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November 17, 2010

“Mayhem” – How Much of Health Insurance is Insurance?

Filed under: Healthcare — Steve Krupa @ 12:12 pm
Tags: , , , , ,

Do you know Mayhem?

He’s a new character played by Dean Winters in a recent run of pretty-damn-funny Allstate commercials.  Check this one out (< 30 seconds).

You see, before you (the driver) caught sight of the hot babe in the awesome pink headband you needed adequate property and casualty insurance to protect you from the distraction that caused you to drive into that light pole.  However, in the immediate moment after you drove into that light pole, you did not need insurance, because its cost would have been exactly equal to what you really need, which is a new car.  Insurance is valuable to you before you run into Mayhem when its price (the insurance premium) is considerably less than the consequences of Mayhem, or in this case, the cost of a new car.

The cost of insurance is much less than the cost of Mayhem because of pooled risk.  Lots of other easily distracted drivers bought car insurance too but most of them managed to veer away from the light pole at the last-minute, avoiding damage, thus providing you with a pool of funding to buy a replacement car after the accident.  Pooling the risk of low-probability high-cost events makes insurance a very valuable product for all purchasers in their effort to protect themselves against Mayhem.

In the health insurance market Mayhem represents the possibility we might get sick, which we know can be very costly.  Very good drivers can drive into light poles.  Similarly very healthy people can require health insurance to pay for unexpected costly medical procedures.  But either way, the fact that the costs are unexpected makes an event insurable at a price significantly less than the cost of the event.

Someone who is sick and is not insured does not need health insurance; they need to be provided with healthcare.  Including someone who is already sick in an insurance pool is the same as including you in an automobile insurance pool after you drove into the light pole.  The event is no longer unexpected, and so your individual premium, which is the cost of your new car, will be spread among the members of the insurance pool, the economic equivalent of your passing a hat around and collecting enough money to pay for your car – in this instance you are not being insured, you are being subsidized.

A type II diabetic with health insurance that covers the costs associated with diabetes is being both insured for the incidence of diseases other than diabetes and subsidized for the known costs associated with diabetes.

Continuing with our property and casualty analogy, consider flood insurance.  There is a much higher probability of Mayhem occurring at a property located on a riverfront than for a property located on a hilltop miles from the water, and, as such, it costs much more to purchase flood insurance for riverfront property.  I wonder, is this fair?  Would we all stand up for a homeowner’s right to live by the river and insist that the unit price for all property insurance be the same regardless of where the property is located?  If we did the cost to insure waterfront property would reduce and the cost to insure the hilltop property would increase, effectively subsidizing riverfront home ownership.  Now, is that fair?  If we were to subsidize anything shouldn’t we instead subsidize safe behavior, a la, living away from water and well above sea level?

A seemingly healthy person with an unhealthy lifestyle that receives health insurance at the same price as people with healthier lifestyles, as is typical in most Group Health insurance models, is being subsidized for the higher probability of Mayhem.

Insurance markets, left to their own devices, are awesome at pricing risk and incentivizing safe behavior (we all know your premium is going up after you file your auto insurance claim for driving into that light pole).  However they (insurance markets) don’t handle subsidization well at all.  If subsidization is going to be required, then it must be structured by forces outside of the insurance market.

The Group Model of health insurance, which is used in the market for corporate-based insurance, is one such structure.  If you work for a corporation and you are receiving a health insurance benefit from your company, you most likely pay the same per member cost as everyone else at your company.  This is done by pooling both the risks and the subsidies.

Clearly the pooling of subsidies creates fertile ground for Moral Hazard, a phenomenon discussed frequently here, but curiously left out of much of the discussion regarding the problems of health insurance, particularly when the subject is healthcare reform.  Healthcare reform claims to be insurance reform, but in fact insurance is insurance – if you have a pre-existing condition you cannot be insured for it because it is already there (your car has hit the light pole).  At the public policy level “healthcare insurance reform” as it is defined within PPACA, is the regulation of the portion of health insurance that represents subsidies and their funding.

All other things equal, an increase in the probability of Mayhem (more unhealthy people) and the expansion of subsidies into the insurance pool (the insuring of more sick people) will cause proportionate increases in health insurance premiums.  On this basis alone, the provisions of the health reform bill are unquestionably inflationary w/r/t insurance premiums.  Count on it.

As a greater portion of insurance premiums represent subsidy, the role of the health insurer has to change from one of underwriting risk, i.e., pricing the probability of Mayhem, to managing risk, i.e., working to reduce the cost of known conditions within the insurance/subsidy pool, the latter requiring a substantially different set of skills than the former.  This transformation of the health insurance industry was already under way prior to the passage of PPACA (our healthcare reform law), as corporations began requiring risk management programs from their insurance companies.  Without this transformation, healthcare inflation is destined to sustain at its current levels, probably for eternity, or at least until the increases in the prevalence of chronic illnesses and the probability of Mayhem achieve some steady state, which with the baby-boomers now reaching 65 years-old will not occur anytime soon.  Regardless of who “pays” for the insurance/subsidies the costs of healthcare are going up, up, up, until the system shifts toward a structure where patients, payers and providers are economically accountable for managing risk.

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September 24, 2010

Talkin’ Health Insurance Rate Increase Blues

 A super-enormous spending bill gets press attention, so I’ve been talking with the media these days (1) regarding recent health insurance premium rate increases following the enactment of health reform, which is estimated to cost approximately $250 billion per year once fully realized.  While rate increases by Aetna and certain Blue Cross and Blue Shield plans correlate with the recent passage of health reform, it is hard to believe health reform is the cause, at least not entirely.  The fact is that health insurers have been raising premiums at hard-to-believe rates for well over a decade.  The primary cause then and now is runaway healthcare inflation.  It is true that for the most part insurers, like any other business, look to maximize profits, but most markets for health insurance are extremely price competitive.  Generally it is the increase in expected medical expenses that drive rate increases, and unfortunately demand for medical care has been increasing at approximately 3x the rate of general inflation.  From what I can tell this will continue forever until fundamental structures in the healthcare system change, so expect ongoing rate increases from insurers to persist, despite the political pressure.

A recent study by the Kaiser Family Foundation, while subtle in its presentation, is astounding in its exposition of runaway medical inflation’s impact on health insurance premiums.  Take a look at the charts below.

       

Compounded Annual Growth

   

Absolute 10 Year Growth

Total Health Insurance Premiums   7.8%   114%
Employee Contribution to Insurance Premium   9.5%   147%
Employer Contribution to Insurance Premium   7.3%   103%
US Inflation   2.4%   26.8%
US Real GDP (2000-2009)   1.6%   15.3%

From just this small amount of data it is clear that health insurance premiums have been sky rocketing for almost two decades.  US inflation averaged 2.4% per year, while health insurance inflation has averaged 7.8% per year, with the brunt of this premium increase being absorbed by employees at an average rate of 9.5% per year.  Wage increases have essentially kept up with inflation, meaning the annual disposable income of the average insured family, in real terms, was reduced by nearly $2,000 over the past decade as a result of medical inflation.  W/r/t employers, their bills rose at 7.8%, about 3.25x their ability to raise prices.  Result: employees and shareholders are getting squeezed.

Why so much medical inflation?

There are lots of little reasons that emanate from one major trend: we (the US and its medical profession) keep getting better and better at keeping people alive.

There are many definitions of the word “doctor,” the most relevant to understanding medical inflation being (from MWD – free version):

Doctor : (n) a person who restores, repairs, or fine-tunes things

Today there are an astounding number of ways to restore, repair and fine-tune humans. “Take two aspirin and call me in the morning” is all but gone.  We now understand thousands of causes of the headache, from too much protein in the diet, to brain tumors, to meningitis, to stress, to something called Syringomyelia ($1 to the first reader that knows what this is, and no fair if you are Neurologist), and so on. 

We now know so much that we are increasing exponentially the things that doctors can restore, repair and fine-tune, creating treatments for ailments, many of which were once life-threatening that are now survived regularly, leaving us with an older and sicker population that costs more and more to fine-tune every year.  In short, much of our medical inflation is a symptom of our amazing technology and our wealth.  Modern medicine, while an awesome exposition of human inventiveness, is slowly and steadily eating away at the more productive sectors of our economy that created the means for such inventiveness in the first place.

Will it end?

If the “it” is invention, the answer is clearly no.  We will forever be extending our life expectancy and reducing the health and fitness levels necessary to achieve it.  Medical invention will not be stopped.

If the “it” is medical inflation, the answer is not anytime soon.

Much of the healthcare chat on this blog, and that of my business partner Lisa Suennen, involves the many structural changes that must take place within the healthcare economy in order for medical inflation to come under control without the government resorting to over-reaching measures like rationing of care and reimbursement controls.  Many changes are underway, and everyday we meet new companies designing new systems and technologies created to both reduce healthcare costs and improve quality.  Unfortunately it will be many years, perhaps decades before the healthcare system begins to function primarily around a cost/quality paradigm.  I would look for measureable changes in the following areas before expecting any meaningful downward shift in the medical inflation trends:

  1. Patients evolve toward more active, cost and quality conscience consumers of healthcare and health insurance.
  2. Insurers evolve to managers of health risk rather than pure underwriters.
  3. Providers evolve their business models from a strict fee-for-service reimbursement model to a more pay-for-performance model, like most advanced industries (will doctors offer one-year warranties? – why not?).

 Such an evolution spawns subsets of ideas like wellness, care management, value-based health insurance, healthcare information exchanges, insurance exchanges, provider pricing based on quality scoring, telemedicine, and on and on.  I have been and will be discussing them all with the understanding that without meaningful progress medical inflation is here to stay.  Expect it (healthcare inflation) to continue at about 8%, so in 5 years our average family will cost about $20,000 or more a year to insure.

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 (1) Here are a couple of links.  First an brief piece on medical inflation from TheStreet.com along with a podcast interview (download the podcast titled “Best (and Worst) Bonds, Insurers and Obama, Gold’s Rush” – my segment comes in around the 23:00 mark).

August 4, 2010

PPACA and the Medical Loss Ratio

 

The role of the health insurance company is changing rapidly, accelerated by many of the provisions in PPACA, including new regulations regarding Medical Loss Ratio.

What is Medical Loss Ratio?

One of the key tenets to healthcare reform is the requirement that health insurers maintain a minimum Medical Loss Ratio, which historically has been defined as the ratio of medical expenses to total insurance premiums (it should be called the medical expense ratio, but claims expenses in the insurance industry have been called “loses” since, well,  forever, and hence the convention sticks).  Insurers that fail to achieve a minimum MLR, expected to be somewhere in the range of 80-85% depending on whether the plan is large group (85%) or small group/individual (80%), will be required to provide a refund to policy holders.

Some numbers, please…

Suppose that in a given year a health insurer has 20,000 members that are charged an average premium of $4,800 per year ($400 per member per month or PMPM in industry parlance), equating to Annual Premium Revenue of $96 million per year.

If the regulated MLR is 85% the amount of money this health plan is required spend on medical expenses equals $81.6 million per year (85% of $96 million).

Suppose it turns out that medical claims actually equal $74.8 million or 78% of premium for that year.  Prior to healthcare reform the excess $6.8 million would be considered profit for the health insurance company.  Under reform the $6.8 million must be refunded ratably to the policy holders for that year, resulting in an average rebate of  $340 per member ($6.8 million divided by 20,000).

If the opposite occurs and medical claims are $88.4 million (92% of premium), the insurance company covers the $6.8 million shortfall out of its capital (profits).

This brief, simplified example illustrates an important aspect of MLR regulation, it effectively eliminates any potential for unexpected upside to the health insurer for underwriting the risk.  If the insurer does better than expected, i.e., the MLR is low, the excess profits inure back to the policy holders.  This has similarities to the model of a mutual company, wherein the policy holders are actually owners of the company, without the downside of unexpected losses accruing to policyholders.

Purpose

The purpose of Minimum MLR is to regulate the “value” provided by health insurance companies.  The theory is an insurance company provides greater value to its policyholders when a higher percentage of premiums is used for healthcare costs, versus, say administrative expenses or profits.  By demanding a minimum MLR legislators and regulators believe they are protecting consumers from potentially uncompetitive or collusive insurance markets, among other things.

Issues Arise

This regulation presents a myriad of issues, some of which are actuarial, but most of which derive from the definition of Medical Expense.  The exact components of Medical Expense are left to HHS to decide, but PPACA (specifically Sec.2718. BRINGING DOWN THE COST OF HEALTH CARE COVERAGE) does provide some guidance, declaring Medical Expense to be equal to (paraphrased): (i) reimbursement for clinical services provided to enrollees plus (ii) costs for activities that improve health care quality.  It is very clear what (i) above means, i.e., the money paid for medical claims.  It is in (ii) where the debate begins.

Defining “Costs for Activities that Improve Health Care Quality” will be left to the bureaucrats, and from what I can tell they are taking an open minded approach to the types of services that will be included.  Over the weekend the Wall Street Journal published an Op-Ed piece by Newt Gingrich and David Merritt titled Who Decides on Health-Care Value? (New rules to micromanage insurance companies could cost patients).  I present it to you not as a position that I support but rather as an introduction to the debate on this subject.  Please give it a read (along with some of the comments, pro and con) and I will come back to this subject soon to take a look at some of its ramifications for investors in the healthcare sector.

July 6, 2010

Inside Value-Based Healthcare – Part 2: Who Pays for Health(care) Insurance

In my previous post, Value-Based Healthcare Part 1, I talked about the two primary business risks faced by insurers, Moral Hazard and Adverse Selection.  Recall that for health insurance markets to work effectively they must be structured to mitigate Adverse Selection (i.e., the reality that the very fact that someone is seeking insurance might make them uninsurable in the first place).  This means that the healthiest people must stay in the market as part of the risk pool, otherwise the underwriting will not work at affordable premium rates.  As such, employer-based Group Model health insurance has evolved as the prevalent distribution method.

So who pays for employer-based health insurance?

Today health insurance costs average about $4,800 per person per year.  While this expense is paid for by employers, it is essentially part of salary costs, and so it is really money that would otherwise be paid to employees were it not for the mandatory participation required in most Group Model plans.

Employers offer to buy the coverage on behalf of employees because they believe that having their employees insured improves productivity and it is viewed by prospective employees as a competitive perk.  This works out well from a risk pooling perspective, making Group Model insurance less expensive on average.  But what really drives the Group Model is its income tax subsidy.  The federal government does not assess income taxes on the value of Group Model health insurance (this subsidy does not exist for individual purchases of health insurance).

This tax subsidy is massive.  The average employee is in the 25% federal income tax bracket, making the subsidy worth about $1,200 per year (25% of the $4,800 average annual premium).  Approximately 180 million people participate in Group Model plans, meaning the total amount of this annual subsidy is about $216 billion per year.

So who pays for employer-based health insurance?

According to these calculations 180 million employees cost a total of approximately $864 billion, $648 billion is paid for by employees through payroll deductions and about $216 billion is paid for by the federal government through income tax subsidies.  These amounts exclude out-of-pocket expenses, which are by enlarge paid for by employees.

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Let’s get back to Moral Hazard.

Have you ever noticed that people are very hesitant to make claims on their automobile and property insurance?  Rarely do the costs of minor fender benders result in an insurance claim.  Why?  Because people fear that claims on their auto policies will result in either their premium increasing or their policy getting cancelled.  People tend to reserve that type of insurance for major catastrophes, paying the cost of minor accidents out of their own pockets.

Most people do not behave this way when it comes to health insurance.  A very high percentage of healthcare expenses become insurance claims.

Few people lose their insurance because of high insurance claims.  As claims increase, the burden of the higher premium is shared among the risk pool.  As a result, Moral Hazard (changing your ethics because you don’t pay for the consequences of your bad behavior) in Group Model plans is severe, and many believe it contributes significantly to the 8-12% average annual healthcare inflation rate.  Despite the reality that employees pay for more than 75% of the cost of their health insurance, they are fearless when making insurance claims.

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So, returning to the thread that ended Value-Based Healthcare Part 1.

Employer-based health insurance suffers from Moral Hazard.  Despite the fact that it seems obvious that employees pay the most of the tab, the cost is not individualized and the consequences of bad behavior are not perceived as even remotely severe.

Research backs the notion that when an insured party pays a higher percentage of the total cost of the service Moral Hazard reduces.

So the question becomes, if we are looking for an employer-based health insurance model that will counter increased healthcare consumption why not just increase the out-of-pocket payments and reduce Moral Hazard?

In some cases higher out-of-pocket costs can lead to Unintended Consequences, namely people forgoing necessary treatment.  For example, the medicines necessary to treat Type-2 diabetes are much less expensive than the costs associated with the side-effects of untreated diabetes like heart attack, stroke, amputations, blindness, etc.  A health insurer wants Type 2 diabetics to take their medications, however high out-of-pocket charges often impose barriers to compliance.

Medications like Glucophage, a treatment for Type 2 diabetes, have a high value.  The treatment costs about $400 per year, real money for an individual, but a small investment for a health insurer given that compliance with the drug should mitigate a number of side effects of Type 2 diabetes, saving money on hospitalizations and other forms of expensive healthcare.  Further, Type 2 diabetics should see podiatrists and ophthalmologists regularly.  Again, high co-pays for these services could mitigate compliance and increase adverse events within an insured diabetic population.

Value-Based Healthcare: Definition #2:

Value-Based Healthcare involves designing insurance benefits with economics that encourage (or remove the barriers to) the utilization of high-value healthcare services.

So why is Value-Based so new?  What are the barriers to implementing Value-Based?

These questions will be covered in future posts.

To leave you with something to think about, it was only until recently that the information technology necessary to begin experimenting with the implementation of Value-Based Healthcare became available.

June 25, 2010

Inside Value-Based Healthcare – Part 1: Moral Hazard

Value-Based Healthcare.  There, I said it…

I had fun on Wednesday sitting on the healthcare reform panel at the Dow Jones Limited Partners Summit.   The conversation centered on investment trends in healthcare as updated for the passage of PPACA, during which I blurted out the concept of value-based healthcare, a pretty complex and to some extent novel concept, and a cornerstone to many of Psilos’ VC investment strategies.  This was subsequently reported, and to Jennifer Rossa’s credit, she provided enough detail around my comment to correctly convey the concept.

There are important nuances, however.  This post is the beginning of a series that will explore the ins-and-outs of Value-Based Healthcare.

Value-Based Healthcare: Definition #1:

Value-Based Healthcare, or more specifically, Value-Based Health Insurance Design, its sobriquet being simply, Value-Based, intends to mitigate the Moral Hazard inherent in low cost-sharing health insurance coverage.

If we were to take an insurance or advanced finance class together we would spend a lot of time talking about Moral Hazard and Adverse Selection, the two primary business risks that underpin managing financial institutions, insurance companies and banks included.  Failure to manage these risks properly can lead to disaster (in fact, recently Moral Hazard and Adverse Selection got the better of the mortgage banking business, a primary cause of the financial crisis).

Moral Hazard reflects the reality that a party insulated from a risk (like an insured or a borrower) will behave differently than if it were fully exposed to the risk.

Adverse Selection reflects the reality that the very nature of a party’s desire to seek insulation from risk reflects a greater risk of loss.  For example, parties that are either sick or expect to get sick have a higher demand for health insurance.  Similarly, parties in the market for a mortgage that have a concern that they may default are more attracted to low-down-payment mortgages.

Underwriting models are designed in part to set prices to countervail the risks of Moral Hazard and Adverse Selection.  This is more easily accomplished in an underwriting model where each policy gets priced individually, like automobile insurance.  In this model individuals are placed in broad price cohorts based on age, gender, style of car, etc., and then adjustments to the policy price are made based on individual attributes like historical driving record.  Moral Hazard and Adverse Selection are less prevalent in insurance markets where policies are individually underwritten and where the underwriter will be the party that ultimately pays the claims on any policy.  Absent these conditions the risks of Moral Hazard and Adverse Selection will always be lurking.

Such is the case in the current market for employer-based health insurance (also called Group Model health insurance).

Let’s start with Moral Hazard.  Today many employer-based health insurance models feature low cost-sharing, meaning that patients pay a very small amount of the health resources they consume.  Here the economic question is whether the value of a healthcare service exceeds the out-of-pocket cost to the patient, which is a small fraction of the actual costs.  Moral Hazard comes into play because the insurance insulates the patient from full payment, thus altering behavior toward increased healthcare consumption, a phenomenon some believe is encouraged by the fact that providers (doctors and hospitals) are generally not at risk either and are paid on a fee-for-service basis.

Consider what might happen if the out-of-pocket costs to the patient were raised.  In insurance markets where patients could opt out and choose not to buy insurance, an increase in out-of-pocket costs would certainly result in some people, probably the healthiest, declining coverage.  This would cause premiums to rise, because the insured pool would be sicker on average, causing more of the healthiest people to decline, increasing the risk of the pool, increasing the premiums, and so on, into an Adverse Selection spiral.

In health insurance markets we need the healthiest people to stay in the market in order for the underwriting to work at reasonable levels of insurance premium.  This is one of the reasons why health insurance is provided by employers.  Employers, or coalitions of employers, are able to deliver large enough populations of sick and healthy people for the underwriting to work.  The participation of large numbers of employees mitigates Adverse Selection and as a result many large employers choose to self-insure (tax incentives is another reason employer-based health insurance dominates – more on this another time).

Nonetheless, in employer-based health insurance we are still left with Moral Hazard, and research seems to back the notion that its degree is inversely correlated with the percentage out-of-pocket paid by patients (low out-of-pocket = high Moral Hazard = high healthcare consumption).

So the question becomes, if we are looking for an employer-based health insurance model that will counter increased healthcare consumption (and believe me, we are), why not just increase the out-of-pocket payments and reduce Moral Hazard?

It turns out not to be that simple.  Please give this some thought and we’ll dig a little deeper next time…

June 15, 2010

President Bill Clinton at AHIP

Filed under: Healthcare — Steve Krupa @ 4:02 pm
Tags: , ,

 

This was my third time seeing Citizen Bill Clinton speak publicly. The first was at the American Red Cross Centennial Ball in October, 2005, a few months after the disaster that was/is Hurricane Katrina; the second was on-site in New Orleans, along with Bush Sr., in May of 2006.(1)  Over the past four years, and much to his credit, Clinton has honed a consistent message, one he is assured to deliver, regardless of his audience’s predilections.

AHIP (America’s Health Insurance Plans) is a collective voice for almost 1,300 health insurance companies, a lobbying group that holds an annual convention and trade show designed to address the pressing issues of and the new technologies/businesses in the health insurance market.  AHIP states that one of their major policy goals is to expand access to high quality, affordable coverage to all Americans, yet it is clear that the AHIP collective was one of the many losers in the recent policy debate regarding PPACA (re: our new healthcare reform law), with their only major policy win being, in my view, the elimination (delay) of the “public option” from the enacted law.

It’s a nice position in life to get paid handsomely to address former foes.  No doubt many members of the AHIP collective had much to do with President Clinton’s own form of healthcare reform failing in the first half of his first term (1992-94).  Putting its primary content aside for just a moment, Clinton’s speech was peppered with two wheedling, audience-specific themes: the first, an invocation of thanks to the AHIP collective for supporting healthcare reform, or the rhetorical equivalent of praising someone for handing over their wallet while being held at gunpoint; and the second, a win-one-for-the-Gipper pep talk praising AHIP’s members as the chosen few who know that improved healthcare quality and lower healthcare costs can coexist, a sentiment that I know from first hand experience many of the AHIP collective struggle to affirm.(2)(3)  By injecting these two themes into what was essentially a speech outlining Clinton’s view of the world’s humanitarian challenges, the ex-president succeeded, brilliantly I believe, in conveying the following message, like it or not: we are committed to making things more equal in the world (the US included); healthcare reform is one step in that direction; and, as part of the process, we are offering you a second chance to re-build your industry around the needs inherent to this objective.  There was no gloating, just a warm embrace and a subtle nod or two – folks please get with the program and get it together – all this for the standard public appearance fee of the popular ex-President, which sources state range in the area of $150,000.

It’s also a nice position in life to do what you want to do and talk about what you want to talk about.  In terms of air time, Clinton’s cajoling served as mere tasting notes to a speech primarily concerned with his current world view and its alignment with the work of his William J. Clinton Foundation (a nongovernmental organization with over 1,100 staff and volunteers in over 40 countries).  A few notable points from his speech, titled Embracing Our Common Humanity, include:

  • The belief that the past decade of crises and changes in the US economic system, up and to the recent (current) recession, has alienated white non-college educated males in the US, who as a group are struggling for hope and optimism and are one of the primary sufferers of the massive unemployment trend.
  • That there is an underlying fear that America, a historical underdog turned post-WWII perennial favorite, may not be winning anymore, as developing countries like Brazil, Russia, India and China challenge our economic supremacy and terrorism challenges the capabilities of our military.
  • That the world is an incredibly interesting place where we continue to advance beyond our imaginations, noting in the years since his first taking office as President: the evolution of cell phones from a 5 lb device to today’s smart-phones accessing a pervasive Internet; and the advancement in genetic engineering to our current realization of synthetic organisms (to list just a few).
  • That despite the world’s being an incredibly interesting place, we still have trouble dealing with three major problems: (a) instability; (b) inequality and (c) climate change (and here I note that these three challenges line-up with many of the Clinton Foundation’s programs including his work to rebuild (or build) Haiti and to reduce global greenhouse gas emissions, the latter of which he believes is a cause to the current climate change).

With respect to healthcare reform specifically, Clinton acknowledged that the law is a vague beginning that is reliant on a second phase of specific programs.  These programs will have to address the real issues of cost and quality that he knows AHIP’s members understand, but that are not clearly understood by the public at large.  According to Clinton, making the new healthcare law work requires innovation, an American specialty that will bridge the gap between “what the government can provide and what the private sector can [currently] produce.”

Notes:

(1) For a transcript of Clinton’s May 2006 speech in New Orleans, click here, and for a transcript of George H.W. Bush’s speech at that same event, click here. Both are short, sweet and excellent, with Bush Sr. winning over the day despite Clinton’s rock star status with the Tulane student body.

(2) The belief that quality healthcare can be delivered at a lower cost is one that many people, not just insurance executives and underwriters, struggle with, especially consumers (patients). Generally, many patients find evidence-based medicine terms like “quality guidelines” and “quality standards” confusing and continue to believe that more and newer care is best. Patients are also reluctant to believe that their doctor could provide anything but sound medical advice.

(3) The vast majority of the new businesses exhibiting at AHIP have as their very purpose improved quality and lower cost.  Our insurers’ skepticism resides in a history of failed attempts at accomplishing this objective on a broad scale.  As I have noted many times in this blog, this objective can be met within subsets of the healthcare economy today. Broader deployment is the challenge and necessity presented by PPACA, a law that will financially bankrupt the US without massive improvements to the cost-quality relationship in healthcare.

April 15, 2010

I Want My Mobile Healthcare (Part 1 of many)

I have long avoided investment in mobile healthcare applications, but I am afraid the time has come to reconsider.   

from the Economist, "Wireless Health Care"

For a long time my pessimism has been propped up by the debacle of e-prescribing (now referred to as mobile Rx or mRx).  In the venture business sometimes you show your chops by what you avoid.  From 1999-2003 we looked at almost every opportunity in the mRx space, but ultimately never pulled the trigger on an investment.   

In that period of time huge amounts of capital went into at least 15 mRx start-ups, with the 5 best-known companies raising over $170 million in venture capital (recall names like: Parkstone, ePhysician, iScribe, and Pocketscript), with only ePocrates (VC-backed) and Allscripts (public company) emerging as survivors, but hardly successes with a pervasive mRx product.   

The idea of mRx is simple.  Doctors prescribe medications using a mobile device.  The mobile device runs a series of applications that confirms the appropriateness of the drug and the dosage and checks for any drug-drug interaction problems for the patient.  If all clears, it sends the script to the pharmacy for fulfillment.  The patient shows up, picks up the initial script, and down the road the doctor can be prompted for renewals delivered by mail order.  The benefits are:  (1) less prescribing errors – which saves money on waste and the potential bad outcomes related to improper medicine and (2) time efficiency for the doctor, the patient and the pharmacy.   

In 1998 mRx ran on PDAs (Palm Pilots – remember those) and today it runs on smart phones.  The application is simple at the mobile device, but super-complicated as an interface.  The number of multi-system interactions necessary to accomplish a transaction are fantastic in number.  We stayed away from the opportunity for precisely 2 reasons:  (1) PDAs were just not that pervasive in the medical community, and frankly the wi-fi capability felt clunky and slow and (2) we just could not quantify the cost of building the systems necessary to interface with the pharmacy, PBM (pharmacy benefit management), Health Plan and provider IT systems, almost all of which were not web-services enabled.

But the times are changing…

Mary Meeker (equity research analyst at Morgan Stanley), predicts that mobile Internet usage is growing so fast it is bound to surpass desktop Internet usage by 2013-14 (chart below).    

 

(For access to all of Ms. Meeker’s presentation, which is very interesting, click here)

Fred Wilson, a leading edge IT VC and Twitter investor, blogged earlier this week about the ascension of social networking platforms like Facebook and Twitter over general email as the leading communication platforms on the Internet (again, see Morgan Stanley chart below).    

Pithiness and convenience drive much of Twitter’s appeal and its seems we are beginning to see a training ground for mHC emerge, where short, precise interactions will serve as the basis for successful applications, particularly in the area of remote patient monitoring, which I see as one of the more interesting areas of mHC from a return on investment standpoint.   

With the mobile market now beginning to make sense, the question turns to whether the HCIT infrastructure is ready for mHC.  Generally the answer is probably no, but recent trends, including the government’s proposed HC reforms, seem to be on track for stimulating changes in this area.

As we all know there are numerous conflicting issues and confusion around the HC business, including the now imminent expansion of the Department of Health and Human Services (HHS) as the next super-big Washington bureaucracy.  With a little help from consultants and attorneys I am in the process of reading and analyzing our new healthcare law (a/k/a  HC Reform which includes, for our purposes here, the Patient Protection and Affordable Care Act -PPACA or HR 3590 – plus the Health Care and Education Reconciliation Act – HCERA or HR 4872 plus the Health Information Technology for Economic and Clinical Health Act – HITECH ), and I promise to begin publishing my cheat sheets soon.  But so far it seems that HC Reform has the potential to revolutionize HC IT as we know it, an attribute that may countervail the financial crisis spawned by its passage.

Many a future post will deal with the details of this idea (revolution, that is), but generally I believe that HHS reimbursement policies, which under HC Reform are expected to revolve around proper care coordination among primary care, specialist and hospital-based providers, will demand smart applications running accross seemless connectivity among HCIT systems.  This means that existing legacy system configurations will not survive the transition to HC reform because they will need to be replaced with Services-oriented architectures (SOA) that enable low-cost web-services and data transfer.  Once this transition gains steam (and it is already happening at the payer level of the value chain), mHC will be set to explode. 

Please note that when I reference mHC I am really not focused on the consumer market for mHC applications (these are cute and I will talk about them soon).  I am interested in applications that link patients, payers and providers in a way that optimizes HC economics and outcomes.   

In upcoming posts on this subject I will begin to explore specific mHC applications, among them remote monitoring of the chronically ill and care coordination among providers, and whether the timing is right for venture investors.

April 5, 2010

The Genius of the Healthcare Consumer

On 3/23/2010 in my post, A First Reaction to Our New Healthcare Reform Law,  I wrote that an engaged and accountable consumer would be a necessary element for universal coverage to work. 

Of course, consumers are always “engaged and accountable,” most notably to themselves, and so, I went on to say parenthetically that HC should not be perceived as “free” or a “right,” but as a cost/liability managed by the collective diligence of individual beneficiaries (and I point out here that often some of my better points end up inside parenthesis).

So what did I mean by this?  Well, check out what is claimed to be going on in Massachusetts, as reported by today’s Boston Globe in a piece titled, Short-term Customers Boosting Health Costs:

“Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage…  [According to Blue Cross Blue Shield of Massachusetts] the typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month…  The problem is, it is less expensive for consumers — especially young and healthy people — to pay the monthly penalty of as much as $93 imposed under the state law for not having insurance, than to buy the coverage year-round.”

Here we again have individuals acting in their self-interest, something we have been able to predict perfectly since the origins of economic theory.  The Bay State healthcare law contains perverse incentives and consumers are exploiting them to the detriment of the collective goal.  No doubt, this behavior will be a cause for premiums to rise unless incentives are altered.

Ideally, self-interested consumer behavior, which is a given in all cases, should be leveraged to improve quality and lower cost in HC.  This requires that all individual consumers have a direct economic stake in HC costs.  That is not the case in HC today and it will definitely not be the case under our new reform law, which contains the same moral hazard problems as the Massachusetts law.

March 23, 2010

A First Reaction to Our New Healthcare Reform Law

Getting health insurance for everyone in this country is a worthy objective that I have wanted to see achieved.  However, I believe the techniques used in the new law to accomplish universal health insurance create serious financial issues that its sponsors have avoided addressing, assuring that as a nation we are bound to confront a massive healthcare driven financial crisis in the very near future.

Recall that several weeks ago I put together a simple post titled “Follow the Money,” that explained that it would cost at least $200 billion to cover all 47+million of the uninsured under today’s average insurance premiums. Presumably the $200 billion would be financed by mandated individual payments and government subsidies (paid for by tax increases). These costs should be expected to grow annually by about 8% (which is the annual growth rate of HC costs, today).

It is fair to speculate, as some have, that using current HC costs and growth as a projection tool misses the latent demand for HC services present in the high-risk uninsured population.  As this manifests, it could create an immediate upward shift in demand for HC and in turn accelerate the rate of growth of HC costs.  As someone who deals with the actuarial realities of HC costs as part of many an investment analysis, I believe this concern has merit.  Over the past 20+ years, as private healthcare evolved from indemnity (80%/20% with a deductible) to first dollar insurance (HMOs, PPOs and POS plans), healthcare utilization accelerated massively, at a minimum demonstrating that HC consumption follows the law of moral hazard, i.e., it increases when HC is perceived as “free.”

As a matter of legislative necessity the new law “works around” this real economic problem and its analysis.  The mechanics of the law requires tax revenues to expand ahead of the provision of subsidies, creating a ten-year projection of net federal deficit reduction (about $134 billion, read, the plan is profitable for the first ten years).  This is exactly how the law had to be structured for it to pass the CBO test and be eligible to become law.  Unfortunately, at some point within or shortly after the 10-year projection period it seems certain that HC subsidies will overtake tax revenue, creating the same ongoing funding problem(s) we constantly face with the current Medicaid and Medicare programs.

On this basis, my first, and unfortunate, take on this law is that it will fail on a financial basis without significant modification to its financial sources, incentives and HC delivery mechanisms.  Such modifications need to be designed to curb moral hazard and HC cost inflation.

One of the main purposes of this Blog (and my professional life) is to explore (and invest in) solutions to these issues. This law accelerates the need for these solutions, almost to an uncomfortable extent.  It may be too much of a financial burden too soon in the technology cycle, which I see as only recently focused on simultaneously lowering costs and improving quality in the HC system.

For any HC reform that envisions universal coverage to work, both financially and medically, it will need eventually to include:

  1. Expansion of consumer accountability and engagement in HC purchasing decisions (HC cannot be perceived by anyone as “free” or a “right” – it is an individual and collective cost/liability that must be managed by the power of the consumer marketplace and the diligence of individual beneficiaries)
  2. Changing HC service compensation from fee-for-service to performance and quality based compensation (just like in almost every other American industry)
  3. Mandated reductions in medical errors and redundancy, especially in hospitals
  4. Deployment of technology and accountable care management designed to more efficiently care for the chronically ill, which represents 70+% of all healthcare costs, especially those insured individuals with 4 or more chronic illnesses

Unfortunately all of these necessities are materially absent from our new law, and as a result, I am unable to applaud its passage despite my genuine belief that universal coverage is a desired and ultimately obtainable goal.  With this legislation I am afraid we are headed down a path that does not portend eventual success.

March 2, 2010

Psilos White Paper – Healthcare Reform and Combatting Rising Healthcare Costs

Please check out a fairly recent (and pretty awesome) white paper written by Al Waxman, Lisa Suennen and Darlene Collins, three of my partners at Psilos Group, titled Cost, Quality and Alignment: A Step-Wise Plan to Reform and Transform Healthcare (published in September, 2009).

The paper was written during the heat of the debate over healthcare reform, last summer, well before either the Senate or the House passed their respective bills.  It was sent to many members of congress (many actually read it) and media editorial boards (many actually wrote about it).

The overall theme of the Waxman et al paper parallels the message I sent a couple of days ago to Senator Patty Murray (D-Washington).  It recommends an incremental approach to healthcare reform designed to achieve the following goals over the next 10 years:

1.  Reduce overall healthcare inflation to 3%

2.  Enable universal access

3.  End prior condition refusals for insurance and policy cancellation for sick people.

4.  Extend solvency of the Medicare Trust Fund beyond 2017

5.  Reduce medical errors

6.  Improve the US healthcare quality ranking from #35 in the world to #5.

7.  Stimulate investment in new healthcare technologies that improve healthcare quality and lower costs

As a practical solution the current versions of the Senate and House bills (and Obama’s slightly abridged plan) have serious problems in that we don’t know the cost effect of many of the individual provisions let alone whether as a whole either bill will rein in healthcare costs (in the state of Massachusetts, universal care seems to have had no impact on rising costs).  They (the Congress) seem to be attempting to solve all of the problems in the system with one fell legislative swoop with little or no proof that their ideas will lower medical inflation.  As I discussed in my previous post, healthcare reform is not financially viable without successfully reducing healthcare costs and inflation.

Logically, the Psilos team recommends an immediate focus on cost reduction that, if successful, would yield much of the long-term financial capital necessary for expanding access (read: health insurance for the 47 million uninsured in the US).  Note that they are not just offering ideas, but proven solutions.  Among others, they note the following areas as low hanging fruit:

1.  Management of the chronically ill, particularly those in Medicare (could yield $750 billion in savings over 10 years)

and

2.  Deployment of technology to eliminate hospital-based errors (recall my prior post on Atul Gawande and checklists, one such error reduction program), which could yield $7-$10 billion annually to Medicare

More advanced programs that could improve costs include:

1.  Performance-based reimbursement for providers

2.  Financial incentives for individuals to lead healthier lifestyles

3.  Deployment of Personal Health Records and individual patient information for real-time point-of-care access

Obviouisly there is much to discuss here, including the young companies that are developing the technologies and programs that make these ideas work.  In the meantime, my colleagues’ white paper, a truly non-partisan view of the healthcare crisis and reform is extremely informative as to what’s possible in the ongoing effort to control runaway healthcare costs.

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