Harry & Louise Go To Washington
By Michael Turpin
As academics, reformers and political action committees swarm to Washington like springtime midges eager to help contour imminent health care reform legislation, change is clearly in the wind. The mood inside the Beltway is infinitely different than in 1993 when a Republican controlled Congress, partisan stakeholders, employers and two iconic middle class consumers named Harry and Louise coalesced to defeat Hillary Clinton’s complex prescription for reforming runaway costs and inefficient delivery. Unfortunately, once the threat was ameliorated, stakeholders fell back into old patterns and failed to offer more enlightened solutions to moderate the rising costs of healthcare in the US.
In May, 2009 the private sector is unusually silent. Harry & Louise, have just lost 40% of their net worth in the recent financial markets meltdown. Harry lost his job in January and is worried about being able to afford healthcare coverage. Being 55, he would love to not go back into sales but take that teaching job. He and Louise are waiting to see what the government might propose to help relieve their financial burdens and growing concerns over healthcare once Harry’s subsidized COBRA coverage runs out.
Harry has read the statistics. He knows that employers who purchase care on the behalf of some 177M workers appear to be at their wits end and seem to be pondering whether now is the time to transfer the risk of a generation of overweight, soon to be chronically ill Americans to the government. Louise has a friend who is a pediatrician and has heard that doctors are torn between two evils – insurers that have serially reduced their reimbursement and smothered them with bureaucracy and a government run system of reimbursement that serially underpays for services. Harry and Louise voted for the new administration and they are hoping these proposed changes will be good for them. However, they get fatigued with all the discussion and don’t seem to have the stamina to question too deeply the long range cost impact for tax payers to extend universal coverage to an additional 45.7M Americans. It seems this time around, everyone is ready for change.
The statistics on the uninsured tell a diverse story of healthcare in America. Of the 45.7M uninsured, 12.1M are eligible for government sponsored children’s health insurance ( SCHIP) or Medicaid but are not enrolled. 17.6M earn $ 50k or more in earnings. 9.7M are non citizens and 7.9M are college aged adults. Each group represents a different pool of risk for a new and broadened US universal access plan. Health reform is not just about achieving 100% access for Americans, it is also about achieving affordability so we can support the cost of high quality care for all citizens. This means driving out an estimated $900M in waste caused by preventable illness due to lifestyles, clinical variability in healthcare delivery due to defensive medicine and inconsistent adherence to evidence based best practices for treatment, and inefficiency/lack of coordination across a predominately manually administered delivery system.
Having worked as a healthcare consultant in the US and in Europe and having laid with pneumonia on a gurney in the hallway of a socialized healthcare system, I felt the need to reach out to Harry and Louise and offer some perspective on a US healthcare platform that we all agree needs to be reformed:
1) This is a Global Issue – Every nationalized system is straining under rising healthcare costs and is achieving affordability primarily through rationing services. In each market, there is a rapidly growing consumer financed, alternative private care market that features concierge medicine and medical tourism (E.g. Canadians coming to US, French going to India, Arabs coming to France.) As we move toward universal coverage and the possibility of backing into a single payer system in the process, we need to understand that many systems we are seeking to emulate are experiencing rapidly expanding privatization paid for by those who can afford to go outside of struggling government run healthcare programs. We are in a sense, passing one another in the hospital hallway.
2) Can Government Handle Being The Bad Guy? -Where there is national health, the government is now the payer. Instead of a for profit or nonprofit insurer denying coverage due to lack of clear medical necessity or the absence of clinical justification, the government now gets to wear the black hat. During my most recent trip to the UK, a 30-year-old cancer patient was suing the NHS for denying a cancer therapy that was very expensive and not likely to change his prognosis. His oncologist was obviously throwing everything he could at the disease but the poor cost/benefit of the specialty drug forced the government to deny the estimated $35,000-a-year treatment.
3) I’ll have the Reformed Torte, please! – There are major differences in medical liability law in Europe. Defensive medicine – that serves both as a shield to avoid allegations of malpractice and as a curtain to obscure overtreatment – is non-existent abroad. There are fewer MRIs, CT Scans, and multiple office visits delivered each year because physicians do not over treat as a means to avoid litigation or to enhance income due to reduced reimbursement. Medical malpractice tort costs exceeded $ 30B in 2007 – a cost that eclipsed the profits of the ten largest commercial insurers by over 2 ½ times.
4) Talent Drain – The per capita multiple of salary for physicians in the US is 8.5 times the average worker’s pay. This is down from over 10 times which attributes to the heartburn expressed by doctors as they watch their overall wages declining. In Europe, that per capita salary delta is less than 2.5 times. Simply put, doctors make a lot less in nationalized systems.
A good example is the UK where the government has reduced pay for local family practice practitioners and nurses creating shortages that have been filled by foreign trained physicians immigrating to the UK seeking higher levels of reimbursement than their home countries. As doctors leave home countries seeking better salaries, the talent drain is creating medical and public health crises in more vulnerable countries often exacerbating difficult public health problems at home.
Physician migration is beginning to happen in the US. For example, in states like Rhode Island, family practice MDs see lower levels of reimbursement than in Massachusetts and as a result, move across state lines to practice the same medicine for higher reimbursement. The drain of physicians is even more acute in New York where rural counties with larger populations of Medicare and Medicaid beneficiaries are losing doctors to Metropolitan New York because there are more privately insured patients to treat. It does not pay much to be a primary care doctor anymore. It does not pay at all to be a primary care doctor paid by the government.
5) Innovation Erosion – The US finances much of the medical device and biotech innovation that drives improvement in medical quality and treatment. Insurers, despite their public relations problems and opaque business practices, do contribute to improving consumer information systems and provide needed sentinel controls to limit fraud and abuse. The US health system also attracts capital – – investment that drives innovation, process improvements, competition and new therapies that are plagiarized around the world – often at much lower costs. New drugs that are financed and sold at expensive retail prices in the US are offered wholesale in other countries where nationalized purchasing depress the profit making power of the bio tech or pharmaceutical company that developed the drug.
If the US is slowly transformed through government purchasing into a single national purchaser, the velocity in which capital will flee the healthcare sector to seek better returns will be unprecedented. Overall medical spend as a percentage of GDP will surely subside but innovation will slow and investment will be redirected like the proverbial baby with the bath water into new areas where capital will get an adequate return.
6) Public Plan Crowd Out – Expanding government run public health plan options will accelerate the transformation of the US to a single payer system. As the Federal government adds 45.7 million plus uninsureds to some type of expanded Medicaid or Medicare (CMS) program, privately financed healthcare through employers will bear more cost shifting from doctors and hospitals. CMS does not negotiate provider reimbursement, it promulgates it. If a hospital knows its costs are increasing 8% and it has received a 2% cut from the government – which represents 60% of the hospital’s reimbursement – the hospital must get in excess of a 25% increase from its private payers to make its 8% budget. If the private payers balk at such a rich price increase, the hospital threatens to drop out of the insurer’s network.
Enter the employer who purchases the private coverage from the insurer. The employer immediately gets skittish at the idea of losing a hospital from their broad PPO network and admonishes the insurer to resolve their dispute with the hospital. Unwittingly, the employer is perpetuating the problem of cost shifting and will end up inflating their own cost of care. The insurer pays the hefty 25% increase and voila, you have medical trends in excess of 10% for private payer care. Meanwhile the government is applauding its 2% across the board cost reductions and urging more employers to join their public plan because of its affordability. Eventually, the government controls the entire system and there is no one left to shift cost of rising care to except taxpayers and providers by limiting reimbursement.
7) Are We Avoiding the Tougher Conversation?- The third rail of health reform is affordability – you touch it as a politician and you die. Access is a safe and popular term right now in the health reform debate. Who does not want to see every American given access to healthcare? However, the challenge is the failure of policymakers to understand that affordability is a zero sum game. With the net present value of our current Medicare obligations already estimated to be underfunded by some $ 8 Trillion dollars, the additional cost of expanding this coverage to 45.7 million additional Americans seems untenable without corresponding cuts to offset the current and future costs of care. To save $ 900B in documented overtreatment and waste, someone will have to get paid less money.
There is tremendous rhetoric around the cost of administration in healthcare. The combined profits of the ten largest commercial insurers added up to $ 12.9B in 2007. On the other end of the spectrum, the estimated cost of obesity, according to the Forum for Health Economics and Policy, over the last 25 years has been $ 1.1 Trillion. The cost of smoking was estimated by Health and Human services to be $ 157B each year. The cost of fraud is estimated at $ 100B by the Center for Medicare and Medicaid Services.
While reform must absolutely change stakeholder practices and insist on total transparency of all administrative expenses not attributable to actual claims, ( PWC estimates this number to be 13% of every dollar while anecdotally, we often hear numbers as high as 30% ), the real opportunity for changing the system is changing people.
Regulation should focus less on price controls and more on population risk management – medical management, personal health improvement, rationalizing redundant and inefficient delivery systems and returning patients to a primary care based model where physicians are incented to keep patients healthy. In Japan, government officials have gotten serious about the public’s obligation to contribute to lower costs of care. Ideas have included considerations that would be viewed as outrageous in the US such as a surcharge tax for overweight individuals – as these consumers are more likely to develop costly and avoidable chronic illnesses that will consume more services from the national system.
8) Achieving Zero Trend – Zero medical trend can be achieved, according to Dr Dee Eddington of the University of Michigan, through risk management not through cost shifting or rationing. The current debate on healthcare reform is unfortunately happening among too few of the stakeholders and as we speak, compromises are being forged that seem to be less about lowering medical trend and more about limiting or eliminating the role of those who add administrative expense to the system.
Pundits point to the Massachusetts “Connector” as a shining example of how a state government has created efficient purchasing of individual and small group coverage for the uninsured of Massachusetts. A closer look reveals a different story – looming deficits, forced expansion of the program to mandate the participation of small employers in with individuals creating a greater spread of risk, and disproportionate cost shift to small employers. Perhaps the most troubling is a menu of benefits so rich ( much richer than most private plans ) that it will surely drive medical trends in double digits for the foreseeable future. It is less than two years old and is already being seriously examined as a ” solution” for individual and small group insurance purchasing.
True affordability creates winners and losers and that’s not always good for politics. You could convert the top ten insurers to non-profit status and save a mere $ 12B a year compared to attacking obesity, one of the root causes of medical inflation that has inflated our costs of care by hundreds of billions of dollars in the last decade.
There are certainly egregious examples of 30% administrative costs for every insurance dollar spent. However, these statistics are often isolated and misleading as these expenses are often incurred by individual and small group plans that have higher distribution, pooling and risk charges. Individual and small group insurance is in need of reform – reforms that require guarantee issue coverage, mandates for insurance and aggregated purchasing to achieve the same administrative savings that larger employers enjoy. Insurers do make a disproportionate amount of profit on small groups and individuals. Insurers will make less money on their commercial products when they no longer can shift risk to smaller employers and individuals. Most large employers pay less than 10% for administrative services. The average margin on all commercial insurance is less than 6%. They, like many others, will have to clearly justify the value they bring to managing the consumer through a complex healthcare system.
9) Rationalize or Ration? – Affordability is an unpopular discussion. To achieve affordable care, one must be prepared to make some tough decisions. You must either begin to rationalize the excessive and uneven care provided in the US or ration it. Rationalizing means taking on difficult decisions around which hospitals stay open and which hospitals close. It means enduring withering attacks from hospital worker unions in underperforming or redundant facilities. It means demanding accountability from consumers to take responsibility for their health and encouraging plan designs that shift cost to those who refuse to be complaint. It means questioning profit taking by players in the system that are not clearly adding value to the distribution chain but merely living off it. It is demanding total transparency in any opaque area of healthcare delivery. Where there is less visibility, there is more room for abuse.
Rationalizing care means making tough decisions about redundancy of services – reducing the number of MRI and CT scanning machines within a geographic area, balancing the excess supply in markets where too many hospitals compete to cover too small a population. And, it means having a difficult ethical debate around end of life care.
True reform and long-range medical trend management is painful for a generation of Americans who believe the unencumbered healthcare is an entitlement. Countries with aging and declining populations are bracing for surging medical and pension obligations. As the US seeks to offer expanded access, other countries are seeking to control it and to forge a more reciprocal public covenant with its citizens. Everybody wants something for nothing and no one wants to change. True political courage is leading the discussion first around affordability. So far, the policymakers seem reticent to hold accountable those most likely to be impacted – consumers, hospitals, doctors, unions, medical device manufacturers, biotech, and pharmaceutical companies. It is almost easier to first expand care, and then knowingly descend into the inevitable crisis of underfunding where Congress can then legislate draconian measures.
10. Stopping the Conveyor Belt – A nationalized system does nothing to slow the conveyor belt that moves “at risk” patients toward becoming tomorrow’s chronic, acute and catastrophically ill. Medical trends will continue unchecked and will only be marginally impacted by bulk government purchasing and price controls. Over time, our best and brightest will no longer seek medicine as a career and with that shift, quality will erode along with capital investment. As costs inevitably go up, rationing increases, and a two-tier system emerges like a toadstool on the heap of government bureaucracy and regulation.
There is no doubt that we need change to our system. However, the question is whether reform will be driven by a Trojan Horse – universal access supported by an expanded public plan to compete with private employer sponsored care or a tougher discussion with all stakeholders – including unhealthy consumers – about the cost drivers and the need for everyone to change.
Will Harry and Louise wake up and smell the coffee? Will Harry lose that 20 lbs he put on while sitting around the house watching the Food Channel when he was supposed to be looking for a new job? Will Louise end up on a hallway gurney in a two tiered American health system? Stay tuned.