing available supply. However, the downside (if there is one) is that the increased availability may stimulate some added demand.
The problem of the uninsured continues. To some extent the savings from improved performance can be used to help cover the approximate 43 million uninsured.
Innovative solutions seem to be coming from the states (for example Massachusetts). Further, the uninsured often use emergency rooms, a high cost alternative, and impose costs on hospitals that hospitals claim they must recoup from profitable procedures on insured patients. This contributes to the problem of cross subsidies.
Foreign competition is a developing issue. Some Americans (including some insured) are traveling to foreign countries to obtain operations, usually at much lower prices than in the U.S. Although this is probably not the answer to the U.S. health care problem, it is obviously desirable for some and it also points out the possibility that more consumers could be induced to travel within the United States to obtain better quality and lower prices.
Pharmaceuticals also present some challenges. New drug development seems to have slowed down but the companies are spending about 16% of their sales revenue on research and development. Generics have become an increasingly important component of the industry. Biotechnology drugs present important opportunities, and many pharmaceutical firms are acquiring biotechnology companies to enhance their pipeline of new drugs. These biotechnology drugs are often high cost and raise reimbursement issues (Blackstone and Fuhr 2007). Agreements between generic and brand name producers that prevent generic competition remain a contentious issue (Blackstone and Fuhr 2006).
Rising prices for health care is another concern. Medical care prices increased 287% between 1982 and 1984 and November 2006 while all consumer prices increased only 102% over that same time period. Interestingly, prescription drugs and outpatient hospital services increased 265% and 303%, respectively. Nonprescription drugs and eyeglass services, both highly competitive areas, had increases of only 55% and 70%, respectively. Physician and dental services increased 194% and 246%, respectively (U.S. Department of Labor 2006). These figures suggest continuing inflation in healthcare prices and the importance of competition.
Conclusion
Historically, the health care system has not focused on creating value for the patient. Porter and Teisberg have developed a scenario in which this can and should change. Their book is a refreshing and insightful treatment of this most pressing of public policy issues. There have been some examples of a movement towards focusing health care on the consumer. However, much still needs to be done to accomplish this goal. The simple solution of increasing competition will help. For example, in hospital services insufficient competition exists in many communities. However, increased competition along with provision of information may be even more helpful. The former will reduce market power and the latter will provide the incentive to migrate to higher quality and lower cost providers. The emphasis upon competition and information will be most likely to improve performance.
Published online: 23 November 2007
References
Abelson, R. Bonus pay by medicare lifts quality, New York Times, Jan. 25, 2007, pp. C1 and C5.
Blackstone, E.A., & Fuhr, J.P., Jr. (2003). Failed hospital mergers. Health Law Journal, 36(2), 301-324, April.
Blackstone, E.A., & Fuhr, J.P., Jr. (2006). Unintended consequences: Generic competition in the prescription drug market. Medicare Patient Management, 1(2), 25-43, March/April.
Blackstone, E.A., & Fuhr, J.P., Jr. (2007). Generic biopharmaceutical drugs: An economic and policy analysis. Biotechnology Healthcare. 4(1), 43-48, February.
Burns, L. R., Cacciamasi, J., Clement, J., & Weldman A. (2000). The fall of the house of AHERF: The Allegheny bankruptcy. Health Affairs, 7-41, January/February.
Goetzel, R. Z., Ozminkowski, R. J., Villagra, V. G., & Duffy, J. (2005). Return on investment in disease management: A review. Health Care Financing Review, 26(4), 1-19, Summer.
Herzlinger, R.E. (1999). Market-driven health care: Who wins, Who loses in the transformation of America's largest service industry, Boulder, CO: Perseus Book Group.
Kwiecinski, M. (2004). Limiting conflicts of interest arising from physician investment in specialty hospitals. Marquette Law Review, 88(3), 413-439. Fall.
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