A Conversation With Peter Kongstvedt, MD: Provider & Manufacturer Pricing Need Reform Too

As the ACA brings access to insurance, it could trigger consideration of price controls for providers and manufacturers

The Affordable Care Act is health insurance market reform, not health care reform, says Peter Kongstvedt, MD, a managed care consultant and educator. “It’s one leg of a three-legged stool. Nothing was done on the provider side or the manufacturer side — whether it is pharmaceuticals or devices — other than some minor twiddling around the edges, like allowing for generics. That is small potatoes compared to what the ACA did on the payer side.”

He’s not complaining and he understands the politics behind it, but he sees a growing unrest about high provider and manufacturer prices, both in the industry and in popular opinion. “The ACA will accelerate the need for us to start looking at those other sectors.”

Kongstvedt is a faculty member at George Mason University, where he teaches a graduate-level course on managed care, and is the author of two books on the topic: The Essentials of Managed Health Care (2012), and Managed Care: What It Is and How It Works (2008). A frequent speaker at trade group conferences and a regular blogger on his Web site, www.kongstvedt.com, he is the founder of P.R. Kongstvedt Co., a consulting firm, and Kongstvedt Learning Solutions, an online employee training company. He previously was a partner at Ernst & Young and was associated with CapGemini and Accenture. Earlier he worked in the insurance industry, where he held a series of positions, including executive vice president and chief operating officer of Blue Cross Blue Shield of the National Capital Area.

A licensed physician and a fellow in the American College of Physicians, Kongstvedt earned his bachelor’s degree and his medical degree at the University of Wisconsin, where he also completed a residency in internal medicine. He spoke recently with Managed Care Editor John Marcille.

Managed Care: Do you see any changes taking place in your consulting practice?

Peter Kongstvedt, MD: I used to focus equally on strategy and operations. It’s more on strategy now, at the board level as well as senior management level.

MC: Strategically, then, what concerns you most about the present state of the industry?

Kongstvedt: You can’t ignore the Affordable Care Act in answering that question. It’s a big law. One concern is, will the changes be implemented well or properly? They don’t have to be perfect, but they do have to provide for information, enrollment, and access to coverage, or at least put that in motion. The biggest fear I have in all that, particularly in those states that are holding their breath, stamping their feet and threatening to turn blue before they do anything, is the information exchange requirements. There is a ton of information that has to get exchanged between insurance exchanges, states, Medicaid, the IRS, the federal government, and the health plans. That’s hanging over the entire system, at least for those who will participate in the insurance exchanges.

MC: How do you feel about accountable care organizations?

Kongstvedt: We are seeing lots of things called ACOs and patient-centered medical homes, but it is sort of like saying “bird” because each one is really, really different from another. Often half of all the revenue that goes into a hospital is from Medicare. You have to get Medicare ACOs right. It’s baked into the law; it’s not there as a pilot. Congress enshrined an experimental concept in law, which is always a good idea, right?

MC: Are you saying that the concept won’t fly well?

Kongstvedt: I don’t know. It may fly perfectly well. They are not stupid over there. ACOs are going to get adjusted a lot, but by putting it in the law, it will happen. We won’t dither around and take forever to get it implemented. But there’s plenty of room for pretty serious provider revenue shortfalls if we don’t do it right.

The first, second, and third place problems go to provider consolidation and its effect on pricing. I can’t overstate what a big deal this is, what a problem it is for us.

MC: What about on the insurance side?

Kongstvedt: My guess is that over the long term, the medical loss ratio restrictions will be fine, but I don’t know that. I worry the most about new risk-bearing health plans that have sprung up — you know they don’t call it risk for nothing. In the early days of HMOs and even PPOs, plans were springing up like dandelions and a lot of them went under because they didn’t know how to manage risk financially, much less medically. Fortunately, I think every state has enough large, stable payers that if new plans do go under, the state could simply divvy members up to existing plans. So I am not that worried on behalf of consumers.

MC: What are you worried about outside of the ACA?

Kongstvedt: The first, second, and third place problems go to provider consolidation and its effect on pricing. I can’t overstate what a big deal this is, what a problem it is for us.

MC: Please elaborate.

Kongstvedt: We’ve seen an astonishing consolidation that began in the 1990s — facilities combining to form these mega, hegemonic systems with true market power in the sense that economists use it: the ability to command prices. Most of these dominant systems got together ostensibly to save money and be more efficient, but that market power sure didn’t translate into payers or employers saving any money. On the other hand, health systems do have their own arms race to deal with.

MC: Arms race?

Kongstvedt: Hospitals make nearly all of their margin from procedures, and little from non-procedural medical care. But procedures can be moved, especially those for healthy patients that provide the highest margins. Hospitals are in competition with their own surgeons frequently or with other facilities that entice surgeons with the world’s most fancy hyper-turbo quantum sub-atomic laser scalpel. To compete, you need one too, or buy the physician’s practice, both of which are happening.

MC: Yet you said many can command prices.

Kongstvedt: If you have market power, you can boost your chargemaster by 10, 11, or 12 percent and tell your health plans that you would be losing money on a new contract based on your new chargemaster. Then it goes back and forth, and at some point, if the hospital has enough market power, the parties come to an agreement, but from the plan’s perspective it is certainly not a happy agreement. In the process of updating my textbook recently, I talked to a lot of health plan executives involved in network negotiations, and a surprising number of health plans were getting double-digit increases every year. Every year. And as I teach my students, chargemasters are like snowflakes: No two are alike. There is some relationship to cost, but it is kind of vague. And prices almost never go down. Even if a procedure gets simpler or less costly to do, the price doesn’t go down. By the way, we shouldn’t use terms like reimbursement — because it’s not, it is payments.

MC: I hate the term reimbursements. I don’t reimburse my mechanic for working on my car.

Kongstvedt: I hate it, too. I actually have a whole speech built around payment models, and that’s the first point I make. You have to understand that it is payment and not reimbursement — which is a kinder and gentler term implying fairness, as though you submitted your travel voucher to your boss.

MC: Is the problem getting worse?

Kongstvedt: It has been getting worse for quite a while, but is getting worse faster because of the employment of physicians. Having market power when you have all of the facilities is one thing, but if you also employ a huge number of physicians, especially primary care or high-volume specialties, that brings you even more premiums. Plus it brings you another hidden goodie: If certain procedures are done in a physician’s office, they are paid at one rate, and if they are done at the hospital, they are paid at a higher rate. When physicians are employed, they are more or less told to use the facility’s services for everything.

MC: Is physician ownership of equipment and self-referral a big problem, too?

Kongstvedt: Yes, but it is a very different problem. The problem with the physician ownership version of self-referral is the effect on utilization. By the way, I am pretty sure that most physicians who steer patients toward their services are doing it subconsciously. Most docs want to do the right thing. It’s not that they want to do more procedures for strictly craven reasons.

MC: But we talk ourselves into things that are in our interest, don’t we?

Kongstvedt: Yes. In another example, I have been reviewing a fair amount of research on this topic, and there are examples where some treatment is found to be really useless, except under certain circumstances, and it still gets done plenty often. It is not until payers and Medicare really put their foot down and say, “We will only pay for it under these circumstances,” that it slows or even stops.

MC: What is going to make a difference?

Kongstvedt: It really takes organizational efforts and pressure. Laws help, but the self-referral thing is a tough nut. It is so tough that in Medicare, Congress passed laws against it, which they have slowly pulled the teeth out of. You could drive a truck through the so-called in-office exemption, which allows physicians to self-refer for stuff that is in their offices. Their office could cover a square block, but it is under one roof, so it is exempt.

MC: Are fixes in those laws, or other laws that will deal with this, on the horizon?

Kongstvedt: The next piece that I think will happen — and we are starting to hear rumbles about it in Maryland and Massachusetts — is price control for facilities. Maryland already has a form of price control called an all-payer setting, which means the state sets the payment terms and all of the insurers use it. It is not single payer, and they don’t pay everybody the same. They have a lot of factors that they apply to it, but it is the state setting those rates. They still have to contend with the chargemaster and the incredible number of things that have fees attached to them, but there is some evidence that it does slow the rate of rise in facility costs. Other countries do it routinely, by the way. Maryland is also starting to talk about budgetary control. In Massachusetts, there is some discussion about this, too. The state would actually set payment caps. That would be getting a lot closer to Quebec in Canada. In their all-payer system, they also set budgets, and every quarter when the money runs out, facilities don’t get paid. That drops utilization fast.

MC: Will we get to that point?

Kongstvedt: I don’t know if or when those states will go to that, but it does point out that it is no longer completely out of the question to start to discuss it. I think that eventually we are going to end up with some form of price control or rate control on the facility side.

MC: And what about for the third category you discussed, the manufacturers?

Kongstvedt: We are the only nation that doesn’t have price controls for manufacturers. Medicare and Medicaid do for some things, though there are examples of its being deeply flawed. But we don’t have anything in the private sector. Sure, other countries that control pricing experience health inflation, too, but you just can’t escape the fact that we are so far out of bounds and have been for so long. We have willfully ignored this part of it. We are willfully ignoring it now when we say that health care cost inflation is due to all of these baby boomers retiring into Medicare. But their costs don’t change all that much from the day they were not eligible to the next day when they are. This hasn’t been dealt with in the popular press, but in the academic world, there’s a reasonably good acceptance that the aging of the population is not having as big of an impact as other things.

MC: But we need medical devices.

Kongstvedt: Yes, and I for one am glad for their existence. But the prices of the devices are completely irrational. In certain procedures, the price of the device is half the price of the admission.

MC: So you think we’ll end up with price controls for manufacturers?

Kongstvedt: I think that is what we are slowly going to move to. I don’t expect to see it for a while, but I think the ACA is going to accelerate it.

MC: Ten or fifteen years?

Kongstvedt: Maybe. It’s actually very hard to really know what the effect of high health costs is on our economy because the other side of the equation is that it employs a huge number of people. If you cut health care costs by 5 percent, unemployment would go up. That’s not something you do without thinking about it, at least. In speeches, I sometimes employ a sort of trick on the audience. I show a picture of a cover of Time magazine that reads “Medical Costs: Seeking the Cure” over a picture of a physician wearing a surgical mask made with a dollar bill. And up in the corner it says, “The Politics of Gas.” I say, “You’ve seen this Time magazine recently, right?” And people will nod and say, “Yeah.” And then I blow out the date: 1979. The article makes the comment that health care costs are over 8 percent of our GDP now [1979], which is higher than any other nation on the planet, and if we get into double digits, we are doomed.

MC: But we weren’t, were we?

Kongstvedt: No, we weren’t doomed at all. In fact, we boomed. We didn’t lower health care cost inflation in the mid ’90s, as a lot of people think we did, but mostly our economy boomed, and so it kept pace. Then, when the economy started to flatten off and HMOs were backlashed, health care cost inflation started to accelerate again, especially compared to the regular GDP. And we are still chugging along. We talk about the cost of health care and how much it is crippling us, but it’s actually pretty hard to point to how or how much that is actually happening. The cost of wages and benefits for labor is higher, but when you have electronics and auto manufacturers moving back to the U.S., that tells you something. Health care diverts money in directions that don’t go into wages. On the other hand, it pays wages to people who are in health care.

MC: Changing the topic, your online program trains people in managed care, saying, “The more you know, the better you’ll do your job.” What is most important for medical and pharmaceutical executives to know?

Kongstvedt: They don’t necessarily need to know everything, but it helps to know how the pieces fit together if they want to improve the quality of the work that they do. For example, medical directors just coming from full-time practice are going to need to focus first on utilization management, quality management, and network management and recruiting. It is also very important for medical directors to understand payment methodologies. They can also play a role in marketing and sales.

MC: How are they most effective in that capacity?

Kongstvedt: Large employers and benefits management consultants want to know what is going on inside the medical management function. It’s one thing to read a description of it; it’s another thing to talk to a person who is charge of it. That can be a very powerful element of the marketing and sales process. It’s also important to be involved in new product design because sometimes you will see a benefit design that might sell well, but people didn’t really think through the implications of actually trying to administer it. But sales is where you really see a medical director’s involvement paying off.

MC: They go along for the pitch?

Kongstvedt: Yes, but sales is not just the initial sale. It is every single day, and keeping in touch with your largest customers can be a very good way to bind them a little bit closer. Ask them their input, what is important to them, what they are hearing about from their employees, that type of thing. Medical directors can often see that through a different lens than somebody who is not trained clinically. In one case, I suggested that a company’s medical directors talk to regulators and build up more of a relationship.

MC: Thank you.