Archive for February, 2013

Bowles-Simpson is no match for the sequester

Erskine Bowles and Alan Simpson announced this week another proposal to right the budget over the next decade, proposing both spending cuts and revenue increases.  There are many striking things about it, but one of them is that it actually demands cuts to Medicare.  As it is, the sequester will cut domestic programs, but leave Medicare and Social Security untouched.


And so while it is not being framed this way, what we are watching is de facto a question of how much we are willing to give up now in order to preserve the illusion that Medicare is an unlimited entitlement, for another year or two.  In Bowles-Simpson, discipline is imposed, provider fees are cut, higher efficiency is demanded.  None of this would be popular with doctors, hospitals, or other providers in the industry, and their lobbies I’m sure would work hard to defeat this proposal, should we ever give it serious consideration.  In the sequester, we cut virtually everything else, but Medicare in all its inefficient, fee-for-serviceness remains a happily overgrazing sacred cow. 


The process of making that choice would be hard enough in a calm, rational environment.  In that hypothetical world, we’d understand the consequences of each choice, we’d listen to those who would be affected thoughtfully, and we’d make tradeoffs and compromises so that every constituency would be mildly unsettled but not threatened with nonexistence. 


But we don’t live in a calm, rational environment.  We live in a world where poorly informed votes are prized (since they count the same as well-informed ones), emotion sells air time, rationality is often defeated by fear, and the short-term arbitrage almost always trumps long-term investment.  In this environment, my sad suspicion is that the fear of a catastrophic future loses to the prospect of a painful present most of the time.  Through our continued inability to address Medicare decisively, we are increasing the odds of both, year by year. 


February 22, 2013 at 12:52 PM Leave a comment

Warren Buffett, ketchup, airlines, and health care consolidation

Berkshire Hathaway is acquiring Heinz.  US Air is merging with American Airlines.  Anthem is hiring a hospital system veteran to become its next CEO.  What do the first two have to do with the last?  How are mergers and acquisitions in other industries related to those in health care?


What the press is saying is that the first two acquisitions have come now because some stability has been restored to the markets, and people feel freer to put capital on the sidelines to work.  Throughout the Great Recession, companies have been stockpiling cash because it increased their flexibility and therefore survivability in an uncertain environment.  The public did the same, paying down debt, holding cash, getting out of stocks and bonds and into safer investments like money markets.  Now, with volatility down, some sense that Europe will not go to hell in a handcart in the short run, companies are buying future capacity.


But why do companies merge in the first place?  There are good reasons not to: the clash of cultures in the airline mergers is legendary, and some mergers fail because of that.  Companies merge because they cannot compete at the level at which they are currently organized.  American Airlines is a good case in point, where even at their size, they are still in receivership in the tough competitive environment that is the airline industry.  They needed economies of scale, and synergies in their route structure to hit the price points of their competitors. 


The airline merger is an example of horizontal integration, the merger of companies in the same business.  But increasingly in health care, we are watching vertical integration, the merger of companies in related businesses, but who do not do exactly the same thing.  Hospitals are acquiring physician practices at an increasing rate.  They are also entering related businesses.  There was a recent announcement here in Denver that the University Hospital system is contemplating building its own health plan.  Rumor is other systems are thinking the same thing.  Now running hospitals is hard enough, as anyone who has tried can tell you.  Why would they want to acquire practices and health plans?


I think it’s because of the same reasons other companies in other industries do: because they can’t compete at the level of their current organization.  If your competitor has an integrated enterprise of hospitals, docs, and health plan functions, you might need the same in order to compete in the marketplace, say, a health benefit exchange. 


This brings me back the beginning of this post, and Joe Swedish taking the wheel at Anthem.  Mr. Swedish is a long-time hospital executive; but Anthem may have recognized that its future disproportionately depends on the integration and efficiency of its provider networks.  And Joe Swedish knows all about those.  

Now that everyone is feeling safer, the cash that has been stockpiled in health care companies will likely be mobilized in the same way it is in other industries.  I will be watching for more integration of assets, both vertically and horizontally.

February 15, 2013 at 10:00 AM Leave a comment

Upton Sinclair, Elinor Ostrom, and the end of the illusion

Why do we think we can continue to increase what we spend on health care forever?  And if we cannot, how will we ever develop the discipline to control costs?  A friend of mine asked this in an email conversation several months ago.  Here was my answer:

What I think we are watching is the end of an illusion, so well maintained, that there are no limits in time, money, or resources that we can devote to the pursuit of the medically-based fix.  We have created and maintained this illusion so very well that we have two generations of medical professionals who claim as birthright this illusion and defend it with passion and fervor.  We medical professionals make outstanding incomes from this illusion, and so in the words of Upton Sinclair, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”  And nonetheless, we are out of money in this richest of all societies to continue to believe what isn’t true.

The mechanisms by which we have preserved this illusion are instructive.  The third party payer system allows us to feel emotionally that the cost of an intervention is just the copay or deductible, even though intellectually we know that to be untrue.  The separation of payment of premiums and delivery of services uncouples them emotionally, and so we don’t feel them as causal.  Indeed, if you have employer based insurance, you don’t even see about 70% of the cost as a payroll deduction, as it’s coming out of your company’s profitability.  In essence, we don’t notice the true cost of medical stuff because we are using pooled dollars, metaphorically grazing our sheep on the village green, in our time of need.  Haven’t we done that for others in their time of need, and so aren’t we entitled to the same?  Of course we are, we think, and the “best” (read: most expensive) intervention possible because of a vague and fervent hope that the additional dollars buy some benefit that we can neither directly sense nor articulate.

The grand challenge of payment reform is to restore some sense of limits to those who allocate finite resources that are fungible into medical interventions.  In essence, we are trying to undo the spending behaviors that have arisen from the lack of accountability that insurance offers us.  While neither I nor anyone I know would want to do without the peace of mind that insurance offers, it also creates moral hazard, the decreased sensitivity to the true costs of goods that comes with not paying the tab out of pocket and at the time of service.

I do some work in payment reform around the country, and I am starting to note a trend: those places with the least are often the first to understand this, and are beginning to behave in ways that reflect health care as a limited and shared community asset.  They are doing it before communities and regions that have more wealth, and therefore the luxury of preserving the aforementioned illusion.  The late Elinor Ostrom’s theory of common pool resource management, for which she won the 2009 Nobel Prize in Economics, is a reasonable first approximation of those mechanisms and structures that create sustainable use of shared resources:  While its pretty dense, and requires an economist to explain it to us all, it does outline those things that successful communities build to prevent the depletion of stuff all might need at some time but can’t have simultaneously.

So in the best of worlds, when a shiny new medical intervention appears in your community, someone in your community would evaluate this intervention, its cost, and the health it creates, against the aggregated resources your community has to spend on health in general.  They would understand that spending on that intervention necessarily means other interventions would likely not be funded, and it would have to stand up to that test of value.  As all of us know, this evaluating someone doesn’t exist in American communities, and we have a primal cultural dread of that someone that goes back to the reason many of our ancestors migrated here.  Despite this, as I like to say, being out of money has an amazing clarifying effect on people’s thinking, and we are figuring it out with a speed inversely proportional to the amount of disposable income we have to spend on preserving the illusion.

Thus, as usual, Don Berwick is right: cost is the quality dimension of our time, as continuing to delude ourselves increases the odds that some in our society will receive nothing, as we decide that the way to make sure there is enough in the common pool is to exclude some of us, to make the pool of recipients smaller, to decide that really we were only meant to share with those who look, think, and behave like us. And therein lies the great moral dilemma of our time: who are we talking about when we use the term “we”?

Who indeed.

February 4, 2013 at 12:11 PM Leave a comment


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