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Matthew Holt

Why Wall Street hates health care services but doesn’t know it.

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In a news article titled HealthSouth Scandal Doesn’t Slow Former Chief the New York Times’ Milt Freudenheim profiles former Healthsouth CEO Richard Scrushy.  Healthsouth was in may ways a corollary of Columbia/HCA and Medpartners.  Whereas Columbia was hospitals and MedPartners was physician clinics, Healthsouth owns home health services and out-patient surgicenters. Like the other two it over-expanded and over-promised to Wall Street.  The problem with for-profit health care in Wall Street terms is that these are all low-margin businesses, which are dependent on labor, and can produce little "same-store" growth without poaching business from competitors down the street.  High growth businesses that Wall Street loves have high margins and produce high productivity gains to maintain them.

None of these companies fundamentally changed the way medical care was delivered by introducing huge productivity gains. Even in the early days of Medpartners when they bought multi-specialty groups like Mullikin Medical Centers in Los Angeles, the promise of new ways of delivering care more cost-effectively under capitation ended up passing the improved margins onto payers and health plans. Then when "medical trend" went back up in the mid-1990s the capitated groups were left holding the bag.  Medpartners (of which Scrushy was also briefly Chairman) ended up going into bankruptcy, although the company reemerged as the now successful PBM CaremarkRx.

Given that Wall Street likes high margins and perpetual growth, yet creating high margins in medical care delivery is difficult, these for-profit companies are left with three options.
1) Buy competitors rapidly and mask flat "same-store" growth with overall revenue growth until the music stops and there’s no-one left to buy. (Medpartners, Columbia/HCA).
2) Increase margins and revenue by sticking it to payers (especially Medicare) and hope they don’t notice. Problem is they will eventually. (Columbia/HCA, Tenet)
3) Lie about it.  Claim to be making massive profits, even if it’s not true, until the FBI wakes up. (Healthsouth, Enron — OK, OK I know they weren’t a healthcare company but it’s the same principle)

There is of course the fourth option, that of admitting you are a low margin player like a utility company, and accepting the low valuation Wall Street gives you. But that’s not really much fun, is it?

As for Scrushy at Healthsouth, he’s clearly still having lots of fun going powerboating and jetting around in his new plane.  He’s also claiming that he knew nothing about what the 12 of his lackeys who’ve already plead guilty to fraud were doing. That sounds similar to Ken Lay’s claims about his innocence to what was going on at Enron.  Who knows? They may end up sharing the same cell at Club Fed.

More on the underbelly of pharma marketing: State of Mass sues drug makers

Massachusetts is suing drug makers for ripping off the state’s Medicaid program.  But note carefully, they’re suing generic drugmakers. I thought generics were supposed to be cheap!  The suit accuses the generic-makers of a familiar tactic.  Selling the drugs to pharmacies at one price, charging Medicaid a higher price and kicking back (some of) the difference to the pharmacies to move around market share.  It’s a little odd that virtually every generic maker was allegedly doing this–how can they all be buying market share at the pharmacy?

However, this does start to get at some of the underbelly issues of marketing drugs.  It’s well known that doctors are marketed to extensively by pharma companies, and the definition of what’s a legitimate promotion and what’s  a kick-back has been changing over time. It’s also well know that PBMs are paid extensive spiffs by pharma companies (called "rebates") to favor one brand over another. What’s not so well known is that pharma companies are also paying pharmacies to try to move share around within the formulary–a kind of counter-formulary trying to move scripts from the first-tier drug to the second tier . These programs are run (somewhat quietly) as part of the Rx point of dispensing messaging by the big transaction companies, like NDC, WebMD and Proxymed. It looks like a similar activity by the generic makers in Massachusetts may have stepped over the legal line.

More on nursing staff ratios, from Matt Quinn

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Just when I was wondering what to write today, Matt Quinn comes to the rescue again……Linda Aitken, who’s study on nursing education I wrote about yesterday, also wrote an article last year about the impact of staff ratios. This is something Matt has looked at in depth, he writes:

Linda Aitken and (others) had an article in JAMA in Oct of last year ("Hospital Nurse Staffing and Patient Mortality, Nurse Burnout, and Job Dissatisfaction" in Oct 23/30, 2002) regarding the link between nurse to patient ratios and (suprise!) patient outcomes and whether nurses like their jobs. The long and short of it is that for every additional (surgery) patient that a nurse is in charge of, that patient’s chance of dying within 30 days of admission increases 7%.  Each patient also added 23% to the level of nurse burnout…  With the average age of US nurses north of 45 years and with the Philippines and other countries already experiencing shortages of experienced nurses (from flight to the US), the government must step in to provide strong incentives for both men and women to become nurses.  And nurses must gain (ongoing) leadership and management training.

A conversation that I had with a nurse yesterday helped me understand the difference between BS nurses and those with 2 and 3 year (vocational degrees). (Editor’s note: As you’ll notice, Matt was in the army but don’t hold it against him!) The BS nurse is like a new army 2LT: brimming with enthusiasm, long on theory/book knowledge and short on hands-on experience or credibility.  The vocational nurse is like a PFC: knows how to do tasks, but needs to be directed (a "worker bee").  The hospitals of this nation are short on the link between the two – the "sergeants" of the Army: nurses who have both years of hands-on experience and formal training in leadership / management skills.  Just as the Army is able to conduct complex operations with a few educated officers, a bunch of (perhaps) high-school-educated 18-24 year olds and a strong "backbone" of experienced sergeants to ensure the hands-on execution of things and the training of the new folks, hospitals need to develop this cadre of "nurse sergeants" and the professional "nurse officers" to lead them.  While I agree that a group of higher educated folks can probably outperform a group of less educated folks in a task like managing a group of patients, developing tightly knit teams ("squads"?) composed of nurse officers, sergeants, and PFCs could outperform both – at a lower cost and in less time than all BS nurses.

Matt has written two articles about staffing effectiveness based on his work at GE & Quantros. They are, The True Cost of Overtime and Balancing Staffing and Effectiveness . You can reach Matt at mtquinn@3fire.com.

Tenet quickie: another arrest!

A mid-level executive from a Tenet hospital in San Diego was indicted yesterday, joining her boss who’s already in hot water for setting up a $10 million kickback scheme to generate patient referrals. This reminds me a little of when the dark stuff hit the fan over at Columbia/HCA.  A bunch of local execs and hospital administrators went to jail. CEO Rick Scott never even got charged, although at the very least his management style created an atmosphere in which upcoding and Medicare fraud could flourish.  Whether Tenet can stem the bleeding from the recent scandals remains to be seen. However, ex-CEO Barbakow must be somewhat concerned that, as opposed to the good old days of 1997 when Scott was kicked out of Columbia, the American public and its DAs now know the words Enron, Adelphia and Global Crossing.

Quality Quickie: Better educated nurses make the hospital safer?

Linda Aitken has been the leading academic looking at nursing professionals in the US for several years. (Ed O’Neill has been her opposite number on the physician side).  Aitken’s latest research is going to put the cat amongst the pigeons and maybe have a major impact. Both the abstract and some more detailed press reports (like this one that interviews Aitken) suggest that hospitals that have a greater proportion of better educated nurses have better mortality rates.  And the differences are significant both statisitically and in real life; up to 5% improvement in 30 day mortality for a 10% increase in the number of nurses with bachelor degrees.  All other features of the hospitals were corrected for, so the only difference was whether the nurse had a 2 year degree or a 4+ year degree. While representatives of 2 year nursing courses criticized the methodology, Aitken is no dummy and JAMA is no throwaway mag, so it carries the burden of proof.

So if a shift from a ratio of 50-50 to 55-45 in nursing mix (based on education) leads to a 5% decrease in mortality, how long before the lawyers/quality advocates start coming after hospitals that employ a large proportion of nurses holding only Associates degrees? You know that if a drug came out that improved mortality in the inpatient setting by 5% over a competitor, it would be adopted like a shot. The proof is in the uptake of TPA over Streptokinase 10 years ago when TPA decreased mortality only 0.2% better (see this post).  And if such a  move is made, who will end up paying for it given that we have a nursing shortage already?

Technical Note: RSS Feed & thanks to other HC bloggers

With help from fellow Bloggers–and a slightly more aggressive effort at understanding Blogger’s not always crystal-clear help function– I think I have an RSS feed up and running here. There’s a little RSS icon in the right sidebar that links to it as well.  I’m not quite sure how it gets picked up by the RSS aggregators but hopefully someone will tell me what happens next!

The Bloggers who helped are  Steve Hoffman who runs Product Management for Medscape (now part of WebMD), Enoch Choi, a doc at the Palo Alto Medical Foundation and Graham Walker a very new medical student (3 Weeks into it!) at Stanford, who’s also been a policy wonk over at Physicians for a National Health Plan. All have interesting sites (linked to their names) so go check ’em out. Oh, and thanks guys!

Thanks also to Elke Cisco, who’s given me some template help after a cry for help I put out on craigslist and won’t let me pay her!  This being the Internet, 3 of these people live less than 30 miles from me, but of course we’ve never met!

Technical Note:RSS

I’ve been asked by a few readers to provide an RSS feed.  I’ve tried without success to do this using Blogger.  Can anyone who knows more about Blogger than me do me a favor and walk me through the steps? Please email me if you can help! Thanks.

Got the Blues? WellPoint keeps growing, so does Anthem

Yesterday the shareholders of the Wisconsin Blue Cross plan, Cobalt, OKed the WellPoint Merger originally announced back in June.  So Wellpoint keeps growing.  It now has Blue Cross of California, Missouri, Wisconsin and several other national products.  Anthem–originally Blue Cross of Indiana–now has Indiana, Ohio, Kentucky, much of the North-east including New Hampshire, Maine & Connecticut, Virginia (Trigon) and Colorado (which includes Nevada).  Meanwhile Regence in the northwest now has Utah, Oregon, Idaho, and one of the Washington Blues.  (Washington state is the Bosnia of the Blues with lots of little plans). 

Many of the rest of the big Blues have gone or are going for-profit, leaving them more open to takeovers such as Trigon’s by Anthem. For instance, Empire Blue Cross (in New York City) is now owned by Wellchoice, which operates plans in neighboring states like New Jersey. The process of these for-profit conversions (Wellpoint) or demutualizations (Anthem, Trigon), have not been without their problems. Carefirst (the nearly former Blues of Maryland & Washington DC) has experienced massive problems since the failure of its attempt to go for-profit and sell out to Wellpoint. Surprise, surprise the problems were associated with a too low price offered to the State/Foundation and sky high incentive payments to the Carefirst board. However, several smaller plans like Premera in Washington state, are still going for-profit.

The acquisition strategies of Anthem and Wellpoint demonstrate that health insurance is a local product. Instead of growing organically or trying to bring in new products, they’ve mostly been buying lookalike organizations that have big market share. Big market share equates to more power in negotiations with providers, although that’s less effective than it was a few years back (see this post).

Certainly Wellpoint’s historical stock performance shows a fourfold increase in market cap over 10 years–so financially it’s been a success even though much of that is due to health insurers being at the top of the underwriting cycle and will get worse in the next few years. Plus there are several very rich Foundations (such as California Endowment) which are doing good works with the money they made from the non-profit conversions.

I know this will produce squeals from the traditionalists, but I’ve always felt that  the non-profit Blues plans act just like for-profit plans. In fact at one meeting presenting to a senior management team at a very big non-profit Blue, I went around the table asking for people’s issues and interests. The CEO replied "Money".  So as the Foundations are spending far more money on good works than are the non-profit Blues, I don’t see a real reason why these accidents of history shouldn’t just become like other insurance companies.   However, given the complications of transition and the bad name of for-profit in health care (Anyone for Tenet?), the few remaining non-profit big guys (BS of California, Highmark in Pennsylvania, Illinois & Texas, and the biggest of all BC of Michigan) are probably staying that way.

Health care IT spend up sharply

iHealthbeat (reg rqd) put me onto this Information week article which says that health care organizations report that their spending on IT has gone from 2.7% of revenues to 3.3% in the past year. That’s a pretty big jump of over 20%.  Several of the interviewees in the article say their spending has gone up by more than 30%.  This includes some huge IDNs like Caregroups in Boston, and Sutter in California.  Although they’re not quoted in the article, a similar huge effort is underway at Kaiser. For many years it’s been trotted out by consultants like me that healthcare only spends 1-2% of its revenues on IT whereas financial service companies spend 5-10%.  So the question becomes, is this jump just brought upon by fear of HIPAA or is there a real transformation going on?