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Matthew Holt

Performance-based pay in health care?

Given some off-this-stage politicking I’ve been involved in, the Medicare drug coverage argument, and the recent "Physicians" plan in JAMA proposing single-payer, this Forbes article caught my attention. I subscribed to Forbes for a while and they never ceased to amaze me with how captured they were by new Internet business models while they decried any attempt to reform old-world fee-for-service medicine. Now even Forbes is coming out in limited favor of some type of pay for performance linked to basic quality guidelines. Back in 1997 my IFTF colleagues (especially Greg Schmidt) and I forecast that insurers paying some type of reward for performance would account for a sizable minority of the health care system by 2010.  In the RWJ-sponsored "Health & Health Care in America: A Ten year Forecast" we wrote:

"…a separate type of payment system will develop. Plans and intermediaries will devise reimbursement programmes that give providers incentives to deliver care in a manner that improves quality, customer satisfaction, patient tenure in the plan, and outcomes, as well as productivity and cost-effectiveness. We dub this system ‘performance-based reimbursement’, as payments will depend on the providers’ performance on a strung of relevant algorithms. By the latter part of the next decade this system will be the single most important way of paying provider organizations, although the old methods will still be a part of the system."

Well on re-reading this section I note that the accompanying chart had Performance-based pay at only 15% of all dollars by 2010, with the rest evenly split between prospective payment (DRGs and capitation) and FFS land.  So when you’re busting to get out a big report not every word will be internally consistent.  And this change (should it happen) would certainly seem revolutionary compared to what has happened in the first five years of our 13 year forecast. At the time the report was written there were already HMOs paying some limited amount to medical groups based on quality metrics.  Since then the quality movement seems to have somewhat been the baby thrown out with the bathwater of the managed care backlash.  But I think that as the initial foregin policy concerns of the first Bush administration fade, and even if it doesn’t pass Drug Coverage this year, Congress will return to the future of Medicare as a whole.  And if the political right (as represented by Forbes) is starting to think about the possiblity of performance based-pay, then the mainstream private health payers will start to introduce it too. When that happens, we’ll be on for another round of changes in care delivery and provider organization.

PBMs face a little more mail-order trouble

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Pity the poor PBM industry.  Hailed in the early 1990s as the solution to manage health care costs, bought up by the drug industry for far, far too much money in the mid-1990s, and investigated on again/off again by various attorney generals ever since over their relationships with drug manufacturers. In early 2000 due to another investigation, their stock price tumbles and one of the biggest (PCS) gets bought by one of the smallest (Advance Paradigm) at a fire sale price.  So ends the decade, but a funny thing has been happening. Remember that PBMs are supposed to be working on behalf of health plans and employers to get drug costs down.  But overall drug costs have gone up massively all this time (as have brand prices mostly due to the new blockbusters of the 1990s.). But so have the PBMs’ profits and their stock prices.

There are four main lines of revenue for a PBM.  1) Claims processing/transactions with all the formulary stuff and presumably price discounting that goes with it 2) Switching people between different drugs based on rebates from the manufacturers, and doing other drug promotions, 3) mail-order pharmacies, and 4) a loose bunch of activities some companies call health promotion, which also includes DSM, data analysis, etc. Buried somewhere in there is the level of risk they take on from their clients, although the answer seems to be "not too much". No one will give you a straight answer about what proportion of their revenue comes from which activity, which makes Sen. Cantwell (D-WA) suspicious enough to ask them to disclose their deals in the new Medicare legislation.  Until now their mail-order piece was very profitable (and supposedly is why Express Scripts’ market cap is around $5bn, Caremark’s around $6bn but AdvancePCS’ only at $4.5bn although it has far more covered lives than the other two.) Medco is being spun off by Merck next week and it also has a strong mail-order side.  Now they are also under what looks like a pre-emptive strike from the pharmacists who for some reason believe that the PBMs are using their formulary management techniques to steer business to their mail-order divisions — imagine that!

This presages the main question of what role PBMs will play in whatever eventually comes out of Congress on Medicare drug coverage. Are they going to get the biggest bonanza in their history (all those lovely seniors signing up)? Or are they going to lose all their abilities to make money the way they’ve do now, and be turned into government data processing agencies with PE ratios to match? With their stocks recently close to their all time highs, this is a space to be watched.

Jeanne Scott–an unabashed plug

If you don’t already, go now and sign up for Jeanne Scott’s newsletter on health care inside the beltway at her new site, right click on http://www.health-politics.com. Now you’ve done that let me tell you a bit about her.  She just retired from over 10 years at CIS, then NDC and is the best source of knowledge on HIPAA, politics inside the beltway and anything touching health care policy. You get the dirty sausage-making aspect of politics from Jeanne, but you also get highly considered and understandable background, and logical opinions on what’s likely to happen when push comes to shove.  All that and an endless supply of lawyer jokes!  Now she’s officically independent, I’m hoping that her newsletters will get even more "explicit", but they weren’t exactly quiet before. Plus go read her explanation of what’s going on in the House versus Senate Medicare Drug debate/bill settlement feud (so I don’t have to repeat it all when I write about it!)

My favorite Jeanne line comes from a few years back.  I had her as a speaker at an IFTF meeting, and she talked very amusingly in great detail about the then new HIPPA transaction laws.  One client asked her why HCFA (now CM3/CMS) had set the fines for HIPAA violations so low.  Quick as a flash she replied – "That’s all they can afford!"

Quality

All you need to know about health care quality is encapsulated in Ian Morrison’s line–"you can tell a quality doctor when the people in the waiting room make more money than you do".  The latest Harris Poll on the subject shows that "Reputation", and the reccomendations of families and friends are still what drives doctor choice, while for hospital choice, whether the patient’s insurance plan covers it is added into the mix. (Although virtually all plans cover all hospitals unless Sutter and Blue Cross are fighting again!).  Only 20% said that they would choose a doctor because the doctor had been highly rated in a published evalutation of doctors. (Harris’s site is down at the moment, but their healthcare section should be here and is well worth cruising through). So well over a decade into NCQA and all that, we’re a long, long way from Consumer Reports

Quickie 2: Pharma market research

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My now defunct dotcom i-Beacon was buried deep in the Rx market research space (and, yes, the pun is deliberate). A new report from Cutting Edge Information suggests that we were onto something. (The report summary/ad piece is here, but if you want the whole thing you need the odd $5,000). An average of $26 million on market research is spent per drug over its life, with over 70% of that spent post-launch.  Assuming that you can triple those numbers for a blockbuster of $1 billion, and again assume that most of that is spent in the first two years, a reasonable guestimate is that a new blockbuster has $30-40m spent on market research annually, which is roughly 30% of what is spent on consumer advertising for a similar drug and probably only 10-15% of what’s spent on marketing to doctors.  All in all you can understand why the pharma business is so critical for market research companies.  We used to estimate that that the whole market research and sales data market totalled $1.2 billion in the US compared to something like $8-12 billion spent on marketing and sales teams (of roughly a $100 billion market).

A few quickies 1: Single payer rears its head, again!

Well Steffie and David are back on the single payer war-path, with an article in August 13 JAMA. While most of us in the real world agree with Ian Morrison that single-payer is "culturally unavailable" to Americans, Woolhandler and Himmelstein have been arguing for it officially since 1989.  The AMA continues to claim that it is in favor of universal coverage, but remembering back to 1994, they were among the first to help torpedo the Clinton plan —  not that Hillarycare was single payer as Canadians, Brits or even Germans know it. However, I remember doing focus groups of doctors in the mid-1990s when you could not get them to shut up about MSAs as the solution to all their problems — ‘Just let the patients pay cash and we’ll be fine’. Both the doctors and the pharma companies are starting to reap what they ideolgoically sowed back then, because as we  all know consumers think health care should be free. And, as the health care industry discovered after 1965 you’re better off having third parties paying. (More to come on this when I finally unload on Medicare drug coveage…)

The first post: What’s wrong with Medicare?

For the first post, don’t expect a big essay despite that subject line. It came up because while I was away from the US for the first part of this year, yet another incarnation of NME or HCA — the two original for profit hospital chains of the 1970s that amalgamated into Columbia (now calling itself HCA again!) and Tenet — got caught with its hand in the cookie jar.  You’ll remember NME getting bad press and worse in the 1980s for imposing unwanted inpatient stays on “psychiatric patients”. After that NME morphed into Tenet. Columbia of course said that “health care had never worked like this before” and they were right — to the extent of the upcoding and fraudulent billing going on in its hospitals in the mid 1990s.  I remember one cover of Modern Healthcare in which Tenet’s strategy was encapsulated as “We’re not Columbia”.  Apparently only slogan deep. Last week they settled with the state and feds in California due to massive amounts of upcoding and worse at Redding Medical Center. Several other settlements are pending.

The New York Times’ description (registration req’d) of the level of unnecessary surgery at the Redding Medical Center is quite shocking. But I do recall Alain Enthoven at Stanford telling me in 1991 that one third of carotid andarterectomies in California were found to be counter-indicated after chart review.  Why were they done?  Well everyone — surgeons, hospitals, supplier– made money by doing them. Given the imbalance in knowledge between a patient and a doctor, it’s not too surprising that a very aggressive surgeon can do way more than he or she should.  Medicare is still basically a fee-for-service program with very little oversight, and so this type of thing is going to go on and on. And it has been going on for a while, as this partial list of whistlebower suits shows. Enthoven’s view was that everyone should be put into competing managed care plans which would act as patient (and payer) sponsors, and look after the money better than the government could.  It didn’t happen that way, and the backlash against managed care’s ham-fisted attempts to do so ensured that most health plans gave up on trying to control what providers did.  Medicare never really ever tried, as all its internal review cases were co-opted by providers.  Its only weapons were inquisitions and indictments from the FBI and others well after the fact. Eventually Medicare will have to have more controls, but that will need reform as well as more money. I’ll talk more about this when I get to drug coverage later this week.  Suffice it to say, don’t hold your breath.

Meanwhile, Uwe Reinhardt says in the NY Times article that (despite Wall Street’s desires) hospitals “can’t be a growth industry like some Internet company”. Well maybe not a “growth” sector, Uwe, but look at Yahoo’s stock price in 2000, Tenet’s this year, and tell me that you’re not getting some of that Internet fever coming back!

more on Medicare and drugs later this week….