Shifting Costs Is Not Saving Costs

Today’s Managing Health Care Costs Indicator is $11.54

Today’s Boston Globe brings another depressing headline, “State Will Cut Flu Shots by Over Half.”   The state’s Commissioner of Public Health puts a brave face on this public health blunder, pointing to the high rate of insurance among Massachusetts residents.  He said

“We think it’s a good thing for people to use their insurance card when their insurance card will pay for a service.”

But he’s demonstrably wrong.

The state purchases vaccines for $1.44 less per dose than they can be acquired by private purchasers.  While all of us can go to a CVS or a Walgreens to get a flu shot, the injection that would have cost the state under $11 costs our insurer as much as $30. 

Influenza vaccines save lives – and they reduce overall health care claims costs.  They’re a good deal for insurers to cover – even if they pay physicians just about $20 for the vaccine and administration.  But they’re an even better deal for the state to purchase (at a discount).   Vaccination is a classic public good ; when I get vaccinated, not only am I protected, but I’m less likely to infect  everyone I meet.   

State purchase of vaccines has helped Massachusetts lead the nation in childhood vaccination – and these vaccine programs are threatened by budget cuts as well.

So – the federal government will lower state aid, and the state will cut flu shot budgets.  Either health insurance will purchase these vaccines for an even higher price, or people will go without the vaccinations, and suffer from worse health and sometimes die.  Either way, for lack of paying for flu shots, health care will cost more – not less.

While I’m on the topic of cost shifting, Austin Frakt had a post in the Incidental Economist  last week that  mentioned another unpardonable cost shifting proposal, the proposal to raise the Medicare eligibility age.  Raising the age from 65 to 67 would ‘save’ the federal government $5.7 billion. But it would cost those who would have otherwise been eligible for Medicare $3.7 billion, employers $4.5 billion, and would cause other premiums to rise by $2.4 billion due to the influx of older, sicker people into the health insurance exchanges.  

Total “savings”:  $5.7 billion

Total “costs”:      $11.4 billion

This is a terrible deal.  To lower health care costs we have to lower resource inputs – we can’t simply cut spending in one place (the federal government) and ignore how those costs will be borne by others. 

(12-22-11  I corrected an error in earlier version which suggested Frakt was critiquing the Ryan plan.  He's since done a multipart series on Medicare premium support proposals. )

Time Defined Activity Based Costing

I wanted to spend a bit more time talking about a thoughtful piece in the September Harvard Business Review http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1 by Robert Kaplan, who originated the Balanced Scorecard, and Michael Porter, business strategy guru, and author of Redefining Health Care.

The cover of HBR points to the article’s debunking of reviews three myths about health care costs

1)     Charges are a good surrogate for actual health care costs

2)     Hospital overhead costs are too complex to allocate accurately

3)     Most health care costs are fixed.

I think the real insight of this article is that it’s hard to get more value out of health care if we don’t know what the real resource cost is.  And let’s be honest – we almost never really know what the resource cost of a service is.   Beth Israel http://managinghealthcarecosts.blogspot.com/2011/08/bundled-payment-matters-beth-israel.html physicians are walking around with a price list – but that’s the price charged –not the cost to deliver the service.  The actual marginal cost to perform an upper airway endoscopy is the physician’s time (less than 10 minutes) and the cost of sterilizing a machine – not the $1000 price tag!

Activity based costing is painfully difficult to implement – essentially someone has to stand around with a stopwatch and do “time and motion” studies.  As you can imagine, physicians aren’t thrilled with that approach, and it isn’t cheap to implement.  Kaplan has developed a wonderfully intuitive short cut – time-driven activity-based costing (TD-ABC) which uses standardized time units. 

The authors give a number of examples of health care providers who have implemented this, and decreased their resource costs while likely improving quality and reliability. The case studies include MD Anderson Cancer Center in Texas, Children’s Hospital and Brigham and Women’s in Boston, and Shon Klinic in Germany.  The examples are generally around procedures more than cognitive services- but this approach should work for cognitive services as well.

The most difficult element of implementing TD-ABC will be that it requires process maps for each activity that will be assessed.   Physicians are notoriously unwilling to standardize processes – and developing a process map requires this.  TC-ABC fits very well with LEAN and Toyota process improvement other techniques seeking to reduce waste- and gives executives a better way to measure waste.

I believe there will be unprecedented pressures over the next years to lower medical costs. Lowering prices alone won’t be sustainable – hospitals and physicians will have to figure out how to actual lower input costs. TD-ABC give hospitals and physicians a powerful accounting tool to be sure that they know where they can cut actual expenses to be able to continue to meet their mission of providing high quality health care. 

TD-ABC is also further evidence of the need to standardize medical care delivery.

Bundled Payment Matters: The Beth Israel Example

Today’s Managing Health Care Costs Indicator is 10

Paul Levy , the former CEO of Beth Israel Deaconess here in Boston, wrote a few days ago  that the “religious” belief among architects of health care reform that we need to move away from  Fee For Service payment was distracting us from other reforms that could genuinely make health care better.  

He writes:

How much damage is being done and how much time is being lost by our society by a religious belief in a payment scheme that has not been proven and that has many inherent difficulties? 

I beg to differ, and I offer his own Beth Israel as an example. 

There was a report two days ago on WBUR  about a new program by the physician organization there to educate physicians about the prices of various tests they order and procedures their patients undergo.   The primary care physicians, it turns out, are enraged that every time an otolaryngologist performs uses a scope to view a patient’s larynx the cost of an office visit goes up by a factor of 10. 

Why do physicians rarely know the prices of what they order?  There are a multitude of reasons – which include our chaotic pricing system where each payer allows a different amount for the same procedure and high margin procedures cross-subsidize lower-margin services.   (Great article in September’s Harvard Business Review by Michael Porter (Redefining Health Care) and Robert Kaplan (Balanced Scorecard) on the issue which illustrates the folly of how we currently account for health care costs; I’ll have more to say on this article in the coming days). 

What has made the BIDMC physician organization decide to tackle the issue?  I’d argue that this is a result of the BIDMC’s participation in the alternative quality contract with BCBSMA – a payment system that includes a total global budget  - capitation by another name.  When a group of doctors are responsible for overall costs, they start caring about the resource costs of care delivery!

The AQC hasn’t saved any money in its first year , and it’s easy to throw stones.  But sensitizing physicians to prices and costs, who order many of the procedures that drive health care costs up, is certainly a good first step.

By the way, for a longer description of the problems of fee for service, see a series of past posts

Part One

Part Two

Part Three

Cost Sharing Keeps Cancer Patients From Getting Medications

Today’s Managing Health Care Costs Indicator is $1700

That’s what a patient with leukemia has to spend out of pocket each month to get a new medication for a rare kind of leukemia in an employer health plan with a “fourth tier” for specialty drugs, according to an article from Kaiser Health News in yesterday’s USA Today.    In her case, the full cost of the medication is $6800 per month.

Fourth tiers in drug benefits are increasingly common – as employers struggle with the increasing cost of specialty medications, which often cost $50,000 or more per year.  In a fourth tier, patients must pay a percentage of the cost of a medication (coinsurance), rather than a set dollar copayment.   

These specialty drugs usually target chronic diseases like certain cancers, multiple sclerosis, or rheumatoid arthritis – so their cost recurs month after month after month.   Many of these drugs represent the best advances in clinical medicine in my generation.   I’ve written before about Chronic Myelocytic Leukemia, which was once a rapid death sentence.   Patients now take Gleevec ($40-50,000 per year) and often have normal life expectancy. 

Research  suggests that 10% of oral cancer medication prescriptions are abandoned at the pharmacy -  the portion of medicines with over $500 cost share not picked up by patients is over 4 times as large as those medicines with cost sharing of under $100.

There is no “perfect” answer to this problem .  We want drug companies to do research for novel treatments for rare diseases, but the research is of little social value if many Americans can’t afford the resultant treatment. 

Possible approaches:

1. 1)   Higher member cost sharing for expensive drugs.   This penalizes those who have already lost the “health lottery,” and causes poor medication adherence.  It does put pressure on drug companies to lower prices, since we are all more price sensitive when exposed to more of the bill. 


2. 2)   Share cost of these medications over a large population (no higher cost share for specialty medications).   There are good insurance reasons for a large population to share the cost of these medications.  However, this doesn’t exert pressure to lower prices.


3. 3)   Special programs to fund these medicines for those who can’t afford them. Drug companies offer programs for discounted or free medicine for those in poverty, but these programs are difficult to navigate and often lead to missed doses.  They are also an effective form of price discrimination that lessens pressures to make medicines more affordable.


4. 4)   Price regulation:  This is the European approach to specialty medication cost – and the US is among few industrialized countries that have no price controls on pharmaceuticals.  On the other hand, price regulation could decrease research for drugs to treat rare diseases. Furthermore, well-meaning price controls are why some inexpensive generic cancer drugs are currently in critically short supply in the US.  


5. 5)   Allow the FDA to consider cost when it is approving new drugs.  Clearly, this has helped the National Institute for Clinical Excellence (NICE) negotiate lower drug prices in the UK.  On the other hand, the public outcry about drug availability has led the UK to restrict NICE’s ability to consider price when approving medications.


6. 6)   Perform medical management, such as prior authorization, to prevent overuse of these expensive medications.   This can help prevent waste and make patients try less expensive alternatives first.  However, there are rarely good alternatives for these medicines.  Utilization management programs work best where the problem is overutilization, and in this instance the problem is unit cost.


7. 7)   Include these expensive medicines in bundled payments, to transfer the risk to providers.   This would help only if providers are now overutilizing these medications, and could discourage physicians from caring for patients who have diseases responsive to these expensive drugs.


8. 8)   Bulk purchasing can yield higher discounts, but these expensive drugs have a single source.  Required Medicaid “most favored” pricing discourages pharmaceutical companies from offering significant discounts to other payers.  

Where no approach on its own seems efficacious, it’s usually wise to consider a hybrid of various approaches.  With the increase in specialty pharmaceutical costs likely to continue, and few of these drugs going off patent any time soon, there will be continued pressure to lower the acquisition costs of these medications.   Expect to hear more of these horror stories in the future.

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