Economics

flying cadeuciiIn the United States, the question has been asked time and again but never satisfactorily answered. By virtue of publically financed healthcare systems, the rest of the developed world has decided, to a greater or lesser extent, that medicine and healthcare are not pure businesses—that citizens have a right to care, even when they can’t pay all associated costs.

It’s starting to look like Americans won’t be able to duck the question for much longer.

In the last year, the profitability of U.S. hospitals eroded for the first time since the Great Recession, pushing some closer to and others over the solvency precipice. Revenues are down and costs are up.  And these issues appear systemic and entrenched, giving rise to a series of important and relevant questions: How can hospitals adapt?  If they do, will they still survive? And, do we as a nation think it’s important to make hospitals accessible, even if they lose money?

As recently reported in the New York Timesanalysis by Moody’s Investors Service shows that this year nonprofit hospitals had their worst financial performance since the Great Recession. Among the 383 hospitals studied, revenue growth dipped from a 7 percent average to 3.9 percent on declining admissions.  For the last two years, expenses have grown faster than revenues, and fully one quarter of all hospitals are operating at a loss.

In a word, Moody’s describes the situation as “unsustainable” because it is the product of what look like enduring realities:

  1. Private insurers did not increase payments to hospitals.
  2. Medicare reduced payments due to federal budget cuts.
  3. Demand for inpatient services declined as outpatient care options rose.
  4. Retail outpatient options now compete with hospital clinics.
  5. Patients with higher copays and deductibles chose not to seek care.
  6. Hospitals are buying up physician practices.
  7. The costs of electronic medical record systems are impacting the bottom line.

Continue reading “Is Healthcare a Business?”

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flying cadeuciiWhat motivates a healthcare executive?

Remember Flower’s Laws of Behavioral Economics? The first two are:

  1. People do what you pay them to do.
  2. People do exactly what you pay them to do.

That is, it’s not general. It’s not “be a good doctor.” It’s more like, “Do lots of complex back fusion surgeries.” What’s more profitable gets done more.

I know that some people say that money has nothing to do with people’s motivation in healthcare, and that’s fine, I totally respect that opinion. You’re just in the wrong section. You want Aisle C, between Dr. Seuss and the Disney fairy tales.

But what about healthcare executives? What gets them more money? What constitutes hitting it into the cheap seats for them?

There are of course lots of compensation surveys. There’s a whole industry of people who do that. But they don’t tie compensation to anything specific. So when someone does a study that does look at correlations, that’s interesting information. One came out a few months ago in JAMA’s Internal Medicine .

Karen Joynt, MD, and her colleagues used 2009 data, so things might be beginning to change now. And they only looked at CEOs, so we will have to speculate whether the same things apply to other C-suite suits.

What did they find? They found great variation in the salaries, with a mean (average) salary of $595,781, a median (half are above and half below) of $404,938). The nearly $200,000 difference tells us that the sample is skewed by a smaller number of really large salaries at the top.

There is nothing surprising in the size of the salaries or their variation. That’s normal for any industry. No matter how much you might think that healthcare is special and different and sacred, it is nonetheless a very big business. In many or most towns, the hospitals and health systems are the biggest businesses in town. A typical suburban three-hospital system might have an annual budget in the $5 billion range.

What correlates with a higher salary? Size.

More beds means a higher salary ($550 for each extra bed, to be exact). Teaching status means $425,078 more — in other words, doubling the median. And most teaching hospitals are much bigger than average. Urban location gets you more, but this is likely also a marker for size, or the cliché phrase “big city hospital” wouldn’t roll off the tongue so easily. High tech gets you more, too. Hospitals with high technologic capabilities paid their CEOs $135,862 more than hospitals with low levels of technology — but this again is likely a marker (a co-variate) for size and teaching status.

Continue reading “So That’s What You Get The Big Bucks For?”

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When Michael injured his knee, he did what any responsible person would do.  He was not incapacitated, and though the knee was painful and swollen, he could get around pretty well on it.  So he waited a few days to see if it would get better.  When it didn’t, he saw his primary care physician, who examined it and quite reasonably referred him to an orthopedic surgeon.  The orthopedic surgeon considered ordering an MRI of the knee but worried that insurance would not cover a substantial portion of the $1,500 price tag, so he suggested a less expensive alternative: a six-week course of physical therapy that would cost only $600 – a quite responsible course of action.

At the end of this period of time, Michael was still experiencing pain and intermittent swelling.  The orthopedic surgeon made another quite responsible decision and ordered the MRI exam, which showed a torn meniscus.  The orthopedic surgeon could have recommended arthroscopic surgery, which would have earned him a handsome fee and generated revenue for his physician-owned surgery center.  Instead he again acted quite responsibly, advising Michael that the surgery would actually increase the pain and swelling for a time and probably not improve his long-term outcome.  Based on this advice, Michael declined surgery.

Though everyone in this case proceeded responsibly, the ultimate outcome was inefficient and costly.  Many factors contributed, but perhaps the most important was the fact that Michael’s physician outlined choices based on an inaccurate understanding of the costs associated with his recommendations.  The orthopedic surgeon thought that the cost of six weeks of physical therapy was 60% less than the MRI.  In fact, however, the actual payment for the MRI from the insurance company would be only $300, not the “retail” price of $1,500.  What appeared to be the less expensive option was actually twice as expensive, and it delayed definitive diagnosis by six weeks.

This story is emblematic of a larger problem in contemporary healthcare.  No one – not the patients, the physicians, the hospitals, or the payers – really understands in a thorough way the true costs of their decisions.  After receiving care, patients routinely receive by mail multi-page “explanations of benefits” that show huge differences between list prices and actual payments.  Most find it baffling to try to determine who is paying how much for what.  Physician practices and hospitals get calls every day from panicked patients who believe that they are being billed for exorbitant costs, when in fact most or all of the charges will be paid by insurance at a huge discount.

Continue reading “The Black Box at the Center of Health Economics”

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A THCB reader in Virginia writes:

“As a small business owner, I’ve been following the arguments about Obamacare with a mixture of amusement and total horror. Just when you thought Washington couldn’t screw things up any worse, they find new and creative ways to do exactly that.

My question concerns the phenomenon of the “death spiral” the terrifying sounding scenario that observers predict will occur if not enough people buy insurance. According to this theory, if not enough people buy health insurance, insurers will be forced to abandon unprofitable markets.  As a business owner myself, this argument resonates. But I still don’t get it. This seems like common sense.

It is certainly true that if nobody buys my goods and services, my business will go into a “death spiral.” I will no longer be able to make a living selling my widgets. I will be forced to invent a new widget. Or go get a new job. This is like my kid saying if he doesn’t to play more Call of Duty IV he will go into an “entertainment death spiral” and be unable to do his homework ever again or be a productive member of society.

Or McDonalds warning that if too many people take up vegetarianism, its business will go into a horrible “hamburger death spiral.” So what evidence do we have? I need documentation. Like, let’s say, a picture. Or a YouTube clip.

Seriously, when has this happened? Otherwise, the death spiral thing sounds like really good economic spin to me …”

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We will be blunt. Hidden under the cloak of expanding health insurance, the Affordable Care Act (ACA) has fostered a massive subsidization of healthcare goods and services.

These subsidies often have little or anything to do with what economists would consider the “insurance” part of health insurance – providing protection against financial catastrophe.

Perhaps more troubling, if the past is prologue these subsidies will continue to grow, transferring huge amounts of money to politically favored groups and doing very little to decrease aggregate health spending – a presumed goal of health reform.

In order to understand these claims, it is necessary to take a step back and explain why insurance (of any form) is a good thing in the first place. Simply stated, insurance provides individuals with protection against unpredictable financial hardships not of their own making.

Most of us don’t like risk, and therefore we are willing to pay other people to avoid uncertain outcomes. Therefore the benefits of insurance are to protect us from uncertain events.

The key here is the uncertainty. If something is not going to cause financial distress, or the expense is relatively predictable, then, by definition, the service is not insurable. A health plan could cover the service, but that is a subsidy, i.e. other people in the insurance pool or an outside actor such as the government are simply paying for your service. It is not insurance.

Sadly, most of the discussion around what constitutes “real” health insurance under the ACA bears only a passing resemblance to the protection against financial risk that is the hallmark of insurance. For example, Secretary of Health and Human Services Kathleen Sebelius said: “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus … They’re really mortgage protection, not health insurance.”

What does Secretary Sebelius think insurance is? We don’t expect auto insurance to pay for our gasoline.

Continue reading “The ACA: When Insurance Isn’t Insurance”

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Risk adjustment is a key mechanism to ensuring appropriate payments for Medicare Advantage plans, Medicare Part D drug plans, and Medicaid health plans.  Since health plans vary in their mix of healthy and sick enrollees, risk adjustment modifies premium payments to better reflect the projected costs of members served and compensate plans that enroll high-cost patients.

Historically, risk adjustment was only used in Medicaid and Medicare – in effect, redistributing some revenue from health or drug plans with a relatively healthier mix of members to those plans with a more costly enrollment profile.  However, the Affordable Care Act (ACA) extends risk adjustment to the individual and small group health insurance markets starting in 2014.

A new brief from The Synthesis Project tackles the issue and makes several interesting recommendations for how to improve risk adjustment methods for the post-ACA market. Without accurate risk adjustment, health plans have a strong financial incentive to seek out only the healthiest enrollees, especially under ACA-mandated adjusted community rating.  Under adjusted community rating, health plans may not vary premiums based on health status or sex and are limited in how much they may vary premiums based on age.  Under ACA, the healthy, the young, and men subsidize the health costs of the unhealthy, the older, and women.

Risk adjustment is therefore a necessary factor in stabilizing the dramatically new post-ACA health insurance marketplace, particularly the new Health Insurance Exchanges.  Even then, the ACA is a giant game of musical chairs.  The market under ACA will be chaotic and challenging, with a mix of winners and losers once the music stops and the dust settles, which will take at least three to five years.

Continue reading “How Health Plan Risk Adjustment Models May Change Under the ACA”

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As the health insurance exchanges find their footing and potentially millions of Americans gain access to insurance, this may be a good time to step back and take a longer term view of the ACA. When you get down to it, expanding health insurance coverage was the easiest and least controversial part of health reform. There is no shortage of ways to expand health coverage and almost any credible health reform proposal would have done the job, provided enough money was thrown at the problem.

In designing the ACA, perhaps as a result of political pressure, President Obama opted for a combination of heavily subsidized individual insurance exchanges and generous expansions of Medicaid. Freed from political constraints, he might have instead pushed for the single payer system that many of his most ardent supporters desired. Republicans inclined to expand coverage (at least one of us is proof that unlike the unicorn these do exist) might have pushed for a pure voucher program that harnessed market forces.

All of these options would expand coverage to the degree that policymakers were willing to fund them. So while we congratulate the President for his political success (we doubt the other options could have made it through Congress), it is a simplistic mistake to evaluate the implementation of the ACA by counting the numbers of uninsured or waiting for the monthly updates on the enrollment figures from the exchanges website. Any regulator with a big enough purse can, in the fullness of time, expand access. Frankly, that’s the “easy” part of healthcare reform.

But what about the other elements of the so-called “triple aim” of health reform: cost and quality? You see, while we agree that liberal, moderate, and conservative health reforms can all improve coverage, they each will have very different effects on the other important outcomes. Consider for example the oft-discussed “Medicare for all”; i.e. a single payer system. This would increase access without the messiness of the exchanges. It would also allow the government to flex its monopsonistic muscles and quickly reduce costs – though likely at the expense of quality. In contrast, relying on markets may not reduce costs in the short run, and may not necessarily reward real quality (though it has a better short than single payer in this regard).

Evaluating health reform in the context of the “Triple Aim” is important, but even that approach is not nearly enough. There is a broad consensus among that technological change is the most important long run driver of cost and quality. It follows that the most important element of health reform is its impact on technological change.

To understand how technological change affects all of us, consider the profound impact of the top ten medical advances in the last ten years, as listed by CNN:

1. Sequencing the human genome
2. Stem cell research
3. HIV cocktails
4. Targeted cancer therapies.
5. Laparoscopic surgery

Continue reading “What We Don’t Know Can Hurt Us”

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Besides state and higher-level health care expenditures, county level HCE are useful, integral really. For example, to promote the Triple Aim (the best care for the whole population at the lowest cost) you need per capita HCE. And knowing those costs at the county level would help a lot. However, county estimates generally don’t exist. They didn’t in Washington State until a client needed cost estimates for our 39 counties. To supply those estimates I used a regression approach resulting in this model:

percaphce = +0.1*percapinc + 247*pctage65 + 0.71*percapmedaid + 10.5*pctrural – 1349

Washington State Context
Before discussing model rationale and county HCE estimation, here’s some context about Washington State and its counties. You might view Washington as a microcosm of the nation. It has mountains, forests, deserts, rivers and lakes, vast rural areas, major cities, diverse populations and industries, and a varied climate. It is distinguished by active volcanoes and a coastal border. There is a wide range of political, social and economic clusters. In 2010 King County, where Seattle is located, median annual household income was about $67 thousand (the U.S. median was roughly $50 thousand) yet there are state counties where one in three children live in poverty. The total population is approximately 7 million with half of those people living in just three of the 39 counties.1 At the other end about a third of the counties have populations of 30 thousand or less.

An Aside about Seattle Weather
You may have been told that it rains all the time in Seattle. I live in Seattle and can tell you that’s a myth. Seattle’s average annual rainfall is less than New York City’s. However, during a good part of the non-summer months Seattle, and Puget Sound generally, is grey and cloudy. I once heard a story about the original settlers who landed in November, 1851, at Alki near present-day Seattle. The story is they were there for months before the weather finally cleared and they saw Mt. Rainier for the first time. I don’t know if that story is historically true, but as a Seattleite it’s believable. Regardless, Seattle is a summer paradise. Seattle summers, like most of Puget Sound, are characterized by pleasant sunny days, cool nights and no mosquitoes.

Background for the County HCE Estimates
Last year Empire Health Foundation of Spokane, Washington, asked me to estimate HCE for the 39 counties in the state. The purpose was for an upcoming meeting of policy types such as county commissioners, members of various health organizations, and other stake holders. A theme would be Donald Berwick’s Triple Aim, so cost estimates were wanted for benchmarks and context. The CMS2 Office of the Actuary had recently developed state HCE.3 If I could build a reasonable regression model on state-level data to predict state HCE, and there were similar variables at the county level, I could use the state model to estimate county HCE. That’s the approach I took. A caveat is my understanding was that acceptance—believability and reasonableness of the estimates to a lay audience—were as important as accuracy.

Continue reading “Letting the Data Speak: Estimating County Health Care Costs In Washington State”

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That past month of debate over the botched launch of the health care exchanges has brought the programming geeks, and their hired mouthpieces, out in the open to defend the indefensible. As painful as this has been for so many Americans, we cannot help but be amused to hear so many commentators doing their best impression of Captain Renault and expressing their shock that the federal procurement system could have produced such an outcome. Of course, most of this is a sideshow, the opening act to an even more serious drama in the making.

Let us be clear from the outset, the rollout of Healthcare.gov is an embarrassment. However, this only becomes a real problem if it dissuades enough people who were already marginal customers with respect to their purchase of health insurance on the exchanges to simply pay the penalty and avoid the hassle of staring at a computer screen, waiting on hold for hours, or refusing to try again once the geeks get this all sorted out.

While the self-appointed technology experts on both sides of the aisle have been debating the causes of the web site debacle, attention has been diverted away from the necessarily frank discussions we must have about the real potential benefits and looming costs of the exchanges.

In a valiant attempt to steer the conversation towards the benefits of the ACA, President Obama held a rose garden press event where he repeatedly claimed that the health insurance on the exchanges is good product. But as is all too often the case, the President talked about the benefits and side stepped the difficult conversation about the costs.

At least he is half right. If they can ever fix the web sites, people with pre-existing conditions who shop on the exchanges will gain access to insurance at a more affordable price. Enrollees may save thousands of dollars. But let’s not kid ourselves.

The exchanges do not reduce the cost of medical care; they only change who pays for it. And we all know who that is.

Continue reading “The Opening Act”

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Beholding David H. Howard’s rendering of the crazy-quilt of financial sources that have been tapped by the designers of the Affordable Care Act of 2010 (hereafter ACA ’10) to finance the new entitlements they put in place – a little nuisance tax here, a little nuisance cut in other federal spending there – reminds me once more of the sincere, indeed touching, naiveté with which Democrats tend to go about enacting new entitlements.

It is a totally counterproductive and inelegant approach. To be sure, none of the added taxes or spending cuts in the bill seriously disrupt anyone; but they do spread a little pain all around. Therefore, it seems almost deliberately designed to maximize opposition to it from many quarters.

It also leads to acute embarrassments, such as having to postpone by a year (and perhaps more years) the unseemly penalty imposed on employers with 50 or more employees each working 40 your or more etc etc, even at the appearance of having broken the law – or so we are told.

When will the Democrats ever learn?

And from whom might they learn?

From the Republicans, of course.

Dream back to the good old days – 2003 – when the Bush Administration and the Republican Congress pushed through, with deft parliamentary maneuvering and some arms twisting, H.R. 1 (2003), the Medicare Prescription Drug, Improvement, and Modernization Act – hereafter the MMA ’03.

Continue reading “How Naïve Can Democrats Get?”

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