Innovating Innovation: Why Government-Sponsored Innovation Grants Are a Poor Remedy for What Ails Us

Earlier this week, Health and Human Services (HHS) Secretary Kathleen Sebelius announced the first recipients of the Health Care Innovation awards. Made possible by the Affordable Care Act, the awards will support 26 projects that propose to save money, deliver high-quality medical care and enhance the health-care workforce. HHS announced that it expects to reduce health spending by $254 million over the next 3 years through these awards totaling $122.6 million.

The successful proposals seek to deliver a wide range of improvements to our health-care system by way of lower costs, improved outcomes, or greater access to care.

HHS Secretary Sebeliius rightfully stated, “We can’t wait to support innovative projects that will save money and make our health care system stronger.”

All of which leaves me wondering --Why have we been waiting at all? After all, we Americans spend enormous sums to maintain our mediocre health status. Health care is a “house on fire” when it comes to the need for innovation. If we are to believe the ROIs on each of the initiatives, someone, somewhere, should have had a financial interest in seeing these changes implemented long before HHS came forward. The question, then, is: Why didn’t this happen earlier?

My quick read of the proposed “innovations” doesn’t reveal anything really innovative. Rather, it’s a list of projects that fall outside the mainstream of what the current system will pay for. Moreover, the payers, led by Medicare and Medicaid, are interested in paying only for the absolute minimum for care, preferably somewhere south of the marginal cost of providing the service. To innovate, you must have the resources and flexibility to do so. Sadly, our health-care programs provide little of either.

Innovation requires nurturing to take root and produce fruit. It also requires an outsized reward attached to the risk of abject failure that often accompanies true innovation.

In a government-led, health- care system risk taking is not rewarded. Therefore, we should come to expect that what comes to pass for innovation is merely a half-step outside the established mainstream of how health care is practiced and paid for under the current system.

Innovators gravitate to problems in need of solutions. We certainly have these in health care. What we don’t have is a financial model that rewards spontaneous innovation. The most important innovation the government can sponsor is to change how it pays for care. We need innovation that is not dependent on government funding.

Could It Be So Simple?

Could it be that the only reason health-care costs in the United States are so much higher than other countries is that we pay more for health care than other countries? That’s the point of view articulated in a February 28, 2012 Washington Post article by Ezra Klein.

But wait. Aren’t Americans sicker, more stressed out, less attentive to our health than almost every other society on the planet? Aren’t we more addicted and dependent on the relative proximity and ease of access our health-care system provides and that drives the consumption of health care to astronomical proportions?

A survey released on March 2, 2012 by the International Federation of Health Plans suggests that the cause of higher health costs in the U.S. may, in fact, be that straightforward. The survey found that for 22 of 23 medical services and products, Americans pay more than any citizens of the other 24 countries surveyed.




Source: Washington Post

Perhaps we shouldn’t be so surprised with these findings. After all, in most other countries, prices for health-care services are either set by government edict or established through industry-wide negotiations between providers of services and payers. In the U.S., while Medicare and Medicaid have wide latitude to establish prices, they will pay for services --subject to political pressure from provider groups-- the commercial health-care market operates differently from health-care systems in other countries.

In the commercial market, payers and the providers of health-care goods and services engage in sophisticated negotiations. The result is the establishment of prices for goods and services that often reflect the relative market leverage of the participants. Because these negotiations take place between local, regional and national payers and local, regional and national providers, the result is an array of prices that vary significantly from market to market and among payers.

Is it practical to think that the United States will someday achieve a national market for health care? By that, I mean a market in which the prices for services will be generally equivalent across the country, just as the price of gasoline or milk is today. Without significant change to the way prices are set today, it doesn’t appear so. To the contrary, health-care prices are by and large established locally and regionally, and are often driven by the degree to which health systems and practitioners can exert market power.

Food for thought: The way we establish prices for health care today isn’t working to our benefit, at least if we compare the cost of health care here to other, industrialized countries. As Americans, we resist government price controls. If truth be told, we need a different, better way to price health-care services, one that leads to long-term price stability at a lower proportion of our GNP.

The business community gets this, and so do most American health-care consumers.

The big question in all this is: Why is it so hard to identify leaders within the health-care community who are willing to talk openly about this problem and tackle it head on?

What Contraception and Government Health Benefits Tell Us about the Health of Our Pluralistic Society

The current debate over the coverage of contraception tells us much about the state of our society in ways that have little to do with how we approach the issue of contraception, but much to do with how we view the role of government in our daily lives.  This issue also spells out a lesson about the pitfalls of designing large, uniform, national programs for an increasingly pluralistic society.

This controversy arose within the context of the Obama administration’s decision to include contraception as a mandated benefit that all employers would be required to offer employees. As we’ve learned once again, many employers, particularly faith-based organizations, are repulsed at the prospect of having to fund something that runs so counter to their religious and moral beliefs. 

The Administration’s policy remedy is to exempt faith-based employers from the mandate on the proviso that insurers will offer a separate policy of contraception benefits to employees of these employers who desire contraception benefits.  This benefit is to be provided by the insurer at no cost to the policyholder.

The remedy itself, as many have pointed out, this remedy is flawed, because objecting employers will not be shielded from paying the cost of these benefits.  The health insurer will act as a convenient intermediary to shield the employer from having to directly purchase a policy of insurance that includes coverage for these benefits.  Nonetheless, these employers will still contribute toward the funding of these benefits through the insurance mechanism. This will socialize the cost of providing contraception benefits across all policyholders through the premium-setting mechanism.

Apart from the weaknesses of the Administration’s remedy, we have much to learn from this episode. 

First, an attempt to provide uniform benefits to all Americans is problematic, particularly when it comes to the charged issue of health care.  The problem worsens even more when done through the employer-based system for financing health benefits.  This issue would have played out much differently if faith-based employers did not have a financial stake in the decision.

And let’s not overlook that the controversy about including contraceptive services in the health care benefit is really an outgrowth of our society’s bias for government-provided benefits.  This bias is fueled by our democratically-elected leaders’ penchant for demonstrating value in the form of legislated benefits, and our appetite for accepting these benefits, especially when we perceive them as being paid for by someone else.  By socializing what economists would describe as a private good, we become parties to decisions made by our policymakers that would have otherwise been our private, personal decisions.

Spending other people’s money has been elevated to an art form under the guise of a social return on investment (ROI).   Our politicians and policymakers often argue in favor of a decision based on the return on investment that will be associated with a proposal.  Forecasting the ROI of a social policy is always problematic.  It’s made even more so when the policy is so morally charged.  The problem with social ROI’s is that we don’t all place the same value on the hoped-for return.

Similarly, policies are often promoted and defended on the basis of the unaffordability of the good that has such high value for society.  This approach is also fraught with danger.  Is most contraception unaffordable, or have we just decided to place a social premium on its use?  Is contraception any less affordable than gasoline?  Only the person making the decision can answer that question, unless of course, the contraception becomes free to the consumer.  We can avoid having to make trade-offs like this between competing goods by making one of the goods less expensive or free.

Long ago, we expanded our view of the proper role of government beyond securing our national defense and building roads.  Our government is now actively and intricately engaged in providing health care to its citizens.  Government programs, by their very nature, strive for consistency and uniformity of implementation and result.  Uniform benefit standards have forced us to debate and defend our various moral preferences in the town square. 

It should come as no surprise then that on issues like contraception benefits, it has been so hard to find a middle ground that accommodates the views and interests of dissenting voices.

Perhaps the most confounding aspect of the current debate regarding contraception is that it could arguably be sold safely without a required prescription.  A Los Angeles Times Op-Ed by Malcolm Potts effectively makes the case for making contraception an over-the-counter product.  If that were the case today, contraception would not qualify as a health-care benefit.

The bottom line is that the Obama decision is a political and policy bias in favor of making contraception widely available at little or no cost to users.  By doing so, the Administration has revealed much about us and our society – beyond the limits of contraception – that should give us pause.

The End of Health Insurance Companies?

Imagine: No more health-insurance companies. That’s what Ezekiel J. Emanuel and Jeffrey B. Liebman, former advisors under President Obama opined in a blog piece posted on The New York Times website on January 30. The two authors boldly predicted the end of health insurance by 2020 in what many might optimistically view as the health-care equivalent of President Kennedy’s declaration that the United States would land on the moon by the end of the ‘60’s. After all, even on their best days, health insurers don’t win many popularity contests.

Emanuel and Liebman accurately depict many of the mega-forces taking place in the health-care market today. Employers are taking on more financial risk for health benefits as they become self-insured. The government is driving reimbursement reform with its Accountable Care Organization (ACO) pilots, and private insurers are following suit.

There’s a lot to like in their arguments, and yes, we have reason to be optimistic that improvements are being made to our health-care system. In declaring the death of health insurers, however, Emanuel and Liebman have fallen into the all too familiar, medical-establishment trap -- oversimplifying the roles insurers play and exaggerating the medical field’s ability to take on these functions.

Let’s start with the premise that health insurers will become extinct by 2020. The hard reality is that health insurance, properly viewed, has been extinct for at least the last 20 years, perhaps longer. The employer purchasing model and previous reforms that placed limits on underwriting and pricing saw to that.

Today, insurers serve as financial intermediaries that provide a variety of services necessary for our health-care system to function properly. Would we feel better if we didn’t know that some doctors practice medicine outside the mainstream of currently accepted practice or science? Insurers help inform us of these instances.

Similarly, would we feel better not knowing that different health systems charge much higher prices for identical services, or that their outcomes place patients in greater jeopardy than if care were delivered at a different health system? Insurers help inform us of these instances.

Having said that, there is much to like about the ACO model, starting with the fact that health systems and practitioners will ultimately be accountable for delivering care outcomes within a predefined cost target. The irony is that thus far, the presence of private and public health insurance programs has helped create a system in which mediocre outcomes have been acceptable and escalating costs have been almost guaranteed.

Emanuel and Liebman look forward to a day when ACO’s are unencumbered by health insurers and have accountability for making decisions that promote health while eliminating barriers to treatment. The risk in predicting the end of insurers, is that we blind ourselves to the fact that many functions insurers perform remain necessary, and must be transferred to another entity.

For example, what will an ACO’s response be when the best medical science points practitioners in a direction that runs afoul of current medical practice and popular opinion? ACOs will have a clear choice: Either continue practicing under the old paradigm and deliver suboptimal care, or become the new gatekeeper that stands in the way of delivering sub-optimal care patients have come to expect.

ACO’s that take the gatekeeper role seriously will provide an important, social benefit. Practitioners are inherently better positioned to manage patients through the evolutionary changes that will take place in how medicine is practiced, and will be more likely to assuage their patients of the value associated with future changes in the way medicine is practiced. On this front, insurers have failed miserably.

Will ACO’s take on this role? Only time will tell.

The problem with predicting the demise of insurers, is that this view risks celebrating the death of the messenger – in this case, health insurers. This outlook also invites a visceral, celebratory reaction from many quarters that we’ll solve all our problems by eliminating insurers. There’s much to dislike about health insurers, but it’s naïve to think that simply moving them off the stage of health care will solve our problems. Unfortunately, our problems are more fundamental and aren’t confined to the insurance function.

“Where Have You Gone, Marcus Welby?”

According to the 2012 edition of AHA Hospital Statistics, hospitals now employ 212,000 physicians, reflecting a 12-year, upward trend. Since 2000 the number of physicians employed by hospitals has soared by 32 percent.

This trend appears to be irreversible. A recent report by MedSynergies, Inc. and HealthLeaders Media reveals that 70 percent of American hospitals and health systems plan on hiring more physicians in the next one to three years and that 76 percent of hospitals and health systems use a full-employment, medical-staff model.

There are at least three forces taking the market in this direction.  One, many physicians are crying “uncle” and deciding that the independent practice of medicine is no longer worth the long hours, administrative burdens, and ongoing downward pressure on reimbursements.  These physicians are capitulating and seeking the relative safety that a hospital system provides.

The second force driving consolidation is the lax scrutiny being applied to hospital-physician combinations.  Unlike the past, state and federal regulators are being more accepting of combinations that in the past would have invited antitrust scrutiny.

The third, and most powerful force favoring consolidation, is the future outlook for reimbursements from government and private payers.  One needs look no further than the recent actuarial estimate of the Medicare Trust Fund. 

According to A Summary of the 2011 Annual Reports, Social Security and Medicare Boards of Trustees, “Medicare’s HI Trust Fund is expected to pay out more in hospital benefits and other expenditures than it receives in income in all future years...The share of HI expenditures that can be financed with HI dedicated revenues is projected to decline slowly to 75 percent in 2045, and then to rise slowly, reaching 88 percent in 2085. Over 75 years, HI’s actuarial imbalance is estimated to be equivalent to 21 percent of tax receipts or 17 percent of program outlays.”

Stop for a moment to think about what you just read.  Unless fundamental changes occur, the Medicare program will spend more than it collects in revenue for each of the next 75 years!  Unless we choose to continue ignoring reality, higher Medicare premiums, eligibility cutbacks --including means testing--and lower reimbursements are a given, and overt  rationing is a real possibility.

Health systems read the same reports the rest of us do, and know that they can’t print money.  Therefore, they must recreate themselves as fixed fee providers of bundled care.  This is hard to do unless you control physicians, one of the primary means of health care production.

This is really what the Accountable Care Organization movement is about – nudging health systems to redefine their business models to create savings by operating at a lower cost.  While the savings are shared today, the shared savings model is just a warm up for the hard decisions yet to come.  Better to learn the rules of the new game with the government’s help and support now, than wait until later when the learning curve is much steeper and the penalties for failure are much greater.

These changes represent a huge transformation in business orientation and organizational culture for physicians and health systems.  While physicians will enjoy being relieved of many of the administrative burdens of owning and managing a practice, they will adapt less easily to the loss of freedom and independent decision making that must certainly accompany their integration into a health system.

For their part, health systems are being challenged to transition from service-driven revenue centers to output-focused organizations in which quality and cost are equally important.  They will do so by engaging physicians in an employment setting that is much different from the past model in which hospitals competed against each other for revenue-generating practitioners

There’s a saying I’m fond of, that goes like this: “Culture eats strategy for breakfast.”  The hardest work to come will not be getting the strategy right, but managing the change it requires.

Self-Regulation or Government Regulation: Which Is Better for Hospitals and Health Systems?

Don’t look now, but systematic efforts to lower costs and improve efficiencies may be taking hold within health care organizations. Recently, USA Today ran a story describing how the Bon Secours Health System and the Banner Health System are achieving this.

Among other things, Bon Secours Health System is giving fewer blood transfusions during heart surgeries. Counter intuitively, perhaps, this is improving care, and costs are falling with marked results.

The share of patients receiving transfusions fell to 42 percent from 66 percent, the average amount of blood transfused dropped by two thirds and the system saved $1.1 million. What’s more, the complication rate dropped along with the length of time people spent in the hospital.

This is all well and good, but such an achievement begs some questions: Why are these achievements making news now? Why is this such a big deal? After all, businesses have long known the value of working more productively and shaving unnecessary costs. Why hasn’t our health-care system?

Some answers to these questions lie embedded in certain biases within the health-care culture that have gone unexamined. Here’s one: It’s better to err on the side of over treatment than under treatment, whatever the cost. This has translated into the maxim: If some is good, more is better.

As a corollary, hospitals and health systems have traditionally relied on physicians to deliver health care for patients without budget restrictions. In one sense this is understandable, because doctors have served as patient sources for hospitals. And employing doctors and promoting them to prospective patients has helped to boost the patient draw.

Here’s another unexamined bias: In their competition with each other, hospitals and health systems have focused exclusively on growing revenue. They’ve paid little or no attention to cost management. No wonder, then that greater productivity and cost reductions have languished like neglected step children.

Still another bias has been to rely on physician impressions relative to health care procedures rather than on hard, measurable data. This, too, is changing.

The same USA Today article reported that the Banner Health System analyzed data on the use of adhesion barriers –pieces of film or fabric—to prevent abnormal scarring following abdominal and pelvic surgery. Some Banner hospitals used the barriers during 79 percent of C-sections, and others used them less than 1 percent. Data analysis data revealed that the barriers made no difference.

The upshot: Banner has used the barriers for C-sections in less than 1 percent of C-sections in 2011 and has saved more than $1 million.

All of which brings to mind a truism about health-care in our United States, and it’s this: If you don’t self-regulate the way you do business, something else will soon come along to regulate your business for you.

In the United States, that something else is the federal government. We’ve already seen this happening with Medicare and Medicaid exercising what many consider to be loathsome price ceilings on health-care services.

The steps the Bon Secours Health System and the Banner Health System have taken are teaching us that the best way to manage health care costs in our free-market economy is to self-regulate. Otherwise, our government will do it for us.

Our Dysfunctional Health-Care System: Can Cost Cutting Heal It?

The number of Americans who have health insurance through their employers is dropping with unprecedented speed. The latest Gallup and Healthways, Inc. survey reveals that in the third quarter of 2011, only 44.5 percent of Americans now carry health insurance through their employers. That’s a decrease of more than 5 percentage points in three years.

As fewer employees enjoy health-care coverage through their employers, they’re paying more for the privilege. According to the Commonwealth Fund, premiums for employer-sponsored family health insurance policies increased by 50 percent from 2003 to 2010.

In fact, the annual amount employees pay toward their insurance has risen by a whopping 63 percent over that timeframe.

As sobering as these statistics are, they only skim the surface of an underlying problem. Over time, our health-care system has morphed into a dysfunctional state, and now resembles a dinosaur teetering under its own weight.

Our current system suffers from two, life-threatening disorders. The first is a market bias to provide the very best health care no matter what the cost. This cost push has moved steadily up even as consumers have been shielded from the true costs of their health care and are now shouldering more and more of the cost burden.  They just don’t know the cost of what they’re buying.

Look at it this way. Consumers are familiar with the cost of gas. They haven’t a clue about what health-care services cost until they get socked with a bill, even though they are the primary purchasers of these services.

The second disorder is this: Unlike other consumer purchases, in health care, price and demand carry no equilibrium-creating pressure to put the brakes on rising costs. If gasoline gets too expensive, people can drive less and prices fall. If the costs of health-care services soar, consumers have not had any effective way to make prices fall. For the most part, they don’t use less health care, at least not yet.

The rub comes in as employers are hit with rising insurance costs. Simply put, employers are typically willing to pay increased premiums if the increases are in line with inflation and if their cost structures allow for them. If the increases exceed these criteria, they pass the cost increases on to their employees.

All of which begs the question: How will consumers be able to keep supporting the staggering increases in health care? The answer is: they won’t. And this suggests that the system is fast growing more dysfunctional, will soon fail to support its own weight, and will fall apart. Unless, that is, something major is done.

Some health-care systems are already scanning the horizon and learning what other industries instinctually know how to do when costs unreasonably outpace demand. They’re searching for ways to cut costs. What a novel idea for health care.

Others are looking to the federal government to step in and shore up our dysfunctional - system. Ironically, government is a big part of the problem. Given the rigid, non-compromising philosophies now driving the health-care discourse in Washington, government stands frozen in grid lock without the resilience to find or even discuss solutions. Thus, nothing gets done.

And as we know, through Medicare and Medicaid, the federal government unilaterally establishes the prices it pays for health-care services and leaves hospitals and physicians to right size their incomes by digging deeper into the pockets of their customers.

Just as important, Washington today moves with a vacuum of leadership and without a shared vision of what should be done. And so the health-care dysfunction continues.

Without a resolution at hand, our health-care system risks turning into a non-caring force in favor of those who can afford its services. Those with the money to pay will receive the health care they need. Those who can’t pay will go without.

In the meantime, the best course seems to be to do whatever we as individuals can do to keep ourselves healthy so as to minimize our reliance on this dysfunctional system.