I’m Fed Up with This

I used to follow the pundits and read the inside stories about the progress of health reform.  During the past year, I’ve avidly read Politico.com and the NY Times, watched Washington Week in Review, and followed #hcr on Twitter to keep up with what’s happening.  But I’m fed up with the way that the Republican spin has become the conventional view of things.

Latest example — in today’s Politico Pulse lead, Chris Frates writes:

President Barack Obama announced Sunday that he will hold yet another meeting on health care reform. But this one comes with two twists – it will be televised and bipartisan. The move seems designed to help counter the public’s distaste for legislation that Democrats crafted behind closed doors and rammed through both chambers with little Republican support. [emphasis mine]

You gotta be kidding.  First, the legislation was not “crafted behind closed doors” any more than most bills in Congress.  On the contrary, the legislation has been available for public scrutiny since the original bills were introduced last spring in the House.  You could even go further back to Sen. Baucus’s white paper in November 2008, which laid out the basic framework for all the bills that followed.  When each subsequent bill was introduced, the Kaiser Family Foundation and many others produced “side-by-side” comparisons so that people could understand the key elements of the bills.  The details (the public option, the insurance exchange, the affordability credits, the excise tax, the Medicare Advantage reductions, the “doughnut hole”, and many more) were agonizingly dissected by the mainstream media, the bloggers, and interest groups.  As Jon Cohn said today,

The idea that Republicans haven’t had a chance to present their ideas on health care reform is a bit mind-boggling. Five separate congressional committees had hearings; each chamber had floor debates. That’s hundreds of hours the GOP had to talk about health care, all of it in public view and televised on C-SPAN.

And the Democrats “rammed it through both chambers”?  Anyone watching the process objectively would say that the Democrats did just about everything they could to accommodate Republican interests and wishes.  First, they wrote a bill that incorporates many Republican ideas in an attempt to get bipartisan support.  It’s built on the existing private insurance and medical care delivery system; it’s not the single-payer plan that many progressives wanted.  It uses market forces to control costs rather than regulation and government price setting.  And it includes pet Republican ideas such as tort reform and allowing people to buy insurance across state lines.  (Ezra Klein has summarized this nicely in a new article.)  Second, the Democrats included the Republicans in almost every step of the process.  The best example was the “Gang of Six” led by Sen. Baucus.  For weeks during the summer and early fall, we watched the Democrats’ attempt to accommodate the wishes of Grassley, Enzi, and Snowe.  But it became clear that the Republicans were only stringing the Democrats along.  They never intended to get on board; they only wanted to drag out the process.  And when the votes were finally taken, it was clear that the Republicans had decided – for purely political reasons – that they would oppose any bill.  For them, defeating the Democrats was more important than reforming health care and saving the lives of the uninsured. Their obstructionist tactics were appalling, and their hypocrisy was sickening.  The basic facts: this is a bipartisan bill that the Republicans chose to oppose, despite the best efforts of Democrats to accommodate them.

But most of the media seem to have been co-opted by the Republican spin machine.  I would have expected better from a so-called independent press.

House of Straw or House of Bricks?

A week ago, before the Massachusetts special election, health reformers felt that their house was almost finished.  The edifice of health reform had been built painstakingly using blueprints designed by policy and political experts during the past 10 years.  It wasn’t a perfect building — like many construction projects, there were concerns that it would cost too much and wouldn’t be aesthetically pleasing — but most agreed that it would provide shelter for those who had been excluded from health coverage: the uninsured and the medically uninsurable.  The imperfections could be fixed later.  As many said, this would be the foundation and framework on which an even better health system for the U.S. could be built.  And the wolves who had ruthlessly blown down health reform houses in the 1990s and before had been kept at bay.

As the reformers stood on the top floor last week, deciding on the final touch-ups and planning for the housewarming, someone pulled the rug out from under them. The upset election of Scott Brown to fill the late Sen. Kennedy’s seat changed the political calculus. It would not be possible for the Senate to pass a bill including the final modifications, since a unified Republican minority of 41 would be able to block consideration of the bill. It turned out that under the rug was a hole in the floor, and suddenly the reformers were on the next floor down.  The reformers might have to leave the top floor unfinished (the modifications that were needed to get House approval), but they could still have a pretty solid building if they could reach agreement.

But the Democrats haven’t been able to find a way to finish it off.  The idea for the Senate to quickly pass the modified bill before Brown was seated was rejected as politically unseemly.  The plan for the House to simply pass the Senate bill and send it to the President for signature has apparently been rejected by House members.  The idea of a two-step process – the House would pass the Senate bill in exchange for a promise that the desired modifications would be included in a separate budget reconciliation bill – seems like a pragmatic if inelegant solution, but it is apparently stalled for lack of clear direction.  Some have suggested that a “pared-down” bill – incorporating some insurance reforms, small business subsidies and Medicaid expansion – might be the only feasible option.  Others are skeptical that any reform could pass the Senate and said that the Democrats should “pivot” to other issues like job growth. Suddenly the reform effort seems to be in free fall.  The reformers have fallen through a hole in the top floor, and now it seems that every floor has a hole.  It’s a panicky, sickening feeling – not knowing where the bottom might be.  The memory the recent earthquake in Haiti is fresh in everyone’s mind, and we all know that the death and damage was immensely compounded by the poor construction standards in that impoverished country.  Is the health reform house built of bricks or straw? Is it so easy to tear down a house that was so carefully constructed?  And if the building were to totally collapse – surrounded by a new generation of gleeful howling wolves — how many decades would it be before a new house could be built?  How many more uninsured people would die because there was no shelter from the storms of catastrophic injuries and chronic disease?

I think the health reform proposal is much stronger than most people think.  The conceptual framework was built during decades of thoughtful policy analysis that incorporated the best of liberal and conservative thinking.  The legislative details have been carefully crafted to fix the most serious problems in the current system without creating a political backlash from the health industry’s economic interests.  The bill still has political momentum from the 2006 and 2008 elections, in which Democrats ran and were elected on a promise to reform our health system.  The problems of our current situation haven’t gone away, and anyone that can build a better health system will deserve a lot of credit.

In the last few days, there have been signs of hope.  Forty-seven distinguished health economists sent a strong letter of support for reform to Congress, and many political analysts pushed the Democrats to complete the bill.  The President reasserted his commitment to comprehensive reform at a town hall meeting in Ohio, and the Democratic leaders in Congress are reportedly working on a two-step process that could pass the House and Senate.  It may be that the health reform house will be completed with nearly all the floors intact.  What happens in the next few days will determine the life and death of hundreds of thousands of uninsured, and it will shape the political landscape for decades.

State vs. National Exchanges – Why it Matters

Does it matter whether health insurance exchanges are state-level or national?  I used to think that it wasn’t a major issue, but my opinion has changed.

During the health reform debate early in 2009, I thought that other exchange design issues were more important than whether they are organized at the state or national level.  In my view, who is eligible to join (all small business employees or just those who receive subsidies?), whether the exchange is the exclusive market for individuals and small groups, and how the exchange will be protected from an adverse selection “death spiral” are critical design features and will determine whether the exchanges are successful.

It seemed to me that the arguments put forward by advocates of a national exchange were not compelling.  The most common argument was that a national exchange was needed in order to gain sufficient size, which would supposedly give the exchange more bargaining power with health insurers.  But I always thought that size was more important at the local level.  Health insurers negotiate provider contracts locally, not nationally, and they gain leverage based on their size locally regardless of how big they are nationwide.  In addition, the “bargaining power” argument is relevant only if the exchange is negotiating rates with insurers.  In an “all comers” model, the exchange isn’t negotiating rates; it relies on healthy competition among insurers to drive down premiums.

There is another argument, however, for a national-level exchange. A problem with state-level exchanges is the likelihood that they would be different from each other in variety of ways: participation rules, quality standards, enrollment processing, payment coordination, management effectiveness, etc.  In other words, they would be non-standardized, and this would create a serious barrier for participation by large, multi-state employers.  This isn’t an immediate problem, since the current health reform bills permit only individuals and employees of small employers to use the exchange in the near term.  But the lack of standardization would effectively limit the exchanges to these groups for the long term.  Most large, multi-state employers would look at the patchwork of state-level exchanges and decide that it wouldn’t be worth the hassle.  (One of the reasons that these employers fiercely defend ERISA’s federal preemption of state insurance regulations is the administrative complexity caused by the differences in state laws.)  If the exchanges were administered nationally, however, some large employers might seriously consider participating.

One of the major goals of the current reform bills is to put in place the framework for an effective health insurance system.  If the framework is robust and flexible, we can make improvements and allow the system to evolve.  If we get it wrong, however, a flawed framework can block the evolution.  We don’t have to decide right now if we want the exchanges to completely replace the employer-based system in the long run, but shouldn’t we at least give large employers the option to use the exchange if it makes sense to them?  We can do that with a nationally administered exchange; it won’t work with a 50 state approach.

(Note: I should be clear about definitions.  This is not a single nationwide exchange including only insurers who have provider contracts throughout the U.S.  It is a nationally administered exchange, with insurers choosing to participate in selected locations.  There could be local administrative organizations to which the national exchange administrator could delegate certain tasks, e.g., health plan certification, coordination with state Medicaid programs, etc.  There would be some national insurers in the exchange, of course, but it would also include insurers who have only a local or regional presence.  People would have a choice among several national insurers as well as the local insurers that participate in their area.  This is the model used successfully by FEHBP and nearly all large, multi-state employers.)

Improving the Harvest: Farming and Health Care

I love Atul Gawande’s writings on health care.  He has a rare talent for describing technical details of health care, insurance and finances in terms that most people can understand.   His recent article in the New Yorker discussed the current health reform bills’ approach to curbing costs, using the agricultural industry as a potential model.

One of his basic points is similar to one I have made before.  He describes two kinds of problems: “those which are amenable to a technical solution and those which are not.  Universal health care coverage belongs to the first category . . . Problems of the second kind [referring to rising health care costs], by contrast, are never solved, exactly; they are managed.” I would frame it somewhat differently.  The two basic kinds of problems are those which are amenable to a government solution, and those which are best addressed using decentralized market forces.

There are two serious shortcomings in our current health care system: lack of access to health care and insurance coverage for many low-income people, and the rising costs of health care.  While private market forces do have the potential to address cost issues –”efficiency” in the jargon of economists – they don’t do very well at handling issues of “equity”.  Specifically, private markets can’t do the following very well in the health care system:

• Provide access to insurance or health care to low-income or very ill people
• Ensure that reliable standardized information is available to consumers
• Maintain the appropriate balance of power between providers and consumers

This means there is an important role for government:

• Ensuring that coverage or care is available to low income and very sick people
• Providing information is reliable and available
• Maintaining healthy markets.

In the latter role, it is appropriate for government to establish the rules for the structure of the market in order to create:

• Real choice
• Healthy competition
• Incentives for improving value (quality/cost)

Government can also play a role in providing financing for innovations (i.e., start-up funding for pilots).  After this point, however, it’s probably better for government to get out of the way and let the market do what it can do best – drive improved value for consumers.

So far, so good.  I basically agree with Gawande’s observation that different problems should be addressed by different means.  But is Gawande correct in using the developments of the agricultural industry as a model for what might occur in health care?  While there are a lot of parallels (e.g., fragmented and inefficient production, resistance to change), I am concerned that there are some important differences between agriculture and health care.  I won’t offer a critique of the outcomes of U.S. agriculture (lower prices, yes, but also the growth of corporate farming at the expense of family farms and small town economies, as well as serious concerns about food safety); I want to focus on two other issues about the relevance of the agriculture model to health care.

First, the economic incentives in agriculture seem much more direct and consistent with consumer welfare.  If the farmer can find more efficient ways to produce crops, it will result in higher net income.  Lower production costs also allow the farmer to reduce prices, gain market share and increase revenue.  Other farmers then have a strong financial incentive to adopt better production methods; otherwise they will lose market share, revenues and profits.  This healthy competition results in lower prices and improved value for consumers.

In the health care world, however, the financial incentives for improving efficiency are much weaker.  The knowledge about how to be more efficient is available, but the adoption of these methods is very limited.  Simply introducing the health care equivalent of USDA extension agents and financing a lot of pilot projects are unlikely to change this.  The incentives are weak for a variety of well-known reasons: health insurance, which shields most consumers from the real costs of health care; federal tax policy, which excludes employer-sponsored health benefits from personal income taxes; the ability for insurers to use risk management strategies to avoid high-risk enrollees; the ability for providers to use payer-mix strategies to avoid low-reimbursement patients; the well-entrenched use of fee-for-service payments that reward volume instead of outcomes, etc.  Unless we make structural changes to address these issues, the financial incentives will not be aligned in a way that will cause the health care industry to embrace more efficient production methods.

The second potential problem is the difference in relative market power of buyers and sellers.  In agriculture, the sellers (farmers) are much weaker than the buyers (consumers and middlemen), which forces the farmers to compete aggressively on price and quality.  In health care, however, the sellers (physicians, hospitals, drug manufacturers) are more powerful than buyers.  There are several reasons for this: providers have professional knowledge and expertise that consumers rely upon, and many areas have a high concentration or even monopolies of providers.  Even if the provider payment incentives were aligned with consumer interests, health care providers would probably still be able to charge relatively high prices.

How do the current Senate and House bills line up with the issues raised by Gawande and my analysis?  The underlying philosophy of the legislation is consistent with the two-sector approach described above: government helps low-income people to get access to health care and sets the rules for the health care market, while private sector providers and insurers compete to offer the best value to consumers.  The bills also begin to address the issue of financial incentives, by encouraging alternatives to fee-for-service, eliminating the use of risk skimming by insurers, and taxing high cost health plans.  Not surprisingly, the bills do not directly address the market power issue, although the proposed strengthening of the Medicare payment commission would be a small step toward curbing costs.

Will all of this work?  We don’t really know, but at least the bills are built on a framework that has some chance of success.  We do know, however, that the current system is cruel in human terms and unsustainable in economic terms, and we have to try something.  We will have more work to do to get this right.

Vitality vs. Security? Not So

David Brooks gets it partly right in his recent column – the health reform debate is fundamentally about values – but he is wrong about the trade-offs.  His framing – “vitality or security” – sets up a straw man, a false choice.  How can anyone say that allowing 18-22,000 people to die each year due to lack of health insurance (according to the IOM and Urban Institute) represents “vitality”?  The tremendous loss of life as well as needless suffering and lost productivity in our current health system are surely a drag on our nation’s vitality.  And as Jon Cohn points out in his response to Brooks, the current employer-based system creates job lock for many people, stifling entrepreneurship and job mobility.

Of course, the Congressional health reform proposals could be stronger on cost containment, but they would be politically DOA.  The choice is simply between the status quo – with continued rising costs, rising uninsurance, inconsistent quality and more needless deaths – or an imperfect reform bill that expands coverage, reforms the insurance market, reduces mortality and suffering and establishes a framework for future cost containment initiatives.  It’s not about vitality vs. security – it’s slow death vs. possible cure.  Or in terms of values, it’s “we’re all in this together” vs. “you’re on your own”.

A “Third School” of Cost Containment?

Is there a “Third School” of reformers that could help us resolve the long debate about how to contain health care spending?  Drew Altman’s recent column describes the history of the debate between the “Regulators” and the “Marketeers”, and he suggests that a new school of thought – the “System Reformers” – is in the ascendance.  According this Altman:

The Systems Reformers believe that the best way to bend the cost curve is not through external market incentives or regulatory controls, but from the inside out, by creating a smarter health care system with the information base, new delivery models and payment incentives that will improve quality and lower costs. . . .

The Systems Reformers’ paradigm is reflected in the “bending the curve” elements of the health reform legislation currently in Congress, which mostly come in the form of pilot projects and experiments. These include tests of ideas like Accountable Care Organizations, “pay for performance” and “bundled payments,” as well as efforts to create a smarter, evidence-based health delivery system through comparative effectiveness research.

He describes the Systems Reformers’ approach as a  “third leg of the stool of cost containment strategies”.

While Altman is right about the importance of the Systems Reformers’ ideas, I don’t consider this to be a new paradigm.  We’re really talking about two different things.  The debate between the Regulators and the Marketeers is a philosophical disagreement about the fundamental political economy of the health care sector.  The use of System Reforms, however, is simply an issue of how deep we go into the health care system in order to bring about reforms.  The former issue is about which fork in the road we should take; the latter is about how far we can go down that road.

The debate about the merits of regulation and markets is very important, and we do need to make a choice.  This issue is not unique to health care; it’s been raging in other sectors as well – for example, regulatory limits vs. cap and trade mechanisms to reduce air pollution.  In health care, the Regulators point to the failure of markets to contain costs, and they advocate regulation of supply and prices.  In the U.S. political debate, the ultimate model of the Regulators’ approach is a single payer plan.  Marketeers, on the other hand, point to the failure of past regulatory approaches (e.g., price controls, certificate of need) and the fact that health care markets haven’t been structured in a way to provide incentives for cost containment.  Intelligent and well-intentioned people can find good reasons to support either approach.

In the current national debate, we’ve largely made the choice to go down the Marketeer path.  Despite the protests of disappointed single payer advocates, all five major bills in Congress are based on a market-based approach.  If we did a word count of Congressional speeches on health reform during the past six months, it’s likely that “competition” and “choice” would be near the top.  And even wonky phrases like “cost conscious consumers”, “financial incentives”, and “transparency” have leaked into Congressional speeches, demonstrating that the Marketeers are in ascendance.

How does the “System Reform” approach fit into this?  As Altman says, it looks at the health care system from the “inside out”, and the System Reformers deserve credit for helping us understand how the health insurance and medical care markets really work.  But the solutions that Altman points to are tools, not systemic solutions.  These tools, such as electronic health records, comparative effectiveness research, and alternative payment mechanisms, have been around for a long time.  The problem is that they haven’t been used widely within the health insurance and medical delivery system. For example, most physicians have not been quick to adopt electronic health records, since there is little reward for making improvements in efficiency and quality in the current system.  The solution to this lies outside, i.e., with the purchasers, consumers and/or regulators.  In order for the system reform tools to be used by health insurers and providers, there needs to be pressure from the outside.  One way to do this is a Regulatory approach, e.g., establishing a single payer plan and requiring all physicians to accept salaries or capitation rates set by the government.  Another way is with a Market approach, e.g., establishing health insurance exchanges and reforming the individual and small group market to encourage healthy competition and provide incentives for improved cost, quality and customer service.

The Congressional bills have used the work of the System Reformers to turn the Marketeer approach from a guiding principle into something meaningful and practical in the health care system.  For example, using the information that John Wennberg, Elliott Fisher and their colleagues have documented in their enormously important Dartmouth Atlas, the bills in Congress include pilots for Medicare payment reforms, such as bundling and pay-for-quality, which should reduce the geographic variation in costs and the inflationary effects of the current fee-for-service payment system.  Another example: System Reformers have pointed out that much of the medical care provided is not supported by evidence-based research; many physicians rely instead on simple protocols, community norms and what they were taught in medical school decades ago.  The lack of good clinical information has led to overuse as well as underuse of medical services, creating high costs and inconsistent quality of care.  Based on this finding, the bills in Congress include funding for comparative effectiveness research.  In a well-functioning market, good information is essential; CER will nudge the system toward more efficiency and higher value.

The work of the System Reformers is tremendously valuable, since it shows us what specifically needs to be done to improve our health insurance and medical care system.  This doesn’t, however, make it a “third school” of cost containment.  The current direction for health reform in Congress can be best understood as a Marketeer approach that is more likely to be effective in containing costs because it incorporates the System Reformers’ deep understanding of health markets.

Last Chance to Fix the Exchanges

Last Chance to Fix the Exchanges

We all know that well-designed health insurance exchanges are a critical element for good health reform, right?  And we also hear that exchanges are part of all five reform bills in Congress, so we should be satisfied, right?  Wrong.  There are some good design elements in the various bills, but the best components from each need to be pulled together as the bills are merged, amended, and worked over in conference.

Health insurance exchanges are arguably the key to successful reform, but most of the recent health reform debate has focused on other issues – subsidies for low-income people, the penalty for noncompliance with the individual mandate, taxes on high cost insurance plans, cost containment measures, protections against high out-of-pocket expenses, etc.  Many of the other elements can be tweaked if we don’t get them quite right in the first version of reform, but it’s critical to establish the right design framework for exchanges at the beginning.

The exchanges are needed to address three critical problems that most small employers and individuals face in the current health insurance market:

COSTS — Individuals and small employers pay much higher premiums than large employers for similar health benefit plans, due primarily to high insurance administrative and selling costs for this segment and a lack of bargaining power.

CHOICE — Very few employees of small employers are offered a choice of health plans; most insurers will offer coverage to small employers only on a “sole source” basis.  This also makes coverage less “portable when people change jobs.

CONVENIENCE – It’s a tremendous administrative burden for small employers to manage health benefits for their employees.

There are three design elements that are crucial to achieving these goals:

How big? Who’s in? Size is important; as Sen. Olympia Snowe put it, “The more the merrier.”  Sufficient size will attract more insurers and offer wider choice to consumers in the exchange.  It will also enable the insurers to achieve economies of scale and reduce administrative costs and premiums.  And allowing more categories of groups into the exchange will allow more people to get the benefits of expanded choice, reduced hassle for administering health benefits, and improved portability of health coverage.

How to avoid the “death spiral”. Many exchanges in the past have collapsed when high cost people joined and stayed in the exchange while low cost people purchased coverage outside the exchange.  Ideally, the exchange would be the sole market for individuals and small groups.  Since this is probably unrealistic politically, it is necessary to put in place mechanisms to minimize the danger of the death spiral.  For example

• The same insurance regulations (e.g., guaranteed issue, rating, benefit design, etc.) should apply inside and outside the exchange.
• Insurers should be required to set their premiums based on the entire pool of the combined markets (inside and outside the exchange).
• Insurers should be prohibited from advantaging their comparable non-exchange products in any way (e.g., through the use of different marketing, application processes, etc.)
• If an insurer participates in the individual and small group markets outside of the exchange, it must also participate inside the exchange.

What role for the exchange? An exchange can play a variety roles ranging from passive provider of consumer information to active purchaser of health benefits on behalf of consumers.  A narrower role would leave the consumers to deal directly with the insurers.  (If this is the case, there won’t be any savings in administrative or marketing expenses.)  But the exchange could play a broader role by managing the enrollment process, determining eligibility for subsidies, collecting premium contributions from multiple sources, administering a risk equalization mechanism to protect insurers from adverse selection, contracting selectively with insurers, and even negotiating rates.

I’ve put together a simple chart comparing the key design elements from the three bills.

	Senate Finance	Senate HELP	House TriCommittee
How Big?Who’s In?	Reasonably inclusive.Individuals + small employers (<100) in 2015; state option to add large employers (>100) in 2017	Somewhat inclusive.Individuals + small employers (<50); state option to add large employers (>50)	Somewhat restrictive.Individuals + very small employers (<20) phased in by 2014; option to add large employers (>20) in 2015.
Avoiding the “Death Spiral”	Some features to reduce danger of death spiral	Reasonably strong features to reduce danger of death spiral	Unclear or weak features to reduce danger of death spiral
Role	Limited role.  All insurers must be made available in the exchange	Substantive role, but does not include negotiating rates with insurers	Active role, including accepting bids and negotiating with insurers

Here is my recipe for the best policy blend to address these problems.  (It’s basically one from column A, one from column B, and one from column C.)

How big/Who’s in — Use the Senate Finance Committee bill as a starting point, but consider expanding further.  (Sen. Wyden’s proposed amendment would accomplish this by allowing employees of larger groups to join the exchange, but there would need to be stronger protections against a “death spiral” for the exchange.)

Avoiding the death spiral – Use the Senate HELP bill as a starting point, but add language to (a) prohibit insurers from advantaging their comparable non-exchange products in any way, and (b) require insurers that participate in the individual and small group markets outside of the exchange to also participate inside the exchange.

Role – Use the language in the House bills, which allow a more active role for the exchanges, including selective contracting.  (The proposed Kerry amendment would achieve this in the Senate bills as they are merged.)

Other commentators have made the point about the importance of designing insurance exchanges right.  Jon Cohn included it in his recent list of “The Top Ten Things Worth Fighting For”.  (Just to show how important it is, it’s on his list twice: #5 – Strengthen the Exchanges, and #10 – Open up the Exchanges.)  Elliot Wickes posted a new blog at Health Affairs on the essential characteristics of exchanges in health reform.  Earlier this summer, Alain Enthoven, Peter Lee/John Grgurina, Joe Minarik, David Riemer and Ezra Klein posted excellent commentaries on exchange design.

The design of health insurance exchanges is too important to be brushed aside or used as simple political bargaining chip.  If we don’t get it right in the bill this year, it will be very difficult to fix it in future years.  If we get it right, however, exchanges will address the problems of cost, choice and convenience faced by small employers and individuals, and it will help to bring healthy competition and drive down overall costs in the health insurance market.

Note: Revised slightly 10/28/09 after helpful conversation with Alain Enthoven.

Let’s Not Lose Sight of the Goals

I love Daniel Schorr.  I’ve never met him in person, but I love his voice and his insights about politics on NPR’s Weekend Edition.  But this morning I was disappointed.  After listening to his comments on the Olympics and Iran, I looked forward with anticipation to his thoughts about the Senate Finance Committee’s accomplishments earlier this week on health reform legislation.  When asked whether a “real health care bill” is likely to pass later this year, he said, “Well, it begins to look more [likely] . . . that there will be a bill.  The question is not whether there will be a bill . . . but what will be left in the bill, because so many things have been taken out.”  I could almost hear him sigh.  He went on to talk about the fact that the public option is not a part of the Senate Finance bill, although it might be restored in full or part (through a trigger mechanism or health cooperatives) as the bill moves through Congress.

Let’s step back for a minute.  (This is what I usually rely on Schorr to do for us.)  Where were we a year ago?  Although advocates of health reform were encouraged that the health care crisis was getting a lot of attention in the Presidential election campaign, the outlook was not rosy.  Obama and McCain were neck and neck, and McCain’s reform proposal was so weak as to be laughable.  The pundits and pollsters were predicting that the Democrats would get about 56 seats in the Senate – not enough to overcome a filibuster.  And there was serious concern that even if Obama were elected, health reform would be crowded out by other major crises – the threat of a serious economic depression, the banking collapse, Iraq/Afghanistan/Iran, energy and global climate change, and who knows what else.  In October 2008 the likelihood of serious comprehensive health reform was probably about 25%.

What has happened during the last 12 months?  Well, Obama was elected with a clear mandate to do something about health reform, and his proposal was pretty solid.  The Democrats surprisingly won 60 seats in the Senate, although it took months for the Minnesota recount to be completed.  The President and the Democratic leaders in Congress have made health reform a top priority and haven’t let other critical issues get in the way.  Obama selected a top-flight team of policy experts and – more importantly – politically savvy professionals to push health reform.  (Sen. Baucus and others on the Hill had started doing this a year earlier.)  Using the lessons from the defeat of the Clinton plan in the 1990s, Obama set the overall goals and framework for reform but let Congress take the lead in creating the specific legislation.  The administration worked closely with health care industry groups to get their support for reform, or at least reduce the likelihood they would torpedo it.  A strong consensus emerged about the basic shape of the reform package, and five Congressional Committees have passed very similar bills.  We’re on the verge of actually getting something done.

What’s in the bills? Is it real reform or something watered down?  As the President reminded us in his September 9, we need to stay focused on the goals and not get tangled up in arguments about the ways we achieve those goals.  Reform advocates have been working for decades to improve access to health care for all Americans, improve the quality of health care, and reform the system in a financially responsible and sustainable way.  The bills in Congress would make major progress on all three of these goals, and we shouldn’t lose sight of that.  The bills can be improved, of course, but we must not let the perfect be the enemy of the good.  The inclusion of a public plan option should not be the litmus test of a good bill, despite what Howard Dean says; it’s only a means to an end, and there are other ways to get there.  We should focus instead on whether the final reform plan would make real progress on the three critical goals of access, quality and affordability.  In the end, it seems increasingly likely that we will pass the most important and far-reaching domestic legislation in many years – one that will help millions of people who cannot afford decent health care – and we should not lose sight of that.

But I still love you, Daniel Schorr.  We all need a healthy perspective on the major issues of our day, and I’ll listen in again next weekend.

Winners and Losers: Strategy in a Post-Reform World

Most health policy experts are focusing on the daily ups and downs in the political battles over health reform.  Within the health care industry, however, there is a buzz about who will be the winners and losers after health reform passes.  A.M. Best’s U.S. Health and HMO Insurance Index has been volatile since last November, reflecting high uncertainty about the effect of health reform.  Earlier this summer, there was some speculative analysis about the potential impact of reform on health care stocks.  Will health insurers come out as winners?  What about hospitals, doctors, drug manufacturers, and insurance agents?

It’s good to look ahead, but I think most people are asking the wrong question.  Each of these health industry sectors – in aggregate — will probably do just fine in the post-reform world, as Bob Laszewski points out in his recent blog.  The more important question is: who will be the winners and losers within each sector?

Change is coming.  After all of the political maneuvering this fall, some kind of health reform bill is likely to pass.  The basic shape of the post-reform world is coming into focus, and it is likely to include:

• Insurance reform: guaranteed issue (no medical screening), along with rating rules and standardized benefits in the individual and small group markets.
• Broader coverage: expansion of Medicaid, subsidies for low-income people and an individual mandate.
• New market structures: an insurance exchange for individuals and employees of small groups.
• Cost containment: increased attention to costs, transparency and accountability for insurers and providers.
• Payment reform: a gradual shift from fee-for-service to bundled payments, as well as incentives for quality outcomes.
• Emphasis on prevention, primary care, chronic disease management, and the use of comparative effectiveness research.

These changes in the regulatory and market environment will create changes in the dimensions of competition within the health care industry.  In the PRW (post-reform world), health insurers and providers will require different skills and strategies to be successful.

Health Insurers:  In the past, the key to financial success was risk management, i.e., making sure that the expected medical costs of enrollees were predictable and not too high.  Insurance CFOs focused on the “loss ratio” — medical claims payments as a percentage of premiums – as a key measure.  Insurers used medical underwriting, targeted pricing and benefit design to manage the risk profile of their enrollees.  Many insurers also tried to hold down medical costs and administrative expenses, but it’s much harder to do that.  (No one likes being yelled at by doctors.)  Most insurers have deep expertise and experience in risk management, so it’s not surprising that this would be the primary tool for achieving their financial goals.

In the PRW, however, the usefulness of risk management tools will be greatly diminished.  Medical screening won’t be allowed, and insurers will be limited in their ability to use pricing and benefit design to attract only low-cost enrollees.  Even if they do, risk equalization mechanisms within the new health insurance exchange will reduce the financial benefits of cherry picking.  Insurers will need to put more effort into managing expenses, for both administration and medical services.  In other words, insurers will need to move from risk management to cost management.

The second major change for insurers will be in the small employer market segment.  In the past, insurers focused on the employer as the customer, not the employee.  They worked through brokers to get access to employers, to whom they offered coverage on a sole source basis.  Insurers – rightly concerned about adverse risk selection in a multiple choice arrangement within a small pool – insisted on being the only health plan offered within a small group.  The employees could only join the plan offered by the employer, so there was little need for consumer-oriented marketing.

In the PRW, the employees of most small businesses will purchase their coverage through a health insurance exchange.  The employer will have a minimal role, and the employee will have a choice of multiple health plan options.  Insurers will need to focus their sales and marketing efforts to consumers rather than brokers and employers.  In other words, insurers will need to shift from employer-based to consumer-based marketing.

Health Care Providers:  Hospitals and physicians face similar changes.  The analogy to insurers’ risk-management strategies is providers’ payer mix strategies.  An important factor in providers’ financial performance has been the mix of commercially insured, Medicare, Medicaid, and uninsured patients.  Since the payments for commercially insured patients have been much higher than for the others, many providers have systematically minimized or avoided patients in the other three categories.  Even not-for-profit safety net clinics have been forced to increase the proportion of commercially insured patients to stay afloat financially.  Many providers have also tried to hold down medical expenses, but it’s much harder to do that.  (No one likes being yelled at by staff physicians and nurses unions.)

In the PRW, the effectiveness of payer-mix management strategies will be reduced.  Most people will have insurance coverage, which will provide new revenue to providers who had been serving the uninsured.  There probably will still be payment differences between commercially insured vs. Medicare and Medicaid patients, but the importance of payer-mix management will be reduced.  In response, providers will need to focus more on managing their costs of delivering care.  In other words, providers will need to move from payer-mix management to cost management.

The second major change for providers will be in provider payment formulas.  In the past, the fee-for-service payment system rewarded a higher volume of services, regardless of the patient’s health outcomes.  The CFOs of provider organizations used key indicators such as the number of hospital admissions, the number of medical procedures, and billable physician time.  There was increased pressure for improved physician “productivity”, and billing systems were upgraded to maximize fee-for-service revenue.

In the PRW there is likely to be a movement away from fee-for-service payments — although it will probably happen gradually — and the incentives for increased service volume will be dampened.  Instead, providers will be paid for a “bundle” of services, and there will be a greater emphasis on quality processes and outcomes.  Hospitals will not be paid for a patient’s readmission for the same medical condition or for correcting medical errors (“never events”).  Physicians will be paid to take care of patients with chronic conditions via a specialized capitation or case rate.  Providers will need to coordinate their services and improve the management of chronic disease patients.  There will be stronger incentives to invest in electronic health records, use evidence-based clinical guidelines, and develop integrated delivery systems.  Providers will need to move from increasing service volume to improving patient care.

These are only a few of the changes that will be driven by health reform; the effects of reform are likely to be far-reaching.  The new legislative and market landscape will be very different from the one that insurers and providers have been accustomed to.  Smart health care organizations are already thinking ahead and developing strategies to be successful. The ones that don’t adapt will be moving against the tide.  Some insurers will gain, and others will shrink.  Some providers will thrive, and others will struggle.  Within a few short years, we’ll be able to sort out the real winners from the losers.

A Town Hall Meeting 3000 Miles from Washington, DC

Seaside, Oregon, is about as far away from Washington, DC, as you can get in the continental U.S. Not quite 3000 miles, but almost (2860 to be exact). And it seemed very far away from the sound and fury of the health care debate in the nation’s capital when I attended a Town Hall meeting last Friday. Sen. Ron Wyden was the speaker at the event, which was attended by over 400 people crowded into the Seaside High School cafeteria.

As we waited, the crowd was calm and polite, but there was a murmur of anticipation and an undercurrent of tension. We had all seen the stories about disruptions and threatened violence at similar Town Hall meetings across the country. Would it happen here? We could see people standing at the back with signs opposing health reform. Would they interrupt the proceedings and cause problems? We all respect freedom of speech, but somehow it wouldn’t seem like “freedom” if someone else was shouting us down and disrupting our attempts to learn about the health reform proposals.

To my pleasant surprise, everyone behaved well; the process was orderly, and the tone was respectful. People asked Sen. Wyden some tough questions: Why not simply expand Medicare for all? Will there be enough doctors to take care of everyone? What will happen to the federal deficit? How can we reduce the administrative hassle for doctors? Why do you take campaign contributions from insurance and drug companies? Sen. Wyden is very knowledgeable about health care and answered the questions thoroughly, but – more importantly – he didn’t speak down to anyone. He explained the issues clearly and tried to help people to understand the complexities of the challenges we face. I overheard him talking afterwards with a member of the U.S. Army color guard who said, “I learned a lot from what you said and what the people were asking today.” Isn’t that the basic idea of a Town Hall meeting?

The scene reminded me of the well-known Freedom of Speech painting (one of the Four Freedoms series) by Norman Rockwell. A man in a flannel shirt and leather jacket is standing up to speak at a Town Hall meeting, and the people around him are looking up with interest and curiosity. Many people think Rockwell was just a talented illustrator who painted sentimental themes. They may be right from an artistic perspective, but I think he tapped into something important about us – something we often forget. Big issues like health care are too important to leave to the special interest lobbyists, the experts and the cable television commentators. We need to have conversations in every one of our communities around the U.S. We need to listen, share our ideas, learn from each other, move toward consensus, and trust the wisdom of the people.

During the past few weeks we’ve heard about the disruptive and abusive tactics used by opponents of health reform at some Town Hall meetings. We haven’t heard, however, what happened at the hundreds of other Town Hall meetings across the country. I suspect that most of them are like the one I attended in Seaside, where people are struggling to find common ground to address one of the biggest problems we face – providing access to affordable, high quality health care for everyone. Seaside may be far from Washington, DC, but it’s close in spirit to Stockbridge, MA – the home of Norman Rockwell – and thousands of other communities in the U.S. My faith in the American people is being strengthened, one Town Meeting at a time.