Is the Drug Industry an Existential Threat to the Private Health Insurance Business?

At a time when many Democrats are calling for a single-payer health insurance system, are the drug companies inadvertently driving the system on a course to that end?

Consider this.

Implementation of the Affordable Care Act––More Evidence That Rate Shock is Coming

The Society of Actuaries is out with another estimate of health insurance rate increases as a result of implementation of the Affordable Care Act ("Obamacare").

While there is a great deal of difference between states, they are estimating an average increase of 31.5% on account of the new underwriting reform and benefit expansion requirements of the health law:

More Predictions of Rate Shock Because of the New Health Law

Last week, I reported on my informal survey of health insurance companies and their estimate for how much rates will rise on account of the Affordable Care Act ("Obamacare").

Today, there are press reports quoting the CEO of Aetna with their estimate. The Aetna estimate is worse than mine.

Private Health Insurance Exchanges––Will They Save Money? Will the Idea Grow?

Private health insurance exchanges will save employers money but not make health insurance cheaper.

Because private health insurance will save employers money, they will grow.

Will Private Insurance Exchanges Reduce Health Insurance Costs?

There's lots of buzz these days about private insurance exchanges. The idea is to give employees more choice in purchasing their own individual coverage from a big menu of insurance companies and plan alternatives, and as a result, create more robust competition and thereby help control costs.

But I think private insurance exchanges will have just the opposite effect on the price of large employer health insurance plans.

I Hope Trustmark Tells HHS to Go Pound Sand

Today, the Department of Health and Human Services announced that, "Trustmark Life Insurance Company has proposed unreasonable health insurance premium increases in five states—Alabama, Arizona, Pennsylvania, Virginia, and Wyoming. The excessive rate hikes would affect nearly 10,000 residents across these five states."

The HHS statement continued, "In these five states, Trustmark has raised rates by 13 percent. For small businesses in Alabama and Arizona, when combined with other rate hikes made over the last 12 months, rates have increased by 27.2 percent and 18.1 percent, respectively. These increases were reviewed by independent experts to determine whether they are reasonable. In this case, HHS determined that the rate increases were unreasonable because the insurer would be spending a low percent of premium dollars on actual medical care and quality improvements, and because the justifications were based on unreasonable assumptions."

I hope Trustmark tells HHS to go pound sand.

Here inside the Beltway, there is this assumption that the health insurance market is not competitive and health insurance consumers--in this case small employers--are helpless without the federal government. From the HHS statement: "Before the Affordable Care Act, consumers were in the dark about their health insurance premiums because there was no nationwide transparency or accountability."

Baloney.

We can all have a vigorous debate about just how well the health insurance market has worked to control health insurance costs and readers of this blog know I haven't exactly been an insurance industry apologist on that score.

But anybody who thinks there is no "transparency" or no "accountability" in the small group market has never been there.

Small group carriers regularly see 30% of their block "churn" in a given year as they lose business to competitors. It is not unheard of for an entire block to turn over every few years. There are tens of thousands of health insurance agents and brokers tripping over each other out in the market--their trade association claims 100,000 members. If the incumbent agent isn't continually "check bidding" for his customers that agent can be sure lots of his competitors will be knocking on that client's door with lower rate quotes.

There is no market in America any more competitive than the small group health insurance market. Does competition work to control costs? That's another story. But a lack of competition is not what ails the small group health insurance market.

I have no idea whether Trustmark's rate increases are reasonable or not, or whether they made mistakes in calculating them. I am certain they know they will lose lots of business if these increases are not competitive.

Is a 27% rate increase justifiable at a time when health insurance cost trend is at historic lows? I don't know--it depends where the rates started. My point is that knowing a carrier's rate increase percentage tells you nothing about whether that rate is reasonable or not. It is the absolute rate that matters. Maybe Trustmark erred in setting these rates in the first place and is now playing catch-up.

What matters to a health insurance buyer is not the rate increase or even the medical loss ratio, what matters is the price--which insurer has the lowest price for the same benefits.

Who will know whether the final price is reasonable or not? The small group customer who, upon getting a 27% rate increase, will demand the business go out to bid--presuming the agent hasn't already done that. It the rate is not competitive, the business will very quickly be moved to another insurer where it is.

This rate increase action by HHS is just political grandstanding as the Obama administration tries to sell a still unpopular law.

But it is dangerous grandstanding.

Let me tell you something you may find counterintuitive about the small group and individual health insurance markets. It is the little and often "inefficient" carrier that keeps the big guys honest. These guys often come in and out of markets necessarily undercutting the dominant players' rate base to get a foothold in the market. And, by the way, Trustmark is a mutual company owned by its policyholders. The big guys would like nothing more than to get rid of these little "pests" that upset the market order. And, HHS appears to be doing its best to comply.

This rate oversight action by HHS amounts to nothing more than the jumbo insurance company full employment act. If HHS thinks an oligopoly in the health insurance market, where only a very few big guys dominate the market, is the way to create competition, they are well on their way.

Unless Trustmark, and the little guys like them, just tell HHS to go pound sand.

Rethinking the Value of Medical Services

by Brian Klepper and David Kibbe

One of American politics’ most disingenuous conceits is that health care must cost what we currently pay. Another is that the only way to make it cost less is to deny care. It has been in industry executives’ financial interests to perpetuate these myths, but most will acknowledge privately that the way we value and pay for medical services is a deep root of America’s health care cost explosion.

When the Resource-Based Relative Value Scale (RBRVS) became the framework for Medicare payment nearly twenty years ago, it equated a medical service’s “value” with four categories of physician work inputs: time, mental effort and judgment, technical skill and physical effort, and psychological stress. The assessment process, handled from the outset by the American Medical Association’s (AMA) secretive, specialist-dominated Relative Value Scale Update Committee (RUC), delineates and quantifies a service’s inputs in terms of its Relative Value Units (RVUs) which, with a monetary multiplier, define its worth.

In 1989, RBRVS’ lead architect, William Hsaio, confidently suggested that the process would be rational and reliable:

We found that physicians can rate the relative amount of work of the services within their specialty directly, taking into account all the dimensions of work. Moreover, these ratings are highly reproducible, consistent, and therefore probably valid.

But Dr. Hsaio did not anticipate that special interests would capture the process and manipulate it to financial advantage. Twenty years after RBRVS was adopted, “mental effort and judgment” has been hijacked to favor specialist physicians and hospitals, primary care has been stifled, and the relative value system has become a study in caprice and distortion.

Getting Values Wrong

The resulting inconsistencies in how we value services are breathtaking. For an unexceptional example, compare the reimbursements for a moderately complex primary care office visit for an established patient (CPT 99214) with an ophthalmologist’s 10-15 minute cataract extraction with implantation of an intra-ocular lens.

A primary care office visit can be classified as a 99214 if it requires 25 minutes of face time and has two of three components: a detailed history, a detailed examination or medical decision-making of moderate complexity.

Keep in mind that, in primary care, new signs and symptoms must be weighed against the whole of medicine. Is a persistent cough a bronchial infection, tuberculosis, lung cancer or something else? The variation across patients is staggering as well. Primary care doctors typically see conditions ranging from sprains and hernias to infectious diseases and vascular ailments, and must be a specialist in dealing with this complexity. In 2011, Medicare pays $111.36 for a 99214.

By contrast, specialist physicians in many disciplines face less patient variation, at least compared to primary care doctors’ experience, but their work may have more “wow.” Cataract removal, a 50 year old procedure that has been highly refined and automated, immediately improves sight, a dramatic impact. Many ophthalmologists operate “focused factories,” processing an assembly line of 20 or more cataract patients. With pre-screened patients and a controlled clinical environment, the risks are relatively predictable, the mental demands limited and the work repetitive. For cataract extraction, Medicare currently reimburses the ophthalmologist $697.12, and requires a $139.24 patient co-payment, for a total of $836.36.

In other words, relying on the RUC’s assessment using RBRVS, Medicare values the ophthalmologist’s work 7.5 times more than the primary care specialist’s. The valuation assumes that the complexity and skill required in the two encounters are heavily weighted toward the ophthalmologist, though it could be reasonably argued that the mental effort, judgment and skill required by the primary care doctor are greater.

But there is a more serious flaw in the approach. RBRVS bases value on the demands of physician work, but ignores the actual benefit to the patient or society. It doesn’t consider whether the service followed evidence-based guidelines (and whether it was appropriate or even necessary) or whether the hoped for health outcome was achieved.

We need both primary care specialists and procedural specialists. The policy questions are whether one should be valued at so much more than the other, and whether we need more procedural specialists than primary care doctors, or the opposite as other developed nations have settled on. The way we pay for services should reflect our decisions. But also, we need a payment approach that is fair, consistent, transparent and more congruent with modern notions of value.

The flaws in our medical services valuation and payment system create incentives for unnecessary and unnecessarily complex services that expose patients to gratuitous risk (and sometimes, harm), and that artificially increase cost for purchasers. This one mechanism is largely responsible for taking the health care industry and the larger economy to the edge of an economic precipice.

What Should CMS Do Now?

Against the intensifying national economic crisis, CMS could immediately and substantially reduce unnecessary cost by revamping this system. It should aggressively identify and reassess over-valued specialty services, while re-valuing primary care. Equally important, the definition of value must be broadened beyond physician work inputs to quantitative measures of impact, efficacy and efficiency, using the plentiful evidence now available in both clinical encounter and financial claims data.

Adjusting the current approach to payment will be opposed by procedural specialists and powerful health care interests that have fed for decades off the specialty-based largess. But ultimately, it would serve their interests and those of the American people by stabilizing a system wildly out of control.


Klepper and Kibbe have been frequent contributors to this blog

Brian Klepper, PhD is a health care analyst, consultant and commentator. He is Managing Principal of Healthcare Performance Inc., a business development practice based in Atlantic Beach, FL, and Chief Development Officer for WeCare TLC, LLC, an onsite clinic firm based in Longwood, FL.

David C. Kibbe, MD, MBA is well known as an innovator and independent thought leader in the fields of primary care EHR technology and consumer health IT in the United States. HIs writings have had a strong influence on the "modular approach" to EHRs, and to the development of Clinical Groupware. A co-developer of the ASTM Continuity of Care Record standard, or CCR, that utilizes XML for computable health information exchange, he is an experienced clinician who practiced medicine in private and academic settings for more than 15 years. Dr. Kibbe has taught informatics at the School of Public Health, University of North Carolina at Chapel Hill, and founded two health care IT companies.

Inconvenient Facts for Both Republicans and Democrats—Neither Side’s Health Care Proposals Are Supported By Past Performance

I call your attention to Ezra Klein’s column in the Washington Post this morning.

In it he cites data that has been out there for a long time but Ezra puts some perspective on it that never occurred to me before.

Examining the Kaiser Family Foundation brief, “Health Care Spending in the United States and Selected OECD Countries” he points out, “Our government spends more [as a percentage of GDP] on health care than the governments of Japan, Australia, Norway, the United Kingdom, Spain, Italy, Canada, or Switzerland.”

The data would seem to indicate that even our single payer government-run American health care programs, Medicare and Medicaid, cost way more than similar health plans in these nations.

The argument is often made that we should adopt a single payer—or perhaps a “public option”—health plan in the United States in order to control costs and cover everyone. But it would appear that even those programs in America are way too expensive when compared to similar programs in other industrialized nations.

As for the Republican market-based approach, Klein also points out that those programs have been ineffective at cost control. House Republican Paul Ryan often cites the Medicare Part D drug benefit as proof his proposals to privatize Medicare would work better than what we have. But as Klein points out, Part D premiums have risen 57% since 2006 and the program is on track to see nearly 10% growth in annual costs over the next decade.

And, the existing private Medicare Advantage program “ended up costing about 120% of what Medicare costs.” That’s a new data point for me. However, I do know that Medicare Advantage insurers in recent years have been paid at least 13% more than traditional Medicare.

My takeaway from all of this is that neither side has the answer to bringing America’s health care costs under control.

Liberals think that a single payer, or at least a “public option,” is the best hope and point to Europe and Canada as proof of that. But, as a percentage of GDP, the cost of our already government run health care plans rivals many of those nations' entire government spending on health care.

Republicans argue we need to move entirely toward market-based solutions. But with two big market-based Medicare programs already operating, neither Part D nor Medicare Advantage has come close to demonstrating affordable cost growth.

But both Republicans and Democrats do have something in common—each is offering supposedly painless solutions. For the liberals, just put the government in charge and we will magically have affordable health care for everyone. For the conservatives, just put the market in charge and we will have a solution.

Painless solutions might be politically attractive, but the data indicates they will not get the job done.

Recent post: What It Will Take to Bring America’s Health Care Costs Under Control––We Have to Change the Game

What It Will Take to Bring America’s Health Care Costs Under Control––We Have to Change the Game

Last week, I posted that I was disappointed in Paul Ryan’s health care budget proposal because it lacked cost containment ideas other than the usual conservative reliance upon the market and defined contribution health care.

In my last post, Why ACOs Won’t Work, I argued that the latest health care silver bullet solution, Accountable Care Organizations (ACOs), are just a tool in a big tool box of care and cost management tools. But, like all of the other tools over the years like HMOs and IPAs, they won’t be used as they were intended because everybody—providers and insurers—can make more money in the existing so far limitless fee-for-service system.

How do you make the American health care system efficient?

You change the game.

You can’t let the $2.5 trillion health care industrial complex any longer make money just getting bigger. The new game has to be one that only pays out a profit for results—better care for a budget the country can live with. There are lots of tools available to do that. ACOs, capitated HMOs, disease management, enormous data mines, electronic patient data systems, and so on.

How do you change the game?

Generally, it will have to be an unavoidable policy imperative that will have to make the giant and powerful health care industrial complex shift to a more efficient and sustainable platform. They gotta have a reason that is unavoidable.

There must be no other choice for them but to play the game differently with new rules that make profit possible only if they make quality care affordable for America.

And, it has to be a policy change. As I have said here before, the conservative notion that the market can, by itself, accomplish this is every bit as naive as the liberal argument we just need a government payer to make things instantly better. There is no evidence in the under-65 market or in Medicare Advantage that the market can do it by itself. There is also no evidence that the giant single payer system we now have—Medicare—has done it.

I also have no illusions about how hard this will be—that recent history is evidence that accomplishing such a game changing policy is all but impossible. The recent health care debate and the lack of cost containment in the Affordable Care Act (I wouldn’t have called it that), makes that clear. Even as this country faces annual deficits of over a trillion dollars and an accumulated $14 trillion dollar debt there is no appetite for real health care solutions—witness the Ryan plan and the Congress’ inability to tackle the Medicare doc payment mess.

Just look at the one thing in the Affordable Care Act that might at least begin to put us on a path to affordable care—the Medicare Independent Payment Advisory Board (IPAB). It would take policymaking for Medicare payments out of the hands of the Congress starting in 2015—2020 for hospitals—and put those decisions with an independent expert board.

But already one Republican and Democratic “deficit hawk” after another is trying to kill the IPAB before it even starts mostly because the health care industrial complex wants it dead. These politicians argue these are decisions that should be left to elected officials. You might also find it interesting to know that the Republican leading the charge for the repeal of the IPAB, Representative Phil Roe (R-TX), received $91,000 in campaign contributions from providers in the last election cycle—double that of the next category of givers on his list (contractors).

A couple of years ago, I suggested a way to get the attention of the health care industrial complex and change the game was to tie the tax deductibility of health insurance offerings to that network of insurers, doctors, hospitals, drug companies, and other providers’ ability to meet cost targets (the Affordability Model). Either control costs or lose the tax incentives for consumers and employers to buy your services and therefore your ability to compete for business. That would get their attention.

That would change the game.

So, if in the face of all of these recent failures to really tackle costs, is there any hope policymakers will be able to give us a game changer?

I will remind you of a post I did last fall. In it I quoted former Fed Chairman Alan Greenspan. When asked if he thought we could ever implement the kind of tough budget medicine called for by the Deficit Commission chairs he replied, “The only question is, is it before or after a bond market crisis.”

This country is headed for a health care budget. The only question is will it be forced on us just before or just after the bond crisis. Just before or just after the rest of the world tells us they aren’t going to subsidize this American fiscal mess—largely driven by our health care costs—any longer.

Then the question will be about whether we have the sense to rationally manage that health care budget with all of these tools we have been developing for 20 years or will the politicians, in the midst of a real crisis, just impose expedient and arbitrary (as in ration care) budget solutions?

I hope the path we will then take is to change the game in a rational way.

How Will the Senate Bill Impact the Insurance Companies and Their Customers?

How will the Senate bill impact health insurance companies and their customers?

Even better, how will it impact a not-for-profit health plan--one with a reputation for being a "good guy" that continually wins the country's top awards for member services and with historic profits of less than 1% of premium? And, one that is operating in Massachusetts--a market that has already been through much of this?

I will suggest that, in combination, these are three intriguing questions.

That is why I thought that the Harvard Pilgrim's CEO's recent post on their website was important. It is short, direct, and to the point. And, from everything I know, it is bang-on.

Some samples:

From the look of the finished product, most of the [more recent changes to the Reid bill] were unrelated to health reform, since the changes to the bill itself were marginal. The individual requirement to purchase has been tweaked, but still fails to ensure that individuals cannot delay buying coverage until they need it. A new Independent Payment Advisory Board will be created, but because its recommendations are not binding, its impact on meaningful cost containment is questionable. The most significant additions are new provisions directed at health insurers, including minimum medical expense ratio requirements, and a back-loading of the health insurance premium tax, designed to delay inevitable premium increases...

The flawed structure of the bill is therefore retained, which means that expansion of eligibility and other reforms are largely delayed to 2014, but changes having the effect of increasing health insurance premiums will take effect prior to 2014. Before seeing any material benefits of reform, some will see their Medicare payroll tax rate increase, many fully insured subscribers will, beginning in 2011, see the effects of the health insurance premium tax, and everyone in the commercial market will see the cost-shifting effects of Medicare payment reductions and the tax on drug and medical device manufacturers. Medicare Advantage plan enrollees will also see sharp increases in premiums. Since there is no significant cost containment in the bill, these increases will occur on top of normal medical trend. And because the universal requirement to purchase coverage is weak, adverse selection will further increase costs starting in 2014...

Imagine how this plays in Massachusetts, where the insurance market is already reformed, the cost of health insurance is already high, and the major health plans are not-for-profits. The impact of federal health reform will be little more than higher premiums...

Our colleagues at the Massachusetts Hospital Association just released a “Health Plan Performance Report” which compares key financial indicators for the state’s health plans. It shows that in 2009 [before any of the changes occur] the four dominant not-for-profit health plans in Massachusetts all have less than a 1% profit margin and a medical expense ratio of 90% or higher. Not much room there to finance anything else.

You can read the rest of Bruce Bullen's comments at "Let's Talk Health Care."

Related post:
There Are Four Health Insurance Renewal Cycles and Two Elections Between Now and 2014—Could be Sort of Like a “Death By a Thousand Cuts” for the Dems

The Senate Democratic Health Care Bill is a “Milestone” on the Road to Cost Containment—If It Is It's a Pretty Small One

The Obama administration is reportedly pleased with a recent Ron Brownstein article in the Atlantic.

In it Brownstein praises the Reid Senate health care bill for the steps it takes toward containing costs. He quotes MIT economist Jonathan Gruber who says, “My summary is it's really hard to figure out how to bend the cost curve, but I can't think of a thing to try that they didn't try. They really make the best effort anyone has ever made. Everything is in here.... I can't think of anything I'd do that they are not doing in the bill. You couldn't have done better than they are doing."

You can see why the White House liked the column.

But reality is a little harder on them.

While the Reid bill does begin down a road toward better value, that road is a very brief and incomplete one. A few of the things it does to "bend the curve" or not:

• The Reid bill does establish a Medicare board with the power to focus payments more on value than quantity. But then the Reid bill pointedly excludes the commission from even touching hospital costs until 2019. According to the CBO, the way it is structured it would have little if any impact on physician costs. After 2019, the commission would only have the power to deal with Medicare costs that grew faster than overall health care costs—not growth greater than the economy generally.
• The Reid bill does include a public option health plan that proponents argue would provide existing health insurers with more competition. But the CBO says its premiums will likely be even higher than those in the private market.
  
• The bill would penalize hospitals that infected their patients—but only by 1%.
• A provision to encourage more cooperation among doctors would not apply to chronic diseases!
• The bill does tax high cost "Cadillac" health plans. However, it provides no incentives for the vast majority of consumers with premiums below the $8,500/$23,000 threshold to encourage them be more discreet purchasers of their health insurance.
• The Reid bill does spend money on more comparative effectiveness research. But it provides no significant incentives for either providers or consumers to take advantage of it.

It looks like we are in the “yes it does", "no it doesn’t" phase of the political health care end game.

That the Reid bill hardly starts down the value for what we pay road is underscored by a November 23 statement from the National Coalition on Health Care—a group of 85 diverse stakeholders. They aren't buying the spin that Reid has achieved a cost containment "milestone:"

“As we move closer to a final bill, Congress must act to strengthen the systemic cost control and quality improvement provisions of the pending legislation. Without immediate and system-wide reform more and more American families and businesses will face uncertain financial futures due to escalating health care costs. America needs real, affordable, fiscally responsible health system reform.”

Perhaps the best hope for real systemic change could come from a robust Medicare commission that takes the recrafting of the health care system out of the hands of the Congress. In my mind, the cost containment/value answer lies in the integrated delivery of health care—systems such as Mayo, Marshfield, Cleveland, and Kaiser Permanente.

Getting the system to move in that direction will likely take a series of iterative steps based upon pilot projects and trial and error that give providers good reason to want to be part of these kinds of systems or figure out ways to provide comparable care. But it will have to be a slow, deliberative, and iterative process as we learn what we don’t know today. In the early 1990s the market tried to quickly move the system in that direction when we introduced capitation and about blew it all up.

The longer-term trial and error process that it will likely take to finally move the system toward one of value is not something that is going to be driven in the political arena. The best chance is for a robust independent and expert Medicare commission with the ability to make the hard decisions year after year.

Whatever the best way to do that the incentives are not in the Reid bill--or the House bill for that matter--to get us on that road.

Under the Reid approach, a cost commission that can’t even touch hospitals or doctors is not the result of an effort I would have described as one in which, “You couldn't have done better than they are doing.”

Comments like that do provide for some political cover for one “budget buster” of a bill though.

Don't Rationalize Busting the Budget--Start Over

I detect a growing rationalization among supporters of the Democratic health care bills: The recent flare-up over when a woman should have a mammogram proves we are nowhere near ready to pass a health care reform bill that will actually control costs. So, why bother?

You would be hard pressed to find any health policy expert who isn’t disappointed that cost containment has fallen off the health care “reform” express. In fact, it’s more commonplace to hear the term “budget-buster” when these bills are discussed.

Now, even many proponents of the bills are conceding there isn’t a lot of cost containment in them and beginning to argue that since the American people aren’t ready for real reform let’s just get on with passing what’s on the table.

But this rationalization misses something very important.

Read the rest of this op-ed at Kaiser Health News.

The Best Health Care Idea All Year

Out of almost nowhere has come momentum for a proposal to create a bipartisan entitlement and tax commission to draft proposals to control the long-term costs of Social Security, Medicare, and Medicaid. The idea would require the Congress to quickly vote the recommendations up or down via a super majority vote.

The idea isn't new--proposals for a such a commission have been around for a longtime.

What is new is the bipartisan enthusiasm that is growing--particularly in the Senate. Coming out of the Budget Committee, and Chairman Kent Conrad and Ranking Republican Judd Gregg, the idea is picking up bipartisan steam with, among others, Republican Senate Minority Leader Mitch McConnell expressing general support for the idea.

A number of Senators have threatened to tie their votes to raise the deficit ceiling to establishing such a commission.

If the recent Democratic health care bills have made one thing crystal clear it is that the Congress is wholly incapable of dealing with cost containment under present circumstances.

Just Which $2 Trillion Were They Talking About?

Just two weeks after putting $2 trillion in health care cost reductions on the table, the response to President Obama's plan to cut the health care providers by a total of $618 billion over the next ten years ($305 billion in his original budget and another $313 billion this week) is startling--if not in the final analysis predictable.

Given that, at present trends, we are on our way to spending $35 trillion on health care services during the next ten years you wouldn't think $618 billion (two percent of $35 trillion) would be so hard for the health care providers to contribute to the effort--especially after they told us cutting $2 trillion was something they knew how to do.

First, the American Medical Association (AMA) made it clear to the President he'd better not cut their payments by imposing a Medicare-like public plan, complete with much lower reimbursement rates, on them.

And at today's speech by the President to the AMA, did you also notice how quiet the audience was when he also suggested that an independent body of experts, MedPAC, rest control of Medicare reimbursement from the Congress as a means to further control costs?

But it isn't just the AMA that suddenly can't find any savings to put into the health care pot. It's all of the other $2 trillion health care providers as well--hospitals, drug companies, and medical device companies.

This from Monday's Wall Street Journal:

"The sharp response from the hospital industry, which under the proposal faces reductions in subsidies exceeding $100 billion over 10 years, illustrates the administration's challenge in winning the deep concessions from industry needed to pay for the overhaul. After agreeing in May to contribute to a $2 trillion reduction in health spending over 10 years, the hospital industry is now bristling at the prospect of more givebacks -- this time, cuts that would be set in law.

'We're certainly disappointed,' said Rich Umbdenstock, chief executive of the American Hospital Association, an industry group. 'It will be very, very difficult for hospitals to live with cuts of that magnitude.' He said what concerns the group is that the cuts were being laid out before lawmakers have agreed on concrete proposals for reducing the number of uninsured...

"The pharmaceutical industry recently has been negotiating with the White House and Congress over how much it would contribute to the cuts, said several people familiar with the negotiations. Drug companies were initially asked to contribute $100 billion over the next decade, but pressed for their contribution to be closer to $60 billion, they said. The industry argued that giving up too much in payments would cut into spending to develop new drugs.

"Otherwise we might all just become generic drug companies,' said one industry official familiar with the talks. The White House on Saturday said it would save $75 billion over 10 years by paying better prices for drugs under the Medicare Part D prescription drug plan.

"The Access to Medical Imaging Coalition, which represents makers of medical-imaging equipment, said the administration's proposed cuts 'will impair access to diagnostic imaging services and result in patients' delaying or forgoing life-and-cost savings imaging procedures."

It’s NOT the Prices Stupid!

Out here on Kent Island, the federal government says that I like to watch the Baltimore TV stations and therefore forbids my satellite provider to give me access to the local DC channels. (We’re about an hour from both Baltimore and DC.)

There is reason number one never to put the government in charge of any more than absolutely necessary.

While my new digital converter box had been working just fine for months, enabling me to switch over and get my favorite weatherman from DC, on Friday that signal was lost. Losing Doug alone is a reason to become a libertarian.

But fiddling with the converter box Friday night (there is a health care story here), I came across an interview between former Clinton Labor Secretary Robert Reich and Bill Moyers.

Reich was arguing that it's necessary to have a public plan as part of a health care reform bill because only then will government have the ability to pool enough people together to negotiate for lower prices. And, lower prices are the route to a sustainable health care system:

"Well, there's a very simple test. And that is the public option big enough and is it going to have bargaining leverage to get drug prices down and keep private insurers on their toes, forcing them to cut prices.

"There's nothing actually pushing the system unless you have a public option that gives the insurers and the pharmaceutical industry and the hospitals a real run for their money"

Setting aside concerns that government ever negotiates anything, Reich’s focus on prices is just plain wrong.

Medicare now pays doctors and hospitals prices that are 20% to 30% lower than what commercial insurers and HMOs pay them.

So, if we follow Reich’s logic, the current Medicare plan, paying much lower prices, should have health care under control. Of course, Medicare is as unsustainable as the private health care system.

Uwe Reinhardt has done lots of great research finding that America’s health care prices are higher than those in the rest of the western industrialized world.

But the more immediate problem here is utilization—the often-made Dartmouth Atlas argument. The very same argument the President very properly made in Green Bay last week.

The first things we have to tackle are the structural over-utilization problems that have evolved for decades. If we just go and start cutting prices 20% or 30%, we'd create a chaotic situation. Can you imagine the cost shifting that would ensue from even more underpaid providers in the form of even higher utilization rates?

Sustainable health care reform has to be about incentives that will fundamentally change practice patterns.

Reich, and the other public plan proponents, need to explain why, if getting lower prices through a public plan is the solution, isn't Medicare already a model of health care efficiency?

Raising Taxes to Pay for a Health Care Bill--Apparently the Congress Wouldn't Be Able to Find a John Deere in a Hay Stack

Why Do We Need to Raise Taxes to Pay For a Health Care Bill in a System That Has $10 Trillion in Waste?

White House Budget Director Peter Orszag has promised in the next few days to detail just how the administration would like to see health care reform paid for.

There are some people who question whether he will play it straight or play games with those numbers—will the list really be scoreable?

He will play it straight. You only need look at the comprehensive and highly regarded December Congressional Budget Office (CBO) report he put his signature on, as the then CBO director, that detailed 115 health care reform options to know that.

But the White House list of health care reform pay-fors will undoubtedly also have a number of new taxes to pay for as much as half the cost of a health care bill. Because the Congress has been unable to do much toward getting the waste out of the system, and therefore needs billions more, there will be lots of tax increases on the list.

Let me be clear, using the tax system to drive people to more efficient health plans could be good policy. But most of the tax increases on the list are just plain tax increases.

So, as we await word on just which new taxes the White House and Congress will propose to pay for a health care bill, consider this.

The Centers for Medicare and Medicaid (CMS) has said that our health care system will cost $2.5 trillion in 2009. CMS has also projected that we will pay $4.3 trillion at current trends in 2018. A little simple math says that we will pay out about $35 trillion over the next ten years.

About half of that—or $17 trillion—will be paid by government under existing programs.

Most experts estimate that the final health care bill will cost at least $1.2 trillion over those same ten years. It looks like the Democrats are getting ready to propose paying for half the cost of a health care bill with new taxes.

So, out of that $35 trillion we can’t find a little more than a trillion dollars in savings to pay the full cost of a health care bill?

Just taking the $17 billion that government will pay over the next ten years, we can’t find a trillion dollars there either?

Most experts agree that our system costs so much because we waste something like 30% of what we now spend.

At 30% in waste, that would mean that of the $35 trillion we will spend on health care over the next ten years there is more than $10 trillion in waste. Just in the $17 trillion government will spend on health care there would be more than $5 trillion in waste.

Just think about the logic of that for a moment.

It appears we are on our way to a $600 billion to $800 billion tax increase for a health care bill because we can’t find that amount of money in a system that will waste $10 trillion over the same period.

I don’t think these guys could find a John Deere in a hay stack.

"Health Care Leaders Say Obama Overstated Their Promise to Control Costs"

That was the headline in yesterday's New York Times regarding Monday's promise by health care stakeholders to reduce spending by $2 trillion.

A couple of snipets from the Times article:

Hospitals and insurance companies said Thursday that President Obama had substantially overstated their promise earlier this week to reduce the growth of health spending.

“There’s been a lot of misunderstanding that has caused a lot of consternation among our members,” said Richard J. Umbdenstock, the president of the American Hospital Association. “I’ve spent the better part of the last three days trying to deal with it.”

One of the lobbyists, Karen M. Ignagni, president of America’s Health Insurance Plans, said the savings would “ramp up” gradually as the growth of health spending slowed.

Right after the $2 trillion announcement I posted:

Don’t also assume that the American Medical Association (AMA) really represents doctors—I don’t think anyone or anything really represents doctors. If the AMA makes a commitment that actually means sacrifice among the docs you will see just what I mean—especially if the national association folks do a deal with the insurers "on behalf" of all the docs back home requiring real sacrifice. To some degree, you can say the same for the thousands of hospitals out there.

If these stakeholders don't deliver $2 trillion in something Orszag can take to the bank will the Democratic response be a "public health plan?" Watch the fireworks.

Someone dug themselves one heck of a hole yesterday.

Is it the stakeholders that now have to do in a few weeks what no one has done in decades of pondering this dilemma—make a tangible, measurable, and enforceable offer that cuts real money? If you think coming up with $2 trillion was a big deal actually figuring out the mechanism to carry it off will be a dramatically bigger challenge.

Was it the Obama administration that just raised expectations exponentially trusting these guys can actually deliver something measurable? Or, is the Obama administration just setting them up?

Or was the Obama administration just setting them up?

When those stakeholders walked into the White House on Monday they never intended to make more than a vague promise. When they walked out it was to headlines that they would make "scoreable" proposals by June 1st.

They also had some very angry constituents across the country wondering just what kind of deal they were doing.

They never had $2 trillion and now they have one big problem!

As one insider told me this week, "They got smoked!"

Update: Stakeholders released a statement in response to the NY Times article:

Washington, DC — “We are committed to working together to bend the health care cost curve. Health care reform will not be sustainable unless the nation brings down the rate of growth of health care spending. We are committed to doing our part to make reform sustainable and to make the system more affordable and effective for patients and purchasers.

"Our organizations are currently engaged in an intensive process to develop proposals to reduce the rate of increase in future health care costs. And to be successful, we must take action in public-private partnership. We look forward to offering cost-savings
recommendations in the weeks ahead.

"The participating organizations reaffirm their commitment as outlined in the May 11 letter pledging to do our part to bring down health care costs."

The $2 Trillion Offer to Reduce Health Care Costs—Now They've Done It!

First it was great to see the press coverage of the $2 trillion offer come back down to reality as the day wore on yesterday. From gushing over the “unprecedented” commitment to reform by these key stakeholder groups the news reports and editorials finally, by days end, reflected the fact that nothing is really promised or enforceable yet.

Now we hear that these groups have to deliver specifics on just how they will deliver the trillions in the next few weeks.

For this to be a big deal it has to be “scorable.” By the Congressional budget rules that means there has to be the reasonable expectation the savings will be there. The referee, the Congressional Budget Office (CBO), has proven to be skeptical of anything that isn’t backed up with hard data. (Good for them!).

Don’t also assume that the American Medical Association (AMA) really represents doctors—I don’t think anyone or anything really represents doctors. If the AMA makes a commitment that actually means sacrifice among the docs you will see just what I mean—especially if the national association folks do a deal with the insurers "on behalf" of all the docs back home requiring real sacrifice. To some degree, you can say the same for the thousands of hospitals out there.

So if we get more vague promises and nothing scorable then how will the Obama administration respond? If we do get something cutting edge how will the constituents respond? Will the constituents even let the stakeholders get that far?

I continue to get reporters asking me if—or arguing—it is really different this time compared to 1993 and 1994.

Sure, there are lots of things that are different compared to 15 or 16 years ago—the critical nature of the problem at the top of the list.

But I was there in the Indian Treaty Room with the Clinton task force. I was in Ira Magaziner’s office. Let me tell you, in May of 1993 every one of these stakeholders couldn’t wait to be part of the process and on the right side of Mrs. Clinton. The term, “being at the table” was as commonly used then as it was yesterday in all of the glowing reports.

Then the details came out and it got ugly. "Harry and Louise" was never intentional—it was a reaction that came months later when it became clear the insurers were on the outs and had a “bulls eye” on their backs.

But back to this year.

If these stakeholders don't deliver $2 trillion in something Orszag can take to the bank will the Democratic response be a "public health plan?" Watch the fireworks.

Someone dug themselves one heck of a hole yesterday.

Is it the stakeholders that now have to do in a few weeks what no one has done in decades of pondering this dilemma—make a tangible, measurable, and enforceable offer that cuts real money? If you think coming up with $2 trillion was a big deal actually figuring out the mechanism to carry it off will be a dramatically bigger challenge.

Was it the Obama administration that just raised expectations exponentially trusting these guys can actually deliver something measurable? Or, is the Obama administration just setting them up?

Or, is the expectation it will be the CBO that will break under all the added pressure and suddenly get easy in evaluating these vague promises?

To have health care reform we will need to find more than a trillion dollars to pay for it. So far, the Obama administration has identified about $300 billion in scorable savings.

And don’t forget the need to find over a trillion dollars and the $2 trillion offer is apples and oranges. The $1 trillion+ is what we need to offset a new program in the federal budget. The $2 trillion relates to the entire health care economy that will total something approaching $40 trillion in the next ten years.

Really, nothing has changed during the last couple of days. This morning, Chuck Grassley referred to the $2 trillion offer as "Fairy dust just waiting to turn to gold."

That $2 trillion offer has yet to move the health care reform meter past $300 billion.

But boy are there some people on the spot!

Recent related posts:

"Trust But Verify"--Health Care Stakeholders to Pledge $2 Trillion in Reductions

An Open Letter to the Men and Women Over at the CBO--Hang In There!

"Trust But Verify"--Health Care Stakeholders to Pledge $2 Trillion in Reductions

This from the Wall Street Journal on Sunday:

Major health-care providers are planning to pledge Monday to President Barack Obama that they will work to reduce cost increases in the nation's health-care system by $2 trillion over the next decade, officials said…

Groups representing hospitals, health-insurance companies, doctors, drug makers, medical-device makers and labor are joining in Monday's announcement. According to a letter from the groups, reviewed by The Wall Street Journal, they will promise to help reduce the growth of national health-care spending by 1.5 percentage points in each of the next 10 years. "The times demand and the nation expects that we, as health care leaders, work with you to reform the health care system," the letter says.

Is it possible for these stakeholders to find $2 trillion in excess health care costs over the next ten years?

Are there ice cubes in Antarctica?

During the next ten years, we are on track to spend something approaching $40 trillion on health care in America. The stakeholders need to be proposing something that is more than a rounding error--it needs to actually make a difference toward making entitlements and private health insurance affordable.

According to CMS, the U.S. is projected to spend over $2.5 trillion on health are in 2009—or 17.6% of GDP.

In 1970, U.S. health care spending was about $75 billion—7.2% of GDP.

Health care costs have risen about 2.4 percentage points faster than GDP since 1970.

In 2018, CMS projects that we will spend more than $4.3 trillion on health care—20.3% of GDP.

So, these key stakeholders are going to visit the White House tomorrow and tell us that after 39 straight years of blowing the lid off of GDP they are now going to control costs?

That is if the President and the Congress mandate that everybody buy their health insurance products and therefore get funding to visit their doctors offices and hospitals as well as buy their drugs and devices.

OK.

But I would suggest some hard questions:

1. What measurable and verifiable benchmarks are the stakeholders willing to set?
2. What consequences are they going to suffer if they don’t make a real difference in controlling costs?

I think Ronald Reagan had it right when he was negotiating disarmament with the Soviets—“Trust but verify.”

Is this $2 trillion offer a big deal?

Is it more than just a rounding error in the grand scheme of things?

Is it is measurable, verifiable, and are there consequences for falling short?

If the answer is “Yes” to each of these elements, then it is scorable.

If the answer is “No” it’s just good PR.

One other thing is clear--the pressure is building on the Congressional Budget Office to agree on some health care reform savings. Recent post: An Open Letter to the Men and Women Over at the CBO--Hang In There!

"Take the $600 Billion in New Revenue from Obama's 'Cap and Trade' Climate Change Proposal and Use it To Pay for Health Care Reform"

Last week Senate Majority Leader Harry Reid was quoted as raising the possibility we could take the $600 billion in new revenue projected from a "cap-and-trade" plan to cut green house-gas emissions and use some or all of it to help pay the estimated $1.5 trillion cost for comprehensive health care reform.

Energy and climate change issues aside that would be a bad idea--a really bad idea.

The biggest health care challenge we face in America is the cost of health care. To really reform the system we have to bring its costs under control. The only way we can achieve sustainable health care reform is to pay for most of the cost of any reform plan out of the savings we achieve fixing the system and its perverse incentives to spend more without regard to what we receive.

Finding $600 billion from another part of the budget to simply subsidize these out-of-control costs would be tantamount to just raising taxes to keep paying this unsustainable bill. Pouring another $600 billion into the system would have the supply-side inflationary effect of just pushing costs up even more--pour lots more money in and it will get spent. Why would any stakeholder--provider or beneficiary--have any incentive to reduce health care costs?

But finding $600 billion would go a long way to also meaning no one in Washington would have to face the hard choices needed to actually reform our system. It would mean we could just promise everyone painless access to whatever health care services they want. Just think how happy consumers, doctors, drug companies, hospitals, and all the rest would be.

That is until the money ran out.

But, you know, this is just shortsighted and politically expedient enough to go somewhere.

"A Handshake That Made Health Care History"--A Boston Globe Expose: A "Quiet Deal" Between Mass Blue Cross and Boston's Most Powerful Hospitals

In a lengthy expose entitled, "A Hand Shake That Made Health Care History," the Boston Globe details what it called a "gentleman's agreement that accelerated a health care cost crisis" in Massachusetts. The reported deal was between Partners Health Care, the state's biggest health care provider, and Massachusetts Blue Cross, the largest state insurer.

The article charges that the agreement all but kept the national health plans from gaining a foothold in the state and forced the state's other not-for-profit insurers to accept Partner's terms.

I will suggest this article, apart from its sensational reporting, may have two significant implications:

1. There will now be more pressure for Massachusetts to change the financial terms with its health care providers in order to keep the Mass Health Law afloat. The Massachusetts Health Law is coming up on its third year and its unsustainable costs are generally seen as a huge challenge for its long term viability. Getting those costs under control will have to focus on what is paid to providers more than any other issue. This may be the opening salvo on what will be more focus and pressure on what doctors and hospitals are paid in the state. The day this law was passed the die was cast that the generous payments made to powerful providers would have to be faced--sooner or later--and that day is upon them.
2. Getting doctors and hospitals onside will be the real challenge to health care reform. Health care reform in Massachusetts, and more importantly in Washington, will require payment policy that doctors and hospitals can buy into and at the same time result in sustainable costs for any new health reform plan. While hospitals are more powerful in Boston than most other markets, I would argue that this story is a study in just who really is, or can be, the most powerful player in the American health are system--it is the health care provider.
   

The recent CBO cost study underscores that it is what is being paid to health care providers that will be the real challenge to reform. If the docs and hospitals don't like the health reform plan they are politically powerful enough to kill it. If it is too generous to providers, the plan will be fiscally unsustainable.

Here is a small excerpt from the Boston Globe Story:

"Partners Healthcare was born in 1993, but its powerhouse potential didn't fully hit home until 2000. That's when the emerging giant cut a quiet deal with Blue Cross to ratchet up insurance costs across the state. Nothing in Massachusetts healthcare has been the same since.

"It was the gentleman's agreement that accelerated a health cost crisis.

"And Dr. Samuel O. Thier, chief executive of Partners HealthCare, and William C. Van Faasen, chief executive of Blue Cross Blue Shield of Massachusetts, weren't about to put it in writing.

"And so, in May 2000, the two simply shook hands on this: Van Faasen would give Partners doctors and hospitals the biggest insurance payment increase since Massachusetts General and Brigham and Women's hospitals agreed to join forces in 1993.

"In return, Thier would protect Blue Cross from Van Faasen's biggest fear: that Partners would allow other insurers to pay less. Those who helped broker the deal say Thier promised he would push for the same or bigger payment increases for everything from X-rays to brain surgery from Van Faasen's competition, ensuring that all major insurers would face tens of millions in cost increases. Blue Cross called it a "market covenant."

"The deal, never before made public, marked the beginning of a period of rapid escalation in Massachusetts insurance prices, a Spotlight Team investigation has found, as Partners repeatedly used its clout to get rate increases and other hospitals tried to keep up. Individual insurance premiums have risen 8.9 percent a year ever since the "market covenant," state figures show, more than twice the annual rise in the late 1990s.

"Both Partners and Blue Cross deny that they acted improperly in the 2000 payment negotiations or in their dealings since. Partners issued a statement saying that Thier pledged only that he would treat all insurers equally. Blue Cross executives have said that the big pay raise to Partners in 2000 was needed to offset years of low rates."

You can read the entire article here.