Why Congress Should Consider Bob Laszewski's Health Care Affordability Model

BY BRIAN KLEPPER

Over the last few months, I have become increasingly disheartened over the prospects for meaningful health care reform.

First, the process is terribly conflicted, and it shows. In the first quarter of 2009, the Center for Responsive Politics reported that the health care industry contributed $128 million to Congress. Now that the tide has turned, this has gone mostly to Democrats who, as it turns out, are just as receptive as their Republican predecessors.

In turn, the Congressional health care reform proposals so far are mostly about coverage entitlements and access - fair enough - but despite cost containment rhetoric, they mostly ignore the ever rising cost burden that has brought health care to its knees. As longtime health care crusader Paul O'Neill pointed out in last weekend's NY Times, the proposals pay relatively little attention to adjusting the health system's structural flaws that encourage and tolerate tremendous waste and excess: fee-for-service reimbursement; a specialist-dominated medical paradigm; and a lack of enterprise-wide infrastructure that can facilitate transparency, transactional streamlining, and evidence-based decision-support. It appears we could be headed for Massachusetts-style health care reform, in which all the concessions will be made by the people paying the bills, and virtually none are borne by the health industry itself.

The health care waste that has been glossed-over in these proposals is monumental, the result of millions of premeditated decisions made by real people. Consider, for example, the MedPac report issued a couple weeks ago that found that physicians who own or lease imaging devices order images at twice the rate of physicians who do not have a financial stake in them. Or the fact that, even though the majority of claims are auto-adjudicated and we live in the age of electronic fund transfers, it takes health plans - which earn interest while they hold onto the funds - more than a month on average to pay a physician's practice and nearly two months to pay a health system. Or that many health plan brokers represent that they are independent consultants to employers, but steer their clients to health plans with whom they have a financial relationship.

There are literally thousands of examples like this tucked inside every health care sector: the supply chain, the IT sector, the care delivery system and the finance system. No one knows for sure what these excesses actually cost, but estimates vary between 30 percent ($800 billion) and 60 percent ($1.5 trillion) of our annual total health care expenditures. These are breathtaking numbers. We fork over these immense sums every year for services that provide little or no value.

In the process, we have eroded our national economic stability. The President and his health team have repeatedly noted that health care cost represents the single largest threat to the nation's long term financial viability. The savings that presumably would accrue from meaningful reform are key to the success of their larger economic plan.

The American people may not understand the technical issues, but they're also aware that the system is not working in their interests. In a recent NY Times/CBS poll, 72 percent of respondents - nearly 3 in 4 - said they favored "the government's offering everyone a government administered health insurance plan like Medicare that would compete with private health insurance plans." While I doubt that the rank-and-file of respondants understands what a public option would really mean, the deeper message seems clear: the current system is dreadfully broken and we need a different approach.

But the Democratic proposals seem oblivious to how crucial the issue is to the President or the American people. And so their focus has been on two seemingly extraneous issues.

First is whether the proposals' programmatic costs will come in at less than a trillion dollars over 10 years (rather than their long term impacts). Let's leave aside the fact that a trillion dollars is less than 40 percent of our annual health care expenditure at the moment.

Internally, the Congressional Budget Office and then Congress scores each proposal - the most recent version of the Affordable Health Choices Act from the Senate Health, Education, Labor and Pensions Committee (HELP) came in at $611.4 billion over 10 years - even though the evaluations may not consider ancillary deals made to win the buy-in of powerful health care lobbies, or financing that offloads costs onto some part of the private sector.

Still, if 30-60 percent of all current health care cost is waste, it is not clear why we should spend another $60 billion a year to improve the system. Why can't we recover and apply the wasted resources instead?

Second is whether the government offers a public option. This issue is worth a separate post, but suffice it to say that the cost growth of Medicare, a public option, has tracked closely with that of commercial health plans for 30 years. There is literally no evidence that the placing a program in the public domain - where it is highly susceptible to perverse influences like lobbying - is any guarantee of better performance.

In other words, one of the lessons of the last 50 years is that changing the financing model alone probably won't fix health care. What's needed - what is critical right now - are changes to the ways health care is supplied, tooled, delivered, managed and reimbursed, independent of any health plan's sponsorship and legal structure.

So far, our current round of reform has conspicuously dodged those issues, presumably at the industry's encouragement. The long term consequences of that avoidance, though, could prove disastrous.

*****

One of the problems with taking on health care reform is that it is so complicated, with endless facets and special cases, and with stakes that are extraordinarily high. After all, we're tinkering with an economic sector that represents one dollar in seven and one job in eleven. There is a tendency to suggest that the health care marketplace IS the problem, and that we can solve problems through policy alone.

But the truth is that the marketplace has not been allowed to work in health care, or at least not in the classical sense. Government has financed about half of health care over the last several decades, distorting market functions. And the most powerful organizational forces in the market - physicians, hospitals, health plans, drug companies, device companies - have consistently lobbied against transparency of cost and quality information, the one ingredient that markets need to work effectively. The hope is that good policy both empowers market innovation and constrains its propensity for excess.

What is really needed in situations like these, though it rarely appears, is a fresh approach from an unimpeachably non-partisan and credible source. That approach must cut through complexity to get at the root of the problem, preferably with a relatively simple, easy-to-understand idea. I believe Bob Laszewski has provided us with this kind of solution.

There are many excellent writers and thinkers in health care, but I doubt many would object if I suggest that Bob Laszewski is at the very pinnacle of this group. His articles, written plainly and clearly, are a model of lucid, informed thought. A former health insurance executive, he has deep expertise in health care finance. A longtime DC health policy advisor, he has extensive connections with and is highly regarded within that community.

Bob has written a summary piece and a detailed piece about the Health Care Affordability Model. These posts should be as high on the required reading list for everyone involved in the national health policy reform discussion as Gawande's Cost Conundrum article was for the White House staff.

The Affordability Model posits a simple idea: Let's use tax incentives to align everyone's interest around driving out waste. If health plans and their health system partners hit targets, they keep their advantage. If they don't, they lose them. He then provides sufficient underlying detail to convince us that it is a workable plan for attacking one specific, important piece of the health care crisis: unrelenting cost growth. He states it like this:

The Health Care Affordability Model creates unavoidable incentives for health plans and their provider network partners to maintain their tax qualification:

• The health plan would be placed at a substantial competitive disadvantage without it.
• Doctors, hospitals, and other providers who were not in a tax qualified health care network would lose patients to networks that did control costs.
• Employers and consumers would almost certainly purchase their health benefits only from qualified plans.

And, unlike most health care reform proposals, the Affordability Model would simultaneously reduce both public and private health care costs.

The Health Care Affordability Model is not a standalone health care reform proposal. It could be attached to virtually any health care reform plan now on the table.

There is nothing new about using tax incentives to shape individual and corporate behaviors. We have used them to encourage employers to purchase coverage for their employees, but we have not applied them to drive behavior within the health industry itself.

In my experience, most seasoned health care professionals have very good ideas about what will work and won't work, and what remedies can be applied to fix the current crisis. There isn't a lot of mystery about this. Empowered primary care, data aggregation and mining for transparency and decision support, some new genomic assays, new imaging procedures, face-to-face disease management, and many other approaches are known to work but have been under-utilized. As Bob notes, there simply hasn't been the reason to pursue these approaches.

We know, for example, that, when they're appropriate, minimally invasive surgeries are a grand slam. They dramatically reduce the pain associated with an invasive procedure. They have lower episodic costs. They're associated with fewer complications and nosocomial infections. And they produce quicker back-to-work times for workers. But we often pay surgeons less to do them, so we have created a perverse incentive to use the older, less positive approach. Under the Affordability Model, there would be a clear incentive for health plans, clinicians and everyone that supports them to change to the better, higher value approach.

To me, the real beauty of the Affordability Model is that it offers minimalist steerage. It implements a (relatively) simple, straightforward incentive, and then allows the market to innovate to achieve the desired results. It is as hands-off as possible, is likely to keep the best parts of our system intact and creates the impetus to drive out services that offer little value. It empowers the health care marketplace.

Who will be against Bob's proposal? Nearly everyone in the industry, because over time it will organically reduce revenues throughout the industry. But they ought to be for it, because it would stabilize health care, and at long last provide the sustainability that has been missing for so long.

Read Bob's piece closely, and you'll hear the passion he has infused into it. This is not simply a post, a suggestion. It is the distilled, highly focused advice of a top professional, offered to his country in a time of need. It is the summary wisdom of a life's work.

Congress has not adequately turned to the very pressing cost problem that Bob's model addresses. If it does not do so, the result will health care reform that is empty, meaningless and, ultimately, shameful.

My fervent hope, for all of us, is that they are listening with open minds, and that they have the courage to follow his advice.

Is the Health Care Economy Rightsizing?

by BRIAN KLEPPER and DAVID KIBBE

More than at any time in recent memory, powerful forces are buffeting the health care sector. We are in the midst of profound upheaval, driven by market and policy responses to the industry’s long-term excesses. We can already see evidence that the dysfunction of our traditional health system is accelerating. It also seems clear that the center cannot hold indefinitely.

Dog Eat Dog
It is useful to remember that the health care industry’s different stakeholders are adversaries. While they clearly share a common understanding that a wholesale meltdown is possible, there is little real motivation for collaboration and no unity. Independent of role, the industry as a whole has been focused on, and extremely effective at, securing dollars from purchasers: government, employers and individuals.

But each silo within the industry has been separately focused on growing its own slice of the health care pie. In every niche, there are courteous conceits - access, appropriateness, efficiency and value - reserved for the good manners of public relations. But these are meaningful in practice only if they do not conflict with the professional’s or the firm’s economic performance.

Back in December when the bloom of the Obama election was still on the rose, the rhetoric of health industry representatives reflected widespread, earnest agreement that we must finally move toward meaningful reforms. But as the details of reform have taken shape, their impending realities have started to chill the industry’s public stance on change. And so the gloves are coming off to protect self-interest as the system seeks solutions.

Steven Pearlstein of the Washington Post detailed the campaign by conservative commentators led by Rush Limbaugh to discredit the stimulus bill’s allocation for comparative effectiveness research. The mantra was that this effort was really cost-benefit analysis intended to deny people care. But the funding for the disinformation effort came from the drug and device industries. The funders worried that credible data showing which drugs and devices actually worked best would wreck their sales, margins and, most importantly, their business paradigm of the last twenty years.

Short of an enterprise-wide catastrophe that sinks all ships, fundamental differences in goals will also make any real collaboration and compromise among the power players difficult. A New York Times story last week focused on two important unions, the Service Employees International Union (SEIU) and the American Federation of State, County and Municipal Employees (AFSCM), that suddenly and without comment, quit the multi-constituency Healthcare Reform Dialogue (HRD). HRD, a health care reform coalition, has tried to bring together employers, unions, and health industry players to find consensus on reform approaches. It is hard to not interpret this seemingly insignificant event, the shattering of unity by apparent intense disagreement, as a foreshadowing of the ferociousness yet to come on health care reform.

Then there’s the simmering rage that lower- and middle-class Americans harbor for the industry. Most lawmakers are finally realizing that this is a sleeping dragon. True, nurses, pharmacists and doctors, in that order, continue to engender the greatest consumer trust of professionals. But many health care corporate segments - certainly the health plans and the drug companies - are widely seen as taking advantage whenever they can. Remember audiences’ overwhelmingly supportive reactions to Helen Hunt’s frustration with her HMO in the 1997 movie, As Good As It Gets?

So we have the industry’s fragmentation and fear of reduced margin, and the consumers’ seething. Now add an unexpected national economic downturn, and the industry is finding that tolerance of its exorbitant costs is evaporating and that its very structure is in question. Health care has out-priced the mainstream of its purchasers, a sin that is finally being revisited on every sector of the industry.

A Deteriorating Marketplace
We see circumstantial evidence that the health care industry is under unprecedented siege in the marketplace, the fruit of longstanding business practices that, as John Sinibaldi so eloquently pointed out last week, have consistently favored health care vendors over patients and purchasers.

Health plan enrollment is now like a sieve. At a recent conference of senior health plan executives, all admitted that enrollment had recently dropped precipitously. Some members are switching to other plans. But many more are dropping out because their premiums became unaffordable, or because they’ve lost their jobs. The execs also agreed that the multiplier used by industry professionals to estimate the number of total lives from employee lives, stable at 2.2 for many years, has plummeted over the last few years to 1.8. If true, that would signal that increased costs have driven fewer businesses to subsidize dependent coverage, resulting in a 20% drop in total enrollment - the casualties would be mostly children here - that is NOT being reflected in the uninsurance surveys. In a related vein, HHS data from before the economic downturn show that only 39% of Florida’s small businesses - they comprise 95% of all Florida businesses - still offer health coverage to their employees. This is significantly below the coverage values reported by the Kaiser Family Foundation, which makes it difficult to believe that these dynamics are accurately reflected in the surveys of those populations.

As coverage erodes, we are most concerned about the hospitals and health systems that are the anchor health care resources in most communities. With the economy and stocks tanking, the investment income that was keeping many health systems afloat has disappeared. The ranks of the uninsured and underinsured have exploded, so uncompensated care costs and bad debt are skyrocketing. Few health systems have gotten serious about huge supply chain margins, often north of 50 percent, so there’s nowhere to turn in the short term. While safety net short term acute care facilities have been under duress for many years, now these trends are conspiring to also threaten the community facilities that cater to those with more resources. One recent survey of 4,500 health systems, published before the economy really began to plummet, found that more than half were “technically insolvent or at risk of insolvency.”

As the economy has worsened, and jobs and money evaporate, many patients are breaking physician appointments or are unable to pay for services received. Bad debt has become much more of a problem for physician practices, so many have become more aggressive in collections. We have received anecdotal reports that some physician practices are demanding payment in full prior to procedures, and are balance-billing their health plan patients in direct violation of their contractual agreements. The health plans aren’t positioned to police every practice’s policies. But if this trend is widespread in the system, it suggests that the niceties of business practice are going by the wayside as practices struggle to maintain.

Finally, the combination of health coverage erosion and high care costs is fueling an arms race that, until fixes are in place, patients will lose. The two fastest growing segments of the health care financial sector are individual credit scoring and collections, specifically aimed at capturing available dollars for the system. In this economy, aggressive collections practices will drive many more patients into bankruptcy, intensifying consumer dissatisfaction and further fueling the engines of change.

Is Health Care A Bursting Bubble?
One of us recently had a 3.5 hour diagnostic procedure at a local hospital outpatient surgery center. The EOB (Explanation of Benefits) from the health plan showed the hospital had submitted a facility charge of just over $13,000 - more than four months of total income for one-third of American households - and the health plan paid approximately $1,300, which means that willing vendors and purchasers agreed that the procedure’s market value was 10% of the charge.

But without insurance, we would have been legally responsible for that bill, with the willingness to negotiate utterly at the discretion of the health system. Setting aside the fact that charges are crazily tied to the evolution of Medicare cost reports and grow out of stuffing every bit of possible cost into each charge, the EOB begs three questions.

1. Is it appropriate to add a 1,000% surcharge for the sin of uninsurance. For not-for-profit health systems especially, is it appropriate to do so while receiving a tax break for providing community service?
2. When a provider chooses to pursue a receivable figure that is more than the established market value (as determined through the contractual figure with the health plan), can that effort properly be understood as inflating the market?
3. Can a system maintain stability when it inflates value beyond the means of most of its purchasers ?

The definition of a market bubble is a high variance between the intrinsic value of a product and its market valuation. Bubbles always burst eventually, as inflated market values tumble back towards intrinsic value. We’re seeing this with homes and banking stocks. Are we there yet with health care services? Could America’s health system collapse?

The Threat
It’s hard to imagine the health care system in free fall. The federal government pays for approximately half of health care already, through allocations for Medicare, Medicaid, SCHIP, the VA, and the Federal Employees’ Benefit Program. The stimulus bill allocates a “down payment” of $634 billion for health care reform over the next ten years, assuming that somehow this money will go to save health care dollars. But it could just as easily become a bail out for the failing health care sector, massively larger than the bailouts for the banks or the autos, and “too large to fail.” Keep in mind that health care is now 16 percent of the US economy, one dollar in seven and one job in eleven, so large that any significant disruption in the sector would inevitably cascade to all other parts of the economy.

And the threat goes both ways. Health care could push the larger economy over the cliff, or the reduced resources associated with the downturned economy could precipitate the collapse of a health care sector that has become accustomed to inflated reimbursements. Either way, American society is vulnerable and in very big trouble.
It goes without saying that, as the funding dries up, the safety net provider organizations that deliver the lion’s share of care to the medically indigent will fail first, as did Martin Luther King in Los Angeles, and as Grady in Atlanta almost did. A year ago, the safety nets’ distress at the edges of the system were already the most tangible signs of the unfolding crisis. Now, the problems we’ve described above are with mainstream providers who cater to the middle class. What we have not seen yet is the impact on the health care supply chain, which accounts for 40 percent of health care dollars and which are also tremendously over-valued.

The Opportunity
Instability in systems that are directly connected with important societal benefit is never good, because powerless people suffer disproportionately according to caprices of fortune and the system’s rules. American health care certainly fits that bill at the moment. A majority of the American people are very unhappy with the system, and nearly every sector of the health care industry is under increasing and unsustainable stress. American health care’s storm clouds are gathering. It’s very ugly right now, and getting worse.

The good news is that, as the system becomes becomes increasingly unstable, the opportunity also increases for a full scale overhaul of health care that rightsizes the longstanding waste and pricing of American health care to more sensible proportions, and develops both policy- and market-based solutions that build on experience and that can have lasting utility. If our leaders are unwise and susceptible to special interest influence, it could also go the other way. But times like this are our best shot, because the problems are so glaring and the solutions that are in the common interest so straightforward.

Whatever path we go down, health care is certainly poised for significant change. Part of our national effort for that change must include a transition plan that consciously seeks to reduce to a minimum the turmoil involved.