Blue Cross and Blue Shield of Minnesota has lobbed a hand grenade into the fishpond of Minnesota hospital management by instituting a new system of tiered hospital rankings. People covered by the insurer face doubled co-pays if they choose treatment at hospitals in the lower-ranked groups.
No fish are floating belly-up yet, but some big lunkers — including the Mayo Clinic, Hennepin County Medical Center and St. Paul Children’s — seem stunned by the detonation. Many people must be asking themselves how this innovation will affect their families, or, more broadly, how it will affect Minnesota as a whole.
Blue Cross’ incentives may result in lower costs and better care. But they also could have unintended effects on medical research, the ability to provide specialized services and how we treat those who can’t afford to pay for care.
Trying to analyze economics of U.S. health care can make you feel as though you just tumbled down the rabbit hole after Alice. Everything is distorted. Nothing is really as it seems. Good incentives turn out perversely. Anticipated outcomes don’t materialize. New technology upsets everything.
The problem is that none of the assumptions that facilitate economic analysis is true for U.S. health care. For example, outcomes are quite clear in situations when many consumers interact directly with many producers. There are millions of health care consumers in Minnesota, but there are not many providers. There are thousands of doctors, but only hundreds of clinics or specialty practices and only dozens of hospitals. Health care is nearly as monopolistic as automobile or even warship production.
Virtually none of the millions of consumers go out to buy health care the way they buy gas or tomatoes. Instead, they get care through an intermediary: an insurance company or health maintenance organization. A handful of such intermediaries dominate the market.
Moreover, few consumers freely choose which insurer or HMO they will use. Instead, most use whichever one their employer contracts with. At best, they can choose from a list of three or four.
These administrative intermediaries in turn negotiate a Byzantine set of covered treatments, fee schedules, discounts and preferences with hospitals, clinics and other providers. A few providers are large enough to jawbone insurers and HMOs. Most have little, if any, bargaining power.
Consumers do not know details of these intricate agreements, fee schedules and discounts. Nor do they have good information about the relative competence or quality of care they will get from different health providers.
If you eat out a few times a month, you soon develop a good sense of which restaurants give good value for your money. People do not get cardiac bypasses or chemotherapy treatments frequently enough to make equally sound judgments.
In other words, there is not a lot of “market” in the health care market. Still, economics deals with how people respond to incentives. Plenty of incentives remain in the U.S. health care system even if it is far from an ideal market.
Blue Cross asserts that its plan creates incentives for both lower costs and better care. If its tiered co-insurance plan does motivate consumers to get health care at more cost-efficient hospitals with higher-quality care, Blue Cross will save money that could get passed along to employers and eventually to consumers.
Moreover, if the quality component of the rating system is accurate, consumers may get better care.
Incentives from the new plan may not be limited to consumers. For hospitals, the tiered plan creates powerful incentives to, first, lower costs to match their higher-rated competitors and, second, improve the service or quality-control measures targeted by the Blue Cross ratings.
These potential benefits should not be dismissed out of hand, though some skeptics may wonder if cost savings to Blue Cross will help consumers. In competitive sectors like farming, cost reductions filter through to consumers. In less competitive sectors, this outcome is questionable.
Hospitals like Mayo, Regions and HCMC question whether the costs to insurers measured by the Blue Cross ratings fully reflect overall costs to society. Teaching and research hospitals benefit society by advancing medical science and training professionals. Government appropriations and research grants cover some costs of these socially useful functions, but others are averaged over all patients. This can result in higher costs per patient or per procedure than those incurred at institutions without such programs.
One can question whether any such costs should be borne by patients or by insurers. Perhaps government should foot the entire bill for teaching and research. One cannot argue, however, that these activities are superfluous for society. If institutions like Mayo cannot get funds to cover research costs somewhere, they will do less research.
Similar arguments apply to hospitals that have specialized trauma or premature infant facilities. If some costs of these programs may not be spread across all patients, the costs do not just disappear.
Regions, HCMC and other public hospitals treat a higher proportion of uninsured patients than does the average hospital. Unpaid bills have to be amortized somehow. Cross-subsidizing this socially useful task results in higher average costs. Again, we can reduce reimbursements to these hospitals, but that won’t eliminate the need to treat the poor.
Perhaps the most relevant insight comes not from economics, but animal behaviorists: “What can an 800-pound gorilla do?” The answer, of course, is “Whatever it wants to do.” Covering nearly a third of all Minnesotans, Blue Cross is the 800-pound gorilla of insurers in the state. No hospital or group of hospitals has comparable bargaining power. No competing insurer or HMO has the market clout to undercut an initiative such as this by offering hospitals a better deal. No government agency can overrule business decisions like this one.
Blue Cross’ new measures may contain incentives that are positive at the margins. The overall effects for society won’t be evident for some time.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.