Friday, June 19, 2009

"Quality" Health Care Reform

What is health care reform? The debate's convolutions expose extreme differences in priority and understandings of what exactly the problems are, and what legislation should accomplish.

We read a lot about cost as a priority issue. But how should we define this? As price, volume – or how about intensity of use?

Another cornerstone is access. Does this constitute a right, a privilege or maybe an economic good?

A third contention is quality. But what is quality? Is it something consumers should determine for themselves, or should agencies and third-parties decide it on a top-down basis?

The attempt at universal health care prioritizes access. The consequences of the Congressional Budget Office's scoring this week, however, indicate that cost now supersedes it as an issue. (Recent polls suggest that the electorate concurs.)

These consequences are also defining health care as an economic good, which happens to coincide with some of the discussion on quality. For example, MedPAC, a favorite among reform odds-makers to assume an enhanced role, argues repeatedly for accountability and transparency in its recent biannual report.

The report, importantly, advocates an economic resolution:

"To increase value for beneficiaries and taxpayers, the Medicare program must overcome the limitations of its current payment systems. A reformed system would pay for care that spans across provider types and time (encompassing multiple patient visits and procedures) and would hold providers accountable for the quality of that care and the resources they use to provide it." (From the executive summary)

It stops short, though, of calling for a turned-over system. Even in its advancement of "accountable care organizations", the report still assumes a critical role for Medicare in payment decisions. Of course, if MedPAC were to argue for a complete surrender to consumers as purchasing decision-makers, it would put itself and Medicare's $80 trillion liability out of business.

Let's assume the debate does shift to address quality as the absolute priority. One, this increases the possibility of legislators actually accomplishing something, because it centers the discussion not just on value, but also the payer-provider dynamic.

Hot-button items such as comparative effectiveness and health IT would all come into focus without the risk the CBO not scoring them. Remember, the CBO is only giving credit to tax and payment policies, which these past few days have proven politically unpalatable. Not including access would eliminate both, and the CBO as a factor.

Two, quality-based resolutions that incorporate value could serve as stepping stones to access and cost. That's because they’re likely to result in more accountability and transparency, neither of which can occur without consumer participation. And the more consumers engage, the more likely access will expand in a cost-efficient way.

Perhaps, one day, supply (physicians) and demand (consumers) might actually transact with each other.

Now that would be a noble goal indeed.

Wednesday, June 17, 2009

Universal Coverage Too Expensive to Finance

If Congress has learned anything these past few days, it's that the Congressional Budget Office (CBO) and its scoring system are deciding the fate of health care reform. On Monday and Tuesday, the CBO reportedly priced the Kennedy and Baucus bills at over $1 trillion a piece. In doing so, it completely upended the spend-more-to-save-more game plan.

CBO Director Douglas Elmendorf explained the premise behind his agency's scoring in a letter to Sens. Gregg (R-NH) and Conrad (D-ND) and on his blog, "[L]arge reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care." He oferred two areas that he believes would reduce federal spending, "payment policies in federal programs" and "the current tax subsidy for health insurance".

In an important reference to proposed efficiency initiatives (comparative effectiveness and health IT, for example), he writes: "Many of the specific changes that might ultimately prove most important cannot be foreseen today and could be developed only over time through experimentation and learning."

So back to the drawing board Congress goes. The political stakes, meanwhile, are rising. So far, health care reform has centered on universal coverage, which no one is disputing. More covered lives addresses both the welfare agenda and the business agenda of an expanded marketplace.

Nevertheless, there's significant political risk in how lawmakers may choose to fund it: higher taxes and pay cuts to providers.

Let's not forget, too, that health care reform will now have to compete with financial market reform for lawmaker and taxpayer attention. This will magnify the economic backdrop, and, in doing so, further diminish the moral argument in the health care debate. As we learned in the 2008 election, it’s financial security that matters most, as well-intended as we might otherwise want to be.

And with the economy muddling along, no one wants to think about how things might look ten years down the road, just how to get things back on track as soon as possible.

If not already, folks will soon frame financing options in terms of cost of capital, and what this means over the next two or three years. Inflation fears and the prospect for higher taxes might be too much for even the most committed reformists on either side of the aisle to stomach.

So, has Mr. Elmendorf effectively quashed health care reform as currently intended? Maybe not, but universal coverage is not the sure thing that it might have been a week ago. There’s still ample opportunity for new attempts. Sen. Conrad’s health-insurance "co-op" might factor into this, and so could modifications to the proposed health care exchange marketplace. Legislative maneuvering, though, is tightening.

The wild card is MedPAC, the Medicare Payment Advisory Commission. As New York Times columnist David Brooks writes: “You can take every thorny issue, throw it to MedPac and consider it solved.”

Making MedPAC the “Federal Reserve” of the health care system could well be the safest approach to payment reform as the central component of health care reform, inside of a government-first agenda.

The market-based folks will still have to wait for another day, and so might universal coverage.

Monday, June 15, 2009

MedPAC Targets Cost Savings in Biologics

Recently, the health care reform debate has featured little-known MedPAC among its various twists and turns. President Obama has advocated an expanded role for the agency, which advises Congress on issues affecting the Medicare program, while Senator Jay Rockefeller (D-WVA) has introduced legislation that would tranform it into a "Federal Reserve" for the health care system.

These are reasons why folks might want to pay close attention to its June 2009 payment policy report (published today) and, in particular, its chapter dedicated to follow-on biologics (FOBs).

FOBs–or generic biologics–are new versions of innovator products. A legislated pathway does not exist, although Congress has been debating its creation for the past few years. There are currently two bills introduced, both in the House, and neither an attempt at compromise.

A key point of contention: the period during which generic manufacturers cannot utilize innovator test data (data exclusivity). Innovators want a longer period in order to protect profits, and generic makers a shorter period to commence profits. An equally important, but far more complex, issue is the question of patent law, and the fact the biologics may not always be patentable in the same way.

The MedPAC report covers these and other issues in detail. It makes the point that without the FDA providing sufficient cover in designating product "similarity" or "interchangeability", current policy severely limits Medicare's ability to drive price competition.

Significant, therefore, are the report's recommendations for policy change on coding and payment strategies. As MedPAC notes: "The extent to which a regulatory pathway for FOBs could achieve savings in Medicare Part B would depend in part on how these producst are coded and paid under the Medicare Part B payment system." (Part B accounts for 70% of Medicare's $13 billion biologics spend, Part D the rest.)

Recommendations include different approaches for placing FOBs and innovator biologics in the same billing code, seen as a key component of price competition. It also proposes three payment options, notable in their divergence from the fee-for-service payment system:
  1. Reference pricing: a single payment rate established for a group of clinically comparable drugs; patients pay the difference for a higher priced drug
  2. Payment for results: an explicit, risk-sharing link between a drug's payment and patient outcome; manufacturers might, for example, guarantee a clinically defined biomarker or surrogate outcomes
  3. Bundling: a prospectively set payment rate for a group–or bundle–of services providers furnish during an episode of care
Combined with a legislated pathway, these policy changes would substantially increase Medicare's ability to extract savings. And given Medicare's leading stature among all payers, they would also open the door for commercial health plans to do likewise.

Even absent a pathway, Medicare could still leverage these new pricing strategies against rising costs.

Suddenly, the biopharmaceutical value chain finds itself the target of a potent economic force.

Wednesday, June 10, 2009

Market Policy: We Don't Need a False Sense of Hope

Here's an important market lesson: Never underestimate its ability to self-correct. Here's another: Never underestimate its capacity to exaggerate bad policy.

It would seem that neither impressed Messrs Greenspan and Bernanke enough to heed. In 2005, Greenspan could not explain price appreciation in long-dated securities as he steered a tighter monetary policy amid inflation fears, and now Bernanke faces his own "conundrum" in long-rates moving higher against his agressive expansion of the monetary base.

For many pundits, Greenspan's ineffectiveness contributed substantially to the 2008 market rout. Is Bernanke about to face (or already facing) a similar fate in inflation-ravaged asset prices?

The issue is price stability, and how markets see this occurring. We can measure this in terms of volatility. The more fearful market participants become, the greater the pressure they exert on bid-ask spreads.

Think, for example, of Treasurys as stores of value. If the market anticipates an erosion in value, then yields rise and prices fall – and vice versa. These continuous market assessments include pitting US paper against other countries' debt. Even when nothing looks good, markets will bid the least bad paper higher in price – a perpetual relative-value play.

And when a massive inflection threatens a country's national price level, markets will act swiftly in judging its monetary policy, especially if its proportionate effect is greater than fiscal policy. Massive budget deficits notwithstanding, for example, market focus is now addressing Bernanke's overheated printing press.

Consider the chart below. It measures Treasury volatility against the 10Y-2Y spread (constant maturity), from June 1976 through May 2009.


  • The green line depicts the 10 year–2 year yield spread (right-hand scale).
  • The blue line shows the 10 year unitized risk level (left-hand scale, in percentage)
  • The pink line shows the 2 year unitized risk level (left-hand scale, in percentage)
  • Unitized risk is calculated as the ratio of the annualized monthly standard deviation in the Treasury yield to its monthly average. By measuring the relative degree of variation, it helps to compare different time periods on an apples-to-apples basis.
Since 2001, peak levels in unitized risk have increased markedly. These jumps have also sustained for longer periods of time than during the previous 25 years, matching the more intrusive Fed.

Rapid changes in the yield spread (expansion and contraction) occurred during periods of elevated risk. Though intuitive, what's surprising is the contrasting degree of change. While the yield spread's rolling pattern is fairly consistent since 1990, unitized risk has successively increased, from one recession to the next.

Equity market direction, meanwhile, corresponds inversely with Treasury volatility, favoring less stressful periods (no surprise).

Amid complex, interweaving global capital flows, not even the Fed and its presumed omniscience can evaluate monetary conditions as effectively as the marketplace. The central bank overextending itself was a major contributor to the damage wrought in recent years, and quite possibly yet to come.

And whether it's Greenspan's put or Bernanke's helicopter, the last thing the market needs is a false sense of hope. Beware its disappointment, as we've just witnessed.

Better that bankers stay humble, and steer policy in a more respectful manner.

Friday, June 5, 2009

Health Care's Perfect Storms: Which One is Worse?

In response to a reader's comment (Economix Blog, The New York Times), noted health economist Uwe Reinhardt considers the question, How much do we spend on health care? He answers this as follows – but, in doing so, neglects the other "perfect storm" in the making:

"Consider a family whose breadwinner(s) earn a gross wage of $60,000. By “gross wage” I mean wages that the employer books as labor expense — in accounting parlance, the total debits the employer makes to the payroll-expense account for the employee. It includes the employee’s pay before deducting any contributions that employees make toward their fringe benefits — e.g. health insurance — and any taxes they owe. It also includes the full cost of employer-paid fringe benefits and contributions to Social Security and Medicare.

"In the absence of any government subsidies, this “gross wage base” of a family is the donkey that must carry the full burden of the family’s employment-based health insurance, whether formally paid for by the employer or employee.

"At an annual growth rate of 3 percent, a wage base of $60,000 now will grow to $80,600 in 10 years. On the other hand, at an annual growth rate of 8 percent, a family’s total spending on health care would grow from $16,700 now to $36,000 in 10 years.

"It follows that 10 years hence health care would swallow up 44 percent of this family’s gross wage base in 2019, before any allowance for employer- or employee-paid fringe benefits and taxes..."

His next post will examine the cost of universal coverage, and how to finance it.

Clearly, any way you cut it, the consumer's ability to pay is stressing the system. However, a potentially bigger issue looms on the provider side: specifically, its willingness and ability to accept public funds. More and more providers are dropping Medicare and Medicaid simply because reimbursements don't cover costs – not just physicians, but other service vendors too such as drug stores. At the same time, funding sources are in jeopardy. Medicare's hospital trust fund, for example, is only a few years away from insolvency.

These reinforcing tensions could paralyze the system well before consumer finances reach the precipice.

Creating another entitlement program in universal coverage might exacerbate this provider problem even more. The result: mandated coverage for all, but at the cost of rapidly shrinking access and quality – and, let's not forget, an added tax burden.

On the flip side, at what point do enough providers stepping away from the current system form a viable shadow system? Would this new system offer better value than currently exists?

Time will tell, but the opt-out rate continues to accelerate.

Thursday, June 4, 2009

Parsing National Health Expenditures: Why It's About More Than Just Price

Who's spending health care dollars – and where?

Every January, the Centers for Medicare and Medicaid Services (CMS) publishes the National Health Expenditures report. A composite of total US health care spending, it serves as a primary source for national expenditure data.

The report measures annual spending up until the second year prior to the release date. The January 2009 publication, for example, reflects data through 2007. It also provides CMS's projected data for the next ten years.

The report doesn't, however, disaggregate spending into price, volume and mix. It merely offers total value figures. (No doubt, such data would be difficult to break down, especially on the opaque medical-side of the ledger.)

While price inflation is certainly a concern, experts highlight substantial, and easily attainable, cost-reduction opportunities in inefficient utilization, which detailed price-volume-mix information would help to underscore. (Better utilization is also industry's main goal in its promised cost savings.)

Nevertheless, we can still consider the report as important reference material on spending trends, especially as we navigate our way through the ongoing legislative debate.

Take our following chart (click to enlarge). It illustrates spending by category in 2007, the most recent, complete year. Two areas account for nearly two-thirds of total expenditures: hospital care and physician and clinical services. Prescription drugs, while headline-grabbing, account for just 12% of total – half the level of physician services.


Of course, when it comes to spending, the big question is, How fast is it growing? The table below shows total value growth for each category (click to enlarge). It also presents the proportion of private and public funding.


Between 1997 and 2007, spending on hospital care, for instance, compounded at 6.7% per annum – about 3.5 times core inflation. More recently, the rate increased to over 7%. Medicare and Medicaid (public funds) paid for the bulk of this.

In fact, 45c of every dollar Medicare spent went to hospital care: reason why the fast-approaching insolvency if its hospital trust fund is a major concern.

Efficiency experts (those noted above) point to evidence-based clinical pathways and hospital operating hours as focus areas for dramatic improvement in inpatient utilization, and, likewise, as more effective alternatives to price controls.

Another important takeaway is the contrast in trend lines between categories. While prescription drug spending has slowed dramatically over the course of ten years, home health spending has surged, from three times core inflation to nearly six times. Much of this is mix-related, higher generic utilization among drugs and more intensely used home services for chronic diseases.

Data reliability will always challenge observers of the health care industry. And that's before stakeholders politicize it for their own ends, convoluting it even more. The NHE report provides, at least, a base level against which to reconcile analysis.

In the case of health care reform, it also helps us to understand the opportunity for cost reduction beyond just price.