Is the Price Right?
Photo by Gage Skidmore
On February 10th, Rep. Tom Price was confirmed as Secretary of Health and Human Services on a party line vote, 52-47. As such, it seems prudent to learn a bit about his plans for reshaping American health care. The good news is that there is already a document that gives us a detailed view of what he’d like to see in law: he was lead sponsor of the Empowering Patients First Act, that passed the House in 2015. The bad news is that it’s 242 pages long. So here are some important points about it:
- EPFA has many of the elements Republicans have been clamoring for during the last eight years, including expansion of Health Savings Accounts, selling insurance across state lines, association health plans, and high risk pools.
- To replace the individual mandate, there are continuous coverage provisions. This allows insurance companies to charge a premium for those who have not had recent coverage, as a deterrent to those who would otherwise wait until they’re sick to get insurance.
- To replace the Cadillac tax on especially rich health coverage, there is a limit on deductibility of health insurance for companies. While wonks will argue about the difference between these two arcane provisions, the intent and effect of them are the same. Both are intended to blunt the effect of rich health coverage on increasing utilization. This isn’t popular with some in the Republican party, but it’s in here nonetheless.
- To replace the subsidies in the marketplaces/exchanges, there are refundable and advanceable tax credits. So instead of using federal dollars to make coverage more affordable, Dr. Price uses federal dollars to make coverage more affordable. EPFA is different, however, in that while the ACA subsidies are only available to lower income individuals, everybody gets access to the tax credits regardless of income. So even the wealthy will get some federal dollars to buy health insurance.
- EPFA contemplates the return of annual and lifetime maximums. Effectively this opens the door to “running out of insurance” again, not a comforting thought but something that will make insurance cheaper for everyone else. You get what you pay for.
- Medicaid provisions are a bit vague, but speak about states needing to submit plans to insure 90% of children under government programs or commercial insurance. Notably missing are details of coverage for childless adults, a big portion of the expansion population. This leads many to conclude there might not be coverage for those folks under a Price HHS.
There are other competing Republican plans out there, and it remains to be seen how much the final repeal and replace effort resembles Secretary Price’s plan while a member of the House. But it is noted in the press that his plan is one of the more aggressive in rolling back key provisions of the ACA. Many of these same provisions appear in the draft that just came out of the House, which was drawn on A Better Way, the speaker’s plan.
Does the provider lose money making repairs, or does he make money?
Photo by ccPixs.com
There is a lot of talk in health care these days about paying differently for services. Like any other industry, we have our jargon: fee for service (FFS), pay for performance (P4P), bundles, capitation, population payment. All of this is confusing for the average American, and understandably so.
But no matter what we call it, there is a big difference between various ways of paying for health care. It’s actually not that different from how we buy stuff in other parts of our lives. This came home to me recently when my wife was in two situations:
- First, when she recently went to a new dentist to get a teeth cleaning, the dentist did a thorough exam. She then offered that if Marti wanted it, she would be happy to drill out some old fillings to see if they were likely to fail soon. Only by drilling them out could she be sure that the fillings were still sound or not. If there was a problem, she could refill the cavity or replace the whole tooth with a crown. My wife had no symptoms then and still doesn’t.
- She also recently went into the local tire store where she’d bought a set of four tires a few months ago, with a warranty. There was a screw in one of the tires (we have a lot of remodeling going on in our neighborhood). The technician looked at it, and after examining the screw and removing it told her that there was no leak caused by the screw, and she was good to go. No tire repair or replacement needed.
Quick quiz: which practitioner was operating on FFS, and which one was operating on a bundled payment?
If you said the first was FFS and the second a bundle, you get a gold star. The fundamental difference is that the first proposed transaction would have resulted in the dentist getting a fee for the work, maybe over a thousand dollars if it involved a crown. The second transaction would have been covered under a warranty, and so would have cost the tire shop time, materials, and labor, but would not have generated a new payment. This is the fundamental difference between FFS and bundles or capitation. Right down to brass tacks, in fee for service, every new service draws a new fee; in bundles or capitation, some or all services don’t generate new revenue. I often think I can spot FFS behavior and capitated behavior without knowing the financial arrangement, just from how the practitioner behaves in the transaction. For example, if a shop offers to do a “free inspection”, I think you can almost always expect them to come back with a recommended purchase of something from them. This is classic FFS behavior. Conversely when someone is capitated or works under a bundled payment, they give a lot more thought to the question, “Is this really necessary, or could we watch and wait to see if it’s really a problem?”
There are big implications for our health care system in the move away from FFS to bundles and capitation. I personally favor the latter, because I think it’s just too easy for American providers to order and reorder things without consideration for the financial consequences to the payer, which is increasingly the patient himself. Even if the patient isn’t directly responsible for the bill, someone pays for it, and that usually means the collective we, whether through insurance or government programs. Most people in health care reform think this dynamic is one of the reasons we spend twice as much as most countries and get poorer results: the FFS system incents people to do more, not better.
So when you go see your provider, which do they seem more like, the dentist or the tire shop? More importantly, which do you want them to resemble more?
Why you can’t fool all of the people all of the time
Photo by Strolic Furlan
I think for most people including me at times, the effort to repeal and replace the Affordable Care Act is an exercise in taking something they didn’t understand well but have feelings about, and replacing it with something else they don’t understand well and will have feelings about. I could comment on the state of our legislative process that this is the case, but that’s for another day and another blog.
Instead, if you can stand it, I’m going to use this column to try to explain the difficulty in reshaping the insurance pools in the ACA. First, a few rules of economics:
And one rule of insurance:
Avoid the Death Spiral: If participation is voluntary, you better give a heck of a deal to those who aren’t likely to use any stuff. They effectively make it possible for the sick people to get what they need without going broke. In the insurance biz, when you can’t attract healthy people, it’s called a “death spiral”. If all you get in the pool are sick people, you have to charge so much that you can’t sell the product to healthy people, and that makes it attractive to only those who are very sick, which makes it even more expensive, etc. You get the idea. It doesn’t end well.
The death spiral is a big deal in the insurance and policy worlds. People spend a lot of brain power trying to avoid it. Not surprisingly, Republicans and Democrats have different solutions for the death spiral. The ACA solution was called the individual mandate, which made it a taxable event to go without insurance, and therefore if you didn’t buy a policy, you put into the government kitty to make up for the risk you didn’t assume with the rest of us.
The Republican solution involves a couple of things:
- First, you allow rates to be more different than they are now. Currently in the ACA, you can’t charge anyone more than three times the lowest rate offered to someone else for the same policy. So if I’m 60 and have heart disease, I can’t have a premium more than three times my healthy daughter’s rate. Under some Republican plans, that multiple rises to five times, which is about what the market was before the ACA. But the benefit is that should make my daughter’s premium lower.
- Second, if you take a bunch of sick people out of the general pool, you can lower the rates for everyone else, because they’re no longer subsidizing all those sick people. This is a concept called “high risk pools”, and many states including Colorado had them before the ACA.
But wait, don’t the really sick people have to pay a fortune in the high risk pool to get care? The answer is yes, but in Republican solutions, the government kicks in a bunch of money to make it affordable for the sick people as well. Since the government’s money comes from all of us, we’re still subsidizing the sick, but we’re doing it through government rather than private insurance pools. (Yes, you read that right, one of the critical features of the Republican plans is government subsidies.)
Okay, what’s not to like? We avoid the death spiral because we attracted young invincibles with low rates, we give healthy people a break by taking sick people out of the pool, and we subsidize the sick in their own special off-to-the-side pool.
Yogi Berra is (wrongly) thought to have said, “In theory there’s not a lot of difference between theory and practice. In practice, there is.” When high risk pools existed before, they were chronically underfunded, and therefore really expensive for people, such that only well-off people could afford the premiums. It was a terrible slog to go to the legislature every year to ask for more money, and you can imagine what the answer was. In Colorado at least, one of the solutions was to tax the health plans, so that—you guessed it—healthy people buying insurance were effectively subsidizing sick people in a now not-so-off-to-the-side pool.
There are other ways to lower premiums for the well. You can make their policies cover less, and then the actuaries will tell the insurance companies that they can charge less and still have a business. Annual limits, lifetime limits, stripping out mandated services that don’t apply to particular individuals—all these used to exist before the ACA but don’t now, and make insurance cheaper. They may return in a future iteration of American health care.
But the fundamental rule of insurance pools is you’ve got to come up with enough money to pay all the bills. So that makes this a key question: do we want to make insurance rates for people more alike, or more different? What is the “fairest” way for all of us to pay for care through a common pool or set of pools?
Photo by elPadawan
Back when I was in college in a small school in Indiana, I was in a fraternity, like 85% of the kids who attended there. All the guys in my house slept in one of two “dorms”, or mass sleeping rooms in the back of the house. The freshmen slept in the “rookie dorm”, and the upperclassmen slept in the other dorm (there wasn’t another name that I recall).
But over time, my fraternity brothers started building lofts, or sleeping platforms that went over their desks, for their rooms. This allowed them to sleep in their study rooms, rather than in the communal space. I’ve been back to that fraternity house in recent years, and the dorms are altogether gone, replaced by more spacious rooms that include both study space and bed space, like more traditional college dorm rooms.
Why did my friends build their lofts? The dorms dated from the mid-20th century, and looked like what was familiar to that post-war generation: barracks. It was a bonding mechanism for pledge classes, that they had to live, eat, and sleep alongside one another. Partially as a result, I still have friends from that pledge class, and I still feel loyal to them. But sharing space also meant listening to each other’s snoring, or gossip in the middle of the night.
I think about this experience now, because that drive to not have to accommodate to others is pretty human, and very American. The lofts allowed people to have their own schedules, and not have to cooperate with one another on quiet time, etc. But since then, we’ve essentially become a country where lots of kids grow up with a bedroom to themselves. But it makes me wonder if we aren’t worse off in some ways, because having to depend on and accommodate to one another made us know one another, with all our quirks and faults on display daily. (Believe me, some of it wasn’t pretty!) I wonder if in a society based on individual empowerment we aren’t losing some of the glue that holds us together in community. Freedom is great, but perhaps some experiences that force us to accommodate to one another wouldn’t be all bad. Indeed, sharing a health care financing and delivery system appears to be one of those shared experiences that will remain for the foreseeable future.
This has relevance in the ongoing debate on health care reform. Should we have community rating, or should it be experience rating? In other words, if I smoke and am obese, should I pay more for health insurance? If so, how much more? In essence, how much can and should we depend on others’ money to bail us out when we get sick? What if it’s a disease that I’m partially responsible for causing through my behavior? What if it’s something that I couldn’t reasonably prevent or control? Are there circumstances under which I don’t deserve to be able to buy insurance, because I didn’t paid into the pool when I was healthy?
As we watch a new administration unfold, these questions are going to be terribly relevant. Clearly the Obama administration’s answers to the questions above were toward the community side. Community rating, guaranteed issue, the individual mandate, and outlawing lifetime and annual maximums are all in line with the thought: “We’re all in this together. Everyone should pay into the system, and it should be there for everyone, even if you are in some part responsible for the disease from which you are now suffering.” But reading some of the Republican plans, there is more emphasis on individual responsibility and taking consequences for not living a healthy life. Which is better? The results of the past few election cycles tell me that we don’t agree as a country on the answer to this question.
On April 27th, CMS released proposed rules for the implementation of the Medicare and CHIP Reauthorization Act (MACRA), an act that heretofore was famous for containing the repeal of the Sustainable Growth Rate (SGR). The SGR was uniformly hated by physicians and other providers, as it theoretically controlled the rate of Medicare inflation, while in practice did nothing of the sort. It essentially put all physicians on one global cap for the nation, such that if utilization went up, the price paid for each service was adjusted down to make the overall cost effect neutral. Every year, the rate adjustment was threatened, and almost every year, some short-term, finger-in-the-dike measure was passed by Congress to avoid the cut. Providers rightly felt little motivation to think in cost-effective terms, as any efforts they made in that direction were essentially diluted by the vast majority of providers who didn’t (almost everyone else).
So this is the bargain that was struck. In exchange for getting rid of this sham spending control, providers must move to payment systems that emphasize quality and value over pure volume, through a variety of mechanisms to be determined later. “Deal!” cried providers. “Anything to get rid of the despised SGR!” But having lifted one end of that stick, the implications of the other end are become clearer.
First, there are two tracks from which you can choose as a provider. Track one is called the Merit-Based Incentive Payment System (MIPS). This is essentially a fee for service system that overlays a modifier based on several factors. These factors are an amalgam of prior incentive programs, including the Physician Quality Reporting System (PQRS), Meaningful Use, and the Value-Based Payment Modifier. There are four factors that weigh into the formula: quality, practice improvement, advancing care information, and relative cost. These factors taken together form the basis of getting paid more if you perform well, and less if you don’t. The program is designed to be cost neutral, so theoretically the bonuses paid will equal the penalties imposed. This program is intended for all those who can’t or choose not to participate in an Alternative Payment Model (Advanced APM).
The second track is the Alternative Payment Models (APMs). These include the next iteration of Medical Home, Comprehensive Primary Care Plus (CPC+); Accountable Care Organizations (ACOs); and various bundled payment programs. All of these generally share the quality of having significant financial risk for participating providers. The rewards are bigger for those participating in APMs, and probably justifiably so, as they likely involve more work and more risk financially. (Risk and reward are naturally connected, and usually commensurately so.)
This two track design carries forward CMS’ stated intent to shift to value-based reimbursement and alternative payment methodologies. It attempts to thread the needle of offering incentives for assume more financial risk, but also give credit for those who are doing good things without assuming risk. It gives some nods to small providers for whom assuming downside risk is just not feasible, given their lack of access to capital and infrastructure to bear that risk.
What will be the effect of this pivotal piece of rule-making? I would say that as of this moment, it’s impossible to tell. On the whole, it attempts to ease the transition between fee for service, still the dominant payment methodology for most payers, and forms of aggregated payment that gradually increase provider financial risk. It continues with the clear intent of moving away from FFS, and toward other payment forms that are less activity-based, and more outcome-based. It attempts to incorporate quality, interoperability, process improvement, and cost containment as determinants of payment rates, in essence saying that pure FFS alone isn’t enough to get us what we want. To get real value, you have to pay for it, and CMS is defining that value as including the above categories.
This inevitably will reshape how we practice American medicine. Whether intentional or not, this new wave of pay for reporting increases the advantage of large organizations with the access to capital necessary to track and report outcomes. It is likely, in my opinion, that it will accelerate the consolidation of the health care sector, both vertically and horizontally. The evidence that bigger is better or even just cheaper is quite mixed, and so consolidation alone cannot be the desired outcome. But it seems it may be a necessary side effect to achieve to goal of value-based care and payment.
In a recent online article in the Journal of the American Medical Association (doi:10.1001/jama.2016.4226.), economists from Stanford and MIT did a very interesting thing. There is a general assumption that the richer you are, the longer you live, on average. This turns out to be true. But why does increasing income mean increasing lifespan? These economists tested that hypothesis by using two related data sources: tax returns and Social Security Administration death records. Using these two databases, they were able to map life expectancy by income level across different “commuting zones” around the country, over a fifteen year period. This involved roughly 1.4 billion tax records over that time.
The results are fascinating. Some of the conclusions:
- If you’re wealthy, geography matters less. Pretty much across the country, if you’re a man in the top 1% of income, you live to be about 87; a woman in the same income bracket lives to be almost 89.
- If you’re poor, where you live matters a lot. The difference for the bottom quartile in income is 4.5 years between the best areas of the country and the worst. This is roughly the difference we’d see in population life expectancy if we were able to cure cancer (i.e., not a small difference!).
- The study did not support four popular theories about the causal link between income and longevity.
- First, access to medical care didn’t correlate with living longer, measured by % uninsured, Medicare spending, 30 day hospital mortality rates, and use of preventive care.
- Environmental factors didn’t seem to matter. This was measured pretty indirectly, looking at the degree of income segregation in a commuting zone. The reasoning goes like this: if you have money, you move away from environmental hazard, and therefore more highly income-segregated areas would have a bigger difference between rich and poor life expectancy. Contrary to what one might expect, those regions that were more income-segregated had better longevity for the poor, not worse.
- Greater income inequality was not correlated with shorter lifespans for the poor. It was correlated with shorter lifespans for the rich. Social cohesion was not correlated with lifespan.
- Finally, local labor market conditions did not correlate with lifespan among the poor. The theory that the best thing we can do for health is to get people jobs wasn’t supported in this study.
- These were some of the characteristics that were associated with areas with higher life expectancy for the poor: higher percentage of immigrants, higher incomes, higher governmental expenditures, higher population density, and higher college graduate rates.
Well, what else correlated with increased lifespan for the poor? In addition to the factors above, they were the tried and true behavioral factors we already know about: lower smoking and obesity rates and higher exercise rates.
There is much more in this study, and I will continue to ponder its findings. But in an oversimplified way, this tells me that the best way to improve the health of communities may not be to get them more health care. The best way might be to alter the health habits of its poor. There may also be sound societal reasons for trying to clean up the environment, reduce income inequality, and reduce unemployment, but improving the health of the population isn’t one of them, at least according to the correlations found in this study.
The other thing we should notice is that this study took massive amounts of computing power. Manipulating 1.4 billion records is no small feat, but we are likely to see more studies like this because of the emergent force of big data. We should see these kinds of insights with increasing frequency as analytics get ever more powerful.
In a long awaited decision, the Supreme Court of the United States handed down a 6-3 decision in favor of the administration in King vs. Burwell, a challenge to the legality of subsidies for the poor in the federal health care exchange. I am not a legal scholar, so can’t comment on the legal nuances of the case. Nonetheless, there are big implications to the law standing that even I can understand.
What this effectively means is that one of the biggest remaining legal challenges to the Affordable Care Act has failed. Future efforts will be harder, including the continued drive of Congressional Republicans to repeal and replace the ACA altogether. Most observers believe that reversal of the ACA became substantially less likely with this decision.
Some of those observers are major health plans, who shortly after the decision was handed down, announced mergers with, or acquisitions of, their peers. Aetna has announced a $37 billion purchase of Humana, and Anthem has offered (and had rejected) a $47 billion price for Cigna. The reason for the timing is that these insurers wanted to make certain that their government lines of business were stable prior to purchasing the membership of their cohorts, i.e., there would be no rollback of the millions that got new coverage as the result of the ACA.
In my last post, I discussed the incentives for providers to consolidate with one another, and with payers. The reasons for this aren’t solely or even predominantly due to the ACA, although some say that the ACA accelerated that trend. The main reason, in my opinion, is the same one I cited in the post about provider consolidation: big gets you economies of scale. That is, to build a claims processing system, or a care coordination program, or an advertising campaign for the first customer is enormously expensive. But adding the ten millionth customer? Effectively the cost is zero. Computerization has made that number even closer to zero, as you don’t necessarily even have to hire any more people to process that ten millionth customer’s enrollment or claims, just add a little more cheap computing power. Posts I have been reading since these mergers announcements talk about health insurance becoming a commodity, in which there are scarcely any product differentiators. This leaves only one basis for choosing one company over another: price. This is already the prevailing view on the exchanges, that share is predominantly determined by price, as the offerings don’t differ much between companies.
So overall, is this good or bad for consumers? On the one hand, some say that bigger health plans means less cost per enrollee due to the economies of scale just discussed, and that the mandatory medical loss ratios built into the ACA mean that the savings that result are often passed on to the consumer. Others warn, though, that consolidation reduces competition, and allows oligopolies to raise prices without the threat of being undercut by smaller and hungrier competitors. Providers in particular are loathe to face bigger and bigger insurers, even as they consolidate to gain more market leverage of their own. Time will tell, but the incentives are undeniable: big is in, on the insurer side as well as the provider side, and it’s based on pretty simple economics.