Sustainable health reform requires a solid foundation…unfortunately the proposals we’re seeing out of Washington create a more elaborate house of cards, as we continue to create an elaborate health care ponzi scheme.  The House that built Medicare has already saddled our country with Trillions in unfunded liabilities.  The proposals we see look to continue to reward a medical-industrial complex that creates and manages diseases rather than focusing on optimizing the health of people.

So what are the criteria of a sustainable health system?

1. Individuals receive fair value for premiums: Cost-shifting is a major foundation for today’s system.  We take money from the healthy to subsidize the sick.  We negotiate group discounts, undercutting the individual/ small group market.  This creates a phenomenon where insurers cherrypick the young and healthy who overpay and try to avoid the older or sicker who underpay.  THIS IS MADNESS.  Auto insurance has a system where we each pay based on our actuarial risk.  This is the only sustainable approach to health insurance…and may take a multi-year, lump-sum payout type approach.
2. Health Insurance is actual insurance (ie doesn’t insure pre-existing): Insurance, by definition, is a premium paid against a risk.  You can’t insure something that has already happened.  By creating an insurance structure to “insure” what has already happened, we’re looking only to pass cost off to someone else…and the insurance model is the most expensive way to pass along these subsidies.
3. Comprehensive services exist to Actively Manage Chronic Conditions: Chronic conditions (pre-existing) need active management.  We need to have tiers of services that are coordinated and judged against their impact, convenience, and cost.  Those doing the best job at reducing existing risk need to be rewarded…and today are marginalized with a PMPM (per member per month) approach that doesn’t reward the best management of risks.
4. Subsidies occur Transparently: Health care can be expensive and may require government intervention.  However, in an atmosphere where these subsidies are hidden, the subsidized payments tend to be used for many other things than providing the best care for the individual being served.  PCPs should be paid market value for Medicare patients, allowing a thriving primary care landscape (as opposed to starving the PCPs which has resulted in a declining number of gerontologists as we face the baby boom retirement…while numerous specialists will inflate the overall treatment bill).
5. Retail Competition based on Differentiation: Providers are allowed to compete…and price, quality, service approaches, and service levels are all part of the mix.  Is there any reason why we should pay the same amount for an overnight housecall as a 6 minute office visit with an hour’s wait?  There’s a reason why higher levels of convenience and service are not available today.  By the same token, a visit to a nurse practitioner just out of school probably shouldn’t cost the same as the world’s expert on your disease… Until we acknowledge that its ok that innovators are allowed to pursue either higher-priced models for better care or lower priced models for “good enough” high-volume care, we won’t see the innovations that will drive service excellence and efficiency in the same markets.

I’m all for fairness and equality and everyone having access to an affordable health system.  I’ve laid out the principles that I think create a sustainable system that doesn’t take advantage of anyone or just try to play “pass the cost potato”.  For those who disagree, what criteria would create a SUSTAINABLE system that incented efficient care?

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His premise, which I’ve been arguing for a while, and which Dr Rich has written about eloquently as Covert Rationing, is that insurance, rather than solving the problems of cost, creates much of the problems we see today.

Insurance is all about betting against negative consequences and the insurance business model is unique in that profits depend upon goods and services not being provided. Using actuarial tables, insurers place their bets. Sometimes even the canniest MIT grads can’t help: Property and casualty insurers have collapsed in the wake of natural disasters.

Health insurers have taken steps to avoid that level of surprise: Once they affix themselves to the host – in this case dual hosts, both doctor and patient – they systematically suck the lifeblood out of the supply chain with obstructive strategies. For that reason, the consequences of any insurance-based health-care model, be it privately run, or a government entitlement, are painfully easy to predict. There will be progressively draconian rationing using denial of authorization and steadily rising co-payments on the patient end; massive paperwork and other bureaucratic hurdles, and steadily diminishing fee-recovery on the doctor end.

While I approve of his overall premise that physicians, especially those practicing minor surgery or primary care, should move away from the insurance model for reimbursement, I think his rationale doesn’t address some of the core misassumptions out in the marketplace today.

But a hefty proportion of health-care services – office visits, minor surgeries – would be affordable to most Americans if the slice of the health-care dollar that currently ends up in the coffers of insurance companies was eliminated.

Its not that insurance companies, as the middleman, are making health services unaffordable by inserting themselves in the transaction and charging fees (although for small dollar services, the processing overhead can be truly phenomenal–over 50%). Its really that the type of transaction being incented by payment is suboptimal– the focus on technology instead of communication, personalized advice, and support has led to a severe underutilization of primary care services. Even more so, by removing the price discussion between consumers and providers, incentives to provide incremental services that financially benefit the provider have raised costs tremendously over time. In fact, cash prices and “usual and customary” fee schedules are largely unrelated, as Kellerman highlights

Several years ago, I suffered a sports injury that necessitated an MRI. The “fee” for a 20-minute procedure was over $3,000. My insurance company refused to pay, so I informed the radiologist that I’d be footing the bill myself. Immediately, the “fee” was cut by two thirds. And the doctor was tickled to get it.

In fact one of the biggest issues with the 3rd party reimbursement model is that innovators creating lower cost, disruptive models lose their customer base, as customers are not forced to make choices between higher cost and good enough. In essence, we’ve installed a model that systematically starves out the low cost innovators, who instead have been conditioned to always make something better and more expensive. Clay Christensen’s explanation of low-end disruption:

“Low-end disruption” occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments, thereby gaining a foothold in the market.

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained foot hold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.

Indeed, less insurance, especially for low-dollar items will create consumer demand for “good enough” services, especially where they add convenience or personalization as we’re seeing with the retail clinics. Unlocking the system to a market based pricing approach will create more effective primary care approaches that can better address the issues of non-adherence to therapy and significant frictional cost incurred with each doctor’s visit.

For those who want an executive summary, my major point is that the median expenditure for medical care in the US in 2002 was ~$700. The vast majority of individuals in the US can afford health care. The shift to the premium-based insurance model that spends a disproportionate share on the very sick is what is making healthcare unaffordable today. Moving away from that model is the only way to ensure good healthcare for all (vs. ridiculously high health expenditures for the few). Its odd to find all the liberals (and less odd to find the health insurance execs) looking to supplement the head of the Pareto curve.

Their findings are as follows:

Percentile	% of total expenditures	Average cost/ person
Top 1%	22	$35,500
Top 5%	49	$11,500
Top 10%	64	$6,400
Top 20%	80	$3,200
Top 50%	97	$700
Bottom 50%	3	$<700

Source:2002 AHRQ MEPS study

Most people focus on the average cost of health care in the US, which on average, was ~$6300 per person in 2002. However, this data shows that the distribution is muc
h more telling, with a small number of people generating the vast majority of cost (when the average spent is equivalent to the costs of those in the top 10%, there is more of a Pareto curve than a Bell curve in play)

Moreover, costs incurred were not random, one-time catastrophic events. As you may guess with the high incidence of chronic illness, the people within each category remained relatively constant over time.

Percentile	% with same percentile rank, 1 year later
Top 1%	25%
Top 5%	34%
Top 10%	42%
Top 20%	54%
Top 50%	74%
Bottom 50%	73%

Source:2002 AHRQ MEPS study

And it appears that these costs have been mostly stable over time, except for a significant shift toward the population between 5-50 percentile since between 1996 and 2002 (potentially due to the increasing medical arsenal for the chronically ill).

Source:2002 AHRQ MEPS study

In addition, the vast majority of costs came from the elderly:

The average health care expense in 2002 was $11,089 per year for elderly people but only $3,352 per year for working-age people (ages 19-64). 43% of the top 5 percentile were >65 years of age.

There are two issues here in the discussion of healthcare:

1. What are the implications of the data as presented, and
2. How is this data gathered and what that means

Implications of the data
We’re not dealing with events that fit the insurance model, as that model is about the underwriting of random, largely unpredictable events or the catastrophic cost of singular episodes of care. That element exists for about 2/3 of those in the top 5%, and most of them are nearing the natural end of life, which isn’t unpredictable.

Instead, we’re dealing with the shifting of expenditures for the already, chronically ill from the sick to the healthy. This isn’t insurance. This is social redistribution of wealth/ resources.

The staggering fact is that the median medical expenditures per capita in this country were somewhere around $700 in 2002. Most people don’t go to the doctor, and if they do, the expenditures are affordable for the vast majority of households, as they are significantly less than what is spent on insurance premiums today.

This would indicate that expanding insurance is the wrong model. We’re wasting a tremendous amount of money on underwriting and claims processing to administer what can’t be insured. Instead, we should be encouraging those that are chronically ill to enter treatment pathways that will most efficiently address their illnesses, while focusing programs on ways to prevent chronic disease/ illness. That model would look very different than the model we see today.

Implications of how they got the data
Here is the description of how the MEPS data is gathered:

Medical Expenditure Panel Survey (MEPS) is a large, ongoing nationally representative survey of households, medical providers, and employers conducted by the Agency for Healthcare Research and Quality (AHRQ). Data derived from MEPS and analyzed by AHRQ-funded and other researchers show where health care expenses are concentrated and how this distribution has changed over time. The distribution of medical expenses is determined by ranking individuals in descending order according to their total medical expenses and then determining
aggregate spending at specific percentiles of the population.

MEPS is unique in its ability to link data on individuals and households (including demographics,health status, health conditions, health insurance, employment, and income) to detailed information on their use of and expenses for health care. MEPS interviewers ask households for detailed information about each health care visit, hospital stay, prescription drug fill, and other medical services, including out-of pocket expenses and sources of payment. Followback surveys of the ho
spitals, physicians, and home health agencies used by MEPS households provide further
information about payments made by Medicaid, Medicare, private health plans, and other sources.

MEPS has been continuously conducted since 1996, and its design makes it possible to examine how health care use, expenses, sources of payment, and insurance coverage change over time. No other survey contains such a wide range of data essential for relating health spending and insurance coverage to individual and family characteristics such as age, race and ethnicity, health conditions and health status, and family income.

The other thing I get out of how they got the data is that medical expenditures are currently being defined only as things that health plans will cover. This I think is the biggest gap– health spend in aggregate for the consumer is composed of many more things– spending on nutritious food, time/money for exercise and healthy activities, choices in dealing with stress and life’s aggravations, time lost waiting in the doctors office, etc.

Until we look at the spectrum of what health is to the median/ average individual, and encourage individual investments there of time and resources (and these are specifically excluded from HSAs and other “consumerism” tools), we won’t address how to prevent the type of chronic illness we now see in the Top 20th percentile.

In practice, this will mean we need to invest MORE in everyday healthy opportunities for the vast majority of the population. Instead of trying to screen for those who should instantly become high-resource consumers with a “disease” label (and the industry is making more of them every day– what is this “restless legs” and prescription insomnia stuff?), we should create greater opportunities and investments in making good health a part of everyday life.

We’re currently so busy trying to insure the burning houses that we’re not spending the time to replace the dry wooden roofs on the rest of the houses in the neighborhood.

Medicare proposed sweeping changes to the way it reimburses hospitals, outlining a plan that would essentially redistribute cash by reducing payments across the board and then giving providers a chance to “earn back” money by meeting quality-of-care thresholds.

Its not surprising to see individual providers opting away from Medicare patients with reimbursement not tracking to inflation, and with a 10% punitive Medicare reimbursement cut hanging over their heads, and noise about further requirements for installation of EMRs making their economics look even worse.

Unfortunately for hospitals, demographics dictate that a large portion of their patient population and revenue is tied to Medicare, where these unilateral decisions can be made. (Medicine and Economics blog has a great post on government’s difference from corporations and charity being the ability to use force, Covert rationing blog has a great post on how Medicare/insurance contracting is non-negotiable, and therefore monopolistic and potentially illegal)

“We think this is another step down the pay-for-performance road,” said Tom Valuck, who led the project for the federal Center for Medicare and Medicaid Services, or CMS. “That’s the heart of pay for performance — if you’re not performing, you’re not paid as much.”

As laid out in the report, Medicare would cut payments to all facilities by a flat 2% to 5%. That money would then form an incentive pool for distribution to hospitals that show the most improvement or that meet or surpass certain thresholds on a variety of quality measures. The plan, dubbed “value-based pricing,” would require congressional action to implement.

As you can see from the statements made, there is no win-win in this equation. In this case, hospitals, many operating on margins under 5% will find their Medicare reimbursement cut by 4-5% by government fiat. The government may then give back some of that money, and if they do so, there are lots of new documentation and process requirements that will further dictate how you deliver care.

The agency said the program is designed to be cost-neutral to the government, and could even save money if Congress decides not to require redistribution of all the withheld cash. Lawmakers ordered up the report in 2005 as part of a deficit-reduction act.

And here is the kicker. Under the guise of quality, Medicare may simply cut reimbursement and not give it back. After all, the report was ordered up as a way to see if they could take money out of the Medicare kitty.

In the private world, innovators get large market share shifts and laggards get to try to hold onto their share, but pricing declines and quality increases because innovators get outsize rewards, and work harder to create better value for the market to earn them.

The Medicare approach is more akin to having a rat in a cage getting random shocks to speed its journey down the treadmill. Everyone is being prodded at the same rate, regardless of the effort’s ability to address market needs, and government provides random, unpredictable shocks that redirect the herd when it realizes the course it plotted isn’t working as planned.

In entrepreneur/ IT parlance Medicare is using the Waterfall model (give them specs, lock them in, and see what you get), rather than the entrepreneur’s agile model (beta test, iterate, iterate). The difference is that in a market system, entrepreneurs are essentially a portfolio of pilot tests, allowing society to pick things that are proven to work before creating major shifts of share to promising but unproven methods or technologies. The current approach is akin to running a herd of lemmings full speed toward a perceived crossing of a gorge, and hoping that there really is a bridge there upon arrival so they don’t all fall in.

Personally, I’m excited to see Medicare play such a heavy hand– it accelerates the animosity towards and ineffectiveness of the current comprehensive insurance-based system, priming it for alternate solutions (such as Health Shoppr‘s development of a retail marketplace for health services, coming in late 2008). As a physician, I see the current approaches to be unsustainable and within the next decade, I think we’ll see a significant retreat from comprehensive insurance toward catastrophic only (potentially lump-sum payment vs. defined benefit).

On the surface, this sounds good– coverage for more children. As someone who strongly considered pediatrics as his calling, I wholeheartedly believe that better health for kids is something strongly needed– especially in an era with increasing childhood obesity, diabetes, etc. While at the LA County hospital, I cared for a number of kids with SCFE– kids so heavy that their growth plates in their hips started to slip/break from the weight being placed on them. It was heartbreaking to see young kids (12-14) who’s health was already compromised to the point that they were unlikely to live full, active lives.

One would expect that any additional funds for children’s health would be invested in creating additional programs to improve wellness, increase physical fitness, emphasize good nutritional habits, and screen for early-stage addressable illnesses.

However, this isn’t about better health for more children…this is about expanding government programs to those who don’t need them– and will likely be harmed by the change.

As John Goodman cites in his blog and WSJ editorial:

Almost eight of every 10 children whose parents earn from 200%-300% more than the poverty level already have private health-care coverage, according to the Congressional Budget office (CBO). At incomes between 300% and 400% more than poverty, nine of every 10 children are already insured.

What about the eight to nine million children currently uninsured? Nearly 75% of them are already eligible for Medicaid or Schip, according to the CBO. So the main result of the Democrats’ proposal to expand Schip will be to shift middle-class children from private to public plans.

Why is that bad? One reason is that most Schip programs pay doctors at Medicaid rates — rates so low that Medicaid patients are having increasing difficulty getting access to health care. Anecdotal evidence suggests that U.S. Medicaid patients already must wait as long for specialist care and hospital surgery as in Canada.

Many doctors won’t see Medicaid patients. Among those that do, many will not accept new patients. As a result, children who lose private coverage and enroll in Schip are likely to get less care, not more.

Instead of providing better care for kids, we’re just throwing more public money at existing, sub-optimal fee-for-procedure systems of today. And in the process, we’re likely to reduce reimbursement to pediatricians already at the bottom of the physician payscale, while asking them to do more. As I mention in previous posts, government mandates tend to accentuate rather than solve the problems they try to fix.

Driving more qualified physicians away from pediatrics through low reimbursement doesn’t seem to be the answer to improving children’s health. These aren’t the people making huge incomes…and lowering reimbursement won’t attract high quality people to medicine.

Instead, lets invest money in recess, physical education programs, and improved nutrition of school lunches– things that impact all kids and set habits for a lifetime to come.