Monday, November 23, 2009

A Tale of Two Towns

The summary below comes from an article originally printed in the New Yorker on June 1, 2009 and written by Atul Gawande. Atul Gawande is a practicing surgeon in Boston, MA, frequently writes for New Yorker magazine, and has written his own books called Complications and Better.

I love this article. I highly, highly encourage you to read it yourself on the New Yorker website. I think Atul is a beautiful writer, and this article has been vetted by some of the best editors in the business, so this summary barely does it justice.

Atul compares two towns in Texas with similar demographics, incomes, population sizes, public-health statistics, illegal immigrant percentages, and unemployment rates. Basically, just about everything is the same, but the big difference between these two towns is that McAllen, TX costs twice as much as its nearby neighbor El Paso, TX and almost twice as much as the national average. In fact, Medicare spends $15,000/enrollee even though the per capita income of the town is $12,000! He explores many different possible reasons for such a big difference, but it boils down to one thing: overutilization of healthcare. There are too many tests, services, and procedures being ordered by physicians. Ultimately, Atul blames the entrepreneurial spirit and culture of McAllen that has infected the market since 1992 – the last time that McAllen’s costs were on par with the national average. Doctors not only own their own practices but may also be part equity owners in various specialized surgery centers and other provider facilities. The incentive to recommend too many procedures and tests proves to be too much.

I think my favorite part of the whole article is the sentence that states, “the real puzzle of American health care…is not why McAllen is different from El Paso. It’s why El Paso isn’t like McAllen. Every incentive in the system is an invitation to go the way McAllen has gone.”

Having read a lot of political opinions and listened to political pundits, it’s quite refreshing to see the correct conclusion being drawn from an example of two divergent healthcare costs. Many people point to the efficient exception asking – why isn’t everyone else just like this? I’m a big believer in motivations from incentives and conditioning through learned behavior. I studied a lot of economics, psychology, sociology, and statistics, so this education significantly influences my view the world. The fact is that our system today rewards the behavior in McAllen, so it should not be a surprise that McAllens exist in the US. Perhaps the degree is a bit amazing, but look for the outlier, and it will be found. Atul’s ending is a bit fitting and foreboding, “the decision is whether we are going to reward the leaders who are trying to build a new generation [healthcare delivery models]. If we don’t, McAllen won’t be an outlier. It will be our future.” I think he’s right.

We can’t continue to ask our doctors to be altruistic saints by choosing between what is right and what makes financial sense. If each doctor did what was best for himself, as they do in McAllen, the result is disaster. In a certain way, it is similar to a prisoner’s dilemma where the collection of individuals’ optimal decisions is the worst outcome for the group. Antibiotics is one example – physicians almost always prescribe the antibiotic for the patient because that patient will be better off in any individual instance, but over time this overprescribing produces antibiotic-resistant bacteria that is worse for the entire system. Of course if physician 1 does it, it’s not a big deal, but if physicians 1-10,000 do it, then it becomes an issue. Changing the incentives of physicians is not an easy task. However, there are a few places that have managed to change the way they delivery healthcare.

Next we’ll take a look at some of these places that seem to have achieved healthcare Zen – lower costs, better outcomes, happy patients, and happy doctors.

Sources: New Yorker

Monday, November 16, 2009

The Public Plan

There has been a lot of buzz about the public plan, but what exactly is it, and what would it do to the US healthcare system? You’ll probably hate this answer, but it all depends. Here’s the general tension: one side believes that the government can run the healthcare system more efficiently and cheaply than the private sector. The other side is a belief that the private sector generally can do things better than the government and that the healthcare sector is no exception. I’ll start with the most liberal/powerful version, and move towards the right.

Strong public plan option
To me this is defined by 2 key elements: (1) required provider participation and (2) Medicare-based rates. Since no bill has actually required providers to participate, I won’t get into that. I did make a reference to low Medicare rates in an earlier post, but suffice it to say that there are studies, including one from the Lewin Group, which is admittedly a subsidiary of United Health Group, that show that Medicare rates are as low as 71% of standard commercial rates. If you don’t believe me or doubt the validity of the study, go ask your doctor (or ANY doctor) if the rates that Medicare pays come remotely close to the rates for commercial payors. One key question though is, why should providers care – isn’t Medicare+Plus better than an uninsured patient, who’s paying pennies on the dollar? Well the fear for hospitals and physicians alike is not about converting uninsured patients into some type of insured patient (government or commercial). The key fear is what if the commercial patients turn into a lower paying government-insured patient? If half of the patients are commercial paying patients, then the average rate that hospitals receive is slashed by 30% for half its patients. This would devastate the hospital industry. Remember, 30% off of reimbursement goes straight to the bottom line, so after accounting for mix and taxes, it’s roughly 10% of net income gone. For an industry that makes an average of ~3% profit margins (~85% of hospitals are non-profit), taking out 10% is infeasible. Even though every proposal has limited the eligibility of a public plan to a small group of people, industry experts, conservatives, and moderates alike have recognized that establishing a public option could be the “camel’s nose under the tent.” In other words, if the plan is eligible for groups under 50 today, then who’s to say that eligibility won’t be expanded down the road to groups of 100, 500, 1000…until eventually the government controls the entire healthcare industry? It’s for these reasons that the earliest versions of the House bill with a strong public plan at Medicare + 5% rates were defeated in committee.

House version Public plan option
To compromise a little with the moderates, the early House version switched from a Medicare+Plus system to a “negotiated rates” system. Loosely defined, the Director of Health and Human Services (the department in charge of Medicare, Medicaid, FDA, CDC, etc.) would be in charge of negotiating rates with providers. Ignoring the difficulties of negotiating with >5,000 hospitals and the hundreds of thousands of doctors, it is unclear if these rates would be closer to Medicare or commercial rates. Again, the same argument (Camel’s nose) is being used to argue against putting in the public plan infrastructure in this form.

Other proposed verions
There are a few other versions in the Senate being thrown around as ideas. 1) Senate Majority leader Harry Reid’s state-based public plans with an opt-out clause, 2) Senator Olympia Snowe’s public plan with trigger provisions if the health insurance industry does not meet certain coverage or cost goals, and 3) Senator Kent Conrad’s non-governmental, state-based cooperatives akin to the agricultural industry cooperatives (think FL orange growers). The state-based plans are nearly as powerful as their national-based cousins, but it would allow states to opt-out. Considering that a few moderate Senators do not like this plan, it has no chance of passing. Chalk this one up to politicking by Senator Reid. The cooperative has been blasted by liberals as being too impotent to cause any change in the current environment. In other words, it would be the same as not having a public plan at all, and those critics would be right. Private insurers have already been competing against non-profit, non-governmental entities for decades. The intriguing one to me is the trigger-based public plan. On the surface, it solves the general tension that debaters have: it gives the private sector the chance to prove that it can bend the cost curve and cover the uninsured under new regulation, but it also creates a public plan if the private sector fails as the public plan backers would believe. It seems like the perfect compromise, but then the question becomes what is the “trigger” itself? Can insurers really be responsible for cost controls when they control only 15-20% of the premium via SG&A and profits? Will the trigger be strong enough to motivate the journey towards efficiency? This and many other questions remain to be seen.

If you asked me my opinion (and I emphasize this is an opinion because I can respect the belief that government can do things better than the private sector – defense and utilities for example), I’d tell you that I look at Medicare as the model for the government’s ability to run a health insurance program. If you’ve read my earlier post about Medicare, then you’d know that I think it is a pretty miserable program full of inefficiency and fraud. Regardless, the public plan is truly a big distraction from all the things that need to be fixed. As an American, I really do sincerely hope that legislation gets passed in some form. It is impossible to argue that the current system works. We’re next going to explore some of the ideas and writings of Atul Gawande and identify some of the positive changes that are being proposed to the system.

Monday, November 2, 2009

State Experiments in the Individual Market

There are really only a handful of states that have tried to put serious restrictions/regulation into their individual insurance market. We saw in the previous post about the individual insurance market how most states, like Texas for example, favors the currently healthy. The most extreme example of a state that favors the currently sick is New York. This state has both pure community rating and guaranteed issue requirements. This means that everyone buying individual insurance in the state pays the same price (community rating), and that insurance companies can not deny you if you apply for insurance – even if you are already sick (guaranteed issue). That may sound great and fair in principle, but once you dig deeper into what the effects are, it’s simple to see that it too is a broken market. Today, the cost of a New York insurance premium is $1,300 per month for an individual (not family). Only about 44 people of the 19.5mm New York residents have individual insurance. Most just go uninsured and many delay minor-moderate care needs. I have friends that are one sports accident or an apartment-moving injury away from wiping out their savings and moving back home. For comparison’s sake, in Kentucky the premiums are as low as $95/month – clearly more affordable for the average person.

Understanding what happened to New York isn’t that hard. If you’re guaranteed to be able to get insurance, then you’ll only buy it when you know it’ll be more beneficial to have it than not. So a rational person would wait until a tangible need arose. Since only sick people are buying insurance and using more services than they’re paying for, the insurer then raises rates the following year to make up for the losses. The marginally healthier people subsequently drop out, and the cycle repeats. This is the classic spiral of adverse selection: the higher the premiums drive out the healthier population leaving the sicker population to pay ever higher rates.

Herein lies the problem – how do you get someone to pay for something they don’t (think they) need? Well the answer is pretty easy, even if it is unpopular. You force them to get it (taxes anyone?). The same has been true in auto insurance for decades. Auto-insurance is a prerequisite for driving (even if compliance is lower than the 100% hoped). In my humble opinion, there has been only 1 state to date that has tried with any amount of success: Massachusetts.

In 2006 Massachusetts passed one of the most ambitious healthcare reform bills to date. Its reforms had several elements, but here are the key features:

• Insurance “Connector” for individuals and small groups
• Guaranteed coverage for people in the connector – insurance companies must either offer insurance to everyone or not sell insurance to individuals at all
• Penalties for not having health insurance (individuals relinquish the $219 state personal exemption and/or non-exempt employers pay a small penalty if they don’t offer insurance)
• Insurance companies must contract with providers (hospitals and physicians); in other words, it is voluntary participation for providers
• Subsidies for the poor

The result was that a lot more people got coverage. Employers felt obligated to offer insurance (possibly from the pressure from their employees), individuals purchased coverage to avoid the penalty, and coverage was kept affordable since healthy members bought in and broker commissions were eliminated. Step 2 of the reform was reining in the costs of the program. Unfortunately, the recession hit at the same time that step 2 needed to take place, and the dual impact put an incredible strain on the state. Some might argue that Massachusetts was one of the only states that could have pulled this off. It happens to have a few built-in advantages in executing its version of universal coverage.

• It already had a high insurance coverage rate to begin with (~94% pre-reform/ ~97% post-reform)
• It has an affluent population (median income of $62,365 vs. $41,994 national average).
• Many of the residents culturally believed that insurance was a necessity/right/basic need etc. It is, after all, one of the most liberal states in the US.

I’d say that Massachusetts was successful in achieving the second goal of covering the uninsured (See: What’s wrong with the individual market? A look into the uninsured.) It failed pretty miserably at achieving what is the first goal of US reform: controlling costs. One of the ways that is repeatedly cited as a way to control costs is a national public plan option. After all, if England can do it, can’t we do it too? (Yes, we can!)

Sources: Interviews with Blue Cross Blue Shield insurance executives, US Census Data

Next Post: What is a public plan? What are its advantages? Disadvantages? Is one feasible in the US?