Some Little-Noticed Health Care Cost Triumphs

Today’s Managing Health Care Costs Indicator is $230,000

Some weeks, it seems like this blog is about nothing but waste, greed and misaligned incentives.   In contrast, I wanted to point out two optimistic news items from last week.

The first is that the number of dollars retirees need to put away to pay  for their post-retirement health care went down this year – for the first year in ten years that this indicator has declined, according to Fidelity Investments.  The required savings are still $230,000 per person - which is substantially more than the average retiree has socked away - so many near elderly are likely to be pauperized by their medical expenses. 

The second is that that the epidemic of lung cancer among women is finally receding (a little bit).  According to a report in the Washington Post.      The rate of lung cancer in women peaked in 2002, and has been decreasing since 2007, although this is the first year that decline reached statistical significance. 

The decrease in retiree health care costs is because of the Affordable Care Act, which is gradually removing the “donut hole” which forced retirees had to pay 100% of costs of prescriptions between about $900 and $4300.   Care isn’t getting less expensive – it’s just being paid for by the government rather than retirees.  Still - good news is good news.

The decline in lung cancer among women is unabashed good news.  Public health measures work – and when it comes to saving lives, prevention and decreasing risks are as important as miracle treatment breakthroughs.

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Why Nonprofits Can’t Pay Their Executives As Much as For Profit Companies

Today’s Managing Health Care Costs Indicator is $11 million

 There has been a lot of angst, and frankly pretty awful press, about executive compensation at nonprofit health care organizations over the past month.

In Massachusetts, this started with reports of the $11million severance and final year package for Cleve Killingsworth, the deposed CEO of Blue Cross Blue Shield of Massachusetts.   This was only a few years after the previous long-term CEO had cashed out with a $16.4 million package.  BCBSMA board compensation quickly came under the glare of the public spotlight; one board member received compensation of almost $90,000.  

The New York Times expanded the scrutiny to the Bronx, where the CEO of Bronx Lebanon Hospital earned  $4.8 million in 2007 and $3.6 million in 2008.   In Manhattan, the CEO of the much larger New York Presbyterian earned $9.2 million in 2007 and $2.8 million in 2008.

These compensation numbers, of course, aren’t what drives health care to be increasingly unaffordable.    Killingsworth’s entire exit package would be 30 cents per BCBSMA member per month, a very tiny fraction of the amount of premium inflation each year.  Much of this package was compensation for services in previous years that Killingsworth deferred at the time. 

Nonprofits live in a world where they have to compete for talent at all levels with for-profit organizations.   Hospitals and health plans are complicated organizations – and getting the best executives to run them is critical to achieving their important public missions.

Still, payouts like this from organizations receiving the tax subsidization through not-for-profit status feel wrong.   I think there is a good reason high compensation seems disreputable in a health care nonprofit –while it doesn’t feel wrong in a for-profit company.

A nonprofit hospital must pay its executive salaries from revenue – that’s fees paid by health plans, patients, and the government.  If an executive is paid more, the revenue must cover this.   Nonprofits are making resource allocations all the time; Bronx Lebanon has been cutting its money-losing home services even while it pays a stratospheric salary to its top executive.

When for-profits offer especially generous pay, that pay is usually a combination of salary and stock options.  So – a CEO of a for-profit hospital chain might make $10 million in a year – but usually a small minority of that is salary which comes from operations.  If a CEO gets an $8 million stock grant, the shareholders of the for-profit company are essentially giving her an ownership stake in the company - thus diluting their own investment.  If shareholders of a for-profit publicly-traded company want to give a CEO some shares of the company they own – well – it’s their business! 

This is very different than a nonprofit Board of Directors granting a CEO a very high salary, where the organization will have to charge patients (or health plans or the government) more money to support this high pay.  There is no financial tool for nonprofits to transfer wealth to their top executives without raising their prices (or selling some of their valuables, or failing to make appropriate investments in improving their facilities).

I’ve worked at nonprofits and for-profit organizations, and each can do important work in financing or delivering health care.   Nonprofits are granted a substantial competitive advantage by not having to pay taxes, and some are able to receive charitable donations as well.   With those advantages comes a potential competitive disadvantage – nonprofits cannot use their stock to inflate the salaries of their top executives.  

Health care nonprofits can attract business-savvy, mission-driven chief executives without paying the all-in compensation numbers offered by some for-profit companies.  The damage to public trust with high executive payouts is much larger than the impact on health care costs.  

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Medical Device Company Payments to Cardiologists

Today’s Managing Health Care Costs Indicator is 95%

That’s the portion of patients at University Medical Center in Las Vegas who received pacemakers made by Biotronik, a small German firm that has only 5% of the market nationally.   The New York Times reported yesterday that a Biotronik salesman who had left Boston Scientific began hiring physicians from UMC as consultants, and pretty soon a leading cardiologist was pushing the CEO to junk an existing group purchasing contract and to purchase cardiac implantable devices independently.

The price?  One cardiologist who was paid “up to $5000 per month” implanted a quarter million dollars of Biotronik devices in patients each month.  Some of the cardiologists were paid $2000 per month – which couldn’t have had much impact on their income.  Still, the UMC cardiologists moved in lockstep from the top brands of pacemakers to Biotronik’s offerings.

This isn’t the first we’ve heard of this problem with high-margin medical devices.  Every major orthopedic medical device manufacturer entered into a consent decree with the FDA prohibiting future inappropriate marketing to orthopedists. New York Times       Academic Reference 

The factors that make this kind of inappropriate ‘consulting’ payment likely include

-        High margin devices

-        Nontransparency about industry payment

-        Physicians who make choices on behalf of their patients

-        Lack of incentive for anyone in the supply chain to try to lower overall resource cost

What can we do about this going forward?

Making industry payment to physicians public is a first step.  In general, these payments drop dramatically when they are made public. There are some legitimate payments from the medical device industry to practicing physicians who help the industry innovate – but patients should know if their physician has taken such payments.  Making payments public in fully-identifiable searchable databases is the best approach.  The Wall Street Journal has been doing a great job using data mining to identify likely fraud in Medicare, but has needed to sue using the Freedom of Information Act, and is only able to mention physicians by name if they are foolish enough to consent to being interviewed.  

Payment reform can make hospitals responsible for overall cost of a procedure. This means that there would be an agent who cared about overall resource cost use, which would push down the price (and margin) of these implantable devices.

Increased Medicare scrutiny and pursuit of kickback allegations against participating physicians and pharmaceutical and medical device companies can help – but don’t address the underlying problem.  These payments and the resultant changes in device purchase are result in higher cost to Medicare and to other purchasers.  They are not an exception – they are an expectable result of the current payment system.

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