Healthcare Economics: Why This Stuff Doesn’t Actually Work The Way You Think...

Healthcare Economics: Why This Stuff Doesn’t Actually Work The Way You Think It Does

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This is a letter I sent to Gary Cohn, appointed by President Trump to head the National Economic Council and, among other things, come up with a plan for reforming healthcare. Formerly president of Goldman Sachs, Cohn may be a wizard at finance, but healthcare economics are wildly different and famously opaque. So I thought I would help him out.]

Subject: A brief on healthcare economics. (8 minutes)

 o Why healthcare economics are different.

 o Why the ACA is failing.

 o What would work.

Who I am (credentials): Independent healthcare author and analyst since Jimmy Carter’s administration. Speaker, consultant across the industry at all levels, including insurers, hospitals, device manufacturers, employers, Veterans, pharma, World Health Organization, Department of Defense. Look me up: ImagineWhatIf.com. Books on Amazon.

Core problem:
 The core problem in healthcare reform is the actual cost of medical care.

o Healthcare in the U.S. by any measure costs about twice what it should.
o Medical prices are completely disconnected from the cost of production.
o Few medical providers even know the true cost of ownership of their products.
o By a number of analyses at least one third of that (well over $1 trillion this year) is waste, paying for things that we don’t need and that don’t help.
o Solving just the federal part of this would completely wipe out the deficit.

Trying to “take care of everybody” will always be impossible politically and economically as long as healthcare costs twice what it should and wastes trillions of dollars.

Solvable: This is a solvable problem. Change the relationship of the sector to its true customers by shifting the payment structure, prompting business model innovation. Stop paying for waste, and $1 trillion/year in unneeded overtreatment will disappear. Prices will drop to something like a true market price. This will not happen overnight, but it could happen over five years with vigorous implementation.

Why does it cost so much?

No price signals: The structure of the U.S. healthcare market since the early 1980s has made it opaque to price signals. Customers in healthcare ask a different question than customers in most markets. Whether hospitals (as customers of suppliers) or individuals needing an operation, healthcare customers mostly don’t ask, “Can we afford it?” Or even, “What’s the best value for the money?” They ask, “Is it covered? Can we get reimbursed for this?” And the reimbursement or coverage is set by complex non-market mechanisms that in most parts of the market are themselves opaque to the customer. So there is no real customer and no real price signal in most relationships throughout the market.

Why health plan competition doesn’t help: The ACA and the major Republican proposals all attempt to lower the cost of medical care through increased competition among health plans. The strategy is: Plans will compete to offer lower premiums, and in turn demand lower prices from doctors, clinics, and hospitals, driving pricing demands into the market. Doesn’t work. Won’t work. Here’s why:

In health insurance markets there is no advantage to being the least expensive offering. You’ll increase your market share, yes, but:
The customers have to renew every year. The customers you gain at the bottom will leave you as soon as you are not the cheapest. The market share you gain will evaporate.
o The bottom of the market is typically sicker, requiring more of the premium dollar to pay for their medical care.
o If you priced yourself lower than anyone else on the market, your rivals are more likely to have a sustainable price than you are: You will likely spend 100% or more of that low premium servicing those patients. Without ample funding from the “risk corridors” established under the ACA (and then defunded by Congress), you will go bankrupt — as many did in the last two years.

The sweet spot? The median premium price or a little below it. Even being a bit above it is not bad.

Health plans’ incentives: Health plans’ profit (or margin) comes as percentage of the cost of healthcare (a percentage that is capped under the ACA). Any plan that disrupted the market by truly devising a way to provide healthcare for half as much would be cutting their profit (margin) per account in half. So health plans actually have no incentive to seriously drive the cost of medical care lower.

Government programs such as Medicare and Medicaid have an incentive to drive costs lower, but that incentive is balanced by the need to offer everyone meaningful coverage, which means they have to entice providers to accept these lower payments, without the power to force providers to take them.

Consolidation: In addition, private health plans’ ability to drive price signals into the market is quite limited, because the strongest providers in any given market have some immunity to demands for seriously lower prices. If you are selling a health plan in New York and you can’t offer your customers access to (for instance) NYU Langone, or the Northwell system, your health plan going to lose market share. This is main reason why the healthcare system has been undergoing rapid consolidation in recent years and will continue to: Stronger market presence allows them to resist the price demands of insurers.

Fee for service: What’s the question that defines a “customer”? We can consider an individual customer or, for instance, an employer as a proxy customer paying for its employees’ healthcare. Any true customer would ask (for instance) “How much will this new knee cost me, all in?” But most of healthcare is not sold bundled that way, it is sold per item, with each test and procedure billed separately, each surgeon and anesthesiologist and radiologist billing separately, according to negotiated billing codes. Most typically the customer or payer cannot know the cost until they see the bill.

This creates a powerful incentive for the hospital to do more billable items, to do more complex items, and to bill for everything possible at the highest price possible. Examples: I have seen hospitals bills with a $40 charge for handing a mother her brand-new baby, or a $600 line item for “NaCl .01 infusion therapy” which is actually a bag of water with a teaspoon of salt whose wholesale cost is 69 cents.

The fee-for-service payment system is the core of the problem.

“Selling insurance across state lines:” Won’t help. Health plans already can and do sell nationally: Aetna, United, Anthem… This phrase is really a call to gut states’ ability to regulate health insurance within their boundaries. But regulation is not what keeps health plans from competing in state markets. The most heavily regulated states, such as California, New York, and Massachusetts, are also the states with the most health plan competition.

Health plans hesitate to go into competition in a new state because it is a difficult, expensive, and risky business proposition. You have to build networks of providers across the state, build considerable infrastructure, woo major accounts (such as employers) away from their traditional relationships, and set aside capital to service the accounts. If you’re a for-profit business, the question often is, “Why bother?”

Vouchers: Other Republican proposals for Medicare as well as an ACA replacement argue for a “defined contribution” program: “We’ll give each individual X dollars per year to buy health insurance. That will automatically set a price point that all health plans will compete to hit, and that will bring health premiums down.”

But health plans have to set their premiums high enough to pay for medical care, regardless of the size of the voucher. In a code-driven fee-for-service payment system their price signals will still have a very weak effect on the industry costs. The main effect of vouchers will be to transfer much more of the cost of healthcare to the individual, which will drive many of them out of the market. That in turn will drive premiums even higher, because of adverse selection: The only people getting health insurance will be those who feel they both need it and can afford the premiums and deductibles — not only higher income people but sicker and older people.

So: The attempt to drive price signals through health plan competition will not work to lower the cost of healthcare in aggregate or for individuals.

What will work?

There exist many other models of actually paying for medical care beyond the fee-for-service model. These models drive value competition directly between medical providers and drive both individuals and payers (such as employers) into customer-like behaviors, and so drive strong price signals into the market. What is needed is not one model, but a variety of payment models supporting different business models across the system. To mention a few: bundled payments, medical tourism, direct-pay primary care, reference pricing, on-site clinics, capitation, mini-capitation, risk contracts.

These models exist, and their use is spreading in the private markets. Medicare is pushing what I consider “lite” versions of them on the industry. The rubric in the industry is “volume to value” or “value-based purchasing.”

What will work: Keeping an ACA-like system alive while reforming payment models to drive the market into customer-like behavior.

Recommended strategies:

1) Preserve the ACA (or an ACA-like system) and expand Medicaid. This would require more than just not repealing the ACA immediately. The ACA needs shoring up and patching or it will implode quite soon, as more health plans exit more markets and premiums for the rest rise rapidly. Letting the ACA fail by continuing to cripple it not only will be a political morass, it will also do serious damage to the healthcare industry, which will lose tens of millions of paying customers.

2) At the same time, reformulate the ACA (or its replacement) to require health plans to offer and support the numerous ways of paying for healthcare that are not fee-for-service and that promote competition among healthcare providers.

3) Preserve the parts of the ACA that establish and fund the Center for Innovation at CMS (Center for Medicare and Medicaid Services). Use Medicare funding to be far more aggressive in pushing the industry off the fee-for-service model and into the numerous other payment models that are appearing.

4) Require CMS to negotiate drug prices. Easiest model: Allow large users of drugs (such as health systems) to buy on the world market through any nation or company that meets FDA standards for production and importation (as most advanced countries do). Peg U.S. government prices to prices in Canada and the EU. (By the way, they make a profit in those other markets. They claim high development cost, but seriously, this is much like Hollywood financing, where even blockbusters are often claimed to make no above-the-line profit. Next step: Fund most fundamental and translational drug development federally, license drug companies to formulate and market the drugs).

5) Expand Medicaid but with non-fee-for-service models such as those that have grown up recently (particularly in Republican states) that seem to be successful in providing lower-cost but more effective healthcare. These risk-based “population health” programs are good for the patients, profitable for the insurance companies (because they can lower the cost of good care and eliminate waste), and good for the healthcare providers, because they greatly lower the burden of uncompensated care.

6) Seriously streamline the regulatory burden on healthcare providers, which has multiplied many times in recent years. The most rapidly-growing part of the hospital sector is the compliance department.

Political support

Politically, the main problem for this strategy is that it will not drop costs overnight. Market-based reforms are more effective but take longer.

The main political advantage is that Republicans can claim to have supplanted Obamacare with something better, with a different, new idea — and Democrats can claim to have preserved coverage for everyone while eventually lowering costs. Healthcare reform has become a quagmire for both parties, with little hope of declaring victory for either side. This strategy offers a way out of that quagmire.

Some of these points would be very difficult for many Congressional conservatives to vote for (such as allocating more money for the ACA to make it truly affordable for lower income people). On the other hand, any replacement for the ACA will require some Democratic support, especially in the Senate. Any solution in this Congress must be at least somewhat bipartisan.

Other points would be very welcome to a market-oriented conservative, as they are all about driving true market competition rather than dictating prices from above.

Some points would be fiercely opposed by some portions of the industry, especially setting drug prices. But the pharmaceutical sector has very little support among the public for its prices. Any politician who can claim to have helped drive down drug prices would be a hero to the voters, especially the AARP voter.

The bulk of the healthcare sector (such as health plans, healthcare providers, device manufacturers and other suppliers) could deal with most of these points, as they already have been dealing with milder versions of them these past eight years, and adjusting rapidly.

I believe from my long experience that the medical providers (such as the American Medical Association and the American Hospital Association) would not oppose them, especially if regulation streamlining were strongly implemented. The American Hospital Association’s strategic plan for the next five years, for instance, touts “volume to value” and business model innovation as strategic goals for the industry.

Strategy summary

Keep an ACA-like system alive while reforming payment models to drive the market into customer-like behavior.

Sent from my iPhone

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7 Comments on "Healthcare Economics: Why This Stuff Doesn’t Actually Work The Way You Think It Does"


Member
meltoots
Mar 13, 2017

Again, all fairy tales and rainbows, I like those too. This is buzzword care. First, patients are not customers. Period. I will agree with you that direct pay could work as it takes out all the middlemen, but that will be fought heavily by CMS, insurers, and then politically. Im all for DPC and direct care. CMS Bundles will never work if they are mandated for all patients, as they are now, they are doomed. Meaning, the sickest, more complex patients will never get care as they will break the bundle. Every single patient is different, all with many variables that may make recovery more difficult or problematic. So in a bundled system, only the least complicated will get care. “Volume to value” is the epitome of buzzword care. If you want me to stay glued to my computer and click boxes all day, and report how I am such a good doctor instead of doing the actual caring, well, thats never going to work. Its like the ghost of HMOs has revisited with ACO/APMs and VBC. Its doing the least amount of care you can for every patient. Patients aren’t dumb, they know when they are getting the “ignore” treatment. This is why Kaiser has failed everywhere but basically CA. VBC has turned “care” into 1000s of clicks and data entry for highly skilled care givers. That doomed it. Value based reporting/care, already failed. MU PQRS, and now MACRA, are extremely nonsensical, over burdening, meaningless, complicated and very destructive to the practice of medicine. HIT is hamstrung by ONC and CMS by making crazy 1000 page regs that change every year and demanding all the attesting, numerator and denominator counting by MDs. Totally ridiculous. Further, nothing is ever as simple as counting readmit rates, or HA1C etc. and then blaming the MD (and which MD?) for all issues with readmits, HA1C is silly. Patients do not follow diets, care instructions, etc. And every readmit is not a negative. In fact, Medicare penalizes less for a death than a live readmit. Hows that for an incentive.A big portion of waste is in defensive medicine, I did not read anything about that in your article, in the US, that is a huge issue and contributes an enormous amount to waste. Also in the US, we have to have some serious discussions about end of life care and the enormous cost of futile care at the end of life. Its a tough talk, but in the US, we do need to have that talk.
So you may ask what could work…
1. Get US Gov out of the exam room. All MDs to use ANY EHR, custom made ones, not gov sanctioned Cert EHR. This will allow innovation and IT working directly with MDs to provide better care. We do not need a nanny state of ONC and CMS telling HIT vendors what needs to be in there. We know.
2. Stop all penalties for non proven, wonky and currently failing VBC reporting mandates and the hyper-regulatory environment on MDs. Allow groups to try alternative care models, but don’t get in the way, even bonus them, but do not make them so complicated to sign up that no one wants to do them.
3. Medicaid is coverage, but it does not guarantee care. Medicaid pays literally nothing for MDs to care for them. We need to stop thinking that Medicaid is the answer to coverage/care. We also need incentives to get people OFF medicaid, and into the private market. What incentive is there to work, if you can get housing, food, and healthcare if you do not work. We have to come to grips with that. Why work? There are some that cannot, but we have many that are working poor, that get nothing because they work. We should focus on their coverage and well being.
4. Lets stop blaming the MD if the patient does not follow a diet, not take their meds, or not follow instructions. Further, how do we attribute blame to a single MD if a patient gets readmitted, if they have 8 MDs working on their care. We blame them all? how?
5. The burdens on MDs are a crisis level. We need to understand that we have a shortage already of MDs and its only getting worse. Driving us all out of practice is a terrible idea. Talk about costs when we all quit, and quitting is happening all the time. Its time to unburden MDs with all these forced buzzword care schemes.
6. We do have to try to stop solving all the problems in the US with congressional regulation. We always have to pause when we try to get the federal gov involved in solving anything. That may be the best place to start.

Member

Joe, I agree with many, even most, of the points you make. But it surprises me you don’t even mention the success of high deductible plans linked to health savings accounts…..so thoroughly documented by the Rand Corporation. The power of letting patients/employees keep some of the savings that come from prudent use of medical services is an essential….and the most powerful…..component of efforts to reduce the wasteful/harmful over use of medical services your piece discusses.

Member
Mar 17, 2017

Keep in mind that this is directed at a Trump policy-maker, specifically on how to improve or replace the ACA. The plans in the ACA exchanges are all high deductible plans, most linked to HSAs. So that’s kind of assumed here.

Member
lynncwang
Mar 12, 2017

Thank you for a very informative post. Do you think recommendations #3 (push for value-based payment models) and #6 (streamline provider regulatory burden) are at odds with each other? The amount of bureaucracy that physicians have to deal with these days to meet quality standards is suffocating. EMR vendors are not helping. Can there be value-based payment without an explosion in documentation?

Member
Mar 13, 2017

> Can there be value-based payment without an explosion in documentation?

Absolutely. For two reasons: First, the various “value-based payment” schemes in use now start with the assumption that the payers are going to pay not for the actual value but for specific markers that are taken to stand for value. So we are going to penalize re-admissions on the assumption that any re-admit means the hospital didn’t get it right the first time. Or we pay for knowing a diabetic’s A1c score, on the assumption that is a marker for the patient getting the right kind of attention. Then the payers demand that the physician or hospital document those markers in some separate way.

There are methods of paying for “value” that pay for value, not for markers for value. A prime example are the Blue Alternative Quality Contracts. These pay for keeping up some quality markers while keeping the patients from needing emergency treatment or surgery as often as before — but they don’t dictate how the physicians accomplish this extra-attentive care.

And, for those quality markers that need documentation, all it would take is a lick of sense and some coding to extract them directly from the medical record without any need for re-documenting. It’s not as if physicians’ practices are not documented. If you know the patient’s A1c scores, that fact is already there in the medical record. We could vastly reduce the need for documentation by simply agreeing across agencies and payers and medical record providers how to define and code for each piece of information sought, and writing programs that can extract that information directly from the medical record.

This is not a technical problem. It is a bureaucratic and political problem.

Member
Allan
Mar 13, 2017

Before drawing conclusions one has to ably recognize the problems involved.

“ we are going to penalize re-admissions on the assumption that any re-admit means the hospital didn’t get it right the first time.”

Maybe the hospital got it right, but the patient didn’t follow through correctly. This happens more in the lower socio economic groups. Suddenly there will be a need for documentation of this problem or even the problems involving differences among patients. Maybe the discharged patient has a spouse that can help. Maybe not. This generally hurts the hospitals that treat a poorer patient.

“ Or we pay for knowing a diabetic’s A1c score, on the assumption that is a marker for the patient getting the right kind of attention.”

We have gone a similar route before for alternative reasons and that led to hypoglycemic episodes along with hospital admissions or at least emergency care. I wonder the type of documentation one will need to prove that the A1c score was appropriate for the patient.

” keeping the patients from needing emergency treatment or surgery as often as before “

Dead patients or patients that disappear elsewhere don’t need emergency treatment.

“all it would take is a lick of sense and some coding to extract them”

Common sense doesn’t seem to exist and coding means more documentation.

“ by simply agreeing across agencies and payers and medical record providers how to define and code for each piece of information sought, and writing programs that can extract that information directly from the medical record.”

That is sending a paper pusher on a fools errand.

Member
Mar 11, 2017

“Government programs such as Medicare and Medicaid have an incentive to drive costs lower, but that incentive is balanced by the need to offer everyone meaningful coverage, which means they have to entice providers to accept these lower payments, without the power to force providers to take them.”

“Any true customer would ask (for instance) “How much will this new knee cost me, all in?” But most of healthcare is not sold bundled that way, it is sold per item, with each test and procedure billed separately, each surgeon and anesthesiologist and radiologist billing separately, according to negotiated billing codes. Most typically the customer or payer cannot know the cost until they see the bill.”

Yeah. See my new post “Rationing by ‘Price’.”

http://regionalextensioncenter.blogspot.com/2017/03/rationing-by-price.html