Healthcare reform efforts appeared to take it on the chin a day after President Obama took his bully pulpit to the docs of the American Medical Association (AMA) meeting in Chicago on June 15.
Photo: MSNBCOn that day, the Congressional Budget Office (CBO) “scored” the Democrat’s healthcare proposal to the tune of about $1.6 trillion, which was significantly higher than the numbers outlined by the president in his speech. That sobering bit of news caused senators to call off their planned pre-Fourth of July bipartisan announcement of a proposal that included the much maligned “public” coverage option. Senator Max Baucus, the chief Democrat on healthcare reform, said his Finance Committee would not have a healthcare reform bill to look at until after their Fourth of July recess.
Republicans who have rediscovered their fiscal conservatism and “Blue Dog” Democrats balked at the price tag, and Baucus went back to the drawing board to keep his hopes of a bipartisan reform package intact.
Thanks to the CBO, this will be another Health Care Fourth of July. Just one year ago the AMA ran television ads criticizing the “greed” of private insurance companies and threatening to cut off services to seniors if scheduled cuts of Medicare payments to physicians weren’t reversed.
Ticking Time Bomb
“Healthcare spending is a ticking time bomb, ” said the president. He asserted that if nothing changes, the country will spend one out of five dollars it earns on health care within the decade and one of three dollars in 30 years. Within a generation the entire federal budget could be allocated to health care.
Americans spent about $2.4 trillion on health care in 2008. That is approximately equal to the respective GDPs of France, Germany or England. The U.S. spending on health care is more than half of China’s GDP and is equal to two-thirds of India’s entire output.
While we spend about 17% of our GDP on health care, Germany and Canada spend 10.7% and 9.7%, respectively, on caring for the health of their citizens.
All that and our health outcomes, as measured by some, aren’t any better than those who spend less.
Geographic Disparities
Obama cited Dr. Atul Gawande’s June 1 article in the New Yorker, which showed how McAllen, Texas, was spending twice as much as El Paso, Texas, on health care, not because people in McAllen are sicker and not because they are getting better care. “They are simply using more treatments—treatments they don’t really need; treatments that in some cases, actually do people harm by raising the risk of infection or medical error, ” said Obama.
He also cited a Dartmouth study which showed that one is no less likely to die from a heart attack and other ailments in a higher spending area than in a lower spending area.
Where are those areas of higher healthcare spending?
Dartmouth researcher Elliott Fisher told Money Magazine on June 16 that Miami, Manhattan, and Los Angeles are expensive. Large Eastern urban settings seem to have particularly high spending, especially those that have a lot of medical schools, like Philadelphia. But they’re not all urban areas. Eastern Long Island has one of the highest costs of healthcare in the country.
Fisher said one driver of the differences in healthcare spending is the local capacity. How many hospital beds—and how many beds in major medical center hospitals—does an area have? How many physicians?
“Physicians must always stay busy to keep their practice profitable. Likewise, in hospitals a bed you have is a bed you fill. And in order for hospitals to offset the cost of caring for the uninsured, they must offer more highly profitable treatments to those who can pay. They’re competing with one another to build the fanciest atriums, and they look like five-star hotels. They’re bidding up orthopedics and cardiology salaries because those are revenue centers. That’s what’s driving up the costs of American health care, ” observed Fisher.
And the areas with lower spending?
Minneapolis, San Francisco and Rochester, New York. Said Fisher, “You can find pairs of communities within the same state—such as Miami and Orlando—where the spending is radically different. It’s very idiosyncratic.”
Fisher believes that spending for Medicare would fall by about 20% if everybody practiced medicine the way the lowest-spending fifth of the nation does.
Porter: A Value-Based System
Although most U.S. healthcare reform efforts have focused on coverage, the far bigger long-term driver of success will come from restructuring the delivery system. That is where most of the value is created and most of the costs are incurred, writes Michael Porter, Ph.D., in an article titled A Strategy for Health Care Reform – Toward a Value-Based System, in the New England Journal of Medicine on June 3. (10.1056/NEJMp0904131)
Porter observes that the current delivery system is not organized around value for patients. He says our system rewards those who shift costs, bargain away or capture someone else’s revenues, and bill for more services, not those who deliver the most value. The focus is on minimizing the cost of each intervention and limiting services rather than on maximizing value over the entire care cycle. Moreover, without comprehensive outcome measurement, it is hard to know what improves value and what does not.
In order to achieve a value-based delivery system, writes Porter, we need to make the measurement and dissemination of health outcomes mandatory for every provider and every medical condition. He believes that results data will not only drive providers and health plans to improve outcomes and efficiency, but it also will help patients and health plans choose the best provider teams for their medical circumstances.
Outcomes must be measured over the full cycle of care for a medical condition, not separately for each intervention, says Porter. To do this, we need to measure true health outcomes rather than relying solely on process measures, such as compliance with practice guidelines, which are incomplete and slow to change.
The CBO Roadmap
Which brings us back to the June 16 letter from CBO Director Doug Elmendorf.
Elmendorf laid out a detailed roadmap practically showing senators how the CBO can give them what they are looking for.
Wrote Elmendorf, “Many experts believe that a substantial share of spending on health care contributes little if anything to the overall health of the nation. Therefore, changes in government policy have the potential to yield large reductions in both national health expenditures and federal health care spending without harming health.”
In other words, we can cut healthcare spending without harming patient health.
Elmendorf told senators that large reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care. “Policymakers can spur those changes by transforming payment policies in federal health care programs and by significantly limiting the current tax subsidy for health insurance. This would directly lower federal spending on health care and indirectly lower private spending.”
He declared that if the growth rate of federal healthcare spending were trimmed by 1% per year during the next 20 years, the savings would roughly match the cost of an expansion of insurance coverage by the end of the decade and would exceed that cost in the next decade.
Echoing Porter, the Elmendorf letter recommends a variety of changes that are likely to make the delivery of healthcare services more efficient. At the top of the list is a move away from a fee-for-services system toward paying providers through fixed payments per patient, bonuses based on performance, or penalties for substandard care.
MedPAC Authority
On the cost containment side, Elmendorf’s letter suggests some things that could work. For instance, he recommends taking the power over physician payment rates out of the hands of Congress and putting it into that of a third party to keep the pressure up over time. One such suggestion was made by the president in a letter to senators a couple of weeks ago when he suggested that MedPAC (Medicare Payment Advisory Commission) be given authority to make payment decisions.
Orthopedics Winners and Losers
A disruption of current payment and reimbursement mechanisms would create winners and losers in health care in general and orthopedics in particular. How might reform impact orthopedics?
One of our favorite analysts, Mike Matson of Wachovia Capital, gave this question his best shot in an investor note on June 10.
Said Matson, “Our general view on reform is that it is a modest negative for the orthopedics subsector and its actual impact on fundamentals may end up being much less significant than many investors fear.” Matson believes that pricing power (and margins) in the orthopedics industry is largely a result of a principal-agent problem in which surgeons (agents) are typically less concerned about implant costs than the hospital (principal). “Since we are not aware of any reform proposals that would address this principal-agent problem, we expect pressure but not a collapse in orthopedic implant prices, ” stated Matson.
If there is an increase in coverage for the uninsured, Matson believes that it would have two effects.
First, it would increase the pool of patients and possibly orthopedic procedure volumes and, second, it could lead to a negative mix shift in orthopedic implants since a greater portion of patients would be covered under government health plans with lower reimbursement than private insurance plans.
“We have conducted an analysis of these impacts and the volume effect dominates the mix shift effect, resulting in a net positive. If all 36 million uninsured adults were to become covered, we estimate it would expand the U.S. recon market by around 5% and reduce U.S. recon margins by 20 bps and expand the U.S. spine market by around 10% and reduce U.S. spine margins by 40 bps, ” wrote Matson.
With that assumption, Matson believes that Medicare inpatient reimbursement may be cut and/or the rate of growth in the market basket may be slowed from its recent 3% type growth, leading to pricing pressure on orthopedic implants. He estimates that the recon market could absorb an average 3.4% price decline and the spine market could absorb an average 7.6% price decline before the benefit from expanded coverage is offset and gross profits begin to decline.
Data, Data, Data
All this analysis of various ways to slow the growth of healthcare spending and predictions of the impact on orthopedics will hinge on the gathering of data that demonstrates whether or not a procedure, device or service actually improved someone’s health.
That’s where the $1.1 billion Comparative Effectiveness Research funding in the stimulus bill comes in. This is already law and will set up a framework to provide evidence of what works and what doesn’t. Advocates say this will not be used to make payment decisions. They say providing a physician with such evidence is enough to change the behavior of doctors, patients and payers.
The Final Scrum
How will this all play out after the Fourth of July?
We look to The New York Times columnist David Brooks.
Brooks offered us a tour of the four-stage Kabuki theater libretto President Obama has written:
“The first step in this strategy is table-setting. You will spend the first several months of your administration talking grandly about the need for reform. You will invite all interested parties to the table, and you will serve a great heaping plate of pabulum. You will talk about things that no sentient person could possibly disagree with—about the need for better information technology and for more preventive care…
In stage two, you pass everything over to Congress. You’ll need these windbags at the end, so you might as well get them busy at the beginning. This will produce a whirl of White Papers, a flurry of committee activity, a set of legislative rivalries as every chairman in the stable seeks to be the lead horse in the romp to legislative glory…
This brings us to the current stage: The Long Tease. Every player in this game has a favorite idea, and you are open to all of them. The liberals want a public plan, and you’re for it. The budget guys are for slashing Medicare reimbursements, and you’re for that. The doctors want relief from lawsuits, and you’re open to it. The Republicans want you to cap the tax exemption on employee health benefits. You campaigned against that, but you’re still privately for it…
This brings you to the final stage, the scrum. This is the set of all-night meetings at the end of the congressional summer session when all the different pieces actually get put together.
You want the scrum to be quick so that the bill is passed before some of the interest groups realize that they’ve been decapitated. You want the scrum to be frantic so you can tell your allies that their reservations might destroy the whole effort (this is how you are going to get the liberals to water down the public plan and the moderates to loosen their fiscal rectitude).
The scrum will be an ugly, all-out scramble for dough. You can probably get expanded coverage out of it. You can hammer the hospitals and get much of the $1.2 trillion to pay for the expansion. But you won’t be able to honestly address the toughest issues and still hold your coalition. You won’t get the kind of structural change that will bring down costs long-term. In the scrum, Congress will embrace the easy stuff and bury the hard stuff.
Which is why you have MedPAC that you want to turn into a health care Federal Reserve Board—an aloof technocratic body of experts that will make tough decisions beyond the reach of politics. You can take every thorny issue, throw it to MedPAC and consider it solved.
Conservatives will claim you’re giving enormous power to an unelected bunch of wonks. They’ll say that health care is too complicated to be run by experts from Washington. But you’ll say that you are rising above politics. You’ll have your (partial) health care victory. Not bad for a skinny guy with big ears.”
Members of Congress will now head back home to participate in Fourth of July parades, corn feeds and community celebrations. The airwaves will be filled with messages trying to convince voters to voice their views with their elected officials. It will be another Health Care Fourth of July.
