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!