How to Reward Value Instead of Volume

Who has heard the favorite healthcare reform saying these days? “We need to reward providers for value, not volume!” It has almost become cliche. And conventional wisdom would teach that something touted frequently would be well thought through by the people touting it; but we all know conventional wisdom is often wrong. (Did I just say that the knowledge that conventional wisdom is often wrong is conventional wisdom?) I admit that I have not read everything by everyone doing the touting, but I’ve never heard anyone break down exactly how we can reward value instead of volume. So I’ll tell you.

There are only two ways to do it: a dumb way and a smart way. But first, let’s review how a healthcare provider makes money:

Revenue = Price x Quantity

Do you see that there are only two components (that we can control, at least) that determine how much money a company makes? We can change the prices we pay them or the quantity they sell.

Now, let’s suppose we are able to identify an objectively highest value healthcare provider out there. Let’s further suppose that we want to reward this high-value health system for its amazingly high value so that it can be financially rewarded for being so awesome and so (we hope) others will copy them to have high value and be rewarded, too. How can we do it? Let’s look at our two options:

Increase price: You’ll recognize this as what Medicare is trying to do. Will it have the intended effect? Probably. High-value providers will be rewarded with higher prices. But hold the phone–isn’t our true intended effect to get society the highest-value healthcare we possibly can? So how are we maximizing value if we’re raising prices? Raising prices lowers value. So we’re identifying the highest-value providers and then lowering their value. Hm. Ah, but maybe there will be an overall aggregate effect of higher value because we won’t raise prices much, but we’ll get lots of low-value providers to improve their quality. I guess. But all this seems to be doing is increasing the total money we pay on healthcare, which is not a good idea right now. So I call this the dumb approach. But people haven’t thought hard enough to know there’s also a smart approach . . .

Increase quantity: What this means is getting more people to the highest-value providers, so now we’re rewarding value with volume. Their hospital beds are full, their specialists are performing lots of high-margin surgeries, etc., and they are rewarded handsomely for being high value. Not only does this reward the high-value provider, but look what happens to patients–they get to have higher-value care because they’re going to the high-value providers! In other words, society collectively will be receiving higher-value healthcare. And the low-value competition, meanwhile, will not be so busy anymore, they’ll start to lose money, and they might actually go out of business UNLESS they improve their value as well. That’s quite an incentive to change (probably the most powerful one, actually).

So why aren’t we doing this rewarding value with volume thing? I could list a bunch of reasons why we’re not, but that wouldn’t be very clear thinking now, would it? Instead, I’ll ask this: Who is deciding which providers patients will go to? Whoever is making that provider selection (sometimes it’s the insurer or employer, sometimes it’s other providers, usually it’s the patients themselves) needs to (1) have the price and quality information necessary and be able to determine which provider they think is the highest value and (2) bear the financial consequences of their choice (otherwise they’ll just choose the highest quality every time without regard for price!). If the provider-selecting party can meet both of those conditions, they will be making what I call value-sensitive provider selections.

In summary, policy ideas to reward value with higher prices will not do much for aggregate healthcare value our society is purchasing. But policy ideas that can get those 2 conditions fulfilled for the parties making the provider selections will successfully reward value with volume and concomitantly provide low-value providers with an ultimatum to either improve value or go out of business.

So the questions we should be asking ourselves if we want to “reward providers for value, not volume” is How can we remove the barriers to value-sensitive provider selection?” When will I write another post that enumerates all of the most salient barriers and how to remove them? Ask me tomorrow, but not today.

How to Make the Cost of Care Cheaper

I’ve been leading up to this for a long time. Lowering the cost of the actual provision of care is one of the most important things all countries with unsustainable health spending growth need. And, at the outset, I’ll say I don’t have all the answers. But here’s what I’ve got, explained in maybe a roundabout way, but hopefully it makes sense by the end.

Think about providers’ incentive to innovate. Do they have one? Hopefully your initial response is “yes,” because you’d be right (partially). Assuming this is a provider that operates as most in the country do, its prices are determined based on market power, not costs. So, with the assurance that prices will stay the same regardless of costs, providers have a great incentive to lower costs! Any cost decrease will go straight to their bottom line.

At this point, I picture in my head a little map of the United States with a vertical pin sticking out of it for each hospital, with the height of the pin representing that hospital’s costs of delivering care. The taller the pin, the higher the costs. So, the incentive for each hospital is to lower their costs as much as possible in order to maximize profits, and different hospitals succeed to varying degrees. The pins get pushed down with each successful cost-cutting initiative, some more than others.

Now let’s say there is a hospital that finds a really innovative way to deliver care, and their costs are way lower than everyone else’s. They want to get more customers in an effort to continue generating more wealth, but they’re stuck! Why are they stuck? Because even though their costs are so much lower, they don’t really get to set the prices the patients actually pay when choosing which hospital to go to for care. High-value providers can’t expand to new cities because they’d have to set their prices lower than existing providers’ prices, steal a whole bunch of the market share, and most likely force some of the lower-value incumbents out of business. But if they could, do you see what would happen to the pins? The one really low pin would start spreading, making the tallest pins get taken off the map completely with each market that it spreads to. It would be beautiful! Different kinds of cost-saving innovations would be spreading all over the country.

So, to repeat David Cutler’s question, Where are all the healthcare innovators? They’re out there, all over the country, but they’re stuck in their current markets; thus, we don’t see or even hear about most of them.

In summary, think of the two ways a company can make more money:

  1. Sell items at a higher margin
  2. Sell more items

Providers in our healthcare system can only do the first one. The second one is mostly not functioning, and thus we don’t have the harsh (and absolutely crucial) evolutionary force of putting lower-value providers out of business and lowering the cost of healthcare.

I’ll admit, the proliferation of high-deductible plans and new kinds of deals between providers and insurers are starting to overcome this. But there are probably other ways to increase the pace of the elimination of these barriers, and I would think the government should be focused on figuring out what they are if they want to solve this country’s budget problems. Or they could continue to argue over how to how to reduce volume and price while largely ignoring costs.

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.)

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.”

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.