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January 31st 2012 healthcare cost reform

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How to improve cost savings to end consumer by changing health care insurer business model

How to improve cost savings to end consumer by changing health care insurer business model

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  • 1. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937 Independent Research & Management US HEALTHCARE COSTS: Why US Healthcare is most expensive in world and yet ranks 37th in developed world in terms of effectivenessIn 2008 the US spent 16.2% of its resources services they provide.[as measured by overall cost of health careas % GDP]. Yet quality in US is consistently An alternative business model is for eachranked lower than Holland, Great Britain patient to be provided a lifetime healthcareand Germany which have ―socialized‖ budget, over and above which the patient ishealthcare systems. In a 2008 survey of responsible for the costs. If a patient staysquality of Healthcare service provided, the healthy his entire life, his lifetime budgetUS ranked 37th. would not be drawn down. What would happen to these funds dependson the typeUS healthcare is primarily of ―fee for of approach one takes; in theory this shouldservice‖[FFS] business model. Healthcare accrue to the patient for use whatever wayproviders are paid on the basis of the they choose.amount of services they provide. Doctorsas entrepreneurs, make money on The choice of business model has a hugetreatments that they can provide; the more impact on the overall economic sustainabilityservice or drugs they can prescribe, the of the payers of health care, ~ patients andmore money they make. Clearly in a FFS insurers.world it is in the interest of Medical serviceproviders to maximize the volume of 1
  • 2. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937 Since 1960 the cost of healthcare in the United States as % GDP has tripled. The Congressional Budget Office has estimated that in 2025 is expected to quadruple to 24% of GDP, if the business model that has been adopted by the healthcare providers does not change. If unchecked in 2080, Healthcare will consume > 40% of GDP. It is inherently dangerous for one sector of the economy to account for >40% of national resources, as we saw when the financial system crashed in 2008. By 2008 the US financial system accounted for > 40% of all S&P 500 profits. The cost of healthcare in the United States is borne principally by employers, who pay premiums to insurers and by individuals who either un-insured or have own insurance. 2
  • 3. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937 This paper examines ways in which patients and insurers can contain healthcare costs. STRUCTURE OF HEALTHCARE IN US: The US system as we have discussed is a fee for service system, [FFS]. This business model is a payment model in which services are unbundled each service is paid for separately. In an entrepreneurial healthcare system, it incentivizes physicians to provide more treatments (including unnecessary ones) because payment is dependent on the quantity of care, rather than quality of care. Similarly, when patients are shielded from paying (cost-sharing) by health insurance coverage, they are incentivized to welcome any medical service that might do some good. A variety of reform efforts have been attempted, recommended, or initiated to reduce its influence (such as moving towards bundled payments and capitation, or per capita services). The table on the left demonstrates the effects of the FFS. The US system essentially costs 3 times for the same healthcare than it would cost a patient in New Zealand, considered one of the top countries in the world for quality of life and living standards. A simple check up in the US costs double what it costs in Canada or the Netherlands. Canada has the highest quality of life index in the world, and is a developed country. A hospital visit in America costs three times what a hospital visit costs in France. Many Hospitals in America have extensive art collections on the walls, plush facilities and extra-ordinary overhead expenses, all of which are being paid for by the patient and the insurer. WHY THE COSTS ADD UP UNDER FFS: 3
  • 4. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937FFS payments are issued retrospectively, primary care physicians to invest in radiologyafter the services are provided. One of the clinics and perform physician self-referral inmain features of FFS, is that no cost order to generate income.This verticallysavings are negotiated for an entire integrated business model creates very largeprocedure up front.FFS causes an barriers to entry and local heathcare providerinflationary pressure on costs, as no monopolies are very common in regions allbundled services can be priced, raising over the USA. FFS has been a barrier tohealth care costs. FFS also creates a coordinated care, or integrated care—potential financial conflict of interest with exemplified by the Mayo Clinic—because itpatients, as it incentivizesoverutilization— rewards individual clinicians for performingtreatments with either an inappropriately separate treatments.FFS also does not payexcessive volume or cost, nor does it providers to pay attention to the most costlyincentivize physicians to withhold patients,ones that could benefit fromservices. When bills are paid under FFS interventions such as phone calls that canby a third party, patients (along with make some hospital stays and 911 callsdoctors) have no real incentive to consider unnecessary. FFS became the mainthe cost of treatment.When patients ―are healthcare business model after WWII wheninsulated from the cost of a desirable there was need for a business model thatproduct or service, they use more", such could deal with high inflation; thus was bornas endless medical tests, diagnostics and the inflation monster ~ FFS. The familiarityofprocedures. There is a large body of FFS to doctors and patients in the USis theevidence that suggests primary care main reason FFS is seen by many patients asphysicianspaid under a FFS model, tend the only or main payment method, [e.g.to treat and refer patients to more Medicare is FFS]. Doctors as entrepreneursprocedures than those paid under want to be reward for output notcapitation or a salary. FFS incentivizes effectiveness, so FFS does just that. The 4
  • 5. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937Soviet Union’s economic system also providers a set amount for each enrolledrewarded output not effectiveness in meeting person assigned to that physician or groupconsumer demand. The ―heaviest‖ TV sets of physicians, whether or not that personin the world were produced in the Soviet seeks care, over time, such as lifetime ofUnion, because output = weight. So in the the patient.US we have the ―heaviest‖ healthcaresystem, a result of FFS. Providers are contracted through health maintenance organizations (HMO) known as an independent practice associationIt is important to note that General (IPA). The providers contract with the HMOPractitioners have less autonomy after to take care of patients enrolled in theswitching from an FFS model to integrated HMO.care.Patients, who moved from an FFSmodel saw their choice of physicians The amount of remuneration is based onrestricted, as was done in the Netherlands in the average expected health caretheir attempt to move towards coordinated utilization of that patient (morecare. remuneration for patients with significant medical history). Other factors consideredIn a business model where physicians include age, race, sex, type ofcannot bill for a service, it serves as a employment, and geographical location, asdisincentive to perform that service if other these factors typically influence the cost ofbillable options exist. In an electronic referral, providing care.for example, a specialist evaluates medicaldata (such as laboratory tests or examinationof images) to diagnose a patient instead of MOVING OFF AN FFS SYSTEM:seeing the patient in person;this has beenfound to improve health care quality andlower costs. The economies of scale of this Proponents of leaving an FFS systemapproach might finally be passed onto the argue that this increased efficiency,payer of the service, patient or insurer. It improved overall quality standards, leadingshould be noted that, "in the private fee-for- to a better understanding of the economicservice context, the loss of specialist income relationship between costs and quality,is a powerful barrier to e-referral, a barrier cost and volume of services provided.that might be overcome if health plans According to a 2002 Juran Institute study,compensated specialists for the time spent there is no consistent, direct correlationhandling e-referrals". between the cost of care and its quality. The "cost of poor quality" is in effectIn Canada, the proportion of services billed caused directly by FFS overuse, misuse,under FFS over the period of 1990 to 2010 and/or waste amounts to 30 percent of allshifted substantially. Less care was paid out direct health care spending.The emergingfor patients under the age of 55 while for practice of evidence-based medicine isthose over 65, payment for diagnostic being used to determine when lower-costservices was sharply increased. medicine may in fact be more effective. Critics of managed care argue that "for-ALTERNATIVE BUSINESS MODELS: profit" managed care has been an unsuccessful health policy, as it hasCapitation: Capitation is defined as a contributed to higher health care costs (25-method for paying health care service 33% higher overhead at some of the 5
  • 6. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937largest HMOs), increased the number of bonuses depending upon patientuninsured citizens, driven away health care performance. Utahs Intermountainproviders, and applied downward pressure Healthcare, the Cleveland Clinic, and Kaiseron quality (worse scores on 14 of 14 quality Permanente also use a coordinatedindicators reported to the National healthcare system in alternative to FFS.Committee for Quality Assurance). However while coordinated care can produce cost savings of ~ 50% whenThe most common managed care financial compared to FFS programs, long termarrangement, ~ capitation, places health savings may be compromised by Physicianscare providers in the role of micro-health wanting higher base compensation becauseinsurers, assuming the responsibility for of the loss ―volume‖ business relative tomanaging the unknown future health care FFS. [See interesting study by Peter Zweifelcosts of their patients. Small insurers, like (March 2011). "Swiss experiment showsindividual consumers, tend to have annual physicians, consumers want significantcosts that fluctuate far more than larger compensation to embrace coordinatedinsurers. care". Health Affairs (Project Hope)30 (3): 510–518]."Professional Caregiver Insurance Risk‖describes the inefficiencies in health carefinance resulting from the inefficient transfer ACCOUNTABLE CAREof insurance risks to health care providers ORGANIZATIONS:who are expected to cover such costs inreturn for their capitation payments. As a One of the goals of accountable carestudy by Thomas Cox Ph.D RN (2006) organizations (ACOs), part of the 2010 U.S.shows, providers may not be adequately Patient Protection and Affordable Care Actcompensated for their insurance risks, (PPACA), has been to move from FFS towithout forcing managed care organizations integrated care.ACOs, however, fit largelyto become price uncompetitive vis-à-vis risk into a FFS framework, and do not abandonretaining insurers. Cox (2010) also shows the model entirely, as has been pointed outthat smaller insurers have lower probabilities by John K. Iglehart (April 2011) in"The ACOof modest profits than large insurers, higher regulations – some answers, moreprobabilities of high losses than large questions". The New England journal ofinsurers, provide lower benefits to medicine. This approach suggestspolicyholders, and have far higher surplus policymakers are attempting to avoidrequirements. All these effects work against provoking public outcry, as happened withthe viability of health care provider insurance managed care in the 1990s by givingrisk assumption. providers incentives to give less care.TheMoving away from FFS towards pay for PPACA aims to first move Medicare awayperformance introduces quality and from FFS, then other payers.A Swiss Peterefficiency incentives, instead of solely Zeiwfel study showed physicians wantedrewarding quantity. significant pay raises to leave FFS for an integrated care model, while patients wantedThe famous Mayo Clinic, has among others, lower premiums before they would chooseoffered a system that serves as a one, results that hint at difficulties forcoordinated/integrated care alternative to PPACA aims.the FFS model. The PennsylvaniaGeisinger Health System has a system In China—where FFS resulted in costly,where the physicians, residents and fellows inefficient, and poor quality health care withare paid a salary with the potential for a degeneration in medical ethics—reforms 6
  • 7. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937have been initiated to realign health care legislative mandate to come up with a planprovider incentives, see Winnie Chi-Man to tackle costs (the Massachusetts PaymentYip, William Hsiao, Qingyue Meng, Wen Reform Commission); they unanimouslyChen&Xiaoming Sun (March 2010) and concluded the FFS model must be done"Realignment of incentives for health-care away with. Their plan included a move awayproviders in China". The Lancet . from FFS to a global payment system thatExperimentation with new payment models had similarities to a capitated system. Nois ongoing with recommendations including U.S. state, up to 2009, had attempted to doa strengthening of medical ethics, alignment away with FFS. The Medicare Paymentof providers profit motives with patient Advisory Commission(MedPAC), in theirneeds, and, in cases where hospitals retain mid-2011 report to Congress, called for atheir profit motive, segregating physicians mechanism so that Medicarefrom the goal of profit. beneficiaries would have disincentives toIn the 1990s the move in the US from FFS undergo discretionary care, but notto pure capitation provoked a backlash from needed care.patients and health care providers. Purecapitation pays only a set fee per patient, WHY CONSOLIDATION IN INSURANCEregardless of sickness, giving physicians an INDUSTRY HAS NOT BROUGHT LOWERincentive to avoid the most costly patients.In COSTS:order to avoid the pitfalls of FFS and purecapitation, models of episode-of-care One of the mysteries of Healthcarepayment and comprehensive care payment Insurance is why consolidation resulting inhave been proposed.In 2009, the U.S. state larger insurers has not provided lower costs,of Massachusetts (with the then highest as we should have expected had thehealth care costs in the country) had a group Thomas Cox Ph.D RN ―case‖ studies ofof ten health care experts who worked under 2000 2011. Two studies published by Health 7
  • 8. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937Affairs, the bible of health policy, document business professor at the University ofthe shortcomings of health industry California at Berkeley, have also weighed inconsolidation. with their study of hospital mergers two years out. It shows that costs increased, notJames Robinson, a professor of health decreased, that there was no improvementeconomics, calculates that the top 3 health in basic quality measures such as mortalityinsurance companies control two-thirds or and adverse safety events, and that pricesmore of the business in all but 14 states, increased 7.7 percent for managed carewith numbers reaching as high 92 percent in customers and 4.1 percent for fee-for-Maryland and 98 percent in the District and service plans.Northern Virginia. How do we explain these data?Robinson juxtaposes these numbers withthe 2000 to 2003 financial results of the top In the case of hospital mergers, Cuellarfive national firms. He shows a decline in the states that administrative efficiencies windpercent of each premium dollar that goes to up being minimal, while efforts to realizecover medical costs, along with an even operational efficiency often run into a stonestronger trend toward higher premiums, wall of opposition from doctors uninterestedprofit and stock prices. While this doesnt in changing the way they practice. That wasprove causality, it certainly raises serious the undoing of the merger between Mountquestions about the consumer benefits of Sinai and New York University hospitals inconsolidation. New York, she said.Alison Evans Cuellar, an economist at Meanwhile, the effort to gain negotiatingColumbia University, and Paul Gertler, a leverage through mergers often proves to be 8
  • 9. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937an arms race with no winners. Insurance based medical practices that hold out themergers beget hospital mergers, and vice best promise for lowering costs andversa, neutralizing any negotiating advantage. improving medical outcomes. In the few places where such innovations haveOne result of all this consolidation is the taken hold, it turns out that managementreduced chance of a new entrant coming along and culture are the key factors, not scale.to shake things up with a new technology orbusiness model. In a world where giants dealonly with giants, thats not likely. CONCLUSIONS:An emerging source of competition has come There is undoubtedly a need on the partfrom regional companies deciding to grow the of insurance companies to be pro-activeold-fashioned way, moving into geographically with both patients and healthcareadjacent markets to win new customers. But providers so as to formulate a strategy fornow that national insurers have gobbled up cost reduction in healthcare.most of the regional players, there arent manyleft. [UnitedHealths purchase of MAMSI and In the view of the authors of this paper, itOxford in the Virginia/Maryland areas]. is very likely that the very same experience curve effects that exist in anyAs for the newly merged hospital "systems," other industry exist for healthcaresome -- like Inova Health Systems nicely providers as well. [An example of theprofitable "nonprofit" operation in Northern ―effect‖ of an experience curve on overallVirginia -- are now so dominant they have costs is shown overleaf].become somewhat immune to competitivepricing pressures. We submit that it is likely that healthcare providers have deliberately promoted the FFS business model because itOthers have discovered that they so overpaid maximized revenues, while allowing themfor recent acquisitions, or have become so to ―privatize‖ almost all the gains fromstymied by integration issues, that they have ―experience effects‖ for the provider.neither the time nor money to leverage thebenefits of size to install computerized record In order to reduce the rate of increase ofsystems or introduce the kind of evidence- 9
  • 10. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937healthcare costs for patients, it is essential accept these types of new business models,to begin to move the industry off FFS and to and how to reconcile the conflicting prioritiesa capitation business model. Employers are of patient needs, health-insurers and thepushing this change of business model, as profit motives of health care providers is thethe healthcare insurance costs are the subject for another paper.highest benefit cost facing employers. Gnostam LLCMany employers like for example PitneyBowes who have a young healthy hourly Philip Corsanowork force, are insisting that these Patrick Kellyemployees do not opt out of healthcarecoverage while at the same time promotinga form of capitation.For more than a decade Pitney Bowes hasprovided subsidies that make coveragemore affordable for lower-wage workers. Itseems to work: 78 percent of U.S.employees opt for health coverage at PitneyBowes. Starting this year, the company tooka step that ties health coverage costs evenmore closely to pay. In its consumer-directed health plan, the company sets thedeductible, out-of-pocket maximum andcompany contribution based on salary.Hourly workers, for example, have a $1,500deductible and $3,000 out-of-pocketmaximum, while employees at the directorlevel or higher have a $2,500 deductible and$5,000 out-of-pocket maximum.How to drive a patient and provider toBibliography:Gosden T, Forland F, Kristiansen IS et al [2000] “Capitation, salary, fee-for service and mixedsystems of payment: effects on the behavior of primary care physicians, Cochrane DatabaseSyst. Rev;Thomas Bodenheimer [March 2008] “Coordinating care – a perilous journey through thehealthcare system” The New England Journal of Medicine [358-10];Medicare Option in Biden Budget talks get a boost. NPR, Associated Press June 2011;Rachel Mendleson [Oct 25th 2010]. “The worst run industry in Canada – Healthcare. CanadianBusiness;Phil Galewitz: Jordan Rau and Bara Vaida [March 31st 2011]. Accountable Healthcare expectedto save millions, Kaiser Health New, [McClatchy];Peter Zweifel, [March 2011] “Swiss Experiment shows that physicians, consumers wantsignificant compensation to embrace coordinated healthcare, Health Affairs, [Project Hope] 10
  • 11. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937510-518;Thomas Cox Ph.D RN, 2011 “Exposing the true costs of capitation financed healthcare” Journalof Healthcare Risk Management 30-34;Thomas Cox Ph.D RN, 2011 “Standard Errors of our failing healthcare [finance] systems andhow to fix them;Thomas Cox Ph.D RN, 2010 “Legal and Ethical Implications of Healthcare Provider InsuranceRisk Assumption. Jona’s Healthcare Law, Ethics and Regulation 106-114;Thomas Cox Ph.D RN, [2000] “Professional care giver insurance risk. A brief primer for nurses,executives and decision makers, Nurse Leader 48-55.Harold D. Miller [September – October 2009]. “From Volume to value: better ways to pay forHealthcare” – Health Affairs, Project Hope. Diagram of flows of a FFS Business Model 11
  • 12. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937 Debt Explosion in US is not unique. See European experience in graph below, in part because of unfunded liabilities in the public healthcare sector. 12
  • 13. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937 Differening share of Profit and Labour 1947 to 2011 United States 13
  • 14. Gnostam LLC January 31st, 2012 NewsletterPO Box 960Inverness, CA 94937Disclaimer:The information and any statistical data contained herein have been obtained from sources which webelieve to be reliable, but we do not represent that they are accurate or complete, and they should notbe relied upon as such. All opinions expressed and data provided herein are subject to changewithout notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may havelong or short positions or deal as principal in the securities discussed herein, related securities or inoptions, futures or other derivative instruments based thereon. The securities mentioned in this reportmay not be suitable for all types of investors. ALL investments involve different degrees of risk. Youshould be aware of your risk tolerance level and financial situations at all times. Furthermore, youshould read all transaction confirmations, monthly, and year-end statements. Read any and allprospectuses carefully before making any investment decisions. You are free at all times to accept orreject all investment recommendations made by the Gnostam LLC. As you know, arecommendation, which you are free to accept or reject, is not a guarantee for the successfulperformance of an investment and we are expressly prohibited from guaranteeing accounts againstlosses arising from market conditions.Past performance is no guarantee of future results, and current performance may be lower or higherthan the performance data quoted.Investment Disclaimer
 All investments involve different degrees of risk. You should be aware ofyour risk tolerance level and financial situations at all times. Furthermore, you should read alltransaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefullybefore making any investment decisions. You are free at all times to accept or reject all investmentrecommendations made. All products sold are subject to market risk and may result in the entire lossto the clients investment. (For example: excessive withdrawals may result in the depletion of youraccount). Please understand that any losses are attributed to market forces beyond the control orprediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject,is not a guarantee for the successful performance of an investment and we are expressly prohibited Gnostam LLCfrom guaranteeing accounts against losses arising from market conditions. PO Box 960Inverness, CA 94937 USAE-mail: pcorsano@gnostam.comwww.gnostam.com 14

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