Consumer Driven Health Care Category

CDHPs, which combine high deductibles with catastrophic insurance, have been criticized as being only for the “healthy and wealthy.” On MPT, we’ll discuss the growing body of research that shows that CDHPs not only control costs better than traditional insurance, but can provide health outcomes that are comparable if not (in some cases) better. We’ll also explain how the growing transparency of costs and quality in health care markets, along with the emergence of new personalized medicine tools (like advanced diagnostics), can empower patients with serious chronic illnesses to use CDHPs to improve their health and encourage more coordinated care.

In recent weeks, early reporting data from Advocate Health Care's accountable care organization (ACO) has reignited discussion about the sustainability and scalability of the ACO model. This is especially noteworthy since ACO advocates are touting the 2% savings Advocate's ACO has achieved. Unfortunately, most of the discussion so far has focused on the obvious issues, like upfront infrastructure investments and concerns about the fact that patients aren't required to stay within the ACO. But these concerns barely scratch the surface of the issues surrounding ACOs.

Let me put what I see as the real problem with ACOs in context. The goal of ACOs -- getting to better healthcare at lower cost -- is laudable. But the means are fundamentally flawed.

I've been an advocate for healthcare reform in this country for many years... moving to a market-based system that centers on the consumer and reflects transparency in cost and quality while connecting payment with outcomes. The means to do this are there. My firm has identified about $500 billion in unnecessary care, in cost due to medication errors, and in cost due to poor care coordination. Add to that the estimated $250 billion in fraud and abuse, and you have a substantial amount of money in our healthcare system that could be redeployed. That's more than enough to provide coverage for those that can't afford it.

With the Patient Protection and Affordable Care Act (PPACA), there were really 3 goals: insurance reform, delivery reform, and payment reform. So when I read the legislation and saw the 9 pages describing the ACO, I thought, "This is not going to work." It flies in the face of everything we know about organizational design and human behavior. And to make matters worse, it's an overlay on the existing fee-for-service model.

Theoretically, the idea of combining all providers across the continuum of care under one umbrella sounds good. But if you've ever worked at a large company, you know that having everyone nominally working for a single organization doesn't mean that everyone is aligned, and it doesn't mean that you won't have silos. And as designed, the ACO model is very complex, and it's very difficult to implement. It creates a bureaucratic overly on a broken system.

So that 2% that Advocate has saved? They've got a lot further to go to get to $750 billion.

Accountable care is needed. But as I've argued consistently, ACOs are not. So the obvious question becomes, what will get us to better health outcomes at lower cost?

Imagine an alternative where primary care physicians are able to take time to diagnose patients and help them make better choices for their own health. Insurers incent beneficiaries financially to make better health choices. Employers create financial incentives to make good decisions about health. Physicians make information about cost and outcomes available, like in any other industry. It's a fundamentally different approach -- one that is market-based and patient-centered, not organization-centered.

Consider the example of Lasik and cosmetic dermatology. When the technology was first developed, it was very expensive. But in the years since, the costs have gone down while quality has improved -- like in any other industry. Years later, many more people are able to take advantage of these services. And they pay for them differently -- it's a bundled price for a whole procedure, instead of paying separately for every minute detail.

The only way to get costs under control is by changing payment. Providers need to have incentives to keep patients out of the hospital. We're starting to see some signs of that already -- outside of the PPACA legislation -- in CMS's refusal to reimburse "never" events. Ironically, CMS already had the administrative authority to do this and didn't need PPACA.

In the end, it's all about payment for outcomes and putting the consumer at the center. The ACO model fails to do this.

One of the most disappointing things about the recent commentary is that while some questions have been raised about sustainability and scalability, what's largely been absent from the debate are questions about ACOs' viability. ACOs will fail to improve healthcare costs and quality because they take a fundamentally broken system and create a complex bureaucratic overlay, making an already complicated system even more complex. And each layer of complexity will only add cost, decrease efficiency, and reduce transparency.

The answer isn't a new, complex organizational model, but rather greater transparency and greater accountability for costs and outcomes. Creating incentives that focus on achieving quality outcomes, providing choice and allowing real competition will get us there -- ACOs won't.

Paul Krugman, the Nobel laureate, Princeton University economics professor, New York Times economics blogger, and die-hard champion of the left, argues in his Saturday piece, that we aren't having a legitimate, serious discussion about Obamacare. He points to my Manhattan Institute colleague, Avik Roy's, recent piece, which claims that in California, insurance premiums are increasing, contrary to what California's Benefit Exchange is claiming.

I've written briefly about California's numbers - one problem is that the exchange is framing them as falling by comparing with small-group plans (employer sponsored insurance); the other is that California already has a large individual market, which means that the current rates shouldn't be as oppressive as those around the country, which in turn means that California isn't representative of the rest of the country.

Roy takes it a step further and actually examines what it would cost 25 year old non-smoking male to buy insurance coverage now and under Obamacare - the median cost more than doubles from $92 to $205 a month (or $184 a month for non-subsidized catastrophic coverage). Ditto for 40 year olds, who will see costs increase from $121 to $261.

It would seem that the result is pretty clear - costs will increase. But that isn't what Dr. Krugman is disputing - the point of contention is that this methodology essentially compares apples to oranges, when oranges won't be available in 2014 (a better way of putting it is comparing two apples - one weighing half-a-pound and the other weighing a pound, when the half-pound apple will be taken off the market next year). To his credit, Krugman is correct. A combination of new benefits requirements, community rating restrictions, maximum out-of-pocket limits, taxes, and various other regulations will make some plans unavailable in 2014 - ostensibly, the cheapest plans available now won't make the cut.

Before delving into questions of benefits etc., it is worth noting that this is one case where comparing apples to oranges is exactly the correct methodology. The very fact that new regulations will make some plans obsolete is one of the main points that those on the right are making. Because the plans being made obsolete are relatively inexpensive, costs will, by definition, increase. Whether consumers are, on average, better off with more comprehensive minimum benefit packages and community rating restrictions, is an altogether different question. It is certainly within the realm of possibilities that consumers could be made better off (total consumer surplus increases) with new regulations. That isn't a question that can be answered now, however - Obamacare will have to be studied years after the fact to understand its impact. Moreover, other questions remain - for instance, costs aside, since the uninsured are predominantly young and (relatively) healthy, it is questionable whether we should be requiring them to purchase relatively comprehensive insurance coverage.

The question of costs, however, is easy to answer now. Costs are - no matter how you measure them - increasing.

But what if we were to make a more "apples to apples" comparison - that is, compare relatively generous plans now, with the default generous plans under Obamacare?

Let's take our 40-year old non-smoking male, and assume that he is fairly risk-averse. Let's say he earns close to GDP per-capita - about $50,000. Our 40-year old is currently uninsured, and being risk-averse as he is, would probably like to cover a good number of eventualities, meaning that his plan should have a relatively higher actuarial value - similar to those mandated under Obamacare.

If our 40-year old currently lives in Southern Los Angeles, a good option might be the Cigna "CA Open Access Value 3000" plan - coming at $227 per-month, with a relatively low deductible of $3,000. The plan includes maternity coverage, and a prescription drug plan, and covers preventive services without a deductible. Indeed, the plan's brochure indicates that the plan design is intended to comply with Obamacare regulations. What will be the cheapest plan available on the exchange for this 40-year old? It will be 9.3 percent more expensive, at $242 dollars (and this doesn't take into account potentially higher deductibles).

This isn't quite the doubling of premiums that Roy discusses - because this does compare similar plan designs. And yes, as some have noted, premium tax credits may brunt the impact for individuals buying insurance on the exchange. But the point is the same - even comparing plans that offer similar benefits, other regulations in Obamacare will make the insurance market more expensive, driving up costs.

 Note: Current insurance rates here are based on estimates from  

It is almost axiomatic today that the future of health care delivery will be dominated by gadgets, apps, and everything in between that track your vital signs in real-time, use genomic and phenotypic testing to guide treatment selection, and portable electronic health records that do away with doctors' chicken scratch and seamlessly integrate across thousands of different systems. Of course, we always tend to view the future through rose-colored glasses, and tend to discount the possibility that things may not work out as we hope (electronic health records have not brought the expected cost savings, for instance), and there will still be many kinks to work out when it comes to precision medicine.

Nevertheless, the trajectory of our health care system is clear - much of the data that will fuel the big data revolution is already on the cloud (many apps readily use this data for various purposes but simply the data isn't completely interoperable across systems) - the velocity (whether we get there 5 or 20 years from now) is less relevant.

But amidst all the hubbub about these new developments (like the potential Star Trek-ification of future health care diagnostics) some have cried foul on an issue that Americans take very seriously - privacy.

Imagine a decade from now, that throughout the day, you're wearing the Apple iWatch - it monitors everything including your blood pressure, body temperature, and the amount of calories burned throughout the day. The information is uploaded to your iTunes account so you can track your daily activity, it shares the information with your electronic health record (maintained by your local physician, ACO etc.) so your health care provider knows what you mean when you say "I run every day!", and somewhere along the line, it ends up being part of a study looking at the effects of wearing the Apple iWatch on weight loss. Of course, the researchers are careful to aggregate the data - removing information like zip codes, addresses, social security numbers and other identifiable characteristics to make sure that no one - not the government, not your health insurer, nor any marketing agencies interested in maximizing their outreach efforts - can use the data to identify any individuals. Unfortunately, the reality is that no matter how careful researchers are, someone is bound to make a mistake - although the risks of re-identification (particularly post-HIPAA) are estimated to be fairly low, as information becomes more digitized this will increasingly become an issue.

Not only is re-identification an issue, but security of the records - protecting against data breaches - will become ever more important. As health information gets stored on the cloud - in a server that is just as likely to be located domestically as it is in India or the UK - it becomes, by definition, less secure. Of course, advances such as public key cryptography (where data is locked by one "public" password, but can only be unlocked by another "private" password), MD5 hashes, and ever-increasing encryption complexity, help to protect against these threats. The impending digitization of health care data will make these innovations ever more important, and federal (as well as state) regulatory standards will have to keep pace.

But let's assume for a moment that digital security will be able to prevent nearly all data breaches, personal information will be stripped where necessary, and federal regulations will help, not hinder, these efforts. There still remains a question that privacy advocates should worry about - that of permission. High profile lawsuits against companies like Facebook (which used members' profile information to help target ads) occur because companies can be negligent (whether intentionally or not) about requesting their users' permission to use personal data. For the time being this isn't a major issue (of course, there are exceptions) - health insurers aren't constantly scouring Facebook just yet to help them determine your premiums. But once again, as information becomes more digitized - particularly relevant health-related information (for instance, how much you run during the week, how many calories you intake etc.) - different stakeholders, like insurers, employers, and the government will certainly have an interest in accessing it (whether to adjust your insurance premiums or to investigate fraudulent disability claims).

The incentive for various stakeholders to seek out relevant personal information about you will put enormous pressure on developers of these gadgets and apps of the future, particularly when it comes to using your data. To maximize the use of these innovative technologies and maximize their benefit to society, companies will need to assure their customers that they will retain complete discretion over how their information is used. Privacy policies will need to be simplified from legalese into easy-to-read language so customers understand when they're signing away their information to be sold to third parties. One competitor for Qualcomm's Tricorder Prize (a competition to develop a Star Trek-like medical device), the Scanadu, offers what may very well be a gold standard for privacy:

The most recent data will be stored on your phone. But you will help us define the way data is stored for the long term. It is anonymized and encrypted. It is your data. What ever we'll do - it will always be opt-in.

You are the only person that has access to your data. You do however have the ability to share the data with doctors or even your friends and only if you want to.  

It doesn't really get any simpler than that. A simple checkbox that simply asks "yes or no" is all that's necessary (here is where federal regulations can help - the DOJ can issue simple "model" privacy language for developers to build off of).

But what about insurers? Surely, they have a right to know (and risk-adjust appropriately) if you have a genetic abnormality that predisposes you to a particular form of breast cancer. Let's ignore, for a moment, the fact that insurers are currently not permitted to discriminate based on genetics. There are other ways for insurers to encourage consumers to share this kind of information without bringing to mind a "big brother" corporate dystopia. The car insurer, Progressive, for example, lets prospective customers attach a device to their car to track their driving for a period of time. The information gathered can then be used to reduce their insurance premiums, but the company promises not to use the information to increase premiums (say, if you're a more erratic driver than other, similar drivers). Rather than penalizing people for sharing their risk factors, insurers can reward them - for instance, by helping to decide what the most appropriate and cost-effective course of action is, if a mutation in the BRCA gene is discovered.

Nevertheless, the onus will remain on developers that are leading the big data revolution in health care to ensure that customers understand what they're sharing (if anything), who they're sharing it with, and most importantly developers will have to allow customers to opt-out of sharing as well. Indeed, the big data revolution in health care can be accelerated if consumers trust that their data is safe and secure, and that they are in control of their data, rather than the big bad insurer, hospital, or generic "corporate giant." The market, along with smart and lean government regulations will ensure that companies that protect their customers' privacy will be the ones that succeed in the big data era. 

In today's evolving healthcare market, hospitals are under increasing pressure to provide better quality of care at lower cost. The fee-for-service payment system that's been in place for years rewards volume, not value. It unintentionally encourages the inefficient use of resources, thereby driving up medical costs because it doesn't connect payment to outcomes. As commercial and public payers attempt to get healthcare costs under control, there is growing recognition that we need new payment models. One approach gaining momentum is bundled pricing.

It was previously reported that over 500 organizations will participate in CMS's bundled payment initiative within the next year. In addition, we know that many commercial payers and providers are collaborating to implement bundled payment programs. As we predicted, bundled pricing is here to stay.

But not all bundled pricing is created equal. There are many definitions. Some approaches are more likely to work than others; and some are a really bad idea, likely to repeat the problems of HMOs in the 1990s. Until accountability for outcomes is tied to payment and the market becomes more transparent, we won't see the changes that are needed within the healthcare system.

One concern is that as hospitals quickly move to adopt bundled pricing initiatives, including those sponsored by CMS, these programs will only focus on lowering costs without delivering better outcomes. Effective bundled payments must deliver a "standardized," evidence-based set of services for a fixed price with specific quality guarantees. This approach will force care providers to align their efforts to manage underlying cost drivers and focus on outcomes.

Healthcare providers must realize that bundled pricing requires more than combining relevant procedural codes and offering services at a reduced price. Implementing bundled pricing requires significant preparation and organizational change. When designing a bundled payment model, measures must be in place to track variability in cost and quality across the continuum of care. The model also requires an environment where clinicians and administrators have established a partnership involving strong communication and coordination. Hospitals that fail to take these steps will have a difficult road ahead of them as stakeholders across the industry demand more value for their healthcare dollar.

As I discuss in Healthcare at a Turning Point, a well-structured bundled pricing model that delivers defined outcomes at a specific price will better meet the demands of both payers and patients. It will ensure that we achieve the ultimate objective - better health outcomes at lower cost. Keeping this objective in mind, how are you seeing the changes described above playing out in your area of work? Please share your thoughts.

As I've written here and elsewhere, Obamacare furthers a public misconception of what "health insurance" is meant to be. The law requires plans that are sold on health insurance exchanges to cover a vast array of benefits ("Essential Required Benefits") that include basic, inexpensive preventive care with no cost-sharing. And by doing so, the law mistakes what insurance actually is - a financial instrument to help individuals pay for costly, unexpected, events.

You want insurance that covers everything from an annual doctor's visit to the $9-a-month birth control pill? Then be prepared to pay more.

Ultimately, however, the insurance exchanges are likely to affect a relatively small share of Americans - at last count, about 25 million according to the CBO.

The majority of Americans - around 160 million - will continue to receive insurance through their employers (whether this is desirable or not is a whole different question - hint: most economists believe it isn't). But even here, Obamacare's miscalculation of what insurance should be, is creeping in.

Perhaps what's most noteworthy about Obamacare is that it offers a case study for Econ 101 students in unintended consequences.

Obamacare's major change to employer-sponsored coverage is that firms with 50 or more (full-time equivalent) employees will be required to offer health insurance to their full-timers, else pay a per-worker penalty of $2,000 (there is a separate penalty for workers who are offered "unaffordable" health coverage).

Because one goal of the health reform law was to disrupt as little as possible existing coverage (remember that "you can keep your coverage if you like it"), requirements for employer-sponsored insurance are significantly less onerous than those for plans sold on the exchanges. The only real requirement is that employer-sponsored plans have to cover preventive services with no lifetime benefit limits.

As can be expected, we've already seen employers discuss cutting hours and employment as ways of avoiding this mandate. But a WSJ piece out on Sunday offers insight into a third strategy: cutting benefits.

As the WSJ article points out, a number of businesses including two food-chains in Texas will offer "skinny," mini-med plans - relatively inexpensive form of health insurance. These types of policies have been around well before Obamacare and typically don't include coverage for surgeries or hospital stays, and when it comes to drug coverage, tend to only cover generics - they can often be priced at under $100-a-month.

For those of us concerned about health care costs and waste in the health care system, this is a mixed blessing. Perhaps few employers will embrace mini-med plans; maybe many will. The big picture, however, is what deserves attention. There appears to be a growing industry-level move that focuses more on insuring routine health events like doctor's visits along with (or, as in the case of mini-meds, instead of) expensive events like surgeries and hospitalizations.

This is exact opposite of what you'd want to see.  We should be encouraging people to pay for more routine costs out of pocket, rather than relying on insurance.  For really big ticket items - like hospitalization or expensive chronic illnesses, insurance should bear the cost.

Such is the law of unintended consequences that Obamacare is extending coverage for many services where the evidence on value is actually pretty weak.   

Before Obamacare, the American health care system was bifurcated (trifurcated, really - but that's a discussion for another day): those with health insurance and those without.

Underpinning the law was unambiguously a belief that when someone wants to see a doctor, they should be able to do so at minimum cost to them - costs to others be damned! That regular doctor visits are cheap (and getting cheaper courtesy of companies like Wal-Mart!), or that annual physical exams (that will now be effectively free) have not been shown to improve health outcomes was never a concern to the drafters of the law. But they missed something potentially worse - further fragmentation of the health care system.

Those receiving health insurance as a result of the employer mandate (or those whose employer-sponsored insurance will change its benefits package) might end up becoming "second-class" policyholders who can see a physician at no cost to them, but god forbid they land a kidney infection that requires a weeklong hospitalization. We know that this wasn't the intention of Obamacare's backers, but their preferences blinded them to another set of problems. It's understandable that the authors of the law missed such potential market shifts - after all, it's hard to see the forest for the trees when you're layering regulations on a market with very few signals thanks to other regulations.

"Reformers of the reform" should take heed and remember that insurance doesn't need to be comprehensive - covering the most unexpected events is all that's necessary. Direct Primary Care memberships - like Primary Care 1 in West Virginia - can be cost-competitive with mini-med plans, while offering a far wider range of services. Layering catastrophic insurance on top of that would help cover rare but expensive events that mini-meds don't. And in a bit of good news, Obamacare allows such plans to be sold on the exchanges and they even qualify for federal subsidies (albeit with a requirement that the DPC plan provide a "medical home" as well).

Those in Congress concerned about how the implementation of the law will play out should focus their energies on making the law more friendly to catastrophic plans on their own (for those who are healthy enough and don't need an annual doctor's visit, for instance) by allowing the use of premium subsidies for these low-cost plans.

Estimates of Americans without health insurance hover between 15 and 20 percent - depending on the source (much of this is a difference in whether you ask about being uninsured presently or being uninsured at any time during the past year). According to the CBO, Obamacare will expand coverage to some 25 million people through exchanges and 12 million people through Medicaid expansion (a net of 27 million fewer uninsured because some people will lose employer coverage and others will lose existing non-group coverage). By CBO's estimates, this cuts the number of uninsured down to around 10 percent - about 30 million people.

This coverage expansion, however, masks some confusion about what health insurance really is. Beth Haynes, Executive Director of the Benjamin Rush institute points out the underlying problem:

Think about your auto, life and homeowner's insurance. Each of these is designed as a means to pay for unexpected, unpredictable, very expensive occurrences outside of the control of the policyholder... So what is it we have that we call health insurance but isn't? We have the prepayment of medical expenses. We expect our "insurance" to cover predictable, relatively inexpensive events like health maintenance checks, minor illnesses and injuries -- and to pay for them with minimal out of pocket spending.

Unfortunately, almost none of the discussion about America's health care woes attempts to clarify the point that insurance is designed to protect against catastrophic events - not cover every day, basic expenses. As Paul Howard and I have written previously, there isn't much logic in forcing "Cadillac" coverage (comprehensive coverage with little out-of-pocket spending) on a person that only needs coverage for the most catastrophic events (a young, healthy person, who can afford to cover a basic doctor's visit once a year but wants to hedge his bets against an unexpected cancer, for instance).

Because insurance companies are required - currently by states, and come 2014 by federal regulations - to cover basic expenses with minimal cost to the individual, the only place to shave costs remains in covering catastrophic episodes - the ones that tend to cause medical bankruptcies.

The problem is rooted in the idea that we can cut costs while offering more expansive coverage - you can't have your cake and eat it. More expansive coverage by definition means spending more money, regardless of who is paying. The fact that many people under Obamacare won't bare the full weight of their medical costs doesn't change the underlying price being paid for an inflated "insurance" product.

Think of it this way: you can get cheap auto insurance for under $100 a month; it will likely have a high deductible (say, $2,000) and no auto insurance covers maintenance like oil changes and tire rotations. But if your car gets totaled in an accident (which shouldn't happen often), you shell out the $2,000 deductible and the insurance company pays for the rest. That's how insurance works - except in the health care sector. Subsidies under Obamacare will mask the true cost of the law, but won't fundamentally change the fact that American health insurance isn't real health insurance at all.

One of the many objections to President Obama's health care reform law echoed philosophical beliefs rather than explicitly appealing to empirical evidence; the refrain is that Obamacare is a government takeover of our health care system, and as such, infringes on our freedom. While the reality isn't quite that gloomy, the law does significantly increase government involvement in health insurance - through subsidies, Medicaid expansion, and new regulations for health care providers and insurers.

In a recent column, Paul Krugman argues in his usual lofty tone that these concerns are little more than typical conservative attacks, trying to dismantle the benefits that the underprivileged truly need. Indeed, Dr. Krugman flips the conservative point around in defense of Obamacare:

Over time, as people come to realize that affordable coverage is now guaranteed, it will have a powerful liberating effect.

This line of reasoning argues that those at the bottom rung of the income ladder, particularly those stuck in a job because they fear losing health care coverage, are far from free now. Insuring access to affordable coverage liberates people to make life decisions - such as changing jobs - without worrying about losing the valuable (and possibly life-saving) health coverage. The solution is, of course, to subsidize expansive, one-size-fits-all coverage for the poor-to-middle-income population.

There are, of course, merits to this argument. However, the reasonable conclusion is far from where Dr. Krugman arrives.

Addressing Obamacare within the context of freedom - particularly freedom to work where you please - requires going back half-a-century to the Economic Stabilization Act of 1942. This Executive Order, signed by FDR, forcibly "stabilized" wages and salaries, preventing companies from raising or cutting workers' salaries (it explicitly excluded insurance from this regulation). So, in order to attract workers, companies began offering health insurance and deducting its cost from their taxes as they did with wages. 

Ironically, it's precisely this situation that creates what economists call (and what Obamacare would fix, according to Dr. Krugman) "job lock." When health insurance coverage is contingent on a particular job, an employee would be less likely to leave that job for another that may not have the same level of coverage, if any. Because of this, workers can be stuck in a situation with a job they'd like to leave, but are unable to because they would lose their health care coverage (this is especially a problem with lower-income households that may not qualify for Medicaid).

Dr. Krugman's reasoning is that because Obamacare effectively creates a market for nongroup health insurance (by mandating coverage and providing subsidies), people are liberated from having to stay in a job simply for the health coverage. This is certainly one way of looking at it, and it's very possible that Obamacare may marginally remedy job lock.

Let's consider another perspective, however. If the goal was really to "liberate" people from job lock, a more effective and direct approach would be to eliminate the very deduction that creates job lock. Not only would this nullify the incentive to remain at a job because of insurance coverage, it would likely increase actual wages as companies would shift compensation away from benefits and towards salary. With this extra money, along with basic reform to create a truly national health insurance market (think Obamacare exchanges, but on a national rather than state level, with one set of fairly unobtrusive regulations for the country as a whole and a focus on catastrophic coverage paired with HSAs), individuals could very well purchase coverage that is appropriate for them without the massive subsidies under Obamacare.

Under this second perspective, people have more money in their pockets at the end of the day, have more control over their health insurance, and are free to work where they want without fear of losing health insurance.

While we don't yet know exactly what impacts Obamacare will have, portraying it as liberating workers is at best a stretch. It merely substitutes reliance on a job for reliance on government subsidies - not exactly "liberating." 


In a brilliant op-ed at the Wall Street Journal, Harvard Business School professor Clayton Christensen &co. make the point that the American healthcare system needs a strong dose of disruptive innovation to start addressing the issue of costs. At the core, he writes, the problem with the ACA is that Accountable Care Organizations "most assuredly will not...deliver [this] disruptive innovation."

Christensen is definitely on to something - particularly when he recognizes the importance of technologies that allow price and quality competition (such as telemedicine) to give more control over health care decisions to patients. And it shouldn't be surprising that a recent foray into this market has arrived at Wal-Mart.

The super-retailer already offers retail walk-in clinics at many locations, with low-cost services that include vaccinations, blood sugar testing, and cholesterol screenings. But it seems this was only the beginning for Wal-Mart. The cheaper a technology is (assuming equivalent quality), the more disruptive it is. What's cheaper than free? In October of last year, the retailer partnered with Solohealth, a company that develops retail "health stations" that offer basic medical tests, to install hundreds of the health stations at its retail locations.

These health stations will allow Wal-Mart customers to run basic tests like a vision and BMI check at no cost. Based on the test results, the health station will spit out a list of doctors in the surrounding area that the customer can go see. Certainly, this is a brilliant move on Wal-Mart's part - you probably rarely go to the doctor, but you're at Wal-Mart pretty often. But more than that, this echoes Christensen's point about disruptive health care innovation - while these health stations won't replace a doctor (and are not a panacea for growing health care costs), they're a great step towards more efficient use of health care resources. It isn't a stretch to imagine similar health stations offering quick and cheap video calls with doctors to answer some basic questions. Looking further down the line is even more exciting - algorithms and whole language machine learning are making computers as smart (or smarter) than the best human doctor (think of the holographic doctor in Star Trek Voyager).  And the cost of sending these "doctors" to medical school is essentially zero for the marginal patient. But one step at a time.

By ensuring that these health kiosks will be at one of the world's largest retailers, people may even start thinking about health care a little differently. Right now, when someone thinks about health care, they don't think of it as a commodity - you don't pay for it; your insurance company does. When you see your doctor and he tells you that you have a cold but he'll prescribe antibiotics anyway "just to be safe" - you don't ask why. And part of this is due to the informational asymmetry inherent in health care - let's face it, the doctor is a professional and holds a wealth of knowledge about human physiology that you, as a consumer, likely don't have. But that doesn't mean you can't be a little more educated. When you go to get your car fixed after a fender-bender and one body shop quotes you $500 and another quotes you $1,000, you'll probably feel comfortable enough asking why. When it comes to medicine and health care, we don't have that same comfort. And though it may be too early to start jumping for joy, greater commoditization of health care is a terrific way to slow future cost growth and maybe, just maybe, have more educated patients.

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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.

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.


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.


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?

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.


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.


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.   

Anyone following the manufacturing sector will tell you that one of the most exciting trends is the advent of 3D printing. Using complex software, it is now possible to "print" 3-dimensional objects essentially creating a "desktop factory". It really couldn't be easier - you input the proper calibrations into your computer, feed in the raw materials, and let the high-powered lasers in the printer do the rest. For manufacturing, this is an exciting turn of events - last year, my colleague Mark Mills, senior fellow at the Manhattan Institute, discussed the enormous potential that 3D printing has for disrupting the manufacturing status quo. 

More recently, it's spilled over into the biotech sphere. Autodesk, a CAD-software developer, just entered into a partnership with Organovo, a 3D bioprinting company, to develop software that can create architecturally accurate, living human tissue. Think about that for a second - software that enables the creation of human tissue. This represents a tremendous step forward in medical research. Though the technology is still far away, the logical endpoint is the ability to create replacement human organs or body parts.

There will be many challenges before this kind of technology becomes widely used - many barriers not the least of which are the safety and technological challenges stand in the way. With luck, FDA reform will ensure that regulatory barriers are minimized by then. 

Now that HHS has released all of their guidance concerning essential health benefits, the minimum benefits that insurance plans must offer to be sold in the state, nine states have received approval for their benefits package (out of 19 that have said they will build their own exchanges). Looking only at the nine approved so far, it becomes apparent that insurance will be no more affordable in most states than it was pre-Obamacare (one of the main goals of setting up health insurance exchanges is to offer consumers more choice among insurers). In fact, it is likely to be more expensive, and no more accessible than before.

State-Level Insurance Mandates


Previous Mandates

Proposed Mandates Under 
New Benchmark Plan

New York






District of Columbia





















Source: "Previous Mandates" from the Council on Affordable Health Insurance's 2011 report; "New Mandates" from National Conference of State Legislatures.

Under the law's essential health benefit requirements, HHS defines the categories of benefits, while states determine the specifics by selecting a benchmark plan for minimum coverage. For the most part, states have taken to choosing plans with more generous coverage than their previous requirements mandated, with D.C. making the biggest jump. Some, like Connecticut however, have actually reduced the number of total mandates, but at the same time have imposed requirements on insurers to commit to at least two years of participating in the exchange (note: D.C. has done the opposite, and has said that they will allow any insurer  that covers the minimum federal EHB to participate).  Thus far, as my colleague Avik Roy has noted, one large insurer has only committed to participating in a little more than a dozen exchanges; another only in ten. Fewer insurers means less competition, which means higher prices for consumers.

The market-influenced approach of health insurance exchanges is surely one of Obamacare's bright spots - if nothing else, a properly implemented exchange allows the individual to know exactly what kind of insurance policy they're purchasing , how much it costs, and what it covers. It encourages consumers to shop around for value, and encourages insurers to compete for people's business.

This isn't the approach that the ACA encourages, however.  Richer plans require higher premiums, which will in turn discourage young and healthy people from buying coverage, especially when they can pay a small penalty and buy the same coverage later if they become sick.

Given what we know about the approved exchanges to date (which, to be fair, isn't much), there isn't much reason to think that they will encourage robust competition. Increased state-level mandates and other requirements are likely to cancel out any potential for increased competition amongst insurers.

So what are we left with? For insurers, this is a new minefield of regulations to navigate. Insurers will likely avoid those exchanges with more mandates, and onerous rules and regulations. For consumers and taxpayers, this leads to fewer options to choose from and higher premiums.  A more flexible exchange format, encouraging more competition among insurers (Utah's clearinghouse model for instance has contracted to sell 140 plans already) and more choice for consumers, would be a far superior approach.

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

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