Price controls — Do they ever work?

A proposed rule from CMS would reduce physicians’ Medicare payments by 6.1% starting Jan. 1, 2011. That is in addition to a projected 23.5% cut scheduled to take effect Dec. 1, 2010 unless Congress changes it.

The sustainable growth-rate formula (SGR) formula has called for payment cuts to doctors for years, with Congress stepping in intermittently to stop the reductions.  The latest intervention came on June 24, 2010 when the House replaced a 21.2% Medicare physician pay cut with a 2.2% raise through November.  Unless, Congress acts by the end of November, the 2.2% raise will be eliminated and the 21.2% cut will be implemented, resulting in a 23.5% reduction in current reimbursement rates.

Add in the potential 6.1% reduction scheduled for January 2011 and physicians face the potential of a nearly 30% SGR cut.

Do we need academic studies and journalistic investigations to tell us how doctors will respond?  Of course not.  We all can guess what will happen.  However, the studies and investigations are available.  As reported in the New York Times and elsewhere, physicians will reduce the number of Medicare patients they see.  As reported in a new study in Health Affairs, doctors will respond by simply treating more patients or ordering more tests and procedures for existing patients to make up for the lost income.  Cost cuts for Medicare will not yield a commensurate decrease in Medicare spending.  Also, there will be a growth in spending for commercial and Medicaid patients.  An onward and upward goes the healthcare cost spiral.

The solution is for cost cutting to be part of a broader strategy for healthcare cost management.  Only a partial list of strategies include:

• Incentives that encourage patients to better manage their own health (eg, reductions in healthcare premiums for weight loss; value-based insurance design)
• Financial incentives for physicians based on patient outcomes
• Better management of the healthcare services and resources available to patients (eg, patient centered medical homes)
• Evidence-based increases or reductions in reimbursement for select healthcare services based on the value they deliver in terms of outcomes
• Reductions in administrative requirements
• Better sharing of healthcare information between providers
• Development of cost-effective treatment algorithms and incentives for physicians to comply with them

Taking cost out of the healthcare system will affect provider income.  However, the reduction in income does not need to translate dollar-for-dollar in a reduction in profitability.  More efficiently using our healthcare system will yield a reduction in the infrastructure required to deliver healthcare.  For example, a reduction in the administrative burden for a doctor or a hospital can be accompanied by a reduction in staff.   Therefore, reductions in services are more palatable than simple cuts in reimbursement.

A thoughtful and coordinated strategy for reducing the use of our healthcare system that improves outcomes is the critical next step.  Hodge-podge cost cuts by government and private payers only leads to more ill effects.  As illustrated above, such attempts actually lead to increases in reimbursement.  This is where the Federal administration needs to focus its efforts and provide leadership. 

Many of us look today at China and wonder about the wisdom of state capitalism.  Under this system, authoritarian governments use markets “to create wealth that can be directed as political officials see fit.” The ultimate motive, he continues, “is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).” Under state capitalism, market enterprises exist to earn money to finance the ruling class. (Credits to  “The End of the Free Market” by Ian Bremmer.)  In the United States’ healthcare industry, democratic capitalism has led to chaos. 

In 2009 and 2010, we saw how the country reacts to a state takeover of the healthcare industry.  I am not arguing for a complete takeover.  However, a step in that direction where the administration works with healthcare industry to develop a coordinated strategy seems wise and appropriate.  Once the plan is developed, we can leave it to the free markets to implement it.  Without leadership, chaos and cost rises that significantly hinder the health of business, large and small, will continue.

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The Big Bad Drug Industry?

A recent study by the Kaiser Family Foundation found that spending in the US for prescription drugs was $234.1 billion in 2008, nearly 6 times the $40.3 billion spent in 1990. Although prescription drug spending has been a relatively small proportion of national health care spending (10% in 2008, compared to 31% for hospitals and 21% for physician services), it has been one of the fastest growing components, until the early 2000’s growing at double-digit rates compared to single-digit rates for hospital and physician services.  

Since 2000, the rate of increase in drug spending has declined each year except for 2006, which was the year Medicare Part D was implemented. By 2008, the annual rate of increase in prescription spending was 3%, compared to 5% for hospital care and 5% for physician services. From 1998 to 2008, prescription drugs contributed 13% of the total growth in national health expenditures, compared to 30% for hospital care and 21% for physician and clinical services.  

 

Annual prescription spending growth slowed from 1999 (18%) to 2005 (6%).  The key reasons for this slowing of prescription drug spending are: 

• Increased use of generic drugs
• Increase in tiered copayment benefit plans
• Changes in the types of drugs used
• A decrease in the number of new drugs introduced.

This profile raises the question as to why the drug industry has been a major focus of the healthcare reform effort.  Sure, some drugs cost more than $100,000 per dose.  That is significant, even for people with insurance coverage, and not easily understood by many consumers and healthcare professionals.  But given the limited portion of healthcare costs due to drugs, the significant rate of introduction of generic drugs, the lack of a significant drug pipeline outside of oncology and other, select disease states, there seems to be limited room for better managing these costs.

 

Instead, the lack of a significant pipeline outside of oncology therapies should be a major concern.  Pharmaceuticals offer the potential to improve outcomes while offsetting hospital and other healthcare costs.  The United States should support research efforts into new therapies while encouraging appropriate choice of drug therapy and compliance with indicated therapy regimens.  Such concepts as the patient-centered medical home and value-based insurance design should make inroads.  Appropriate provider and patient education will encourage even better therapy choice and enhanced compliance.

 

  

 

Let’s focus our energies in areas where cost savings and improved outcomes can be gained as there is significant room for improvement in the United States.  Let’s not excessively beat up those who are seeking to improve healthcare outcomes in a cost-effective way.

 

More healthcare is better? You get what you pay for?

The journal Health Affairs just surveyed more than 1,500 patients with employer-provided insurance.   The majority of respondents believe that “more is better, newer is better, you get what you pay for, (and) guidelines limit my doctor’s ability to provide me with the care I need and deserve.”

Healthcare experts can come up with sophisticated ideas for containing healthcare costs.  Congress can simply mandate reductions in Medicare reimbursement.  However, without patient support, we won’t make progress with reducing the burden of the world’s costliest healthcare system.  Lack of patient support is what sunk the healthcare reform efforts of the 1990s.

The question is how to convince the majority of us that “you get what you pay for” but you don’t have to buy everything on the menu or pay more than we should for a therapy when all we have is a scratch or a cough.  When providing the best healthcare possible for our family shows our love and the best means the most costly, when Americans have an innate sense of entitlement for access to the best our healthcare system can provide, we are stuck with in “drive.”   Quick and direct efforts at cost reduction will meet nothing but resistance and failure.

Addressing this challenge will take time.  It took years to convince people to do something as simple and clearly beneficial as wear a seat belt or to not litter.  Healthcare is complex.  We need to develop simple and clear messages, supported with evidence, to change perceptions and the beliefs that are the cornerstone of our society. 

Physicians will play a key role in changing patient beliefs.  Patients will look to their doctor for guidance as to what treatment alternatives are appropriate and which are most beneficial. 

The physician-patient relationship also is complex.  Often, patients listen to their physician without question.  We follow our doctors’ directives solely relying on their judgement.  At other times, patients resist their physician’s guidance and physicians give in to their patient’s demands.  As we are our doctor’s customer, it is a case of “the customer is always right (as long as no harm is done).”  This interaction must be better managed to be more effective.

One approach is to allow doctors more time to educate patients.  This leads us to concepts such as the patient-centered medical home, which we have described in previous blog entries.  Reducing patient loads so primary care physicians can better address patient concerns, providing clinical pathways that guide physician decisions, using EHR to ensure physicians have all data available and redesignining physician and patient incentives to encourage short-and long-term implications of medical decisions will help make the patient-physician interaction more effective and focused on more cost-effective care.

Compensation and the Patient-Centered Medical Home

Compensation for a PCMH team must achieve the following outcomes: 1) Reward improvements in outcome, 2) Drive decreases in the utilization of healthcare resources; 3) Encourage cooperation among team members.  Compensation structure should be simple enough for everyone to easily understand, measure their performance and calculate their expected compensation.  In other words, compensation should be evidence- and value-based rather than based on piecemeal work.

Of course, this is easier said than done.  Compensation is the most difficult issue associated with the patient-centered medical home (PCMH).  Understandably, no one wants their income to decrease and everyone wants to be compensated for the work they do (or don’t do).  Primary care physicians want compensation for coordinating the PCMH provider team.  Specialists and institutional providers, such as hospitals, don’t want to see a drop in their current income levels, even if their workload decreases. 

Compensation systems should be based on improved outcomes, both in the short term and the long term.   In many instances, short-term markers will be substituted for more appropriate long-term outcomes.  For example, measuring improvements in HbA1c scores for diabetes patients is more practical than measuring reductions in cardiovascular events and other co-morbidities.

As well, the PCMH should share the cost savings that insurers realize, without double-counting the cost savings associated with improved outcomes.  If the PCMH can realize the same outcomes with a comparable level of risk but fewer diagnostic exams or specialist referrals, the PCMH team should share those savings.  Sharing the cost savings will encourage providers to reduce the services they provide as the impact on their income will be softened.

Measuring the risk associated with reduced levels of care is as important as measuring short-term improvements in outcomes.  For comparison, many US corporations focus on short-term results as that drives their bonuses.  However, the long-term risks rise.  For example, Wall Street executives recognized significant profitability from derivatives and other risky trading and money management strategies in the years leading up to 2008 and the Great Recession.  We must avoid similar behavior with our healthcare status.

Developing a value- and evidence-based system that provides compensation based on improved outcomes, cost savings and acceptable levels of risk is a complex, time-consuming and costly endeavor.  It is predicated on the widespread implementation of EHR, the funding of comparative effectiveness research, and gaining consensus on outcomes, risk and cost-savings metrics and their measurement.  Therefore, compensation systems that enhance the effectiveness of PCMH will be phased in over time and increase in scope, complexity and benefit to the healthcare system over time.

As hinted at above, effective compensation systems requires sharing of rewards among the PCMH team.  That argues for further integration of providers to facilitate such sharing.  We’ll explore that issue next week. 

Take care and have a fun holiday weekend.

Implementing EHR and PCMH

Implementing EHR is a requirement for implementing the PCMH concept.  However, it can be a costly requirement.   PriceWaterhouseCoopers’ report “Rock and a Hard Place: An Analysis of the $36 Billion Impact From Health IT Stimulus Funding” estimates that a three-physician practice could spend anywhere from $173,750 to $296,000 for an EHR package complete with software, implementation, training and software maintenance.  The cost of maintaining the data in the system, developing procedures and adding enhancements to the system over time are not included.

That cost exceeds the funding available through The American Recovery and Reinvestment Act of 2009 .  The act makes up to $44,000  available to  individual physicians to upgrade their practices from paper-based records to EHRs  between 2011 and 2015.

Then, why will physician practices implement EHR?  One significant incentive is that, beginning in 2017, the government will reduce Medicare payments to physicians who do not implement an EHR by 1% per year for as many as five years.  Hospitals could see even larger reductions for failing to implement EHR systems.  This will provide an incentive for practices to implement an EHR. 

A second incentive is that, over time, CMS, private payers, medical specialty societies and researchers will mine the data available through EHR systems.  They will use the data to drive value-based and evidence-based medicine and identify pathways for improving outcomes.  For example,  the  data will affect treatment algorithms and prior authorization requirements as well as ensuring compliance with them.  Therefore, once most physician practices have adopted EHR the remaining practices will be forced to follow suit or face expulsion from the healthcare delivery system. 

Simply maintaining competitiveness with other physician practices will not encourage adoption of EHR.  Very few patients will ask a primary care physician if he or she uses electronic or paper records. 

Qualifying for NCQA certification as a PCMH, which requires an EHR, will not be a significant incentive.   The certification might generate a few more chronically-ill patients but it is not clear that the revenue from these patients will outweigh the additional costs fo the systems. 

Also, for some practices, the timing difference between implementing the PCMH and generating more patients will be affordable for small physician practices.

As EHR moves towards a requirement for physician practices over the next 7 to 12 years, small physician practices are left with the challenge of  affording it.   Borrowing funds from a bank is one avenue.  However, the initial capital outlay for the system and the costs of implementing it will occur years before additional revenues are realized.

More likely is that providers will consolidate their practices to gain economies of scale from implementing the system.  EHR implementation will be simpler for single specialty rather than multi-specialty groups due to the uniformity of requirements.   However, the formation of larger multi-specialty groups will facilitate the success of PCMH and other approaches to delivering lower cost, higher quality care.

Integration of physician practices with hospitals is the least likely approach to affording EHR.  On the positive side, many hospitals have available the capital required to implement EHR for the physician practices.  Also, physician-hospital organizations offer opportunities to integrate the delivery of care.  Unfortunately, as the 1990s demonstrated, the political issues of developing an effective physician-hospital relationship are very challenging.

In summary, the advent of PCMH and developing the EHR systems required for its success is likely to contribute to the changing profile of the healthcare delivery system.  Larger physician groups, more multi-specialty groups and possibly the resurgence of some physician-hospital organizations will help drive the success of PCMH and the delivery of lower cost, higher quality care.