Bending the Curve(s)

Several Health Reform initiatives will take effect including bans on dropping coverage when people need it, rejecting children with pre-existing conditions, and imposing lifetime coverage limits.  Much pain will be nipped in the bud, but healthcare workers and physicians alike know that these measures are just the tip of the iceberg of an increasing need for healthcare.

Demand for healthcare was already going to steeply escalate because, on average, people use half of their healthcare in the last six months of their life with one third of Medicare costs incurred during that final month.  The swell of Baby Boomers is starting to retire and the already full hospital parking lots will need to get vertical.

All of the increased demands on the system without cost controls – market forces or regulations – will cause hyperinflation in an already overinflated market.  Critics of Reform argue that there are no cost controls written in it, puzzled that they were repeatedly told it would “bend the curve.”

Changing the Playing Field

Concerned that Rush Limbaugh might move to Costa Rica (with its universal care), the federal government and CMS are making moves to create a playing field where market forces will be allowed to yield the best product for the dollar and temper medical inflation rate increases. Functional market tools being developed include:

1. Increased Provider Accountability for cost and quality of the health product;
2. Standardized Data about that product and Comparative Effectiveness data about its technological and pharmaceutical inputs; as well as
3. Use of Healthcare Information Technology (HIT) to increase quality, safety, and efficiency.

Coming Soon to Your Neighborhood - Accountable Care Organizations

Dr. Donald Berwick, Administrator of the Center for Medicare and Medicaid Studies (CMS) has said that governments and insurers can increase the quality and efficiency of care by basing payments on the value of services, not the volume.

So in addition to expanding access this fall, the Department of Health and Human Services will also release specifications for Medicare Accountable Care Organizations (ACO’s) as referred to in Title XVIII of the Affordable Care Act, New Section 1899, the Shared Savings Program.

Physician-led ACO’s will enter three year contracts with CMS, agreeing to be accountable for the quality, cost, and overall care of at least 5,000 Medicare beneficiaries.  Providers will share the savings they generate with CMS and ultimately taxpayers.

Current proposals allow community customization, promising flexibility in both the types of organizations and the provider payment methods.  CMS will contract with these ACO’s in January of 2012, so providers are starting to build them now.

If these ACO’s bend the cost curve as they evolve, they can expect to manage the healthcare of 40-75% of Medicare recipients.  People will be able to move among ACO’s, using comparative data about how the group of providers meets those DHHS cost and quality benchmarks when deciding where to “spend” their Medicare dollar.

Aligning Incentives through Provider Accountability

The ACO’s that succeed will be those that incent doctors to use cost containment tools right.  This is how CMS can mitigate costs and maintain quality, while reimbursing providers adequately.  A “smart” methodology should take all the costs of care into account when generating savings, paying providers to “use smarter” care modalities as well as more efficient input.

In other words, providers might be allowed to focus on the full continuum of care and be rewarded for treatments that increase success instead of for drugs and technology that cost five times for negligible gains.  And ACO’s where providers bear financial risk for unnecessary overutilization can actually go a giant step further.

Direct Contracting with CMS

Many current ACO constructions still involve a third party payer that assumes the financial risk.  Recently on an ACO Conference Call conducted by DHHS, a harried Florida doctor noted with exasperation that he had heard the same laudatory goals years earlier when Medicare Advantage plans were first proposed.  He insisted that it is time to get rid of some of the middle layers.

The graph above reflects third party payer HMO profits in the highly managed State of California for the first part of the decade.  Currently, Medicare Advantage plans are making healthy profits even without significant control of the care processes.

Provider who choose to contract directly with CMS and take on financial risk with the appropriate safeguards will realize direct rewards for the cost savings and quality improvements they create.  And they have significant control of the care processes.

CMS will allow such direct contracting with presumably less regulation than Provider-Sponsored Organizations (PSO’s) have had to deal with in the past.   
After direct contracting with CMS, the doctor will be able to fully benefit from:

• Referrals to more appropriate input technologies as seen in NIH Comparative Effectiveness data;
• Use of formula drugs, including Generic or lower cost Therapeutic Equivalent Medications;
• Documented “end of life” conversations to determine patient intentions – living wills when appropriate;
• Active referral to and reinforcement of Disease Management/Home Health Care routines; and
• Efficient use of specialists.

That which is Measured, Improves: Standardized Data

There’s a saying “that which is measured, improves.”  Standard measurement of how good the product is - effectiveness measurements about results of products and processes - have cleaned up other industries including airlines, engineering, and most recently, public education.

For some reason, people have resisted measuring the effectiveness of medical care.  But medical inflation that is multiples of other cost increase rates are making payers demand real measurements about the worth of the services they are paying for.

Treatment Outcomes Data

Data evaluating providers in terms of the age/sex/risk adjusted outcomes of the care (comparing apples to apples) is already available in many formats, included in the annual U.S. News & World Report ranking of hospitals and HealthGrades evaluations of hospitals, physicians, and nursing homes.  Additionally, individual states offer similar report cards, which have repeatedly led to improved care paths with media attention.

But these will only comprehensively contain costs and increase value if, like Dr. Berwick recommends, payers link the money more closely to clinical results.  

Comparative Effectiveness of Inputs

Medical technology and pharmaceutical inputs to care are unfettered by meaningful competition constraints.  In a functional free market, paying consumers look for the best deal and manufacturers improve their product, hone unnecessary costs, and try to get the most patrons.

Remember how expensive and slow Personal Computers were when they first came out? Now you can get a fantastic netbook for a mere $350 because manufacturers continue to try to win consumers by increasing the value of their product – the usefulness/cost ratio.

Healthcare doesn’t work that way . . . not yet.  Today, physicians prescribe a $500 hypertension drug that works for 90% of cases, ignoring the $35 drug that is just as effective for 85%.  They do not own the process, listen to the RX salespeople, and have no reason to care about the cost of inputs.

So payers for most of those 85% of patients essentially pay $140,000 for next year's model of a $10,000 car - maybe the manufacturer added power locks for that extra $130,000.

Who would do that?

Unlike other markets where businesses look at the cost and quality of inputs into their product, healthcare suppliers (physicians) order technology and drugs they don’t pay for, and have very few motives to watch costs.

So their patient’s insurance companies have little choice but to raise premiums.  Unfortunately, annual premium price increases of 15-35% on larger base amounts to meet unrestrained demands are not sustainable – something has to give besides more coverage cuts.

The National Institute of Health is working with universities to develop standardized measurement systems that will allow physicians and patients to compare the effectiveness of drugs, treatment modalities, and medical technology.  Providers who own the entire process including costs will be fully motivated to best use the Comparative Effectiveness information.

Reactionaries will call it “Rationing.”  Others might call bringing order to chaos “Rational.”

But these will only effectively contain costs and increase value if the physicians who prescribe them and the patients who demand them are properly motivated to understand and use the information.

Health Information Technology – Doing More with Less

Remember those Baby Boomers who are retiring and will be demanding more healthcare?  Well Boomer doctors and nurses will also be cashing in their pension plans and moving to Florida and Arizona.  So who is going to take care of everyone?

Combine the increased demand per 1,000 for health services with fewer staff per 1,000 to meet that demand and the prices per procedure or unit will be another sharply rising Curve – labor costs.

One solution consistently proposed to deal with the shortage is dramatically increasing the number of providers and health workers.  But that means paying higher wages to attract more labor to an industry that already uses a lot of people – remember that shortage of nurses and RN teachers?

Another, more realistic solution might be to do more with less via Healthcare Information Technology (HIT).  Computers and automation has streamlined other industries to do just that, allowing them to get more out of their human and other resources.

But alas, the incentive in an industry that is generally reimbursed according to costs does not directly reward efficiencies.  Think of a HDTV manufacturer using IT to streamline production and automate suppliers.  Lower costs will increases its profit margins in the long run.  Or if demand for the product increases dramatically, the manufacturer can use IT to better meet it with only a one-time cost investment (the IT).

Lower input costs in the long run with steady prices and higher volume mean more profits, not to mention a more reliable, higher quality product.  Higher profits combined with easier operations are enough incentive to put in IT.

But if doctors and hospitals are reimbursed according to costs, why should they come up with similar efficiencies?  If they streamline and mitigate costs, third party payers might actually lower reimbursement rates after a regulated Medicare audit.

HIT will only be used in a meaningful way when reimbursement is linked more directly to the quality and efficiency gains it creates and providers see a tangible benefit.  Through ACO’s, CMS could be giving physicians and hospitals rewards for creating needed HIT efficiencies.

Conclusion

There several are ways that market forces can truly improve the quality of healthcare while bending the healthcare cost curves.  But ultimately, market forces will work only when healthcare Purchasers (CMS, Businesses and Groups) demand and use information about the product's real worth for what it costs.

Because only when the ones who buy healthcare look for and demand Value using these new tools, will they stop paying $130,000 for their car’s new power locks.

About The Author

Health Economist Jennifer Zaft understands the dysfunction of the current industry and the promise that lies behind Reform efforts.  Currently she is Principal and Founder of The JAZ Group, LLC, a design, management, and HIT consulting company that builds and assists teams of physicians and other providers so they can best meet current and upcoming challenges.

After completing a M.A. in Economics at the University of Michigan in 1992, Jennifer created benefits for national customers (GM, Ford, Kmart, Budd Company, among others) as well as provider network development and reimbursement methodologies out of BCBSM in Detroit.  In 1997, she moved to California where she managed hospital and physician finances and labor for Kaiser Permanente Disease Management and IT Programs.

She also built a Healthcare Systems Certificate Program for the University of California in 2003, where she developed a model for reform involving more provider control, responsibility, leverage, and direct reimbursement that would benefit patients and providers.  While teaching Healthcare Organization and Industry Economics, she created a model for reform involving using treatment accuracy and outcomes data along with direct contracting to result in safer, more effective, and lower cost healthcare processes.

The JAZ Group includes experts who have successfully started or added to healthcare businesses using Care Pathway Data, Finance, HIT, Change Management, as well as Program/Product Development. These professionals combine these skills to result in the creation of High Value clinical and business products for providers that lead to cost efficiencies, increased negotiating leverage, as well as direct customer contracting capabilities. Provider groups who work with the JAZ Group staff-plan network can also recognize lower malpractice insurance, reinsurance and risk management rates, as well as HIT economies of scale.