What’s Going On With Health Care Costs?


Posted by Joel Wittman

Egads!  Is it truly possible?  Has the increase in health care costs been at its lowest in almost four decades?  And this in spite of the Baby Boomer generation fast approaching retirement age?  What could account for such a phenomenon and is it sustainable?  All relevant questions that have health care experts scratching their heads in search of answers and have politicians scrambling to enact programs to further the slow down in the increase in health care costs.  But, perhaps inaction at this time is the appropriate response.  Can we afford to have the fractured political process impede the progress that has been achieved?  Eduardo Porter, in an article in his Economic Scene column in the New York Times, opines on his take on the subject.  The article is shown below.  I thought this would be of interest to you.  Comments, please.

 

Economic Scene

Medicare Needs Fixing, but Not Right Now

By EDUARDO PORTER

What’s the rush? For all the white-knuckled wrangling over spending cuts set to start on Friday, the fundamental partisan argument over how to fix the government’s finances is not about the immediate future. It is about the much longer term: how will the nation pay for the care of older Americans as the vast baby boom generation retires? Will the government keep Medicare spending in check by asking older Americans to shoulder more costs? Should we raise taxes instead?

Experiments by health care providers on cheaper and more efficient ways to deliver care appear to be helping push costs down.

Health Spending Slows

It might not be a good idea to try to resolve these questions quite so urgently. Partisan bickering under the threat of automatic budget cuts is unlikely to produce a calm, thoughtful deal.

“We don’t have to solve this tomorrow; not even next year,” said Jonathan Gruber, an economist at the Massachusetts Institute of Technology who worked on the design of President Obama’s health care reform.

More significantly perhaps, some economists point out that the problem may already be on the way toward largely fixing itself. The budget-busting rise in health care costs, it seems, is finally losing speed. While it would be foolhardy to assume that this alone will stabilize government’s finances, the slowdown offers hope that the challenge may not be as daunting as the frenzied declarations from Washington make it seem.

The growth of the nation’s spending slowed sharply over the last four years. This year, it is expected to increase only 3.8 percent, according to the Centers for Medicare and Medicaid Services, the slowest pace in four decades and slower than the rate of nominal economic growth.

Medicare spending is growing faster — stretched by baby boomers stepping out of the work force and into retirement. But its pace has slowed markedly, too. Earlier this month, the Congressional Budget Office said that by 2020 Medicare spending would be $126 billion less than it predicted three years ago. Spending over the coming decade, it added, would be $143 billion less than it forecast just last August.

While economists acknowledge that the recession accounts for part of the decline, depressing incomes and consumption, something else also seems to be going on: insurers, doctors, hospitals and other providers are experimenting with new, cheaper and more efficient ways to deliver care.

Prodded by President Obama’s Affordable Care Act, which offers providers a share of savings reaped by Medicare from any efficiency gains, many doctors are dropping the costly practice of charging a fee for each service regardless of its contribution to patients’ health. Doctors are joining hundreds of so-called Accountable Care Organizations, which are paid to maintain patients in good health and are thus encouraged to seek the most effective treatments at the lowest possible cost.

This has kindled hope among some scholars that Medicare could achieve the needed savings just by cleaning out the health care system’s waste.

Elliott Fisher, who directs Dartmouth’s Atlas of Health Care, which tracks disparities in medical practices and outcomes across the country, pointed out that Medicare spending per person varies widely regardless of quality — from $7,734 a year in Minneapolis to $11,646 in Chicago — even after correcting for the different age, sex and race profiles of their populations.

He noted that if hospital stays by Medicare enrollees across the country fell to the length prevailing in Oregon and Washington, hospital use — one of the biggest drivers of costs — would fall by almost a third.

“Twenty to 30 percent of Medicare spending is pure waste,” Dr. Fisher argues. “The challenge of getting those savings is nontrivial. But those kinds of savings are not out of the question.”

We could be disappointed, of course. Similar breakthroughs before have quickly fizzled. Just think back to that brief spell in the mid-1990s when health maintenance organizations seemed to beat health care inflation — until patients rebelled against being denied services and doctors dropped out of their networks rather than accept lower fees.

The Centers for Medicare and Medicaid Services already expects spending to rebound in coming years. Without tougher cost control devices, be it vouchers to limit government spending or direct government rationing, counting on savings of the scale needed to overcome the expected increase in Medicare rolls may be hoping for pie in the sky.

“It makes no sense,” said Eugene Steuerle, an economist at the Urban Institute, to expect the government will reap vast Medicare savings without having an impact on the quality of care.

The Affordable Care Act already contemplates fairly big cuts to Medicare. In its latest long-term projections published last year, the Congressional Budget Office estimated that under current law, growth in spending per beneficiary over the coming decade would be about half a percentage point slower than the rate of economic growth per person.

To understand how ambitious this is, consider that Medicare spending per beneficiary since 1985 has exceeded the growth of gross domestic product per person by about 1.5 percentage points per year. Slowing down that spending would require deep cuts in doctor reimbursements that, though written into law, Congress has never allowed to happen — repeatedly voting to cancel or postpone them.

Under a more realistic situation, the Budget Office projected that the growth of Medicare spending per capita over the next 10 years would be in fact 0.6 percentage points higher than under current law and accelerate further after that.

Yet despite the ambition of these targets, they would not be enough to stabilize future Medicare spending as a share of the economy. A report by three health care policy experts, Michael Chernew and Richard Frank of Harvard Medical School, together with Stephen Parente of the University of Minnesota, concluded that to do that would require limiting the growth of spending per beneficiary at 1.25 percentage points less than the growth of our gross domestic product per person.

“The Affordable Care Act places Medicare spending on a trajectory that is historically low,” Mr. Chernew said, noting his opinion was not an official statement as vice chairman of Medicare’s Payment Advisory Commission, which advises Congress on Medicare. “Could we do better? Of course. Will we? That requires a little more skepticism.”

Yet even if it is unrealistic to expect that newfound efficiencies will stabilize Medicare’s finances, the slowdown in health care spending suggests that politicians in Washington calm down. It offers, at the very least, more breathing room to carefully consider reforms to the system to raise revenue or trim benefits in the least damaging way.

There are many ideas out there — from changing Medicare’s premiums, deductibles and coinsurance to introducing a tax on carbon emissions to raise revenue. Some of them are not as good as others. Until recently, President Obama favored increasing the eligibility age for Medicare. Then research by the Kaiser Family Foundation concluded that raising the age would increase insurance premiums and cost businesses, beneficiaries and states more than the federal government would save. The nation would lose money in the deal.

“As we do this, there are smarter and dumber ways to do it,” Mr. Gruber said. “It would be a problem if we were to do things in a panic mode that set us backward.”

                                                                                                                                               

 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.


Do Health Care and Profits Mix?


Posted by: Joel Wittman 

The debate continues: can a social service such as health care operate in a profit-generating mode?  Undoubtedly, there are fierce opinions on both the pro and con aspects of this question.  Those who support the notion that health care can operate as for-profit entities point out that the financial difficulties encountered by not-for-profit health care providers.  Their mantra is “No Margin, No Mission”; the patient population will receive fewer, or no, services if health care companies are not managed in financially responsible and profitable ways.  On the other hand, those who favor the realm of the non-profit universe contend that the quality of care is compromised and patients not receiving care because of the emphasis in the profit mentality.  So, who’s correct?  It’s a difficult conundrum to address.

An article in the January 8, 2013 edition of the New York Times focused on this issue.  The article appears below:

Health Care and Profits, a Poor Mix

By EDUARDO PORTER
Published: January 8, 2013

Thirty years ago, Bonnie Svarstad and Chester Bond of the School of Pharmacy at the University of Wisconsin-Madison discovered an interesting pattern in the use of sedatives at nursing homes in the south of the state.

Patients entering church-affiliated nonprofit homes were prescribed drugs roughly as often as those entering profit-making “proprietary” institutions. But patients in proprietary homes received, on average, more than four times the dose of patients at nonprofits.

Writing about his colleagues’ research in his 1988 book “The Nonprofit Economy,” the economist Burton Weisbrod provided a straightforward explanation: “differences in the pursuit of profit.” Sedatives are cheap, Mr. Weisbrod noted. “Less expensive than, say, giving special attention to more active patients who need to be kept busy.”

This behavior was hardly surprising. Hospitals run for profit are also less likely than nonprofit and government-run institutions to offer services like home health care and psychiatric emergency care, which are not as profitable as open-heart surgery.

A shareholder might even applaud the creativity with which profit-seeking institutions go about seeking profit. But the consequences of this pursuit might not be so great for other stakeholders in the system — patients, for instance. One study found that patients’ mortality rates spiked when nonprofit hospitals switched to become profit-making, and their staff levels declined.

These profit-maximizing tactics point to a troubling conflict of interest that goes beyond the private delivery of health care. They raise a broader, more important question: How much should we rely on the private sector to satisfy broad social needs?

From health to pensions to education, the United States relies on private enterprise more than pretty much every other advanced, industrial nation to provide essential social services. The government pays Medicare Advantage plans to deliver health care to aging Americans. It provides a tax break to encourage employers to cover workers under 65.

Businesses devote almost 6 percent of the nation’s economic output to pay for health insurance for their employees. This amounts to nine times similar private spending on health benefits across the Organization for Economic Cooperation and Development, on average. Private plans cover more than a third of pension benefits. The average for 30 countries in the O.E.C.D. is just over one-fifth.

We let the private sector handle tasks other countries would never dream of moving outside the government’s purview. Consider bail bondsmen and their rugged sidekicks, the bounty hunters.

American TV audiences may reminisce fondly about Lee Majors in “The Fall Guy” chasing bad guys in a souped-up GMC truck — a cheap way to get felons to court. People in most other nations see them as an undue commercial intrusion into the criminal justice system that discriminates against the poor.

Our reliance on private enterprise to provide the most essential services stems, in part, from a more narrow understanding of our collective responsibility to provide social goods. Private American health care has stood out for decades among industrial nations, where public universal coverage has long been considered a right of citizenship. But our faith in private solutions also draws on an ingrained belief that big government serves too many disparate objectives and must cater to too many conflicting interests to deliver services fairly and effectively.

Our trust appears undeserved, however. Our track record suggests that handing over responsibility for social goals to private enterprise is providing us with social goods of lower quality, distributed more inequitably and at a higher cost than if government delivered or paid for them directly.

The government’s most expensive housing support program — it will cost about $140 billion this year — is a tax break for individuals to buy homes on the private market.

According to the Tax Policy Center, this break will benefit only 20 percent of mostly well-to-do taxpayers, and most economists agree that it does nothing to further its purported goal of increasing homeownership. Tax breaks for private pensions also mostly benefit the wealthy. And 401(k) plans are riskier and costlier to administer than Social Security.

From the high administrative costs incurred by health insurers to screen out sick patients to the array of expensive treatments prescribed by doctors who earn more money for every treatment they provide, our private health care industry provides perhaps the clearest illustration of how the profit motive can send incentives astray.

By many objective measures, the mostly private American system delivers worse value for money than every other in the developed world. We spend nearly 18 percent of the nation’s economic output on health care and still manage to leave tens of millions of Americans without adequate access to care.

Britain gets universal coverage for 10 percent of gross domestic product. Germany and France for 12 percent. What’s more, our free market for health services produces no better health than the public health care systems in other advanced nations. On some measuresinfant mortality, for instance — it does much worse.

In a way, private delivery of health care misleads Americans about the financial burdens they must bear to lead an adequate existence. If they were to consider the additional private spending on health care as a form of tax — an indispensable cost to live a healthy life — the nation’s tax bill would rise to about 31 percent from 25 percent of the nation’s G.D.P. — much closer to the 34 percent average across the O.E.C.D.

A quarter of a century ago, a belief swept across America that we could reduce the ballooning costs of the government’s health care entitlements just by handing over their management to the private sector. Private companies would have a strong incentive to identify and wipe out wasteful treatment. They could encourage healthy lifestyles among beneficiaries, lowering use of costly care. Competition for government contracts would keep the overall price down.

We now know this didn’t work as advertised. Competition wasn’t as robust as hoped. Health maintenance organizations didn’t keep costs in check, and they spent heavily on administration and screening to enroll only the healthiest, most profitable beneficiaries.

One study of Medicare spending found that the program saved no money by relying on H.M.O.’s. Another found that moving Medicaid recipients into H.M.O.’s increased the average cost per beneficiary by 12 percent with no improvement in the quality of care for the poor. Two years ago, President Obama’s health care law cut almost $150 billion from Medicare simply by reducing payments to private plans that provide similar care to plain vanilla Medicare at a higher cost.

Today, again, entitlements are at the center of the national debate. Our elected officials are consumed by slashing a budget deficit that is expected to balloon over coming decades. With both Democrats and Republicans unwilling to raise taxes on the middle class, the discussion is quickly boiling down to how deeply entitlements must be cut.

We may want to broaden the debate. The relevant question is how best we can serve our social needs at the lowest possible cost. One answer is that we have a lot of room to do better. Improving the delivery of social services like health care and pensions may be possible without increasing the burden on American families, simply by removing the profit motive from the equation.

 

Granted this is one person’s view of the matter. What are your thoughts?  In my course, “The Business of Health Care”, this issue is a key component of the subject matter.  Care to learn more and hear both points of view?  Register for the class.  I look forward to meeting you.

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.


Reducing Waste in Health Care


Posted by: Joel Wittman 

The discussions continue about the ways that  waste and overspending can be  restrained in our domestic health care system.  With health care expenditures soon to approach 20% of the GDP, the matter is increasingly more important.  Recent studies and policy papers have addressed this issue.

With the Institute of Medicine concluding that the U.S. healthcare industry wastes about $750 billion a year, hospitals need to understand the types and levels of waste, as well as the barriers to eliminating it.

A Health Affairs policy brief published yesterday points to care delivery failures, poor care coordination, overtreatment, administrative complexity, pricing failures, and fraud and abuse as the greatest drivers of waste in healthcare.

Former CMS Administrator Donald Berwick has also called on healthcare leaders to focus on these six categories of waste that account for more than 20 percent of escalating healthcare expenditures.

For instance, poor execution of care delivery processes not only leads to higher costs but also patient injuries and low clinical outcomes, the policy brief notes.

It also recommends addressing fragmented care to prevent unnecessary hospital readmissions and avoidable complications. With poor care coordination, costs can jump by $25 billion to $45 billion a year.

Overtreatment accounts for extremely high levels of waste, with defensive medicine as the primary culprit. Doctors have admitted to providing too much medical care, but thanks to malpractice concerns, current reimbursement systems and clinical performance measures, more aggressive healthcare will likely continue.

Higher-priced services that don’t provide greater health benefits than their less-expensive counterparts are another problem plaguing the healthcare system. But some hospitals, including Memorial Sloan-Kettering Hospital, are starting to say no to expensive drugs and devices that don’t guarantee value.

The industry also needs standardized forms and procedures to get rid of complex and time-consuming billing work for providers. In fact, about 30 percent of every healthcare dollar goes toward paperwork and administrative tasks, Forbes reported.

However, the policy brief noted, eliminating waste in healthcare gets even more complicated with fears that cost-curbing efforts will jeopardize or ration patient care.

The policy brief follows:

A third or more of what the US spends annually may be wasteful. How much could be pared back–and how–is a key question.

What’s the issue?
Health care spending in the United States is widely deemed to be growing at an unsustainable rate, and policy makers increasingly seek ways to slow that growth or reduce spending overall. A key target is eliminating waste–spending that could be eliminated without harming consumers or reducing the quality of care that people receive and that, according to some estimates, may constitute one-third to nearly one-half of all US health spending.

Waste can include spending on services that lack evidence of producing better health outcomes compared to less-expensive alternatives; inefficiencies in the provision of health care goods and services; and costs incurred while treating avoidable medical injuries, such as preventable infections in hospitals. It can also include fraud and abuse, which was the topic of a Health Policy Brief published on July 31, 2012.

This policy brief focuses on types of waste in health care other than fraud and abuse, on ideas for eliminating it, and on the considerable hurdles that must be overcome to do so.

What’s the background?
Many studies have examined the characteristics and amounts of wasteful or ineffective US health care spending in public programs, such as Medicare and Medicaid, and in care paid for by private insurance as well as out-of-pocket by consumers. By most accounts, the amount of waste is enormous.

THE COST OF WASTE: By comparing health care spending by country, the McKinsey Global Institute found that, after controlling for its relative wealth, the United States spent nearly $650 billion more than did other developed countries in 2006, and that this difference was not due to the US population being sicker. This spending was fueled by factors such as growth in provider capacity for outpatient services, technological innovation, and growth in demand in response to greater availability of those services. Another $91 billion in wasteful costs or 14 percent of the total was due to inefficient and redundant health administration practices.

By looking at regional variations in Medicare spending, researchers at the Dartmouth Institute for Health Policy and Clinical Practice have estimated that 30 percent of all Medicare clinical care spending could be avoided without worsening health outcomes. This amount represents about $700 billion in savings when extrapolated to total US health care spending, according to the Congressional Budget Office.

More recently, an April 2012 study by former Centers for Medicare and Medicaid Services (CMS) administrator Donald M. Berwick and RAND Corporation analyst Andrew D. Hackbarth estimated that five categories of waste consumed $476 billion to $992 billion, or 18 percent to 37 percent of the approximately $2.6 trillion annual total of all health spending in 2011. Spending in the Medicare and Medicaid programs, including state and federal costs, contributed about one-third of this wasteful spending, or $166 billion to $304 billion (Exhibit 1). Similarly, a panel of the Institute of Medicine (IOM) estimated in a September 2012 report that $690 billion was wasted in US health care annually, not including fraud.

Exhibit 1
Download Powerpoint Slide

CATEGORIES OF WASTE: Researchers have identified a number of categories of waste in health care, including the following:

  • Failures of care delivery. This category includes poor execution or lack of widespread adoption of best practices, such as effective preventive care practices or patient safety best practices. Delivery failures can result in patient injuries, worse clinical outcomes, and higher costs.

    A study led by University of Utah researcher David C. Classen and published in the April 2011 issue of Health Affairs found that adverse events occurred in one-third of hospital admissions. This proportion is in line with findings from a 2010 study by the Department of Health and Human Services’ Office of Inspector General (OIG), which found that Medicare patients experienced injuries because of their care in 27 percent of hospital admissions.

    These injuries ranged from “temporary harm events,” such as prolonged vomiting and hypoglycemia, to more serious “adverse events,” such as kidney failure because of medication error. Projected nationally, these types of injuries–44 percent of which were found to be clearly or likely preventable–led to an estimated $4.4 billion in additional spending by Medicare in 2009, the OIG found. Berwick and Hackbarth estimate that failures of care delivery accounted for $102 billion to $154 billion in wasteful spending in 2011.

  • Failures of care coordination. These problems occur when patients experience care that is fragmented and disjointed–for example, when the care of patients transitioning from one care setting to another is poorly managed. These problems can include unnecessary hospital readmissions, avoidable complications, and declines in functional status, especially for the chronically ill.

    Nearly one-fifth of fee-for-service Medicare beneficiaries discharged from the hospital are readmitted with 30 days; three-quarters of these readmissions–costing an estimated $12 billion annually–are in categories of diagnoses that are potentially avoidable. Failures of care coordination can increase costs by $25 billion to $45 billion annually. (See the Health Policy Brief published on September 13, 2012, for more information on improving care transitions.)

  • Overtreatment. This category includes care that is rooted in outmoded habits, that is driven by providers’ preferences rather than those of informed patients, that ignores scientific findings, or that is motivated by something other than provision of optimal care for a patient. Overall, the category of overtreatment added between $158 billion and $226 billion in wasteful spending in 2011, according to Berwick and Hackbarth.

    An example of overtreatment is defensive medicine, in which health care providers order unnecessary tests or diagnostic procedures to guard against liability in malpractice lawsuits. A September 2010 Health Affairs study led by Harvard University researcher Michelle M. Mello estimated that in 2008, $55.6 billion or 2.4 percent of total US health care spending was attributed to medical liability system costs, including those for defensive medicine.

    Overtreatment can also result from overdiagnosis, which results from efforts to identify and treat disease in its earliest stages when the disease might never actually progress and when a strategy such as watchful waiting may have been preferred. For example, in July 2012 the US Preventive Services Task Force recommended against prostate-specific antigen-based screening for prostate cancer because of “substantial overdiagnosis” of tumors, many of which are benign. Excessive treatment of these tumors, including surgery, leads to unnecessary harms, the task force said.

    Overtreatment also includes intensive care at the end of a person’s life when alternative care would have been preferred by the patient and family, or excessive use of antibiotics.

    Another form of overtreatment is the use of higher-priced services that have negligible or no health benefits over less-expensive alternatives. When two approaches offer identical benefits but have very different costs, the case for steering patients and providers to the less costly alternative may be clear–for example, using generics instead of brand-name drugs.

    There is also provision of many services that may once have been considered good health care but that now have been discredited as lacking in evidence of benefit. Under the umbrella of the American Board of Internal Medicine Foundation’s “Choosing Wisely” initiative, nine different medical specialty groups and Consumer Reports have identified a series of regularly used tests or procedures whose use should be examined more closely. In 2013, 21 additional medical specialty groups will release similar lists in their respective fields.

    The National Priorities Partnership program at the National Quality Forum, a nonprofit organization that works with providers, consumer groups, and governments to establish and build consensus for specific health care quality and efficiency measures, has produced a list of specific clinical procedures, tests, medications, and other services that may not benefit patients. The next step is for physicians and payers to change their practices accordingly.

    After requesting public input, CMS on November 27, 2012, posted on its website a list of procedures or services that may be overused, misused, or provide only minimal health care benefits. They include lap-band surgery for obesity, endoscopy for gastroesophageal reflux disease, and lung volume reduction surgery. CMS said that these services may be evaluated to determine whether they should continue to be reimbursed under Medicare.

  • Administrative complexity. This category of waste consists of excess spending that occurs because private health insurance companies, the government, or accreditation agencies create inefficient or flawed rules and overly bureaucratic procedures. For example, a lack of standardized forms and procedures can result in needlessly complex and time-consuming billing work for physicians and their staff.

    In an August 2011 Health Affairs article, University of Toronto researcher Dante Morra and coauthors compared administrative costs incurred by small physician practices in the United States, which interact with numerous insurance plans, to small physician practices in Canada, which interact with a single payer agency. US physicians, on average, incurred nearly four times more administrative costs than did their Canadian counterparts. If US physicians’ administrative costs were similar to those of Canadian physicians, the result would be $27.6 billion in savings annually. Overall, administrative complexity added $107 billion to $389 billion in wasteful spending in 2011.

  • Pricing failures. This type of waste occurs when the price of a service exceeds that found in a properly functioning market, which would be equal to the actual cost of production plus a reasonable profit. For example, Berwick and Hackbarth note that magnetic resonance imaging and computed tomography scans are several times more expensive in the United States than they are in other countries, attributing this to an absence of transparency and lack of competitive markets. In total, they estimate that these kinds of pricing failures added $84 billion to $178 billion in wasteful spending in 2011.
  • Fraud and abuse. In addition to fake medical bills and scams, this category includes the cost of additional inspections and regulations to catch wrongdoing. Berwick and Hackbarth estimate that fraud and abuse added $82 billion to $272 billion to US health care spending in 2011.
What are the issues?
Although there is general agreement about the types and level of waste in the US health care system, there are significant challenges involved in reducing it. Much waste is driven by the way US health care is organized, delivered, and paid for and, in particular, by the economic incentives in the system that favor volume over value. An additional problem is that attacking “waste” usually means targeting someone’s income.

In its September 2012 report, the IOM offered 10 broad recommendations for creating a very different health care system in which research, new incentives, partnerships between providers and patients, and a culture that supports continuous learning and development could lead to real-time improvements in the efficiency and effectiveness of US health care.

Although the IOM committee that prepared the report did not estimate cost savings, it predicted that implementing these measures would improve care and reduce expenses. The panel’s recommendations included the following:

  • Improve providers’ capacity to collect and use digital data to advance science and improve care.
  • Involve patients and their families or caregivers in care decisions. Increasing comparative effectiveness research may help physicians, patients, and their families make more informed decisions. (See the Health Policy Brief published on October 8, 2010, for more information on comparative effectiveness research.)
  • Use clinical practice guidelines and provider decision support tools to a greater extent.
  • Promote partnerships and coordination between providers and the community to improve care transitions.
  • Realign financial incentives to promote continuous learning and the delivery of high-quality, low-cost care. Numerous efforts are underway among public and private payers to move from the traditional fee-for-service mechanism, which pays based on the volume of services performed, and toward those that pay based on value and outcomes. (For more information, see the Health Policy Brief published October 11, 2012, on pay-for-performance, and the Health Policy Brief published January 31, 2012, on accountable care organizations.
  • Improve transparency in provider performance, including quality, price, cost, and outcomes information. In a May 2003 Health Affairs article, Gerard F. Anderson from Johns Hopkins University, Uwe E. Reinhardt from Princeton University, and coauthors compared US health care spending with those of other member nations of the Organization for Economic Cooperation and Development. They found that the United States spent more on health care than any other country and that the difference was caused mostly by higher prices.

One way to improve transparency and reduce prices is through “reference pricing,” in which an employer or insurer makes a defined contribution toward covering the cost of a particular service and the patient pays the remainder. The objective is to encourage patients to choose providers with both quality and costs in mind. In a September 2012 Health Affairs article, University of California, Berkeley, researchers James C. Robinson and Kimberly MacPherson reviewed how this approach is being tested.

Many of the measures described above are in process, although they are playing out at different rates in different regions and systems around the country. There are widespread concerns about how replicable and scalable some new payment models are, and how soon they will make a major difference in the way care is provided and in what amount. There are also cross-cutting trends, including consolidation of hospital systems and their employment of physicians, which could lead to the provision of more unnecessary services, not fewer.

For example, in a May 2012 Health Affairs article, Robert A. Berenson, an institute fellow at the Urban Institute, and coauthors found that dominant hospital systems and large physician groups can often exert considerable market power to obtain steep payment rates from insurers.

FEAR OF RATIONING: In theory, a focus on eliminating waste in health care could skirt the issue of rationing because wasteful activities, by definition, carry no benefit to consumers. However, there may be a fine line between health care that is of no benefit and situations where the benefits are relatively small, especially in comparison to the cost.

A common example involves continued chemotherapy treatments for patients having certain advanced cancers. These treatments can cost tens of thousands of dollars but extend a patient’s life by only a few weeks. However, restricting the use of such treatments or services can lead to accusations of “rationing.”

To address many Americans’ fear that the Affordable Care Act would lead to rationing, the law specifically forbids the federal government from making decisions on “coverage, reimbursement, or incentive programs” under Medicare that take cost-effectiveness into account, and “in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill.” The law is silent on any of these activities going on outside of Medicare.

What’s Next?
Efforts to extract waste from the health care system will in all likelihood continue along a range of federal government initiatives, including information technology adoption, pay-for-performance, payment and delivery reforms, comparative effectiveness research, and competitive bidding. Similar programs are also being initiated by state Medicaid agencies and by private payers. In the view of many experts, even more vigorous efforts to pursue the reduction of waste in health care are clearly warranted.

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.


Hospital Pay-for-Performance [P4P] for NYC’s Public Hospitals


Posted by: Jan Blustein

According to a recent press release New York City’s public hospitals will begin to pay its MDs for meeting targets relating to health care quality and efficiency.  The targets are quite varied, and include enhanced coordination of care, reductions in readmissions, decreases in ER wait times, and reductions in length-of-stay.

Using pay-for-performance [P4P] to improve hospital care is not new.  The concept has been used by private insurers and some state Medicaid programs, and the Medicare program has long had a national demonstration project on hospital P4P.  Last year hospital P4P was extended to most US acute care hospitals, under Medicare.   Historically, incentive payments have gone to hospitals, as organizations.  But under the proposal, some of those dollars will in turn go to the physicians who work in the city’s public hospitals.

How effective has hospital P4P been?  While the evidence is mixed, it has generally has not been particularly effective in improving the quality of hospital care.  My colleague Andy Ryan and I review the evidence and discuss some of the possible reasons here.

However, the New York City approach offers a new twist: it makes MDs the direct beneficiaries of high hospital performance ratings.  Indeed, it is no coincidence that the metrics that the city’s public hospitals will use in its program are the very metrics that the hospitals will be held accountable for by Medicare and other regulatory bodies.   In other words, if the hospitals perform well, the public hospital system will receive bonuses from regulatory bodies.  Under the program that was just announced, if the hospitals perform well, that wealth will be shared with the physicians who work in those hospitals.

This is a promising and interesting approach.


Health Reform to Stay the Bumpy Course


Posted by: Joel Wittman

As this is my first post since the presidential election, I thought that this would be a good time to look at how the ACA may play out.  Fierce Healthcare published an article about this soon after the election.  I thought it would be of interest to you.

Reelected for a second term, President Barack Obama is expected to carry out the landmark Affordable Care Act of 2010–but not without some resistance from a split Congress.

Many health reform provisions that hung in the balance during election season could see implementation in 2013 and 2014. The Democratic presidential win particularly confirms the forth-coming health insurance exchanges, the phasing out of annual insurance limits and protections for those with pre-existing conditions. However, it also leaves certain controversial provisions–namely, Medicaid expansion and the Independent Payment Advisory Board–in the hands of a divided Congress that may slow reform.

According to the Healthcare.gov timeline, the healthcare industry can expect:

Higher Medicaid payments for primary care physicians – Jan. 1, 2013
Under the Affordable Care Act, primary care physicians can expect Medicaid payments that resemble reimbursements for Medicare. Family doctors, internists and pediatricians next year will see Medicaid payments increase by up to 7 percent, estimated at $11 billion, although specialists have complained they are largely left out of the increased payments.

Medicaid expansion – Jan. 1, 2014
Perhaps one the most contentious issues that could see continued partisan politics is Medicaid expansion. Individuals who earn less than 133 percent of the poverty level (approximately $14,000 for an individual and $29,000 for a family of four) will be eligible to enroll in Medicaid. Although the Obama administration envisioned Medicaid expansion would be implemented across the country, the U.S. Supreme Court decision in June left it up to the states. Red, Southern states, in particular, have been particularly resistant to Medicaid expansion.

“The surprise Medicaid ruling by the Supreme Court will put hospitals in direct conflict with Republican governors who may want to not participate in the Medicaid expansion for political reasons,” Kent Bottles , senior fellow at the Thomas Jefferson University School of Population Health in Philadelphia and FierceHealthcare editorial advisory board member, told FierceHealthcare in an interview. “States not participating will be terrible for hospitals that are depending on the increased coverage to offset the decreased revenue from the federal government contained in the PPACA,” Bottles said.

With an expected 16 million uninsured Americans to enter the Medicaid system, provider reactions have been mixed, with some saying greater coverage for all will be a welcome relief, while others worry the patient volume will tax already overburdened staffs and resources.

“The ACA will increase the number of Medicaid beneficiaries, but it does not guarantee access to primary care,” Jesse Pines, director of the Center for Health Care Quality and associate professor of emergency medicine and health policy at George Washington University in Washington, D.C., told FierceHealthcare. Pines, a FierceHealthcare editorial advisory board member, noted many primary care physicians are turning away Medicaid patients, opting for higher-yielding patients who have commercial insurance or are on Medicare. “So it may be difficult for people to get in to see primary care doctors. With no other option (but with insurance), many will come to the ED,” he said.

Jeremy Tucker, medical director of the emergency department at MedStar St. Mary’s Hospital in Leonardtown, Md., and FierceHealthcare advisory board member, added his area already has physician shortages that may push newly insured patients to turn to emergency departments and urgent care centers to get their care.

“We are already seeing tertiary care hospitals that we transfer patients to asking us insurance status questions, and while they do not refuse to accept the patient, they will absolutely limit what they do for the patient [by simply stabilizing and discharging].”

He also said the physician shortage, coupled with increased patient volume, will lend to a higher reliance on non-physician providers, such as nurse practitioners and physician assistants.

Divided Congress could slow reform
With the Democratic hold on the Senate and Republicans maintaining the House, Congress will look much like the past four years–a political landscape that worries some in the industry.

“We should see more of the same–stalemates and gridlock in Washington,” Tucker told FierceHealthcare when asked the possibility of a Republican repeal.

A bitterly divided Congress could mean delays in appropriating money to fund the health law’s provisions.

The American Medical Association, while congratulating the President, also took the opportunity to point to the lingering question about the ever-present fiscal cliff–what will happen with the doc fix?

“The AMA is … committed to working with Congress and the administration to stop the nearly 27 percent cut scheduled to hit physicians who care for Medicare patients on Jan. 1, [2013],” AMA President Jeremy Lazarus said in a Wednesday statement. “It is time to transition to a plan that will move Medicare away from this broken physician payment system and toward a Medicare program that rewards physicians for providing well-coordinated, efficient, high-quality patient care while reducing healthcare costs.”

What are your thoughts about the ultimate success of the health care reform act?  Can a split Congress put aside their partisanship for the betterment of those in need of health care services who otherwise could not afford coverage?  While not perfect, the ACA is at least a start in the right direction.  Your comments are always welcome – let me hear from you.

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.


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.


Building a Health Exchange Strategy – Part III


Understanding Your Operational Readiness – Step 1
Posted by Errol Pierre

In Part I of Building a Health Exchange Strategy the discussion centered on how payers will have to be more consumer centric in their approaches to delivering health care. Part II focused on being aware of the political climate and how that will impact strategic decisions on whether to enter a Health Exchange market and upon entrance how to operate within one. Both dynamics, though critical, outlined external factors. Part III dives into internal factors; particularly around operational readiness.

It is clearly recognized that Health Exchanges offer a tremendous opportunity for health insurance companies to broaden their consumer base and expand their market share. By making health coverage more affordable it is likely that 30 million of the 45 to 50 million uninsured Americans will enter the market and purchase coverage through a Health Exchange.  Despite this opportunity, there is a high degree of complexity behind implementing and operating a Health Exchange book of business. The work in 2012 and 2013 provides a barrier to entry for smaller firms who may not have the financial and human capital to build the necessary tools and operational foundation to effectively compete with the larger players. Additionally, there are many interdependencies that exist with heavy reliance on each individual state as well as select Federal agencies to coordinate the coverage and manage the financing of the Health Exchange. The three main areas of concern that health insurance companies are grappling with are (1) product and plan design, (2) subsidy calculations and premium collection, and (3) eligibility and enrollment. Today’s article, (Part III, Step 1) will focus specifically on products and plan designs.

Product and Plan Design
Health Exchanges require at a minimum four levels of benefit offerings; bronze, silver, gold, and platinum. The different metals denote the level of coverage each plan must provide. For example, a bronze plan must cover up to 58% and no more than 62% of the health care costs for the health benefits a state deems “essential “ for a health insurer to provide. Likewise, a platinum plan must cover up to 88% and no more than 92% of the health care costs. These plan designs may be dictated by the individual state depending on the type of Health Exchange the state decides to run. Active Purchaser states like New York would be more inclined to create standard plan designs while Facilitator state like Utah would allow health insurance companies to come up with products and plan designs independently.

Within the “Silver” plan offerings the Health Exchanges will require the reduction of cost-sharing levels such as deductibles, co-payments, coinsurance, and out of pocket maximums depending on the consumer’s federal poverty level (FPL). For example, a silver plan may have a $1,000 deductible before coverage from the health plan kicks in. However, if a consumer with a FPL below 250% purchases a silver plan, the $1,000 deductible would need to be lowered by up to $500. This provides a level of complexity for health plans that has not been seen before. Lowering the deductible actuarially increases the price of the plan since the plan will provide more coverage. However, that cost of lowering the deductible is returned back to the health plan by the Federal government and not the purchasing consumer.

Additionally, the silver plan created by a health plan will have to be replicated up to 4 times over to accommodate for the variations in cost-sharing reductions that change the plan design of the product for each FPL level. Operationally, this inevitably means multiple people can buy the same exact silver plan. However based on their income level, they will have very different plans and very different utilization trends. Accumulator calculators that help health plans count up health care dollars will be imperative to ensure that physicians, hospitals, health plans, and most importantly health care consumers know when they have reached their deductibles and coinsurance maximums. The costs of administering such a complex set of plan designs are still unknown to many health plans; however this has not deterred them from pursuing the Health Exchange opportunity. However, the bigger impact to the cost of administration is how it will work in parallel with minimum loss ratio requirements that mandate the percentage of health care revenue that must be spent on providing health care as opposed to administrative costs; particularly if administrative costs increase due to the complexity of administering these plans.  This undoubtedly eats away at the profit margins of health care plans that already operate with very low margins (2-4% on average).

Basic Health Option
In addition to the four metal plans a state may opt to offer a Basic Health Option. This basically extends the state’s current Medicaid plan eligibility from beyond the 133% FPL up to 200% FPL. It behooves a state to pursue such an option because the Federal government would reimburse 95% of the costs. Today, the Federal government only pays 50% of a state’s Medicaid costs. As a result, states could potentially realize huge savings by shifting a portion of its Medicaid population to this Basic Health Option.

However, this route is very complex. The nuances here are that the Basic Health Option must have the essential health benefits deemed by the state even though the current Medicaid plans do not. So the population over and above the 133% FPL level will have a similar product however the underlying benefits could be substantially different. This poses complexity to the providers with coding and claim submissions. The states will be free to choose the methodology for their essential health benefit package as long as it represents (1) the most popular small group health plan, (2) the most popular HMO health plan in the state, (3) the health plan offered by the State to its employees, or (4) the health plan offered by the Federal Government to its employees in that state. There is also added complexity to the Basic Health Option when it comes to cost sharing. Deductibles and coinsurance levels are regulated within the health care reform bill to be based on FPL as well. So a health plan would have to administer two different types of Basic Health Plans based on whether a consumer is 133% to 150% of the FPL or if they are 150% to 200% of the FPL. These intricacies cause added complexity when it comes to administering a health plan, accumulating consumers’ deductibles and out of pocket maximums, and ensuring the plan designs receive actuarially sound price increases and adjustments year to year.

Catastrophic Plan
Lastly, individual states will also have the ability to create catastrophic plans that can only be offered to health care consumers under the age of 30. Many industry insiders refer to this population as the “young invincibles”. These plans must also meet the essential health benefit requirements, however the deductibles and out of pocket maximums are allowed to be higher. As a safeguard against consumers forgoing care because of high out of pocket healthcare expense there are a number of protections put in place as well. For example, preventive care and particular routine care must be covered in full and not be subject to the deductible. Additionally, three to four primary care office visits must also be covered in full and not subject to the deductible as well. Pricing for these plans provides a unique opportunity for health insurers since the risk pool and experience of the population will reflect a younger demographic. This means that pricing should in theory be more affordable and subsidies from the Federal government potentially could go a longer way.

In the End
Health Exchanges present standardization of plan designs to the health care consumer market with the potential of commoditization of health insurers as they compete for market share. As a result, the emphasis on products and plan designs becomes imperative. How an insurer operationally administers health care products in this space will be the differentiator to the consumer. Innovation in finding the ability to be unique in a very regulated space produces an opportunity for insurers to make product development the focal point of their Health Exchange success strategy.

Errol Pierre is the Assistant Vice President of Product Management at a regional health insurance company focused on business development, sales, and strategy planning around Health Exchanges. 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 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.

 


What Can Be Done About Hospital Readmissions? – Is Home Care Part of the Solution


posted by Joel Wittman

A comprehensive analysis of Medicare claims data demonstrates that Medicare payments more than double when the beneficiary’s care contains at least one hospital visit.  A report by the Alliance for Home Health Quality and Innovation examined the effects of hospital admissions and readmissions on Medicare expenditures.

Hospital readmissions play a key role in the amount Medicare spends per patient per episode.  The research aims to more fully explain how hospital readmissions affect the Medicare episode payment and to provide guidance on the Medicare home health benefit.  The data will provide information on to lawmakers as they look to revamp the Medicare fee-for-service payment system and eliminate unnecessary spending on avoidable hospitalizations.

In post-acute care episodes, patients whose episodes contained at least one readmission cost Medicare twice as much – roughly $33,000 compared to $15,000.  When the number of chronic conditions per patient increases, so does the average number of readmissions, suggesting that a more complex patient is more likely to be readmitted.  Services such as home health may be able to reduce the number of unplanned readmissions for some clinically appropriate patients by caring for them in home health and improving coordination and continuity of care.

There are interesting trends when an episode contains an admission.  With regard to chronic conditions, the severity of the primary chronic condition, rather than the number of conditions, plays a more significant role in the impact on Medicare payment for the episode.  For example, an episode with a primary chronic condition of diabetes and a prior admission generates a Medicare episode payment nearly three times that of a diabetes episode without a prior admission.  This suggest that better management of low-severity chronic conditions (as well as high-severity conditions), which can be provided by home health care, may limit prior admissions for pre-acute episodes or even prevent some hospital admissions and subsequent post-acute care.  As the severity of a chronic condition increases, so does the proportion of episodes in non post-acute care episodes.  However, when patient with low-severity chronic conditions require a hospital admission, the payment per episode nearly quadruples since the cost of caring for these patients is relatively low without the readmission.

The data suggest that better management of chronic disease through home health intervention could enable more patients to remain out of the hospital following an initial admission.  With clinically appropriate and effective care, patients have the potential to avoid some unnecessary admissions altogether, ultimately saving Medicare and taxpayers a significant amount.  Home health care combines the right mix of care management, prevention training, and close observation to significantly reduce hospital admissions.

A program conducted in upstate New York generated some positive results.  See below:

A group of hospitals in upstate New York have been able to cut inpatient readmissions by 25 percent as the result of a home visit program, reported the Rochester Democrat and Chronicle.

The collaboration between Rochester General Hospital and three other area facilities not only cut readmissions over 30 days but also cut down readmissions over a 60-day period, the article noted.

Reduction of readmissions is critical particularly for hospitals as the Centers for Medicare & Medicaid Services intends to cut payments for excess numbers of patients readmitted within 30 days of discharge for congestive heart failure, heart attacks and pneumonia. According to research, up to 75 percent of hospital readmissions may be avoidable, Consumer Reports magazine noted.  Specific cost savings from the initiative were not immediately disclosed but could be as much as $100 saved for every dollar invested. “The cost of the intervention is measured in hundreds of dollars,” said Martin Lustick, corporate medical director for Excellus BlueCross Blue Shield. “The cost of a readmission is upward of $10,000.”

The program, known as Care Transitions Intervention, was conducted in coordination with the hospitals, local home health agencies, Excellus and the Monroe Plan for Medical Care, a Medicaid managed care program, according to the article. State and federal grants will allow the initiative to expand.

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.