Day Six of Good News: Massachusetts

Today’s Managing Health Care Costs Indicator is 2%

If you watch the Republican Presidential debates, you’d guess that the health care system in Massachusetts was in utter disarray.   Mitt Romney at least intermittently runs away from what’s probably the signature effort of his one-term governorship, and Newt Gingrich and others rarely go a day without throwing mud and bombs.

Here in Massachusetts, things are… much better than you might think.

• Our rate of uninsured is about 2% - the lowest in the nation
• Our current rate of health care cost inflation is no longer the highest in the nation, although it’s still far too high
• There has been a dramatic move toward contracts that include global payments, which will likely mean that providers will play an important role in modulating future health care cost increases
• The Attorney General has published meaningful cost data that has been risk adjusted.
• The state just renegotiated its Medicaid waiver, allowing continued funding for subsidies for health care coverage for the poor and near poor.

Massachusetts’ health care reform was clearly a model for the Affordable Care Act. It’s working well here –which augers well for the future of health care in the US.

I wish all a Happy New Year –and I’ll have some 2011 wrapup and health care innovations that could lower cost from my HSPH fall course “Managing Health Care Costs” over the next week.

RomneyCare Works.

Today’s Managing Health Care Costs Indicator is 98.1%

Click to enlarge image

There has been a lot in the national press about how health care reform in Massachusetts has worked.  There's a lot of blather on both sides of the political spectrum, and the Boston Globe had a comprehensive article today reviewing how “RomneyCare” is working here. 

Conclusions:

1) Far more people are insured than before health care reform, despite the disastrous recession (98.1%)

2) More employers (up from 70 to 76%) are offering insurance, again despite the recession

3) The exchanges work for individuals - they haven't worked well for small employers yet

4) The cost of the care of the uninsured has declined.

5) There is inadequate primary care access, and ED visits have gone up rather than down.

6) The cost has been manageable - but the state has relied on some payments from the feds (stimulus dollars and Medicaid add-on dollars) that will not continue. The federal government has paid a disproportionate share of the total cost (as it will under the Affordable Care Act).

7) Health care reform promised incremental provider Medicaid payments that have not been funded. Hospitals say they must pass these costs on to other payers, which worries employers greatly.

8) Health care reform is actually pretty popular in Massachusetts.  The last Harvard School of Public Health poll said that 63% of residents support health care reform. 

Massachusetts’ Health Care Reform: Chapter 2

Today’s Managing Health Care Costs Indicator is 52

  

Governor Deval Patrick of Massachusetts announced the state’s plans to move from fee for service to bundled payments for accountable care organizations (ACOs) last week.   The initiative could be a bold reshaping of health care in the Commonwealth It could be the opening volley in a battle to reintroduce rate regulation.  Or it could be an interesting idea that doesn’t make any legislative headway. 

Here’s my outline of the 52 page proposed legislation: 

·      * The Attorney General is instructed to:

o   Evaluate potential provider mergers and accountable care organizations (ACOs) to be sure these are not anticompetitive

o   Help arrange necessary federal waivers

o   Develop an enforcement mechanism to prohibit providers from shifting costs from one payer to another.

·      * The Division of Insurance will

o   Collect data on provider contracts and determine if they are consistent with legislation, including increases below certain thresholds.

o   Disapprove rate hikes that are based on provider contracts inconsistent with this legislation

·      * The Executive Office of Health and Human Services will

o   Help arrange necessary waivers

o   Establish an ACO pilot with early-adopter provider organizations

o   Report on progress

·      * The Division of Health Care Finance and Policy (DHCFP) gets substantial new responsibilities:

o   Evaluate alternative payment methods

o   Determine how to share reporting on payments with the public

o   Examine terms of health plan contracts with providers, and require annual reporting on these, including an inventory of payment methods to be completed by March, 2012

o   Figure out how to apply the state’s preferred payment methodology to self-funded employers

o   Study best practices from other states and other countries

·      * Establishes a Health System and Payment Reform Coordinating Council with responsibilities including:

o   Collects data and report on quality and cost

o   Determines what entities qualify as an ACO

o   Monitors and reports on ACO performance

·      *Establishes a Health Care Information Technology Council and a Behavioral Health Task Force

·      *Mandates that primary care physicians participate in only a single ACO

·      *Establishes a mandatory self-funding reinsurance plan for ACOs 

·      *Standardizes and enforcesuniform risk adjustment so that ACOs and health plans will not “win” by failing to serve those with serious illness.

o   Risk adjustment is supposed to include socioeconomic status, which is notoriously difficult

·      *Malpractice reforms include

o   “Cooling off” period before malpractice claims can be filed, to allow for settlement talks.

o   Disallows apologies from being used against providers in malpractice claims.

o   Protects peer review privilege within ACOs

This is a big bill – and will be changed significantly as it winds its way through the legislative process.

Here are some key observations about factors which will determine this bill’s success.

•  There are many new responsibilities, especially for DHCFP.   Will there be staff to complete these requirements? Will there be adequate budget to hire independent actuaries and analysts for what the department cannot do within its own staff?
• Providers and health plans feel proprietary about their contractual arrangements, and have spent years developing the expertise to maximize returns.  The contracts are complex and often not easily comparable
• It isn’t easy to compare provider prices
• It’s easiest to compare cost using relative discount rates.  But the ‘chargemaster’ used by most providers is hopelessly irrational.
• It’s also possible to compare charges for high volume units of service (such as medium intensity office visits.) 
• However, it’s more appropriate to compare the cost of risk-adjusted episodes of care, so that the provider who uses more units of service doesn’t inappropriately appear to be offering a better “deal.” 
• Risk adjusting episodes of care is doable- but it’s not for the faint of heart.
•  The current bill appears to target rate of increase, which would not address existing disparities in allowable fee schedules.
• A substantial portion of Massachusetts residents get coverage through ERISA eligible plans, where an employer self-funds the health insurance benefit.  These plans are not subject to Massachusetts regulations.   If these plans continue to be fully committed to fee for service, it might be hard to get traction with the provider community
• On the other hand, Patrick has announced that he expects full participation of 1.7 million beneficiaries who have state-funded health care (state employees, many municipal employees, and Medicaid recipients).

This proposed legislation is ambitious and groundbreaking – a fitting followup to the health care reform that has led to insurance coverage for 98% of Massachusetts residents. 

The Republican Health Care Plan

Today’s Managing Health Care Cost Indicator is 239

The election is over, and while the Democrats retain a narrowed majority in the Senate, they lost 60 House seats.  John Boehner will take over as Speaker of the House in January.  There are 239 Republicans as of now in the next House; the NY Times reports that there are seven seats still undecided.

The election season had plenty of overheated rhetoric about health care – and Republican whip, Eric Cantor, has released a health care plan with some detail.   

Here’s a summary of that plan:

1. Establish high risk pools for those who are difficult to insure, and fund this with $25 billion.
   The funding is small, and there is a promise to cap their premiums at 50% more than regular premiums, which would be actuarially expensive.
2. Extend HIPAA so that employees would be protected from exclusions of preexisting illness even if they did not exhaust their COBRA coverage
3. Eliminate annual or lifetime maximum
4. Prohibit recissions (where an insurance company withdraws coverage that has already been in force and paid for because of an often-minor error in the original application.)
5. Fund $50b for a state innovation fund
6. Establish state health plan “finders,” a marketplace for health plans, as opposed to exchanges, where consumers can purchase health plans
7. Administrative simplification
8. Allow small businesses to band together as “association health plans.”
9. Cover dependents on their parents’ plan until age 25 (instead of the 26 in Affordable Care Act)
10. Eliminate legal barriers to auto-enrollment, or “opt out” insurance, where employees will be enrolled unless they refuse.
11. Allow interstate sale of insurance
12. Make health care savings accounts more attractive, through tax credits and by allowing their use to purchase high deductible health plans (HDHPs), to fund some past expenses,  and by requiring greater HDHP-HSA coordination
13. Malpractice reform, including caps on noneconomic damages ($250,000), proportional damages (meaning that the party with deep pockets or generous insurance would only pay her share of damages), and limits on attorney billing.
14. Eliminate comparative effectiveness research.  The cost of this research is small, and it could help us figure out what health care is most valuable.
15. Allow higher discounts for wellness.  This effectively allows higher penalties for those who do not have healthy lifestyles.
16. Increased funding for antifraud efforts, as well as better subrogation to recover claims from other responsible parties and tracking banned providers across state lines.
17. Prohibitions on taxpayer funding for abortions and protections for health care professionals who don’t want to participate in certain procedures, such as pharmacists who believe the “morning after pill” is equivalent to abortion and therefore immoral.
18. FDA approval for biosimilars. This is similar to the Affordable Care Act

There is a lot missing from this bill.   There is no employer or individual mandate, and no big bucks for subsidizing health care purchases by those of low and modest income.  It’s likely that the bill will have little effect at decreasing the number of uninsured Americans.  There is no Medicare Payment Commission to help reign in costs if the market "doesn't work."

What would the Republican plan do to health care costs?

Malpractice reform could help lower the cost of health care a bit, although these changes could make it harder for genuinely harmed patients to receive legal assistance for a tort claim.  More systems to detect and prevent fraud can also lower health care costs.

Allowing interstate sale of insurance would essentially eliminate state regulation of health insurance, since all health plans could simply move their domicile and be subject to regulation by a different state.  Just as most businesses prefer the corporate regulation of Delaware, we could see most health plans relocating to a low-regulation state.   This could lower the cost of health care, to the extent that many states have expensive coverage mandates.  It would likely lower consumer protection, especially in the northeast and on the west coast.

There are no cuts to Medicare, so Medicare would remain on track to have an “insolvent” hospital trust fund by 2017.  It’s ironic that many Republicans including Newt Gingrich have suggested that Americans should be weaned from Medicare, while this plan actually means Medicare costs will be substantially higher than with the Affordable Care Act. 

There are no cuts to Medicare Advantage plans, although a number of studies have suggested that many of these are overpaid, especially the private fee for service plans.  Further, the bill includes no taxes on providers, pharmaceutical companies, medical device companies, and insurers.

Overall, the Cantor plan would lead to fewer Americans insured and higher federal deficits than the Affordable Care Act.  Overall health care trend is not likely to bend significantly because of the Medicare provisions of this proposal. 

Another article of note: The NYTimes reports that some employers are charging differential insurance rates for highly compensated employees compared to lower compensated employees.   As premiums go up, those with lower income have suffered from both increased premiums and increase in out of pocket costs at the point of service.   Keeping health care affordable for those of modest means will require that the premiums be affordable and that copayments and coinsurance aren't ruinous.   Thanks to Wing Lee of HPM235 for pointing out this article . 

Health Care Reform Will Lower Long Term Medical Costs

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This image from The Washington Post

There has been a lot of blathering about how the new estimates from the CMS actuary show that health care reform will increase the cost of health care.   In fact, the Wall Street Journal's headline is "Health Outlays Still Rising".

Here's the commentary in the WSJ:

The report by federal number-crunchers casts fresh doubt on Democrats' argument that the health-care law would curb the sharp increase in costs over the long term, the second setback this week for one of the party's biggest legislative achievements.


The graphic above is from a pithy post by Ezra Klein of the Washington Post, who points out that there is a cost spike from providing subsidies to cover 10% of the population.  It's striking that in the out years (and that's what counts), the costs are lower under health care reform even with the near-universal coverage.


The costs are lower because of diminished provider payments, which will extend the life of the Medicare trust fund, as well as make it possible to cover most of the currently uninsured while lowering the federal deficit.    The reform bill is far from perfect - but is looking like a very good deal indeed. 

Should teachers support repeal of health care reform?

 Nebraska’s (Republican) Governor Dave Heineman is on the mark when he points out that costs of health care “crowd out” other important social needs. That’s the reason why it is so important to decrease the rate of medical inflation.

Here is his quote: 

"Increased funding for Medicaid is likely to result in less funding for education," Heineman says in the letter sent Wednesday to associations representing teachers, school boards and school administrators. "Don't sit on the sidelines," it says later. "I strongly urge you to support the repeal of the recently enacted federal health care law."

Is Heineman right that school committees in Nebraska should fear the health care reform act?

The Kaiser Family Foundation  has calculated how much each state will spend to comply with health care reform (largely Medicaid expansion), and how much new federal money will come into the state.  In the case of Nebraska, KFF projects that the state would spend $106 million from 2014-2019, the federal government will spend over $2.3 billion, or over 95% of the total new spending.  This $2.3 billion will lead to new jobs – and with a 6.84% income tax, the increased income tax alone would equal the cost of the state Medicaid outlays as long as 2/3 of the spending is on salaries. That’s not counting a “multiplier” effect where one person’s new income leads to increased incomes for everyone from whom she purchases goods or services, and it’s not considering state sales tax of 5.5%.

Across the country, most analysts believe health care reform will increase the cost of overall health care by a very modest amount.   The reform bill also includes some serious cost control, including cuts in payments to Medicare Advantage health plans, cuts to providers, funding for comparative effectiveness research, and a Medicare innovation center.  The answer to health care crowding out other important social services isn’t repealing health care reform, but building on it.   Teachers should not be on the picket lines pushing for repeal.

Health Care Reform Will Save Medicare Costs

Today’s Managing Health Care Cost Indicator is $575 billion        

The Washington Post reports that the health care reform bill will

• -       Save $8 billion in 2011
• -       Add 12 years of solvency to the Medicare trust fund
• -       Save $575 billion over the next 10 years

Where is this money coming from?  For starters, Medicare will continue to increase in cost – just not as fast as it would have without the passage of health care reform.   The biggest losers (Modern Healthcare, registration required) 

• -       Hospitals and other providers  $205 billion
• -       Medicare Advantage plans $145 billion

The estimate suggests that care improvement will result in savings of $13 billion over 10 years.

This won’t solve all the problems in health care finance (and savings in Medicare could result in cost shift to other payers).  But this demonstrates that health care reform does begin to address the cost problem.

What's in a Medical Loss Ratio?

Today’s Managing Health Care Costs Indicator is 80%

Health care reform requires that commercial health plans spend at least 80% of their collected premium on delivering medical care.  The idea of this rule is to prevent bloated administrative costs, including executives with sky-high compensation, high profit margins for shareholders of public companies, and massive administrative structures which add cost but not value to health care.  But the devil, of course, is in the details.  The Times  reports that health plans are frantically lobbying to reclassify some costs as medical costs.

Insurers have focused on the “medical loss ratio,” or MLR, for years. Wall Street analysts routinely issue “sell” ratings for health plans with high MLRs, and regard health plans which have low MLRs as likely to ‘outperform’ the market.   That’s why many plans sought to keep their MLRs low to please Wall Street, even if now they will need to keep MLR high to please regulators.  But MLRs are like most of accounting – and are far more subjective than they might at first appear.

How do health plans spend their premiums?

They pay for health care delivery – cut checks to doctors, hospitals, pharmaceutical companies, medical device companies, and all sorts of other parties who directly deliver health care.   Those payments are unequivocally part of the medical loss ratio – there is no argument.

BUT – some health plans, like Kaiser Permanente, pass more of their premium dollar on to their delivery system (the Permanente Medical Organization for outpatient and professional care). The Kaiser delivery system does some of the medical management that would be done by one of the national health plans (like Anthem, Aetna, Cigna or United) for providers not in an integrated system.  So, there is general agreement that the cost of medical management programs, whether done by providers or done by health plans, can also be counted in the MLR.

There are some things health plans do which pretty obviously should NOT be counted in the MLR.  For instance, a health plan sponsors a local baseball team, or purchases advertisements on television.   I don’t think anyone would argue that this should be part of its medical loss ratio. Same goes for stock dividends, or bonuses for the senior leadership team.  These are administrative expenses, plain and simple.

Then, there are health plan activities that might improve health care delivery, but feel very much like health plan administration.   Aetna argues that its fraud detection programs should count as part of the MLR. Anthem wants to count its physician credentialing activities.  AHIP wants MLR to include any health plan expense to move from ICD9 to ICD10, a method of classifying diagnoses.

The Washington Post reported that Anthem/Wellpoint recategorized a half billion dollars of expenses from administrative to MLR in April. 

Many health plans are also seeking to exclude payments to brokers from the definition of premiums collected, since these premiums were not available to the health plan, and the brokerage commissions are critical to making health insurance available (much as it’s often hard to sell a home without a realtor). 

There’s also another problem of small numbers.  Health plans will be judged state by state, and some health plans have very small populations in some states.  These small enrollments might have a low (or high) MLR based on chance alone, and this regulation could cause health plans to further consolidate or to forego expansion to contiguous states, diminishing competition.  The Maine insurance regulator has requested a waiver from the 80% rule, fearing that one of two remaining health plans in that state would abandon Maine if forced to lower its profit margin.  

My business school accounting professor, Mike Kirschenheiter, asked us to recite  “There is no truth in accounting” at the beginning of each class session.   He went on to point out that subjective decisions inherent in accounting should be made with a clear vision of the goals.   In this instance, the goal is that health care premiums are used to improve health care.   We should keep this in mind as regulators clarify what is counted in the “medical loss ratio.” 

Today’s Managing Health Care Costs Indicator is

$180  million

That’s the amount that the Seattle Children’s Hospital says it has saved in capital costs over the last six years by instituting lean techniques, or the Toyota method.  The effort is highlighted in an article in today’s New York Times.  

Seattle Children’s Hospital has invested in training and measurement and consulting services to adopt the Toyota method,  and has studied its processes and standardized, overcoming physician demands for autonomy and nursing demands for high (and fixed) staffing ratios.   The hospital has been able to increase its volume while resisting large new capital investments in its facilities. That’s important, because capital investments require higher reimbursements in the future.  The cost of servicing this type of debt (3%, 10 year amortization) is $5.6 million per month – so avoiding this new investment really matters

One of the ‘wastes’ that the Toyota system focuses its attention on is waiting.  Keeping patients waiting a long time isn’t just bad for patients – it’s really expensive.  An efficient system that eliminates the waste of waiting needs fewer staff, fewer  chairs, and even fewer new parking spaces.  The result is that a “lean” health care system is able to deliver care that is more likely to satisfy patients, and do it for less.

This is especially important as we travel into the post-health-reform world.  The pressures on hospitals to lower their costs will be very large.  Hospitals will receive $245 billion less  in increased reimbursements over the next ten years as part of the PPACA Act, and more patients will be enrolled in Medicaid, which historically pays very low rates.  It will be hard for hospitals to simply shift those costs onto those with employer-sponsored insurance, since that would raise employer premiums so much that more would exit offering health insurance altogether.

It’s heartening to see institutions reengineering to lower their resource costs. That’s the only way that we can succeed in expanding access dramatically without continuing to have rampant health care inflation.   Seattle Children’s Hospital is using techniques honed in the best manufacturing plants in the world to provide higher value.

“As Good as it Gets”: RAND's Evaluation of Health Care Reform Bill

RAND researchers Elizabeth McGlynn et al have used a microsimulation model to conclude that the health care reform bill signed into law did about as good a job of expanding coverage without increasing the bill (much) as we could reasonably expect within the confines of the real political world.

The researchers did a sensitivity analysis with multiple variables, including:

1)       Varying individual or employer penalties for not obtaining or providing health insurance.  Researchers found that lower penalties increased the cost of expanded coverage.  Increased penalties lowered the cost of increased coverage – but were not likely politically palatable.  

2)       Varying the threshold for Medicaid eligibility. If this is lower than the federal poverty level, the rate of uninsurance remains high.   If it is set above 133%, there is more ”crowd out” with members leaving employer-sponsored plans, which increases the cost to government.

3)       Varying the restrictions on increased costs for older enrollees.,

All modeling was done as if there was a single national exchange, and the researchers did not consider penalties collected (essentially discounted these at 100%).

The researchers also evaluated which scenarios led to the highest value for consumers.  Invariably, there was a proportionate relationship between government spending and value to consumers – so to reliably give more benefit to consumers, government spending would have to increase. 

In the graphic above, the origin (red square) is the health care reform bill as passed.  Area 1 represents less government spending AND more people insured.  It’s the smallest area – meaning the fewest of the simulations were here.  All of these were judged by the authors to be political non-starters,.  Area 2 is unequivocally worse outcomes – higher government cost with fewer new enrollees covered.  Area 3 represents more coverage and higher spending, while Area 4 represents less coverage and lower spending.  (3B and 3B represent better ‘value’ – in that there is less government spending for each newly insured person).

We all know what’s wrong with the Patient Protection and Affordable Care Act (PPACA).  We wish that its cost saving was more iron-clad, and we wish some of the benefits came more quickly. We are worried that some of the cost savings might be overstated.  Having said that, the sausage-factory that is Congress ultimately passed a bill that does an admirable job of increasing coverage and being prudent with taxpayer dollars.  

Insurance Companies Targeting High Risk Patients for "Recission"

Reuters published an excellent and scary article this weekend about Anthem/Wellpoint routinely targeting those with newly diagnosed breast cancer for investigation and possible termination of their coverage. The article is replete with multiple case studies of women forced to pay out of pocket or delay care while they fought with Wellpoint.

Wellpoint suggests that its efforts to find 'cheating' and kick sick patients off its insurance plan is part of its responsibility to prevent fraud and lower the cost of health care.  There is some truth to this - if the sickest lie to gain voluntary insurance, it raises the cost for all.  The truth is, though, it's always less expensive to care for a healthy population than to care for a sick population.

In some ways, this is old news.  In 2008, Wellpoint paid California a fine of $10 million and agreed to resume coverage for almost 1800 it had kicked off the plan. (search for "cancellation" to find the story within this Wikipedia entry).

Health care reform will outlaw these practices, and the Reuters reporter suggests we need more vigorous regulatory enforcement.    I agree - but I don't think that goes far enough.  

We need
(1) Universal mandate - so that everyone chooses health insurance - not just those with illness. We can't make health care affordable if only those with adverse risk choose to be in the "pool."  Health reform has this, although many worry the mandate might be weak enough than many healthy people will continue to opt out.
(2) A community-wide reinsurance pool so that exceptionally expensive cases can't threaten the financial viability of a health insurance plan.  Katherine Swartz suggested an approach that would do this in 2003 (here's a link to an RWJ interview with her.)

Sick people are very expensive to care for, and that won't change.  Rather than just setting up regulations to make it more difficult for insurers to shirk their responsibility, we should make structural reforms to make it less profitable to discriminate against those who need insurance most.

Health Care Reform will Change Innovation - Not Decrease It

I’ll be part of a panel at the Harvard Business School this weekend on the potential impact of health care reform on innovation and investment of private equity in health care.   I’ve heard a lot of concern and hand-wringing over whether managing health care costs would decrease life-saving innovation that nourishes the ‘knowledge economy’ of the US.  The worry is especially intense in Massachusetts, with our economy deeply dependent upon health care delivery, and pharmaceutical, medical device and basic science research.

While it seems that the brakes are on health care reform right now, I wanted to share my perspective on how health care reform and meaningful cost control could impact innovation.

First of all – the need to lower the rate of inflation in health care cost is real.  Medicare is a giant deficit-generating machine for the federal government. The Medicare trust fund will have a negative balance in just a few years, and states cannot afford rapid rates of increase in Medicaid costs. US manufacturers send their work overseas in part because of high US health care costs.  Many Americans are uninsured, and more are underinsured.   Americans have effectively gotten no real wage increases since 1988 while productivity has soared; this extra wealth has been used for health care expenses.

Things that are unsustainable don’t continue forever, and medical costs can’t continue to rise at a rate far higher than inflation.  If they do, they crowd out other meaningful uses for our resources.   A dollar wasted in health care could have been better deployed in education or in infrastructure investment – and either of these is likely to spur more innovation.

In the US, there have been examples of big disruptions in health care revenue – and these have not led to a decrease in innovation. Rather they have led to a change in innovation.

The transition of Medicare inpatient payments from a “cost plus” basis to a ‘diagnosis related group’ (DRG) payment method in the early 1980s led to dramatic changes and innovations in health care.  Under the “cost plus” system, hospitals were rewarded for capital investment that increased the cost basis – and there were cranes all over the country building new medical meccas to be funded by Medicare.   Under the DRG system, hospitals were paid a fixed fee for each hospitalization, and so they innovated to decrease lengths of stay.  The fruits of this transformation in hospital payment included minimally invasive surgery, ambulatory surgery centers, and home intravenous therapy for infections and other maladies that once required a hospitalization.  So – a decrease in health care payments led to system changes, and an opportunity to innovate that was different (but not less) than under the previous system.

Many other countries impose strict, even ominous, controls on prices.   This has many consequences – and sometimes leads to shortages. However, even draconian price control can lead to increased, not decreased, innovation.   In Japan, the government mandates prices, and lowers prices for services where volume increases sharply.  Japan has an even higher rate of MRI use than the US, and as a result, the “list price” of an MRI is under $100.  Have MRI manufacturers stopped innovating?  Hardly.  Toshiba has developed an MRI unit that is lower powered (less magnetic strength, lower resolution, less computing power) that can be purchased for under $200,000 – compared to multimillion dollar price tags for the most technologically advanced MRIs available in the US.  So  - the low prices didn’t lead to a decrease in innovation – but rather a change in innovation.

Here’s a graphic demonstrating four quadrants of “value” (cost vs. quality).   The upper right always increases value – costs are lower and quality is higher.  Public health interventions usually are in this quadrant, as are pediatric vaccines.   Not much else, I’m afraid – the medical delivery system was designed to improve lives, not to save money.  We can all agree that we want more innovations in the upper right quadrant. 

The lower left quadrant shows unequivocal value destruction – we spend more and get less quality. In retrospect, Vioxx is a good example of this – a medicine just as effective as Ibuprofen, dramatically more expensive, and associated with a substantial increased risk of heart attack.  We can all agree that we want to eliminate spending in the lower left quadrant.

The challenge is the other two quadrants.  Folotyn, a new chemotherapy medicine that costs $30,000 a month and shrinks tumors a bit over a quarter of the time but doesn’t increase life expectancy, is in the lower right quadrant (small increment in quality but large increase in cost).  That’s where innovation has focused in recent years – and that has not made the US health care system “higher value.”

I’d submit that meaningful health care reform (which will come sooner or later, because we can’t afford not to) will move interest and private equity investment into the upper left quadrant.  That’s the “disruptive innovation” quadrant – where we accept innovations like generic drugs and the Toshiba MRI machine that is decrementally cost-effective -  i.e. we get less quality, but the cost savings are dramatic.

In the US, we’re historically not very interested in ‘decrementally cost effective’ innovations.  I think that controlling health care cost inflation is likely to lead to more innovation like the lower quality MRI machine, and less innovation like a new $36,000 a year chemotherapy agent that is not associated with extending life.

I’m at peace with the upper left quadrant.

Lobbying and Health Care Reform

(Click on graphic to enlarge)
Robert Steinbrook of the NEJM has posted the amounts spent on lobbying Congress and federal agencies so far this year.  The health and health insurance industry have spent over a half billion dollars (through September).  This is about 1/5 of all lobbying expenses.

With the dollars at stake in health care reform, this is probably a very small investment indeed.

CBO: Health Reform will Increase Value (and no segment will personally pay higher premiums)

The Congressional Budget Office has weighed in on the impact of the Senate health care bill on insurance premiums.  It's highly likely that opponents will latch on to 10-13% increases projected for health insurance premiums for those in the nongroup market (17% of the population).  However, as Ezra Klein notes on the Washington Post blog, this is a "steal." In fact, the cost is up a bit - but these are credible insurance plans of 27-30% greater actuarial value. Furthermore, more than half of those in the nongroup market will receive subsidies, so their cost of having insurance will effectively drop by more than half.  The CBO projects no change to a tiny decrease in cost of premiums for the small and large group market. For both the small and nongroup market, the CBO projects that the SAME policy would cost between 1-10% less.

All told - this is a solid double for the health care reform plan. However, we'll see how this gets interpreted by the talking heads.

Japanese Have A Better Idea for SGR (Sustainable Growth Rate) Fee Cuts

The House of Representatives voted last week to give another reprieve to physicians, who faced a 21% Medicare fee cut because of a provision called SGR – or Sustainable Growth Rate.   The SGR mandates cuts in fees for all Medicare services if the total number of services increases. Essentially, if too much service is delivered, each unit of service is reimbursed at a lower rate. This helps keep the Medicare budget “in balance.”

National Public Radio and others  characterize the SGR provision as a “glitch.”  Indeed it really feels like a mistake, since each year Congress overturns the SGR and reinstates small fee schedule increases or flat fee schedules. Each year, Congress has only kicked the can forward to the next year. When SGR would have required a 5% fee cut one year, it requires a cut of over 10% the next year, and you can see where this is going.

It was never intellectually honest to overturn the SGR on a year by year basis –because if a 5% pay cut is untenable, a 21% pay cut is unimaginable.   Still, the cost to the federal budget deficit of eliminating SGR altogether would be over $200 billion (over 10 years). The Congressional Budget Office recently reminded us that eliminating this fee cut will also cost Medicare beneficiaries almost $50 billion in increased out of pocket expense over the next ten years.

The SGR was not a “glitch,” but it was a poorly designed way of trying to prevent overutilization.  The problem is that the benefit of increased revenue to individual providers overwhelms the risk of a pay cut due to overall higher than expected utilization.  This is a classic “tragedy of the commons”  problem – where it pays for each individual provider to do more procedures, knowing that her contribution to the “overgrazing” will be overwhelmed by the practices of the general population.

SGR is poorly designed because the group of procedures it applies to (the equivalent of the “pasture” in the tragedy of the commons) is too big – and no physician would rationally think about cutting back on utilization to prevent future fee cuts.  There is a better way.  Japan has an SGR-equivalent which is by individual service –not generic across all services. 

Prices are revised individually, adjusted for each procedure and drug, and not by an across-the-board conversion rate. In particular, the prices of procedures that show large increases in volume tend to be decreased. (Ikegami  and Campbell, Health Affairs, 2004)       Harvard Link 

As a practical matter, procedures with large increases in utilization are sometimes those where there is new evidence of efficacy, but they are likely to be procedures with an exceptionally high margin.  This method of adjusting helps diminish the excess margin associated with particular services, so there is less likelihood they will continue to be overused.

So – we should get rid of the SGR – it’s not effective at changing physician utilization, and would cause politically infeasible across-the-board cuts.  As long as we are using primarily fee for service payments, Medicare should adopt the Japanese approach to targeted fee cuts for certain procedures if the volume increases. 

(Thanks to Tori Fancher, Sophie Miller, Amy Rothkopf, and Alicia Widge of HSPH HPM235 for drawing my attention to this approach)

Health Care Reform Passes the House. Access Will Improve - Cost Increases Not Likely to Abate

The House passed health care reform 220-215 last night – a landmark bill that could decrease the uninsured by as much as two thirds.  The Congressional Budget Office estimates that the bill will decrease the federal budget deficit by $109 billion over the next 10 years.  The Senate is not yet ready to pass its health care reform bill, and after it does, the bills will need to be reconciled – so the final bill that emerges could look substantially different. But let’s examine -  if this bill became law, what would it likely do to health care costs?

I reviewed the likely impact of the Baucus Senate  bill on overall health care spending – using analysis from the CBO, in a post last month.   Essentially – the deficit goes down even while the cost of health care continues to rise.   That’s because the government is collecting taxes and penalties to fund all of the increase that is not funded by cuts in government health care spending (mostly on Medicare).

Here is a breakdown, again from the CBO,  of the House reform bill (that is very similar to what ultimately passed on Saturday night.  (Note that I have simplified this a bit – and there are rounding errors)

According to the CBO, the total amount of incremental dollars going into the health care system over the next ten years will be $633 billion ($1.06 trillion minus the $427billion in Medicare and other cuts).  And that’s assuming that these cuts will “stick.”  There is also the additional $210 billion required to reverse the “sustainable growth revenue”(SGR) formula that would require 21% Medicare physician pay cuts this January, and continued smaller decreases for many years to come.

The House health care reform bill is a political success – it has already gotten further than the Clinton Health Plan in 1994.   It’s also a policy success - increasing access to coverage, providing subsidies to bring healthy and middle class people into the system, and enacting regulations to protect against some health insurance practices that have frozen the sick out of our system.  Assuming this bill, or something like it, passes – the next big job will be figuring out how to lower the cost of health care!

Block That Metaphor – and Marbled Fat

Yesterday on Fresh Air Maggie Mahar told Terri Gross of NPR that there was 30% waste in the health care system. She went on to say that the waste was not just “fat hanging out of the sides of the meat…. It is marbled in, so we’ll need a scalpel” to remove the waste.

I don’t know any carnivorous surgeons who can use a scalpel to carve out marbled fat. While at first I thought the metaphor was awful – perhaps it’s very apt. Cutting out some waste might appear easy – but since waste is always someone’s income, removing it might be akin to removing the marbled fat in a steak.

Speaking of marbled fat- Health Affairs had a timely web release yesterday pointing out the cost of obesity n the American health care budget. This article assigned $147 billion to excess costs from obesity in 2006 – and pointed out that obese people cost 13% more than matched nonobese people in the working population under 65 (with private insurance).

This number will be quoted a lot – and it should be. We pay a huge societal price for being sedentary and eating too many calories. Individuals with high BMIs(body mass index) pay a high personal price, too.

Let’s remember, though, that identifying obesity as a cause of excess costs is not equivalent to solving the health care cost crisis. In the medical world, there aren’t many wildly successful approaches to weight loss aside from bariatric surgery – which is serious enough that it is restricted to those with morbid (severe) obesity. There are things we can do outside of the medical world – like building bike lanes and walkable cities, opening up the stairway doors and discouraging elevator use, and putting calorie counts on menus. None of these has been definitely proven to cause weight loss – but at least all of these public-health oriented measures are inexpensive. They are also a great example of “choice architecture,” making it easy for people to make more personally and socially beneficial choices.