By David Dranove

In a recent New York Times blog, Uwe Reinhardt places much of the blame for high and rising medical prices on passive employers. He argues that employers should work just as hard to reduce healthcare benefit costs as they work to reduce other input costs. But he then observes:

“One reason for the employers’ passivity in paying health care bills may be that they know, or should know, that the fringe benefits they purchase for their employees ultimately come out of the employees’ total pay package. In a sense, employers behave like pickpockets who take from their employees’ wallets and with the money lifted purchase goodies for their employees.”

I think that Reinhardt gets the economics wrong here and, in the process, he puts too much of the blame on employers. Reinhardt is right in one respect – employees care about their entire wage/benefit packages. If benefits deteriorate, employers will have to increase wages to retain workers. Thus, it seems that if an employer reduces benefit costs, it must increase wages by an equal amount. If that is true, we can understand why employers are passive.

The correct economic argument is a bit more nuanced. Employees do not care about the cost of their benefits; they care about the benefits. If an employer can procure the same benefits at a lower cost, the employer need not increase wages one iota. In this regard, there is nothing special about health benefits. Suppose an employer offers employees the use of company cars. Workers don’t care what the employer paid for the cars, and if the employer can purchase cars at a deep discount, it will pocket the savings.

Continue reading “Are Employers to Blame For Our High Medical Prices?”

By Vik Khanna

Eat your vegetables.  Turn off the TV.  Go outside and play.  Go to bed on time.  These four imperatives were once amongst the core messages delivered to children by their parents and neighbors, a setting of behavioral parameters that people intuitively expected would help to produce healthy, well-balanced kids.  We’re not so good at this anymore.  Like so many other behaviors that animate the phrase “personal responsibility”, in the face of economic and demographic tumult we have decided to pass the buck on them in our homes, neighborhoods, schools, and churches.  We now want employers to handle them, and health-contingent wellness is the final step in the ascendancy of the employer as the new parent.

Employers find themselves teaching employees how to read and write effectively, do math, be polite, how to eat in the presence of others, and even how to sleep better.  Why not throw at their feet the notion that employers should coerce workers into intrusive and dubious health-contingent workplace wellness strategies that are easy as pie for the healthiest, but far more difficult for the less fortunate who are, ostensibly, the ones who need the most help?  This is not why most people start businesses (unless, of course, you’re a wellness vendor).  It certainly is not why people devote themselves to work, which is supposed to be for securing (hopefully) individual and familial prosperity and experiencing the unique contribution to personal dignity that comes from purposeful endeavors.

US employers are not responsible for the chronic disease crisis; truth be told, their sufferance of the costs of many wellness-sensitive events is limited because the majority of the medical catastrophes that health-contingent wellness programs promise to prevent (such as heart attacks, strokes, and many cancers) happen predominantly in older people who have mostly left the work force. Employers have been caught up in the maelstrom of demographic, industrial, and technological changes just like the rest of us.  Yet,  not only do we actively seek their participation in fishing expeditions such as health-contingent workplace wellness programs, some of them jump in with both feet.  This should help to remind you that your CEO might just be the one who graduated at the bottom of his class.

Continue reading “The Wellness Game: The Employer As the New Parent”

By Robert S. Galvin, MD

Purchasers of health care, long-time supporters of organized systems of care, are watching with growing alarm as horizontal and vertical mergers between providers accelerate.  Buyers with experience in other sectors understand that consolidation can improve efficiency, quality, and the generation of capital, especially where there is excess capacity and abundant waste. They are equally aware, however, that ‘over’-consolidation can lead to pricing power, the absence of competition, and the crowding out of disruptive innovations.

Catalyst for Payment Reform(CPR), a non-profit working on behalf of large employers and public health care purchasers to improve the quality and affordability of health care through payment innovation, convened a National Summit on Provider Market Power on June 11^th in Washington D.C.

There, the nation’s leading experts discussed and debated how to maintain enough competition among health care providers to stimulate improvements in the delivery and affordability of care.

Participating experts stated that by as early as 2006, over 75% of U.S. metropolitan statistical areas (MSAs) had experienced enough hospital mergers to be considered ‘highly consolidated’ – a trend that continues. Economists agreed that the evidence demonstrates that highly-consolidated providers can raise prices considerably. Provider leaders offered their views on why consolidation is occurring, including to meet the demands for integration and efficiency, to counterbalance a highly-consolidated health insurance market, and to have enough income to invest in IT systems and other infrastructure necessary for population management.

Continue reading “Will “Too Big to Fail” Come to Health Care?”

By Joe Flower

The Next Health Care calls for very different strategies and tool sets. Many systems are acting as if they read a manual on how to do it wrong. How many of these critical strategic and tactical mistakes is your system making?

So I was beta testing FutureSearch, this cool new Google add-on app I’m writing with a coder, and I found an article that I wrote in 2025. My first thought was, “Cool! It works!” My second thought was, “I’m still working at the age of 75?” It was only then that I focused on the title of the article: “Fail: The 16 Steps by Which Hospitals Failed in the Post-ACA Risk Environment — An Analysis.”

The article detailed a dispiriting history from 2013 to 2020. More important, it listed the 16 most common mistakes that hospitals and health systems made while trying to navigate the new risk environment of the Next Health Care.

I found this interesting because of course right at this moment much of the health care industry, in many different ways, is trying to move away from the traditional fee-for-service payment system, which has given the whole industry adverse incentives, leading to much higher costs, poorer quality and restricted access. The rubric of the day is “volume to value.” And I see many different institutions and systems across the country making exactly these mistakes already in 2013.

Step-by-Step Instructions

As you read this list, ask yourself in what way you and your institution might be making the wrong decisions, and ask yourself what they will look like looking back from 2025.

Stick with fee-for-service. Though they included various incentives and kickbacks, most accountable care organizations and ACO-like structures built in the 2012–2014 period were based on a payment system that remained stubbornly fee-for-service. Systems continued to make more money if they checked off more items on the list (and more complex items), rather than solving their customers’ problems as well and as efficiently as possible.

Continue reading “How to Fail at the Next Health Care”

By Jim Hansen

“You’ve got to be very careful if you don’t know where you are going because you might not get there.”

- Yogi Berra

“Would you tell me, please, which way I ought to go from here?” said Alice.
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where —” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“— so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

- Alice’s Adventures in Wonderland

The country is in the midst of an unprecedented transformation of the health care system and may even be at a ‘tipping point’, yet many of us find it astounding that we have no official (or unofficial for that matter) collective vision of where we are headed, thus how the heck do we know if we are on the right path to get there? Given the very high stakes and costs that extend far beyond financial ones, why is it acceptable to not have a future state in mind so that the current state can be quantified and a gap analysis roadmap can be created to address it? Sure, we have the Triple Aim as the overall goal but what are the ‘guardrails’ that help build the road to it?

The truly great news is that we actually have those ‘guardrails’, and in fact have had them for over a dozen years. It is just that most people have not been aware of this hidden time-tested gem, created by incredibly thoughtful health system transformation forefathers and foremothers back in 2001. This visionary team has overwhelmingly been praised for creating the powerful and gutsy call to action in their Crossing the Quality Chasm Institute of Medicine (IOM) report. What many have missed is that in addition to all the highly visible work, the group created a set of 10 key new rules to inform a future state for the health care system (see figure 1).

Figure 1 Source: Institute of Medicine, “Crossing the Quality Chasm,” p. 67, 2001.

Twelve years later, the chart in Figure 1 strikes many of us in two powerful ways: 1) How the ‘New Rule’ column has stood the test of time for the vast majority of its intended direction and spirit, and 2) how sad and disappointing that many of the 2001 ‘Current Approach’ column items are still entrenched even today.

Continue reading “What is the Future State Vision for Health Care Delivery System Transformation?”

By David M. Walker

Oct. 1, 2013 is a focus of increasing anxiety in this country. That’s the date when enrollments begin for the federally run health insurance exchanges, created under the Affordable Care Act (ACA). No one really knows what to expect, but it could be far worse than advertised —and for a reason that has more to do with the federal deficit than health care.

What’s anticipated is unsettling enough. President Obama speaks of inevitable “glitches and bumps” in the implementation. Senate Finance Committee Chairman Max Baucus (D-Mont.) sees the possibility of “a huge train wreck” if the public isn’t adequately educated and prepared. Supporters of the ACA, especially Democrats in the Congress, are nervous about taking the blame if the exchanges don’t unfold as intended.

All these worries are legitimate. The American people, already burdened by a numbingly complex, inefficient and inequitable tax system, now wonder if an increasingly government-run health care system will follow suit. Many are concerned that some employers will dump their current health care plans and pay the relatively modest fine. There’s also worry that young people will opt out of the exchanges (preferring to pay the small penalty), leaving the exchanges with a disproportionately older and sicker pool. Then there’s the very real uncertainty surrounding the ACA’s ultimate cost — illustrated by the impact of Medicare alone, which the Office of the Chief Actuary of Medicare estimates could cost cost $10 trillion more than claimed.

Amid all these concerns and speculations, almost no attention is being paid to the opportunity that the ACA’s insurance exchanges could represent for state and local governments’ retiree health care programs. It’s time to think about it because the consequences could be far-reaching.

States in a deep hole

We already know that many state and local governments are in a financial hole that keeps getting deeper. A newly released report by the U.S. Government Accountability Office (GAO) makes clear that, absent significant reforms, the fiscal picture for most state and local governments will steadily worsen through 2060. A main cause, in addition to Medicaid, is the cost of health care for state and local government retirees. These largely unfunded obligations are similar to the pressures on the federal government to fulfill its unrealistic Medicare promises.

Continue reading “When Retiree Benefits and Obamacare Collide”

By Robert Laszewski

I have to say I was surprised with the press reports last week that there wasn’t “rate shock” in California when the California exchange offered preliminary information about their new plans and rates.

At least one prominent health actuarial group had predicted a 30% baseline increase in costs for California’s new health insurance exchange plans under the Affordable Care Act (ObamaCare”).

As the director of the California exchange put it, “These rates are way below the worst-case gloom-and-doom scenarios we have heard.”

But a few days later there is lots more information coming out and it would appear we have a case of apples to oranges to grapefruit. And, we have a pretty good case of rate shock.

First, the exchange officials pointed out that we have to be careful to compare apples to apples when looking at 2013 rates and comparing them to the 2014 exchange rates because the 2014 exchange plans have far more generous benefits.

Yes we do, particularly when the California exchange forces us to give up our apple and buy a more expensive orange.

One of the reasons health insurance in the exchange will cost a lot more in most states is because the new health law outlaws many of the existing plans now being offered and requires only those much richer plans to be sold.

Are people going to get more coverage for their money? Yes. Do they want more coverage if the premium costs for those plans is a lot higher? Likely yes if taxpayers are paying for most of it. If not, clearly they didn’t want to pay for it before. Come January, lots of California consumers in the small group and individual market are going to get a letter from their existing insurer telling them their current plan is no longer available and the cost of the new required plans will be a lot more.

Simply, the new law is taking plan design choices away instead of letting the consumer decide what is good for them. Does that matter in California?

Continue reading “Rate Shock and Awe in California”

By Vik Khanna & Al Lewis

Health-contingent workplace wellness, the two-time darling of federal legislation codified in both the Health Insurance Portability and Affordability Act (HIPAA) and the Affordable Care Act (ACA), is now plagued by doubts about effectiveness and validity that are inexorably grinding away its legitimacy.  This puts employers, particularly large employers who have committed to it so vocally and visibly, in an awkward spot.  In the style of politicians nervously trying to change the terms of debate, wellness advocates are now walking back the assertions that have undergirded their entire construct for more than a decade.  While some business leaders are apparently either unwilling or unable to back away from this self-inflicted wound, staying the present course is neither inevitable nor required.  A course correction might actually prove quite liberating, especially for leaders of smaller and mid-sized businesses who must scratch their heads wondering how they’re supposed to reproduce a big-company style workplace wellness program or even why they should, given the dearth of data on effectiveness.

As a case in point, we offer GE, an iconic American multinational with 305,000 employees, $147BN in revenues, and $16.1BN in earnings worldwide in 2012.  The company offers its employees a much-lauded wellness program, saluted by the National Business Group on Health (NBGH) in a fawning 2009 case study. GE’s wellness program has several things to recommend it:

• A top line focus on environmental change
• An emphasis on strong and consistent positive health messaging to employees
• The “Health By The Numbers” strategy that asks employees to commit to essential behavior changes (don’t smoke, eat more produce, walk more, and maintain a healthy body mass index [BMI]; there is wisdom in these choices, as they are the baseline activities for good health)

Beyond these obviously beneficial wellness program components, the GE wellness program veers off into a compendium of wellness convention, with encouragement for employees to take HRAs and get screenings, in particular, mammography, colonoscopy, cholesterol, and blood pressure.  Some of the affection for diagnostics springs, of course, from GE’s corporate commitment to health care, which includes selling a broad variety of diagnostic devices to medical care providers who must, in turn, induce demand in order to pay for their contribution to GE Healthcare’s $18.2BN revenue stream.

As far as is discernible from publicly available documents, the wellness program targets GE worksites with over 100 employees, and GE claims in the NBGH case report that over 90% of employees worldwide participate.  Beyond these data, however, it is remarkably difficult to understand what results GE gets and at what cost.  The only publicly available insight on expense comes from GE wellness leader Rachel Becker in an essay published online by EHS Journal, in which she reports $100,000 per site as the wellness startup cost.   Extrapolating this figure to GE’s more than 600 global worksites produces a wellness capitalization expense of about $60M, which presumably does not include annual wellness program operating costs.  This might be why GE makes absolutely no mention of the cost or results of its wellness program in either its annual report or its 10K filing, although the NBGH quotes GE as saying the implementation was “inexpensive”.  Even though $60M is equal to only 0.38% of GE’s 2012 earnings, it nonetheless might seem an untidy sum to skeptical shareholders.

Continue reading “GE’s Wellness Program: Bright Shining Light or Dim Bulb?”

By Jeff Goldsmith

There has been a lot of controversy in health policy circles recently about hospital market consolidation and its effect on costs.  However, less noticed than the quickened pace of industry consolidation is a more puzzling and largely unremarked-upon development:  hospitals seem to have hit the wall in technological innovation.   One can wonder if the two phenomena are related somehow.

During the last three decades of the twentieth century, health policymakers warned constantly that medical technology was driving up costs inexorably, and that unless we could somehow harness technological change, we’d be forced to ration care.  The most prominent statement of this thesis was Henry Aaron and William Schwartz’s Painful Prescription (1984).  Advocates of technological change argued that higher prices for care were justified by substantial qualitative improvements in hospitals’ output.

Perhaps policymakers should be careful what they wish for.  The care provided in the American hospital of 2013 seems eerily similar to that of the hospital of the year 2000, albeit far more expensive.    This is despite some powerful incentives for manufacturers and inventors to innovate (like an aging boomer generation, advances in materials, and a revolution in genetics), and the widespread persistence of  fee for service insurance payment that rewards hospitals for offering a more complex product.

Technology junkies should feel free to quarrel with these observations.  But the last major new imaging platform in the health system was PET , which was introduced into hospital use in the early 1990’s.  Though fusion technologies like PET/CT and PET/MR were introduced later, the last “got to have it” major imaging product was the 64 slice CT Scanner, which was introduced in 1998.  Both PET and CT angiography were subjects of fierce controversy over CMS decisions to pay for the services.

Continue reading “Hospitals’ Twenty First Century Time Warp”

By Les Funtleyder

The Kaiser Family Foundation (KFF) recently released a study that showed that 42% of Americans are unaware that Obamacare (the Affordable Care Act) remains the “law of the land.” News like this seems to us, to act as a Rorschach test on how observers feel about the law. Considering 50% of Americans can’t identify New York on a map we tend not to read too much into these polls. However, according to the logic of extrapolation, since we know that the ACA remains law, we are in the elite 58% (it’s about time we made it into the elite of something).

In almost parallel to the KFF news, the New England Journal of Medicine published a follow-up study of the “Oregon experiment.” For those who haven’t been following closely, the study found that previously uninsured people who were enrolled in Medicaid did not see an improvement in clinical measures when compared to those who remained uninsured. The study did seem to show a reduction in the amount of financial distress for the insured however.

Another contentious study, another Rorschach test (example, example). The problem we see with the polarity of views is that both sides seem to be cranking up the extrapolation machine and use single studies/data points to draw broad conclusions to gin up opinions about ACA’s success or lack thereof. In light of the fact that for most practical matters ACA doesn’t really get going until 2014, use of the extrapolation noise generator approach smacks of a lack of analytical rigor in our view. We will know soon enough how the program is doing… exchanges start enrolling on 10/1.

As investors, we should state upfront that we tend to give more weight to financial returns than what the philosopher-kings might call the political context. So what caught our eye in the Oregon study was that Medicaid recipients had higher healthcare utilization rates (and associated costs) than the uninsured. The connection between gaining insured status and healthcare utilization should not come as a surprise since there is a very extensive literature elucidating this connection.

Continue reading “Into the Extrapolation Machine”