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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
In the past, healthcare consolidation most often looked like large health systems acquiring smaller physician practices. While this trend continues, lately we've also seen increasing instances of vertical integration, that is, new entities where the payer and the provider join forces, sometimes referred to as payviders. This scenario often centers around Medicare Advantage plans in particular, targeting a large and growing segment of the patient population. This phenomenon is increasingly common. There's no doubt about it.
Rob Lott:But what's less clear is how this integration affects markets and prices. Do health systems charge the same rates to health plans with which they are affiliated compared to those with which they have no financial ties? And if not, why not? These are among the questions we get to ask on today's Health Podyssey. I'm here with Doctor.
Rob Lott:Grace Mackleby, research scientist at the University of Southern California, Schaeffer Center for Health Policy and Economics. Together with coauthors, she has a new paper in the August issue of Health Affairs. Its title is also one of its main findings. Quote, Most hospitals with vertically integrated MA plans charge similar prices to affiliated and unaffiliated plans. This is a really very cool study with a a pretty novel data set, and I can't wait to hear more all about it.
Rob Lott:Doctor. Mackleby, welcome to A Health Podyssey.
Grace Mackleby:Oh, well, thank you so much for having me. I'm excited to talk about the paper.
Rob Lott:Great. Well, let's dive right in. Maybe we could start with some background. Can you say a little bit about how widespread these sort of vertically integrated systems are, integration between MA plans and hospital providers? How widespread is that?
Grace Mackleby:So I think it's probably more widespread than people appreciate. So shout out to Geronimo Verrano and Josephine Rohr, who are two of the coauthors on this paper. Together, we compiled a dataset of these vertically integrated plans. And what we found was that there's about 125 health systems throughout The United States that offer one of these vertically integrated plans. And I think as of 2020, about one in six Medicare Advantage beneficiaries are in a vertically integrated plan.
Grace Mackleby:And that might sound kind of high if you're just thinking about a vertically integrated plan as like a Kaiser like system where there's kind of a big health, a big hospital system and a big health insurance company that have grown up together. But among vertically integrated plans, there's actually a lot of different arrangements. For instance, there can be a health system that starts its own plan or a health system that decides to join up with an insurance company. So when you take all those into account, it's a pretty big chunk of the market, I'd say.
Rob Lott:Okay, great. So before we talk about your findings, I'd love for you to describe maybe some of the potential theories that perhaps were on your radar, before you set out on this research. What sort of factors or mechanisms did you think might be leading to a potential discrepancy between the prices charged by hospitals to affiliated plans versus unaffiliated plans?
Grace Mackleby:Yeah, so I think we had kind of two main theories of the case, which is you might expect that a vertically integrated hospital could kind of cut a deal to its affiliated plan and charge them a lower price. So like in economics, we think about that as like double marginalization, where basically, you know, I as the hospital know what the cost it is to, you know, do a heart surgery or something like that. So if I have an affiliated plan, I can just charge that plan as low a price as possible that I am still covering my costs. And then that plan maybe can use those savings to charge a lower premium to enrollees or add extra benefits that can kind of attract people to my plan. So yeah, that was theory number one, where basically the hospital and plan can work together to attract more enrollees to the plan.
Grace Mackleby:I think the other kind of possibility of course, is that the hospital is actually charging a higher price to the affiliated plan. And that could emerge for a couple of reasons. Like for one, maybe you just think that people in affiliated plans tend to be a little bit more sick or complex, and maybe it just costs the hospital more to administer care to those people. The other factor that I think we were really interested in exploring is whether or not high prices could maybe be used to help plans skirt medical loss ratio rules, which, I don't know, is it helpful for me to give a little background on that?
Rob Lott:Yeah, you know, we've covered that topic on this podcast before, but I think maybe a very brief recap might be helpful.
Grace Mackleby:Okay, great. Yeah, a little background then. In Medicare Advantage, you're subject to a medical loss ratio, which basically means that a plan has to spend at least like 85% of its revenues on medical care for its enrollees. And if they don't satisfy that, it can be bad news for the plan because you have to pay penalties. Sometimes you're barred from enrolling people.
Grace Mackleby:So it's ostensibly a pretty big deal. And so if I'm a vertically integrated hospital, I know that my affiliated plan is gonna send a lot of people to me for care. If I wanna make sure that plan can satisfy its MLR ratio, I can just charge a really high price for that care. And then on paper, it looks like that plan is spending a ton of money on medical care. They don't have to worry about MLR.
Grace Mackleby:But of course, I as a hospital, I'm just part of the same company as the plan. So it's more just moving money around within the same firm. And so, to summarize, we kind of had a few possible mechanisms. One, maybe lower prices to help kind of attract enrollees. Second, maybe there's a little bit of MLR gaming.
Grace Mackleby:Third, there's some other stuff about maybe these enrollees are just different.
Rob Lott:Got it. Okay. Well, a lot of great theories to sort of drive the research question. Let's talk about that research now. You, used national hospital price transparency data on inpatient and outpatient prices to sort of explore how vertically integrated plans pay their affiliate providers, and then how that payment behavior varied.
Rob Lott:What were some of your top line findings?
Grace Mackleby:Yeah, so the top line finding, which I guess our title kind of gives it away a little bit, but yeah, we find that about two thirds to three quarters of hospitals actually charge their affiliated plan almost the exact same price as unaffiliated plans, which in turn cues really close to traditional Medicare prices. So that's kind of finding number one. However, you're probably wondering, well, what about the other 30% or so of hospitals? For those hospitals, we found evidence of both types of behavior that I talked about just a minute ago, where we see some hospitals that tend to charge lower prices to affiliated plans. But for the most part, among that kind of remaining chunk of hospitals, we actually see a decent number that are charging higher prices.
Grace Mackleby:So that's kind of main finding number one. And then, you know, when you average across all those hospitals and kind of look at the average price differential, so at the average kind of vertical integration hospital for the same procedure at that hospital, the average affiliated plan is paying about 5% more, I think, than the average unaffiliated plan. And then in the final part of the paper, we kind of try to explore, well, where are these high prices happening? Do they seem like they're happening in places where we think that they should happen if it's about this MLR thing potentially?
Rob Lott:Gotcha. And what did you find in terms of where this is happening? Was it consistent with that expectation?
Grace Mackleby:Yeah. So, you know, I don't know if this podcast has like a caveat corner, but of course this is descriptive.
Rob Lott:I like that. Maybe a special logo or maybe a master
Grace Mackleby:You know, like a theme song? Yeah.
Rob Lott:Exactly. Yeah.
Grace Mackleby:Yeah. Well stepping into caveat corner, I guess. Yeah, so this is a descriptive study, but basically our heterogeneity analysis at least suggests some things that are consistent with those kind of two theories we put forward, where in settings where the MA market is really competitive and not that concentrated, which to be fair is not that many markets, but in those markets, we do see that vertically integrated hospitals actually charge their affiliated plans lower prices on average. Whereas in markets where there is a lot of MA concentration, and you might think that these plans don't necessarily have to entice members as much. In those markets, we see that affiliated plans tend to pay higher prices at those vertically integrated hospitals.
Grace Mackleby:So it's only suggestive that one important element of this is how big of an incentive is there for the plan to try to attract enrollees.
Rob Lott:A great question that keeps popping up in a lot of the research we publish on health affairs. I want to ask a little more about what's sort of going on under the hood, as you've hinted. But first, let's take a quick break. And we're back. I'm here with Doctor.
Rob Lott:Grace Mackleby talking about her research studying how hospitals with vertically integrated MA plans charge prices to affiliated versus unaffiliated plans. Just a moment ago, you talked about how, the majority of plans basically charge the same price, but there is a sizable minority where that's not the case, where there is this discrepancy. Were you surprised to find that? And how is that shaping your thinking going forward?
Grace Mackleby:Yeah, I think I was fairly surprised. I think first that there were so many VI hospitals that were basically charging the same price to affiliated and unaffiliated plans. I think ex ante, it's a lot of work to start one of these VI plans. And so you would think like there must be some advantage to doing so. And so one place we thought we would see that is in prices.
Grace Mackleby:That being said, I think in retrospect, one of the really clear findings for the past ten years or so about Medicare Advantage is that Medicare Advantage plans tend to pay really close prices to traditional Medicare. And so I think one kind of contextualization for that finding is just that in the MA setting specifically, there's not much of a price discount that these hospitals could give their affiliated plans if marginal costs are not so different from the prices they'd receive otherwise. So I think it was surprising, but in retrospect, I think there is some reason why we saw such close hewing between the affiliated and unaffiliated prices. I think the other surprising thing was that among the hospitals that we didn't see pay similar prices, it was kind of surprising that, you know, strategies varied across hospitals. I think we were pretty concerned that, you know, maybe we're just picking up some noise here.
Grace Mackleby:So we had to do some placebo testing and then also, try to convince ourselves with that heterogeneity analysis. But I think that just kind of maybe goes to the point that these BI plans are actually pretty varied in how they structure and maybe how they're approaching their strategy.
Rob Lott:So this might bring us back to the same answer, which is there's a lot of variation, but there's the phrase, the tail wagging the dog. And I find myself asking sort of, what's the tail and what's the dog here? Is it the MA plan sort of wagging the hospital system? Is it the hospital system driving the choices of the MA plan? Or maybe that's a terrible metaphor and you'd like to think about it in a different way, but I'm curious sort of how you might react to that thought noodled.
Grace Mackleby:Yeah, I think you were kind of spot on when you were talking about the variation. So you have the Kaiser situation where, in my sense, it's like both the insurer and the system are making a lot of important decisions together. But you also have situations where it kind of seems like the plan is more heavily administered by the insurer and they're making a lot of strategic decisions, but they kind of have this profit sharing agreement with the hospital. And maybe in those cases, it's kind of the insurer making a lot of decisions, but the prices that we've seen it administered between those two, that could actually almost resemble more of a traditional negotiation process in some And ways, you then you also have situations like Johns Hopkins, where you have a system that, you know, starts its own plan. So I think you're right, where like the tale kind of varies from BI plan to BI plan in terms of who's kind of running the show.
Grace Mackleby:That's my sense from the outside, I guess, after talking to a couple of people that work at some of these places.
Rob Lott:Got it. So this all sort of takes place against the backdrop of ongoing debate about the role of Medicare Advantage in our health system writ large, especially as it's grown over the years. And there are a lot of sort of granular questions that are part of that debate. Are we paying too much? What are the outcomes?
Rob Lott:Does MA drive better outcomes? You know, what to make of risk adjustment and up coding. There's so much to think about and to research and to study, but they're all sort of part of this bigger fundamental question, which is, is Medicare Advantage actually achieving the broad goals that its sort of creators envisioned way back when and then continue to try to tinker to achieve. And I'm curious how your findings might help us answer that bigger question. What are your thoughts on that?
Grace Mackleby:Yeah, yeah, I guess the tough thing is people have a lot of goals when it comes to Medicare Advantage, right? Yeah. So I think if you look at a lot of language around 2006 when the program was really expanded and modernized, it was a lot about choice, right? And so I think our paper is like another data point that Medicare Advantage has been really successful at proliferating a lot of types of plans where you can choose between TM and MA, but you can also choose between a non vertically integrated plan and a lot of different types of vertically integrated plans. I think the other set of goals though, that I think are probably more salient nowadays is like, we want the Medicare Advantage system to reduce medical costs that maybe the plans could pass along to either taxpayers or to enrollees in the form of lower benefits.
Grace Mackleby:And yeah, I guess a return to the caveats, but our paper doesn't directly study whether these plans are achieving savings in terms of medical spending or costs to taxpayers or anything. But I think maybe it has like a little bit to say on the mechanism by which any of those savings would be achieved, which is basically for most plans, it's really going to be coming through quantity and not through prices. And so I guess this paper along with other papers on MA prices that I published and then other people have published, it's really crystallized for me as like, well, the degree to which MA can really achieve that goal is really, well, how much do you think utilization management and care coordination can really lower medical spending? And then on top of that, how good do you think the program is at getting those plans to pass on those savings to taxpayers and beneficiaries through supplemental benefits and lower cost sharing and that sort of stuff. So our paper doesn't directly speak to that, but maybe gives a little bit of insight into the potential mechanism that we'd be relying on, if that makes sense.
Rob Lott:Got it, yeah, and maybe provide some data or some evidence that folks could use as they kind of think about potential policy interventions or kind of next steps. And I guess that brings me to perhaps our last question, which is sort of imagine a policymaker, you know, kind of reading this paper and thinking, you know, as you pointed to, taxpayers and beneficiaries, what are, you know, maybe some potential next steps, whether it's policy intervention or just even further research that you think your paper might inspire going forward?
Grace Mackleby:Yeah, so I think maybe the big takeaway if I'm a policymaker is that if I think the vertical integration relationship in MA is just about skirting MLR rules, I think the evidence we have thus far at least doesn't really support that. You know, it seems like a lot of these plans are pricing very similarly. You might have other concerns about vertical integration, but at least the evidence that this paper has found, it doesn't seem like it's like an endemic issue for the most part. More broadly, I think there's like a ton of research that should be done on these plans. Like they're growing, they're a pretty big part of the market.
Grace Mackleby:And I think there's a lot of questions about how these vertically integrated hospitals are interacting with other non affiliated plans in their market, what the terms they're setting for that network agreements are. And so, if I'm a researcher, which I am, I'd be interested in studying that. If I'm a policymaker, I think the big thing to appreciate is just like, you know, as we kind of mentioned earlier, these arrangements can really vary a lot. And so the devil's kind of in the details in terms of you would want to be paying attention to how that plan is actually coordinating care within the system, and then how they're interacting with other plans in the market to see if anything anticompetitive is happening.
Rob Lott:Great. Well, a wonderful set of further questions and tasks for study going forward. Doctor. Mackleby, thank you so much for taking the time to speak with us today. I really enjoyed it.
Grace Mackleby:Yeah, thanks for having me.
Rob Lott:And to our listeners, thanks for tuning in. Remember, we'll always have the Caveat Corner for you to visit, on a weekly basis here at A Health Podyssey. If you enjoyed this episode, leave a review, recommend it to a friend, and of course, tune in next week. Thanks, everyone.