Tuesday, September 13, 2011

When Generations Collide

Fact: Equity prices have wallowed for ten years and counting.
Fact: Financial market turmoil has wiped out retirement accounts.
Fact: Young people are experiencing an unemployment rate twice the national average.
Fact: Consumer deleveraging is likely to persist indefinitely, at least until employment rates and income levels rise.

Where once a young person could find employment, embark on a career and expect to retire comfortably, that social expectation no longer exists. Instead, young people and people near or at retirement find themselves competing for jobs in an economy that simply isn't meeting their demand.

The Perspectives article "Age and the Workplace" considers the evidence for this emerging generational conflict. The supporting numbers extend beyond months and quarters to encompass years and decades. Even if the economy were to turn, the trends in place won't alter anytime soon.

For companies and government to remain competitive, corporate strategy and public policy must address this powerful new social dynamic.

Read "Age and the Workplace" here.

Friday, September 2, 2011

Deleveraging and Consumerism in Health Care

Consumer deleveraging has instigated a changed mindset.

Although many economists would argue that the debt removal process has much further to go, consumer downsizing thus far has substantially altered behavior. Note, for example, depressed sales in big ticket items.

If consumers, by living more within their means, develop a greater respect for risk, then their approach to health care will likely change as well.

Prior to 2008, in the riskless world of super-sized SUVs and flat-screen TVs, carefree lifestyles repudiated value-based decision making. Today's risk-averse world could easily nurture opposite inclinations that endure.

For health care, the process of payers offsetting responsibility to consumers constitutes (potentially) a similar effect. At least one can hope that government will begin to discern its own approach to value, rather than dictate one to others.

Consumers, by already starting down the road of personal responsibility, should in fact consume health care more efficiently (and responsibly) than they otherwise would have in years past.

In health care's next phase, expect a more balanced approach to risk and return in combination with a general trend towards consumerism to establish a value equation that eliminates years of built-in inefficiency.

Read "Alternative Themes in Health Care" here.

Tuesday, August 30, 2011

Bad Consequences

"Bad consequences often follow even the best-intended government action," notes a commentary in Perspectives. Although Hurricane (and later, and more damaging, Tropical Storm) Irene may cost billions, the financial burden could have been worse—much worse.

In yet another example of government intending to protect the less fortunate but doing the exact opposite, the state of Florida in 1993 established two insurance funds to offset planned rate hikes by private insurers. Nearly 20 years later, both funds, despite having become the insurer and reinsurer of first resort, lack anything close to adequate capitalization.

Had Irene barreled into Florida, its impact could have forced a federal government bailout amounting to billions of dollars.

The fact that Florida remains at continuous hurricane risk only adds to the future cost.

What's more, Florida's subsidized insurance overwhelmingly favors the wealthy, those folks most likely to own waterfront properties. In classic big bank fashion, it evokes "heads I win, tails you lose".

The alternative, an environment advocating personal responsibility, would put risk and return into proper balance, and eliminate unnecessary cost.

Read "Case Study: Florida Catastrophic Insurance Funds" here.

Tuesday, August 23, 2011

Individuals Taking Charge

"Government needs to foster an environment of resiliency, innovation, and risk taking, and enable a population willing to commit time, labor and money," notes a Perspectives article. "It cannot shield success from failure."

Beyond malicious bankers and politicians, we all need to look hard in the mirror to realize the full extent of blame for the 2008 financial crisis. For decades now, the United States has been losing its sense of risk and return.

Today, most people believe simply that the economic system will heal itself and things will get better. In times past, folks distrusted system solutions as infringements on personal freedom, and endeavored to take direct control of their own livelihoods.

Entitlement programs such as Social Security and Medicare have accelerated this moral shift from responsibility to dependency, and, at the same time, skewered financial judgment. Had consumers possessed better acumen it's unlikely they would have closed their eyes to downside risk to the extent they did throughout the housing boom.

The United States now confronts the difficult task of rediscovering and affirming individual responsibility. Failure to do so damages the nation's future competitiveness, especially against China, India and other emerging countries and their brands of capitalism and democracy.

We can begin by putting consumers more in control of health care, breaking apart massive concentrations of capital (institutions, for example, that are too-big-to-fail), and reforming the tax code to emphasize long-term investment and business building.

The fact that we can no longer afford top-down measures provides some hope that the shift away from dependency will begin sooner than later.

Read "A Deeper Problem in the Credit Crisis" here.

Monday, August 22, 2011

Biosimilars on the Brink

Biosimilars—follow-on products of innovator biopharmaceuticals—will transform the drug marketplace, according to Steve Grossman writing in Perspectives. This despite substantial skepticism.

Starting as early as 2014, FDA approval of biosimilars could begin to accelerate. Once price competition kicks in, industry economics will transform.

Although the FDA may not issue guidance for several months, recent publications and industry interactions suggest that key officials are already laying the groundwork for these products. Drugmakers, meanwhile, are considering new business models, and, in some cases, committing substantial investment dollars and defining a new product line.

Read "Biosimilars and Market Transformation" here.

Wednesday, August 10, 2011

The Brick Wall

We often ask Lyceum participants to speculate on the moment when health care hits the brick wall—that point in time when the reimbursement system goes from unsustainable to insolvent.

Consensus typically points to Medicare and argues five, maybe ten years. Real reform (the kind that truly transforms the industry), folks continue, won't happen until the current system hurtles headfirst into the wall. All other policy action is too watered-down, too constituent-wary.

Fast forward to last weekend (August 5th). Calling a spade a spade in political ineptitude, Standard & Poor's finally published its historic downgrade of US long-term debt. Symbolic, perhaps, but not without considerable consequence.

Yet again, as giant global banks reel, we confront the systemic challenge of too-big-to-fail, painfully realizing that lawmakers and regulators had done nothing to contain its malignancy.

But the fear this time that policymakers have nothing left—no more QEs, exorbitant stimulus packages, or magic bullets—in fact gives 2011 a certain hope that did not exist in 2008.

This time, we might just have to bite the bullet and reconsider how the whole damned system works, from tax law to entitlements.

As no time before, this new reality stands up—like a brick wall—against the great unfunded onslaught of government health care.

What degree and what duration of pain, then, are policymakers willing to exert on the electorate before taking action? Trillions more in stock market losses? Days, weeks, or even months of deliberations?

The sooner the better, we say. Any longer, and the shattered brick wall might just bury us.

Thursday, August 4, 2011

ACOs Beyond Payers and Providers

Accountable Care Organizations (ACOs) don't just represent new business opportunities for payers and providers. Diverse stakeholders from pharmaceutical companies to employers could realize significant business gains in forming targeted partnerships, according a recent Lyceum newsletter article.

"[T]he opportunity is significant for new entrants willing to provide the capital, organization, governance, and leadership to create new relationships with physicians that could dramatically change the health care landscape."

The fact is, most physician practices can't organize themselves into ACOs alone, due to limited resources. They want to realize an ACO's business and clinical control, but fear that partnerships with health plans and hospitals would compromise that control.

As defined in the Medicare Shared Savings Program, ACOs could feature a range of stakeholders as the principle organizer—not just deep-pocketed payers and providers. Such structures could channel substantial benefits to all parties.

Read "Help Wanted: ACO Leadership" here.

Saturday, July 30, 2011

Understanding Risk Adjustment

On Wall Street, capital markets facilitate securities' pricing and allow for efficient capital allocation. Buyers and sellers bid and offer prices based on multiple data points, and, in many cases, gut feeling. Risk—the uncertainty of systemic and non-systemic factors—plays a key role.

Market participants apply different models (some sophisticated, some not) to ascertain the value of a security. Their collective input generates a market bid-ask spread, not always accurate but in most cases more accurate than any one entity could otherwise determine over an extended time period. (Of the 8,500 plus mutual funds almost none beats the market consistently.)

Seems like logical process, right? Well, we should be at least familiar with it since we engage in price discovery in just about every aspect of our lives. That is every aspect except for health care.

In health care, the actual delivery of care (going to the doctor for a checkup, for example), a transparent price discovery process does not exist. Health plans contract with provider groups to pay fees for services that physicians perform. The price setter is in many cases the U.S. government, specifically Medicare the single largest payer which covers health care's highest utilizers, folks aged 65 and older. (Picture Goldman Sachs times one hundred, and everyone else following its lead.)

Unlike the capital markets, a transparent marketplace does not exist. Commercial health plans don't compete across state lines, and within states, plans can exercise near-monopoly power.

Moreover, because of the first-dollar nature of health insurance, what plans charge beneficiaries in premiums includes considerable actuarial assumptions about the health of their population, and how this changes over time.

Health reform (whether the Patient Protection and Affordable Care Act, "PPACA", or competing proposals) targets fundamental change in the payment system.

PPACA requires plans to offer equal access and prohibits differentiated pricing based on health status. It also establishes the formation of accountable care organizations ("ACOs"), care coordination vehicles that require providers to assume degrees of risk.

As a result, risk selection—a result of not having full information in the marketplace—is shifting from plans to providers as a business strategy.

But before providers can consider selecting risk they need to model and quantify it first. Not an easy task when patient populations vary substantially, depending on demographics and location.

The process of measuring risk factors for the purpose of risk-adjusted reimbursement is called simply risk adjustment. (Something that Wall Street does quite efficiently in a marketplace setting.)

As with any type of modeling, risk adjustment is an imperfect science, especially as it pertains to a price discovery process that involves thousands of beneficiaries but only one payer and one provider.

In a recent white paper written for the Massachusetts Medical Society, Milliman, the actuarial consultancy, tackles the intricacies of risk adjustment and submits key principles that both the payer and provider need to heed when looking to form ACOs. [Read the Milliman paper here.]

Many people, the Milliman paper explains, view the ACO concept as a viable alternative to the existing fee-for-service payment system. Not waiting for the U.S. government, commercial entities have already conceived and deployed ACO-type models, which included both a risk-adjusted global payment and a performance-based payment.

The government model continues the fee-for-service system but introduces additional payments based on a set of benchmarks for health care costs, outcomes, and quality. HHS is expected to recognize risk adjustment tools that will determine how much it reimburses groups for exceeding these benchmarks.

Milliman lists the following five key risk adjustment design principles:
  1. The groupings of medical conditions in a risk adjustment model should be clinically meaningful and reasonably specific, in order to minimize opportunities for gaming or discretionary coding.
  2. Diagnoses within the same condition category should be reasonably homogeneous with respect to health care cost and utilization, in order to optimize predictive accuracy and robustness of the model.
  3. Condition categories should have adequate sample sizes, to permit accuracy and stability of model predictions.
  4. The risk adjustment model design should encourage specific coding and discourage vague coding. Vague codes and nonspecific diagnoses should be excluded from the risk adjustment model
  5. The risk adjustment model should not reward coding proliferation. Providers should not be penalized for recording additional diagnoses. In other words, coding more diagnoses should not reduce the risk scores.
"When used to set payment rates," the Milliman report continues, "a risk adjustment methodology needs to strike a balance between predictive accuracy and incentives issues." The problem is physicians are human just like the rest of us, and will arbitrage gaps in mandates and models to realize additional compensation. A risk adjustment model needs to take this into account and avoid awarding overuse and overtreatment.

The ACO environment requires additional principles to address the organization's core competency and patient assignments. Under an ACO structure, the care delivery entity (a hospital or physician group practice) bears responsibility for assigned patient outcomes regardless of who ultimately provides the care—for example, a patients seeking care outside his assigned ACO.

What's more, there isn't a single risk adjustment model. Selecting and engaging a risk adjuster involves a detailed understanding the model itself and how it compares with different vendors.

And there's the matter of coding, the record-keeping system physicians use to indicate diagnosis and treatment. How physicians enter codes affects risk scores, and the coding system itself (encompassing tens of thousands of codes) is changing to an even more extensive system—a sort-of Y2K for health care—with the introduction of ICD-10-CM.

Imagine now that you're a physician and that your practice or affiliation is considering an ACO structure featuring a highly sophisticated risk adjustment process.

For many, the obvious answer is 'why bother?' At least in the fee-for-service model you had a clearer understanding of what your reimbursement rates were. Your compensation now comes down to a pool of money that the ACO's officers will allocate based on a black-box model.

Some who see no benefits in either system are existing the insurance model altogether, or simply vacating the profession.

Over recent years, Wall Street hasn't exactly demonstrated perfection, but at least the marketplace model is transparent. The answer to risk adjustment's complexity as it's implemented might just be market competition and consumer choice.

Thursday, July 28, 2011

A Dangerous Political Climate and the Path to Growth

Try not to gag on this one. At the end of 2008, J.P. Morgan encompassed $1.7 trillion in assets. Today the bank is 25 percent bigger at more than $2.1 trillion.

Despite extensive postmortem analysis on the financial crisis and the universal conclusion that capital concentration is dangerous, too big to fail rages on. In fact, the agency mandated a year ago to monitor this very risk factor isn't even fully functioning and remains leaderless.

At the same time (and more cavalier than three years ago), politicians are hurling ideological barbs at each other, while failing to acknowledge the economy for what is—an engine of prosperity.

Two recent articles in the Lyceum newsletter Perspectives address the worsening political climate in Washington and argue the benefits of simply letting private industry do what it can do.

As long as political extremism overheats the United States and Europe, the challenges of restoring economic recovery and long-term growth will remain unmet. The horrific shooting tragedy in Norway should shake each and everyone of us awake.

It exposes a tense political environment that extends beyond the tiny Scandinavian country. It underscores the need to resolve festering financial problems.

Read "The Path to Growth" and "A Dangerous Political Climate" in Perspectives here.

Monday, June 27, 2011

Care Delivery Doesn't Require a Radical Makeover

Think of the Patient Protection and Affordable Care Act (PPACA) as legislation in two parts. The first part puts in place insurance reform. Its highly contentious features, including medical loss ratio provisions and the establishment of insurance exchanges, extend government control over the insurance industry.

The second—and much smaller—part initiates reform of the care delivery system. The centerpiece provision, originally just a few pages in length and now several hundred in follow-up rules, formalizes the creation of accountable care organizations (ACOs).

Few would argue that the care delivery system as it currently functions creates the necessary value to sustain the long-term health of the U.S. population. More aptly, value, in terms of costs, quality and outcome, does not even exist as a metric that stakeholders uniformly agree upon.

ACOs, PPACA's authors believe, establish critical functions that occur only in part or not at all: continuum of care, seamless integration, and risk sharing across providers. Consider its propagation the manifest destiny of the Kaiser model.

Dawn Holcombe, writing in Perspectives, disputes the ACO vision. She supports the counterargument that ACOs would accomplish little more than forced consolidation of hospitals and physician practices. Applying her extensive experience in community oncology, she advocates a simpler reform process that emphasizes collaboration and basic information flow between payers and physician practices.

Hospitals, because of their vast inefficiencies and top-line incentives, would make terrible partners. In the case of oncology, they account for 80% of the costs.

The key, Dawn contends, is to promote the entrepreneurial efficiencies of community practices, not destroy them.

Read "Care Delivery Doesn't Require a Radical Makeover" here.

Thursday, June 23, 2011

Book Review: 'Reckless Endangerment'

Every now and then—but hopefully not too often—you read a book that just makes you spitting mad. Not because you disagree with the author's point-of-view, but because he's completely sold you on his can-you-believe-this premise.

In three-hundred pages, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, a financial service analyst and expert on the housing market, present a powerful indictment of high-profile individuals who wittingly undermine the U.S. and global financial systems in their pursuit of vast riches.

Their book, "Reckless Endangerment", explains the origins of the financial crisis, the political and economic gains of blind commitment to homeownership, and the betrayal of American taxpayers—most notably, those at the bottom-end of the economic ladder.

Not one of the individuals they detail has gone to jail. Nor will they ever likely pay penance. In fact, some still preside over our political and financial systems.

All remain wealthy (extremely wealthy in some cases), if suffering somewhat-damaged reputations. Bank of America, at the time the new owner of Countrywide Financial, covered, for example, most of the SEC's $67 million fine against Countrywide's CEO Angelo Mozilo, accused of insider trading. Mr. Mozilo's net worth totaled more than $500 million.

The authors deliver substantial evidence, much of it gleaned from years of investigative interviews and note-taking, against people such as Jim Johnson, Robert Rubin, Barney Frank, Chris Dodd, Timothy Geithner, and Mr. Mozilo. Their laundry list includes both Democrats and Republicans, and leaders of the biggest financial institutions in the world.

In particular, they assail Fannie Mae and Goldman Sachs, and the relationship the two institutions form. Both established and exerted considerable market power that prioritized no one but their management teams and employees. Their pretense of serving customers and doing social good was pure hypocrisy—even criminal, as the authors suggest.

Jim Johnson, who transformed Fannie Mae into a personal ATM, left the GSE (Government Sponsored Enterprise) in 1998 a decade before the crisis. Nevertheless, he did more than anyone to position the organization for scandal and abuse. Shortly after resigning from Fannie Mae, he became a board member of Goldman Sachs and head of the firm's compensation committee, a role he performed through 2010.

Likewise, and at the same time, Stephen Friedman, who had run Goldman Sachs from 1994 to 1996, chaired Fannie Mae's compensation committee. His tenure as a board member included Fannie Mae's purchase of a Goldman deal designed to inflate executive compensation, which, as later played out, perpetrated accounting fraud.

"Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street," write Ms. Morgenson and Mr. Rosner. "If mortgage originators like NovaStar or Countrywide were the equivalent of drug pushers hanging around a schoolyard and the ratings agencies were the narcotics cops looking the other way, brokerage firms providing capital to the anything-goes lenders were the overseers of the cartel."

While the authors highlight Peter Orszag and other noted economists who endorsed the GSEs despite overwhelming evidence contradicting their economic security, they also showcase less well-known individuals who dared to expose the organizations' systemic risk. These include Marvin Phaup and June O'Neill of the Congressional Budget Office, and Armando Falcon, who directed the Office of Federal Housing Enterprise Oversight ("OFHEO"), the regulatory body overseeing the GSEs.

Beginning with President Clinton's political pursuit of homeownership in the early 1990s and culminating in the repeal of Glass Steagall, the country adopted a big institution mindset, where public-private partnerships could provide homes to any person with any credit rating and Wall Street could package high-risk debt and redistribute it as zero-risk debt—of course, with the blessing of the ratings agenices.

At the same time, global events realigned capital flows, a consequence of the Cold War ending and a massive peace dividend taking effect. Times were good, but, by decade's end, clear warning signs had surfaced: the Russian debt crisis, the collapse of Long-Term Capital Management, and the first demise of the subprime market.

After the dotcom meltdown and the mild recession that followed, Alan Greenspan and the Federal Reserve pursued historically low rates. The Wall Street machine kicked in at this point, extracting every penny possible from the U.S. housing market and reaping huge fees at each stage of the securitization process.

When consumer savings rates should have risen, they fell. But everything was safe, according to Mr. Greenspan. The bigger the financial institution, the more it could self-regulate. Risk models, he and others pointed out, were more sophisticated than ever before, and derivative instruments could offset sharp market contractions without having to increase capital ratios.

In 2007, the game ended. Still, we feel its repercussions. Many, including the authors, argue that the financial system and the political process haven't changed. Wall Street's record profits against the backdrop of a struggling economy in the two years following the crisis certainly support this.

What has changed is consumer appetite. High unemployment and a fear of indebtedness have curtailed aspirations of second homes, super-sized SUVs and floor-to-ceiling TVs. Until the consumer regains his confidence, the next bubble might be some time off. But if lawmakers and regulators haven't actually altered the system—restricting too-big-to-fail and breaking apart and privatizing Fannie Mae, for example—then the next crisis could closely resemble the one we've just experienced.

Blame, Ms. Morgenson and Mr. Rosner argue, can and should be made. Beyond anyone else, Wall Street, the mortgage lenders, Fannie Mae and to a lesser extent Freddie Mac, and a handful of politicians understood the game and its complexities.

To win that game, they often crossed ethical and, in some cases, legal boundaries.

Wednesday, June 22, 2011

Improve Post-Market Safety, Improve a Drug's Entire Life Cycle

The drug industry and its watchers often define success as the approval of a new product or indication. The FDA's responsibilities don't end there, however.

Writing in Perspectives, Steve Grossman notes that the agency's mission includes "determining whether already-approved drugs perform safely and effectively when used by large numbers of patients in routine medical practice."

The problem is, post-market surveillance utilizes data that's neither easily obtainable, objective, nor complete. To bolster this effort, the FDA has been developing a monitoring system called Sentinel, which incorporates not just claims data but medical records and patient registry information.

Mr. Grossman argues that a more comprehensive system such as Sentinel would greatly improve the entire life cycle of a biopharmaceutical product, and benefit all stakeholders at the same time.

After-market assurance, for example, would likely increase the FDA's drug approval rate, in particular of those on-the-fence products that clinical trials don't complete satisfy.

Read Mr. Grossman's article "Standing 'Sentinel': The FDA and Post-Market Safety" here.

Tuesday, June 21, 2011

Where Have All the Investors Gone?

Let's face it. Slow economic growth is here to stay.

Among the biggest issues weighing down growth is concern over sovereign debt, and the more general fact that de-leveraging has (much) further to go. While upticks in some developing markets may lift exports and help avoid another recession, the U.S. consumer has neither the wallet nor the optimism to resume recent years' spending levels.

Add to this austere picture, disappointing corporate earnings, incipient inflation, uncertainty over market regulation, and Middle East unrest, and the prospect of stock market gains appears to dim considerably.

Don't be so pessimistic, notes a recent Perspectives article. Even during the years following the 1929 collapse, returns outpaced inflation.

Most important, market participants need to believe in the long-term.

Read "Where Have All the Investors Gone?" here

Friday, June 3, 2011

The Provider Business Model

On May 31st, Lyceum Associates convened a roundtable session in New York on provider business models. Represented organizations included major commercial health plans, an alternative primary care delivery model, a mid-sized employer, a global consultancy, and a national hospital association.

In addition to several specific points, we realized the following, more general takeaways:
  • More than ever, health care's participants apply the term 'value' to performance, even if they don't always agree to an exact definition. The result: price, cost and quality now function as interlocking components, and few dispute that the heath care system operates as an economic good. 
  • On integration, many advocate it, but they should not view consolidation as the same effect. 
  • On care coordination, monopoly pricing risks curtailing wide adoption. 
  • On cost rationalization, the rule that 'one person's waste is another person's profit' will constantly contravene.
The provider—especially the independent physician—confronts the greatest economic uncertainty among the health value chain's components, both in terms of pricing power and market positioning.

Over the coming weeks, Lyceum events will consider this uncertainty as a central topic, with emphasis on July 14th at our roundtable summit.

Learn more about Lyceum events here. We look forward to including you!

Friday, May 27, 2011

Gold Standard in Clinical Oncology Care Guidelines

Most stakeholders agree that clinical guidelines support effective and efficient treatment. Most also agree that the National Comprehensive Cancer Network (NCCN) publishes the most extensive guidelines.

Until now, no one has created a powerful-enough technological platform to allow physicians to utilize the full extent of NCCN's guidelines. 

The April 1st launch of Proventys CDS Oncology—a product of NCCN and Proventys, a health care technology company—dramatically alters the landscape. The new web-based system features extensive algorithms that enhance the decision-making process, and, once and for all, advance the industry beyond its bickering over guideline platforms.

Friday, May 20, 2011

Lyceum Roundtable Summit


On July 14th in Washington DC, Lyceum will host a roundtable summit analyzing opportunities and challenges facing the care delivery system, related corporate strategy, and new business models such as ACOs and other care coordination platforms.

The event features three roundtable tracks of eight to 14 participants. Each track breaks down into two separate three-hour sessions. (See below)

View details here. Indicate your interest in participating here. Official enrollment will commence shortly.

"The Provider Business Model" 
Track One: "Leadership"

New delivery models featuring care coordination and integration threaten to destabilize the marketplace. Whether large systems or small practices, health care providers now more than ever require capable, business-minded leaders.
  • What defines a capable leader? 
  • How important are value, accountability and customer satisfaction as business goals? 
  • Over the next two to five years, which providers will gain economic share, and which will lose? 
  • How should leaders expect the relationship between physicians and hospitals to evolve?
Track Two: "Data/ Performance Measurement"

Many industry people expect data and performance measurement tools—such as e-prescribing and electronic health records—to enable economic gains for physicians and health care providers.
  • Are these expectations too optimistic? 
  • Should provider groups strive for data control? If so, what type of data? 
  • To what extent are payers, by diversifying into IT businesses, recasting the health value chain?
Track Three: "Risk Management"

Efforts to diminish or discard the fee-for-service payment system are accelerating. Replacement models may incorporate varying degrees of provider risk taking. At the same time, health reform threatens to eliminate competition in insurance underwriting.
  • How much risk and what type of risk will providers likely assume? 
  • How does the demand for risk management expertise alter market positioning among and between payers and providers?

Tuesday, May 17, 2011

Imprison Criminals, Not the Street

Unless an appeals court overturns his conviction, Raj Rajaratnam faces considerable time behind bars. His actions could not have been more blatant.

More important than one man's crime is the alarm spreading across Wall Street. For the first time, a federal judge admitted wiretapping as evidence in an insider trading case. Will prosecutors take advantage of a big win and vigorously pursue other fund managers?

Also, there's the question of Wall Street's basic model and how it deals in information. Will the Galleon Case produce extreme legal burdens that overwhelm a system requiring, in the interest of price discovery, speed and efficiency?

"Imprison Criminals, Not the Street" tackles these issues and more in the current issue of Perspectives.

Thursday, May 12, 2011

Health Plans Transforming Themselves

As the chart below shows, the five largest health plans have thrived since President Obama signed the Patient Protection and Affordable Care Act into law, outperforming the S&P 500 by between ten and sixty percent. Beginning a few years ago, commercial plans began diversifying away from their core underwriting and ASO franchises. In recent months and to market cheer, they've accelerated these efforts, in order to combat eroding margins and the full impact of health reform.

The Wall Street Journal discusses this strategy in detail here.

Some questions to consider:
  • Are health plans more than making up for lost margins and creating more powerful businesses?
  • Do their diversification efforts materially disrupt the balance-of-power with providers? If so, is consolidation the only response providers have?
  • Could a different player—a smaller-sized insurer, for example—execute an alternative strategy and roll up out-of-favor underwriting and ASO operations?
  • What happens if the U.S. Supreme Court strikes down the individual mandate, or the health reform law fails to reach full impact? 
  • What's the likelihood of underwriting competition going the other direction and intensifying?
Click on chart to expand
Source: Google Finance

Monday, May 9, 2011

Winning the Impossible Game

Sometimes, in trying to impress a reader, a writer can create the wrong impression. Howard Marks, the veteran Chairman of Oaktree Capital Management and author of a widely-read client memo, tightly defines an investment philosophy that he's developed over four decades in his book, "The Most Important Thing".

While he strives to show the reader that long-term investment success requires psychological discipline (second-level thinking, as he terms it), in doing so, he re-affirms something the thoughtful investor knows already: it's nearly impossible to sustain outperformance in money management.

Investment managers, we learn, must overcome many common emotions that undermine consistent success: greed, fear, the willingness to suspend disbelief, the tendency to conform to the herd, envy, ego, and capitulation. They function in markets that are neither efficient nor inefficient, and must constantly mitigate risk exposures where they often have no clue what those exposures are.

He argues that, because cycles are unpredictable and the future is unknowable, the best an investor can do is determine where he is at present, in terms of market conditions. But even that realization is often impossible to achieve, especially if, as is usually the case, one or more negative emotions overwhelms an investor's psyche. (By implication, the clear-sighted folks might as well be needles in haystacks.)

What's more, Mr. Marks advocates Nassim Taleb's concept of alternative histories—where events that already transpired are, in fact, just small subsets of events that could have happened. In supporting this view, he dismisses, for example, an investor's great performance if that investor has assumed unnecessary risk, and luckily skirted harmful events.

Taken together, it's a miracle anyone can outperform the market for any length of time at all.

Why, after reading his book, would anyone trust his or her hard-won earnings with any individual or investment group?

To be sure, examples exist of folks who, over decades (the total time a person might buy and sell investment funds), have beaten the market, but you can probably count the number on one—maybe two—hands. Plenty more individuals have excelled over shorter time periods, but their performance showcases a small sample size (a few years) or may feature substantial losses, or both.

In either case (the long- or short-term period of outperformance), the shareholder entering and exiting a fund makes a critical timing decision that can dramatically affect his wealth's appreciation—or depreciation. Take Mr. Marks himself. He won't retain his position at Oaktree indefinitely, and his eventual departure presents considerable uncertainty to whomever purchases his funds today. (The same holds true for folks investing in Berkshire Hathaway and Warren Buffett.)

Past performance, Mr. Marks reminds us, does not guarantee future success. The shareholder, it would seem, could just as well visit the nearest casino, and claim the same chance for wealth improvement.

If investing in a money manager constitutes mostly luck—or a skill for timing (something Mr. Marks dismisses outright)—then why not create a money management operation instead? That career choice has produced vast riches for many, many different people—often far greater wealth than any of their shareholders.

Mr. Marks does not provide a model for building a money management operation. Instead, he delivers something more valuable—a complete investment framework, the operation's core competency and competitive advantage.

While investment groups can experience massive gains over short time periods, enough for its founders to enjoy a long retirement, most should plan for a long haul. Fat fees (management and, for some funds, performance) may not last forever, nor the ease of amassing assets under management—now especially challenging in the aftermath of the 2008 financial crisis.

The Graham-and-Dodd school of value investing, of which Mr. Marks is a disciple, perfectly fits a long-term approach. It produces a manager who applies patience, extreme diligence and a mental commitment to decades of work. The school—its espousal of frugality—doesn't demand that its students invest in costly trading infrastructure, super computers and complex algorithms, or ramp up risk exposure and deploy leverage and concentrated positions. Rather, it endorses in-depth, pound-the-pavement analysis, downside protection and margin of safety.

Farewell the retire-before-forty era. Pity the fool who expects to catch the next massive momentum wave, and trade his way to riches. Fads appear and disappear, back and forth Mr. Marks' pendulum swings, but steady goes the skeptical, value investor.

The long-term manager traverses the slow road of careful, defensive investing. Sexy, no. Successful business-building, yes.

Mr. Marks does not lack confidence. The book's title might well read "Everything I Have to Say is Important"; he manages, with eye-opening assertiveness, to identify each of his key statements as "the most important thing".

Of course, when it comes to money, we tend to use superlatives. And what could be more important than generating wealth-creating returns? We hope lots of things.

The first nineteen chapters explain different lessons he's learned—pearls of wisdom. Throughout the book, he interweaves excerpts from his client memo which he has published since the early 1990s. The twentieth, and final, chapter presents short outtakes from different issues of his memo, and summarizes his philosophy.

Early on, Mr. Marks distinguishes value investing from other investment styles, and cites the infamous Nifty Fifty of the late 60s and early 70s as a stark example of the perils of growth investing and misplaced risk taking. While certainly some of the companies bellied up, not only did many survive, they thrived: Eli Lilly, Coca-Cola, Philip Morris, Hewlett-Packard, Texas Instruments, and Motorola among the names he mentions. Had someone purchased and held on to equal positions in each company, that person today, forty years later, would have done quite well.

Even if Mr. Marks disparages the Nifty Fifty phenomenon, his repeated argument that patience pays is essential wisdom. An investor's career inevitably spans multiple market cycles—often extreme conditions. Confidence in long-term results contradicts our age of escalating portfolio turnover rates. For Mr. Marks and other contrary-minded investors, it's an obvious opportunity.

Finding and investing in a hot-handed fund manager may well be impossible for most people. Many more could opt to play the game themselves. Now, a manual—replete with enough catchy aphorisms to post as quotes-of-the-day for years to come—exists from which to make a business of it.

Thursday, April 28, 2011

The Backlash Against Becoming Rich

The latest Perspectives article, "Demonizing the Rich", highlights a key irony: "While we applaud our children's and friends' success, when those success stories translate into wealth, we chafe and claim unjustness."

Two high-octane forces explain income disparity in the U.S. One, entrepreneurship, emerges from our freedom to conceive and execute new ideas. The other, large company executive compensation, roots itself in the evolution of the corporate system (particularly in publicly-traded companies), and executives simply being executives at the right place at the right time and wanting to preserve a comfortable way of life.

For folks participating in the first force, fortune gained is fitting, because they risk failure. For those participating in the second force, fortune gained is largely fortuitous.

The article underscores a genuine problem in how corporate boards too often pay their executives undeserved sums. At the same time, it warns that, in not recognizing the other force at play, populist action and the results this action seeks could harm the pursuit of completely justified gains in income.

Rather than unwittingly suppress the entrepreneurial opportunity many individuals enjoy, we should find ways to create the same opportunity for larger numbers of people.

Read "Demonizing the Rich" here.

Tuesday, April 26, 2011

The Twilight Zone of Health Care Investing

Writing in Perspectives, John Schaetzl, a long-time investment professional, notes a Twilight Zone opportunity where, by converging, non-profit philanthropic investors and traditional, commercial investors could greatly advance their individual agendas.

"Returns in socially-minded investments are expanding just as for-profit investments are shrinking—and at risk of further contraction," he observes.

The opportunity for coming together exists primarily in developing markets where returns are typically low and investment horizons long, and among early stage investments. "By contributing knowledge and credibility, foundations and other NGOs can smooth the road for for-profit investors, whose experience and expertise doesn't extend to developing markets and their maladies, if they become co-investors and share risk and reward."

The key for both sides cooperating is overcoming suspicion and misunderstanding of the other side's motives. Once in communication, however, the two types of investors can measure and adjust valuation for known differences.

Mr. Schaetzl's Twilight Zone concept takes into account a shifting investment landscape of decreasing returns in developed markets, elongating investment periods, and the massive volume opportunity manifest in the majority of the world's population.

But don't expect investors to realign themselves radically anytime soon. Habits and experience are strongly ingrained.

Those who do recognize the potential fortune of cooperation will likely gain substantially.

Friday, April 15, 2011

Factors Determining ACO Success

"Financial success or failure of an ACO [accountable care organization] will depend on meeting rules-based budgets set by the Centers for Medicare and Medicaid Services for each ACO’s population," note five senior executives from Milliman, the actuarial consultancy. "To be successful, the ACO will need to: (1) demonstrate quality, and (2) reduce spending below targets."

The executives, whose article appears in the Lyceum newsletter Perspectives, argue that, much more than quality improvement, risk analysis is most likely to generate necessary monetary savings—especially when, three years after an ACO program commences, CMS requires the organization to assume downside risk.

"Few organizations have sufficient assets for [their boards] to gamble on the ACO program’s financial downside without carefully assessing the risk. How should they evaluate this risk? Data is important, but data does not organize itself into risk analysis."

The biggest source of financial failure won't be insufficient data, the authors contend, but failure to calculate risk.

Read 'Factors Determining ACO Success' for more insight, including a view on which providers are best-positioned to gain from an ACO formation.

Monday, April 11, 2011

The Games of Behavioral Economics

In their book Scorecasting, Tobias Moskowitz, a professor of finance at the University of Chicago, and Jon Wertheim, a senior writer for Sports Illustrated, put many traditional sports beliefs through an econometric wringer.

Although the authors realize a natural audience in the legions of fans, their work should appeal to business leaders as well.  Loss aversion, conformity, omission bias, random chance, and 'the endowment effect' don't just impact sports. Human nature can be universally peculiar, and companies and industry participants that recognize and act on this fact gain strategic advantages.

Take, for example, health care and the design of accountable care organizations. The Department of Health and Human Services' 400-plus pages of rules establish tightly conforming structures. And why not? Care variation, we're told, contributes directly to an ineffective and cost-ridden system.

But, in narrowing variation, do highly-conforming structures limit much-needed innovation? Is HHS, in fact, ignoring some of behavioral economics' most powerful lessons?

Whether exploring the unlikely fortunes of an Arkansas high school football coach or the perennial misfortunes of the beloved Chicago Cubs, Moskowitz and Wertheim not only debug many long-held myths; they also challenge conventional thinking.

And since sports always make great analogies, many readers will naturally look to apply the book's revelations to other aspects of daily life, including work environments.

Read our review of Scorecasting here.

Thursday, March 31, 2011

Philanthropy, Sustainable Investing and a Private Journey

Careers don't often unfold in straight lines, entering a company or industry as a trainee and finishing as CEO. For most folks, careers shift—often crossing industries and job titles. Just the same, these different tracks create success, though maybe not in the sense of the traditional corporate ladder.

John Schaetzl is a shifter. Over the course of his career, he's been an educator, consultant, and, most recently, investor. A few years ago, John transitioned to non-profit investing, vacating his position as a highly-regarded analyst and portfolio manager at GE Asset Management.

He explores this transition and the opportunity of 'sustainable investing' in Perspectives.

"I was an investor," writes John, "from what many folks in the philanthropic community and elsewhere might label the 'dark side', the straightforward, for-profit professional investment community.

"I wasn't a bad person or an irresponsible investor. It is just that, like the large number of institutional investment managers, sustainability concerns were not part of my mandate—my legal and fiduciary responsibility—to my investors."

Demographics, globalization and the dynamics of wealth creation have contributed to a well-organized and substantial philanthropic community. John advises some of the largest organizations in the world on how best to allocate capital.

Much of the protocol, and many of the lessons learned, in for-profit investing apply to philanthropy—but not everything, John cautions.

The non-profit and for-profit communities could in several cases function alongside each other, where appropriate jointly target the same investments.

For his effort at a point in time where philanthropy is ascendant, John contributes a rich and, most important, varied background.

Read John's article "Sustainable Investing Made Simple" here.

Monday, March 28, 2011

Drug Product Pricing 101

What happens when a drug that once cost ten to 20 dollars per dose, now cost $1500? Outrage, of course.

KV Pharmaceuticals, the manufacturer of Makena a drug used to prevent premature labor for high-risk pregnancies, now confronts tough Congressional scrutiny, most notably from Sen. Sherrod Brown (D-OH) who fears the making of another Medicaid cost lever.

Steve Grossman writes in Perspectives that the Makena case provides yet another example of a drug company not bothering "to undertake a sophisticated [pricing] analysis ahead of time". He goes on to explain three approaches a consultancy—or, in the case of a large company, an internal team—might utilize to establish an effective price: value-added pricing, cost plus pricing and comparable value pricing.

For anyone looking to understand more about some of the techniques used in setting drug prices, read Steve's article.

"No one can completely avoid controversy," he notes, "but shareholders, patients, and payers are always going to respond more favorably to companies which use sound reasoning to back up their pricing."

Steven Grossman is president of HPS Group, LLC, a solution-oriented health policy and public affairs company.

Friday, March 25, 2011

The End of Work

So it's Friday afternoon and everyone's thinking about the weekend. Well, not everyone. And, in fact, fewer and fewer folks as time goes by.

The unemployment rate may be receding but so is the number of folks in a job or actively seeking one. At 64.2 percent, the labor force participation rate is the lowest it's been in a generation.

According to the CBO, the participation rate may continue to decline, due to aging, women opting out, and young people choosing school instead. (Read: "More Americans Dropping Out of the Labor Force")

Hmm—aren't retirement savings still depleted? And if young people are prolonging—or creating—academic careers, how do they reconcile their mounting debt burden, especially if the economy adjusts to a lower employment rate?

Tyler Cowen submits a few questions and thoughts of his own:

1. What is the political economy of a world where so few people work?

2. What kind of low-rent areas will evolve to accommodate some of these people?

3. Will we in fact move to some form of a guaranteed annual income?

Note that the answer to #2 will affect the feasibility of #3. And our current notion of “protecting all the old people” against major health care catastrophes may someday be seen as an anachronism. The more progress medicine makes, the harder this will be to achieve and afford. Feasible future equilibria all seem to involve death panels, which actually may make #3 seem more attractive, relatively speaking, than spending so much money on Medicare. Rationally or not, once the moral principle is admitted of not giving everyone absolute protection against every extreme health care event, this may encourage a shift toward cash transfers.

At least we can expect easier traffic Fridays after five.

Wednesday, March 23, 2011

How to Define and Implement Accountability in Health Care

Writing in the Lyceum newsletter Perspectives, Bruce Cutter cautions: "Before implementing accountability we need to define it first. This begins by understanding and addressing value: the provider's—and health care organization's—most important deliverable. Value constitutes that critical 'something' necessary to the process of becoming accountable."

His latest article, "Accountability in Health Care: Definition and Implementation", tackles perhaps the most discussed and least understood aspect of medical system reform.

If, for example, the health care system and its various actors cannot agree to a workable definition, then one of the Affordable Care Act's primary vehicles, the accountable care organization (or ACO), simply cannot function effectively.

Dr. Cutter introduces and answers three questions:
  1. How should we define accountability?
  2. How do accountability and value intersect?
  3. Who should be accountable to whom?
"Ultimately," he notes, "health care organizations, and in particular their leaders, must become accountable for the care of a population of patients. This focus on populations, along with the role of the health care delivery organization (and its leadership), is a profound change from our current health care delivery model and culture."
After many years of both patient care and leadership, Dr. Cutter is now a health care consultant. Key leadership accomplishments over the past ten years have included design and implementation of a community-based, integrated oncology delivery system, together with development, in close collaboration with a health plan, of a comprehensive quality initiative combined with a pay-for-quality contractual arrangement.

Friday, March 18, 2011

Book Review: 'The Social Animal'

Want a job at Goldman Sachs? Well, make sure you plan ahead. Way ahead, like in high school. Because if you're applying as an undergrad and don't go to Harvard, Yale, Princeton or Stanford, Goldman won't even consider you.

Okay, maybe you're a little behind the curve, and you attended Berkeley, Michigan, Dartmouth or some other second tier elite school. There's always business school, right? That depends. Unless you go to Harvard, Wharton or Stanford, you won't have a chance. MIT, the University of Chicago, and Columbia simply don't cut it anymore.

As harsh as this seems, academic research now proves this über-selection to be increasingly prevalent. "The portrait that emerges is of a culture that’s insanely obsessed with pedigree," notes one commentator.

If you're Goldman Sachs, Morgan Stanley or McKinsey, why not simply outsource your corporate recruiting to a college admissions officer? After all, most of your corporate leaders attended these schools anyway, and it saves time and money to narrow your source pool.

Entry to big banks, big consultancies and big, well, anything is nothing more than an intellectual achievement game. By not attending a super-elite university, the candidate has already failed.

How did we get to this point? Our big institutions were never this big, and, once, a long time ago, social frameworks determined success, not college admissions officers. David Brooks' new book, The Social Animal, helps us to formulate some answers.

According to Mr. Brooks, who is a New York Times columnist, we live in a bifurcated world. On the one hand, we promote high-achieving cognitive skills, and, on the other hand, we ignore intuition and valuable "soft skills".  In his fascinating book, Mr. Brooks describes this great social fissure from the perspective of two characters, Harold and Erica.

As a child, Harold enjoys two loving, married parents. He plays with imaginary friends, his stories end happily, and he cries when his parents go out to dinner on Saturdays. In high school, he comes across an English teacher who imparts a new way of learning. Her method turns Harold from a professional student zeroing in on the right college into a knowledge acquirer, a person who understands the details because he understands the context.

Erica, in contrast, grows up in a broken home, mostly in poverty. She is the child of Mexican and Chinese immigrants. At age ten, she almost gets arrested. Erica is an ambitious person, which we observe when she gains admission to the Academy, a new school built to break its students of poverty's vicious circle by surrounding them with an entirely new culture and a web of new relationships.

Circumstances eventually bring Harold and Erica together. They wed, and we follow their lives and careers, from adulthood to old age and death.

An illustrative writer, Mr. Brooks delivers a powerful narrative. His book assimilates studies in neuroscience, psychology, sociology, and behavioral economics to paint a composite picture of the world in which we live. He often interweaves these studies to explain his characters' comments and actions.

Mr. Brooks' multidisciplinary study works because he creates empathic characters, which he needs to achieve because his subject matter is complex. His characters anchor the book, keeping Mr. Brooks' wide-ranging commentary and multiple scientific citations from drifting and dissipating.

Most important, they succeed in drawing the reader into the story. They resemble people we know. In many ways, they are ourselves.

Towards the end of the book, when Erica's career takes her to Washington, Harold joins a think tank and espouses the Hamiltonian tradition.

Harold found himself in a nation with two dominant political movements. There was a liberal movement that believed in using government to enhance quality. There was a conservative movement that believed in limited government to enhance freedom. But historically, there once had been another movement that believed in limited but energetic government to enhance social mobility.

Alexander Hamilton, a destitute orphan by age 12, became the "most successful treasury secretary in American history". He created a political tradition that inspired Henry Clay, Abraham Lincoln and Teddy Roosevelt and survived until the twentieth century, when it promptly died.

Subsequent government policy, Harold observes, has tried to "fortify material development but weakened social and emotional development that underpins it".

For Harold (and Mr. Brooks), Hamilton embodies a social construct where local communities matter and social fabrics form to allow people to improve their lives as individuals. It emphasizes intuition over IQ, recognizing that what we unconsciously know is more substantial and more powerful than what we consciously know.

Appearing thematically throughout the book, this construct makes for better decision making and more effective organizations, whether business or social structures. Reason and emotion aren't separate or opposite, as Mr. Brooks notes. In fact, they intertwine. The unconscious mind (emotion) assigns a value to a choice; the conscious mind (reason) makes decisions based on those values.

The ten largest financial institutions in 1990 controlled ten percent of U.S. assets. Today, they control 70 percent. At the same time that fewer organizations—whether in finance, health or the retail trades—dominate larger portions of the economy, the leadership pool is narrowing. Social mobility, Mr. Brooks would argue, has become more difficult, and entrepreneurship more incestuous, a consequence of the right schools rather than the right skills.

For an individual to matriculate at the nation's most elite schools, he must demonstrate high scores in various aptitude and achievement tests, none of which measure his total social performance simply because reductive reasoning, which the tests measure, cannot explain dynamic complexity, which characterizes the world in which he will live.

The pity of today's big banks and big institutions, then, is their narrow definition of human capital and inability to achieve a value-aware culture, with the 2008 financial crisis the starkest manifestation of this weakness.

Mr. Brooks expertly addresses a societal problem that continues to worsen. He writes of his book, "This is the happiest story you'll ever read. It's about two people who lead wonderfully fulfilling lives."

His characters are not flawless. We see them as ourselves. And yet, they observe and navigate the world differently. They are happy because they understand how the human mind works, and, together and separately, make the most of this understanding.

Wednesday, March 9, 2011

What Happens to Employer-Based Insurance?

The latest Health Affairs Policy Brief addresses the question of what happens to employer-based insurance by considering opposing viewpoints. While there's no clear answer, the likelihood of an employer not maintaining coverage does appear to decrease with the size of the organization.

Beginning in 2014, the Affordable Care Act requires employers with more than 50 full-time employees to offer qualified health insurance coverage, or pay penalties. A qualified plan must be comprehensive (pay at least 60 percent of health care expenses) and affordable (cost less than 9.5 percent of employees' household incomes).

According to the CBO, 6-7 million people would acquire employer coverage for the first time because the requirement would increase workers' demand for coverage through their jobs. Another 1-2 million, who currently have employment-based coverage, would instead move to the exchanges because the coverage would be more affordable. About 8-9 million others covered under an employer plan under current law would lose employer coverage because firms would choose to no longer offer coverage. Employers, the CBO adds, will pay about $52 billion in additional assessments between 2014 and 2019.

In contrast, Market Strategies International shows in a recent survey that the number of workers offered employer-sponsored health benefits would decline by 10 percent by January 2014. 13 percent of workers would lose access to employer-sponsored health benefits and 3 percent would gain benefits.

According to another survey by Fidelity Investments, 65 percent of large employers said they're not seriously considering eliminating health care benefits. But when asked what they would do if others dropped coverage, 36 percent said they too would consider eliminating coverage.

When compared with the cost of covering an employer and beneficiaries, the penalties an employer must pay for not meeting quality standards—or offering coverage—are light. And since these penalties are static and medical inflation is not, they become even lighter over time.

These facts we know:

1. Congress cannot impose stiffer enforcement rules due to Republican opposition.
2. Congress cannot loosen enforcement rules due to Democratic and White House opposition.
3. Large employers will likely maintain coverage, while small employers won't.
4. State insurance exchanges would pick up most of the non-covered individuals, even though few exchanges will likely be prepared for high volumes by 2014.

Keep in mind a wild card not often discussed: the strength of the overall economy, and what shape it will be in leading up to the 2014 deadline.

Should the economy strengthen relative to medical cost inflation, then employers would likely maintain health benefits as an additional form of compensation to lure employees.

Should it worsen or not improve, then an exit strategy seems highly plausible.

Monday, February 28, 2011

The Thorny Issue of 'Essential' Benefits

The health reform law (PPACA) outlines 'essential benefits' that plans must offer after January 1, 2014. These benefits break down into ten broad categories, from hospitalization, to prescription drugs, to rehabilitative and habilitative services. Under the law, the Secretary of Health and Human Services will decide how detailed to make the essential benefits package and what exactly to put in it.

Keep in mind:
  • Insurance policies must cover these benefits in order to be certified and offered in Exchanges, and all Medicaid State plans must cover these services.
  • Individual and small group plans offered outside the exchanges must include the essential health benefits package.
  • All new group health plans must adjust cost-sharing and deductibles to the limits specified for the essential health benefits package.
  • The benefits directive does not apply to large group plans.
Focus questions:
  • How long will the process of defining essential benefits play out?
  • To what extent will the directive, regardless of details specified or not, impact the political process? Will any meaningful resolution occur prior to the 2012 election?
  • To what extent does the law permit states to administer their own benefits irrespective of federal guidelines? Will they take advantage of this?
Relevant articles:

Wednesday, February 23, 2011

"Why Isn't Wall Street in Jail?"

Matt Taibbi of Rolling Stone Magazine asks: “Why isn’t Wall Street in Jail?”

His answer: "a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance."

For the select few on Wall Street who destroyed billions—if not trillions—of dollars in wealth, their own fortunes (and, for many, their reputations) remain largely intact.

But political winds are variable.  A populist shift could blow hard against an entrenched system that intertwines big banks and big government.

Wall Street has sinned, notes the latest Perspectives article; investors and the capital markets have not. Fixing the Wall Street problem must not come at the expense of a system that retirees will need to replenish savings, nor compound damages to the capital allocation and price discovery process.

Fix it. But, this time, fix it right.

Thursday, February 17, 2011

Turning Back 'The Great Stagnation'

Tyler Cowen's The Great Stagnation just might challenge Amy Chua and her shock parenting manual, Battle Hymn of the Tiger Mother, for most-discussed book of 2011. Just as Ms. Chua has us reconsidering—or reaffirming—how we raise our children, Mr. Cowen's observations on the dramatic slowdown in U.S. economic growth, life expectancy, and technological change likewise force us to re-evaluate some deeply-ingrained views.

Folks are already weighing in with vigor. New York Times columnist David Brooks recently introduced a social context to Mr. Cowen's thesis in his article "The Experience Economy", a thought-provoking piece if there ever was one.

Mr. Brooks proposes that Mr. Cowen's thesis—our country, having exhausted its economic low-hanging fruit, is now stuck on a technological plateau—"can also be used to tell a related story". Rather than focus on the technological change causing the slowdown, Mr. Brooks suggests it could be a shift in values.

He presents the economic choices of two hypothetical people, a man and his grandson. The first is born in 1900 and dies in 1974, the year from which growth rates continuously erode according to Mr. Cowen. The second is born in 1978, and is currently living the Facebook life to its max. The first, an entrepreneur, built a brake system company. His life begins with horse-drawn buggies and ends with the Moon landings. He "understood that if he wanted to create a secure life for his family he had to create wealth".

The grandson, on the other hand, works for a company that organizes conferences. (Okay, a little close to the bone for this writer.) He lives a "much more intellectually diverse life" than person number one. Moreover, he consumes products that are mostly produced for free, and don't create many jobs.

Most important, this person is more interested in living standards than wealth creation. He possesses a postmaterialist mindset in an affluent information-driven world.

There's a lot to chew on here, and particularly the economic connection of the individual to society.

Does the pursuit of wealth create a more secure life experience, not just for the individual and his immediate family but for larger groups of people?

Can someone pursue better living standards and avoid wealth creation at the same time?

Is the promise of information technology over-hyped?

For which type of firm does the Internet contribute a bigger slice of GDP growth: a long-standing bricks-and-mortar business or a cloud-based start-up?

Do conventional economic gauges (for example, GDP, CPI and employment) truly capture the full extent of economic activity, by either overstating or understating it?

The key difference between the two individuals is that the first person is an entrepreneur and the second is not. We're led to assume the second person feels entitled to a better lifestyle, while not actually having earned it. The first, having devoted his entire life to earning a better standing, has also helped others improve their own standings.

Although the grandson may believe that his way of life is improving as well, when compared with his grandfather and his predecessors, his gains are smaller to start with and progressively shrinking.

Big societal gains begin in small increments. The Internet may not be forming jobs on the scale of the auto industry in its heyday, but at least it provides an expanded opportunity for individuals to become entrepreneurs, however small.

Over the past 30-plus years, as the rate of progress has slowed, our economy, Mr. Cowen points out, has increasingly coalesced around three large systems: government, eduction, and health care. Within these systems, we can further argue that a handful of dominant players have emerged at the expense of smaller ones: for example, consolidation trends in health care are overrunning regional insurers and private practices; major well-funded universities are absorbing educational dollars that might otherwise go to primary and secondary schools; and even the federal government is usurping greater legislative and economic share from states and communities.

If the Internet and information technology can produce an entrepreneurial class that does not automatically sell out to bigger players (and which, for that matter, doesn't actually operate with an 'exit strategy'), then we might recapture the prior generation's growth.

Think of this in terms of the equity funding sources available today: the public and private capital markets. The public markets measure success in terms of quarterly earnings. Private equity, at five years or so, utilizes a considerably longer timeframe, but hardly the full term of a person's working career, the length of time to which early entrepreneurs aspired.

Perhaps the greatest lesson of a persistently languid economy is that real wealth in most cases does not come easily—nor does it come quickly.

Even now, after nearly two years of nine percent unemployment, it would seem that too few folks fear they won't have the independence that comes with having created their own wealth. In contrast to the generations of the first half of the twentieth century, that fearlessness stands out as a crucial difference.

As for Lyceum and its contribution to economic growth, I'll defer to our members and their judgment. Let's just say, few firms offer the idea factory that we do for difference makers to convene in a trusted environment, and explore changing business models.

Commerce, after all, is more than just a transaction. Commerce requires careful strategic planning and a thorough awareness of how a complex world is evolving.

Ms. Chua, who bases her controversial book on self-reliance, would probably agree: True entrepreneurial drive is an undying commitment to a more independent life.

More like an essay, Mr. Cowen's work is about 15,000 words in length, and is available in electronic form only.

Friday, February 11, 2011

Health Care Consulting Survey

Myriad legislative and economic challenges confront the $2.5 trillion health care industry, and for its components, hardly enough time and resources. Consultancies, large and small, will play a critical role in meeting these challenges.

Please take a moment to complete our brief survey assessing the health care consulting marketplace.

The survey, developed by Lyceum Associates and Ready Consultant (a web-based consultant management platform), supports our goal of providing buyers and sellers of health care consulting services unique access to efficient information and effective project engagement and management.

Many thanks!

Friday, February 4, 2011

How ACOs Become Accountable

One of the most discussed provisions in the Patient Protection and Affordable Care Act is the establishment of Accountable Care Organizations (ACOs). Often labeled a unicorn, something everyone can visualize but nothing anyone's actually seen, the ACO is conceived as a vehicle for more efficient care.

Where the current care delivery model emphasizes utilization and minimizes patient-physician interaction, the ACO—or integrated care delivery—model embraces care coordination, quality outcomes and risk-sharing. It features many different providers seamlessly integrated, and collectively compensated for producing a continuum of care.

For hardened veterans of the health care industry, the ACO is simply a reincarnation of the HMO; true enough, except for one critical difference. The HMO model features primary care physicians in a gatekeeper role. A patient, or member in the HMO, cannot utilize the health care system without prior approval from his personal gatekeeper.

No surprise HMOs collapsed. Consumers opted instead for plans offering choice and unrestricted use of the health care system.

By not establishing gatekeepers in the HMO sense, ACOs allow members considerable flexibility.

But here's the rub, ACOs, despite member flexibility, still hold providers accountable for member performance. Any members running rampantly over the system would directly penalize providers in the ACO.

Therefore, for providers to believe that they have a fighting chance at enhanced compensation (and for the ACO to succeed), the question of which patients join—or are assigned to—the ACO becomes vitally important.

Our latest newsletter article tackles this critical dynamic called patient attribution, and considers different methodologies ACOs might employ.

Not all ACOs will be alike. In large part, the patient populations they serve will determine how they differ.

Read "ACOs and the Importance of Patient Attribution" here.

Wednesday, January 26, 2011

Business Risk and the Physician Reimbursement Model

Picture this. You're a lawyer or financial adviser. You operate independently and take enormous pride in the service you perform. At the same time, you understand that your service is a business, and that no matter how much pride or skill you possess, your business won't float if you don't cover costs.

Now imagine that an obscure regulatory body determines exactly what your clients pay you. Oh, and the people who pay you aren't the ones who actually consume your services.

Talk about out-of-control business risk. On the one hand, straightforward market supply and demand dictate the price levels of your expenses. On the other hand, an anonymous group of people big enough to fill the corner coffee shop presets the price levels of your revenues.

In the normal world, if your costs rise you adjust prices accordingly. If you're a skilled business person and understand your market and customers, you'll set prices that match your specific demand.

In this alternative world, because you have no control over prices, you're reduced to vendor pleading. Any negotiating position—call it pricing power—you might otherwise have had simply does not exist.

That world, of course, is health care.

In health care, the 240,000-member American Medical Association convenes a 29-person committee that 'recommends' physician reimbursement rates to the Centers for Medicare and Medicaid Services ("CMS"). Since CMS accepts and implements the committee's recommendations 90 percent of the time, the committee has become the de facto market price-setter.

Once a year, the Relative Value Scale Update Committee (or "RUC") makes its recommendations. Every five years, it submits broad reviews.  RUC has "no official government standing", according to the Wall Street Journal. "Members are mostly selected by medical-specialty trade groups. Anyone who attends its meetings must sign a confidentiality agreement."

"In sessions that can stretch 12 hours or longer each day," the Journal notes, "the committee walks through dozens of services. The discussions can be mind-numbing—a subcommittee once debated whether to factor tissues into the payment for a psychoanalysis session."

But as obscure as RUC is, the formula that CMS uses to determine its fee schedule and implement the committee's recommendations might as well exist a hundred miles underground. Writing in the New York Times, noted health economist Uwe Reinhardt explains the Resourced-Based Relative Value Scale ("RBRVS") as follows:

In a nutshell, for a particular service (e.g., a routine office revisit or an appendectomy or a heart transplant) that we shall call Z, Medicare pays a fee calculated with this formula:

FeeZ is the dollar amount of the fee paid for the service, Work RVUZ denotes the relative value units for the physicians’ work going into the production of service Z, PEZ denotes the relative value units of the physician’s practice expenses allocated to service Z and PLIZ denotes the relative value units for the professional liability insurance premium allocated to service Z.

Each of these three relative cost factors is adjusted for its own geographic price index, GPCI in the equation. Thus, there is one GPCI for the physician’s work, one for practice expenses and a one for malpractice premiums.

The sum of these three RVU components, adjusted by their GPCIs, is multiplied by CV, the conversion factor. This is the dollar amount that Medicare pays for one overall RVU.


Maybe to a Princeton economist—or a PhD in mathematics or, for that matter, a Wall Street quant—it makes perfect sense. For most physicians, RBRVS is just the way the world works.

In fact, because the average doc contributes no input anyway, the formula could be any number of tangled algorithms. The consequences would be no different.

And let's not forget that CMS is the dominant payer. Commercial health plans, rather than undertaking an entirely different approach, simply base their rates on what it—the government—pays. (So much for moving to a single payer system.)

Perhaps one of the least noted risks to health care is a sudden and sustained change in vendor pricing levels.

The United States hasn't experienced double digit inflation for 30 years—10 years prior to Congress legislating the RBRVS standard. Nevertheless, price volatility ebbs and flows.

As the chart below shows, current volatility is the highest since the 1960s. (We calculate volatility as the annualized ratio of standard deviation in the Personal Consumption Expenditures index to its mean—the coefficient of variation.)

More than the absolute price level, what's important to business owners is the extent of variation. High variation increases business risk especially for folks with little or no pricing power, and vice versa.

Several experts warn that overly aggressive fiscal and monetary policy could resurrect 1970s-style inflation. Consumers need only visit the local gas station to experience one commodity already rapidly rising in price.

Volatility, of course, would persist (likely elevate) as the economy jumps to this higher level.

What if rents, utility bills and other business costs remain unstable? How does RUC, which only makes its recommendations once a year, compensate for this?

In the collapsing municipal bond market, we see not just the dire finances of state and local governments, but extreme regional economic conditions—unimaginably complex for a 29-person body to manage.

Simply put, committee-based pricing encourages consolidation. It handicaps practitioners who want independence. And it contorts basic economics, favoring obscurity over transparency and inflexibility over resilience.

On Wall Street, bankers—the conventional ones advising corporate bosses on deals and financing, and who generate revenues based on negotiated fees—are ascendant again, replacing enigmatic quants and their bullet-proof trading models. In health care, the foundation stones remain an obscure decision-making process and an indeterminate formula.

To be sure, the same certainty that existed on Wall Street where a limited group of really smart people could protect a business model continues to apply to the care delivery system.

For a lawyer, financial adviser or just about anyone else outside of the health industry, the ability to price a service is an essential business tool.

For a physician that inability is fast-becoming a sacrifice in independence.