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The Half Life of Healthcare: Understanding the Velocity of Change

Friday, March 2nd, 2012

The key drivers of healthcare have different rates of change.  Coverage expansion is on a two to three year timeline.  Reimbursement reform is on a ten year timeline.  Cultural transformation of institutions is on a thirty year timeline.  Yet there are many areas of healthcare on a short fuse.  Budget cuts at the federal level can happen almost immediately.  Network changes or contracts can change in a year.  Some new technologies can have immediate impacts, others take decades to reach full deployment.  Understanding the different half lives of healthcare is crucial to preparing for the future.  Too many actors conflate these forces into a blur of change moving at the same speed.  That can cause big strategic problems.

Understanding the Velocity of Change

Half Life is a term from radioactive physics referring to the time it takes for a substance to decay by half, it is the rate of change in radioactive decay.  Similarly in healthcare, different dimensions of the future move at different rates.  We may understand this intellectually, but as actors in an unfolding game, we have difficulty in judging the pace of change. My old mentor, Roy Amara who headed the Institute for the Future for twenty years taught us a basic principle about the future that we codified as Amara’s Law:  “There is a natural human tendency to overestimate the impact of phenomena in the sort run, and underestimate it, in the long run.”

Another eminent IFTF colleague, Paul Saffo, had a brilliant insight about the pace of the unfolding future:  “Never confuse a clear view with a short distance.”  A phenomenon I dubbed “premature extrapolation”.

We imagine many important changes are close, even though logic suggests that they might move slower than you think.   For example, the aging of the baby boom as a driver of healthcare utilization has been hyped for as long as I have been in the futures business, which is over thirty years.  And yet the very first baby boomers, those born in 1947, only became eligible for Medicare this year!  We have been so eager to anticipate their arrival in Medicare, this particular major demographic trend is old news.

We are eager to see positive changes happen fast and celebrate their progress even though it may be imperceptibly slow.  One of my basic principles in analyzing future trends is that if something is going to be a big deal in the future, it has to start sometime.  And show meaningful progress year over year.

While we have a tendency to overestimate in the short run and underestimate in the long run, that is not the whole story.  Some things can move faster than you think.  Look at the sting of the recession, and its impact on credit availability for hospitals, and on slowing demand for elective healthcare services; or a change in the law that allowed coverage of 26 year olds.  And there may be more rude short term shocks in our future, that we will highlight in a moment.

So it is important to sort out the rate of change for each of the factors that are causing changes in healthcare and weave them into a plausible unfolding reality.

 

Short Half Life

Some drivers of change can happen pretty quickly (in the next 1-2 years):

  • Budget Cuts.  Perhaps the fastest change that could happen in healthcare is for significant cuts in public programs, particularly Medicare and Medicaid, within the next 12-24 months.  The deficits at both federal and state levels (even though states cannot really run them) may force significant action, much in the way that austerity measures have swept the European economies.  Piled on top of the existing reimbursement cuts in PPACA means this sting could hit the field before the benefits of expanded coverage take hold.
  • Cost Shifting.  A related impact is the immediate potential for providers to cost shift:  make up for the shortfall in public payment by increasing prices to commercial payers.  In turn, employers can simply cost shift (or as they call it cost share) with their employees.  This has been the game for the last decade and has meant that the typical American household is in a PPO with a $1,000 family deductible.
  • Lansky’s Short Fuse.  My friend Dr. David Lansky who leads the Pacific Business Group on Health, gave me the basic idea for this column when he told me that he believes that employers now have a short fuse.  I took this to mean that employers’ patience with inexorably rising costs and cost shifting is wearing pretty thin.  It also explains the speculation that employers may prefer a future where they are off the hook for healthcare, and send their employees to the new health insurance exchanges.  (I would argue that employer exit on a massive scale has a longer half life, maybe in 2018 when exchanges are up and running and the Cadillac Tax kicks in, because by then everyone will be driving Cadillacs).
  • Network Contract Changes.  Large employers can make big changes in their employee benefits plans two years out.  Small employers can switch insurers each year.  Providers can find themselves cut out in a skinny network in a year or two.  I have run into a significant number of hospitals, large and small, caught flat-footed by a sudden change in their preferred provider status as payers (plans and large employers in concert) move to skinny networks.
  • Mergers and Acquisitions.  Hospital leaders can merge institutions on short notice, and buy medical groups even faster.  Witness the rapid contractual integration of hospitals and physicians taking place across the country.  (I say contractual integration because that has a short half life, in contrast to true clinical integration and the related cultural shift toward accountability and quality which may take decades to fully accomplish).
  • Supreme Court Decisions.  The Supreme Court will rule in the summer whether PPACA is constitutional and no matter what the ruling it will have a big and immediate impact.  At the extremes, if PPACA is overturned anticipate less coverage expansion in the future (although the delivery system changes underway will likely continue), at the other extreme if the law is upheld, states like Florida will have to scramble to set up a health insurance exchange in six months, (that will be fun to watch).

 

Medium Half Life

Some aspects of change have a half life that is two to five years out:

  • Coverage Expansion. The major provisions for coverage expansion happen in 2014, a deadline that may drag out if states are unprepared to operate health insurance exchanges or rapidly expand Medicaid coverage.
  • Meaningful Use.  Meaningful use of computers got a major stimulus (pardon the pun) and relatively rapid progress is being made in deploying electronic health records.  The vision of interoperability enabled through robust Health Information Exchanges may take a lot longer.
  • Value Based Purchasing.  AHA Analysts estimate that approximately 9 percent of Medicare reimbursement to hospitals will be at risk based on quality by 2015, based on the value purchasing and readmission reimbursement provisions on the books.
  • Large Group Practice Formation.  Large multi-specialty group practices will be formed through a variety of models over the next five years.  But, we should learn from all the high functioning medical groups that have taken 30 years to become an overnight success.  Culture takes time.

Long Half Life

Some changes take a very long time, perhaps a decade or more:

  • Reimbursement reform.  Some reimbursement reforms like DRGs can be implemented to make significant short term changes in incentives that have a major impact.  The proposed reimbursement reforms in both public and private sectors are moving slowly (but inexorably) toward a new future.  Pilots must take take off and become mainstream.  That usually takes time.
  • Cultural transformation.  Some organizations like Virginia-Mason in Seattle have shown that leadership and commitment can change the culture, but these are exceptions.  Most high-performing cultures take a long time to build.  Patience, persistence and passion are needed to overcome the cultural inertia in most organizations.
  • Medical Education Reform.  Medical education needs to change to reinforce the broader transformation agenda, but it takes a very long time to affect the stock and flow of doctors and other advanced practitioners.  Most of the people practicing 10 years from now are practicing today (do the math).  And academic medicine is not often described as nimble, market sensitive, and change oriented.  There are notable exceptions such as UCLA who are pursuing a rapid and aggressive innovation agenda, but in the main it is hard to turn the academic medicine battleship.

Half Life in Action

Here are some key examples of the half life phenomenon to watch for:

  • Medicare.  The future of Medicare will be an enormous issue in an election year.  Medicare must be changed, but how much, how fast, and for whom?  Proposals to shift Medicare to a voucher plan for those who are 55 or younger today, is a long half life proposal.  (It won’t save in the short run but will have big impacts in the long run). Cutting the Medicare budget in 2013, has a short half life.  Bending the trend through reimbursement and delivery reform could take a very long time, maybe forever.
  • ACOs.  Accountable care is a megatrend, not necessarily the formal CMS pilot programs, but the general idea that integrated systems of care are being formed to provide accountable care to the population they serve.  You can buy the doctors tomorrow, but managing the half-life of payment reform, and business model migration is tricky stuff.
  • Health Information Technology Infrastructure.  We are seeing relatively rapid deployment of HIT and real progress towards meaningful use.  But we must keep the pressure on to build an infrastructure to support the vision of a high performing health system.  Finding faster pathways to interoperability will be required.

My advice to leaders is to discipline yourself to parse the future and use the half life concept to understand the pace of each of the individual elements of change.  If you conflate the future and see all the big changes as clear and close, you may have trouble in developing a sensible strategy, sequenced to meet the unfolding future.   Conversely, try to find ways to shorten the half life of change for elements such as clinical redesign and cultural transformation that are key to meaningful change.  I am very encouraged, because on my travels, I see front line providers stepping up to change clinical processes to make them better, safer, and high performing and they are doing this rapidly.  The best way to have a better future is speed up the good parts.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.

 

Reinventing Rural Health

Monday, January 2nd, 2012

America is a big country. Every summer vacation with my family, I drive exactly 1,000 miles each way from San Francisco to Northern Idaho; I don’t go through another city. If you take a 1,000-mile drive across Europe, you not only have crossed 10 countries, you are now in Asia.

So, as a geography major who has been to just about every state (and a majority of them in the last year alone), I understand that America is one big piece of real estate, and a lot of people, almost 20 percent, live in rural areas. But, even in states like Indiana, Nebraska, Kansas, Oklahoma or Texas, most people live within 90 miles of a pretty fancy hospital, and even more live within 20 miles of a Walmart (which, we are told, may well be a key health care provider in the future).

Critical Access

Part of the reason so many rural communities are relatively accessible to major hospitals is that we built the hospitals before we built the freeways.

However, according to Census classifications, a full 60 percent of rural residents live in rural areas that are adjacent to urban areas, while only 10 percent of rural residents (some 2 percent of the total population) live in remote areas with small populations.

Rural hospitals account for about a third of the nation’s hospitals but only about 12 percent of national hospital spending.

At the core of our national policy toward rural health is financial support for critical access hospitals (CAH). There are 1,327 CAHs across the country, and they must meet three core criteria (among many other complex regulatory provisions), according to the Department of Health and Human Services:

  • They must have an acute care average length of stay of 96 hours or less.
  • They must have 25 acute care beds or less.
  • They must be 35 miles or more from another hospital (or 15 miles from another hospital in mountainous terrains or on secondary roads).

This latter distance provision was debated during super committee deliberations when proposals were floated to change the distance criteria, potentially reducing the number of CAHs. In a lot of states like Kansas, Indiana and Nebraska, that change would dramatically reduce the numbers of hospitals designated as critical access. When I spoke to hospital associations in those states in the last few months and asked whether a 20-mile change in the distance provisions would affect their designation, a significant minority of the audience raised their hands. (By the way, when I asked, “How many of you are within 25 miles of a Walmart?” almost everyone raised a hand.)

In addition, because of the previous provisions in some states that governors were able to designate critical access facilities using an “any necessary provider rule,” you ended up with CAHs that are quite close together. In counties in rural heartland states such as Iowa and Indiana (with not many mountains), you can find two, three or even four CAHS in the same relatively small county or within a stone’s throw of the county line.

The number of counties per 1,000 square miles and per 100,000 population also increases the number of CAHs that are geographically proximal, because so many hospitals built in the Hill-Burton era were county based. To give perspective on this phenomenon, take three large states with large populations and large land area: California, New York and Florida. California has 58 counties, New York has 57 counties while Florida has 67. Compare that with Texas (254), Georgia (159), Kentucky (120), Missouri (115), Kansas (105) and Illinois (102).

There are other relatively small population states such as Iowa, Indiana and Nebraska that have more than 90 counties each. I understand that these county lines were derived by natural boundaries based on how far you could ride a horse in a day in the 18th century. But they create a density of local government and health care infrastructure that varies enormously across the country, and it may be fuel for unneeded duplication of facilities and services.

But the really critical thing to understand about critical access hospitals is that they operate under a cost-based system of reimbursement. This seems to be a model that is inconsistent with the trends of the time. As Todd Linden, CEO of Grinnell Regional Medical Center in Iowa and a national thought leader in rural health care, told me in an interview: “Being a cost-based component of a health system that is moving overall to value-based reimbursement is going to be like trying to put a square peg in a round hole.” He’s concerned that CAHs might get left out of accountable health development plans or shared savings models because cost-based payment doesn’t necessarily lead to quality or efficiency.

Grinnell’s hospital is a tweener at around 50 beds, so it is too big to be a critical access hospital with cost-based reimbursement, but it has all the challenges of any rural health facility, such as heavy Medicare and Medicaid dependency.

Critical Community Resource

While many rural health facilities may be sustained economically by cost-based reimbursement, they are in turn a major economic engine, if not the economic engine of rural America. Hospitals are the largest employer (generally after local government) in most small towns. By the way, the same is true in very big cities, but at least in many large cities there are some other employers of scale. In smaller communities, hospitals may be the sole economic engine, and both a platform for and symbol of continued community cohesion. They are important not only for the health care services they deliver, but for maintaining the overall economic vitality and viability of the communities they serve.

Rural Health Challenges

Rural health is tough to manage, from both a policy and practical point of view, for many reasons. UnitedHealth Group (in conjunction with new survey research from my colleagues at Harris Interactive) recently produced a fantastic fact-based review of rural health, which I urge you all to read as a deep dive into rural health. (See “Modernizing Rural Health Care” [Working Paper 6], published in July 2011 by the UnitedHealth Center for Health Reform & Modernization.) Drawing on that paper and other resources, such as the Institute of Medicine’s 2005 report on the issue and the ongoing great work of the Rural Policy Research Institute, the picture is pretty clear, and the challenges for rural health are great:

Dominated by public coverage. Rural health is more dependent on Medicare and Medicaid coverage and has lower levels of commercial insurance and a resultant higher level of uninsured.

Higher health needs. Rural populations tend to be older and in poorer health, with higher rates of obesity and poor health habits, such as smoking. In addition, they have a surprisingly high set of needs in terms of drug abuse, according to the United report. (This squares with my anecdotal evidence: I can’t tell you the number of relatively rural states I have visited that claim to be the crystal meth capital of America. I Googled this question and apparently there is no clear winner: It depends on which denominator you use. Suffice it to say that crystal meth is a big problem everywhere, including the rural heartland.)

Difficulty attracting providers, particularly specialists. A full 12 million Americans live in areas designated as primary care shortage areas (defined as having less than 33 primary care physicians per 100,000 population). Of that 12 million, 5 million are living in rural areas. (Presumably, the residual is found in underserved urban areas.)

It is difficult to recruit new physicians to rural areas. Most new doctors want to be close to big cities with Starbucks and symphonies. They want to eat tofu and drink soy macchiatos, not watch soy grow. Even premium pay for rural service won’t overcome the tendency of young physicians to pick urban areas and employed practice environments. The big question is who will replace the current generation of rural primary care physicians and good all-round generalists in the surgical and medical specialties. As Grinnell’s Todd Linden told me: “I am trying to hire a good generalist orthopedics specialist who can handle a wide variety of cases; they don’t exist anymore.”

Sub-optimal in scale, both clinically and financially. While cost-based reimbursement can cover a multitude of operational sins and inefficiencies, it is pretty clear that rural health violates the basic economic principles of economies of scale and scope. It also violates the well-established health services research linking volume to outcome.

Similarly, there are basic operations research principles that show that the smaller the institution, the lower the occupancy rate. (A CEO of a large Midwestern health system that I visited last week had just toured a critical access hospital in his system that had a census of zero all that week; now that’s low occupancy.) Conversely, cost-based reimbursement can lead to overbuilding and to small institutions acquiring technologies (such as robotic surgery equipment or advanced imaging) that are arguably too advanced for the setting.

Quality of care differentials. The UnitedHealth working paper using published scientific evidence, Harris Interactive surveys of doctors and patients, and claims data analysis paints an overall picture of health care quality (both perceived and measured) to be slightly lower in rural areas compared with urban areas overall.

For example, the analysis of quality performance for the 256 hospital referral regions (HRRs) for which there were sufficient data found that 75 percent of HRRs had rural quality lower than urban quality, 20 percent had the same quality, and only 5 percent of HRRs had rural quality that was higher than urban quality. This last group of relatively high-performing rural HRRs tends to be in regions where larger integrated systems of care have been developed, such as in the Upper Midwest.

Aging plant and equipment. Half of CAHs are more than 40 years old. The aging physical plant of these Hill-Burton institutions means that renovation, rebuilding or repurposing is high on the strategic agenda of hundreds, if not thousands, of facilities. (Hill-Burton was a 1946 act that provided funding and support for the upgrading of hospitals, particularly in rural areas.)

Measuring quality with small numbers. Quality measurement and reporting is challenging in rural health because of the small number problem, where it is difficult to have statistically reliable measures of performance because the number of events is low. This is a problem generally in health care as we drive to finer granularity of measurement to the individual provider level. The issue is even more challenging in the case of rural health because of low volumes and dispersed populations.

The Helping Hand of Health Reform

The Patient Protection and Affordable Care Act provides assistance to rural health care in a number of ways, including coverage expansion through exchanges to an estimated 5 million additional rural residents, expansion of Medicaid, increases in rural health funding for rural health clinics, support for telehealth and meaningful use of electronic health records, training grants for rural providers, and differential payments for primary care.

Rural health policy experts seem to advocate a mini version of national health care delivery reform (with the addition of telehealth initiatives). This version would encourage a team-based primary care focus through patient-centered medical homes. (To an outsider such as me, however, it seems like that is what country doctors have been doing for the last 100 years.

Reinvention Options

As we redesign the overall health care delivery system from volume to value, we raise the question of what happens to rural health care. While the challenges described here are real, in my travels I detect a growing openness to reinvention of rural health among community leaders and hospital CEOs across the country.

Here are some examples of promising approaches:

Regional integrated systems. Large urban-based health systems in primarily rural states are building significant scale by bringing regional facilities into systems of care through outright ownership of facilities, or through formal and informal regional networks of affiliation. Examples include Avera Health, a network of hospitals, family care practices and specialty clinics located in South Dakota, Minnesota, Iowa and Nebraska that have created sophisticated e-health links to their more remote partners.

Similarly, while Mayo Clinic is a global brand, less well known is the Mayo Clinic Health System, which describes itself as “a family of clinics, hospitals and health care facilities serving 70 communities in Minnesota, Iowa and Wisconsin.” “Mayo Clinic Health System,” it maintains, “links the expertise of Mayo Clinic with health care providers (including 17 owned hospitals) in local communities to offer patients a full spectrum of health care options. Patients receive quality health care at their local clinic or hospital, and, when needed, can receive highly specialized care at Mayo Clinic.” More and more such regional systems like these will emerge, but not all through direct ownership and acquisition.

High-tech rural ambulatory centers. Many of these new regional systems will repurpose individual facilities into regionalized hub-and-spoke sub-networks (analogous to the transformation in the airline business). Many rural hospitals may have a better long-term future for the institution and the community as a high-tech ambulatory care hub with limited short-stay capacity and a heli-pad on the roof or across the street.

Rural community-based continuum of care centers for the chronically ill. To a larger extent, the longstanding, valid and important role that rural hospitals have played is as a center for managing the aging rural population with chronic illness. In many rural communities, aging parents remain down on the farm while their children Skype them from L.A. or New York. Preserving the local capacity to have older patients “age in place” with the appropriate level of support for their chronic care needs seems an incredibly valuable asset, nationally and locally.

On a trip to Ireland last year, I was deeply struck by the potential for aging in place as an economic base for rural communities. We drove through fishing villages that clearly have not many farmers or fishermen left, but have seemingly thriving long-term care and assisted living facilities that, as far as I could determine, were the sole economic base for miles around.

Referral platforms. Many urban-based hospitals, faced with tightening appropriateness of care standards and a tough economy for elective procedures, are looking to expand their regional referral footprint. I joked with a large Midwestern system recently that, if you added all the growth aspirations of every adjacent regional hospital system in the Midwest, you would have to bring in the entire population of China for them all to come true. (It’s a wee bit of an exaggeration but directionally correct.) The result will be that, if rural facilities try to remain independent, they may have their economic base eroded by expanding urban-based regional systems that seek to maintain the economic viability of their own high-tech core operations.

A High-Tech Approach to Rural Health Care

Rural communities have as much right to high quality health care as the rest of us. But the answer can’t simply be providing sufficient cost-based reimbursement to keep all systems doing what they are doing, especially if they are under-scale for true quality care. In my view, the solutions will come through a reinvention of rural health care delivery, including:

  • imaginative use of contemporary information and communications technology;
  • regionalized quality improvement initiatives; and
  • rationalized deployment of clinical technology and human resources.

I am confident that regional health system leaders and their rural partners will figure all this out. While the politics of reinvention are extremely difficult, both nationally and locally, rural health leaders (board members, rural hospital CEOs and the community at large) are passionate and committed to doing whatever it takes to serve their rural communities.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.

The Spot Market

Wednesday, November 2nd, 2011

We are all very busy building massive accountable care behemoths to compete in the new future. Like medieval fortresses, with lords, knights and serfs aligned under a common flag, these new organizations will dominate the health landscape of the future. Or will they?

A counter trend is one in which payers (employers and health plans) are trying to unlock the value inside these massive fortresses, by identifying a subset of the knights and serfs, who are top quadrant (better and cheaper) than the rest of the organization, and encouraging patients to visit only them. Similarly, new organizations are being formed with health plans in direct partnership with physicians that are prepared to contract for the expensive services of hospitals and specialist providers for (the reduced volume of) specialty services, on an as-needed basis. Welcome to the spot market.

The great Wikipedia, from whence all true knowledge comes, defines a spot market as “a public financial market, in which financial instruments or commodities are traded for immediate delivery.” Willing buyers find willing sellers in real time. If supply exceeds demand, prices go down; if demand exceeds supply, prices go up.

For spot markets to function there must be transparency, real-time information on prices and motivated buyers and sellers who are willing to trade. Doesn’t sound much like health care, does it?

But wait, there are a number of forces that are coming together to create change toward a spot market for hospital and specialty services. These trends may have a big impact on providers and may challenge the movement toward massive accountable care systems.

The Reinvigoration of Skinny Networks

The idea of tiered networks is certainly not new. What is giving the high-performance network new life is the fact that health care costs (premiums and out-of-pocket costs) are now so high that consumers are willing to make real trade-offs between choice and costs.

My colleagues at Harris Interactive recently conducted an elaborate consumer trade-off survey to identify what consumers value most and what they are prepared to trade off to get it. The survey showed that consumers’ highest priorities were (in order): low monthly premiums, high technology such as MRIs (and they see no irony in those two top priorities together), keeping dependents on their plan, maintaining their current physicians, and access to inexpensive generic drugs.

What are consumers prepared to give up? The will give up access to prestigious academic institutions (throwing Cedars, Stanford and the Mass General under the bus in the process) and they will, on balance, give up choice of hospitals and, to a lesser extent, choice of specialists. (The rank order of these preferences did not change across almost all demographic segments including those consumers with chronic illness).

We interpret this survey as showing a greater willingness of consumers (even consumers with high health care needs) to accept skinnier networks than the market is currently delivering. In particular, the current high-performance offerings by health plans have been about only about 3 percent cheaper than the norm. What consumers really want, and what variation research tells us, is that a skinny network with only the high-performing providers could be 30 percent cheaper. Advice to health plans: If you build it, they will come.

Mining Variation

A second major trend favoring the creation of spot markets is the growing interest in variation on an all-payer basis. The Dartmouth Atlas work has shown us for 30 years the unwarranted variation in utilization of services for Medicare patients. Provider density (more specialists means more specialty services per capita) and provider preferences are the key drivers of variation. This rich analysis of service variation is being extended to all payer data sets (including commercial insurance claims data) and exposing similar inexplicable variation. For example, Stanford researchers found that the residents of Clearlake, Calif., have 15 times the rate of coronary angioplasty as those in neighboring Sonoma.

In a wonderful newspaper report on the original Stanford study of this phenomenon, journalist Emily Bazar tracked down some Clearlake patients who had stents inserted and had declined the suggestion from local cardiologists to have repeat procedures, even though they were asymptomatic. The patients told their doctors (in effect): “No thanks, Doc, I’m good, I’ve had enough for now. Two’s my limit…” (See “High Rates of Heart Procedures Seen in Clearlake,” San Francisco Chronicle, Sept. 4, 2011, www.sfgate.com.)

But, even more interesting are the new variation analyses using commercial claims data where price information is included. Commercial insurance prices vary much more dramatically than do Medicare reimbursement rates. As a result, formerly inexpensive geographic areas seen through the eyes of Medicare-only analyses (such as the Dartmouth Atlas) become expensive areas when commercial prices are considered.

So, for example, recent total cost analysis of medical groups in Northern California versus Southern California (conducted by the Integrated Healthcare Association as part of its Pay for Performance Initiatives) shows that Northern California has lower utilization of services but higher prices. Conversely, Southern California has higher utilization of services but lower prices. On balance, Northern California is more expensive: Price trumps quantity. It is the up to 10-fold variation in pricing of specialty services such as imaging, colonoscopies and surgical interventions that is fueling renewed interest in spot market initiatives such as reference pricing.

Reference Pricing Schemes

Reference pricing is a model of reimbursement in which payers pay a fixed price for a service and consumers are at risk for the total costs of care beyond that fixed price. Your choice whether you go to the more expensive provider.

A truly fine health care journalist, Julie Appleby of Kaiser Health News, in collaboration with USA Today, scooped me on reference pricing models in her article of Sept. 22, 2011, titled “Companies Steering Workers to Lower Priced Medical Care.” (Honest, check with my editor; I had this idea in the works for a while for this column.) I will not repeat her great points and the examples she cites, because I agree 100 percent with what she found are the important examples of the phenomenon. Just go read it at www.kaiserhealthnews.org. But, let me just reiterate the key message: Reference pricing can have a powerful effect on providers because it is a purchasing method that engages consumers with meaningful information and incentives at the moment consumers have to choose their location of care decisions.

For example, if you the California Public Employees’ Retirement System member want to pick one of the 45 high-quality hospitals in California that have negotiated a fixed-hospitalization payment of $30,000, there will be no additional costs for your knee replacement. But if you select one of the other 400 odd places in California that do it but do not participate in the plan, you the patient pay the entire difference in cost (maybe $20,000 to 30,000)! That will focus the mind. Lest you say “That’s horrible, patients are being effectively bribed to have hip and knee replacements in some Shell Station in Oakland,” let me tell you that Cedars-Sinai in the south and Stanford in the north are participating hospitals.

Now how many knees do CalPERS members have? Apparently, on average two each, but the annual replacement rates for the entire population is not a huge number. More important than the actual impact on volume is the signal it sends to providers: High price-setter beware. It is but a beginning, a shot over the bow.

Registries

As the idea of reference pricing spreads to other frequent high-cost elective services such as maternity care, orthopedic interventions of all types, colonoscopies and imaging studies, more and more science-based evidence will help patients and providers make better decisions. The creation of registries (large databases that capture information on clinical performance, including patient reported outcome measures) can help identify the high-performing method of care and the providers who deliver it. Cardiology has led the way, but orthopedics, gastroenterology and even oncology will follow.

New evidence will come from the fruits of the research investments being made in comparative effectiveness. While the enabling legislation forbids the use of comparative effectiveness research in making reimbursement decisions in public programs, there is nothing to stop private payers steering patients to high-performing providers, and they would be nuts not to do it.

Leveraged Group Practice

New multispecialty group models may provide a further boost to these spot market trends. For example, Kaiser’s Mid-Atlantic Permanente Medical Group under the leadership of Dr. Bernadette Loftus, has recently rocketed to the top of the charts in National Committee on Quality Assurance ratings. Unlike the mother ship of Permanente in California, Kaiser Mid-Atlantic does not have its own hospitals. Instead, it contracts with willing provider partners for those services.

Kaiser Mid-Atlantic is embarking on a new strategy of medical center hubs that combine sophisticated diagnostic and outpatient surgical services with the capacity to have up to 23-hour lengths of stay. These models could enable Kaiser to internalize an increasing amount of specialty care and may provide them (and others) with a replicable business model in hospital-dominant regions such as the Northeast.

Similarly, Optum Health (the artist formerly known as Ingenix, part of United Health Group) has set the provider world atwitter with its recent purchase of Monarch Health, a very large 2,300-physician IPA in Southern California. The smart people at Optum, in combination with the smart people at Monarch, may very well develop reproducible business models that improve the health of the populations they serve by streamlining care coordination, reducing use of specialty services and hospitalization, and applying business discipline across the revenue cycle. In addition, boutique firms such as Accretive Health are fast-rising stars that bring together HIT, business process and re-engineering assets that can enable provider groups to take risk and produce high clinical and financial performance.

Physician-led accountable care organizations may also provide a new force to reduce demand for hospitalization and specialty services in the Medicare population. While enthusiasm for CMS’s original Shared Savings Program has been underwhelming, we may still see some new entrants who find a way to make a good living by doing less, not more, for fee-for-service Medicare patients. And don’t forget about Medicare Advantage plans that have an even greater impact on demand and that I discussed in a previous column, “Medicare Disadvantage”).

All of these emerging models are not hospital centric, and they could put downward pressure on the overall demand for specialty and hospital services.

Over Capacity

But the greatest potential driver of the spot market may be the emerging overcapacity in health care. It’s true that expanded health care coverage will expand demand for services. And true that we have an aging population, and a seemingly endless appetite for new medical interventions. But Harris surveys of hospital executives reveal an astonishingly high proportion of hospitals planning for expansion (for example 72 percent of hospitals with new construction or renovation plans, 65 percent planning on expanding satellite facilities, and 48 percent adding new surgical or operating facilities). It reminds me of commercial real estate: Every developer thinks his or her office building will sell because tenants will come from the other guy. They can’t all win; it is a zero-sum game.

Many strategy consultants point to the ambitious expansion plans that neighboring competitors have in most markets across the country. The capacity being planned may create over-supply—powerful fuel for a spot market.

Watch This Space

My advice is to watch this trend toward spot markets very closely. A newly released AHA report “Hospitals and Care Systems of the Future” (which flatteringly draws on my Second Curve concept) provides an excellent road map of migrating hospital and health systems from volume to value. But migration toward value, not volume, may also create a perfect environment for spot markets to flourish.

The bottom line: Be high-performing and competitive on costs and quality at the procedure level, the service line level, the enterprise level and the population level, and you will have nothing to worry about.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.

Common Ground

Friday, March 11th, 2011

In the wake of the Tucson tragedy, the national political conversation is on the cusp of potential transformation. As I write this, we are in the first stage: a pious truce in which most leaders on both sides honor the dead and wounded and avoid inflammatory rhetoric and analysis. Both President Obama’s oratory and Speaker Boehner’s genuine grief have inspired the country to try to tone down the vitriolic rhetoric. Next, we enter the second stage where we as a country (hopefully) “disagree without being disagreeable.”

But longer term, there are three possible scenarios for the civility of our national discourse and the potential for finding common ground. Each will have an impact on healthcare:

• We go back to business as usual
• We disagree without being disagreeable, on an ongoing basis
• We really search for common ground in policy

Scenario 1: Short Memories

The first scenario is the short national memory alternative. We have largely forgotten the Ninth Ward of New Orleans; the people of Haiti, where only 5% of the rubble from the disaster has been cleared a year after; and, the Gulf Coast Beaches post oil spill. And so with Tucson, we may return to business as usual, and the national conversation resumes its ill-tempered tone, especially about healthcare. I certainly hope this is not the case.

In this scenario, Republicans may try to run out the clock on Obama, and run aggressively against Obamacare by promising to repeal it if elected to control both the Congress and the White House in 2012.

It makes perfect political sense. The major benefits of the bill to lower income folks have not kicked in and will not kick in until 2014, health insurance costs continue to rise in the interim (and some even blame Obamacare for making it so), and the public really don’t understand what is (and what is not) in the law. For example, surveys show that majorities of the public don’t know that provisions that they like, such as tax credits for small business to purchase health insurance, are in the law. While on the other hand, significant minorities (around 30 percent) continue to believe that unpopular provisions such as death panels are in the law when they are not.

In addition, the legal challenges to the individual mandate will make their way through the legal system (and make some state Attorneys General into Republican rock stars in the process) eventually winding up in the Supreme Court. And who knows what a Roberts court would decide?

All of this political theater aimed at demonizing health reform will drag out over the year and then, before you know it, we will all be in Iowa in January 2012 listening to Republican presidential hopefuls argue that repeal of Obamacare is a national priority. In the absence of tangible benefits to voters, Republicans might be successful in persuading the country that Obamacare is a bad idea and that it should be repealed and replaced.

Scenario 2: Civil Disagreement: Repeal and Replace

A second scenario is that the tone of the debate is more civil going forward, but the fierceness of the disagreement remains. In this scenario, “respectful, repeal and replace” will be the clarion cry of the new Congress this spring. Obamacare will likely be the subject of many rounds of congressional hearings. As new regulatory details emerge there will be much to criticize. Any reform so sweeping has lots of crazy moving parts and is a target rich environment for critics, doubters, and outright opponents.

Harris Interactive/Health Day polls taken after the election show that about 40% of Americans want to repeal all or most of the provisions of the bill (only 28% say repeal the whole bill). But, and this is funny, the public wants to repeal most of the key elements of the bill except for the key elements that are in the bill. For example, when asked about specific elements to repeal, only one element, the individual mandate, has a majority (57%) favoring repeal, all the other elements including guaranteed issuance, health insurance exchanges, tax credits for small business, employer mandates, and expansion of Medicaid have either majorities or significant pluralities favoring keeping the provisions rather than repeal. The Harris poll also shows that the basis for opposition among those who oppose is largely ideological (big government, higher taxes, rationing of healthcare, socialism) or fear of higher taxes, higher costs, or lower quality. Those who oppose Obamacare oppose the caricature not the content of the law.

I have been to thirty states (mostly red states) since Obamacare was passed in March, 2010 and I can testify that the new law is not universally adored across the nation. Yet, I also found that everywhere I go healthcare leaders are preparing for a new future when key provisions of the health reform legislation will be in place. Expected features such as expanded Medicaid coverage, new exchange based health insurance expansion, and changes in reimbursement to reward accountable care and patient centered medical homes are all stimulating strategic actions in the field. A lot of people are out there preparing for a future that assumes that repeal and replace does not happen.

Obamacare Repealed: Welcome to the Replace Part

If Republicans were to control the White House and Congress in 2012 (as in Scenario 1 or 2) what would happen to healthcare reform? Well, to fully undo the statute requires an enormous bulletproof majority in both houses, but let’s assume that happens, what would repeal and replace look like.

The best clue to what “replace” looks like is in the proposals put forward by Republicans in the past: tax credits for small business to provide insurance (which is already in Obamacare), high risk insurance pools (also in the law), allowing purchase of health insurance across state lines, Health Savings Accounts and malpractice reform. These initiatives are unlikely to make much of a dent in the 50 million uninsured. (The non-partisan CBO estimated approximately 3 million uninsured would be covered). Nor would they do much to reduce the costs of care (with the exception perhaps of malpractice reform, which I will return to below).

More radical ideas have been put forward by young members of the Republican Party such as Representative Paul Ryan who has proposed a voucher system for Medicare starting in 2021. The Ryan Plan would undoubtedly save Medicare money but cost seniors a fortune, because the value of the voucher would be considerably below the expected costs of care.

Asking seniors to pay ever higher out of pocket costs for healthcare is a little problematic. Senior median income is $22,800 mostly from Social Security and 87% of seniors have incomes less than $50,000 per annum. There is not a lot of leeway for massive cost shifting. Similarly, “affordable health insurance” is code for high deductible catastrophic insurance policies, which are fine if you are rich but don’t work so well for low-income folks. We already have armies of people who are getting inadequate primary care and prevention because of onerous cost sharing.

The other likely part of “replace” is significant reimbursement rate cuts under Medicare and Medicaid. If you are a budget deficit hawk you don’t have to be great at arithmetic to figure out that cutting reimbursement rates for public programs will save the government money.

So there doesn’t seem to be much to the replace part of the “repeal and replace” that would deal with the broader problems of cost, quality, access, and security of benefits. I would like to hear more details beyond the vague promise of a “robust, market-based system where free enterprise and competition produces the best healthcare system in the world.”

The Gathering Storm

While it may be perfectly logical to talk about repeal and replace, it is a policy disaster in the making. Just like climate change, we don’t have time to play chicken.

Healthcare costs are a national security emergency. Lack of coverage and care for low- income people is a national disgrace. Working families are financially devastated by illness. Mothers of children with pre-existing conditions live in fear of being uninsured.

Just last evening, our friends, an affluent couple each with their own small business described the agony of trying to get health insurance for their 13 year old son who because of a heart defect, that he had corrected surgically at birth, is permanently uninsurable. Their fall back plan? Activate Canadian citizenship because the father is a native Canadian.

It seems crazy to me that you have to change countries to get access to health insurance.

Before you say, well let’s just regulate insurers to take all comers at an affordable price, think it through. If insurers have to take all comers you have to mandate that everyone has to have insurance (don’t listen to me, go talk to an actuary). If everyone has to have insurance, then you have to subsidize a lot of lower income people, because health insurance costs the same for everyone regardless of income, and people with below median incomes really cannot afford it. The logical source of subsidy for poor people is rich people. Pretty soon you are at Obamacare, or some variant of it.

I don’t think the law is perfect. I think it is an ugly compromise like every other healthcare system around the world, but I think we should improve it, not waste our time and energy on repeal and replace discussions, however civil.

Scenario 3: Finding Common Ground

A third scenario would be for both sides to come together to refine and refocus the healthcare reform legislation. Early polls after the Tucson tragedy showed increased support for making constructive amendments to the bill rather than outright repeal. In the spirit of finding common ground, Republicans could use their new found political clout in Congress to refine and refresh health reform, not repeal and replace it. Here are some areas of common ground where Republicans might propose and Democrats might accept modifications of the law, particularly focused on making healthcare more affordable for everyone:

• Malpractice Reform tied to Quality and Patient Safety. Republicans and doctors firmly believe that malpractice concerns is the root cause of cost escalation. Policy wonks disagree, but that is irrelevant. So why can’t we have an intelligent, civil debate about changing the malpractice environment? For example, by tying malpractice reform to patient safety and quality improvement efforts and creating safe harbors for medical practice when it is evidence-based. Or what about requiring arbitration before malpractice suits could occur, or changing contingency fee arrangements, as well as the usual discussions of limiting damages? I am no expert in this area but I am sure there are some commonsense things that might actually work.

• Personal Responsibility. Republicans are big on personal responsibility. I agree. Let’s put a little more responsibility on patients to comply with treatment, pay more if they are not participating in their get well program, increase incentives for wellness and so on. What about a tax credit if your BMI is under 25? We have been light on the personal responsibility stuff the last couple of years. Members of Congress could propose something sensible.

• Administrative Modernization. Corporate America has gone through massive re-engineering with standardized information technology solutions to streamline administrative processes. Obamacare contains important steps toward the modernization of eligibility verification systems particularly for Medicaid and in the new health insurance exchanges. Republicans and Democrats could come together behind administrative efficiencies.

• Value Based Purchasing and Reimbursement Reform. CMS and DHHS have shown themselves willing and eager to work with the private sector on value based purchasing and reimbursement reform initiatives. The private sector could benefit greatly if they synchronize their purchasing and reimbursement reform efforts with Medicare in particular. Bring the private sector guys to the table.

• Revitalizing Managed Care in Public Programs. Managed care, whether for profit or non-profit, can be a real force for good. Republicans have historically been managed care’s champions, and ironically there is much opportunity for managed care in Obamacare such as Managed Medicaid, despite the whacks to the Medicare Advantage program. Let’s refresh and revitalize managed care for public programs.

I hope the new Congress comes together to work on the peoples’ business. Searching for common ground on healthcare would be a good start.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Health Forum’s Forum Faculty Speaker Service.

In Search of the Next Economy

Monday, November 1st, 2010

The global economic boom of the last quarter century got found out in the meltdown of the last two years. It was fun while it lasted, and it sustained unprecedented (and some would argue, wasteful and unnecessary) growth in the health care sector. The old global economy was predicated on Asian toil and savings subsidizing American self-indulgence, gluttony and sloth. Bankers made out like bandits creating esoteric and highly lucrative instruments to facilitate the to-ing and fro-ing of cash. The rest of us just got older, fatter and more stressed out as we worked too hard and then collapsed in an overleveraged heap.

Health care reaped the rewards of global growth by skimming an ever larger share “off the top” of corporate profits, government revenues and household incomes. No one complained because we had houses and pickups and jet skis and Applebee’s, and when we overindulged we had fancy stents and well-heeled hospitals fixing our failing corpus. That game is so over.

Understanding the Global Economy before 2007 in 10 Easy Steps

I am not a card-carrying economist, but I know enough to be dangerous. Really smart people (whether true economists or not) have thought long and hard about what has happened in the global economy. (I particularly like the work of Harvard historian, and fellow Glaswegian, Niall Ferguson, whose Ascent of Money was a wonderfully insightful review of recent economic history, especially his concept of Chimerica, the intricate co-dependence between American investment and consumption, on the one hand, and Chinese production and saving, on the other.)

Drawing on the work of these smart people, here is my simple-minded take on how the global economy worked prior to the meltdown, in 10 easy steps.

1.    Hard working people in communist countries (e.g. China, Vietnam) made good, cheap products and exported them to America at a profit.
2.    They saved as much money as they could (like 30 percent of their income; before the meltdown, the U.S. savings rate was zero).
3.    They loaned their money to U.S. banks and government.
4.    Our banks leveraged the money 30 to 1 and loaned it to Americans to buy big houses we couldn’t really afford.
5.    Many Americans (and a lot of immigrants) were fully employed building these houses, cleaning them, and selling mortgages and title insurance.
6.    Some Americans worked as nurses, doctors, teachers, waiters or cooks because they weren’t any good at real estate or construction.
7.    The rest of Americans were prison guards or gave PowerPoint presentations to each other.
8.    We all had jobs, we all could borrow money to buy stocks and more houses, and there was great demand, so the value of the houses and the stocks kept going up; and because we all felt rich…
9.    We got to borrow even more money so that…
10.    We filled our houses with good, cheap products made by hard working people in communist countries.

As we say in Glasgow, this is half-joking, full serious. We have been on a consumption binge fueled by asset inflation. This binge was a product of cheap U.S. money, unrealistically loose credit, supported by artificially high Asian savings rates buoyed by artificially low foreign exchange rates. Add lack of government oversight and a global financial market that rewarded speculation, leverage and trading over prudence, parsimony and sustainability, and you have a recipe for financial disaster.

We know the story:

•    $6 trillion of home equity wiped out since 2005 (with all the hopes, dreams and economic security that the home equity represents);
•    reduction in stock values to a new normal Dow at 10,000 with lackluster growth anticipated;
•    national income growth stalled, personal income declining and in turn, government tax revenues at federal, state and local level in severe deficit;
•    massive credit card balances for working families left unpaid or unpayable;
•    lack of demand for goods and services, because working families can’t afford Applebee’s, or nail salons, or prescription drugs, or doctors’ visits, or elective surgery;
•    now the Europeans are seriously belt tightening because of their own profligacy and government spending, further crimping global demand; and
•    14.6 million unemployed, millions more underemployed, and millions more with reduced work hours, furloughs, elimination of overtime and, in an increasing number of cases, an absolute reduction in wages for those who have jobs.

The contraction of employment and the asset devaluation has touched almost everyone, from rich retirees to highly trained professionals like lawyers, accountants and techies, to teachers, firefighters and the waitress at your local diner.

Health care was not unscathed in the economic meltdown. As we forecast in “Meltdown,” a column published in the depth of despair in January 2009, health care did take significant hits in terms of patient volumes, Medicaid reimbursement rates, rising uninsured, increasing bad debt loads and difficulty accessing capital. (Indeed, the latest figures just released for 2009 show that the number of uninsured grew by 4.4 million in 2009 to an astonishing 50.7 million.  A full 7 million people lost their employment related health insurance, in 2009. Had it not been for expansions in Medicaid enrollment and SCHIP the total uninsured would have skyrocketed further. What is perhaps most alarming is that over half of those who became uninsured in 2009 had household incomes over $50,000 per year).  But despite all this economic turmoil, total health care spending continued to grow, albeit more slowly, and employment in health care continued to grow continuously over the last year. From June 2009 to July 2010, according to the Bureau of Labor Statistics, health care employment grew by 231,000 jobs from 13.54 million to 13.77 million. Hospitals alone added 35,000 jobs, one of the few bright spots in the whole economy.

The Obama administration deserves a lot of credit for avoiding the economic Armageddon that was perilously close to happening. But, despite the stimulus package and the happier news at GM, and the oil leak being capped, we are all still a bit worried about the massive deficit and, more troubling to the average citizen, the lackluster job and income growth prospects as far as the eye can see. We are all in search of the Next Economy.

In Search of the Next Economy: The Global View

The Global Economy is not over. But it might be different in the future. Here are some ideas of how the Next Economy might work from a global perspective:

China and India grow up. If China were to allow its currency to strengthen and the Chinese consumed more at home, we might all be better off. For example, according to the New York Times on July 22, 2010:

“In the first half of this year, G.M.’s sales in China rose 48.5 percent from a year earlier, and for the first time ever, the automaker sold more vehicles in China than in the United States…. G.M. sold nearly half a million Buicks in China last year, almost five times the brand’s sales in the United States.”

Internal domestic consumption growth in China can make America better off. Similarly, the India market has huge opportunities to grow as its population surges past China in the decades ahead.

Europe smartens up. Europe is biting the bullet. From the PIGS (Portugal, Ireland, Greece, Spain) to the once business-like United Kingdom, the deficit issues are enormous. On a recent visit to Ireland, I witnessed the carnage of a burst bubble. While outwardly prosperous and perpetually cheerful, the Irish have been through an economic rollercoaster that has seen deficits rise to a high of 14.3 percent of GDP in 2009, GDP fall by 7 percent in 2009 and property values down by 30 percent. In Dublin’s tony Merrion Square area, every second elegant Georgian doorway has a To Let (For Lease) sign, and the brass plaques of the former tenants portray a cadre of hedge fund managers, property speculators and assorted economic hangers on, vaporized as the bubble burst. (I should say that Ireland has still extraordinarily expensive real estate; a modest little bungalow in the suburbs of Dublin might still list at 1.5 million euros!) While growth is now essentially flat in 2010, the Irish remain cheerful, charming and convinced of happier times ahead, but they are in a very deep hole, with total debt at 997 percent of GNP in 2009 compared with the United Kingdom at 409 percent; United States, 93 percent; Canada, 62 percent; India, 20 percent; and China, 7 percent.

Throughout Europe, governments (including the recently elected Conservative–Liberal Democrat coalition government in the United Kingdom) are tackling their deficits by raising taxes and cutting public spending and by taking really tough steps for Europeans (including reducing public pension schemes, cutting services and pairing back public sector employment). If the French are taking on pension entitlements, you know it’s serious! The trick will be not to overdo it and contribute to a worldwide, double-dip Grand Recession. In the long run, generous health and pension costs will have to be paid for through the toil and taxes of young immigrants from within the European borders and beyond, who will be needed to sustain economic growth in the European Union.

Africa wakes up. Following a superbly organized World Cup, South Africa was seen by the world as a modern, sophisticated nation. The whole of Africa may have an opportunity to come into its own in the next two decades and climb out of the post-colonial malaise of corruption, political and tribal infighting, and crushing poverty and disease. What if China chose to subsidize African growth and consumption instead of American, in exchange for access to Africa’s natural resources: What would the global economy of 2050 look like? We might find out in the decades ahead.

Latin America turns up. The Latin American miracle is that it has not collapsed in its last 50 years of economic turmoil. Progress is being made through a weird combination of petro-socialism (such as Venezuela), narco-autocracy as in Colombia, and good old-fashioned industrialization in Brazil and Argentina. A growing middle class market and a lot of natural resources make all of Latin America another natural target for Asian investment and economic partnership.

Islam wants up. There are about a billion Muslims in the world, and most live in economically repressed nations. Some citizens, like the Saudis and Kuwaitis, get bought off by their oil-rich leaders, while migrant workers from Pakistan do all the hard work. Other Islamic countries—Iraq and Afghanistan come to mind—struggle economically and remain horrible examples of corruption, inequity and inefficiency. Countries like Turkey (not without its own problems), which is secular in government and mostly Islamic in the private lives of its citizens, represents, perhaps, the best possible example of how Islamic nations can embrace freedom, democracy and markets without losing face or faith.

The United States ’fesses up. And we in the United States, yes, we need to ’fess up. We need to ’fess up that lower taxes means higher deficits. And that Proposition 13–like tax provisions, and the tax deductibility of mortgage interest, may be great if you have them as individuals, but as a society, they are luxuries that we cannot afford. And that most government spending at the state and local levels goes to health care for the poor, education and prisons, and no one wants to cut these programs. But that, in turn, generous public sector pensions and health benefits for workers in those sectors are unsustainable. And finally, that rising health care costs are the primary threat to long-term budget deficits, not because of more old people, or more poor people, or more covered people under Obamacare, but because of the continuously rising intensity, and thus costs, of medical services for people in public programs. And before you say, “Well, shift them to private programs,” the problem is that private programs are even more costly, and most people can’t pay for them anyway; it’s all too expensive, and most of us need a subsidy. Unless we change the way we do what we do.

In Search of the Next Economy: The U.S. View

Look, it’s really not that bad. I believe in the United States and the energy and ability of its people to create a better life. I also believe that the Chinese and the Indians and the Brazilians and the Russians and the Turks and the Estonians want that, too, if you give them half a chance. It will all work out in the end. Trust me.

Let me offer one view of how the U.S. economy may reshape itself over the next decade, and what it means for health care. The economy may be composed of a number of very different sectors:

The ultra-productive, high-performing, globally competitive economic base. There is emerging a high-performing, ultra-productive economic base in the United States that takes ideas, knowledge, innovation, branding, marketing and technology and turns them into profits on a global basis. Think Microsoft, Oracle, Google, Apple, Intel, Cisco and Salesforce.com, but also think P&G, Coca-Cola, Amgen and Pfizer. Along the way, they create a lot of profit and a few jobs. Not a lot of jobs though, as most of these global high fliers manage global webs of production and distribution, and we consumers could care less where our iPad was made as long as Steve Jobs and his friends designed it. These companies primarily create profit and wealth, not jobs and incomes.

The new free-basing experience economy sector. Joe Pine and Jim Gilmore coined the term “the experience economy” a decade ago and wrote a great book about it. But a new variant is emerging based on a free base, as Chris Anderson (formerly of Wired magazine and now of TED) artfully predicted.

For example, Facebook has more than 500 million members. It is privately held, but if it IPOs, as it might in the next year, its market cap could be stratospheric. Does it make money? Who knows? Who cares? But with 500 million users spending endless hours a day saying “Wassup?” to each other, it has got to be worth a lot. It employs a few hundred people and occupies a few hundred million more.

Another good example is a start-up company called Bleacher Report that my son works for in San Francisco. It is a sports fan–based website. Fans create content for free: Wannabee sports journalists lying on their couches in Wisconsin work very hard writing articles and creating other content. They do it for nothing more than exposure. Bleacher Report gets upward of 14 million unique visitors a month, and they are now in the top 150 websites on the planet. They do have employees and real offices and smart engineers and server contracts all paid for by Venture investors, and increasingly by advertisers. Like most Silicon Valley start-ups, much of their office technology infrastructure is free: Google docs, G-Mail, G-Chat and the like. The good news for health care is that, like most Silicon Valley start-ups, the company offers generous health benefits; the bad news for health care is that virtually no one in the company is over 30, and there are only two girls.

But the best example of this new free-base experience economy is Zynga. It makes games for Facebook and gives them away free. For instance, according to the New York Times of July 24, 2010:

“In FarmVille, its most popular game, players tend to virtual farms, planting and harvesting crops, and turning little plots of land into ever more sophisticated or idyllic cyberfarms. Good farmers — those who don’t let crops wither — earn virtual currency they can use for things like more seed or farm animals and equipment. But players can also buy those goods with credit cards, PayPal accounts or Facebook’s new payment system, called Credits. A pink tractor, a FarmVille favorite, costs about $3.50, and fuel to power it is 60 cents. A Breton horse can be had for $4.40, and four chickens for $5.60. The sums are small, but add up quickly when multiplied by millions of users: Zynga says it has been profitable since shortly after its founding.”

You think I am kidding, right? People buy virtual chickens and tractors with real money so they can play a game on Facebook.

Zynga has 1,000 employees, up from 375 a year ago, and 400 current job openings. The company has been valued at $4.5 billion and has the backing of Silicon Valley’s Venture elite companies such as Kleiner Perkins.

Maybe there is an opportunity providing virtual health care to the virtual farmers?

Market-based meritocratic Maslowian economy. Most Americans will work in a market system of exchange, meeting basic needs through labor. The more you make, the higher up the Maslowian needs pyramid you will get. It will be meritocratic based on value creation, which in turn will largely be dependent on education levels. For example, in the depth of the recession H1 Visa slots available for engineers from abroad with bachelor degree qualifications remained unfilled because there was no demand, whereas masters degree level requests for visas were oversubscribed. Folks will be working tables at Applebee’s serving other folks who work tables at Applebee’s, where they will likely be paid more in the form of health benefits than they earn in the form of wages. Smart bankers will still be buying big boats if they have really added value to companies and to shareholders. But they will be taxed more progressively, as the tax cuts expire, to pay for health and education programs for those who want to work their way out of waiting tables, and for the health programs of those who remain through choice or circumstance.

Gigantic Keynesian sector. The health care, education and criminal justice systems represent a gigantic Keynesian sector that employs large numbers of people mostly supported by federal, state and local taxes. These sectors will offer solid, though not spectacular employment opportunities, shielded as they are from the worst sting of global competition, by virtue of the fact that they are geographically bound social services. But in the future, employees of the organizations will have more modest pensions, skinnier health benefits, less overtime and lower income growth, though they will have more economic security than most.

Freelancers. Liberated from job-lock, working forever to pay the bills, and forced out by restructuring and realignment in corporate America, armies of baby boomers will drift through the next decade eventually into Medicare but buying health benefits through insurance exchanges on the way. The individual market for health insurance purchased through exchanges will grow much further if employers decide to exit health benefits and send the employees to the insurance exchanges. It is unlikely to happen immediately, but a decade from now, it could be very different. For example, assume health insurance exchanges get established properly and work effectively from 2014 on. Assume further that the Cadillac tax comes into force in 2018 as planned, providing a major incentive for employers to opt out. Under these assumptions, and if employers feel morally freed to send their employees to the exchange (with some more generous employers giving employees a cash inducement, but other less generous employers giving employees simply an apology), then many employers may exit health benefits altogether, creating a massive shift to those plans sold through the exchanges.

The luxury sector. There will still be basketball stars, and entrepreneurs, and wealthy families, and smart lawyers who live in luxury. It won’t be as good as the Bush years, but it will still be good to be rich. No matter what happens to the overall economy, there will be a lot of rich people in the United States (many of them non–U.S. citizens), and they will want and demand the best possible health care that money can buy. Problem is, there are not enough of them to go around, so competition for the luxury set will be fierce.

Change Or …

It might all sound a bit depressing, and it is certainly more austere. But it could turn out to be a bit fairer, more meritocratic, less capricious and more sustainable than the economic boom we went through.

If health care leaders think they can survive and thrive in the decade ahead by focusing solely on the privately insured, then you have to ask: Where exactly are those privately insured going to come from in the Next Economy? And how rich will there insurance coverage be?

No matter what, health care leaders need to prepare for the Next Economy by making their health systems high performers: delivering superior quality at competitive costs. Health systems must also learn to survive and thrive on public payment levels, competitive private sector pricing, and most importantly, changing how they deliver care. Do that and you will still be in the phone book in 2050 (at least on my iPad), and I will friend you on Facebook.

The New Math

Monday, September 6th, 2010

It’s becoming increasingly clear that the future of health care is now arithmetically impossible. You know, the future where the trend bends, the people get everything they want without paying more, the doctors are whole and happy, the hospitals flourish because there are no uninsured, and the ERs are empty because everyone has an insurance card and they go to their regular doctor instead. Well, it was nice PowerPoint while it lasted. Reforming the health care insurance system without fundamentally changing the health care delivery system is mathematically impossible. We need a new math for the entire system.

Welcome to the Future under the Old Math

The old math is based on the notion that you pay providers every time they do something. Some patients have cards that pay providers a lot, some patients have cards that pay providers a little and some patients have no cards. The trick, if you are a hospital, is to have more patients with well-paying cards than patients with no cards. For a doctor, it is best to avoid the no-card patients entirely, unless you work for a federally qualified health center and you therefore get paid a lot per unit of service for the patients with no cards; or if you are doctoring in a big safety net institution on a salary; or you are simply noble, hard-working and eager to be extremely badly compensated.

With health reform, some of the people with no cards will get cards that have poor reimbursement attached to them. (They are called Medicaid patients and they will expand by 16 million under the law.) Doctors won’t see these patients because the doctors are already too busy. Hospitals will see them, somewhat reluctantly, because they have no real choice. They will lose money on each one of the patients, and they will try to make it up on volume, until they find they can’t.

Then, there are the people with the richly paying cards (who are employed by companies who currently offer health insurance at an annual cost of $18,000 a year in premium for a PPO family product). These companies are going to be the target of cost-shifting by doctors and hospitals until the companies decide they have to move their employee’s job to India because they can’t afford to pay the money for cost-shifted health care. The unemployed patients will go on Medicaid or get substantial federal subsidies to purchase insurance through a federally subsidized health insurance exchange.

Everyone is grumpy, no one can afford the taxes, the premiums are ridiculous, hospitals cannot make money, you have to wait forever to see a doctor. Doctors want to retire but they can’t because their 401(k) never recovers because health care costs are ruining the economy. This is not good.

A New Math for Health Care

All this misery is predicated on two key assumptions. First, that reimbursement should cover the costs of care. Second, that the way we do things now is the right way.

I think we need a new math. When CFOs say to me that “Medicare covers only 95 percent of the costs of care,” I rephrase that as: “Medicare doesn’t meet the current income expectations that your people have for delivering the service in exactly the same inefficient way as today.” Doesn’t sound so good.

Similarly, physicians who refuse to take Medicaid patients (most of them) and those who refuse to take Medicare patients (about 20 percent and growing) are basically saying the same thing: “You are not meeting my income expectation for me doing things the same way I have always done them.”

Every business in every other industry has had to change what they do and how they do it. We need to learn from them about how to change.

But, also, we need to help these providers out of the bind they are in by developing a New Math:

Population-based payment. Pay integrated systems of care a risk-adjusted, per capita fee to cover a population. (Wait, you say, that sounds like capitation! Dude, it is capitation. Get over it.) If these integrated systems of care can develop a way to deliver services that result in superior health outcomes for the population they cover and the systems make money, God bless them, so long as there are performance scorecards, and the patients join these systems voluntarily and willingly (with an incentive to select low-cost, high-performing systems).
Change the delivery model with technology. One doctor can see 20 patients per day. How many patient encounters per day can be generated by a team of one doctor, three nurse practitioners, five patient service representatives and a big honking server? I don’t know, but the fact that Kaiser had close to 9 million e-visits last year and took their in-person visits down to 60 percent of the prior year, by all accounts, speaks to a new math emerging in how to use technology to do more with the limited number of doctors we have.
Change the compensation principle from action to outcome. Patients want health outcomes, not health services. They can be encouraged to watchfully wait, rather than be aggressively treated. When pleasantly presented by persuasive professionals, patients pick properly. The shared decision-making literature is full of lessons on how to do this if the incentives mesh with the decision-making science.
Pay doctors more (sometimes at the micro level) to save money at the macro level. It may be better to spend a well-compensated hour with a co-morbid Congestive Heart Failure (CHF) patient than to have that patient become part of the all-too-familiar “revolving door” of chronic care management in acute care hospitals. This will not happen spontaneously without a new math to support the economics of medical homes, accountable care organizations and readmission reimbursement.
Release the power of pyramids. Referral pyramids can lead to volume-quality virtuous cycles. Similarly, delegation of tasks down the clinical pyramids can improve throughput and quality so that everyone is practicing at the limit of scope of practice and those limits are being expanded through licensure, decision support, organizational innovation and clinical redesign.

I am encouraged that if we are lucky and get good leadership from HHS and CMS, and from the policy and academic communities, we can conceive of a New Math that will lead us to a sustainable future. For example, I was really excited to learn that a friend and colleague, Dr. Arnie Milstein (who retains his role as chief medical officer of the Pacific Business Group on Health) in addition will be leading the new Clinical Excellence Research Center at Stanford University. The center is dedicated to bringing engineering, business and clinical faculty together to pursue innovation that will lead to high-performance health care delivery that is truly better, faster, cheaper. I can’t wait to see the fruits of that new effort.

But, while theory, policy, pilots and thought leadership are all important in developing a New Math for health care, the most important critical success factor for the future is a health care field (and health care leaders) willing to embrace this New Math. I believe that a new generation of health care leadership will come of age under the New Math, that they’ll figure it out, like it, work it and create great health systems for the future. And then the math might work out for all of us.

Mandated Competition

Tuesday, July 1st, 2008

Americans hate mandates. Mandates to cover specific diseases and conditions drive health insurance costs up. Mandates to provide open access to Emergency Rooms sink geographically undesirable hospitals. Mandates to collect, collate, and communicate data create burdensome administrative chores. Now we are going to add more mandates in healthcare. We are now talking about millions of Americans, even all of us, being mandated to buy health insurance. We are also talking about insurers being mandated to offer insurance and not have the freedom to walk away from risks they don’t like.

But while many healthcare folks hate mandates there are also a lot of mandates they really like. Doctors of all stripes like the mandates that you have to be a doctor or a certain type of “ologist” to do certain procedures and tasks and access the income streams associated with it. Hospitals like the mandate that they are the place where certain procedures can be done. Employers like the mandate that because of ERISA they can’t be mandated by states to do things. Sweet.

We have to put up with other mandates in our lives, like income tax, parking tickets, bridge tolls, paying admission to ball games, and so on. We are not mandated to vote like the Australians, (maybe we should be, then look out).

Coverage Mandates. Let’s be clear: there is no such thing as voluntary universal coverage anywhere in the world. By the same token, while many countries including Japan, Germany and Holland have mandated insurance that achieves almost complete universal coverage, similar schemes in America would not yield anything close to universal coverage. Why? Because we would cheat. We have to have car insurance and many of us don’t. We have to have children in order to claim children as dependents on our income tax, but until some smart aleck at the IRS started asking for the social security numbers of the kids, more than seven million non-existent kids were claimed as dependents. We all listen to NPR and we never pledge. So even liberals cheat. That doesn’t mean that mandates in healthcare might not make a lot of sense, we have to worry about enforcing them in a nation of cheaters. Part of the reason cheaters cheat when it comes to car insurance and possibly health insurance is that the cheaters can’t afford it or the consequences of not having insurance are less dire than buying it. As Judge Harry Low, former California Health Insurance Commissioner once famously said, “You don’t need insurance, unless you have assets to protect.” I would favor phased-in mandates, for individuals starting with kids and applying to all Americans over time, with instant enrollment and subsidy for the lowest income families. But I also favor employer mandates, starting with the largest and moving down to all employers over time. Eventually we will meet in the German middle where healthcare is paid by a payroll tax (half employer paid, half employee paid) with a ceiling on total payment close to our current FICA ceiling on income, because we upper income folk don’t like progressive taxation.

Issuance Mandates. Health insurers should not just pick and choose worthy risks. There are precedents internationally for risk adjustment factors that even out the adverse selection effects on insurers (see my column on Australia). Cream skimming by insurers that leaves vulnerable families destitute, is more of a crime than inadequately adjusted adverse selection experienced by a multi-billion insurer.

Provider Mandates. At a recent meeting of the World Healthcare Congress, a New Zealand doctor was asked how that country achieved virtually universal adoption of electronic health records by that nation’s primary care doctors compare to approximately 20% of primary care doctors in the US. In his wonderfully quiet and clipped New Zealand accent he said: “The government won’t pay you unless you have one.” Brilliant. Now, I am sympathetic to the economic plight of American primary care doctors who now earn approximately half of the pay of their British brethren. So here’s my idea: tell doctors that they can’t bill Medicare unless they have an electronic medical record by 2010 and give them a tax credit to put one in. While we are at it we should have mandatory public reporting of standardized costs and quality metrics by all providers.

Patient Mandates. We slothful consumer should not get off the hook. Everyone should be mandated to complete a Health Risk Appraisal before enrolling in any health insurance plan. No HRA, no coverage. Our co-payment should rise if we are not in compliance with our treatment plan. And we should all be mandated to submit to arbitration before we get to sue our health plan, our doctor, or our employer over health issues.

Then let’s have it in a good old fashioned market, competing head to head on the basis of cost, quality and value. And let’s not whine about it.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN OnLine.

The New American Compromise

Saturday, May 3rd, 2008

In the 1980s and 1990s, an American compromise called managed competition was the dominant force behind health reform. Born from the ideas of Alain Enthoven at Stanford University, the theory laid out a path where consumers picked plans when they were well and lived with the consequences of their decision when they were sick. Integrated delivery systems organized in an HMO model competed for business on the basis of cost and quality, and cost-conscious consumers had real incentives to select low-cost plans; otherwise, they paid hundreds of dollars a month for more expensive (and usually broader choice) alternatives.

Managed competition was the basis for health reform initiatives in California in the 1980s and was really the intellectual foundation for all health reform efforts in the 1990s, including the ill-fated Clinton health plan. Managed competition worked best in a framework of universal coverage. Everyone was to be in a plan, and plan sponsors (such as employers or government) as well as individual consumers would have a marketplace of choices at the plan level or the integrated delivery system level. Kaiser-like entities would then compete on a value basis within a framework of universal coverage. I always kind of liked the idea because it reconciled issues of cost, quality and access, and I felt it was a genuinely American compromise between top-down control and consumer choice.

Shared Sacrifice

There is a “new American compromise” being forged. Emerging from the Romney and Schwarzenegger political aberrations (popular Republican governors in strongly Democratic states), the new American compromise makes universal coverage the primary goal. It is to be achieved through shared sacrifice in payment by business, government, individual households and even, in some cases, payment by special groups like smokers, doctors and hospitals.

The new compromise is forged from a belief that health care is both a right and an obligation: You have a right to expect access to health care but you have an obligation to pay your share of the tab. The compromise is a form of what I have called strategic incrementalism (incrementalism is going from one bad idea to another bad idea; strategic incrementalism takes steady steps toward a broader vision). The new compromise builds on existing public and private health insurance programs, it lets you keep what you have if you like it, it requires you to pay something for coverage if you have none, and it limits the behavior of health insurers in the marketplace.

The Massachusetts plan, Schwarzenegger’s California proposal and the plans of all the Democratic presidential candidates are close variants of this new compromise. Republican candidates as of this writing (in the early stages of 2008) have shown little interest in embracing universal coverage through shared sacrifice, preferring instead a combination of tax credits and deregulation of insurance markets to stimulate competition. Still, while none of them has embraced the new compromise (or said much about health care in his campaigning), whoever emerges as the candidate on the Republican side will be forced to talk about health care as the general election heats up. Why? Because, after the economy, health care is the dominant domestic issue for Democrats and Independents, which is in sharp contrast to the Republican ranking of health care as an issue (behind the economy, immigration and taxes).

A Real Debate

You could argue that the stars seem aligned for a victory for health reform, based on the new compromise, that leads to universal coverage, first in some landmark states like Massachusetts and California and then perhaps emulated through national policy. (I have always argued that Americans will not buy a car they haven’t driven. So they will want to see the new compromise working before they sign off on it.) But it is plausible to expect a real debate about health reform that may actually lead to political change and in turn to legislation.

However, there are a few things to watch for:

God is in the details. While the new compromise has been embraced by politicians on either side, there can be large and important differences in the details such as which groups of newly covered are added at what rate and to what maximum level. Is universal coverage the goal or is it simply significant coverage expansion (“universal coverage for some” was how an old colleague put it)? Similarly, while there is unanimity among Democrats about rolling back tax cuts for the rich to pay for health reform (and other things), unsurprisingly this view is not held by Republicans. Perhaps the most meaningful detail over which there is disagreement is in the degree of regulation or deregulation of the health insurance industry. Democrats are much more likely to tighten the rules on issuance, underwriting, and availability and funding of public versus private choices.

Political victory does not always mean legislation. It is one thing to speechify, to campaign and to win an election with health care reform as a plank in your platform. It is quite another to get laws passed and enacted that make massive change in one-sixth of the U.S. economy. Every lobbyist and their dog is itching to get into the middle of this next round of change making.

Affordability. Here is my big concern. We may succeed in getting everyone an insurance card, but to reach that laudable goal we may be ignoring the need to transform a delivery system to make it better, faster and cheaper than the system we have now. Giving people a card doesn’t solve the fundamental cost problem, and there seems little in the candidates’ proposals that will do much about the cost problem. We will have more people covered and we will pay significantly more to achieve it. Without adequate cost controls we may be digging our children an even bigger fiscal black hole than the one they are already facing.

Health reform should happen – it could happen. But if it addresses only coverage expansion and ignores the issues of affordability, quality and sustainability, we will have missed an opportunity to transform health care to deliver much higher performance for decades to come.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN OnLine. This article 1st appeared on March 4, 2008 in HHN Magazine online site.

The Fallacy of Excellence

Tuesday, January 1st, 2008

“We have the best doctors and hospitals, and we have the best health care system in the world,” I heard a Republican candidate for president say the other day. It rolled off his tongue very smoothly. The audience applauded, nodding quietly in assent. (I couldn’t see them well enough – the camera was on him – but it felt like they were nodding.)

The candidate’s statement struck me for two reasons. First, you don’t hear it much these days. Almost everyone from CEOs to presidential hopefuls to policy wonkettes seems to think health care is broken, or in deep crisis. So when John McCain said it, it was kind of a nice retro moment, back to a time when almost everyone in America agreed with the three-step statement: best doctors, best hospitals, best health care system.

Second, what struck me was the fact that the audience applauded and nodded in agreement (in my mind’s eye). In my rattling around American health care I see this all the time, among lay audiences, hospital board members and a lot of business people. I have come to call it the “fallacy of excellence.”

Only as Good as the System

There is a common perception that quality of inputs equals quality of performance and outcomes. Health care delivery has become mind-bogglingly complicated, but we still like to cling to the simple, reassuring notion that if we have really well-trained doctors and nurses, and we put them in nice new sparkling buildings and provide them with lots of new technology, we will always deliver excellent care. I don’t believe that. While having well-trained staff and good facilities may be necessary conditions, they are far from sufficient.

The health care glitterati agree that it takes a “system” to deliver safe, reliable, high-quality, cost-effective care, from the very top level of policy to the micro-organization of care. The general public knows only too well the downside of a lack of systemness: from the 47 million uninsured, to the lack of coordination of caregivers, to the absence of a medical home. The public may know the system doesn’t work, but it seems to me they still cling to the notion that more is better, that good doctors and hospitals guarantee good quality, and (maybe by inference) that higher costs and prices are associated with excellence in outcomes.

I see this in the eyes of lay board members at hospital retreats. I hear it in the questions from general audiences. And I see it in folks whose eyes glaze over in disbelief that cost and quality may be correlated inversely (namely, that high cost is associated with poor quality, an assertion that has increasing evidence behind it from the Dartmouth Atlas of Health Care to the Premier pay-for-performance experiments with the Centers for Medicare & Medicaid Services).

If the public, doctors and hospital trustees are aligned in the fallacy of excellence, that behavior may foreshadow a rocky road for some important policy initiatives, such as:

Pay-for-performance (P4P) initiatives that reward efficiency. Increasingly the P4P movement will incorporate so-called efficiency measures into its programs. This reinforces the notion that high-quality care can also be of lower cost.

High-performance networks. Similarly, patients will be asked to believe that lower-cost performers are also higher quality as they are directed to so-called high-performing providers that are low-cost and high-quality.

Center for comparative effectiveness. Increasingly, there are calls from health policy groups (including America’s Health Insurance Plans and the Committee for Economic Development) for the creation of a national independent center to evaluate the cost-effectiveness of new medical technologies and provide side-by-side analysis of the effectiveness of new technologies against existing therapies.

Changing the Mind-Set

In my humble opinion, there needs to be a national campaign to educate the public (and maybe even the doctors and hospital trustees) that more is not better, that outcomes cannot be guaranteed by excellence of inputs, and that it takes a system at both the macro and micro levels to deliver good health care.

The Institute of Medicine has done a brilliant job of documenting the value of systemness in its path-breaking reports. But we need to popularize the message and educate the public that systems of care matter. Otherwise, the fallacy of excellence will dominate the public discourse on health care – from presidential campaign debates to hospital board retreats – and we will continue to spend more and get less than we should.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. This article 1st appeared on January 8, 2008 in HHN Magazine online site.

The Doctor Conundrum

Saturday, December 1st, 2007

Health care in America is a $2 trillion, high-growth industry. Doctors are in short supply just about anywhere you go in the country. Many, if not most, family practice doctors are not accepting new patients. Even upper-class, well-insured patients have to wait a couple of weeks or more for a regular appointment with a specialist.

Doctors seem to be busy. Indeed, the surveys show that they are spending as much time or more on patient care activities than they did 10 years ago – and the volume of procedures per physician is way up.

The stock of new physicians (new graduates minus retirees) is growing no faster than the population, but health care costs have been consistently growing at 6 percent to 10 percent per annum over the last decade or more. We are also smartening up as a nation and starting to reward physicians for quality improvement through pay-for-performance schemes. And here is the big one: Given that baby boomers have started to hit the early stages of total body breakdown, the demand for almost every medical specialty is poised to explode.

Reasons to Be Cranky

It would seem to be a brilliant time to be a doctor. You have market power, a demographic bonanza, lots of new technology to use that liberates you from the clutches of hospitals, patients who want to spend time with you, and an American society that appears to grant health care an ever-expanding share of the economy. What’s not to like?

How then can you explain the fact that in Harris Interactive/Harvard surveys of physicians conducted for Strategic Health Perspectives, my colleagues found physician satisfaction at its lowest ebb since we started measuring it in the early 1990s? A full 43 percent are saying they are dissatisfied with their practice. Are these people nuts?

Well, I don’t think they are crazy. Physicians are frustrated by administrative complexity, both public and private. They are angry at the constant threat of Medicare price cuts. They feel they are losing autonomy to faceless bureaucrats in Washington, the state capitals and Hartford, Conn. They see their patients as having to jump through mindless financial hoops that impair their compliance. They are happy about expanding science and knowledge and want to deliver good care, but the economic and administrative circumstances overwhelm the positives and put them in a black mood. Doctors are just cranky.

But what really pisses them off is the gap between their incomes and those of the rest of the high-end college graduates of America. The Center for Health Systems Change analysis of average physician income adjusted for inflation between 1995 and 2003 showed that income for all physicians declined by 7.1 percent over the period; for primary care doctors, by 10.2 percent; for medical specialists, by 2.1 percent; and for surgical specialists, by 8.2 percent. This is in sharp contrast to the 6.9 percent gain that all professional and technical workers made in the same period.

Put in stark local terms, my surgeon neighbors at Stanford drive Chryslers, my software neighbors drive Mercedes, my lawyer neighbors drive multiple BMWs (they are good at multitasking) and my venture capitalist neighbors have off-site garages to store their many exotic cars. If I were a doctor, the smartest kid in my high school class, the top 2 percent of my college class, and magna cum laude at Stanford, I would be pissed off, too. It is pretty bad when the lazy geography graduates like me make more than the surgeons.

Compensation Discrimination

While many like to point to the fact that doctors make more money in America than in any other country – which is true – they miss the big point. There are way more undeserving, highly compensated pigs at the health care trough than doctors.

Let’s start at home. Consultants and futurists are paid four to five times what they would be in other countries; hospital CEOs, three to four times; administrators of all types, two to three times; and so on. CEOs of health plans who rack up $100 million-plus in compensation over the course of a career are well ahead of the cumulative earnings of all the ministers of health in the developed world.

And then there are the sales men and women of America. I want my son to be a salesman because America rewards sales more than almost any other profession. There are armies of sales people in American health care, many of whom are making much higher incomes than the doctors they are calling on. These are just estimates: I urge someone with access to all these numbers (such as the compensation consultants) to publish them. Just wait and see how angry the doctors will be then.

The solution is not just to pay doctors more through fee-for-service upgrades or to tweak their incentives through petty pay-for-performance schemes. We need to imagine reimbursement systems that reward clinical excellence and professionalism and that provide incentives to do the right thing for patients, at the right time, in the right place and by the right people (which may mean less expensive and more reliable auxiliary health professionals). We also need to look long and hard at whether we are rewarding acts of commercialism in health care more than the health care services that patients and society really want.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. This article 1st appeared on December 11, 2007 in HHN Magazine online site.