One Way New Medical Knowledge and Technology Will Make Healthcare Cheaper

Here’s my way of explaining one cool way that healthcare will get cheaper. Picture a stack of papers. It’s maybe a few feet tall, and each paper represents some kind of healthcare-related service that could be delivered. For example, one of those sheets represents a triple bypass. Another represents a consultation about asthma. Another represents an MRI imaging. There are tons of them! Now picture that they are arranged in order of simplest procedure (at the bottom of the stack) to the most complex procedure (at the top of the stack). So we’ve got administering someone with a vaccine and stuff like that at the bottom of the stack, all the way up to, say, some crazy brain surgery at the very top of the stack.

Obviously only the most super-specialized physicians can do brain surgeries and other similarly complex services, while probably a technician or medical assistant could administer vaccines. Thus, we could draw lines on that stack of papers that look like this:

A physician could do anything in his section of papers, and he could probably also do (maybe with a little practice) anything that a nurse or technician could do. But he isn’t trained to do anything above his line–only specialists can do those things.

Now on to how healthcare will become cheaper. As our medical knowledge and technology increase, things that used to require great training become simpler. For example, hip replacements used to be so complex that only the most highly trained specialists could do them. Now, thanks to better man-made sockets and such, they are much simpler to perform, and probably any orthopedic surgeon could perform one and get outcomes that are better than in 1980. In short, the lines move up as technology and knowledge progresses.

This saves money mostly because a technician’s time is less costly than a nurse’s time, a nurse’s time is less costly than a physician’s time, and so forth.

And, I should probably mention two other things. First, there is another, lower cost, caregiver emerging: the patient himself. These days, who do you think primarily takes care of diabetic patients? The diabetic himself! Second, I don’t know if specialists will become extinct any time soon, since there are always papers being added to the stack as we find out we can do more and more things to heal people.

And one last thing: I said all this will make healthcare cheaper–meaning the actual cost of the provision of care will decrease for a lot of diseases–I didn’t say this will reduce our total spending on healthcare. Why not? Because as we learn how to do new, crazy surgeries and stuff, we’ll probably start spending lots of money on those, and that will likely more than outweigh the spending reductions we’ll get as a result of what I described above.

The Only Two Ways to Reduce Healthcare Spending

If you’ve graduated from elementary school, you have probably learned this formula:

Money Spent = Number of Units * Price per Unit

If we’re talking healthcare (and we are), the “Money Spent” part would be the approximately 18 percent of our GDP that goes to healthcare. The number of units would be the number of doctor visits, ER visits, x-rays, cardiac catheterizations, pills, MRIs, etc. that we buy each year. And the price per unit would be the actual cost of the provision of care plus some amount of profit.

So, if we are to solve our healthcare spending crisis, we need to either reduce the number of units we buy or the price per unit. Those are the only two ways.

It’s been interesting lately as I read/hear about healthcare reform ideas with this in mind. I’m not sure any of them have actually proposed something that will directly reduce the actual cost of the provision of care, which, in my mind, is what we need to be worrying about. Think about it: We can reduce the number of units by doing more preventive care and rationing; we can reduce healthcare organizations’ profits by having the government set prices lower; but healthcare will still cost a lot of money! The real money-saving potential lies in reducing the actual cost of the provision of care.

Is that possible? YES.

How? Evolution of the healthcare industry through better information, business model innovation, and technology. (See The Innovator’s Prescription by Christensen, Grossman, and Hwang, which doesn’t have all the answers, and the ones provided are disputed, but I think they’re on the right track.)

Stupid Assumptions I Often See Healthcare Experts Make

Brief preface: Our healthcare system is a mixture of government-run stuff (e.g., Medicare, the VA system) and non-government-run stuff (e.g., the private insurance market, private hospitals).

Often I will read something written by a healthcare expert that says, “Turning healthcare completely over to the free market can’t fix our healthcare cost problems because spending in the private aspects of our healthcare system has been growing at an unsustainable rate.” That statement is often accompanied by its corollary, “And there is also no data that a completely government-run system can solve our increasing cost problem because Medicare hasn’t done so already.”

I’d just like to make explicit the major assumptions contained within those two faulty assertions:

  • Major assumption #1: The free-market aspects of our current system have no influence on the success of the government-run aspects of our system.
  • Major assumption #2: The government-run aspects of our current system have no influence on the success of the free-market aspects of our system.

An example: Our free-market system’s pricing is mostly based on the government-administered prices Medicare uses. This definitely hinders the free market’s ability to price things according to their real value to the market, which, in turn, affects what medical device companies and pharmaceutical companies choose to invest in.

Another example: Medicare is limited in how much it can reduce compensation to providers because they will just start rejecting Medicare patients in favor of seeing only private-insurance patients. This definitely hinders Medicare’s ability to price things according to what they view as sustainable.

How to Keep Insurance Companies from Stealing Healthcare Cost Savings

In February 2011, I posted on what healthcare delivery reform proposals are getting wrong. Here’s the brief rundown on what I explained:

  • Most reform proposals will make care less expensive for patients (due to more integrated care plans, a better focus on preventive care, fewer complications, etc.)
  • Providers are the ones charged with making these delivery changes
  • Patients saving money = providers getting paid less
  • Why would providers make the changes only to lose money? They somehow need to financially benefit from their efforts and improvements
Are there solutions to this? Of course! Here are my favorite two:

 

First, integrated delivery. If the organization charged with making changes to how care is delivered is the same that will benefit financially, it works. An example might help. I live in Utah, where Intermountain Health Care (IHC) dominates. IHC is really good about doing research and finding ways to improve quality. So let’s pretend they do a lot of heart valve replacements, and that they’re usually paid $20,000. But, if they have a complication, they have to do all sorts of extra work, and they end up getting paid $30,000. (I’m making the numbers up, but I’m not lying about the fact that providers often get paid more for procedures when there were complications.) So, IHC finds that they can tilt the bed at a 20-degree angle and that magically reduces complications by 25%. But that means they’re getting paid $10,000 less every time they avoid that complication! The patient whose complication was averted with the tilting of the bed maybe ends up paying $2,000 less in co-pays than he would have, and the insurance company saves the other $8,000.

 

Poor IHC, right? They spent thousands of dollars on the research that produced the bed-tilting idea, and now the patients’ and insurance companies’ wallets are benefitting. Except, IHC has a secret. The insurance that patient was on is Select Health, which is IHC-owned! So, really, IHC just saved its patient $2,000 and saved itself $8,000. Not bad! This scenario, when the provider and insurer are the same entity, is called “integrated delivery,” and it creates excellent incentives to improve quality. The only time this breaks down is when IHC averts all sorts of complications for patients on different insurance companies. [Update: There are downsides to integrated delivery organizations, including ACOs, that relate to their limiting of the options available to patients and, thus, interfere with value-sensitive decisions. I won’t explain it here, but I’ve learned more since writing this post.]

 

This brings me to the second solution, which can sometimes work when it’s not an integrated delivery situation. So when IHC goes to renegotiate their contract with, say, Altius, they will have their reduced-complication-rates data in hand, and they will say, “Hey, we have 25% fewer complications than before, so your average cost will go down from $22,500 to $21,000. But we want some of those savings since you didn’t do anything to warrant saving all that money, so we’ll raise your rates a little bit to make your average cost $22,000, which is still lower than it was before, and we’ll be getting some compensation for all this hard quality-improvement work we’ve been doing.” I guess this solution could be called “splitting the savings.” [Update: Since writing this, an amazing idea called “shared savings” became popular. It’s exactly what I describe above. But it has a pithier name.]

 

The providers will still be losing some of the savings to the patients and external insurance companies, but at least they’re improving quality and their reputation!

How Doctors Make Prices

I’m venturing out a little bit on this post because I don’t know if the pricing process I’m about to explain is used by all providers or not. That’s my disclaimer.

Now I’m going to pretend I’m a doctor with a brand new self-run clinic. I’ve just hired all my nurses and bought all my computers, etc. My next step is to decide on a fee schedule. How do I do it?

I start by checking prices of other doctors in the area. Or not, because I can’t find any of those. So then I ask some of my physician friends, who say they generally charge 100 to 120 percent of Medicare fees. “That’s quite a range,” I say. But then they say it doesn’t matter too much what I set my fees at because my future patients’ insurance companies will basically choose how much they are going to pay me anyway.

Insurance companies decide the price? I guess that makes sense because they have all the bargaining power over me, a lowly solo doctor running my own clinic. So I somehow find a way to take a look at compensation schedules for different insurance companies, including Medicare and Medicaid. Their prices are all over the board for every procedure! For a single billing code (maybe it’s the one for setting and casting a broken arm), Insurance Company X will pay $1,100, Insurance Company Y will pay $1,000, Medicare will pay $900, and Insurance Company Z will pay $1,200.

Now I start thinking strategically about this. If patients are never going to ask me how much I charge, since their insurance companies will handle all of that, I decide to set my price for setting and casting a broken arm at $1,200. Why? Because if I set it at $1,000, I’m only going to get $1,000 from Company X, who was willing to pay me $1,100, and $1,000 from Company Z, who was willing to pay me $1,200. Why would I set my price low and leave all that money on the table? So as long as I set my price at $1,200 or higher, I’ll get the full $1,200 from Company Z, the full $1,100 from Company X, the full $1,000 from Company Y, etc.

So how do the insurance companies decide on these fees? I hear stuff about this specialist-dominated group of physicians who, working as a committee (known as the RVS Update Committee, or RUC), get to update the Medicare fee schedule every year. And people keep telling me that’s why I, as a primary-care doc, don’t get paid as much as I should because those darn specialists in that committee overvalue work done by specialists and undervalue work done by primary-care physicians.

At this point, I give up worrying about prices and just trust that the money that comes in every month will be more than the money that goes out every month. And, after a few years, that seems to consistently be the case, so I just stop worrying about it.

. . . That is, until patients on high-deductible insurance plans start calling my receptionist and asking what our prices are for various procedures. We’re not sure we want her to admit that our price for setting and casting a broken arm is a whole $1,200, so we prepare a canned response to such inquiries: “We’re not allowed to quote prices over the phone. You’ll just have to come in so the doctor can take a look at you first.”

Why Doesn’t the Healthcare Industry Evolve Like Other Industries?

If you think about almost any industry and how it changes over time, you can see an obvious shift from high cost, low quality to lower cost, higher quality (and, thus, greater access to the product/service). Think about computers, or portable music players, or cars, or flat-screen TVs, or indoor plumbing, or airline flights. . . .

Average yearly productivity growth of industries is estimated to be about 2.4%. But healthcare is different–it receives negative estimates year after year. So what’s the cause of this? Why doesn’t healthcare evolve toward higher productivity over time? If we can figure this out, then maybe we’ll know what we should work on changing with how the industry is structured. And then we’ll be able to permanently solve this crazy trend of healthcare spending, which has been increasing at a rate of 2 – 4% faster than the rest of our economy for a long, long time.

People often blame the lack of evolution (toward lower cost, at least) on healthcare providers not having an incentive to compete on price. Patients don’t price shop, so why would they compete on price? And patients don’t price shop because insurance just covers everything for them, even the small, routine things.  We’re all contributing to this because, no matter which doctor we choose, we still have a $15 co-pay, so why would we waste our time finding out which provider will send the cheapest bill to our insurer? It’s reasonable, this argument, which says that the insurance structure is the reason healthcare providers don’t have to compete on price, and that that is causing the industry not to evolve like it should.

Are there any solutions to this?

The most commonly proposed solution is high-deductible insurance plans. It makes sense. If nothing is covered until you surpass a $1,000 or $2,000 or $5,000 deductible, price starts to really matter unless you’ve already surpassed that deductible for the year (which would be unusual for healthy people). The hard part about this is actually being able to find out prices from providers, but we’ll ignore that with the assumption that if enough people start requesting prices, providers will start making them more readily available. So the result would be that providers finally have to compete on price, they now have an incentive to find ways to reduce prices, and problem solved!

Not so fast.

Did anyone ever consider that providers already do compete on price? No, they don’t compete on prices for patients, but they do compete on price to win insurance contracts. How do you think insurance companies choose which doctors will be in their network? By price! Yes, providers definitely compete on price already. They do it to win insurance contracts, which then guarantees them a steady flow of patients and revenue.

But why doesn’t price competition for insurer contracts provide enough of an incentive for providers to find ways to cut costs and help the healthcare industry to evolve like almost every other industry?

I don’t know. But here’s my guess:

Management is in charge of negotiations to win insurance contracts, so they feel the pressure to find ways to lower costs, but that pressure isn’t conveyed strongly down to the people who have the knowledge required to actually recommend cost-cutting changes: doctors and nurses. If management isn’t working with the current business model’s routines and processes day in and day out, they aren’t going to see the inefficiencies in how things run. Doctors and nurses need to do that, so maybe most healthcare organizations aren’t giving doctors and nurses enough/any incentives to do that.

But, management’s specialty is figuring out completely new processes, routines, and business models that can achieve the same job for the patient but at a way lower cost. So why aren’t healthcare management people figuring out and experimenting with those in an effort to secure more insurance contracts (and, thus, market share and higher profitability)? You’d think the price competition for insurance contracts would at least motivate those kinds of experiments.

The answer may lie in the fact that healthcare provider organizations are known as some of the most complex organizations conceived by man. Possibly this complexity deters innovations like that. They’d be so hard to predict financial outcomes and market response! And with fewer ideas being tested, the evolution of healthcare will necessarily be slower than most industries. I’d love to see some research comparing the complexity of organizations with their speed of productivity growth. And I’m also interested to see the results of all sorts of government-funded “pilot programs” that allow providers to test new ideas out.

So, those are my conjectures, that price competition for insurance contracts isn’t enough because doctors and nurses aren’t given enough incentives to root out inefficiencies and because healthcare organizations are so complex that they deter business model innovations. Maybe I’m way off. Ideas?

UPDATE: I’m wrong. Providers don’t compete on price to convince insurers to add them to their networks. I’ve since learned that prices between insurers and providers are pretty much decided by Medicare prices as an anchor and adjusted up or down depending on bargaining power. This means prices will stay the same even if providers find lower-cost ways to deliver care. So, the question remains: Why aren’t providers finding all sorts of ways to lower costs if any cost reduction would not be followed by price reductions and, therefore, go straight to their bottom line? I still haven’t figured this one out, but Clay Christensen seems to think providers need to encompass the whole value chain to be successful at it, so maybe that has something to do with it.

What Healthcare Delivery Reform Proposals Are Getting Wrong

Let’s pretend I own a primary care clinic. There are quite a few doctors who work in my clinic (primary-care and specialists), and everything’s going great–we have plenty of patients, have a good reputation in the area, and are fairly profitable.

And then I am told I have to start doing this “patient-centered medical home” thing, which means I will now be responsible for all aspects of my patients’ care plans. If my patients go to other doctors, I need someone to talk to those outside physicians and find out what they did. I need to have someone available to answer questions and solve problems at all hours of the day and night so my patients will have continual guidance on how to make good decisions if something goes wrong. I need to hire a “care manager” to keep a close eye on all my high-maintenance patients (e.g., ones with multiple chronic diseases or social disabilities), calling them to make sure they’re taking their medications, teaching them how to follow their care plan the best, and all sorts of babysitting-type things like that. I also need to invest in a more comprehensive electronic health record system so I can keep track of all of this stuff. And I should probably also periodically pay someone to perform a data analysis on how efficiently the doctors in my clinic are performing so that I can find ways to further improve patient health and reduce the cost to my patients. And, as an incentive for my physicians to go along with all of this, I should probably find a way to adjust compensation to reward them for improving their patients’ health and lowering costs. . . . You get the picture.

So now I, the clinic manager, am faced with a choice: turn my clinic into a medical home OR just leave things the way they are.

In evaluating the first choice, I think about the upsides. Most of my patients will be healthier and better taken care of. Maybe even my physicians will have greater job satisfaction, which leads to increased productivity and lower turnover.

And then I think about the downsides. I will expend a lot of energy and money doing all of those things. I stand to lose profits from those increased costs and because my doctors will probably be performing fewer high-profit procedures. This loss of profit might be mitigated by the fact that my physicians will now have more time to take on additional patients, but that assumes I will be able to strengthen my reputation so much that I can steal market share from local competitors.

In summary, I figure the main upside is that my patients will be healthier, and the main downside is that it will generate a net loss in revenue. As high-minded as I am, I am not willing to risk my business’ very viability to potentially improve my patients’ health by implementing this medical home thing, so I choose to leave things the way they are.

Now, step out of the clinic manager perspective and analyze this with me for a second. This whole conversation begs the question: If medical-home patients’ care is so much less expensive (because of fewer procedures, ER visits, and the like), who is getting all of those savings? It’s obviously not the clinic (who, interestingly, is the one being asked to make the effort to change and assume all the attendant financial risk). Have you figured it out? It’s the payer! So patients and insurance companies will reap all the benefits, while the provider will take all the risks, make all the effort, and sacrifice profitability.

If any delivery reform proposal (e.g., ACOs, medical homes, etc.) is to be widely accepted by providers, that reform idea must include a way for the providers to reap some of the financial benefits. And that’s where many of these trendy reforms go wrong.

Our Healthcare Spending Trend and Why It’s Killing Us

I wrote a post a little while back explaining that there are two types of healthcare costs: care costs and non-care costs. Well, taking a step back, those are actually both related only to our level of spending. But there is another aspect of spending that is not talked about nearly as much, and about which I am much more concerned: trend.

The U.S. Department of Labor keeps track of the U.S. inflation rate, and they say it has been under 4 percent every year since 1991. Estimates of yearly health spending growth range from 5 to 15 percent, but most come in over the 10 percent mark. If you’ve done your math correctly, you probably figured out that healthcare spending is increasing faster than inflation.

So, is this bad? Well, as a country, we’re getting wealthier, and with more wealth comes more health spending, which is a great thing. There are tons of things that people choose to get healthcare-wise when they have more money. Maybe it’s plastic surgery, maybe it’s other cosmetic surgeries, maybe it’s eye surgery, maybe it’s weight-loss surgery, maybe it’s the more expensive treatment option for longtime joint or back pain, . . . you get the picture.

So yes, some spending increases are a good sign. But that crazy spending growth can’t all be attributed to wealth increases in our country. Two other big causes of spending growth can probably be labeled as (1) medical technology and (2) chronic diseases, and both of these are causing me some concern. First, a little explanation of each.

Medical technology causes spending growth because it allows us to spend tons of money saving someone or fixing someone when we used to have to just watch from the sidelines. It also allows us to treat things more effectively and more expensively. For example, a robot for use in surgeries is super expensive, but it reduces invasiveness and increases the range of things that are considered operable. These are positive things as well.

And as for chronic diseases, this refers to kidney disease, heart disease, diabetes, those sorts of things. And some estimates say that two thirds of our healthcare expenditures are generated by them. Crazy, I know.

So there’s a basic overview of why healthcare costs are increasing faster than our economy is growing. And here is why I’m concerned about it: it’s pricing low-income Americans out of healthcare insurance and contributing to a growing national debt.

As insurance companies have to deal with more expensive beneficiaries (especially the ones with chronic diseases), they have to raise insurance rates. And as new (more expensive) treatment options become available, they have to cover many of those (or risk losing beneficiaries), which means (again) raising insurance rates. All of this raising insurance rates business means it gets too expensive for people and employers, so they just make the decision to just get rid of health insurance and hope for the best.

And then there’s the government debt. Medicare and Medicaid are not immune to all the insurance cost increases. Yeah, they get to decide how much they pay providers, but they still have to decide what to do about new expensive treatments, and they also have to fork out more dough for people with chronic diseases, especially since the over-65 population is the main chronic-disease population. It’s just getting more expensive for the government to pay for healthcare!

So there you have it. Our spending trend is causing some major problems, and it is definitely exacerbating our quality and access problems. But never fear! There are some amazingly good solutions out there for all of this, but I’ll save those for another post, same bat time, same bat channel.

Numbers Don’t Lie . . . People Do

Yes, I’ve strayed from the healthcare basics focus that I intended to take. I’ll get back to that, I promise. But this is something I’ve been wanting to post about for a while now.

Picture a child learning how to count. Now picture that child trying to use that new skill to count trees on her way home from school. She walks past a tree and says, “One.” Then she walks past another, even bigger one, and says, “Two.” And then she walks past a little tiny bush. She ignores it, confidently praising herself for knowing that that’s not a tree. But then she walks past a pretty tall bush. It has a trunk. It has leaves. Is it a tree? She gets confused and decides not to apply stuff she learns in school to her life anymore.

What was her problem, and what does that have to do with healthcare? She had a problem with identifying what she should count and what she shouldn’t. This is an essential fact of counting–it’s a game of categorization. By counting trees, you have to define what a tree is and what a tree isn’t. And this has everything to do with healthcare! Have you ever heard the number 46 million come up in healthcare debates before? You got it! It’s the number of “uninsured” people in the U.S.

I always took that number at face value. After all, numbers don’t lie. Right? Right. But that number was obtained by some people somewhere deciding who should be considered “uninsured” and who shouldn’t. So are they completely unbiased when they are deciding what to count and what not to count? I argue that they are not.

Numbers are almost always used for political purposes! The mere fact that you’re counting something presupposes that it’s worth counting, probably because you think it will help you know if you’re right in suspecting something’s wrong. In the case of healthcare, people were probably hearing anecdotes about how someone didn’t have insurance died because of it (probably leaving her kids behind as orphans). “Wow! I think the number of uninsured people in the U.S. is a problem! I’m going to check that by counting them.” And then, after they decide how to count uninsured people, they get a number. And they don’t stop there. They use that number to incite action. Why else would someone count something? “Look, that’s really neat that I got that number. Let’s stare at it.”

So, am I saying that the people advocating universal health coverage are the ones who are counting (and skewing) the number of uninsured people in the U.S.? Glenn Beck certainly thinks so. He estimates that number of uninsured people to be closer to 9 million, not 46 million. And I don’t know if he’s right or wrong. I haven’t done the research to find out how the powers that be get to that 46 million number.

What I am sure of, though, is that the principle is correct. It seems cynical to say that you shouldn’t trust any numbers or statistics, but it also seems naive to completely ignore the politics that goes into obtaining a number. I’ve seen charts that show health spending growth by country. Depending on which countries are included on the chart, some make it look like the United States’ health spending growth is pretty average, others make it look like we’re an extreme outlier (implying something should be done about it NOW!). But maybe this is all a good thing. I mean, if no one was convinced that healthcare is a problem, would we be going through this whole “let’s improve healthcare” movement? Probably not.

The Secret Problem with Healthcare

I’ve decided it’s a good evening to wax Platonic a little bit and write in dialogue form.

Interviewer: I see you like to study health policy. What do you think are the biggest problems with our healthcare system today?

Taylor: Cost, quality, and access; we spend way too much money and still don’t have relatively great outcomes or access to care.

Interviewer: How do you think we can solve them?

Taylor: You missed a question.

Interviewer: What do you mean?

Taylor: Didn’t you mean to ask me what’s causing the problems before you asked me how to solve them?

Interviewer: *Gives me the “go on” look*

Taylor: Well, you’ve just exemplified the secret (fourth) problem of healthcare: ignorance. We skip the second question. We don’t really understand what’s causing the problems we identify. Instead, we jump right to ideas about how to solve them (i.e., answering the third question). So, go ahead and try again.

Interviewer: Thank you, but that will be all. And remember, don’t worry about calling us–we’ll call you.

This is my explanation for being so slow to form an opinion on reform proposals. I don’t really know what would help yet because I don’t really understand all the root causes of the problems. I guess one can probably never understand all of the root causes, but one can surely understand the two or three main ones to each problem. And there doesn’t seem to be a single place online or anywhere that I can go to find them clearly laid out and thoroughly explained. It’s probably because we keep skipping the second question.

Now if only I could figure out what justice is . . .

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