With or without GPOs?

Misaligned interests – they happen far more often than we think. At the core of the 2008 financial crisis for instance were rating agencies being compensated by the very firms whose securities they assessed that lead to unreliable ratings leading bankers and investors astray. The Enron mess – ring a bell? Did we not learn anything for that? In the healthcare space – we see this happen too. Robert Litan and Hal Singer write a great article in HBR drawing our attention to broken compensation structures that result in higher cost outcomes for healthcare consumers. I don't mean the dysfunctional fee-for-service payment model for doctors.

What am I trying to get at? GPOs. GPOs or group purchasing organizations are organization whose role is to serve their member hospitals money by relieving them of some of the transaction costs associated with procuring medical supplies on their own. Without a doubt, they play a very critical role in cost containment by leveraging buying power in the market. If hospitals were to independently contract for medical supplies they would be stumped with astronomically higher costs for supplies. We're talking in the billions here. In essence, GPO's "seem" indispensible.

The issue however is not that they stand to serve a critical function but how reliable they are. A recent GAO report questions the price saving intent of GPOs. Drawing on the most relevant conclusions from the article reveal that GPO contracts did not ensure that hospitals saved money. In many cases, among hospitals of all sizes, GPO negotiated contracts were often higher for supplies like pacemakers and safety needles. The GAO study is in stark contrast to the GPO funded studies touting substantial cost savings for hospitals – go figure!

This brings us to examine how GPO's make their money. By hospitals themselves. By charging a percentage of the total outlay their member hospitals pay to preferred medical suppliers on the negotiated contracts. The economics of it are simple – higher the expenditures - higher the GPO compensation. Are you thinking about kickbacks? Back in the 1980's GPOs convinced Congress of their indispensible role in reining in healthcare costs and they are thus exempt from the "general statutory ban on kickbacks where the government covers health care costs".

A recent article I read over the summer, does a great job in bringing to light GPOs engaged in a partly dirty business under the guise of helping hospitals. What the author here focuses on is how GPOs stifle innovation and even went as far in stating that GPOs keep life saving devices from entering the market. He relates his particular experience of getting a needless-syringe proven to lessen catheter infections into hospitals. His product was significantly less expensive and more effective. That's why he was thwarted time and again.

With the perverse incentives for GPOs, their "intended" pro-competitive stand is questionable. What is needed here? The HBR article concludes that these perverse incentives need to be reversed by repealing the safe harbor provisions that exempt GPOs. Over and above policy change – how about transparency of GPO contracts to start with?

Itemized receipt for my health insurance premium

There’s been lots of discussion recently on transparency. Whether that means getting a receipt for the income tax we pay and what it’s used for or providing a price list to consumer/patients for different medical procedures in a geographic region, the buzz of transparency is everywhere. All this talk has gotten me thinking about renewing my auto insurance - Bear with me, I swear health care costs are related. When I asked for a quote, I got to see exactly how much I pay for each point of coverage. Having auto insurance liability coverage is required by law in my state, but for other types of coverage, I chose the level of coverage that best fit my own risk tolerance. After playing around with different levels of coverage I received a calculate premium payment. I knew that 50% of the premium was for liability coverage, 30% for collision, 10% for additional medical coverage and 10% for services that save me time. Then I took that same standard language and shopped it around. There is lots of competition, and I have a vested interest in getting the right coverage for me for the lowest cost. I own a lot of the responsibility for controlling the premium and the costs of my coverage are very transparent. I have a direct incentive to encourage me to drive safely and to take care of my car. While I could not tell you the statistical likelihood of me getting in an accident; I know that if I do my best to avoid accidents and take care of my car then my risk is reduced and so is the increase in my premiums. My behavior doesn’t eliminate the risk entirely, but then that’s why I have insurance, isn’t it?

I sure wish health insurance worked this way. I have insurance coverage through my employer. Don’t get me wrong, I’m really grateful for it. But my employer gets to figure out what is the most cost effective coverage for them and only then do I get to choose from the couple of selections that they provide. I feel very disconnected from the cost of insurance. Even though I only pay a portion of the total premium, I know vaguely that I might play a role in keeping health care costs in control by diet and exercise and regular checkups, but I don’t have a very visible way of seeing the impact. I sort of know what my health insurance covers. For instance, I know my employer ensures that all major plans cover approximately the same thing. But then my choice is based on which doctors I have access to and the overall portion of the premium I pay. I also know what my co-pays are and what my deductible is. But I don’t know how much of my health insurance premiums go to catastrophic coverage, preventive care services, chronic care management, prescription coverage, etc. I feel very disconnected from the premium cost and even more disconnected from how I impact that premium.

Out of curiosity, I asked the insurance agent from whom I purchased auto insurance whether their health insurance quotes were itemized in the same way as their auto insurance quotes. Let’s just say that the lack of transparency is not just a symptom of employer coverage.

We keep asking for transparency on health care costs thinking that it will help align consumer and practitioner incentives to use health care effectively. Maybe we could start by asking for transparency on the costs we, as consumers, have a real relationship to, the amount we pay for insurance. It’s all well and good to know how much a triple bypass costs at the different hospitals in my town; I just don’t know that knowing the difference would induce better health behavior on my part. What is relevant to me is what my premium actually buys me and where I might play a role in controlling it.