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.

As We Eliminate Life-Time Benefit Caps on Health Insurance, We Continue to Short Change Ourselves on Health Care

Thanks to a provision in the Patient Protection and Affordable Care Act, we’re living in the midst of one of the more significant changes in American health care – the elimination of life-time benefit caps on individual, health-insurance policies.

Between September 23, 2011 and September 23, 2012, the annual limit capped out at   $1.25 million. And between September 23, 2012 and January 1, 2014, the limit rises to $2 million. After January 1, 2014, caps will cease entirely.

The elimination of life-time benefit caps comes as a welcome change by those who are insured. But nothing is unalloyed. Consumers will encounter increases estimated at two to three percent to compensate health insurers for the costs that result from the caps elimination.

The end of caps on health benefits will have scant effect on many insured.  Comparatively speaking, few would have reached pre-2014 caps in their coverage. The real value of the elimination will be felt most people who require health care that’s extraordinarily expensive. They include people who suffer from chronic illnesses like hemophilia, cancer, HIV AIDS, diabetes rheumatoid arthritis, and heart disease. Costs to treat these conditions can sky rocket into the high six figures in a single year.

Some months ago, I wrote about Edward Burke, a resident of Palm Harbor, Florida, who was diagnosed with hemophilia at an early age in 1960 and suffers from Factor VIII deficiency. According to the National Hemophilia Foundation, about one in 5,000 males born in the United States has hemophilia. All races and economic groups are affected equally

Factor VIII created by drug companies early in the 1970s was a god send for Burke. This chemical takes the place of the blood factor that enables clotting in non-hemophiliac individuals but is lacking in people with hemophilia. Factor VIII has enabled Burke to lead a life that’s close to normal.

But Factor VIII doesn’t come cheap. This chemical costs nearly $1 million a year. At this rate in the past, he reached his lifetime health insurance caps in no time, and had to change employers and health plans frequently to renew his health coverage with new plans.

The unspoken social bias at work here is that we, as a society, should do whatever it takes to deliver the best of health care to whomever needs it, regardless of the cost. But this bias begs the question: Why must it cost such staggering sums to deliver health care to people who suffer from debilitating and life-threatening conditions? And this raises the ultimate dilemma that looms before us: How are we going to pay for our future health-care needs?

In the April 2011  paper titled “Health Care Spending in the United States and Selected OECD Countries, the Kaiser Foundation lays it out with abundant clarity:

“This issue is particularly acute in the United States, which not only spends much more per capita on health care, but also has one of the highest spending growth rates. Both public and private health expenditures are growing at rates which outpace comparable countries. Despite this higher level of spending, the United States does not achieve better outcomes on many important health measures.”

Clearly, we are not only spending more on health care than other countries In the bargain, we are short changing ourselves on health care and will continue to do so until we resolve this woeful situation.

Health Benefit Plans for Consumers: More Choices at Higher Cost

There’s little doubt that health insurance as we knew it -- or as some would like it to be again -- is irretrievably lost.  The cost of healthcare services and the declining health of Americans have precipitated a fundamental shift in how health benefits will be structured, financed, and delivered.  Events of the past week offer a critical insight into how these changes are taking place.

First, the National Center for Health Statistics reported that the percentage of employees enrolled in high-deductible healthcare plans (HDHP) has jumped significantly during the past four years.  During the first quarter of 2011, 20.3% of group health-care plan participants were enrolled in a high-deductible plan, up from 12.9% in 2007.  The center defines a high-deductible health plan as one with deductibles of $1,200 for self-only coverage and $2,400 for family coverage in 2011. This compares with a deductible of $1,150 for self-only coverage and $2,200 for family coverage in 2007.

During the same period, enrollment in consumer-driven, high-deductible plans nearly doubled, rising to 8.8% of plan enrollees during the first quarter of 2011 from just 4.5% in 2007. A CDHP is a high-deductible plan linked to a health savings account or health reimbursement arrangement.  Combined, HDHPs and CDHPs are now used by 3 in 10 group healthcare plan participants.  It’s likely that an even larger percentage of Americans who purchase health insurance directly choose either a HDHP or CDHP plan.

This upward trend should come as no surprise.  Employers will continue to adjust benefits and shift greater exposure to employees as long as healthcare costs exceed employee productivity gains.  Increasingly, employers want to limit their health benefit exposure, and are moving to defined- contribution financing models, similar to what occurred with retirement benefits.

The benefits industry is moving quickly to respond to this trend.  Last week, three Blue Cross Blue Shield Plans – Blue Cross Blue Shield of Michigan, Health Care Services Corporation and WellPoint – jointly purchased Bloom Health, an emerging leader in the development of private insurance exchange capabilities. 

Although the public attention has focused on the development of government-led health insurance exchanges, the private sector has been busy creating exchange models for employers who don’t participate in the public exchanges.  Private exchanges, marketed directly to employers, will facilitate the defined contribution model that employers are favoring.

All of which tells us that in the near future, look for most employers to offer employees a fixed amount to be spent on health care--and other benefits-- available through an exchange platform.  Employees will likely have more benefit choices to choose from, but the choices will more often involve HDHP and CDHP plans.

The era of the healthcare consumer is upon us.  A growing number of fully accountable purchasers are entering the market.  There’s still a lot not to like about American health care, such as the reimbursement mechanisms now in place. But the foundation for a consumer marketplace is well underway. 

It’s Time to Rethink the Tax Exemption for Non-Profit Hospitals

Simply put, it’s time to end the tax-exemption for America’s hospitals. 

This issue resurfaced recently as the result of a decision by the State of Illinois to revoke the property-tax exemption for three hospitals. The reason: Their average percent of revenues dedicated to charity care was only 1.3 percent.  In revoking the exemption, the state established a simple litmus test: Is the hospital a charity or a business?  Is it Motorola or is it a soup kitchen? 

When hospitals came on the scene more than 100 years ago, they were more like soup kitchens than Motorola.  The health care they provided to our communities was a luxury.  Many communities lacked e doctors, and even fewer had hospitals.  Many hospitals were established only when community leaders pooled their treasures to build and staff them.   Back then, it was only fitting that these institutions be chartered as nonprofit entities, exempt from paying taxes.  The healing profession was as much a calling as a career.  That’s all changed. 

Can anyone argue that today’s hospital is anything other than a commercial enterprise?  Watch more than five minutes of Sports Center highlights and you can’t help noticing a community’s local hospital system advertising its services across a stadium or arena.  In communities with more than one hospital, open competition exists for patients who will occupy treatment centers and fill beds.  American hospitals are now fully entrenched in the business of providing health care. Many of them are $100- million-plus businesses. Today, more hospitals resemble Motorola than soup kitchens.

The foundational problem with exempting hospitals from paying taxes is this: Doing so implies that they’re something they’re not.  Hospitals are not charities in the classic sense.  Hospitals don’t agree to provide care to all without regard to the ability to pay for their services.  Indeed, think about the first question you’re typically asked when you’re admitted to a hospital:  Do you have insurance?

Yes, hospitals provide free care to some, but this is the exception.  The overwhelming majority of patients are insured by private or government programs, and others without insurance pay for their care out of pocket.  What’s more, hospitals don’t rely solely on contributions from the public to support their charitable cause.

The hospital community will almost assuredly oppose any thought of repealing their tax exemption, but the repeal may actually work to their benefit in three, important ways.

First, taxing hospitals will eliminate a significant, public relations problem – executive compensation. The public image of a tax-exempt charity is at odds with the compensation practices of today’s hospital systems.  In Illinois, one of eight hospital CEOs earned seven figure paychecks in 2008.   

Second, providing charity care will soon be much less of an issue for hospitals than it’s been in the past.  That’s because the number of Americans without coverage will decline significantly in 2014 as health care reform is more fully implemented.  The traditional argument not to tax hospitals as we do other businesses will lose its merit.

Even if hospitals fear that they’ll be disproportionately disadvantaged by charity-care patients, a number of ways exist to equitably share this cost across the hospital community.

To those who argue that the burden of paying taxes will simply increase the cost of health care, I offer two responses.  First, the current tax exemptions, on the margin, distort the true cost of health care to the extent that these institutions do not pay taxes.  Second, factoring the burden of paying taxes into a hospital’s cost structure will force hospital leaders to more aggressively manage their expenses.

Third, eliminating the tax exemption will eliminate the time and expense hospitals spend on justifying the exemption.  Wouldn’t this time and energy be better spent on delivering care?

Hospitals have become sophisticated, commercial enterprises.  This is a good thing; it’s a reflection of the gains we’ve made in treating the health-care needs of our communities.  

Because of these changes, the time has come to update our thinking on the tax benefits we provide hospitals. 

Medicare May Be Serving Seniors, but It’s Putting the Rest of Us in a Financial Death Grip

Information released this past week point out the damaging impact that government health-care programs are having on the commercial, health-insurance market, and the market for private health benefits.

The first bit of news comes from the latest Healthcare Economic Indices released by Standard & Poor's (click here for the indices).  The indices show that the average cost of health-care services covered by private-insurance companies jumped by nearly 7.5% for the year ending June 2011.  By comparison, the average cost of services covered by Medicare increased only 2.5 percent for that same time period.  Experts speculate that hospitals will likely continue to shift costs to private payers as government programs squeeze hospitals and doctors with lower reimbursements to manage their program shortfalls.

For every action, there is an equal and opposite reaction.  On Monday of this week, the National Business Group on Health released the results of a survey of its membership.  The news here is that large employers expect their health care costs to increase 7.2% in 2012.  Is it just coincidence that hospitals are increasing their charges to private insurers by 7.5% and that commercial health-care costs will be up by an expected 7.2% in 2012?

The secondary affect of these developments is that employers now plan to offer even more consumer-driven health plans in 2012.  Of those surveyed by the National Business Group on Health, 75% said they expected to offer a high-deductible health plan (HDHP) with a health savings account (HSA) in 2012, compared to 64% this year.  Realistically, we should expect all, large employers to offer HDHP/HSA products within the next two to three years.

Some time ago, the virtues and vices of high-deductible health plans used to spark fierce debates. Not now.  For the time being, those debates have been overshadowed by the reality of health-care costs that continue to rise, and to increase disproportionately for commercial insurance programs.  High-deductible health plans are now the default choice for employers seeking to shield themselves from the costs of commercial health insurance.

Far from being better purchasers of health care, the government simply establishes a price it is willing to pay, leaving hospitals and physicians to right size their income statements and balance sheets by digging into the pockets of their customers.  As long as employers continue to finance the lion’s share of the private sector health-care tab, they will adjust their benefit programs to achieve a premium price point that’s affordable.  This will drive the continued adoption of high-deductible health plans and health savings accounts.

In the short run, advocates of greater health-care consumerism are benefiting from the continuing cost shifting from government programs that’s taking place.  This phenomenon may be single-handedly creating millions of HDHP/HSA health-care consumers, who are learning firsthand how to become savvy health-care purchasers.  This may, however, simply be the proverbial “lipstick on the pig.”

Unless America’s government programs are reformed quickly, they will continue to crowd out private benefit programs and make them even less affordable.  The increased prices paid for services in the commercial market are, in reality, a hidden tax paid to support the solvency of the Medicare program.

Equitable, sustainable, payment system reform can’t come quickly enough.

Health Care Reform, the “Constitutional Hazard” and Innovation

It would be entertaining to hear health-care experts debate whether health-care reform has been a catalyst or deer edterrent to innovation within the health care market.  On the one hand, tremendous uncertainty exists as to whether or not the health-care reform law, in part or in the whole, will withstand the constitutional challenges now working their way through the lower courts.

On the other hand, there’s no denying that the reform act and the escalating cost of care in general have spawned a tremendous surge of activity as market participants seek to cash in on the stated – and perceived  – changes that will take place over the next three to five years.

The events of the past week further underscored the dynamic nature of health care in 2011. The 11^th Circuit Court of Appeals affirmed an earlier decision striking down the individual mandate as unconstitutional.  Admittedly, the ruling was a divided one. And though other courts have affirmed the constitutionality of the mandate, the 11^th Circuit’s decision reminded us once again that we really won’t know for certain whether the Affordable Care Act will stand until the U.S. Supreme Court issues a final ruling.

In the meantime, the regulatory machinery tasked with implementing the Act churns forward.  Almost simultaneously with the 11^th Circuit’s decision, The Department of Health and Human Services announced that it was awarding more than $185 million in “Exchange Establishment Grants” to 13 states and the District of Columbia to support state-level implementation of health insurance exchanges, that  must be operational by January 1, 2013.  Dozens of other major initiatives either have been or are being implemented.

All of which presents a real policy dilemma and what I call a “constitutional hazard.”  Should policymakers take a go-slow approach with implementation until the Supreme Court provides a final ruling?  Don’t look for the Obama administration to do so anytime soon.  Or should the Supreme Court hasten its review of the legal issues?  The Court has already settled this question, having already denied a request for an expedited review. 

All of this introduces the possibility that the Supreme Court judges may be asked to factor into their deliberation the fact that so much has already been done to implement the law. They could decide that a full and outright repeal, while perhaps the legally correct outcome, would be so disruptive as to be unwise.  This is the “constitutional hazard” confronting us today.

If ever there were a reason for health-care decision makers to take a wait-and-see approach, this is it.  Except that underneath the storm cloud of uncertainty hovering over the health-care market, a high level of innovation is taking place.

Consider, for example, the announcement last week by Walgreens that this fall, the company would begin marketing health insurance to its customers through its own version of a health-insurance exchange. Walgreens will partner with selected health-insurance partners and attempt to use its enormous retail footprint to become a one-stop shop for all health-care needs. 

To understand the potential significance of this, ask yourself: When driving down a busy street, what am I more likely to observe – an insurance brokerage, or a Walgreens store?  If consumers show a willingness to buy insurance from the same retailer that sells them prescriptions, we may soon see insurance brokers working for Walgreens.

Other companies are also putting their toes in the health-insurance exchange waters.  Aon, the large national insurance consultancy, announced earlier this year that it would create a health-insurance exchange for employers with more than 1,000 employees.  The value Aon seeks to create lets large employers exit the business of administering health-benefit programs.  In the Aon model, a large employer simply decides how much to spend on health benefits and lets Aon do the rest.  For their part, employees presumably get more choices to select from, and avail themselves of more professional, simplified administrative support.

Within the broad uncertainty of health care reform implementation, there are then, at least two significant trends emerging.

The first is the growth of the retail, health-benefit consumer.  Whether through state-sponsored exchanges, a Walgreens exchange, or an Aon model, consumers are likely to take on greater decision making authority for their health-care benefits and the costs associated with them.  This will occur as employers take steps to cap their exposure for health-benefit programs.

Second, market participants are aggressively re-examining their traditional business models and markets and are looking to grow into adjacent markets that expand their footprint.  This is the case with Walgreens, but they’re not alone.  Hospitals are becoming health systems, and many will also become insurers within their local markets.

Whether driven by reform or the pressures of the market, change is afoot in health care.  I will leave it to others to decide whether all this change represents true innovation.

The National Significance of the Highmark and West Penn Allegheny Merger

A health-care transformation is unfolding in Pittsburgh that has national implications for health care. Recently, Pittsburgh-based Highmark announced its purchase of West Penn Allegheny Health System (WPAHS), a five-hospital, health system that’s the second largest health system in the Pittsburgh area. 

With this announcement, the two organizations have begun to create a preview for what the future of health care may look like.  In fact, the merger of these two organizations offers a glimpse into the challenges that await health-care organizations that take bold steps to reposition themselves into the future.

Others are better positioned to ascribe the true catalysts behind this acquisition.  Nonetheless, it’s entirely plausible to suggest that Highmark was driven to this acquisition out of a fear that UPMC was simply becoming too large a force in the Pittsburgh health-care market.  If that’s the case, Highmark’s move can be seen as a defensive counter-response.  Having said that, Highmark and West Penn Allegheny describe another motive for coming together, one that is more far-reaching and significant.  Together, they describe their desire to create an integrated health-care system that marries the financing and delivery of care.

Why is this a big deal?  After all, there are examples of integrated health systems across the country that also market health insurance to the public. The Geisinger Health System is an example of such a model.  This one, though, is different.  Highmark comes to this acquisition already well entrenched in the health-benefit market.  Highmark’s health plan includes more than 3-million members and holds significant market share in Western Pennsylvania as a stand-alone insurer. 

Highmark also includes almost every hospital in the area in its network of hospitals and physicians.  This means that Highmark will have to manage a hugely difficult transformation.  The company occupies the leadership position in the benefits market and the market power that comes with this.  It is less clear that the Pittsburgh market will cede to Highmark the same position as an integrated health system.  Equally as significant, the company will eventually find itself in direct or indirect competition with many of the hospitals and medical professionals now in its networks.

Health plans have historically avoided ownership of health-care delivery systems for a couple of sound reasons.  Agreeing to managed-care joint ventures with hospital systems has been about as far as health plans have been willing to go, and most of these have not performed up to their promise.  In fact, these partnerships have underperformed because the two parties involved were not as aligned as they wanted others to believe. 

What’s more, health plans have sought competitively advantageous pricing from their partners, and health systems have sought competitively advantageous referrals to their systems.  Neither party has been truly able to make a difference in how care was priced or delivered.

In their own words, Highmark and West Penn Allegheny are attempting to create what health-care thought leader, Clayton Christensen, in The Innovator’s Prescription, describes as an integrated, fixed-fee provider system.  As such, Highmark and West Penn Allegheny are undertaking a tremendous change agenda.  In the future they describe –when  health-care practitioners will deliver care in a world in which revenues and resources are fixed, not variable. 

This doesn’t mean health care will be rationed.  It does mean the delivery of health care will be rationalized.  In other words, patients will be much more likely to receive care from professionals who are best matched to provide the care they need.

With this shift in focus, change of great magnitude is possible.  The new health system will be encouraged to make resource allocation decisions based not on how best to generate immediate revenue, but on how to best maximize fixed, scarce resources.  If accepted in the market, the new organization will be motivated to invest in the health of its members/patients to avoid longer-term costs.

It is too early to say whether this new, combined organization will be accepted into the Pittsburgh market or granted regulatory approval.  But if the answer is yes to these two stipulations, Highmark and West Penn Allegheny have the opportunity to create a “super” accountable care organization (ACO)–an integrated health system that’s also integrated into a large health plan. 

The rest of the United States will certainly watch this development closely for its impact on the immediate and long-term impact on American health care.  It’s also worth watching because of the significant leadership challenges and questions the combination of Highmark and West Penn Allegheny presents. 

Can the combined management bridge the cultural divide that has defined health-care payers and providers?  If so, how long will it take?

Can the combined management effectively integrate the two organizations into a seamlessly integrated health-care financing and delivery system?

And how quickly can Highmark and West Penn Allegheny abandon their current ways of thinking and redirect their focus toward population-based care delivery and long-term health management?

The nation should watch this game being played in Pittsburgh.  It doesn’t involve the Steelers or the Pirates.  But it is worth keeping a close eye on to see how it all plays out and how it advances a new form of health-care. 

Its Time to Get the Government out of Fixing Prices for Health Care

Nine family physicians have decided to leave Indianapolis-based American Health Network (AHN) in favor of practicing their profession trade as part of Riverview Hospital.  The Indianapolis Business Journal’s reporting of this seemingly innocuous decision by nine doctors offers rich insight into the convoluted nature of the American health-care payment system.

According to AHN, these doctors can now bill their services for around three times what they were asking patients to pay when they were part of American Health Network.  AHN estimates that the additional billings will add $6.9 million to the health-care tab paid by the Indianapolis community for health care.

A number of reasons may have prompted Riverside to want these physicians to come to work for the hospital, but the bottom line appears to be this: Because these physicians are employed by Riverside, the hospital can charge higher fees for their services. In fact, the fees are three times higher than the physicians charged before they worked for the hospital.  Are the services now three times more valuable to patients?  Doubtful.  Are the outcomes delivered by these physicians significantly better?  Probably not.  Why then, the difference?

As they say, “it’s complicated.”  Let’s try to uncomplicate it.

In its quest to engineer an equitable and efficient payment system, the federal government regularly adjusts the payments it will make to the medical community for serving Medicare patients.  Because Medicare is such a large and significant component of health care, private insurers often establish payment systems that mirror those of Medicare. 

To clamp down on suspected over-billing for services by physicians in outpatient settings, Medicare has taken steps, the result of which is to make the differential between services provided in an inpatient setting larger than it has been in the past.  Not surprisingly, hospitals and physicians are reacting as you or I might if we were in their shoes.  They’re following the money.

Decisions like this by players within the health-care market have little, if anything, to do with improving the quality of care or reducing its cost.  These decisions have to do with maximizing revenue. This is what one should expect within an open-ended, fee-for-service financing model.

On the other hand, what if there were open and free markets for the services these family physicians provide?  And what if the price for services were based on the perceived value of the service, not on where the service was delivered?

To make this happen, a number of significant and important changes would have to occur. First, the government would have to get out of ongoing and continuous central planning. By substituting its judgment for the wisdom of the market as to how to best allocate resources, the government has created so many market distortions that health care can no longer legitimately be described as a market.  At least not a free market. 

The U.S. health-care system suffers from a fate that’s actually worse than centralized planning.  In Soviet-style economies, central planning worked within the framework of fixed resources and this led to rationing.  In the U.S. health care system, we don’t ration services. Instead, the government has a safety valve – the private sector. Insurers and Patients are expected to pick up the tab for whatever the government won’t pay for.

Government would also have to get comfortable paying providers market prices for services it funds through Medicare and Medicaid.  It used to be gospel that these programs deserved preferential pricing because the alternative would be uncompensated care arriving at the doorstep of providers and hospitals.  This argument may have had merit early in the development of these programs. But this argument has outlived its usefulness.  The time has come to move beyond social policies that deliver preferential pricing for these programs.  Pricing policies like this inflict grave harm on the larger market for health-care services.

Second, care providers would have to rationalize their business models and actually become familiar with what they’re charging for their services.  Many types of care are necessarily open-ended, because it’s often difficult to estimate or predict what the total price for a regiment of care will be.  Diagnosing a particularly vexing ailment is a good example of the kind of service that can be hard to create a fixed price for.  On the other hand, a routine physical is pretty straightforward.  So is a normal baby delivery.  Do you think your doctor knows what he or she charges you for services like these?  Probably not.

Third, Insurers, with a helping hand from a newly-restrained government, would need to recognize that their own practices help cloud the market for health-care services.  This begs the question: What good is a posted price for services if the actual cost to the consumer is significantly adjusted by a health insurer after the fact? 

Under many benefit plans, the only meaningful price distinction drawn is among those providers who are or aren’t in the plan’s network.  Provider competition and innovation on the basis of price isn’t going to come anytime soon in this world.

Is all of this going a bridge too far?”  Hopefully not, but a realist would have to conclude that achieving even a beach head with these changes represents a lot of heavy lifting.  It’s not that it can’t be done.  It’s just that in health care, we’ve come to believe that markets don’t work, and that even if they did, we would collectively suffer. 

In the meantime, how can we blame the health care market for not working when we don’t have the discipline or conviction it takes to bring it to life?

The Battle of the Bulge – America’s Obesity Epidemic

"Some people are born to fatness. Others have to get there."
Les Murray

The news lately has not been kind when describing the state of American health.  Last week, I shared a report that detailed the dramatic rise in diabetes worldwide, and in particular, within the United States.  Issued by the Trust for America's Health (TFAH) and the Robert Wood Johnson Foundation (RWJF),  F as in Fat: How Obesity Threatens America's Future 2011 reveals the continuing and worsening rise in obesity rates across the country.  According to the report, adult obesity rates increased in 16 states in the past year and didn’t decline in any state.

Twelve states now have striking obesity rates above 30 percent. Four years ago, only one state was above 30 percent.  To understand just how out of shape we’ve become, the state with the lowest obesity rate would have scored the highest rate of obesity in 1995!

The obesity epidemic continues to be most dramatic in the South, which includes nine of the 10 states with the highest adult obesity rates. States in the Northeast and West tend to have lower rates. Mississippi maintained the highest adult-obesity rate for the seventh year in a row. Colorado has the lowest obesity rate and is the only state with a rate under 20 percent.

Obesity is closely linked with other, severe health problems, most notably diabetes and high blood pressure. These, in turn, are precursors to other health risks.  The report shows how rates of diabetes and high blood pressure have also climbed dramatically over the last two decades.

Since 1995, diabetes rates have doubled in eight states. Back then, only four states had diabetes rates above 6 percent.  Now, 43 states have diabetes rates over 7 percent, and 32 have rates above 8 percent. Twenty years ago, 37 states had hypertension rates over 20 percent. Now, every state is more than 20 percent, with nine over 30 percent.

Obesity is nothing, if not epidemic. This year, for the first time, the report examined how obesity has surged over the past two decades. Twenty years ago, not one state had an obesity rate above 15 percent.  By contrast, today, more than two out of three states -- 38 in total -- have obesity rates over 25 percent, and just one has a rate lower than 20 percent.

Since 1995, when data was available for every state, obesity rates have doubled in 7 states and soared by at least 90 percent in 10 others. Obesity rates have grown fastest in Oklahoma, Alabama, and Tennessee, and slowest in Washington, D.C., Colorado, and Connecticut. What’s noteworthy is that obesity rates haven’t declined in any of the 50 states since 1995, the first year of this continuing study.

Obesity is complicated.  Its cause can often be as straightforward as too many calories stacked up against too little exercise.  Obesity can also manifest psycho-social factors that are harder to address.  Whatever the cause, individuals who suffer from obesity can find it as hard to conquer as cancer. 

We’ve been arguing quite a bit over the past few years about health care in the U.S. and who’s to blame for its high cost.  Depending on your point of view, you may believe that insurance company profits are the culprit, or that an inefficient delivery system is to blame.  Regardless of how important these factors are, it’s hard to ignore the reality we see face every morning when arise from a sound sleep and look in the mirror. We’re just not as healthy as we used to be. And we’re taking care of ourselves with far less attention than we used to.

For most of us, it’s not hard to see why we’ve become so overweight.  We walk and exercise less.  More than ever before, we consume more high-calorie, low-nutrient foods.  We lead more stressful lives than we did in the past and have difficulty de-stressing ourselves.  It’s not hard to imagine a lifestyle in which each of us gains 5 to 10 pounds each year.  Before you know it … well, you get the picture.

Two factors account for the unprecedented growth in obesity. First, obesity is a cultural issue.  We all live within a larger, cultural fabric that carries with it norms that pervade our thinking and influence our decisions about weight gain. 

Second, obesity is an individual health issue that carries with it huge, health-care cost ramifications. Each one of us will make progress on obesity only by mustering the individual courage it takes to tackle the characteristics of modern life that make obesity so hard to avoid and so easy to accept.  

For the Most Part, We Behave Ourselves into Diabetes, and Our Health-Care System Doesn’t Do Much about That

Think about it. Worldwide, 347-million human beings worldwide suffer from diabetes, according to a Lancet study released earlier this week. That’s more than the entire population of the United States and Canada combined. Throughout the world, the prevalence of diabetes has doubled over the past 30 years. In the United States, the prevalence of diabetes has tripled.

In the U.S., the dramatic rise in the number of people with this disease is troubling, and for good reason. Diabetes is almost entirely preventable. In fact, until the late 20^th century, Type-2 diabetes, the most common form, was unheard of. And so, in many ways, Type 2 diabetes can be thought of as a yardstick to measure how closely human beings live in sync or out of sync with the natural-health ecosystem. Looked at this way, we can say that we have strayed off the path, and don’t seem to be heading back toward it any time soon.

Of course, diabetes also comes at a cost. The Centers for Disease Control (CDC) estimates that diabetes treatment costs amounted to $116 billion in 2007. The CDC also indicates that because of diabetes, another $58 billion was incurred in lost productivity, absenteeism, and the like. What’s more, Americans with diabetes can expect to incur medical costs that are more than double what the rest of the population will incur.

Diabetes is also often accompanied by the onset of other chronic conditions, and account for much of the morbidity patients with diabetes face. According to the Medical Expenditure Panel Survey, most adults with diabetes have at least one co-morbid chronic disease, and as many as 40 percent have at least three.

Get the picture? More than 8 percent of Americans are diabetic, and this number has tripled in the past 30 years. Those with diabetes consume health care at twice the rate of the rest of society. And diabetes is often associated with the onset of other chronic conditions. You don’t need to plot this on a graph to know that we have a real problem.

The sad news–and also the reason for hope–is that diabetes is not only preventable, but apparently reversible. In a recent experiment, Newcastle University researchers found that an extreme, eight-week diet of 600 calories a day can reverse Type 2 diabetes in people newly-diagnosed with the disease. There are other examples of individuals who, through adopting a lifestyle of regular exercise and healthy eating, have reduced or minimized their diabetic symptoms.

Diabetes, closely tied to being overweight or obese, is perhaps the most important disease for us to get our arms around. It’s also the hardest to make headway against, because its onset is almost entirely behaviorally driven.

We have a pathway for making progress against this disease. Two-thirds of the population that’s overweight or obese can control diabetes in large part by adopting healthy diets, exercising regularly, and losing weight.

I know what you’re thinking. If only it were that easy.

Although a small portion of Americans are predisposed to diabetes, for most of us, diabetes is the inevitable consequence of lifestyle choices they’ve made that have ultimately taken a toll on the body’s ability to maintain a healthy state. The problem is, our health-care system doesn’t do a very good job when it comes to affecting large-scale, behavior change. After all, how many times have each of us been told to eat less and exercise more often? In the aggregate, how’s that working for us?

Our health-care system is most confident in dealing with specific conditions for which there is a defined treatment or cure. The system is not so good at affecting the behaviors of individuals.

Progress on the diabetes front requires a larger vision–one that is societal in scope. It involves changing how we think about our modern world by asking the right questions.

Is physical convenience always progress? Especially if it means we become more sedentary?

Is providing easy access to low-cost, high-glycemic-index foods good public policy? Are we willing to accept reduced access to, and higher prices for, these choices?

Is a fee-for-service payment system in which physicians spend 12 to 15 minutes with a patient the best way to relay the consequences of poor lifestyle choices and the consequences of diabetes?

We’ve got big decisions to make, as individuals, as health-care leaders, and as a society. We also don’t have much time to waste.

The Fight for Accountable Care

The medical community and the Department of Health and Human Services are currently embroiled in a fight over the makeup of regulations that will frame the Accountable Care Organization model for Medicare. If this were the NFL players’ union negotiations, observers would describe the parties as being “far apart.” In fact, The Wall Street Journal went so far over the weekend to editorialize on the “Accountable Care Fiasco.”

There are many ways to view this dispute between the health industry and its regulator. It’s a fair argument to say that the 429-page, proposed ACO rule represents an aggressive effort by the government to micromanage ACOs as they develop. Over-regulate ACOs at the beginning, critics argue, and they will never voluntarily materialize.

One can also argue that the proposed rules are simply an early attempt by regulators who are more familiar with the regulation of fee-for-service health care than the regulations of integrated-care delivery systems. The Obama administration, which made ACOs a cornerstone of its Medicare cost- containment strategy, will almost certainly react to the pushback that’s happening with a revised set of regulations that are more accommodating to industry’s concerns.

No matter how you view this tug of war, we can’t afford to let accountable care organizations fail to get off the ground. Developing integrated health systems that effectively deliver population-based health care is a linchpin to improving health and managing costs. This is true whether we focus on Medicare, Medicaid, or the private market. Today’s fragmented deliver system, created to treat acute care needs and fueled by fee-for-service financing models, is ill-suited to manage a population in which chronic diseases drive 75 percent of our costs.

Whether ACOs take hold in Medicare is largely a function of will power and economics. Will health care leaders be willing to risk taking their organizations into the ambiguity of an ACO model without knowing all of the details? Will payers, especially Medicare, be willing to engage industry in a collaborative process in which adjustments are made as we learn more about what’s really important?

It’s often said, and for good reason, that Medicare and Medicaid are the 500-pound gorillas that drive health-care delivery. After all, they account for the lion’s share of revenue for many hospitals and health systems. Medicare and Medicaid policies also drive decisions that affect commercial insurance programs. For that reason, we should all hope that the government and industry can settle on an approach that works reasonably well for everyone. If they can, this framework can help shape and mold private sector, ACO models.

If reasonable Medicare ACO regulations can’t be agreed upon, the private sector lift is harder, but not impossible. Most important, the health-care industry can’t afford to use the failure to come to agreement on Medicare ACO regulations as an excuse not to press forward. The stakes are too high, and the alternative–the status quo–is unsustainable.

We are at a crossroads. The leadership capacity of the health-care industry will be tested as never before. Collaboration is becoming more important than competition. Accountability and determination must replace finger pointing and denial. Innovation and risk taking must be promoted and celebrated, even when it results in well-intended failure. Most important, we need to cultivate and support health-care leaders willing to embrace ambiguity and lead through it. We won’t always have perfect information or clearly-defined rules of engagement.

Let’s hope that six months from now, we can look back on the current Medicare ACO draft regulations as nothing other than an honest attempt to move the ball forward, and that we’ve advanced the model further down the road. Whether Medicare drives the development of Accountable Care Organizations or the private sector develops accountable care organizations outside the rubric of regulation, we need to bring to life the promise of accountable care.

Obama's Gift to the Heritage Foundation

For the past 30 years, the Heritage Foundation and many conservatives have advocated the virtues of a reformed health care market in which individuals take ownership of selecting their health benefits. The Obama health care reforms may deliver just that result to millions of Americans. At least that’s the outlook described in a study released by McKinsey & Company early last week.

McKinsey suggests that employers will stop providing employer-sponsored health insurance (ESI) under health care reform at a much greater rate than previously assumed. Earlier government studies estimated that, beginning in 2014, up to 9 million Americans would shift from employer-sponsored insurance to insurance purchased through Health Insurance Exchanges. McKinsey estimates that as many as 30% of employers will definitely or probably stop offering ESI in the years after 2014.

A core finding of the McKinsey analysis is the recognition that employers have a built-in incentive to capture the government subsidies made available to individuals earning less than 400% of the federal poverty rate and for whom their health insurance premiums exceed 9.5% of their income. By facilitating a scenario in which premiums for low-income employees exceed 9.5%, employers can reduce their health care costs, even after paying a government-imposed penalty.

The McKinsey study identifies a number of ways employers can facilitate this strategy, but the net effect of each approach is an outcome in which highly-paid employees retain employer-sponsored insurance and lower-compensated employees migrate toward purchasing health insurance through the Exchanges. In the process, employers can effectively cap their health insurance liabilities at a fixed amount.’

If McKinsey is correct in its analysis, the implications for the health benefits industry are significant.

1. The health benefit marketplace will be more “retail” than ever before. Health Insurance Exchange purchasers will perhaps represent the “lions share” of the commercial health insurance market. Health insurers will need to effectively segment their customers on a basis other than medical costs to be successful.
2. The purchasing considerations of employers will likewise evolve. Employer-sponsored insurance may become a more pronounced tool for attracting and retaining highly-skilled employees. If this is the case, employers may become less fixated on the total cost of the product and more interested in the value-added product features that in the past have been left on the “cutting room floor.”
3. The health improvement and wellness sector can also be expected to undergo change. Employers have never been completely sold on the ROI of health improvement and wellness programs. As significant portions of employees move into the Health Insurance Exchange market where employer costs are fixed, it is unclear whether employer-sponsored health improvement and wellness programs will be as highly valued as a cost containment tool. Health improvement and wellness program providers will have to sell employers on a different value proposition, one that emphasizes the ability of these programs to improve workforce satisfaction, engagement and productivity.
4. Finally, it would be shortsighted to think that the government would see such an influx of subsidy-eligible employees without reacting. If McKinsey is right in its analysis, the government’s cost estimates are woefully low. It will not take long for the government to react, most likely by increasing the penalty employers pay when their employees opt out of employer sponsored coverage.

Ironically, it may be the Obama health care reforms that move the country further than it ever imagined toward an individually-driven consumer market.

The New Health-Care Cost Equation:Individual Accountability + Cost Cutting = Better Futures for All of Us

If personal incomes in the United States doubled every nine years, health care would not be a national concern. That’s the implied message of the 2011 Milliman Medical Index that measures the total cost of health care for a typical family of four covered by a preferred provider plan (PPO). The cost for a PPO plan in 2011 rose to a staggering $19,303, an increase of $1,319, or 7.3% over 2010.

According to the U.S. Census Bureau, the median U.S. household income was $50,211 in 2010. Even though the total cost of health care is not born solely by households, the proportion of household incomes spent on health care still remains significant. In fact, employees’ share of the total cost of health care has reached an all-time high and accounts for reaching almost 40% of total health care spending in 2010.

If health-care costs aren’t brought under control soon, the U.S. health care system can look forward to even more drastic changes as we wrestle with how to get costs under control. Our country’s economic future will require that we contain health-care costs before they crowd out an even larger portion of personal spending and the economy.

Implicit in the MIlliman study lies a fascinating story.

Of last year’s health-care cost increase, most of the increase–about 90%--resulted solely from increases in the unit cost of health care services. In contrast, only 10% was driven by increases in the use of health-care services. The price of hospital inpatient services rose 8.3%; outpatient services crept up as the price of physician services increased 4.4%.

Given this scenario, it’s fair to conclude that at least for the moment, private sector health-care spending isn’t propelled by a population of increasingly unhealthy individuals.

What’s more, price increases levied by the health-care system are driving commercial health insurance premiums higher.

In the zany U.S. health-care financing ecosystem, cost shifting from other payment sources is always an issue. And given the Milliman findings, we’ll surely see a significant amount of cost shifting at play. In today’s fiscal environment, Medicare and Medicaid are not increasing the prices they pay for health care. If this continues, providers of care can be expected to increase the prices they charge to commercial patients at a faster rate.

So is there any hope left for a reasonably well-performing, private health-care delivery and financing system? Maybe, but only if we collectively develop a mindset that focuses on health-care cost reduction--not containment or control--as our single most important priority.

For generations, we’ve thought of health-care expenditures as national “investments” in the health of our society. The problem is if past spending was an investment in the health of today’s population, it has produced dismal returns. As a society, we’ve never been in poorer health than we are today.

We need a mind shift in how we think about health care. Each of us must accept an individual accountability for improving our health and a collective commitment to lowering the cost of treating ourselves when we get sick.

If we don’t, we’ll face economic and social consequences no one wants.

Jim Tressel’s Firing, and What it can Teach Health Care Leaders

Jim Tressel, the now former head coach of Ohio State, is the latest college coaching celebrity to lose his job because of an NCAA inquiry into rules infractions. In the aftermath of Coach Tressel’s Memorial Day decision to resign as Ohio State’s head football coach, many pundits are already offering what have become familiar refrains.

“The NCAA rules are arcane and unfair,” say some.

“Coach Tressel’s real failing was in trying to cover up the original offense,” say others.

There is truth to both points of view. The lasting lesson, however, that each of us can take from this latest tragedy is this: Jim Tressel’s biggest and most important mistake was in letting the interests of a small handful of his players become greater than the interests of his team.

In trying to shield his star quarterback, Terrell Pryor, and a handful of other players from the scrutiny of possible NCAA violations, Jim Tressel paid a huge price--one of the best head coaching jobs in the country. He also sacrificed the interests of his entire team which will now play for a new coach, in a new system, under what will certainly be NCAA-imposed sanctions.

More than anything else, Jim Tressel lost sight of the values embedded in the Ohio State fight song and sung by over 100,000 fans every home game Saturday. "Our honor defend, we will fight to the end, for OHIO!"

What’s true for football coaches is also true for health-care leaders. By their very definition, organizations exist to pursue goals that they cannot achieve by individuals acting alone. As in sports, rules aren’t meant to be broken, they’re meant to be followed and enforced. And in health care, more so than most other industries, rules are the norm.

How many health-care leaders do you know who’ve fallen because they didn’t live up to the compliance standards their organization must meet? Like the conversation now swirling around the Jim Tressel resignation, it’s not hard to envision a conversation that goes something like this: “Everybody knows those rules are a joke; who can live up to those standards anyway?”

As health-care managers face complying with regulations that are often burdensome and ineffective, it’s tempting to take the bait and excuse compliance transgressions. As leaders, however, excusing transgressions of any type is organizational suicide, and can never be tolerated.

I’m not suggesting that every compliance violation requires a firing. I’m recommending strong allegiance to compliance with the rules, no matter how arcane, and whatever the consequences.

Otherwise, your organization–your team–will begin to accept the big compromise that the players at Ohio State came to: That rules don’t matter; that different rules hold for different players. And that, my friend, is the beginning of the end for every organization that seeks greatness.