What's Really Driving Healthcare Costs?

Behind a viral headline about health insurance greed

Like everyone else, I’ve been talking about health insurance more than usual.

One of the news stories that caught my eye was about Anthem Blue Cross Blue Shield’s new policy to put a time limit on anesthesia coverage. As I assume was the case for most readers, it made me angry. Public outrage led Anthem to reverse the policy, which seemed like a straightforward win for the public.

I mentioned that story to a friend of mine who works at Employ America, a research and advocacy organization dedicated to promoting policies that lead to full employment, and I was surprised when he replied that this wasn’t necessarily the win for the public that I thought it was.

How is that possible? I asked. So my friend connected me with two of his colleagues who have been collaborating on healthcare reports, and who could give me the nuance behind the headlines.

Preston Mui is a senior economist at Employ America, and Ashley George is a policy associate there. I invited them both to talk about the Anthem Blue Cross Blue Shield policy, and, more generally, about what drives healthcare costs in America. They shared some fascinating tidbits about costs and market power in our healthcare system. Our conversation is below.

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David Epstein: I want to jump into the specific thing that brought me to you: in the aftermath of the murder of the United Healthcare CEO, I started to see headlines popping up about Anthem Blue Cross Blue Shield's recent decision — in a few states — to put a time limit on reimbursement for anesthesia during a procedure.

The idea that went viral was of a patient waking up from surgery, being told that surgery went too long and now they owe thousands of dollars. And the policy was reversed, due to public outrage.

I mentioned this story to one of your colleagues just casually recently, and I said that it seemed good that the policy was reversed, and he replied that it’s not so clear that it’s good. I was surprised to hear that. And so I'm wondering if you can explain what we might be getting wrong about this story.

Ashley George: So I think there are a few issues with this story. First, the policy does not call for patients under anesthesia to be cut off mid-surgery. Instead, it sets a kind of billing benchmark, if you will, for what Anthem is willing to pay for that anesthesia service.

So this requires understanding how anesthesia services specifically are paid for. With anesthesia, whenever you're talking about reimbursement policies, either from a public insurer like Medicare or a private insurer like Anthem Blue Cross Blue Shield, you're going to take into account the complexity of the care, the duration of the procedure, and then the provider's qualification to determine that total payment. And so what Anthem’s policy was proposing …essentially was to use Medicare data that shows the total physician time for different anesthesia procedures. And based off this data, they were going to set a targeted length of time for anesthesia services. And if an anesthesia provider were to submit a claim to Anthem for reimbursement where the procedure time exceeded this limit, then that claim would be denied. After that claim would be denied, the provider could then appeal, and they could potentially get paid for the full length of time, or if the provider's appeal is denied, they could still submit a claim for that targeted time limit.

If the procedure exceeded that targeted time limit, anesthesia providers were not going to stop providing anesthesia in the middle of surgery. They would still continue with the surgery and anesthesia up until the point that was medically necessary.

A second thing the story is getting wrong is the idea that the policy would hurt patients. The reality is, patients were not going to bear the burden of this cost. That is because this issue is between the insurance company and the provider, not the patient. The insurance company has a contract, an in-network contract with providers that outlines their reimbursement policies, and these providers agree to those policies, and so they would not be able to charge patients for this so-called extra time beyond that targeted time limit, because the contract between the provider and the insurer — Anthem, in this case — sets limits on patients’ responsibility, like copays, deductibles, or coinsurance. And so the actual provider can't go outside of those limits to charge patients because the contract is already set.

DE: To harp on this, let me read you Senator Chris Murphy’s tweet in response to the Anthem policy: “This is appalling. Saddling patients with thousands of dollars in surprise additional medical debt. And for what? Just to boost corporate profits?” So it sounds like you’re telling me, at least in the typical case — I know it’s hard to think of every possible thing that can happen in healthcare — that this idea of saddling patients with surprise additional medical debt was never a factor here, because this policy didn't involve the patient paying. So my sense of what you're saying is that, for the most part, Sen. Murphy’s tweet is misleading, and that patients weren't going to be saddled with additional medical debt even if a procedure did go over length.

AG: Yes, that's correct. And in fact, patients could actually see lower cost, because the overall cost of the procedure is going to decline now because of this targeted time limit, which will then lower premiums and out-of-pocket costs. The patient’s coinsurance is always a percentage of the total procedure bill, and if that bill is now lower, then the costs for the patient are also going to be lower.

DE: Back when I was at ProPublica, I did a bit of reporting on healthcare, and I wasn’t reporting on costs — rather on overuse of low-value care — but I did come away feeling that the main driver of healthcare costs is probably not insurance companies, which actually have low profit margins, but providers, like hospitals and drug companies. That’s not to say insurance companies aren’t part of it too, but it seemed like the main driver was providers charging more. But I’m definitely no expert in this, so please tell me if I’m even in the ballpark of being correct with that lesson.

Preston Mui: I think you're in the ballpark. One of the reasons why healthcare is so expensive in the United States is just that we pay a lot more for similar procedures compared to other countries. It’s really an underrated source of the high cost of healthcare in the United States. It's not the entire reason, and our private insurance system definitely has a lot to do with that, being that there are pretty significant administrative costs in the United States. Not only do you have the whole private health insurance system with people processing claims on that side, but you also have, on the provider side, you have to hire people to manage all these different streams of payment, whereas in other countries they may only have to manage a single payer. And so the administrative aspect is a significant cost. But, as you mentioned, a lot of people point — for example in Chris Murphy's tweet — he points to corporate profits at health insurance companies. And I don't want to say that the effect of profits on costs is zero, but you could zero out executive compensation and profits at health insurance companies, and American healthcare would still be extremely expensive compared to other countries.

DE: Correct me if I'm wrong here, Preston, but isn’t there actually some kind of regulation that limits the profit that insurance companies can make? Something like they have to spend some high percentage of all of their revenue on procedures, so their profit margin is actually restricted. If that’s true, I don't know if that's good or bad, because if the profit margin has to be a lower percentage, then their incentive is to make it a low percentage of a really, really high number. Am I right in recalling that there's something like that?

PM: Yes, so there's something called a medical loss ratio. This is a policy in the Affordable Care Act that says that insurers have to spend a certain percentage — 80 or 85% depending on the type of insurer — on healthcare, and then the rest is overhead plus profits. And one of the ironies here is that this sounds on its face like a good policy, but this also means that there's not a lot of incentive to do cost control if you're a private insurance company, because if you manage to lower waste, or lower fraud and abuse or whatever and get some healthcare costs down, you're not going to see it translated into higher profit, because that’s not allowed.

DE: To go back to Anthem Blue Cross Blue Shield, what do you think they were trying to do with this policy? Nearly everybody who has commented publicly is clear on what they think they were trying to do, which is to shift more cost to patients. But you’re both telling me this was between providers and Anthem, not patients. So what was the point of the now-reversed policy?

AG: Providers and practitioners within our healthcare system exercise a significant amount of discretion when it comes to the total amount of money that they are paid, ultimately. Especially in anesthesia services, as anesthesia billing often relies on physician-reported time. And so there is evidence that shows that some practitioners — not all, and not even the majority, I would say — but some providers are disproportionately reporting anesthesia times rounded up in multiples of five minutes. So for those providers, for example, instead of the procedure being 59 minutes or 61 minutes, they're rounding up to 60 minutes or 65 minutes. And so while these few minutes might not reflect a significant change, and while most providers do accurately report their time, the few bad actors who are willing to kind of round up their time…This study that I'm referencing reported that those actors reported anesthesia times that were 22 minutes longer than expected, which ended up resulting in an extra payment to the provider per procedure. And so there is evidence showing us that some of these providers are upping their total time of procedure to get a larger reimbursement from insurance.

DE: Are you saying, then, that maybe the target of the Blue Cross Blue Shield policy was to use typical procedure times to rein in the doctors who looked like they were chronically extending the time of procedures?

AG: I think that's probably a fair assessment.

DE: Okay, let me zoom out to the bigger issue here, because obviously the thing that everyone is concerned about is costs for medical care, and insurance companies, it would seem, can play a big role in containing costs. But in order to do that, they have to put some pressure on providers to contain their costs, right? The American Society of Anesthesiologists, in their rebuke of Anthem, cited the year-over-year jump in Anthem’s net income; interestingly, anesthesiologists apparently also saw a boost — an average salary jump of $70,000 year-over-year. So there are a lot of people making money on the other end of these high costs in healthcare. Given that the Blue Cross Blue Shield policy would have put some downward pressure on prices, is the fact that it’s gone now a win or a loss for consumers? It’s obviously being hailed as a victory by the public.

AG: Ultimately, lowering healthcare costs throughout the system is a move in the right direction. Whether or not the way Anthem decided to do that through this proposal was the best policy solution, I would say that is debatable. But the effects of what it would do would have helped patients, and it would have lowered cost in the system. In general, commercial insurers should move in the direction of thinking about cost control.

DE: Every country has to ration healthcare to some extent, in one way or another, right? It’s not magically paid for. But it seems like every proposal to contain costs in the U.S. is beat back either by providers or patients themselves. How do we compare to the rest of the world?

PM: There's a large diversity of healthcare systems, so it's hard to say. In comparison to the world in general, it’s hard to give a short answer there, but I think you touched on something really important, which is that every healthcare expenditure is someone else's income. Even wasteful expenditure is someone else's income. So if you want to reduce healthcare costs, somebody is going to have to see some reduced income down the line. And the whole challenge politically is how can we reduce expenditures in a way that's equitable and doesn't sacrifice patient outcomes? I think actually there's a useful comparison here, not so much to another country, but actually to another healthcare system in America, which is Medicare. There is a bit of irony in this whole situation, which is that, on average, private insurers reimburse anesthesiologists at rates far higher than Medicare. For certain procedures, across different states, it's anywhere between 2.4 to 7.9 times, but on average private insurers reimburse at rates 3.5 times that which Medicare pays. So I think a lot of people saw this episode and said: “Well, this is really bad, because private insurers need to be paying anesthesiologists for what their time is worth.” At the same time, actually, Medicare is even stingier than private insurance. Even if this policy had gone through, it was almost assured that payments from Blue Cross Blue Shield would still be higher than what Medicare pays in the vast majority of cases. There's a possible angle you could take here, which is that private insurance in this particular realm is actually not stingy enough, and Medicare is the one doing cost control.

DE: And why is that? Does Medicare just have that much more bargaining power with providers?

PM: I think that's a big reason. There are times when private insurers really do want to reduce costs, and sometimes lack the market power. Especially in recent years, as there's been so much consolidation of providers, where hospitals are buying up physician practices and consolidating. The result is that insurers have lost a lot of market power, relatively speaking, to the providers, and that's one reason why this fragmented system does not do a good job of cost control. Whereas Medicare is a relatively large player. It consists of a fifth of national healthcare expenditures as just one payer.

DE: Thinking of myself when I use healthcare services, it's unlike any other market, or sort-of market, that I participate in. I have no idea how much anything costs. Sometimes I even ask, and rarely can anybody tell me. Sometimes I can’t even get the order of magnitude. So there’s no price transparency for consumers, and if you have good insurance there isn’t much incentive to use services judiciously. So if that’s the case, you’re saying that the government and private insurance companies are our proxy for cost control, basically. And you're saying that because of the consolidation of providers, they're losing bargaining power that they can use on our behalf, is that right?

PM: Yes, that is something that we've seen in recent years, is that hospital consolidation has really picked up. And there's a lot of evidence out there that shows that hospital consolidation leads to higher prices, which eventually get passed down to higher costs for health insurance at the employer level, and this affects things like wage growth and employment, and so it's a big problem.

DE: So I don’t want to ask you here to fix healthcare costs, but what are some leverage points we should be looking at?

PM: One thing that has bipartisan appeal and could potentially be changed is that there are a lot of procedures that currently take place in hospitals, which are very expensive places to have procedures done, because there's a lot more overhead. The reimbursement rates from private insurance companies for these procedures at hospitals is a lot higher than the same procedure done in, for example, a free-standing physician's office —

DE: Sorry to interrupt, but you’re saying: same exact procedure, but whether it’s done in a hospital or a physician’s office? What’s an example?

AG: One example is an ultrasound. Getting an ultrasound can end up costing more than double at a hospital compared to what you're going to be charged in a free-standing physician’s office, and that's because hospitals will tack on what they're calling facility fees. Which is true, it does take a lot of upkeep to run a hospital, but there are a lot of medical procedures that are performed in hospitals or hospital-owned facilities that can also be performed in stand-alone physician offices, and for those procedures, facility fees aren’t justified.

DE: But hospitals are acquiring those offices, so there are fewer of them, is that right?

PM: Oftentimes what happens is that a hospital system will acquire a free-standing physician’s office, and they’ll call it an off-campus hospital outpatient department. But now, because this is part of the hospital system, they can turn around and say: now we're also going to charge this facility fee, despite the fact that, physically speaking, not much has changed about the physician's office.

AG: You can even have the same exact doctor that you were seeing a week ago, and now this doctor has been purchased as a part of a hospital system, and then you go back the next month and your bill as a patient has significantly increased.

DE: So, to conclude, what is another leverage point that each of you think we should be looking at to control costs?

PM: Going back to the anesthesiology example, in the study we mentioned, they didn't find that it was a majority of anesthesiologists that were up-coding their time. It was only a small percentage, but the thing about cost and control is, even if you have mostly good actors in the system, if you don't have a careful incentive structure in place, bad actors can really put a lot of wasteful spending through these loopholes.

DE: That reminds me of the interview I did recently with Malcolm Gladwell about his new book, which noted that 350 physicians in America were writing 10% of the OxyContin prescriptions, and 2500 were writing 30%. What’s another leverage point?

AG: I think, broadly, as we've talked about, just the wide discrepancy in what Medicare pays versus what private insurance pays. If insurers could align their policies and their reimbursement rates with what Medicare does, I think that is a really good way to think about how we can get cost down…But private insurers are negotiating constantly, and, again, as we said before, providers have more market power.

Thanks to Ashley and Preston of Employ America for their time, and thank you for reading. If you learned something new in this post, please share it.

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Until next time…

David

P.S. I tried Substack’s “pull quote” feature once in this post. Let me know what you think in the comments below.