“It’s a time of great tension in our country,” says NEJM Catalyst New Marketplace Theme Leader and Harvard Business School Professor Leemore Dafny. That includes tension between the demand and supply sides of the U.S. health care market.
On the demand side: patients, individuals, employers, and the government consuming health care services and purchasing health insurance. On the supply side: health care providers, insurance companies, drug and device manufacturers, and the myriad sectors that support all these.
In a healthy, competitive market, price and quantity are determined where the demand curve crosses the supply curve. All products and services that generate value above their long-run cost are produced — no more, and no less.
“But the U.S. health care system is far from a healthy, competitive marketplace,” says Dafny.
Treatment for an ailing, uncompetitive marketplace has three components:
- More entry or repositioning by incumbents
- More transparency to foster competition among suppliers, whether new or old
- Regulation to promote the first two components
A Buyer’s Revolt
These three components are emerging in the U.S. health care market to some degree. First, Dafny discusses a phenomenon that historically hasn’t been common in health care: “The demand side is rising up and saying, ‘enough is enough.’”
“In my view, it’s a symptom that is arising from not following the standard of care in treating ailing markets,” says Dafny. “We’re basically seeing some signs of a buyer revolt.” She mentions, for example, the nonprofit health care entity by JP Morgan, Berkshire Hathaway, and Amazon, whose goal is to improve health care while lowering cost.
“Now, health care providers talk about doing that sort of thing all day long, but a couple of big buyers propose it — and, admittedly, one of those buyers is an Internet behemoth — and the markets go wild. The early excitement and hysteria died down once everyone figured out that these large companies had agreed to agree to do something, but they didn’t know what that was going to be. But I take that as a cry by the demand side for help,” says Dafny. “And there are other cries out there.”
To show how unusual this buyer’s revolt is, Dafny shares an analogy: What if Harvard University were so frustrated with its paper suppliers that it decided to backward integrate into making paper itself? This may seem inefficient, but it’s what health care buyers and employers are proposing. “The product that insurers and providers jointly are offering isn’t cutting it, and if you’re not going to offer us something that we think is a high enough value, we’ll have to figure out how to do it ourselves,” explains Dafny.
Answering Cries for Help
Another answer to a cry for help is Civica RX, a new nonprofit generic drug manufacturer. Led by Intermountain Healthcare, several hospital systems have banded together to source and manufacture generics that they can’t consistently buy at a reasonable price on the U.S. health care market.
Employers are also making deals with providers, cutting out insurers. General Motors signed a deal with Henry Ford Health System to offer a health plan to employees, where Henry Ford agreed to a shared savings arrangement and General Motors promised lower premiums than other plans.
“All of these little revolts will help to undermine the system, but death by a thousand cuts can feel pretty slow,” says Dafny. Fortunately, some suppliers are jumping in to reimagine their roles.
“For an example of repositioning, all you have to do is open up The Wall Street Journal any day. You will find all kinds of information about new transformations and deals going on in health care,” Dafny explains.
Pharmacy benefit managers are or will soon be wholly owned by big insurers, and there is some evidence that this integration provides value for consumers, according to Dafny. When a health plan offers both medical and pharmacy benefits jointly, they offer a greater subsidy to enrollees with respect to high medical offset drugs — drugs that when taken as prescribed are associated with lower medical spending.
CVS-Aetna is connecting directly with patients through retail clinics and pharmacies. “I don’t know if that’s going to work,” says Dafny, “but I would expect that if it doesn’t create value, consumers, patients, and employers and insurers would just get up and walk away.”
“Of course, to make choices, consumers need options. And for every example of repositioning, I can find one of retrenching,” Dafny adds, bringing up ongoing hospital merger and acquisition activity. “The evidence on hospital mergers, whether within or across geographic markets, is discouraging, particularly when it comes to creating value for patients. That’s an average, and there may be some exceptions.”
A potential silver lining for hospital M&A is the possibility that some of the broader systems will create narrow, limited, or high-performance network health plans. These plans, on average, come at a 15% premium below what a comparable broad network plan would be, according to Dafny. “Even if there aren’t that many employers who end up offering that plan, the fact that it’s out there and there is some interest in it should encourage expensive providers to think harder about how to reduce their total spending.”
Transparency Fosters Competition
“You’ve often heard this,” says Dafny. “For me to react to your prices, I need to know what they are. Ideally, I would also know what your quality is, but we’ve poured a lot of money into transparency and research shows that patients don’t look at the data. If they do, they don’t tend to react very much.”
“There is evidence that transparency can work if it’s combined with two things: price negotiations with providers, and if it has teeth,” says Dafny. For example, Walmart Centers for Excellence for spine surgery generated little interest until 2 years ago, when they decided to make all other sites out-of-network, and the volume at those centers shot up.
The third key component to treating our ailing, uncompetitive U.S. health care market is regulation to promote competition and efficient production. Dafny mentions the U.S. Food and Drug Administration headed by Scott Gottlieb, which is taking steps to help biosimilars and generics come to market. Some state Medicaid programs are also innovating, and there is movement at state and federal levels to curb one clear example of market failure: out-of-network charges at emergency rooms.
“I think of those particular initiatives as topical treatments to address systemic problems, but it’s better than nothing,” says Dafny. “Sometimes there is a role for legislation and regulation to step in when markets are failing us.”
U.S. Health Care Market Prediction
At the 2017 New Marketplace event on payment reform, Dafny asked a panel of large employers why they keep paying insurance plans and health care providers for an underperforming health care product. Their answer? “It’s just not that painful yet.”
These employers, having benefitted from strong economic growth, tolerate modest increases in premiums and keep them modest by “passing the buck” to patients through higher deductibles and greater cost sharing.
“We are finding, of course, that’s not such a great solution for patients,” says Dafny. “While they’re cutting back on health care spending, they aren’t cutting wisely — eliminating low-value spending and retaining high-value spending — and who could really blame them?” They aren’t informed health care practitioners, and they’re not always in the right financial position to optimize over what prescriptions to fill.
But “the good times won’t go on forever, because they never do,” says Dafny. “When the next recession does hit, the attitude of employers and taxpayers is going to get tougher. They’re going to demand competition, transparency focused on the supply side where it might be useful, and regulation,” she predicts.
And when they do, the $1 trillion question is: Who on the supply side of the U.S. health care market will be ready?
From the NEJM Catalyst event Disrupting the Health Care Landscape: New Roles for Familiar Players, held at NewYork-Presbyterian, October 25, 2018.