February 6, 2018
Big employers flex their health care muscles
by Paul Carroll
Last week’s announcement of a healthcare venture by Amazon, Berkshire Hathaway and JPMorgan Chase may finally shift the debate in the U.S. in what I firmly believe is the right direction.
The debates on the Affordable Care Act and then on “repeal and replace” have largely focused on who pays for care. The real issue is the incredibly high cost of care in the U.S. If we can start to fix that problem, then the issue of who pays becomes easier. If we don’t, the issue of who pays will keep getting hairier. And the venture could take a whack at healthcare costs, first for the three companies’ employees, then for the whole market.
In theory, health insurers use their size and market power to keep prices down. In fact, health insurers have basically become a tax on the system. Whatever healthcare costs are, insurers get their 20%. Yes, insurers have incentives to push back on individual claims—many of us have learned the hard way—but the higher that costs are in the aggregate, the more the insurers earn. Netting 20% of $1 trillion a year is great, but why stop there if you can collect 20% of nearly $4 trillion? (Healthcare spending was $3.3 trillion in the U.S. in 2016, or 18% of GDP, and is still increasing rapidly. That percentage is roughly twice as high as in other major Western countries, even though Americans consume about as much medicine and services and have relatively low life expectancy.)
Pharmacy benefit managers (PBMs) were, likewise, supposed to protect us on prices, but they’ve been co-opted, too, by the immense profits to be had. Rather than just negotiate drug prices on behalf of employers and health plans, the PBMs now take payments from all comers, including drug makers—and the U.S. pays prices roughly twice those in other major countries.
Other ideas have been floated, notably “consumerization”—making consumers more accountable for their care by assigning them responsibility for some portion of every payment, while giving them far more information than they have now about prices and the quality of caregivers and value of medicines and procedures. That approach makes some sense, but it requires changing the whole system—and the system will fight back. Patients’ cost are the system’s revenue, and it has become so large and powerful that it will battle as hard as can be to protect that revenue.
The best idea I’ve seen, the one that could actually be the point of the spear that pierces the healthcare system’s armor, sounds rather like the Amazon/Berkshire Hathaway/JPMorgan Chase deal (which some are calling ABC, after Amazon, Berkshire and Chase).
The notion is that employers—initially, big employers—can lead the way on a form of consumerization because they have both the right incentives and the right scale. Individual consumers carry no particular weight, and we can hardly be expected to sort out the mind-boggling complexity that is healthcare. But big employers that self-insure can hire expertise to negotiate directly with providers and get better prices than if the employers rely on health insurers and pay the middlemen their 20%. Big employers can also draw on their data analytics expertise to measure outcomes and locate the best treatment for employees through programs such as Centers of Excellence. Prices may well be higher for these highest-quality providers, but the centers avoid unnecessary treatment (not something that a revenue-maximizing system is especially good at policing) while providing care that is more likely to be right the first time; that both avoids cost and reduces complications for patients. Employers can also cut through the fog that cloaks drug charges and insist on better prices either from PBMs or directly from makers.
Essentially, big employers kick insurers out of the picture and go toe to toe with healthcare providers and PBMs to both lower prices and improve care. That’s the theory, anyway.
The details about ABC, while still sketchy, suggest it is the best example thus far of this approach. If ABC works, and other examples follow, they might just provide a market-based solution to a major drag on Americans. Individuals would initially be left out, but some way could eventually be found to let them benefit from the prices negotiated by corporations or Medicare.
There are, of course, plenty of reasons to be skeptical. If you’ll allow me, ABC isn’t as simple as A, B, C. Even if the deal works as advertised, what’s to stop the combined companies from becoming just another power that jacks up healthcare prices for individuals while working for their own benefit? Amazon’s Jeff Bezos, Berkshire Hathaway’s Warren Buffett and Chase’s Jamie Dimon aren’t exactly known for turning down profits.
Still, for now, let’s call ABC progress and keep a close eye on where it goes. That’s pretty much the initial take among our thoughts leaders, three of whose articles on the subject I’ve included below. (One, Brian Klepper, has organized an impressive array of thinkers on a listserv on healthcare costs that has done much to shape my thinking.)
I’ll keep my fingers crossed. If this approach doesn’t work….
Have a great week.