Counterpoint

In Part I published last week, I highlighted the cognitive dissonance of state governments implementing price controls that would limit commercial reimbursement rates paid to hospitals, the only health economy stakeholder with unlimited downside risk because of the requirements of the Emergency Medical Treatment and Active Labor Act (EMTALA). I also noted that Part II would analyze real, as opposed to merely “percent of Medicare,” commercial reimbursement rates in Indiana and nationally for physicians and hospitals to explore the interplay between reimbursement rates and physician employment. 

In Part I, I also noted that it is unsurprising that Federal government officials have determined that the best way to control prices is to implement price controls. Price controls have long been the hammer for healthcare policymakers, while reimbursement policies are the nails. As a pendulum swings from one extreme to the other, price controls are the logical opposite of cost-plus reimbursement systems that are frequently the starting point for government reimbursement, if only immortal in the Defense Department. 

Diagnosis related groups (DRGs) replaced cost-based hospital reimbursement in 1983, and the Medicare physician fee schedule (PFS) replaced “usual, customary and reasonable” charges in 1992. Today, the Centers for Medicare and Medicaid Services (CMS) uses “prospective payment systems (PPS)” to reimburse “acute inpatient hospitals, home health agencies, hospice, hospital outpatient, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals, and skilled nursing facilities” based on a “predetermined, fixed amount.”¹ In other words, “prospective payment systems” is government-speak for price controls.  

In summary, the Federal government has fully implemented price controls to reimburse healthcare providers, leaving reimbursement for commercially insured patients as the only “free market” in the health economy, except for cash reimbursement models like plastic surgery and cosmetic dermatology. PPS models are also extensible, as revealed by CMS’s forthcoming Transforming Episode Accountability Model (TEAM), which essentially applies the DRG concept to a larger group of clinical providers.

The long-term deleterious impact of Federal price controls is abundantly evident, which led me to declare in 2017 that the U.S. healthcare system operates in what game theorists refer to as a negative-sum game. 

How it started: 

How it's going: 

The combination of the Federal government’s implementation of price controls on healthcare providers over the last 40 years and a shrinking percentage of commercially insured patients in the U.S. health economy have created what economists call a “doom loop” for hospitals and physicians, “a situation in which one negative economic condition creates a second negative condition, which in turn creates a third negative condition or reinforces the first, resulting in a downward spiral.”²  

Importantly, and bizarrely, the implementation of price controls, particularly for physicians, and especially for primary care physicians, is completely contrary to widely held beliefs about what is required to address the cost crisis in the U.S. healthcare industry. In 2012, the New England Journal of Medicine published an article titled “From Sick Care to Health Care – Reengineering Prevention into the U.S. System,” in which Farshad Fani Marvasti, M.D., M.P.H., and Randall Stafford, M.D., Ph.D., wrote this: 

"A key feature of U.S. healthcare is its use of a piecemeal, task-based system that reimburses for 'sick visits' aimed at addressing acute conditions or acute exacerbations of chronic conditions... 

Moreover, our reliance on ever newer, more advanced technology has perpetuated an expensive system in which costly new technology is widely adopted in the absence of comparative advantage. When combined with economic incentives for patenting devices and drugs, these technological factors become self-reinforcing. Although many preventive strategies may be cost-effective, they unfortunately have limited potential for wide adoption because they cannot be patented or made profitable… 

Payers and the federal government must fully reward use of appropriate nonpatentable therapies and support research on the development and dissemination of prevention strategies… 

Systematic steps must also be taken to change the culture of medicine so that primary care is valued. Renewing primary care will require increasing ambulatory care training in community settings and reallocating funding for residency training away from hospitals to reimburse appropriately for innovative models such as medical homes. Furthermore, we must compensate primary care physicians for their work as care coordinators by establishing reimbursement parity for cognitive and procedural care and accounting for long-term costs and benefits.”³  

These concepts articulated in 2012 are now accepted wisdom, and the Federal government could have implemented them in a straightforward way: drastically increasing reimbursement for the ten evaluation and management (E&M), i.e. office visit, codes that are the foundation of every physician’s practice. E&M codes represent almost 35% of the total number of medical claims in any given year, and our all-payer claims database contains almost 800M E&M codes in calendar year 2023.⁴ 

Implicit in the axiom that you get what you pay for is that you don’t get what you don’t pay for, and not paying physicians enough to cover their costs inexorably leads some of them, as perhaps the most rational economic actors on the planet, to pursue paths to maximize their economic interests. 

According to the American Medical Association, “between 2012 and 2022 the share of physicians who were self-employed fell by 9 percentage points from 53.2% to 44%. In contrast, the share of physicians who were employed grew from 41.8% to 49.7% during the same period… The share of physicians working in practices at least partially owned by a hospital or health system increased from 23.4% to 31.3% between 2012 and 2022.”⁵  

The marriage between hospitals and physicians is almost always for convenience and never for love, as evidenced by Generation Y physicians seeking to be employed for better “work/life balance,” with an emphasis on avoiding taking call on nights and weekends. Although the relationship between hospitals and their employed physicians frequently mimics Stockholm Syndrome, a drowning man is desperate for a life preserver, and many physicians will relinquish some of their autonomy for an employment model that allows them to relinquish the myriad administrative complexities and financial challenges of private practice. 

Indiana is a notable outlier to the national trends in physician employment, with 71% of physicians employed by hospitals, as this data from our proprietary provider directory reveals.

One reason for the high percentage of hospital-employed physicians might be the comparatively low commercial reimbursement of E&M codes in Indiana: 

Interestingly, Anthem’s reimbursement of E&M codes is lower for Indiana physicians than any other Anthem state, and just barely higher than the national average for Medicare reimbursement.

Quite obviously, the aggregation of numerous unprofitable physician practices into a large group will result in the aggregation of a large financial loss. In addition, independent physicians are principals, while employed physicians are agents, a distinction that frequently manifests in differing productivity. In a world in which Medicare and Medicaid payments are capped, there is only one way for hospitals to recoup losses from employed physician practices: higher commercial reimbursement. Despite employing physicians at a significantly higher level than national averages, Indiana hospitals receive relatively average reimbursement from Anthem, the dominant commercial payer in Indiana:

Implementing price controls on commercial reimbursement to Indiana health systems will certainly achieve the goal of controlling prices, but the question is at what cost. Broadly speaking, price controls are a negative economic condition that will strengthen the doom loop.  

The fundamentals of economics posit that price controls distort price signals and usually lead to a decrease in supply.⁶ The presence of third-party reimbursement, whether by the government or an employer, obfuscates price signals in the health economy. Even so, everyone knows that physicians respond to price signals in the form of reimbursement rates, the most obvious example of which is the large number of physicians who will not accept new Medicaid patients into their practice.⁷ Similarly, many specialists, especially psychiatrists, dermatologists and dentists, no longer accept insurance.^8,9,10 Perhaps the most logical result of price controls on commercial reimbursement is a further reduction in the number of providers who will treat Medicaid patients.  

With all of that as context, the fact that the Indiana General Assembly is actively considering price controls is curious in many respects.  

First, price controls are akin to price fixing based on the Federal Trade Commission (FTC)’s definition: “an agreement (written, verbal, or inferred from conduct) among competitors to raise, lower, maintain, or stabilize prices or price levels.”¹¹  What the Indiana General Assembly is considering – establishing a price ceiling - would be patently illegal for two or more healthcare providers to implement. It is illogical to believe that consumers can be harmed by price fixing that is organized by competitors but be unharmed by price fixing that is orchestrated by the government with respect to those same competitors. As an aside, it is also concerning to consider the power of government to compel behavior that it can simultaneously prohibit by a private citizen.  

According to the FTC, “when purchasers make choices about what products and services to buy, they expect that the price has been determined on the basis of supply and demand, not by an agreement among competitors.”¹² Consumers might therefore be surprised to learn that the cost of their healthcare was not determined on the basis of supply and demand but by government mandate. Moreover, how the public interest is served by the state government’s interference with arm’s length transactions between two non-governmental entities is also unclear. 

Second, and more importantly, the primary driver of healthcare costs is the health of the population. Logically, the health policy of the executive and legislative branch of every state government would focus on the health status of the residents of the state. In such an event, Indiana’s Governor and General Assembly might consider initiatives to improve Indiana’s perennially poor performance in state public health rankings.^13,14,15 Indiana’s Governor and General Assembly presumably understand this embarrassing performance since the Governor’s Public Health Commission published this one-pager noting that Indiana ranked 45th in the nation in public health spending as recently as 2021, with per capita funding 40% lower than the national average. 

While it is undeniable that employers pay more than their share for healthcare services in Indiana and every other state in the Union, it is equally undeniable that the Federal and state government are almost entirely to blame. The thought that things will improve with additional government-mandated price controls is at best sophomoric.  

With the advent of CMS’s Transparency in Coverage initiative, employers who tire of being the parasitic host of the entire health economy have an option to reduce their spending on healthcare benefits: value for money, about which we have written extensively. Employers don’t lack a solution to rising healthcare costs, they just lack the courage of their convictions. 

As a result, it would be foolish, if unsurprising, for the Indiana General Assembly to double down on their historic failure to invest in public health for their constituents by implementing price controls that ultimately reduce access to healthcare services for those very constituents whose health status is already grave. In contrast, it would be wise, if surprising, for the General Assembly both to double down on their investment in public health and also to incentivize the expansion of primary care access throughout the state. The most obvious step to lowering healthcare costs in Indiana and the United States is for Americans to be healthier. 

For the sake of my fellow American citizens in Indiana, I hope the members of General Assembly come to their senses soon.