Newtown, CT – May 29, 2015
Life is a lot harder when you have to compete, but it's always a win for the consumer – Three years ago we published a report on the overutilization of hospitalizations in Pittsburgh, comparing that city to four others. The upshot was that the excessive, and seemingly unjustifiably higher rate of bed days per thousand residents, created an added financial burden in the community of close to $200 million. Since then, UPMC, the dominant health system, and Highmark BCBS, the dominant payer, have split up. Highmark plan members no longer have access to UPMC as an in-network provider, and our analyses at the time strongly supported that decision. UPMC's pricing was significantly higher than the market average, in addition to overusing hospital-based services. The consequence was higher premiums for employers and higher costs for individuals. In all truth, this situation, which is rampant in many other parts of the country, would likely have continued had UPMC not owned a health plan. UPMC's health plan was draining Highmark's plan membership, undercutting its competitor with lower premiums. It's quite a brilliant strategy if you can get away with it. As a health system you overcharge the competing health plan, and undercharge your own health plan. In a sense, the competing health plan is subsidizing the success of your own. And then Highmark pulled the plug.
What this means to you – UPMC recently announced a buyout for 5% of its workforce, applying the same cost-cutting techniques that many other "old line" companies have for decades. That's on top of other cost-cutting efforts. Without the indirect subsidization from Highmark, the UPMC health system must slim down in order for its health plan to stay competitive. Hospital capacity is being reduced and staff laid off, resulting in a win for all other employers and employees in Pittsburgh. While no one should rejoice about these layoffs, the reality is that many of the UPMC jobs created over a couple of decades were the result of artificial growth, completely subsidized by every other employee in the city. UPMC's over-building and overreach wasn't in response to consumer needs, but simply the result of consolidation and market dominance. The forces of competition finally exerted themselves in Pittsburgh because Highmark's market share was threatened and that's an important lesson for all employers tired of rising premiums. In most other markets the unique dynamic of Pittsburgh does not exist. As a result, the only force that can rationalize prices and capacity is transparency accompanied by steerage. Fear of business loss changed the game in Pittsburgh and it can change it everywhere, but it doesn't just materialize out of thin air. It must be injected in a market, and can be with payment and benefit design reform.