In The Godfather, Michael Corleone tells his fiancée the story of how his father, Vito Corleone, made bandleader Les Halley “an offer he couldn’t refuse.” Either Halley would release singer Johnny Fontaine, Vito Corleone’s godson, from his contract or Luca Brasi, Corleone’s hitman, would put a bullet in Halley’s brain. Not surprisingly, Halley caved.1
Metaphorically speaking, lobbyists for health care providers regularly make similar offers when dealing with public officials. Consider how they handled electronic health records (EHRs), which advocates believe can improve medical treatments and reduce spending. When CMS urged providers to adopt EHRs, the industry said it would do so when the feds paid it to. Translated into Corleone-speak, the answer was: “Make it worth our while and we’ll adopt EHRs. Otherwise, we’ll stick with paper records, which will injure and kill thousands of patients and waste billions of taxpayers’ dollars. You decide which one you want us to do.”
The threat worked. In 2009, Congress passed the Health Information Technology for Economic and Clinical Health (HITECH) Act, which made billions of dollars in federal subsidies available to pay providers that adopted EHRs. As of late 2015, the United States had shelled out over $31 billion in bonus payments—more than twice the amount that EHRs are expected to save over the 10-year budgetary window.2
Did the $31 billion buy anything of value? Astonishingly, the answer isn’t clear. In mid-2015, the Journal of the American Medical Informatics Association published a study of “the physician EHR diffusion curve”—the rate at which doctors deployed the new technology. The authors found no statistically significant effect of the HITECH Act subsidies on EHR adoptions. More doctors were using EHRs at the end of the period studied than at the beginning, but the authors failed to find that the HITECH Act subsidies sped up the implementation rate. In their words, their “analyses suggest that the external stimulus on physicians . . . had ambiguous effects on the overall adoption rates. Somewhat like the ‘cash for clunkers’ subsidies in the automobile industry, the HITECH subsidies may have only contributed to inevitable adoptions.”3 If this study is correct, after providers threatened the feds, they got an extra $31 billion to do what they were going to do anyway.
This problem is not unique to the HITECH Act. When the government doles out quality improvement grants, it’s often hard to know whether providers improve, much less whether they improve faster than they would have on their own. For example, the Affordable Care Act (ACA) earmarked $1 billion for quality improvements. As the dollars were being spent on various projects, industry cheerleaders bragged that tens of thousands of health care–induced injuries and deaths had been avoided, saving almost $12 billion. Once again, it would be nice to know why providers had to be paid extra to avoid harming and killing patients. But an even worse problem is that the claims of dramatic improvement were unverifiable, as patient safety advocates quickly pointed out. Dr. Pronovost observed that the hospitals that received federal dollars to implement pilot projects used quality measures that were “of low validity, with data varying among sites and limited quality control.”4 The projects also lacked control groups, making it impossible to tell how patients would have fared without the expensive programs.5
Why didn’t the bureaucrats who handed out the money standardize the collection of data? Dr. Pronovost didn’t speculate, but an obvious possibility is that they didn’t want good data. If the $1 billion was never intended to help patients but was instead a bribe to buy hospitals’ support for the ACA, then good data would only have embarrassed everyone by showing that the funded experiments were duds. Positive yet unreliable data enabled everyone to claim victory and celebrate.
The idea that the public should pay extra for health care improvements is deeply ingrained. In Crossing The Quality Chasm, a landmark publication by the Institute of Medicine that was supposed to set out a path for quality improvement, the first suggestion was that Congress kick-start the effort by plunking $1 billion into a Health Care Quality Innovation Fund.6 Why $1 billion rather than, say $1 million? Because health care policy wonks are accustomed to big budgets. For a measly $1 million grant, they won’t even do lunch.
An outsider might reasonably think that paying even $1 million more for quality improvement is stupid. Americans already spend more than $3 trillion a year on health care. That’s far more than any other developed nation, whether measured in the aggregate or per person. Are we really supposed to believe that’s only enough money to buy mediocrity? Isn’t it more than enough to cover the cost of EHRs and other quality-enhancing technologies?
The idea that we should pay extra for quality improvement seems especially galling when one remembers that we don’t pay non-health care businesses extra to make their goods and services better. Imagine Starbucks telling its customers, “Give us $5 now and we’ll come up with a better cup of coffee later.” Other businesses fund improvements with their own money or with money they get from investors, who expect to get it back and then some.
Consider consumer electronics. In 1999, the average price of a 20-inch flat screen TV was $1,200. In 2011, the same TV cost only $84, 7 percent of the price tag 13 years earlier, without even accounting for inflation. Picture quality was much better too.7 Why the huge improvements? Because manufacturers spent billions of dollars on flat panel and manufacturing technology. Early on, the machines that printed flat panel circuits could only handle sheets of glass that were 18-inch squares. Today, they can work with sheets the size of garage doors. Ramping up wasn’t cheap. Flat panel fabrication plants built in the mid-2000s cost $1.5 billion to $2 billion apiece.8
No one paid flat panel manufacturers extra to bear this expense. They used their own money to sponsor research and development and to underwrite capital improvements. Why? Because they faced stiff competition. The manufacturers knew they’d lose customers if they fell behind the curve. They also sought to gain market share by creating a technological edge. Manufacturers upgraded their technology because they wanted to prosper. No payments from the Treasury were necessary.
Competition does motivate health care providers to implement some improvements. Every hospital wants the latest high-tech tool for performing cardiac procedures, firing protons at prostate tumors, and delivering other profitable services. Fear of losing customers may have something to do with this. But notice that these are quality improvements that involve providers doing more and billing more. Providers rarely implement quality improvements that involve them delivering more while charging less. Our politically controlled, third-party payer system punishes them for doing that, even though doing so would make consumers much better off.
The American Hospital Association contends that hospitals must be paid directly to adopt quality-improving technologies because they differ from other businesses:
Implementing new technology is costly to hospitals while the benefits—both financial and non-financial—accrue somewhat to hospitals but primarily to payers and patients. Contrast this to other industries where most technology directly improves productivity, generates savings and thus builds profitability for the entity that invested in the new technology.9
Hogwash. In competitive markets, every business that innovates in ways that increase workers’ productivity, reduce costs, or make their products better shares the gains with consumers. Consumers benefit by paying lower prices or by enjoying products more. Competitive markets are uniformly tough on sellers, all of whom feel constant pressure to offer customers more for their money. When it comes to making consumers better off by operating more efficiently, hospitals are neither unique nor even especially interesting. We should recognize the American Hospital Association’s statement for what it is: an explicit admission by a hired lobbyist that the lack of market discipline has left its member-hospitals uninterested in improving quality of care.
The real reason that health care providers can force the government to pay them to improve is that poor performance usually costs them little or nothing. Mediocrity may kill businesses of other types, but it seems to have little or no impact on health care providers. As David Goldhill observed in Catastrophic Care, “the reason hospitals kill so many patients is that they can—killing patients doesn’t mean they have less loyal customers or that their profits decline.”10 Hospitals with high infection rates keep on treating patients and making money. Cardiac surgeons prosper even when their patients die at above-average rates. General practitioners who misdiagnose illnesses or overprescribe antibiotics do fine financially. Health care providers can pick and choose which improvements they will make because they face little competitive pressure to improve.
When it comes to other businesses, competition is brutal. Remember Oldsmobile? In the 1980s, the flagging brand adopted the slogan “Not your father’s Oldsmobile.” The ad campaign backfired, and General Motors shuttered the brand. And you’re not buying Renaults, Yugos, Plymouths, Geos, Opels, Suzukis, Isuzus, Daewoos, or Daihatsus either. Competition drove all these brands out of the U.S. market. Chrysler and General Motors are still in business, but both nearly bought the farm during the financial crisis and were only saved by politicians who forced taxpayers to bail them out.
The auto sector is hardly unique. Everywhere one looks, competition dooms companies that underperform. Remember Kodak? Once upon a time, its yellow film boxes were ubiquitous. Paul Simon wrote a chart-topping song about the joys of Kodachrome. But, as digital cameras became cheaper, demand for film, paper, and other Kodak products fell so drastically that the company failed. Its former rival, Polaroid, also tanked. What about airlines? Pan Am and TWA are dead and gone, along with Eastern Airlines and many others. Other famous companies that are dead and buried include Montgomery Ward, Tower Records, Circuit City, Woolworth, and Borders Books.
The turnover rate in the health care sector, by contrast, is low. As Professor David Dranove, of the Kellogg School of Management at Northwestern University, observed:
Entry is the engine that drives economic progress. Entrants bring new technologies to manufacturing and new service models to sales. Threatened by entry, incumbents strive to innovate and improve customer service. . . . [I]n a typical manufacturing industry, fully one third of established firms are replaced by entrants within five years. . . . Turnover in the service sector is likely even higher.
If entry is the engine that drives change, the health care sector is out of gas. Turnover in the health care sector is slow to nonexistent. Ask yourself, who are the biggest health insurers today? In nearly all states, the answer is the Blues. Who were the biggest health insurers 50 years ago? The Blues. Now name the biggest hospital in your home town and then look up historical data to find the biggest hospital in your town in 1960. Odds are good it is the same hospital.11
Other researchers agree. The authors of a 2008 Health Affairs article observed:
Most innovation-intensive industries . . . regularly undergo major changes, including wholesale cycling of industry leadership. But the U.S. health sector has been strikingly ossified, with the same industry leaders (academic hospitals and university medical centers) that led a generation or more ago continuing to hold leadership status today. Disruptive innovation is fueled by entrants, yet the U.S. health care market has managed to either exclude or cripple realistic challenges posed by newcomers with innovative organizational forms.12
Health care providers can safely underperform because new entrants find it hard to challenge them.
Why can’t new entrants compete? There are many reasons. Start with innovators who might compete on the basis of price. Retail outlets like Costco, WalMart, and Amazon thrive because buyers want to save money. But patients whose medical bills are largely or entirely covered by private insurance, Medicare, or Medicaid don’t care about prices. They are responsible only for copays and deductibles, so that’s where their financial interest ends. Because their out-of-pocket expense is fixed, they have no reason to prefer low-cost providers. They may even prefer high-cost providers whose services come with more creature comforts. It’s no skin off their backs because their insurers cover the charges.
Insulating patients from the cost of care also reduces the pressure on providers to improve quality. After David Goldhill’s father died unnecessarily from a hospital-acquired infection, he wrote:
Imagine my father’s hospital had to present the bill for his “care” not to a government bureaucracy, but to my grieving mother. Do you really believe that the hospital—forced to face the victim of its poor-quality service, forced to collect the bill from the real customer—wouldn’t have figured out how to make its doctors wash their hands?13
Third-party payment insulates inefficient, high-cost, established health care providers from low-cost competition.
Price-cutting innovators must also overcome patients’ tendency to equate low cost with low quality. The phrase “you get what you pay for” is not always true. Better quality goods and services often cost more. But in the health care sector, the connection between price and quality is far weaker. Indeed, it can be inverted, with better providers charging less than inferior ones.
Patients don’t know this, so they use price as a signal of quality. In 2012, Health Affairs published a study of more than 1,000 employed adults who were given information about health care costs. A substantial minority of the participants “shied away from low-cost providers. . . . Even consumers who pay a larger share of their health care costs themselves were likely to equate high cost with high quality.”14 Patients’ wariness of cheap providers makes it hard for innovators to compete on price.
Now consider innovators who might compete on the basis of quality. Patients should care about quality because their health is on the line. Unfortunately, many quality differences are hard for patients to assess. Consider hospital-acquired infections (HAIs), discussed in Chapter 13. Many patients don’t know about HAIs. Even fewer know how their hospital stacks up against other hospitals. And no one knows how to balance the risk of contracting an HAI against any of the other relevant attributes (i.e., quality of the surgeon and nurses, service quality, distance from one’s home, and so on). Most patients just go where their doctors send them.15
Unfortunately, high-quality innovators can’t rely on doctors to point patients in their direction either. First, doctors have no financial incentive to prefer new entrants. Because the law prohibits payments for referrals, new entrants find it extremely difficult to disrupt existing referral arrangements, even when they offer better service at a lower price. Unless high-quality innovators can offer more and better in-kind benefits to referral sources, their ability to attract patients will be limited.
Second, like patients, doctors themselves often have difficulty identifying the best providers. They base their referrals on reputations, friendships, and past experiences. Unfortunately, all of these measures correlate poorly with quality. Even when high-quality innovators spend the money needed to show physicians that they have built a “better mousetrap,” referral sources are free to ignore the information.
Consider where doctors send patients who need coronary artery bypass graft (CABG—pronounced “cabbage”) surgery. Since the early 1990s, New York and Pennsylvania have issued report cards on surgeons who perform these operations.16 The report cards reflect the surgeons’ risk-adjusted mortality rates—that is, the rates at which their CABG patients die after adjusting for the patients’ pre-surgery physical condition. Risk adjustment means that surgeons whose patients are unusually old or unusually sick are not penalized relative to those whose patients are younger or healthier. Send two identical CABG patients to cardiac surgeons with different mortality rates, and the patient who goes to the surgeon with the higher mortality rate will be more likely to die.
The report cards provide a great deal of information about the performance of cardiac surgeons. They are also easy for physicians to access. The states send them to cardiologists in hope of influencing their referral decisions. But doctors rarely use them. Surveys conducted in the mid-1990s found that cardiologists in both New York and Pennsylvania ignored the report cards when referring patients for CABG procedures. A study published in 2004 also found no change in referral patterns.17 The authors speculated that referring cardiologists remained loyal to particular cardiac surgeons because they had “incentives to direct their patients to specific hospitals” or because of “collegial relationships that are hard to break.”18
The failure of CABG report cards to influence referral practices was again documented in 2006, when Health Affairs published a study finding that New York’s annual ratings had no impact on hospitals’ or surgeons’ shares of the market, even though they were good predictors of expected outcomes for patients.19 Finally, in 2013, a team of prominent public health researchers surveyed New York cardiologists again. Over half of the doctors considered the report card data “not important or minimally important.” Three-quarters said the report cards had little or no effect on their referral decisions. “Seventy-one percent . . . did not discuss the report cards with a single patient.”20
Maybe physicians don’t pay attention to this kind of information for ordinary patients, but they must behave differently when treating VIPs, right? Guess again. When former president Bill Clinton needed heart surgery in 2004, his doctor sent to him a hospital with a proven record of mortality twice that of other hospitals in New York.21 Perhaps this information was fully disclosed to President Clinton, and he made an informed decision to receive care at a facility where his predicted likelihood of dying was twice what it would have been elsewhere, but it seems more likely that the subject never came up.
CABG report cards are not alone in having little impact on referrals. Similar report cards have been prepared by multiple public and private entities, including CMS, the Agency for Health Care Research and Quality, the Joint Commission, the National Committee for Quality Assurance, the American Heart Association, the American College of Cardiology, the Society for Thoracic Surgeons, the American College of Surgeons, Consumer Reports, the Leapfrog Group, and U.S. News and World Report. There is little evidence that any of these rankings influence referrals. If new entrants can’t rely on superior quality to change doctors’ behavior and generate a flow of patients, they aren’t going to enter the market in the first place.
We have already explained that prices don’t correlate with quality in the health care sector. Payments by insurers don’t correlate with quality either. The Rhode Island Health Insurance Commissioner hired Xerox to study that issue, using data from inpatient and outpatient visits to general hospitals in Rhode Island during 2010. Prior studies had found that payments varied widely and that insurers paid large, prestigious hospitals more, regardless of quality. The new study found that payment levels varied substantially among hospitals and that, “If there is a correlation between quality and payment, it is neither strong nor obvious.”22
Similar results were observed in Massachusetts, where studies by both the Massachusetts attorney general and the Massachusetts Division of Health Care Finance and Policy found huge price and payment variation for health care services.23 The Massachusetts Health Policy Commission concluded, “Higher prices are not generally associated with measures of higher quality of care or hospital costs.”24
The news that quality has little or no impact on payments won’t surprise industry insiders. The Massachusetts Health Policy Commission noted that “quality measures do not factor heavily in price negotiations” between insurers and health care providers.25 Instead, leverage is the key. A study published in Health Affairs in 2014 reported that
High-price hospitals . . . tend to be larger; be major teaching hospitals; belong to systems with large market shares; and provide specialized services, such as heart transplants and Level I trauma care. High-price hospitals also receive significant revenues from nonpatient sources, such as state Medicaid disproportionate-share hospital funds, and they enjoy healthy total financial margins. Quality indicators for high-price hospitals [a]re mixed: [they fared] much better than low-price hospitals . . . in U.S. News & World Report rankings, which are largely based on reputation, while generally scoring worse on objective measures of quality, such as postsurgical mortality rates. Thus, insurers may face resistance if they attempt to steer patients away from high-price hospitals because these facilities have good reputations and offer specialized services that may be unique in their markets.26 (emphasis added)
Big, prestigious hospitals and practice groups can threaten to take their patients and go elsewhere, so insurers treat them well. Smaller hospitals and practices have less bargaining power, so they get short-changed, even when their services are better and less expensive. For these reasons, it is not surprising that the Massachusetts Health Policy Commission concluded that “much of the variation in inpatient hospital prices is likely unwarranted and reflects the leverage of certain providers to negotiate higher prices with commercial insurers.”27 Third-party payment keeps consumers ignorant, and hospitals are using the loyalty of ignorant and cost-insensitive consumers to rob everyone blind.
According to a published report, a 2016 study of New York hospitals also found that hospitals associated with systems that have large market shares “tend to be higher-priced as a result of the[ir] power . . . in contract negotiations.”28 Some hospitals were 2.7 times more expensive than others in the same region. And although hospitals often contend that they need higher payments from private insurers to offset underpayments by Medicare and Medicaid, the study disproved that claim. Hospitals that extracted larger payments from private insurers treated fewer patients covered by these government programs. Finally, “hospitals with higher prices did not necessarily have higher quality,” and lower-priced hospitals were often no worse.29
Maybe the problem is unique to the Northeast, and the rest of the country is more sensible? Nope. Consider North Carolina, a state with great university hospitals attached to Duke and the University of North Carolina. These institutions can extract top dollar from insurers by threatening to leave their networks unless paid to stay.30 But North Carolina also has many smaller hospitals located in rural areas. Those hospitals can’t steer big patient populations toward or away from insurers. Lacking leverage, they get bargain-basement rates. When “[a]sked why some hospitals [in North Carolina] charge so much, Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management, said, ‘Because they can. It’s not any more sophisticated than that.’”31
The same goes for physician practice groups. Those with strong reputations and lots of patients receive larger payments than others. Because leverage and payments are connected so strongly, hospitals are consolidating and buying physicians’ practice groups. Maggie Mahar, a financial writer and health care policy analyst, commented on these trends.
Across the nation, hospitals have been consolidating, and when they do, they flex their market muscles. Few insurers are big enough to stand up to them. . . . Large specialty practices with a presence in the community enjoy market leverage [too]. And when physicians are employed by hospitals . . . those institutions use their market heft to lift doctors’ fees by as much 30 or 40 percent. The “bounce” can be even greater. . . . “Blue Shield of California said that after one group of physicians based in Burlingame, Calif., came under the umbrella of the powerful Sutter Healthsystem in 2010, its rates for services increased about 140%. The insurer said it saw a jump of approximately 95% after a Santa Monica, Calif., group became part of the UCLA Health System in January 2011.”32
We discussed some of the reasons why a hospital’s acquisition of a physician’s practice can result in increased payments in Chapter 9. But the larger point regarding market entry is simple. The health care sector is a rough-and-tumble world where bargaining power matters and the strong players control large patient flows. This makes the sector hard for new entrants to break into. Upstarts with small numbers of patients are paid less than existing health care providers even when their services are of higher quality.
In sum, established health care providers have little to fear from new entrants because innovators have difficulty competing with them on quality or price. For the same reason, established providers can comfortably deliver care that is mediocre or worse and can take a pass on technologies that would help patients by improving quality or reducing cost. No matter what they do, patients will keep coming and payers will keep paying. It’s a very cozy arrangement, for everyone but the taxpayers and injured patients.
That’s why providers keep making offers that legislators, insurers, and patients can’t refuse. They don’t even need Luca Brasi to enforce the threat. Don Corleone would be proud.