The Drivers of Health Care Costs


Posted by Joel Wittman

With health care costs continuing to comprise a huge portion of the nation’s Gross Domestic Product, efforts are ever-continuing to identify the drivers of these costs and, ultimately, devise methods to slow or decrease health care expenses.  A recent article in Kaiser Health News addressed seven factors that contribute to the rise in spending.  I thought that this article would be of interest to you.

There is no one villain in the battle against rising health care costs. Currently, the United States spends more on health care services than any other country, exceeding $2.6 trillion, or about 18 percent of gross domestic product. Most years, medical spending rises faster than inflation and the economy as a whole. Many factors — and nearly everyone — contributes to those increases.

Here are seven ways you or your medical providers play a role, based on a recent report from the Bipartisan Policy Center, a think tank in Washington, D.C.

1. We pay our doctors, hospitals and other medical providers in ways that reward doing more, rather than being efficient.

Most insurers — including traditional Medicare — pay doctors, hospitals and other medical providers under a fee-for-service system that reimburses for each test, procedure or visit. Coupled with a medical system that is not integrated, this encourages over treatment, including repetitive tests, the report says. New efforts in the federal health law and among some private insurers aim to move payments toward a flat rate for a specific condition, such as a knee replacement, or for a patient’s entire episode of care, in order to streamline costs. Medical systems and doctors are also looking to electronic medical records as a way to improve coordination and reduce unnecessary, repeated tests.

2. We’re growing older, sicker and fatter.

As we get older, we tend to need more medical care. The baby boom generation is heading into retirement, with enrollment in Medicare set to grow by an average of 1.6 million people annually. Additionally, nearly half the U.S. population has one or more chronic conditions, among them asthma, heart disease or diabetes, which drive up costs. And two-thirds of adults are either overweight or obese, which can also lead to chronic illness and additional medical spending.

3. We want new drugs, technologies, services and procedures.

Medical advances can help us get well, avoid disease and delay death, but they also drive up spending. Much new technology comes on the market after being tested only for safety or whether the new treatment is comparable to existing ones or even placebos. Patients and doctors often demand the newest treatments, even if there is little or no evidence that they are better. Prices for newer treatments are often higher than for the products they replace.

4. We get tax breaks on buying health insurance — and the cost to patients of seeking care is often low.

The majority of people with insurance get it through their jobs. The amount employers pay toward coverage is tax deductible for the firm and tax exempt to the worker, thus encouraging more expensive health plans with richer benefits, the report says. How that coverage is designed also plays a role: Low deductibles or small office co-payments can encourage overuse of care, the report says. Increasingly, however, employers are moving toward high-deductible coverage as a way to slow premium growth and require workers to pay more toward the cost of care.

5. We don’t have enough information to make decisions on which medical care is best for us.

While medical journals, the Internet and the popular press are awash in health information and studies, professionals and patients find there is no broad standard for evaluating individual treatments, or how specific treatments compare with others. Even when evidence shows a treatment isn’t effective, or is potentially harmful, it can take a long time for that information to actually change how doctors practice or what patients demand, the report says. Additionally, Americans vary widely in how they view end-of- life issues, with some desiring every possible medical intervention to stave off death in every situation, no matter how small the possibility of success.

6. Our hospitals and other providers are increasingly gaining market share and are better able to demand higher prices.

While mergers or partnerships among medical providers or insurers may improve efficiency and help drive down prices, consolidation can also have the opposite effect, allowing near-monopolies in some markets and driving up prices, the report says. Increasingly, hospitals are buying up rivals and directly employing physicians, creating larger medical systems.

7. We have supply and demand problems, and legal issues that complicate efforts to slow spending.

Malpractice premiums and jury awards are part of what drives spending. A larger problem, although hard to quantify, is “defensive medicine” — when doctors prescribe unnecessary tests or treatment out of fear of facing a lawsuit, the report says. Fraudulent billing or unnecessary tests by medical providers seeking to “game the system” are another concern.

Finally, the report notes that state laws sometimes limit the ability of nurse practitioners or other medical professionals, who are paid less than doctors, to fully perform work for which they are trained. The U.S. faces a shortage of primary care doctors, so more advanced practice nurses and others will be needed to help care for patients who gain insurance coverage under the federal health law. Conversely, the U.S. has a higher ratio of specialists than other countries, which can serve to drive up spending. Specialists have more advanced training than primary care doctors, and are paid far more.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


What’s Behind the Slowdown in Health Care Costs?


Posted by Joel Wittman

In my article in the September blog, I wrote about a systemic approach to containing health care spending.  I thought this article about the slowdown in health care spending would also be of interest. 

Democrats on the campaign trail have warmed up to health care in recent months, touting the benefits of their mammoth 2010 law. While trumpeting popular provisions such as coverage for preexisting medical conditions, Democrats are also linking the Affordable Care Act to a recent slowdown in the rise of health care costs.

Former President Clinton delved into the subject at his convention speech in Charlotte, N.C., suggesting that President Obama’s health care law produced the slower-than-average growth in health care spending in 2010 and 2011.

“Health care spending has been under 4 percent in both years, for the first time in 50 years,” Clinton said.

Health care spending increased by just 3.9 percent in 2010 and 3.8 percent in 2009. And within Medicare, the spending slowdown has been even more dramatic: Instead of the program’s average 6 percent annual increase per beneficiary in recent years, 2010’s rate was 0.2 percent. In 2011, it was 2.8 percent. This benefits household budgets but also the government’s coffers since the longer-term costs of Medicare and other health entitlements pose huge fiscal challenges for the nation.

But economists on both sides of the political spectrum say that a variety of forces are at work in the more restrained increases in health care spending. One factor is a weak economy, which means Americans might opt to postpone elective procedures like cataract or knee surgery to avoid out-of-pocket costs that aren’t covered by insurance. Or they might skimp on costs like prescription drugs. When fewer people visit the doctor or when people cut back on prescription-drug purchases, insurance companies see lower costs and that can eventually translate into cheaper premiums for consumers.

The Kaiser Family Foundation found that the average family premium for employer-sponsored health insurance rose to nearly $16,000 a year, about a 4 percent increase from last year. The numbers might give many Americans sticker shock, but it was a smaller rise than expected. KFF President Drew Altman said that it’s too soon to tell what the cause is, exactly.

David Cutler, a Harvard economist and frequent adviser to the Obama campaign, told the New York Times this week that the Affordable Care Act’s efforts to control costs were contributing to the slowdown.

“The slow economy is only part of it,” he told The Times.

The good numbers are fodder for Democrats on the campaign trail to argue that Obama’s health care law did, in fact, slow down health care costs. The law primarily saves money by slashing $716 billion from Medicare payment rates to hospitals and private Medicare plans. Those cuts just went into effect this year, and at least on the hospital side, they are contributing to the slower-than-expected growth in Medicare spending in 2012. But those cuts were largely put in place to offset the cost of helping an additional 30 million people get insurance coverage, not to stem the rising cost of health care.

There are also several pilot programs in the Affordable Care Act that reward hospitals and doctors with federal funding if they successfully save money by using new delivery methods, most of which emphasize greater coordination between health care providers. Many of those programs just started in the past year and haven’t been operating long enough to see savings.

As far as consumers’ pocketbooks are concerned, the law also included a new rule for insurance companies that limits how much they can spend from premiums on things like advertising and salaries. That went into effect in 2011, and consumers started seeing the dividends of that rule last month: the Obama administration reports that insurance companies paid back more than $1 billion to American consumers this year.

Gail Wilensky, a former top health official in the George H.W. Bush administration, said she hoped it was true that the health care law was contributing to a lasting trend of lower health care inflation. But Wilensky said in an interview, “Whatever is going on, it’s very hard to attribute it to anything in the ACA. It was starting before that.”

Wilensky said that though the slowdown in health spending outpaces the decline in incomes tied to the recession, that calculation does not include other losses in wealth that impact how much people spend on health care.

“It was not just job loss, but in a way that has been unusual, it was wealth loss, as reflected by the decline of the stock market and, for many people, the decline in their home values. That is such a big, big part of middle-class American’s wealth position, and we underestimate if we only look at income loss,” Wilensky said.

She also pointed to a slowdown in spending that occurred in the 1990s as health-maintenance organizations restricted health services. Eventually that spending slowdown was reversed as doctors, hospitals, and patients pushed back against insurance-company restrictions.

Robert Berenson, a fellow at the liberal-leaning Urban Institute, said that the talk of health care reform in general, and not the specific policies of the Affordable Care Act in particular, could potentially be credited with the spending slowdown.

“I do think it’s more of an environmental phenomenon that the world is going to change,” Berenson said in an interview. “I think something real is going on related to all the proposals for new payment models, and physicians and others are getting the message.”

In other words, the health care industry has seen the writing on the wall: They will no longer get paid for every single test and procedure they do.

Berenson, who spent 20 years practicing as an internist, said it might be that doctors are tired of getting criticized for not paying attention to costs.

“I suspect physicians are tired being criticized for not being able to restrain themselves,” Berenson said. “It’s more health reform in general, rather than specific provisions that are associated with ACA.”

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


A Systemic Approach to Containing Health Care Spending


Posted by Joel Wittman

In this election year, U.S. national spending on health care will reach $2.8 trillion, or about 18% of total spending on all goods and services. This high level of spending reduces the ability to invest in other important parts of the economy and also adds to the national debt. There is wide agreement that ways must be found to bend the health care cost curve.

National health spending is projected to continue to grow faster than the economy, increasing from 18% to about 25% of the gross domestic product (GDP) by 2037.1 Federal health spending is projected to increase from 25% to approximately 40% of total federal spending by 2037. These trends could squeeze out critical investments in education and infrastructure, contribute to unsustainable debt levels, and constrain wage increases for the middle class.

Although the influx of baby boomers will increase the number of Medicare beneficiaries, growth in per capita health costs will increasingly drive growth in federal health spending over the long term. This means that health costs throughout the system drive federal health spending. Reforms that shift federal spending to individuals, employers, and states fail to address the problem. The only sustainable solution is to control overall growth in health costs.

Although the Affordable Care Act (ACA) will significantly reduce Medicare spending over the next decade, health costs remain a major challenge. To effectively contain costs, solutions must target the drivers of both the level of costs and the growth in costs — and both medical prices and the quantity of services play important roles. Solutions will need to reduce costs not only for public payers but also for private payers. Finally, solutions will need to root out administrative costs that do not improve health status and outcomes.

The Center for American Progress convened leading health-policy experts with diverse perspectives to develop bold and innovative solutions that meet these criteria.  See the following solutions below that were recommended:

Promote Payment Rates within Global Targets

Under the current fragmented payment system, providers can shift costs from public payers to private payers and from large insurers to small insurers. Since each provider negotiates payment rates with multiple insurers, administrative costs are excessive. Moreover, continued consolidation of market power among providers will increase prices over time. For all these reasons, the current system is not sustainable.

Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state. Providers could still offer rates below the negotiated rates.  The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state.

Accelerate Use of Alternatives to Fee-For-Service Payment

Fee-for-service payment encourages wasteful use of high-cost tests and procedures. Instead of paying a fee for each service, payers could pay a fixed amount to physicians and hospitals for a bundle of services (bundled payments) or for all the care that a patient needs (global payments).

Use Competitive Bidding for All Commodities

Evidence suggests that prices for many products, such as medical equipment and devices, are excessive. Instead of the government setting prices, market forces should be used to allow manufacturers and suppliers to compete to offer the lowest price. In 2011, such competitive bidding reduced Medicare spending on medical equipment such as wheelchairs by more than 42%. The ACA requires Medicare to expand competitive bidding for equipment, prosthetics, orthotics, and supplies to all regions by 2016.  It is suggested that Medicare expand the current program nationwide to include all commodities and extend to all federal health programs, including the insurance exchanges that will start in 2014.

Require Exchanges to Offer Tiered Products

The market dominance of select providers often drives substantial price variation. To address this problem, insurers can offer tiered plans. These insurance products designate a high-value tier of providers with high quality and low costs and reduce cost sharing for patients who obtain services from these providers.

Require All Exchanges to Be Active Purchasers

If exchanges passively offer any insurance product that meets minimal standards, an important opportunity will be lost. As soon as reliable quality-reporting systems exist and exchanges achieve adequate scale, it is critical that federal and state exchanges engage in active purchasing — leveraging their bargaining power to secure the best premium rates and promote reforms in payment and delivery systems.

Simplify Administrative Systems for All Payers and Providers

The United States spends nearly $360 billion a year on administrative costs, accounting for 14% of excessive health spending.  It is suggested that payers and providers electronically exchange eligibility, claims, and other administrative information as soon as possible and public and private payers and providers should use a single, standardized physician credentialing system.  Electronic health records should integrate clinical and administrative functions — such as billing, prior authorization, and payments.

Require Full Transparency of Prices

Price transparency would allow consumers to plan ahead and choose lower-cost providers, which may lead high-cost providers to lower prices. Although price transparency could facilitate collusion, this risk could be addressed through aggressive enforcement of antitrust laws.

Make Better Use of Nonphysician Providers

Eliminate restrictive state scope-of-practice laws prevent non-physician providers from practicing to the full extent of their training and provide adequate reimbursement for those services.

Expand the Medicare Ban on Physician Self-Referrals

It is suggested that the Stark law should be expanded to prohibit physician self-referrals for services that are paid for by private insurers. In addition, the loopholes for in-office imaging, pathology laboratories, and radiation therapy should be closed. Physicians who use alternatives to fee-for-service payment should be exempted because these methods reduce incentives to increase volume.

Leverage the Federal Employees Program to Drive Reform

It is suggested that the FEHBP align with Medicare by requiring plans to transition to alternative payment methods, reduce payments to hospitals with high rates of readmissions and hospital-acquired conditions, and adjust payments to hospitals and physicians on the basis of their performance on quality measures. In addition, the FEHBP should require carriers to offer tiered products and conduct competitive bidding on behalf of plans for all commodities. Finally, the FEHBP should require plans to provide price information to enrollees and prohibit gag clauses in plan contracts with providers

Reduce the Costs of Defensive Medicine

Regardless of whether a claim results in liability, the risk of being sued may cause physicians to practice a type of defensive medicine that increases costs without improving the quality of care.  A promising strategy would provide a so-called safe harbor, in which physicians would be presumed to have no liability if they used qualified health-information-technology systems and adhered to evidence-based clinical practice guidelines that did not reflect defensive medicine. Physicians could use clinical-decision support systems that incorporate these guidelines.

Conclusions

Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that the current spending patterns cannot continue. In the absence of any meaningful change, payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options could become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 


Four Recommendations to Achieve Health Care Savings


Posted by Joel Wittman

The now-defunct so-called congressional “super committee” that was charged with the task of identifying deficit reductions received several recommendations that would create significant health care savings over a ten year period.  Despite the failure of the committee to successfully achieve its mandate, it is well worth exploring the cost reduction suggestions the committee received from health care executives.  These chief executives of both for-profit and not-for-profit health care companies, members of the Healthcare Leadership Council (HLC), presented a set of reform proposals that would not only generate $410 billion in savings over 10 years, but would also strengthen Medicare’s long-term sustainability.  In fact, according to Mary R. Grealy, president of HLC, “the reform recommendations will contribute to deficit reduction without placing an unfair or disproportionate burden on patients, healthcare consumers, or our most vulnerable citizens.”

HLC’s recommendations to the “super committee” included:

Create a new “Medicare Exchange” in which private insurance plans would compete on the basis of cost, quality, and value.  

While acknowledging that this recommendation would be compared to the Medicare reform concept contained in Congressman Paul Ryan’s proposed budget, the HLC indicated that the differences include the fact that there Medicare beneficiaries would have the option of staying in traditional fee-for-service Medicare and there would be a more generous inflation factor – growth in GDP plus one percent – for premium subsidies.

The thought behind this proposal is that Medicare beneficiaries should have the same freedom of choice as Medicare Part D prescription drug program participants, federal employees and members of Congress participating in the Federal Employees Health Benefits Program, and those who will utilize the new state-level insurance exchanges created as part of the Affordable Care Act.  The competitive environment will require healthcare providers, plans, manufacturers, and distributors to achieve greater cost-efficiencies while still offering quality and value to beneficiaries.

As Ms. Grealy stated: “ If given the choice between deeper provider cuts, which will reduce patient access to care, and reducing costs by using consumer choice to incentivize  cost-effective innovation, it doesn’t seem like a difficult decision.”  However, does it seem similar to the public option plan that was vigorously opposed when being considered as part of the ACA?  And, can competition be the driver of health care cost reductions in an imperfect market place?

Gradually increase the Medicare eligibility age from 65 to 67.

As more Americans remain healthy over a longer period of time, this transition would mirror the increase in the Social Security retirement age and reflect today’s longer average lifespans.  The increase would be implemented over roughly a decade, raising the eligibility age by two months annually.  The shrinking ratio of active workers to Medicare beneficiaries makes this change inevitable.  The Affordable Care Act makes such a change possible in that Americans in their mid-60s not yet eligible for Medicare would be able to purchase health insurance on the new state exchanges without their health status affecting their ability to acquire coverage.  But at what cost?  More than the price of Medicare Part B premium coverage?

Reform Medicare’s cost-sharing structure.

This reform would involve making the Medicare Part A and B beneficiary cost-sharing uniform, with a reasonable deductible and co-pays as well as a cap on annual out-of-pocket costs.  This would make Medicare costs more predictable and consistent for beneficiaries while also ensuring that seniors wouldn’t be devastated by catastrophic care costs or faced with limits on hospital stays.  Another part of this proposal would be a requirement that individuals with incomes of $150,000 and greater pay their full premium costs for Medicare Parts B and D.  Supposedly, this would affect less than 3% of Medicare beneficiaries and would generate budget savings while protecting financially vulnerable beneficiaries.  Uh-oh.  Is this an “us against them” issue?

Implement medical liability reform.

HLC members recommended liability reform measures including a cap on non-economic damages in medical malpractice cases, a one-year statute of limitations from the point of injury to the filing of litigation, and a “fair share” rule to have defendants pay damages commensurate with their responsibility for the injury involved.  Acknowledging the partisan difficulty in advancing tort reform legislation, alternative approaches including linking liability protections to healthcare providers’ use of health information technology and practice of evidence-based medicine should be considered.

The above four recommendations would generate just over $410 billion in budget savings over a ten-year period, based on Congressional Budget Office estimates and other published budget projections.  Alas, the “super committee” wasn’t so super after all and could not generate a program acceptable to the partisan participants. But, should that mean that some worthwhile recommendations not be explored further with the thought of strengthening our healthcare system?  Or do we slowly move along and be subject to on-going sequestration reimbursement rate reductions?

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


It’s a Rotten Apple for NY’s Small Businesses: A look at health care regulations that uniquely contribute to high health insurance costs in NY


Posted By Errol Pierre

Want to start a small business and help our staggering economy? Think twice about NY. Studies continue to show that affordable health coverage is the top concern for small businesses in this state. Contrary to popular belief health insurance profits and administrative costs barely contribute to the rising cost of coverage representing only 6% of total health spending. Despite this reality, this is exactly where policy makers have focused their time and energy with a desire to rein in costs. Profit margin in the NY small business insurance market is among the lowest in the country. In fact, many health insurance companies in NY are losing money, barely breaking even, or attaining modest 2-3% margins. Instead, we should focus on the big ticket items. That is, let’s focus on the factors that are unique to NY that contribute the most to higher costs. If modified to match national standards, these factors could substantially reduce insurance rates in this state making affordable health coverage available to more small businesses and in effect, more New Yorkers. After all, small businesses are the engine of the NY economy and the catalyst for NY job creation.

The primary driver of high insurance premiums in NY is the unusually high cost of health care delivery. NY is one of two states (California being the other) that lead the nation in spending at $163 billion per year. Each New Yorker makes up about $8,300 in annual health care costs per year; 22% higher than the national average. However, NY’s high spending rates have not translated into healthier New Yorkers. NY is only in the middle of the pack when it comes to quality (21nd out of 50 states). The state comes in dead last (50th out of 50 states) when it comes to avoidable hospital use. Statistics continue to show that hospital care is the #1 contributor to total health care spending in the America and this is exactly where NY has its problems. As health spending increases in this state, the price to insure New Yorkers increases as well.

Why is this happening?

Here are several regulatory factors unique to NY that exacerbates the high cost of coverage listed in order of magnitude:

High Medicaid Enrollment – A huge detriment to the affordability of small business health insurance rates is the number of New Yorkers enrolled in Medicaid. Of the 10 states that lead the nation in health insurance rates, high Medicaid enrollment is a reoccurring theme among them all. 1 out of every 4 New Yorkers receiving Medicaid benefits making it the 6th highest of any other state. Despite not leading the country in Medicaid enrollment, NY is the highest spending Medicaid state in the entire country. This means we are paying more per person without offering better care. In its meager attempts to rein in these high rates of spending, NY continually cuts the payments given to hospitals and doctors that provide care to NY Medicaid enrollees. These cuts set off a chain reaction causing hospitals and doctors to subsidize patient revenue losses with income from patients that have private insurance. This disproportionately impacts small businesses because there are fewer tools at their disposal to combat cost shifts. As a result, NY is the 2nd most expensive state for small business health insurance in the country averaging $554 a month for an individual and $1,455 a month for a family. How does that compare to the rest of the country? NY rates are 30% higher than the national average.

SOLUTION:  NY should immediately implement the recommendations from the NY Medicaid Redesign Team formed under the leadership of Governor Cuomo. The #1 cost contributor to small business health insurance is its subsidization of Medicaid spending in the state. If NY wishes to attract and retain small businesses, it must enact legislation that stops it from being the highest spending Medicaid state in the nation.

Pure Community RatingNY stands alone as the only state that requires health insurance companies to charge all small businesses purchasing the same plan in a similar region the same price regardless of business size, demographic makeup, industry type, or health history. The other 49 states allow pricing to differ on a variety of factors which provide lower rates for healthier, younger, and even larger small businesses encouraging enrollment. Enrollment from diverse companies balances the insurance risk pool making coverage affordable for all. Inherent to the smallest of companies are higher operating costs and more fluctuations in health status and demographics which cause pricing for this population to be higher than average. However, because of this law, NY must charge all small businesses the same price regardless of size. This has caused NY to be the highest priced state in the nation for companies with 11-50 employees, which becomes a huge disadvantage for the NY economy.  Small businesses in this segment size represent more than 60% of the total small business workforce in NY making neighboring states like CT, NJ, and PA more attractive to larger small businesses. When fewer small businesses opt to offer coverage and the ones that do are smaller in size, the cost of insurance drives up at even faster rates than the normal health trend.

SOLUTION:  Adopt “modified community rating” as outlined in the federal health care reform bill which allows small business rates to vary by age and  tobacco use. This will allow more favorable pricing that will attract a both larger small businesses that employ more people and attract younger/healthier New Yorkers into the insurance risk pool.

Hidden TaxesThe single largest small business tax in NY is on private health insurance coverage. NY collected over $4.1 billion in revenue through these various taxes, fees, and assessments in 2011. Private health insurance has historically been targeted for solving state budget deficits. As such, these taxes have increased year after year adding more than $500 million to insurance costs since 2007. No other state has such an onerous tax burden and it is only likely to get worse as Federal health care reform is implemented. Both Health Benefits Exchanges and Market share assessments will result in more taxes imposed on the privately insured).

SOLUTION: Make New Yorkers aware of the taxes, fees, assessments hidden in health insurance rates. New Yorkers have a right to know where tax revenue for the state is generated.

o   $2.33B was raised by surcharges placed on hospital and health services given to consumers of private insurance

o   $1.16B was raised by an assessment based on a health insurer’s enrollment

o   $353M was raised by taxes placed on the prices commercial insurance companies charge their customers

o   $270M was raised by assessments on health insurance companies to fund running the Department of Financial Services

o   $240M was raised by an assessment based on a health insurer’s enrollment to specifically fill NY State budget shortfalls.

Benefit Mandates NY has a laundry list of over 40 specific conditions and treatments that all health insurance policies must cover by law, regardless of an employee’s health needs or preferences. Compared to states like Idaho (12 mandates) and Alabama (18 mandates), NY is one of the states that lead the nation in mandates. These mandates in many instances supersede Federal standards, increasing NY’s health care costs by more than a 12%. In fact depending on the mandate, insurance costs can increase between 1% and 5% for each additional mandate.

SOLUTION:  Change the current set of benefit mandates that exceed the Federal standards to be “made available for purchase” rather than being mandated for inclusion in all small business plans offered.  This will allow employers to choose the plan that best suit their business needs. Larger employers that self-insure have been able to free themselves of many burdensome and costly mandates through ERISA rules which have not created a level playing field and disproportionately impacted smaller businesses.

Health Insurance Rate Review (Prior Approval Law) In 2010, NY passed a law requiring all small business insurance rates to be approved by the Department of Financial Services. It also requires that $0.82 of every $1.00 in revenue be spent on medical care. As feared, this new rate approval process has become highly politicized rather than being a true actuarial exercise. First, $0.82 is higher than the federal requirement of $0.80 found in the recent health care reform legislation. Secondly, insurance companies in NY spend closer to $0.87 of ever $1.00 in the small business market and after operating costs, profit margins average only 2%. These actions create a hostile market place for competition and have led to fewer insurance companies offering coverage to small businesses in NY.

SOLUTION: Remove the onerous and political nature of rate increase reviews and improve the timeliness of state decisions

Individual Market FailuresHealth insurance coverage for an individual in NY exceeds $1,000 a month in most cases. These rates are almost 60% higher than those for small businesses, causing some individuals who are priced out of the marketplace to form phony small businesses to avoid the high costs and market failures of the individual market.  As a result, insurance companies inadequately price small business insurance coverage to properly reflect the risk.

SOLUTION: Enact a “facilitated model” for health benefit exchanges as outlined in the health care reform legislation. This will increase competition and fix the individual market by removing the restrictions of plan options that must be sold in the state. Today, NY requires all health insurance companies to offer basic HMO and POS products that costs more than $1,000 a month for an individual. Fewer regulations in the pricing and the plans offered to individuals would unleash the creativity and innovation found in products health insurance companies sell to larger businesses.

SOLUTION: Modify the NY “Young Adult Option” law that allows unmarried young adults through age 29 to purchase health insurance through their parent’s plan. This law should be modified to lower the cost of insurance to adequately reflect the health status of an average 29-year-old. Today, the pricing reflect the health status of the current population, which is much older and less healthy, making it unaffordable for many young workers in NY.

The NY Dilemma

Based on a 2010 AHIP study below, NY health insurance pricing is more attractive to the very small businesses that cause rates to sky-rocket. This is an unsustainable state of affairs that only hampers NY’s ability to have a strong and fast economic recovery.

Premiums by State, 2010 (Top 5 Most Expensive States)
       
Small Employers w/ 26-50 employees Avg. Monthly Premium
  State

Single

Family

1. New York

$565

$1,485

2. New Hampshire

$512

$1,345

3. Nebraska

$443

$1,164

4. Illinois

$435

$1,147

5. California

$428

$1,125

Avg. United States

$406

$1,065

   

Small Employers w/ 11-25 employees Avg. Monthly Premium
  State

Single

Family

1. New York

$577

$1,514

2. New Hampshire

$523

$1,374

3. Nebraska

$449

$1,179

4. Massachusetts

$439

$1,153

5. Illinois

$438

$1,151

Avg. United States

$419

$1,100

   

Small Employers w/ 10 or fewer employees Avg. Monthly Premium
  State

Single

Family

1. Nebraska

$579

$1,519

2. Massachusetts

$545

$1,430

3. New Hampshire

$539

$1,415

4. New York

$536

$1,408

5. Florida

$489

$1,283

Avg. United States

$446

$1,172

AHIP Small Group Health Insurance in 2010: A Comprehensive Survey of Premiums, Product Choices, and Benefits, July 2011

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu


What’s Trending in Global Health


Posted by Debbie Koh

Trends are a part of our lives. Fashion, YouTube videos, Twitter hashtags – they all come and go. International health and development is not immune to these cycles either. On January 30, Bill Gates announced the commitment of pharmaceutical companies, public and private donors in the “London Declaration” to eliminate neglected tropical diseases (NTDs) by 2020. This overdue focus certainly should be celebrated – you know it’s bad if the fact that nobody pays attention to this group of diseases has been worked into their name.

Two days later, the New York Times ran an op-ed by Paul Farmer,“Why the Global Fund Matters,”in which he essentially pleads for the continued existence of the formerly behemoth funding mechanism. Before the establishment of the Global Fund to Fight AIDS, Tuberculosis and Malaria and the Presidents Emergency Plan for AIDS Relief (PEPFAR) in the early 2000s, development assistance for HIV/AIDS was less than $1 billion. By 2005, more than $3 billion was being spent to fight HIV/AIDS. Throw TB and malaria into the mix (and the establishment of the President’s Malaria Initiative) and the total amount of development assistance for health by mid-decade was more than $17 billion. Between 2001 and 2008, the total development assistance for health more than doubled.[i]

So what’s the problem? By 2008 and 2009, development assistance for HIV/AIDS and TB slowed while areas like maternal, newborn and child health enjoyed rapid growth. This is in no doubt aided by the rapidly approaching 2015 deadline for achieving the Millennium Development Goals, including Goal 5 – reducing the maternal mortality ratio by three quarters.As someone working in maternal health, I already get the sense of needing to strike while the iron is hot, before the attention and funding moves on, if it hasn’t started to already.

Agriculture and food security, social franchising, and mobile health technology are just a few areas gathering momentum. I am not arguing for any one over the other, and reality is that the total amount of funding for HIV/AIDS still remains high, even if growth is slowing. I’m as guilty of following the herd as anyone else:  I jumped from HIV/AIDS work to maternal health and eagerly track what’s new and upcoming in the field. I do worry, though, that these recent developments are indicative of shortening attention spans in a field that requires sustained commitment and focus.

The fight against HIV/AIDS continues to be a drawn out, difficult battle with “wins” that are very different from what we envisioned a decade ago. Truly reducing maternal mortality in the world will require a long-term and complex combination of health interventions, economic growth, political will, education and empowerment. NTDs are low hanging fruit now, but who will be there to address the social, environmental, and other unanticipated factors that will inevitably thwart these new efforts?

Paul Farmer’s plea serves as a reminder that achieving true, lasting impact in global health is a long haul. Lives are at stake in our work. Let’s not forget our commitment to them.


[i]Institute for Health Metrics and Evaluation. Financing Global Health 2011: Continued Growth as MDG Deadline Approaches. Seattle, WA: IHME, 2011.

Debbie graduated from Wagner in 2010 with her MPA in Health Policy and Management, International Health. She returned to her native California in 2011 and currently works for Venture Strategies Innovations. Follow her on Twitter at @thedebkoh or connect via LinkedIn. All views expressed are her own.


SOTU: What Obama Didn’t Say


Posted By Errol Pierre

President Obama filled up close to 90 minutes of TV airtime giving his 3rd State of the Union Address last week. With 6,953 words (about 12 pages) to choose from political pundits filled the airwaves all across the country with animated reactions commenting on everything from the details of his plans to his tone, his demeanor, and overall performance. But all too often we forget that with great orators, it is more important to focus on the words that were not said than the ones that were….

Here are the facts:

- “Health” was used only 7 times during his speech (roughly 0.001% which takes up less than 1 line on a page).

- His comments regarding Healthcare made up only 332 words. That represented 4.7% of his speech (about a page and half). A little better but still severely lacking in substance.

How can that be?

- Health expenditures in this country represent more than 16% of our GDP while the average percentage among high income nations is roughly 10%.

- 13.1 million Americans lack a job but more than 50 million Americans in this country lack health insurance. Doesn’t healthcare deserve more attention?

- Since inauguration, he has spent 60% of his time in office getting what he called his #1 domestic policy agenda, healthcare reform, passed through Congress. If you recall, he entered office on January 20, 2010 and healthcare reform was passed on March 23, 2011. So 15 out of his now 25 months were dedicated to the pursuit of universal healthcare.

- Lastly, most of the popular provisions of the law have already been instituted. Millions of young adults in their twenties have been able to get insurance through their parents. And even more promising, no child under 18 can be denied coverage for pre-existing conditions.

So why were there so few words on healthcare? Discussing income inequality yet avoiding healthcare is not having an honest discussion about the problem. America spends more money on healthcare than any country on the planet. What is not widely known are the percentages spent by the government versus the private sector and how that impacts the American pocketbook. This country is actually on par with other high income nations spending 7.4% of their GDP on government health expenditures like Medicare, Medicaid, and Veteran healthcare. For a comparison, countries like France (8.7%) and Germany (8.1%) are at higher levels with government run universal healthcare. However, when it comes to expenditures from the private sector, America spends an additional 8.5% of its GDP representing almost half (52.2%) of total health costs for the entire country. That is 4 times higher than most like nations. In fact those private sector figures put us in 50th place between Rwanda (49th) and Gambia (51st) according to the World Health Organization.

WHY IT MATTERS

Most Americans get health insurance through their employer leaving American businesses on the hook for large portions of the country’s private health expenditures. It’s been the catalyst for corporations moving jobs overseas. It’s why the United States Postal Service is teetering on the edge of insolvency. It’s why America bailed out General Motors and restructured their Union contracts to be the #1 car company in the world again.

Most Americans work for businesses with 200 or more employees. According to the Kaiser Family Foundation, 99% of the time these businesses are offering health insurance to those employees. The foundation goes on to highlight that the cost of these employer health plans have gone up by 113% over the past 10 years with employers paying close to 73% of those costs on behalf of their employee population. As a result they have shielded much of the exorbitant healthcare increases from their employees. This has had grave repercussions to the average American salary. You cannot talk about income inequality and ignore non-salaried benefits like health insurance. These increases have poked huge holes in the bucket of funds that corporations use to payout employee compensation. You also cannot blame health insurance companies for these increases either. Their profit margins barely surpass 4% compared to pharmaceutical companies that enjoy 15% margins. The blame really goes to the actual cost of providing healthcare.

The U.S Social Security Administration has tracked the national average wages in this country since 1951. In 2001 it was $32,921. In 2010 it is $41,673. So despite the increases in health insurance costs, wages have still gone up 27% in the past 10 years. American employees however have seen 131% growth in the amount of money they must contribute to their health plan. It has gone from $1,787 in 2001 to $4,129 in 2010. So Americans have literally went from paying 5% of their salary on health insurance to 10% in 10 years not even accounting for the increase in co-payments, deductibles, and out of pocket costs.

If you truly want to tackle income inequality, look no further than tackling the increases in healthcare spending. Healthcare reform did not go far enough on this issue. It increased access via health exchanges, protected more patients via insurance regulations like profit ceilings and mandated benefits. But it did nothing to tackle costs. Even worse, our healthcare system will continue to shield costs from the consumer by giving subsidies to lower income Americans so that insurance can be more affordable. But these subsidies are paid for by taxes and fees levied on health insurance companies ($60 billion), on Americans with rich “Cadillac” type health plans ($32 billion), on pharmaceutical companies ($27 billion), and on high income earners use of hospitals ($210 billion). The only problem with these types of revenue streams are the laws of economics. Since individual Americans and large businesses will be required by law to purchase insurance by 2014, they as consumers will be more inelastic than their suppliers. In the end most of these taxes and fees will be passed on to the most vulnerable consumers further eating away at their hard earned income.

President Obama concluded his healthcare remarks conceding that he was “willing to look at other ideas to bring down costs, including one that Republicans suggested last year — medical malpractice reform to rein in frivolous lawsuits.” The only problem is here is the sad reality. According to the Kaiser Family Foundation only 11,000 malpractice claims were paid in 2009 amounting to $3.6 billion. That sounds like a big number but it is only 0.2% of total U.S. health costs. So the only question left is how much medical malpractice reform could help to actually close the income inequality gap. Well, the average malpractice suit is only $11.99 per capita, putting $12 bucks back in everyone’s pocket. I guess the good news is this kind of policy change would help fight the common cold giving every American the extra disposable income to buy a bottle of Robitussin from CVS.

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu

 


The Power and Shortcomings of Healthcare Interventions


Posted by Katie Magoon

I was living in rural Kenya the first time I really began to think critically about the power and shortcomings of healthcare interventions.  I stumbled upon this totally accidentally as I was studying the economic empowerment of females in the “informal sector” of Kenya’s rural economy.   Specifically, I was exploring the ways in which women create and distribute their wealth, and the how these decisions impact the communities in which they live.  As I looked more intimately into the lives of these women, I realized that one could not truly understand the role of a female in an economy without understanding a variety of aspects related to her health.

In talking with many women, it became clear that some of their economic concerns were in large part related to the number of children their husbands/communities expected them to have.  Some women secretly obtained birth control in order to shelter their families from the economic hardships that they would face with having more and more children.  In some cases, their husbands would begin to suspect this and abuse them or use it as an excuse to have extra-marital affairs with other women (often bringing home sexually transmitted infections or HIV).  In many settings, women bear the brunt of raising families.  As a result their individual health is extraordinarily important to the health of an individual female’s family as well as community.  Issues such as lack of access to birth control, “back-alley” abortions, the dangers of childbirth, lack of empowerment for sexual decision-making and boundary setting, and even post partum depression can have a tremendous impact on the economic health of a community.  Such issues were so pervasive in the lives of the women with whom I spoke that it quickly became clear that these women could not achieve economic security without accessible and effective healthcare that is responsive to their specific needs.

Many believe that these are problems that do not apply to women in the United States.  I have found this belief to be grossly inaccurate.  In my work as a nurse practitioner, I encounter young women every single day who are forced to have sex, pressured to leave school and have children, and struggle with depression and other mental health problems that can make employment and/or caring for children very difficult.  Often these women put faith in their “boyfriend” who quickly moves on when their belly starts to grow or times get tough.  A young woman may be left to support a family with very limited resources.  Further, she has already stopped school to have and begin to raise the child, leaving her even more vulnerable to economic hardship.  This has obvious implications for her family and community.

Health interventions can address a small portion of this problem by offering family planning to women.  Women that do not want or are not ready to have more children can use birth control.  If need be, they can do this without the knowledge of their partner.  However, a woman is more likely to be successful with the use of her birth control if her partner is supportive.  In my mind, this simultaneously points to a success and shortcoming of the health system.  In this example, birth control is simply addressing a symptom of a larger problem in society—gender inequality.  Birth control could be considered a single disparity-decreasing intervention that can help women, and in turn their communities.  However, in a world that often does not value women as it values men, I cannot help but to ask: Is birth control enough?  Internationally and domestically, when will women finally be empowered to make their own decisions about what happens to their bodies, and offered support for those decisions?

Katie Magoon is a North Canton, Ohio native who currently works as a nurse practitioner at an adolescent community center in Manhattan.  She is an HPAM student, specializing in policy.

 


What is my company worth? Part 2


Posted by Joel Wittman, MS, MBA

Last month’s blog contained information about valuation and value drivers for health care companies.  In this posting, the strategies that can be used to enhance the value of an M&A transaction is discussed.

After a decision has been made to sell the business, owners ask what strategies they can implement to enhance the value of the transaction in addition to those indicated above.  Some of those include:

- defining your business, personal, and financial goals – This drives the comprehensive     divestiture strategy.  The seller has to consider what he or she can realistically expect in the future. What does the seller want to do post transaction? What are the seller’s financial requirements?  Am I suffering burnout?  A clear understanding of these goals is the foundation for a successful transaction.

-exerting control and influence over the content and flow and information.  It is imperative to present the company in its best possible light to qualified buyers and to control the timing of the release of information.

-identifying the correct sources of value – While revenues and profits are the drivers of fair market value, buyers are looking for strategic opportunities.  This is the basis of investment value and translates into a higher purchase price.  The goal here is to distinguish between fair market value and investment value.

-managing weaknesses in your business – No company does things perfectly.  Buyers are aware of this and expect to see some “warts” on the face of the business.  A seller should identify the weaknesses, develop a course of correction, and reveal these to the buyer.  This strategy reduces the uncertainty a buyer may have that there are other problems in the company and also compartmentalizes the weaknesses from other aspects of the business’s operations. The effect: the perceived risk in acquiring the company is reduced to the buyer which results in increased value and pricing.

-creating a critical mass of buyers – The larger the pool of qualified buyers, the more likely that there will be more than one offer received for the company.  This creates a competition between buyers that result in a higher purchase price.

-orchestrating simultaneous presentations – Maintaining control over the timing and distribution of information is critical to managing the mergers and acquisition process.  Strategic dissemination of materials can create a competitive bidding situation that will likely result in increased value.

-know the buyer – Play to the strategic interests of the qualified buyers that have been identified as potential acquirers of the company.  This tends to improve your negotiating position – you are meeting a need of the buyer – and creates higher investment value for the company (N.B. investment value always exceeds fair market value).

-setting expectations high – The higher you aim, the better the result.  Know your sources of power – the strengths, performance, and reputation of the company; the competition in the market place; your ability to exhibit time and patience – and utilize them to achieve higher value.

-paying attention to the deal structure – What exactly is the buyer buying? Is it a stock or asset deal?  What are the components of the purchase price?  Remember to discount non-cash remuneration and carefully evaluate “earnouts” or payments contingent upon achieving certain parameters.

-working the letter of intent to closing –  Prepare well for due diligence – make it easy for the buyer to buy.  Be wary of “nibbling” to the “corners” of the purchase price.  Carefully scrutinize any post transaction adjustments that can result in a change to the price. Employ counsel wisely including your M&A advisor, attorney, and CPA; when was the last time you sold a business?  And, finally, assume the deal won’t close – manage your company like you are not selling because you never know what can happen that can cause a transaction not to close.

You may be wondering how the answer to such a simple question such as “what is my company worth?” is so complex.  Selling or acquiring a business is a complex process that combines the aspects of valuation, finance, legal, and emotional matters.  If you decide to embark on the M&A process it is wise to engage an experienced professional who can help you achieve your goals and objectives.  It would also help if this advisor has the attributes of a good mental health therapist.  It can be a grueling ride.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


7 Billionth Birthday Raises Public Health Concerns


Posted by Errol Pierre

The world reached an important milestone on Monday, October 31st. The UN reported that there are now 7 billion people on the planet. Marking such a milestone was no easy task. Every second approximately 4 births and 2 deaths occur worldwide. That makes it nearly impossible to zero in on the exact number of people at any given time. Nonetheless in a symbolic gesture the UN celebrated this achievement with a press conference held by Secretary-General Ban Ki-Moon. There were also several coordinated festivals around the world celebrating the births of children on Monday in a sign of solidarity.

Danica May Camacho of Manila, Philippines was one such birth. She was born minutes before Monday but close enough to be bestowed the wonderful honor of being a ‘7 billionth baby’.  Her celebration was joined with fanfare from news cameras, photographers, and well wishers but other concerns lingered in the delivery room. Danica May was born premature. At 5 pounds and 8 ounce, she joined the other 13 million babies worldwide that are born too soon every year. Obstetrician & Gynecologist know all too well that premature birth is the leading cause of newborn deaths in the world.  Ironically, November 17th marks World Prematurity Day. So in just a few short weeks, March of Dimes and other organizations will participate in a robust international awareness campaign about Danica May’s plight.

There have been strides over the years to lower infant mortality but the averages are still too high. A 2011 report from the UN listed the worldwide infant mortality rate at 42 deaths for every 1,000 births. Luckily for Danica May, rates vary wildly and differ by country and region. The Philippines is well below this average with only 21 deaths per 1,000 births. However that is still 700% higher than countries like France, Germany, Japan, and Israel, which have some of the lowest rates in the world hovering around just 3 deaths per 1,000 live births.

And this is only half of the problem. About 40% of infant mortality can be attributed to premature births. The remaining 60% are caused by many other risk factors and socioeconomic conditions. Danica May has a 44% chance of growing up in poverty being born in the Philippines increasing the likelihood that she will have issues with access to food, shelter, education, clean water and healthcare. Higher income countries fair better but wide disparities within those countries still exist. Say Danica May were born in the United States for example. Her chances of growing up in poverty decrease in half to 22%. However, if she were Black or Hispanic, those chances only decrease by a quarter to about 35%. Understandably, money is a factor. The Philippines only spends 4% of its GDP on healthcare compared to the United States which spends closer to 17%.  But more money does not always correlate to more quality. Every single country in the world with a lower infant mortality rate than the United States actually spends less money as a percentage of GDP on healthcare.

These issues point to a much larger concern about our planet and its readiness to handle 7 billion people; let alone more. We are on pace to celebrate the 8 billionth baby by 2025. Public policy and health professionals dare to wonder if the world can accommodate the needs of so many humans. On Monday, Nozipho Goqo gave birth in Johannesburg, South Africa to a child which joined Danica May in recognition from the UN as another ‘7 billionth baby’. She named her child, Gwakwanele, which in Zulu means “enough”. Goqu might be right.

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu