AG: High Prices in Massachusetts From Market Leverage

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Martha Coakley has been in the news mostly for her upset loss to Scott Brown in the special election to fill Ted Kennedy’s Senate seat.  Her office got only a little coverage  when it released its report on medical cost increases in Massachusetts last week.  The 27-page report makes for good reading for those interested in what drives high medical costs here in Massachusetts.

The AG’s office, using civil investigative demands, obtained payment information from 5 insurers and 15 provider organizations, and came to the following conclusions:

1)       Prices paid to different providers differed by a factor of more than two.

2)       Higher prices were not associated with

a.       Higher quality

b.       Sicker patients

c.       Portion of patients on Medicare and Medicaid

d.       Teaching status

e.       Hospital resource costs

3)       Higher prices were associated with market leverage

4)       Providers receiving global payment (capitation) were not less expensive than those being paid fee for service

5)       Most of the increase in cost in Massachusetts has been due to an increase in price per unit of service, not an increase in utilization.

Most of this is no surprise, and The Boston Globe did a series in Fall, 2008 demonstrating that payments are higher at Partners, Children's Hospital, and some other hospitals with reputational or geographic advantage.  The Globe actually identified institutions, while the AG’s office blinds all providers in this report.

Of course, in a free market – it makes sense for an organization with better reputation to get higher pay.  The market grants higher prices to Bose for headphones compared to Sony – and it’s OK to pay more for the same gallbladder surgery at Mass General compared to a community hospital.   But the amount of the difference has become staggering.  Worse still, the highly-paid institutions can afford to make investments that lead to more future business – while the lower-paid institutions skimp on capital investment, and continue to lose patients, leading to still higher costs.

What can be done to address this?

One option is the Maryland approach of regulating prices.  Price regulation is a blunt instrument –and generally cannot keep up with changes in technology.  We also see from the distortions in Medicare physician pricing that price regulation can lead to big winners and big losers.  In the US and across the world, price regulation also leads to shortages of services that are paid relatively poorly.

Another approach is to move to bundled or global payments.  However, Ellen Zane, CEO of Tufts Medical Center (which is one of the lower-paid academic medical centers in Massachusetts) pointed out at a Harvard Business School panel yesterday that capitation would likely lock in current high prices at the currently-advantaged institutions. 

A third approach is to give patients large deductibles, and count on them to do better comparison shopping when they have to pay their own dollars.   There is evidence that this works for less-expensive elective medical care. However, most  hospitalizations in Massachusetts are so expensive that most patients who have any inpatient stay at any hospital – even the most cost effective one – will hit the out-of-pocket maximum.

It’s distressing to see that this report suggests that global payment was not associated with lower overall costs.  There are only a few capitated groups included in this analysis – so perhaps the issue is a small sample size.  There is substantial evidence that fee for service leads to much higher utilization (and costs) than global payment.  Here’s some data on ophthalmology practice- showing that when fee for service ophthalmologists converted to a capitation payment (no incremental pay for extra cataract surgeries), their rate of cataract surgery plummeted (by half).  

The AG’s office promises detailed findings for hearings by the Dept of Health Care Finance and Policy that begin in mid-March.    The payment disparities are large – and they won’t be easy to change.

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.

Salt Reduction and Cost Savings

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The New England Journal of Medicine published a computer simulation online late this week showing that salt reduction would reduce new onset of heart disease by 1/3 and stroke by almost half -- saving between $10 and $24 billion dollars of health care costs annually.

As we've seen, changes to the payment system are complicated and difficult to implement - since there is always a loser as we move to lower unit prices, or insist on more accountability from various parties in  the health care system.  Changes to the delivery system are even more difficult.

This is another example of a public health intervention being cost saving -not merely cost effective. The intervention is not free. Regulatory effort is necessary, since a large portion of the sodium in the American diet comes from processed food.  The authors estimate that salt reduction would yield between 200,000 and 400,000 QALYs annually - with cost saving as opposed to incremental costs.  The authors note that this is substantially better value than antihypertensive therapy for those with hypertension -which at between $6,000 and $26,000 per QALY is also a very good value!

We need to reform health care payment and health care delivery - but that seems further away today than last week.  Let's not forget the value of public health interventions as we contemplate making health care more affordable .  I'll be skipping salt from now on, too.

Baumol's Law: Will Health Care Costs Always Exceed Inflation?

David Herszenhorn has an interesting article in today's New York Times suggesting that it's not possible to get health care cost inflation below the general rate of inflation.  He interviews and quotes economist William Baumol, who wrote an article in 1966 pointing out that while many tasks got less expensive over time, others required similar labor input - and thus the cost did not decrease.

Baumol's academic studies were around performing arts.  A Mozart quintet took 5 musicians in the 1700s, and still takes 5 musicians today.  A flat screen TV is manufactured with far fewer inputs today than it was a few years ago -hence the cost comes way down.

Although Herszenhorn doesn't mention it, this relates directly to the CMS Actuary's contention that it requires flawed logic to assume we can lower Medicare fee increases to account for future 'productivity increases.'

I acknowledge that it's more difficult to reengineer health care delivery than to optimize a manufacturing process. It's not easy to get doctors to rethink their approach, and demands of patients facing loss of life or health are different than demands of consumers in Best Buy.   However, unlike the string quintet, there are elements of health care where input costs can be dramatically decreased.  Efforts at implementing Toyota production techniques at hospitals have dramatically decreased the number of steps required.  Most of us who have visited a physician office recently in the US and seen how many staff are required to do administrative (nonclinical) tasks know that there are substantial productivity gains possible in health.

Further, countries with robust growth tend to have large increases in health care costs, while countries undergoing economic contractions (think Russia after the fall of the Soviet Union, or Argentina after the currency failure) tend to have health care costs that go down.   Countries like Russia with declining health care costs, though, also often have far worse outcomes.  This would suggest that overall, health care costs are sensitive to the overall economy - lowering health care costs (or health care inflation) is difficult in good economic times, and easier in tough times.

I don't think Baumol's Law unequivocally tells us we can't manage health care costs.  It does provide insight into why it's so difficult.