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Friday, January 15, 2010

At least someone understands the finances

I used to deal with insurance companies in running a small capitated provider network. We complained bitterly when we were not provided with sufficient funds to pay the providers what we thought were appropriate payments for services. As a rule our complaints fell upon deaf ears. We complained yet continued to provide services.

That all changed when we threatened to pull out. At that point negotiations began in earnest. We were previously under the mistaken belief that both we and the insurer were negotiating in good faith. However, in reality negotiations really did not begin until we established credibility by threatening to pull out. We had leverage when it was perceived we were willing to do something which would really put the hurt to those who held the funds.

Today in the WSJ, there was a report on Walgreen's in Washington State threatening to pull out of the Medicaid dispensing business (link below -unfortunately behind the firewall).
Walgreen Co. warned Wednesday night it will withdraw about half of its pharmacies from the state of Washington's Medicaid program Feb. 15 as the program continues to cut back on reimbursements.

The nation's largest drug-store chain made the same vow last year, but a smaller cut in reimbursement rates made Walgreen stand down. A similar standoff occurred last year in Delaware.

The company said Wednesday the most-recent cut in Washington has resulted in Walgreen losing money on the dispensing of 95% of brand-name medications. The reduction, the company said, stems from a Massachusetts court ruling last fall that cut the industry pricing standard "even though pharmacies' acquisition costs haven't changed."

It added, While many private insurance providers have adjusted pharmacy reimbursement rates to limit the impact of the court ruling, Washington's Medicaid program has yet to do so."

Walgreen said it will pull 64 of its pharmacies from the program, representing 75% of the company's total Medicaid business in the state. The company operates 121 pharmacies in Washington.

There are certain businesses which have been highly successful in the past decade and the large integrated pharmacy businesses are in that camp. They have deployed sophisticated information and inventory tools which allow them to manage costs and track margins. They have a very focused business model. When an organization like Walgreens threatens to walk away from a huge piece of market share this should serve as a major signal that payments have been set incorrectly. It would be hard to imagine that anyone would want to walk in to fill any void they leave since there would be great fear that unless the payments change it will be an opportunity to lose money.

As the pricing of health care becomes more and more centralized and standardized, there will be more examples where the prices are set too low and providers will walk away. Where lower cost providers can fill the void, that will happen. In some cases it will make little or no difference in terms of patient outcomes. Services of some sort will be rendered, likely of lower quality.

It is difficult to predict specific highly undesirable outcomes. Perhaps large segments of care will simply cease to be available and no one will notice. What is an almost certainty is there will some realms of care which will be tragically under-reimbursed, which will disappear, and have huge impact. The opportunities for this outcome are so great that it is a virtual certainty.

So what will Washington state do if the pharmacy which provides the lion's share of medication dispensing pulls the plug? At least they have some warning. How will other states respond when the the threat is a decentralized one and they wake up one day with no primary care doctors accepting new "insured" patients? Legislatively concocted rights to health care assume that there will always be sufficient resources that can be allocated to fulfill these moral obligations which have been converted to legal ones.

There are always legitimate needs and wants which go unfulfilled because scarcity is a fact of our world. Create punishing mandates to obligate people and businesses to provide services for payments less than the cost and it is the magic formula to make things even scarcer. Unless you can or want to hold a gun to their heads they will walk away. If Walgreens walks away, the state will likely save lots of money be stinting on services. At least everyone (or at least nearly everyone) will have insurance coverage.

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