Month: January 2021

Who Can Fix Irrational Healthcare Spending?

Photo by Karolina Grabowska on Pexels.com

A couple weeks ago, I wrote about an experience I had at work with a patient wanting to stay in the hospital for two extra days just so he could spend a few hours with his daughter from out of town before going to a skilled nursing facility where no visitors would be allowed. The cost of staying in the hospital those couple extra days was probably at least $4,000 total, but the patient and his family were (rationally) ignoring that cost because they weren’t going to have to pay for any of it directly themselves.

The solution I proposed to such system-level irrational spending was to have the person making the purchase decision bear at least part of the cost of that decision. That way, if they choose something more expensive, it will be done with a consideration for the additional cost that choice entails.

As context for my proposed solution to such a problem, remember three things: (1) every system is perfectly designed to get the results it gets, (2) the design of a system generates a set of incentives, and (3) incentives are what drive the results of every system. So does no one have an incentive to get the people making purchase decisions to bear at least part of the price differential?

This is how I look at it:

Anything that lowers the total cost of care (while at least holding quality constant) is desirable for whoever is bearing the burden of that total cost of care. And the parties who bear that burden are the insurer and the patient, to varying degrees.

But since the patient typically doesn’t have much of an idea about what their out-of-pocket cost will be or how those costs will be impacted by choosing a different procedure or a different provider, they are not in a position to do anything about it.

The insurer, on the other hand, has the capacity to know–or at least give a reasonable estimate of–the cost of something. Therefore, we need to look to insurers for the necessary changes.

But think about this proposal from an insurer’s perspective . . .

The young energetic intern pitches such a plan to the executives, “Hey, how about we offer a new and innovative insurance plan that gets rid of the typical deductible and instead makes enrollees pay a 50% coinsurance on each service they receive (subject to their out-of-pocket max, of course). We could set the total price of each service (and, therefore, their coinsurance portion) at our negotiated rates with each provider. And we’ll make an app that will allow them to compare prices beforehand.”

The room’s executives would immediately see all the problems with such a plan. “This is too complicated for people! They will hate it and never want to get an insurance plan from us again.” “We can’t divulge our negotiated rates, all the providers who find out they are getting paid less will be angry and demand more from us.” “What about things that are not shoppable?” “If a single bad publicity event comes out of this experiment, it will severely damage our reputation and we’ll lose market share as a result, so we stand to lose more than we could gain.” “We’re going to have to make premiums extra low for such a plan to be able to convince people to try it out, but there’s no way to easily communicate how this plan is different, so a lot of people will just choose it because it’s cheap and says it has a $0 deductible and then they won’t be prepared to pay all their coinsurance costs.” “What about out-of-network coinsurance rates?” “Nobody’s ever done something like this before, so it’s too crazy to try unless we are likely to make a killing on it, which we aren’t.”

I talked about these same issues in my Why Insurers Don’t Innovate post a year ago. And not all of them are immediately solveable. But if we could address at least a majority of those executives’ concerns, I believe we would start seeing some enterprising insurers try this out.

The big thing would be solving the novel complexities that such a plan would create and then finding a way to convey this information to potential enrollees, either in the health insurance marketplace or in employer benefits explanations. And we would have to hope that many people would be willing to use an app to check healthcare prices in compensation for paying a much lower premium.

There would be lots of challenges to solve, and apparently no insurer has yet determined that the potential benefits are worth the potential harms. But I have hope that this will happen and be successful sooner or later. Maybe if the first enterprising insurer to try it can identify some first-mover advantages and create some barriers to imitation, they would stand to gain a lot more.

Also, remember there’s the static-world benefits to patients making value-sensitive decisions (they get better deals on the care they buy), and then there’s the dynamic-world benefits (the market starts to evolve toward delivering higher value). This kind of insurance plan design change, as it starts and then spreads, will enact a big change in providers’ incentives. In other words, the system will be fundamentally changed, which will result in much higher value care being delivered as it evolves in response to that change.

NEJM’s Fundamentals of U.S. Health Policy, Part 2: How Broken the U.S. Healthcare System Is

Image credit: Karsten Schley

I only vaguely remember the great interest and surprise and bafflement I felt when first reading health policy articles that describe how broken the U.S. healthcare system is. But now, after having seen those sorts of summaries hundreds of times, I kind of just gloss over them. Having said that, I think Dr. Schneider does a great job covering the “our healthcare system is broken” lay of the land fairly succinctly in this article, which is the second in NEJM’s series on the fundamentals of U.S. health policy.

Not only does he cover each of the three main categories of issues (quality, spending, and access), but he makes mention of other important aspects to that that are sometimes forgotten, such as the fact that part of our higher spending relative to other countries is simply attributable to our wealth, the impacts of healthcare overspending on U.S. competitiveness, and that a big unmeasured component of the inconvenience of our healthcare system is how much time is wasted by patients trying to figure out insurance or navigate this system in other ways.

I won’t rehash everything he talks about here, but I did find one small section in this article particularly interesting. He is talking about how private organizations and private markets affect the healthcare system, and then he says, “Functioning private markets can reduce costs and innovate in ways that broaden service availability. But private markets may not restrain costs in health care as they do in other sectors. Patients frequently rely on professionals to decide what services are needed, and costs may not be a consideration for either patients or professionals.”

Translation: Markets don’t work in healthcare. And a couple reasons they don’t work are (1) information asymmetries and (2) costs are not considered.

I remember reading things like this as well from the very beginning. And my question was always, “Why?” Or, if reasons were given, “How does that mean markets don’t work in healthcare?” And there never seemed to be a good answer that contained spelled out causal details. The unsatisfactory answer was always, “Healthcare is different.” And then they’d reference the same landmark article by Kenneth Arrow, Uncertainty and the Welfare Economics of Medical Care. So I read that article carefully, and it is a great and important article, but it never seemed to address the challenges for which people were referencing it.

This is, in big part, what spawned this blog. And thousands of hours of researching and thinking and writing later, I feel like I have answers to those questions. Not every answer to every question, mind you, but the main answers to the most important questions. I’ve found that it’s not that markets don’t work in healthcare–it’s that markets aren’t working in healthcare. And the reasons why are explained in my Healthcare Incentives Framework, which I probably reference in at least 50% of my posts because it’s the foundation of how I have come to understand healthcare markets and our healthcare system specifically.

So, if you do any degree of reading about health policy topics, you are sure to come across similar statements about how markets don’t work in healthcare. Or, just as commonly, that they could work in healthcare but relying on them would cause even worse disparities. Don’t believe either of them.

There is a whole article about markets at the end of this NEJM series, so we will see whether it has worthwhile things to say on the topic!

A Real Life Example of Irrational Healthcare Spending

Photo by Karolina Grabowska on Pexels.com

This week at work, I had a patient in the hospital who had been through a pretty challenging illness, and he was going to have to be discharged to a skilled nursing facility (SNF) to rehab for a few weeks. Sadly, SNFs in my area don’t currently allow any visitors due to the pandemic. The patient is very close with his daughter, who lives out of state, and she was flying in the next day to visit him and lend support in his challenging time.

Unfortunately, he was ready for discharge to the SNF now, and upon hearing my plans for discharge, the family requested we keep him in the hospital until he could see his daughter. Because she would be arriving late afternoon the next day, it would be too late to send him to the SNF that day, so he would be stuck in the hospital an extra two days just so he could see his daughter for a few hours.

It’s a perfectly reasonable request, right? But what am I to do when I get a request like that? What’s the socially responsible thing to do? If I assume that every day spent in my hospital costs at least $2,000, I am left judging whether $4,000 of society’s money is worth spending on this brief visit from the patient’s daughter.

As all these things were going through my mind, I gave them my response: “Sure.”

Maybe that’s an irrational use of society’s resources, but it’s a rational response to the situation. I, as a physician, am often asked the be the incidental steward of society’s resources.

And I face experiences like this every week at work. Actually, I would contend that there are thousands of these illogical spending decisions happening every single day across the healthcare system.

The issue at play here is this: The people making decisions about healthcare purchases are not the people directly paying for it.

But what if Medicare patients were required to pay even just a portion of the $2,000/day cost of staying in a hospital? Of course, not all patients could afford it, so there would have to be a policy to account for that, but let’s focus on the people who could afford it. Suddenly, the conversation with that family changes quite a bit.

“Can you keep him in the hospital two extra days so he can see his daughter for a few hours?”

“Sure, I’m happy to do that. Medicare requires patients to pay 50% of the cost of each hospital day though, which means it’s costing him $1,000/day to keep him here, so you need to decide if it’s worth paying $2,000 extra for him to see her for a few hours.”

Then the people making the purchase are directly bearing a portion of the cost of that purchase, and the utilization of resources becomes more rational.

In my Healthcare Incentives Framework, I focus so much on removing the barriers to people bearing at least part of the cost of their healthcare purchases for this very reason. And the way to get there starts with changing insurance plan designs and enabling patients to obtain price information up front.

NEJM’s Fundamentals of U.S. Health Policy, Part 1: What Is Health Policy?

The New England Journal of Medicine (NEJM) is one of the most prestigious medical journals in the world, and it has a new series of articles I find particularly interesting called Fundamentals of U.S. Health Policy. I’ll be reading through the articles of that series and giving some thoughts in response.

The first article in the series, written by Eric Schneider, Debra Malina, and Stephen Morrissey, introduces and defines the field of health policy, and then it defines the goal for the series: “To offer a foundation for a common understanding of where we stand and where we need to go.”

When I tell people I’m an internal medicine physician but that my real passion is health policy, they often respond by saying, “Oh, so you want to get into administration, eh?” And then I have the opportunity to introduce them to this amazing field of health policy.

Sometimes I’ll tell them my oversimplified analogy to NCAA basketball, with the clinicians being the players, the administrators being the coaches, and the policy makers being the NCAA. Sometimes I’ll tell them I want to set the rules for the system, to align incentives properly. Sometimes I’ll simply just say my goal is to fix the healthcare system (so far, everyone agrees–it needs fixing).

This is how Schneider et al. define it: “the choices made by the people who govern, manage, deliver, and pay for health care.” They also describe it as shaping (1) how clinicians deliver care and (2) how patients seek care, obtain care, pay for care, and adhere to care.

There are many other definitions you can find online with a quick “what is health policy?” search. But they all seem kind of vague and textbook-y and obscure the captivating challenge and monumental opportunity that health policy offers.

My working definition of health policy is different. I would say that health policy is the field of work that deals with making the rules for our healthcare system; it takes on the ultimate challenge of figuring out how to properly align all the industry participants’ incentives in a way that motivates them to maximize value for patients. And then I’d add some rhetoric about how healthcare is the most complex and high-stakes industry there is, that it’s like the ultimate puzzle, and I’d tell them about how success can mean solving many people’s greatest heartaches, solving the nation’s fiscal crisis, and saving the world.

I look forward to evaluating the rest of the articles in this series!