8 Variables Fueling Increasing Healthcare Costs

At a recent meeting about implementing the Accountable Affordable Care Act, Karen Ignagni, (President and CEO of the America’s Health Insurance Plans), listed 8 variables that are fueling increasing healthcare costs – and thus need to be addressed to “bend the cost curve”:

  1. Prices of services (Not insurance premiums, which mostly reflect input prices, i.e., the cost of healthcare services and products.)
  2. Variations in care delivery practices and how that impacts safety (She also suggested that transparency and reporting measurements for 10-12 key conditions would significantly help reduce care variation – which can improve quality and drive down costs)
  3. Measurement (Alignment between public and private sector reporting requirements to make #2 more feasible for healthcare delivery systems already struggling with data collection, analysis, and reporting.)
  4. Value Based Benefits (Particularly getting people with chronic conditions into stable, care coordinating systems)
  5. Impact of consolidation – both horizontal and vertical (See the recent Synthesis Project Brief on this topic)
  6. Scope of practice (Enabling clinicians at all levels to practice at the top of their capabilities, which will help address growing clinician shortages)
  7. Building and Construction (Other people at the meeting noted the problem with building and infrastructure.  Don Berwick noted “stranded capital” is a challenge for delivery systems, and another speaker noted that most healthcare organizations were literally designed and built to maximize revenues under the volume incentivizing fee-for-service system rather than prioritizing value or community health status)
  8. Power of States (Non-Federal government officials and regulations are important determinants of public health activities, clinicians scope of practice, and collaborations among local stakeholders)

Karen’s list – like Don Berwick’s list from my previous post – is a very valuable tool that I’ll keep in mind when evaluation local, regional, and national proposals for controlling healthcare spending.

I’ve known Karen for about 20 years, since she was the health lobbyist for the AFL-CIO and we were on a panel taking about how to improve primary care. The discussion mostly focused on how to increase the number of primary care clinicians and access in the era of emerging managed care. I particularly remember that part of the discussion involved the hazards of calling primary care clinicians “gatekeepers v. “care coordinators.” It all sounds a bit familiar doesn’t it?

Why Healthcare Spending is Slowing – A New Normal?

The growth in healthcare spending has slowed in recent years.  Many experts and pundits have sought to explain why – while also worrying, (or predicting), that this slowing is only temporary, i.e. past performance will predict the future.

Healthcare Delivery and Financing are Dynamically Evolving

The future will be significantly different than the past because our healthcare system, society, and economy are evolving into what might be called a “New Normal” state.  Assuming current priorities and pressures continue, public and private sector organizations at all levels will increasingly emphasize value¹ in their decisions about spending and preferences for healthcare services – including choices about substituting one treatment option for another.  For public entities, these choices involve coverage and budgeting for programs ranging from Medicare, Medicaid, and Veterans’ healthcare, to benefits for government employees – as well as rules for insurance exchanges. For private organizations, these choices range from health insurance benefits provided by large employers to the decisions individuals make for their insurance coverage – as well as the clinical and lifestyle choices individuals make inside and outside doctors’ offices.

While those choices will collectively mold our future healthcare system, many changes have occurred in the last five years that are creating a new environment for making these choices and pushing us into a “New Normal” state, i.e., these evolutionary forces have already started bending the cost/spending curve.  This progress towards more value oriented healthcare will continue unless the driving forces are hampered, hindered, or blocked by future actions.

The Times They Are a-Changin”
                             Robert Zimmerman

Listed below – in my estimated rough order of importance – are reasons why healthcare spending has slowed and will continue to be less than had been projected.

  1. Dipping Economy: The economic slowdown has decreased the amount of healthcare people are seeking – as well as creating a temporary disruptive environment for making other changes in stakeholders’ attitude and latitudes of practice. Whether the decrease in healthcare utilization is because people have mostly declined or delayed unnecessary or truly discretionary healthcare services and treatments, or are foregoing many important preventive actions and therapies – which will lead to higher costs and morbidity in the future – remains to be determined.
  2. Private Insurance Benefit Design Changes: People with private insurance have shifted to higher deductible plans², (a.k.a. consumer directed plans), which have lower monthly premiums and higher deductibles, and sometimes increased co-payments/co-insurance.  This change has been in both employer sponsored plans – where individuals may not have a choice – as well as for people (and families) buying insurance as individuals or through small business plans.  Like #1 above, economic incentives have led people to be more selective in what healthcare services and products they are using, but the wisdom of these choices and their long-term effects on costs and quality of care (and life) are not yet fully understood.
  3. Medicare Outpatient Prescription Drug Benefit: The Medicare outpatient prescription drug benefit, (a.k.a. Part D), started in 2006.  If the general premise that prescription medicines are the most clinically and cost-effective form of healthcare is correct, then the greater use of prescription medicines by Medicare enrollees should be reducing spending growth in other Parts of Medicare, e.g. hospitalizations and doctor visits.
  4. Mindset Changes for Patients and Clinicians: The economic downturn, various provisions of the Accountable Care Act, and changes in healthcare benefit design – particularly more high deductible health insurance plans – are making patients and clinicians more attuned to the economic implications of healthcare choices and the value of integrated, multidisciplinary, (a.k.a. team-based), care delivery. Resistance to shifting to such integrated care from the old one-patient/one-doctor Marcus Welby, MD-esque mindset will impede progress in some areas – particularly the adoption of EMRs and regional health information systems, which require up-front spending, and where the long-term benefits are derived from providers participating in such team-based care paradigms.
  5. Change to Healthcare Delivery System:
    1. Integrated care delivery systems and the purchase or affiliation of physicians’ practices;
    2. Geographically uneven changes;
    3. Accountable Care Organizations (ACOs);
    4. Patient Centered Medical Homes (PCMH);
    5. Concierge medical practices;
    6. Greater use of tele-medicine for remote monitoring, management, and consultations;
    7. Greater use of non-physician clinicians, community based healthcare coordinators, and home care services – including more old-fashioned house calls.
  6. Change to Financial Incentives: (Besides high-deductible insurance plans)
    1. Pay for Reporting (P4R) – usually tied to quality metrics, but also used for EMR capabilities;
    2. Pay for Performance (P4P) – similar to P4R, but for actually performance, not just reporting;
    3. Global or bundled payments, e.g. ACOs shared savings and risk sharing arrangements with Medicare and private payers;
    4. Non-payment for “never events”.
  7. Trans-Fat Labeling: FDA regulations have required food labels to list trans-fats since 2006, which has had a two-fold effect which should be driving down long-term health spending: Making people more aware of trans-fats as an unhealthy choice, and inducing food companies to both remove trans-fats from their products and advertise that fact. The results have been significant. Earlier this year the CDC reported that blood levels of trans-fats have declined from 2000 to 2009: “The 58 percent decline shows substantial progress that should help lower the risk of cardiovascular disease in adults”. I suspect that CBO or others didn’t project savings to Medicare or Medicaid from the food labeling requirement.  However, shifts to healthier lifestyles will need more environmental changes like these, e.g. bike sharing programs; walking paths; programs connecting individuals with shared goals; healthier food options at cafeterias, restaurants, and grocery stores, etc.
  8. Price Transparency and Accountability for Outcomes: More transparency about prices and quality of care delivered by individual clinicians and providers is placing greater pressure on healthcare prices. In addition, since healthcare prices in the US are higher than in other countries, globalization will increasingly create downward pricing pressure – especially for products and services where people, (or their specimens), can easily travel to other countries, such as for elective surgery, or DNA testing. [Note - accountability for quality, accuracy, and fraud prevention will be necessary to ensure that foreign services with lower prices represent higher value rather than just greater waste and harm to patients.]
  9. Innovations – Better Therapies, Diagnostics, and Prevention:
    Healthcare innovations range from biopharmaceuticals, genetic tests, HIT/tele-medicine, to validated best practices including checklists and clinical decision support.  Some innovations increase costs. Some improve clinical outcomes. Some do one but not the other. Some do both.  As metrics demonstrating the value of innovations become more granular and can be determined more rapidly, clinicians and providers will be under greater pressure to demonstrate – and be accountable for – the outcomes they are delivering. However, this will only occur in a balanced way as long at patient-centric quality outcomes are measured alongside economic outcomes.  The danger is that clinical outcomes will only be determined on a population basis, but then applied to patient care decisions without considering individual patient characteristics or priorities.
  10. Smoking Restrictions.  Restrictions on smoking in public places is reducing exposure to second-hand smoke.  Some studies have shown rapid declines in heart attacks for people working in restaurants and bars after smoking in those workplaces was prohibited.  (FYI – LEED certified residential buildings treat second-hand cigarette smoke as a pollutant and often prohibit smoking inside the entire building – including people’s apartments, as well as outside doors and windows. And the DC Department of Health has been publicizing the toxic nature of second-hand cigarette smoke from adjacent apartments.)
  11. Tougher Enforcement Against Fraud and Abuse. Cracking down on fraud and abuse may be reducing healthcare spending by deterring such criminal activity.  These efforts have been aided by improvements to healthcare IT – and this will only improve in the future.
  12. There certainly should be a 12th reason – since all good lists have 12 items – but I can’t think of one right now…. Any suggestions?

Not a Simple Picture

The dynamic interactions among many of the factors listed above makes it very difficult to determine the contribution each one makes to reducing healthcare spending for a particular condition, population, or US healthcare spending overall. For example, improvements to healthcare IT are enabling improvements to delivery system operations and financial incentives – which are also linked to each other.  Each of these also affect the mindsets of  patients and clinicians, i.e., HIT systems are elevating patients’ and clinicians’ expectations for better information about treatment options and less waste. And financial incentives are evolving to support the use of such information to achieve better outcomes. Together these and other changes are altering patients and clinicians attitudes and actions towards the entire healthcare system to be accountable for delivering greater value. This hyper-cross-connected situation is analogous to the biomedical research field of systems biology, which is seeking to understand how multiple physiological systems cause specific diseases – and how combination therapies may be needed to treat such complex illnesses.


1. Value in healthcare can be a tricky concept, but it generally encompasses the clinical and economic outcomes produced by the intervention compared to the total costs, risks, and potential adverse effects of the treatment option.
2. Haviland A., et. al., “Growth Of Consumer-Directed Health Plans To One-Half Of All Employer-Sponsored Insurance Could Save $57 Billion Annually,” Health Affairs, May 2012 31:5,1009-1015

Predicting the Future is Easy

Predicting the future is easy.  Predicting the future accurately, is hard.

Public policy deliberations about initiatives for improving healthcare delivery and financing are often handcuffed by an over-reliance on the accuracy of projections.  This happens because estimates of costs, disease prevalence, utilization rates, etc. are embraced as descriptions of inevitable futures, rather than as well-executed analytical projections with inherent probability ranges.  This metamorphosis from estimation to “factation” occurred though a predictable sequence:

  • Quantitative analyses yield estimates;
  • Estimates are published or presented;
  • Summaries of estimates are extracted from tables and slides;
  • These summaries – or “bottom lines” – are rhetorically converted by the media and others from “projections” and “estimates,” to what “will happen,” as in, “healthcare spending will be….” without any recognition of the underlying assumptions or likelihood of significant deviation.

And just like that, well constructed estimates built on assumptions of “what would happen assuming” scenarios are treated as inevitable and de facto futures.  (Note – This scenario can also occur for private sector initiatives.)

“Everyone is entitled to his own opinion, but not to his own facts.”
US Senator Daniel Patrick Moynihan

Experience  Can Lead to Clarity of Vision

Henry Aaron, the very experienced and respected Brookings Institution scholar, eloquently commented at an April 19th Atlantic Magazine Forum on the challenges of projecting healthcare spending – and particularly the expectations for savings from the ACA. [Click below for video of his Q&A on this topic – go to time code 36.00 minutes - or here for the Forum’s webpage and select Panel 1.]

Below are some of Henry Aaron’s comments:

 “There is an enormous range of uncertainty.  A very flat probability distribution that stretches a long way on both sides of the central estimate that CBO is making.”

The ACA “is first and foremost a declaration that the status quo is intolerable. And that we have to begin to try to do different things both to improve coverage and to change the delivery system… ”

And he concludes, “The key aspect of the bill is that we have started on a journey of change in our delivery system.  A lot of the elements can’t be stopped.  They have deeper roots than legislation. But don’t underestimate the importance of this legislation and the message that it sends.”

We Don’t Want to Repeat History – But Projections Are Dependent on Historical Precedents

The fewer precedents for a proposed change, the harder it is to accurately model the change’s effects. But failing to recognize this limitation of the process is to not learn from history.  Below are several examples of how projections have deviated far from their original estimates or have changed as the underlying assumptions are updated:

  • CBO projections for the 10 year savings from the ACA’s Independent Medicare Payment Advisory Board went from about $15 Billion in 2010, (shortly after the law’s enactment), to $2.8 billion in May 2011, to $3.1 billion in March 2012.
  • The Balanced Budget Act of 1997 included provisions to increase geographic access to Medicare managed care plans – which the law also renamed Medicare+Choice (M+C).  However, the opposite occurred.  As noted in a 2002 research paper, “[T]he number of contracted M+COs has dropped, from a high of 456 in December 1998 to 253 in December 2001. Total enrollment in M+COs has dropped from 6.7 million in December 1998 to slightly over 6 million in December 2001.”¹  In addition, beneficiary cost sharing went up for those individuals who remained in M+C plans rather than return to “traditional” Medicare. [Note – the M+C program was significantly revised and renamed Medicare Advantage (MA) in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.  These changes created significant growth in enrollment so that today about 25% of Medicare enrollees are in MA plans.]
  • The overall costs and individual monthly premiums for the Medicare Part D prescription drug program have been much lower than projected.  Competition from a greater number of plan choices may have kept the monthly premiums down, and it seems that lower enrollment numbers have kept the government costs below projections.
  • Estimates for national healthcare spending created in 2007 were significantly higher than what occurred in 2008-2010 – in part because of the unforeseen economic downturn.  (I’ll discuss this and other factors in greater detail in my next post.)

Bottom Line: Don’t be Fooled – Don’t be Foolish

Policy makers should strive to obtain the best possible analyses to guide, (but not dictate), their planning and actions.  They should also scrutinize and question the assumptions underlying those analyses so when important factors change, they aren’t fooled into foolishly thinking that the previous projections are still valid.

 “Half of what we know is wrong, we just don’t know which half.”
Day One Lecture to First Year Medical Students


1. Graham S. Updating Medicare Managed Care. Health Policy Newsletter 2002; 15(1): Article 13. Retrieved 5/19/2012 from http://jdc.jefferson.edu/hpn/vol15/iss1/13.

Health Insurance Security Creates Jobs

People feeling secure that their health insurance will continue (or be easy to get) creates an often overlooked societal benefit, i.e., it promotes job creation – particularly for entrepreneurs. Because this value is hard to quantify, it is seldom seen in policy or political rhetoric. (It is also overshadowed by the general “job lock” phenomenon of employment-based health insurance.)

This week’s National Journal has a great article on this topic (“The Other Jobs Bill”) that examines Massachusetts’ experience with their insurance reforms and coverage requirements: The expert consensus is that these reforms have boosted Massachusetts’ economy and job growth compared to other states. Two quotes from the NJ article highlight the impact:

“Massachusetts, despite the confounding effects of the recession, can now offer aspiring entrepreneurs the freedom to leave large companies and start small ones – and give dissatisfied workers the freedom to change jobs, freelance, or scale back their hours without worrying about depriving their families of health coverage.”

“Despite some initial concern from the business community, companies have largely embraced the law as a benefit, not a burden.”

Implications for the Supreme Court’s Ruling on the ACA

Driving home how interstate commerce is affected by health insurance coverage, the article tells the story of a start-up company’s Founder recognizing the business value of guaranteed access to health insurance through the state’s exchange: It was the factor that “finally snagged her several talented staff members from bigger, established companies out of state.” [emphasis added]

Era of Accountable Care

For many months I’ve been talking about the array of health transformation initiatives the Department of Health and Human Services has been deploying as both demonstrations and programmatic changes.  I’ve been characterizing this strategy to create more accountability as an evolving menu, buffet, or map – sort of like those magical Harry Potter maps where the lines keep appearing on the parchment to create a recognizable image.

As part of releasing the final rules for the Medicare Shared Savings Program, HHS also put forth a document subtitled “Menu of Options for Improving Care,” which is a list of some of the landmarks in the future map of an Era of Accountable Care. This document listed “options for healthcare providers of all sizes, types, all across the country” to work together to coordinate patient care, improve quality and lower costs. Besides the Medicare Shared Savings Program for Accountable Care Organizations (ACOs), these options include:

  • Partnership for Patients ($1B over 3 years)
  • Bundled Payments for Care Improvements (4 models proposed and 4 more planned)
  • Comprehensive Primary Care Initiative (Medicare partnering with Medicaid and private payers in 5-7 local markets to support primary care improvement)
  • FQHC Advanced Primary Care Practice Demonstration (with HRSA)
  • Advanced Payment Accountable Care Organization Model (pre-funding for physician groups wanting to form ACOs for the Shared Savings Program)
  • Pioneer Accountable Care Organization Model (demonstration program for advanced ACOs)
  • Financial Models to Support State Efforts to Integrate Care for Medicare-Medicaid Enrollees

The Menu document clearly indicates a coherent strategy for doing what the Medicare Payment Advisory Commission recently recommended: “Medicare payments should strongly encourage providers to move towards [ACOs, bundled payments, capitated models, shared savings programs] and make FFS less attractive.”

HSS’ Menu document is an initial description of the map HHS is drawing for providers about these more attractive options.  In contrast, in all the debate about health reform and Medicare there has been very little discussion about the future of Fee-for-Service payments or how to make FFS more sustainable -  except for the $300B budgetary hole and pending 30% fee reduction in  Medicare’s physician payment system’s Sustainable Growth Rate formula.  However, making “FFS less attractive” is certainly one of the transformational “sticks” Medicare has been wielding based upon provisions in the Accountable Care Act* and through other Medicare initiatives such as Value Based Purchasing, not paying for Never Events, and using Competitive Bidding for certain products and services.  And the future will see more and expanded use of these types of initiatives to “make FFS less attractive.”

CMS Has Already Been Transformed

Another significant distinction between HHS’ current actions and what they have traditionally done is that HHS is not moving forward alone by modifying Medicare and Medicaid.  Instead they are actively seeking to work in alignment – if not outright partnership – with private payers.  This is clearly stated in the CPCI and the Multi-payer Advanced Primary Care Initiative, which has already started in 8 states.

I have previously written about Accountable Care, (and how it is fundamental for successful health reform), and with the unveiling of the menu from HHS I am encouraged that we are on the way to an Era of Accountable Care – because that is what people really want and society needs, i.e. Accountability for Clinical Outcomes and Accountability for Economic Results.  It is only through those two avenues of accountability that we will achieve my version of the 3-Part Aim:

  1. Saving Lives
  2. Cutting Costs
  3. Creating Jobs

Health Reform is Essential for Creating Jobs

“Creating Jobs” doesn’t usually appear in lists about the goals for health reform, but it is really a fundamental reason for fixing our fractured healthcare system: By reducing the financial bite healthcare is putting on families and companies – as well as creating security for access to health insurance for individuals – health reform will pour capital and confidence into the economy leading to the creation of jobs.  That will be an era of healthcare that we can all count on.

* The given name for the health reform legislation is the “Patient Protection and Affordable Care Act,” and it is often referred to as the Affordable Care Act or the ACA.  However, I believe the transformational components of the ACA are its features that will create accountability for the clinical and economic outcomes our healthcare system produces, and thus I call it the Accountable Care Act.  In the context where others are referring to this law as Obamacare, or as a government take-over of the US healthcare system, or portrayed voluntary counseling as death panels, then I am very comfortable nick-naming the ACA the Accountable Care Act.

Selling Healthcare Changes – Loss Aversion & Adoption of Innovations

Healthcare issues ranging from national health reform to stem cell research have become a major force in political rhetoric – often overwhelming substantive information. This creates challenges for individuals and organizations seeking to achieve positive changes as their communications are swamped by election-driven messaging.

Creating and implementing successful communications programs in this turbulent environment is easier when the principles of “loss aversion” and the factors affecting the adoption of innovations are used constructively.

Loss Aversion & Campaign Messages: Swinging Votes Not Actions
Campaign communications – particularly negative messages – are very effective because they use loss aversion principles to leverage people’s reluctance to embrace change.

I have repeatedly heard that people need to believe they will receive a gain that is twice as large as their potential loss before seeking to make a change.  However, that 2:1 ratio is derived from some specific social psychology experiments, while loss aversion research demonstrates that the ratio varies depending upon the magnitudes of the risks and rewards for the individual.  For example, many people would willingly wager 10 cents on a coin flip if they could win 11 cents by guessing correctly – if nothing else just for the “fun” of playing, and because losing 10 cents isn’t a big deal. However, very few people would wager $1,000,000 on the same coin flip for the chance to win $1,100,000 – even though the odds and the loss-gain ratio are the same, (and in the player’s favor), because the significance of the risk is much greater.

Kahneman 1991 Loss Aversion Figure

Source: Kahneman et. al. 1991

While these principles are not unique to healthcare, their power for influencing people’s perceptions and actions is greater for healthcare issues because of healthcare’s very personal nature and most people’s impression that they have some healthcare expertise acquired through first-hand experience. [Reader Participation: Insert your story here about a friend or relative who has "educated" or "advised" you with a personal healthcare story, or how someone - perhaps a stranger - has offered healthcare advice based upon something that happened to them, or someone they knew, or they just heard about from someone else.]

The principles of loss aversion make it very, very difficult for potential short-term and individual gains to be the foundation for effective communications campaigns about healthcare improvements for the following reasons:

  1. Loss aversion means that most people are going to want to see a potential gain that is a multiple of the potential loss – and those most affected by a proposed change will see the potential loss as much more significant, and thus require an even larger potential gain in order for them to not oppose it.  (And those most affected will also be the most active and vocal in their opposition.)
  2. For most people, healthcare changes have significant levels of perceived personal risk – whether it’s changing their health insurance benefits, choice of physicians or hospitals, how they can obtain access to new or experimental treatments, or even very specific changes such as stem cell research, abortions, end-of-life counseling, genetic or autism screening, etc.
  3. While potential losses are well understood by most people – since they know what they currently have and realize that change will be “something different” – potential gains are usually much harder to visualize and believe in. (This is why the current Administration has said that under the new health reform law people can keep their current health insurance plans if they like them.)
  4. People’s trust in government and large organizations, (e.g. corporations), has plummeted in recent years, greatly reducing people’s confidence that changes advocated by these sources will actually produce the promised gains. Specifically, in “calculating” potential losses and gains most people will greatly discount potential gains from government or corporate initiatives. For example, suppose a proposed government healthcare change is described as having a gain of 10 and a potential risk of 3. [These numbers are obviously only arbitrary representations of the magnitude of how potential changes might be valued.] This change might be seen as having a gain-risk ratio of 10:3, but a general distrust of government actions could discount the potential gain to 25%, (which is about where Congress’ approval rating is right now), resulting in a perceived gain-risk ratio of only 2.5:3 – and this assumes that people don’t inflate the potential losses because of their low opinion of government, which could make the perceived ratio 2.5:6 or 2.5:9.  Clearly this is not a situation where people would eagerly support a change in something as important as their health.

This means that even for a proposed change where the best projections indicate significant benefits to many, many people, any individual or organization who opposes the change, (for political or other reasons), has a very easy time crafting messages and images that are very effective in undermining support for the proposed change.  (For example, the combination of the following phrases has been effective in undermining support for the new health reform law: “Government Takeover,” “Death Panels,” “Unconstitutional,” and “You Lie.”)

Overcoming Loss Aversion and Negative/Counter Messaging
The solution to overcoming such undermining messages that play on people’s concerns about losing what they have (and know) – as well as their mistrust of governments and other large organizations – is to present proposed changes in ways that expand people’s confidence in and understanding of the potential gains, while also minimizing the perceived loss potential.  One way to do this effectively in a communications strategy is to address the 5 factors influencing the adoption of innovations that Rodgers first described in the 1960s:

  1. Relative Advantage
  2. Compatibility
  3. Simplicity
  4. Observability
  5. Trialability
    [These are derived from Rogers 2003 book and it's earlier editions, and described by Dealy and Thomas in their 2006 book.]

Selling Health Reform as Positive Innovation
Shifting to a “selling” campaign that incorporates these factors – while minimizing the potential affects of loss aversion – moves the communications dynamic away from the slippery losing slope of loss aversion’s context to one that is more favorable to thinking about the longer-term and more tangible benefits of the proposed changes.  For example, the broad communications campaign for the bipartisanlly supported Medicare prescription drug benefit, (Part D -  enacted in late 2003, benefits started in 2006), emphasized  how much individuals would save, rather than the long-term value and security of having  insurance – which is what Part D plans are, they are insurance, not a discounted purchasing scheme. (A USA Today article stated that an average person who enrolled in a Medicare Part D plan would save $1,100 in 2006.)

The Result: While people who did purchase Part D plans were generally happy with their plans, about 10% of Medicare beneficiaries (~4.5 million people) didn’t have prescription drug coverage in 2007 despite some plans costing less than $10 per month. The large number of people who decided to not purchase this very low cost insurance is even more striking because individuals’ premiums increase by a “penalty” of 1% per month for every month between their initial period of eligibility and their enrollment date. (This penalty is to reduce adverse selection, which occurs when people wait until they are ill before getting  insurance.) Unfortunately, the number of Medicare beneficiaries without drug coverage doesn’t appear to be declining – in 2010 it was still about 10% of beneficiaries, and this compares very poorly to the very low percentage of people who declined Medicare Part B coverage.

The significant number of Medicare beneficiaries who decided not to purchase a Part D plan could be due to their aversion to a perceived loss being stronger than the positive messages used to sell the benefits of the plans.  This imbalance results from the gains being presented as short-term financial savings, (rather than the long-term benefits of having insurance), and thus didn’t utilize the factors for improving the adoption of innovations, i.e., Part D insurance plans is comparable to other insurance they have, it is not  complicated (except for the initial large number of choices), they can observe it, the plans can be tried, and the insurance provides a significant relative long-term advantage.

Bottom Line – Sell the Value & Spirit, Not the Calculation
The bottom line is that selling the value of healthcare changes – whether it’s national reform or narrow innovations – needs to encompass broader, longer-term, and tangible values, rather than short-term calculations that may be both uncertain and not believed, while also deflecting and undermining opposing arguments, i.e. capitalize on the factors that ease the adoption of innovations while minimizing people’s inherent aversion to potential losses.

And in closing, (at least for this posting), how these principles were used in a negative way to sell a non-healthcare change might be a useful illustration:

Buying a house with an unaffordable mortgage was seen as OK before 2008 because the potential for loss was believed to be very small – since prices were rising and foreclosures were rare so there was very little to trigger an aversion. And owning a home is compatible with most people’s desires and daily lives, home ownership is observable, renting is akin to a trial of ownership, brokers and agents made it all very simple, and home ownership has potentially great financial and social advantages. However, in retrospect it’s clear that purchasing a home was vastly wrong for many people – and potentially involved outright fraudulent communications – because they had been led to believe in illusory loss-gain (a.k.a. risk-benefit) calculations.

Fixing or Fracturing Medicare?

Reducing Medicare spending has been one of the focal points in the debt ceiling negotiations, and it was reported that the President is considering throwing the idea of raising the eligibility age for Medicare into the pot as part of a stone soup recipe that might get enough Congressional Ds and Rs to swallow the end product.

Increasing Medicare’s Eligibility Age is Bad Policy and Worse Politics
While increasing Medicare’s eligibility age to reduce spending makes simple arithmetic sense using the formula Spending = Number of People x Spending per Person, like almost everything in healthcare, what is simple is often 30 degrees wrong. And raising Medicare’s eligibility age is no exception because it has significant fiscal and political problems.

First, that simple arithmetic formula ($=#($/#)) doesn’t account for the reality that older Medicare enrollees are more expensive than younger ones, so the savings from eliminating people who are at 65 and a few years older only saves a fraction of the average per person Medicare spending.

Second, raising the age of eligibility won’t eliminate all those people under the new enrollment age since some of them will still qualify because they are disabled or have end-stage renal disease – and these enrollees are more expensive than average too.

Third, eliminating the youngest (and least expensive) enrollees from Medicare will cause the Part B premium to increase because by law it has to account for a fixed percentage of all Medicare Part B spending.

Fourth, those individuals age 65+ who would be ineligible for Medicare would have to buy private insurance – or continue to be covered by their employers’ retiree health plans or state Medicaid programs. And just as they are generally less expensive than older Medicare beneficiaries, they are also more costly to insure than the average person under the age of 65.  Which means that they (or their former employers or Medicaid – which the Federal government also partially pays for) would be paying more per/person for their insurance. AND, including these individuals in the now forming insurance exchanges would raise premiums for everyone else in the exchanges. (In a report released in March, the Kaiser Family Foundation found that raising Medicare’s eligibility to 67 in 2014 would “result in an estimated net increase of $5.6 billion in out-of-pocket costs for 65- and 66-year-olds, and $4.5 billion in employer retiree health-care costs,” as well as $0.7 billion more spending by states for their Medicaid plans in 2014.)

So the final score is bad fiscal outcomes, (Medicare is saving less money than might be quickly conceived), along with a bunch of bad political outcomes: People aged 65+ without Medicare would pay the highest private sector premiums – either directly or via their former employers or Medicaid – and middle income people on Medicare would see a Part B premium increase. Of course those effects could be mitigated by subsidizing the Part B premiums and the private sector insurance (and Medicaid) costs to lessen these impacts – and the political fallout. But then what happens to those Medicare “savings?”  If that’s the “deal” that is struck, it would be a direct hit to begin fracturing the fundamental social contract that has defined Medicare since it’s founding – and subsequent whacks would likely be to incrementally increase enrollment age and otherwise cut eligibility criteria.

A Better Idea
A better solution is to actually improve Medicare – and (spoiler alert) much of what is needed to do that was contained in the ACA and the fiscal stabilization legislation.  Specifically, changing incentives for providers from volume to quality and creating support for the adoption of healthcare IT systems.  Neither of these will occur rapidly, but just as real medicine doesn’t cure people like Dr. McCoy did on Star Trek or Dr. House does on TV today, really changing a system as complex as the one that delivers the services that Medicare pays for won’t occur quickly.  The first stones on that path have been laid (e.g. ACO concepts, advanced primary care that coordinates care, similar pilots/demos, and penalties for delivering low value care, a.k.a.”value based purchasing”), and veering off that path  because it’s “hard” or not as speedy a trip as some would want, is like jumping into a turbulent river to get downstream faster without any idea where the rapids or waterfalls might be, or what carnivores (or nasty microbes) are waiting for a tasty snack.

Health Law Is Reforming System Via Market Forces

All the controversial rhetoric about the new health reform law is missing a huge reality:  The law is driving dramatic changes in the real world.  Almost every major health delivery system is preparing to reorganize how they provide care to hundreds of millions of Americans by becoming Accountable Care Organizations (ACOs).

Health Systems are Voting With Their Wallets
The magnitude and level of financial interest in ACOs – and proof that it is not just cautious planning – were dramatically illuminated by recent actions and a Washington Post article:

  • On Thursday, HHS released the long anticipated proposed rule for ACOs and Medicare “Shared Savings.” For the rest of the day the Federal Register’s website was nearly shut down by people trying to download the 429 page document.
  • Today’s Washington Post article, “Complicated health-care law leads to payday for consultants,” includes figures about the tens of thousands of dollars consultants are charging for strategy sessions about how to think about ACOs, and the millions of dollars in fees they are getting for actually helping health systems to become ACOs. Health systems were signing consultants up for these engagements before the draft regulations were released because of their expectations of how dramatically competition among ACOs will change their financial incentives and structures. And some of the phrases in the article highlight the level of importance being placed on ACOs: “ACO frenzy,” “Oversubscribed,” “Glittering high fees” and, “I have never seen anything quite like this in my 35 years in this business.”

Bottom Line
I could write more about the proposed ACO rule, my interactions with health systems looking to become ACOs (and the organizations helping them), and how ACOs will very likely produce significantly more savings for Medicare than the Congressional Budget Office has projected, but the bottom line looks like this:

  • ACOs are happening.
  • The Medicare ACO/Shared Savings rule will shape their form, but not their creation.
  • ACOs – and their quality/efficiency incentives payments – will fundamentally transform health care in the US.
  • This transformation will be like an avalanche as health systems compete locally to demonstrate how much more Accountable they are to patients and payers, i.e. how they provide higher quality at lower costs than their competitors down the street or across the river.
  • While the official title of the new health law is the “Affordable Care Act,” it very easily – and perhaps more accurately – should have been called the “Accountable Care Act” because it is that part of the law which will actually lead to more affordable care for more people.

As always, stay tuned and keep your seat belts tightly fastened for the upcoming wild ride. Like a roller-coaster, the fun is just beginning.

Roller Coaster

Creating and Implementing Healthcare Innovation – BioPharmaceuticals, Delivery System and Reimbursements

Healthcare innovation is an extremely hot topic right now, ranging from the new Center for Medicare and Medicaid Innovation, FDA’s approach to approving therapies and devices, an entire issue of Health Affairs, and of course patient-centered medical homes and Accountable Care Organizations [Patient-centered medical homes are also known as Advanced Primary Care Model practices, and ACOs are a combination of delivery and reimbursement innovations.]

I’ve been working for many years to create value for patients and society by speeding adoption of these types of innovations by clinicians, other providers, patients, payers, regulators, communities, etc., and have found that healthcare innovations have at least three things in common:

  1. Healthcare innovations occur in steps, with each advance building on the shoulders of what came before
  2. These stepwise advances also produce indirect benefits that can be greater than the innovation’s direct effects
  3. Adoption of innovations doesn’t just “happen.” Strategic planning can improve the speed and breadth of adoption – leading to greater value for patients and society

1. Axes of Innovation – Primary, Secondary and Tertiary Benefits
Every healthcare innovation can have multiple benefits to patients and society – often for different conditions.  I call this cascade of different benefits UP, OVER, and OUT Innovations. (The text and diagrams below illustrate this biopharmacueticals.)

UP Innovation: UP Innovations occurs when subsequent medicines in a class, (e.g. Beta Blockers for high blood pressure), have characteristics, (such as once-a-day dosing, and less side-effects or drug-drug interactions), that permits more patients to use the medicine correctly, and thus produce better outcomes.

Healthcare Innovation - UP Innovation - X Axis - MDMiller 2011

OVER Innovation: OVER Innovations occur when medicines are discovered that treat the same disease through different mechanisms of action, such as Beta Blockers and ACE Inhibitors to treat high blood pressure.

OVER Innovation also occurs across industries and platforms when devices and other therapies are developed that compete with biopharmaceuticals – and vice versa. This occurred for erectile dysfunction (ED), when devices, (both the vacuum pump made famous by Austin Powers and implanted prosthetics), and an injectable medicine, presented different treatment options. These therapies all had certain characteristics that caused patients to not use them very widely – which provided the clinical opportunity for the oral medicine sildenafil (Viagra®) – and then the other subsequent UP Innovators in the PDE5 Inhibitor class of pills.

Healthcare Innovation - OVER Innovation - Y Axis - MDMiller 2011

OUT Innovation: OUT Innovation involves the use of an existing therapy for completely new diseases or conditions. Sildenafil to treat early-stage pulmonary arterial hypertension is an example of this type of innovation. (You didn’t think I used Viagra® in the previous example just to be salacious did you?).  Similarly, many medicines to treat cancer were originally approved for a specific type of tumor and then used for other cancers, or even for non-malignant conditions. (Oncology and immune disorders such as rheumatoid arthritis are also clinical areas where small molecules and biologics compete as UP and OVER Innovations.)

Healthcare Innovation - OUT Innovation - Z Axis - MDMiller 2011

2. Innovations Enable Many Types of Benefits
Another way to view the benefits innovations have for patients and society is to examine how the adoption of an innovation produces indirect changes in care delivery and reimbursements – some of which can be more significant than the innovation’s original change:

  • New treatments can change how care is delivered, e.g., stents, (originally developed for urology), expanded the treatment options for clogged heart arteries from surgery to include outpatient invasive radiology procedures.
  • Payment systems for specific illnesses have influenced the development of therapeutic options and care delivery infrastructure, e.g. low reimbursements for chemical dependency present barriers to R&D in that area, while high profit opportunities for cardiac rehab and obstetrics have prompted health systems to build new facilities for those conditions.

Health information technology (HIT) is a great example of a class of innovations with broad enabling effects.  At a fundamental level, having clinical information in electronic forms improves the efficiency of storage and transmission, and thus reduces the time (and costs) for copying, billing and looking for records, as well as minimizing the need for repeat tests etc.  (This was one of the benefits of HIT that President Obama cited in a State of the Union address.) However, the value of electronic medical records (EMRs) and related HIT applications for patients and society is even greater than these direct benefits because it enables activities such as:

  • Tracking mechanisms to make sure patients are receiving recommended treatments and preventions
  • Automatic checking for drug-drug interactions and patient allergies
  • Easy access to recommended diagnostic and therapeutic protocols based upon the individual patient’s condition
  • Systems to evaluate the overall progress of physicians and practices in meeting recommended standards of care, such as A1C levels and blood pressure for people with diabetes. (See here for an example of a web-site reporting this type of information.)
  • Research across a community to identify trends in care patterns and illnesses to better allocate resources for quality improvement and public health initiatives.

Furthermore, advanced HIT applications can enable overall healthcare integration and care coordination via care teams – which leads to better care for individual patients and more rapid adoption of evidence-based practices that improve quality and efficiency. These effects are particularly evident with telemedicine, which can literally force different clinicians and caregivers to work together as a team because they are connected via a sharing technology that clearly demarcates their roles, i.e. monitor/manager and actual deliverers of care.  (The draft report Telemedicine’s use in Intensive Care Units describes an example of this in more detail.)

Payment Innovation Enables Quality Improvement
Another example of how one innovation can produce significant secondary benefits is payment innovation’s potential to turbo-charge quality improvement programs: The fee-for-service payment system in the United States often penalizes clinicians and health delivery systems for providing the best quality care.  For example, if a hospital/health system provides coordinators (such as social workers) to patients being discharged from the hospital or emergency room to make sure they get proper follow-up care, they are less likely to “bounce back” to the ER or hospital. (This is good quality coordinated care.) However, in many cases the hospital or health system doesn’t get paid for those follow-up outpatient services, and by preventing repeat inpatient and ER visits it also loses potential revenues.

Payment innovations – if properly structured and implemented – can reverse these types of incentives and lead to less overall spending, as well as broader and more rapid adoption of quality improving practices.  Such payment innovations could involve bundling reimbursements around an episode of care, (or treatment of a condition for a month or year), or across broader care teams such as the hospital, outpatient physicians, home health and rehabilitation.  And, just to come full-circle, by creating the capabilities for monitoring quality and spending, HIT systems enable accountability of health systems, providers and clinicians – as well as payers, patients, and public health officials.  That is, such monitoring can ensure that the care delivered in response to the payment innovations are quality and efficiency based, and don’t lead to rationing and budget cuts disconnected from overall costs or quality.

3. Change Adoption – Faster, Sooner, Better
A third important aspect of innovation is that it needs to be adopted in order to produce value. (Duh.) While there has been a lot written about adoption of innovation, it is particularly challenging in the healthcare environment where the “product” is a service delivered very directly (and often intimately) from  person-to-person. That is, healthcare is largely a service industry, and thus getting clinicians and patients to adopt an innovation is much more complicated than convincing people to purchase the latest tablet computer, or even to use self-scanners at grocery and drug stores.

Below is a simple graph illustrating the importance of strategies and steps to promote the adoption of innovation in healthcare. The two diverging lines shows why planning for and investing in change adoption are very important for actually changing clinician and patient behaviors.

Champions for Change - Change Agents - Promoting Adoption of Healthcare Innovations

The specific strategy illustrated in this figure involves creating and supporting champions for the innovation. These “change agents” are people who can connect to the targeted users and demonstrate the value of the innovation in a real-world way. The two curves in the diagram show the difference between the adoption of innovations when they are just released into the wilds of the healthcare system, (lower line), and when they are actively promoted with an adoption strategy. Specifically, the adoption of an innovation would proceed without these champions for change from point 0 to A1, B1 and C1, etc. But with champions, the path can proceed along the upper line from point 0 to A2, B2, and C2, etc. (The value of investing in the champions and change adoption strategies can be calculated by the vertical distance between the points A1 and A2, B1 and B2, etc.)

Value to Whom
How the value of an innovation is demonstrated to potential adopters depends upon the specific innovation, but generally it requires the champion presenting the information to be a peer-leader, to communicate the relevance of the innovation to the individual, and to demonstrate how the innovation will create a better situation for the individual adopting it.

This last point is crucial for adoption of healthcare innovations – such as the post-discharge care coordinators mentioned above – because many innovations may benefit patients or society, but to the individual adopting the innovation the costs would be greater than the benefits.  This is what I call the “Value to Whom?” analysis since it highlights that an ROI calculation about an innovation that aggregates the costs and benefits for all stakeholder may be misleading if the costs are borne mostly by one stakeholder while the benefits are received mostly by another, i.e. their is a value mismatch across stakeholders.

Similarly, many innovations will present differential benefits (and ROIs) for different types of patients based on their clinical states.  For example, while the team-based care embodied in patient-centered medical homes is good for all patients, it clearly should be of the greatest benefits to people with the most complicated and chronic conditions.

SUMMARY – The Healthcare System’s Bones are Connected Like a Skeleton (or Gears in a Machine)

  • Innovations Build on Each Other: Innovations are developed based upon new knowledge, they build upon the existing “standard of care.” But the adoption of innovative treatments, delivery methods, and payment models is not a unwavering process.  Rather, the breadth and depth of adoption is greatly influenced by factors intrinsic to the innovation, the clinical/economic environment in which is will be adopted, and how effectively it is presented to those who need to adopt it, i.e. clinicians, patients, payers, regulators, etc…..
  • Innovations Need to Fit Into the Existing System In Order to Change It: Innovations don’t occur in isolation.  Innovations are adopted into highly connected healthcare delivery and financing systems.

Connections Among Healthcare Delivery and Financing

  • Innovations Have Many Connected Benefits: Important innovations not only have direct benefits, but also create changes in the fundamental delivery of care – both by individual clinicians and within the overall structure of the healthcare delivery system.  HIT and payment innovations can produce of these types of “game changing” benefits.
  • Adoption of Innovations are Connected to Reimbursements: The adoption curves for innovations are tied to financial incentives.  This is part of the “Value to Whom” reality. Therefore, reimbursement amounts and policies can create incentives or barriers to the development and adoption of innovations – and thus greatly influence the benefits patients and society eventually derive from any innovation.
  • Innovations are Necessary for Progress: Without innovations – and without the adoption of innovations – healthcare delivery will not improve, and progress towards better quality care and lowered costs, (a.k.a. bending the cost curve), will be very slow and overwhelmed by the wave of Baby Boomers soon to hit our healthcare systems.

Accountable Care Now

If all arrows in Washington pointed to the same spot for solving the healthcare and Federal spending problems could the politicians, pundits and policy people agree?  Or would it take some new and powerful force to shine a spotlight and focus the collective vision on this solution, and what would that force be?

These are the two questions I’ve been asking myself as the battle over Federal spending has become near white-hot, and as it has become increasingly clearer that long-term Federal solvency and deficit reduction will require addressing the growth in healthcare spending – particularly Medicare.

Federal Outlays and Spending - Medicare - 2010 Pie Chart[Source: Kaiser Family Foundation "Medicare Spending and Financing," February 2011]

To summarize the highlights of this situation:

  • Cutting non-defense discretionary Federal spending can’t produce the reductions needed to significantly impact the deficit – contrary to the general misunderstanding about how the Federal budget is spent. (See this recent Washington Post article, and the bullet below from an associated poll.)
    • “There are widespread misperceptions about the state of the federal budget. A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse. Voters do not casually agree with these untruths- at least 40% strongly agree. Further, less than half (44%) believe Medicare and Social Security costs are a major source of problems for the federal budget (49% disagree).”
  • Medicaid spending is high but counter-cyclical, so improvements in the economy and employment will reduce those costs by cutting the number of people using the program
  • Social Security is a straight numbers issue – while the Baby Boomers are increasing the program’s numbers, the per person cost growth is close to CPI
  • Medicare is not counter-cyclical, its growth is a combination of the Baby Boomer influx and the per person growth rate, which is projected to be about 7%.  The result is that since Medicare accounts for about 15% of total Federal spending, the Medicare program is the keystone to solving the Federal fiscal puzzle

Solving the Medicare Puzzle
Wouldn’t it be great if there were a way to reduce Medicare long-term spending, and one that most politicians and policy people agreed was the right solution?  Fortunately there is.  And it’s already in Federal law: It’s a concept that many Democrats and Republicans have repeatedly endorsed because it increases local control and decision-making, while shifting incentives from quantity of services to quality of care.  This new model is called Accountable Care Organizations (ACOs), and it was included in the new health reform law, (a.k.a. Patient Protection and Affordable Care Act, or “Obamacare”).  This short provision in the law adds ACOs as a fundamental change to Medicare, (i.e., not just a pilot or a demonstration), and it enables Medicare to pay ACOs in any way that both Medicare and the healthcare provider (or delivery system) agree to.  Further, it encourages Medicare to work with private payers to enhance the motivations for creating successful ACOs. [See 1899(i)(3) and 1899(j) of Title XVIII of the Social Security Act (42 U.S.C. 1395) as added by Public Laws 111-148 & 111-152.]

So why isn’t there a collective multi-partisan and multi-stakeholder rally of support for ACOs?

  • Making healthcare delivery systems and providers into effective ACOs won’t happen quickly – it will require a stepwise transition.  (However, many, many hospitals, health systems, group practices and others are gearing up for the transition – which will likely involve bundled payments and focused bonuses for achieving desired outcomes – but the roads to becoming a full ACO will be varied and lead to many different successful structures.)
  • The proposed rules for the ACO provisions of the health reform law haven’t been issued yet, so there is still significant uncertainty about how Medicare will implement their new authority.
  • Political philosophy against government programs – particularly on the national level – is now a very strong force focused on repealing “Obamacare” like college students during spring break fixated on a blinking “Free Beer” sign.
  • The ACO provisions lack the specific payment formulas or dollar amounts that fiscal forecasters desire for building models and developing multi-year estimates.  As a result, the savings projections, (a.k.a. scoring), have estimated only very modest reductions in Medicare spending since there is significant uncertainty about how ACOs will develop and evolve.

Here’s why those savings projections are too conservative, and what can be done to swing the political tide the other way:

  • Hospitals, healthcare systems, other providers, and other organizations are already preparing to become ACOs.  That is, rapid movement towards ACOs is happening across the country, and it needs Medicare to be a positive – and maybe even aggressive – supporter.  This private sector movement is similar to the reaction health providers and payers had to the potential national health reform legislation in 1993-95 – (see chart below) – but this time the reform is actually in law, and the private sector responses are much broader and intense…. From what I am seeing, this activity is about 10 times greater in terms of resources being committed, and plans being developed and implemented.
    US National Health Expenditures 1960-2007
    [National Health Expenditure Increases: Actual and Adjusted for CPI]
  • The other “solutions” to reducing Medicare spending are the typical “cuts” in payments to hospitals and doctors, or reducing benefits to seniors…. But for either of those to significantly reduce long-term spending would require politically and socially untenable changes to Medicare. In addition, these changes would involve much greater Federal government intrusion in actual care delivery decisions than would effectively implementing the ACO provisions of the ACA.
  • For Americans to be receiving UnAccountable Care as the norm is no longer acceptable – just as driving cars without seat belts or dumping raw sewage into rivers is also not acceptable today, even though it was the norm in the past.  Just as the standards of care for medical practice change, so should the overall structure of care delivery. For example, high blood pressure in the elderly used to be accepted and not treated because the thinking was that the high pressure was a good thing and needed to push blood through hardened arteries.  That idea is no longer accepted, and not treating hypertension today would be UnAcceptable care.
  • There needs to be a public groundswell for “Accountable Care Now.” This can be true grassroots support, grass-tops advocacy from opinion leaders, and even “astro-turf” campaigns from national advocacy organizations and companies.  The end result needs to be getting public opinion and voices to be coherent and loud for change.  What matters is that the chorus for “Accountable Care Now” sound something like:

What Do We Want?

Accountable Care!

When Do We Want It?


Bottom Line
If Medicare beneficiaries, organizations paying for healthcare, (including Medicare and Medicaid programs), and everyone else – including leading healthcare professionals – start a drum-beat for “Accountable Care Now,” it will become UnAcceptable to be delivering or paying for UnAccountable Care. And elected officials across the spectrum, pundits, and policy leaders will have to – and want to – start looking under the Accountable Care spotlight and put their efforts toward making Accountable Care a reality Now – or at least ASAP.