Medicine as a Product

Dr. Toby Cosgrove, a physician and the CEO of Cleveland Clinic, gave a very enlightening interview recently to the WSJ. The topic was his view of the Affordable Care Act.

He thinks this bill will replace the fee-for-service system for one that rewards hospitals for efficient and high quality care. The system will emphasize hospital organizations; physicians will not be allowed to be independent, they will be instruments of integrated care providers. Doctors will be paid a salary and will not be paid on the basis of productivity.

He expects consolidation to occur country-wide and compared the new medicine to other nationalized consumer systems: "I don't think that anyone would suggest that supermarkets have not reduced the cost of food across the United States or that books from Amazon don't cost less than books do from your local bookstore." When asked if consolidation has had an impact on costs up to now he replied it had not because "Medicare pays 6% under the cost of delivering care, Medicaid 13% under the cost of delivering care." That means that every single medicare or Medicaid patient cost more to take care of than the hospital is compensated for. That means the private insurer , Blue Cross, Etna and the like have to be overcharged to make up the difference.

When asked about the argument that physicians should not be cost conscious and should weigh only clinical factors in their decisions, Dr. Cosgrove said, "They can't do that."

So he sees the medical system shifting from physician-driven to system-driven and decisions on care to be influenced by cost considerations. If you think this sounds like the direct opposite of what one would think of as "professionalism," you would be right.

Dr. Cosgrove estimates that in ten years 75% of health care costs will be paid by the federal government and eventually it will be entirely single payer. The displacement of physician's responsibility from the patient to the hospital/system/insurer will be the end of medicine as a profession.

Adult Questions and Government Answers

The Wall Street Journal recently wrote an article on health care cost, centering on an unfortunate man who had extensive surgery at Hopkins, was hospitalized for almost a year before dying. They used this story to focus on health care costs. Some results:

In 2009, the top 10% of Medicare beneficiaries who received hospital care accounted for 64% of the program's hospital spending. So individual outliers do a lot of general financial damage to the overall system.

Medicare patients create disproportionate costs in the final year of life. In 2009, 6.6% of the people who received hospital care died. Those 1.6 million people accounted for 22.3% of total hospital expenditures. So, while specific outliers damage the system, the general group of Medicare patients who die, 6.6% of the Medicare group, make a tremendously disproportionate demand on resources. And people over the age of 65 consume 76% of total hospital costs.

Nor is this nightmare static. The program's net expenditures totaled $486 billion last year, according to the Congressional Budget Office, or 13.5% of all federal expenditures. In March, the CBO projected that Medicare expenditures would grow an average of 5.7% per year through 2022 and equal 16.2% of all federal outlays.

Jonathan Blum, deputy administrator and director for Medicare, had some opinions. As for...(the patient in Hopkins)..., "A lot of the costs were driven by complications that could have been avoided." So the program, a program the government volunteered responsibility for, is beset by horrific financial problems and a government representative's answer is a glib, unsubstantiated criticism of one of the world's best medical institutions.

Behind this inane thesis lies a thinking that is more and more apparent in government planning from health care to energy to education: Wishing makes it so.

PQRS

 PQRS was established as a voluntary program providing bonus payments to qualified professionals for reporting certain results from their medical practice  under the guidelines of Physician Quality Reporting Initiatives to Medicare from 2006 to 2014 (created under the Tax Relief and Health Care Act of 2006). Obamacare, the recently passed Patient Protection and Affordability Health Care Act, mandates this reporting after 2015 and beyond.

Reporting on management and results of management can return a small financial reward, a gradually decreasing percentage of the physician's Medicare billing, until 2015 when a fine will be imposed for not reporting or demonstrating desired results.

In essence, milestones of medical care have been established by the Washington leadership and physicians will be fined for not achieving them. How these milestones will be created, what and how they will be measured and whether they will be meaningful  is yet to be determined. Current milestones are limited, for example having electronic records or sending prescriptions by fax to pharmacies. Future milestones might be considerably more grand, like changing complication rates of diabetes or fracture rates in osteoporosis. This appears to be similar in nature to the government solar energy initiatives: If you build a theoretical framework, real working individuals will fill it in.

Whether or not physicians will allow themselves to be held responsible for such results will be interesting.

Healthcare and Misdirection

The angst over the Obamacare debate before the Supreme Court is simply weird.

The entire concern by government officials, as echoed through the criticism of the American system by the Europeans, is that no nation can afford to spend 16% to 18% of its GNP on health care. When Hillary was constructing her plan fifteen years ago its architect, Uwe Reinhardt, said that medical costs should make up no more than 10 to 11 percent GDP. So? So....the point is cost, not coverage; expense, not health care. This entire debate is being held as if the point was somehow to deliver more health care to more people; the actual debate is how to cut the expense of health care. That sounds like decreasing medical care, regardless of the size of the population the system is supposed to serve.

Now it is true that people without plans and living on the charity of others use emergency rooms as local practitioners and putting them in a plan may, or may not, change their behavior. And people have bad habits that drive up the cost of care. But certainly no one would suggest that decreased emergency room visits by the indigent or taking salt off McDonald's fries would decrease medical expenses from 18% of GDP to 11%. That is a 38% reduction.

That 38% is not coming out of efficiencies or fraud. That is coming out of services.

Health Careless--Opps!

The U.S. spends on health care the equivalent of 300% of India's gross domestic product although India has three times the population. So the Americans on health care spend three times the dollars the Indians spend on everything--food, housing, military, health care--everything. Last year the American venture capitalists invested 410 million dollars on health care information technology compared with 30 billion dollars in social media and other technology.

One third of American health dollars go to the 5% of the population that dies every year, usually after an intense 2-3 month illness. Another 30% goes to the 5% with chronic illnesses. 90% of rest of the population (the healthy ones) consumes the last third.

Now there may be some wonderful medical breakthroughs coming, there may be some frauds uncovered, the government may introduce new efficiencies (although they have never done so before) but it is clear that some hard decisions will have to be made. After all the promises made, one might even say cruel.

Health Careless

The U.S. spends on health care the equivalent of 300% of India's gross domestic product although India has three times the population. So the Americans on health care spend three times the dollars the Indians spend on everything--food, housing, military, health care--everything. Last year the American venture capitalists invested 410 million dollars on health care information technology compared with 30 billion dollars in social media and other technology.

One third of American health dollars go to the 5% of the population that dies every year, usually after an intense 2-3 month illness. Another 30% goes to the 5% with chronic illnesses. 90% of rest of the population (the healthy ones) consumes the last third.

Now there may be some wonderful medical breakthroughs coming, there may be some frauds uncovered, the government may introduce new efficiencies (although they have never done so before) but it is clear that some hard decisions will have to be made. After all the promises made, one might even say cruel.

Health Care and Other People's Money

A key component of the health care debate is that people who are not receiving the care but are paying the bills begin to separate cost from care. Cost control becomes its own objective regardless of the health care delivered. This is why, in a survey done of British taxpayers, the first question, "Is health care under NHS as good as it was before NHS" the answer was "No" and to the second question, "Would you like to go back to the old system?" the answer could again be "No."

Here are some proposals to help solve the health care problem in America:
1. Allow any insurer to sell any policy in any state. Mandate a deductible that increases with age.
2. Create a workman's compensation for bad medical outcomes to be adjudicated by a medical court where injured patients would receive compensation similar to workman's compensation, if deserved, and end malpractice litigation.
3. Use the time honored "soil bank" concept to supplant fee-for-service and "pre-pay" the physicians. Take each physician's earnings for the last five years, average them and declare that the annual payment for each of his next five years, regardless of how much work he did, how many test he ordered, how many patients he saw. Just send him the check every month and see if the overall cost of medicine goes down.

Control Health Care Costs!

According to a Kaiser study, of each dollar spent on health care in the United States, 31% goes to hospital care, 21% goes to physician/clinical services, 10% to pharmaceuticals, 4% to dental, 6% to nursing homes and 3% to home health care, 3% for other retail products, 3% for government public health activities, 7% to administrative costs, 7% to investment, and 6% to other professional services (physical therapists, optometrists, etc). 16% of the country's GDP is health care, the second highest in the world; the average Western nation spends 10% of GDP on health care. The U.S. is the only industrialized nation that does not have a nationalized health system.

Those are the bare bones of medical care in the U.S. There are more facts: 66% of Medicare money annually is spent on the last two months of life, the FDA is famously hostile to new pharmaceuticals so that much of the research has moved overseas, insurance programs are restricted to states and cannot negotiate across state lines which creates byzantine monopolies, medical reimbursement has fallen annually while overhead has annually increased, lawsuits are responsible for 2% of direct medical costs but no one knows how much overhead is generated by the fear of lawsuits--it is estimated at 15% of testing.

Attacking medical costs tends to rest on the old chestnuts of fraud and abuse. Somehow the incredibly inefficient government believes that they can make the system more honest and efficient and save enough money to bring the U.S. into line with other nations.

But everyone else knows that this is untrue. There are only two ways to decrease the GDP contribution of health care from 16% to 10: Decrease health care services by 37.5% or grow the economy by 60% without growing medical expenses. Period.

Do either of these options look likely?

Government Money: Where It Comes From and Where It Goes

There are 312 million citizens in the United States, 147 million submit tax forms, 69 million paid no money on those forms and 78 million did pay money. Therefore 66% of tax form submitters paid taxes.

50 million people receive money from medicaid, 46 million from medicare, 52 million from social security, 5 million from disability, 7.5 million unemployment, 44 million from food stamps and 24 million from "tax credit." The average individual receiving money given--not paid--from the government receives 20 thousand dollars a year.

One can see that the straight charity activity of the government would be quite manageable had the government not decided to become an insurance agency in medicare and social security.

How Do You Spell the New Means-Tested Medicare?

So now the debate over government costs will include a debate over means-testing for medicare. The money taken out of people's earnings for years with the promise that it would be available for their medical coverage in their old age is not actually going to be available if they do not meet certain income requirements. This is only fair, it is said, as people with more money do not need the help. Why, then were they told to contribute in the first place?

This ex post facto justice has little to do with justice and a lot to do with cost cutting aimed at groups that can not complain. Moreover, it is the first public admission that this welfare state creation is a myth and in so much trouble its goofy architects are willing to confess to it.

How do you spell the new means-tested Medicare?

MEDICAID.

The Future of Medical Care (And Health Care)

The current problems regarding medical care in this country has become obscured. Even the topic is unclear. We have a "health care" problem which implies a slightly different problem than the problem most people are experiencing. The problem is not about "health care." Regardless of the publicity and the debates, the problem with medical care is what it costs.

Availability of medical care is not the question. I have never once seen a person deprived of medical attention because of money. The care is always available because the people who practice medicine--the physicians, the nurses, the PA's--have taken a vow to take care of sick people. The vows they take specifically prohibit the abuse of the inequality that exists between patient and caregiver, the vulnerability that his illness gives him.

And while insurance is a problem, it is not the main problem. It is not even the problem it is cracked up to be. According to the Census Bureau there may be up to 47 million people without health insurance. Of those, 18 million come from households with incomes of over $50,000 annually (more than the medical resident who would see him), 10 million from households of over $75,000. 10 million are not American citizens. Another 10 million are eligible for Medicaid but have not applied. Their reasons for not having insurance may be interesting, may be sad or even stupid. They may stimulate many tax deductible conferences. But the noble goal of having these people insured is not the point. The high cost of medical care is the point.

And there is the conceit that the government (the government!) might be able to improve medical care. The government! Some point to those strange studies from the U.N. that rank states on medical care quality. Aside from credibility questions (Castro, Chavez, Mugabe have great ability to apply statistical analysis to their electricity-free nations and would never lie) these studies have some fascinating assumptions. For example, a nation that does not have a central medical service is automatically downgraded. Ditto large nations. If you have high expectations of your medical system and are disappointed that nation is downgraded, if you expect little and are pleasantly surprised, upgraded. And there is no standardization. A newborn death in the first 24 hours of life is a death in the U.S., a miscarriage in Britain and France. The major non genetic cause of infant death is prematurity and low birth weight; these are functions of smoking, teenage mothers and race (Afro-Americans have a very high prematurity regardless of circumstances). These are social factors, not medical.

But even if the government could improve medical care, it is a side point. The problem in this country is the cost of medical care.

This country has developed highly selected, well educated people to apply complex surgery, expensive devices and advanced pharmaceuticals quickly to ill people. There are few wards; there are many private hospital rooms. The nurses are extremely well educated and available. Transport to plentiful facilities is managed from anywhere in the country to any select institution. In short, this is an expensive system. All of this comes at a cost. And many think that cost is too high. I do not know how that is determined; we have an older population, they want care and are willing to pay for it. Ewe Reinhold thinks that uncontrolled health costs can digest the whole economy. These theoretical questions are interesting and peripheral; medical costs in this country are too high.

The answer here is not to improve insurance, not to make medical care more available, and not to have the government bring its version of "expertise" to the science of medicine. Medical cost are high and increasing because the medical care those costs support is of high calibre and growing. Soon we will all be priced out of the Maserati medical market. The answer will be to build a Chevy. The effort to increase the number of people covered by insurance is cynically deceptive. The answer to high health care costs is to have less medical care. The government knows this and will start the process by simply paying less and less for more and more of what it receives. The consequences of decreasing price paid for a product or service without consideration of underlying costs is simple as well: The product or service goes away. That will result in medical care that is less available, less prompt, and less good. That will cause some major changes, but decreasing medical costs will not occur in any other way.

Canadian Breakthrough

A few years ago, when the Provence of Quebec took over the financial responsibility for medical care, one of the changes the government instituted was to forbid patient families from calling pediatricians after office hours--and pediatricians from calling their patients during the same period. Calls were handled instead by a call center manned by nurse practitioners. The logic was that strangers who were not emotionally involved with both the patient and the family were less likely to pursue investigations of complaints. They had some experiential evidence for this. They had some support from physicians, who generally hate the unpaid for time and inconvenience of on-call schedules. The patients initially objected but eventually did not complain much. Change in quality was difficult to assess.
That this idea was somewhat successful is an example of bad concepts becoming first tolerable and then laudable. Imagine the notion that encourages indifference to the patient. Only the coldest organization could consider it.
The relationship between physician and patient is unique: The physician pledges to put aside all considerations in dealing with the patient other than the patient's illness and how the physician can help. The patient will never be a client, a customer, a sexual target. The patient will always, always, be primary. This placement of the patient in the center of medical care is the one aspect of medical care that makes it different; it can never become anything other than medical care. The relationship can never become commercial, can never be entrepreneurial or seductive. And it is this specialness that government must destroy in order to control price.
If the patient is of primary concern, an outside agent will never be able to manage medical care. If the patient is to be replace as the focus of care, there is only one way to do it: The physicians will have to change. Those who cannot change, will have to leave.

The Managers of Commerce

I suppose the debate is simply how to allocate resources. How will gas, coal, oil, lumber, savings, medical services, cars....how will anything be allocated. And, of course, who will do it. If it is assumed that desires and resources have some limits, some restraints, that even the most pro-growth advocate would affirm then some management of those desires and resources must, eventually, occur. The debate then is really not how to make all things available to all people, it is how to make the limited products and services available to which selected people.

In short, how do we assign the shortages.

Now things get ugly. If we are not assigning products and services but their shortages instead, the problems of organization and governance take on a harsher and more honest appearance. The most noble of souls will admit that some of our resources and services have limits already. Most parents would prefer a live-in pediatrician, around the clock pediatric care. Most drivers would prefer a high performance car although the minority of drivers will ever even be in one. And the theoretical shortages--petroleum, potable water--loom.

There are countless foundation theories here to direct us: The poor are always with us, capitalism has a production bias and provides more goods and services, the greatest good for the greatest number, only those who work eat, from each according to his ability to each according to his needs, the birds of the air and the lilies of the field do not want. But none of these theories, save the last, prepare us for what is actually implied here: If allocation is the responsibility of someone other than the producer then there must be a significant element of coercion to take his service or product and there must be the recognition that some will get nothing. If we are going to manage the distribution of health care and there are limits, who will be deprived of the care and when? Who will be deprived of a Porsche and when? If we are anxious about limited petroleum, should anyone own a Porsche?

These are reasonable questions, especially in a culture that purports to esteem freedom above all other qualities. What is not reasonable is to approach this problem of allocation as if products and services were being expanding and not restricted. And what is not reasonable is to ignore the motives and abilities of those volunteering to make these inherently damaging decisions for us.

Medical Fees

It seems that there will be more, not less, debate over the national health care plan. Massachusetts has confused matters and, apparently, the administration. Some financial perspective from the medical angle might be worthwhile.
Over the last years there has been a gradual decline in Medicare medical fees to physicians. One reason is that individual fees are determined by attempting to keep total physician reimbursement stable at 19% of total medical expense despite the increase in patient volume and the expansion of medical therapies. The GEO estimates that fees will decline further, about 35%, from 2005 to 2012 while office overhead will increase 19%. Medicare also pays on average ten percent less than private insurance for the identical service. Medicaid pays less than the cost of billing and I know no physician who bills it. Moreover, Medicare plans a 21% decrease in reimbursement to physicians across the board on March 1, 2010 as well as a $500 billion decrease to overall Medicare funding.
It almost looks like a satire on price controls, how it misunderstands cost and what it does to supply.
The overhead--the percentage of total earnings that go to running a medical office before profit--varies between 47% and 60%; for the sake of argument let's say 50%.
If a medical office suffers a 21% decline in reimbursement, that vastly underestimates the impact in the office itself. The overhead costs are fixed--rent, salaries, insurance. So the decline in reimbursement will be absorbed by the profit side of the ledger. If the overhead is 50%, the profit 50%--a 21% decline would result in a 42% decline in earnings. That, with the erosion of earnings over the last years, would be unthinkable in any other field. It is unlikely many medical offices would survive. That it is being considered at all means the government is intentionally trying to destroy medicine or create a physician shortage. The other option is they don't understand what they are doing.
On the other hand, with Barney Frank's 180 degree turn on Freddy and Fanny, maybe the entire country is being run at random.