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CONSUMERS/INDUSTRY: Reggie’s back and the intellectual slop goes on

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Regina Herzlinger is back and has now moved from Market Driven HealthCare (which in my view produced one of the best letters ever to Health Affairs from Jamie Robinson following her disputing of his review) to a new tome called Consumer-Driven Health Care: Implications for Providers, Players, and Policy-Makers. The new book is basically 7 chapters from Herzlinger and a ton of short pieces (600 pages worth) describing a grab-bag of "innovations" in health care.

Trying to define, understand or explain Herzlinger’s points is maddening, as poor old Jamie Robinson found out–he ges well slagged off in this book in multiple places, mostly for making the mistake of interviewing the CEO of Aetna as he was walking out the door–Reggie though remembers that nasty review. She wraps in so many anecdotes, so many stories, and includes so many variants of health services and insurance packages that what she actually thinks will work is baffling. The market will sort it out. But of course, not the market as we now know it (that for instance Don Johnson supports). She agrees that we need some form of change to the current set of market incentives. But she never actually explains what it is that’s going to get us from our current dud system (on which we are agreed) to the consumer-centered nirvana. What type of changes to the tax laws, what about Medicare, how can you mandate risk adjustment? All big deals and all ignored.

This postulating a bunch of stories, flitting from one to another unrelated issue page by page, and not really getting to a solid intellectual explanation is exactly the problem Market-Driven Healthcare had. And of course there was neither a number nor a date in her book–she really understands how to be a forecaster! Well I suppose she nearly titled the book right. As the pharma industry showed us by spending $3bn a year advertising Rx drugs, it should have been called Marketing Driven Healthcare.

I think what she concludes in the latest tome is that Enthoven-style managed competition is a failure, even though it was never tried, but that it can be replaced with giving individuals the right to buy different assortments of flavor of health plan, using their own HSAs, and using highly complex risk adjustment to make sure no one games the system, and that insurers only seek out healthy people to insure. Providers will immediately respond by creating clear bundled pricing for disease states, or episodes of care, or something, these will be offered to insurers, or is it consumers, or is it both, and everyone will wonder happily into the sunset.

And how are we going toa) get everyone into these systems, particularly those who are in Medicare, where the real money is spent?b) cross-subsidize within a group when 80% of the money is spent on 20% of the people?c) pay for the care of the uninsured, rather than allowing them to be gamed out of insurance via underwriting?d) get the providers to actually create these bundled pricing schemes, when her own book shows that the only providers who ever had an incentive to figure out their costs for different care processes (the fully capitated California medical groups in the 1990s) couldn’t figure out their real cost structures?

Oh, all just details, details that Reggie doesn’t seem to think require explanation. According to her introduction she won the best teacher at Harvard award. Either she manages a much higher level of intellectual clarity in the rarified atmosphere of Cambridge than she gets on paper, or those Harvard MBAs are rather less demanding than their equivalents at Stanford.

Reading these two books is just so frustrating. Most of her criticisms of the current system are identical to the pro-managed competition crowd’s–about excessive provider power, perverse incentives, limited information about quality, low use of information systems, etc, etc. But she doesn’t ever give a clear view about what she thinks ought to be done to get from here to there. Or bother defending her ideas properly from the "naysayers" that she attacks. Somewhere in here there are some interesting ideas trying to get out. I just don’t think Reggie is going to be the one to explain them. That of course won’t stop her going on the lecture circuit and making a packet.

My final thoughts? Well as we’re dealing with Reggie, true to her style they’re just random anecdotes. First, when I saw her talk in 1998 she gave the presentation, made all these bold assertions and left without taking a single question. That was symbolic to me. Secondly, she spends a great deal of energy slagging off the single-payer and European models. But her favorite example of a really successful health care focus factory is the Shouldice institute for hernia repair in Toronto. You recall Toronto, it’s in Canada, and this care is all paid for by the single payer system in which the focused factory has thrived, without any help from self-actualizing consumers. But sadly even there the story isn’t that great. A 2001 clinical trial found that the Shouldice technique wasn’t as good as one from Lichenstein. So it’s another example of a North American factory being outdone by a foreign one.

The sad thing is that there is something to the concept of consumers making intelligent choices with their own money. Thrid party payment with cost-unconcious payers and guild-model providers is what got us into this mess. So something needs to replace it. The consumer movement needs as honest an intellectual theorist as Alain Enthoven is to the managed competition model or Steffi Wollhandler is to single payer. Regina Herzlinger is not it. But she sure sells a lot more books than they do.

PHARMA: How big a deal is cross-border Internet pharmacy?

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Regular THCB readers will know that I’ve been forecasting that the Republican administration will have the FDA back down from its stance banning re-importation of drugs from Canada (and elsewhere) mostly because over 80% of the public think that they ought to, and it’s by far the most disliked part of the recent Medicare bill. AARP has thrown its weight behind the change and HHS secretary Tommy Thompson has set up a commission to come up with that ruling, but of course there are still massive objections from the pharma industry. An organization called the Partnership for Safe Medicines is so keen on keeping the status quo that it even had a PR firm contact yours truly to ask me to cover a press conference it had yesterday, which included Peter Neupert, President of Drugstore.com speaking out against imports. Here’s the press release which quotes Neupert as saying:

    “Rogue Internet drug sellers, which operate offshore, overseas, or through Canada, are illegal and unregulated by U.S. or Canadian authorities,” said Peter Neupert, chairman of the board of drugstore.com, inc. “It is extremely difficult for consumers to know who they are dealing with on the Internet today; even sites purporting to be Canadian pharmacies may be actually located in Third World countries. We feel the only safe way to purchase prescription drugs over the Internet is to shop at an online pharmacy certified by the National Association of Boards of Pharmacy(R)’s (NABP(R)) Verified Internet Pharmacy Practice Sites(TM) program (VIPPS(R)).”

A little background. There are three types of internet pharmacy. 1) US based mail-order operations that are legitimate parts of US pharmacies and PBMs or are similar–Drugstore is in this number with Medco, Walgreens etc. They request that you send in a genuine prescription and are just another delivery vehicle like the corner pharmacy or the mail order that’s been used for years with no problems. 2) Then there are the ones who send you spam offering access to Viagra or Cialis and allow you to go online and buy with a prescription “their doctor” gives you. These guys are clearly cowboys and they are being dealt with by the proper authorities here, although some bloggers with a libertarian bent don’t believe that type of dispensing should be illegal. (By the way Trent, I somewhat agree, but it’ll never happen!).

3) What the SafeMedicine folk fail to point out is that there is a third group, which is composed of legitimate pharmacies already certified by the Canadian government which are simply mailing across the border as opposed to across the country. These look far more like the first group than the second. If you go to their site they demand a prescription, and their drugs come from reputable suppliers and are handled in as reputable a way as in the US. So is SafeMedicine advocating that these pharmacies receive the VIPPS certification so that US consumers can tell them from the cowboys? Of course not. They’re holding press conferences like yesterdays and peddling propaganda like this from a Pfizer sponsored doctor-journalist. That’s because the members of Safe Medicine are PhRMA and various associations of American pharmacists, who’s economic interests are hurt by imports, and by restricting the supplies available in Canada they are actually making it harder for those legitimate Canadian pharmacies to get drugs to send to the US and so are opening up the opportunity for the cowboys to step in. If the industry really cared primarily about patient safety they would support the FDA or VIPPS certifying Canadian based online/mail-order pharmacies. This was suggested on 60 Minutes a couple of weeks back by the mayor of Springfield, MA:

    Mayor Albano concedes that casually buying drugs on the Internet could be risky, but says it was quite simple for him to check out his Canadian supplier, and challenges the FDA to do the same thing. “The FDA has become a pawn of the pharmaceutical industry, that they are protecting those high profit margins. If the FDA wanted to put a plan together similar to what we’re doing in Springfield, that would be good for all Americans, they can do it in 15 minutes, relative to safety,” says Albano. “We get all our medications from certified, regulated pharmacies in Canada. It’s no different than going to your neighborhood pharmacy. And it’s the exact same medication.”

So beyond the ridiculous credibility problem that the industry is facing here, and the fact that they seem to have even lost the Republicans they bought and paid for in 2002, how much would it really cost them to retreat on this issue? My guess is not that much. Harris reports this week that only 4% of Americans have bought a drug online when prompted by email (which may of course be spam or a legitimate reminder email from drugstore.com or a competitor). That number is itself a problem for Drugstore.com, because it really means that only a small proportion of the drugs consumed in America come via mail order or online.

One number I found was that mail order counted for around 14% of all drugs in 1999–that was back in the days when PlanetRX and Drugstore.com could actually afford advertising! The vast majority of that 14% comes from the big PBMs mail-order operations. There don’t appear to be any good numbers on the amount of imports (at least the AMA News couldn’t find any) Quick update IMS reports that imports from Canada totalled about $1 billion in 2003 which is less than 0.5% of all drugs sold. The fundamental question is, why would you bother going to the trouble of importing from Canada if someone else is picking up the tab? Most Americans have pretty decent drug coverage and aren’t getting their drugs from Canada. The ones that do are the small share of Medicare folks who don’t have any drug coverage, and a few leading edge employers (like the city of Springfield). I suspect that the cost of losing that revenue is less than the hit the pharmas are taking in bad publicity right now. Let alone how bad it might be for them if this issue is enough to lose Bush Pennsylvania and Florida, which it well might be. In 1992-4 the pharmas kept pricing in check in what we called the “heads down for Hillary” effect. In the end the outrage against their pricing then wasn’t enough to prompt price controls, and they had a bonanza for the rest of the 1990s. Those tactics might be just as advisable now.

TECHNOLOGY/QUALITY: Physician use of point of care clinical information

So the proof is in–informed medical decision making at the point of care for physicians works and they like it. A very large sample of physicians (over 5,000 surveyed, out of 55,000 clinicians who could access the system) were given a point of care information system. 63% of them knew about it and 75% of those, used it. 41% of those users reported that they directly improved patient care they delivered by using the system. (The results are in the abstract here).

The only reason that this isn’t sweeping American medicine as we speak is, of course, that the system is only available in Australia.

PHARMA: Spitzer looks into Norvir pricing controversy

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THCB readers will recall that last year Abbott radically increased the price of its HIV drug Norvir mostly in order to make competitors drugs taken with it more expensive than a combo pill it was launching. Well apparently NY state attorney-general Eliot Spitzer has already opened an inquiry into the issue and several New York state agencies and HIV pressure groups are piling in. In the most recent exchange, the New York Department of Health, which of course runs the biggest and most expensive Medicaid program in the US (yes, more than California’s!) wrote in a letter to an HIV group:

    "We have requested representatives from Abbott to present their documentation regarding this claim [that the price hike would not harm Medicaid programs], however we are not yet convinced that this is the case."

You may love the bureaucratic understatement, but the intent is clear and Spitzer has proved his ability to go after corporate "bad guys" enough that Abbott may have to tread carefully here.

PHARMA & TECHNOLOGY: JSK on scenario planning, Mittman on forecasting

If you go down a couple of pages in this edition of Pharma Marketing News you’ll find an interesting article written about a speech Jane Sarasohn Kahn gave to a pharma conference about scenario planning. Once you’ve taken a look at that, read this article by Robert Mittman on forecasting technology change. If you can steal the components of these two pieces and make a powerpoint chart, you can now officially call yourself a futurist.

Hey, it’s worked for me for years…..

PHARMA: Pharma stocks–Apparently it’s all Kerry’s fault

Investment magazine Barron’s claims that the pharma sector’s stocks have slid because of fears that Kerry will win the election and presumably institute price controls. Quite how he’ll do that with a Republican house and Senate is a good question, unless of course Barron’s thinks that the Democrats will sweep those races too. And further to this question if you look at the 6 month chart of Astra-Zeneca, BMS and Pfizer versus the S&P, you notice that over time only BMS has really hit the skids–and that has far more to do with Pravachol’s impending patent expiration.

And of course if you want to compare stock prices, note that as shown in the chart below Pfizer’s stock price tripled in the second Clinton administration, and has gone down under Bush.

So I suspect that no matter who’s in power, you’re better off being a pharma with a great pipeline than one with great clout in DC!

POLICY: Redefining the underserved–1 in 8 Americans have no access to basic care

I’ve just returned from a hospital meeting at which some take-all-comers, mission-driven hospitals are seeing bad debt ratios of up to 12% of patients, and at the same time the National Association of Community Health Centers reports that 36 million Americans lack access to basic care. These are not just the uninsured, some of whom do get access to care–hence the 12% bad debt ratio at that hospital. And don’t forget that at any one time 1 in 7 Americans is uninsured.

But roughly half the 36 million do have some level of insurance, even if it’s Medicaid (which in a state like Texas is barely what most of us would recognize as health insurance). The problem is not so much insurance as it is access to providers. As Dan Hawkins, Vice President For Policy at NACHC said:

    "They live in inner-cities and in isolated rural communities. But no matter where they live, the story is the same: they can’t get health care because there aren’t enough doctors in their communities who are willing or able to care for them."

The dirty little secret of American health care is that although we have an over abundant supply of facilities and doctors on a national level, at a micro-regional level there are areas that are severely under-served. Many rural regions have less than one-third the number of doctors per head that are seen in affluent suburbs, and if you are living in an inner city area, the experience is similar. The dedicated folks doing the worthy work at community health centers and in county hospitals are desperate to get this message across. Dr. Gary Wiltz, MD, Executive and Medical Director of Teche Action Board in Franklin, Louisiana said:

    "Where the unserved live, there are higher rates of infant and childhood illnesses, and higher mortality rates. In my state, which is the most medically unserved state in the union, we have a diabetes rate that is out of control–and that is because the diabetics who need help don’t have a doctor, or can’t go to a doctor because they don’t have transportation; or can’t afford a doctor, or even the medicines they prescribe."

This doesn’t stop when patients become eligible for Medicare, even though it’s not supposed to be a "separate but equal" system as Medicaid tends to be. Several reports including this one about knee surgery rates published in the New England Journal of Medicine last year, or this one in JAMA about access rates for Medicare HMO enrollees show that minority populations are less likely to get care than whites. And it’s not racism on the part of plans or providers that’s the cause. The problem is that there are fewer providers where minorities tend to live.

Of course the health service researcher cynics amongst us might think that minorities are doing better because they get less care, but a Kaiser Family Foundation report shows that being poor, non-white, un or underinsured and having problems with language severely restricts access to care, and results in much poorer health outcomes for those groups. For instance:

    One result of limited access to primary and preventive health care is an increase in the extent to which patients are hospitalized for conditions, like asthma, that could be avoided with appropriate primary care. Gaskin and Hoffman found that Latino children and African American adults were more likely to be hospitalized for such preventable disorders than similar white patients. Disparities in access to care are not a new or recently discovered phenomenon; studies done in the mid-1980s found that Latino adults and children had substantially less access to a variety of health care services than their white peers.

Sadly the political impact of this report will barely make a ripple in the sea of the healthcare system it’s dropped into.

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.

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