The Low Unit Price Fallacy

Today’s Managing Health Care Cost Number is $121

Propublica, a nonprofit investigative reporting organization, published a carefully-researched article on kidney dialysis  in the United States last week. The article will be in next month’s Atlantic magazine, and I learned about it from an interview on NPR’s Fresh Air.

We initiate dialysis a lot of people in the United States – more proportionately than any other developed country.  We’re obese and getting more so, and diabetes is a major cause of renal failure. Renal failure disproportionately afflicts African-Americans and the poor; part of this is because those with poor access to health care are more likely to have uncontrolled high blood pressure.  However, our patients on dialysis die more quickly than those in other countries --

The article focuses on the poor care offered in the US compared to other developed countries.  Reporter Robin Fields documents renal failure patients who exanguinated when their dialysis catheters were hooked up incorrectly, and centers that were repeatedly cited for safety violations.  She points out that in other countries kidney failure patients get longer dialysis, and have more physician supervision.

No surprise – we spend a lot of money on dialysis too.  On average, we spend $77,000 on dialysis per patient per year – more than any other country

Here’s the surprise.  We spend less per dialysis session than all other developed countries except Australia - $121 per session in 2003 -  even though the resource cost to deliver dialysis is substantially higher.

How could it be that in a country where unit price is almost always the problem, we are paying such a low unit price for dialysis?

Well – this price is set by the US Congress – which has been aghast at the total cost of dialysis, about  $20 billion per year. Congress lowered the price per session in the 1980s after noting very high margins for dialysis providers. The two companies that dominate the dialysis industry remain very profitable. 

AND while the unit price is low, the aggregate cost of dialysis per patient per year is much higher than elsewhere.   How can this be?

In the US, we pay a single price for the dialysis, and we pay separately for medications that are administered intravenously during the dialysis.  This has meant that dialysis units facing a large cut in their reimbursement for their core service were able to be profitable by administering large doses of erythropoietin (epo), a medicine to combat the anemia associated with renal failure.

As a result, the US has used far more epo than other countries – good news for Amgen, the manufacturer.  This has been bad news for patients, though, as we’ve learned that higher doses of this medicine don’t simply mean less anemia, they also cause higher risk of heart attacks and strokes. 

CMS has announced a new plan to bundle payments for dialysis. The total stated cost will be higher –but the dialysis center will no longer be able to gain margin from administration of medications.   That’s good news.

As the Congress debates legislation that would once again reverse the physician SGR (sustainable growth revenue) 23% Medicare physician fee cut, it’s important to remember that too low a price in a fee for service world can lead to overutilization of other services.   Simply cutting prices can lead to results that can be expensive, and can hurt patients.   

These graphics and data for top graphic are from this article in the International Journal of Health Care Finance 2007. Click images to enlarge 

CMS: 2008 Medical Inflation Much Lower

The Centers for Medicare and Medicaid studies released its report on health care spending in 2008 – published in Health Affairs on Monday and covered extensively in the press.   The good news is that health care inflation overall was lower than it’s been for years (4.4%).  The bad news is that health care inflation continued to outpace growth in the economy – so health care moved from 15.9% to 16.2% of GDP. 

Some of the conclusions that have been widely reported 

- Health care is not immune to the effects of severe recessions

- Hospital inflation decreased to 4.5% - and hospital prices only went up 3%

- Physician services increased by 5% - the slowest rate since 1996.  Medicare physician spending, however, increased by 7.8%

- Prescription drug spending increased only 3.2% - continuing a trend of relatively low pharmaceutical inflation with the onset of many new generics and without big blockbusters coming out of the pipeline. Still, most of this increase was price (2.5%) as opposed to utilization.

-Medicare spending was up 8.6% - and growth in Medicare Advantage plans played a role.  Big cuts in Medicare Advantage reimbursement in health care reform could now have an impact on more constituents.

- Medicaid spending increased.

One observation that has not been covered extensively.  The government pays much lower rates (especially Medicaid). Therefore, a shift of a patient from commercial health insurance plans to Medicaid could  easily mean a decline of 50% in reimbursement to many hospitals.  If providers shift these costs by charging private insurers more, then there are no “real” savings.  On the other hand, if providers see decreases in revenue and reengineer their processes to allow for sustainability at lower reimbursement, then the increased government role should lower unit prices.

I’ve often blogged about the problem we have with unit price in the United States.  The CMS article has a great graphic (below) showing the role that price inflation (compared to utilization inflation) has played over the last 30 years.

 (click the image to enlarge it)