Another blog highlighting the problems with command and control pricing

http://healthaffairs.org/blog/2011/11/15/a-better-way-to-approach-medicares-impossible-task/

Untended consequences of administrative payment schemes: A tale of two specialities

Rheumatologists and Orthopedists both deal with human muscles, bones, and joints. That is where all similarities end. One specialty has huge margins, is highly lucrative, and has become hyper-specialized. The other has negative margins, is financially a mess, remains the realm of the generalist, taking on whatever is  thrown at them, generally whatever other physicians do not want to deal with. How did this happen? It is a simple answer (but not so simple solution) - administratively set prices which value one specialties activities much differently than another.

For orthopedics, lucrative reimbursement for focused, value-added interventions combined with strategic incompetence in assuming any long term responsibility for caring for chronically ill people is a winner for building empires. This model has allowed for hyper-specialization. Orthopedic surgeons  tend to focus on one joint or segment of an extremity (wrist, ankle, elbow) making it relatively easy to deflect unwanted business. Payments and business models may be so lucrative that you have the margins to underwrite the hiring of non-proceduralists who can screen a larger patient population and cull those who can be shunted to the operative engine, being careful to not to assume care for anyone who requires any high risk drugs such as immunosuppressives or biological agents such as TNF blockers.

In contrast, Rheumatology is the realm of the chronically ill and medically managed. a low margin activity because of the random financial violence created by administrative pricing. Rheumatologists are called upon to care for everything ranging from gout, to fibromyalgia, vasculitis, myositis, RA, Behcet's syndrome, systemic lupus, or chronic depression.  Rheumatologists are called upon to treat any inflammatory disorder of any organ system where focused and procedural specialists have perfected the art of strategic incompetence, unwilling to cultivate and maintain particular, but low margin expertise, required to care for patients who have organ specific disease affecting the organ of their interest. Better to simply dump this responsibility on the unfortunate Rheumatologist.  Also be sure to berate your local rheumatologist when they fail to willingly accept all the low margin work dumped on them. 

Without sufficient margins, there are insufficient funds to build an infrastructure with any semblance to the infrastructure that supports orthopedics. This includes sufficient incentives for physicians to enter the field in the first place. Thus, shortages of Rheumatologists prevents the development of specialization and the inefficiencies that may come with this, aggravating the financial stresses even more. Why is it acceptable for one set of specialists to have focused expertise and deflect difficult to manage (and coincidentally low margin activities) to a more poorly paid specialist who are financially punished for maintaining remarkably broad expertise? It is justified on the basis of the financial rewards, created through an entirely artificial world of administratively set value.

Where it might make sense for leaders in medicine to take this on, recognizing the dysfunctional and unjust nature of how value is arbitrarily assigned. Such a road is a highly risky road. Why take on such a difficult, long run challenge (to fundamentally change the rules of the game) with only possible returns.  It has been much easier and less risky to figure out how to exploit the rules in the short term, even though it has created bizarre and indefensible holes in the health care delivery system. No wonder why it is increasingly difficult to find Rheumatology expertise? Rheumatology is not alone in this fate. Where we find insured patients with medical needs and no one to deliver them, you have likely found the mischief created by administratively set prices, sending misinformation about what patients actually need and where value to patients lies.

Administrative prices and economic triangles as creators of new information asymmetries

Much has been made of Kenneth Arrow's famous critique of health care economics and his observation that information asymmetry made the delivery of health care different from other information. While I cannot disagree with Arrow that information asymmetries create challenges for consumers of health care, I believe there are elements of the payment system which actually worsen this situation.

Within a market system, the role of prices is to convey information. Pricing is a remarkable information system which merges both conscious and unconscious individual and group preferences. Prices derived from market mechanisms are amazing in terms of the information they reveal. While each of us may consciously believe we have certain preferences, our cognitive unconscious may play an even more important role is the expression of our actual preferences and value trade-offs. The expression "Put your money where your mouth is" is a commonly accepted understanding of this.  Money is a synthesizer of conscious and unconscious preferences.  Thus market price information is valuable in that it tends to reveal real preferences in a format that virtually everyone understands.

When Arrow wrote his analysis, the world of medicine in the US was very different from what the current state is. Most medical encounters involved people who were acutely ill whose questions were rather straight forward. Why am I sick, will I get better, and can you do something for me? The time frame was measured in days or weeks, not years or decades. The resources available to patients was vanishing small (Merck Manual) and the way that physicians practiced invoked the mantle of more the magician than scientist.

Furthermore, in the early 1960's medicine still focused around the two way exchange of physician and patient and the role of third party payers was nowhere near what it is today. Physicians knew more than patients but in reality they did not know too much and for the most part, health care encounters consumed a trivial amount of overall household resources. There were exceptions but there are outlier circumstances in all realms of life where events result in huge and unexpected financial impact. That is why we have insurance.

There are information asymmetries which occur is all elements of exchange. Frank Knight highlighted this in the early portion of the 20th Century when he viewed that risk and uncertainty were drivers of all sorts of transactions, where parties contract with other parties in order to manage risk and uncertainty. I beleive that there is no reason to believe that health care information asymmetries are inherently any more than exists in the interactions of humans in other realms.

Yes, medicine has made incredible strides in the past 100 years, perhaps temporarily outstripping the capacity of the general public to fully comprehend the impact on them and their options when dealing with illness and health business. It was Arthur C. Clark who said "Any sufficiently advanced technology is indistinguishable from magic". Ultimately, the magic trick becomes common knowledge and few are impressed or baffled. The microwave was magical when first available. Now it is used without a moments thought and units can be purchased for less than a tank of gas.

As a practicing physician, I am constantly amazed how little we can predict reproducibly and how little we actually know. There may be a perceived asymmetry of knowledge but the differential of what is known between physician and patient is likely less than one might believe. Generally, physicians (and other health care providers) know substantially less about what is really important to patients their patients and patients, particularly educated ones with chronic problems, know immeasurably more of what is important than any of their treating agents.

The information asymmetry still exists, but in an entirely different form. Instead of a two-way transaction, we now have a three way transaction. Each of the parties has information that is not shared with the other parties, sometimes intentionally but often quite by accident. Each party has different goals and different priorities. In a situation where market prices were actual information tools and could convey information regarding preferences of the various parties involved, perhaps they could serve to work toward shared goals and efficient allocation of scarce resources. However, administratively set prices in health care are simply accounting tools and not information tools.

Thus, we lose the use of perhaps the most important information tool available in a price coordinated economy. We no longer just have information asymmetries. We end up with information voids. Physicians have little or no idea of what patients really value since patients are for the most part not asked to value their preferences in the format which we all understand.

Marketers of health care services game the system and are driven to respond to a payment system devoid of real patient preferences. They move to where the margins are, whether what they do delivers the most value to patients. Payers are driven by pressures from their biggest customers and those who can exert political pressure. Without a dynamic pricing system, the feedback loop which operates in other vibrant elements of the economy is not present. Without information that comes from market based prices, resources are allocated poorly, productivity fails to increase (or falls), and scarcities are worsened.

Our present circumstances are all too predictable based upon what we have done to the pricing mechanism in health care and its impact on information exchange.

The ongoing saga in Europe

I simply do not get what is going on in Europe. I get that the Greeks are broke and I understand that there is no easy way for them to dig themselves out of the hole they have dug. From what I can glean from the the many pieces written on the situation is that someone is going to take a haircut. The initial plans were that bondholders,  including many banks as well as small investors, were going to take a modest haircut but as things unwound, the losses they were to face were much greater than what was first imagined.

The latest deal proposes that bondholders will lose about half of their investment, with questions still being whether this is still not sufficient to make the deal work. Even at this substantial discount, the long term outcome is workable only if the Greece imposes an austerity program which will be onerous and long in duration.

Here lies the rub. If the Greeks agree to this (which they may or may not), how can any agreement be binding an the next government which may come to power in the coming years (or months)? While there is a great desire to come to some sort of agreement because there is a belief that this will bring some sort of closure, nothing could be farther from the truth. Greece will require ongoing infusions of capital and with each agreement comes only the opening of the next round of negotiations and posturing.

This is like budget negotiations in the US. The sequence is negotiation, agreement, money transfer, and then failure to meet negotiated goals, followed by the cycle all over again. The only way this can work is if the sequence is altered to negotiation, agreement,  meet negotiated goals, and then money transfer. It will never happen.

Drugs and markets: A tale of two stories

Health care delivery in the US is experiencing yet another mismatch of supply and demand. This time it has happened within the realm of cancer treatment. As noted in this week's NEJM:

For the first time in the United States, some essential chemotherapy drugs are in short supply. Most are generic drugs that have been used for years in childhood leukemia and curable cancers — vincristine, methotrexate, leucovorin, cytarabine, doxorubicin, bleomycin, and paclitaxel.1 The shortages have caused serious concerns about safety, cost, and availability of lifesaving treatments. In a survey from the Institute for Safe Medication Practices, 25% of clinicians indicated that an error had occurred at their site because of drug shortages. (http://www.nejm.org/doi/full/10.1056/NEJMp1109772?query=O). 

 The reason for this shortage is not hard to determine.The authors go one to draw a simple conclusion.

The main cause of drug shortages is economic. If manufacturers don't make enough profit, they won't make generic drugs.........The second economic cause of shortages is that oncologists have less incentive to administer generics than brand-name drugs.

The regulated medical marketplace is heavily weighted to the regulated aspects and very light on the market aspects. Price fixing, particularly fixing margins to 6% for chemo drugs administered created a perverse incentive to administer the most expensive drugs one can practically get away with. A 6% mark up of an expensive drug yields more income that the same percentage mark up of an inexpensive one. With the such substantial incentives for physicians to administer expensive drugs, what in the upside for pharmaceutical firm to continue manufacturing low or no margin drugs when they can invest their resources to produce a better return on their investments.

Before the medical community cries foul, indicting the pharmaceutical industry for failing to produce drugs  because of limited margins, we should first look at ourselves. The medical community also directs resources primarily to generate financial returns. It is an existential thing. Those entities that fail to do so also fail to exist in the long term. Survival is not required. Entities whose business is based upon not making money have short life spans.

In contrast to the non-market for chemotherapy drugs where there are profound shortages, there is a separate universe where there are no drug shortages. The CDC reported that the number of deaths from overdose involving prescription opiates has reached record levels. (http://cdc.gov/mmwr/preview/mmwrhtml/mm60e1101a1.htm?s_cid=mm60e1101a1)  Here is a world where major efforts have been undertaken to limit use  the use of these agents and yet there is no evidence of drug shortages. It is quite the contrary. One of many things that the state cannot control is the price of street drugs. This should not be taken as an endorsement of  drug culture or illicit drug use. However, it is evidence of the power of markets and market pricing.

When shortages are present, it is more often the mark of dysfunctional regulatory states. If we want to make sure that cancer patients have access to affordable life saving drugs, we need to stop tinkering, stop making more rules, and let the power of markets fix the problems wrought by regulatory demons.

Oh no...Not again!

As the financial calamity is unfolding in Europe, I see remarkable parallels similarities between every budget crisis which has unfolded in the past 20 years. The present crisis involving Greece and the EU, has been punctuated by specific episodes where Greece faces a liquidity crisis prompting it to make an urgent request to the EU (primarily Germany) to provide access to emergency loans. The loans are made technically made contingent upon financial reform in Greece. However, once the loans are made, the leverage to hold the Greeks to their promises evaporates. With each additional cycle, those loaning the money become more and more vested in avoiding a Greek default, thus perpetuating the cycle of profligate spending, emergency bailout, followed by additional spending which outstrips economic productivity. 

  

The problem is the asymmetry of power based on the chronology of required action. Those providing the funds for bailout are required to take action up front while those who as ostensibly bound to to respond afterwards with financial reform and spending cuts are able to renege on whatever agreement that was hammered out initially. The may be because the agreement was made in bad faith but even more likely because whomever made the agreement in the first place is no longer in power when austerity actions are required to be put in place.

The same dynamic is operational in budget negotiations  in the US. Almost invariably, tax hikes are implemented immediately, sometimes retroactively. Business planning for 2011 is based upon a tax environment which may be in place as much as 12-24 months prior to 2011. However, tax rates for 2011 can be hiked basically anytime prior to when 2011 taxes are due. This can be as late as April 2012. On the other hand, spending cuts tend to be most heavily focused on out years, particularly years well after upcoming elections, after which elected officials may have little or no incentive to be held to promises which they did not make.

 This dynamic is acutely relevant to our present state in the finance of health care. I found a very interesting in Greg Mankiw's blog where he calls attention to a 1967 quote from Paul Samuelson from Newsweek magazine.

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.

More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

While we were at the helm of a growing wealth generating engine which used to the the US economy, making such promises as Social Security, Medicare, and Medicaid could be done without fear that the chickens would come home to roost in any near term time frame. The asymmetry of time frame allowed for implementation (the glory) without immediate impact the wealth engine making things possible (the pain). Those Jeremiahs who could see the crisis coming and made attempts to inject fiscal discipline may have temporarily appeared to be successful. Agreements generally involved immediate revenue enhancements coupled with spending cuts in the longer term, agreements which fail to materialize well after tax increases were set in stone. They have been much like Charlie Brown, forever the optimist, committing to kick that ball,  firmly believing that Lucy will not snatch the football away.  


It is unfortunate but it appears that the process continues until one or more of the parties is incapable of continuing because they broke and flat out of money.  Ponzi schemes always end and generally not well. In the case of the US economy, when the growth rates drop and the demographics of the US population turn less than favorable, the game is over unless we learn from the events unfolding in Europe.

The Price, Cost, Reimbursement, and Value quandary

Michael Porter and Robert Kaplan have written a piece on the Harvard Business Review entitled "How to solve the cost crisis in health care". http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1 The concepts cut to the basics of economics; scarce resources, optimal allocation, and incentives. One of the most basic tenants of business management is knowing what it costs to deliver a product or service. The health care is not equipped with the tools needed to really understand the costs of health care delivery.

Porter and Kaplan outline multiple reasons why this is the case, the major one being that health care accounting confounds charges with actual costs. While this approach worked OK when margins were huge and there was enough money in the system to allow for massive cross subsidies, we are no longer in a position to run such an increasingly expensive endeavor without  knowing what it costs to deliver any given service. Furthermore, any real attempts to actually measure value must take into consider actual costs of service delivery. It is easier for low cost interventions to meet the value bar than high cost ones. When you don't know the cost figures, any attempt to assess value is doomed from the start.

It seems remarkable that such an industry consuming more than 15% of GDP of the US can operate with such a rudimentary understanding of cost. From my perspective, this is a product of a mindset which permeates medicine which I can best term Medical or Health Care Exceptionalism. What I mean by this exceptionalism in health care is that it has been viewed as an industry that can and should operate outside of basic economic principles.  This perspective is deeply flawed. While the great wealth generating engine could spin off so much wealth in the US in the second half of the 20th century, we could live under this delusion. We now are faced with reality. Scarcity matters in all human endeavors, including health care. The health care industry, like all industries, requires resources, including people, who have choices and need to be given appropriate incentives to utilize scarce resources prudently. 

Porter and Kaplan's analysis also reminded me of the analysis of another Harvard Professor, Dr. Hsaio, developer of the resource based relative value scale (RBRVS). Both use a system of measuring inputs in order to accomplish some end in health care delivery. However, there is a huge difference in how they seek to deploy their information.  Hsaio developed the RBRVS as a tool to set payments to physicians. He conflated costs of inputs with actual value to patients. Porter and Kaplan promote cost analysis as an essential tool to define resources used, not value delivered. They look to use cost information to better utilize scarce resources, not administratively set prices.

Whether cost analysis is an essential step in defining value depends upon who pays for the services and what they are trying to achieve. In my opinion, value always needs to be defined by those purchasing the services. In the health care three way transactions, it will always be fuzzy as to who is the customer and who will be most pressed to measure value and deliver value. However, we should be in agreement that actual cost to deliver a service does not equal price of that service which does not equal the value delivered to the patient. If we can get past this confusion, we can  get our bearings and start to move in a direction away from the financial abyss.