Have you visited a MinuteClinic or other retail health clinic?  This approach to health care is transparent (prices clearly posted and generally cheaper than physician visits), convenient (located in a pharmacy or other retailer), and customer-friendly (walk-in appointments easy to find).

So why are these clinics, which customers love, struggling?

The answer is surprisingly simple: Medicare (and by proxy, other health insurers) have created a payment system that starves innovators because:

1. they can’t charge more for providing better service
2. there’s no reward for customers who select a cheaper service
3. they can’t even bill customers for innovations that achieve better results and reduce the need for further services

The Centralized Structure of Medical Payments:

Medical payments are based on the Soviet-style assumption that all physicians provide services that are essentially equivalent– the core payment model uses a central committee to define what can be paid for and how much.  This has led us to a system that has undervalued relationships, quality, and service and systematically overvalued procedures and specialty care vs. primary care.  How this works is outlined below:

Medicare pays physicians for services based on submission of a claim using one or more specific CPT® codes. Each CPT® code has a Relative Value Unit (RVU) assigned to it which, when multiplied by the conversion factor (CF) and a geographical adjustment (GPCI), creates the compensation level for a particular service.  — American College of Radiation Oncology

Defining where payments come from can be pretty confusing to average people, as you can see from the sentence above.  The formula that defines payment for a submitted claim is:

submitted CPT code for visit  => (assigned RVU x F/NF factor) x CF x GPCI = payment

Confused yet?  Let’s break it down

• Claim: After your visit, the physician submits a “claim” to the insurance company/ government to have them reimburse an agreed upon amount for the billable services provided during the visit
• Certified Procedural Terminology (CPT) code: The CPT code defines the services a physician is allowed to bill, and are maintained by the American Medical Association.  CPT codes define the interactions that a physician may bill an insurance company.  We’ll explore the limitations of these definitions below
• Relative Value Unit (RVU): The RVU is a number assigned to each CPT code to assign a relative definition of productivity to each code (and amount paid for performing them). Different numbers are assigned to procedures performed in a Facility (F) vs. not in a facility (NF).  Per Kevin, MD, a colonoscopy CPT code may be weighted at 8 RVU while a 15 minute office visit receives 0.7 RVU.  Thus, the colonoscopy is reimbursed at 11 times the rate of the office visit.  The low RVUs assigned to primary care have led to primary care physicians having significantly lower income than specialists.
• Conversion Factor (CF): The dollar figure assigned to each RVU, ~$36 in 2009.  This number is set by statute (the Sustainable Growth Rate) and limited to an overall budget, which can be changed by act of Congress.  The higher the overall spend, the lower the CF without an act of Congress.  This Congressional change in the CF has been referred to as the “Doc Fix” and in 2010 would avert a 21% reduction in physician fees, with an expected impact of $245B over 10 years.
• Global Practice Cost Index (GPCI): Geographic adjustment for the cost of providing care in different parts of the country

How the Centralized Payment Structure Locks out Innovators

1. Physicians can’t charge more for better service:

Ever wonder why physicians make you come into the office rather than make house calls, deliver phone consultations, answer questions via email, or any use other familiar modern-day approach?  The tight definitions for the services provided and paid for (the combination of CPT codes and the RVUs used to pay for each) has arbitrarily rewarded more complex office visits and eliminated payment for other approaches of delivering service.  It also has rewarded specialists over primary care and resulted in a shortage of Primary Care Physicians relative to higher-paid specialists.  Medicare also specifically prohibits patients for paying for better service through its prohibition of “balance billing“.  Why should a physician donate their time to provide un-reimbursed house calls, emails, or phone consults?  We’ve seen that they don’t outside of a few exceptions who are forced to donate more of their time for work performed on behalf of the government at rates already below the cost of providing them.

2. Customers see no reward for choosing a cheaper option:

The perverse other side of fixed rates is that the customer, who is charged up front with premiums, and who pays set amounts for the service coded doesn’t benefit from choosing a cheaper alternative.  Why would you care to find the physician charging 25% less for an equivalent service (because they found a faster or cheaper method of getting the same results)?  The answer is that people don’t — they don’t even know what the prices for the services are (even after they receive their EOB (Explanation of Benefits)

3. Innovators who achieve better results up-front (and reduce the need for future services) reduce their own revenue:

I interviewed a hospital executive who dramatically reduced the rate of birth injuries occurring in their delivery rooms (they took their rate from 3-4 in 10,000 births to 0 over ~60,000 births).  By saving families the suffering related to their injured baby’s stay in the Neo-natal Intensive Care Unit (NICU), they were rewarded by a $5M cut in their reimbursement (because they did not need to deliver those services).  Rather than scaling these services, innovators who accomplish these higher quality revenue-reducing approaches face the wrath of hospital executives who need to stem the bleeding before it closes the entire facility.

In future posts, we’ll explore how RVUs and CPTs are set by committees and why this prevents higher value alternatives and has destroyed primary care.

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Was struck today that I have heard very little about the role of Medigap in the current health insurance debate…despite massive discussion of Medicare, Medicare Advantage, payment reform…etc.  In addition, it highlights how difficult it is to sort through the tangled web of money and influence…not sure how much I believe it, but its certainly food for thought.

This thought was triggered by Michelle Milkin’s post on AARP’s dependance on royalties from selling sponsored insurance plans:

A Hill source summed it up for me this way: “AARP has endorsed a huge reduction in funding of Medicare Advantage, which touches over 10 million middle-lower income seniors. If Medicare Advantage funding is reduced, and seniors are forced out of the program, they become potential buyers of the heavily-promoted and very profitable Medicare Supplement program sponsored by AARP (MediGap is 70% of AARP’s annual income). Medicare Supplement is a huge source of revenue to AARP. At a minimum, AARP should be required to disclose this every time they discuss Medicare Advantage.

Since AARP makes a substantial amount of money on a competing product that serves to drive up demand by eliminating co-pays, deductibles, and other elements of cost-sharing for a flat premium; it would make a bit more sense as to why they’re willing to sacrifice the Medicare Advantage improvement in benefits.  Per Bloomberg:

Laupus stumbled onto something that many members of the world’s largest seniors’ organization don’t know: The group, formerly called American Association of Retired Persons, collects hundreds of millions of dollars annually from insurers who pay for AARP’s endorsement of their policies.

The insurance companies build the cost of these so-called royalties and fees, which amounted to $497.6 million in 2007, into the premiums they charge AARP members, according to AARP’s consolidated financial statement for that year.

AARP uses the royalties and fees to fund about half the expenses that pay for activities such as publishing brochures about health care and consumer fraud — as well as for paying down the $200 million bond debt that funded the association’s marble and brass-studded Washington headquarters.

In addition, AARP holds clients’ insurance premiums for as long as a month and invests the money, which added $40.4 million to its revenue in 2007.

‘Fatting the Coffers’

“At the end of the day, it’s all about fattening the coffers of the organization,” says Thomas Orecchio, who was chairman of the Arlington Heights, Illinois-based National Association of Personal Financial Advisors until September. AARP, he says, is sponsoring insurance for its members at inflated prices.

“It’s the dirty little secret,” he says.

During the past decade, royalties and fees have made up an increasing percentage of AARP’s income, rising to 43 percent of its $1.17 billion in revenue in 2007 from 11 percent in 1999, according to AARP data.

So what of Medigap?  Here’s a comparison to Medicare Advantage in terms of how each may add upon the basic Medicare entitlement.

Medicare Advantage vs. Medigap

Members pay an upfront premium with Medigap to eliminate co-pays, co-insurance, deductibles, and other financial restraints on services.  This seems a little odd, when you think that the reason these were put in place was to reduce unnecessary utilization.

So why then isn’t Medigap part of the overall health reform debate in addition to Medicare Advantage?

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For those who haven’t seen it, its a terrific read, and highlighted by David Brooks as the first thing he would ask President Obama to do in preparation for his health care speech.  An excerpt below:

Hospitals implementing Pronovost’s checklist had enjoyed almost instantaneous success, reducing hospital-infection rates by two-thirds within the first three months of its adoption. But many physicians rejected the checklist as an unnecessary and belittling bureaucratic intrusion, and many hospital executives were reluctant to push it on them. The story chronicled Pronovost’s travels around the country as he struggled to persuade hospitals to embrace his reform.

It was a heroic story, but to me, it was also deeply unsettling. How was it possible that Pronovost needed to beg hospitals to adopt an essentially cost-free idea that saved so many lives? Here’s an industry that loudly protests the high cost of liability insurance and the injustice of our tort system and yet needs extensive lobbying to embrace a simple technique to save up to 100,000 people.

And what about us—the patients? How does a nation that might close down a business for a single illness from a suspicious hamburger tolerate the carnage inflicted by our hospitals?

While those of us in health take this current state for granted, it is a reminder of how morally corrupt the incentives are that promote physician convenience over patient outcomes, that promote aloof and unaccountable treatment approaches, and that take little interest in examining failures to constantly improve results.

I’m reinvigorated as I’m refocused on improving health, not engaged in all the insurance goobledygook going around in the “health care reform debate”.

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But Representative Jim McCrery, Republican of Louisiana, said the bill “just kicks the can down the road” and does not fix fundamental flaws in the formula for paying doctors. In 18 months, Mr. McCrery said, doctors will face a 20 percent cut in their Medicare payments.

So, as we stall auction programs to stop overpaying for wheelchairs and medical equipment, our primary care docs get yet another warning that the bleeding continues and at some point the ax will fall.

Given the nursing shortage, I don’t think physician extenders will be the answer to bolstering our rapidly aging (and discouraged) primary care folks. Strangely enough, keeping Medicare on life support by passing this bill, vs. fixing the underlying issues, may be what kills it…as a taxpayer who can I get to hold the bag so someone else can pay for it?

Image via Wikipedia

As related in the NYTimes, Congress has been setting the price for goods, and lobbying efforts have ensured that price is significantly higher than can be found elsewhere on the free market.

On Wal-Mart’s Web site, you can buy a walker for $59.92. It is called the Carex Explorer, and it’s a typical walker: a few feet high, with four metal poles extending to the ground. The Explorer is one of the walkers covered by Medicare.

But Medicare and its beneficiaries aren’t paying $59.92 for the Explorer or any similar walker. In fact, they’re not paying anything close to it. They are paying about $110.

For years, Congress has set the price for walkers and various medical equipment, and it has consistently set them well above the market rate, effectively handing out a few hundred million dollars of corporate welfare every year to the equipment makers.

The core of this goes to an argument about top-down vs. bottom-up control. Our current system is top-down…the oligarchs decide who gets what and they put out regulatory arrangements that they think make sense…and if what you do doesn’t fit, too bad. The market works bottom up, people have a budget and make their own choices. When people aren’t forced to make choices and disruptive pricing does not create competitive advantage, you see a system stagnate at the prices of yesteryear for political reasons–as companies aren’t forced by competition to drive prices lower.

In the abstract, fixing the health care system sounds perfectly unobjectionable: it’s about reducing costs (and then being able to cover the uninsured) by getting rid of inefficiency and waste. In reality, though, almost every bit of waste benefits someone.

Doctors who perform spinal fusion surgeries, despite decidedly mixed evidence that they’re effective, are making a nice living. Hospitals that order $1,000 diagnostic tests, even when a cheaper one would work just as well, are helping their bottom line. Medical equipment makers selling walkers for $110, while Wal-Mart sells them for $60, are fattening their profits.

The current fight to protect those profits is a microcosm of what you can expect to see if a larger effort to rein in health costs ever gets going. The defenders of the status quo won’t say that they are protecting themselves. Instead, they’ll use the same arguments that the medical equipment makers are using — that a change will destroy jobs, bankrupt small businesses and, above all, harm patients.

“This is small compared to what broad health care reform would look like,” Kerry Weems, the top official at the agency that runs Medicare, told me, “and you can see the reaction.”

The current system of overpaying the manufacturers dates back to 1989, when Congress adopted a “fee schedule” for durable medical equipment and allowed any company to sell the equipment at the official price.

Its amazing to me, that in the country that fought to bring democracy and capitalism to the rest of the world, we’ve encouraged a medical system based on socialism. In the long term, socialism isn’t a practical fix to anything, as people get lazy and entrepreneurs see risk with no reward.

Moving our health system away from its current socialistic roots and into a true market, while painful, would significant decrease the social burden it is placing on workers, families, and taxpayers and incent (and improve the flexibility to deliver) the creation of lower cost models to deliver care.

Are we willing to sacrifice the solvency of the taxpaying public so that the elderly can eat freely at the “free” table of medical expenditures? In my mind, this figure alone highlights the insanity of a defined benefit for medical care– and knocks any thoughts around expansion of government “insurance” programs out of the water.

Its a paradoxical situation– government control of medical costs per visit (via the RVUs and billing through CPT based claims coding) has systematically swapped out thought-driven primary care for technology driven specialty care. As overall cost increases, government hits cost/ time units harder and harder, incenting physicians to dispense with talking to patients at all, while freely paying for diagnostics and expensive specialty procedures. We’re now at a point where the strong controls on primary care time have made that practice virtually unaffordable and the specialists are driving us faster and faster to bankruptcy.

Is this the system we should bolt all future health expenditures through? Seems the low administrative costs of this pass-through system have allowed the wolves to raid the henhouse. Were it not for taxpayers being forced to pay into the system, it would have been tossed on the scrapheap long before, with something better at managing overall spend (likely through enhanced access to primary care and increased controls on specialty medicine) in its place.

Some experts say the push reflects the best and worst of the nation’s market-based health care system, which tends to pursue the latest, most expensive treatments — without much evidence of improved health — even as soaring costs add to the nation’s economic burden.

The machines accelerate protons to nearly the speed of light and shoot them into tumors. Scientists say proton beams are more precise than the X-rays now typically used for radiation therapy, meaning fewer side effects from stray radiation and, possibly, a higher cure rate.

The payment system of today is part of the reason why hospitals can make such a large investment in a technology with unproven impact on mortality– Medicare payments for proton therapy runs about twice as high as payments for the existing X-ray technology. Why? Medicare continues to set prices in a top-down fashion and suffers from its legacy of cost-plus (at the time of initial pricing) reimbursement. This means that as procedures could get cheaper over time due to the experience curve, pricing doesn’t adjust, benefiting specialists performing procedures (and incenting them to do more for marginal patients). It also means that Medicare is more focused on paying for things “on sale” than they are making sure that its something the patient really wants/ needs (think about all those advertisements for “free” wheelchairs paid for by Medicare).

“There are no solid clinical data that protons are better” said Dr. Theodore S. Lawrence, the chairman of radiation oncology at the University of Michigan. “If you are going to spend a lot more money, you want to make sure the patient can detect an improvement, not just a theoretical improvement.”

Lack of data aside, men are flocking to proton treatment.

“I’m 67 years old, and the last thing I want to do is wear a diaper for the rest of my life,” said Pete Freeman of Spokane, Wash., who was undergoing treatment at Loma Linda.

Some men hear about proton therapy from the Brotherhood of the Balloon, a group of 3,000 men who have had the treatment. (A balloon is inserted into the rectum and filled with water to immobilize the prostate during treatment.)

The organization, which now gets some financial support from Loma Linda, was founded by Robert J. Marckini, a former Loma Linda patient who calls himself Proton Bob.

And herein lies the rub– if our government is paying twice the price, we should see twice the benefit– and today we don’t. Whereas, if individuals are driving demand for an unproven therapy, they should see the difference in cost– and they don’t.

I believe we need to move toward the consumer view of the world– but that also means that decisions need to happen because average Americans decide to open up their pocketbooks for the latest treatments, not because some random committee being lobbied by hospitals and device companies decides to open up our tax coffers for something that will yield zero return to society (many prostate cancers don’t even need to be treated aggressively to have limited impact prior to the end of normal lifespan).

The building of palaces to modern medicine shouldn’t come directly from taxpayer pockets, with no strings attached. But then again, arbitrary decisionmaking to spend our money comes with very low administrative cost.

Now, setting aside that the way administrative cost is measured still misses significant cost shifted to other parties (namely providers and DOJ), in theory, it still doesn’t make any sense to me.

When a chicken gets its head cut off, it also “benefits” from reduced administrative costs . Lots of activity, with no wasted sugar going up to the brain…is this the “efficiency” we want for our health system?

Similarly, the postal service “wastes” less on profit than Fedex. Yet, when you need your package to actually get there the next day (and know exactly where it is along the way), which one do you use? I thought so…