Noneconomic costs of malpractice cases

I’ve blogged in the past about the (small) impact of malpractice on health care costs. One of my former teachers, Joan Savitsky, MD, had a heartfelt piece in today’s New York Times on the (huge) impact an impending malpractice trial had on a then-practicing physician.  It's not all about the economic costs!

Will eliminating the donut hole break the budget?

Good article in today’s Washington Post about the potential downside of closing the “donut hole” that forces seniors to bear full financial responsibility for all prescriptions between $2700 and $4350
Between ¼ and 1/8  of Medicare beneficiaries with Part D coverage fall into this gap – which was established to lower the total cost of Part D coverage, and also as part of the Bush administration attempt to keep patients’ “skin in the game” so that they would comparison shop. 

There’s been a sea change in Washington – in the prior administration the mantra was to keep patients engaged by exposing them to a portion of the price of care. The current administration is pushing to eliminate substantial gaps in coverage.  Congress enacted minimum out of pocket deductibles for health savings account eligibility in the past.  Congress is now seeking to enact maximum out of pocket deductibles.   Harry Reid called the donut hole an “indefensible injustice for American's seniors." 

The big problem with this plan is that the funding is in part from the $80 billion pledged by pharmaceutical companies, which will use this to subsidize 50% of the cost of brand name drugs prescribed for Medicare beneficiaries in the ‘donut hole.”  This is a terrible idea, since many of these brand name medicines could be substituted, and the brand names remain a bad value even at half price.  Some brand names, of course, offer unique advantages, and this will be a valuable break for Medicare beneficiaries on those medications.

Some have claimed that increased medication adherence will prevent hospitalizations and therefore save money.  Since almost all medications are cost-effective and not cost-saving, this is not true.  Purchasing medications so that beneficiaries follow their doctors’ instructions will buy us better quality – but will not save dollars to fund the increased pharmaceutical spending.

Politically, closing the donut hole is critical.  Clinically, decreasing nonadherence among sick elderly is an excellent idea.  This will likely raise the overall cost of health care, though, while improving quality.

The Senate Bill: Better for Cost Control than the Status Quo

Cost Control Implications 

There has been substantial buzz about whether the proposed health care reform does enough to address the problem of health care inflation.

There is almost universal agreement that it does not do as much as we’d like it to do control costs, especially when we compare the health care reform in the Senate bill to each of our “ideal” version of health care reform.  Compared to the status quo – the Senate bill does much more that might lower health care costs.   This includes
- Medicare independent commission
- Substantial cuts in Medicare fee increases going forward
- Tax incentives to avoid overcoverage (Cadillac tax)
- Many pilots – each of which might show us the way to lower costs substantially.  Here is Atul Gawande’s take on the importance  of experimentation in controlling health care costs.
We have to start somewhere.

Nate Silver of has a good graphic showing his point of view about how preferable different health care reform proposals would be in his mind. I’ve taken his graphic approach – and applied the lens of “cost control” – so I am not giving “extra credit” for the dramatic decrease in the uninsured projected under health care reform.

There are a few things I would rank differently. I added “price controls,” since there is good evidence that price controls DO lower prices, although they often have unexpected consequences.  Here’s an interesting take by Uwe Reinhardt, pointing out that if we import drugs from Canada, we are ‘outsourcing’ price control to the Canadian government. Remember, Japan is the home of the $98 MRI because the government price book says that’s the price.

I also ranked a ‘weak’ public option as worse than the current Senate bill in terms of cost control. I continue to be worried that a weak public option merely fragments  the payer market further – and could lead to higher unit prices.

By the way, the market says the health plans “win” in the Senate bill, and their stocks are up sharply today.  

Council of Economic Advisors: Economic Growth is Dependent on Controlling Health Care Costs

Anyone who doubts the importance of controlling health care costs should look at the graphs in the report from the Council of Economic Advisors.  Economists generally agree that a major reason that family income has been stagnant for decades in the face of higher worker productivity is that the extra dollars have gone into into health care.  The Council estimates that health care reform will produce higher growth (as much as 4% increase in GDP by 2030) by freeing up resources for other investment, decreasing workforce disability, and lower government and employer insurance costs.  This will lead to higher family income as well as lower federal deficits.

Wednesday addendum: David Leonhardt of the NY Times weighs in, noting that the "insurance lock" of the current system contributes to what he calls our "innovation deficit," where 1.5 million don't change jobs because they don't want to jeopardize their current insurance.

Adding 55-65 year olds to Medicare: Compelling reasons (but won't lower cost)

In my third year of practice, I took on the care of a retired Ivy League professor and his wife. He retired at 65, and at his “exit interview” was told that he could purchase the “Medicare family plan” for his wife – who had multiple preexisting conditions.

Of course, there is no Medicare family plan – and the university ended up leaving his wife on its medical plan until she qualified for Medicare at age 65.  But I think of this story often.  It’s hard for people between 55 and 65 to get insurance on their own –and when they lose their jobs (or if their spouse provided insurance and s/he retires), they can find themselves uninsured just when they start having serious medical problems and worrisome medical bills. 

So, from a public policy point of view, I like the idea of a Medicare “buy in” for people 55 and over who don’t have access to employer-based (or other) health insurance.

I’ve been thinking about whether this is likely to lower the overall cost of health care – since that’s the point of this blog. 

Here are ways that allowing those over 55 to “buy in” to Medicare could change the overall cost of health care:

1)      55-65 year olds newly-eligible for Medicare would have insurance, and those with insurance have better health and fewer years of potential life lost.  They see physicians and obtain medical care more than the uninsured. This means that Medicare would see less “pent up demand” when people turn 65.  BUT –it’s always more expensive to have people insured than have them out in the cold.   Alas, there is not likely to be savings from the cost-effective (not cost-saving) health care these 55-65 year olds received because they were insured. So  - score one for social benefit – but not one for cost containment.

2)      Medicare pays hospitals and physicians lower fees than most employer-sponsored health plans (but more than most state Medicaid programs). So, the care delivered to these 55-65 year olds would have lower unit costs.  This could help lower overall costs.  However, if providers simply ‘shift costs’ and raise private insurance rates to cover this new shortfall, aggregate health spending would not go down.

3)      Medicare generally has lower administrative cost than the private sector.  Adding 55-65 year olds on a voluntary basis but with some qualification requirements would increase Medicare administrative costs a bit . Further, those over 65 have their Medicare premiums deducted directly from their Social Security payments – and this new addition would mean Medicare would have to contract for billing services.   If these 55-65 year olds were coming to Medicare from private insurance, there would be some administrative savings. If they were coming from the rolls of the uninsured, the administrative costs would actually be higher (since the cost of administering insurance to the uninsured is zero).

I do see a big risk selection issue likely in voluntary enrollment in Medicare for uninsured 55-65 year olds.  For one thing, those who are eligible for employer based insurance are likely a bit healthier – so those eligible to buy in to Medicare are likely to have higher burden of illness.  Further, a voluntary system tends to attract adverse selection. Therefore, it might be hard for this program to pay for itself if the beneficiaries were paying the full cost (since with adverse selection each successive year the premiums go up and more healthy people drop out, a phenomenon fondly referred to as a “death spiral.” )

Employers have been getting out of retiree health insurance   for some time,   and Medicare eligibility would likely accelerate that.   Paradoxically, if more of the older, sicker early retirees went to Medicare, this could lower health insurance premiums for employers and their employees. But this would not be lowering health care cost overall – it would be shifting some of the higher risks on to the federal program.

(click on graphic to enlarge)

The increased administrative costs of adding this new population to Medicare and the potential of adverse selection are serious concerns.   Some sort of individual mandate would go a long way to preventing a ‘death spiral’ of this type of a program

There is a big social benefit to being sure that 55-65 year olds can be insured.  The ability to buy in to Medicare could make this group feel more comfortable changing jobs or taking a risk, and it would mean fewer medical bankruptcies going forward.   

It doesn’t seem to me that this initiative is likely to lower overall health care costs.  There are compelling reasons to offer Medicare to 55-65 year olds who cannot otherwise obtain insurance.  Lowering overall health care costs is not one of the compelling reasons.

Two case studies on why it's hard to constrain health care costs

Two articles in the New York Times on Saturday demonstrate the difficulty we have constraining health care costs.  We have trouble agreeing to cuts in home health care when independent analysis shows overly generous margins (on average), and we have trouble rejecting payment for a cancer drug that costs $36,000 a month, and has not been shown to have clinical benefit.

A front page articl follows a home health nurse making rounds in rural Caribou, Maine. (Not coincidentally, Maine has two Republican senators most likely to buck their party and vote for health care reform. One of them, Susan Collins, was born in Caribou.)   Cuts in home health care payments could force large layoffs in this community – which would deprive isolated rural seniors from a low-tech lifeline, and could lead to more hospitalizations. 

MedPAC recommended sharp cuts in home health care, as its analysis showed that on the average the margin in home care was too high.  (Of course, averages obscure many situations – and rural home care nurses who are only able to see five patients a day due to travel distances are very different than urban home care nurses who can walk from client to client!)   This information from the Dartmouth Atlas shows that overall Maine has far less home health expenses than expected, even though more highly populated southern Maine uses more resources than average. 

National Average:   434.5 services/1000
Maine Average:   350.3 services/1000
Maine uses $14,600,000 less resources on home health services than the national average

The front page of the business section  of the paper highlighted Folotyn, a drug newly approved for peripheral T cell lymphoma.  This disease is aggressive, strikes under 6000 in the US each year, and there is no other effective therapy.  Folotyn has been shown to shrink tumors in 27% of patients treated; it was not shown to prolong life. Here’s a direct quote from the article.

...Dr. Lee N. Newcomer, senior vice president for oncology at the big insurer UnitedHealthcare, called the price of Folotyn “unconscionable.” He said that Folotyn alone would cost as much as UnitedHealthcare now typically spends in total to treat a lymphoma patient from diagnosis until death. That median expenditure now, he said, is $87,000 for a little over a year of treatments.

But Dr. Newcomer said insurers would be obligated to pay for Folotyn because there were no alternatives.

So there you have it.  Home care probably is paid too much on average – but there are areas where resources spent are inadequate.  We focus on these areas in our public discussion.   Oncology care costs too much, but with no alternative for this new medication, we will keep writing checks.

Health Care Adds Jobs

Good news and bad news.

The good news is that employment is up in health care.  In a gloomy job market as unemployment exceeds 10% (and 17% when including underemployment),

The bad news is that increasing employment is almost certainly associated with continued health care inflation.   I was worried when the Council of Economic Advisors  projected robust future growth in health care this summer – I’m concerned that this will bear out my concerns.

RAND Cost Saving Estimates, August (MA) and November (US)

(Click on graphic to enlarge)
The Mass Division of Health Care Policy and Finance sponsored an impressive review by RAND researchers of potential cost-saving opportunities in Massachusetts, which was published in August. I blogged about this late this summer, and have always felt that this extensive analysis didn't get nearly enough attention.

The NEJM last week published an article by same RAND researchers extending this analysis to the rest of the country.

This remains an important study - and I'm glad to see an extrapolation getting new press.

I'm also intrigued by the differences in findings.

Hospital rate setting: Maximum savings in MA 4%; US 2%
Healthcare IT: Maximum savings in MA 1.8%; US 1.5%; Maximum increase in costs in MA 0.6%; in US 0.8%
Expand scope of practice for NPs and PAs: MA range savings 0.6%-1.3%; US 0.3%-0.5%
Medical home: MA maximum savings 0.9%; US 1.2%
Disease management:  MA maximum savings 0.1%; US maximum savings 1.3%

It makes sense that rate setting might be more effective in Massachusetts to the extent that prices are higher. In fairness, this might not be a 1:1 comparison since the NEJM lumps a few different options together.  Scope of practice savings might be different based on supply of physician and non-physician providers.  I'm surprised to see higher projections of savings for medical home, since our specialist:primary care ratio is high in Massachusetts.  I also can't explain why disease management would have so much higher projected maximum savings in the US overall compared to Massachusetts.

This analytic work is especially important as we consider what cost-control mechanisms should be included in health care reform.

Lobbying and Health Care Reform

(Click on graphic to enlarge)
Robert Steinbrook of the NEJM has posted the amounts spent on lobbying Congress and federal agencies so far this year.  The health and health insurance industry have spent over a half billion dollars (through September).  This is about 1/5 of all lobbying expenses.

With the dollars at stake in health care reform, this is probably a very small investment indeed.

CBO: Health Reform will Increase Value (and no segment will personally pay higher premiums)

The Congressional Budget Office has weighed in on the impact of the Senate health care bill on insurance premiums.  It's highly likely that opponents will latch on to 10-13% increases projected for health insurance premiums for those in the nongroup market (17% of the population).  However, as Ezra Klein notes on the Washington Post blog, this is a "steal." In fact, the cost is up a bit - but these are credible insurance plans of 27-30% greater actuarial value. Furthermore, more than half of those in the nongroup market will receive subsidies, so their cost of having insurance will effectively drop by more than half.  The CBO projects no change to a tiny decrease in cost of premiums for the small and large group market. For both the small and nongroup market, the CBO projects that the SAME policy would cost between 1-10% less.

All told - this is a solid double for the health care reform plan. However, we'll see how this gets interpreted by the talking heads.

NYT Vs. NYT on Public Option

The New York Times today has an editorial urging support for a public option.  The Times quotes the CBO, which has suggested that even a weakened public option could lower costs.  On the op-ed page, Paul Starr argues that the public option, as currently proposed will not save money. I have previously suggested that the public option might actually lead to higher prices and higher overall costs through decreasing health plan leverage in some markets.  

A Public Health Success That Can Save Real Dollars

Last week, the Massachusetts Department of Public Health released data showing a dramatic drop in smoking rates among low income individuals insured through the state Medicaid program.  The graph above comes from the Boston Globe on November 18.

Preliminary data also shows lower rates of heart attacks among those who used the program.

There are reasons to be a bit skeptical of this data.  Those who used the smoking cessation program were probably different than those who didn't, and the percent drop seems quite high.   Also, Medicaid is a combination of "Temporary Assistance to Needy Families" (largely pregnant women and their kids -where smoking rates do not lead to a lot of heart attacks in the short run), and those with serious disabilities, who are older and where smoking cessation could lead to prevented heart attacks over the short run.

Still - this is just great news.  Smoking is a very major cause of preventable illness and death, and smoking rates remain highest among those with lower socioeconomic status.  It's unfortunate that even in light of the proven effectiveness of antismoking programs states have cut funding for such programs in light of their current budget shortfalls.

When You Have Skin in the Game, it Can Pinch

Just in time for Thanksgiving, the New York Times  has served up a half dozen personal stories of bankruptcies brought on by medical expenses.   This article brings faces to statistics published earlier this year – showing that 61% of personal bankruptcies are associated with medical debt.

What’s the underlying problem here?

For starters, the costs of health care have more than doubled in 7 years – and a routine hospitalization of just a few days is often billed at well over $10,000 – a quarter of all annual income for a family of four at the federal poverty level.   Few can afford to pay medical bills if they are uninsured.

Further, the nature of employer-sponsored health insurance has changed. To cope with the large increases in cost, many employers have shifted substantial costs to their employees. Everyone sees this in higher copayments for office visits and medications – but in addition there is a move toward higher deductibles and more coinsurance. Copayments are fixed fees – whereas coinsurance means that the patient is responsible for a percentage of the allowed bills.   The average amount of hospital coinsurance is 18%.  Even when plans have an out of pocket maximum, certain costs (like out of network costs) do not count toward this maximum. 

For the “average” employee this works out fine, and health savings or health reimbursement accounts can be a great boon for those who are healthy, and those who can afford to put their own funds in tax-advantaged accounts.  But for those with serious illness, coinsurance can be ruinous.   Most of the stories told in the Times today were of those who had insurance – but were startled to find that having insurance did not offer them financial security. 

"Skin in the game" is the phrase used to describe individuals' bearing a substantial share of the cost of health care  - and there is evidence that this helps keep people from consuming too much 'low value' health care.  All insurance creates 'moral hazard,' where people make different demands than they would make if they were paying their own dollars.

On the other hand, we do consume health care differently than other goods and services, and none of the bankruptcies in the NYT article involved discretionary, 'low value' care.  There are many academicians and policymakers who doubt that "moral hazard" is the driving issue in health care inflation. Here's a link to a Malcolm Gladwell 2005 New Yorker article on this topic.

Ironically, the NYT report comes from Tennessee, a state that tried to dramatically expand insurance to its residents in the 1990s through TennCare – a public-private program that included large expansions of Medicaid.  The program was shelved when the state ran short of cash – a cautionary tale of expanding health insurance without adequate funding and appropriate cost control.  

Japanese Have A Better Idea for SGR (Sustainable Growth Rate) Fee Cuts

The House of Representatives voted last week to give another reprieve to physicians, who faced a 21% Medicare fee cut because of a provision called SGR – or Sustainable Growth Rate.   The SGR mandates cuts in fees for all Medicare services if the total number of services increases. Essentially, if too much service is delivered, each unit of service is reimbursed at a lower rate. This helps keep the Medicare budget “in balance.”

National Public Radio and others  characterize the SGR provision as a “glitch.”  Indeed it really feels like a mistake, since each year Congress overturns the SGR and reinstates small fee schedule increases or flat fee schedules. Each year, Congress has only kicked the can forward to the next year. When SGR would have required a 5% fee cut one year, it requires a cut of over 10% the next year, and you can see where this is going.

It was never intellectually honest to overturn the SGR on a year by year basis –because if a 5% pay cut is untenable, a 21% pay cut is unimaginable.   Still, the cost to the federal budget deficit of eliminating SGR altogether would be over $200 billion (over 10 years). The Congressional Budget Office recently reminded us that eliminating this fee cut will also cost Medicare beneficiaries almost $50 billion in increased out of pocket expense over the next ten years.

The SGR was not a “glitch,” but it was a poorly designed way of trying to prevent overutilization.  The problem is that the benefit of increased revenue to individual providers overwhelms the risk of a pay cut due to overall higher than expected utilization.  This is a classic “tragedy of the commons”  problem – where it pays for each individual provider to do more procedures, knowing that her contribution to the “overgrazing” will be overwhelmed by the practices of the general population.

SGR is poorly designed because the group of procedures it applies to (the equivalent of the “pasture” in the tragedy of the commons) is too big – and no physician would rationally think about cutting back on utilization to prevent future fee cuts.  There is a better way.  Japan has an SGR-equivalent which is by individual service –not generic across all services. 

Prices are revised individually, adjusted for each procedure and drug, and not by an across-the-board conversion rate. In particular, the prices of procedures that show large increases in volume tend to be decreased. (Ikegami  and Campbell, Health Affairs, 2004)       Harvard Link 

As a practical matter, procedures with large increases in utilization are sometimes those where there is new evidence of efficacy, but they are likely to be procedures with an exceptionally high margin.  This method of adjusting helps diminish the excess margin associated with particular services, so there is less likelihood they will continue to be overused.

So – we should get rid of the SGR – it’s not effective at changing physician utilization, and would cause politically infeasible across-the-board cuts.  As long as we are using primarily fee for service payments, Medicare should adopt the Japanese approach to targeted fee cuts for certain procedures if the volume increases. 

(Thanks to Tori Fancher, Sophie Miller, Amy Rothkopf, and Alicia Widge of HSPH HPM235 for drawing my attention to this approach)

Compassionate Caregivers

A break from health care costs for an evening.

Tonight was the annual dinner of the Kenneth Schwartz CenterKenneth Schwartz  was a health care lawyer who died 14 years ago of lung cancer at the age of 42. (We’re reminded that his was a cancer not associated with smoking – but of course a 42 year old smoker dying of lung cancer is a profound tragedy, too) His wish was to endow a foundation to train doctors, nurses, and other health care providers to be more compassionate in their care, and his friends and family have made the Schwartz Center an invaluable community resource to improve patient-centered care.   The Center runs Schwartz Rounds, usually with a patient and a caregiver, at over 150 hospitals across the US, runs an intense pastoral training program for clinicians, and gives grants to health care organizations to encourage more compassionate care.

One of the speakers tonight, guitarist and composer Jason Crigler,  had a devastating stroke from a burst brain blood vessel in his early 20s when his his wife was pregnant with their first child.    He awoke 1 ½ years later a gaunt shadow of himself, unable to move one side of his body, the fingers of his left hand contracted in a flexed position.   He spoke passionately about the care he received at the Spaulding Rehab Center – and his wife talked about the contrasting clinicians at a hospital in New York who talked around him, and framed his life in past tense.   Jason regained his weight and is a rehabilitation success story – he sang and played his guitar for us to a standing ovation.  He saluted his compassionate caregivers who believed in him, and who helped him return his life and his musical career to the present tense.

Jason Crigler’s tale is a reminder that we don’t need compassionate care only at the end of life. It’s also a reminder that any of us can make the painful journey from health to severe illness in an instant.  We want and need a robust health care system to minister to us.   We want advanced technology and new drugs and fancy imaging equipment (and all of that was critical to Jason Crigler’s recovery).  But we also want, and need, the human touch.   It’s easy to overlook the importance of the human touch in academic discussions of health care inflation.

Cheap But "Good Enough." Can We Accept Decrementally Cost Effective Interventions?

We can all easily agree that if something increases cost and offers worse outcomes (red in diagram), we shouldn't do it. That's why prescriptions for Vioxx and similar antiinflammatories cratered after reports emerged of higher cardiac mortality for these high-priced medicines that were only as effective as Advil.   We can also all agree that if something decreases cost and increases quality - we should do it (Green in chart)

The challenge is with the blue slice of these pie --medical services that increase quality (a little) and increase price (a lot).  That's true of a majority of novel interventions tested in the literature - they displace less expensive standbys, but offer some new advantage.  It's tough to say no for higher quality.

Another challenge, that is ill-studied, is an intervention that is less expensive, and not QUITE as good -but really "good enough," at least for most people (yellow in this diagram).  These decisions are clinically (and politically) difficult.

The early November Annals of Internal Medicine has a literature review on “decremental cost effectiveness” entitled “Much Cheaper, Almost as Good.”  Authors Nelson et al from Tufts Medical Center point out that in other industries we value products and services that are “good enough,” but cost much less. Examples include personal computers (not as good as mainframes), IKEA furniture (painful to assemble, but much less expensive), and the Nano automobile from Tata Motors (sacrificing comfort and safety but costing only about $2,000).  However, in health care, we only value the highest quality  - regardless of the price.  A good example of this was an NPR report this evening about MRIs.  They often cost $2000 in the US - and we have the best machines in the world. In Japan, the government-enforced price of an MRI is $120.  Is the best image worth this price differential?

The authors in the Annals article found 2128 cost effectiveness ratios in the medical literature between 2002-2007 – and only 33 involved sacrificing any quality for price. In general, these studies involved the sacrifice of between 8 hours and 1 week of quality adjusted life (0.001 – 0.021 QALYs), and the savings were beween $122 and almost $12,000 per patient.  (Of the studies they reviewed, only 9 were of high enough quality to fully evaluate).

Of course, in the majority of instances where there was an innovation that represented increased costs and increased quality, the “usual care” before the innovation might have been “decrementally cost effective.”

This is relevant to the firestorm over the US Preventive Services Task Force finding that evidence doesn't support recommending annual mammography for women under 50 (and only supports biannual mammography from 50-69).  This recommendation was NOT made to save money - but much of the vehement disagreement is focused on whether lives would be sacrificed to save dollars.  What if the number of "quality adjusted life minutes" saved by mammograms is less than the number of minutes women would spend getting additional mammography and having followup biopsies? Listening to some of the vitriol about this finding on the radio reminded me that we don't like to make tradeoffs, especially in decisions around our health.

We are unwilling to "settle" for a decrementally cost effective treatment for ourselves and our families and friends.  Further, the highest margins are often associated with newer, discretionary technology - so the medical system often does not discourage overuse.  This is the conundrum we face that makes technology continue to ratchet up the cost of health care.

CMS Actuary Weighs In

The newspapers of record in New York and Washington yesterday had different takes on health care reform. 

The New York Times had a long, thoughtful editorial pointing out that taken together the House and Senate health care reform bills really do have some cost containment, including
- Lowering future increases assuming that health care can benefit from productivity improvements like other industries
- Limiting tax deductibility for “Cadillac” health plans
- Administrative simplification
- Implementation of heath information technology
- Pilots to replace fee for service
- Comparative effectiveness research with an independent commission to use this information to make recommendations on coverage
- Public option
- Health insurance exchanges
- Negotiated drug prices
The Times notes that there is no malpractice reform. The Times also goes pretty easy on the current bills  - as there is good reason to believe that health care IT will improve care without  big cost savings, payment reform is only pilots, most believe that comparative effectiveness research will only lead to small decreases in costs, the public option has had much of its leverage removed (and that’s before Joe Lieberman’s threatened filibuster), and the drug prices will not go down as much as if PhARMA had not been first to the table. 

The Washington Post web front page highlighted an analysis by the Chief Actuary of CMS suggesting that many of the cost savings promised by health care reform are likely not to be realized.   The full report is here. 

Richard Foster, the chief actuary for the government agency that runs Medicare and Medicaid, presents data suggesting that the cuts in Medicare are likely to cause substantial angst (and financial shortfalls) at many hospitals, including some hospitals that are critical to their service areas.  He reasons that Congress is likely to overturn cuts that would endanger their local hospitals.  This certainly seems likely – remembering that hospitals are one of the top employers almost everywhere where there are hospitals.

Other important notes on the CMS Actuary report
* Estimates that while the public plan will be 4% less expensive to administer, it will suffer adverse selection (sicker patients) so will have 5% higher premiums.
* Estimates that Medicare Advantage enrollment will drop by almost 2/3.  I am worried that for many integrated groups this is a major source of non-fee-for-service revenue that covers infrastructure. Without this revenue, these groups might start resembling the rest of American high-volume medicine.
* Suggests that the voluntary long-term care program is likely to suffer from adverse selection and be unviable.
* Notes that the out of pocket expenditures would decrease under this plan (a reversal of attempts to have patients have greater “skin in the game,” but a relief for sick patients and their families.
* Notes that many providers would be likely to refuse to deliver care to an increased number of Medicaid patients given very low rates.

The action is now at the Senate, where apparently Harry Reid is holding up release of the health care reform bill awaiting Congressional Budget Office valuation (and hoping for under $900 billion over ten years). 

More to come.

The Media and Health Care Inflation

This week’s On the Media (NPR) starts with four (count 'em) stories on the media’s obsession with health care, and how this drives up costs in the United States.  The first reviews the breathless accounts of the next medical advance that will make lives better (but might omit the fact that it’s only been tested so far in a half dozen rats.)  The second is an interview with one of the more sober media commentators, Dr. Jonathan LaPook of CBS Evening News.  The third is about Cyberchondria, and how easy it is to self-diagnose on the web and believe that a muscle twitch is Amyotrophic Lateral Sclerosis (Lou Gehrig’s Disease). The last interview notes that there are over 400 national awareness days, weeks and months sanctioned by the government (and countless more that are unsanctioned)—leaving us with awareness fatigue.    

I drive by a bus shelter in Cambridge that suggests if you “look so good but feel so bad” you might have lupus.   A truly awful disease – and hard to diagnose too.  I would actually trust google more than a bus shelter, though, as a tool to help empower patients with information to better treat themselves.

The House Bill and Lowering Health Care Costs

The NY Times  reported yesterday on a figurative intrafamilial smackdown.  Ezekial Emmanel, a brilliant oncologist and ethicist and an adviser to the Obama administration, is concerned that the health plan isn’t going to do enough to lower costs.  His brother Rahm, Obama’s Chief of Staff, claims that critics (like Ezekiel) begs to differ.

“Let’s be honest,” Rahm Emanuel said in a recent interview. “The goal isn’t to see whether I can pass this through the executive board of the Brookings Institution. I’m passing it through the United States Congress with people who represent constituents.”

He went on: “I’m sure there are a lot of people sitting in the shade at the Aspen Institute — my brother being one of them — who will tell you what the ideal plan is. Great, fascinating. You have the art of the possible measured against the ideal.”

Of course, they’re both right. The House bill has far more generous subsidies to help the working class afford mandatory insurance – but it lacks the equivalent of a “Fed” to regulate medical prices, and it doesn’t impose a stiff tax on the most expensive plans.  But Rahm knows how to count his votes – and there is good reason to believe that passing a flawed bill is a better foundation than starting over.  

It’s easy to agree that none of the legislation with a prayer of passing does enough  to control health care costs.   However, the House bill (even if it is not as parsimonious as the Senate’s does make some early efforts to control cost.  Not all of these are good, and not all of them will survive in a final bill, but don’t believe those who say that the bill does nothing to lower cost.

* Create state based exchanges for the small group market – which can lower the transactional costs of small groups purchasing health insurance
* Decrease Medicare Advantage payments
* Reduce annual updates for hospitals, home health agencies, and others, and in the future take into account “increased productivity” to reduce annual increases
* Establish an independent Medicare Commission
* Reduce Medicare disproportionate share” payments to safety net providers. (Not necessarily a good thing, as we’ve found out in Massachusetts where the subsidies end before the number of uninsured drops adequately).
* Medicare pilots to test new payment methodologies
* Reduce payments for preventable hospital readmissions
* Reduce Medicaid payments to pharmaceutical companies
* Increase screening for fraud
* Administrative simplification by single set of operating rules for eligibility and claims
* Discounts for seniors on Medicare Part D drugs in the “donut hole.”

Here is a good summary of most of the major health care bills from Kaiser Family Foundation.  A briefer summary is available at from the Wall Street Journal  Thanks to Dan Schwarz of HSPH for pointing out these references.

More on Cost Per Unit in the US

Health care costs come from utilization and cost per unit.  We’ve given a lot of attention to variation and the many pockets of overutilization in this country – and these are a real issue.  However, as Uwe Reinhardt has said, “It’s the prices, stupid.”

Ezra Klein of the Washington Post did an excellent two-part interview with George Halverson, the CEO of Kaiser Permanente, and linked to slides from the International Federation of Health Plans showing that the cost of units of service are much higher than in other countries. 

When we’re thinking of how to lower health care costs, we’ll need to address the issue of cost per unit if we want to achieve affordable health care. 

Health Care Reform Passes the House. Access Will Improve - Cost Increases Not Likely to Abate

The House passed health care reform 220-215 last night – a landmark bill that could decrease the uninsured by as much as two thirds.  The Congressional Budget Office estimates that the bill will decrease the federal budget deficit by $109 billion over the next 10 years.  The Senate is not yet ready to pass its health care reform bill, and after it does, the bills will need to be reconciled – so the final bill that emerges could look substantially different. But let’s examine -  if this bill became law, what would it likely do to health care costs?

I reviewed the likely impact of the Baucus Senate  bill on overall health care spending – using analysis from the CBO, in a post last month Essentially – the deficit goes down even while the cost of health care continues to rise.   That’s because the government is collecting taxes and penalties to fund all of the increase that is not funded by cuts in government health care spending (mostly on Medicare).

Here is a breakdown, again from the CBO,  of the House reform bill (that is very similar to what ultimately passed on Saturday night.  (Note that I have simplified this a bit – and there are rounding errors)

According to the CBO, the total amount of incremental dollars going into the health care system over the next ten years will be $633 billion ($1.06 trillion minus the $427billion in Medicare and other cuts).  And that’s assuming that these cuts will “stick.”  There is also the additional $210 billion required to reverse the “sustainable growth revenue”(SGR) formula that would require 21% Medicare physician pay cuts this January, and continued smaller decreases for many years to come.

The House health care reform bill is a political success – it has already gotten further than the Clinton Health Plan in 1994.   It’s also a policy success - increasing access to coverage, providing subsidies to bring healthy and middle class people into the system, and enacting regulations to protect against some health insurance practices that have frozen the sick out of our system.  Assuming this bill, or something like it, passes – the next big job will be figuring out how to lower the cost of health care!

Brent James and Intermountain Health - Following Rules Improves Care

Tomorrow’s New York Times Magazine  has a thoughtful piece by economics reporter David Leonhart about Brent James, the Chief Quality Officer at Intermountain Health, a hospital system in Utah.  Intermountain is often cited as one of the “high value” health care delivery systems – it has lower complication rates and lower overall costs.   Intermountain, under James’ leadership, has developed detailed “best practice” algorithms for at least 50 conditions representing half of all hospitalized patients, and has gone through the difficult process of convincing doctors that they should follow the rules, rather than their “gut.”

Leonhart points out that in most industries, developing methods to lower the resource costs while maintaining or increasing quality allows growth in market share.   However, under fee for service reimbursement, a hospital like Intermountain loses money when it prevents complications – because it is no longer paid to treat those complications.  For instance, Intermountain says it lost $329,000 by standardizing protocols for inducing labor in expectant mothers (and decreasing babies with premature lungs).  Toyota doesn’t lose money by making cars that were more reliable.  If it did, we would all still be driving AMC Ramblers (a notoriously unreliable car from the 1960s)!

I also appreciate that Leonhart referenced the ongoing debate between those who emphasize the “art” of medicine, like Jerome Groopman, and those who espouse the science like Brent James.  “Cookbook medicine” is not right for every patient, and good physicians know when to deviate from evidence-based rules.  But at least half of all patients are cared for by below average physicians, and populations have better outcomes when physicians follow rules more closely.    Furthermore, the evidence-based rules generally don’t favor the most expensive approach to an individual patient’s treatment.   Comparative effectiveness research could help us enlarge the body of evidence and create more rules.  When physicians and care teams follow those rules, outcomes will be better and physicians can focus on difficult decisions where the evidence is less clear and where their wisdom and expertise will really drive more value for patients.

Much of the change that will decrease the rate of health care inflation has to come in the delivery system (where 85+% of all the dollars are spent).  Intermountain offers the promise of evidence based care that is better and saves money.  Let’s hope the health care reform that passes is able to provide incentives for more organizations to follow this approach.

IBM offers free primary care visits to save health care costs

IBM announced last week that it is eliminating copayment requirements when its employees see primary care physicians.  (This is applicable to the 90% of its employees in self-insured plans, and IBM previously had a $20 copayment for these office visits.)   

IBM states that this move will help it reduce health care costs. How likely is this?

Incremental costs to IBM will be:
            - Loss of copay contribution from employees. 
            - Incremental PCP visits (which are likely to be small, since IBM's plan does not have high barriers in the first place)

With almost 400,000 employees, waived copayments could easily cost IBM over $35 million (400,000 employees, average family size of 2.2, average of 2 visits per year, which includes young children who have many office visits)

Offsetting benefits could be:
            - Decreased specialist visits (a "medical home" pilot at Group Health in Seattle actually saw an increase in specialist visits when primary care access improved - which is disappointing.  )
            - Decreased ED visits 
            - Decreased admissions (but not many of these are preventable by a primary care office visit in the employed population)

I'm skeptical that this initiative will actually save IBM money in health care claims. This is because the extra cost to IBM for each incremental PCP office visit is not $20 - but is actually much more (since the majority of waived copayments were for visits that would have happened anyway). If this new policy increases PCP office visits by 10%, for instance, the incremental cost for each PCP office visit could easily be $100 for the visit and $200 for the waived office visit copays on the other 10 visits that would have happened anyway.  I'm not sure the "value" of this incremental visit would often be $300!  Further, some incremental visits might remedy undercare - which improves quality but raises cost. 

This initiative might be value-generating for IBM if productivity implications are taken into account.  But IBM is not likely to see cost savings in health care expenses alone.

Why Do Small Businesses Pay More for Health Insurance?

There is a backlash from small businesses against greedy insurance companies, which charge them more than their larger competitors for health insurance.  In Massachusetts, the Division of Insurance has begun an investigation into the practice.

There are a few reasons why small business pays more for health insurance, and health care reform can address some of these issues, but some of the bills being considered won't go very far.

1. Small businesses tend to have adverse selection.  
Large companies offer health insurance universally, while small businesses (<50 employees) offer insurance in only about  60% of instances.  Those businesses that offer health insurance aren’t randomly distributed amongst small businesses; rather, they are small businesses that see the value of health insurance.  No surprise, they tend to have older employees, more chronic illness, and higher expenses.   Small businesses tend to offer lower subsidies for insurance, too, so the healthiest employees of small businesses are more likely to take a pass and forego insurance. It’s also hard to “game” the system by putting an ill relative or friend on the payroll for the purpose of health insurance in a large company with formal human resource policies, and far easier to do so in a very small company.   Groups that are more expensive simply will pay more for their insurance.

2. It’s more expensive to sell policies to small groups than to large groups. 
When a health plan sells health insurance to a large company like Bank of America, a single negotiation leads to tens of thousands of “covered lives.”   It’s simply more expensive to sell ‘retail’ than ‘wholesale,’ and sales and marketing represents a larger portion of the overall expense of selling health insurance policies to small groups.

3. It’s more expensive to deliver services to small groups. 
Health plans have to collect member information, deliver health insurance cards, and deliver customer service through call centers.   Small businesses tend to be less automated, so data is less likely to be exchanged electronically – leading to higher transaction costs.

4. Regulations merging small group and individual market in Massachusetts have led to decrease in individual premiums, but there is a small amount of subsidy of individual insurance by small groups.

5. Large employers can self-insure.    Self-insurance generally means that the employer is responsible for all bill payment after services are delivered, rather than paying a premium for insurance in advance.   Thus, large employers don’t have to pay for a health insurer’s margin on ‘insurance risk,’ only on health plan services delivered.  Large employers can also avoid state insurance mandates for coverage, and can tailor plans to be substantially less expensive.  For instance, in Massachusetts fully insured health plans such as those available to small employers must include coverage of artificial reproductive techniques, while self-insured plans can restrict these services and thus decrease claims costs.

6. Large employers have substantial leverage, and can negotiate lower prices, while small employers are “price takers,” and must accept rates offered.   Small employers also don’t usually have in-house expertise to negotiate with health plans, and thus also have higher brokerage costs.

What will health reform mean for the differentially higher costs for small business? 

A robust individual mandate would substantially diminish the issue of adverse selection. When everyone must have insurance, the healthy employees of all small companies have to be in the pool, lowering average costs.   Modest penalties, though, would be far more politically palatable.  If the penalties for not having insurance are not steep,  more healthy people will continue to forego insurance, and adverse selection would continue.

A health insurance exchange could decrease the cost of marketing and administering health insurance for small employers, which could lower the cost of this insurance.  The exchange could also negotiate on behalf of small businesses, increasing their leverage.  

The proposed health care reform could lower premiums for health insurance for small businesses.  However, bringing healthy Americans into the system lowers cost per insured person, but does not lower the aggregate cost of health care.

CBO Says House Bill Will Cost Under $900b, and Decrease Uninsured by 2/3

The Congressional Budget Office  has already weighed in on the impact of the House health care reform bill (HR 3962).  The CBO is a fast reader – the bill is 1990 pages.

The CBO concludes that the bill will come in at a whisker under the magic $900 billion over 10 years, and will result in a decrease of 2/3 in the number of uninsured adults in the US.  It includes a public option, which the CBO estimates would attract 9 million enrollees by 2019.

New spending:
Medicaid and SCHIP: $425 billion
Subsidies for poor to buy insurance: $605 billion
Primary care increases: $57 billion
Public health initiatives $34 billion

Offsetting savings:
Provider (nonphysician) fee cuts: $229 billion
Medicare Advantage cuts: $170 billion

New revenue
Individual penalties:  $33 billion
Employer penalties: $135 billion

Not considered:
Cost of reversing the dreaded physician’s SGR Sustainable Growth Revenue, which threatens to reduce physician payment by Medicare by 21% on January 1. The cost of reversing this would be $245 billion over 10 years.  

Can the Public Option Raise Costs?

The public option is reborn, with Harry Reid promising a public option in the Senate health care reform bill, and Nancy Pelosi committed to a public option in the House bill.  Progressives are jubilant – they feel that a government plan is an important counter to the influence of private, largely for-profit, health insurance plans.  They note how well Medicare runs, and say (correctly in my belief) that Medicare helps contain medical care unit price. Conservatives are aghast --  the government is already doing more than enough to disturb the free market, thank you very much.

What does a public option mean for health care costs?

It depends on the public option.

The Congressional Budget Office suggested that a public option would substantially lower costs.  There’s a big “if", though.  The public plan would lower costs not through administrative savings, but rather through deeper discounts by enforcing the Medicare fee schedule (or Medicare + 5%).   Here’s a link to a good diagram from the Blue Cross Blue Shield Foundation showing that currently  Medicare is a net deficit payer for hospitals, which “make it up” by extracting higher payment from commercial health plans.  If a substantial number of employed people were on a plan with Medicare or near-Medicare rates, either the extra costs passed on to remaining private insurers would escalate dramatically, or prices would come down.  And medical prices are higher in the US than in any other country

What if a public option had to play on a “level playing field?”  The level-playing-field public option would have

  • Higher costs for delivering care
  • A platoon of network contracting specialists across the country negotiating contracts
  • Difficulty convincing hospitals and physicians in rural areas to accept its preferred fee schedule
  • A much less complete network
  • A much larger challenge in marketing itself, which would lead to higher advertising and customer relations  costs

In some markets, the public option without leverage of enforcing Medicare-like prices or tying participation to Medicare eligibility might even raise unit prices.   This could happen because the new hobbled public option might actually fragment the insurer market further, in the context of a consolidated provider community.  Each of the insurers in this scenario has less leverage to demand price concessions, which could lead to prices for all insurers going up.

It would be ironic if the public option actually increased unit costs.

Background: A post in June about public option

Addendum: Nancy Pelosi has announced that the public option in the House bill will include a requirement to negotiate rates with providers. 

Are Health Plan Profits Obscene?

Nancy Pelosi says that health insurance company profits are “obscene.” An article in yesterday’s Washington Post (and elsewhere) lnotes that health plans are the 35th most profitable of  53 different categories of industry. 
Who’s right?

Total insurance company profits are serious money – and the big for-profit national health plans have substantial market capitalization (although the market thinks these five health plans are worth a bit less than half of what the market thought in December, 2007).

Mkt Cap
From 12/07
Down 59%
Down 55%
Down 48%
Down 51%
Down 49%


On the other hand, as the Washington Post notes, United made just barely more as a share of revenue than Jack in the Box!

Health insurers have two main businesses.  Some of their customers (employers) pay a premium, and the health plan pays about 85% of that premium out in fees to health care providers.  Other customers are “self insured.”  They don’t prepay for health care for their employees; rather, they pay an administrative fee to health plans, and the health plan pays claims on the employer’s behalf. 

The fully insured business is shrinking rapidly, and the self insured business is growing dramatically.  This is because federal regulations (ERISA – the Employee Retirement and Income Security Act) treats self-insured employers as their own health plan, as they are thus exempted from any state regulation.  Self-insured employers can put limits on coverage that would be prohibited by state regulators would not accept, and can arrange a specialized plan they judge more appropriate for their own employees.

For the fully insured business, the 3-5% return on revenues might be viewed as “obscene,” since 85% of these revenues are just “pass through.”  If all of an insurer’s business was insured, you might want to look at the return on the 15% of revenues that are dedicated to the running of the company, so a 3% return on gross revenues would be an effective 20% return on earned revenue.  For self-insured business, though, where the insurer is not taking in pass-through dollars, it’s not unreasonable for investors to expect a 3-5% or more return.  Remember, we even need nonprofit health insurers to have some profit to build up reserves to tide them over in the event of adverse experience - like for instance a severe swine flu epidemic.

Once again, a note about the fact that Medicare is able to do its administration with only 3% of premium – compared to 12-15% for other health plans. As you can see, profit doesn’t make up the delta. The largest portion of this difference is that Medicare premiums tend to be about $1000 per member per month, and premiums for younger enrollees in employer-based health plans are about a third of this.   Medicare does pay more claims per beneficiary – but comparing just percentages of premium for administrative costs is like comparing apples to skateboards.