Archive for November, 2017

Spotlight on Healthcare Costs

Tuesday, November 21st, 2017

Ian Morrison specializes in long-term forecasting and planning with particular emphasis on healthcare and the changing business environment. He sat down with Leader’s Edge to discuss hospitals bills from both the patient and provider perspective, the politics of repeal and replace, and how some providers are already preparing for a Medicare-for-all kind of world. He also addresses employers’ role in long-term change for our healthcare system.

Can you start by digging into the healthcare cost issue a little from the consumer side?

The basic problem with the consumer’s relationship with the bill is the bill is a fabrication that bears really no tie back to reality. Hospitals bill for things they can count, so you get a ridiculous equivalent of the $750 toilet seat. It’s basically a failure, in my view, of the whole way in which the industry accounts for cost and confuses cost and prices.

So things that are really expensive are, for example, a day in an ICU where you’ve got seven FTEs per patient. It’s hard to charge what it really costs for that in a way that is defensible. So they end up creating these bills …The lab test that nominally the marginal cost would be $80 is $800. It becomes a revenue-capturing vehicle that isn’t really tied to the true underlying cost of delivering the service. So that’s frustration number one.

Frustration number two is, you don’t know it in advance. And unfortunately, where the consumer is on the hook, particularly in the outpatient environment and particularly in the initial stages of deductibility, it comes as a complete shock, right? Nobody tells you in advance you’re going to write a check for $1,500.

So on the one hand the industry does a poor job of actually measuring what things cost and attaching prices to the real thing. And then there’s a communications failure, which is basically that you don’t know in advance and you end up getting these enormous surprises, at just the wrong time. It’s like a perfect storm of indignation.

Is there a lack of ability to measure among providers? Or is it more that they know what things cost but, like you alluded to, they can’t reasonably charge you what the real cost is to provide your intensive care service so they have to make up for it somewhere else?

I think that’s an accurate way of reflecting it. I call it the financial hydraulics of healthcare. If you do cardiovascular surgery in Oklahoma on an uninsured person and you sic a collections agency on him, you’ll get seven cents back on the dollar. Medicaid pays about 70 cents of the cost of care on average for inpatients across the country. Medicare pays about 90 to 95 percent of the cost.

So, basically, what all hospitals systems do is charge private insurers at least 120, sometimes 300 percent of Medicare to make up for the difference. That’s the cost-shifting piece. Then you apply it …to a procedure, which as I explained at the beginning, is not accurately cost accounted, and it multiplies the error, in some sense. And the consumer is left going, “Seriously? That can’t be right. How can an aspirin be that much?” There’s a certain lunacy to it.

But all they’re trying to do is to get the revenue they need to cover the services they provide with some margin. And they back into charges out of that goal.

You mentioned there’s a range that happens, here, on the private side. What are your thoughts on this model of creating a cap of Medicare cost, plus, as a certain percentage that would potentially create more transparency and insight, and not that surprise cost for the consumer on the end?

I’m working with some colleagues at Leavitt Partners and Stanford CERC [to find] providers who actually can survive on Medicare level of reimbursement, or at least have higher quality than average and below-average cost… many of them aspire to learn to live on Medicare level of reimbursement because they can feel the winds of change and the pressure that the game of cost shifting may not be sustainable.

So they’re tightening their belts and seeing their margins erode, quite frankly. The first 2017 numbers are all horrible for most hospital systems I’ve seen the numbers for. And that’s part of this broader squeeze. You know, expenses are rising, people are being paid more. You got to subsidize the docs. The technology is expensive. The drugs keep going up, and the people up the food chain are trying to dampen costs. So I think there’s real interest conceptually in trying to live in a field of level reimbursement.

But getting from here to there is a tough one to pull off because most hospitals in America are 15 to 20 % away, minimum, from making money on Medicare, and are reliant on that cost shift to stay afloat. So it is very threatening.

My work with Leavitt and Stanford is still in progress, but from our initial pass, I would say the hospitals [that met our cost/quality criteria]—and there were not many of them—tended to be ones that were passionate about cost management and had a long history of doing that. And they were in markets where they didn’t have the luxury of so much of cost shifting, whether because the population wasn’t growing or they just had a disproportionate share of their revenue coming from Medicare and Medicaid and not a lot of commercial.

And it’s appealing. The only downside I see on these rate settings things—well, there’s a lot downsides. How do you administer it? Suppose you had been a hospital that was doing all the hard work to reduce costs and all of a sudden somebody came in with an arbitrary price that was tied just to Medicare.…I always worry about the unevenness of the application with an arbitrary across-the-board scheme in that you create winners and losers and it may not be, quote, unquote, “fair.”

I think this is going to be floated as a policy proposal, especially because the more moderate Democrats are recognizing that only a third of Americans would go for single payer, but you could probably build a broader coalition for what they’re calling Medicare-X, which is allowing Medicare buy-ins and the use of Medicare fee schedules in a public option that is available to more Americans and to more employers.

Do you think this would pose a slippery slope to single payer?

I think that’s the fear that the more conservative thinkers would have. Because let’s be honest, if you get access to Medicare prices, how could you lose as a plan, right? On average in America commercials are paying 150 % of Medicare to hospitals. In some states, like Wisconsin, it’s 200 to 300%. So if I can walk in and start a health plan with Medicare prices, I theoretically should be able to clean up. And I should have a bunch of employers knocking down my door because basically I’ve created an ability to do something the private sector can’t do currently, which is get enough clout, to get the price down.

You have a presentation slide that says employers are most concerned with hospital prices, specialty pharmaceuticals, and cancer care, respectively. Given their skin in the game and how much they are forced to pay attention to all this stuff, do you feel that they have a responsibility for pushing payment reform forward? And, if so, do you think they have the will to do it?

The short answer is yes. If you think about two sides of the problem being either utilization or price, we often frame the problem as utilization. There’s overuse of this, or there’s too many of that. When you think about commercial insurance, and particularly self-insured employers, it’s about price. …They have trouble affecting price. And payment reform is a method to try and engage providers in doing things differently…the role of the private sector is incredibly important as a source of potential experiments in payment reform and as a kind of test bed and co-collaborator. But if you don’t get CMS [the Centers for Medicare & Medicaid Services] driving this in Medicare and, in turn, Medicaid, you don’t have enough critical mass to change the game. And that’s the basic dilemma here.

It’s a very different CMS under a Trump administration than it was with Obama. Andy Slavitt at CMS in the Obama Administration was trying to push his team to imagine what’s possible in payment reformand go 10 % faster than that. Sometimes they overreached. But Secretary Price and Seema Verma’s  signal to the market was, “No, we’re not doing mandatory. We’re doing voluntary. Yeah, we’ll do that but maybe later. Well, MACRA is good, yeah, but we’ll exempt even more people and slow the timetable down.” So that’s not gone unnoticed by the [field].

It’s not that people think payment reform is being undone. It’s just that the sense of urgency and speed is undone. And I don’t think employers are capable of driving it without that.

Do you believe the only way we get acceleration around this is with federal government intervention? And is that the only viable lever that will really change the paradigm?

I wish it were not true but I think it is true… The basic problem, and you guys know this better than anyone, is employers are very different in their needs. Disney is a perfect example of the blended problem. Disney has a billion in spend, half of the employees working the theme parks making just above minimum wage, and the other half are Johnny Depp or on ESPN or work for Lucasfilm. And they’re all on the same health plan. That’s a tough gig to organize, given you’ve got people who are making $20,000 a year and $20 million a year.

I think employers are coming to the payment reform issue. They are doing it with increased vigor and attention. Their problem is they can’t coordinate in a meaningful way to impact providers in given geographies because they have different strategic priorities and it’s hard for them to operationalize a kind of kumbaya strategy, just in the Bay Area, even, for example.

Look at a company like GE, which is massive, but it doesn’t have more than 12,000 or 15,000 lives in any one place. And the companies who do are public employers. So states, big governments, school boards and so forth, they’ve got more concentrated fire power but ironically they are the most brain dead with regard to employee benefit innovation. With the exception of CalPERS and a few others. The people with the most generous health benefits in America are school teachers and firefighters, probably, legitimately, but they’ve been less aggressive on the cost management side than almost anyone.

I think a lot of our members right now are extremely frustrated in the ACA repeal and replace exercise around there being no discussion above the committee level about cost and price. Is that just a manifestation of the politics and lawmakers ignoring that part for now, or do they just not understand it well enough. Or it is a blend?

It’s a very, very good question. The Democratic proposals that became Obamacare were very much about coverage expansion, not necessarily cost containment in the aggregate. Although there were significant pilot experiments, like CMMI and [ACO] legislation and IPAB that were meant to provide some kind of intellectual support and policy support for cost in the aggregate.

But your point is right. Both [Republicans and Democrats] in their own way are ignoring the fundamental problem, which is the health system is too expensive. The Republicans made enormous political gains in the last seven years and all they had was repeal and replace and cutting taxes. The goal was not to cover more people and reduce cost. The goal was repeal and replace, politically. It was to say you’ve done that. And to cut government spending. They were trying to get rid of something and cut what they saw as another entitlement that was badly crafted. And if you can’t deliver the first one, you know, come on. You’ve got all the leverage of government. So that’s where I think the frustration on the right is coming from.

Now, the Democrats would say, like in Massachusetts, once you get the coverage thing done you can manage cost. And I was just in Massachusetts last week, you know, and they’ve got this commission and the commission basically says we’ll monitor if you go over, you know, whatever the number is – 3.5 percent GDP healthcare growth per capita. And they came in at 2.8, you know, and everyone was declaring victory.

Well, that’s fine and dandy but Massachusetts has the highest per capita healthcare cost in the known universe. It’s fair enough to slow your costs when your costs are enormous. It doesn’t solve the problem that we all have, which is the stuff is too expensive. And the bottom line, there, is healthcare cost equals healthcare incomes. If you start taking cost down somebody’s income has to go down. Either fewer people or they make less money. That’s how it works in every other country. The reason it’s cheaper in other countries is people make less money doing the same thing. Way less money. The prices are much lower. It’s not that utilization is lower. It’s the prices are lower for the same thing. That is very threatening to everybody.









Rochester Revisited

Tuesday, November 21st, 2017

In 1953, Marion Folsom left his role as treasurer of the Eastman Kodak Company to serve his country as deputy secretary and then secretary of Health Education and Welfare in the Eisenhower administration. When he returned to Rochester, N.Y., in 1958, he brought with him some new ideas about health care. He was resolved to harness the purchasing power of the private sector to get the best deal for the community.

Since then, the local business community in Rochester has fostered (even demanded) collaboration among health care providers to help manage the cost of care and improve quality for the benefit of their employees and the community.

Rochester still leads the country as a beacon of high performance on cost and quality. For Medicaid, it was hailed by Governor Andrew Cuomo as the most cost-effective in the country. In Dartmouth Atlas and commercial spending analyses, Rochester is a high-value performer. And for commercial self-insured employers like Paychex, the results are remarkable – low deductibles and co-payments not seen by most Americans since the 1990s. If value and affordability are important, we should continue to learn from Rochester.

To fully understand the Rochester story, I reached out to a number of experts: Jim Block, M.D., a former CEO of Johns Hopkins Health System and Case Western Reserve, was a young intern in Rochester in the 1960s. Linda Becker is a former senior executive of Xerox and Kodak who has served as a business community leader and board member for the last 15 years of the Rochester General Health System, one of the two principal integrated systems in Rochester. Her husband, Larry Becker, recently retired as head of Xerox’s health benefits program. (Larry Becker serves on numerous boards and has a long history of galvanizing the Rochester business community on health care.) And Jake Flaitz, who has a distinguished health care career as a hospital administrator, is a benefits consultant and for the last 12 years head of benefits at Paychex.

The early days

In 1969, Dr. Block returned to Rochester to focus on care for underserved communities. He developed pioneering IPAs with the local medical society, built Kaiser-like groups to serve the new Medicaid population, and started HMO-like organizations for underserved populations, including an HMO for the chronically mentally ill. Perhaps the most notable of these pioneering health services activities was his role as the first leader of the Rochester Area Hospital Corporation.

In the late 1960s and early 1970s, Governor Hugh Carey of New York promised voters to rein in public expenditures on Medicaid by slashing budgets. But Rochester business leaders strongly urged the governor to “stay the hell out of Rochester,” because things were going so well in both cost and quality.

In the 1970s, as health care costs continued to rise, four prospective payment pilots were initiated to reform Medicare: in Maryland, New Jersey, Washington State and the cutely titled “province of Rochester.” In the Rochester model, reimbursement rates were standardized for all the players, and there were revenue caps placed on the industry as well as a cost sharing arrangement (shared savings between providers and purchasers on a 50-50 split). After the pilot experiments finished, Rochester had the lowest cost and the highest quality.

Block told me a funny story of how he and his colleagues went to Washington with a multimillion-dollar check to return money to the federal government because of the savings they had achieved with the program. They anticipated a ceremonial greeting in Washington with handshakes and accolades. Instead, the assistant secretary of the health department under the Reagan administration chided them that the model was “too socialistic up there in Rochester.” Instead of selecting Rochester as the model for the nation, the New Jersey experiment was chosen because it was less socialistic and not as complicated to administer.

The early days of Rochester provided other useful insights. A full 3 percent to 5 percent of the Rochester Area Hospital Corporation’s revenues were set aside for an innovation fund. The fund allowed for what we would now call health services research and clinical analytics – developing measures of outcome and measuring both care and cost carefully.

When I asked Block what the relevance of the early Rochester experience was for today’s health challenges, without hesitating he said there are two forces at play: “We’re moving decision making from DC to the states and communities, and we are moving risk for the cost and quality of care back to those states and communities. Regardless of the political direction, these trends seem inevitable.”

Block agreed that these changes are further intensified by employers such as Disney, Boeing, Microsoft and others focusing more on accountable care organizations and shared savings arrangements to reduce costs and improve quality. Block added a fourth contemporary driver: big data. Clinically, and in cost and quality, big data can help steer the selection of provider partners and the management of the entire system. Finally, Block pointed to the role of professionalism (not just financial incentives) in building high-performing clinical teams. As he told me: “We were careful not to monetize health professionals with productivity goals, but rather to support the pursuit of effectiveness and accountability, which resulted in greater efficiency.”

The recent history

When I asked Linda Becker whether the Rochester experience still has relevance today, she was quick to point out that Rochester enjoys the fourth lowest commercial premiums in the country and the lowest on Medicare cost according to the Dartmouth Atlas (some 21 percent less than the national average). Becker attributes these successes to Rochester’s continued ability to cooperate. She also cited the early history of Marion Folsom and the Rochester Hospital Corporation and how they provided the platform of collaboration that exists to this day.

The Rochester history has not been without rocky patches. In the early 2000s some of the collaboration started to unravel as the two main systems, University of Rochester and Rochester General, started competing more aggressively. The business community, however, encouraged renewed cooperation and collaboration.

As Linda Becker told me, employers realized “they can’t expect hospitals to collaborate if they didn’t do it themselves.” Employers then embarked on several initiatives over the coming years that really galvanized the community to improve health and health care. Below are some examples.

Living well initiatives. An early pioneering project in the early 2000s was to encourage community members to “eat well and live well” by consuming more fruits and vegetables and monitoring exercise. For 16 years, employers in the community (now a total of some 500 companies) have their employees participate in this program, which was originally pioneered by the leaders of Wegmans Food Markets.

An engaged and enduring purchaser community. Every Thursday for the last 15 years, human resource and benefits leaders from local businesses and employers such as Rochester Institute of Technology, University of Rochester, Kodak, Xerox, Bausch and Lomb, Wegmans and Paychex have gathered to discuss how they can keep costs down and improve quality. Larry Becker and Jake Flaitz are long-standing members of the Thursday group and explained to me the keys to success. “We all had longstanding relationships in the community,” Larry Becker told me. “CEO support was key,” both men stressed, “but they also delegated and empowered the HR and health professionals to do the work and bring expertise from the companies such as six sigma capabilities,” Flaitz said. Both men agreed persistence was key: “We stayed on message for the long haul.”

Wellness and prevention initiatives. Rochester has communitywide measurement of high blood pressure. Faith-based organizations, barber shops and other local institutions are empowered to collect blood pressure of community members with a registry of 150,000 people. Anyone, regardless of insurance coverage, who is identified as having high blood pressure is referred for immediate treatment. Ongoing financial support for such initiatives is raised through a modest “discharge tax” on hospitals ($23 per hospital discharge). While yearly comparisons are tricky because of constantly evolving national clinical standards for blood pressure management, the best data available are impressive: in 2010 the blood pressure of 62 percent of Rochester residents was in control; it’s now an estimated 78 percent.

The 2020 commission. The business community still provides oversight and management of the number of beds in the community, which has led to a 91 percent occupancy and full use of hospital capacity during flu season. This has forced hospitals to be parsimonious in their length of stay.

Technology assessment. Over 20 years ago, Rochester established its Community Technology Assessment Advisory Board. The board has been assiduous in managing deployment of MRIs, PET scanners and robotic devices within the community. The PET scanner is on a large trailer; it spends half its week at one hospital facility and half at the competitor hospital to prevent the unnecessary duplication of equipment. Hospitals and other providers have to submit new technology applications to the board for approval, for both inpatient and outpatient technologies.

Chronic care innovation. Rochester successfully secured one of the largest Center for Medicare and Medicaid Innovation initiatives (a $26 million grant) to evaluate new care coordination programs, including what many are terming “upstreaming” activities in the management of chronic illnesses. These interventions include cooking classes and social determinants of health approaches.

Best little RHIO in America. Regional health information organizations (RHIOs) have struggled across the country to bring stakeholders together and find a sustainable business model. Yet Rochester has a successful RHIO with all health care facilities participating and a million patient records. It enables all providers to seamlessly share imaging and other lab results and prevent waste and duplication of tests.

Developing leadership competencies. Linda Becker is a pioneer in creating an ongoing fellowship program, now in its fifth year, for senior executives and physicians across the entire value chain, including providers, payers, employers, community agencies, long-term care and suppliers. Using Baldridge Award–like principles, fellows are exposed to finance, legal, process and managerial excellence activities. National thought leaders and experts have educated 217 graduates over its five-year existence. Part of the leadership program involves a shark-tank-type exercise, which has helped invest in innovative and collaborative projects at the community level.

Physician alliance. The Greater Rochester Independent Physicians Association, formed in the late ’70s, is still one of the key platforms for collaboration and contracting with doctors. In addition, each of the major systems has its own accountable care organization that works closely with local insurance partners Excellus and MVP.

Increasing transparency. Linda Becker points to ongoing initiatives to encourage greater transparency on price and quality to help consumers navigate through the system. We’ll stay tuned for news on this front.

Many health services research junkies will appreciate that Rochester was the story of the ’70s and ’80s when corporate giants such as Xerox and Kodak ruled the Rochester roost. In particular, Kodak has gone from 60,000 employees in the Rochester community to less than 3,000. But as Linda Becker told me: “Now we are a large community of small companies,” many of them entrepreneurial technology spin-offs from the corporate giants and their staff.

Lessons for the field

There are a lot of local experiments on payment reform that are worthy of consideration: the Massachusetts top-down approach of monitoring cost and quality (which seems to be working), along with Maryland’s all-payer rate setting, which many argue is a model for others. We will focus on these in subsequent columns.

The Rochester experience provides great insights on a number of factors and forces relevant today that we don’t often discuss:

  • Managing bed and technology capacity is a fundamental tool for reducing cost.
  • An engaged business community – activated to do more than simply play with benefit design, and engaged in the measurement and management of health care delivery – ensures high quality and low cost, and eliminates unnecessary resource use and capacity.
  • As more burden is placed on state and local communities for risk and financial responsibility, local communities must figure out the best way to come together to serve the people.
  • Going upstream to the determinants of health – diet, nutrition and exercise – is critical in primary prevention such as blood pressure measurement.

As Flaitz told me, the Rochester story reflects a local culture that has been built where all stakeholders recognize “We are all in this together.” We need more of that in America.

Ian Morrison, Ph.D., is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to AHA Today and a member of Speakers Express.