Starbucks, which taught America to love lattes, made news this week with the announcement of a new tuition benefit for its partners (Starbucks-speak for employees). At first glance this move seems like simply another benefit in Starbucks relatively (for its industry) generous compensation package. In particular, Starbucks has long been heralded for providing health insurance for all partners working more than 20 hours per week. It is this connection to health insurance that we wish to explore. While Howard Schulz the founder and current CEO of Starbucks has long said the firm offers health insurance because it is the “right thing to do” for their employees, we have always suspected a more profit maximizing goal for this compensation decision. If we put on our strategy hats (we are both members of Kellogg’s Strategy Department), we can deduce that as a profit-maximizing firm, what Starbucks giveth with tuition benefits it may soon taketh away from health insurance benefits. In the process, Starbucks may be heralding the demise of employer sponsored health insurance, something we have predicted in previous blogs.
When the Cleveland Clinic announced job and expense reductions of 6% in 2013, the healthcare sector took notice.
Did the world-renowned hospital and healthcare research center, with 40,000 employees and a $6 billion budget, really believe it did not possess the heft to take on the increasingly turbulent sea changes in American healthcare? Or was this yet another stakeholder using Obamacare as cover to drive draconian change?
Both sides of the political aisle were quick to make hay of the announcement, with conservatives blaming reform for eliminating jobs while liberals questioned the timing of the cuts when the Cleveland Clinic was posting positive growth. The answer from Eileen Sheil, corporate communications director, was apolitically straightforward: “We know we are going to be reimbursed less.” Period.
The question of reimbursement reform and the unintended consequences of the Affordable Care Act are weighing on the minds of hospital executives nationwide as independent, regional and national healthcare systems grapple with a post-reform marketplace. The inevitable conclusion that the unsustainable trend in American healthcare consumption is now at its nadir seems to have finally hit home.
These days, America’s hospitals are scrambling to anticipate and organize around several unanswered questions:
- How adversely will Medicaid and Medicare reimbursement cuts affect us over the next five years?
- Can we continue to maintain our brand and the perception that any employer’s PPO network would be incomplete without our participation?
- Can we become a risk-bearing institution?
- Can we survive if we choose not to become an accountable care organization (ACO)?
- Will the ACO model, by definition, cannibalize our traditional inpatient revenues?
- Can we finance and service a hard turn into integrated healthcare by acquiring physician and specialty practices?
Go It Alone or Join a Convoy?
Mergers and acquisitions remain in high gear in the hospital industry—“the frothiest market we have seen in a decade,” according to one Wall Street analyst. “Doing nothing is tantamount to signing your own death certificate.”
Many insiders believe consolidation and price deflation is inevitable in healthcare. Consolidation, however, means scarcity of competition. If we operate under the assumption that scarcity drives costs higher, we may not necessarily feel good about consolidation leading to lower costs unless mergers are accompanied by expense cuts that seek to improve processes, eliminate redundancies and transform into a sleeker, more profitable version of one’s former self.
Bigger may not always be better, but bigger seems to have benefited a select group for the last decade.
Ultimately, spending less on health care is a relatively easy task: We either need to consume fewer services, or spend less on the services that we consume. But much like we teach our Kellogg students about maximizing profits, the devil is in the details.
It’s certainly tempting to ask the government to swoop in on a white stallion and solve the all our problems by fiat. For example, we could have the government simply exploit its monopsony power and set prices, but an artificially low price will lead to an inefficiently low quantity of services and future innovation (stay tuned, we will have more to say about this next week).
Similarly, we could explicitly ration quantities (as opposed to implicitly doing it through a large uninsured population). But how could we hope to determine the right level of care? Ultimately, if we ask the government to unilaterally fix this problem, instead of a white stallion we could behold a pale horse and all that it entails.
The good part, perhaps the best part, about the Affordable Care Act is that it attempts to address this problem using market forces. The question is whether we are ready for what these market forces will entail.
We will focus today on the role of market forces in the insurance market to control prices in the newly established ACA exchanges.
This month the Obama administration announced that it would allow insurers to use “reference pricing” for insurance programs in the exchanges. Under a reference pricing system, insurers set the maximum price they will pay for a specific set of services and if patients go to a facility that costs more than that amount they are required to pay the difference.
The all-too-familiar finals week all-nighter beckoned, and though I’ve had my fair share of experiences with studying until the sun rose, I decided to forgo the typical mug of coffee and take some over-the-counter caffeine pills instead.
My friend proclaimed that they would help more than any energy drink would. I laid out all my exam materials, popped in a couple caffeine pills, and strapped myself in for a wild night of allopatric speciation and coadaptation. A wild night did ensue, but there was no evolutionary biology involved.
Around 11:30PM, what could only be described as the worst headache of my life, detracted me from my desk and led me to the bathroom floor. I decided something needed to be done. Student services at the university health system were closed, so that only left me with the ER as an option.
An ER visit was outside the coverage of my standard student health insurance provided with tuition and I didn’t have a personal health insurance plan. I was wary of any costs that I might incur in the ER.
Instead of an ambulance, my best friend, Eric, drove me to the hospital.
There’s a war being waged on one of America’s most revered institutions, the Emergency Room. The ER, or Emergency Department (ED for the sake of this post) has been the subject of at least a dozen primetime TV shows.
What’s not to love about a place where both Doogie Houser and George Clooney worked?
Every new parent in the world knows three different ways to get to the closest ED. It’s the place we all know we can go, no matter what, when we are feeling our worst. And yet, we’re not supposed to go there. Unless we are. But you know, don’t really go.
Somehow, we’ve turned the ED into this sacrosanct place where arriving by ambulance is ok, and all others are deemed worthy based on their insurance rather than acuity. If you think I’m wrong, ask any ED director if they want to lose 25% of their Blue Cross Blue Shield volume.
But its true. I hear ED physicians openly express disappointment in people who came into the ED and shouldn’t have.
It’s just a stomach bug, you shouldn’t be here for this… Or, it’s not my job to fill your prescriptions…
The Emergency Department is a fairly modern invention. The first EDs were born of two separate, though similar, aims. At Johns Hopkins, the ED began as the accident room, place where physicians could assess and treat —wait for it —minor accidents.
Today, billing for emergency department visits is done on the E&M Levels where level 1 is the least acute (think removing a splinter) and level 6 is traumatic life saving measures requiring hospitalization (think very bad car wreck). Most EDs, and CMS auditors, look for a bell curve distribution, which means there are more level 3 and 4 incidents than most others. While coding is unfortunately subjective, solid examples of level 3 visits include stomach bugs requiring IV fluids, a cut requiring stitches, and treatment of a migraine headache.
In a broad research portfolio, Joe has focused on the effects from differing intensity of medical treatments.
This research is shattering some long held beliefs about the relationship between health spending and outcomes.
We think that Joe’s work is not known widely enough outside of the academic community, so we are using our blog to let you know what you have been missing and, in the process, perhaps change the way you think about healthcare spending.
It is well known that the U.S. far outspends other nations on healthcare, yet the outcomes for Americans (in terms of coarse aggregate measures such as life expectancy, infant mortality, and other dimensions) are quite average.
Of course, these outcomes are not the only things that we value in health care.
A lot of our spending is on drugs and medical services that improve our quality of life and won’t show up in these aggregate outcomes. For example, more effective pain management can decrease pain and improve quality of life – often with important economic benefits.
Despite this fact, most health policy analysts have concluded that we can cut back on health spending, without harming quality on any dimension.
This is not a new idea, of course. In a famous 1978 New England Journal article, Alain Enthoven coined the term “flat of the curve medicine” to describe how the U.S. had reached the point of diminishing returns in health spending. And for nearly 30 years the Dartmouth Atlas has documented how health spending dramatically varies across communities without any apparent correlation with outcomes.
The question has always been, what health spending to cut? Garthwaite’s previous work has shown that broad regulations requiring longer hospital stays for new mothers and their babies have provided only limited benefits and that more targeted rules could save money without sacrificing quality.
Beyond some wasteful regulations, we can always point to gross examples of overspending such as the rapid proliferation of proton beam treatments. But beyond those clear examples how can one identify what is waste and what is medically necessary?
In two important papers, Joe Doyle and co-authors ask a more fundamental question – is the often cited broad variation in health spending actually wasteful at all? They find that even in healthcare, there really is no such thing as a free lunch.
His work should be mandatory reading for everyone who believes that broad spending cuts will have no adverse consequences.
For those who lack the time to read these papers, we provide the “Cliff’s Notes” versions.
A long time ago, when I worked in Sweden’s Socialized health care system, there were no incentives to see more patients.
In the hospital and in the outpatient offices there were scheduled coffee breaks at 10 and at 3 o’clock, lunch was an hour, and everyone left on the dot at five. On-call work was reimbursed as time off. Any extra income would have been taxed at the prevailing marginal income tax rate of somewhere around 80%.
There was, in my view, a culture of giving less than you were able to, a lack of urgency, and a patient-unfriendly set of barriers. One example: most clinics took phone calls only for an hour or two in the morning.
After that, there was no patient access; no additions were made to providers’ schedules, even if some patients didn’t keep their appointments, not that there was a way to call and make a same-day cancellation.
As my father always said: “There must be a reward for working”.
But, high productivity can sometimes mean churning out patient visits without accomplishing much, or it can mean providing unnecessary care just to increase revenue. For example, some of my patients who spend winters in warmer climates come back with tall tales of excessive testing while away.
A recent Wall Street Journal article offers an interactive display of doctors who collect the highest Medicare payments. The difference between providers in the same specialties across the country makes interesting reading. It is hard to imagine that many individual doctors are billing Medicare more than $10,000,000 per year.
So it might make sense to insure against paying for excessive care by also demanding a certain level of quality.
But defining quality is fraught with scientific and ethical problems, since quality targets really aren’t, or shouldn’t be, the same for all of our patients.
Using a survey fielded by the RAND American Life Panel, we estimate a net gain of 9.3 million in the number of American adults with health insurance coverage from September 2013 to mid-March 2014.
The survey, drawn from a small but nationally representative sample, indicates that this significant uptick in insurance coverage has come not only from enrollment in the new marketplaces established under the Affordable Care Act (ACA), but also from new enrollment in employer coverage and Medicaid.
Put another way, the survey estimates that the share of uninsured American adults has dropped over the measured period from 20.5 percent to 15.8 percent. Among those gaining coverage, most enrolled through employer-sponsored coverage or Medicaid.
Although a total of 3.9 million people enrolled in marketplace plans, only 1.4 million of these individuals were previously uninsured. Our marketplace enrollment numbers are lower than those reported by the federal government at least in part because our data do not fully capture the surge in enrollment that occurred in late March 2014.
Using the RAND American Life Panel, a nationally representative panel of individuals who regularly participate in surveys, we have conducted monthly surveys since November 2013 about insurance choices and public opinion. This particular survey work—which is ongoing—is known as the RAND Health Reform Opinion Study(RHROS).
We match these data with data collected in September 2013 about insurance choices. The results presented here are based on 2,425 adults between the ages of 18 and 64 who responded in both March 2014 and September 2013.
People shift from one type of health insurance to another for a number of reasons, such as job changes or marital status changes. Our survey work can’t say for certain which of these shifts are due to the ACA and which are due to other factors, but we can draw some limited conclusions.
Three years after the first baby steps of implementation, what has the ACA accomplished?
When we consider the ACA, we can think of two broad goals. The “easy” goal was expanding coverage to the uninsured. We say “easy” because regulators should be able to succeed by simply throwing money at the problem, and that is a task our elected officials seem particularly adept at accomplishing.
The “hard” goal was bringing down the rate of growth in health care spending.
This has proven to be a difficult task for policy makers, who have been trying (and failing) for decades and have often done more harm than good.
We first consider the goal of expanding coverage to the uninsured. From its onset, the ACA chalked up a small victory by requiring plans to continue coverage for dependents under age 26.
This provided coverage to as many as three million uninsured, albeit the healthiest members of the population. The lion’s share of the reduction in the numbers of uninsured was supposed to come from Medicaid expansions and private exchanges.
And here is where the problems emerge.
Medicaid ranks have swelled in the 27 states (including DC) that have chosen to expand the program. Republican leadership in other states continue to assert they will not expand Medicaid, but given the exceptionally generous federal funding for this expansion, we find it hard to believe that most of these states won’t soon join the expansion.
After all, even Louisiana eventually raised its drinking age to 21 to get its share of federal highway funding. Similarly, we can’t imagine that the red states will turn down billions of dollars in federal funds.
In December, I defended the term death panel. Specifically, I demonstrated that we already have, and for over 50 years have had, quite a number of tribunals that act as death panels.
For example, at least daily, UNOS denies potentially life-saving organ transplant requests. While the term “death panel” has a pejorative connotation, the essential concept and function is necessary. Particularly in situations of strict scarcity, life and death decisions must be made. They are made. And they will continue to be made.
So, the relevant question is not whether to “have” death panels. Instead, the relevant question is whether we want to openly “acknowledge” our death panels. I am reminded of a famous scene from the 1992 film, A Few Good Men. You will recall that the story revolves around the court martial of two Marines charged with the murder of a fellow Marine. The defendants had administered a “Code Red,” an unofficial punishment, against a fellow member of their unit who was not sufficiently squared away to meet the Corps’ standards.
In the film’s most famous scene, Lt. Kaffee (Tom Cruise) cross examines Col. Jessup (Jack Nicholson) about the Code Red. Lt. Kaffee says, “I want the truth!” Jessup responds:
You can’t handle the truth! Son, we live in a world that has walls, and those walls have to be guarded by men with guns. . . . I have a greater responsibility than you can possibly fathom.
You weep for Santiago and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know, that Santiago’s death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives!
You don’t want the truth, because deep down in places you don’t talk about at parties, you want me on that wall.
Col. Jessup’s point is that Code Reds are an invaluable part of close infantry training. But since they are “grotesque,” they are officially discouraged (even prohibited).
Is this the path that we should take with death panels? Since we find them grotesque, should we deny both their necessity and their existence? The argument has been compellingly made. In their 1978 book, Tragic Choices, Guido Calabresi and Phillip Bobbitt argued that the difficult but necessary life-and-death choices entailed in rationing can only be made by hiding them from public scrutiny.
In contrast, others call for open acknowledgement of death panels. For example, in a recent interview with Rolling Stones, Bill Gates rightly observed that we must deny even effective and life-saving medical technology to some people. “The idea that there aren’t trade-offs is an outrageous thing. Most countries know that there are trade-offs, but here, we manage to have the notion that there aren’t any. So that’s unfortunate, to not have people think, ‘Hey, there are finite resources here.’”
Gates is right. Calabresi and Bobbitt are wrong. The disadvantages of a “hide and deny” approach are substantial. First, it makes it more difficult to have our death panels operate in an open and transparent manner. This increases the risk of bias and corruption. Second, it means that they may not operate according to sufficiently deliberated principles. Third, a hide and deny approach means that death panels may not operate in a consistent and uniform manner from region to region. In short, hiding and denying death panels forecloses and delays much needed public discourse over how we want out death panels to operate.
Death panels, while tragic, save lives. And their existence, while grotesque and incomprehensible to many, saves lives. We don’t want the truth, because deep down in places we don’t talk about at parties, we want death panels.