I have to say it’s been interesting watching the political process for the past 18+ months. For me, it started with Senator Baucus’s “Call to Action” white paper on what he believed would be the essential elements of healthcare reform and Tom Daschle’s book “Critical: What we can do about the Healthcare Crisis” (remember that guy? Ever wonder what the process would have been like if he had become Secretary of Health and Human Services instead of Sebelius?). These works were meant to be base cases worthy of being a jumping-off point for discussions. The Baucus paper was released November 12, 2008, and the book was released in 2008. For some Democrats, this saga started in 1993 when the Clintons attempted to tackle healthcare reform. For the historical buffs, the start date could be pinned with 1965’s social security act (the creation of Medicare and thus the ever-present looming tweaks to the system) or even earlier (Obama frequently cites Teddy Roosevelt).
Obama’s 2009 budget helped to kick-start the great healthcare debate, which has gone from bipartisan Senate Finance committee talks, to reconciliation threats, to August town halls, to House and Senate passages, to Scott Brown’s election, to where we are today. It’s been a winding journey, and I do feel we are nearing the final forks in the road.
Scott Brown’s election in Massachusetts to take over Ted Kennedy’s seat brought the healthcare reform bill to a screeching halt. The House had previously passed their version of the healthcare bill. The Senate had passed their own version as well. As the legislative process dictates, the two arms of Congress were hammering out compromises in conference committee when the Republicans gained this seat. Normally, a single bill comes out of conference committee and both the House and Senate pass it again to send it to the President. In this instance, with only 59 Democrats remaining, the Senate would be unable to pass the bill again, so suddenly the options became limited.
1) The House can pass the Senate version as-is, without any amendments. This requires 216 House votes
2) The House passes the Senate version as-is, without any amendments and both the House and Senate pass another bill (via reconciliation) to incorporate all the changes they would have made. This requires 216 House votes and 50 Senate votes.
3) Start over. This requires 216 House votes and 60 Senate votes.
The finals steps began with Obama’s healthcare summit on February 25th, 2010. It was meant to be a bipartisan conversation between Democrats and Republicans to push the legislation forward. It was televised on cspan, and all 6.5 excruciating hours are available on the web (AM Session and the PM Session) for those that enjoy mind-numbing pain. Both sides made a couple good points, but they were few and very far between, and I found the demeanor and points of some members of each party to be saddening. Right now though, healthcare reform is stuck in an odd catch-22. Option 3 (start over) has been pulled off the table by Democratic leaders, including Obama. Option 1 (House pass the Senate version only) is untenable for some House members whether that has to do with abortion language (Bart Stupak), pork barrel spending (“Cornhusker kickback,” “Louisiana Purchase,” or the “Florida carve-out”), or reelection fears (Dems in Republican districts). So that leaves Option 2 – the Senate version with a sidecar of amendments. With 216 remaining Democrats who voted “yes” for the House-version of the healthcare bill, Democrats are walking a very fine line as to whether or not they can pass healthcare legislation.
Reconciliation is a tricky beast. Originally conceived as a way to hasten budget cuts, it limits its scope to budgetary matters only. Unfortunately, the tool has been perverted and abused by both parties to pass legislation with only a simple majority rather than the usual 60 votes it takes in the Senate. Ignoring whether or not you believe reconciliation can or should be used as part of the healthcare reform process, there are at least 2 main issues that Democrats are coming to grips with.
1) No one is sure what is permissible through reconciliation. One example of an issue that is NOT permissible is abortion funding. This obviously creates some issues for someone like Stupak who has openly stated that he can not vote yes on the existing Senate language regarding abortions. For him, he needs assurance that these provisions will be changed when it’s all said and done.
2) There is a large distrust between the House and Senate chambers. It is probable that the House must vote on the Senate bill before taking up the sidecar bill (ie. a bill must be law before another bill can be written to amend the law). The big fear for House members is that they pass the Senate version, and then the Senate fails to pass the sidecar bill, which means House members are stuck without their changes.
3) A litany of other issues that include Medicare Advantage cuts , Medicaid funding, controlling costs, and other items.
As our lawmakers tussle with the best course of action, I think it’s fair to say that politics and the political process have overtaken policy issues at this point. There’s a soft deadline to move this legislation forward in the next week or two. As of Tuesday 9:00PM ET March 16th, that means a House vote on Saturday. We’ll see what happens though. I salute anyone with the fortitude to continue following the politics of healthcare reform. It’s been a long March.
Tuesday, March 16, 2010
Monday, February 15, 2010
Pharmaceutical Marketing
“Drug manufacturers are paid way too much money, just look at all those ads talking about erectile dysfunction, urination issues, or heartburn. We should just cap what they’re paid, and then maybe these ads would stop.”
I’ve heard statements like this many times before, and it definitely brings up issues worth discussing. I myself find the underlying issues concerning but think the solution offered is misguided.
Ever wonder how doctors learned about the newest drugs and what they did? Perhaps you thought they learned it through scientific trade journals, so they update themselves on which one works best. Maybe that is true to a certain extent, but there are far too many drugs nowadays to learn about them all. Doctors are also busier than ever, so it isn’t possible to spend 20 hours a week just to read trade journals about potential new drugs. On the contrary, the real way most learn about new drugs happens with a pharmaceutical representatives visit. The representatives conduct tutorials and luncheons to educate the physician about the drug and all its potential uses. This was the earliest form of pharmaceutical marketing before pharmaceutical companies found out that “direct-to-consumer” (DTC) advertising could help control the sales channel as well.
With this background in mind, let’s break down the statement above to read between the lines.
Statement: “Drug manufacturers are paid way too much money.”
Underlying issue: Healthcare costs too much
Proposed solution: “We should cap what [drug manufacturers are] paid”
Statement: “Look at all those ads talking about erectile dysfunction, urination issues, or heartburn”
Underlying issue: Uncomfortable subjects combined with frequency of media
Proposed solution: “Maybe these ads would stop [if they had less money]”
Look at the two underlying issues – healthcare costs too much and annoying advertisements.
Well in the last post titled, “Technology and Innovation,” I tried to explain why I think (branded) pharmaceuticals costs a lot – ie. theoretically to make up for the R&D that is spent. So changing the costs of a branded pharmaceutical drug involves a change in the law. One proposed change is a cap on the drug costs (perhaps as a fixed % of the actual manufacturing cost or some other method). One perceived benefit would be the reduced advertisement budgets that the pharmaceutical manufacturers would have – killing 2 birds with 1 stone right? Well unfortunately, the pharma manufacturers have figured out that to maximize their long-term profits, an incremental dollar spent on advertising is actually more valuable than an incremental dollar spent on R&D. What this means is that any reductions in the price would result in direct cuts to R&D spending. Now Henry Waxman fans would cry foul here – the whole point of the patent protections is to encourage R&D investment, not profits and excessive SG&A expenses. As often is the case, I’m not going to take a political stance here, I just want to point out what would be the real effects of price caps on drugs.
So what would I recommend? I think the more appropriate way to cut out all of these direct-to-consumer advertisements would be to place restrictions on the advertisements themselves. There is precedent with the tobacco industry. Such restrictions would 1) save consumers from bombardment of annoying advertisements, 2) save doctors from having to answer frivoulous requests for unnecessary medications, 3) reduce utilization of drugs, and 4) effectively reduce the expenditures made by the pharmaceutical manufacturers. I’m perfectly comfortable with doctors remaining the gatekeepers of healthcare – the way they were meant to practice medicine.
Sources: Normally, I’d try to cite here that “an incremental dollar spent on advertising is actually more valuable than an incremental dollar spent on R&D” was based on a McKinsey study done in the early ‘90s, but I haven’t been able to find it anywhere, so my apologies on the lack of a primary source.
I’ve heard statements like this many times before, and it definitely brings up issues worth discussing. I myself find the underlying issues concerning but think the solution offered is misguided.
Ever wonder how doctors learned about the newest drugs and what they did? Perhaps you thought they learned it through scientific trade journals, so they update themselves on which one works best. Maybe that is true to a certain extent, but there are far too many drugs nowadays to learn about them all. Doctors are also busier than ever, so it isn’t possible to spend 20 hours a week just to read trade journals about potential new drugs. On the contrary, the real way most learn about new drugs happens with a pharmaceutical representatives visit. The representatives conduct tutorials and luncheons to educate the physician about the drug and all its potential uses. This was the earliest form of pharmaceutical marketing before pharmaceutical companies found out that “direct-to-consumer” (DTC) advertising could help control the sales channel as well.
With this background in mind, let’s break down the statement above to read between the lines.
Statement: “Drug manufacturers are paid way too much money.”
Underlying issue: Healthcare costs too much
Proposed solution: “We should cap what [drug manufacturers are] paid”
Statement: “Look at all those ads talking about erectile dysfunction, urination issues, or heartburn”
Underlying issue: Uncomfortable subjects combined with frequency of media
Proposed solution: “Maybe these ads would stop [if they had less money]”
Look at the two underlying issues – healthcare costs too much and annoying advertisements.
Well in the last post titled, “Technology and Innovation,” I tried to explain why I think (branded) pharmaceuticals costs a lot – ie. theoretically to make up for the R&D that is spent. So changing the costs of a branded pharmaceutical drug involves a change in the law. One proposed change is a cap on the drug costs (perhaps as a fixed % of the actual manufacturing cost or some other method). One perceived benefit would be the reduced advertisement budgets that the pharmaceutical manufacturers would have – killing 2 birds with 1 stone right? Well unfortunately, the pharma manufacturers have figured out that to maximize their long-term profits, an incremental dollar spent on advertising is actually more valuable than an incremental dollar spent on R&D. What this means is that any reductions in the price would result in direct cuts to R&D spending. Now Henry Waxman fans would cry foul here – the whole point of the patent protections is to encourage R&D investment, not profits and excessive SG&A expenses. As often is the case, I’m not going to take a political stance here, I just want to point out what would be the real effects of price caps on drugs.
So what would I recommend? I think the more appropriate way to cut out all of these direct-to-consumer advertisements would be to place restrictions on the advertisements themselves. There is precedent with the tobacco industry. Such restrictions would 1) save consumers from bombardment of annoying advertisements, 2) save doctors from having to answer frivoulous requests for unnecessary medications, 3) reduce utilization of drugs, and 4) effectively reduce the expenditures made by the pharmaceutical manufacturers. I’m perfectly comfortable with doctors remaining the gatekeepers of healthcare – the way they were meant to practice medicine.
Sources: Normally, I’d try to cite here that “an incremental dollar spent on advertising is actually more valuable than an incremental dollar spent on R&D” was based on a McKinsey study done in the early ‘90s, but I haven’t been able to find it anywhere, so my apologies on the lack of a primary source.
Sunday, January 24, 2010
Technology and Innovation
Hi everyone! I’m back from the holidays, so the blogging is returning. I had the honor of serving as best man at my older brother’s wedding! I also attended a week-long healthcare-focused investor conference in San Francisco. I appreciate the encouragement from those of you who’ve seen me around.
In the last post, we took a look at some various health systems around the world, but I wanted to point out one of their understated flaws. Many point to their lower costs and better health outcomes. One example of this is the better drug pricing that these countries receive because of their aggregated purchasing power with the drug makers. The economics from a negotiation standpoint makes sense; the marginal cost of a pill that already exists is fairly low. If the choice for a drug manufacturer is to make a smaller margin on larger volume or no profit at all, then obviously they will sell the drug at the lower price.
The US pays significantly more for their branded drugs than other countries. The most salient of which is Canada. Politicians even talk about allowing drugs purchased in Canada to be reimported into the US on a large scale (we’re not talking about families bringing drugs across the border, but making it an industry). Think about that…US manufactured drugs, shipped to Canada, only to be reshipped back to the US. I don’t even want to bother going through the laundry list of reasons why this is ridiculously stupid, but I’ll just go through a couple of the practical realities for the sake of argument. 1) Would the drug manufacturers allow Canada to purchase the type of volume required to be sent back to the US? 2) Does the Canadian government want to get involved with trying to control US healthcare costs? (I think both of these answers would be no). Okay, admittedly I don’t have the highest opinion of all politicians…I’ve definitely found rhetoric, grandstanding, and pandering to popular opinion to be more prevalent than true, honest thoughtfulness about the best policy for the long-term benefit of our country. I contend the real reason the US pays so much more for these drugs is that US law has carved out a monopoly for them. Patent law allows 17 years of monopolistic competition, which allows the manufacturer to charge an excessive premium for their product in the US. In theory, this excess profit is meant to encourage the initial investment into research and development.
Now, to be honest, (and I’ve been up front about this before), I’m a big believer in economic incentives and I think the patent protections and laws that encourage innovation have genuinely helped increase the funding to find the next big idea or create the next helpful drug or product. [It’s part of what make this country so great.] Granted, one of the legal side effects results in me-too type “innovative” products and gross abuse of intellectual-property law to sustain/hide-behind these patent protections far beyond the originally intended 17 years (that’s another discussion). Aside from these, I think the US healthcare system has ~funded~ many of the pharmaceutical drugs that we see today. Clearly the production cost of an additional pill is very tiny, so once you have one market that is making up for the losses in R&D (the US), the drug companies would be willing to slash prices for additional volume elsewhere. This is where countries like Canada and the UK can step in to be the beneficiary of being the marginal buyer as opposed to the initial buyer. Without the initial buyer willing to pay such a large premium, the investor may never fund the research costs required to discover new drugs.
The fundamental flaw of every government trying to be the marginal buyer should be pretty clear. It would be like every airline passenger refusing to pay more than the marginal cost of flying on a plane (peanuts, soda, and some meager fuel costs) without anyone helping to pay for the fixed costs (plane, pilot, flight attendants, airport fees, etc.). Now is there a solution to have countries other than the US funding the pharmaceutical innovation? Perhaps, but I can’t think of one that doesn’t have massive ripple effects. Can you imagine the international outcry if there were a tariff on US drug exporters? What if other countries just manufactured US-patented drugs? Seems like another case of underpaying for intellectual property – like the massive amounts of stolen software and movies that you can find in Asia or Chinatowns in the US. If you have a good suggestion – I’d love to hear it.
In the last post, we took a look at some various health systems around the world, but I wanted to point out one of their understated flaws. Many point to their lower costs and better health outcomes. One example of this is the better drug pricing that these countries receive because of their aggregated purchasing power with the drug makers. The economics from a negotiation standpoint makes sense; the marginal cost of a pill that already exists is fairly low. If the choice for a drug manufacturer is to make a smaller margin on larger volume or no profit at all, then obviously they will sell the drug at the lower price.
The US pays significantly more for their branded drugs than other countries. The most salient of which is Canada. Politicians even talk about allowing drugs purchased in Canada to be reimported into the US on a large scale (we’re not talking about families bringing drugs across the border, but making it an industry). Think about that…US manufactured drugs, shipped to Canada, only to be reshipped back to the US. I don’t even want to bother going through the laundry list of reasons why this is ridiculously stupid, but I’ll just go through a couple of the practical realities for the sake of argument. 1) Would the drug manufacturers allow Canada to purchase the type of volume required to be sent back to the US? 2) Does the Canadian government want to get involved with trying to control US healthcare costs? (I think both of these answers would be no). Okay, admittedly I don’t have the highest opinion of all politicians…I’ve definitely found rhetoric, grandstanding, and pandering to popular opinion to be more prevalent than true, honest thoughtfulness about the best policy for the long-term benefit of our country. I contend the real reason the US pays so much more for these drugs is that US law has carved out a monopoly for them. Patent law allows 17 years of monopolistic competition, which allows the manufacturer to charge an excessive premium for their product in the US. In theory, this excess profit is meant to encourage the initial investment into research and development.
Now, to be honest, (and I’ve been up front about this before), I’m a big believer in economic incentives and I think the patent protections and laws that encourage innovation have genuinely helped increase the funding to find the next big idea or create the next helpful drug or product. [It’s part of what make this country so great.] Granted, one of the legal side effects results in me-too type “innovative” products and gross abuse of intellectual-property law to sustain/hide-behind these patent protections far beyond the originally intended 17 years (that’s another discussion). Aside from these, I think the US healthcare system has ~funded~ many of the pharmaceutical drugs that we see today. Clearly the production cost of an additional pill is very tiny, so once you have one market that is making up for the losses in R&D (the US), the drug companies would be willing to slash prices for additional volume elsewhere. This is where countries like Canada and the UK can step in to be the beneficiary of being the marginal buyer as opposed to the initial buyer. Without the initial buyer willing to pay such a large premium, the investor may never fund the research costs required to discover new drugs.
The fundamental flaw of every government trying to be the marginal buyer should be pretty clear. It would be like every airline passenger refusing to pay more than the marginal cost of flying on a plane (peanuts, soda, and some meager fuel costs) without anyone helping to pay for the fixed costs (plane, pilot, flight attendants, airport fees, etc.). Now is there a solution to have countries other than the US funding the pharmaceutical innovation? Perhaps, but I can’t think of one that doesn’t have massive ripple effects. Can you imagine the international outcry if there were a tariff on US drug exporters? What if other countries just manufactured US-patented drugs? Seems like another case of underpaying for intellectual property – like the massive amounts of stolen software and movies that you can find in Asia or Chinatowns in the US. If you have a good suggestion – I’d love to hear it.
Sunday, December 20, 2009
Fixing the System – Where do we start?
This is another piece that takes a bite out of the ideas of writer Atul Gawande. One thing we haven’t looked at are the diverse systems that can be found internationally that seem to work. The British system uses a purely governmental-run healthcare system called the National Health System.
The interesting part is a lot of these systems seem to work, and a very fair question is – can these systems work in the
Again, just like last time with the Two Towns posting, this will be a slight summary of Dr. Gawande’s main points, so I highly encourage you to read the source article to help formulate your own opinion.
Back in the 1940s, the British system consisted of a variety of hospitals and health insurance systems.
The French system developed in a different way. Before the war, large manufacturers and unions had organized insurance cooperatives through a payroll tax. By the time
The other example that Dr. Gawande presents is the Swedish system. Because they chose to be neutral, it was not ravaged by the war the way the rest of
The
I know this concept doesn’t make a whole lot of intellectual sense. If a system is bad to begin with, why don’t we scrap it and go with something else that is better? Atul Gawande goes on to describe a few more examples of this “path-dependence” including VHS vs. beta-max (a superior technology to VHS), the telephone system, the gasoline-based transportation network. Sometimes nations are too far down one path to turn it around, and any such upheaval of the existing system can pose serious risks (like Mao’s Great Leap Forward).
Our country is built on a patch-work of 1) the employer-paid piece, 2) the government-paid piece for seniors (Medicare), 3) government-run piece for veterans (Veterans Administration), and 4) the federal/state government-paid piece for the poor (Medicaid). Any realistic/pragmatic expansion would build on these already-existing programs. Indeed, just earlier this morning, the Senate is pushing a package through that will expand Medicaid and establish a new health insurance exchange that will help solve the broken individual market. They are building on what already exists; not by intellectual choice, but by practical necessity.
Friday, December 4, 2009
Model Health Systems
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As broken as the American health system is, there truly are pockets of amazing systems that we can look to: Intermountain Healthcare (Utah), Geisinger Health System (PA), Kaiser Permanente (primarily CA). These guys deliver technologically advanced care with better outcomes, lower costs, and happy employees. It is worthy to note that they’re all non-profit entities as well. I’ll be honest – I haven’t personally visited any of these systems, so my information is admittedly second hand. I have, however, spoken to key figures in some of these systems and read numerous studies and anecdotes about these systems, but the point isn’t whether or not these systems are better – the question is HOW are they better. So what’s the secret sauce?
The crucial pieces of their success are cooperation and motivation. Normally, a patient’s care can be done in numerous settings – a hospital, a primary care physician, multiple specialists all in different places, and possibly even other places like a long-term care facility or nursing home. These entities bring together the key elements of care – the hospital, the primary care physician, the specialists, and the payor (ie. the insurance piece). Instead of shuffling the patient back and forth among provider settings with disparate patient records and an inherent dependence on patient’s memory, understanding, and effort, these places bring the care TO the patient. With the patient’s primary care physician always nearby, a full team of specialists can communicate with each other to discuss a patient’s issues and treatment. Think about that – each physician gets to see a variety of cases and gets more experience than the average individual specialist can, and they get the benefits of practicing together as a team and pooling their knowledge. Now the cardiologist can speak directly with the radiologist and primary care physician to get a quick, efficient understand of the issue on top of knowing the patient’s history and current medication. Just avoiding the common errors alone (conflicting medicines, mis-diagnoses, repeated tests, etc.), these systems easily give care that is better, faster, and more cost-efficient. Of course, we’d all love if all healthcare delivery systems could do that, but how do the physicians get the motivation in place?
Remember that most physicians get paid on a per-service basis. Each test they order, each service performed means more revenue. There is no pecuniary motivation to spend extra time speaking with the patient to ensure they completely understand the instructions or taking extra time to speak with other specialists to double check themselves etc. What these systems do is to employ the physicians. The physicians get paid more than the average physician would earn on their own, and they are given the freedom to practice the way they want to – to give the patient the best care without an eye on how it impacts their own financial situation. Essentially, the financial motivation for more services is taken away from the physician. The pursuit for the intellectually-correct care is the main goal for most of these guys.
For the hospital, the motivation is different as well. Instead of a fee for service basis, this ultimately boils down to a single basic principle – capitation. These systems are given a fixed amount of money to care for their patients. The more money they save, the more money they get to keep. That means that they’ll be very mindful of waste, inappropriate uses of services, and long-term health of the patient. In short, they are taking on insurance-type risk.
So why is this system the El Paso rather than the McAllen? Can it be transported elsewhere?
1) It takes a certain type of physician to be successful in this environment. They’ll do well financially by hitting doubles, but they won’t be given the opportunity to swing for the fences.
2) Patients need to buy into the program. They need to accept that they’ll be funneled into a specific hospital system and only get to see a specific set of physicians. They won’t be given a vast choice of doctors to choose from.
3) Employers need to be small-mid sized companies that are either local or regional employers. National employers have no use for such a narrow network, so the addressable market is much smaller.
4) Hospitals will need to redesign themselves. Integrating physicians into the entity, spending more money than ever on information technology and capital expenditures, renegotiating the fundamental way they are compensated.
In short, it is pretty hard for a system like this to start up, but it’s certainly possible. Some of the Medicare Advantage health insurers have some pretty deep and integrated HMOs, so perhaps we’re seeing advanced health systems in their nascent stages. Or perhaps that’s wishful thinking – after all the promise of HMOs as the savior to the health system has been around since the 1990s.
http://www.facebook.com/pages/Gen-Y-Healthcare/187150235177
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As broken as the American health system is, there truly are pockets of amazing systems that we can look to: Intermountain Healthcare (Utah), Geisinger Health System (PA), Kaiser Permanente (primarily CA). These guys deliver technologically advanced care with better outcomes, lower costs, and happy employees. It is worthy to note that they’re all non-profit entities as well. I’ll be honest – I haven’t personally visited any of these systems, so my information is admittedly second hand. I have, however, spoken to key figures in some of these systems and read numerous studies and anecdotes about these systems, but the point isn’t whether or not these systems are better – the question is HOW are they better. So what’s the secret sauce?
The crucial pieces of their success are cooperation and motivation. Normally, a patient’s care can be done in numerous settings – a hospital, a primary care physician, multiple specialists all in different places, and possibly even other places like a long-term care facility or nursing home. These entities bring together the key elements of care – the hospital, the primary care physician, the specialists, and the payor (ie. the insurance piece). Instead of shuffling the patient back and forth among provider settings with disparate patient records and an inherent dependence on patient’s memory, understanding, and effort, these places bring the care TO the patient. With the patient’s primary care physician always nearby, a full team of specialists can communicate with each other to discuss a patient’s issues and treatment. Think about that – each physician gets to see a variety of cases and gets more experience than the average individual specialist can, and they get the benefits of practicing together as a team and pooling their knowledge. Now the cardiologist can speak directly with the radiologist and primary care physician to get a quick, efficient understand of the issue on top of knowing the patient’s history and current medication. Just avoiding the common errors alone (conflicting medicines, mis-diagnoses, repeated tests, etc.), these systems easily give care that is better, faster, and more cost-efficient. Of course, we’d all love if all healthcare delivery systems could do that, but how do the physicians get the motivation in place?
Remember that most physicians get paid on a per-service basis. Each test they order, each service performed means more revenue. There is no pecuniary motivation to spend extra time speaking with the patient to ensure they completely understand the instructions or taking extra time to speak with other specialists to double check themselves etc. What these systems do is to employ the physicians. The physicians get paid more than the average physician would earn on their own, and they are given the freedom to practice the way they want to – to give the patient the best care without an eye on how it impacts their own financial situation. Essentially, the financial motivation for more services is taken away from the physician. The pursuit for the intellectually-correct care is the main goal for most of these guys.
For the hospital, the motivation is different as well. Instead of a fee for service basis, this ultimately boils down to a single basic principle – capitation. These systems are given a fixed amount of money to care for their patients. The more money they save, the more money they get to keep. That means that they’ll be very mindful of waste, inappropriate uses of services, and long-term health of the patient. In short, they are taking on insurance-type risk.
So why is this system the El Paso rather than the McAllen? Can it be transported elsewhere?
1) It takes a certain type of physician to be successful in this environment. They’ll do well financially by hitting doubles, but they won’t be given the opportunity to swing for the fences.
2) Patients need to buy into the program. They need to accept that they’ll be funneled into a specific hospital system and only get to see a specific set of physicians. They won’t be given a vast choice of doctors to choose from.
3) Employers need to be small-mid sized companies that are either local or regional employers. National employers have no use for such a narrow network, so the addressable market is much smaller.
4) Hospitals will need to redesign themselves. Integrating physicians into the entity, spending more money than ever on information technology and capital expenditures, renegotiating the fundamental way they are compensated.
In short, it is pretty hard for a system like this to start up, but it’s certainly possible. Some of the Medicare Advantage health insurers have some pretty deep and integrated HMOs, so perhaps we’re seeing advanced health systems in their nascent stages. Or perhaps that’s wishful thinking – after all the promise of HMOs as the savior to the health system has been around since the 1990s.
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 http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande
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 http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande
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.
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.
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