When money is no object

This is a great piece on child seats on airplanes. When something is more important than money, you can be sure of two things:
1. Lots of money will be spent
2. Little will be gained

http://theincidentaleconomist.com/wordpress/when-good-intentions-make-bad-policy-car-seat-edition/

Money, complexity, and insurance

Uwe Rheinhardt published a piece in Health Economics entitled "DIVIDE ET IMPERA: PROTECTING THE GROWTH OF HEALTH CARE INCOMES (COSTS)". http://www.princeton.edu/~reinhard/pdfs/MAYNARD_PAPER_25TH_JAN_2012.pdf

In this piece he builds a compelling case that the present in place in the US for the payment of health care services is fragmented and the source of huge administrative costs. The preamble to the essay states:

It is proper to preamble an essay of this sort with the observation that anyone who has received health care for a serious illness is likely to agree that, with few exceptions, health care sectors in the USA and elsewhere tend to be staffed with millions of smart and highly trained professionals who sincerely seek to improve the quality of their patients’ lives. Their admirable clinical efforts, however, are embedded in a ceaseless struggle over money. That struggle is the focus of this essay.

He goes on to focus on the weakness on the payer side of the equation, resulting in huge increases in costs over time, which are not sustainable. Medicine is not the only industry where there is a ceaseless struggle over money. Anywhere there are limited resources there are struggles over these  resources. To believe that healthcare can or should be different is naive.

His naivete is not unique. We are taught from early in our career that  somehow health care is different and the usual struggles over money can and should be overcome through the efforts of professionalism. Like Plato's philosopher kings, physicians should function outside the world of personal (financial) gain. I think this human history shows this expectation to be unrealistic and tragically unworkable.

A number of unintended consequences have flowed from this flawed assessment of human nature and the increasingly insurance-based economic landscape which has underpinned the US health care economy since the mid 1960's. Health care has grown increasingly complex, driven not only by technological innovation but also the extraordinary infusion of money. Much of that infusion has gone to waste.

I am presently listening to Dr. David Hazen's lectures on the Origins of Life through the Teaching Company. It is yet one of many outstanding courses offered by them (no financial interests in the company!). He spends much time discussing prerequisites for and  the development of complex systems which led up the formation of life. One key element is the requirement for energy to support complex systems. In the same vein, energy is also required for the support of complex systems in health care and the energy supplied is done so through the injection of money. Money is required to support complex systems in health care.

That there has been a preferential infusion of money into health care over other elements of the economy is incontestable. Tax preferences, state driven entitlements, and expansion of the use of insurance to pay for health care costs is driving larger and larger segments of spending into the health care arena. This is true all over the world. The ongoing infusion has driven an expansion of technology which as been blamed at least in part for increasing costs. However, technology in other fields tends to drive costs down over time.

In health care, the increased funds directed to health care have served to underwrite and encourage increased complexity in everything we do and it is not clear that the increased complexity has provided real value to patients. However, when the medical culture espouses that health care is different and that health care resources should not be allocated by the same market mechanisms which have been observed to be superior to all other allocation schemes, we end up wasting resources (money) on schemes which subsidize wasteful complexity.

This is no where more evident than in the insurance based payment system. The beauty of market based systems is that they are simple. They involve buyers and sellers engaged in voluntary exchange. Ideally exchanges happen simultaneously or near simultaneously. One party receiving money or goods well before the other leads to all sorts of problems. Add another party and things get much more complex. There are certain times where a third party intermediary is needed such as when goods or services are exchanged across borders. This always adds costs although it may facilitate exchange.

 However, third parties in health care just inject complexity. Mix administratively set prices together with the profound tendency to insulate those receiving services from their actual costs and you create perverse incentives and the grounds for a financial arms race pitting providers against payers. As noted by Rheinhadt, payers have been very successful in advancing their agenda but claiming the high ground of pushing better patient care. The cycles of payer maneuvering, provider billing responses,  followed by payer responses, all associated with increased administrative costs create a complexity cost spiral. To support the increased complexity requires more and more money. In the short term it always looks as though there is a positive rate of return for injecting more payment/collection complexity and this will be true as long as payments from third parties remain robust enough to support increasing complexity. There will be a point where the cost of collecting for certain services will outstrip what the third party is willing to pay.

The observation that we suffer from a proliferation of insurers unquestionably drives costs and complexity. Rheinhardt raises the consideration of a single payer solution to save administrative costs. To his credit he recognizes that single payers still have issues with controlling costs because they cannot control volume. Furthermore, they function in a three party system which I believe injects additional complexity (as well as insulating recipients from costs) and complexity costs money. Market based solutions were criticized based upon the observation:

The Congressional Budget Office has estimated that under this plan, the typical 65-year-old Medicare beneficiary with average health spending would pay out of pocket for premiums, coinsurance, and deductibles a share equal to 68% of total annual health spending on that beneficiary (Congressional Budget Office, 2011).

All those estimates were based upon inflated costs driven by the present system which subsidizes complexity and insulates beneficiaries from costs. Involving patients directly requiring them to wisely spend defined contributions will almost certainly drive down costs and decrease payment complexity. There will be less incentives to build huge billing and collection systems and there will be more transparency in terms of charges and costs. I also suspect such a payment system would provide huge incentives to roll out lower cost products and services which would appeal to prudent consumers who are again aware that they control limited resources, only some of which they want to spend on health care. The health care industry needs to compete directly for consumer dollars which can be deployed by consumers elsewhere.

The root cause is not that we have a proliferation of insurers. The root cause is we use insurance where it should not be used. The proliferation of insurers aggravates the problem and further drives costs, but it is not what we should focus our efforts to fix. The use of insurance to pay be an increasing burden of payments is upstream of virtually all the pathology we see: administrative pricing, insulation of recipients from costs,  the financial arms race involving payers and providers, a subsidy which drives increased complexity at all levels, and growth of health care expenditures which is unsustainable.

 

    

  

The changing goals of healthcare

The IOM has published a wealth of interesting papers. My attention this week was drawn this week to a paper entitled "Knowing What Works in Health Care: A Roadmap for the Nation" which can be found at

http://www.nap.edu/catalog/12038.html. It speaks to the need for a transparent and believable process which is used to assess what delivers value to patients and how to package that information where it is accessible and understandable to health care providers and to patients and their families. It is a complex problem which will require collation, synthesis, and interpretation of vast amounts of information.

It brought to mind how the landscape of the health care delivery world has changed. That might seem like I am stating the obvious but I believe that the changes which are most fundamental one the ones that are least appreciated. When Jesus was dining with the sinners and tax collectors, he was asked by the Pharisees why he would engage in such behavior. His response was"

“It is not the healthy who need a doctor, but the sick. I have not come to call the righteous, but sinners.” (Mark 2:17)

This is a far cry from the present world where doctors offices are filled with people who are the worried well. This underscores how our perspective on the purpose of health care has changed. While Jesus' remarks may have been recorded almost 2000 years ago, the role of physicians really did not change much until mid way through the last century. Physicians took care of people who were sick and generally acutely sick or injured. There was plenty to do and the outcomes were often not desirable ones. Well people did not seek out care from physicians because there was no reason to believe that physicians could deliver anything of value to a well person and perhaps even those with chronic and non-life threatening conditions. The question now is whether times have actually changed.

For those who needed the attention of a physician, for the most part the interventions were for acute conditions and the time frame required to assess success or failure was measured in hours to days. The goals of treatment were very simple. Did the patient live or die. No one was concerned about 30 day re-admission rates. Until relatively recently (meaning the last 50 years), few people were admitted to hospitals for anything (Jimmy Carter was the first President of the US actually born in a hospital). The revolution unleashed by drug development, especially the development of antibiotics (see "Demons Under the Microscope" for a great read on this http://www.amazon.com/Demon-Under-Microscope-Battlefield-Hospitals/dp/1400082137) completely changed not only how physicians practiced, but fundamentally changed what the goals of our jobs would end up being.

There are still many physicians who deal with life or death situations. However, increasingly our services are delivered to patients who are no longer sick in the same sense as those viewed as ill in previous generations.  Perhaps even more fundamental is the change in the time line for the assessment of success or failure of interventions. We no longer exclusively attempt to focus on acutely saving lives. Measurement of outcomes in acute care settings is still demanding and can have pitfalls, but it is inherently easier than measuring more difficult to define outcomes which may occur years in the future. In my opinion, the IOM paper was written because of the need to know what works in the realm outside of acute life or death scenarios. We need to be able to figure out which interventions are best for patients when we look out months, years, or decades. This is exceptionally hard and in certain circumstances perhaps not even possible no matter what technology we deploy.

Our confidence in the health care industry is to a substantial degree still living off the momentum created by the almost magical accomplishments in acute care setting that have occurred in the past century. It reminds me a an Arthur C. Clark observation.

Any sufficiently advanced technology is indistinguishable from magic. Arthur C. Clarke, "Profiles of The Future", 1961  

There is no question that we are still are amazingly good at dealing with acute care situations where we can deploy technology which has the semblance of magic. It is questionable whether accomplishments in this realm should translate into confidence in medicine's ability to intervene and make meanigful impact in a more distant time frame.

Innovation and Medicare - Fundamentally Conflicted

The CBO just issued a report on Medicare Demonstration Projects: (http://www.cbo.gov/ftpdocs/126xx/doc12663/01-18-12-MedicareDemoBrief.pdf)

The idea behind these projects is to deliver better care for less money. It is a noble and essential goal since health care spending stands to undermine our entire economy within the next 10-20 years (and perhaps sooner). The results can be characterized as mixed at best with roughly equivalent numbers of pilots costing more money as opposed to less money. Granted the time frames had short time horizons and we have to take as a given that most innovative approaches will fail. 

My problem with the whole idea of Medicare Innovation projects is that the idea of top down driven innovation is really a non-starter and that meaningful innovation of Medicare the third party payment system it is embedded in are ones that will result in something entirely different. That will not happen if the innovations are embedded in the Medicare/Third party payment system we now use. They will co-opt any real change. 

I believe that Clayton Christensen's book the Innovators Prescription has an analysis of this problem which is spot on. He identifies various strategies which companies can use to address disruptive innovation in their industry. The disruptions almost always are related to some new product or service which comes in at the low end of the market and ultimately moves up market to disrupt the market leader. 

One example he uses was IBM, which was a leader in the mainframe computer industry. During the early 1980's, technological innovation allowed for the development of desktop computers which had a much larger market than the mainframe business. The first desktops were no match for the computing power of the mainframes.  Multiple mainframe and mini-computer companies saw the change coming but none except IBM actually adapted to their impact on the market. Companies like DEC and Wang went out of business but IBM did not. Why?

IBM leadership had the insight to understand that their attempts to grow a desktop computer business would require creation of a separate entity (IBM Entry Systems Division in Boca Raton, Florida - 1981). They understood that otherwise their innovations would be co-opted by the very business model (mainframe and mini-computer) which successful deployment of the desktop computer will displace.

From my perspective, successful innovation in health care payment and delivery means undermining third party payment systems, including Medicare. Given how Medicare is organized and administered, that will not happen. Markets allow for tremendous flexibility and do so by allowing participants to tweak from the bottom up. Medicare demonstration projects are a top down endeavor. The ideas may come from a variety of parties but they must percolate through the Medicare bureaucracy before they can be test or implemented. As it stands now, Medicare and other third party payers will always co-opt any attempts to change the system in any meaningful way and are now in positions to insure they are always in a position to co-opt any attempt using their control of the payment system.

The most constraining part of the Medicare and third party payment system is executed through the lack of the ability of health care providers and delivery systems to experiment with re-bundling of services. Medicare constrains providers through legal constraints. You either participate in Medicare with all its restrictions or you opt out. Similarly, other third party payers use the Medicare template to force providers to be either all in or not in at all.

I see the concierge movement is simply an effort to repackage and bundle services. In my estimation, it is exactly the right thing to do. It is viewed by critics as allowing the camel's  nose in the tent, the first step in disrupting a payment system which should be used to guarantee health care access to all. I also see it as a first step in disrupting a payment system which needs disruption. Once physicians and other providers of health care services are empowered to bundle services differently from what is allowed by Medicare and private insurance, innovation in those realms will explode. The public will benefit the most.

Finally, our perspective on the nature of desirable innovation needs to change. Hearkening back to Christensen's work again, the largest impact comes from innovations that enter at the low end of markets. Generally, these innovations have impact by delivering a product which is inferior to what was previously available but they do so at prices hugely less. While a mainframe computer may have costed millions of dollars or a mini-computer hundreds of thousands, the desktops cost $5-10K. They could do much less than their more expensive alternatives, but they could do infinitely more than nothing.

True innovation in health care which can save money to the degree that will be required to prevent financial calamity will require deployment of innovations which can cut costs, not in small and inconsistent  increments, but in huge chunks. The trade offs required will be modest compromise on the deliverables.  We put computers in a huge percentage of homes in 2012 not by promising million dollar mainframes but by initially deploying crappy desktop machines.

Furthermore, we succeed in deploying sophisticated technology by initially targeting the affluent few after which markets relentlessly drive costs down to make them available to the many at a fraction of the costs. High end whistles and bells in cars such as ABS braking systems and high end electronics were first available only in the top end luxury cars. They are now standard equipment at a fraction of the initial cost. Why has this not happened in health care? Non-market based, administratively controlled payment systems have served as a brake on this type of innovation. Medicare demonstration projects will not disrupt these systems and without that type of disruption, no meaningful change can occur.

I have a simple plan for innovation. Allow us to get a waiver from Medicare which allows us to continue our participation in Medicare while we experiment with alternative payment systems. We need no grant monies, just additional autonomy and the ability to bundle and price our services in novel ways.

He who sets the prices controls healthcare

http://reason.com/archives/2011/12/13/medicare-whac-a-mole

Reflections on my old home town

Steve Malanaga wrote an Op-Ed piece in the WSJ which took me back to my childhood. I grew up in Buffalo, New York. Oddly enough my recollections were almost Shangri La like. It was a wonderful place to grow up, particularly if you had nothing to compare it to from the perspective of climate. I thought everyone played pick up basketball outdoors at -20F wearing a parka and mittens. There was also a certain appeal of women whose natural curves were augmented by down filler.

http://online.wsj.com/article/SB10001424052970204409004577156603296740624.html?mod=WSJ_article_comments#articleTabs%3Darticle

However years have past (many) and the shine has worn off. While I grew up there, Buffalo was clearly off its peak but there were many other less affluent and less thriving communities in the US. That has changed and if it were not for places like Detroit, Buffalo could take the prize as the most fallen from economic grace.

I had not ventured back to visit for many years until 2001 when I was invited to give a seminar at the University by a colleague who had moved to Buffalo to run a training program. I thought it would it would be great to wander around my old haunts and visit the few old family friends who still remained. It turned out to be an odd trip at many levels.

The visit was planned for around September 18, 2001. It almost did not happen because of 9/11. However, I took one of the first flights after airline travel was restored. On the way to the airport, I listened to a lecture from the Teaching Company. I am a TC freak. The lecture series was on the history of the United States and the specific lecture was focused on the US at the turn of the last century..1900. It centered on what was then arguably the richest city in the country. You guessed it... Buffalo, NY. The lecturer spoke of the confluence of transportation systems, the steel mills belching smoke, and the vistas of grain elevators.

I recall flying into Buffalo after listening to this lecture and our approach to the airport actually took us over the sites of those previous thriving industrial sites. How things had changed. What I saw were the rusted hulks of those majestic enterprises and the land was well into reclaiming them. The good news is Lake was much cleaner than I recall. No longer is the small boat harbour water stained orange from the slag from the Bethlehem Steel plant. The bad news is, Buffalo has joined the ranks of a number of more pristine but very poor places on this earth. Both the pollution and the jobs left.

Which brings me back to Steve Malanga's Op-Ed piece. What takes a place like Buffalo from richest to poorest in slightly more than 100 years? Is that a rapid transition or a gradual one? Is it surprising or predictable? Are transitions like this consistently preventable or inevitable? Will we be looking back at Silicon Valley in 100 years and have witnessed the same thing? Will Buffalo undergo a revival and become a destination location?

What makes some places rich and other places not so much so? The answer is wealth as as one of my favorite authors P.J. O'Rourke has written in his hilariously funny books "Eat the Rich" we tend to have little understanding of this process. Creating wealth and the entities that create wealth is not like baking a cake. Even under the best of circumstances we can and should expect failures. In addition, we should expect radical change. Entities which support the enduring generation of wealth are entities that are prepared to reinvent themselves, even if it means their reinvented selves look little like their own selves.

Places like Buffalo die because they tried to hold on to what they were and failed to empower those who might create a new and different Buffalo. Large infusion of political dollars do what they do best; preserve their political bases. They do not create wealth because that tends to upset the political status quo. What will bring back Buffalo? I don't know and I would venture to guess that no single person knows. However the decisions in the political realm which can help can best be described as permissive. At best they can allow them to happen. In the present state the default is to prevent them.

You'll shoot your eye out!

A favorite ploy of health care economists who are market deniers is to channel through the spirit of Kenneth Arrow, whose sentinal work on health care economics in 1963 still shapes the debate today. In Uwe Rheinhardt's piece today in the NYTs, there is such an example:
(http://economix.blogs.nytimes.com/2010/08/13/health-care-uncertainty-and-morality/)

In a recent interview with Conor Clarke in The Atlantic, Professor Arrow was asked how much of his 1963 paper “is still an accurate representation of the problems the health market faces.”
He responded:

I think the basic analysis hasn’t changed. There are wars over the details, but the basic analysis is accepted. Some specifics have changed. If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won’t work – it doesn’t work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren’t self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.

The emphasis is mine. Whenever market based solutions to health care economy problems arise, the response is predictable. A firm and confident declaration is made that the market does not work in health care. End of story. Debate is closed. Justification or empiric support is not required. A Nobel Laureate has spoken.   It reminds me of one of my favorite movies, A Christmas Story where the main character Ralphie desires a Red Ryder bee bee gun for Christmas. When he expresses his desire, he consistently gets the same response:

Ralphie: I want an official Red Ryder, carbine action, two-hundred shot range model air rifle!  Mrs. Parker: No, you'll shoot your eye out.

He gets his courage up to ask a departmental store Santa and he gets the same response. Why would you want that...you'll shoot your eye out!!! No argument. No response. Ralphie's desires are trumped by a statement for which he has no response. He cannot ask whether this claim is supported by any sort of empiric evidence. He is not at liberty to ask whether the risk of eye injury is different in Red Ryder air gun users. It is the gospel truth and should not be questioned.

So tell me why markets won't work in health care? I don't want to be shown that market solutions will not be perfect. I take that as a given. I do not want to be shown anecdotes of imperfect outcomes. Bad outcomes will happen even with even good systems and should not be used as a basis to scrap market approaches. The center piece of Arrow's argument was the existence of information asymetries which he comments on further..

Such has changed since the early 1960s. In particular, the unimaginable advances in information technology have revolutionized many sectors of the economy. In health care, this electronic revolution has made it possible for patients to be much better informed about the efficacy of alternative medical treatments. That, by itself, should have reduced the problem of information asymmetry.

On the other hand, as medical science and practice advance rapidly, the information gap between physicians and their patients increases. Many transactions in the market for health care therefore still proceed on the basis of trust in the expertise and integrity of physicians and other health workers, rather than on the countervailing power of equally well-informed buyers and sellers, each looking out only for their own self-interest.

Is this really any different from other segments of the economy? I do not understand how to fix the brakes on my care and I suspect that a faulty brake job more likely puts me in harms way than most interactions with my physician. I have to trust that my mechanic installed the shoes correctly. I have to trust that the  mechanic who maintains the engines on the planes I fly is not cutting to may corners. I need to trust the cooks who prepare my food are not adulterating their fare. Our entire economy is based upon trust and skepticism. You need both. 

Again there are times where those who are ill at inherently at an insurmountable disadvantage but not always. In the same vein automobile repairs do not always have to happen within the context of being broken down in a desolate place with a tight time table. However, if your car breaks down in the boonies where you know no one you are more likely to be fleeced by someone who can and will take advantage of you. That does not mean we should eliminate the market to deal with automotive repairs.

The fundamental tenants of my belief in markets in health care are simple. First, it is basically incontrovertible that markets are the best tools yet developed to optimally allocate scarce resources. Second, it is impossible to make any consistent distinction between what is inside and outside of the health care economy at the margins.  Almost any good or service which enhances human life could arguably fall within the health care realm. Between health care cost inflation and ongoing redefinition of what entails health care, the health care economy will basically absorb the rest of the economy. If the health care economy is divorced from market allocation schemes, it means that the world of the future will be a throwback to the pre-market allocated world. Unless there is some other resource allocation mechanism which miraculously develops to replace market mechanisms in the near future, we will commit our descendants to wealth destroying race to the bottom.

It is not as if it needs to be all or nothing immediately. For each health care entity, give us the flexibility to move parts of our business to outside the third party system. As it stands now, you are either all in or all out. That is no way to structure a system that needs innovation. No one wants to make that big bet. Which portions of the health care business that can move to market and consumer driven models will be decided by many little bets. Many will lose. Some will win. A few will win big and winning big I mean the consumer will end up getting much more for much less. That is what markets do. Yes, someone may shoot their eye out. I am willing to take that chance.