In 2005, Pamela Neighbor, who was feeling well, made an appointment for her yearly colon cancer follow-up. The IPA in which her physician practiced had recently gone bankrupt and closed its doors. Ms. Neighbor’s employer had switched its employees from Apple a Day Insurance Company’s HMO product to Apple a Day PPO, allowing patients to access most of the physicians and all the hospitals in town. Ms. Neighbor had a difficult time finding a new primary care physician, and when she found one, it took several weeks to get an appointment. Eventually, a colonoscopy was scheduled at a diagnostic center owned by a group of gastroenterologists. She was diagnosed with a second colon cancer and her primary care physician arranged for her admission to Crosstown Hospital. Ms. Neighbor never saw her primary care physician in the hospital; a surgeon plus a salaried inpatient physician called a hospitalist cared for Ms. Neighbor during her 4-day hospital stay. Apple a Day paid Crosstown Hospital $7,200, $1,800 per diem.
Several trends characterize the first decade of the 21st century: the counterrevolution by providers, consolidation in the health care market, growing power of specialists and specialty services, increasing physician–hospital tensions, an emerging crisis in primary care, and growing criticism of pharmaceutical companies.
The Provider Counter-Revolution
The first decade of the 21st century could be called the era of the provider counter-revolution. Hospitals consolidated into hospital systems and demanded large price increases from insurers. From 2000 to 2010, HMO enrollment dropped from 32 to 19% of insured employees and preferred provider organization (PPO) enrollment grew from about 30 to 60% (Claxton et al., 2010). Tightly managed care was faltering.
Negotiations between providers and insurers became increasingly hostile, with one side or the other often refusing to sign contracts. As hospitals and providers gained an upper hand in negotiations with health plans, costs accelerated. Insurance premiums for family coverage went from an average of $6,000 per year in 2000 to almost $14,000 in 2010 (Claxton et al., 2010). At the same time, individuals were stuck with a greater proportion of health care costs. Twenty percent of insured employees, up from 10% in 2006, had deductibles of $1,000 or more for individual coverage. In a typical high-deductible plan, employees paid over $3,000 for their portion of the premium plus a deductible of $4,000 (Claxton et al., 2010). Employees’ out-of-pocket health care costs increased 34% from 2004 to 2007 (Gabel et al., 2009).
Large HMOs bought up smaller ones and merged with one another. Three huge for-profit insurers, Wellpoint (the parent corporation of many Blue Cross plans) with 34 million enrollees in 2010, United Healthcare with 32 million, and Aetna with 18 million, dominated many metropolitan areas. Providers also consolidated. By 2001, 65% of hospitals were members of multihospital systems or networks (Bazzoli, 2004), and consolidation continued through 2008. Many cities had only two or three competing hospital systems. Private primary care and specialty practices were acquired by hospital systems hoping to increase their market clout (Iglehart, 2011).
The Quest for Profitability and the Growing Power of Specialists and Specialty Services
For-profit insurers and providers increased their dominance in health care. Beginning with the rise in the 1970s of the “medical–industrial complex” (Relman, 2007), for-profits continued to expand their reach. Nine of the 10 largest HMOs were for-profit by 1994; HMO stocks soared and executives were rewarded with enormous compensation packages (Anders, 1996). Already in 1990, 77% of nursing homes and 50% of home health agencies were for-profit. Between 1993 and 1996, more than 100 nonprofit hospitals were taken over by for-profit hospital chains, though several financial scandals slowed down this trend. For-profit hospitals provide less charity care, treat fewer Medicaid patients, have higher administrative costs, and lower quality than nonprofit hospitals (Relman, 2007).
A growing proportion of profitable services—cataract surgery and orthopedic procedures, diagnostic studies such as colonoscopies, and CT or MRI studies—shifted from hospital facilities to physician-owned ambulatory centers. Physicians earn income from both the services they directly provide and the facility’s profits. The common practice of physicians referring patients for imaging tests at a facility owned by the same physician is associated with higher volumes of imaging services, increasing costs, and exposing patients to unnecessary radiation (Relman, 2009; Sunshine & Bhargavan, 2010).
Specialists increasingly joined single-specialty groups, with the majority of cardiologists or orthopedists in some cities belonging to a dominant group (Liebhaber & Grossman, 2007). Single-specialty groups grew markedly, so that organized specialists with market power in a local area negotiate for high payment rates from insurers. The income of specialists who offer procedural or imaging services far outpaced earnings for primary care physicians (Bodenheimer et al., 2007). Multispecialty groups, which include primary care physicians and tend to have the best scores on quality report cards, have not grown in part because specialist physicians in multispecialty groups are expected to share their high revenues with primary care physicians who generate lower payments for the group (Casalino et al., 2004; Mehrotra et al., 2006). As discussed in Chapter 5, lucrative payment for procedurally oriented specialty care is one key factor shaping a physician workforce weighted toward nonprimary care fields and a hospital sector filled with tertiary care facilities.
Nonprofit community hospitals responded to competition from specialist physicians by creating “specialty service lines” to attract specialist physicians and well-insured patients to their institutions. To create capacity for these profitable service lines, hospitals de-emphasized traditional medical-surgical wards. Filling a hospital bed with a patient receiving an organ transplant or spine surgery is more financially rewarding than filling the same bed with an elderly patient with pneumonia or heart failure. Strategic planning by hospitals focused on how to maximize the most profitable service lines, rather than how to provide services most needed in the community (Berenson et al., 2006).
Surgeons, diagnostic cardiologists, gastroenterologists, ophthalmologists, and radiologists can successfully run a practice without ever setting foot in a hospital by performing their work in ambulatory centers of which these physicians are owners. Because these specialists no longer need the hospital, they feel little obligation to be on call for hospital emergency departments or for patients in intensive care. Hospitals are forced to pay specialists large sums to provide nighttime emergency department backup or are employing specialists to perform duties formerly done for free. The divorce of physicians from the community hospital is not limited to specialists. The new hospitalist specialty—physicians who care only for hospitalized patients—grew rapidly from 500 in 1997 to 30,000 in 2010. As a result, many primary care physicians are never seen in a hospital, making care coordination difficult (Bodenheimer, 2008).
The Pharmaceutical Industry Comes Under Criticism
The rising tensions among purchasers, insurers, and providers spilled over to engulf health care’s major supplier: the pharmaceutical industry. In 1988, prescription drugs accounted for 5.5% of national health expenditures. With 71% of drug costs borne out of pocket by individuals and only 18% paid by private insurance plans, these costs had little impact on insurers. In contrast, by 2009, prescription drug costs had risen to 10.1% of total health expenditures, with only 21% paid out of pocket, the rest covered by employers, insurers, and governmental purchasers. These payers and patient groups like the AARP began to fight back against pharmaceutical costs. The growing cost of pharmaceuticals for the elderly became a major national issue, resulting in the passage of Medicare Part D in 2003 (see Chapter 2).
For years, drug companies have been the most profitable industry in the United States, earning net profits after taxes close to 20% of revenues (19.3% in 2008), compared with 5% for all Fortune 500 firms. The pharmaceutical industry argues that high drug prices are justified by its expenditures on research and development of new drugs, yet R&D for the largest drug companies consumed 14% of revenues in 2002, while marketing and administration accounted for 33% and after-tax net profits 21% (Reinhardt, 2004). Unlike many nations, the US government does not impose regulated prices on drugs; as a result of drug industry lobbying, the government is not allowed to regulate drug prices under Medicare Part D. From 2006 to 2008, the health industry spent more money on lobbying than any other sector of the economy, and the drug industry was the largest contributor within the health industry (Steinbrook, 2008).
Companies developing a new brand-name drug enjoy a patent for 20 years from the date the patent application is filed, during which time no other company can produce the same drug. Once the patent expires, generic drug manufacturers can compete by selling the same product at lower prices. Some drug companies have waged legal battles to delay patent expirations on their brand name products or have paid generic drug manufacturers not to market generic alternatives (Stolberg & Gerth, 2000; Hall, 2001). In addition, the industry spent $7 billion in 2009 on sales representatives’ visits to physicians, journal advertising, and sponsorship of professional meetings, plus $4 billion on direct-to-consumer television ads (Kaiser Family Foundation, 2010). Authors of clinical practice guidelines often have ties to the pharmaceutical industry (Abramson & Starfield, 2005). From 2006 to 2010, at least 18 relatively new drugs were removed from the market because of serious side effects; in some cases, the manufacturer knew of the problems but hid them from the FDA (Angell, 2004).
In response to growing drug prices, insurers created tiered formularies in which generic drugs have lower copayments than brand-name drugs. As a result, 75% of all prescriptions filled in the United States in 2009 were for generic products (Spatz, 2010). However, the generic industry is consolidating into fewer and larger companies such that generic prices are rising.