Tag: health care cost

The Doctor Is In and Logged On.

ParikhWow. I’ve just taken care of three patients in 12 minutes, and I didn’t do it by “churning” them through my office as if it’s some sort of factory assembly line. Rather, those patients (their parents, more specifically — I’m a pediatrician), e-mailed me over a secure network with questions and descriptions of signs and symptoms.

One mother attached a digital photo of a rash on her 3-month-old daughter’s face; it turned out be nothing more serious than baby acne (it’ll go away in a month or so). Another mom had noticed that her son was missing one of his pre-kindergarten immunizations (she had pulled up his shot records online) and requested that I order it. And the father of a 5-month-old boy told me that his son has been constipated off and on for the last month. I e-mailed him a questionnaire so I could determine whether the family should try something at home or bring the child to the office.Continue reading…

McAllen: A Tale of Three Counties

Daniel Gilden


The challenge of constraining costs while maintaining or enhancing the quality of medical care is vividly brought to life by Atul Gawande in his recent widely-read New Yorker essay The anecdotal evidence presented in the article is compelling as a description of how physician practices can relate to excessive costs.  The assertion that the observations in McAllen also explain McAllen’s costliness is an inductive exercise that may go too far.  Physician ownership of imaging facilities, ownership interest in hospitals and more subtle forms of self-referral are all substantially present in large healthcare market areas across the country.  Is McAllen an extreme example of a bad physician culture or is there another explanation?  Our analysis of Medicare data from McAllen Texas demonstrates that exceptionally high rates of chronic disease and poverty explain much of the variation in cost.

According to Gawande, McAllen Texas has a physician culture that promotes high cost, low quality care. By comparison El Paso is portrayed as having a similar patient population to McAllen with lower costs of care.   Grand Junction, Colorado, however, the antithesis of McAllen according to the article, is credited with having a physician culture that promotes low costs and high quality.  Ultimately Gawande warns that by failing to change the physician culture nationally, “McAllen won’t be an outlier.  It will be our future.”  But is McAllen really an outlier, a harbinger of physician income-enhancing practices run amok?

A fair comparison between McAllen and Grand Junction would include a more precise analytic methodology than could be offered in Dr. Gawande’s article.  Such an analysis is important: the correct diagnosis of the health care cost crisis is an essential step in selecting an effective prescription.  If McAllen is not an outlier and Grand Junction is not a paragon, then the solution is not to simply tamp down variation by exporting Grand Junction values to McAllen.  If the physician practices reported by Dr. Gawande in McAllen lead to explainable patterns of costs according to current norms, then those practices are part of a national phenomenon right now, not in a nightmare future.

An analysis of the Medicare population in the three counties can place Dr. Gawande’s observations in a more complete context.  Medicare beneficiaries enjoy a standardized benefit package, and detailed data are available on the services they receive.  We can use cost data for Medicare enrollees in the three counties to test Dr. Gawande’s assertions regarding McAllen’s and Grand Junction’s comparative health care costs.  Medicare fee-for-service claims provide us with service level payment and patient health status information; Medicare monthly enrollment data details HMO affiliation, Part B premium assistance and beneficiary demographics.  The Centers for Medicare and Medicaid Service supplies researchers (including the Dartmouth Health Atlas team) with data of this type for Medicare policy analysis.

Accurate Medicare Cost Comparisons

The city of McAllen lies at the center of Hidalgo County, one of the costliest areas for Medicare.  The population is racially diverse, low income and exhibits high levels of chronic disease.  El Paso is similar to McAllen but with less poverty.  Grand Junction is the county seat of Mesa County, a largely white and relatively wealthy region.  In Exhibit 1 annualized Medicare fee-for-service payments for the counties of McAllen, El Paso and Grand Junction show wide divergence in the total Medicare spends per beneficiary.2

Exhibit 1: Annualized Payments per Medicare Beneficiary by County of Residence, 2006

County Medicare Enrollees Medicare Payments
McAllen, Texas 63,770 $12,384
El Paso, Texas 85,478 $6,163
Grand Junction, Colorado 22,887 $4,436

The payments in McAllen’s county are twice as high as in El Paso’s and nearly three times as high as in Grand Junction’s but adjustments are required to the statistics to make the comparison fair.  These adjustments should include normalization for Medicare coverage type and population health.  Relatively few McAllen area Medicare beneficiaries are enrolled in HMOs (2%) in comparison to Grand Junction (42%) and El Paso (16%).   Medicare publishes costs only for services paid on a fee-for-service basis; some services supplied by cost-based HMOs (more common in Grand Junction than in either McAllen or El Paso) are included and some are not.  As a result the cost of care for counties with high numbers of Medicare HMO enrollees is under reported.  In addition, while all eligible individuals receive hospital insurance under Part A of Medicare, beneficiaries must pay a monthly premium to receive outpatient coverage under Medicare Part B, or are enrolled by Medicaid if they are poor enough to meet the state’s income requirement.  The percent of the population in the different counties without full Part A and Part B benefits varies.  In Grand Junction almost twice as many beneficiaries do not have Parts A & B coverage compared to McAllen (4% versus 8%).  The outpatient expenses of this population are not included in Medicare expenditure reports.  In Exhibit 2 HMO enrollees and Medicare beneficiaries without full Medicare benefits are removed from the comparison.

Exhibit 2: Comparative Annualized Payments per Medicare Beneficiary by County after Managed Care and Medicare Part A&B Adjustments, 2006

County Medicare Enrollees Medicare Payments
McAllen, Texas 59,665 $13,150
El Paso, Texas 67,133 $7,656
Grand Junction, Colorado 12,355 $5,579

When the analysis is restricted to cost and enrollment data only for Medicare fee-for-service beneficiaries covered by both Part A and Part B, Grand Junction’s beneficiary annual costs rise by almost 25%.  The difference between McAllen and Grand Junction beneficiary costs falls, but McAllen Medicare costs, now for populations with the same coverage, are still well over twice those for Grand Junction.

County Socio-Demographic Characteristics

The dissimilarities between the McAllen and Grand Junction county populations are extensive.  The socio-demographic characteristics of a population affect its access to care, ability to pay out of pocket for uncovered care and rates of disease associated with diet and life history.  The costs of Medicare co-pays and deductibles can be substantial barriers to access, and history of health care coverage and access to preventive care vary substantially based on socio-demographic variables.  Low-income individuals often reach Medicare enrollment age with a lifetime history of access and cost barriers, a potent mixture.  Barriers to access to care can lead to expensive hospital care for conditions normally treated on an outpatient basis.

Grand Junction Medicare enrollees are 98% white and only 11% require assistance in paying for their Medicare Part B premium (a proxy for low income status).  In contrast McAllen and El Paso are both 26% Hispanic, and a higher proportion of Medicare beneficiaries rely on Medicaid to pay for Part B — 36% in El Paso and 48% in McAllen. To assess how socio-demographic factors affect Medicare costs, Exhibit 3 compares costs for beneficiaries with and without Part B premium assistance.

Exhibit 3: Comparative Annualized Payments by County and Need for Premium Assistance, 2006

County Premium Assistance-No(not low income) Premium Assistance-Yes(low income)
McAllen, Texas $10,012 $16,518
El Paso, Texas $6,709 $9,374
Grand Junction, Colorado $4,853 $11,425

Expenditures are consistently higher for low income beneficiaries, but McAllen is still more expensive than Grand Junction for both income groups — more than 45% more expensive for low-income beneficiaries and more than twice as expensive for those not receiving premium assistance.  However, the Grand Junction advantage is not as great for the low-income population as for higher income beneficiaries.  Could it be that a good part of the McAllen “excess” is simply due to its larger proportion of low-income Medicare beneficiaries compared to Grand Junction?

But socio-economic differences in themselves cannot explain cost differences. What makes the low income population so much more expensive to care for? And why is El Paso, which also has a large low-income Medicare population, so much less costly to Medicare than McAllen?

Population Health

Exhibit 4 uses estimates of population rates of disease derived from Medicare hospital and physician claims to reveal that the prevalence of chronic disease is substantially higher in the McAllen Medicare beneficiary population than in Grand Junction or El Paso; and that the proportion of the McAllen Medicare population with more than two of these conditions is a whopping 52%, in comparison to 23% in the Grand Junction area and 34% in El Paso.

Exhibit 4: Disease Prevalence by County, 2006

McAllen El Paso Grand Junction
Single Selected Condition Rates per 1,000
Diabetes 422 330 145
Ischemic Heart Disease 443 252 211
Heart Failure 168 107 74
Cerebro-Vascular Disease 202 93 56
Chronic  Respiratory Disease 266 190 169
Arthritis 405 290 239
Dementia 107 57 51
Parkinson’s 20 15 12
Multiple Conditions Population Percentage
None of the Selected Conditions 23% 36% 46%
One Condition Only 22% 27% 30%
Multiple Conditions 55% 37% 24%

Many of the disease rates for the McAllen population are more than double those for Grand Junction.  If the Medicare population in McAllen is truly that much sicker wouldn’t we expect the payments to be greater?  A comparison of expenditures for Medicare enrollees without a diagnosis of diabetes or heart disease in the last year shows that costs for these standard populations are statistically very close (Exhibit 5).

Exhibit 5: Medicare Monthly Payments per Patient without a Diagnosis in the Year for Diabetes or Heart Disease, 2006

Row Labels Medicare Enrollees Monthly Per Person Payments
McAllen, Texas 28,680 $3,147
El Paso, Texas 47,960 $2,564
Grand Junction, Colorado 11,160 $3,307

By eliminating diabetes, ischemic heart disease or heart failure from the population payment measures the Grand Junction advantage is completely removed.  Grand Junction is just as costly as McAllen for populations without one of these conditions.

Even though diabetes and heart disease are both costly and highly prevalent in McAllen, beneficiaries experience a wide range of costly illnesses, and patients with multiple conditions are difficult to treat.  We used a more sophisticated risk adjustment method to take into account an array of concurrent conditions.3 Beneficiaries in the top risk scores, the sickest patients, make up 27% of the McAllen, 16% of the El Paso and only 12% of the Grand Junction populations. Average Medicare payments were then computed for each risk group in each county (Exhibit 6). The effect on costs of accounting for this measure of illness burden is dramatic.

Exhibit 6: Annual Medicare Payments by Risk Level

Graphic for Daniel G post

Taking into account the disease combinations eliminates the apparent low cost difference across the full range of disease risk scores. If the disease levels in the McAllen population were magically made to match the Grand Junction disease distribution, but experienced McAllen-level costs, annualized Medicare payments would fall from $13,150 to $6,145.  The morbidity-adjusted per beneficiary payment rate for McAllen is 10% higher than the $5,579 Medicare per beneficiary annualized payments observed in Grand Junction, substantially less than the observed 300% payment differential seen in the unadjusted data.

Discussion and Implications

McAllen is different from many areas of the United States: it is sicker and poorer.  The observed differences in the rates of chronic disease are highest for those conditions rampant in low income American populations: diabetes and heart disease. Further, Medicare beneficiaries in McAllen have significantly higher rates of co-occurring chronic conditions. As a result the costs of caring for McAllen Medicare population appears high in comparison to other areas but not abnormally so.  McAllen suffers from a tremendous burden, but it not caused by its physicians: the care they provide leads to costs that are substantially comparable to the other counties in the article once adjustments are made for the magnitude of the health problems they face.  The disturbing pattern of physician practices uncovered by Dr. Gawande sounds a warning not because it foretells a McAllen-like future but because it portrays the on-going crisis that affects both McAllen and Grand Junction and it is national in scope.  Physician culture is only part of the McAllen story.

Patients with chronic disease, especially those with multiple conditions, are extremely costly to treat.  Cost savings will not be realized by denouncing and penalizing medical systems because they treat patient populations with high rates of disease.  Instead health care reform must develop policies that support streamlining and coordinating care for beneficiaries with multiple chronic conditions, wherever they reside. Policies that support lifetime continuity of coverage, disease prevention and early treatment, could reduce healthcare costs for populations who now reach Medicare eligibility with a history of under-service.  Physician culture has a role to play: Accountable Care Entities are intended to reduce barriers to access by facilitating care coordination. The high costs of care in places like McAllen will not be dramatically reduced by transforming physician ethics and organization if the roots of the crisis are in the interaction between class, demographics and chronic disease.


1)  The payment amounts and beneficiary counts are from CMS claims and enrollment data that includes a 5% sample of the Medicare population.  The data is hosted by JEN Associates Incorporated of Cambridge Massachusetts, a CMS MRAD contractor.

2)  A risk score ranging from 1 to 13 was computed for each beneficiary using diagnoses found on Medicare physician and hospital claims.  Beneficiaries with scores greater than 9 are not observed in the Grand Junction 5% data in numbers sufficient for analysis.  The grouping and scoring system was developed by JEN Associates Inc. of Cambridge Massachusetts for Medicare and Medicaid program planning and evaluation applications.  Diagnoses are selected based on correlation with future hospitalization, nursing home entry and death and grouped according to a disease’s functional impact.

Daniel Gilden is a health services researcher with 20 years of hard core quant experience.He’s the President of JEN Associates which provides highly specialized analysis of Medicare and Medicaid data. He contacted THCB regarding the fuss about the  McAllen, TX “overuse” story. In his calculations the data suggests something very different from the “practice variation” theory–the patients really are sicker. As this goes counter to decades worth of work by Wennberg et al, we invited Daniel to share his data and methodology with THCB. And we invite those of you who like this kind of research but may disagree with Daniel’s analysis to respond. Finally it’s worth noting that if his conclusions are true this has huge implications for overall health care policy…Matthew Holt

In which I play Obama, answering Michael Cannon

6a00d8341c909d53ef0105371fd47b970b-320wi Last night I was busy spending two hours of my and my business partner’s time buying health insurance for our massive 4 person company. That means doing a multi-factorial equation between premiums, co-pays, deductibles, out of pocket maximums, & in & out of network costs. It’s no wonder that no one understands their health insurance, especially when still doesn’t bother putting half of the important variables on its front page. But no matter, it will be my pleasure to make Wellpoint or Aetna better off—they’re not having such great years and they can use the money.

But then I noticed from the tweets that Obama was doing a primetime townhall about health care. So having failed to find it on my TV (cos I’m on the west coast and we’re not alive at the same time as you east coasters), I looked on the ABC web site. There I didn’t find the TV version , but I did find what I thought was a most amusing article….and as I went all the way through I noticed that it was by my buddy Michael Cannon…the thinking man’s health care libertarian from Cato.

Obama’s too busy talking mush with the townhall to answer…but I thought I might.

So here’s Michael’s questions, and in italics are my answers

Health Care Reform: Questions for the President

Will Health Care Reform Improve Our Health?


June 24, 2009—

“Health care reform is on life support,” says Rep. Jim Cooper of Tennessee. And he’s a Democrat.

MH: Not really!  Or at least not in a sane country unless he has the word “Christian” in front of his party label

President Obama has spent months building momentum for health care reform. But when the Congressional Budget Office put the price tag near $2 trillion, it stopped reform dead in its tracks.

What Senate Finance Committee chairman Max Baucus, D-Mont., once called “nearly inevitable” now seems much less so — and that’s before supporters have confronted the really tough questions.

Before this debate is over, Obama should answer a few questions about his plans for reform, including:

Mr. President, in your inaugural address and elsewhere, you said you are not interested in ideology, only what works. Economists Helen Levy of the University of Michigan and David Meltzer of the University of Chicago, where you used to teach, have researched what works. They conclude there is “no evidence” that universal health insurance coverage is the best way to improve public health. Before enacting universal coverage, shouldn’t you spend at least some of the $1 billion you dedicated to comparative-effectiveness research to determine whether universal coverage is comparatively effective? Absent such evidence, isn’t pursuing universal coverage by definition an ideological crusade?

MH: Sadly Michael, universal coverage is not about improving public health. If you want to do that, go teach some kids age 1–5 and build some sewage systems. Universal care is about making sure that the costs of health care are fairly distributed. Under the systems you prefer and the one we now have they’re distributed to the poor and sick from the healthy and wealthy—many of whom we both know work in the health care system. But apparently there was NOT ONE MENTION from a questioner of the uninsured or sick people bankrupted by the system in the whole hour. (Update Fri: and the only time the moderator Charlie Gibson mentioned it was when he wondered how rich people like him would get access to a doctor with all these newly insured people wanting care–he spent the whole evening appearing to be a selfish git)

A draft congressional report said that comparative-effectiveness research would “yield significant payoffs” because some treatments “will no longer be prescribed.” Who will decide which treatments will get the axe? Since government pays for half of all treatments, is it plausible to suggest that government will not insert itself into medical decisions? Or is it reasonable for patients to fear that government will deny them care?

MH: Why should patients fear it? We know that less intensive care is better, and cheaper primary care is better than more extensive specialty care. As the taxpayer pays for training doctors and funds most medical facilities why shouldn’t they demand that the resources are better spent?

You recently said the United States spends “almost 50 percent more per person than the next most costly nation. And yet … the quality of our care is often lower, and we aren’t any healthier.” Achieving universal coverage could require us to spend an additional $2 trillion over the next 10 years. If America already spends too much on health care, why are you asking Americans to spend even more?

MH: Ah we agree. All the money should come from the current system, even if it means reducing the incomes of pundits, bloggers and those who sponsor them, and a few people in the system. Sadly the politics of the US means that apparently Obama can’t say that

You have said, “Making health care affordable for all Americans will cost somewhere on the order of $1 trillion.” Precise dollar figures aside, isn’t that a contradiction in terms?

MH: Well for a start it’s not $1 trillion, it’s $100 billion a year which these days will barely buy you 6 months invasion of a small country. Which we do without debate on a regular basis it seems. And if we take the money from somewhere else we’re spending the money in health care, it shouldn’t cost more. Ah ha, cant be done because well see last answer

Last year, you told a competitiveness summit that rising health care costs are “a major anchor on the ability of American business to compete.” In May, you wrote, “Getting spiraling health care costs under control is essential to … making our businesses more competitive.” The head of your Council of Economic Advisors says such claims are “schlocky.” Who is right: you or your top economist?

MH: Obama is. I just spent 2 hours figuring out a mess of health insurance decisions that not one of my international competitors has to do. Multiply that out by every business in America, and don’t bother adding the fact that what we actually pay for health care is more than double per head what everyone else does. We’re both political scientists so we know that economists don’t know squat.

You recently told an audience, “No matter how we reform health care, we will keep this promise to the American people. … If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.” The Associated Press subsequently reported, “White House officials suggest the president’s rhetoric shouldn’t be taken literally.” You then clarified, “What I’m saying is the government is not going to make you change plans under health reform.” Would your reforms encourage employers to drop their health plans?

MH: So? If employers do drop coverage as there are only 3 or 4 health plans in most markets, it would still be the same plan that the citizen would get to buy if they wanted to keep it and the costs would be subsidized for the poor. But don’t worry too much Michael. Americans hate their health plans. For some strange reason though they apparently like their doctors. Of course the AMA tells them they do

You found $600 billion worth of inefficiencies that you want to cut from Medicare and Medicaid. If government health programs generate that much waste, why do you want to create another?

MH: You’re saying all government programs are the same? That means the US Marine Corps and the Iraqi volunteer EDF (or whatever it’s called) are the same. I could start a government program that saved $600b very easily in Medicare & Medicaid. I might make a few enemies

You and your advisors argue that Medicare creates misaligned financial incentives that discourage preventive care, comparative-effectiveness research, electronic medical records, and efforts to reduce medical errors. Medicare’s payment system is the product of the political process. What gives you faith that the political process can devise less-perverse financial incentives this time?

MH: See my above answer, oh and abolish the Senate

You claim a new government program would create “a better range of choices, make the health care market more competitive, and keep insurance companies honest.” Since when is having the government enter a market the remedy for insufficient competition? Should the government have launched its own software company to compete with Microsoft? Are there better ways to create more choices and more competition?

MH: Hmm…the government did launch its own software “company”, which was way better & cheaper than the private sector competition, and made the government agency that used it provide the “best care anywhere”—demonstrably superior to privately provided care.  And it was so good that the monopolists at Microsoft stole its name and never paid compensation! Or did you miss Vista in your health care system and software market analysis?

When government entered the markets for workers compensation insurance, crop and flood insurance, and disaster insurance, it often completely crowded out private options. Do you expect a new government health insurance program would do the same?

MH: I hope so because the current private options are lousy at keeping down health care costs, or satisfying their customers. Oops, Obama can’t say that, can he.

You have said there are “legitimate concerns” that the government might give its new health plan an unfair advantage through taxpayer subsidies or by “printing money.” How do you propose to prevent this Congress and future Congresses from creating any unfair advantages?

MH: I don’t know but I’ll make a deal. I’ll promise my health plan wont have use an unfair advantage if you promise that AHIP’s members will stop lobbying Congress to rip-off the taxpayer. This wonderful chart shows that the likelihood of being against the public plan is directly proportional to the bribes paid to Senators by insurance companies.

President Obama needs to address questions these directly. The health of millions depends on his answers.

MH: No it doesn’t. The health of Americans depends on a bunch of stuff. The wealth of a few millions who get royally screwed by the current system does depend on reform. The current system is aided and abetted by its defenders like Cato and others who advocate “solutions” that are not only unworkable but also politically un-feasible. Their only role is to be spoilers to keep the status quo in place.

Michael F. Cannon is director of health policy studies at the libertarian Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It.

Matthew Holt is a vicious blogger who wouldn’t mind being President for a day or two but not without the ability to break Congress to his will in the first ten minutes.

We Need Southwest Airlines!

Roger Collier

Can price competition cut health care costs? There are lessons to be learned from the airline industry.

Over thirty years, per capita health care costs, adjusted for inflation, have increased two and a half times. In the same period, despite a doubling of fuel prices, airline fares have fallen by more than half.

Why the five-fold disparity?

It’s obvious the two industries have followed very different paths. While airline travel has become an experience of packed planes, crowded airports, and peanuts (or less) meal service, health care has seen dramatic advances. Treatments that a few years ago seemed unimaginable are now commonplace: heart transplants, anti-depression drugs, artificial joints, laparoscopic surgery using miniature television cameras, and—of course—Viagra.

That’s only part of the story, though. While air travel is now safer and more convenient, with more frequent flights to more destinations, health care in some communities is so inadequate that morbidity and mortality rates are comparable to those of third world countries.

Why have airlines been apparently so much more successful in giving value for money?

Led by Southwest, the airlines that sprung up after deregulation recognized that individual flyers were price-sensitive, and cut their costs accordingly. They faced barriers, though, many of them analogous to those in today’s health care system. Business travelers flying on their employers’ nickel resisted efforts to move them to crowded peanut-only flights, frequent flyers resisted having to switch from their favorite mileage plan to that of another airline network, and travel agents much preferred to send their customers on airlines paying higher commissions.

Southwest and its peers succeeded by marketing directly to the public, through relentless emphasis on lower fares, and by maintaining standards that were, if not luxurious, acceptable to travelers. Few businesses are now sympathetic to employees’ preferences for more comfortable higher-cost flights, frequent travelers have adapted to low-cost airlines’ mileage programs, and travel agents and their commissions are almost a thing of the past.

And now, just as Southwest Airlines travelers found that they reached their destinations as reliably—if not quite as comfortably—as before, so recent studies have shown that there is little or no relationship, within the range of acceptable medical standards, between health care costs and quality.

So, what must health care reform do to emulate Southwest Airlines’ effect on fares?

First, just as deregulation ended most legacy airlines’ government subsidies, the tax exemption for employer-paid insurance should be reduced or eliminated.  Not only is the $300 billion a year tax subsidy needed to help pay for reform, but cutting the exemption will discourage overly-generous coverage and remove the inequity between employer-paid and individual-paid insurance.

Second, just as travelers can compare airlines’ fares for the same itinerary using Orbitz or Expedia, insurers should be required to price the same basic benefits, perhaps through insurance exchanges. Supplemental benefits could be offered and separately priced, but being able to compare prices for the same basic coverage is essential.

Third, just as individuals purchase most airline tickets, so individuals should be responsible for choosing insurance to meet their own needs. In practice, this implies subsidies for the lower-income, and perhaps also some form of voucher model to facilitate the process. It may be appropriate, however, to allow self-insuring companies to continue to provide employee coverage since, with no insurer risk or profit involved, they typically provide better value.

Fourth, just as airlines’ pay is negotiated only with their own unions—not with every airline union in each airport—so there should be more effective constraints on provider monopolies in which specialists in an area group together to control prices.

Emulating Southwest Airlines won’t result in the cost of health care falling by half, but it offers a far more promising approach to cost control than the expensive band-aid solutions, superimposed on the worst features of our present system, apparently preferred by congressional committees.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies. He is editor of Health Care REFORM UPDATE [].

The Road from McAllen to El Paso

Head Shot Dr. Harold S LuftDr. Atul Gawande has provided a chilling description of the problems facing true health reform in his  recent New Yorker article.  In  The Cost Conundrum he describes how medical care is provided in McAllen, Texas, which is second only to Miami as the most expensive healthcare market in the country. McAllen’s per capita expenditures are twice those in El Paso, Texas, a city with similar demographics.

There are no good reasons for the differences. McAllen’s population isn’t demonstrably sicker and the care isn’t measurably better.  There is also little understanding among the participants about what causes the higher spending. What is chilling is how easy the medical care environment in El Paso could become like McAllen’s.

Gawande refers to the accountable care organization (ACO) concept proposed by Elliott Fisher and colleagues at Dartmouth University. They propose that physicians whose practices are focused around a specific hospital be given incentives to lower the overall costs of patient care.

Payer Costs are Provider Revenues

The ACO has merit as a goal, but the challenge is in forming them.  Getting very intelligent people such as physicians and hospital administrators to change their behaviors, especially if such changes may reduce their income, will be difficult. We need ways to encourage voluntary participation of both physicians providing care in the hospital and those who decide who should be hospitalized.

The Dartmouth data show that in areas like McAllen, there is much more interventional work, such as tests, procedures and admissions, than in areas like El Paso.  With more access to, and time with, primary care physicians there is less need for interventional work.  This means redistributing resources from the interventionists to primary care clinicians.

It is hard to imagine a new ACO with interventionists and primary care physicians achieving this redistribution.  The interventionists often wield scalpels and have a ready ally in the hospital that depends on them to keep beds filled.The Answer Lies in Separation, Not Amalgamation

Interventionists should partner with the facility in which they do most of their work. Elsewhere, I describe these new care delivery teams (CDTs) that are effectively the inpatient side of Fisher’s ACOs.  CDTs would be voluntary associations of a facility (usually a hospital) and those physicians whose work depends on the facility.

Unlike Fisher’s ACO, the CDT specifically excludes office-based physicians responsible for the ongoing treatment of patients.  The CDT also need not include all eligible physicians at the hospital, just the voluntary paticpants.

The CDT may be a single entity with physician employees or a loose collaboration of independent physicians and a facility, collectively deciding its own governance rules.  The key is that the CDT takes responsibility for an episode of care at a fixed price.  Physicians might be compensated by salary, fee-for-time, or fee-for-service and may share in the gains or losses of the CDT.

CDTs will focus on how to provide inpatient care more efficiently and at higher quality.  (Quality measurement is critical in any reform; see my overall proposal. Savings will be achieved not through lower net provider income, but through better management and clinical decisions.  For example, instead of routinely repeating imaging, radiologists may review well-done MRI and CAT scans done elsewhere.  Orthopedists can agree on the necessary implants, allowing the hospital to strike better deals with suppliers.  Nurses may be empowered to implement routine procedures reducing infection rates.  Lowering Interventional Costs and Rewarding High Quality Care

CDTs by themselves will not solve the key problem identified by Gawande — the overuse of interventional services.  To address that problem, we need to redirect patients toward those physicians who provide high quality care at lower overall cost.  This can be achieved by combining (1) a mechanism shifting resources from interventional care to effective outpatient management with (2) a way to identify those physicians who provide such effective care.

A  comprehensive realignment of the payment system can accomplish this, but in the interim, a  voluntary major risk pool (MRP) can move us in the right direction.  The MRP covers hospitalizations and chronic illness.  This coverage for insurers eliminates costly underwriting.  The MRP, however, is not simply reimbursing plans for expenses incurred; it directly offers attractive bundled payments to CDTs.  These episode-based payments allow CDTs to do what they do best—high intensity acute care—and reap increased income.   Higher provider incomes within CDTs are not inconsistent with lower costs to the MRP as the CDT reduces the resources needed from suppliers outside the CDT.

The MRP obtains electronic copies of claims from the insurers who are its clients and from Medicare, more information than the Dartmouth group has.  After linking all the data and substituting coded identifiers, the MRP will make available the data under arrangements ensuring patient confidentiality.

The Power of the Electronic Matchmaker

Insurers and others accessing the MRP data will see there are local providers with efficient practice patterns, but not their names.  An intermediary trusted by physicians will serve as an electronic “matchmaker,” transmitting messages from insurers seeking efficient physicians.   By remaining anonymous until a “deal is struck,” efficient physicians will negotiate better remuneration—probably not just higher fees, but payment for ongoing patient management, telephone and e-mail consultations, and other innovations.  Some physicians may band together, perhaps by sharing electronic medical records, forming real or virtual group practices—the outpatient component of the ACO.

The major risk pool is the mechanism reallocating dollars.  More effective chronic illness management will lower admission rates and the MRP will transfer more dollars to those health plans directing more patients to efficient ambulatory care providers.  To find those providers, health plans will negotiate better payment arrangements.  To steer patients towards those providers, plans will provide new incentives and sources of information.  We can create what Fisher and Gawande have in mind, as long as we think about how to manage the transition.

McAllen and El Paso are almost 800 miles apart—a long day’s drive.  To move away from the expensive McAllen model of care, we need not just a destination but a plan how to get there.  The self-interest of the players is currently driving us in the wrong direction. By harnessing that self-interest with realigned incentives we can reform the system.  Without taking account of the incentives, we will never get to where we need to go.

Harold S. Luft is Professor Emeritus in health policy at University of California, San Francisco, and author of Total Cure:  The Antidote to the Health Care Crisis (Harvard University Press, 2008).  More information is available at

Gawande Nails It on Healthcare Costs

Wachter pic (informal)I just finished reading Atul Gawande’s June 1st New Yorker piece – it’s the Talk of the Health Policy Town – on healthcare’s “Cost Conundrum.” Like most of Atul’s work, the article is lyrical, powerful, insightful, and correct.

As you’ve probably heard, Gawande profiles the town of McAllen, Texas, whose healthcare costs are nearly double the national average. He swats away the usual explanations (our patients are sicker, more obese, more addicted, more Mexican; our lawyers are nastier; our quality is better…) to unblinkingly zoom in on the real culprit: a culture in which providers’ greed trumps the patients’ interests. He contrasts McAllen’s healthcare culture with that of El Paso, just 800 miles up the border, a town with similar demographics but whose healthcare costs are exactly half as high. He also describes the Mayo Clinic, which manages to deliver the best healthcare in the country, perhaps the world, at a fraction of McAllen’s costs.

His main point is that policymakers need to focus less on who pays (i.e., should there be a “public plan”?) and more on creating physician-led accountable entities that manage the dollars and possess the wherewithal and incentives to make rational choices about how to organize care – the ratio of primary care docs to specialists, the number of MRI scanners, the algorithm for the workup of chest pain or gallstones. Atul understands that we can’t snap our fingers and change culture, but that culture will change when structure and incentives are lined up correctly.Continue reading…

What’s good for General Motors is good for America

In 1953, Charles Erwin Wilson, then GM president, was named by Eisenhower as Secretary of Defense. When he was asked during the hearings before the Senate Armed Services Committee if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation “because for years I thought what was good for the country was good for General Motors and vice versa”. Later this statement was often misquoted, suggesting that Wilson had said simply, “What’s good for General Motors is good for the country.” (From Wikipedia’s History of General Motors)

The American auto industry exploited the loophole by ramping up production of big passenger vehicles that sat on truck beds. The mini-van evolved into the the extended pick-up trucks and SUVs that proliferated during the next two decades. The American public loved the big vehicles, which were affordable because national energy policy made low gasoline prices a priority. The SUVs and trucks were hugely profitable for the manufacturers, offsetting losses incurred partly because of labor-related costs. Detroit’s dependence on these vehicles though was risky, as became clear last year when fuel prices rose steeply and the industry effectively crashed. (Peter J Boyer, The Road Ahead, The New Yorker, April 27, 2009)

This has been a tough couple of weeks for anyone believing in radical change, Obama-style. There has been unnecessary compromise over closing Gitmo and investigating torture. The lobbyists for America’s health care immediately recanted their promised voluntary cost cutbacks. The response so far from the White House has been a statement from Orszag that’s none too radical, essentially saying that bending the curve is OK.

And now there’s the revelation that some idiot at Blues of N. Carolina had already planned a smear campaign against reform, even while the AHIP crowd seems to be winning, as represented by the mealy-mouthed proposals coming out of Baucus’ committee—as Baucus himself ducks meaningful dialogue over alternatives.

So realistically, as I’ve been saying for several months, the best we can hope for from the current body politic is some kind of national exchange and a sorting out of the scummy underbelly of the individual health insurance market. (Incidentally I was watching The Rainmaker, made back in 1997, over the weekend and life has totally imitated fiction in the individual market since then—yes, I’m talking about MEGA but not just them!).

But even if we get some kind of exchange with some kind of vaguely unenforceable individual mandate and some type of guaranteed issue, the basic structure of health insurance passing through the excesses of the FFS system won’t change. Real sustainable change will only happen if we create a single universal pool and give the insurance intermediary some type of global budget, such as a fixed voucher payment per member. No one in the Baucus world or the White House, with the exception of Zeke Emmanuel is talking about that, so it’s not going to happen. And the second best choice—the establishment of a competing public plan that is budget limited—is likely to be bargained away.

So unless some secret mechanism that we’re not being told about will be sprung from the wings, realistically the best that can be done is that we’ll end up with the Massachusetts scenario. More people insured at more cost, unsustainably. And widespread practice and cost variation will continue.

The data of course tells us that on any metric you pick, spending doesn’t equal quality. Just this week the Dartmouth guys found a nil or negative correlation between spending per patient in individual hospitals and outcomes. It’s got to the point when you barely need to read the abstract on these studies. (I guess if you like you can read Atul Gawande running through the numbers yet again in this weeks New Yorker)

But if something can’t for on forever, it will stop (known as Stein’s law). Which is why I opened this piece with a reference to that wonderful New Yorker article about the meltdown in the auto industry.

The auto industry’s last two decades resulted from three irrational government policies that were kept in place by a weird combination of political forces. First, fuel prices were kept artificially low—in part by a deal between Reagan & the Saudi’s to break the Russians, and also by the reticence of American politicians to put European-level taxes on gasoline. Of course, fossil fuel producers and users didn’t have to bear the real costs of these cheap prices. But the planet and its (present & future) inhabitants do.

Second, as pointed out in the New Yorker article, the CAFE standards ridiculously excluded SUVs and mini-vans—proving that partial regulation is much worse than using taxes to do the same thing. We’re still waiting for a sensible carbon tax. Third, partial taxation is just as bad. For weird historical reasons there is a 25% tariff on foreign trucks and SUVs which means that the Japanese couldn’t compete effectively (e.g. destroy the lumbering big 3) in that market, and the big 3 could make far more profit on the SUVs than they would have done in a free market. A combination of the auto companies, the oil companies, the unthinking consumer, and bought-and-paid-for politicians enabled this to happen.

The parallels are obvious. In American health care policy, for the Big 3, substitute the AHA, PhRMA, AHIP, ADVAMED and the AMA. For the dumb carbon fuel policies, substitute an irrational employer-based insurance system with a wrap-around and uncontrolled Medicare and Medicaid system, all paying suppliers using Fee-For-Service. For the problems of global warming and pollution substitute the societal ill-effects of spending too much money on health care services that make outcomes worse, and leave less money for education, infrastructure and other more worthwhile spending. For SUVs and mini-vans substitute cardiology, orthopedics, neuro-surgery, general surgery, oncology drugs, and all the other service-lines that make hospitals profitable, but do very little for the overall health of the population. And of course the whole thing stays together because Congress is in the special interests’ pocket, the public responds well to prods from special interests (especially doctors), and it doesn’t understand the raw deal it’s getting in the bigger picture.

There’s even a parallel lies and dissemination industry. The auto and oil industries fund their “global warming is a myth crowd”, health care has Betsy McCrackers, Grace Marie Turner and the rest of the free-market nut-jobs—all on the teat of some sub-segment of the health care business which should rationally be put out to pasture.

So assuming that we don’t fix this problem in 2009, what happens when health care has its meltdown moment, or when as Alan Greene and George Lundberg like to say, the health care bubble will burst?

Lundberg argued earlier this month on THCB that there was an excessive trillion dollars spent in health care—somewhere around 40% of current spending. Actuarial firm Milliman did more work on this and suggested that we can move health care spending from the current 16% of GDP to 12%. Now they and fellow travelers like George Halvorson seem to hope that this can be done in some seamless and painless fashion. But that hardly seems realistic. Instead my scenario is that some future cataclysmic event finds the next President offering the health care industry the kind of choices that Obama has just been offering the auto industry.

Which takes me back to Boyer’s wonderful piece about the auto industry. Essentially the industry has been given extremely limited choices of how to restructure itself. They were told to:

  • Massively restructure their obligations to their retirees and employees
  • Change their work arrangements to match those of the Japanese transplant factories
  • Close many factories and lay-off many employees
  • Change their present and future product mix to reflect the worldwide energy crisis
  • Reeducate the buying public as to what to expect from a car (50 miles range and being plugged in nightly?)

Note that many of the Senators from “transplant states” with like Tennessee and Alabama felt pretty aggrieved that GM and Chrysler were getting all this help to compete with their “foreign” imports. Those of you who get Sen Dave Durenberger’s occasional (and prescient) health policy commentary emails may note that he frequently describes Medicare as being a redistribution mechanism whereby doctors and hosptials in high costs states like Louisiana and Florida get subsidies from taxpayers in low cost ones like Minnesota.

The way these hard choices were made at GM and Chrysler were essentially that the Treasury took over the companies and their strategy. Both the CEOs of GM and Chrysler are either gone or going, and the Federal government is directing traffic.

There isn’t quite the centralization of production in health care that there is in autos, but a 40% fall in revenues would effectively mean the government would take over the industry. So what might the equivalent of a fast GM-type restructuring look like in health care?

  • Massively restructure their obligations to their retirees and employees. The health care industry mostly rewards specialists, technology & pharma manufacturers, and certain segments of the hospital business. Those payment schemes would necessarily be slashed. We’re not talking about narrowing the RVU imbalance here, we’re talking about some kind of massive fee-cut backed up by a global budget cap.
  • Change their work arrangements to match those of the Japanese transplant factories. No prizes for guessing this. Virgin Mason and a few others have already significantly reduced all of their costs by introducing Japanese-style quality innovation process. Under current payment schemes that was a crazy thing to do. But in this scenario those hospitals and physician groups that survive would not get the choice. If the accountable health care organization, or medical home ever gets off the ground, the customary relationship of referrals from PCP to specialist and from specialist to hospital will change remarkably.
  • Close many factories and lay-off many employees. If you replace the word “factories” with the words imaging center, hospitals and clinics, you’re getting the picture.
  • Change their present and future product mix. From inpatient care and intensive procedures to prevention and primary care, with extreme makeovers in terms of chronic care process management.
  • Reeducate the buying public as to what to expect from a car. This may be one of the hardest parts of all. The American public regards $4 a gallon gasoline as a pestilence sent to punish them. Similarly, the move to reduce inappropriate health technology use, overhauling end of life care, and changing how people approach their health, is fraught with political peril. But the need is the same, and at some point we’re all going to have to realize that the consequences of our orgy of medical care overuse are dreadful.

Any restructuring like this will cause extreme pain. In addition, we need to make sure that the reduction in health care spending is balanced by a comparative increase in wages, or other spending. In other words, we can’t suck 3–4% out of local economies without adding it back in.

But in the end, like the auto restructuring, we desperately need this health care restructuring. And what’s now necessary for GM will end up being a good thing for both the nation’s health care system and the nation.

This doesn’t mean it will happen, or at least not soon. But one way or another, the health care system needs to share Detroit’s fate.

Coda: Mike Cassidy, San Jose Mercury News Columnist wrote a not dissimilar piece piece on Saturday which I saw on Sunday. I’d started this piece last week, so this is a case of great (?) minds thinking alike—not plagiarism, honest!

Money-Driven Medicine—N.Y. Premiere of Film, June 11

At last, Money-Driven Medicine is finished.  This  90-minute documentary was produced by Alex Gibney, best known for his 2005 film, Enron: The Smartest Guys in the Room  and his 2007 Academy Award Winning documentary, Taxi to the Dark Side.The film was directed by Andy Fredericks, and is based on my book, Money-Driven Medicine: The Real Reason Health Care Costs So Much (Harper Collins).The Century Foundation and the New York Society for Ethical Culture are co-hosting the New York premiere on June11,  7p.m.  at the New York Society for Ethical Culture, 2 West 64th Street at Central Park West. Doors open at 6:30.  Admission is free.  If you’re planning to attend, please RSVP  Loretta Ahlrich, or (212) 452-7722 so that we can have a rough idea of how many people will be coming.

Alex Gibney will be there to talk about the film, and following the screening, I’ll take questions from the audience about healthcare and healthcare reform.

About the Film: Money-Driven Medicine explores how a profit-driven health care system squanders billions of health care dollars, while exposing millions of patients to unnecessary or redundant tests, unproven, sometimes unwanted procedures, and over-priced drugs and devices that, too often, are no better than the less expensive products they have replaced. As I have said on this blog, this isn’t just a waste of money. It’s ‘hazardous waste’—waste that is hazardous to our health.In remarkably candid interviews both doctors and patients tell the riveting, sometimes funny, and often wrenching stories of a system where medicine has become a business. “We are paid to do things to patients,” says one doctor. “We are not paid to talk to them.”Patients,and physicians star in the film. They include Dr. Don Berwick, author of Escape Fire and founder of the Institute for Health Care Improvement , and Dr. Jim Weinstein, Director of Dartmouth’s  Institute for Health Policy and Clinical Practice.  ( Dr. Jack Wennberg,  the founder of what I often refer to as “the Dartmouth Research” passed the torch to Weinstein  in 2007.)Lisa Lindell, a HealthBeat reader, patient advocate and author of  108 Days, also appears in the documentary, talking about her husband’s experience in a Texas hospital after he was seriously burned in a freak industrial accident.

How Physicians Inspired Money-Driven Medicine: I narrate the film, and in the course of the narration, recall how the story began:“When I started writing the book, I began phoning doctors, explaining the project, and asking for interviews. To my great surprise the majority  of them returned my calls.  In most cases, I didn’t know them. I expected responses from perhaps 20 percent. Instead, four out of five called back.“‘We want someone to know what is going on,’ explained one prominent physician in Manhattan. ‘But please don’t use my name. You have to promise me that. In this business, the politics are so rough—it would be the end of my career.’”They were right. Everyone needs to know.

Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of  “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.

McKinsey weighs in on healthcare reform

Charlie Baker is the president and CEO of Harvard Pilgrim Health Care, Inc., a nonprofit health plan that covers more than 1 million New Englanders. Baker blogs regularly at Let’s Talk Health Care.

Charlie_headshotBack in December, 2008, the folks at McKinsey – one of the world’s most well known consulting firms –  wrote an interesting article on health care reform in the U.S.  What’s striking about it now as we all watch the debate unfold in Washington, DC is how different McKinsey’s approach is to the one being taken in our nation’s capital.  McKinsey focused on three things – personal behavior, cost and quality transparency, and administrative simplification.  The Washington debate is focused mostly on whether or not to create a government run health insurance plan, individual and small group health insurance market reforms, Medicaid and/or Medicare expansions, how much deficit spending is too much, and administrative simplification.

People in DC would argue that doing anything about personal behavior is virtually impossible, so why bother, but McKinsey’s case on this one is pretty compelling.  In fact, McKinsey argues that the whole “40% of individual health care expenses occur in the last year of life” is no longer true – primarily due to the rise in costs associated with managing chronic conditions.  Quote – “…our findings suggest that the management of chronic disease outside of acute-care environments accounts for at least 20 percent of total U.S. health care spending, perhaps more.  That level of expenditure, compounded over decades in many cases, dwarfs the cost of end-of-life care…”  They indicate that end-of-life health care spending – on average – for people who pass away between the ages of 65 and 95 represents less than 10% of the total amount of money they spend on health care during their lifetimes.

McKinsey references obesity as a specific example.  The incidence of clinically defined obesity has doubled in the U.S. since 1980 – to roughly 34% of the adult population.  Clinically obese patients spend almost twice as much as someone with a normal body mass index on health care – every single year.  Put another way, if we were as obese today as we were in 1980, we’d spend $60 billion less on health care.  McKinsey says ignoring the impact personal behavior – and here, I’m mostly referencing diet and exercise – has on the rising cost of health care is a huge missed opportunity, and their data points make a compelling case.

Second, McKinsey points out that the same service provided by two different providers in the same geographic area with the same patient and the same outcome can vary in cost by as much as 40%, and no one knows it.  “In no other industry are service attributes and prices so opaque.”  No kidding.  Some of us having been banging this drum for years, and we are still in the crawl stage in terms of making this sort of information publicly available.  And while I’ve always thought of that as a way to rationalize provider prices, McKinsey thinks it could also rationalize insurance plan design and re-frame the health care conversation generally.  They note that without publicly available information on price and performance, the move from delivery and insurance models that are based on acute episodes of injury or illness to ones that are based on promoting healthy behaviors and managing chronic conditions will take forever to occur.

Third, McKinsey discusses the price of administrative complexity – and while Washington does seem interested in taking this one on, some of McKinsey’s observations about what drives complexity require a more nuanced approach than  the ones currently under discussion.  For example, McKinsey notes that regulation drives complexity, that providers and payors each own a piece of the complexity around claims processing and payment, and that the government as payor has contributed significantly to this conundrum as well.  Are there opportunities here?  Yup, but it’s not as obvious as it seems.  Remember, when someone talks about standardizing processes and rules, they usually standardizing everyone else to the way they do business.

I wonder if the whole diet/exercise question – or the transparency issue – will find their way into the health care reform discussion.  My guess is the answer will be “no.”  They are too beside the point for a discussion that’s primarily about financing and paying for services rendered.  That’s too bad.  McKinsey’s piece makes it pretty clear that reducing the rate of growth in health care spending and improving care quality is about a lot more than whether or not we have a government run plan for the non-Medicare/Medicaid population.


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