Wednesday, September 23, 2009

Why is Medicare bankrupting us? Why are the costs out of control?

We’ve heard many times that healthcare costs are spiraling out of control, but a lot of things are described that way, so how can we put this into context? The two best figures to compare are the US Gross Domestic Product (GDP), which grows at 2-3%/year in normal times, and the US Consumer Price Index (CPI), which has been 0-4%/year since 1990s. Medical cost trend has grown around 6-10%/year since the turn of the century. Quick sidenote - for employees, it feels even higher since they are being asked to pay for a greater share of their healthcare costs. It's no wonder that healthcare is taking on a greater share of the economy and the consumer's wallet.

Medicare officially keeps a relatively low cost trend for the program – roughly 5-8%/year. However, Medicare’s hidden trick is that it pays providers a predetermined rate that providers can not negotiate. If a hospital doesn’t like its Medicare rate, the only thing it can do is not accept Medicare. Considering the volume of business that Medicare commands, that’s an impossible option. Said another way, because of the high fixed cost nature of hospital, hospitals without Medicare volume would not survive, but hospitals with only Medicare rates across all their volume would not survive either. This means that Medicare is actually underpaying providers by paying above variable cost but below average cost. Hospitals cope in 2 ways: 1) They increase the number of billable services they perform on Medicare patients (we'll revisit this below) and 2) They charge the commercial insurers more than they normally would. [See this Milliman report for more information on cost shifting to the commercial insurers]

What this really means is that the true cost of Medicare does not show up in its official Medicare medical cost trend. That’s because some of the costs that Medicare should be paying for is paid for by the commercial insurance population. In fact, even the true administrative cost of Medicare is higher than what is claimed. For example, while only the Center for Medicare and Medicaid Services is counted towards the 2-3% administrative costs, the cost of enrollment is actually housed under the social security administration.

So what makes Medicare’s true cost trend so high? The answer is in the utilization of services. Breaking Medicare’s cost trend into two parts: it’s roughly 20% rate increases and 80% volume (utilization) increases. Roughly the opposite is true in the commercial managed care environment with 20% utilization and 80% price inflation. Remember how Medicare is an unmanaged fee-for-service program? That means Medicare reimburses whatever a physician charges to Medicare – no questions asked. I’ll give a few examples of extreme cases to illustrate the point. First example, if someone walks into a hospital with some knee pain there are a few things that could happen ranging from least to most expensive: a) an external examination and some aspirin, b) an x-ray, or c) an MRI. All of these practices are equally acceptable to Medicare. There are parts of the country where the care is delivered in a cost appropriate manner (ie. giving x-rays where appropriate and MRIs where appropriate), but there are certain parts of the country where an immediate MRI is standard operating procedure. [Expect a future post on geographic disparities.] Second example, if a senior needed an oxygen ventilator to help them breathe, Medicare pays the same monthly rental of that equipment whether it is new, used, or outdated. There were ventilators that had been passed through multiple patients and racked up $11,541 in rental charges to Medicare while having an original price tag of $745! There are cases where a single patient would rack up enough charges to pay for 12 ventilators. This is equipment that has “minimal servicing and maintenance” required. There is a clear reason that almost no commercial plans pay for oxygen equipment rental – they just buy them and administer it themselves. Today, there have been a lot of limitations imposed and cuts to the rates of these oxygen providers, but they still continue to make some pretty enviable margins. Honestly, how hard could that be? Third example, the plain vanilla hospitals (called inpatient acute care hospitals) are paid based on the diagnosis that someone has. That means they get paid the same amount whether someone stays for 5 days or 55 days because of a mild or nasty case of XYZ. Ideally, that encourages hospitals to be efficient and get patients better more quickly. There’s a special type of hospital called long-term acute care hospitals. These guys treat some of the sickest patients that require more attention (think a step below the intensive care unit). One day the inpatient hospitals decided that this was actually a pretty good business to be in, so they started their own long-term acute care hospitals, except they would put it on another floor of their own hospitals. So the egregious part of it is what they did with the patient to maximize the revenue they get from each patient. Remember, they should be getting a flat rate for the whole thing. First, they would admit a patient into their inpatient hospital (bill Medicare once), discharge the patient and roll him upstairs to admit him to their long-term acute care hospital (bill Medicare a 2nd time), discharge the patient after the allowable amount of time, and then READMIT him into the inpatient hospital (bill Medicare a 3rd time)! I’ll emphasize a few things. The latter two are just examples of old, ridiculous loopholes in the Medicare reimbursement system there have been caught and addressed (although I wouldn’t say closed), but trust me many more examples of these abuses exist.

So reading this stuff may make you wonder why there is zero management to reduce some of the fraud, waste, and abuse of the Medicare system. The reason there is no management of services is that culturally and/or politically speaking, many citizens in the US believe that the government should not get between the physician and his patient to determine the type of care the patient needs. I think this is a very well-intentioned principle that has inadvertently lead to some ill consequences – namely uncontrollable costs. To be clear, I’m not commenting here that I think the government or private sector should be involved in the physician/patient decision; I am merely underscoring one of the major effects of having Uncle Sam’s blank check available.

We’ll next explore another well-intentioned principle that has had some boneheaded ripple effects.

Sources: Bureau of Labor Statistics, Barclays Capital, Office of the Inspector General

Next Post: Why does healthcare come from our employers anyway? How did that get started?

Sunday, September 20, 2009

What is Medicare? How did it start? What makes it so great?

Every US citizen gets Medicare when they turn 65 or qualify through disability status. Today, there are over 45mm people on the program. That’s roughly the same number of people who are uninsured, and about a fourth of the number who get health insurance through the commercial market (ie. their employer, spouse, or parents). The Medicare program itself is divided into 4 parts called Part A (hospital insurance), Part B (physician insurance), Part C (Medicare Advantage or private Medicare), and Part D (prescription drug insurance). Traditional Medicare includes Parts A and B. A senior can choose Medicare Advantage (Part C), which replaces traditional Medicare coverage. Medicare Advantage can also be known as privatized Medicare or as Obama called it in his speech to Congress the “Medicare voucher program.” Seniors can opt into Part D at any time but pay a penalty for opting in later than 65. Confused yet? We’ve barely scratched the surface.

Traditional Medicare is a fee-for-service insurance program or an indemnity program. This means a patient can go to any willing provider in America to get their healthcare. What that effectively means is that they can go to any hospital and almost any physician to get treatment. This is vastly different from what we may be used to in the commercial market, which is dominated by network products. We are familiar with the concepts of in-network and out-of-network (and if you’re not, you’ll figure it out when you start working) and the cost savings associated with going in-network.

So how did Medicare get started, why do some Congressmen believe Medicare or a program like it is the answer to all our problems, and what are its flaws?

In the 1960s, Lyndon B. Johnson overcame a lot of political hurdles to cover the nation’s sickest and most vulnerable population, the elderly. This was an admirable goal, and the debate over whether or not to have this program was remarkably similar to the one we have today. Think about it – huge public plan, criticized that it was going to be a Trojan Horse to government take over, promises by supporters that it could support itself through premiums and modest taxes. That didn’t exactly work to plan.

It is believed by some Congressmen that Medicare is an efficient, popular program that should be expanded to the entire population – boom all problems solved. In fact, Pete Stark of California introduces a “Medicare for all” bill to every new Congress or in other words every 2 years. So, why do people like Pete Stark think of it as efficient? Well the argument is that 1) the administrative costs of Medicare are much lower than a private health insurer and 2) there is no need for profits. To put this into perspective, let’s look into where an average healthcare dollar goes for a for-profit insurance company in the Medicare Advantage space. Roughly 85% of each $1 is spent on medical costs. 10% is spent on administrative costs, and 5% is kept in the form of profits. These numbers vary company to company and product to product, so to be fair in the commercial market these numbers would look closer to high 70s medical costs, mid double digits administrative costs, and high single digit pretax profit margins. The not-for-profits may have something like mid-high 80s medical costs, low-mid double digit administrative costs, and less than 2% profit margins (yes they make something, but they give it back later). To keep the comparison equivalent, we’ll stick to the senior population. So what’s the thought process for efficiency? Eliminate the 15% spent on administrative costs and profits and replace it with the 2-3% of administrative costs borne by the government. The problem…the other 85%!

Next Post: Why is Medicare bankrupting us? Why are the costs out of control?

Wednesday, September 16, 2009

What is the healthcare system? How is the government involved today?

First, I am not a doctor or scientist. This is a focus on the services side of healthcare, not the products. I am not in the position to deeply explore the pharmaceutical world, the intricacies of a surgery, or the medical devices that are used to make miracles happen. What I will try to explain is how the hospitals, doctors, nurses, pharmacists, health insurers, and patients fit together in this system and what role the government plays today. This will help frame many of the future topics we will explore and put context around any posts that analyze current events. Below is a simple diagram of healthcare services system.

The majority of people have some type of insurance coverage. This can be private insurance through their employer, family insurance through their parents, Medicare through the Federal government, Medicaid through their state government, or even military health benefits. At interaction #1, Americans or their employers are paying these insurance companies premiums up-front each month for future uses of services. At interaction #2, a patient renders services from some type of healthcare provider. At interaction #3, the healthcare provider requests reimbursement from the health insurer. We won’t worry about all the details of the bullets now, but we’ll come back to them eventually.

The government is involved in the insurance side through two major programs: Medicare and Medicaid. Medicare is a program started in 1965 to offer coverage for the elderly. It is by far the largest health insurance entity in America by dollars spent. Medicaid is a Federal-state government partnership started in 1965 to offer coverage for the poor and uninsured. The program is run by each individual state, but the Federal government subsidizes the states by giving states money for each $1 spent on the Medicaid program. For example, in a 40-60 split, the Federal government gives certain states $2 for every $3 that the state spends.

Healthcare happens to be the perfect example of the 80/20 rule. Roughly 80% of the spending is done by 20% of the people. More than half of all healthcare spending is done by those with less than 2 years left to live. Of the entire $1.9 trillion annual spending in the healthcare industry, 22% comes from the Medicare program. It also stands to take an even greater role as our parents, the baby boomers, begin to age into the Medicare program. Understanding Medicare is fundamental to understanding why our Federal government is going bankrupt and how the program shapes the entire healthcare system itself. If Walmart is the 800-lb. gorilla that shapes the retail industry and its practices, then Medicare is the 4 ton gorilla that shapes the healthcare industry.

Whether we like it or not, Medicare affects our generation directly and indirectly. The most direct effect is the 2.9% tax on income paid 50/50 by employees (1.45%) and employers (1.45%). This money is going directly into paying for existing Medicare beneficiaries. No matter what the government claims, it is not being socked away untouched for 40 years in a trust fund. Seniors are getting ~$11,000 health plan and paying ~$2,300 out of pocket. Rolling back to the birth of the program, the 1st generation of seniors received the entitlement benefits but never paid for it through Medicare taxes like our generation is doing today. Ultimately this means that deterioration of the financial health of the program will lead to either a) benefit cuts or b) higher taxes. Fundamentally that means either our government can’t keep its promises or it must tax us. Considering the size of our generation – I’d make a big bet that a lot of these taxes will fall squarely on our shoulders.


Next Post: What is Medicare? How did it start? Why do people think it's great?

Friday, September 11, 2009

Inaugural Post

Welcome readers! Healthcare is such a powerful and complex issue for many Americans. In 2009, it engulfed 16% of the US GDP, and it was the number one cause of bankruptcies in America. If the system continues its course, it will be 20% of the US GDP by 2018 and bankrupt the Medicare trust fund by 2017. Clearly this is a growing issue, but how can we begin to understand it?

The purpose of this website is to explore the healthcare system. Specifically, this is written for our generation (Generation Y) to seek answers to our favorite questions – why and how? Why is it so expensive? Why does it grow so quickly? Why haven’t we changed it yet? Who are the players? What are their roles? How does it affect us? Why should we care? How can we help? While I truly believe we are one of the smartest generations with an unquenchable thirst for knowledge, I also believe our generation is ill-informed of the healthcare system. Part of that problem is that many of the resources available are geared towards older generations. We are not big users of the healthcare system – yet. We are healthy and young. If we’re thinking about healthcare, we’re probably either dreaming of the potential advancements 50 years from now or thinking about it from the perspective of a loved one. We need to grow our understanding of the system so that we can make informed opinions.

I spend every day at work learning about the US healthcare system and how it works. The twist that makes healthcare such a complicated industry to analyze and comment on is the political aspect to it. As I start this website, it is the summer of 2009 – the middle of one of the greatest healthcare debates this country has had thus far. Many of the platitudes and anecdotes being espoused in the media have been both misleading and sensationalized. This makes it terribly difficult to sift through the rhetoric in search for truth. My goal is not to convince you into any way of thinking or belief. It is to develop your knowledge base so that the foundation of your opinions stands on well-informed ground. At the same time, through the comments and discussion I hope to learn new ways to think about the system and new viewpoints that I never would have had before.

So here are my pledges to you:
1) I will try to be as unbiased as possible. This means that I will present both sides of the argument in an intellectually honest way. Facts will not be bent or omitted to support one idea or the other. This does not mean I won’t have opinions.
2) I will try to cite credible sources of information where possible and avoid passing off anecdotes as a proxy for real research.

Next Post: What is the healthcare system? How is the government involved today?