The Cost of Doing Nothing

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Reed Abelson has an excellent essay in today’s New York Times –making the case that the alternative to health care reform is NOT what we’ve got right now, since what we have right now is getting too ruinously expensive with each passing month.  Abelson reproduces a Commonwealth Fund chart (above) showing estimates of how much less of our GDP we would have been spending on health care if only we had succeeded at reforming health care in the Clinton, Carter, or Nixon administrations.

This is the right way to frame the health care reform debate to break the “Nash Equilibrium” that leads to gridlock.  Obama has tried to do this too, pointing out that if we wanted an health care systemn where every 10 years the costs doubled and 15% of our population was uninsured and much more felt at risk, we should oppose health care reform.  This framing hasn’t stuck, though, and the public (at least in most polling) doesn’t have the sense of urgency that many health care economists and public policy wonks see.

The Washington Post notes that interest groups are gearing up for the fight on health care reform – and pretty much everyone besides for the AARP is hiring lobbyists, shooting commercials, and protecting their turf.   This suggests that stakeholders deeply believe health care reform can be defeated –so they’re not likely to be willing to accept substantial changes (yet).

 Michael Kinsley notes that both sides of the health care reform debate are missing an important point (also in today's TImes)

Neither side has really grappled with the cost issue. When Aunt Minnie back in the district has a hip replacement (her second) and gets a bill for $90,000, the challenge is not to find someone other than Aunt Minnie to pay. The challenge is to deliver hip replacements for less than $90,000, or tell Aunt Minnie she can’t have one. 

We really need to transform the delivery system – changes in health plan benefits, health plan administration, and payment methodologies alone will not get us to the health care system our patients deserve.

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California Provider Leverage Drives Health Care Cost Increases

I blogged yesterday about health plan powerlessness to control cost per unit – the major driver of excess health care costs in the US compared to other developed OECD countries. 

As if on cue, Health Affairs published an article from the Center for Health System Change pointing out that this is exactly what has happened in California.  A combination of public demand for full provider choice and consolidation of hospitals and physicians has left health plans with little power to control overall costs.

A direct quote:

“Physician overlap in two prominent health plan networks was 97–98 percent. This reality weakens the position of health plans. If plans cannot exclude providers from their network because of customers’ demands for broad networks, they cannot credibly threaten network exclusion. That fact undermines their ability to resist providers’ demands for higher payment rates.

Although it doesn’t seem possible that prices could have increased even faster, it turns out that providers sometimes don’t wield all available leverage power in negotiations. In effect, they leave “money on the table” because

-          Hospitals and big physician groups worry that raising prices too high will chase business away from the local geography

-          Hospitals and big physician groups worry that raising prices for smaller health plans might increase health plan concentration

-          Kaiser Permanente in Northern California has large market presence and drives costs down in that market.

I am convinced that more integration of provider groups can lead to higher quality of care – and more cost-effectiveness, too.   This quote from a physician who had moved from Fresno, a non-integrated market, gives me pause:

“The good thing about the systems not being highly integrated and coordinated [in Fresno] is that premiums are lower. Why are those hospitals and physicians [integrating]? It wasn’t for increased coordination of care, disease management, blah, blah, blah—that was not the primary reason. They wanted more money and market share.”

Many observers have commented on the importance of vigorous enforcement of antitrust regulations.  However, this article points out that some characteristics that make a hospital a “must have,” high-leverage facility, such as reputation and provision of unique services, are not addressed by antitrust enforcement. 

The authors conclude that policy makers should consider price caps and all-payer rate setting.  Of course, all-payer rate setting would likely require Medicare and Medicaid to pay substantially higher rates.  Since Medicare is already woefully underfunded and the states are chafing at Medicaid costs, no one will be enthusiastic about an approach which increases Medicare and Medicaid liabilities.

The market helped control prices when hospitals and care delivery systems genuinely competed against each other. In the current environment, where health plans must have a contract with all providers, hospitals (and delivery networks) have become akin to utilities. Utilities are usually subject to price regulation.

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Scapegoating the Health Plans

Angela Braly, CEO of Wellpoint, defended individual rate increases at Anthem of California before Congress today ,  She said that increased premiums in the individual and small group market were caused by increases in the cost of health care and healthier subscribers dropping their insurance.  When NPR ran the story, the highlight was that she recited her 2009 compensation.  For the record, she stated that her compensation included $1.1million salary, $70,000 performance bonus, and stock options valued at over $8 million.

Robert Reich, former Labor Secretary, has an op-ed in the New York Times decrying the health industry entitled “Bust the Health Care Trusts.”   He notes the concentration in the health insurance industry, where “90% of the insurance markets in 300 metropolitan areas are ‘highly concentrated.’” Reich reminds us that the five largest health insurers made profits of over $12 billion last year, and supports the repeal of the McCarren-Ferguson Act, which exempts insurers from federal antitrust scrutiny and makes them subject to state regulation.  The House voted to scrap McCarren-Ferguson earlier today.

It’s hard to be favor of 39% rate increases – and there certainly are instances where health plans with little competition have enriched themselves at the expense of public good.   But there is a lot of demagoguery going on here. 

·         The Wellpoint CEO’s salary and bonus are relatively small for a company of this size.  The stock grant makes total compensation appear large – but the stock grant dilutes the value of shareholders –and is not paid out of ‘health care dollars.”  Executive compensation is easy to despise, but this expense represents a tiny portion of all health care expenditures. The really costly issue is the “friction” in health insurance and provider payment.

·         The problem of the healthy dropping out of health insurance is real and worrisome.  This is called a ‘death spiral,’ where soaring costs make the healthier people drop out – causing sequential increases in premium expenses, fewer people insured, and higher illness burden of the insured population. Paul Krugman wrote about this on Friday.

·         Between 80-90% of all health care premium goes to pay those who deliver health care.  We often focus on the 10+% of administrative costs, since it’s easy to oppose administration and bureaucracy.   But most health care inflation comes from the health care delivery system (and in the US, the biggest issue is cost per unit, not utilization.)

·         We face both insurer consolidation AND provider consolidation. In an environment where health plans must have virtually all providers “in network,” many provider organizations have been able to get substantial contractual rate increases.   A market needs only a few viable health plans to have competition on the insurance side, and there are only a few markets where there are not multiple competing health plans The real challenge is how to promote meaningful competition on the provider side.  

The Anthem rate increases in California are painful and represent a failure of social policy.  We need structures to allow real pooling of risk among small groups and individuals.  But keeping the healthy people in the plan is critical – and no one has a better idea for this than an individual mandate.  And the public debate seems to omit the role increased provider payments play in increased insurance rates.  

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Commonwealth Fund Paper on Global Payment

The Commonwealth Fund just published a paper on the potential for transition to global payment.  The paper is by by Ann Robinow (one of the founders of Patient Choice Healthcare, which administered BHCAG in Minnesota) Disclosure – I was one of her interviewees, based on my past experience at Harvard Vanguard.

This is important work – and Ann’s 16 interviewees were overall enthusiastic that global payment – otherwise known as next-generation capitation – can improve quality and lower cost by as much as 20-30% (!). Her paper notes that risk adjustment has improved, clinical systems are better, and some of the provider consolidation will make global payment transitions easier.  She notes that our cultural belief that “more is better” will need to be challenged, and notes that a move to global capitation will substantially change the roles of hospitals (a filled bed becomes bad instead of good) and health plans (which will be sending some of the risk to providers). 

 My take

1. I’m not convinced that the risk selection issue is totally settled. (Risk adjustment works best close to the mean – and works more poorly out at the extremes).
2. We’ll also have to watch carefully to be sure that groups under global payment don’t skimp on care.  The best care is NOT always the least expensive! 
3. The culture at the groups that have delivered real value with capitation were not created overnight (good opinion piece by David Mechanic in JAMA– and that’s why the transition should not happen rapidly
4. Patients also still really demand choice, and are often unwilling to obtain all their care in a single system.  Porter, Herzlinger and others have made arguments that are hard to dismiss that people should “shop” for the best care for the illness they are currently facing, rather than stay in a single integrated network (that might be the best for a transplant, but isn’t optimal for their gallbladder removal).   
5. Capitation has worked best when patients felt that they entered it voluntarily – so widespread global payment with no patient alternative might create a lot of friction
6. I believe that fee for service is the best method of payment for services which are high value but underutilized, such as childhood vaccinations, colonoscopies and mammograms). 
7. I think the 20-30% figure for cost savings is probably too high. Many of the great capitated cost-effective provider organizations are in areas that have low underlying medical costs. It is clear that Mayo Clinic offers high value health care in Rochester MN; I’ve heard that its costs are similar to market in Jacksonville, FL and Scottsdale AZ (although I can’t find a source for this statement – so I’ll resort to crowdsourcing.  If you know where I can find this information – please leave a comment on this post).  

I’m hopeful that payment reform (aka capitation) can increase the interest in decrementally cost effective services (like the $100 MRI in Japan) http://managinghealthcarecosts.blogspot.com/2010/01/health-care-reform-will-change.html

I think this paper is an important contribution to the discussion. Our current fee for service method of payment doesn’t work http://managinghealthcarecosts.blogspot.com/2009/03/fee-for-service-problem-part-one-of.html– and we need the push to try out credible alternatives. 

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Obama Health Care Reform Proposal: New Life, or Last Gasp?

The Obama White House released its health care proposal today in advance of the Thursday bipartisan summit.   The proposal builds off the bill passed by the Senate.  The White House also gave a special nod to Republican ideas incorporated in the proposal.  In this post, I’ll briefly review the proposal, and then review why I believe that many of the parties that embraced the initial legislation will lose interest, and be happy to see this proposal die on the vine.

Main elements:

-          Eliminate the provisions for special deals for Nebraska (and presumably Louisiana)

-          Offer more subsidies to make insurance affordable for the working class

-          Eliminate the ‘donut hole’ for senior citizen prescriptions more rapidly

-          Provide more subsidies to community health centers

-          Create a Health Insurance Rate Authority to oversee health insurance premium increases

-          Regulate health insurers to prohibit some of the worst abuses, including recission , and require more appeals process

-          Decrease the penalty for violating the individual mandate to purchase insurance

-          Impose a payroll tax for employers of over 50 whose employees get tax credits to purchase health insurance

-          $40 billion in new tax credit for small businesses to encourage insurance

-          Crack down harder on fraud and abuse, including better use of databases, harsher penalties, and holding Medicare intermediaries more accountable.

-          Prohibit brand name drug company payments to generic drugmakers to delay marketing of new generic medications

-          Delay of new fees on medical device companies, which would be framed as excise taxes

-          Decrease Medicare Advantage payments to health plans by more, including penalizing those health plans which submit coding suggesting increased illness burden when claims suggest that this is not true

-          Initiate the “Cadillac tax” for high value health plans later, omit dental and vision care, and adjust for age and gender

-          Increase Medicare inpatient tax for high income taxpayers.

-          $10 billion more in fees from pharmaceutical companies (Total $33 billion over 10 years)

-          Increase funding for state Medicaid programs, and make this uniform

-          $1 billion for implementation.

Much of this represents finding a “middle ground” between the House and Senate bills.  Giving administrators the tools to better fight fraud is a good idea, and more subsidies for the working class and small businesses will make it more likely this bill would really decrease the level of uninsured. 

Notably absent is malpractice reform – which would not save big dollars , but could help the bill gain more support. 

The White House estimates that this bill would help insure an additional 31 million Americans, and would decrease the deficit by $100 billion over 10 years.

But I’ve become pessimistic.

Many months ago, before anyone had heard of Scott Brown and when the Democrats got their 60^th Senate seat, passage of health reform seemed close to a certainty. In that environment, the stakeholders came to the table and made real concessions (even if some, including me, pointed out that some of these concessions were self-serving – like pharmas which promised $80 billion in prescription discounts in exchange for far more in new business . The insurers agreed to rein in rate increases in exchange for more membership. The physicians and hospitals agreed to lower rate increases in exchange for fewer uninsured patients. AARP agreed to Medicare cuts.  None of these concessions felt painless to these stakeholders, but they were willing to come to the table when it appeared that health care reform was inevitable.  They made concessions because the alternative appeared to be worse – being left out and potentially suffering more severe cuts.

The current rate of health care cost increases is economically unsustainable – but we have what in game theory is called a “Nash Equilibrium”  where none of the players in a multiplayer game are willing to change their strategy for fear other players will not change theirs.  When it looked like everyone would change their strategy – the logjam appeared to be broken. 

Today, the political world is a different place.  Some commentators are talking about a failed Obama presidency, and the Tea Party convention (with its 600 attendees) commanded two days of news attention.   The Republicans are dead-set against deficits, but denounce any attempt to cut Medicare spending by encouraging evidence-based medicine as “death panels.”

Health care cost inflation isn’t sustainable –  and so we will come to a crisis that will break this logjam.  It looked like the Obama administration and its allies in Congress would have broken the Nash Equilibrium in late 2009.  It’s not looking any easier in early 2010.

By the way, the Kaiser Family Foundation has put together a great side-by-side summary of the different health plan proposals.  

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Selling health insurance across state lines

Ezra Klein blogs today about why letting insurers sell health insurance across state lines is a terrible idea - using the model of what happened when South Dakota offered to let the credit card industry "write the regs" and many credit card companies moved to that state.  He's done a pretty complete job in recounting the cons -  we would likely have a small, economically distressed, conservative state dictating our health care coverage, and while costs would go down for healthy people, they would go up for those with illness.

I have one item to add to Klein's litany of concerns.  It's been a long time since a sizable health insurer went bankrupt, but this used to happen with some frequency.  State regulators insist on adequate rates of capitalization, so that if an insurer become insolvent those who already paid for coverage would not be left in the lurch. Local regulators also have the leverage to force other regulated plans to have an unscheduled open enrollment for members of a failed health plan.

It's politically important for the New York Attorney General to be sure that New Yorkers are not shut out of health care coverage.   The Alabama Attorney General might not feel that protecting New Yorkers is as much of a political necessity!

Advocates of selling insurance across lines say that this would increase competition.  However, it would increase the wrong competition - competition to attract the healthiest beneficiaries.  It would not increase competition to actually improve the cost-effectiveness of health care.

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Proposed Health Care Bill in Massachusetts Would Regulate Price Increases - Not Prices

The Massachusetts governor filed a wide-ranging bill  last week which would further regulate the small group and individual insurance market in the state, while encouraging selective networks and reducing state mandates. Health care provisions represent 6 1/2 pages of the bill, which is entitled  “An Act Providing for Job Creation by Small Businesses.”

The proposed legislation doesn’t regulate prices – it regulates price increases by both health plans and providers.  Therefore, this bill would likely prolong the current situation, where different provider networks are paid vastly different sums for the same care.  The bill will not address the problems outlined in the Attorney General’s report on pricing in the commonwealth.  

One interesting provision would mandate that small group plans offer narrow network plans with lower premiums.  This could substantially increase competition, since health plans currently lack leverage to press for lower prices as long as every health plan must include all providers. However, the bill only requires these narrow networks for individual and small business accounts, although they could be made available to other health plan clients.

The bill also extends a moratorium on new mandates and gives plans for individuals and small businesses a very narrow window to ignore current state mandates. 

Overall – this bill might give the state a bully pulpit to discourage increased prices from providers and health plans.  It will not address large price disparities, and is not likely to substantially lower overall health care costs.  The state legislature is generally unlikely to pass the health care elements of this proposed bill without substantial revisions.

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Disconnect between knowledge and clinical practice

Two articles published this past week demonstrate that there is a striking disconnect between publication and dissemination of knowledge.

Last week, the Wall Street Journal had an article on angioplasty with stents.   The COURAGE study in the New England Journal (2007)  showed that angioplasty (WSJ estimated cost $15,000) gives slightly quicker relief from chest pain of angina, but does not lower the risk of heart attack or death.  In fact, the stock price of Boston Scientific went down by 23% the month the study was published.   However, the rate of angioplasty has continued to increase after a brief dip.   The evidence was in – but this did not lead to a change in practice.

The Wall Street Journal conclusion is that comparative effectiveness doesn’t work.  I think this shows it didn’t work – not that it can’t work.

Yesterday’s New York Times  has an article about the rapid adoption of the daVinci robot to do prostate cancer surgery.  In fact, the only study done shows that those getting laparoscopic or robotic surgery appear to have more incontinence and erectile dysfunction than those who have traditional “radical” prostatectomy.   (This study combines laparoscopic and robotic surgery, and infers complications from claims) The urologists focus on a 40 year-old policeman who was able to have sex a few days after his procedure. Men facing prostate cancer find that heartening, but this is an unusual prostatectomy patients whose experience is not generalizable to most such patients.  This anecdote is certainly not enough to be the foundation for public policy.

What gives?

Periodically, we hear complaints that it’s difficult to disseminate innovation in health care.  I’d say that this is the wrong diagnosis.  Innovation is speedy when it leads to higher profits and more margin opportunity. That’s the case study of the daVinci robot for prostatectomy.  Dissemination of innovation and knowledge is painfully if that knowledge leads to lower margins and less profit opportunity.  Hence, the message that angioplasties with stents don’t offer that much benefit to those with stable coronary disease has little influence on clinical practice.

Should we give up on comparative effectiveness research?

Absolutely not.

It’s critical that we have evidence to determine what is best practice.   We also need to align payment with evidence-based medicine.   We need to decrease the profit margins of procedures with unclear incremental benefit. This is not easy to do, of course.  Cardiologists,hospitals and medical device makers don’t want to lose margin of angioplasties, and they will argue forcefully that angioplasties are far better than medical therapy for a select group of patients – those with unstable angina or acute evolving heart attack.  That argument is correct, and perhaps we need different fees based on diagnosis since the value is different based on diagnosis.

Similarly, urologists and hospitals will argue, correctly, that for surgeons with a long track record of performing robotic surgery – that method is indeed likely to be better, and can even decrease resource cost by saving OR time.  (Most surgeons, with less than a hundred of cases behind them, take more time with robotic surgery. It’s likely that the ‘learning curve’ is one of the reasons that the robotic surgery study results were so disappointing.)  Some might suggest differential payments for surgeons based on their volume – but frankly that’s complicated and might encourage aggressive surgery recommendations.  My preference would be a bundled rate –and if the hospital and physician feel that a high-capital-cost item will be worth it – they can spring for it. 

The issue of high fixed costs and low marginal costs with new technology also looms large.  Once a hospital has a daVinci robot, there are very few incremental costs associated with increased volume. Therefore, once technology is in place, it is highly likely to be used.

We need to do more research on comparative effectiveness, disseminate the results quickly and effectively, and consider results was we design payment and incentive systems to drive more value for our patients and for health care purchasers.

By the way, the governor of Massachusetts has announced a wide-ranging plan to regulate health care cost increases. I'll be planning to blog on that later in the week. 

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Problems in the Small Group Market - Rates Go Up

Anthem BCBS of California has been hit by a firestorm of protest  over increases as high as 39% for its small group policies.  Kathleen Sebelius and Dianne Feinstein have blasted the company, and Barack Obama mentioned these rate increases during an interview with Katie Couric.   Wellpoint, the parent company, had large profits; why should it increase its rates so much? What has changed?

With the economic downturn, many companies downsized.  The smaller the company the higher the ‘selection’ risk – where the healthiest people opt out of insurance, leaving a sicker group continuing in insurance.   Further, younger (healthier) workers were more likely to be laid off.  A less healthy population leads to higher premiums.

Further, health plans have been able to “underwrite” for these small group plans – where they assess the risk of the group and price accordingly.   That means that a small group with a single person with a catastrophic chronic disease would pay prohibitively high rates.  There is significant threat to the insurers that health care reform would make health insurance “guarantee issue,” where an insurer could not turn down an individual (or a small group), and might not be able to charge more for such a group.   

Guarantee issue (which we have in Massachusetts) is socially good, since the sickest people need insurance the most – and this way they get it.  But guarantee issue works best when (almost) everyone is insured.  The sick get insurance, and underpay for it. The healthy get insurance, and pay more to subsidize the sick.

However, the political climate has changed dramatically.  While there is still support for sticking it to the health plans and forcing them to offer insurance to all, support has waned for individual mandates.  In fact, the Democratic–controlled State in Virginia just passed a bill banning individual mandates.   Even Howard Dean railed against individual mandates (and the Senate health care reform bill in general) on National Public Radio. 

 If there are no mandates to keep the healthy people IN the insurance system, it’s likely that the individual and small group markets will increasingly serve only the sickest of the sick.  If that’s the case, the Anthem rate increases are only the beginning.

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"Mini-Med" plans have low premiums, but can be a road to bankruptcy

Here’s a worry.  Some states are starting to offer “mini-med” policies for those who can’t afford “traditional” insurance.  Tennessee has a health plan with a cap of $25,000, which began after the collapse of the massive expansion of TennCare a few years ago.  Now, Washington State put out an RFP for insurers to provide an insurance plan with a $75,000 cap on benefits.  WSJ article  Puget Sound Business Journal 

The good news about these “mini med” plans is that they are cheap – the Washington plan is supposed to retail for $100 a month.  That’s nice for young healthy folks –especially the immortal ones who know for certain that nothing bad will happen.  These plans also probably select against those with existing illnesses, who know far too well how easy it is to rack up serious bills in our health care system.

The bad news: these plans basically offer no insurance for when people are especially sick – just when they need the coverage most.   “Mini-med” plans give their members access to the system – but the plans are a rapid route to medical bankruptcy if people get sick.  Many states (including Washington State) prohibit such plans – and proposed health care reform would not consider this kind of a plan to meet “minimum credible coverage” standards.

 “Mini med” plan could be a good complement to a community-wide “reinsurance”  program that covers all (or almost all) bills in excess of some set amount.   This suggestion was part of the Kerry health care plan in 2004, and Katherine Swartz of Harvard School of Public Health has written a book on the subject.  High cost “shock” claims are rare and somewhat random – so spreading the risk for these as widely as possible makes policy sense.   However, putting in place obviously inadequate plans that leave the truly sick without any coverage is a bad policy idea, and it’s depressing to see state governments heading in this direction. 

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Health Care Costs Keep on Rising

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The Centers for Medicare and Medicaid Services (CMS) published the 2010 national health expenditure numbers – with spending projections through 2019.   The email announcing this article from Health Affairs screamed “U.S 2009 Health Spending Projection -- largest increase in 40 years.”  That’s a true statement –but it’s a little more complicated.

Health care expenditures went up by 5.7% last year –more than the 4.4% from the year before, but well under the double digit increases from the last decade. However, the economy as a whole contracted by 1.1%.  This means that health care inflation is even more ‘out of balance’ with overall inflation – and health care will have represented an estimated 17.3% of the GDP in 2009.

High points from my perspective:

• There was more growth in public programs compared to privately-funded health care – as the recession has left more people without employer-sponsored health insurance and eligible for government programs.   This understates the government’s role –since subsidy for COBRA payments for recently uninsured count as private insurance spending..
• Medicare spending will only grow 1.5% in 2010 assuming that the SGR 21% physician pay cut was implemented in January. It’s already been delayed until March, and such a draconian cut is highly unlikely.  If the pay cut is not implemented, Medicare costs will swell by 5.1%.  In fact the SGR reversal would result in an increase in overall health care inflation of 0.8%.   It’s going to be hard to reverse this and pay for it without cuts somewhere else or new taxes or fees.
• The CMS Actuary predicts that health care spending will increase after 2010 “primarily (as) a result of expected faster growth in disposable personal income associated with the economic recovery.”  This is a window into the CMS Actuaries assumptions.  Barring health care reform, overall economic growth leads to disproportionate increased spending on health care.   Economic doldrums could help avert health care inflation – but at a terrible price
• Drivers of heath care inflation are primarily increased cost per unit and increased utilization. Both population growth and ageing of the population are responsible for much smaller effects.
• Total costs were 2.24 trillion in 2007, and will more than double (4.83 trillion) by 2019, by which time health care will represent 19.3% of the GDP
• The government share of health care costs will exceed 50% over the next decade. Of course, if you count the tax subsidy for employer-sponsored health insurance, government already pays for more than half of all health care.

The impact of health care cost inflation on the overall economy, and on the federal debt, is huge. We’ll see how (if) this new data helps energize the effort to pass health care reform (and especially to cut future Medicare growth rate).

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