Remarks for a corporate executive upon joining a hospital or health system Board

Today’s Managing Health Care Costs Indicator is 10

Top corporate executives sit on the boards of directors or trustees of nonprofit hospitals and health care delivery systems in many communities.  It’s natural that health care providers want the best minds in business to participate in their governance.  It’s also natural that executives want to ‘give back’ to the community, and it’s an honor to serve on a hospital or health system board.

However, it’s a tough position to be in.  The rise in health care costs is a major headache for the corporate executive, but hospitals seek to increase their revenue.  A hospital that has not increased its revenue is likely to have trouble borrowing money to make capital investments that will keep it successful.

I’ve been talking to a few colleagues about this, and I offer theoretical maiden remarks for a corporate CFO who has just joined the board of a health care delivery system.

Thanks for the opportunity to serve on this board.   This health care delivery system is a pillar of our community.  It delivers health care to many of my company’s employees, and my family has benefited from the excellent quality of health care within this system.

I know I’m joining this board at a time of great change.  Health care costs have skyrocketed over the last decade, and insurance premiums are increasingly unaffordable to companies and to our employees.  My own company has only been able to continue to offer health care coverage and maintain our bottom line through converting our employees to high deductible health plans – so I’m well aware of the impact of rising health care costs.  At the same time, we’ve learned more about the mistakes patients suffer within the health care system, and we know that the system is rarely designed with patients in mind.

Health care reform promises to increase the portion of Americans with health insurance; however, many will have Medicaid, which I know has low payment rates.  It won’t be possible for providers to simply shift extra costs to employer-sponsored health insurance to make up for poor Medicaid payment rates.  

I intend to use my expertise to push this health care system retool itself to succeed in this new world. I hope my fellow Board members will join me.   I don’t underestimate the challenge, and I know that many of this health care system’s constituents would rather things remain as they were.  The current state, though, is not sustainable. We can meet our community mission through delivering higher value in health care, and we cannot meet our community mission if our costs continue to escalate unchecked.

I know that some good transformation work is already underway here, and I’ll be listening to our executives and our staff because I know many of the best ideas will come from those practicing within this system.   As I start my term, I’d like to suggest ten steps this health care delivery system should start working on tomorrow morning to start down the road toward being more accountable, and to deliver better quality, more affordable health care to this community.

1.      Be fully transparent

I’d like to see us make public all of the data we collect on quality, patient service, and patient satisfaction.    That especially means reporting on our performance where we don’t look as good as our reputation and our self-image.  I know our clinicians are intensely committed to being the best – and I suspect that we’ll make things better more quickly when everyone knows that our quality scores will be readily available to anyone through our web site.

2.      Put together bundled prices for various service lines

We need our entire medical staff to function as a team – and we need to have the right incentives to take steps out of our processes that will allow us to deliver the best treatment for a lower price.   As long as we are paid more for delivering more units of service, it will be hard for us to figure out how to make our patients better with fewer units of service.

3.      Fully disclose any medical error or bad outcome, apologize, and offer restitution when we make errors

Harvard Medical School hospitals adopted this policy a few years ago, and the Veterans Administration and the University of Michigan have showed that this can lower the overall cost of health care.  It’s also the right thing to do, and the way all of us would want ourselves and our families treated when we get care within this system.

4.      Consider the community’s real medical needs, rather than revenue potential, when we make capital decisions.

Many hospitals purchase new fancy technology which adds little to patient benefit, but allows for much larger bills and revenue.  Some hospital CEOs have complained about this, but haven’t had the fortitude to obey their own rhetoric.  We want technology that will be the best for our patients and allow us to deliver the highest quality care that is cost-effective. We don’t just want the latest gizmo.

5.      Get rid of sample closets for pharmaceuticals in practices owned by the health care system, and prohibit pharmaceutical representatives from our campuses

Our physicians are making purchasing decisions on behalf of their patients.  Let’s give them access to nonbiased sources of information, and let’s not entice them to prescribe the latest brand name medicine for which there are plenty of generic equivalents at a fraction of the price.

6.      Drive a hard bargain with suppliers

Medical devices are expensive – and often drive up the cost of medical care unnecessarily.  Limit the number of different implantable devices available, and get the best price on behalf of our patients.  The same goes for all supplies.  First, be sure we need the supply.  If we need it, get the supply at the most advantageous price – as if it were our money we were spending.  We will be spending our own money on supplies in a future world of bundled payments.

7.      Improve the health habits of our own employees

Our employees serve as an example to the entire community, and preventable chronic diseases take up too much of our medical resources.  Let’s fully cover counseling and medications to help them quit smoking, and offer healthy food alternatives in our cafeterias.  Let’s make it easy for our employees to walk or cycle to work where that’s safe, and let’s set up employee competitions for exercise to drive the social network here to promote healthy lifestyles.

8.      Give our patients better tools to help them make better decisions

Patients often don’t have the best available information to help them make difficult choices, especially where there is no single “right” medical answer.  Examples include back surgery, hysterectomies, heart surgery, and mastectomy and prostatectomy for cancer.  Patients given access to objective information on treatment alternatives often choose less invasive therapy and have lower costs.  Hospitals have not been enthusiastic about this in the past, as more invasive therapy is often more profitable.  I’d like us to focus on helping our patients make the best decisions for themselves and their families, not merely focus on promoting decisions that might be better for our bottom line

9.      Support efforts to improve the health of the entire community

Our mission is to improve the health of the community – not just those who see us as patients.  I know in the past we’ve done cancer screenings which can increase our own volume. I’d like to see us do much more.  I’d like to see this health care system as at the hub of ‘information therapy’ in the community, and I’d like to see us helping more members of our community avoid chronic disease, and avert preventable emergency department visits and preventable hospital admissions.  We should publish an annual stewardship report showing what we have done to improve the health of the entire community.

10.   Reach out to community employers to see what their real needs are, and to get feedback on how we’re doing. 

Employers purchase health care for their employees because it’s genuinely important. Employees value their health insurance, and the certainty of this insurance means that they can focus on their jobs.  Better health also leads to increased worker productivity.  I’d like to see us regularly interview executives from other companies in our community to assess their needs and how we’re meeting those needs.   When I talk to my colleagues I hear that they would like more primary care access to prevent avoidable emergency department visits and better musculoskeletal care to help patients with back injuries return to work more quickly. I’m sure we’ll learn a lot from talking to other employers, and we’ll help improve our own processes here.

None of what I’m suggesting here is easy, and much of it will be very disruptive. I’ve already talked to the CEO about this, and she’s supportive, but aware that she’ll face opposition from some clinicians and others within the organization.  To succeed, we will need this transformation to be the focus of this Board over the coming months and years.   

I think as a Board we’ll be up to this challenge, and I’m glad to have to opportunity to join you.

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Provider Payment Reform is Key to Encourage Disruptive Innovation in Health Care

There is a lot of great innovation in health care – but not nearly as much disruptive innovation as we’d expect in an industry that represents a sixth of the American economy.  Disruptive innovation can bring huge social benefit – in terms of better good or services at lower prices available to more and more people.  However, disruptive innovation can be terrible for incumbents – and it’s only nurtured in environments where those making purchasing decisions are intensely price conscious. 

So – if we want more disruptive innovation, we need more price-consciousness in health care.

And we’re getting it, too.  As Drew Altman notes in his most recent Kaiser Family Foundation column, high deductible health plans are growing rapidly in the US – and it’s been almost under the radar.  Those with high deductible health plans use far less resources – sometimes skipping valuable care as well as discretionary care. 

Higher patient exposure to health care costs is likely to lead to more fertile territory for disruptive innovation.  For instance, if all office visits cost a $15 copayment at the point of service, patients would not flock to retail clinics, with their limited menu of services.  When patients are paying the first $2,000 or more for their care, and then 20% for care beyond the deductible, they’re much more likely to “shop” for better bargains – which is great for disruptive innovation.  Hospital emergency departments offer many services that most people with earaches don’t need, and higher member cost-share discourages overuse of expensive sites of care.

But patient cost share only works to encourage more prudent purchasing behavior if

-        The health care service is elective, where the patient has a choice. 

o       It’s pretty hard to convince an ambulance driver to take you to the most cost-effective hospital if you feel an elephant sitting on your chest, are out of breath, and are drenched with sweat!

-        The patient has some idea of the cost. 

o       Most physicians have no idea what various health care services cost, and even  health plans often aren’t sure of the actual cost of a service.  This is even worse because services are not bundled in ways patients find intuitive.  Even if I knew that my physician would charge $150 for a level 4 office visit, I’m not sure that she would bill that level of office visit, and she might order laboratory tests that would increase the cost dramatically

-        There is some signal available about quality

o       No one would recommend going for the cheapest angioplasty if the cardiologist had a history of bad outcomes.

-        There is choice

o       In many rural areas, there is a single hospital and often a single group in each specialty.

The biggest problem is that a small portion of patients represent the vast majority of health care costs (10% of patients represent about 60% of all costs). I recently saw data where those in the top 50% represented 93% of total costs (averaging over $3000 per person).  These patients will almost always exceed the annual deductible, so all this extra “skin in the game” might dishearten those with severe illness, but it’s not so likely to change their behavior.  If the extra member cost-share decreased utilization among this half of the population by a factor of half, it would only lower overall health care costs by 3.5% - less than the inflation rate for a single year! Much of the care received by the low cost half of the population is preventive, so we really don’t want to decrease that anyway!

In many instances, the purchaser of health care services is frankly not the patient – but is the health care provider. For example, patients are not generally shopping for the highest value hip prosthesis.  They “shop” for an orthopedist, and the orthopedist recommends what artificial hip should be implanted.  

That’s why I believe that bundled payments and provider risk are the real keys to increasing disruptive innovation in health care. 

Bundled payments have been very effective at increasing disruptive innovation in the provider community in the past.  For instance, when Medicare switched to the diagnosis related group (DRG) payment methodology, hospital stays got dramatically shorter, and total days in the hospital plummeted.  Essentially, the physicians who demanded longer hospital stays under a “cost plus” payment system figured out how to cut hospital stays when they were asked to be prudent purchasers of hospital services.  Independent practice associations and other provider organizations taking “risk” or capitation have put in place innovative programs to diminish hospital admissions and readmissions, and dramatically increase use of generic medications. 

Disruptive innovation is nourished by value-based purchasing, and government can do two things to increase value-based purchasing.

The first is to help us know what really works, and what doesn’t.  That’s why it’s critical to increase our investment in comparative effectiveness research – whatever we want to call it. We’re not talking about rationing or death panels – we’re talking about collecting the data we need to know what’s worth paying for.   

The second thing is, can we please allow the FDA to make determinations about approvals based on value rather than just effectiveness?  As long as we approve a new medication or medical device that is ten times as expensive as existing medicines, and is merely “noninferior,” pharmaceutical and medical device companies will focus their research efforts on innovations that will increase the cost of care, rather than those that could substantially increase value, and sometimes even lower costs.  

The Managing Health Care Costs Indicator will return next week

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Which innovations can lower health care costs, and why they are difficult to obtain

I’m on vacation with my family this week – it gives me a chance to read a lot of fiction (just finished The Tiger’s Wife  and The Beauty of Humanity Movement,  both of which transported me to exotic lands (Yugoslavia as it was collapsing and Vietnam of just a few years ago)   Vacation also gives me a chance to step away from the daily news a bit – and muse about health care policy.

A few thoughts on innovation today.

Bold new innovation isn’t going to solve the problem of health care costs going up.  

We read with great interest the front page story about the young man with quadriplegia who trained his brain to activate his lower extremities.   I pointed out that whatever this therapy and the associated hardware cost, it would be nearly impossible to fund this for even a small portion of quadriplegics.   Of course, we have no idea how much this would cost.  My wife pointed out that quadriplegics were at high risk of pneumonias and other complications, and this therapy could lower the costs of such complications.

Here’s why this type of innovation won’t lower the cost of health care, even if it prevents many grievous and expensive complications.   When this technology becomes more mature and is commercialized, the patent owners will do an economic study of the benefits and cost savings associated with the therapy.  That will include the benefits of this therapy to the individual, to his or her family, and to society overall, as well as any health care cost savings through prevented complications or substitution for more expensive care.  

Many of these benefits will be outside of the health care system – such as years or decades of company of a loved one, productivity at work, and ‘life years’ saved. Then, the patent owner will assign a price, grabbing a substantial portion of the value created by this new invention.  I’m not griping- that’s the way things should be under patent law.  This encourages life-saving and life-improving new inventions.  However, as long as the inventor is setting the price based on all the value created, and much of that value is not measured in saved future health care claims alone, bold new medical innovations will almost always raise, rather than lower the cost of health care.

Disruptive innovation, however, really can lower health care costs.

Disruptive innovations are a bit inferior to the current incumbent technology –but “good enough” initially for a narrow group of customers who are being overserved by the existing approach.  Disruptive innovations exert negative price pressure on incumbent technologies, and improve at rapid enough rates that they often displace the incumbent over time.

Clay Christensen of Harvard Business School has developed this theory, initially from the world of computer hardware,  and most recently applied it to health care.   His first book The Innovator’s Dilemma,  is a short, pithy, insightful business classic.  Everyone in health care policy should read it. 

What are examples of disruptive innovations in health care?

-        Retail clinics:  They can’t do nearly all that can be done in a physician’s office – at this point, 20 or so different diagnoses are the limit.  They often use nurse practitioners rather than physicians, and they don’t offer 24 hour coverage.  So, retail clinics are not as good as a physician’s office – but MUCH more accessible, and substantially less expensive.  Over time, they will increase their capabilities.

-        Low strength MRI scans and handheld ultrasound machines.  Japan has $100 MRI scans, which don’t have nearly the definition offered by 2+ Tesla machines available in the US.  Handheld ultrasounds also don’t give as good an image as currently available installed ultrasound machines.  But they’re good enough for many purposes. Right now in the US, we use MRIs that are good enough to give a roadmap for brain surgery –but the level of detail available is unnecessary for many orthopedic procedures.

-        Generic drugs.  You could argue, and I often do, that generic drugs are just as good as brand name drugs.  The FDA’s effective regulation of the generic drug manufacturers has meant that the generics are as likely as brand name medicines to have the stated potency.   But they are at least a bit inferior, because the pills are not all the same colors and shapes. This can lead to more difficulty with adherence, especially for older patients and those with cognitive difficulty.  They’re good enough, though, for many, and much less expensive.

Disruptive innovation isn’t easy to implement.   Physician advocacy groups vehemently opposed retail clinics in many states, and licensure rules meant to protect the public are often used as “guild” tools to protect those who have an existing monopoly.  You might know that the Toshiba MRI scanner that allows $100 MRI scans isn’t licensed for use in the United States.  It would be opposed by makers of the current expensive MRI scanners – much as the makers of mainframe computers weren’t thrilled about the idea of personal computers. A complex web of regulations in health care makes it almost impossible to get a license to import a scanner that is inferior (albeit much cheaper) than existing technology. Radiologists aren’t eager for a lower priced scanner, which could further erode their dominance in imaging as many other physicians purchased such scanners.  Hospitals that have invested millions in the current generation of MRIs with incredible capabilities also see how low-priced scanners could threaten their profit margins.

Generic drugs are readily available, and have been a major source of health care savings over the past half-decade. However, brand name pharmaceutical companies have used vigorous legal maneuvers to delay the introduction of generics. Big pharma companies in some instances have even paid generic manufacturers to delay generic launches to maintain their sole-source protection for extra months or years. 

So – bold new innovation can make our lives longer and better, but won’t save a lot of health care claims dollars.   Disruptive innovation can save money – but is forcefully opposed by those who profit from the current state, who are enabled by regulations meant to protect patients. 

We need to make our health care system more avid for disruptive innovation. 

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Surgical Vampires – a brief successful intervention to lower lab costs

Dark bars represent new interns on the ward. Click to enlarge

I know, this won’t generate the number of hits that the CDC got when it provided a step-by-step manual to prepare for an onslaught of flesh-eating zombies!   But the title is irresistible.

A colleague pointed out that there was a small interesting study in this month's Archives of Surgery   entitled “Surgical vampires and rising health care expenditure.”

The researchers simply told surgical interns and residents how much was being spent on daily laboratory tests per person on three surgical wards at Rhode Island Hospital.  Then, they calculated the daily charges, which started at over $140 per person, and settled closer to $120.

This was a small study, and only lasted 11 weeks. There is no long-term followup.  When a new group of interns rotated onto these wards, the costs went up again (represented by darker blue bars in the graph above). 

The researchers missed some major benefits from their intervention. One is that patients were stuck with fewer phlebotomy needles. They lost less blood, but more importantly, they suffered less discomfort.  Further, aberrant but self-correcting or erroneous abnormalities were not identified, which could have saved patients from unnecessary follow-ups, some of which could have involved imaging or other diagnostic tests not captured in this study.  The worst outcome from an unnecessary test is when it leads to more unnecessary tests!

The researchers provided only the charges, not the actual price paid by payers.  The price paid to the hospital probably didn’t change at all, since most patients were on Medicare or other health plans that pay DRG (diagnosis related group) bundled payments for hospitalization.  The costs seen by the system were probably, therefore, unchanged.   

Further, the marginal costs for a hospital to perform a few more laboratory tests are probably quite small.  A hospital doing 1000 complete blood counts per day saves very little in the way of laboratory supplies if it is only doing 990!. There are some potential savings in personnel, so there could have been less phlebotomist overtime due to this intervention.

Putting the reins on surgical vampires is not a silver bullet – but stopping doing unnecessary tests is a good idea.

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The Paradox of Generosity: Making Insurance Coverage Broader Can Lead to More Uninsured

Today’s Managing Health Care Costs Indicator is 1.5 million

The May 4 issue of the Journal of the American Medical Association  has a comprehensive literature review of the effectiveness of structured exercise in type 2 diabetics.  Those who begin an structured  program  to exercise at least 150 minutes a week have impressive improvements in their diabetes -- improvements akin to the results of adding an additional diabetes medicine to their drug therapy.

An accompanying editorial suggests that since structured exercise is so cost effective (between $14,000 and $69, 000 per quality adjusted life year) it should be covered by health insurance.

I'm a big fan of exercise - and I do think that breaking down barriers to exercise is important.  For many, the cost of joining a gym is beyond the budget.  However, I couldn't disagree more with this JAMA editorial.

We have a huge affordability problem.   Making health plans more “generous” through offering coverage for fitness club membership also makes them these insurance plans less affordable. This is not exactly an “unfunded mandate” in all instances under the Affordable Care Act, because the government will subsidize health insurance to the extent the cost exceeds 9.5% (or less) of income. Therefore, the government has a strong incentive to keep down the cost of health insurance.

Fortune Magazine  reports that chiropractors, patient advocacy groups, and a wide range of physician specialty groups are lining up to demand that HHS include more services in its list of essential health benefits.  It reports that a 10% increase in the cost of the essential benefits package would increase spending by $67 billion through 2019 and reduce the number of insured Americans by 1.5 million. 

We have to figure out how to avoid medicalizing a large range of important social issues, and we must have the discipline to NOT cover services that are not medically necessary.  Covering fitness club memberships through health insurance might feel good.  But it would paradoxically lead to a lower rate of those with insurance for truly ‘essential’ health care coverage.

Let’s not add more mandates that would make health insurance unaffordable for more Americans.

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Managing Health Care Costs: A Pessimistic Historical View

Today’s Managing Health Care Costs Indicator is 7.5%

That’s what portion of the GDP health care was in 1971 when Steven Schroeder, MD, began work in the trenches to control the costs of health care.  He writes personal reflections on what hasn’t worked over the last four decades, as he progressed from a medical director in a start-up provider-sponsored HMO to an academic at UCSF and on to the presidency of the Robert Wood Johnson Foundation and back to UCSF.  

He writes in the April 25, Archives of Internal Medicine    Harvard Link  

During my professional lifetime I have witnessed a succession of individual cost containment strategies, each theoretically legitimate but each doomed to failure because they were either insufficient as a single intervention or ran up against political opposition to vigorous implementation.

Schroeder recounts efforts to decrease variation in test ordering among physicians in a group practice.  Differences were 17-fold!   Efforts to lower test cost were successful – but no more so among the high utilizers than among the low utilizers.  He notes that in practice, adding more technology can triple a physician’s income.  He observes that new technologies often replace older, more invasive and dangerous technologies – but they are used more and more widely, and no savings are attained. 

It’s a sign of the times that Schroeder remembers when “catastrophic” hospitalizations were those with total costs of over $5000.   At this point, catastrophic cases are over $50,000 or more.  Most of us don’t remember the last time we saw an inpatient hospital bill of less than $5000!

I'll let Schroeder have the last word:

In the long run, reining in costs will require mobilizing political forces that can withstand the inevitable claims of rationing sure to come from the industries currently benefiting from the 17% of the economy spent on health care, and from consumers who have come to expect unlimited access to what they feel they need. Until there exist sufficient countervailing forces so that a comprehensive, multipronged strategy could be implemented, politicians and health policy experts will continue to embrace tepid and ultimately ineffective solutions that may sound good in theory but will fall short in practice. 

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Obama Administration Shows Medicare Savings

Today’s Managing Health Care Costs Indicator is $120 billion

The Obama Administration issued a report demonstrating $120 billion in Medicare savings over the next five years as a result of the Affordable Care Act.  This coincided with the annual report from the Trustees of Medicare and Social Security which stated that the Medicare hospital fund will become insolvent five years earlier than previously projected, due to lower revenue from the lackluster economy and continued increases in the cost of health care.

These savings claimed by the Obama administration look highly credible to me. The vast majority of dollars claimed are from payment decreases – which are straightforward and should yield the savings anticipated.  Health plans will object to decreased profit margins, and providers will object to decreased payment updates, but the Obama administration has all the authority necessary to implement these.  The fraud estimate looks quite low, given that the WSJ reported last week that federal prosecutors are seeking $1b from Johnson and Johnson  alonefor marketing abuses for the antipsychotic medication Respirdal. Competitive bidding for durable medical equipment is likely to save the dollars projected.

The savings from decreased readmissions and complications are harder to predict.   It’s likely that the cost pressures on health care providers will pressure them to continue to reengineer their processes. Don Berwick’s 100,000 lives campaign when he was at IHI was very successful, so I think it’s highly likely Medicare’s effort will be as well, even if his tenure as the CMS Administrator is short.

Of course, this is not nearly enough.  The ten year cost of the “doc fix,” to fund continued physician payment levels to avoid what would be a 25+% cut next year, will be $300 billion.  

But at least this is a start.

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Diagnostic Cascade: A Cautionary Tale

Today’s managing health care cost indicator is 2.8 million

I was at a celebration of the end of the academic year last night at Harvard School of Public Health, and a former student told me a cautionary story.

She mentioned that her dad is very careful about his diet – ever since he had a CT-angiogram that showed calcium – indicating a high likelihood of heart disease.    He had no symptoms –and had the test because a friend, a radiologist, had this new machine and offered to test it on him.

2.8 million Americans were expected to get coronary CT scans in 2009. 

I listened, and mentioned that although her dad got radiation he shouldn’t have gotten –since the test was inappropriate – at least it led him to change his diet and make his life healthier.  (The likelihood of cancer due to the radiation from this exam is about 5 per 10,000 for a 60 year old man – but would be substantially higher for women). 

Alas, she told me, the story was much more complicated.

Based on the CT scan results, he had a cardiac catheterization, which demonstrated blockage of multiple vessels.  He had stents inserted, and was discharged home promptly. 

Then, the trouble started.   

He had bleeding and pain from the femoral artery – where the catheter was inserted for his procedure.  He had multiple exploratory surgeries for this – and eventually an errant stitch was removed. He was readmitted to the hospital multiple times over a period of almost half a year for a variety of complications from the stent placement – including one episode where he fainted just a few hours after his initial discharge.  He limped for years afterward.

My student’s dad is doing well now – he’s had no angina, and he watches his diet carefully and exercises.  

But at multiple levels, the health care system failed him

·       He had an initial screening test that was not indicated – since he had no symptoms of cardiac disease.  Here’s a link to a NEJM editorial about coronary CT scanning. 

·       He had a procedure to fix the incidentally-found asymptomatic heart vessel blockages. There is no evidence that a procedure to open up heart blood vessels prolongs life, but such procedures do relieve symptoms of angina – which he did not have. 

·       An error was made during his catheterization, leading to multiple complications which had a profound impact on his life.

If you’re wondering, the cardiologist who apparently made the medical error never apologized.   A subsequent surgeon explained that there had been a medical error, and then denied he said that. 

Anecdotes don’t usually make good policy – but this is a great example of a diagnostic cascade.  An initial ‘noninvasive’ test suggests unexpected disease – and it’s hard for clinicians and patients to stop until the disease (or the patient) is vanquished.  

The personal cost of misuse of medical technology to my student’s father was enormous.  The cost of his health care misadventure was pretty large too.

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Federal Medicaid Spending Would Plummet Under Ryan Plan

Today’s Managing Health Care Costs Indicator is $243 billion

There's been a lot of attention on the potential impact of converting Medicare into a voucher program. There's been a lot less attention to the Ryan proposal to convert Medicaid into a block grant program and limit the federal government's contributions.

The Kaiser Family Foundation Commission on Medicaid and the Uninsured has released its analysis of the Ryan budget plan – which shows that the Federal payment to states for Medicaid would drop by about a third by 2021 – a decreased transfer of $243 billion in that year.

Medicaid covers 60 million Americans -- about 1/3 of all children in this country, and 40% of births.    However, it also covers 70% of all nursing home residents, and pays for their custodial care, which is not covered by Medicare and which the frail elderly can rarely afford based on their savings. The elderly “dual-eligibles” on Medicare and Medicaid represent 15% of Medicaid beneficiaries, but 40% of total Medicaid costs.

There are a limited number of actions states can take to address increasing Medicaid costs.

1)     Decrease number of people on the Medicaid rolls.   That’s straightforward – but the problem is that the really expensive Medicaid members, those with disabilities, severe psychiatric illness, and nursing home residents, simply cannot be removed from the program

2)     Decrease payment to providers.  Medicaid payment rates are already egregiously low in most states, and they’ve been cut further over recent months.  Medicaid beneficiaries already have a hard time finding a physician, and this could get even worse.  Hospitals already state that they have to shift costs to employer-based health plans because of low Medicaid rates. This is a special issue in some service lines like maternity – where across the country Medicaid pays for a quarter of all deliveries.

3)     Better manage the care of those on Medicaid.  That’s not easy – since the most expensive Medicaid members are so complex, have so many simultaneous illnesses, and are cared for in fragmented systems.  State Medicaid programs tend to be administratively underfunded, and their ability to invest in health management programs is severely limited.

4)     Transfer the risk for Medicaid beneficiaries to managed care companies.  The managed care industry has developed some good models to better care for those with complex illness, and there are some very competent companies that can manage Medicaid “risk” contracts.  This means less choice for Medicaid members, as these plans have strictly limited networks. It means new marketing costs and sometimes the requirement for profit margins, so states should be very careful to avoid allowing managed care companies to “skim” the healthiest Medicaid members.  It’s always more profitable to cherry-pick healthy patients than to better manage those at high risk.

Notice I haven’t mentioned “administrative savings” as a viable approach to solving states’ Medicaid crisis – the administrative costs tend to be low.   Some states probably overspend on qualifying Medicaid beneficiaries – although it’s cheaper to throw someone off the Medicaid rolls than to keep paying their bills.

States are still reeling from decreased tax revenue due to the Great Recession, and many are making substantial cuts in their Medicaid outlays already.  Medicaid is a lynchpin of decreasing the rate of uninsured in the country; the Congressional Budget Office estimates that under the Affordable Care Act an additional 16 million Americans would qualify for Medicaid.

The federal leverage over states to expand Medicaid access is based on funding, and if federal funding is plummeting, Medicaid rolls will shrink rather than swell.  Hence, this decreased funding would lead to a dramatic increase in the uninsured.  These proposed cuts will have a a very high cost in disruption of medical coverage for the most vulnerable. As such, they are bad social policy. 

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Medical Device Companies and Physician Specialty Societies

Today’s Managing Health Care Costs Indicator is $6.7 billion

I’ve been traveling late this week –and there was a copy of USA Today waiting outside my door this morning. Today’s business section has a front page article (penned by the nonprofit journalism group Propublica) on the influence of medical device companies on medical specialty societies.

The article focuses on the Heart Rhythm Society, which is having its 2011 convention in San Francisco this week.  The HRS has about 5000 cardiologists and others – and they implant $6.7 billion of automatic debrillators each year (domestic and international sales).

HRS gets half of its $16 million annual budget from selling “promotional opportunities” to big medical device companies at this annual meeting. The promotional opportunities include advertising on hotel keys, nightstand displays, mobile sidewalk billboards and “promotional booths the size of mansions.”  The majority of directors of HRS get fees from medical device companies as well.

Jack Lewin, the chief executive of the American College of Cardiology, is quoted as saying that the advertising doesn’t influence cardiologists’ decision to implant devices or choice of devices.  The direct quote:  "I don't buy a soft drink just because of the advertising. … I buy it because I like it."

Don’t believe this for a minute.   Advertising unequivocally works.  Very smart companies wouldn’t spend billions of dollars if advertising wasn’t effective. 

The vast quantities of bling at specialist conventions is a real concern.  Marketing is critical to companies to differentiate their products, and the attention that medical device companies purchase leads to higher use of their products. 

Part of the problem is that physicians, like everyone else, like things that are free.  Medical journals would cost far more were it not for the pharmaceutical advertisements, and national conferences like the soiree in San Francisco this week would be prohibitively expensive to attend were it not for commercial sponsorships.   Frankly, these conferences would be less fun without the bling –so fewer physicians would attend. 

Some specialty societies have had internecine conflict over the issue of commercialization, and USA Today quotes a former president of the American Society of Hypertension (ASH), who resigned from ASH over this issue and calls sponsorships an “obscenity.” . 

What should we do that would not impede the important commercial speech of the pharmas and the medical device companies, yet better protect the public and medicine’s professionalism?

I favor dramatic expansion of transparency.

Nonprofit physician specialty societies should open to the public the full range of all financial dealings with suppliers of medical goods and services.    Reporting of honoraria and other inducements to practicing physicians and researchers should be expanded.   All reports should be available to the public in formats that allow downloading and data mining – we see how valuable this has been in Minnesota and elsewhere.  Charles Grassley has been working to gain access to this information – and this effort deserves our support.

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How Does Osama Bin Laden’s Death Affect Health Care Costs in the US?

Today’s Managing Health Care Costs Indicator is 9 ½ years

It’s been almost a decade since Osama Bin Laden and Al Qaeda set in motion the plane hijackings that killed over three thousand at the World Trade Center in New York, in the Pentagon in Virginia, and in a field in Pennsylvania.   We’ve been in two wars in the Middle East since the 9-11 tragedy, and we’ve invested billions in increased airport and other security.

And health care costs have kept rising, although they haven’t been rising quite as fast in the fast few years as they did earlier.

The past two days have been full of analysis of the impact of Osama’s death on terrorism, domestic politics, and on the price of oil.  I wanted to take a few paragraphs to muse about the potential impact of Osama’s death on health care costs in the US.

Of course, this is pure speculation, and the actual impact, if any, depends on many factors.

Osama’s death, and the waning influence of Al Qaeda, might lead to better security in the Middle East, which could cause lower oil prices.  This could make transportation less expensive, and could lower the cost of ingredients of some pharmaceuticals.  This will have virtually no impact on the cost of medical care –because transportation and ingredient costs represent such a small portion of total medical costs.  

When large natural disasters like hurricanes and earthquakes lead to big insurance losses, health care reinsurance prices soar. The converse is likely to be true, so as the risk of future terrorist attacks goes down, large reinsurance companies are likely to be very profitable.  Competition in this space will lead to decreased cost of reinsurance – which health insurers purchase to protect themselves from very high claims rates.  This could lower the cost of health insurance premiums, but only an iota.

The US is more likely to decrease its war effort in Afghanistan and continue its pullout from Iraq.  We have substantial medical resources in both countries (and in the nearby seas) – but the redirection of these resources stateside won’t have much impact at all on health care costs.  Aggregate costs could increase as some military physicians return to civilian life, where they have higher billing rates.   We’ll continue to face high costs of returning veterans with head and other severe trauma – and most of these costs will be borne in the Veteran’s Administration.

The two biggest open questions are whether this military success will give Obama  dramatically more political capital at home, and what impact it will have on the overall economic picture.

If this success in the war on terrorism gives Obama a substantial amount of political capital, more health care stakeholders decide to make plans assuming that the Affordable Care Act (ACA) will continue to be the law of the land.  States could push forward aggressively to complete their health insurance exchanges, and perhaps bills seeking to defund implementation of the ACA would languish in Congress.  We could see less objection to the Independent Payment Advisory Board, and some diminution of the arguments against comparative effectiveness research. 

It wouldn’t make any special sense, though, for this to happen.  George W. Bush tried to use his post-9/11 public support to convince Congress to privatize social security – and got little traction.  The Republicans and Democrats have genuinely different views of the cause of health care inflation, and the most effective approach to reform the system.  Osama’s death doesn’t change this.   I suspect that Obama will continue to face vigorous opposition, although it might be easier for him to keep wavering Democrats from straying and supporting repeal or substantial revision of the ACA.

I think the most important question to ask is whether Osama’s death will lead to higher growth rates and overall improvement in the US economy.  

If the US growth rate increases dramatically, unemployment eases, and consumer confidence returns, we’ll have less depression, fewer suicides, and be far better off.  Our health care costs, paradoxically, will increase as we are less sensitive to health care cost.   If, on the other hand, we have continued economic stagnation, it’s more likely we’ll take the tough steps to control the cost of health care.  Challenging economic times are when companies cut back on their insurance offerings, states try to pare back their Medicaid investment, and patients debate whether to get discretionary care.  Challenging economic times are also when new rules and regulations are most likely to force provider system change.

I think Osama’s death is likely to have a small positive effect on both Obama’s political capital (which could lead to more effective approaches to lower health care costs). It will also have a small positive effect on economic growth, which could hobble attempts to control health care spending.  My prediction is that these two factors will wash each other out, and Osama’s death will have little impact on US health care costs.

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Observations on Managing Health Care Costs

I've been finishing up lectures for the final classes in a health care management program over the last week- and so I'm behind on blogging.  I'll do some catching up this coming week.


In the meantime, I've posted the final slides from the Fall course, Managing Health Care Costs, at Harvard School of Public Health.  Here are my eighteen observations - the slides contain substantially more detail.

Observation One: Sick people are expensive to care for!

Observation Two: The problem in the US is cost per unit, NOT utilization

Observation Three: We are too sedentary, too fat, and smoke less than we used to, but still too much.

Observation Four: We don’t like to make tradeoffs!

Observation Five: There is HUGE Variation

Observation Six: Fee for service is toxic (but everything else is difficult)

Observation Seven : There is a cultural clash between those seeking to preserve the “art” of medicine, and those looking to create more reliability and cost effectiveness through industrial redesign

Observation Eight: We pay a heavy economic and noneconomic price in our effort to banish uncertainty

Observation Nine: We often promote competition that does not generate new value for patients, and reject competition that could create such new value.

Observation Ten: We “medicalize” many conditions, driving up cost

Observation Eleven: Many see a primary care shortage

Observation Twelve: We are reluctant to regulate prices (and when we do, we often do it poorly by design)

Observation Thirteen: Providers must consolidate to allow for more integrated payment; however, provider consolidation increases the cost per unit

Observation Fourteen: We often mistakenly think that we can measure the cost of health care by medical claims alone

Observation Fifteen: You can’t ‘reform’ an industry representing 17% of the GDP without angering many, and without unintended consequences

Observation Sixteen: Americans will pay for a larger portion of their health care out of pocket over the coming years, and this is likely to lower utilization

Observation Seventeen: Physicians are more likely to prescribe treatment associated with high margins for their practices

Observation Eighteen: There are no magic bullets


1/14/12 Addendum:  Here's the OECD list of out of pocket payments.  Remember that the total cost of health care is so much higher in the US than elsewhere that a lower percent of health care spending still means a higher portion of personal income.  Thanks to Vegncook for comments.

Click on image to enlarge. Source 

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