The Hospital and Pharma Agreements to "Cut Costs"

There has been a lot of talk about the recent agreement between the Obama administration and the American Hospital Association promising a $155 billion decrease in hospital costs over the next ten years to help provide funds necessary for health care reform and increased access. This promise represents a lot of money – is it real?

The New York Times suggests, in both a news article and an editorial, that the real “savings” promised by the pharmaceutical industry and the hospital industry are less than they might first appear. I agree.

Much of the savings offered by the hospital association and the pharmaceutical industry are predicated on increasing coverage. The hospitals have agreed to a decrease in payments for uncompensated care – since there will BE less uncompensated care. For the pharmaceutical companies, more coverage means a larger market for their medicines and higher aggregate cost (not lower cost). The medicines that will now have higher adherence rates are generally cost-effective but not cost-saving. Therefore, using more of these medicines can help us achieve better outcomes at a higher (not lower) cost.

What we really need is not cost shifting (pay comes from insurance policies subsidized by the government, rather than directly from the government) but true cost savings. This will take real changes in clinical practice at hospitals. For instance we need efforts to

* Lower hospital-acquired infections and other errors

* Standardize practice, and increase adherence to evidence based guidelines

* Standardize purchasing – so that each surgeon can no longer demand her own brand and type of suture material or prosthetic

* “Downshift” work so that each employee is performing at the highest level for which she has training

Here’s a quote that really worries me, from the head of obstetrics at a hospital south of Boston that was recently noted to have a Caesarian Section rate of 45% (compared to a World Health Organization goal of 15%, and a national average of 28%)

“As long as women are receiving the proper education and the proper information so that they’re making the best decisions for them, then I’m OK with [the high c-section rate],” said Dr. Keith Merlin.

We won’t be able to lower costs at hospitals with attitudes like this. There is pretty good evidence that women don’t choose c-sections – and usually leave that choice to the professionals.

On the pharma side, we’ll also need more medicines that make life better and do so while saving dollars, rather than just costing a reasonable amount. This means quicker follow-on biologics, more generics, and lower initial prices on new entities. This will require wrenching changes in the business model – and could lead to enormous societal benefit.

So – these agreements are a good idea – and having the delivery system “on board” with health care reform is valuable. Obama and Congress will have to push for serious delivery reform, though, if we want truly affordable, reliable, high quality care.

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Protecting Consumers Purchasing Medical Insurance

I’ve been gnashing my teeth over the July 1 New York Times front page story about yet another medical bankruptcy. Lawrence Yurdin, a 64 year old who worked for a temp agency, purchased an Aetna policy through his employer. The policy offered $150,000 in hospital benefits. The catch? It covered only room and board. That wasn’t much help when he was hospitalized for heart surgery.

Now – Senator Charles Grassley is investigating Aetna -- which is a good thing. When he investigated United Health Care for similar policies, the company announced it would no longer sell such “limited” policies.

But a company-by-company review isn’t really the answer here. Even those who believe strongly in the marketplace recognize an important role for government regulation – and this is an area of medical insurance just calling out for such intervention.

What’s wrong with a policy that covers only hospital room and board?

1. Transparency: You’d almost have to be a lawyer to figure out the restrictions of coverage. Even the Aetna preregistration department, it appears, didn’t realize how restrictive the policy really was!

2. Value: This type of coverage would lead to a low “medical loss ratio,” meaning that too much of the premium paid would go to health plan profits or administration rather than to financing health care.

3. Public Policy. I can’t think of anyone who would be well-served by purchasing this type of policy. Government generally only allows sale of insurance contracts that are not contrary to public policy, so this type of restrictive benefit is just aching to be banned.

Many states regulate health insurance effectively. I remember watching the movie Sicko and commenting that most of the egregious health plan activities, like aggressive underwriting that would withdraw coverage for cancer therapy because a claimant hadn’t ‘fessed up about a past vaginal yeast infection, are simply illegal here in Massachusetts. But fixing this problem state by state will take too long, and there will be too many unprotected victims along the way.

There is excellent precedent for the federal government regulating the private health insurance market. A good model is federal regulations which transformed the “Medigap” market a few years ago.

Medicare offers incomplete coverage – and participants have to pay $1,068 inpatient deductible each year, 20% coinsurance for doctors’ services, and between $267 to $534 for each hospital day. Many seniors purchase a Medigap policy to cover these ‘gaps’ in Medicare coverage.

Prior to regulation, the Medigap market was a giant mess. Many senior citizens purchased multiple overlapping plans – most famously some paid premiums for more than one Medigap plan while they could not afford food. Medigap regulation

-Mandated that all Medigap plans offer certain minimal coverage

-Standardized product design

-Prohibited companies from knowingly selling more than a single plan to an individual.

-Banned agent bonus commissions on this product.

It was possible to pass this legislation, in part, because legislators recognized that senior citizens were vulnerable – and were deserving of special protection. The insurance industry suggested that this type of regulation might chase many insurers from the market – but it turned out that there is still plenty of choice in this market.

Lawrence Yurden and his wife will lose just about everything because he trusted his health care financing to an ill-designed insurance policy that victimized him. We’re all vulnerable here – and appropriate regulation would be an important adjunct to a fully-functional private insurance market.

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The Myth of A Painless Way to Cut Health Care Costs

Elliot Fisher, a professor at Dartmouth who has tirelessly researched variation in medical care across the country, has been in the news a lot lately. The Dartmouth Atlas research team has documented enormous variations in utilization around the country. This variation was recently the topic of a widely-quoted New Yorker article by Atul Gawande which helped demonstrate the seamy underbelly of American medicine: our physicians do more procedures because that’s how they earn their money.

National Public Radio had a story yesterday morning entitled “A Painless Way To Cut Health Care Costs?” Fisher was quoted extensively – pointing out that we should move away from fee for service payment methodologies we could eliminate a lot of medical costs. (I agree). Reporter Julie Rovner wondered if this means that slowing the growth of health care costs “doesn’t have to hurt.”

It all depends who you are.

If you are a patient, decreasing variation is good. Decreasing variation means that we offer more reliable health care, and decreasing overutilization will prevent medical errors and lower patient copayment and coinsurance charges. No problem there.

If you are an employer or the government purchasing health insurance – ditto. Decreasing variation (and increasing the prevalence of evidence based care) should lead to higher value in the health care purchase. Sign me up.

But is this likely to be painless for hospitals and doctors? Not by a long shot!

Health care, at 1/6 of the economy, employs a lot of people and creates an enormous amount of wealth. In most communities with a hospital, that hospital is the major employer in town. The top ten nongovernmental employers in Massachusetts includes three hospital systems and one university that includes hospital employees in its headcount.

In a sense, if we cut out 30-35% of all hospital revenues, we would end up with Detroits all across the country (especially in Massachusetts).

Let’s also not forget that the US has much lower utilization than all of the OECD countries that we look to as examples. So – while Fisher et al have demonstrated convincingly that medical communities in northern New England and the northern Plains states deliver better care while spending fewer resources, the excess cost in the US compared to Europe is largely due to cost per unit, not utilization.

I agree with Fisher and others that we should work hard to decrease variation and by so doing decrease utilization. In many instances (like preventive care), decreasing variation and increasing evidence based care will actually increase utilization and costs; I favor this too.

But I would not call solving this problem “painless, “ and I would not underestimate how difficult it will be to overcome opposition to efforts that would undermine the current business model.

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