January 2013 Archives


In the Washington Post on Monday, Louisiana Governor Bobby Jindal issued an invitation to the President to meet with Republican governors to discuss Medicaid reform:

Medicaid operates under a 1960s model of medicine, with inflexible, one-size-fits-all benefits and little consumer engagement and responsibility. Expanding the entitlement program as it stands would further cement a separate and unequal tier of health coverage. Without fundamental reform, Medicaid will continue to deliver what it has for decades: limited access, poor quality and budget deficits.

Fortunately, after nearly a half-century of running this program, states know its problems and how to address them.

A number of Republican governors have asked to meet with President Obama to discuss their solutions, but the White House has ignored these requests. The president claims that he wants to work across party lines to get things done for the American people, so perhaps he could start by meeting with Republican governors who want to solve our nation's health-care problems.

Jindal knows what he's talking about. The governor inherited a Medicaid program that cost $7 billion and covered nearly a third of the state's population (27%), but the Louisiana still ranked nearly last in major health rankings (49th), performed badly on pre-term births and infant mortality measures, with high rates of chronic disease and low use of preventive services.

In other words, like a lot of states, Louisiana was paying a lot of money for Medicaid fee-for-service care and not getting a lot of value for it. In January 2008, Jindal launched a Medicaid Reform Advisory Group to look at improving coordinated care for Medicaid enrollees. Today, the state's Medicaid program (Bayou Health) is focused on prevention, coordination, and actively managing patients with chronic diseases through patient-centered medical homes.

The state is also collecting Medicaid data on nearly 40 health measures, and can penalize private Medicaid plans that don't meet quality benchmarks. If plans meet their health benchmarks, they can also benefit from "shared savings" with the state. Medicaid enrollees can choose from a menu of private health plan offerings, but if they don't, they are auto-assigned to the best plans. Currently, Bayou Health is projected to save $135 million thanks to Governor Jindal's reforms.

You can't call these reforms liberal or conservative - they're just focused on improving value, and states from Louisiana and New York are implementing similar programs. In fact, the Obama Administration - which doesn't hesitate to vilify private insurers when it's politically convenient - is running a demonstration project whereby about 40 percent of all Medicaid/Medicare "dual eligibles" nation-wide are being moved into private managed care plans.

What Governor Jindal does want is increased flexibility to design his state's Medicaid program to meet the needs of different populations - along with the ability to vary Medicaid co-pays, benefits, and plan designs. There is no "one size fits all" Medicaid reform that will work for all populations and all 50 states, and greater state flexibility (along with better transparency for state outcomes) would just recognize this reality.

Today, the only way for states to get broad program waivers is through a lengthy 1115 waiver process; and every new administrations (Democrat or Republican) also have their own policy preferences, which limit states' ability to experiment and the federal government's ability to consistently learn from what works. Here, Jindal has a simple idea that should appeal to governors of both parties:

The process by which states negotiate for flexibility, called "waivers," is broken. Federal officials should have greater accountability for timely review of waiver applications. In particular, waiver applications based on those already approved in other states should be fast-tracked. HHS should allow states to opt in to a more flexible long-term-funding arrangement, allowing them to design programs that best meet residents' needs, rather than requiring the same package of services for every individual. At the same time, federal and state officials could agree to greater accountability for improvements in health outcomes, not just processes.

Jindal's proposal would go a long way to giving Republican governor's what they want (flexibility) while assuring provider and Medicaid advocacy groups that states will still be held responsible for improving outcomes for Medicaid enrollees. In other words, it's a win-win.

A broad based conversation about Medicaid reform should have happened long before Obamacare was passed, but instead the governors were largely locked out of the discussion - a big reason many governor's are balking at Obamacare's massive Medicaid expansion today.

It's not, however, too late to go back to the drawing board and fix a program that millions of Americans depend on for safety net care.

The president keeps saying that he's open to any good ideas, whether they come from Republicans or Democrats. Governor Jindal is taking him at his word.

Mr. President, are you willing to meet him halfway?


I wrote a few weeks ago on the massive backfire that is electronic medical records, i.e., driving costs up rather than down. Via Meadia has a great post yesterday on a related topic: Washington's perennial confidence in wonky schemes to revolutionize health care.

The wonks in Washington have no shortage of miracle fixes for America's health care system. One is performance rewards, where doctors are rewarded for the quality and efficiency of their treatments. As usual, the theory is sound: paying doctors based on outcomes rather than treatments should reduce the use of expensive or unnecessary medical procedures.

Alas, the P4P programs tested so far have largely failed to deliver on their promise to raise quality and control costs.

The largest public experiment happened between 2003 and 2009, when the administrators of Medicare teamed up with Premier Hospitals nationwide to see if financial incentives would improve the quality of care for Medicare patients with certain ailments.

Studies of the program have shown mixed results.

Participating hospitals initially improved, but after five years there was no significant difference between them and the hospitals without the incentive, according to a University of Pennsylvania study.

A separate study from the Harvard School of Public Health found that there was no significant difference in the mortality rate for heart attacks, heart failure, bypass surgery or pneumonia between patients treated at hospitals participating in the program and those that were not.

There is no shortage of exceptionally bright, talented, smart people in health care with great ideas on how to improve the system - people working for government, insurance companies, and hospitals. And some organizations - like Geisinger or Intermountain Healthcare - really seem to work effectively to drive high quality at lower cost .

But health policy wonks too often ignore the massive disincentives that distort behavior across the health care system in favor of instituting a few "best practices" based on pilot programs or oranizations with unique cultures. As David Goldhill puts it in his exceptional new book, Catastrophic Care, health care wonks on both the left and the right are "confined to the impossible task of overcoming the negative effects of bad incentives without changing the fundamentals of the system."

What would change the fundamental incentives of the system? Goldhill thinks (and I agree with him) that real change won't be accomplished until health care operates much more like the rest of the economy. He explains:

Modern economies handle the extraordinary complexity of balancing the diverse needs and preferences of large populations and massive but varied production resources by relying on the diaggregated decision making that implicitly arises from trillions of individual market decisions. This is also known as the free market.

Today, patient's needs and preferences are suffocated by the demands of payors (governments, employers, insurers). What gets done is what gets reimbursed, even if what gets done is expensive, unsafe, and downright crazy.

Normal market mechanisms that punish bad quality or terrible customer service
are short-circuited in health care because the person using the service isn't really paying for it. Regulations and rules try and compensate for this basic asymmetry in power between the user and the provider, but the proliferation of rules leads to rent seeking, complexity, and waste.

A truly consumer oriented health care system would turn this on its head. Who wants to be treated in a hospital with terrible infection scores? Or that is twice as expensive as its competitor across the street?

Critics of consumer oriented health care reforms argue that health care spending is concentrated in a small number of patients with high costs, often who may be less than rational. But people are always irrational, including across the rest of the economy, and yet market forces work pretty well everwhere else.

Some patients - the homeles, the mentally ill or disabled, and other disadvantaged people - may need more help than others. But this is hardly an argument for designing the health care system to meet their needs rather than the 90% of the population who can navigate the system effectively on their own (or with help from intermediaries like Best Doctors.)

On the contrary, a consumer driven system would free up massive amounts of resources and attention to focus on the small number of high needs cases rather than trying to micromanage the vast majority of people who can manage their own care.

This isn't the direction the country is going in today. Instead, we're seeing a massive controlled experiment in top-down health care management - at the federal level and in states like Massachusetts and Vermont. With enough well meaning experts, maybe everything will turn out all right.

Count me skeptical. And maybe when this latest experiment in top down social planning goes awry, we'll finally be willing to try something a little different.


The Drug Enforcement Agency (DEA) categorizes all drugs with the potential for abuse into 5 groups--Schedules I-V. Drugs in groups IV and V have little or no potential for addiction (although Valium is Schedule IV for some reason). Some can even be bought over the counter. Schedule III drugs have a moderate to low potential for physical and psychological dependence. This group currently includes Vicodin. Schedule II drugs have the highest addiction potential of all approved drugs. Percocet (oxycodone) and morphine are in this group. Schedule I drugs (e.g. heroin and LSD) have a very high potential for addiction and no accepted medical use in the US.

Last week, an FDA advisory panel recommended that hydrocodone, the narcotic component of Vicodin (the other component being Tylenol), should be reclassified as a Schedule II drug--a move designed to combat narcotic abuse. The vote was 19-to-10. In my opinion, all 29 got it wrong.

They certainly did get one thing right-- it never made much sense that Vicodin was restricted any more or less so than oxycodone (Percocet, OxyContin). The two are both synthetic derivatives of morphine and are very similar chemically and pharmacologically. Oxycodone is about 1.5-times more potent than hydrocodone.

Yet, somehow, 40 years ago, they were "separated." Hydrocodone was classified as a schedule III drug (less restricted) while oxycodone was put in the more restrictive schedule II category-- the most carefully controlled category of all prescription drugs. I just don't get it.

While Percocet and Vicodin are used more or less interchangeably, there is a real difference between these and other schedule II drugs, which include morphine and fentanyl--a synthetic opioid narcotic which is 100 times more potent than morphine.

So, putting oxycodone and hydrocodone in the same class makes sense, but should they both be more restricted or less? This is where medicine and law enforcement clash. I believe that whatever may be gained from making Vicodin harder to get pales by comparison to the harm it will do to those in need of sufficient pain management.

Further restrictions on Vicodin may or may not have an impact on narcotic abuse, but they will certainly have an impact on patients. The new classification means that doctors may no longer call or fax in a subscription, virtually guaranteeing that patients in need will face additional obstacles--a visit to the doctor being one of them. Nor will they be able to write refills for it. This will add days (weeks?) to the amount of time that those in severe pain will have to suffer needlessly, putting an especially high burden on the poor, elderly and people who live in areas where doctors are scarce.

Compounding this problem is the fact that--despite being in the 21st century--there is still no good way to control chronic pain. Every class of pain medications has its unique set of problems.

Tylenol (acetaminophen), a weak analgesic, won't touch anything more than mild-to-moderate pain. And it also has the serious disadvantage of having a low therapeutic index (the difference between the effective and toxic dose). As little as double the maximum daily dose of acetaminophen can be fatal. It is not uncommon for people who attempt suicide from taking large quantities of Vicodin to die from irreversible liver damage rather than the narcotic.

Non-steroidal anti-inflammatory drugs (NSAIDs) are better for pain management, but carry with them a whole different set of baggage--the potential for severe gastric toxicity (ulcers, bleeding). Even Celebrex--a novel NSAID designed to be easier on the stomach carries with it an increased risk of heart attacks.

Which leaves opioids (narcotics with properties similar to morphine). These are the heavy weapons of pain management, but they carry with them a host of problems--addiction, dependence, constipation, and central nervous system suppression, to name a few. But despite their deficiencies, opioids are the only option to control chronic, severe pain, which not only destroys one's quality of life, but can cause additional physical and psychological problems.

From the law enforcement point of view, I suppose it is possible that this restriction will make some difference in the magnitude of drug abuse in this country. But my guess is that addicts will do whatever is necessary to feed their addiction--even if it means turning to far more dangerous street drugs, such as heroin. I don't believe that this change will make a material difference--our longstanding, and abysmally unsuccessful "war on drugs" is evidence of this.

Doctors should practice medicine--not law enforcement. If they are running "pill mills" they should be tossed in jail. But the rest should not be prohibited from calling in a prescription for someone with a legitimate need, or writing refills for people with terminal cancer and intractable pain. Denying people in need of pain relief is barbaric. Leave the doctors out of this.

It is far more important to provide proper care to those in need than it is to try an easy fix for an eternal and probably unsolvable problem.

This is exactly why this regulation is misguided. You don't punish patients because of the illegal acts of others.


vita-02.jpg

The famous sci-fi writer, and author of the book I, Robot, (namesake of the company as well) would be proud of the FDA's recent approval of the "RP-Vita", a remote-presence robot for use in healthcare settings.

RP-Vita is designed to allow supervising physicians to remotely monitor healthcare delivery in settings like ICUs or emergency rooms, where the physician would have to otherwise be running back-and-forth between patients. The device makes patient data available via wi-fi that the physician can access through an iPad or similar device. Although  some may be understandably pensive about reducing the personal patient-physician relationship to a face on a computer screen, RP-Vita this marks an important step forward in healthcare delivery.

Many tasks routinely performed by specialists can be handled just as well by nurses and nurse practitioners with a physician supervising. Devices like the Vita can free physicians to do what they do best - diagnose based on all available patient information (remember, it's relayed to them electronically via wi-fi), while other healthcare professionals handle the delivery of care under the physician's watchful eye.  And this can be accomplished from a few feet away to hundreds of miles away (battlefield medics or remote military outposts, for instance, might be able to deploy a military version with a satellite links to communicate with physicians at large military hospitals like Walter Read).

From a policy perspective, the approval of RP-Vita shows that technology is beginning to affect how health care is delivered, extending the reach of high quality care and (hopefully) lowering the cost along the way. Eventually, you might even have a virtual supercomputer generated physician diagnosing you at home, with human follow up later. Paging Dr. Watson...



Imagine that your car has been overheating and the starter motor is quickly failing. The wheel alignment is also askew. You take your car to a shop. The mechanic at the shop suggests installing a new battery, reupholstering the seats, and installing some oversized off-road tires. You protest that these proposed solutions won't address the key issues and will perhaps make them worse. After all, bigger tires will tax the car's engine, leading to more overheating. Instead of explaining how these fixes work help, your mechanic belittles you for being resistant to change and for not trusting his expert knowledge. He says that his approach is the only way to fix the problems your car faces. Reluctantly, you agree to the repairs.

After you get your car back from the garage, and the bill was double what you were expecting, the starting and overheating problems return in earnest. The alignment is worse than ever. When you contact your mechanic to alert him to the unfixed problems, he then tells you in a solemn voice that your car has an overheating and starting problem. Oh, and the alignment is off.

That's what you brought the car in for initially!!! That's what you wanted him to fix!

Unfortunately, this analogy describes President Obama's misdiagnosis and improper "fixes" to the nation's health care system. Obama described his flavor of health care reform as "one of the best ways--in fact maybe the only way--to reduce those long-term costs." Further, he called the Affordable Care Act "one of the biggest deficit reduction measures in history." He added: "Everybody who's looked at it says that every single good idea to bend the cost curve and start actually reducing health care costs are in this bill." But that didn't stop Obama from saying last week that, "We don't have a spending problem. We have a health care problem."

When the Affordable Care Act passed, Obama said that "From this day forward, all of the cynics, all the naysayers--they're going to have to confront the reality of what this reform is and what it isn't." Okay, if Obamacare doesn't really help reduce health care costs and doesn't really reduce the federal budget deficit, then what does it do, Mr. President?


In my last post, I described some of the challenges generic makers are facing from a quality standpoint. To some extent, though, these are the same challenges manufacturers have always faced, just expanded as they develop generic versions of some of the largest selling drugs of all time. But these companies face real uncertainty in a completely new area: biologics.

The FDA is still developing its guidelines, but some of the proposals under consideration would force generic manufacturers to undertake clinical trials to demonstrate equivalency. Some might even force them to comply with marketing regulations.

This creates a number of new challenges for generics companies. They will need to develop the ability to conduct appropriate clinical trials. They may also need to develop their sales and marketing ability, since they will have to persuade doctors to prescribe their specific version of the biologic. By the time generics companies have built the required capabilities to comply with manufacturing, clinical trial, sales and marketing regulations, their cost structure is going to more closely resemble their pharma counterparts.


A few months back I discussed the explosion of "big data" - how it helped Obama win the 2012 election, and how it is being used to treat multiple myeloma, a rare bone cancer. To recap, the term "big data" refers to large, complex datasets that require an enormous amount of computing power to plow through. Because over the years, the cost of computing has fallen exponentially (the cost of storage is almost irrelevant now), and the advent of cloud computing essentially gives anyone access to a supercomputer at their fingertips, the big data revolution has become a reality.

A new collaborative project between the Mayo Clinic and United Health (one of the largest insurers in the country) is poised to take big data even further. Optum Labs, the research institute that the two will be building in Cambridge, MA, will combine Mayo's and UH's data on over 100 million people. The goal will be to use the massive dataset to understand which treatments work best, focusing on patient outcomes and cost-effectiveness. For instance, it could allow researchers to find that one diabetes treatment works just as well as another, but costs half as much.

More broadly, however, the results of the research conducted at Optum Labs may help the FDA take steps to reform their clinical trial requirements.

While much has been written about the poor clinical trial designs forced upon drug developers, the FDA has only recently shown real interest in changing them. The 2012 Food and Drug Administration Safety and Innovation Act (FDASIA) establishes the "Breakthrough Therapy" designation; while the law itself was vague on how this designation differed from Accelerated Approval, one clause of the act calls on the FDA to "[take] steps to ensure that the design of the clinical trials is as efficient as possible...", and the first drugs receiving this designation were announced just last week. And a 2012 FDA report went even further, recommending a new optional pathway for drugs shown to be effective in small subgroups of patients, rather than large, broad groups.

So how does this tie into big data? New clinical trial designs, particularly for patients with orphan diseases, should allow the use of existing patient data to demonstrate drug efficacy - for instance, data from emergency room uses of an antibiotic can be used to complement (or substitute) data from what can often be, a very difficult to run clinical trial. Or data on a drug's (successful) off-label use can be used in place of a clinical trial to receive provisional FDA approval for a new indication.

More generally, the use of large datasets like these will allow drugmakers to use observational data to receive provisional FDA approval with confirming studies to follow, and expanding patient populations as new uses are validated.

For Mayo and United Health, these databases can also be used to identify and validate potential biomarkers, allowing further improvements in clinical trial design.

If the FDA continues its slow, but steady move toward reform, Optum Labs may be just the tip of the iceberg.


Manufacturing problems leading to consent decrees.... Products being pulled from the market.... products that haven't lived up to efficacy claims.... The patent cliff.... These sound like familiar challenges for the pharmaceutical industry. But now the drugs in the headlines are generics. As the industry has grown and matured, it's faced greater scrutiny from regulatory agencies. Now it faces many of the same setbacks that plague their branded brethren.

During the past two years, generic manufacturers have benefited from the infamous patent cliff as several of the largest selling branded drugs of all time - Lipitor, Plavix, Lexapro and Seroquel - have all lost patent exclusivity. This has provided a real boost to the generic manufacturers who could sell versions of these products.

But now, these same manufacturers are facing a patent cliff of their own. Over the next few years the value of branded drugs losing exclusivity will drop by more than 50%. In the meantime, generics have been plagued by high-profile manufacturing and quality issues that have raised questions about the sector's safety and ultimate viability. For example, the manufacturing woes that shut down two Ranbaxy plants in 2008 and resulted in 30 products being barred from the US, led to a $500 million settlement with the FDA and a five-year consent decree. Further issues recently led to a recall of its generic Lipitor. And in October, the FDA determined that Teva pharmaceuticals' generic version of Wellbutrin XL 300 MG did not demonstrate therapeutic equivalence and has asked the manufacturers of four other versions of the drug to submit bioequivalence data by March 2013.

As the generic makers adjust to the challenges posed by the introduction of new, large-selling products and related regulatory scrutiny, it's increasingly clear that generic manufacturers will need to develop new capabilities to be prepared. They'll need to broaden their attention -- and their relationships with regulatory agencies -- from securing approval for their products toward more management of mundane but vital issues, such as product quality. The market is increasingly complex for generic manufacturers, and business-as-usual isn't going to cut it. In my next post, I'll describe another critical issue facing these drugmakers and their relationship with regulatory agencies: moving into the new space of biologics.


Offering something that resembles a real market for healthcare (with clear prices, for instance), retail clinics have grown exponentially since 2000 to somewhere around 1,200 by 2010. For many uninsured, particularly those who can't afford insurance, these clinics allow low-cost access to routine medical care - shots, primary care, and even more urgent problems like broken bones - without the long wait at the emergency room.

A somewhat unique turn for retail clinics has been the growth of "Bodega Clinicas" in California, according to Kaiser Health News. These health clinics predominantly cater to the low-income and often undocumented populations of major cities like Los Angeles. Because they manage to remain under the radar of the cities' departments of health, the clinics can offer clear, low prices for many routine services like a check-up.

This brings a slew of concerns, however, since the qualifications of the physicians practicing at such clinicas may be suspect. From KHN:

Kimberly Wyard, chief executive of Northeast Valley Health Corporation, a non-profit group [:] "They are off the radar screen," said Wyard of the clinicas, "and it's unclear what they're doing."

This creates a tough choice for public health officials, particularly with the Affordable Care Act fully taking effect in 2014 - most of these clinicas are cash-only businesses that don't accept insurance. And under the ACA, undocumented immigrants will be unable to purchase insurance through the exchanges; and the affordability of insurance will still e an issue for documented, low-income families for whom the subsidies may simply not be enough. If the clinicas are forced to change their business models because more of their patients have insurance, the prices will likely increase, potentially making them irrelevant.

The alternative to clinicas may not be palatable from both a public health standpoint and a financial standpoint - if those currently served by clinicas are left without affordable insurance and without access to the clinicas, many will likely seek care at emergency rooms - where a diagnosis of a simple cold may take hours, and the bill is ultimately covered by taxpayers.

So while bringing bodega clinicas into the fold may be desirable, officials should be careful of how they approach this thorny issue. Officials should get a better understanding of the quality of care delivered at these clinics before subjecting them to regulation. If the quality of care is no worse than the multitude of retail clinics around the country, then this should be seen as an effective model of care, for one of the most vulnerable populations. 


From yesterday's New York Times:

The conversion to electronic health records has failed so far to produce the hoped-for savings in health care costs and has had mixed results, at best, in improving efficiency and patient care, according to a new analysis by the influential RAND Corporation.

Optimistic predictions by RAND in 2005 helped drive explosive growth in the electronic records industry and encouraged the federal government to give billions of dollars in financial incentives to hospitals and doctors that put the systems in place. ...

RAND's 2005 report was paid for by a group of companies, including General Electric and Cerner Corporation, that have profited by developing and selling electronic records systems to hospitals and physician practices. Cerner's revenue has nearly tripled since the report was released, to a projected $3 billion in 2013, from $1 billion in 2005. ...

The study was widely praised within the technology industry and helped persuade Congress and the Obama administration to authorize billions of dollars in federal stimulus money in 2009 to help hospitals and doctors pay for the installation of electronic records systems.

Kudos to RAND for doing a follow up study to see whether or not their predictions were coming true. But are the latest headlines really all that surprising?

Call it the fallacy of the Next Really Big Thing (NRBT). Industry lobbyists seize on one promising study or report and tell Congress that if they just spent more money to subsidize the NRBT (wind energy, electronic health records, solar panels, biofuels, etc.) massive savings accrue and jobs will blossom.

For the most part, this doesn't ever really happen. In complex economic systems (like health care) pulling switch A often results in unintended result B (along with C, D, F and Q). Data from pilot projects, or existing health systems (like the Mayo Clinic or Geisinger) are often extrapolated far beyond the soil in which they originally flourished.

Subsidies for solar energy have turned into a massive boondoggle because the technology isn't competitive without massive subsidies, and the Chinese are subsidizing them even more heavily than we are. Biofuels are leading farmers to shift from food crops to fuel crops, hurting the poor by raising prices for dual-purpose crops (like corn). (And, from an environmental perspective, they're actually worse for the planet than the much maligned fossil fuels.)

And electronic health records mandated by Congress appear to induce more, not less, health care spending without driving the hoped for efficiency gains.

Last month, Megan McArdle, at the Daily Beast, wrote an excellent blog post explaining why the road to Hell is paved with pilot projects:

This is one more installment in a continuing series, brought to you by the universe, entitled "promising pilot projects often don't scale". They don't scale for corporations, and they don't scale for government agencies. They don't scale even when you put super smart people with expert credentials in charge of them. They don't scale even when you make sure to provide ample budget resources. Rolling something out across an existing system is substantially different from even a well-run test, and often, it simply doesn't translate. ...

Sometimes the success was due to the high quality, fully committed staff. Early childhood interventions show very solid success rates at doing things like reducing high school dropout and incarceration rates, and boosting employment in later life. Head Start does not show those same results--not unless you squint hard and kind of cock your head to the side so you can't see the whole study. Those pilot programs were staffed with highly trained specialists in early childhood education who had been recruited specially to do research. But when they went to roll out Head Start, it turned out the nation didn't have all these highly trained experts in early childhood education that you could recruit....

Megan cites a number of other excellent examples for why early results turn out to be much less promising then they first appeared (my favorite being the failure of New Coke).

But I'd add one other factor to Megan's many good observations.

In the private market, failure is the rule, success the very rare exception. Most new restaurants fail. Most new drug trials fail (at enormous cost). Most new small businesses fail.

And that failure is a good thing. It's one of the best features of market-driven economies. It means that investors, consumers, and taxpayers don't spend money on the NRBT that turns out to be a colossal billion-dollar bust.

Failure is what drives market efficiency, and what makes markets so incredibly adaptive. Markets represent the evolution of ideas and technologies in real time - rife with unintended and emergent consequences.

Ironically, liberals and conservatives often switch ideological roles when it comes to markets. Skeptics of intelligent design in nature, liberals often turn into proponents of intelligent design when it comes to public policy. If we have enough smart minds at the top, or so the theory goes, we can predict the consequences at the bottom, millions of minds and miles away. Alas, it doesn't work like that.

The temptation to assume that the NRBT will work as planned is perennial (that Mind triumphs over Markets), and so should be relentlessly questioned.

It's much more prudent to assume that unintended effects will largely swamp intended effects, and that people and institutions will continue to do what they were doing before the NRBT came along - maximizing their profits (or, if they're not for profit, like the vast majority of hospitals, maximizing their revenues).

A less hubristic approach is to just assume we can only marginally control incentives. And that means tweaking the health care reimbursement system so that it rewards efficiency and innovation and then get out of the way and let the market do what it does best - hatch many small scale experiments and kill all but a handful.

EHRs may yet succeed, and deliver their promised benefits, especially in a more competititve health care system where providers have to answer to consumers, rather than regulators or insurers.

Until then, expect lots more stories like this one. And expect people to keep wondering why the NRBT never seems to become the NRBT.


As policymakers in Washington deliberate over the next fiscal cliff, it would be irresponsible to ignore the need to rein in federal healthcare spending, which as of 2011 has hit $744 billion, or $2,392 per-capita; roughly 28 percent of total national healthcare spending. The remainder of the $2.7 trillion in health spending is made up of state and local spending (which itself depends to a large degree on federal spending) -- $470 billion (17.4 percent of the total) - and private spending -- $1.4 trillion (about 55 percent of the total). Altogether, government spending is just under half of total national health spending.

While the U.S. certainly gets good value for our spending by some measures, much of the growth in spending can be tied to the lack of a true market for healthcare, meaning few or weak price signals to the consumers of medical goods and services (a 2001 essay by Milton Friedman elaborates at some length on this topic).

The discussion on U.S. healthcare spending, unfortunately, often starts and ends with two charts:

oecd_nhe.png Thumbnail image for oecd_nhe_gdp.png

In the first chart, we see that the United States leads the OECD in per-capita health spending; in and of itself this doesn't tell you much. The U.S. is undoubtedly an outlier in many categories that measure domestic consumption. However, the second chart takes into account GDP per-capita (per person) as well, clearly showing the United States as an outlier.

This is a bit more concerning. Why does the U.S. spend so much more, and what does it get (if anything) for its spending.

According to the New York Times editorial board, we don't get anything of value for our added spending.

The contention then turns to the idea that a single-payer, or universal healthcare system is the route that the U.S. needs to take to control health care costs without much consideration for some of the actual reasons for the U.S.'s high levels of spending.

Scratch just a millimeter or two beneath the surface, and there are two factors that can account for more than half of the variation in OECD countries' per-capita health spending over the past decade: differences in per-capita GDP as well as out-of-pocket spending as a share of total national health spending.

Per-Capita GDP

That GDP is strongly correlated with health spending is a given - the chart presented earlier illustrates the highly correlated relationship between levels of GDP per-capita and health spending per-capita. In brief, richer countries spend more on health care. No surprise there. No one would seriously say that a poor country (like Rwanda) has a better health care system than France, just because it spends less on health care.

 While the U.S. may be an outlier in terms of OECD health care spending, it isn't completely removed from a possible trend, particularly if we drop the assumption that it would be a perfectly linear relationship (after all, differences in demographics often do not follow a linear trend).

However, even if we keep the rather rigid assumption of linearity, growth in per-capita GDP explains a significant amount of the growth in U.S. per-capita health spending.

US_spending_GDP.png

Source: OECD StatExtracts Database

The chart above shows the tightly correlated relationship between GDP per-capita and health spending per-capita within the United States over the past 10 years, with the only real exception due to the recession. In fact, the above correlation explains over 90 percent of the change in per-capita health spending over the past decade. Of course, the above shouldn't be taken to imply causation (for a number of reasons, but largely because incomes can rise in response to inflation, as can medical costs, which in turn impact healthcare spending - put simply, there may be an endogenous relationship between the two variables), but does indicate (as the latest national health expenditure numbers do) that the rate of growth of healthcare spending may not be as out of control as it seems.

Out of Pocket Payments

While per-capita GDP may be strongly correlated with per-capita health spending, the explanation isn't entirely satisfactory. The fact is that in cross-national comparisons the United States is still an outlier - and while per-capita GDP may explain some 90 percent of the change within the United States, it explains a little less than half of the variation between OECD countries, over time.

The rather rich data available from the OECD, however, offers another interesting variable to investigate - Out of Pocket Payments (OOP) as a percent of total health spending. It should be noted that OOP refers to spending on actual healthcare goods and services (including deductibles and copayments), and does not include premiums to insurance companies (since those premiums are later used to pay claims). Theory tells us that consumer behavior tracks price sensitivity. If you have to pay more out of pocket for something, all other things being equal you'll buy less of it than if a third party pays a part of the cost.  In other words, people who have to cover more of their own bills, become more cost-conscious. Think of it as the open bar theory: If someone else is paying for your drinks, you don't buy Budweiser you buy Johnnie Walker Black.

The same holds for health care consumption. In fact, 10 years of data tells us that countries that have been more successful in controlling their health spending are indeed those with higher levels of OOP.

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Although the trend may not be quite as clean (owing partly to the fact that these observations are over 10 years) OOP has an undeniably strong correlation with per-capita health spending.  

And in this metric the U.S. stands out rather ingloriously with one of the lowest levels of OOP in the OECD, coming in at 11 percent for 2011 and projected to fall even further as the ACA is implemented.

Now there may be (and probably are) diminishing returns from high levels of OOP, as an overly heavy financial burden incentivizes people to forgo cost-effective care. However, a well implemented system that creates a cost-conscious consumer (such as the health care system of Switzerland, which has an OOP of about 25 percent), can hold down costs without the need for onerous price controls that stifle innovation.

Back to the Fiscal Cliff

Proponents of single-payer health care ignore the fact that there is really no such thing as "free" health care. There's no magic pixie dust that makes health care more efficient when the government pays for it versus private employers. If the price to consumers is zero they will still drive up health care spending compared to other goods and services. And if the underlying costs of medical goods and services is increasing, so too will the price paid by consumers.  What governments can do is set uniform public health care budgets (including through the use of price controls) and - wait for it - increase OOP for consumers.

So what does this mean for fiscal cliff discussions?

The President has seemingly declared government health care spending off-limits. Instead, he wants to balance the budget through revenue increases. But if you're concerned about health care spending (and back in 2009, when he was fighting to pass Obamacare, the president said it was his highest priority) shifting more revenue to health care spending is the exact opposite of what you want to do.

If you really want to slow health care spending, you have to find ways to drive efficiency across the system, and this has to start with consumers. Medicare Part D, for instance, contains means-tested premiums that have helped drive consumers to generics and control costs. HSAs have been among the few insurance plan designs to hold costs down, without hurting quality (at least that we can see).

Other reforms could pare down subsidies in the ACA to 300 percent of FPL to make them a more realistic means test; better tax incentives could be implemented to encourage greater adoption of high-deductible health plans; private health insurance exchanges could be allowed to compete with the ACA exchanges (by allowing ACA subsidy dollars to be spent on those exchanges). Many options exist for putting more control of spending in the hands of consumers - and a system of appropriate means-testing can ensure that vulnerable populations like the low-income and the disabled are protected.

This isn't going anywhere with the White House, which continues to insist that 30% of all U.S. health care spending is wasted, but that health care entitlements can't be cut. And that we need more revenue to pay for them. 


The New Year's Day agreement to avoid the fiscal cliff included a repeal of the Community Living Assistance Services and Support (CLASS) Act. This action will likely not have a material impact on anyone, as this component of the 2010 health reform law was abandoned by the Obama Administration when it was determined to be unsustainable. It was simply a matter of when - not if - it would be eliminated.

Its repeal, however, is welcome as it makes it more difficult for Congress to amend the act and thus impose another financially burdensome entitlement program upon us. As I pointed out previously, if the program makes sense and there is both a demand for it and a means to provide it, the market will ensure it exists without the need for an inefficient and bureaucratic mandate.

While the fiscal cliff deal ended up being smaller than originally expected, the New Year's agreement did make some notable changes in the healthcare space. Repealing CLASS was one; cutting $1.7 billion from the funding for Consumer Oriented and Operated Plans (CO-OPs) is another. What else would you have trimmed and what do see as the implications of these changes?


In a recent issue brief my colleague, Jim Copland, and I discussed the impacts of the recent U.S. Court of Appeals for the Second Circuit's landmark ruling in U.S. v. Caronia - that criminalizing the communication of truthful information about an FDA-approved drug was an unconstitutional impingement on free speech.

The decision highlighted two emerging, but competing, trends in medicine and law: the growing use of FDA-approved medicine for off-label prescriptions and the increased criminalization of pharmaceutical promotion. As it turns out, off-label use is already quite common - some 21 percent of commonly used drugs are prescribed off-label. Nonetheless, the FDA has adopted very restrictive and complex regulations for when pharmaceutical companies can discuss off-label uses for their products, even when those uses are routine in the medical community. And these restrictions only apply to pharmaceutical companies - independent physicians, academic researchers, and consumer groups are entirely free to say what they want about the risks and benefits of FDA-approved medicines.

No one is arguing that companies should be able to say anything and everything about their products. We argue that that the FDA should create a safe-harbor for truthful, scientific information about the emerging uses of their products - allowing for the dissemination of information on drug benefits, as well as risks. (Currently, the FDA requires companies to communicate known information about off-label risks - it's the benefit information that companies can't communicate, with some very narrow exceptions.)

More information means more informed physicians and better care for the patients they treat.

Unfortunately, the FDA isn't the only agency restricting the communication of truthful information about new medicines to consumers. Medical schools and health systems are increasingly restricting pharmaceutical company representatives from communicating with doctors about new products. The result is that physicians have less access to emerging information about both the risks and benefits of medicines.

In fact, a 2012 study published in the Journal of Clinical Hypertension by Chressanthis et al found that physicians with high access to pharmaceutical representatives - who would inform them about better-performing, innovative drugs as well as new warnings about the risks of older drugs (i.e., those of their competitors) - adopted the new treatment between 1.4 and 4.6 times faster and reduced the use of the older treatment 4 times faster.

To put it in simple terms, truthful communications between pharmaceutical companies and doctors (already heavily monitored by the FDA) is generally good for patients. While marketing abuses should be curtailed (and the industry has ended its practice of wooing doctors with expensive trips and meals), we shouldn't throw the baby out with the bathwater and restrict information from companies that can save lives and improve health.


While 11th hour negotiations prevented the country from toppling over the fiscal cliff, we're still teetering on the edge. Most provisions of the sequester were simply pushed back by two months (to March 1st) and the deal included no reform to entitlements - which play a huge role in driving federal spending. This means, effectively, that lawmakers have simply kicked the can down the road - it is a matter of fact that some savings will have to be squeezed out of entitlement programs; a new report by United Health Group, one of the largest insurers in the country offers some ideas on how to do so without cutting benefits or reimbursements to providers.

Through a combination of managed care innovations, better use of fraud-fighting technology, and various care coordination reforms, the report argues that some $542 billion in savings can accrue to the federal government over 10 years, and an additional $69 billion can accrue to states.

United Health Group Savings Estimates ($ billions)

uhc_savings.png

We already know that Medicaid Managed Care programs have resulted in savings for states, without reducing access to services, (in a managed care plan, beneficiaries are generally limited to a tighter network of providers, but this leads to better coordination of care and lower out-of-pocket spending for beneficiaries) so it shouldn't be a surprise that applying a similar framework would lead to savings in Medicare as well. Indeed, the report advocates adopting a "Medicare Administrative Service Organization" program, which my colleague Avik Roy has written about extensively.

One of the more interesting highlights of the report is the enormous savings potential from reforms to the treatment of dual-eligibles - a full $189 billion over 10 years

Dual-eligibles are arguably the most vulnerable, and difficult to treat population - they are those who qualify for both Medicare and Medicaid - generally extremely low-income seniors or the disabled. The nature of treatments that they require, often involving complex chronic diseases, makes coordinating care between Medicare (which covers doctor's visits and prescription drugs) and Medicaid (which would cover long-term care if it is needed) extremely difficult. The lack of care coordination is an important contributing factor to estimates that total spending on dual-eligibles may reach one-third of all spending on Medicare and Medicaid over the next 10 years.

Through better care coordination and high levels of participation by dual-eligibles, the study argues, these significant savings can become a reality. The Centers for Medicare and Medicaid Services are currently testing two models of care coordination - the first is a capitated payment model where states and the federal government to contract with a third-party to provide integrated Medicare and Medicaid benefits, while the second allows states to enroll dual-eligibles into a managed care program. Both models have large savings potentials, and the study doesn't come down in favor of one model over another, explaining that both models have important cost-saving benefits.

Under the capitated model, for instance, insurance plans or other intermediaries could be assured of two steady, but capitated, payment streams from the states and the federal government in exchange for coordinating and integrating care for dual-eligible populations. The managed care approach would probably require some sort of capitation, but would put more control of the programs in the hands of states, which are arguably better positioned to know unique the needs of their own populations.

In any case, the results from CMS testing these models will have to be monitored to see which performs best; one thing is certain, however - for once, we may be able to have our cake and eat it too.


The 2011 numbers are in - for the third year in a row, U.S. healthcare spending continued to grow at a relatively slow rate; just 3.9 percent. Though the initial slowdown was, in some part, due to the recession, national health spending came in about four-tenths of a percentage point lower than GDP growth for that same period - clearly, more than just the economy was in play.

A 2012 study by the RAND Corporation offers some insight into one potential cause - the growing use of High Deductible Health Plans (HDHP). An HDHP places more control over healthcare spending in the hands of consumers by offering lower monthly premiums but requiring a higher deductible for medical services. The study found that these plans (often paired with a Health Savings Account (HSA), which allows consumers to use pre-tax dollars to pay for routine medical expenditures), make consumers more cost-conscious about their care; spending for families who switched to HDHPs was 21 percent lower  than for similar families who remained in traditional plans.

And there is reason to believe that these consumer-directed plans did play some role in slowing the growth of health spending as adoption of these plans grew significantly over the three years of relatively modest spending growth.

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From 2009 to 2011, the use of HDHPs has grown by nearly 43 percent across all markets; even in the individual market, which is usually the most expensive (and the market that Obamacare expands in its exchanges), enrollment grew by about 27 percent.

The results of the RAND study, along with the realities of growing use of HDHPs offer a good case for at least partly explaining the slowdown in cost-growth. Giving this view even more weight, a survey conducted by consultancy Mercer last year, found that the growing use of HDHPs by employers has helped drive their cost growth down to the lowest in 15 years.

The broader takeaway is that getting more skin in the game, financially, from consumers may help keep overall healthcare spending down. Ultimately, however, those covered by HDHPs only represent about six percent of those covered by private insurance - so the effect on overall healthcare spending will likely be minimal. Still, the impacts of higher-cost sharing are becoming visible, as out-of-pocket spending grew by 2.8 percent in 2011, compared to 2.1 percent in 2010, reflecting higher cost-sharing requirements across all plan types.  (However, the RAND study found that if the proportion of people with employer-sponsored coverage with HDHPs rose to 50 percent, annual health expenditures would fall by about $57 billion - accounting for more than half of the 2011 increase in health care spending.)

While the cost-reducing effects of HDHPs are clear, some critics, like Aaron Carroll at the Incidental Economist, have argued that HDHPs may lead people to avoid care that they might need. Indeed, The RAND study found that the savings were driven, in no small part, by reductions in the use of services. (An unexplained phenomenon in the RAND study, however, is that much of the reduction in services was in preventive care which has been covered by most HDHPs even before Obamacare's requirements). These concerns are certainly valid, and health outcomes for individuals with HDHPs will have to be monitored over the years.

As we learn more about states' health insurance exchanges and the types of plans that insurers will be offering, we should hope to see continued growth in HDHP use. Despite critics' concerns, HDHPs offer a market-based tactic for bringing younger, healthier patients into health insurers' pools - and more healthy people in the pools means lower costs for those with chronic ailments as insurers are better able to spread their risk. And while consumer-directed plans shouldn't be seen as a panacea for our healthcare spending (now standing at 18 percent of GDP), for those concerned about the cost of our system, they offer a great starting point.


Despite all the uncertainties of Obamacare, one fact has remained - insurance will become more expensive.

The NY Times reports that insurers are seeking double-digit rate increases in a number of markets - in California for instance, some 68,000 people will see an average increase of 18.8% in the individual market. In Connecticut, a state that will have one of the highest bars for participation in their insurance exchange, a slew of individual market products have already seen increases of about 14%, affecting over 20,000 people.

Under Obamacare, HHS requires states to conduct reviews of proposed health insurance premium increases. For states without an "effective review process" HHS will conduct the reviews themselves. The basic idea is that exposing insurers to public, and government scrutiny will help keep down insurance costs for consumers - there is reason to doubt that this will pan out as well as hoped.  

For starters, the rate increases are often justified by increases in costs - in Connecticut, 20% of the 14% jump was due to administrative expenses; almost 70 percent was due to increases in actual medical costs (the largest of which was "professional services" that includes payments to doctors). Some will doubtlessly argue (and the NYT article addresses this) that this still means that states should simply have the power to deny or modify rate increases - as New York has just done (some 36 other states have the power to do so as well). The problem with this line of logic is that it doesn't address the underlying growth in costs - health care continues to become more expensive, and Obamacare doesn't help much by requiring more generous benefits and banning the ability to base premiums on health status.

Additionally, insurers also have other options for addressing cost growth - rather than raise premiums they can simply increase cost-sharing (such as co-insurance or deductibles) to make consumers foot more of the cost of their health care. This means that rather blunt policy tools like denying rate increases are unlikely to work and would instead make the cost hikes less transparent.

Instead (though it's too early to tell now), states that tend to have more restrictive policies and tendencies (such as denying rate increases or requiring more generous benefits packages) may very well see insurers exiting their markets as they decide that it isn't worthwhile. As states establish their health insurance exchanges this year, it will be wise to keep an eye out for insurers refusing to offer policies in states with higher bars for participation.

So while the ultimate reason for rising insurance costs may be uncertain - more generous coverage, more administrative costs, or higher health care costs - the end result is still the same: under Obamacare consumers will be paying more for their insurance.


As the New York Times noted in its December 15 editorial, When the Physician is Not Needed, health-care reform will propel millions of newly insured Americans into a system with far too few primary-care physicians.

That shortfall will have to be filled by other qualified providers, including nurse practitioners (NPs) operating in retail-based clinics. As I noted in a 2011 New York State Health Foundation-sponsored report, Easy Access, Quality Care: The Role for Retail Clinics in New York, retail clinics offer high-quality care for routine ailments at a fraction of the cost of physician's offices or emergency rooms. Today, about 1,400 retail clinics operate nationwide.

Unfortunately, in New York, retail clinics are often hindered by outdated regulations. Fewer than 20 retail clinics operate in New York today, compared with 106 in Florida (which licenses corporate owned retail clinics, although it does not license provider-owned clinics). Albany policymakers should rescind laws that prohibit companies from directly employing NPs and allow NPs to practice independently - making routine care more affordable and accessible.

This not to say that all traditional hospital or physician-based services are outmoded, just that every provider should be allowed to practice at the top of their license and utilize emerging technologies and new business strategies to reduce costs and increase efficiency. Providers that deliver enhanced quality, improved convenience, and lower costs to consumers - whatever license they happen to have - will win in the emerging cost- and data-driven health care market place.

Take another evolving consumer-oriented health care innovation, telemedicine. Telemedicine (via companies like Teledoc) offers a way for consumers to access physician services using phone or web-based platforms like Skype or Facetime.

Telemedicine allows consumer to conveniently consult with expert physicians or specialists when they can't get an appointment with their regular physician, in rural areas where specialists aren't available, or for business travelers who can't access their regular physicians - avoiding an expensive and onerous trip to the emergency room. In New York, Beth Israel Medical Center offers telemedicine services for just $38 - including prescriptions, if necessary - compared to $75 or $100 for a traditional "bricks and mortar" office visit.

An even more promising evolution is the expansion of app-based health care services through on your smart phone. My colleague Mark Mills has penned a terrific Forbes blog series on the app- and supercomputer-driven future of medicine, enabled by massive increases in computing power and ubiquitous Web access. The real life Star Trek tricorder may not be far off, and it will eventually revolutionize medicine - with sophisticated analytics that can match or better the diagnosing skills of all but the best physicians.

120110-coslog-tricorder-1150a_photoblog600.jpg

Back to the New York Times editorial. Bravo to them for thinking about health care from the consumer's perspective, where cost, quality, and convenience are key. The irony is that the Affordable Care Act is building out mid-century American medicine - subsidizing high cost traditional insurance and physician access - when technology is poised to make the old paradigms obsolete.

Health care's labor problem won't be solved without massive increases in technology driven productivity, espeically given the double whammy of the Affordable Care Act and a rapidly aging population that is going to require much more care and care management. The resulting logjam of patients demanding doctors to "see them" will have to spur a revolution in how care is delivered, and by whom (or what).

In other words, paging Dr. Watson.


An editorial in the LA Times has received some backlash from physicians for expressing support for reforming Medicare's payment system from fee-for-service to a bundled payment.

One Physician from Santa Clarita perfectly sums up the concerns:

Putting financial burdens on doctors for better results ignores social factors, including personal compliance.

Some skin in the game, however, is exactly what we need to demand of physicians.

Under its current structure, Medicare - as with private insurance - reimburses providers based on the complexity (determined somewhat arbitrarily through the Resource Based Relative Value Scale) and volume of their procedures. Predictably, as with any volume-based payment system, this encourages overuse of the system and contributes to fraud. While private insurance, not reliant on taxpayer money, has significant incentive to reduce waste and fraud resulting in higher overhead, Medicare instead has an incentive to keep such "overhead" costs low, resulting in unrealistically low administrative expenses (if Medicare were to combat fraud at the same level as private insurance, their administrative expenses would likely be similar). These dynamics mean that fee-for-service reimbursements may work with private insurance (which tries to reduce waste and fraud) but may not be appropriate for a government program with less incentive to do so.

Under a bundled payment structure, care providers would receive a sum of money to provide for the healthcare needs of their patients while still ensuring quality. By tying providers' income to the health of their patients rather than the volume of care provided, two problems are addressed: first, the perverse incentive to needlessly increase the volume of high paid specialist services is minimized; but secondly, it eliminates the need to constantly return to bickering over Medicare's Sustainable Growth Rate, since growth would be more manageable under pre-determined budgets.   

Indeed, the original LA Times article cites a study showing a 10 percent reduction in costs under a bundled payment approach, with the same level of quality of care.

But it's important to also realize the difficulties that physicians would face if Medicare adopted bundled payments. The same physician concerned about taking on financial burdens also worries about tort reform:

There is also a chance that should I neglect to order a test, I'll get sued by an avaricious malpractice lawyer.

For real Medicare reform to take place, physicians have to be held accountable not only for a patient's health, but also for unnecessary costs incurred by the publicly-funded system. At the same time, other healthcare reforms will be necessary to align the rest of the system with the new reimbursement schemes, and this will no doubt include tort reform. Bundled payments offer a good start to help cut the overuse of Medicare, while ensuring that beneficiaries still receive the same quality of care. 


Paul Howard and Yevgeniy Feyman

The recent bill passed by both the House and the Senate effectively kicked the fiscal cliff can two months down the road and was just approved with the President's signature. Among the provisions in the bill is one that also postpones, for the next year, a 26.5 percent cut to physician reimbursements from Medicare. Commonly known as the 'doc-fix', this measure has been used for many years to avert reimbursement cuts required by Medicare's Sustainable Growth Rate. While physicians can rest easy for the next year, part of the cost of averting the payment cut is being funded by cuts to hospital reimbursements.

So what are we left with? The underlying problem with how Medicare's SGR is calculated remains unattended - come 2014, Medicare providers will once again be at the mercy of congressional maneuvering. Moreover, the hospitals facing the cuts are those that primarily treat poor populations. (Disproportionate Share Hospitals).

The broader problem, which isn't addressed, is how Medicare's payments are calculated - the Resource Based Relative Value Scale. Developed decades ago, the RBRVS guides how Medicare reimbursements are structured based on four categories: mental effort, physical effort, skill, and time. Seemingly uncontroversial, the RBRVS has steadily grown to favor specialists over primary care doctors - reimbursements for specialist services have grown tremendously (even as many procedures - like a cataract extraction - have become more routine and automated) while primary care physicians have seen their reimbursements remain static. Certainly, specialists perform often complicated procedures that require years of training to perform properly - and they deserve to be compensated fairly for their work. But primary care is similarly demanding, and patients rely on their physicians to help diagnose one out of possible dozens of ailments and refer them to the appropriate specialist - no small feat with an ever growing number and variety of chronic diseases.  We're also asking primary care physicians to shoulder more of the burdens of chronic care management, in effect asking them to become health care's version of air traffic controllers.

Of course, it's possible to avoid dealing with the RBRVS entirely by simply changing how the SGR fee update is calculated with a method to always insure a positive increase.  But is this the right way to approach the question?

Congress should be agnostic about who performs a service, as long as the service is delivered effectively and efficiently.  Congress should also set up a system that encourages innovators to replace expensive labor (services) with much less expensive diagnostics.  By basing the RBRVS on the "mental skill" required to perform services, the system implicitly biases the increased utilization of labor rather than diagnostics. 

Or, to put it another way, IBM's Watson could eventually deliver routine and complex analysis of a patient's health through a low-cost tablet app offering supercomputing services to a physicians' assistant, nurse, or primary care physician. This reality isn't that far away - The Tricorder X-Prize, offered by manufacturer Qualcomm, seeks to reward the first company to "put healthcare in the palm of your hand" by essentially creating the ubiquitous Star Trek gadget. Mark Mills, senior fellow at the Manhattan Institute, writes:

The ultimate Tricorder idea is to access the wealth of (voluntary) data about what you've been doing, eating, how your own biological machinery has been operating, and marry it with a rich stream of highly precise and real-time physiologically-specific information about what's going in your body right now - wherever you are - and link this wirelessly to the analytic computing power that resides in the Cloud.

The new world of "Big Data" makes this possible - and with the exabytes of health data out there, it will help put healthcare decisions into the hands of patients.

The RBRVS and the SGR lock American health care into labor arrangements that are swiftly being overtaken by technologies that have the potential to radically change the cost and quality of American health care.  But their use will be constrained as long as pricing signals are based on assumptions about the value of labor that are woefully outdated.

A better solution would be to get out of the business of pricing services entirely, through a premium support mechanism that encouraged robust competition among many different networks of competing health care providers. Pricing competition will encourage insurers and providers to seek out the most cost effective and innovative mix of pricing and services.    

Then we won't have to worry about the SGR or the RBRVS ever again.  And that would be a priceless gain for American health care.   


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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013


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