A City of Two Tales - - Which One Prevails?

BOSTON - - In yesterday's Kaiser Daily Health Policy Report two columnists offered conflicting assessments of the state of Massachusetts.

In the first, Austin Frakt of Boston University's School of Public Health trumpeted the happy news that "the individual mandate requiring state residents to buy health insurance is working." He hopes that will give national reform advocates some confidence.

In the second, Grace-Marie Turner of the Galen Institute says "[i]f Massachusetts is a harbinger - - and all evidence indicates it is - - the new federal health overhaul legislation is headed for serious trouble."

You might be inclined to say, as if to children, "You can't both be right." But I think they are, though not to the same end.

Frakt's argument is quickly exposed as a farcical case of bootstrapping. He first asks "what does it mean for the mandate to 'work'?" He points out that the purpose of the individual mandate is to prevent adverse selection (which is true). And then answers his initial question by saying "the individual mandate is working because it is preventing a destabilizing level of adverse selection."

Adverse selection is when someone waits to buy insurance until they need it, and then drops it when they don't. When the government orders health insurers to issue policies to all buyers whenever and wherever they appear, people will stop buying insurance when they don't need it. (Which is, by the way, an entirely rational economic decision.) Frakt's solution, therefore, is for the government to further order people to buy health insurance even when they don't need it, thereby "solving" the problem which the government itself created to begin with.

That's a twisted definition of a "working" law if ever I saw one.

Turner, in stark contrast, looks at the big picture. Adverse selection is indeed occurring, she says (and as even Frakt admits), and it adds a point or so to premiums. Increased coverage has fueled increased demand for care, she points out, which is pushing up costs. Decreased availability of primary care has led to subsequent increased use of emergency facilities as a substitute, she says, pushing up costs even further. Because of the purchase mandate, providers have found their bargaining positions with insurers much improved, pushing up costs.

All of these cost increases translate (rather predictably, actually) into higher premiums. She sites a study from Stanford which found that since Massachusett's health insurance reforms were initiated, "premiums for private employer-sponsored health insurance in Massachusetts increased by an additional six percent in aggregate compared to the nation as a whole." And, she adds, "[i]t's even worse for smaller firms: Their health insurance costs grew 14 percent more than in the country as a whole from 2006 to 2008." Smaller firms have begun dropping coverage, relying instead on publicly-funded insurance for their employees.

I've seen no analysis that explains how or why federal reform should be different.

So yes, Frakt is right that a purchase mandate "works" to prevent adverse selection from completely destabilizing the market. Imagine for a moment you are on a plane, plummeting to the ground. As the oxygen masks deploy you put yours on and find that indeed it is "working." Take such "confidence" from that as you will.

Health Reform: Banking on Telekinetics - Part I

Now that the shock of having actually passed a health reform bill (if you want to call it "passing," it was really just "deemed passed") is wearing off, conversations seem to be turning more towards costs. The problem of uncontrolled costs persists, and threatens to break the bank if not the very back of the United States.

Happily, some very smart people are sporting their opinions about costs. One of them is David Cutler, the Otto Eckstein Professor of Applied Economics at Harvard University, who spoke recently at a symposium organized by the prominent journal "Health Affairs."

Cutler's take is this: health reform will bend the cost curve, "because it has to." So there. Take that, all you doubters and haters.

"Health reform will only be successful," he says in his symposium remarks, "if it can successfully bend the cost curve."

"If it can," he continues, "then we will be able to afford the commitments we've made under the legislation as well as the committments that were already in place through Medicare and Medicaid. And if we cannot bend the cost curve, then not only will the new commitments we made fail, but the older commitments to Medicare and Medicaid and a variety of other programs will fail as well. And we know that from look - - any cursory look at the federal budget will tell you that. So the success or failure of health care, and health reform, will be determined to a great extent by what this legislation does about cost issues." (Emphasis is mine.)

Agreed.

But if you were wishing Cutler would then proceed to explain why he thinks health reform will actually bend the curve, well, keep on wishing. Instead of talking specifics, Cutler jumps ahead to explain how you will know if health reform is in fact bending the curve: "I think the right way to view this now is not as a kind of, he-said . . . she-said or, or this-team-said . .. that-team-said in the sense of what is likely to happen," he said, "but what I want to do is leave you with the sense of 'how will you know when reform is actually working.'"

He then looks to industries outside of health care, and points out what makes those industries successful. If you see those things happening inside of health care, the theory goes, it means (one supposes) that health care is also becoming a successful industry - - one with "high value, low production costs."

Point one: Information Technology.
"Very successful industries use information technology a lot," Dr. Cutler says, "so they know what they're doing, who's doing it, why they're doing it, who's the right person to do it, how long it's taking, how much it costs . . . everything about the nature of production. Of course in health care the most interesting thing is that we know essentially none of that. And when we do observe it, we observe that it's bad."

Now one hopes it doesn't take a doctoral degree from Harvard to understand that IT can be a useful tool to manage production. Which leads one to wonder, why hasn't the production side of the health care industry already adopted IT solutions to reduce production costs? Especially technologies that have been around for a while and are proven value-adds?

One reason might be because they have no incentive to do so. In other industries, production costs translate directly into retail costs, and retail costs need to be justified in the harsh light of day both against consumer expectations (I'm paying $100 for THAT?) as well as against competitor prices (But I can get it at Joe's for $80!)

Unfortunately, neither of those two factors appear in the health care industry. Either the consumer/patient remains blissfully unaware of the actual retail price of the good or service they are obtaining, or the price is obfuscated by byzantine policies, procedures, and billing practices. "The system" usually shows you nothing, and when it does show you something what you see is a Gordian knot. To top it off, if there is a third party payor involved (private insurance, Medicare, etc.) there is no need for either the hospital or the patient to rationalize the price, because it's someone else's money being spent.

In that basic environment, "cost-cutting" means only reducing your revenue and "productivity gains" means only staff-cutting. Neither of those things would make a hospital CEO very popular, especially the latter, especially in smaller communities where the hospital is likely one of the very few stable employers left in the area.

Take, for example, bar codes. Reading, for example, McKesson's summary of the "glacial" progression of bar code technology in the health care industry (see Appendix B of the target document) is downright depressing. Following adoption of the "uniform product code" in 1972, US grocers began adopting point-of-sale bar code systems "en masse." Throught the 80s, other industries "began leveraging bar codes for unprecedented efficiency gains." Not so health care. Come 2003, there is still more foot-dragging than progress despite proven benefits of bar-coding in terms of efficiency and patient safety.

So what is changing about that basic environment to provide an incentive for health care producers to adopt IT solutions? Nothing, so far as I can tell. And as any IT consultant can tell you, American businesses are full of IT products that were purchased and never implemented, or implemented and later abandoned. If there's no good reason to use the product, it won't be used.

Under Dr. Cutler's theory, if we look at the health industry and we see that it has finally gone mainstream on bar-coding, does that mean health-reform is working? Well, if your employer told you he was getting your computer up-to-par by mid-80s standards, would you be pleased about that? TRS-80, anyone? I didn't think so.

Once the incentive money to buy electronic health records, for example, runs out, nothing about the health care industry's basic environment will draw its major players either to spend the money to upgrade the current technology, or to adopt the NEXT technology - - the technologies that other industries are developing and adopting NOW to boost their productivity and cut costs. The result: a health care industry that is perpetually 20 years behind the times and experiences technology adoption if and only when massive government spending and perhaps a mandate or two is involved.

How successful do YOU think such an industry will be at controlling health care costs?

You Can't Get There From Here

Imagine your car has a bit of a snuffle, so you take it in to your friendly neighborhood auto mechanic. He throws the car up on a lift, pokes around under the chassis, then puts it back down.

"I don't see anything wrong from here," he says, "but I need to put it on a diagnostic machine to check the computer."

"Great," you say naively, "do it."

"Can't," he says. "It's against the law for me to own a diagnostic machine."

"Why?" you ask.

"Because then I might run your car on the diagnostic machine and charge you for it even if you really don't need it."

"Oh," you say. "But you might also decide to throw in the diagnostic run for free as part of your overall service."

"Can't." he says. "It's against the law for me 'throw in' anything for free."

"Why?" you ask.

"Because I might try to 'throw in' a bunch of stuff you need for free in order to lure you into buying even more stuff that you don't need."

"I guess," you say.

A week later you go back to your mechanic with the diagnostic report. He tells you that you have a bad valve which needs to be replaced.

"Great," you say, "replace it."

"Can't," he says, "It's against the law for me to do valve replacements here."

"Why?" you ask.

"Because I might try to con every customer into getting a valve job done even if they don't need one."

"But that's someone else's problem," you say. "I actually need one, and now I have to go somewhere else and pay someone else's overhead - - in addition to yours - - in order to get the job done?"

"That's right," he says. "And the state keeps a strict lock on who actually gets to do valve jobs."

"Why?" you ask.

"I'm not really sure," he says. "I think they want to make sure the people who do valve jobs are really good at it."

"I see," you say, "but that means they can charge whatever they want."

"Basically, yes," he says.

"And there isn't anywhere else I can go?"

"Nope," he says.

"So I'm forced to pay higher prices, to multiple people - - each of whom get their profit cut - - plus suffer the inconvenience of trotting all over town, in order to get a procedure done that you're perfectly capable of doing here all on your own, right now?"

"That's right." he says. "And the law says it has to be that way."

"The law should change," you say.

"Good luck with that," he says.

Happily, such is not the state of auto care. You go to the shop, they put your car on the lift, they run the diagnosis machine, they fix the car, you get it back the same day. Not that the service shop doesn't make money, that's a given. But that's OK, it's an expected part of the deal. What's not expected is that you will have to pay for three or four or seven profit margins instead of just one, or have to spend an extra week or two or three and a lot of hours running around to get it done.

But such is the state of healthcare, for two reasons. One, the third-party, fee-for-service reimbursement model that predominates the industry creates an incentive for providers to deliver care that is not really necessary (or at least is only arguably necessary). Second, arcane laws that were designed to offset that incentive (by paternalistically substituting the state's judgment for the patients) force the sort of fractured and siloed care delivery models that nearly everyone complains of. (Those that wrote the law don't complain. They are the only ones that do not.)

The health reform bills did nothing to address the second of these reasons and both expanded and perpetuated the first, and that by leaps and bounds.

Imagine a market landscape where health care providers could spend their time dreaming up ways to make it more convenient and less expensive for patients to get the care they need. As it is now, providers are forbidden from exploring most alternative delivery means, and are rewarded only for dreaming up new ways to get more money from third party payors.

Cheap and convenient one-stop-shopping? It would be great, but you can't get there from here.