Making Sense of Health Care Markets - 2006

1. Making Sense of Health Care Markets - 2006 Presentation to Greater Milwaukee Employee Benefits Council October 16, 2006 Merton D. Finkler, Ph.D Professor of Economics Lawrence University

2. Overview • The 80-20 rule applies to health care. • Good prices need not mean good value. • Consumer directed health care can be oversold. • Porter & Teisberg’s competitive ideal can focus our attention: Pay for Performance. • The health care world is not yet flat, but we can flatten it much more than we have.

3. Key Sources • Agency for Health Care Research and Quality, “The High Concentration of U.S. Health Care Expenditures,” Research in Action, June 2006 • David Cutler, Your Money or Your Life, Oxford Press, 2004 • Michael Porter and Elizabeth Teisberg, “Redefining Competition in Health Care, Harvard Business Review,” June 2004 (and recent book) • Thomas Friedman, The World is Flat, updated and expanded edition, Farrar, Straus, and Giroux, 2006

4. Health Care Expense Distribution

5. Health expenses persist over time

6. Most Costly Conditions

7. Treated Disease Prevalence Drives Spending

8. The Wisconsin Food Pyramid?

9. Selling “Wellness”

10. Your Money or Your Life - Cutler • We spend more because we can do more • 10 fold decline in infant mortality in 20th century • Life expectancy at 45 increased by 4.5 years since 1950 due to reduced mortality from cardiovascular disease • Doubling of costs of treating depression in the last 20 years has yielded improved quality of life and productivity worth 7 times the cost.

11. Single Biggest Factor in Reduced Mortality is Care for CV Disease

12. Mortality Has Fallen Markedly for LBW Babies

13. Mortality Benefits of Medical Advance Greatly Exceed Costs

14. Much Care Does Not Deliver Value • Payment systems (especially fee-for-service) are largely based on intensity not value • Dependent on who delivers the service • Where the service is delivered • Barriers to entry for competitors • Few providers make money by keeping people healthy • Programs that reduce complications in diabetics, and thus, hospitalizations, reduce incomes for physicians and hospitals.

15. Patients have had little reason to seek value • No information on quality of care differences • Little incentive to seek value since intensive services have been covered by third parties • Just as likely to reduce cost-effective as cost-ineffective services when faced with high out-of-pocket costs. • Current income tax exemptions • Encourage purchase of coverage for high intensity services • Reward people with high incomes for using these services • Thus, current tax policy is both inefficient and inequitable

16. Episodic acute and chronic care Heroic interventions (surgeries, tests, …) Value and Waste - Overall Value of Services Low High Health promotion (Follow-up/monitoring) Intensity of Services Chronic disease management High Low

17. Value and Waste – Traditional Payment Value of Services Low High Follow up/monitoring Intensity of Services High Low Disease management Fancy Stuff

18. Waste and Value – Managed Care Value of Services Low High Follow up/monitoring Intensity of Services High Low Disease management Fancy Stuff

19. Waste and Value – Pay for Quality Value of Services Low High Follow up/monitoring Intensity of Services High Low Disease management Fancy Stuff

20. Pay for Performance • Reward high value (quality per unit cost) services by • Measuring and publishing information on quality of medical care • Rewarding providers who deliver value • Offering lower patient cost-sharing for cost-effective care • Covering compliance with chronic care management plans (including RX use)

21. P4P (Continued) • Will pay for performance be widely adopted? • Over 100 current experiments exist • Bridges to Excellence • Leapfrog • Center for Medicare and Medicaid Services

22. Bridges to Excellence Sites

23. Harvard Business Review on P4P

24. Performance Scorecard for U.S.A.

25. Consumer Directed Health Care • CDHC responds to the OPM problem: • Aim: reduce entitlement mentality • Standard Features • High deductible insurance plan • Personal account funded partly or fully by employer • Gap between deposited amount and the deductible • Tax system encouragement • Internet-based decision support • Key assumptions • A large percentage of medical care use is discretionary • Out-of-pocket incentives will reduce inappropriate spending

26. Do Consumers Have the Tools to Make Informed Healthcare Decisions? • 80% of adults w/ internet access seek healthcare information online. • AHRQ’s “Quality Tools” (www.qualitytools.ahrq.gov) • Will consumers distinguish between accurate and false (or irrelevant) information? • Recent Rand study: only 27% of consumers use formal sources of information to choose a physician • Health Insurance Experiment showed that increased cost-sharing yielded reduced use of both effective and ineffective services

27. CDHC (Continued) • Quality of service information (patient satisfaction) is available in a number of markets. • Study of elderly suggests no correlation between consumer satisfaction survey results and expert measures of the quality of care provided. • Do you know your risk for Cancer? Diabetes? Heart Disease? Osteoporosis? Stoke? If not, check out www.yourdiseaserisk.harvard.edu

28. CDHC (Continued) • Most likely targets for CHDC are the bottom 50%. • Those in the top 20% typically spend > deductible and face limited incentives to purchase high value/low intensity care & to avoid low value/high intensity care. • Since treated prevalence has increased, incentives to cut back on medical care may be misdirected unless they encourage • Behavior that reduces health risks • Primary and secondary prevention • Compliance with best practice

29. Angus Deaton’s Story • Economist at Princeton • Advised to obtain a hip replacement • 150,000 done each year • Average cost $50,000 • Only information on orthopedists was the general rule: “go where the volume is.” • No information on prices – of which there are many • Actual transactions prices (and consumer out-of-pockets) were impossible to know in advance. Nor was he asked if he wanted service x at price y. • Result: impossible to know the total cost in advance. • Conclusion: informed consumer decision-making is not trivial

30. Porter and Teisberg’s competitive ideal for health care • Claim: wrong kind of competition exists – • To shift costs • To increase bargaining power • To capture patients and restrict choice • To restrict services to reduce costs • Right kind of competition • Focuses on value delivered to patients • Based on unlimited competition among providers • Competition base: episode of care for particular medical conditions • Result should be regional & national competition based on who can deliver the most value for patients with particular medical conditions

31. The Shift Goes On

32. P and T on Role of Health Plans • Get out of the “denial” business • Provide information to support patient and physician decision-making • Reward excellence and value-enhancement for patients • Simplify administrative structure and billing • Encourage multi-year contracting

33. P and T on Role of Employers • Increase benefits that add the most health per $ spent instead of seeking to minimize cost • Support enrollees in making cost-effective long term health care choices & in managing their own health • Hold all stakeholders accountable for using benefit dollars wisely

34. P and T’s Ideal • “Buy value” is not new. At least 20 years old. • Reinhardt: “Porter and Teisberg …offer a utopian vision of a health system that might occur to anyone possessed with a modicum of common sense but not too familiar with the real world of health care.” • See recent Health Affairs blog for reaction: www.healthaffairs.org/blog

35. A Few Pertinent Questions • Will P and T’s competition decrease the attractiveness of integrated delivery programs and, thus, further fragments delivery structure along new lines – episode of care products? (Enthoven’s says yes) • Will we find a way to agree on appropriate quality measures and deliver such information in cost-effective ways to those who need the information? P4P helps! • Will stakeholders in the current payment structure give up their advantages to benefit the “greater good”? Wishful thinking

36. The Skeptics • Reinhardt: “It is naïve to assume that the potential losers … would simply roll over and accept their fate.” • Maynard: “…improved control of expenditures … would oblige physicians, nurses, hospitals, and the Rx industry to moderate their lifestyles.”

37. Chronic Care Management

38. Adoption of Clinical Information Technology

39. The health care world is not yet flat, but we can flatten it • The World is Flat – Thomas L. Friedman • Rule No. 1 – Sept 22, 2006 – NY Times • “Whatever can be done, will be done- because so many people now have access to the tools of innovation and connectivity. The only question is: Will it be done by you or to you?” • A Flat World has no barriers to competition: Consumers will seek value and make purchases based on who can deliver it no matter where that provider is located.

40. Today’s health care world is not flat • Lots of information is available and easily transferable because of online connectivity, but the knowledge to use it is very specialized. • Many barriers to the purchase of such care exist • Travel cost • Lack of Information • Health plan limitations • Poor incentives to seek value

41. Flatness requires changes in behavior • What are your priorities? Will you go as far to obtain medical care as you would for • A Packers’ Game • To buy a new car • To shop for a suit or dress ? • A change in incentives would help, but information about quality differences matters too. • P and T are right about regionalization of tertiary care. We have too many low volume providers of intensive services. • Leapfrog members have vowed to reward volume since volume is strongly related to cost-effectiveness. • Sacrifices of local access to obtain more cost-effective care

42. Some services might be ready for flattening: consider radiology • Patient – Physician relationship does not exist • Services can be separated from other aspects of care management • Digital radiography reduces barriers to entry • Does it really matter whether a CT scan or an MRI is read by a Chinese radiologist in Milwaukee, a Greek radiologist in Kansas City or an Indian in Bangalore if the perceived quality is the same? • Does the price differ? Indeed!

43. Radiology in the Central U.S.

44. What can purchasers do? • Educate people about value • Nexium vs. Prilosec • (United Health Care – won’t cover Nexium) • Give incentives to comply with evidence-based, best practice, especially for those with chronic disease • Chronic care improvement model • http://www.improvingchroniccare.org/ • Design payment structures to • Encourage people to be healthy and to comply with best practices (cost-effective care) • Discourage third party payment for cost-ineffective care

45. Summary • The rise in health care costs will continue. Technology and demographics will propel it. • Oscar Wilde said “Economists know the price of everything and the value of nothing” • Cutler, Thorpe, Porter, Reinhardt, and Maynard beg to differ! So do I.

46. Summary (Continued) • To obtain the most for our health care $, public policy needs to stop rewarding high cost/ low value care. • If consumers / patients wish lower spending on health care, they must • accept reduced convenience for some services • reduce their risk of disease • learn to manage the diseases they have • and learn to purchase care that adds value and to not purchase high cost / low value care.

47. Thank Youfor Your Attentionemail: merton.d.finkler@lawrence.edu