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Friday, March 12, 2021

What Does the Lifespan/Care New England merger really mean for Rhode Island?

Profit, administrative costs and executive salaries are killing health care

By Jim Cowan MD MPH  

Lifespan and Care New England are merging, with some help from Brown University. Why?

Because the two health systems can barely make ends meet.

But why are health care systems running out of money when Rhode Islanders spend more on health care than people in many other states?

Because the health systems are not paid enough to cover their costs.

At the same time, one third of every dollar to be spent on health care does not pay for health care. One third is siphoned off to pay for administrative expenses and profits of health insurers. 

The root cause of our health systems’ struggles is the inefficiency of health insurance as it exists today.

  • Health System mergers treat the symptom of hospitals unable to pay their bills
  • The cause is the enormous inefficiency of our complex health insurance industry: 30% of the money you spend on health care is spent on other things.
  • Lifespan and Care New England will be financially stable after the merger but jobs will be lost and the public will pay more for care too.
  • The merger will make the symptom go away but the disease will still be with us.
  • The solution? Replace this highly-inefficient health insurance system with Medicare For All. Medicare is six times more efficient than private insurance and is patients’ choice as the most popular insurance plan.

The hospital mega-deal between Lifespan, Care New England and Brown has long-term implications for Rhode Island, according to 12 News business editor Ted Nesi in Nesi’s Notes.

So what long-term changes are likely for Rhode Islanders? It’s not all good news, I’m afraid.

According to a 2018 study on health system mergers by the National Council on Compensation Insurance (NCCI) mergers have big effects. (NCCI is the licensed rating and statistical organization for workmen’s compensation in Rhode Island and 34 other states.). The biggest effects of health system mergers are:

  1. 15% to 30% reductions in hospital operating costs. Mergers enable consolidation of duplicate services and better integration of care. This is why health systems merge. However, as the largest operating cost in a health system is labor, reductions in operating costs mean job losses.
  2. More bad news is these reductions in operating costs do not translate into health care price decreases. According to NCCI, health system prices increase by 6% to 18% after mergers. Post-merger, the public sees higher, not lower costs. This is not surprising. Health systems use their increased market share to leverage higher reimbursement from insurers.
  3. Also, the same or even greater volume of services are delivered when a single site replaces two. For many patients, the quantity of care delivered is increased. At the same time, there is no evidence that mergers lead to improved outcomes in the community served by the merged health care system, so the extra care appears to be unnecessary care, i.e. care that does not improve health.

In summary, mergers lead to higher health care costs, not the lower costs you might expect. And people lose their jobs.

So why this merger?

Both Lifespan and Care New England are in a precarious financial situation. For several years they have lost money or had very small surpluses. This is concerning. Failing hospitals become targets of for-profit hospital chains which tend to have worse outcomes and even higher costs than non-profit institutions.

Lifespan and Care New England will reduce their combined annual operating costs by several hundred million dollars. We can expect the new organization to negotiate higher prices for its services. More revenue and lower expenses will improve their financial situation.

Because the costs for care at the new organization will increase, businesses and the public will see higher health insurance premiums. This is bad news except for the insurance company.  

If health insurance premiums rise then insurance companies raise premiums, giving themselves more revenue and more profit. For-profit insurers such as United will see their share price increase. This is their principal corporate goal. Not-for-profit Blues plans will see their cash position improve.

Health systems and insurance companies will both benefit from this merger and the public will pay more. This is why the United States healthcare system spends one third of every dollar on activity that does not improve the health of patients. Over a trillion dollars are wasted every year on high prices and paperwork churn. That’s roughly twice the money spent on defense.

The leaders of health systems and insurance companies are not evil. With sound finances, health care systems continue to deliver health care and insurance companies deliver higher profits. This is what they are required to do: health systems by their charter from the state, insurers by their fiduciary responsibility to shareholders.

Health care costs are so high and continue to rise faster than general inflation because no-one negotiating prices in the healthcare system is rewarded for reducing the price paid by business and the public. Thus no one at the negotiating table truly represents the patient or the employer.

A few numbers describe how just much our current system of health insurance has failed to control costs.

Inflation since 2000 has increased the cost of goods and services by 52%, the share price of shares listed on the S&P 500 by 62% and on the Dow by 76%. During the same period the cost of healthcare has risen by 267% and the share price of the largest health insurer, United Health Care, by 770%.

In other words, since 2000 the cost of health care has risen four times faster than other prices and the nation’s largest health insurer has seen its value increase 15 times.

United is not an Apple or a Facebook or a Tesla where true innovation justifies huge rewards. United does business in a mature industry selling pretty much the same commodity that’s been sold for a hundred years. 

What’s happening is private health insurance, for profit and not-for-profit, is draining money from the health care system, and from the rest of the United States economy. With tax breaks and favorable legislation, insurers siphon off a bigger and bigger slice of the health care pie every year while health systems like ours struggle to provide care.

And what about Brown’s contribution of $125 million? Rhode Island spends several billion dollars a year on health care. $125 million spread over time is not much in the big scheme of things. If the new organization creates an academic medical complex with a national reputation that would be wonderful. 

But an academic medical complex would have minimal impact on the present costs, access problems and disparities in health care in Rhode Island. Established academic medical centers tend to have clinical outcomes that are not as good as the best community hospitals for the treatment of common conditions that are the bulk of people’s health problems. Academic medical centers do have much higher costs though, which is not what we want.

Given the health insurance system we have, the Lifespan and Care New England merger is the best possible arrangement of deck chairs on the health insurance Titanic. But we don’t need new deck chairs, we need a new course that avoids the iceberg of for-profit, multi-payer health insurance.

The current private insurance system, with multiple competing companies, has an overhead (administration and profit) of 18% or $1.3 trillion dollars per year, enough to pay for the Department of Defense twice over. 

Medicare has an overhead of 2%. The difference between 18% and 2% would pay health systems and doctors fairly for every patient in the United States. Oh, and by the way, you could see any doctor and go to any hospital that you wanted to if Medicare were the only insurer.

There are a few things that government does best. Health insurance is one of them. The Lifespan and Care New England merger is telling us we need a different health insurance system.

Jim Cowan MD MPH is an expert in health insurance policy.

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