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HEALTH PLANS: It’s a good year for the Rowe(ses)

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2003 certainly was kind to Aetna which managed to complete its turnaround started in 2001. Back in the mid-1990s Jack Rowe was running Mount Sinai hospital in New York, and making less than $1 million a year. In my earshot he asked Ian Morrison to kindly not refer to hospital CEOs as overpaid facilities managers as Ian (then my boss) was inclined to do at board presentations! When Aetna was sailing to disaster after its US Healthcare merger and was getting killed in the market by underestimating its costs, and being sued by every physician in America, it went looking for a physician-friendly management team. Rowe was the physician executive the board chose to lead them away from the brink of disaster.

Rowe’s strategy was to be friendly to the doctors (and Aetna settled a huge lawsuit with several thousand of them), while figuring out which of Aetna’s client groups were unprofitable (and there were many) and getting rid of as many of those groups as possible. In the midst of that brutal turnaround Aetna actually increased its IT spending so it could get a more accurate read on client profitability and do better, more accurate, and faster underwriting. I recently saw a presentation about the turnaround which showed that before that IT investment they were working off cost data that was over 2 years old and were setting their rates essentially blind to the real costs. The same IT strategy finally integrated the numerous companies it had bought in its 1990s expansion binge, although as Jamie Robinson pointed out in a comprehensive article on the turnaround in the most recent Health Affairs, that essentially meant getting rid of huge books of business at a big loss, including virtually the whole of the Prudential business it had bought in the mid-1990s. Aetna also basically gave up the care management activities that in 1996 it had purchased US Healthcare with the then intention of adopting them system-wide. That HMO of course had the goal of actively managing care delivery at the individual provider level and was in a big way responsible for the backlash against managed care on the east coast.

So it’s another story of a great corporate turnaround, but of course there’s a But. The goal of health insurance companies is supposed to be to deliver increasingly better services at increasingly better price to their clients. While the corporate machinations engineered by Rowe’s team (which included lay-offs, culture change, the IT investment, and keeping a management team focused under conditions of great uncertainty in 2001 and 2002) should be applauded, , I’m not sure anyone’s much better off other than Aetna’s shareholders. For a start, it’s very likely that the several thousand laid-off employees aren’t.

Aetna earned $966.8 million profit in 2003, compared with a $266 million loss in 2001. And for this in 2003 Rowe got paid $18m. Ex-Blue Cross of California President, and current Aetna President, Ron Williams received $9.1 million, plus stock options that could be worth another $4.3 million. So the "risk" they took leaving secure and well paid employment certainly paid off!

However, all Aetna has really done is accurately mine and understand the information on its client base to figure out which client groups among them were better actuarial risks. So at a system level it’s contributed to the increase in health premiums seen over the past few years, both by sticking price increases to its clients and by adding a pool of not-so-good risks to the rest of the market–some of whom probably found themselves unable to get insurance. So either their "greater fool" competitors, or their former clients, or the rest of us taxpayers are footing the bill for those groups that Aetna got rid of. Meanwhile, the taxpayer is paying uninsurance benefits to the employees let go, and the clients who stayed with Aetna didn’t exactly see their premiums go down.

So while this is business turnaround success story, because Aetna gave up attempting to manage care and innovate in the face of medical cost increases, it’s actually set back the role of health insurers as a potential source for progress in the system. And I don’t think Jack Rowe could argue with a straight face that he’s not overpaid any more.

Coda: Rowe is of course by no means alone among unbelievably highly paid health insurance executives in either the private sector, in PBMs and among the non-profit Blues, who have all reaped massive rewards for making their companies profitable mostly by being able to stick price increases to their corporate clients. And their clients in their idiocy or their incompetence seem to feel they have no option but to take it in their necks and then to try to pass it on to their employees. As I’ve said before, this cannot last forever, but it can go on for a while.

Afternote: After writing this I re-read Jamie Robinson’s article and realized that great minds think alike (or I subconciously stole his theme–take your pick!). Jamie wrote in his conclusion:

    The implications of its turnaround are less unambiguously positive for the health system as a whole, however. The employment-based health insurance system is proving to be less willing and able to perform the redistributive functions of social insurance in addition to the risk-spreading functions of market insurance. The nation appears unenthusiastic about any prospect of pursuing social insurance through explicit taxes and subsidies, continuing to prefer implicit transfers that do not raise the specter of big government (even as an alternative to big business). In the absence of adequate governmental subsidies for less healthy citizens, however, Aetna’s improved ability to predict and price risk will expose it to obloquy as a failure at social insurance rather than to praise as a success at market insurance. In the health care sector, where no one agrees on the appropriate division of labor between the public and private sectors, no good deed goes unpunished.

HOSPITALS: Another Tenet settlement, but more coming

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Tenet stock fell a little today (fresh from rallying after I’d sold it!) on news that it agreed to a $30.75M settlement for its conduct in Florida seven years ago and some nursing homes shenanigans nationwide. Tenet had put aside somewhere in the range of $50m for this settlement and others, but doesn’t have that much cash left (around $425m) and appears to be burning cash faster than it’s making it. The key question remains, what is the amount that it will have to pay off to settle the rest of its fines? That may be the difference between survival and bankruptcy.

INDUSTRY: PPM evolution–US Oncology to be bought

Buy-out fund Welsh, Carson has bought the biggest for-profit physician group US Oncology. This suggests to me that the market is unlikely to be rewarding oncologists while the whole issue around reduced fees for oncology drugs gets sorted out. THCB oncology correspondent Matt Quinn agrees:

    US Oncology treats about 15% of newly diagnosed cancer patients. USON has persued a strategy of revenue growth by dominating cancer care in medium markets and by negotiating low drug prices (in relation to both other oncologists and AWP) with pharma. They also are large enough to provide critical mass for pharma drug trials… With the pharma side of the equation drying up, it appears that they think the market will react unfavorably. And perhaps they want to hide the "sausage-making" that must go on as they transition business models. I’d be interested to know the docs are reacting to this and whether and how quickly they can "cash out".

BTW if you want to know more from the guts of oncology pricing, here’s this gem from the Pete Stark archives in 2001. It was this kind of drug "pricing" strategy that eventually got CMS’ attention in the past year.

PHARMA: The Motley Fool on drug costs, here and there

The Motley Fool, which is a site for individual investors, has noticed that over the long hauldrug costs are likely to be compressed over time.

    If current trends continue, it’s not hard to imagine some form of caps. Of course, the U.S. could try to convince Canada, Japan, and Europe to eliminate price controls by arguing that unfettered markets will lower costs for everyone. Europe is currently wrestling with its own drug importation issues, because, although most governments employ controls, prices vary widely from country to country. Given European governments’ lack of progress in reforming their welfare states, though, a total rollback seems highly unlikely. A more probable outcome is that the U.S. would adopt a compromise position between its current system and those of other developed countries. Still, any governmental reform would probably involve some erosion in profit margins.

In other words we’re eventually going to end up with lower pricing relative to Europe over time. But from the investors perspective they also believe that:

    The pharmaceutical industry almost certainly will never turn into a low-margin business like consumer electronics.

This is pretty obvious and is another rebuttal to the argument that any attempt to prevent pharma companies price gouging will of necessity stop all pharma R&D. I think their opinion is about right, but then I’ve said that at length before.

HOSPITALS: Scully shorts Medcath? Well not exactly but….

There’s a report in the weekend Washington Post that among his other "achievements" (like the muzzling of the actuarial projections about the cost of Medicare drug coverage) Tom Scully made some remarks that sunk the stock of specialty heart hospital MedCath a couple of years ago. The story is that he essentially hinted at an investment bank’s dinner that the government was going to overturn the exemption that specialty hospitals enjoy from Medicare’s ban on physicians’ self-referring.

What this is about is that, at the moment some facilities can be indirectly owned by doctors and they can bill both for the physician fee, and collect some share of the facility fee–not directly, but in terms of being a part-owner of the facility. Without getting into a lot of arcane law around these "Stark Amendments" about which I don’t remember everything, it’s worth understanding two things. One is that a lot of doctors got rich and Medicare’s finances suffered in the late 1980s when physicians started buying into home-infusion companies and then started referring their patients to them. A lot of the behavior going on then went well over the ethical line, with doctors basically referring to companies they owned or had a part of. Alternately they were also being directly bribed to refer to others– Caremark was heavily involved in this back before it was a PBM and even before it was PPM. After that Democrat Pete Stark introduced a series of legislation that basically made it very difficult for doctors to refer to a facility in which they had an ownership interest.

More recently hospitals have been struggling with the desire of physicians to move their practices into small hospitals that are "focused factories" and tend to specialize on one or two "service lines". This is a real threat to community hospitals. They tend to make money in a few areas (cardiology, neurology, general surgery, orthopedics, etc) and lose it everywhere else. If those profitable service lines walk out the door, then things get very grim very quickly for the community hospitals–and they are all struggling with this issue at the moment. In fact one of the bribes that they were paid concessions the AHA was granted to get its support for the recent Medicare PDIMA bill was to put a moratorium on the building of these new specialty hospitals. Obviously if CMS decided that specialty hospitals owned by doctors fell under the self-referral part of the Stark amendments, that scuppers their expansion plans dramatically. At the least it would force them into significant ownership re-organizations, and give the community hospitals some leverage in gaining back the high-admitting specialists who wield big financial clout in local markets.

To be fair to Scully, although MedCatch’s stock fell the day in question (April 22, 2002), it’s a small cap and very volatile stock, as you can tell from its 5 year chart. I hardly think Scully was short and trying to make money off it, so he probably let slip a fairly rational view from both his standpoint as guardian of the CMS purse and from his time representing the for-profit hospital industry. That view is that by leaving the less profitable "service lines" behind in the hospital, companies like MedCath are raising the overall average hospital cost per case, which in the end will get translated back as cost increases to big payers (like CMS). That’s not likely to be acceptable in the long run to payers and, while there are some efficiency advantages from creating these "focused factories," there’s not much benefit to society if the margins gained from capitalizing on these efficiencies go to subsidize the spending habits of surgeons and specialty hospital shareholders, rather than towards (say) the care of the uninsured in community hospitals. Pete Stark has said exactly as much in legislation he’s introduced that targets Medcath directly.

So Scully may have made a minor faux pas, and he maybe a convenient scapegoat for the Republicans as he just left the Administration, but I don’t think that he was really doing anything worse than giving the official line. After all, Alan Greenspan has far more impact any time he opens his mouth. Was he short the Dow the day of this speech?

INTERNATIONAL: . . . . and you thought doctors were difficult in the US

Word from the UK is that a leading neurosurgeon either took a refill of a bowl of soup or just some more croutons from the hospital cafe (depending on whether you believe him or the canteen staff) and he’s been suspended! This means that at least three operations in his hospital have been cancelled. And this is in England. You remember England, the place where like Canada where you have to wait forever for surgery and 10 months to get a hospital spot for a normal delivery.

On the other hand, it’s probably no skin off the nose of the surgeon, as he almost certainly makes more in his part-time role in the private sector than he does with the NHS, and most likely has been suspended on full pay. I know another British surgeon, who makes the odd appearance in THCB because, well, he’s my father, who was so browned off with the administrators at his hospital that he spent ages trying to figure out how to be suspended on full pay. I bet he never thought of pinching a packet of croutons. And of course now he’s retired–oh, the missed opportunity! Dad, if only you’d known!

POLICY: HSAs here and there, in theory and in practice. (with UPDATED link later afternoon Monday)

The HSA debate is an interesting one. Most of my comments have tended to focus on whether they can in fact be put into practice both on the consumer side, and on the physician side. This comes down to two questions, are there designated accounts that can consumers easily locate accounts from trusted sources to sign up for which will make the HSA accounting transparent? The answer there is "not yet"–I know as I’ve been trying to create one without success as yet, although I do have an application in to a tiny bank in Wisconsin that puports to be ready. But presumably this whole process will take some time but should eventually be doable–but it has now been 4 months already.

The second and more challenging question is, will providers be able to get their act together to create understandable pricing structures that makes sense for consumers? Given the massive challenge I’ve been having trying to get a cash-only surgeon to pre-price a procedure I"m about to have, I suspect not. After all, presumably a cash-only physician should be able to deliver that pricing already. But the end result from my interactions is that the surgeon would not guarantee rates for different procedures, and wouldn’t even be able to give me alternatives based on different likely outcomes. The end result is that I went to a different surgeon who’s group had already had that negotiation with Blue Shield. Of course the new surgeons office has a different pricing schedule for the uninsured, and when I was in their office last week I overheard a conversation between the clerk and an uninsured patient who was totally confused by different bills from 4 separate sources (surgeon, anesthetist, lab and hospital). So I still believe that we’re a long long way to go till we arrive at the point-of-care consumer nirvana. This is the reason that several free-market advocates of the Enthoven and Abramovitz schools believe that HSAs won’t be a big deal.

Paul Ginsburg seems to agree. In a recent HSC commentary, he writes

    So what impact will these new accounts have on physicians, hospitals and other providers? The short answer: Not much in the near term because HSAs are unlikely to reach the critical mass needed to spark significant changes in healthcare delivery. Initial interest is likely to be confined to the individual insurance market under the current requirements.

In other words it’ll be people like yours truly who already have high deductible insurance and know that they are going to have high health care expenses who’ll want the HSA in order to reduce their tax bill. Ginsburg goes on to say:

    Even if the accounts have great success in getting people to increase health cost-sharing, they are unlikely to be the magic cost-containment bullet. Since a small proportion of insured people with medical expenses higher than HSA deductibles account for a large proportion of healthcare spending, even widespread adoption would address only a portion of the cost challenge."

I’ve been commenting about this for a long time (mostly over at the MedRants postings). In a nutshell, HSAs won’t do anything to contain costs, as the vast majority of the money is spent on people who’ve blown through their deductible and are also not in the position of being prudent shoppers at the point of care, often because they’re price unconscious–literally!

But there is one deeper question about the whole HSA theory. If you allow people to contribute to their own accounts rather than pay into an insurance pool, what happens over time to that pool? The Kennedy-ites will tell you that as the healthier and wealthier "withdraw" their money, and the poorer and sicker make more demands on the pool, it will run out of money and need to go back to the taxpayer for more. In other words it will not succeed in creating a sustainable insurance model.

While this may be theory in the US, it is now demonstrated fact in the place in the world that has the greatest experience with things that look like HSAs, and that place is the pleasant, but draconian in parts, city-state of Singapore. So last week the local Singapore Straits Times reports essentially that the insurance pool system that backs up Singapore’s compulsory MSA system has run out of money. Don Mcanne (in his single-payer advocating daily "Quote of the day" email) describes the situation accurately:

    "Singapore has a Medisave program which is composed of individual MSA-type accounts, a MediShield program which covers catastrophic, life threatening disorders, and a Medifund program that serves the poor. What has become evident is that coverage for non-catastrophic illnesses is clearly needed. Their current system leaves many without affordable access to essential but non-catastrophic health care services."

But of course, just because we have some data from abroad doesn’t mean we’re going to pay much attention. And as this is the US, HSAs aren’t going to be a big enough deal to really affect the whole system….probably.

INDUSTRY/POLICY: Humphrey Taylor on the big debates in healthcare’s future

Take time this weekend to read and savor this lecture from Harris Poll Chairman, Humphrey Taylor. A witty and excellent presentation on where the system is, where it’s going and what we’re likely to be talking about in the coming years. It’s called The Big Health Care Debates That Lie Ahead. By the way, just in case you think Humphrey has pre-conceived biases having worked for Tory PM Ted Heath in the UK back in the early 1970s, he’s lived in New York for over 25 years and he told me once that the reason he has never applied for US citizenship is that as a pollster he wants to be able to remain neutral on the issues!

PHARMA: Drug pricing here and there II:The Industry Veteran is not impressed with Levinson’s logic

In a recent speech Art Levinson, CEO of Genetech managed to simultaneously state that "the dollars going into health care are going up exponentially….That can’t happen forever. The question is when is it going to implode?" " and to demand that "if developed nations want access to breakthrough medicines, they should have to pay full price". He pours scorn on the tactics of his competitors "I think the drug industry, and I’m speaking largely about big pharma here, is shooting themselves in the foot by allowing people to buy drugs in Canada for as low as 10 cents on the dollar. I almost see it as unconscionable." While the logic may be somewhat contradictory, given that biotech drug prices are as more or less as high abroad as they here, even if the use of global budgeting and a more conservative medical culture means that they’re used far less and so the total revenues from them are far less, the Forbes article called Drug Prices: The Genentech Solution lays out the end-game as far as Levinson’s concerned.

    Levinson says that if he had the choice, he would "draw a line in the sand." A country that refused to pay a fair price for a medicine simply wouldn’t get it. Levinson said it’s unfair to allow some countries to get drugs on the cheap just because the U.S. pays a great deal. Moreover, he added, if all drugs were sold at those cut-rate prices, the incentives that drive medical innovation would vanish.

As I suggested in my earlier post on this topic, there’s scant evidence that R&D would dissapear for good if US drug prices came down to closer to the European level, despite what some boneheaded columnists with no understanding of the health care "market" think. There would be less R&D at the margin but it would still be one of the most profitable industries to invest in, and there is plenty of R&D spending in lots of other industries which have lower margins and no exended patent protection. Marketing budgets and pharma executive compensation might also be closer to where it is on other industries too, which PhRMA doesn’t mention quite so loudly for some reason. I suspect that the type of logic big pharma is using to protect it’s pricing strategy, and the associated outbursts like Levinison’s, doesn’t help big pharma in the PR war–which if it bothers to read the papers or watch 60 Minutes it would notice that it is currently losing in a blow-out. Of course TCHB contributor The Industry Veteran is slightly more "colorful" in his analysis, which I print below.

    Must a person relinquish 100 IQ points to become a Big Pharma CEO? by The Industry Veteran

    It appears that Big Pharma is respnding to public outrage at their pricing by mounting a major PR campaign and by making indignant, f**k-you comments such as those by Genentech CEO Art Levinson. Levinson and Sanford Bernstein ass-kisser Rick Evans apparently want to play chicken with Brazil, India and several other countries by forcing them into compulsory licensing, i.e., patent busting. These two al Qaeda-like fanatics of crony capitalism seem to willfully ignore at least one market principle. Of course, Mr. Levinson should be free to sell his products at a single price around the world — but let him relinquish his rights of patent exclusivity. He can have it either one way or the other. If he desires a government sanctioned monopoly via patent protection, then let him function the way electric companies do and petition a public utilities board for every rate change he desires. Conversely if he wants to exert total control over pricing decisions for Herceptin, Activase, Avastin and his other products, then he must relinquish his monopoly over them. He can’t have it both ways. Levinson, Evans and their dim bulb epigoni have played a transparently rigged game long enough: a free market for you and me, a government sanctioned, government subsidized monopoly for themselves. Say, Art, is that the wolf I hear at the door, or is it the bowed and bloodied apostle of Big Tobacco trying to tell you that it’s the beginning of the end?

(BTW if like me you weren’t sure who the Epigoni were, here’s encylcopedia.com’s explanation).

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