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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.

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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.

February 25, 2010

Follow the Money – Re: Healthcare Reform

Approximately 47 million Americans are uninsured.

 The average individual health insurance premium is between $300-$400 per month, or $3600 – $4800 per year.

(Multiplying)  Today it would cost $188-$225 billion to provide health insurance to all of the uninsured.

 This cost is currently rising between 8-10% per year.

Generally tax revenue growth is proportional to GDP growth.

How can our government finance an additional $200 billion per year growing at 8+% per year when historically GDP growth has been well below 8+%. 

Can they keep raising taxes?

Most reasonable people would say no, we cannot raise tax rates year after year (or perhaps even now for that matter).

To accomplish universal coverage we need to discover enough healthcare initiatives that together result in reducing healthcare inflation to the level of inflation of the economy in general (about 0-4% over the last 10 years or so).

If we can achieve this goal, then we can realistically and responsibly begin to create proposals for getting everyone insured.

The two biggest areas of potential cost savings are: (1) waste and redundancy (estimated at a total cost of $700 billion/year) and (2) the expansion of the prevalence and cost of chronic illness (about 70% of the $2.4 trillion healthcare economy, or $1.7 trillion per year).

Initial approaches to healthcare reform should focus on measuring these costs and implementing initiatives to reduce them over time.  Many of the technologies and proven approaches  to tackling these issues are currently available, but are going largely ignored by lawmakers as they craft reform.  Many more are in development and will appear over the next 5-10 years.  Many of them cross my desk as potential investment opportunities everyday.

Look for insights on modern and novel approaches to improving healthcare quality and reducing costs as this blog develops.

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