The Next Health Economy

Screen Shot 2014-06-24 at 6.09.38 AMThere’s a growing view in U.S. healthcare circles that the industry is on the cusp of remarkable – perhaps even revolutionary – transformation. At a recent summit sponsored by the Altarum Institute’s Center for Sustainable Health Spending, speaker after speaker returned to the theme that we are slowly but surely moving from a volume-based system (paying for stuff) to a value-based model (paying for results).

The health sector is moving toward the traditional economic principles of other industries.  Revenues flow to businesses that are high quality, efficient and knowledgeable about customer desires. In other words, high performers reap the financial rewards, not those that are simply doing more. We at PwC describe this future state as the New Health Economy.

Several stars have aligned to make this shift possible. Cost pressures have turned attention to getting our money’s worth in healthcare. Technological advances such as cloud storage, mobile devices and data analytics provide the tools to deliver the right care to the right patient at the right time. And consumers today have both the freedom and responsibility that come with making more decisions and spending their own money.

What was striking at the Altarum summit was the widespread agreement on where American healthcare is headed. Speakers referenced the rise of myriad alternative payment programs, including overall spending growth limits in Massachusetts, site agnostic payments for specialty care such as oncology and provider bonuses tied to patient satisfaction.

But if the destination is clear, the journey ahead remains difficult to navigate. As Peter Orszag, former director of the White House Office of Management and Budget observed, “The worst place to be is one foot on the boat and one foot on the dock when the boat’s moving away from the dock.” So how do we make the leap from the dock of volume-based payments to the value-based model?

There is no single answer but healthcare can find clues – and inspiration – in other industries. Consider banking, music and travel, all businesses turned upside down by the forces now descending upon healthcare. So the question is no longer what, but when and how?

Disclaimer: Ceci Connolly serves on the national advisory board of non-profit Altarum Institute.

21 replies »

  1. A short segment was on the radio this morning describing how the “budget” mind-set differs from the more practical (mercenary?) mind-set. Virtually no budgets are “zero-based” in accordance with this Wikipedia definition.

    Zero-based budgeting is an approach to planning and decision-making that reverses the working process of traditional budgeting. In traditional incremental budgeting (Historic Budgeting), departmental managers justify only variances versus past years, based on the assumption that the “baseline” is automatically approved.

    By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent of whether the total budget or specific line items are increasing or decreasing.

    Hospital budgets and most other large corporate operations presume that the main expenses will remain close to those of the previous year. It’s true, of course, but a budget affects the habits of those responsible for disbursing the funds.

    This little five-minute report explains in simple language how wasteful and counter-productive that can become over time. This was exactly what I encountered when I left the for-profit private sector and went to work for a large non-profit system. My whole working life was dedicated to efficiency and productivity, working hard to squeeze a nickle or dime out of every revenue dollar. But when I worked in a budget-oriented system I never even heard mention of any dollar expenses. All we knew was how we were performing in accordance with The Budget. This link is about federal agencies, but it fits exactly with the health care environment in which I worked for five years.


  2. Well, John, I think you mean well too, but meaning well and having a good grasp of the healthcare problem are two different things. I am sorry you think I am being condescending, but I don’t think that is the case. Maybe you are having problems arguing your case and perhaps some of your data is faulty. That is understandable because healthcare wasn’t your life’s work and perhaps your ideas about healthcare are a bit to fixed.

  3. Thanks for the followups, Joe. After plowing this field for the last several years I’m starting to get tired. Since my wife and I are into Medicare range it’s no skin off my nose what happens with healthcare reform. I’m mostly concerned for our kids and grandchildren.

    FWIW, I jumped ship this year and enrolled in a Medicare Advantage plan. I sense the ACO concept is beginning to crystallize and the two local systems involved (Piedmont and Wellstar in Atlanta) are both top-notch. I still advise people who travel a lot to stick with original Medicare with a supplement, but the MA plans in many places are looking better. (I don’t recall who, but I picked up that tip from somebody here at THCB. At this point, those with more complicated medical needs should stick with original Medicare, but that may change in the future.)

    (And good luck with allan, Joe. Despite his condescending manner I think he means well.)

  4. @Joe

    1) Joe, stop looking at all the different plans where the lines aren’t bright and start looking at the incentives. Incentives give you the ability to predict what will happen.

    The two most important incentives are:
    1) profit through over treatment: In general provides too much marginal care that in some cases can be useful. There is a paper trail.
    2) profit through the denial of care: Dangerous as large amounts of money can be saved by denying necessary care. There is no paper trail, but there were plenty of suits and court decisions that demonstrate this is a real problem.

    We know the system that has brought the most benefit to the most people is the marketplace. Thus my focus is whether government helps or hinders the marketplace. Government is necessary for markets to function, but when it becomes an active player it hinders the marketplace.

    I agree that government lends to industry the ability to create monopolies and other anticompetitive things. The marketplace doesn’t function with monopolies or coercion. But take note that most of this happens because of government, not because of lack of government.

    2) Of course it matters who pays. Who pays determines the incentives and incentives determine how people act and react.

    The system that in the long term pays best for value is the marketplace and your statement below is wrong.

    “Paying for “value,” that is, almost any other way but fee for service, forces the provider to consider their true costs for delivering the desired outcome.”

    When a marketplace exists the individual affected makes his own decision with or without the help of others. In general he can determine what is best for him than a third party thousands of miles away. He can even use that third party if he sees fit.

    Our problem is that with a third party payer system we don’t have a marketplace.

    Good discussing this with you Joe. Take a bit of time and read about incentives and third party payers.

  5. Obviously when any industry is able to produce and sell more of its product at a price greater than its costs, it makes money on volume. The question in healthcare is really “volume of what?” Your “product,” in any industry, is what you get paid for. Under fee-for-service, the product is doing stuff (procedures, tests, and such) that can be construed to have something to do with the patient’s problem. That is, the product is processes. This would be like getting a fender fixed, and being billed for each piece of sandpaper and can of Bondo.

    If we could pay for outcomes, that would be quite different. Suppose a healthcare organization got paid for reducing the number of, and the suffering of, the folks with diabetes in a particular population. Yes, that would be a kind of “volume,” but it would a volume of outcomes, not of processes. That would be more like paying for a fixed fender without having to know or care how many cans of Bondo they used.

  6. Hey, Allan!

    > I am not sure where Joe stands on all these issues.

    I suspect that is for two related reasons:

    1) A lot of people read about healthcare through a lens “government interference” vs. “free market.” If you read my writing with that lens, you might find yourself wondering, “Okay, what’s he _really_ getting at?” Because I don’t lay out the problem that way at all. When I look at systems that really work and those that really don’t across the world, it is not at all clear to me that you can draw the bright line between them in that fashion.

    People often have a philosophical argument about the role of government, but I am pragmatic right down to my pinkies. I am laser-focused on what brings the greatest health and healthcare with the least suffering and the lowest cost to the greatest number of people. And the answer to that is never just “less government” or “more government.”

    At the same time, it should be mentioned that an awful lot of “government interference,” that is regulation, of healthcare actually consists of structures that the industry has managed to get put in place for its own protection and profit.

    2) For the shape of healthcare and its cost, it matters much less who pays (government, private, individual) than how they pay and for what. Paying item by item “fee for service” gets you lots of items, and the greater the complexity and reimbursement the better. Paying for “value,” that is, almost any other way but fee for service, forces the provider to consider their true costs for delivering the desired outcome. And the desired outcome is no longer even “Was the operation successful?” so much as “Did you fix the problem? Did you fix it in the most efficient and effective and long-lasting way possible.”

  7. Thanks for the shout-out, John. Your observations of the how little the healthcare industry understands and speaks the normal language of business, how little it uses such basic concepts of real cost and real margin correlate perfectly with my observations over the years. The reality is that they don’t think that way because they have not had, because that’s not the way they have been paid. Now that is changing, and many of the people running healthcare institutions find themselves playing a game in which they are beginners.

  8. Could someone give an example of a profession or industry that is not a volume-based system?

  9. Yes, we will have to agree to disagree, but one inroad to agreement was seen. You seem to recognize the perverse incentives of third party payer. Now, if you could apply that knowledge to the problems we all note in our system you might recognize that our system has not been a marketplace. Then you might be able to follow the chain of events that made prices increase and overall satisfaction decrease. At that time we could more easily debate how the healthcare sector should be managed.

    What surprises me is that you made no remark about those working people that had good private insurance that are now forced onto Medicaid. That has nothing to do with states refusing to go along with a government disaster which would be turned over to the states in costs that could help bankrupt them. I also note your unbridled support of the ACA without touching on the high premiums and copays, foolish dictates, and the fact that we will be left with approximately the same number of uninsured, perhaps a greater number of uninsured.

    I don’t understand your comments about Libertarians. You already made a false assumption of what I said about government involvement that I had to correct. You call their arguments ignorant (I am not of the Libertarian party) and that is inflammatory and unnecessary. It would have been better for you to argue policy rather than attempt to disparage a group that you seem to disagree with.

    I note that you blame the states that refused to blindly follow the President’s dictates while still following the ACA law. Blame the ACA for it was improperly written and didn’t bother to garner the support of the nation. Blame the President for overstepping Presidential power and not enforcing the bill’s laws. Blame politics for the President’s usurpation of Congressional power and his unilateral alteration of the ACA. I’ll wait for the appropriate blog thread to debate the merits of the ACA with you.

  10. As I said previously, you and I need to agree to disagree. We are light years apart and do not speak the same language. When I said my Libertarian warning light comes on it doesn’t mean I’m Libertarian. To the contrary, it means I expect a slew of Libertarian arguments that leave me speechless by their ignorance.

    My non-profit/for-profit observation is that the typical “non-profit” organization is typically a money-laundering center servicing a raft of ancillary for-profit companies, typically a large hospital surrounded by acres of related businesses (profit-centers) with no accountability to, and little coordination with anyone except themselves.
    => http://pllqt.it/lcjvVP

    I appreciate your career experience in health care, whatever it is. And I hope only the best for you. I’m in agreement that what you call the “third party” system of payment has had a corrupting impact on health care since WWII, beginning with group insurance. It was a valuable concept at the time, but over time became more important for shareholders of insurance companies than those who were being insured. (Hence the medical-loss ratio much resisted by the insurance industry.)

    A day is coming when employment and health care will be uncoupled, so that problem can be expected to dry up over the next few years. We are now experiencing a learning curve that will likely take at least a generation, perhaps two, to be accepted…

    Insurance and health care are not to be confused.
    Both are in the business of risk management.
    Health care professionals manage health risks.
    Insurance professionals manage financial risks.

    As for your two classes of workers with identical earnings, one of which gets premium subsidies and the other which doesn’t, that can only be referring to those states that elected not to expand Medicaid. I live in one of those states and it’s sad. We have a low-earning class of people who earn too much to qualify for Medicaid and not enough to qualify for a subsidy. Most are too ignorant to realize the problem is with the state’s refusal to expand Medicaid. Instead they blame that hated Obamacare.

    I guess we can wait together for the correctives. Congress is such a well-oiled machine I’m sure as soon as they return from mid-term elections they will fix all these problems. Cheers.

  11. “I come across phrases like “government shouldn’t interfere, etc” my Libertarian warning light comes on and I start filtering what comes next differently.”

    John, the problem with that statement is that I was explicit in stating government has its place. You certainly don’t sound Libertarian.

    With regard to the mingling of profit and not for profit I don’t find much difference between the two though the not for profits have a tax status that permits them to accept tax free gifts. Some major well known medical centers would likely be under water without those endowments.

    ” I don’t agree that too much “intervention and micromanagement [presumably by government]… has destroyed a normally functioning market.” ”

    I’m surprised that you don’t see it since it is so obvious. We haven’t had a normally functioning market in health care at least since WW2. The employee market is basically third party payer. How do you think the food service business would function today if the third party employer purchased the employee’s food (or at least the plan that bought the food)?

    This third party payer system has had devastating effects on patients, physicians, hospitals and everyone else involved. That would happen in the food service industry in the same fashion if it were subjected to third party payer. You seem to recognize part of the problem but blame it on intermingling of for profit and not for profit organizations instead of third party payer. [Ending third party payer doesn’t mean ending the purchase of health insurance of any type.]

    As you state drug companies are functioning in the reasonably free market when dealing with other pharmaceutical companies, but pharmaceutical companies are definitely not in the free market with regard to the consumer.

    I won’t comment on what you believe to be effective government redistribution. I will just respond with the problem we face today. Government redistribution of Medicare funds has left us with a fiscal disaster as Medicare costs are rising at a faster rate than the GDP. Government is destroying families and their futures.

    Your support of the ACA is duly noted despite the fact that it is an economic and medical failure. The premiums and copays are higher, the panels (important for quality healthcare) are more restricted than ever, and workers have lost their good insurance and now rely upon Medicaid. What the ACA will have done when the smoke clears is to provide less people with private insurance and more on Medicaid. Despite that we might still have more people uninsured than before. It will also have created two classes of identical middle income workers. Those that get subsidies and those that don’t even though their earnings are the same. Talk about equality? How is that fair?

    I’ve been in the healthcare sector all my life with exposure to many different facets of it along with substantial business exposure as well. The ACA as written makes little sense and has to be drastically changed in order to function at just a low level.

  12. @allan,
    I spent my entire working life in the private sector, mostly in retail management and food service. We worked diligently to squeeze a nickle or two out of every revenue dollar and I have combed through more P&Ls than I want to think about. So I have a better than average appreciation for the dynamics and efficiency of the free market. But when I come across phrases like “government shouldn’t interfere, etc” my Libertarian warning light comes on and I start filtering what comes next differently.

    I agree that hospitals have little knowledge of actual costs and the idea of “profit centers” is an alien thought, especially since so much of health care is structured around so-called not-for-profit corporations. And all that isolation usually means most hospital people are mystified when someone brings up the difference between net profits vs operational profits. And acronyms like EBITDA are never in their vocabulary.

    Having said all that, I don’t agree that too much “intervention and micromanagement [presumably by government]… has destroyed a normally functioning market.” After seeing both worlds up close and personal (my retirement job has been in health care and senior living services and environments) my observation is that there is too much co-mingling of non-profit and for-profit operations, much of which is designed to siphon as much revenue as possible from both government and business sources. A complex of insurance, drug, equipment and other enterprises — all free market animals, incidentally — has grown up in and around health care like yeast on bread. As far as I can tell the only roll played by government has been to carve out subsidies, fund heavy-duty research, grant patents and collect taxes to be redirected it where hopefully it is meant to do the most good.

    Yes, yes, I know all about that “redistribution” argument an how socialistic it is. But the longer I live the more I see that there is no way that an ordinary family can successfully rear a couple of kids and work to retirement with enough assets to live out their non-working years without the protection and participation of government.

    So when you speak of interference with the marketplace and the beauty of those invisible hands — whether they be those of Adam Smith, Ayn Rand, von Misses or Hayek — I have to throw up a few defenses. If that’s where you are headed with your comment, we will need to agree to disagree, because despite all it’s warts and shortcomings, I am an enthusiastic proponent of the Affordable Care Act (which should have been named the National Private Sector Health Insurance Clarification Act). And I am convinced that had it not been enacted most of the trends we now see would ever have occurred in a less-regulated market.

  13. “Imagine going through every service,…”

    John, that is what the free market does and is one of its most important functions. I am not sure where Joe stands on all these issues. Hospitals today have little knowledge of actual detailed costs nor do they have knowledge of exactly how much money they are making from their different profit centers. What many are trying to do is duplicate the free market in a non free environment which doesn’t work too well. The failure of our hospitals to be knowledgeable about these things is caused by too much intervention and micromanagement that has destroyed a normally functioning market.

    I hope you are one that can recognize government has its place and can even help to fund healthcare to prevent the problems most often mentioned, but government shouldn’t interfere with normal market place decisions as its effect should have the least possible negative effects on the marketplace.

  14. LOL. Well, Had I been able to find the TCHB link, I’d have cited it instead. Y’all need an internal search function. And, comment edit functionality. For a health care tech blog, you’re pretty dated. Maybe you should outsource the commenting to Disqus 😉

  15. BobbyG is right. Joe Flower is all over this.

    Imagine going through every service, from performing a pregnancy ultrasound to excising a brain tumor, and doing the arithmetic. Run down every step of every task, the labor cost of the person doing it, the actual cost of the supplies involved, then throw in something for overhead and for margin. Add it up to determine how much it costs you to install a hip or repair a hernia. That’s “time-driven, activity-based costing” or TDABC.

    Thanks for the heads up. I got so tired of reading the same stuff at THCB I almost quit coming here. That little snip above is a breath of fresh air. Finally someone grasps the difference between “cost” and “price.” Those of us in most of the for-profit private sector eat stuff like that for breakfast. When I left the food business for a post-retirement job in health care I was shocked at how UN-business-like they operated. It was like I was back in the Army. Everything was centered around the “Budget!” But when I asked where they money actually came from, eyes glazed over and I got the same answer: “Well, it’s in the budget.”
    “How do they decide what’s put into the budget?”
    “That’s another department. We just get a new budget every year.”
    “But where does the revenue actually come from???”
    “It’s in the budget!”

    I finally quit asking. The place was awash with resources, both capital and human. And thanks to elaborate accounting — together with an incestuous relationship among the industries (insurance, health care, pharmacy, durable and disposable equipment) and the prestidigitation of some very well paid executive types, it all churned along.

    Looks like an obesity diagnosis has been obvious for some time, and not just for patients.

  16. “high performers reap the financial rewards, not those that are simply doing more”

    Who is the judge of high performers? Except for a few stars its difficult to tell because each patient is different and the results might not be completely known for decades. So far quality determinations have been relegated to simple yes/no issues which lead to terrible determinations of quality and lead physicians to focus on those things at the expense of other things that might be more important. Additionally what is good in one patient may not be good in another so the idea might incentive the physician to do something to a patient that is not indicated.

    An educated patient could help improve quality if the patient is free to choose, but the business of healthcare (not the provision) seems to want to leave the choice directly or indirectly in the hands of businesses. It is good for revenues.