The Consolidation Trend in Healthcare: What Does it Mean for Patients, Providers, and Payers‪?‬ with Glenn Melnick, PhD Script

[00:00:00.500] Announcer:

America’s healthcare system is almost unanimously viewed as being unaffordable, dysfunctional and severely in need of transformation. APG President and CEO Don Crane talks with leading healthcare executives, physicians and other visionaries to explore solution to lowering costs and improving quality of care by accelerating the movement toward value-based care models and away from fee-for-service. Want to be inspired by our nation’s foremost thought leaders in healthcare? Then this show is for you. Here’s your host, Don Crane.

[00:00:31.800] Don Crane:

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The consolidation of healthcare entities and whether it is a good thing or a bad thing has long been a topic of debate across the country. But two recent events have moved the subject to the front pages of the nation’s newspapers and make it appear likely that it, and measures to regulate it, will pose significant strategic challenges for all of the players in the healthcare ecosystem.

One of those events was the lawsuit against Sutter brought by Xavier Becerra, the California Attorney General. The other event was the confirmation of that very same person as the nation’s Secretary of Health and Human Services. Given the heightened state of interest in this topic, I thought it would be wise to talk with one of the many economists that have gained national attention recently for their studies on the effect of consolidation on the cost and quality of care. One of those experts is Glenn Melnick, Professor of Health Administration in Economics at the University of Southern California who has studied the matter and testified about it extensively.

I think you’ll find his comments interesting and provocative. Take a listen.

[00:02:28.300] Don Crane:

APG friends and listeners, we have a treat in store for you today. As you know, the word consolidation is a hugely important word in today’s healthcare arena. We have a Secretary of HHS who seems very intent, interested in the subject of consolidation and we read article after article sort of asserting that consolidation in healthcare elevates prices and cost but does not improve quality. So, to probe into that subject we’re fortunate to have with us today Professor Glenn Melnick who is a Professor of Health Economics and Finance at USC in the School of Public Administration. Professor Melnick, welcome.

If I may call you Glenn, I’ll do that.

[00:03:28.300] Glenn Melnick:

Welcome. Thank you. Certainly, certainly.

[00:03:28.600] Don Crane:

Very good. Glenn served previously as a faculty member at L.A School of Public Health. He was a Consultant at RAND and an expert witness to the Federal Trade Commission. But what was, I think, most relevant for us today is, Glenn, whether you like it or not, your voice now has risen to the top of those, I think across the country, top academics that are addressing this issue of consolidation. So, anyway, welcome, good to have you with us today, Glenn.

[00:03:52.100] Glenn Melnick:

Happy to be here, Don.

[00:03:54.100] Don Crane:

Very good. So, what do you make…let’s start right off the top…of this allegation that consolidation increases cost but does not improve quality. Is that true or false? What do you think?

[00:04:07.400] Glenn Melnick:

Well, I guess the right answer is that it can do both. Right? And it depends on the situation and the details. However, there is a growing body of literature that when you look across a large sample of consolidated organizations, you see the price increases dominating the performance metrics rather than improvements in quality and service and things like that. That’s not to say that there aren’t organizations that actually do become more efficient, provide better quality or better service when they integrate, it’s just that the data that we have now, it doesn’t show that to be the predominant trend, let’s say.

[00:05:00.500] Don Crane:

Well, that is important for us today and will be important for us going forward and I’ll elaborate on some of my thinking on that in a minute, but let me run an assertion by you. So, I watched and read your testimony before the California State Assembly, the health committee. It was last October 27th, point of fact, and I know you and I have mentioned it to one another. And as I interpreted this sort of multi-page webinar and so forth, you pointed out that healthcare spent per capita is unaffordable and is rising dramatically. As I interpreted your work and your presentation much of that rise in costs is attributable to hospitals. It’s not particularly increased utilization. It is mostly hospital prices and it happens because there is less competition among hospitals and that is a result of hospital consolidation. So, there’s almost a syllogism there that leads to our topic of consolidation with a lot of focus on hospitals. So, is that an apt characterization of your presentation that day? Or did I miss something?

[00:06:18.500] Glenn Melnick:

No, I think that’s right. I think there’s an underlying model there that focuses first on affordability and the cost of health insurance, the annual cost of health insurance, plus out-of-pocket spending and you know, by any measure from many families, they’re at the breaking point. And then if you look underneath, okay, what’s driving that increase? We see, looking at California data, but in other places, it’s largely in the last 10 or 15 years due to rising prices of healthcare services…hospitals leading the way but not the only ones. And rather than increase the quantity of services or increased technology…so, there was a period of time where adoption of new technology was really driving healthcare spending growth in our country.  That, I think, is less the case now and it’s more has to do with these market structure factors that you’re talking about; consolidation and other organizational market changes that make the markets less competitive.

[00:07:44.900] Don Crane:

So, let me ask, so hospitals may, you know, acquire, merge, otherwise, so that there’s some consolidation and I’m focusing only for the moment on hospitals. It allows them, perhaps, to drive higher prices because of market power and there may be other contractual provisions. But, why are they doing it? Don’t we suppose that there’s underlying reasons that would motivate them to do that.

[00:08:07.300] Glenn Melnick:

Well, you know, so one of the reasons that people…I’ve been talking to people across the country…is that we started studying these trends in California early on. As you know, California started the managed care competitive market competition model. And if you look way back when, when we introduced this legislation that stimulated price competition, most hospitals were independent. They were not part of systems or large organizations and these changes stimulated price competition and we saw in the early days in the early data.

Hospital prices stop growing and actually started to decline in California year after year. And so that was kind of the initial market response to these pro-competitive policies.

After a period of time, what we started to see is hospitals, started to think to themselves, ‘You know, I’m kind of tired of fighting with the guy across the street.’ If we get together, we may not have to beat each other up so much and we can charge Blue Cross a higher price. And so, we saw a wave of consolidation of direct competitor consolidation. Now that type of competition is limited by Department of Justice, FTC antitrust laws and regulations and that’s a fairly well accepted framework for limiting those types of mergers and acquisitions where a small geographic area cannot become too consolidated. And so, then what we see is those types of consolidations slowed down and we saw what we call cross-market consolidation where systems started to add hospitals that were not competitors of existing members, but outside the geographic area. And so, if you look over a 20-year period, you see that now more than two-thirds of all hospitals in California and probably 80% of all patients go to a hospital as part of a system, all right? And so, if you look, kind of step back and look over time, you see what the market responses to these changes and how hospitals have responded and now we’re starting to see the same. We’re also seeing similar trends in this physician sector as well.

[00:11:03.200] Don Crane:

Thank you for the last comment because I think it’s probably well to do a little bit of definitional work here. So, when we say consolidation here, what kinds of consolidations are we talking about? We hear horizontal, we hear vertical…who does this involve? Can you give us a little definitional background here, Glenn?

[00:11:20.000] Glenn Melnick:

A simple way to look at it is, horizontal, where I merge with a potential competitor or someone who sells the same services that I do, whether they’re in the same geographic market or in a different geographic market, so that would be hospitals, adding other hospitals to the system or acquiring them or somehow joining together. Then you have what’s called vertical integration which is when two different sets of activities are merged together. So, think about hospitals and physicians…obviously hospitals don’t function on their own. They need doctors or essential inputs into their business into their operation. And so, we see now hospitals acquiring medical groups as an example of vertical consolidation. We see the pharma companies, CVS, and others joining up with insurance companies. So, we see different examples where different kind of market segments are now coming together into single entities or organizations that are under the same roof, same economic roof to do strategic planning, to do contract negotiations and things like that.

[00:12:53.100] Don Crane:

So, running APG as I do, physician groups that believe in integration that come together in an organized fashion in order to take contracts that include a wide population of patients so that they can better coordinate the care, deliver the care, et cetera et cetera…all of that involves, really, contracts, block contracts where a group and or hospital enter into a contract with a payer for an assigned population. So, this is, I think, what we loosely refer to as the value movement. Yes, it’s involves prospective payment and other features and so forth and yes, there’s risk associated with this, but block contracts, big population and thus, I guess the question I would ask you, is the very value movement, where we have, you know, population health, does it create a circumstance or climate where you’re going to get these kinds of aggregations: vertical, hospital and group. Maybe hospital to hospital. But certainly, hospital and group. These kinds of aggregations that produce I guess an opportunity for rising prices that may rise higher, faster than they should. In other words, is part of the problem here the value movement, please say ‘no’ because I worry that it might be, right?

[00:14:24.000] Glenn Melnick:

So, look, the good news for California is the value movement really started here. And we do have evidence that that model can produce more efficient, more satisfying outcomes being quality, access, health outcomes etc. There is evidence here in California that that model can produce, let’s call it higher value for consumers, right? And a number of your members are kind of the national leaders in doing that. However, if they were a part of this call, they would immediately tell you that’s not easy to do. Basically, managing population health, which is the ultimate goal of the value movement and it’s good that we’re now talking about it much more and focusing on it. You know and the pandemic, I think, has raised our consciousness about it, but managing population health is not easy and so organizations have not done it in a long time, when they move into that space, there’s really kind of different models that they can do. One is they can move into that space, take on those contracts, pull together the providers needed to provide the services that they contract for but the other questions is do they have to do the hard work in terms of really integrating their systems, their providers, right? Managing population health and my concern has been when you’re starting with a highly consolidated market like we have, these organizations will come together for those contracts, but there’s no market pressure for them to actually engage in the hard work to increase value because the market is not forcing them to do it. And so, the simple question is, look, if I’m a provider and I’m already getting above market prices, right? I’m part of a system and our system, given our geographic footprint, we’re able to sit down with Blue Cross or Blue Shield and say, look, if you want to keep us in your network and you’re going to have to keep us in your network if you want to sell insurance in this part of the state, you got to pay us 10% above market. That’s it, right? And so, if a provider group has that kind of power, they’re not going to enter into a value-type contract and give lower prices, right? They’re going to maintain those high prices and that will allow them to continue to operate the same way as before without necessarily embracing and actually building a value-based delivery system.

And so, I’m afraid we have both types of those models here in California. Those that actually do deliver value relative to the non-integrated market. And then those that in name at least are value-based products, but don’t necessarily make the organizational transition to do it.

[00:18:10.000] Don Crane:

So, you know listening to this, I think I like to think I have historically thought that there’s examples of good consolidation and then perhaps bad consolidation. And it has a whole lot to do with the motivations underlying the combination of physicians in hospital. So, I think about the IHA data that demonstrated real clearly the efficiencies associated with group practice in Medicare Advantage where comparing the total cost of care in original Medicare where it’s outside the organized group against the total cost of care of Medicare Advantage practice done by a group including reduced hospital admission. Huge differential, so from memory, I think in 2015 it was like 35%. So, the elimination of waste and the increased efficiency, et cetera et cetera, produced great savings that benefits the whole system.

So, as I look at physician groups, looks to me like they’re doing the right kind of thing coming together, but I listen to your testimony now before the health committee and so forth and I can’t help but note the word hospital over and over and over. There’s something going on here peculiar with hospitals that seems to be a problem, am I right or am I wrong?

[00:19:28.800] Glenn Melnick:

Well, it’s not, I mean, again, consolidation by itself is not automatically good or bad for consumers so the details matter. So, you know, there can be consolidation both horizontal and vertical that generates efficiencies and value for consumers.

You know, the antitrust laws are the things that economists worry about is if there’s too much consolidation you take away market pressure for competition and once that market pressure is reduced enough then the pressure to continue to innovate, to cut costs, to make hard decisions, to achieve efficiencies…that pressure lessens and eventually disappears. And then now we’re in a situation where this consolidation is actually harming consumers. So again, it depends on the conditions, the market conditions with respect to consolidation for a lot of your members who are delivering value year after year. One of the reasons they do it is because there’s competition in their local market. And so, there’s pressure on them to work late nights and weekends to figure it out. You know, what committees do we need? What kinds of…to look at the data we have to figure out how can we manage the care of our members better to achieve higher outcomes and lower-costs, right? And those are not necessarily easy objectives to achieve. So, if there’s market pressure for that to happen, then you’re going to continue to see efforts in that direction. On the other hand, there’s lots of markets where there is not that level of competition, even amongst your members and so they don’t need to perform nearly as well to maintain their market position. The other part is it’s not just hospitals that economists worry about, right? We’re seeing an accelerated consolidation in the physician sector, right? Both among primary care physician as well as specialists. And so, some of that consolidation, a lot of that consolidation maybe in part driven by the growth of accountable care organizations which contract for the whole bundle of services. Not just hospital, not just physician, but everything together. And so that kind of accelerated you know, these organizations looking around and saying, ‘okay you know, how do we put the pieces together without having to compete too much?’ And so, we’re seeing consolidation within the physician sector among specialists so you can have literally a large fraction of a single specialty in a single group in a geographic area. And so, economists then worry about that. If they have a lock on this market, why should they ever agree to any changes that make them more efficient, right?

[00:23:06.000] Don Crane:

The answer might be that they don’t get a contract. They charge too much so the payer, whoever that might be, could even be a full-risk group, or a health plan won’t pay that rate and so looks for an alternative.

[00:23:24.400] Glenn Melnick:

As long as there’s an alternative, that’s fine. But let’s say oncology specialists all join a single group within 50 miles of each other. Then all of a sudden you have no choice but to contract with that group and then they could set the terms of the contract.

And so, they become a must-have supplier be they a medical group or a hospital or a hospital system. As soon as they got that must-have label, that has to be part of an insurance network, then they have market power which allows them to get above-market prices generally.

[00:24:09.300] Don Crane:

So, as I look at the landscape, Glenn, you see, you know, the device, medical device industry consolidates. Pharmaceutical industry consolidates. Clearly the health plans have consolidated enormously. Are we fated to this some kind of a, you know, an arms race where everybody has to get larger in order to successfully survive?

[00:24:35.300] Glenn Melnick:

Well, I think, yeah, that is what we’re seeing, right? So, if you look at all of these sectors, all of them are consolidating. So, there’s an economic…generally and economic explanation for that. You know, again, it will depend on local market conditions. I tell my students all the time, you know, trends are national but impacts are local in healthcare, right? And so, particularly here in California…I mean, one of the things that’s made it a great place to do research is we have very good data from the Office of Statewide Health Planning, but also, we have this large diverse state. When I first started studying there were 450 acute care hospitals that we’re down to about 325. But still, you know, I have other research colleagues who are jealous because we have such a large sample here with so many diverse market conditions. So, it’s good. It makes it easier to study using our data.

So, you know, there’s a diverse set of conditions. So, it’s hard to generalize, all right? But in general, you know, there’s lots of research that shows Northern California hospital markets are, the prices are much higher than the prices in Southern California, even after you adjust for all the factors that you think would explain those differences, right? Case mix, cost of living, wage, input prices, those kinds of things and still prices are higher in the north, right? And then the question is, why? And if you look at the systems overlay, hospital systems overlay, you see it’s had a much bigger impact in the north than it has in the south suggesting that you don’t even have to be part of a hospital system to get a higher price in California if you happen to be competing with hospitals that are in systems that get higher prices. You can ascend shadow price and still get higher prices as a result of the impact of the systems, all right? So, it is a complicated story but it depends on local market conditions because again healthcare is local, right? You know, your members know and hospitals know. Most hospitals, most medical groups get most of their business within a very small geographic area. Patients don’t like to travel generally.

[00:27:16.400] Don Crane:

So, when you say prices are higher in Northern California than they are in Southern California, you’re talking about commercial I believe, is that correct?

[00:27:24.800] Glenn Melnick:

Well, that’s right. I mean, Medicare has regulated prices. So, you know, the prices are higher in the north largely and you know those places where you know, they do surveys of wages that hospitals have to pay and they adjust amounts that they have to pay based on the input prices for those hospitals. So, but you know, the only payers that are subject to these market forces really are commercial and then, to some extent, Medi-Cal.

[00:28:36:300] Don Crane:

So, when you look at this commercial Medicare differential in Northern vs. Southern California, and we’ve argued for years about the labor cost inputs and so forth in terms of adjusting these things but the benchmark by which MA is calculated the fee-for-service spend in Northern California is strikingly lower than it is in California creating a dynamic that some have argued produces a sort of cost shift. In other words, to keep hospitals open in Northern California you’ve got to charge more for commercial because you’re getting paid a whole lot less for Medicare and in Southern California, the obverse is true.

You can get away with charging less for commercial because there’s a higher benchmark county book rate and so forth and you get paid more for Medicare. What do you make of that dynamic?

[00:28:46.100] Glenn Melnick:

Well, so, you know the old saying, correlation is not causation. So, those sets of numbers may be true but this whole issue of cost shifting has been debated, you know, for some time in the health economics literature. I think most economist, you know, have reached the point where they don’t subscribe to the cost-shifting argument. And a simple thought experiment is, let’s take hospital prices to Blue Cross in Northern California. And let’s assume that tomorrow Medicare doubles the amount that it pays those hospitals for Medicare patients.

Would those hospitals that call Blue Cross up and say, ‘Oh, we just got a big increase in Medicare so we’re going to give you guys a discount.’ The answer is no. That, from an economic perspective, without getting too academic here, the objective function of these organizations is largely to maximize revenue.

And then, if they’re nonprofits, to use that revenue to do other things with that money, all right? But I don’t know any organization that as part of its objective function, having the lowest prices in the state or lowest prices in town, all right? You only see that in competitive markets. Then you have to have the lowest price in order to maintain your market share. So, this argument, you know, that it’s necessary just doesn’t follow the economic literature. There’s also been studies that show that basically when these organizations get more money, they just simply spend it on other things, all right? And so, they allow their cost to go up, right? Another way to think about it is, there are quite a few hospitals in California where, I don’t know if 70, 80% of their volume is Medicare plus Medicaid, and they’re still in business, right? So, they’re able to survive under those pricing regimes also.

[00:31:24.900] Don Crane:

Sounds very, very, very complex. So, apart from the cost shifting which is getting ever more fascinating now with the recent Trump regulations on transparency that have obliged hospitals to post their prices. So, this is where I intended to go with this, but it is indeed shocking to see, I won’t use the words for the sake of discussion at the moment, cost-shifting, but the differential between the amounts paid for Medicaid versus the amount paid for Medicare versus the amounts paid for commercial versus the amounts paid for out-of-network commercial, if I can call it that. I mean, the spread is 9-football-fields-wide. It is an amazing dynamic. Any further thoughts? Is that a bad thing? Is that a good thing? Should that be addressed?

[00:32:17.100] Glenn Melnick:

One of the factors that explains those differentials is what economists call monopsony power, right? Which is the consolidation of buyers, right, within a single entity, right? So, this monopoly power, which is the seller side. Then there’s monopsony, which is the buyer’s side. So, Medicare is the largest single buyer of hospital services. Even though it’s only 12% of the population, it’s 35 to 40% of all the admissions in California. So, a hospital looks at Medicare and says can I….do I want to be…have my organization run without Medicare and I’m not going to agree to their prices or right now and am I going to give away 30 or 40 or 50% of my revenue simply because I’m not getting the prices that I want.

And so, the same with Medi-Cal. You know in the hospitals that it tends to be concentrated in a subset of hospitals. It’s also the largest purchaser or a large purchaser. So, this issue of monopsony power comes into play here. In general, economists look at that as benefiting consumers, right? Because now you have instead of individual consumers trying to negotiate a deal with the hospital, they come together in large groups, all right? There is a concern, right? That if monopsony power gets too great that quality and access could suffer. Prices could get so low, right? That the other dimensions of the product will suffer, all right? And, you know, provider groups argue that all the time, all right? And so, the problem there is that the Medicare is acting as an agent for Medicare enrollees, right? So, the enrollee doesn’t get a direct input into these decisions. Medicare does extensively monitor access, they do all kinds of surveys and things like that to monitor access, availability, waiting time, all those things for its members. So, they are paying attention to those dimensions. But obviously this is a very important factor because if we look over the horizon at an all-payer system or a Medicare for All or anything like that, that is going to substantially increase monopsony power, right? Then these other dimensions come into play much more strongly.

[00:35:41.500] Don Crane:

So, notwithstanding the arguments about cost-shifting and the realities underlying it, you know, if Medicare is paying, as my hospital friends tell me whatever it is…80 or 90 or something percent of their cost something slightly below cost…Medicare we’re talking about…to the extent that we shift everybody into Medicare, look out. I mean all the sudden the hospital is under water. I mean, they need the commercial population with the higher payment to keep the doors open.

I have a hard time not finding that to be a persuasive view of how their finances work, notwithstanding the cost-shifting arguments. So, what do we do as we kind of wrap this up, Glenn. We’ve got consolidation. It does seem to be driving higher prices. Healthcare is ridiculously costly, unaffordable for many and seems to be out of control basically. So, what are your thoughts on measures that could be taken to remedy this problem?

[00:36:43.800] Glenn Melnick:

Right. So, as an economist, I still believe that the market, when it works well, you know, is the best friend of the consumer because market pressure creates competitive pressure and you have all these entities working day and night to get my business at the best price, at the quality that I want, at the service level that I want. All the things that consumers value, the market delivers those if you have the right conditions, right? And when we started this conversation, we talked about there was a period of time where we had real price competition in California’s healthcare system. And so, you look back at that time, prices were going down. Premiums were going down, if you can imagine that.

[00:37:43.500] Don Crane:

Yes, I recall. I remember.

[00:37:43.600] Glenn Melnick:

Premiums were going down year after year. And then what happened was the so-called managed care backlash, all right? And you know, what that did is that started…it limited the ability of your members actually to control utilization of emergency departments, hospital emergency departments. And at the same time, we started to see in response to price competition, increased consolidation in the hospital sector and the growth of systems, alright? So, I think we need policies that will restore competitive conditions to the market. You know, failing that, the only remaining solution to continued rising prices will be a government takeover of some kind. And so, I’m hopeful that policymakers will intervene to restore competition to the markets so that the consumer’s voice still plays a role in service, quality, accessibility, availability…all the things that we value and that we don’t turn all of that over to a single entity like a Medicare. Because then they end up making all the decisions for consumers. They substitute their judgment for individuals, right? And so, we lose that responsiveness. So, having followed policy now for the last several years, I think the most important thing is transparency. We need to get the data out there so that consumers understand what’s going on. And they put pressure on policymakers to enact reforms that will make the markets more competitive.

[00:39:48.800] Don Crane:

But will they when all they have to pay is their co-payment, co-insurance, their share of premium? High numbers to be sure. But will they really notice the difference between case rates of Hospital A and Hospital B. Or is it the consumer or is it the purchasers of healthcare as in employers, CMS, Medi-Cal, and the like. Who needs the transparency?

[00:40:14.400] Glenn Melnick:

The families. The people who sit around the kitchen table don’t really understand how much rising healthcare costs is hurting their family budgets. They don’t really understand. They think because by my employer’s paying for a chunk of my premium, they’re giving that to me for free. Well, the reality is they’re not. They’re taking that out of your compensation, right? And so, you know, there are literally millions of California who make 15 bucks an hour who are going to be stuck there because any potential increase in take-home pay is first going to be allocated to paying the premium for their insurance next year, right? Most people don’t understand that so there has to be a growing chorus of outrage that says this is no longer acceptable. You’re going to have to enact policies that make life more difficult for healthcare providers. They’ve had it too easy for the last 25 years. You look at any one of their budgets. It doesn’t matter…recession, non-recession, whatever…their budgets go up year after year. Year after year, right? They are immune to the economic forces that everybody else is subject to.

And that’s just not sustainable on a long-term basis and it’s families that either through higher taxes, higher contribution to Medicare and bigger chunks out of your take-home pay for premium or bigger out-of-pocket. And so, that has to get out there so that there’s pressure on legislature to fight back what providers come in and say, you know, you’re going to bankrupt us if you do this change, right? And they said well, I’m sorry you’re bankrupting, you know, millions of families in California. You’re going to have to work harder.

[00:42:18.500] Don Crane:

So, I certainly get the dynamic that leads to wage stagnation. I’ve long wondered how you know employees and consumers tolerate the dynamic you just mention but they don’t seem to connect dots very well in my personal opinion, though I know others do…policy wonks do. Employers do. So, I get it and agree transparency should be a big help.

What do you make of antitrust enforcement? Historically, that hasn’t done much. Is that a tool the government should be using more or less?

[00:42:52.300] Glenn Melnick:

So, I think, we talked about before the types of consolidation. One problem is the federal apparatus for antitrust has typically looked at local market mergers and really has kind of ignored that the out-of-network, out-of- market consolidation, which is now driving consolidation in price increases. So, I think more of that is going to fall to the states. There are a number of states that already do reviews for those kinds of consolidation. There was proposed legislation here in California. I think that’s an appropriate mechanism at the state level that there be a review of consolidation. You know, the details matter. You want to have a program in place that doesn’t disrupt the market but rather maintains competition and restores competition without necessarily slowing things down. One problem with these reviews is they can go on for a long time and be disruptive to the market. So, we have to design them so that they are efficient as well. But I thought about, you know, maybe a policy change that we were sitting at the federal level at least one change that I think would be very helpful is limiting the ability of hospitals to charge extremely high prices for out-of-network emergency care. That has been a tremendous threat to Blue Cross Blue Shield, all the plans, to not let them out of their network and therefore having to pay them higher prices. I would like to see that, you know, further enforced here in California more quickly. You know, what if you did that change you could then actually have legislation that says, you know, every provider should have a contract with every health plan.

And then you can just negotiate the price because I am also worried about as the systems form, you may have ten hospitals in the city. But once the systems start to carve up the market it may turn out that my access to six of those ten hospitals is cut off because they’re in a different system. You know, that just happened to me when I went to get my lab tests done. And we’re no longer part of that system…we can’t do this lab test.

Well, I was just here last month and you did it, but now you’re telling me you’re not doing it because my doctor is not part of your system? So, I’m worried about access that the market be so segmented into these systems.

Because they’re all trying to protect their market share to protect their prices that consumer access and continuities is going to suffer as a result also.

[00:46:02.400] Don Crane:

So, you’re touching on to a large extent here the surprise billing issue, right? Which California has addressed significantly, I think, through regulation a number of years ago.

[00:46:14.400] Glenn Melnick:

That was on the physician side. Not on the hospital side.

[00:46:18.100] Don Crane:

It was on the physician side, that is correct. And frankly, I don’t know exactly where it’s stands in Congress right now. It’s been debated and fought out. I think we have a bill.

[00:46:28.100] Glenn Melnick:

It’s been passed. So, January of next year there’s a cap on out-of-network emergency bills by hospitals and what it says is, if there’s a dispute it goes to arbitration…and the good news is the law says the arbitrator is no longer allowed to consider as a reasonable price…the full bill charge that the hospital lists on his charge master. Because we all know those are incredibly inflated and not meaningful prices. So, the good news is the arbitrator cannot take that into account. And so, that provides some protection to consumers also that they can go to any emergency room, get the care they need and is not going to be this pecuniary price that either they or their plan is going to have to pay. That will help a lot.

[00:47:31.400] Don Crane:

We fought that out for years. I’m going to wrap up, Glenn. You mention capping costs in out-of-network there in the surprise billing. What is your view of rate caps more generally?

They are being discussed in California, I think now, in connection with the Office of Affordability and elsewhere and of course they exist elsewhere also. They are a de facto cut in provider pay if they’re not indexed to inflation which often times they’re not, so they don’t warm the cockles of the hearts of physicians, I don’t think, in the main. What is your view of rate caps and the like?

[00:48:21.500] Glenn Melnick:

If you can have a functioning competitive market that has all the right incentives that consumers get the best price for the service and quality levels that they want and that protects consumers across all those dimensions. Once you have a third party setting the prices, they substitute their judgment for all these other things. And then also the concern is it becomes budget and politically-driven number which further divorces consumers and what they want from the process. One need only look at the UK, right, and see how they struggle. You know, they don’t go for 10 years without an increase and then things will blow up and then there will be a big increase. So, you know, most economists are not big fans of government-regulated prices because they tend to be, you know, not particularly responsive, all right? But on the other hand, given the affordability problem, if we don’t restore competition to the markets, policymakers, the pressure will grow and policymakers will feel that they have no alternative. But you know, to go to some kind of regulated model because it’s simple…you know, it’s simple whereas markets are complicated and messy.

[00:49:55.100] Don Crane:

So, one of the arguments we make in this conversation is, look, if you adopt the best delivery model and payment model and by reason of its intrinsic structure and align incentives, it makes a profit on eliminating waste. Might that not be the solution in lieu of regulation and price caps and single payers and so on. What do you make of that?

[00:50:21.300] Glenn Melnick:

I like that. I mean, but you still have to…look, your successful members are effective only in certain parts of the state.

I’m sure. I’m sure there are other parts where that model doesn’t work because of local market conditions, right? There’s the specialty market that they have to buy services from is too consolidated. And those docs won’t sign a contract unless it’s 500% of Medicare, right? So, there are other…so we need to restore competitive conditions in order to create the incentives that align the incentives for that model to work. So, Glenn, as we look at the prospect or possibility of single-payer, and high levels of regulation and marketplace that is not working really well, I look to my members. I’d like you react to my observation here. Yes, they’re principally in metropolitan areas where there’s a high density of patients and high density of physicians so that organized systems can best be put in place. Their bottom line is derived by reducing waste writ large, right? So, the unnecessary admissions and avoidable treatments, et cetera, et cetera. So, that’s where they derive their profit. And so, I like to think that that model is the model for the nation as opposed to reducing physician pay, the high levels of regulation. React to my thinking.

[00:52:04.200] Glenn Melnick:

I would like to agree with you also. I mean, I think certainly the California model would generate tremendous savings across the country. As you know, our doctors in California over the last 20 years and most, many are your members have learned how to manage care cost effectively and that is not widely done throughout the rest of the country. So, that model would be a fantastic export. Coming back to California, however, though is, I’m worried that your groups, even if they have been successful so far, if they faced an increasingly consolidated hospital market and they have to negotiate year after year with now fewer and fewer hospital options that they could take their patients to, they’re going to face rising prices that then have to be passed on to consumers. You know, so even though they’re managing care at the end of the day, they still need these other inputs. And if those input markets are consolidated, those prices are going to go up and the rate of increase is going to continue to go up.

[00:53:28.000] Don Crane:

I concur, the worry. I mean a significant percentage of my members are full-risk in California. They have restricted Knox-Keene licenses and they’re paying hospital claims. If those hospital prices are rising astronomically, but which they are in some instances, they pay them and that is a problem. And we’re a payer and at the same time, a provider. So, the hope of reducing avoidable admissions and unnecessary utilization with the hospital while a good one, the worry is that it gets outstripped by, you know, steep price increases, so we’ve got, we’re at the table, both sides of it…provider, payer…and clearly a huge stake in this outcome. So anyway, wish us luck, Glenn.

[00:54:14.100] Glenn Melnick:

Yes, absolutely. Wish us all luck.

[00:54:15.600] Don Crane:

I really appreciate talking with you. And we will do it again soon, I hope.

[00:54:26.900] Glenn Melnick:

Anytime. Good talking with you, Don.

[00:54:26.900] Don Crane:

Thank you very much. Take care.

[00:54:26.900] Announcer:

Thanks for listening to APG on American Healthcare with your host President and CEO, Don Crane. For more information about APG and transcripts of this show, visit the APG website at