Friday, August 27, 2010

'Not My Problem!'

What would you do if your employees demanded benefit increases and you had no money to pay for it? Unless you could somehow increase revenues, you'd probably explain an increase simply wasn't possible.

Not so in the fuzzy world of public sector finances.

On June 29th 2001, the New Jersey state legislature approved legislation that revalued the state's pension assets to their June 1999 level. State unions had demanded benefit increases, and officials—not wanting to disappoint key constituents—opted to raise the needed funds in the capital markets, instead of imposing higher taxes.

Problem was, pension assets by mid 2001 were already severely underfunded. In order to entice investors, the state had to show a strong balance sheet, and 1999 was a banner year.

Subsequent bond offering documents not only did not disclose the revaluation until two years later, but also never disclosed the 1999 mark, a date not coincidentally near the peak of the bull market.

By 2007, when the New York Times exposed the state's breathtaking fraud, the State Treasury had issued $26 billion in debt in 79 different offerings.

A recent Lyceum Perspectives article explores the New Jersey debacle—the first ever SEC suit against a state—and the question of how much accountability taxpayers can truly expect of elected officials. Read article here. (And, yes, it took the SEC three years to complete its suit.)

At the most basic level, this extraordinary case reveals the extent to which public officials play by rules completely different than corporate executives—not that the private sector has produced a flawless track record, either.

In the meantime, the federal government continues to create and expand entitlement programs requiring state funding.  The question of accountability and investor trust will loom large in the months and years ahead.

Bottom-line: cost of capital will rise as higher interest rates reflect not just sullied finances, but also deep distrust.

Health reform will test this precarious environment almost immediately. Already, according to the Wall Street Journal, many states are demanding that employees make first-ever contributions to their benefits, something private sector employees have always done.

However, employee unions in Michigan—and, yes, New Jersey—are filing lawsuits against such demands, putting even more pressure on elected officials.

The same Journal article cites a report by the Pew Center that calculates state retiree health care and other non-pension benefits as a $587 billion long-term liability for state governments. As of fiscal year 2008, less than six percent of that amount was funded.

New Jersey immediately consented to the SEC's cease-and-desist order, but did not admit wrongdoing. At this point, the SEC has issued no further penalty, and has not cited individuals for prosecution.

If you are an elected official—or, indeed, an employee—of the state, you might say, "Not my problem."

For investors and taxpayers, already confronting a challenging environment, 'not my problem' is the worst possible utterance, a complete voiding of trust.

And if there's no trust, there's no confidence, and no recovery.

Tuesday, August 10, 2010

Finding a New Way in Accountable Care Organizations

Docs need better business skills, and fast.

Blame it on the medical education system. Medical schools train students to become world-class clinicians, but most graduates haven't the faintest idea how to manage a business—yet many do just that, establish their own practices.

Blame it also on America's peculiar health care system, which distorts basic economics so familiar to any other industry.

Up until the past few years, business acumen wasn't necessary. Most docs had it easy, a flow of patients as steady as reimbursement. Okay, maybe some aggravation in reimbursement, but whatever the government ratcheted down, the doc could ratchet up through cost shifting, or more generous payments from commercial payers.

That comfortable world is changing rapidly. With or without health reform, the current system can no longer sustain itself. Financial resources are shrinking just as demographics are shifting—a population mix giving way to a larger percentage of health-care-consuming retired people than ever before.

For the first time, many physicians—beyond just primary care docs—are having to spend more time at their desks stressing over the wherewithal of their businesses. Their anxiety: patient flows rising just as pricing power shrinks.

And it's not like no one's seen it coming. Examples abound of docs implementing creative business models, whether simple networks or more elaborate integrated delivery systems.

Still, the majority haven't been that clever.  They face certain shock when market dynamics force practices to merge, sell into large organizations, or, worse, shut down. Many docs simply will give up, retire and let someone else worry about the 'new way'.

According to March 2010 survey published in the New England Journal of Medicine, nearly a third of docs said they plan to quit if Congress passed health reform.

Perhaps in the lusher days of more certain economics, we could have viewed health care as a right. No longer. Fundamentally, as we're now learning, it's an economic good. Supply, simply, is finite, and not very good at matching demand.

The more business-focused MDs will discover the new way in integrated care. Health reform addresses this concept in the accountable care organization. An ACO unifies different types of organizations in the delivery of a broad continuum of care, while bearing financial risk for the care provided. Think of it as different tax IDs buying into an economic opportunity.

Risk, a component of every business, will now become a core component of the provider practice—just like its clinical services. And so will information technology, which the ACO's different members will need to share in order to measure performance and assess business risk.

But how exactly does an ACO function? As written in health reform, a government-sponsored ACO is a voluntary formation. It links hospitals and physician practices, different practice specialties, independent practitioners, and more. The Centers for Medicare and Medicaid Services ("CMS") establishes an overall fixed budget, and the ACO must achieve more efficient utilization to remain viable.

If it cannot achieve better utilization, the ensuing budget squeeze could force paycuts on its members.

Utilization refers to how physicians choose to deliver care, taking into account the cost of procedures such as emergency room use, radiology, and specialty visits. It could also feature a more standardized care delivery process, for example, implementation of clinical pathways. The ACO will focus initially on outpatient services, which, according to the actuarial consultancy Milliman, amount to 70 percent of all health care costs.

A July 2010 article in Health Affairs sorts the ACO into five categories by degree of provider risk-taking:
  1. Integrated Delivery System
  2. Multispecialty Group Practice
  3. Physician-Hospital Organization
  4. Independent Practice Association
  5. Virtual Physician Organization
The article's authors argue that an integrated delivery system and multispecialty group practice should consider capitation or bundled payments, because they assume a higher degree of risk than a less structurally integrated system such as a virtual physician organization, which should implement a limited or partial capitation payment program.

In a recent briefing paper [PDF], Milliman highlights the importance of basic risk assessment.  It states:

[T]he ACO must preach and practice two challenging and often-overlooked imperatives: establish actuarial cost and utilization targets appropriate the ACO's designated business, and provide medical management to achieve those targets

No doubt, actuarial assumptions will play a key role, and Milliman describes how the ACO might go about making these assumptions. This means building cost models based on population data and the ACO's own utilization capabilities. If the budget targets are generous, the ACO could realize a substantial commercial opportunity.

If the targets are narrow, its leaders might not want to form an ACO in the first place.

Provider services such as medical oncology that depend heavily on Medicare might form ACOs in partnership with CMS. Others such as primary care might form ACOs in partnership with commercial payers—or, to the extent they capture out-of-pocket payments, with patients themselves or their employers. Many might partner with a combination of payers.

MDs can expect substantial displacement in the months and years ahead. Many will lose their independence, either willingly or unwillingly. In addition to the usual clinical challenges, they will also have to overcome business challenges for which they are completely unprepared.

Those docs wanting a voice in the new way will need to come to terms with direct ownership in organizations that integrate and coordinate care across multiple silos.

If better business skills drive better clinical outcomes, we could soon realize major benefits in a health care system based on value.

Tuesday, August 3, 2010

Clinical Pathways Lessen Geographic Variation, Reduce Costs

Because physicians often treat patients differently for the same condition, outcomes vary—as do the costs. For government and commercial payers, these variations can result in substantial differences across physician practices and hospitals, and geographic regions.

Even before health reform, many constituents had been targeting variation in care as a leading opportunity for efficiency gains.

In a March and April article series in the Lyceum newsletter Perspectives, Dr. Bruce Cutter describes the solution to geographic variation in clinical pathways. He writes:

Clinical pathways are an agreed-upon, standardized way to treat patients with certain diseases, including cancer and other complex diseases. While they can be thought of as a subset of the better known term clinical guidelines, there are many differences.

The intent of a clinical pathway is to standardize care, and to do so in a way that is evidence-based, patient-centered, and value-focused. Standardizing care in such a fashion decreases unexplained and unwarranted variation and enhances the value equation.

Dr. Cutter, a Spokane-based medical oncologist, goes on to define basic characteristics that constitute an effective pathway, and gives examples of successful demonstration projects. "Critically," he notes, "they shift value creation responsibility to the people who have the most influence over quality and costs, and who have an ethical and fiduciary responsibility to patients: physicians and other members of the health care team."

Read Dr. Cutter's articles here.

In an August 2nd Perspectives article, Dawn Holcombe echoes Dr. Cutter's thoughts with additional insight on a pathway's key characteristics. She segments these characteristics into five areas:
  • Clinical Source and Maintenance
  • Pathway Definition
  • Point of Clinical Decision-Making
  • Tracking and Monitoring
  • Documented Ease of Physician Use
Ms. Holcombe, a long-time consultant to oncology providers, argues that not every pathway is a true pathway. Many, in fact, are not much more than tightly defined guidelines. "How those pathways are defined and executed," she observes, "makes an enormous difference."

Once physicians and payers understand what makes up a viable pathway, they can then ask the right questions to make informed decisions. She states:

By asking the right questions, physicians and payers alike will utilize true clinical pathways programs.

They will also avoid programs mistakenly labeled as pathways, which focus more on preferred treatment menus and less on detailed care and reporting—a more tightly controlled way of defining guidelines.

Read Ms. Holcombe's article here.

Clinical pathways are gaining traction in oncology. Dr. Cutter projects that in time we could witness broader adoption in care coordination and integration:

Standardization would allow experts and practitioners to measure a wide range of clinical, quality, outcome, and operational metrics at multiple population levels, and to compare one group to another.