White House Budget: Where the Savings Will Come From

The Wall Street Journal Health Blog has posted a helpful table summarizing the proposed savings in health care in the Obama budget. The source document is here (page 127-8).

Some of the Obama budget savings are inarguable assuming that they will pass Congress, including increasing drug premiums for high income Medicare beneficiaries and decreasing amount paid to Medicare Advantage plans. Others might be hard to achieve, including reducing readmission rates. Many of these potential savings will be controversial - including limiting itemized deductions for high income taxpayers, and employing radiology benefit managers. Some of the savings might lead to increased costs or decreased access elsewhere in the system, like cuts in home health payment rates.

The Obama administration is certainly not taking the "easy" road. The title of the budget document is "A New Era of Responsibility." It will be very interesting to see how this budget weathers the Congressional process.

The Commonwealth Fund and the Congressional Budget Office recently released competing estimates of the impact of various interventions on the federal deficit. The Commonwealth Fund's report is also explicit about the impact of these initiatives on overall health care costs - which is not the focus of the CBO report. I've pulled out five initiatives
1) Medical Home
2) Accelerate Health Care IT Adoption
3) Estabish a Center for Comparative Effectiveness
4) Increase tobacco tax
5) Place tax on sweetened beverages
The CBO suggests each of these will cause modest increases in the federal deficit, while the Commonwealth Fund analysis (performed by the Lewin Group) sees pretty substantial deficit reduction. The Commonwealth Fund's analysis is more in line with the budget proposed by the Obama administration.

I'm skeptical of the CBO's contention that raising taxes on sweetened beverages and tobacco will actually RAISE the federal deficit slightly. But it's important to note that the CBO's calculation of impact of the Clinton Health Plan on the federal deficit played a role in that plan's defeat. (See "The System" by Broder)

Keep your eyes on the Congressional Budget Office!

Comparative Effectiveness: Discordant Drumbeats

There is increasing interest in comparative effectiveness research – and the Annals of Internal Medicine has an editorial this week pointing to the importance of knowing the real value of what we are paying for.   (Harvard Link) The stimulus package and the 2010 budget proposal both envision a large federal investment in such research, and the Congressional Budget Officehas even suggested that such research will save health care dollars (although perhaps not as many dollars as the research will cost).   On the other hand, a heartfelt opinion piece in the Boston Globe last week by the CEO of the Society for Women’s Health Research, points out that what is good for a population might not be good for all individuals.   Phyllis Greenberger says:


As the American comparative effectiveness agency is assembled in the coming months, administrators must take into account the personal needs of individual patients. If the council were to primarily focus on cost effectiveness, it would likely only consider the "average" patient. But in medicine, every patient is unique.


So – here’s a dilemma.  It will be difficult (or impossible) to make cost-saving decisions that will not make anyone feel like they were given every chance.   See a previous post on the woes of the National Institute for Clinical Excellence NICE in the UK.  l Lowering health care costs means standardization and sometimes making tough choices and tradeoffs.


Another dilemma raised by opponents of using comparative effectiveness research to determine what should be covered is that costs decrease when there are competitors for effective innovations. There is an article in this week’s Annals of Internal Medicine (Harvard Link reviewing cost-effectiveness of cholesterol-lowering therapy to prevent heart attacks.  Cost-effectiveness is hugely dependent upon price.  Before it became available generically, Zocor cost over $3 per pill, meaning that it was not cost-effective to use on even a small portion of the “at risk” population.  On the other hand, generic simvastatin can now be obtained for only 10 cents a day,  making it cost-saving (not merely cost-effective) for all patients with LDLs over 130 (a majori ty of the population).  If we had not approved the use of Zocor at $3-$4 a pill a dozen years ago, we would not now have available one of the few cost-saving interventions in adult medical care.

 3/9/09 Update: Good column in Newsweek today noting the irony of a physician-legislator's opposition to science guiding medicine. 

Health Care in Speeches Tonight --Grade on Managing Health Care Costs: Incomplete

President Barack Obama spoke to a joint session of Congress this evening, and healthcare was on his mind. He pointed out that “the cost of health care eats up more and more of our savings each year, yet we keep delaying reform.” He credited Congress with passing an extension of S-CHIP to expand health coverage among children, and committed to investments in electronic medical records and cancer research. The President called preventive care “one of the best ways to keep our people healthy and our costs under control.” He pointed out that reforming health care was critical to controlling the federal deficit in the future, and promised additional health benefits for veterans. Obama promised to bring together a diverse group starting next week to work on health care reform.

Bobby Jindal, Republican Governor of Louisiana, also said we must “address the crisis in health care.” He objected to government-run health care, and suggested that we should “put aside partisan politics and make our system of private medicine affordable for every one of our citizens.”

The “managing health care score” this evening?

Few details here – Obama gets high grades for addressing access, and he is promoting investments that could substantially improve American health care. However, EMRs, cancer research and preventive care buy us both increased Quality Adjusted Life Years AND higher costs. EMRs increase quality and are neutral to cost-increasing, cancer research increases innovation (and the pipeline of new expensive drugs), and few types of preventive care within the medical system actually save money. With the exception of childhood immunizations, preventive care saves lives at an acceptable cost; prevention doesn’t save lives AND save money

No details at all in the briefer Republican response. The current private system is not delivering low costs or high quality – and I’m not sure the Republicans are reading the electorate correctly in their opposition to some government intervention. Jindal might have laid out a formula for change, as opposed to the usual exhortations to work together and confidence that we’ll get different results from our current system in the future.

Both speeches rate an “incomplete” in terms of managing health care costs.

Is it better to lower prices, or lower costs?

I gave a talk for a class at Wharton last week, and made an offhand comment that preventing an unnecessary laboratory test might lower the amount paid by an insurer,  but since the marginal costs of providing a laboratory test approached zero, this didn’t really lower the cost of health care.


One  class member challenged me on this, and stated that from the purchaser perspective, avoidance of paying for a element of care was highly beneficial (regardless of marginal cost of production) .


I’ve been mulling this over for a few days, and I think that the answer is “it depends.”


If I am purchasing a tank of gasoline for my car, I pick the lowest price per gallon today.  I don’t much care if the gas station increased its efficiency through automation, got a better deal from the distributer, or the oil company paid lower tariffs.  Lower price is what counts to me.  I don’t even care if the gas station loses money.  My dealings with gas stations are purely “one off,” and I can easily go to a competitor the following week.  


On the other hand, when Toyota purchases radios for its automobiles, there is a complicated calculus of quality, service, and price – and Toyota is likely to have an ongoing relationship with the vendor. Therefore, a simple one-time price concession is less valuable than a process improvement that allows long-term lower prices. Even Wal-Mart, which is much-feared by its vendors, makes investments to try to lower vendor resource costs so that there will be more of a “win-win” where Wal-Mart gets a low price and the vendor makes a (small) profit.


Denying payment for services rendered can sometimes transmit an important signal.  For instance, Medicare saves only a few dollars  by no longer paying for “never events” (such as wrong-side surgery),  and the providers do spend real resources delivering such defective service.   In this instance, denying payment sends a signal that never events should not happen, which should lead to process changes that would decrease the number of such egregious errors.   This is not the case with a lab test with no marginal cost; preventing this test would not lead to decreased resource use, and could not lead to long-term sustainable lower prices.


 So to sum it up, it’s most important to reduce the price paid for a one-time purchase, and more valuable to reduce the resources used in a long term relationship.  It’s possible that eliminating reimbursement for a service will lead to decreasing future costs – and in those instances cutting such reimbursements leads to savings in the short and the long term. 

Failure of Massachusetts health care reform?

Last week, Physicians for a National Health Plan and Public Citizen, two advocacy groups, released “Massachusetts’ Plan: A Failed Model for Health Care Reform.”
The authors state that Massachusetts’ reforms
• Have not reduced uninsurance as much as as advertised
• Have not addressed the soaring cost of health care
• Expose those of modest means to large copayments and deductibles
• Reduce the subsidies for “safety net” providers, which threatens access to the most vulnerable
• Increase waste in the system, by using commercial (though nonprofit) health plans and by imposing a fee to support the work of the Connector, the agency that administers the insurance exchange at the heart of health care reform here.
Jon Kingsdale, the executive director of the Commonwealth Health Insurance Connector Authority Board, disputes the statistics on cost increases and the number of uninsured.

This report correctly reports many of the challenges faced by health care reform here in Massachusetts. But let’s be sure not to blame the health care reform for problems beyond its mission, and let’s not forget about the real accomplishments.

Some big accomplishments:
• The Connector merged the individual and small group markets, allowing for better pooling and much more affordable policies for many Massachusetts residents.
• No one argues that the number of uninsured has gone down, and the PNHP document points out that the amount of free care delivered went down by over a third (although the authors complain that this decline should have been 75%)

Some problems beyond the scope of Massachusetts health care reform
• The number of employees in the private workplace has declined due to the economic maelstrom around us. In Massachusetts, we’ve learned before that economic malaise can torpedo efforts to expand health insurance.
• Reductions to safety net providers were mandated by the Bush administration, who threatened to cut off $350 million in federal funds. This can and should be revisited as part of the federal stimulus plans going forward.
• The health care reform authors explicitly avoided addressing the cost issue in the initial legislation. They recognized health care inflation would need to be addressed, and felt this was substantially more difficult than expanding coverage, and should be deferred until we provided coverage to more residents.

We all know that health care reform will ultimately be unsustainable if we don’t control costs. The costs we have to control are in the delivery system – and sharply limiting administrative costs alone will not fund large expansions in access. However, if 1/3 of all health care costs are unnecessary (Fisher, Annals, 2003), it will take a long time to unwind these costs. Perhaps Boston will need one or two fewer teaching hospitals, with dozens of thousands of job losses. It might not be wise to try to eliminate all those extra costs right this moment, when so many other portions of the economy are shrinking so violently.

Planning Hospital Discharges Pays Off

The most recent issue of the Annals of Internal Medicine has a thoughtful study from Boston Medical Center showing patients who have a "discharge assistant" coordinate discharge instructions and receive a followup call from a pharmacist after discharge have a dramatically lower rate of emergency department visits and rehospitalizations over the 30 days after discharge.  It's a small study (under 400 patients), and it might not be replicable in different kinds of hospitals.  The average age was under 50, and nursing home and skilled nursing facility discharges were excluded I believe the researchers underestimated the cost of the incremental ambulatory visits - but the savings in hospitalizations in the intervention group were enormous
(Harvard Link) 

Here's a scary thought.  In Medicare, 18% of patients discharged from the hospital are readmitted within 30 days at a cost of $15 billion per year.  35% are readmitted within 90 days.   

So, while disease management programs (see last post) have not shown huge savings, there are some provider-based programs that can both improve quality of care AND decrease costs.

Disease Management Delivers Better Care and No Cost Savings (Again)

Another large, well-designed (case control) study of intensive intervention for high risk patients was reported by Centers for Medicare and Medicaid Studies in this week’s JAMA.   The demonstration project covered over 18,000 patients in 15 demonstration projects and was evaluated by Mathematica Policy Research.  While many of the programs lowered hospitalizations and overall medical cost, none showed net savings after accounting for the program cost. (Harvard full text link)

 The programs most likely to come close to covering their costs had a few characteristics

1)      1.  The nurse coaching interventions were done in-person

2)      2.  The nurse coach was tightly integrated with the physician’s office, often seeing patients at the office

3)     3.  The intervention patients were very high cost in the first place

4)      4.  The programs had the highest emphasis on patient education.

The researchers note that these learnings might help design better interventions in the future.  The two most successful programs will be continued, although CMS fees were cut dramatically in one case, so the program will likely require subsidies from the provider organization.


The January-February issue of Health Affairs reviews all the Medicare demonstration projects on disease management since 1999 (not including the new JAMA article). The results are really depressing.  Many of the programs worked – they made care better – but none saved enough to cover the program implementation cost.


An unconnected (but very much related) editorial in JAMA    points out that little in health care actually saves money, and wonders why we don’t want to cover disease prevention programs when their cost effectiveness is equivalent to (or better than) the cost effectiveness of many disease treatments.    Author Steven Woolf’s conclusion: Throughout health care, the spending crisis requires a comprehensive search for ways to shift spending from services of dubious economic value to those with high cost-effectiveness or net savings.(Harvard Link) 



Wall Street Incentives and Physician Payments

Payment incentives have been in the news a lot lately. There is a vast public outcry against bonuses awarded to top executives of banks which hemorrhaged billions in 2008, and many have been asking “shouldn’t they just do their jobs for their pay – never mind for ridiculous bonuses?”

There is a parallel debate about incentive pay for physicians, and I'd like to point out a journal article last month suggesting that we should get back to professionalism as a motivation to provide high quality care, rather than incentive payments.

Pam Hartzband and Jerome Groopman in New England Journal of Medicine last month use illustrations from the behavioral economics literature to suggest that the monetization of health care leads to decreased medical professionalism and could lead to a decline in the quality of care. They use an example where offering paltry compensation (50 cents for helping move a couch) leads to less participation than no reward at all. However, the behavioral economic literature is also replete with examples where meaningful incentives, financial and otherwise, do drive behavior. In health care, we know that self-referring physicians have higher utilization , and high marginal profit rates are associated with oversupply. The authors themselves note that increased social status, decreased on-call time, and enhanced incomes have led many aspiring physicians away from careers in primary care.

Hartzband and Groopman argue against a system where caregivers are “constantly primed by money.” Indeed, this is the fundamental argument against the fee for service payment system predominant in the US. Paying for bundles of care (or capitation) would allow innovation to improve efficiency, whereas the current payment system rewards increased volume and intensity of services rather than coordination of care. Financial systems alone will not alone lead to defect-free, affordable health care; however, it will be achieve a high performance health care system without better-aligned financial incentives. We need payment reform and strengthening of communal relationships to improve quality, access and cost-effectiveness of health care.

Cost Savings in Obama's Plan: The Congressional Budget Office Begs to Differ

Stuart Altman and his colleagues from the Heller School at Brandeis University gave a day-long primer on the future of health care finance at the Massachusetts Medical Society on January 31. The voluminous slides are available on this website.

Stuart Altman showed the graphic above, from a December report from the Lewin Group, demonstrating potential cost savings from the Obama plan. As you can see, there are substantial savings posited from medical home demonstration project ($133B over 10 years), adoption of health care IT ($111B over 10 years), comparative effectiveness research ($40B over 10 years) and disease management ($43.6B over 10 years).

The conference also reminded me that the Congressional Budget Office did a pretty comprehensive review in December of the estimated impact of 115 health care options on the federal deficit. CBO, a critical and neutral party, reviewed the available evidence for each potential option, and doesn’t find that many options with big cost savings. Remember, of course, that some initiatives could raise the federal deficit even if they lower overall health care costs.

1) Health Care IT (Option 46) would only save money if there were substantial (5%) penalties for non-adopters.
2) Adoption of medical home (Option 39) would increase the federal budget deficit by $7.8 billion over the next 10 years.
3) Disease management is not listed listed as an option in the 12/08 CBO report , and the Medicare Health Support project did not show substantial savings and was not completed. An accompanying CBO report suggests that there is not evidence of substantial cost savings from disease management.
4) Comparative effectiveness (Option 45) would increase the federal budget deficit by $860 million over 10 years. It would save $8 billion in health care - but most of this is not funded by the feds.

I’ll post more on the CBO report over the next few days – suffice it to say that most of the efforts that would actually lower the deficit substantially would either increase the uninsured, shift costs to consumers, or cut provider per-unit reimbursement substantially. As we get set to spend close to a trillion federal dollars in a stimulus package, it seems unlikely we will pursue a federal health care strategy that cost-shifts substantially away from the federal government in health care.

Small Employers Struggling With Cost of Health Insurance

The New York Times has a front page story today of the struggles that very small employers face in maintaining health insurance for their employees.    It quotes the Kaiser Family Foundation - Health Research Educational Trust 2008 survey (images above) which shows that employers are bearing most of the cost increase of health insurance, and small employers have cut back on the percentage of employees insured. If anything, the KFF-HRET data understates the problem, since this survey defines small employers at <200>

The problems for small employers revolve mainly around the size of the risk pool.   Small employers are more likely to opt into insurance if their employees (or they themselves) believe they will have substantial insurance costs.  They have more information than the insurance plan (which knows about this information asymmetry).  Further, they are more likely to employ a sick relative or friend who needs insurance - and again, the insurers know this.  Therefore, where legal they seek to do "medical underwriting" and exclude the people who need insurance most, or exclude certain conditions.  

What can be done?

Some states require "community rating," which means all small employees would pay the same rate.  The bad news is that small employers with young, healthy populations would therefore have to pay higher rates than in an unregulated market.  "Guarantee issue" can also prohibit exclusion of individuals (Massachusetts has this), and states can regulate the exclusion of conditions (imagine a hypertensive purchasing an insurance plan that excluded future heart disease).  

A mandate to purchase insurance eliminates much of the problem of adverse selection -- although it's hard to push for  mandate in our "free choice" culture.  The Obama health plan does not include a mandate, while Hillary Clinton's (and Tom Daschle's) does. 

The government can also set up a high risk pool for those unable to purchase insurance on the open market (the ultimate in adverse selection), or a "connector" to aggregate many small employers together. This works best with a mandate to avoid adverse selection.  

Finally, the government can offer "reinsurance" for health plans, so that patients with catastrophic illnesses (i.e. >$50,000 per year) have some or most of their expenses removed from the insurer's obligations.  This was part of John Kerry's health plan, and many of Obama's health advisers have proposed this. Stuart Altman recently told an audience at the Mass Medical Society that this was getting little traction in Washington, though.

Some of the answer must lie with the delivery system.  We offer episodic, innovation-driven, very expensive health care - and if the costs continue to rise at the current rate, we will likely offer this to a smaller portion of the population.