« Microtrends | Main | The Cycle of Government Bashing »
September 14, 2007
Business and Health Care Forum
There was a great line at this morning's Business and Health Care forum, attributed to Newt Gingrich, which went something like, "one man's $200 billion in waste is another man's $200 billion profit stream." That's about the most essential fact in health care politics there is.
Some other thought-provoking comments:
• "In this country, our biggest source of health costs are preventable, chronic diseases. 25 years ago, they were acute conditions." In other words, the bulk of our spending isn't in cardiac arrest, but in managing cardiac disease. That suggests a prevention and wellness directed approach to cost control, not to mention significantly more research into how to cost effectively manage chronic conditions.
• "We need plan designs that incentivize the right patient behaviors and disincentivize wrong behaviors. At Pitney-Bowes, we eliminated the costs of 'tier one' drugs for chronic conditions. The result was reductions in the rate of cost increase for diabetes, cardiovascular health, etc -- all because we made those drugs free!" This goes to my progressive cost-sharing argument, but there are quite a few treatments we know to be effective and cheap if followed. If we made it effective and cheap to follow them, it would lower costs and improve health.
• "Commodities that are very bad for you are heavily subsidized. Poor people thinking very rationally about how to maximize their food purchasing are purchasing foods that contribute to chronic conditions." Our subsidies go into corn, not organic fruit. So those most likely to take advantage of subsidized foods load up on corn. And then they get sick. And then we pay. On the bright side, this is very good for a very small number of very politically powerful corn farmers.
• "In the past, folks have asked if we really should have wellness plans, because well be spending money on employees who leave for other companies. The hope, now, is that enough other companies will do this that we'll benefit from their programs and they'll benefit from ours." This is what you'd call a collective action problem: If every company will invest in wellness, they'll all save money. But on your own, it doesn't make sense to pump money ensuring a healthy middle age for young workers who will leave your firm.
September 14, 2007 in Health Care | Permalink
Comments
What's with this "organic" business ? Are you aware of any evidence that organic fruit is more healthy than other fruit ? The case looks pretty weak http://tinyurl.com/2v633h
To change the subject, are you about to tell me that we need to eliminate preservatives from our food and also that we can reduce cancer and heart disease with anti-oxidants ? The second claim is supported by some evidence. The problem is that the words "preservative" and "anti-oxidant" are synonyms.
When I took organic chemistry in 1979 the professor seemed to really enjoy himself when he noticed that organic chemicals were mostly introduced in the 60's and we know from the case of cigarettes that there is a 20 year lag from increased exposure to cancer and bwa ha ha ha (I think he was a sadist).
Didn't work out that way. Instead we had a mysterious decline in death rates. So is there any evidence that preservatives prevent heart attacks well uhm yes
http://tinyurl.com/27l7eb
Posted by: Robert Waldmann | Sep 14, 2007 4:18:11 PM
Ezra,
At Pitney-Bowes, we eliminated the costs of 'tier one' drugs for chronic conditions. The result was reductions in the rate of cost increase for diabetes, cardiovascular health, etc -- all because we made those drugs free!" This goes to my progressive cost-sharing argument, but there are quite a few treatments we know to be effective and cheap if followed. If we made it effective and cheap to follow them, it would lower costs and improve health.
Two thoughts:
-- A day or two ago, you made the point clarifying that targeted cost-sharing needed to be in the context of single-payer, in your world. If it can work in the private sector as above, then why the need for it to be in a single-payer system? (And you still didn't address the fact that you've said you aren't for single-payer, but in your prior post you said the opposite)
-- The more important point: There are clearly some areas where what you've said above is true. I'd suggest you spend more time yourself on this area-- because I think your perception of how much low-hanging fruit there is overstated and the feasibility of your "cost-effectiveness expert panel" is less than you would imagine. Specifically, spend some time in the health care cost-effectiveness world-- there is much more gray area than I think you appreciate-- from the methodologies to the analysis to the interpretation/meaning of the results. This area is far from settled, which in part drives my desire for non-single payer/monolithic approach (which is different than govenrment having a large role)-- we need more minds working on this issue than an expert panel/single bureacracy.
Posted by: wisewon | Sep 14, 2007 5:07:53 PM
"one man's $200 billion in waste is another man's $200 billion profit stream."
BS, of course..Gingrich naturally.
There's a thing out there called the Second Law.
The waste is in one degree or another degraded.
Always.
Posted by: has_te | Sep 14, 2007 5:56:18 PM
In a letter sent by Congressional Budget Office Director, Peter Orszag, to Congressman Pete Stark about the potential for comparative effectiveness research to reduce healthcare costs, his bottom line was that it would take many years to have much impact. His letter can be read here.
Posted by: BC | Sep 14, 2007 7:45:54 PM
Hmm, are these being presented as new insights? I've heard them all before. On the plus side, they're also correct, except for the unnecessary introduction of the word "organic" to the point about subsidizing unhealthy foods.
Note that there is nothing special about health care which makes one person's waste another's income. $400 hammer, anyone? $500 coach bag? If you spend it, somebody gets it, and that makes cutting public spending difficult even when it is for the public good.
Taken together, what I think these remarks do point to is the need to take a holistic approach to health care reform. There are four major areas that need to be addressed if we are going more value out of the system in the next 10 years (that is, higher quality care and better outcomes at a lower cost).
1. Reduce payments to providers to rates closer to the rest of the developed world (alternative: hold flat overall for 5 years), and move away from FFS. Savings potential: 30% of total costs.
2. Motivate and incentivize individuals to eat better, exercise more and take better care of themselves. Savings potential: 25% of total costs.
3. Use health information technology to improve the quality of care (discover and disseminate best practices, use EMRs for preventive reminders, drug interaction alerts, charts on demand, etc.). The use of genetic information to selectively guide drug use and motivate behavior change will also soon be significant. Savings potential: 10-15% of costs.
4. Reduce administrative cost and complexity by standardizing health insurance in a universal coverage system. Savings potential: 10-15% of costs.
We could all add other things to the list, such as better preventive care for the presently uninsured. But these are my bets for where to look for savings and quality improvement.
I hasten to add that the rough estimates for potential savings have an interaction effect. There would be up to 15% savings just from implementing a reasonable universal coverage scheme and not changing anything else about how doctors are paid, how they deliver care, etc. But if a miracle occurred and we were actually able to do real reform on all four items at once, there would be overlap effects and the total would be less than the sum of each taken by itself.
Given how high we've started, it isn't reasonable to aim for spending as a share of GDP to be lower than the more expensive European countries, such as Germany. If we can reduce costs by 40% on an inflation- and age-adjusted basis while improving quality, that would be mission accomplished. Of course, the health care players are going to scream bloody murder.
As someone who works in health insurance, I look forward to the day when it is no longer the insurer who is the bad guy, but the provider. When UHC comes along, all of the focus for reform will turn to providers and suppliers. They will be the ones at the forefront protecting their wallets at the expense of the people.
Posted by: jd | Sep 15, 2007 1:28:19 AM
jd,
Your cost reductions add up to 75% of total costs.
#1 is very overstated-- if you think through that current spend is only 40-45% of total, no idea where #2 comes from, #3 is debatable, #4 is more likely 5-10% if you look at medical loss ratios and what the rest is being spent on.
As someone who works in health insurance, I look forward to the day when it is no longer the insurer who is the bad guy, but the provider. When UHC comes along, all of the focus for reform will turn to providers and suppliers. They will be the ones at the forefront protecting their wallets at the expense of the people.
Interesting comment. Not sure what you do there-- but I've never really understood why the industry hasn't done a better job than it has. (I think its because they been able to be profitable doing easy but unproductive stuff, i.e. underwriting/avoiding high risk lives, delaying payment to increase float, etc. that there's been little incentive to do the heavy lifting)-- but would be curious in your views.
I do think your sentiment is likely not realistic-- UHC is not itself going to change people's views of insurance companies. If you meant single-payer, I'd see where your thinking would make sense.
Posted by: wisewon | Sep 15, 2007 7:26:54 AM
"As someone who works in health insurance, I look forward to the day when it is no longer the insurer who is the bad guy, but the provider. When UHC comes along, all of the focus for reform will turn to providers and suppliers. They will be the ones at the forefront protecting their wallets at the expense of the people."
You are a middleman who contributes nothing of value and takes 25% of all healthcare money in return for providing nothign of value.
Its time to eliminate the middle man who provides no value and brings nothing but inefficiency to the system. Have all doctors employed as salaried employees of the federal government. Taht will eliminate wasteful FFS spending.
Dealing with providers is easy. Simply have them all employed by the federal govt at flat salaries. That will eliminate profit motive and bring down costs. Inserting insurance carrier middlemen to try and control provider costs is a joke and provides nothing but extra profit motive and more money siphoning that does not go to patient care like it should.
Posted by: joe blow | Sep 15, 2007 8:17:51 AM
Flat salaries will definitely bring down costs, put will put productivity through the floor as well. Increasing the number of patients and eliminating all motives to work hard will spell disaster. You assume that every physician will work just as hard now as they would under a salary. You've taken them from working for themselves to punching a time clock and no one works as hard in that situation.
Posted by: Dingo | Sep 15, 2007 10:37:34 AM
Wisewon,
I already took care of the fact that the total adds up to 75%. You know what an interaction effect is, right? I repeat:
"I hasten to add that the rough estimates for potential savings have an interaction effect. There would be up to 15% savings just from implementing a reasonable universal coverage scheme and not changing anything else about how doctors are paid, how they deliver care, etc. But if a miracle occurred and we were actually able to do real reform on all four items at once, there would be overlap effects and the total would be less than the sum of each taken by itself."
As for #1, by "provider" I meant all hospital and physician charges. I don't know what you're referring to when you say providers are only 40-45% of spend, but it isn't hospital and physician costs combined. I really should have included in this pharmacy costs as well. These can and should also be reduced to European levels.
For #2, I'm not sure why you doubt it. You know that chronic diseases are now the majority of costs, and that the majority of these diseases are either preventable or their severity is highly controllable through behavior. Diabetes and heart disease are the two biggest areas for improvement, and they are the two most expensive diseases in US medicine today. The 25% was certainly a pretty fast and loose number, but until I see evidence to the contrary there is no need to change it.
#3...well, nearly every general statement about the effect of major industry changes is debatable.
For #4, your forgetting administrative costs on the provider side that will be saved. Total admin in the US, including provider side admin, is about 30%. Total admin in a single payer country like Canada is 17%. 10% is a reasonable goal for admin savings. Of course, politically this is probably not feasible.
As for your final comment:
I've never really understood why the industry hasn't done a better job than it has. (I think its because they been able to be profitable doing easy but unproductive stuff, i.e. underwriting/avoiding high risk lives, delaying payment to increase float, etc. that there's been little incentive to do the heavy lifting)
Insurers felt burned by the backlash to managed care in the late 90s and decided that they simply couldn't continue with aggressively controlling costs and emphasizing preventive care. The only time that health insurance has been able to control medical costs was in the mid 90s, but a combination of ham-handed cost controls and having doctors go to war to protect their autonomy and profits meant that the public turned against it. So now we have a form of managed care that doesn't do much to improve the value of care, but and still doesn't make people happy with their insurers. Frankly, I think there is a lack of vision by the majority of people in a position to make decisions that matter. The industry should have embraced UHC long ago and tried to push something like the German or the new Dutch model.
The issue of underwriting is misunderstood. Don't forget that the vast majority of health insurance in this country is either group-based (employer and union insurance) or it is guaranteed issue (Medicaid, Medicare). I forget the number, but I think it's around 5-10% of the insured who get it in the individual market, which I think we all know is utterly dysfunctional. The smaller the group, the more it behaves like individual insurance. Except in the individual and perhaps very small group market (1-5 EEs), underwriting is less about avoiding risk than it is accurately assessing risk so that you can price accurately. An insurer doesn't care if a 500 person group has an experience of $300PMPM in medical costs vs. $400PMPM, so long as it can price at a rate that gives it a 5% expected margin (or whatever the insurer's target is).
Posted by: jd | Sep 15, 2007 11:52:53 PM
joe blow,
Ad hominem attacks are contemptible when your opponents do them. I suppose that when you do them they appear appropriate.
I need to remain anonymous, but I will say that my work is in the area of improving quality. I look for new ways to reward doctors and members for doing things that improve health outcomes. In my day job I look for small improvements within the system. In my outside political life (these days sadly consisting of reading and posting on blogs) I seek more dramatic structural reforms.
It's certainly true that insurers in our present system generate admin expenses that do not in the aggregate improve the quality of care. I don't defend that system.
But I see no sufficient reason to get rid of the middle men entirely, nor do I see good reason to make every physician a state employee. England does not have a better system than Japan, Germany or France. Really. And even England admits private docs and private insurance.
Posted by: jd | Sep 16, 2007 12:09:00 AM
By the way joe blow,
What are you referring to when you claim insurers "take" 20-25% of healthcare dollars? Not insurer's AER, I hope. The AER for insurers is in the ballpark of 12-15%. Add profit and you get 15-20% of premium that doesn't go to pay for care.
I agree it's way too much.
Posted by: jd | Sep 16, 2007 12:25:09 AM
Dingo,
I couldn't disagree more strongly.
First, what possible reason is there to insist that salaries will diminish productivity? You certainly can't be basing this on salaried systems in other nations or in the US. Hospitals in the US pay physicians on a salaried basis by the thousands. Then there are the integrated systems like Mayo, Kaiser and the VA. What is the basis for saying their productivity has gone "through the floor?" Are these systems also "disasters?"
If not, why will paying more doctors this way create a disaster?
To some extent, I think productivity will decline, but in a good way. Physicians do all kinds of things in the US that are not warranted by the evidence. Reducing the motive to do unnecessary care is good. And before you say that this will also reduce the quality of care, the VA, Kaiser, the Mayo Clinic and other salaried systems have the best care in the US.
You assume that every physician will work just as hard now as they would under a salary. You've taken them from working for themselves to punching a time clock and no one works as hard in that situation.
That's nuts, really dumb. Who punches a time clock? Well, lawyers do. They seem pretty productive. Factory workers do. Our entire way of life is dependent on their substantial productivity. In general, though, professional employees don't punch clocks. Doctors are like management. Also, they will be able to get bonuses for doing their job right. This is a powerful motivator when the bonus is substantial, as it now is in England. I would agree that in a salaried system there should be large bonuses for meeting targets.
Posted by: jd | Sep 16, 2007 12:42:46 AM
jd,
Skipped the last paragraph... thanks for highlighting.
On #1. According to CMS-- the 2005 numbers are actually 55% for physician/hospital services (a little higher than I posted before). My point still holds: to cut 30% of total costs as you suggested from this group, would require a 50-60% decrease in compensation to hospitals and physicians, which is extremely unrealistic. If you got a decrease of let's say 20% in compensation, that would lead to an 11% decrease in total costs-- its hard to see any scenario where it could be higher than that.
On #2. I don't doubt potential savings-- just the number 25%. Also, realize these savings are at least half a generation away-- not that they shouldn't be pursued, but those dollars won't be realized for 10+ years.
On #3. To make my point stronger-- I think key thought leaders in health IT increasingly feel that quality will definitely improve, cost savings less likely to be realized.
On #4. Sounds reasonable.
As a whole, I think we should be awfully skeptical of cost-savings from the existing base of expenditures-- in reality they will be extremely difficult to achieve.
As for this:
Insurers felt burned by the backlash to managed care in the late 90s and decided that they simply couldn't continue with aggressively controlling costs and emphasizing preventive care. The only time that health insurance has been able to control medical costs was in the mid 90s, but a combination of ham-handed cost controls and having doctors go to war to protect their autonomy and profits meant that the public turned against it. So now we have a form of managed care that doesn't do much to improve the value of care, but and still doesn't make people happy with their insurers. Frankly, I think there is a lack of vision by the majority of people in a position to make decisions that matter. The industry should have embraced UHC long ago and tried to push something like the German or the new Dutch model.
I agree on the history-- but that doesn't seem sufficient to me. I think there are many opportunities to encourage certain types of care, with a positive ROI to the big insurance companies that haven't been implemented. Perhaps your "lack of vision" statement hits the nail on the head.
Posted by: wisewon | Sep 16, 2007 3:31:44 PM
While now 15 years old, this paper published in Health Affairs is the best discussion of administrative costs incurred by insurers, Medicare, Medicaid, and throughout the healthcare system that I've seen. The bottom line is that a single payer system would achieve administrative cost savings, but not nearly as much as advocates think. Moving people who now get their insurance in the individual and small group markets into large groups could also achieve significant savings within the insurance sector.
Posted by: BC | Sep 16, 2007 4:44:53 PM
BC,
That is a great article. I hadn't seen it before.
Wisewon, cutting provider costs by 50% in inflation-adjusted terms is indeed a huge undertaking, and may never happen. In relation to how providers get paid in the rest of the world, this is what we would need to get on the same page. Those nations don't have physician supply problems (except to the extent that people leave for the far more lucrative US). But it would be an ugly transition that providers would fight like hell to prevent, and some would take their ball and go home. There are other things that would need to be done to achieve this, of course, such as subsidizing medical school so that physicians don't come out of it in massive debt.
But as for cutting total costs by 30% through provider payment cuts, I do agree that it isn't realistic on political grounds. Those lobbies are too strong and too good at getting the public on their side. I would be satisfied if we cut provider payments by 15-20% in real terms, with an additional 5% savings from pharmaceuticals.
Posted by: jd | Sep 16, 2007 5:47:30 PM
with an additional 5% savings from pharmaceuticals.
Drugs are 10% of spend-- 5% savings would be a 50% cut in prices. Is that really what you're looking for?
Posted by: wisewon | Sep 16, 2007 7:03:28 PM
One other thought on provider payments:
The $400B in physician services is a gross, not net figure. Meaning, for a physician practice, this figure includes their overhead, this isn't their take home.
So without significant changes/improvements in practice managerment (there's a ton to do here) a $100B cut in compensation (which remember, is only 5% of total spend) will come more out of the physician compensation than then overhead. In other words, while a macro-level analysis suggests this would be a 25% decrease in compensation, actual physician take home salary decreases would be much higher-- at least in the short term until practices focused on driving efficiencies as a result. All the more reason why this is a difficult place to look for signficant savings at a policy level.
(Which as an aside, is another reason why I think a greater focus on consumer-directed efforts could further help in ways macro-level policy will never realistically be able to do)
Posted by: wisewon | Sep 16, 2007 7:13:05 PM
Wisewon and jd,
I think there is more gold to be mined by restructuring incentives for doctors to safely drive down utilization, at least on a dollar basis . Some of this could result from much improved price and quality information in the hands of PCP's so they can refer patients to less expensive imaging sites, maximize use of generic drugs, and choose specialists (especially surgeons) and hospitals with good outcomes records. The recent effort in the UK to reward PCP's based on how well they perform on established metrics might also be worth looking into. As I understand it, the UK system rates PCP's on 147 separate measures with points assigned to each adding up to a maximum total of 1,050 points. Bonuses for high scores are substantial.
With respect to malpractice and defensive medicine, my understanding is that a lot of suits are based on a failure to diagnose a serious disease or problem. I've heard of cases, for example, where a doctor and patient discuss the risks and benefits of PSA testing. The doc recommends not doing the test because the data shows that it is not cost-effective at the population level for patients with a similar risk profile to the patient he is meeting with. The patient agrees but then gets prostate cancer and sues. Doctors decide they are better off ordering tests that are not cost-effective rather than risk being sued for a failure to diagnose because a test wasn't ordered. Specialized health courts that would absolve the doctor of responsibility if he or she followed the appropriate evidence based standard of care could solve this over time as doctors gain confidence that the system is fair and objective and consistent from one jurisdiction to another. If I were a doctor, the current capricious malpractice system would drive me to practice defensive medicine (even if I received no financial benefit from the additional tests), especially on patients that are new, or that I don't know well yet, or that I don't know at all because I'm seeing them for the first time in an ER.
I don't think it is wise to try to drive down payments doctors receive for the procedures they perform. We also need to be sensitive to the compensation available in other fields (law, business, etc.) that bright people inclined toward medicine might choose instead if the potential intermediate to longer term financial rewards from medicine were deemed inadequate.
Posted by: BC | Sep 16, 2007 8:00:59 PM
BC,
I think there is more gold to be mined by restructuring incentives for doctors to safely drive down utilization, at least on a dollar basis .
This is the where I believe a consumer-oriented approach will be more effective than a centralized/policy approach.
I wrote something similar in an earlier thread. Lower utilization will lead to lower compensation, unless incentives are restructured. However, since physicians will be looking for a neutral impact on their compensation, i.e. those incentives will need to match prior levels-- meaning overall cost savings will be minimal (there will be some savings from lower utilization on device or facility fees, but even the latter is increasingly becoming part of physician compensation). Will this lead to a better system in the future? For sure. But for cost-savings on the existing base of expenditures, its just not realistic if implemented in that way.
On the fair compensation point-- I think we need serious education reform in the medical field. It takes too long to become a physician and I've written before on the possibility of cutting several years out of the 7-10 years of medical training. Couple that with fully-funded tuition, and a concomitant decrease in compensation would still allow there to be significant incentives for "bright" people to choose medicine as a career.
Posted by: wisewon | Sep 16, 2007 8:53:00 PM
With the economy right now, good, healthy, and affordable weight-loss products are a rare treat. Luckily, as I was web surfing for good finds, as this is my daily routine, I found Purity 12’s website. Being a good shopper that I am, I looked at some of their products, and I was just blown away. Why it is that no one recognizes Purity 12’s products when they’re really great? I just don’t really get it! Their products should be out in the market like wildfire! I really suggest that you try it now because you really won’t regret it. http://if1s.com?116
Posted by: purit12 lover1 | Oct 20, 2010 11:25:36 AM
The comments to this entry are closed.
