Coordination versus Competition in Health Care Reform

By Katherine Baicker, Ph.D., and Helen Levy, Ph.D.
The New England Journal of Medicine, August 14, 2013

Many current proposals to increase the value of care delivered in the U.S. health care system focus on improved coordination — and with good reason. Badly coordinated care, duplicated efforts, bungled handoffs, and failures to follow up result in too much care for some patients, too little care for others, and the wrong care for many. A host of current reform efforts aim to reduce these inefficiencies in both public and private markets. These efforts range from penalizing hospitals with higher-than-expected readmission rates, to rewarding primary care providers when patients receive higher-value care, to providing incentives for the adoption of electronic health records. Accountable care organizations (ACOs) and bundled payments are designed to create monetary incentives for coordinated care. The hope is that coordination will improve value by ensuring that the right care is provided in the right place at the right time.

These laudable efforts, however, may unintentionally be at odds with another strategy for improving value: promoting competition in health care markets. In general, less competition means higher prices; one well-publicized symptom of the lack of competition in U.S. health care is providers’ ability to charge different prices for the same service. Competition may drive higher quality, particularly when prices are constrained. The benefits of competition in private markets may even spill over to higher quality in Medicare, for which the Centers for Medicare and Medicaid Services (CMS) sets prices. A number of policy interventions, such as quality-reporting and price-transparency initiatives, are based on the idea that better information can promote competition and lead to greater value, and these initiatives have the potential to be very effective when patients have a choice of providers.

Well-integrated provider networks may promote coordinated care that improves the allocation of health care resources, but they are likely to undermine competitive pressures to keep prices down while maintaining high quality. Coordinated systems may thus deliver the right care to the right patient at the right time, but at the wrong price. Competitive markets may do a better job of keeping prices low, but with the well-documented drawbacks of fragmentation.

The current suite of policies for addressing the ills of the health care system does not embody a unified approach to the roles of coordination and competition. In part, this lack of coherence reflects the fact that our insurance “system” is really several different systems, including moderately competitive private insurance markets for the nonelderly, nondisabled population and a single government payer, Medicare, for the elderly and disabled that largely pays providers set prices on a fee-for-service basis. These two payers currently pursue different approaches to reform. The most recent round of Medicare reform initiatives focuses on coordination, with ACOs as the prime example. In fact, the FTC has signaled that it will weigh the benefits of integration in improving quality against the potential harms of reduced competition. For the privately insured sector, the current focus is on enhancing competition through price transparency and “skin in the game” for consumers.

So what should policymakers do? We offer three broad prescriptions that may help strike the right balance between coordination and competition. First, we can look for the win–win opportunities to enhance both competition and coordination. As noted, health IT may be an example of such an opportunity if it is implemented well. There may also be win–draw opportunities in which either coordination or competition may be enhanced without harming the other. For example, the contracting processes that CMS uses for Medicare Advantage plans, Medicare Part D, and durable medical equipment have some competitive aspects but do not fully leverage the forces of competition to promote quality without sacrificing coordination. These processes could be improved.

Second, the courts and regulatory agencies that are tasked with enforcing antitrust law could focus explicitly on this trade-off when they examine health care and health insurance markets. After decades of relatively unsuccessful attempts to prevent hospital mergers, the FTC has recently had a string of successes in that arena. Similar vigilance is needed in other areas, particularly in the new realm of ACOs. As we gain insight into the reasons for the price dispersion in health care markets that transparency initiatives are bringing to light, we should explore whether this dispersion results not just from variation in quality and efficiency but potentially from anticompetitive behavior.

Third, policymakers could systematically look across silos to consider the effects that an initiative in one sector will have on consumers in another — and on providers overall. To do so, they must have a clear understanding of the trade-offs at hand and the interaction of multiple policies and regulations aimed at improving quality and value. Coordination may foster delivery of the right quantity of care to each patient, while competition may help keep the prices for that care as low as possible. It is not obvious a priori what point on the competition–coordination spectrum provides the highest value in terms of quality of care and health benefit per dollar of spending. But total spending depends on both quantity and price. We need to evaluate the net effect of the suite of new public and private insurance-market policies on both price and quantity as we consider which policies might restore federal health care spending to a fiscally sustainable path.

Competitive bidding is no Medicare fix

By John Teevan
Milwaukee Journal Sentinel, August 12, 2013

Recently, the Centers for Medicare and Medicaid Services (CMS) substituted its current pricing methodology with an unfair new process for setting prices known as “competitive bidding.” The idea behind this policy is to lower costs and reduce fraud in the system, and these are commendable goals. But what resulted was bad public policy that not only fails to fix the problems it was meant to solve but also creates a host of new problems.

When round 1 of this program was put into place, it was limited to just a few test markets. But in July, it expanded to about 100 more, including one in southeastern Wisconsin. The effects will be devastating for health care providers, health care systems and the patients we serve. If round 1 was any predictor of the future under round 2, numerous providers will go out of business.

Even more troubling, this “competitive bidding” program will lead to less freedom of choice and access for our patients, and, I believe, a possible decrease in the quality of care for them. Many Medicare beneficiaries — seniors over 65 and disabled Americans — have come to rely on their local health care provider to be there for them when they are at their most vulnerable. Local providers are there for their patients during power outages, equipment malfunctions and other potentially life-threatening moments. When many of these local providers are put out of business by “competitive bidding,” it will be the patients who suffer the most.

As smaller, local providers disappear, patients will potentially be forced to rely on providers many miles away. This may mean a delay in Medicare approval of regular services, as well as longer wait times in the case of emergency or equipment failure that could leave the patient stranded, waiting for critical equipment like a wheelchair or oxygen tank.

Not only will this unfair pricing scheme be harmful to health care providers, health care systems and patients, it also will be more expensive for taxpayers. Reducing access to in-home medical care will result in more emergency room visits, delayed discharges and unnecessary hospital stays. Keeping patients in their homes means significant savings to the Medicare trust fund; “competitive bidding” does just the opposite.…

Many policies today are aimed at providing cooperation/integration/coordination as a means of improving quality while obtaining greater value in health care. Although some of the models are inappropriately directed more to business aspects and less to patient care quality, nevertheless, everyone working together seems like a good idea. Free market ideologues may also agree that these efforts are laudable, but they remain emphatic that, above all, marketplace competition must be relied upon to drive higher quality and lower prices.

This is not an idle, intellectual exercise. Pro-market enthusiasts are driving much of our health care system today with the result that health care is outrageously priced, is of mediocre quality, and has impaired access for tens of millions due to financial barriers that the market model has erected. Let’s look a little bit closer at the call of ideologues Katherine Baicker and Helen Levy to “fully leverage the forces of competition” by injecting more competition into coordinated systems.

They mention Medicare Advantage, Medicare Part D, and the purchase of durable medical equipment as CMS programs that have introduced supposedly beneficial competition, although not enough in their opinion. We already know that Medicare Advantage costs more than the traditional Medicare program, while taking away patients’ choices of their health care providers. The Medicare Part D drug program was designed to promote competition between drug plans, yet we are paying much more than we would be with government purchasing programs such as we have with Medicaid and the VA system.

Now CMS is expanding its competitive bidding program for durable medical equipment. The suppliers who win the bids will likely do well when measured by business standards. But many of the losing firms will be forced out of business simply because CMS will take away the largest sector of their clientele – the Medicare beneficiaries. Many patients will lose the services of their own medical suppliers and have to rely on other suppliers who may not be readily accessible because of distances that must be traveled, or who may provide inferior services simply because they cut back too much in order to win the bid based strictly on lower prices.

The government is in a unique position to administer pricing on a take-it-or-leave-it basis. The process is based on an analysis of actual costs plus fair margins. Health care providers would be foolish to reject fair prices. If pricing proved to be too low, threatening sustainability of the providers, it would be the responsibility of government to adjust prices to make sure that services and products were there when patients needed them. For those who say that this process results in $1000 toilet seats, all you need to do is compare costs in the traditional Medicare program with the higher costs through private insurance plans, including Medicare Advantage, or compare VA drug pricing with pricing through Part D plans or even higher pricing through the open competitive market.

Baicker and Levy offer three policy prescriptions that have a goal of being sure that competition remains the driving force, yet they seem to muddle through delivery system reform in order to protect competition. To no surprise, they remain totally silent on a far more effective solution – dump price competition and establish a universal program of government administered fair pricing. It works in all other wealthy nations; it should certainly work here.