Did you know there actually is a “public option” in the health care reform law?  It’s true – it’s called the Pre-Existing Condition Insurance Plan, and it’s designed to cover people who who have been unable to get insurance because of a pre-existing condition.  To hear the stories about how big of a problem this is in America, you’d think a product like this would be a big hit.

Except, it’s been a big flop.

How big of a flop?  Well, according to the Washington Post, they missed their sales targets by 98%:

Government economists had projected that people turned down by private insurers would flock to the new Pre-Existing Condition Insurance Plan, with 375,000 expected to sign up this year. But as of this week, a little more than 8,000 had enrolled, officials said.

According to the Post, it seems the government has figured out what they think the problem is:  “sticker shock.”  The price was too high.  So they’re dropping the price by 20% and significantly enhancing the benefits.

But can that really be the problem?

The Post says average premiums were about $400 per month for a 40-year old.  Meanwhile, according to Healthcare.gov, I can get an individual policy in Massachusetts as a healthy, non-smoking 40-year old – with zero deductible – for $414 per month.  That’s not cheap, but it certainly doesn’t suggest that anyone who had tried (and failed) to buy insurance would find the PCIP plan too expensive.  In fact, it sounds like a pretty good deal to me.

So what’s going on?

I think the problem is that the government doesn’t really know how to sell individual health insurance.  They haven’t built the relationships with brokers, done the marketing, understood their customers’ needs before going to market with a product.  It seems the idea was, if we build it, they will come.  In business, these things don’t really happen.

So the government is walking into the trap that many insurance companies fall into when they’re trying to build market share.  They drop their price until the point when people see that it’s such a good deal they can’t pass it up.  Usually, that price is somewhere past the point where the insurer starts losing a lot of money.  Insurers sometimes do this because they figure once they have enough market share they can start increasing their price and make up for their losses.  The trouble is, they’re not always able to do this.

But the government has it easy.  They don’t have to worry about ever making a profit.  They can just absorb whatever losses they suffer forever.

Are they dumb to do this….or clever?

The PCIP program is slated to expire in 2014.  In that year, the reform law will require private insurers to offer the same kind of coverage as the PCIP does.  Except that the private insurers actually will have to make money on those policies.  Which is to say no one will buy one from them since they will be much more expensive than what PCIP customers are used to paying.

How much do you want to bet that the PCIP lasts long after 2014?  And that private insurers, although they will be required to take people with pre-existing conditions won’t end up taking many of them at all.

In the end, whoever came up with those sales projections will be proven right – they all will flock to the government program.

You want to see a doctor?

You’re going to have to wait.  And I don’t mean like an hour in the office.

I mean like 53 days.

It’s not some doomsday story from the future.  It’s happening today here in Massachusetts.  Massachusetts- the state whose 2006 law was the model for the federal health care reform law.  Massachusetts- home to some of the world’s best medical centers and doctors.  And, as The Boston Globe’s White Coat Notes blog reports, Massachusetts, home to doctor shortages, and long waits to see a doctor:

When primary care patients do secure an appointment for a non-urgent matter, they have to wait to get in the door, the survey found. The average delay is 29 days to see a family medicine doctor, down from 44 days last year, and 53 days to see an internist, up from 44 days last year.

The report said shortages also exist in dermatology, emergency medicine, general surgery, neurology, orthopedics, psychiatry, urology, and vascular surgery.

But what about costs?  If you make sure everyone’s covered, you’ve got the foundation for real cost control, right?  Unfortunately, no.  Health care costs have been booming in Massachusetts:

Costs are rising relentlessly for both families and for the state government. The median annual premium for family plans jumped 10% from 2007 to 2009 to $14,300 — again, that’s a substantial rise on top of an already enormous number. For small businesses, the increase was 12%. In 2006, the state spent around $1 billion on Medicaid, subsidies for medium-to-lower earners, and other health-care programs. Today, the figure is $1.75 billion. The federal government absorbed half of the increase.

So what are the lessons for the future of American health care?

First, the math is very bad if it is important to you to have easy access to a doctor.  Tens of millions new people will have insurance- and a lot of them will use it.  Unless there suddenly appear many thousands of new doctors, there simply aren’t enough doctors to care for them.  So, as in Massachusetts, the future of American health care is going to involve shortages of doctors, and a lot of waiting.

Second, health care is going to keep getting more expensive, no matter what.  A lot of it has to do with the fact that the trends of the last couple of decades – an aging, unhealthy population, and an increasing availability of new tests and treatments – won’t change.  But a lot of it also has to do with the fact that the changes to the private health insurance market embodied in health care reform are going to make health insurance increasingly expensive.  It’s a combination that means that while you’re waiting to see a doctor, you will have plenty of time to think about how much it costs to see him.

Third, and most worrisome, is whether American doctors and hospitals can continue to be among the best in the world.

As cost control has become the central feature of health care over the last couple of decades, the appeal of medicine as a career has been diminishing.  But it’s not really about the money – doctors are still well paid and in any case the fees paid to doctors are a small percentage of overall health care costs.  Rather, the problem is that popular approaches to cost control favor things that undermine doctors’ autonomy to practice medicine.   It has a corrosive, insidious effect on a profession whose best and brightest see as a calling even more than a career.

Will America’s best and brightest still want to become doctors, if they can find more satisfaction in some other profession?

At the beginning of the school year in my hometown, teachers ask parents to donate supplies for the classroom.  They’re often very basic necessities like markers and folders and things.  The school can’t afford them, so teachers ask for help so they don’t have to pay for them out of their own pockets.

If you’re thinking I live in a distressed area, you’re wrong.  I live in a wealthy suburb in one of the wealthiest, highest-taxed states in the country.  Even here, public school teachers aren’t paid enough, and don’t have enough resources.  How is this possible?

One answer:  health care.

It’s not because the cost of health care keeps going up.  Or, it’s not only because the cost keeps going up.  That problem affects businesses across the country- and while it hurts, it doesn’t mean that U.S. workers are underpaid and under-resourced.

What’s really happening is that there are serious gaps between how the private sector and the public sector handle health care.  These gaps mean the government gets a terrible deal, leaving it with far less money to spend on things like teachers and school supplies.

Here’s what I mean.

Easily the biggest health care story in recent weeks has been how much workers pay for health coverage.  Reports show it’s on average 30% of the total cost.  It’s a big number, but there are good reasons for it, other than simply moving costs onto employees.  Evidence shows that the more you pay for the cost of care you more likely you are to make smarter choices about your lifestyle and health care buying decisions.  Together, these things help control costs.  And so most large, sophisticated employers have, in recent years, implemented a tremendous variety of programs designed to help employees do this.

By contrast, state governments are very, very far behind.

Their workers pay, on average, only 11% of their health care premium.   In 2009, state workers in 14 states paid none of the cost of their individual premium.  And it’s been hard to change – earlier this year, there was controversy when the state of New Jersey tried to get its workers to pay just one and one-half percent of the cost of their coverage (they previously paid zero).  It’s a political problem, because the idea was that state workers get less pay but better benefits.  But it’s a practical problem, too, because building plans this way doesn’t work.

From my experience, and published accounts of what’s happening with state governments, these problems with plan design reflect how bad of a deal states get.  While an average family health care premium in my home state of Massachusetts is about $14,000, the cost of covering a family of a worker in my hometown is about $24,000.  One nearby town has plans that cost more than $40,000.

No wonder workers don’t want to be exposed to the cost of such over-priced plans.

So, here’s my advice.  State and local governments ought to hire one of the many highly skilled benefits consultants who help other progressive employers across the country figure out smart ways to manage their health care costs.  Imagine a world in which state or local government paid something close to the national average for health coverage?  (Actually, why aren’t they in the first place?)

If my town were an example, you could save up to $10,000 per family – without doing any new cost sharing with employees.

Now that would buy a lot of markers.

UPDATE: The blogosphere is full of posts by people with no experience in benefits politicizing the health coverage enjoyed by public workers.  This type of talk will impact the decisions policymakers make.  Alas, participation in social media by health benefits experts is terribly low – and that’s something which must change.  If you are one of these people, seek out these posts, leave comments, or write your own story.

For my part, I’ll be hosting a webinar on September 23 to help you learn how to get started.

More to come.

Giving people “incentives” to spend their money wisely is a growing part of the solution to rising health care costs.  Give people financial responsibility for their health care decisions, the thinking goes, and they’ll make cost-effective choices.

It’s usually done by having people pay part of the cost of their employer-provided health coverage, and through things like higher deductibles and co-pays.  Today, on average, people in the private sector pay 20% or more of the cost of their coverage.  The trend is for this number to go up.

But it’s not true everywhere.

If you look in the public sector you see a different, more troubling story.  It’s a lesson in what can happen when incentives go wrong in health care.  Take New Jersey, for example.  There is a massive controversy there as the governor seeks to close an enormous budget deficit, and is proposing cuts to a wide array of state and local services.  One of the most contentious issues has to do with health care.  The governor wants state employees to pay 1.5% — that’s right, one and a half percent – of the cost of their health coverage.  Today, most state employees pay none of the cost.  This change would, by some accounts, save the state hundreds of millions of dollars a year.

Another example is here in my home state of Massachusetts.

Like New Jersey, Massachusetts faces serious problems with the cost of health care for employees of local government.  And, like New Jersey, city and town employees pay much less than their counterparts working in the private sector.  The results are very similar.

While average family health care premiums in the United States are about $13,000 a year, employees in the city of Framingham, Massachusetts can enroll in a plan that costs more than $40,000.  Numerous towns have family plans that cost over $30,000, and many others have plans that cost over $20,000.  It’s putting a great deal of pressure on spending by city and state governments.

I saw a similar story unfolding in Michigan.  I testified at the state legislature last fall at a hearing where the state was trying to grapple with this same issue.  A number of witnesses responsible for the cost of coverage at the local level apparently just didn’t have information about how much they spend on health coverage.  It was clear, however, that the number was very, very high.

So what does this tell you?  Incentives mean something in health coverage.  If no one is exposed to the actual cost of health care, it gets overused, or benefits become too rich.  It’s something to think about the next time you hear about a state or local government trying to cut its budget and taking away things that are important to you.

Today the Commonwealth Fund came out with a chart that it says is a “grim reminder” of what happens when health care doesn’t get reformed.

If only we had listened to Richard Nixon or Jimmy Carter.  We would have saved tens of trillions of dollars in health care spending.

Click to enlarge

Never mind that Nixon and Carter’s big cost savings were supposed to come from price controls.  Which, 4,000 years of history tell us, don’t work. It makes you wonder about that flat line in the alternate universe in which Nixon or Carter got their plans passed.  Beware of charts promising simple descriptions of health care problems.

Still, chart or no chart, it’s a very bad sign for a reform plan when its supporters try to drum up support by linking it to Nixon and Carter.

But the chart does beg another question:  why does the U.S. spend so much more?

There isn’t one answer, just like there’s no unitary health care “system” in the United States.  I’ve written a lot about before, so today I just want to focus on two points.

Other industrialized countries have restrictions on access to care that would be unacceptable to Americans.  We got a tiny taste of what this is like when that group came out earlier this year with a recommendation that women not get mammograms until they were 50.  There was an immediate uproar, and the group ended up re-writing its recommendations.  As an aside, it’s why some people think that a single-payer America would actually spend more on health care, since politicians would never vote for real restrictions on care.

To see what I mean, all you have to do is look at what is happening in state and local governments.  State and local government employees enjoy some of the most generous benefits packages in the country.  As the Boston Globe reported today:

A six-month review by the Globe found that municipal health plans, which cover employees, retirees, and elected officials, provide benefit levels largely unheard of in the private sector. Copays are much lower. Some communities do not force retirees onto Medicare at age 65. Many citizens on elected boards – some after serving as few as six years – receive coverage for life, too.

As medical costs across the board rose over the past decade, municipal health care expenses exploded, draining local budgets and forcing major cuts in services, higher property tax bills, and billions in new debt.

Some cities and towns around Boston are spending close to 20% of their budgets on health care costs.  Some towns spend more than $30,000 per year for family coverage – with almost 90% of that covered by the employer.  Large private employers pay about half that much on average for family coverage, and cover much less of the premium.  And it’s not just happening in Massachusetts.  Governments – for whatever reason – do not have in place the kinds of benefits offerings that have helped slow the growth in health care costs in the private sector.

So of course there should be some kind of reform in America.  But while politicians are arguing about a grab-bag of issues they aren’t grappling with the huge opportunities to improve health care costs right in their own backyards.

Massachusetts Governor Deval Patrick announced this week he has had enough of rising health care costs.

So he is proposing a novel solution: make them illegal.

Well, it’s not fair to call this idea “novel.”  Governments have tried price controls for 40 centuries.  And even though they don’t work, they keep trying.  The explanation isn’t complicated.  It’s an easy way for a politician to seem to do something about rising prices.  In this case, it won’t do much about the underlying problem, but it is a terrific way for a governor to look like a man of action.

There is a small irony in the governor’s proposal.  It admits that government itself is one of the important reasons health insurance is so expensive.  How?  Mandates.  He says he wants a two-year moratorium on telling insurance companies what new benefits they have to cover in their policies.  Mandates are one of the important reasons why health insurance is so expensive.

But the problems of costs in Massachusetts are about way more than just the mandates.  It’s the market.

In the last 20 years, Massachusetts has become dominated by bigger and bigger insurance companies and bigger and bigger hospital systems.  They’ve been fighting it out with each other — or not — and the result has been that consumers and small businesses are getting a very bad deal.  What’s worse is that it’s happened as the state government leaders of both parties have stood by and watched, or even approved.

How consolidated is the market today?  One company controls about half of the health insurance market, with the rest is split up among 4 smaller insurers.  Likewise for hospitals.  In the Boston area, where most Massachusetts residents live, one hospital system dominates.  The rest is split up among a small number of other, smaller systems.

Now, Governor Patrick’s Attorney General, Martha Coakley said something surprising about all of this last week.

She said the problem isn’t really the insurance companies.  Instead, she says, health care is so expensive in Massachusetts because of the consolidation of hospitals.  She did a study and found that big hospital systems use their leverage to charge insurers more money, which they must pass on to consumers.  Coakley says these are “serious system-wide failings in the commercial health care marketplace which, if unaddressed, imperil access to affordable, quality health care.”

It’s odd that Coakley ran for Senate on a platform devoted to a reform bill that would have done nothing to address the “serious system-wide failings” she identified.  Or maybe it’s not.  The gulf between politicians’ rhetoric about the health care and the reality of how it works shouldn’t be surprising anymore.  But the extent to which the government acts in such disconnected ways explains a lot about how our system could become such a fine mess.

One economist, talking about the failure of price controls over the last 4,000 years said this about their appeal, and their peril:

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation’s productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.

In health care price controls won’t work, and they will do something worse.  They will be yet another way to keep in place the corroding system we live in today, yet another in the line of unfortunate policy choices that have brought us here.

And years from now people will look back and wonder: how did the system ever get this way?

A friend sent me this interesting graph from the blog of the National Geographic.

You’ll have to click on it to see a bigger version.  It captures a lot of data very elegantly on a single graph–  Professor Tufte would love it.

What it shows is health care spending per person across a group of countries, along with life expectancies, average number of doctor visits per year, and whether a country has a system of universal health coverage.  Although putting all of this data on one graph is novel, the graph makes what by now is one of the oldest political arguments for reform – for all the money they United States spends on health care we don’t get a good deal.

So why blog about this graph?

Because it terrifically illustrates so many of the flawed assumptions about health care that have plagued the reform process.

First, pretty much nothing correlates with anything.

Does spending more lead to longer life expectancies?  It doesn’t look like it – and it’s not just the United States.  Canada spends almost $4,000 per person but gets roughly the same life expectancy Spain which spends about 35% less.  Luxembourg spends one and half times as much as South Korea, but their life expectancies are the same.  Meanwhile, Austrians spend three times as much as Poles, and live longer, too.  Life expectancies do not appear to be a good metric for health care quality.

What about going to the doctor more often?  That doesn’t seem to make much of a difference, either.  Japanese seem to the doctor almost monthly, but live about as long as the Swiss, who go once a year.  Oh, and the Swiss still spend about 70% more than the Japanese on health care.  Australians and New Zealanders go to the doctor about as often as each other, but Australians live longer, and spend about a third more on health care.  It doesn’t seem like rates of doctor visits tell you much about health care quality, either.

So maybe there’s something about having a “universal health coverage provided by public and private insurers.”  Nope.  If  you live in Hungary you’re going to live a decade less than your fellow beneficiary of universal coverage in Sweden.  Even among the countries in the top chunk of life expectancy, their relative spending levels and rates of doctor visits are all over the place.

So what’s going on?

Americans are often criticized for being ignorant of the cultural differences between our country and others.  We are seen as either wrongly assuming that people from other countries think about the world just like we do, or, worse, that we aren’t as enlightened as people living in other countries.  This chart, from an American organization, is fascinating in that it combines seeming ignorance of differences among other countries with ignorance of the United States.

Here’s what I mean.  The division of the world into “red” and “blue” countries, based on the idea of “universal” coverage is simply false.  For example, like the countries themselves, the health care systems of Canada, Britain and Japan are very different from each other.  Yet this graph treats them as if they were essentially the same.

But it’s also incorrect about the United States.  It’s true that the United States doesn’t have a system of “universal coverage provided by public and private insurers,” but the “United States” is the wrong entity to look at.  Health care coverage is mainly a state, not federal question in America.  And if we look at the states, we see a different – and more complicated – picture.

For example, Massachusetts has a system of “universal coverage provided by public and private insurers.”  It enjoys a life expectancy at birth of  80.2 years.  Sounds like one of the “blue” countries.  But Massachusetts spends $7,000 per person per year on health care.  On this chart it would be a puzzling outlier.

Hawaii has an almost universal system, but spends far less than Massachusetts per person.  And yet it has the highest life expectancy in the country.  It, too, would be an outlier.    Meanwhile, “red” New York, where almost 15% of the population is uninsured, ranks sixth in the country in life expectancy and spends about $6,500 per person on health care.  Another outlier.

At a certain point, the existence of almost nothing but outliers ought to make you question your initial assumptions.

Not so with health care.   The story that the United States gets ripped off in its health care spending sticks because it is a convenient oversimplification.  It’s a catchy slogan to advance (or with other slogans, oppose) difficult to understand changes to a complex system.

But the problem with health care in America is we keep getting lured into assumptions that money is the right metric to measure the quality of medical care.  How much we spend, rather than whether patients are getting the right care.  Money, over medicine.

He puzzled and puzzled till his puzzler was sore. Then the Grinch thought of something he hadn’t before! Maybe Christmas, he thought, doesn’t come from a store. Maybe Christmas… perhaps… means a little bit more!

Merry Christmas.

UPDATE: Via Instapundit, Economist Dan Mitchell says the problem is the rise of third party payers for health care.  He includes his own graph that implies that the trouble is people are paying too little out-of-pocket for health care.  In this view, since people spending other people’s money don’t care how much they spend, high US expenses can be explained in this way.  It’s an interesting idea, except that if you look at other countries, like Canada, where the system is almost entirely third-party payer and has been for a long time, costs are far lower than the United States.  And in any case, the people who drive most of our health care costs are spending at levels that far exceed whatever deductibles or co-pays you could ever put on them.  It’s not about out of pocket costs.

If there’s a lesson to be taken from all of this it’s this: beware of charts promising simple explanations for health care costs.

But if you want to look at a chart that shows the biggest drivers of health care costs, try this the one in this post.  The misguided focus on saving money over good medicine means we get neither.  The surest way to save money is to make sure that patients get enough time with their doctors, who need to be able to use their training and judgment to help their patients make the right decisions.  It’s a global problem, but America suffers from the most exaggerated version of it.

UPDATE 2: Jon Peltier does a terrific analysis of the same data with alternative versions of the National Geographic chart.

Is the health care bill the Senate passed a good thing or a bad thing?

It depends on who you ask. Which ought to be your first clue that it is really an exercise in politics.

I’ve been warning for months that the rushed process and soaring rhetoric veiled the reality of what was happening.  And that is this: no one really can describe what health care reform is about.

There are a lot of reasons for this, but the biggest one is that very few people on either side seem to understand the health care “system.”  In fact, calling it a “system” is part of the problem.  So let me try to help.

Our health care “system” like one of those pictures from an I Spy book.  Here’s one.

The US health care system

What do you see?  There are some coherent things about it.  First, someone put all of those pieces there.  They seem to be set up haphazardly, but they’re actually set up in a way that’s convenient for the publisher of the book.  They also have a general Christmas theme to them.

But that’s about it.

Now, say someone wanted to “reform” this picture.  How would you do it?  You could put everything in some kind of order.  But what order?  Red things on the left, yellow in the middle, blue on the right?  Or the other way around?  Or why not order it by size or shape or type of object?  Why not reform it to make it easier to find the items on that list at the bottom – clear out everything else and just leave behind the thimble, four birds of red, two fuzzy chickens and a gold-trimmed sled?  That would be simple, but it wouldn’t make the game very good.

You could forgive someone who wanted to reform this picture from doing what a lot of people looking at these pictures do – give up and go to sleep.

But would-be health care reformers are cleverer than that.  They decided to change the problem.  Instead of trying to reform the messy health care system, they said let’s reform the health insurance system.  A picture of that looks like a map of the United States.  Now this is a system that can be reformed.

At the federal level it’s a blank slate, so anything you do counts as reform.  And, since we’re in a hurry, you can take a short-cut and just put in place federally something like what the states have been doing for decades.  Presto! Reform.

I poke fun, but what’s so bad about a federalized version of state insurance regulation?

The problem is this: the way states regulate insurance is one of the major reasons why health insurance is so expensive.  Heavily laden with thousands of rules dictating what they have to cover, how much they can charge, who they must accept as insureds, only a few insurers are able to compete.  A cynic might say the rules have become rigged in favor of these few companies.  A kinder person might say that these are the unintended consequences of good intentions.  But whatever the reason the result is the same: a very small number of companies dominate the markets of every state.  Where competition is low, prices are high.

This is the great irony of reform.  The things that have made health insurance so expensive in the states are the very things reformers want to use federally to make it more affordable.

So what do political advocates think about all of this?

Progressives don’t like it because they think it benefits the insurance companies, and they’re probably right.  Conservatives say, no, the insurance companies are getting taken over by the federal government.  They’re probably wrong.  In fact, it’s the machinery of regulation that’s getting taken over by federal government.  And that, should this bill become law, is a bigger deal than most people realize.

The Healthcare Economist points to a study from late last year about the impact of state insurance regulation on the price of health insurance policies.   It’s a subject I’ve blogged about many times before (like here, and here and here and here).

The study tried to quantify the impact of the types of mandates used by states in their insurance markets: guarantee issue, community rating, mandated benefits, and so-called “any willing provider” rules.

It found that all of these increased the price of health insurance, but there were limitations in the study.  They had a “rich data set based on actual insurance contracts” only for guarantee issue and community rating mandates on individual policies.  Still, this is a big segment of the market – perhaps 30 million people buy insurance in this way – and the data are revealing.

But first, what do these terms mean?

“Guarantee issue” means that an insurance company can’t deny you coverage because of a pre-existing condition.  So if you are sick you can buy a policy and the company has to accept you.  “Community rating” means that an insurer can’t charge you more because you are sick, or because of your age or gender.   Different states put different spins on these concepts, or don’t have them at all.  They typically exist together as part of one regulatory scheme.  They are both part of reform bills in Congress.

According to the study, community rating increased individual premiums by as much as 17%, and family premiums by as much as 33%.  Guarantee issue increased premiums by well over 100% for individuals, and by as much as 191% for families.

Why does this happen?

If the law says insurers have to treat every person the same, without taking into account whether they’re sick or healthy, young or old, a rational insurer will do some rational things.  For example, it will assume disproportionate numbers of people who buy a policy from them will be sick and old.

Of course, when they do this, the product becomes expensive, and young, healthy people start to wonder if they should even buy it in the first place.  After all, they don’t really need insurance, right?  They’re young and healthy and can wait to buy insurance when they get sick.  So, the insurers’ assumptions on the age and health of their portfolios come true, or are worse than expected.  Coupled with the overall rise in the cost of health care, insurers now push through new rounds of price increases, which, in turn, create more uninsured people.  It is a very nasty cycle.

Which brings us to reform, circa 2009.

As Congress debates the politics of reform, there seems to be a lack of recognition of what makes health insurance so expensive in the first place.  The great irony of reform is that lurking in the bills our representatives have written are precisely the kind of regulations that got us here in the first place.

Blue Cross Blue Shield of Massachusetts and Caritas Christi Health System are announcing a new agreement that some suggest may be a model for the rest of the country.

Under it, the non-profit insurer will stop paying the non-profit hospital on a fee-for-service basis for certain insureds:

Under the deal expected to be announced Friday, Caritas . . . will be paid to take care of about 60,000 Blue Cross members in its new program — whether or not they get sick. Caritas will use some of the payments for preventive services to help keep patients healthy. If Caritas can keep health-care costs under a certain budget, it can make a profit. But if health-care costs go over the agreed-on amount, Caritas is on the hook. . . . . Blue Cross is adding a carrot: If doctors and hospitals can meet certain quality targets, they can earn a bonus of as much as 10% on the value of the deal.

It sounds like a new approach to health costs.  But it reveals more about how the same old ways of controlling health care costs continue to thrive.

Here’s what I mean.

The model of the last few decades has been this.  Insurers and hospitals negotiate rates to pay for care.  The bigger and more important the hospital, the more leverage it has over the insurer.  The bigger and more important the insurer, the more leverage it can have back over the hospital.  So in Massachusetts, like other states, hospitals have consolidated into a small number of big hospital “systems.”  In turn, the health insurance business has become dominated by a small number of insurers, chief among them Blue Cross.

Simplified, here’s how these negotiations go.  The insurer threatens that if it doesn’t get what it wants, it will change its plan designs to make it less likely that patients will seek care at the hospital.  The hospital, says if it it doesn’t get what it wants, it will stop accepting the insurer’s customers.  It’s a game of high-stakes chicken, but deals usually get made.  They typically involve the hospitals agreeing to lower rates of pay for more routine care, and preserving higher rates of pay for more specialized care.  It’s a set up that encourages big hospital systems to get bigger, so they can capture more patients, and more focused on highly specialized care.  It also makes it far more likely that smaller insurers will end up paying more for the same care at the same hospital, as the hospitals try to offset lost revenue from them.

So what does this have to do with the new deal between Blue Cross and Caritas?

Well, less significant hospital systems like Caritas (which has very good doctors but has been notoriously troubled in recent years) have very little negotiating leverage with the big insurance companies.  For them, the game isn’t so much getting a good rate of pay for their services as it is getting patients through the door.  And so they need to figure out ways to get the insurer to encourage patients to go there.  What better way to do it than to enter into a high-profile new contract with the biggest insurer in the state?

Now, take a look at the numbers.  If I’m doing the math right, Caritas is going to get about $6,000 per insured per year.  With state Medicaid payments running at about $5,500 per insured, these Blue Cross patients not particularly interesting, financially.  Unless, that is, the program works as expected and Blue Cross ends up changing its plan design to encourage more people to go to Caritas for care, as opposed to the other major Massachusetts hospital systems.  And you know Blue Cross would love to be able, one day, to use its deal with Caritas as part of its negotiations with those other systems.

“It’s a bet,” said Caritas Chief Executive Ralph de la Torre.

That, it is.  But some new paradigm for health care?  Not so much.