Trillion Dollar Question: Cost Shifting in Health Care Reform

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Employers and others are enormously worried about what health care reform will mean to them. High on the list of worries is whether the large expansion of Medicaid and the subsidized state individual and small group plans will mean such dramatic provider pay cuts that providers will universally raise the rates for any employer-sponsored health plan.
In 1997, when the federal government passed the Balanced Budget Act which lowered hospital payments, hospitals effectively shifted costs to private payers.  

Will this pattern repeat in 2011 and beyond?  I don't think so.

In most businesses, when one purchaser strikes an exceptionally good deal, prices are eventually suppressed for all purchasers. When Wal*Mart lowers its acquisition cost for duct tape, sooner or later all duct tape manufacturers figure out how to wring efficiencies out of their production.  They often move production to places with lower labor costs, and they retool their factories to remove unnecessary steps and friction.  Manufacturers who maintain their pre-Wal*Mart resource requirements fail, and eventually prices come down for all purchasers.

Health care, of course, is different. We can’t send hospitals to developing countries (there’s a little bit of medical tourism, but not much), and many of us regard health care as a necessity and a social good, and not a mere consumer product.  The purchaser of duct tape doesn’t care so much about what the factory looks like, while the consumer of health care (the patient) is right in the middle of the exam or operating room, and cares a lot about the conditions there.   So, health care delivery is not like manufacturing duct tape.

But employers are not willing to pay continually higher prices for health care they purchase.  The demand for lower costs per unit from newly enlarged public payers won't possibly be fully funded by increases in the prices to employer-sponsored health plans. 

In January, I argued that Medicare payment cuts would not lead to dollar for dollar decreases in the cost of care.   Still, I believe it won’t be possible for health care providers to increase prices to make up for the entire shortfall from Medicare cuts, Medicaid expansion, and likely lower prices from subsidized state exchanges. Our costs per unit in the US are very high compared to the rest of the developed world., and this difference is likely to decrease.   I believe the downward price pressure from health care reform will be severe enough to promote delivery system reform, and thus lower overall health care costs substantially.  We’ll be well advised to look to other countries, including developing countries, to learn how to lower the cost of health care delivery.   We’re also likely to need substantial reform of primary care.

By the way, here’s a link to Ezra Klein’s graphics showing the very small incremental cost under health care reform, compared to the huge decline in the uninsured population. 

Insurance Companies Targeting High Risk Patients for "Recission"

Reuters published an excellent and scary article this weekend about Anthem/Wellpoint routinely targeting those with newly diagnosed breast cancer for investigation and possible termination of their coverage. The article is replete with multiple case studies of women forced to pay out of pocket or delay care while they fought with Wellpoint.

Wellpoint suggests that its efforts to find 'cheating' and kick sick patients off its insurance plan is part of its responsibility to prevent fraud and lower the cost of health care.  There is some truth to this - if the sickest lie to gain voluntary insurance, it raises the cost for all.  The truth is, though, it's always less expensive to care for a healthy population than to care for a sick population.

In some ways, this is old news.  In 2008, Wellpoint paid California a fine of $10 million and agreed to resume coverage for almost 1800 it had kicked off the plan. (search for "cancellation" to find the story within this Wikipedia entry).

Health care reform will outlaw these practices, and the Reuters reporter suggests we need more vigorous regulatory enforcement.    I agree - but I don't think that goes far enough.  

We need
(1) Universal mandate - so that everyone chooses health insurance - not just those with illness. We can't make health care affordable if only those with adverse risk choose to be in the "pool."  Health reform has this, although many worry the mandate might be weak enough than many healthy people will continue to opt out.
(2) A community-wide reinsurance pool so that exceptionally expensive cases can't threaten the financial viability of a health insurance plan.  Katherine Swartz suggested an approach that would do this in 2003 (here's a link to an RWJ interview with her.)

Sick people are very expensive to care for, and that won't change.  Rather than just setting up regulations to make it more difficult for insurers to shirk their responsibility, we should make structural reforms to make it less profitable to discriminate against those who need insurance most.

Good News at a Low Price: Coverage for (Some) Young Adults

Federal health care reform mandates that employer-funded and insured health plans must allow adult children to stay on their parents’ health insurance policies until age 26.   This is especially important in the current economic environment, where jobs with benefits don’t abound.   The requirement applies to employers with self-insured health plans, which is unusual. Under ERISA (Employee Retirement and Income Security Act), employer self-funded health plans are exempt from most state regulations.  While the federal government can regulate these self insured health plans, it has not done so extensively.  

The Los Angeles Times reports today that United Health, Wellpoint, and Humana have announced that they will honor this requirement immediately, rather than waiting for the September 23 implementation date.  This is a sea change.  The Washington Post reported just this past fall that 60% (!) of employers including some states were using dependent eligibility audits to push young (ineligible) adults off their parents’ policies. 

This is not as big a deal as it looks for two reasons
1)       United’s press release  makes it clear that this applies only to fully insured health insurance plans (a minority of UHC’s business) and only to graduating college students. So – it really only applies to a minority of the college class of 2010. 
2)       The cost of providing insurance for adults between 18-26 is quite low.  Actuarially, this group needs little care that is expensive.  There are a small number of pregnancies, trauma cases, and malignancies that can be devastatingly expensive, but most young adults have very low medical expenses.  Therefore, this is a perfect group for insurance coverage!   

This is good news at a low price for a small group of young adults.  

Health Care Cost Containment in Massachusetts

 The battle continues to be sure that close-to-universal health care doesn’t break the state budget and the budget of small businesses –and there have been three interesting developments over the past week.

  1. The state Division of Insurance, which rejected proposed rate increases for dozens of small group policies, is playing hardball.  It threatened fines if health plans did not return to writing small group and individual policies at 2009 rates – and a judge rejected the health plans’ request for an injunction.   Most of the health plans have complied – although Harvard Pilgrim and Fallon  again submitted rates higher than the state wants (stating that other policies with these rate increases had been approved earlier in the year.   

The DOI is in a bind – if it is successful at forcing these lower rates on the health plans, they will lose substantial amounts of money – and the DOI’s other job is to be sure the health plans are adequately capitalized so there is no risk they will collect premium revenue and not be around to pay for related claims.   The health plans are in a bind, because they’ve negotiated multi-year deals that lock in their unit costs in fee for service contracts – so they’ll need lower utilization and/or concessions from providers on unit price to make this sustainable.

  1. Partners (Mass General, Brigham and Womens and others) announced that it would give insurers rebates of a total of $40 million  this year to support selectively lowering rates for small business.   Interestingly, Children’s Hospital did something similar – announcing a price rollback in exchange for some up-front payment to build infrastructure, in fall, 2009.   Other hospitals  are figuring out their next steps – Partners and Childrens are both paid rates higher than other providers – so these rebates probably still don’t level the playing field, and it will be hard for the lower-paid facilities to match this.

  1. State Senate President Therese Murray  outlined her plan to control health care costs, with initiatives including
·         Insurers would gain approval of their proposed rate increases as long as they pledged  to have “medical loss ratios” of at least 90%.  This means that 90 cents of every dollar would go to paying medical claims – the other 10% would include all administration costs including marketing and profit  (or reserves for nonprofits).
·         Allowing insurers to change rates based on age (rather than 5 year age group), which will mean no huge rate increases when someone turns 50, for instance).  Also, allowing insurers to increase base rate if necessary to prevent a “rate shock” to a specific subgroup
·         Annual enrollment (to prevent people from coming into the insurance system for an elective procedure, and then leaving again)
·         Prohibiting those eligible for employer plans from entering the individual market (to avoid adverse risk selection)
·         High risk reinsurance pool
·         Require narrow network products with lower cost. 
·         Give a 5% discount to employers who establish a wellness program
·         Ask for $100 million in contributions from providers in good financial shape
·         Establishing a purchasing coalition for small groups through the Connector
·         Review all mandated benefits every four years

In my opinion, the most important effort here is the narrow network option.   This has the potential to substantially lower unit cost – in part because narrow networks encourage providers to compete on price (There is no reason for providers to try to deliver a lower price to an all-inclusive network, as they maintain very high leverage when every health plan needs every provider).  The Globe today  offers some evidence that narrow networks are starting to gather some momentum.

Avoiding adverse risk selection is critical (article in tomorrow’s NYTimes shows what happens if the healthy opt out of  purchasing insurance.)  Therefore, it’s important to require an  annual enrollment only, as well as to guard against employers sending a few sick individuals into the small group market.

Small businesses overestimate the savings they’ll get from group purchasing – the larger groups are less expensive because there are genuinely lower administrative expenses for insurers to enroll 25,000 covered lives all at once, rather than as 1000 separate 25 person companies, and because there is less opportunity for adverse selection in a large company than with multiple small companies.  I did a more complete review of the reasons why small companies pay more in Fall, 2009. 

Wellness programs are not likely to save 5% in the first year or more when they are implemented. Therefore, a mandate to offer small businesses with wellness programs a 5% discount will raise the cost of health insurance for all.  It’s not a bad idea – and might lead to better, healthier lives.   However, this is not going to help us control health care costs over the next 1-3 years.

When is an Old Drug Worth $5 per Pill?

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The Wall Street Journal has a good article showing how colchicine, a generic medication used to treat gout since the sixth century, and available for pennies a pill until a few months ago, now costs big, brand-name bucks.

What happened?  Cochicine was 'grandfathered' because it was in widespread use before the FDA was founded. The FDA has offered manufacturers willing to do safety and efficacy studies a limited period of exclusivity - so URL Pharmaceuticals did studies with under 1000 patients, filed for exclusive marketing rights, and started suing the other generic makers of this medication.

This isn't the only time an old drug has been 'rebranded' and made devastatingly expensive. Thalidomide, which caused birth defects in the early 1960s, was discovered to be a good treatment for leprosy and as an "orphan drug" was reintroduced to the market priced ~$6 per pill. When thalidomide was shown to be useful for multiple myeloma, the price jumped to $30 per pill.  Cost of manufacture is under a dime a pill.  The manufacturer of Thalidomide, Celgene, performed a substantially more valuable service than URL- it rehabilitated an old drug that was no longer manufactured and identified new ways it could benefit patients.  There is some value to the clinical trials that URL did - which established that a slightly lower dose of colchicine increased safety.  It's hard to argue that the value added by this pharmaceutical company is worth almost $5 per pill for a drug in wide use and used with awfully good safety for decades.  

In the US, we have a huge 'cost per unit' issue - and this is one more example of how this happens.  Patent or other regulatory protection of intellectual property grants a monopoly - which requires careful regulatory oversight.  In this instance, a well-meaning regulatory move to learn about the real safety of an old drug will bleed the health care system of many millions of dollars for relatively little value. 


Yesterday’s USA Today reports that Barack Obama had coronary C-T angiography and a virtual colonoscopy to evaluate the status of his coronary arteries and to screen for colon cancer.

This is truly distressing.   There is good evidence that using CT scans to screen for cardiac disease finds coronary disease but does not improve outcomes – so why is our president getting this test?   Colonoscopies are recommended for those 50 and over (Obama is 49), and virtual colonoscopy via CT scan is not recommended as an alternative to actual colonoscopy at this point. (It does not allow biopsy – and while it does not require insertion of a fiberoptic scope, it still requires the unpleasant preparation.)  Both tests use CT scans – with nontrivial radiation exposure.

I’m sure the President’s physicians feel like they were offering Obama exceptional care.   Doing more high tech “noninvasive” tests gives the ‘sense’ of decreasing uncertainty, although we often end up with more data that is difficult to incorporate into a plan of care. If we want to convince the public to accept the results of comparative effectiveness studies which might constrain future care, we should start at the top by not providing non-recommended care to our President.

Learning from Developing Countries

When it comes to saving money in health care, the developing world which financies health care largely through out-of-pocket health expenditures, often finds good ways to save money. That’s because developing countries accept decremental cost-effectiveness;   they tolerate small sacrifices in quality for big cost savings.  For residents of the developing world, the alternative (as I saw in Laos) l  was no access to health care at all.

Jaclyn Schiff wrote a good piece for the Kaiser Health Network on Friday reviewing a number of decrementally cost-effective interventions developed outside of the US which are promising in terms of increasing access while decreasing cost.  The interventions include:

ð  Inexpensive EKG machines developed in China and commercialized in the US by General Electri
ð  Prevention and Access to Care and Treatment (PACT) in Boston, using community health workers to improve medication adherence among HIV patients, and decrease the annual cost of care.  This approach was developed in South Afric
ð  Holding premature babies in a sling – to increase maternal contact in the US (but initially developed in Colombia to address a shortage of incubator
ð  Oral rehydration for diarrhea, developed in Bangladesh
ð  Open architecture medical record systems used in Africa

These innovations aren’t going to by themselves shave enough from our health care expenses to solve our health care cost crisis.  But it’s promising to see innovation that increases value coming from developing countries – which have a lot to teach us. 

Spinal Surgery as a Barometer of Health Care Cost Increase

This week’s Journal of the American Medical Association (JAMA) has a study showing that Medicare patients have had (we might say suffered) a more than 15-fold rise in spinal fusion surgery in the last eight years.   Simple laminectomies have declined slightly.  Complications are substantially higher with the more complex surgery; life-threatening complications increase from 2.3% (decompression alone) to 5.6% (complex fusions).  Rehospitalizations were higher in the complex surgery groups, and hospital charges were over $80,000 per patient (compared to under $24,000 for simple decompression laminectomies.  It’s unfortunate the authors used hospital charges, rather than actual Medicare payments.)

The authors and an accompanying editorial note that it’s unlikely the proportion of Medicare beneficiaries with the severe pathology requiring complex fusion increased over this time.  There is no evidence that the complex surgery has better outcomes for those with less severe disease; the rate of complications suggests that it is frankly worse.   

So – why did neurosurgeons do so much more complex fusion?

1)       Techniques and tools have improved – so complications are not as high as they once were
2)       Payment is higher
3)       Medical device makers see substantial profits from implanted hardware from the complicated surgery – and they market very effectively.  The major orthopedic device makers have entered into consent decrees and paid fines over recent years for their marketing to physicians
4)       Patients are not in a good position to demand the less invasive surgery when they are in agony and their surgeon suggests what he or she feels is best

What’s the answer to this?

Like most problems in health care cost, there are probably multiple answers – and no single one will magically make everything better.

è More price transparency with patients bearing incremental cost:  If patients knew they would face a $50,000 personal bill for the complex fusion, they would pressure their surgeons for less invasive therapy.  Of course, they might pressure their surgeons for less invasive surgery even in the instances where the more complex surgery is genuinely beneficial.  Further, most plans would (and should) have far lower out-of-pocket maximums 
è Better provider reporting.    What is the complication rate for each surgeon?  This could discourage surgeons from performing more risky surgery where it wasn’t absolutely necessary
è Disclosure (or frank prohibition) of medical device company payments to surgeons.  Minnesota, Vermont Massachusetts and other states have passed laws mandating this type of disclosure.  The embarrassment factor alone should change some behavior. Surgeons don’t believe that pharmaceutical or medical device company lunches, junkets, and honoraria have any impact on their clinical practice, but there is substantial evidence that this marketing expense does change provider behavior
è Decrease in the fee schedule for more complicated surgery.  Higher margin procedures generally are overutilized – so decreasing the margin for this surgery could help.  Japan  has an interesting approach – when a procedure’s utilization jumps, payment is slashed.  That’s why Japan has $100 MRIs – presumably, Japan would also have less of a reimbursement difference from simple laminectomy to complex fusion.
è Bundled payment or capitation – which would leave groups of  providers to decide whether to fund the more expensive surgery themselves.  The provider community is often not arrayed to accept these types of payment methodology – but in general bundling payment leads to much lower utilization of higher cost procedures. 

This JAMA study caused one day of headlines; we’ll see if this will lead to genuine change.

Unit Cost vs. Utilization As Reason for Health Care Cost Increases

The Massachusetts Attorney General published a final report about two weeks ago showing the impact of unit price increases compared to utilization increases for the three major regional health plans in Eastern Massachusetts.    As you can see, over recent years the overwhelming reason for increased overall health care costs was increase in unit cost - not increase in utilization.  

You can click any of these to enlarge - or go to the full report

Gaming the System

No one loves a mandate - a government requirement that we purchase something we might not want is especially unattractive.  Further, individual mandates to purchase health insurance are naturally regressive, since the cost of insurance (even after subsidies) often hits those with more modest income the hardest.  Opponents of health care reform are seeking state legislation and court action that could invalidate the individual mandate.

Important news out of Massachusetts suggests that our individual mandate that might not be quite "tight" enough.  Blue Cross Blue Shield of Massachusetts has noted a small group of subscribers who sign up, have expensive procedures, and then give up their policies (presumably gambling that the penalty for being uninsured is less expensive than the cost of the policy once their planned medical procedure is completed.)

BCBSMA states that almost 1000 people signed up for $400 per month policies for less than 3 months, during which time they racked up over $2200 in expenses.  This might overstate the case (some of these people might have had serious and terminal illnesses and disenrolled 'involuntarily.').  But still, a 'leaky' mandate isn't good enough. Making health care reform work requires that virtually everyone is in the system - and in the system through both sickness and health.

Massachusetts Rejects Small Business Health Plan Rate Increases

Massachusetts’ Division of Insurance has rejected  the lion’s share of proposed small group rate increases from the state’s largest nonprofit insurers – citing new regulations  requiring justification for rate increases in excess of medical inflation.  The state has long had the authority to deny proposed rate increases – and this is the first time it has done this.

Some of this is politics – Governor Deval Patrick’s likely Republican opponent was a CEO of one of the health plans – and this is an opportunity for Patrick to score ‘easy’ points against the health insurance industry, which is an easy target.   National health care reform considered this approach, at which point Karen Ignani  of America’s Health Insurance Plans said

“Regulating premiums won’t do anything to reduce the soaring costs of medical care. This would be like capping the prices auto makers can charge consumers, but letting the steel, rubber, and technology manufacturers charge the auto makers whatever they want.”

Will this move by Massachusetts regulators lower costs?

Probably not.

The idea is that the health plans, with no ability to pass on cost increases, will do a better job in negotiating fee schedules with providers, and will improve their existing medical management capabilities.  However, provider rates are already locked in –and health plans have long since implemented the medical management programs with the largest potential to decrease cost. 

What else can health plans do? 

They can change benefit design – but it’s too late to do this for April, 2010 accounts. (Most small businesses have an April 1-March 31 health plan year).  Beyond that, they can take a loss on the small business portion of their portfolio, and take this out of their reserves.   However, the Division of Insurance which has rejected these rate increases is also responsible for being sure the health plans have adequare reserves.  These two goals are likely to come into serious conflict over the next 12-24 months.

Lowering the cost of health care delivery will require more than an emergency regulation allowing the Division of Insurance to freeze health plan rates. 

Limits on Age Differentials Will Penalize Young

Good article in Washington Post yesterday pointing out that the health care reform bill’s restriction on age based premium can only vary by a factor of 3 means that young insured adults will be subsidizing older insured adults.  This change has the largest impact on young adult males ; they have low costs actuarially, so in the past were able to purchase very inexpensive insurance (as long as they had no preexisting illness).

There is no free lunch. Restricting the ratio between the highest and lowest health care premium is great for those on the upper end – but this ‘compression’ of rates means higher rates for those at the lowest risk.  In the end, we have to manage the total costs we incur – just shifting costs from one group to another is painful, and threatens to be a “wedge” issue to make health care reform less popular.  

Potential Cerberus Exit Strategies After Caritas Investment

In my last post, I reviewed ways that the Cerberus private equity takeover of Caritas Christi Health Care System could, but likely would not, lower overall health care costs in Massachusetts.

What are Cerberus’ potential exit strategies?

1)     1. No Exit. 
Hospitals have serious cash flows, and if the new Caritas can make money, this could be a good business to be in.   Further, expect Cerberus to assess management fees upon Caritas which will be a recurrent source of revenue.  However, venture capital firms seek high rates of return, and hospitals almost never would meet a venture funds “hurtle” rate.  Therefore, I believe long-term full ownership seems unlikely. Continued Cerberus ownership would require profits for eventual distribution to the investor – and historically Caritas has had margins of under 1%.  A private owner would not likely tolerate such a low rate of return.

2)      2. Buy Low and Sell High
Hospitals could be undervalued now due to uncertainty surrounding health care reform.   Having fewer uninsured in the post-health-care-reform environment should be good for hospitals, so perhaps their value will be increased in the future even absent huge improvements in Caritas’ value proposition. On the other hand, there is real worry that the Senate bill just passed will still leave more uninsured than was hoped. Some of the subsidies will be funded through lower fee updates in the Medicare program over the next ten years, which will place additional financial pressure on hospitals. If Cerberus sought to sell Caritas and other acquired health care facilities, there would be large pressure to show very high margins in the quarters immediately prior to the sale.
3)    3. Dividend
Both HCA and Vanguard Health Systems just paid their venture capital owners enormous dividends (in the case of HCA, a total of $1.75 billion) over the last year.  They accomplished this by taking out large amounts of debt.    Essentially, these private equity owned systems recently took on just the kind of debt which Cerberus is pledging to wipe off Caritas’ book. Such a dividend payment would leave the new organization in much the capital-starved position it finds itself in now.    
4)      3. Selective Health Care Asset Sale
Some of the Caritas facilities are financially successful on their own, and could be attractive to other for-profit owners.  After the three year period, the organization could sell Norwood Hospital, for instance.  It could not likely sell Carney Hospital, a perennial money-loser in a relatively poor neighborhood with a predominately disadvantaged population.   Selective health care asset sale would likely be a prelude to eliminating money-losing programs and facilities.
5)      3. Selective Sale of Non-Health Care Assets
In some cases, Caritas’ real estate alone might have substantial value. This was the case with the K-Mart-Sears merger, where the value of the real estate exceeded the ongoing value of the retail chains.  Waltham Hospital was kept on life support briefly by a developer – who eventually secured the property for mixed use development.  It’s possible that selective non-health care asset sale could provide resources to maintain social mission and maintain money-losing programs, which could provide social value.  Cerberus could approach this more dispassionately than a nonprofit management.

One way or another, whether Cerberus maintains ownership or transfers ownership to another party after the three year period has ended, the Caritas system will have to increase its earnings to cover
  •    Local and other taxes from which nonprofit Caritas is now exempt
  •  Loss of philanthropic donations
  •  Additional layer of management
  •  Payments to investors recognizing the time-value and the risk of Cerberus' investment.

That’s why it’s likely that over the long run health care costs will likely be higher as a result of this investment, despite the recent coverage suggesting otherwise. 

Link: Part One (Ways Acquisition Could Save Dollars)
Link: Part Two (Ways Hospitals Can Improve Profitability)