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Tag: Economics

The MSSP Is No Silver Bullet for Healthcare Cost Control

But ACOs could pave the way for more significant cost-cutting based on competition.

By KEN TERRY

The Medicare Shared Savings Program (MSSP), it was revealed recently, achieved a net savings of $314 million in 2017. Although laudable, this victory represents a rounding error on what Medicare spent in 2017 and is far less than the growth in Medicare spending for that year. It also follows two years of net losses for the MSSP, so it’s clearly way too soon for anyone to claim that the program is a success.

The same is true of accountable care organizations (ACOs). About a third of the 472 ACOs in the MSSP received a total of $780 million in shared savings from the Centers for Medicare and Medicaid Services (CMS) in 2017 out of the program’s gross savings of nearly $1.1 billion. The other MSSP ACOs received nothing, either because they didn’t save money or because their savings were insufficient to qualify them for bonuses. It is not known how many of the 838 ACOs that contracted with CMS and/or commercial insurers in 2016 cut health spending or by how much. What is known is that organizations that take financial risk have a greater incentive to cut costs than those that don’t. Less than one in five MSSP participants are doing so today, but half of all ACOs have at least one contract that includes downside risk.

As ACOS gain more experience and expand into financial risk, it is possible they will have a bigger impact. In fact, the ACOs that received MSSP bonuses in 2017 tended to be those that had participated in the program longer—an indication that experience does make a difference.

However, ACOs on their own will never be the silver bullet that finally kills out-of-control health spending. To begin with, 58 percent of ACOs are led by or include hospitals, which have no real incentive to cut payers’ costs. Even if some hospitals receive a share of savings from the MSSP and/or private insurers, that’s still a drop in the bucket compared to the amount of revenue they can generate by filling beds instead of emptying them. So it’s not surprising that physician-led ACOs are usually more profitable than those helmed by hospitals.

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A Libertarian’s Case Against Free Markets in Health Care

By ROMAN ZAMISHKA

In the final act of Shakespeare’s Richard III, the eponymous villain king arrives on the battlefield to fight against Richmond, who will soon become Henry VII. During the battle, Richard is dismounted as his horse is killed and in a mad frenzy wades through the battlefield screaming “A horse, a horse! My kingdom for a horse!” Richard shows us how market value can change drastically depending on the circumstances, or your mental state, and even the most absurd exchange rate can become reasonable in a moment of crisis.

This presumably arbitrary nature of prices should be the first thing about the US healthcare market that catches the attention of any student of economics. Prices for the same procedure vary greatly between hospitals on opposite sides of the street and even then appear to have no basis in reality. Further investigation reveals many other features of the healthcare market that economics teaches us will increase transaction costs and the misallocation of resources. The prices we discussed are generally not paid by the patient, but by a third party insurer. Often the patient isn’t even able to select the insurer but is assigned one by his or her employer. What the patient thinks of the insurer’s ability as a steward of his or her premiums is irrelevant. Further, contracts between providers or pharmacies and the insurer completely hide the true price from the patient’s view. In addition, anti-competitive certificate of need laws limit competition between providers and expensive regulations compel providers to merge to compete in a nuclear arms race with the insurers, although the real victim is the patient’s wallet over which the providers and insurers fight their proxy wars. The best way to explain the US healthcare system is if you took every economic best practice and then did the opposite. How does one get out of this mess?

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It’s (Still) the Prices, Stupid

Inefficient markets create price differentials for identical goods. These price differentials frequently occur among markets dominated by oligopolies. Taking advantage of market pricing inefficiencies is known as arbitrage. Commodity traders frequently arbitrage by buying low and selling high. In inefficient markets for perishable goods, such as airline tickets, hotel rooms, or medical imaging, there is no opportunity to re-sell these goods. Thus consumers of these goods, such as health insurance companies, will attempt to buy at the lowest possible price to maximize value. Today we see many apps and websites, such as Expedia, that engage in improving these markets in airline and hotel industries. Stroll Health is one company attempting to scale this behavior to medicine.

Our current Hospital Outpatient Department (HOPD) payment schedule is one example of an inefficient market where identical CPT codes are priced very differently based on whether they are provided in a grandfathered hospital outpatient department or a freestanding outpatient medical center. Hospital accountants will justify this higher payment schedule by attributing social expenses such as police and training programs. Other HOPD supporters will claim they deliver relative value through higher quality (outcomes) that justifies (often disproportionally) higher prices. Yet increasingly “illusions about value: that we know what it means and can measure it, that the same things matter to all patients” are being voiced.

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How to Avoid Being a Dumb-Ass Doctor, Blog Edition

Evil Dr Rob Part 2It’s been two years since I first started my new practice.  I have successfully avoided driving my business into the ground because I am a dumb-ass doctor.  Don’t get me wrong: I am not a dumb-ass when it comes to being a doctor. I am pretty comfortable on that, but the future will hold many opportunities to change that verdict.  No, I am talking about being a dumb-ass running the businessbecause I am a doctor.

We doctors are generally really bad at running businesses, and I am no exception.  In my previous practice, I successfully delegated any authority I had as the senior partner so that I didn’t know what was going on in most of the practice.

The culmination of this was when I was greeted by a “Dear Rob” letter from my partners who wanted a divorce from me.  It wasn’t a total shock that this happened, but it wasn’t fun.  My mistake in this was to back off and try to “just be a doctor while others ran the business.”  It’s my business, and I should have known what was happening.  I didn’t, and it is now no longer my business.

This new business was built on the premise that I am a dumb-ass doctor when it comes to business.  I consciously avoided making things too complicated.  I wanted no copays for visits (and hence no need to collect money each visit).  I wanted no long-term contracts (and hence no need to refund money if I or the patient was hit by a meteor or attacked by a yeti).   The goal was to keep things as easy as possible, and this is a very good business policy.

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Rethinking The Gruber Controversy: Americans Aren’t Stupid, But They’re Often Ignorant — And Why

flying cadeuciiM.I.T. economist Jonathan Gruber, whom his colleagues in the profession hold in very high esteem for his prowess in economic analysis, recently appeared before the House Committee on Oversight and Government Reform. Gruber was called to explain several caustic remarks he had offered on tortured language and provisions in the Affordable Care Act (the ACA) that allegedly were designed to fool American voters into accepting the ACA.

Many of these linguistic contortions, however, were designed not so much to fool voters, but to force the Congressional Budget Office into scoring taxes as something else. But Gruber did call the American public “stupid” enough to be misled by such linguistic tricks and by other measures in the ACA — for example, taxing health insurers knowing full well that insurers would pass the tax on to the insured.

During the hearing, Gruber apologized profusely and on multiple occasions for his remarks. Although at least some economists apparently see no warrant for such an apology, I believe it was appropriate, as in hindsight Gruber does as well. “Stupid” is entirely the wrong word in this context; Gruber should have said “ignorant” instead.Continue reading…

Grubernomics

Gruber OptimizedIn the giddy days after the passage of ACA, I was chatting to a PhD student in health economics. He was in love with the ACA. He kept repeating that it would reduce costs, increase quality and increase access. Nothing original. You know the sort of stuff you heard at keynotes of medical meetings; ‘Healthcare post Obamacare’ or ‘Radiology in the new era.’ Talks warning us that we were exiting the Cretaceous period.

He spoke about variation in healthcare, six sigma, fee-for-value and ‘paying doctors to do the right thing.’

‘How?’ I asked.

‘I just told you, we need to pay doctors for value and outcomes.’ He smugly replied.

‘How?’ I asked again.

He did not answer. Instead he gave me the look that one gives an utter imbecile who doesn’t know the difference between a polygon and a triangle.Continue reading…

Is Healthcare a Business?

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.

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So That’s What You Get The Big Bucks For?

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.

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The Black Box at the Center of Health Economics

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.

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Are Death Spirals Real? Has Anybody Ever Seen One?

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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