How Can Employers and Government Control Rising Hospital Prices?

By Noam N. Levey

With insurance premiums and deductibles for employer-based health plans continuing to grow faster than inflation and wages, we sat down with two experts with decades of experience dealing with health care costs to discuss rising hospital prices and the pressures they are putting on employers and workers. New research shows that private insurers pay nearly 250% of Medicare rates for hospital services.

We specifically explored what employers and regulators can do about these rapidly rising provider prices in commercial health insurance, and how aggressively government should act to restrain them at a time when hospitals are quickly consolidating.

Offering an employer perspective is Dr. Robert Galvin, CEO of Equity Healthcare and an operating partner at Blackstone, where he advises 75 companies owned by private equity firms on saving money on their health benefits. Galvin was previously a senior executive and chief medical officer at General Electric.

Robert Murray, the former executive director of the Maryland Health Services Cost Review Commission, brings a regulator’s perspective. For 16 years, Murray led the nation’s only remaining state rate-setting body, which is credited with keeping hospital costs for all payers in Maryland consistently below the national average.

The conversation has been edited for length and clarity.

Q: How urgent is this problem of hospital prices?

Murray: There’s a high degree of urgency here. Just look at these trends. Look at the impact on the budget, the federal budget, the state budgets, personal budgets. We don’t have the luxury to sort of test things and delay. The market has failed.

Galvin: Employers think there’s urgency, but it’s a small ‘u’ urgency, and we believe it is essential to go at this in a ready-aim-fire fashion.

Look, we are clearly at an inflection point, but since I got in as a medical practitioner in 1984, we have been talking about how we can’t take it anymore.

I talk to the CEOs and CFOs of the companies my firm advises, and the vast majority of their employees are not complaining. They’re not saying, ‘This has got to change. I can’t tolerate it.’

Q: So, employers can deal with this?

Galvin: For the time being. But what they need to do is a lot more of what Walmart or the California Public Employees’ Retirement System are doing and be active, smart purchasers.

Employers need to have the will to say to their employees: ‘At the same level of quality, there are efficient providers and there are inefficient providers. We’re paying for the efficient ones. If you want to go to inefficient ones, you’re going to pay the difference.’

Murray: But let’s say you go to California. You go to Google or Facebook or Apple and say, ‘Tell your employees not to choose Sutter Health.’ The companies are going to say, ‘Are you kidding me? We’re not going to limit our employees’ choice.’

And that dynamic doesn’t just exist out there in California. That dynamic has been undermining the ability of employers across the country to use aggressive negotiating strategies with hospitals.

Galvin: The model of limiting choice is one that we tried and failed with in the 90’s. But if you give employees choice and you price the choice, employee unhappiness is massively lower than when you just say you can’t go to a place.

Q: So, in a company with say 2,000 employees, is there any evidence that this type of reference pricing is impacting how much hospitals charge?

Galvin: No, we haven’t seen an impact yet, honestly. But when you look at what can the private sector do, that’s what the private sector needs to do.

Q: So, is there a role for government regulators?

Galvin: The federal government needs to do a whole lot better fighting the consolidation of hospitals and physicians.

They need to push for more transparency around price and quality in a way that actually makes sense and is palatable to consumers and will make the market work.

And they need to step in in cases like surprise billing and set an example for how we can sensibly address market failures.

Q: Bob, what do you think about more anti-trust enforcement?

Murray: I wish the Federal Trade Commission was more empowered and had more resources to be very aggressive. I think that would be one way of doing it. But I don’t think it will be a priority for this administration. I also don’t think the business leaders will support it.

Q: Would greater price transparency have an impact on prices?

Murray: Minimal, at best.

Health care is not something that is shoppable. The late Princeton University heath economist Uwe Reinhardt talked about how shopping for health care is like blindfolding somebody, sending them into a department store and asking them to shop smartly.

There are a minimum number of procedures that are commodities that may be able to be compared. Generally, people don’t have a clue.

Galvin: I think you’ve got to look at transparency on two levels.

On the consumer level—meaning, are people going to shop?—I think the data is pretty strong that, except for commodity-type services like MRI scans, labs, etc., it’s not in the cards.

But I think transparency plays a really important role on the B-to-B level. It plays an important role when employers know prices and can go to their health plans and say: ‘What are you doing about the price variation and shifting volume to the providers with the lowest prices?’

And when the media gets a hold of this stuff in the right way, it makes a difference.

Murray: I just fundamentally don’t think that transparency’s an answer unless you’re talking about the type of transparency that the Massachusetts attorney general created by getting hospital prices and analyzing and making comparisons. Those are very positive.

Galvin: I am very supportive about that. I agree.

Q: Let’s talk more about what role states can play. Massachusetts also set up a commission to monitor healthcare spending and set targets to control growth.

Galvin: I find what Massachusetts is doing pretty interesting. While it doesn’t have the force of law, the commission has set a goal, and the media and politicians follow the progress. When I talk with leaders of big provider systems and health plans, they take it seriously and see it as the elephant in the room, because the legislature is behind it.

As a result of the approach, health systems have changed leadership. Some mergers have stopped, and other more promising ones have occurred.

It sets the right tone in the market. This is government working in a way to help solve some market failures, but in a way that lets the market work out solutions. I like that.

Q: Bob, is that just weak tea?

Murray: Yes, because there is a lack of authority to enforce it.

We’ve been at a period of very low inflation. I think eventually, particularly if inflation kicks up, you’re going to see that just blowing out.

Q: So, you would like to see states do something more aggressive, like setting hospital rates?

Murray: If you look around the country, you see some burgeoning rate-setting approaches. Oregon, for example, passed a bill to cap hospital prices at 200% of Medicare rates for health plans that cover state employees.

This gets back to why employers haven’t been successful at getting lower hospital prices. It’s leverage.

If you get a large enough block of people—state employees, retirees, the university folks, the public teachers—and you bring in the Affordable Care Act exchange and open it up to the private sector, you could set up a rate system benchmarked to Medicare.

That’s a system that’s benchmarked to something rational—Medicare—which pays hospitals at basically their cost levels, if they are efficient hospitals. And that’s a way you can get things started.

Q: Does that sound realistic?

Galvin: What worries me is it’s a fantasy. It’s a fantasy that hospitals—with their community roots, their history, how difficult it is to change physician behavior—are going to respond in a fashion that won’t disrupt patient care if their payments get too close to the Medicare benchmark.

Efficient hospitals can do fine with Medicare payments. But the usual hospital is massively inefficient.

Murray: So, it’s all about constraint. A majority of hospitals in the United States don’t face a constraint from the private sector.

And then you get this dynamic, this symbiotic relationship between price and cost, where hospitals can jack up their prices, generate more revenue, and they spend it, and their cost structure goes up.

But there is a group of hospitals that face pressure from commercial payers and governmental payers, and they have much lower costs

Galvin: So, let commercial payers do it without rate-setting.

Q: Both of you have talked about the importance of controlling surprise medical bills, which have been particularly problematic for patients who go to in-network hospitals—usually for emergency care—but are seen by out-of-network doctors, who are often employed by physician outsourcing companies. How would this help control hospital prices in commercial health plans?

Murray: It makes the market more competitive. The Medicare Advantage market is a classic example of that.

You have government law that actually provides a backstop for the Medicare Advantage plans by setting out-of-network prices at Medicare rates. As a result, it’s no coincidence that Medicare Advantage plans pay close to or below fee-for-service rates.

Government’s role is to protect against market failure and egregious prices.

Q: Bob, what do you think about that idea?

Galvin: It’s necessary to do something about surprise medical bills. And I think employers back that.

The devil is in the details. What’s interesting is how government is going to decide what’s the price that’s okay in these surprises. And this is what worries me about government.

If you price low enough—and I believe the best example of this is how government has priced primary care—you get shortages. For example, we need to be very careful about creating shortages in emergency care, particularly in rural areas.

Let me tell you why we favor arbitration to resolve high bills resulting from out-of-network charges. There are some rules. The providers make their case. The payers make their case. And the decision is final and not appealable. It preserves negotiation.

Murray: I’d be less cautious. I mean, we’re running out of time, and I think the first place to start is to set a limit on prices for all out-of-network care. That would restore some degree of negotiating leverage to private insurers.

Q: Isn’t that difficult to do, politically?

Galvin: If you want to talk about reality, your chance of having that happen is somewhere around zero. Providers are never going to stand for it.

Murray: But eventually, the political tides will change, and it will be an imperative. It will happen. I can guarantee that.

Start with California, Oregon, or other states that can get a large enough purchasing pool. They can generate leverage to show that a rate-setting system, maybe benchmarked to Medicare, can work.

Q: Does that make more sense, Bob?

Galvin: I love experimental designs. I love that Maryland does what it’s doing. I love that Washington and Oregon are doing what they’re doing, and all my companies in the business I run are doing what they’re doing.

The biggest point I’m making is not that the market is going to solve this. The point is that we need to be thoughtful and incremental in trying to restrain high provider prices. And I think we ought to be careful about the impact on complex systems that setting prices might have.

Murray: And I agree with you. It can’t be one size fits all.…But we are running out of time. And the first place to start is to set limits on out-of-network bills because it would restore some degree of leverage to private insurers.

I’m not for making changes that substantially disrupt the health care delivery system, but my concern is that the longer we wait, the more we risk having to make more disruptive changes down the road.

Dr. Robert Galvin is the CEO of Equity Healthcare and an Operating Partner at Blackstone. Before joining Blackstone, Dr. Galvin was Executive Director of Health Services and Chief Medical Officer for General Electric. He is a member of the Institute of Medicine, an adjunct professor at Yale, and a board member of TeamHealth, a national provider of emergency room and other physician outsourced services that Blackstone owns.

Robert Murray is the president of Global Health Payment, a health care consulting firm with experience in the development and implementation of alternative prospective payment systems, including hospital global budgets and physician shared savings programs.  Mr. Murray served as the executive director of Maryland’s hospital rate setting agency, the Health Services Cost Review Commission from 1994 to 2011.