Tag: Economics

McAllen and El Paso Redux: New Evidence from the Insured Under-65 Population

Last year, Atul Gawande wrote in the New Yorker about the remarkable differences in health care spending for two Texas cities: McAllen and El Paso.  In 1992, according to the Dartmouth Atlas, the two cities were essentially identical with respect to per capita Medicare expenditures.  By 2007, McAllen’s spending had surged, with overall expenditures nearly twice as high as in El Paso.  Dr. Gawande visited the two communities, and brilliantly documented a culture of entrepreneurship among McAllen physicians that seemed to explain their elevated rates of hospital admissions, end-of-life care, and home health care.

But what about the under-65 population?  Dr. Gawande spoke with two independent firms about their measures of under-65 utilization, and found generally higher rates in McAllen.  My colleague Thomas Bubolz studies the under-65 Medicare population – primarily people on Social Security Disability Insurance — and his preliminary results also point to much higher utilization in McAllen compared to El Paso.   Another study using national data by Michael Chernew and colleagues (here) found a strong positive correlation between utilization rates for Medicare and the under-65 population insured by large firms.  (That they also found a negative correlation between Medicare spending and the negotiated price per procedure in the under-65 population points to another source of regional variation: market concentration.)

So when Luisa Franzini and Osama Mikhail, professors at the University of Texas School of Public Health, first offered me the opportunity to work with them using Blue Cross-Blue Shield data on under-65 spending in Hildago (McAllen) and El Paso Counties, I had strong expectations that we’d end up with  pretty much the same result.

I was wrong.  In a recent Health Affairs article, we found that, on average, overall spending per patient in McAllen was about 7 percent below that in El Paso.  Granted, we found the familiar Medicare utilization patterns among people over age 50: McAllen admission rates were 89 percent higher than those in El Paso, and overall expenditures 23 percent higher.  But outpatient visits and spending were lower across the board in McAllen, as was total spending for those under age 50.  What was going on?

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Health Insurance and Life Expectancy

Did you know that Hispanic Americans live longer than non-Hispanic whites? If that doesn’t knock your socks off, consider this: American Hispanics are three times as likely to be uninsured as non-Hispanic whites.

If you’re still not blown away, maybe you haven’t been following the twists and turns of the health policy debate. As I wrote at my blog the other day, the Centers for Disease Control (CDC) discovery that Hispanics (one-third of whom are uninsured) have a life expectancy that is 2 1/2 years longer than whites (90% of whom have health insurance) makes mincemeat out of the oft-repeated idea that the uninsured get less health care and die earlier than everyone else.

In support of the conventional wisdom, for example, the Physicians for a National Health Care Program (PNHCP) went so far as to claim that a whopping 45,000 people die every year because they are uninsured. That figure, repeated as though it were unquestioned fact by President Obama and most of the health care media, is almost as large as the number of American soldiers killed in the entire Vietnam War!

Families USA went so far as to make the astounding claim that 6 people die every day in Florida because they are uninsured. Eight die every day in California; and 25 die in New York. In Texas, the report implies that more people die every two months from lack of health insurance than the number killed at the battle of the Alamo (counting only losses on our side, that is). Nationwide, says the PNHCP, an uninsured person dies every 12 minutes.

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Suing the Right to Life

Last week, the fire department of a small town in Tennessee called South Fulton ignored the call of a man who needed help quelling a fire near his house. The firefighters declined lending a hand because the caller neglected to pay a $75 bill, the prerequisite for deserving assistance. The caller tried to put down the fire with a garden hose, but after two hours, his house caught on fire. When the property of a neighbor who had paid the $75 became threatened by the flames, the gallant firemen promptly answered the call of duty. The brave public servants prevented the flames from spreading to the property of their responsible contributor, carefully avoiding to suppress the conflagration’s source. Someone has to teach a lesson to the free-loaders in our society, explains a high-minded commentator.

Our health care system works exactly like South Fulton’s worthy fire department: we are entitled to health care only if we have money or qualify for Medicare or Medicaid. If you don’t have money, your health entirely depends on the charity of health care providers, who, as our admirable firefighters, may refuse to help.

I wish to argue that, besides being cruel and inhumane, the “South Fulton health care model” is a latent threat to society. The cost and effort of preventive medicine and basic primary care (fire prevention, putting down a small fire) is less than dealing with instances of end-organ failure (a house in flames). Moreover, having uninsured people (not aiming water to the fire source) creates a constant economic liability to responsible costumers (the neighborhood). On the other hand, why should someone become a doctor, nurse, or health insurance company founder (a firefighter) without being an altruist? Do firefighters dream of wealth and leisure?

The costs of not doing anything about a burning house are always paid in full by society ―and some costs are not immediately apparent. Who loves the sight and smell of a charred landscape? Where will the man live now that he has no house? Will he react violently to the inaction of the firemen? Will the reputation of the fire department (and the city’s) go up in smoke?

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Republican Economics as Social Darwinism


John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”

Actually, those weren’t Boehner’s words. They were uttered by Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929.

But they might as well have been Boehner’s because Hoover’s and Mellon’s means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget.

And we all know what happened after 1929, at least until FDR reversed course.

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First Bend in the Health Care Cost Curve

Recent trends in radiology imaging portend a dramatic and rapid reduction in this segment of a hospital’s business plan. Even before capitated (or global) payments have come into full play, there has been a large reduction in the number of some types of imaging studies in hospitals.

Our Chief of Radiology summarizes our experience — common to other hospitals as well — and provides some of the reasons.

The biggest hit has been in CT, the modality we are most dependent on for revenue. We are about 10% down in CT cases from last year, due to a combination of patient and physician fears about radiation exposure, more prudent ordering of studies by physicians, leakage out of the medical center, and the introduction of physician incentive programs (to minimize the amount of imaging) by some insurers.

Also, and very surprising, we have not seen an upswing in ultrasound or MRI to match the CT volume drop. We have, however, seen an increase in the number of patients arriving with their scans on CD ROMS having been imaged at other lower priced vendors. We don’t bill for these interpretations even though we are frequently asked to reinterpret the studies for our clinicians, and BIDMC is paying to store these images on our PACS systems.

By the way, this occurred while our overall patient volume increased during the same period.

The result of these trends will be to reduce the number of radiologists working in hospitals, and there will also probably result in a reduction of salaries for this physician specialty.

Paul Levy is the President and CEO of Beth Israel Deaconess Medical Center in Boston. Paul recently became the focus of much media attention when he decided to publish infection rates at his hospital, despite the fact that under Massachusetts law he is not yet required to do so. For the past three years he has blogged about his experiences in an online journal, Running a Hospital, one of the few blogs we know of maintained by a senior hospital executive.

Northwestern Memorial Hospital Faces a Brave New World

If you have read my earlier blogs, you know that I am writing a book about the organization of healthcare delivery. A recent story in the Chicago Tribune reminds me that I need to keep my nose to the grindstone. The article told of changes underway at Northwestern Memorial Hospital. In order to prepare for new payment models, the medical staff and hospital want to create something along the lines of an Accountable Care Organization. The ACO will accept an “all-in” fee for treatment of specific conditions. The ACO makes money if it can keep costs under the fee and receives bonuses if quality objectives are met. The ACO model, or versions of it, have floated around for some time, and prepayment is certainly not new. What is new is that payers will now prepay for all costs associated with episodes of care, as opposed to prepaying hospitals for inpatient stays, or prepaying primary care physicians for a year of primary care.

The ACO model tries to better align the payment modality with the “product” that patients would naturally purchase. This should, in theory, lead to a matching of incentives with production. Hospital prepayment leads to a shift to outpatient care. Primary care physician prepayment leads to too much hospital care. Episode of illness prepayment should eliminate these gaming incentives.

Northwestern Memorial and its medical staff still face a dilemma. Should they create a new third legal entity to accept the prepayment, or should the prepayment go directly to the hospital or medical foundation? More importantly, should the hospital and medical foundation become partners in the new venture, or, more radically, unite into a single entity without creating the new entity? Healthcare executives have not always approached this question in the most thoughtful manner, as this short film painfully shows. (Painfully funny if you approach it with the right mindset.)

Integration has many positive connotations, and executives who create new integrated organizations can usually keep their boards at bay. This may explain why so many executives are eager to integrate. But integration comes with numerous challenges. It will take an entire book to make this argument clear, but consider the following two questions. First, what happens when physicians switch from being entrepreneurs to being employees? Second, accepting all-in capitated payments turns the ACO into a de facto insurance company. Will the ACO have the capabilities to be an effective insurer? I hope that Northwestern Memorial does not face the future with its eyes wide shut. Many hospitals have fared quite poorly by jumping on the integration bandwagon without understanding the risks.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University's Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including "The Economic Evolution of American Healthcare and Code Red". He has a Ph.D. in Economics from Stanford University.

New Study Proves Reducing Healthcare Costs While Improving Care Is Achievable

The results are in: population-based care management doesn’t just improve patient satisfaction – it also can significantly reduce medical costs.

It is widely known that chronic disease accounts for 75% of the total cost of healthcare in the United States. In the late 1990s, the care management industry grew out of the need to combat this problem, by increasing medication compliance, reducing gaps in care, and helping individuals become more empowered to actively manage their own health.

Care management programs have long been shown to increase medication compliance and use of other preventative services, and individuals who participate in care management programs find them extremely valuable. Yet the care management industry has always faced challenges in verifiably demonstrating the effectiveness of its programs in  reducing medical costs. Several methodologies have been created to attempt to reverse-engineer a calculation of savings delivered by care management programs, but the gold standard of healthcare effectiveness measures, a randomized controlled trial, has rarely been done and none in a large population.

I’m pleased to say that this is no longer the case. A study from Health Dialog appearing in the New England Journal of Medicine today, uses a randomized controlled trial to definitively show the savings delivered by an enhanced care management program. The trial looked at 174,120 individuals over twelve months, measuring those individuals’ health outcomes and the total savings as a result of an enhanced care management program. The program included chronic condition management and patient decision support programs, and these services were delivered telephonically as well as online.Continue reading…

Profit-seeking Health Insurers Seek Profits

Healthcare reform becomes official this week, as many of the provisions of the legislation kick in. One provision requires insurers to accept children with preexisting conditions while capping what they can charge, undoing a standard industry practice. Several insurers have indicated that they will stop selling child-only policies. Industry officials are having a field day criticizing insurance industry greed.

Maybe these officials haven’t noticed, but insurers are greedy and there is nothing anyone in the Obama administration can do about it. Maybe it needs repeating. Insurers are greedy, have always been greedy, and always will be greedy. So are all investor-owned companies. People don’t invest in health insurance companies (or any other investor-owned companies) for charity. They invest in them to make money. (Investors tend to be greedy too, and that includes the pension funds that most working Americans rely upon for their comfortable retirements.)Continue reading…

Vic Fuchs Speaks!

I was absolutely delighted that after several polite “maybe later” responses I was able to  recently interview Victor Fuchs, the Henry J. Kaiser Professor Emeritus at Stanford University. Vic is best known as the “Father of Health Economics” and perhaps less well known (but more importantly to me!) the professor who taught the first health economics class that I ever took.

Matthew Holt: Victor, thanks so much for agreeing to come on THCB. I must admit Vic when I joined your class I had no idea about your background and reputation in health economics. So, I was just delighted to figure out that I blundered in right at the top. It’s a real pleasure to have you on the line

Victor Fuchs: I think you’re doing a great job and therefore I’m glad to spend some time with you.

Matthew Holt: Fantastic! You’ve, obviously, been observing and commenting on– and more recently sort of promoting ideas around –health reform for quite a while now, so let’s jump into a couple of things that you’ve published very recently, in fact just these past few weeks.

The first is a paper in The New England Journal of Medicine about a conceptual future for new biomedical innovation and I’d be grateful if you could just explain just a little bit what your general concepts are here. You’ve been working on this for quite a while. In fact, back when I was in your class, you were publishing some stuff with Alan Garber about technology assessment and this is sort of a continuation to that in some ways. So, I’d love to hear your thoughts.

Victor Fuchs: Well, I think there were two key elements here, one of them better understood by a larger audience and one of them I think rather new. Let me do the new one first. The new one is that we are going through what I call the second demographic transition.

The first transition was when every country had high mortality and high fertility and then the mortality especially of young people started to drop, but fertility did not drop right away, so you had a divergence there and in some cases it lasted for a couple of decades and during that time the population soared because there was this discrepancy between mortality and fertility.

You see the high fertility made sense when mortality was high because you wanted to have at least a couple of children survive to adulthood, but when mortality dropped it didn’t sink into people’s consciousness right away, so it took quite a bit of period which the historians and the demographers referred to as the demographic transition, okay. I don’t know if you’re familiar with it or not, but —

Matthew Holt: Yeah, I get the concept and there’s been some stuff written about that in terms of the impact on social security and healthcare.

Victor Fuchs: And some of the third world countries are going through it now, but now the second demographic transition is the one that I talk about in the NEJM piece a little bit. It has the following elements.

First is that a very large and increasingly large percentage of the population cohort lives until age 65, whereas at the beginning of the 20th century only a small percentage lived until 65. Now we’re going to 80% and we’ll eventually approach close to a 100% living till 65.

The second element is that life expectancy at 65 is increasing and it’s increasing at a quite brisk pace in recent decades. You put those two things together and you find out a very large and growing percentage of all the additional years that are lived if you have increasing life expectancy will be lived after 65.

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If HIT Plan A Doesn’t Work, What’s Plan B?


Pop quiz: Among early-stage companies that are successful, what percentage are successful with the initial business model with which they started (Plan A) vs. a secondary business model (Plan B)?

Harvard Business School Professor Clay Christensen studied this issue.  He found that among successful companies, only 7% succeeded with their initial business model, while 93% evolved into a different business model.

So let’s take this finding and reexamine our human nature. In light of these statistics, what makes more sense:

  • Defending Plan A to your dying breath?
  • Assuming Plan A is probably flawed, and anticipating the need for Plan B without getting defensive?

We question many of the assumptions underlying HITECH Plan A. We also want to talk about the need and content for Plan B in a constructive way.Continue reading…


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