Health Business Blog

The latest edition of the Cavalacade of Risk blog carnival appears at Free Money Finance.

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One of the interesting things I learned in business school is that not only is it typical for a business to earn 80 percent of its profits from 20 percent of its customers, but that 75 percent of its customers may represent 120 percent of its profit. In other words, not only are some customers more profitable than others, but a fair fraction of the customer base is unprofitable. This kind of pattern is evident in a normal (i.e., non-health care) business. The main drivers are usually cost of customer acquisition and cost to serve. For example, some customers demand a lot more service than others and some customers that cost a lot to bring on only buy once. Price is usually a secondary factor, with more powerful or shrewder customers negotiating discounts.

Once businesses understand their true costs and profitability by customer segment they can take steps to improve profitability. For example, if customers recruited through advertising on Facebook are unprofitable, the company can advertise elsewhere. If some customers use a lot of service, the company can start charging for service explicitly.

Health care is a lot weirder than that, as Ambulance-Bill Chasing in the Sunday Boston Globe Magazine illustrates. A non-health care person wrote about how he tried to understand the bills for his mother’s ambulance rides to and from the hospital. The more he dug, the more bewildered he became:

As a reporter, I’m used to dealing with complex material, but this drive down one of the countless, curvy roads that merge into the Health Cost Superhighway left me both more informed and more confused. Maybe it really is easier to remain clueless and indifferent about our medical bills. The alternative, as a friend who has spent decades in the health care trenches told me, is “to be clueless and terrified.”

The gist of the story is:

• A public (Town of North Andover) ambulance charged $650 for a 4-mile trip to the hospital. Medicare and supplemental insurance will pay $316 and $79 respectively, or $395 in total
• A private (Patriot) ambulance charged $1153 for the return trip. Medicare won’t pay, because it doesn’t consider such trips medically necessary, and Patriot is apparently allowed to charge his mother the full amount. However, they are only planning to charge her $257

Here’s the interesting nugget:

So if Patriot is unlikely to collect its initial steep fees, why bill for them in the first place? Because in this Alice in Wonderland health care world, some people actually do pay them. Car insurance companies, for example, may cut such checks when their clients are in accidents, a windfall [the ambulance company owner] says he needs to offset lower payments from Medicare.

The example here isn’t particularly extreme, because the $1153 for Patriot is only about 3x what Medicare pays. It’s not unusual to see health care charges at 5x negotiated rates. What’s interesting is that there are still quite a few health care businesses that operate in this mode, earning a modest margin on their core business that’s reimbursed by Medicare and commercial insurers with which they have contracts, losing money on the fairly high percentage of patients who don’t pay anything –either because they’re uninsured or just don’t pay–, and making almost 100 percent of their profit on the occasional out-of-network sucker whose insurance pays full boat or who actually pays the bill himself or herself. Some ambulance companies operate in that mode as do other businesses, such as kidney dialysis centers and providers of mail order medical supplies.

It’s not healthy to operate in such a skewed mode, where the normal 80/20 rule cited above doesn’t apply. Price transparency and consumer-directed plans can make some impact here.

However, global capitation would be even more effective. Not only would it give provider systems (such as Accountable Care Organizations) the incentive to negotiate with ambulance companies and their ilk, it could also encourage a more rational view on utilization. If that ambulance trip home really wasn’t medically necessary, why not call a cab instead for $10? Even throw in a nurse or attendant for another $50 or $100 to help mom get settled back into the home…

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In a January Pulling It Together column, Kaiser Family Foundation CEO Drew Altman said all the action challenging the Affordable Care Act would likely bring confusion. He challenged the media to report accurately the impact of activity in the House:

A likely result of a repeal vote in the House will be even greater public confusion.  In our December tracking poll, we found that 43% of the public said they were still “confused” about the law (confusion was the public’s dominant feeling –  30% said they were “angry” and 33% said they were “enthusiastic”).  How many people will think the law has actually been repealed (when it has not) if a repeal measure passes the House?  We will test this in an upcoming tracking poll, but there is a real burden on the news media to explain clearly what has and has not happened (and that implementation of the law is continuing).

Sure enough, as Altman explains this month, the new tracking poll shows confusion and misunderstanding:

I am seldom surprised by our poll findings, but this month’s tracking poll produced a doozy.  Twenty-two percent of the American people think the Affordable Care Act has been repealed, and another 26 percent aren’t sure.  Those are surprisingly large numbers even with the 52 percent who still know it is the law of the land.

I don’t know that Altman is really that surprised, considering his prediction last month and the fact that there have been some high-profile legal rulings against the Act. But the findings do tee up an interesting political calculation for pro and anti-ACA forces: whether and how hard to push the fight on health reform.

Sure people care, but how much will they evolve their views based on legislative actions at this point?

I actually suspect there will be plenty more maneuvering because the stakes are so high and the ideological divide so deep.

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Some of the things consumers are expected to do in the name of health care quality and cost strike me as a stretch. Telling their doctors to wash hands and researching the efficacy of different procedures and facilities are two that are tough. But there are areas where consumers can make a big impact if they’re given the proper information.

Deciding whether to call an ambulance is a good example. A new study from the UK, reported on MedPage Today (
People Confused Over When to Call an Ambulance) illustrates some of the specifics:

When a baby has a stiff neck and a high fever, or an elderly person starts slurring their words without being under the influence of alcohol, it’s time to call an ambulance — but not many people know this…

These signs of meningitis and of stroke are worthy of a lights-flashing, sirens-blaring trip to the hospital, but 53% of Britons responding to a survey said there was no need to call emergency transport for the meningitis scenario and only 25% would call an ambulance for the stroke.

On the other hand, almost 50% thought a woman in labor deserved such a ride to the hospital — just one of many scenarios found to be illustrative of inappropriate use of ambulances…

The study itself is pretty weak since it relied on survey responses from a small number of people, many of whom knew the investigators and some of whom had medical training. And we don’t know the implications for the US. Still, there is ample food for thought. For example:

• Calling an ambulance is something consumers initiate so they have a lot of control over whether it happens or not, unlike trying to influence events once they are in the hospital
• There is both overuse and underuse, so consumer engagement is not merely a euphemism for cost cutting or cost shifting as is sometimes alleged
• A modest amount of education should be sufficient to train people on what to do in many common situations, such as those described int he study

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The latest issue of Today’s Hospitalist contains a number of interesting news briefs, mainly summarizing and commenting on recent medical journal articles. Among them:

• A NEJM article by a sleep specialist calls for mandatory disclosure when sleep-deprived surgeons are scheduled to perform elective surgeries, and suggest hospitals take steps to prevent them from working. The American College of Surgeons prefers having surgeons trained to recognize when they’re too tired to work.
• An Archives of Internal Medicine study reveals that most recommendations contained in guidelines issued by the Infectious Diseases Society of America are based on expert opinion. Only 14 percent were derived from randomized clinical trials. They do mention that it’s hard to do randomized trials for infectious diseases, since many appear infrequently. Still, the authors urge physicians to be careful when they rely purely on guidelines.
• An Annals of Pharmacotherapy article showed most patients transferred between inpatient units have one or more medication discrepancies, often because a medicine is omitted. Reconciliation error rates don’t seem to be affected by whether the order entry system is paper-based or electronic. The study was conducted in Canada.
• A JAMA article revealed that more than 20 percent of patients receiving implantable cardioverter-defibrillators (ICDs) don’t meet the evidence-based guidelines for their use. Thoracic surgeons stood out for their high rate (36%) of patients not meeting guidelines.

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This is the transcript of my recent podcast interview with HealthEdge COO Ray Desrochers.

David Williams: This is David E. Williams, co-founder of MedPharma Partners and author of the Health Business Blog.  I’m speaking today with Ray Desrochers, he is Chief Operating Officer of HealthEdge.  Ray, thanks for your time today.

Ray Desrochers:            Thanks for having me.

Williams:            Let’s start off talking about ICD-10. First, Ray, can you explain what ICD-10 is?

Desrochers:            ICD-10 is a coding standard that allows health care organizations of all types to communicate with each other about a number of important things. The most important are diagnosis codes and procedure codes. Those codes allow us to talk to each other about what your diagnosis might be, all the way down to a fine granular level and also about the procedures that are done and why.

Williams:            Now I understand the standard today is ICD-9, but there is a shift to ICD-10.  What’s the difference and what’s the big deal?

Desrochers:            The difference is that ICD-10 takes coding to a completely different level.  We move from 17,000 diagnosis and procedure codes to over 155,000 diagnosis and procedure codes in the new ICD-10 standard tomorrow.  This allows payer organizations to get to a much more granular level when talking about all of the things that happen in the health care experience.

Williams:            ICD-10 has been talked about for a long time and we were already scheduled to see the benefits of it by now. But there have been serious delays in implementation.  Why have those delays occurred?

Desrochers:            ICD-10 has been called the Y2K of health care.  ICD-10, as we go from the 17,000 codes to the 155,000 codes, introduces a whole different level of complexity that most of the organizations out there today are not ready to deal with.  Remember that many of the technology platforms that are running today’s payer organizations are 20, 25, even 30 years old. When you start to talk about change, particularly significant change like this, they’re not able to easily accommodate that.

Also, similar to Y2K, you’re not only talking about a larger number of codes, you’re also, at the same time, about codes that are much longer than their ICD9 counterparts.  So you start to think about this and you go through all of the same experiences that existed in Y2K in terms of needing to analyze the databases, needing to expand fields, needing to migrate and convert data, etc. So that’s what organizations across the country are looking for as they head towards the 2013 ICD-10 standard.

As you pointed out, it has been delayed several times already and the latest delay was a two-year delay that has landed us in October of 2013.  It looks like, at this point, people are pretty confident it’s not going to move again for a variety of reasons.

Williams:            One of the things about Y2K that’s different is there was a hard deadline, so there was no opportunity to move it back.

How do health plans think of the ICD-10 conversion in the context of their overall information technology strategy? Does it cause them to have a broader view of what they need to do rather than just making a patch? What is the optimal approach that these payer organizations should be taking?

Desrochers:            There are a number of things coming down at exactly the same time.  ICD-10 is certainly a major driver and a major cause of anxiety in the market, but we can’t forget all of the health care reform initiatives that are also going on simultaneously along with next generation proposals including value based health care and next generation consumer based health care.

So ICD-10 is a significant issue, but it’s one of several. I think these issues together are causing payers to step back and ultimately think about what the platforms and the technologies are that will be required, not just to solve this one problem, but ultimately to be ready for tomorrow. They want to be ready to take on any type of new business regardless of where the standards go. They want to automate and streamline existing business and make sure that the platform is at least somewhat future proofed. They want to avoid repeating these massive remediation efforts for the next issues, such as ICD-11.

Williams:            The plans obviously have a lot of big things on their plates. ICD-10 is certainly one of the big ones that they discuss, but there is a fundamental question of what role health plans will play long term. There was certainly discussion during the health reform debate, not so much about single payer, but about a public option and whether it was a backdoor to single payer.  With these different health plan IT platforms that you’re describing, is there an opportunity for plans fundamentally to add more value in the future than they have in the past and therefore to secure their position in the health care world?

Desrochers:            I think there certainly is. We’re already seeing plans that are starting to move in this direction, through the whole concept of value based health care, where everybody plays a role and ultimately shares the risk. I think it is a very interesting new development and is certainly one of the areas that’s getting a lot of market attention right now.

In addition, payers have most of the information required for wellness and other prevention programs for chronic disease. They just haven’t had the systems or technology required to identify the population that is most at risk and to deal with them.  That’s changing now.  Payers are evolving into organizations that can really impact the health and wellness of the population that is connected to them.

Williams:            Accountable Care Organizations and Patient Centered Medical Homes are often positioned as a way for providers to be independent of the plans and perhaps less influenced by them. But on the other hand, much of what’s needed are things that plans specialize in.  Will plans play a bigger role in these new models of care than the conventional wisdom would suggest?

Desrochers:            It’s really hard to say at this point.  From our standpoint as a health care technology company, all of these proposals, initiatives, thoughts and designs have one thing in common: they will not be accomplished using the legacy platforms that have existed for 25 or 30 years.  While those have been fantastic in the “one size fits all” health care of yesterday that we’ve all known and loved, they really aren’t geared to deal with the individualization, personalization and customization that next generation health care will require.

So whichever proposal you believe and whichever reformist you listen to, one thing that they all have in common is ultimately starting to share responsibility for each member’s health between the payer themselves, the member, and the provider. And it will be accomplished using a number of different types and classes of next generation technology.

Williams:            You mentioned earlier that there are some early adopters. Can you provide an example or two about what health plans are actually doing to push ahead and how that might give them an advantage over competitors?

Desrochers:            One thing that is getting a lot of attention and focus is the ability to provide a new level of transparency to everyone involved in the health care delivery cycle. Next generation payers are looking to embrace new concepts such as value-based health care and next generation consumer-based health care.  In order to pull those off, they will need to be able to provide a completely different level of information to everyone involved in that quality of care cycle.  So in order for the member to make good decisions about their care, which is really what we want to incent them to do, they must have the data at their fingertips to do that.

The same thing with the providers. If you’re going to pay for provider performance, this whole pay for performance initiative, they must have the data necessary to incent the right behavior.

Part of what’s going on right now with the early adopters is a number of them are getting ahead of the curve in terms of their technology platforms, ahead of the curve in terms of their ability to follow standards like ICD-10, and are using this next generation of more granular information to push out to the health care delivery recipients and ultimately allow them to make good decisions and incenting them when they do that.

Williams:            Over the past several years we’ve seen large growth in the cost of health care. There are also challenges with access and questions about quality. It hasn’t been the kind of industry where one might look from the outside and say this is a really successful industry in terms of delivering value to people.

It’s gotten to the point where it adversely affects the overall competitiveness and fiscal stability of the country in the long term.  As you look forward, would you say that you’re optimistic or pessimistic?  Do you think we’re going to get cost under control, improve quality, and improve access? Or are those unrealistic goals?

Desrochers:            I do think we’re going to do that.  Many other industries out there have done it. The banking industry underwent a fundamental transformation in the late 1970s as they went through a technology modernization and got rid of a lot of the stuff that wasn’t allowing them to be successful.  The manufacturing industry also embraced massive technology upgrades during the late 70s and early 80s and then retail financial went through basically the same thing in the late 80s and early 90s.  Each one of those industries, as they’ve gone through these transformations, have come out much much better and much more efficient.  They found ways to involve the consumer.  They found ways to cut costs.  They found ways to streamline and automate.

Health care really hasn’t done that yet.  They haven’t had to do it. But with all of these different drivers right now, it appears finally, for the first time, the health care industry as a whole and payers specifically, are being forced to consider modernization and to consider next generation technology upgrades.

If you look at one of the core problems facing the industry, it’s inefficiency and significant administrative cost.  A driver of that is the fact that health plans, using yesterday’s technology, are not able to easily automate today’s options.  Many of them are choosing to use manual labor in order to accomplish those tasks.

For example, a new customer comes to them that wants value-based health care or wants some next generation consumer based health care. They know they can’t do it with their existing systems but they certainly don’t want to turn away that business.  So what do they do in many cases?  We see this over and over again, they say we’re going to deal with this in a manual way for some period of time.

The period of time, they’re being optimistic, is going to be six months to 12 months to 18 months.  It grows to 18 to 24 to 36 months or beyond.  So as a result, we live in a world now where many of the leading payer organizations are processing 15, 20, or 25 percent of their claims manually.  If you believe the analysts’ projections, then each manually processed claim costs between $6 and $8. It doesn’t take a whole lot of those to become a very expensive problem or to become a significant burden on the health care marketplace.

So ultimately I think all of the drivers –value-based health care, ICD-10, all of the reform proposals and the reform legislation– these are all going to cause the transformation to happen in health care, finally. What will result, I hope, is something that’s much more efficient, something that’s much more streamlined and much more automated.

Williams:            I’ve been speaking today with Ray Desrochers. He is Chief Operating Office of HealthEdge.  Ray, thanks so much.

Desrochers:            Thank you for having me.  I appreciate it.

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Today’s Boston Globe (Gift limits for teachers irk givers, recipients; Many reject fears of undue influence) goes after an easy target: restrictions and reporting requirements for teachers who receive gifts from parents. Under a state advisory teachers can’t accept gifts worth more than $50 and must file written disclosures even for cheaper gifts if a “reasonable person” could think a teacher would be influenced as a result of the gift.

The Globe story trots out the obvious objections to the policy:

• “There’s no common sense here,” says a superintendent.
• Teachers often use the gifts to buy something for the classroom, not themselves
• Expensive gifts are rare
• No one’s complained

I’m sympathetic to these arguments. And yet, experience from the pharmaceutical industry tells us that the state may actually be on to something here with its restrictions. There are a lot of reasons pharmaceutical companies give doctors gifts. Some of the big items (largely banned now) such as pricey tickets for sporting events and trips to exotic locations are straightforward attempts to buy influence.

But it’s interesting to note that pharma is still keen to give out small gifts such as pens and prescription pads and to pay for lunch. One reason they do this is that pharma understands that even small gifts create a sense of obligation on the part of the recipient. Subconsciously the doctor wants to pay the pharma rep back, and the easiest ways to do that are to spend time with the rep (when they can be influenced to prescribe a specific drug) or just to start writing more prescriptions. Even when doctors think they aren’t being influenced they often are. That’s why pharma keeps at it.

I’m not saying teachers are necessarily going to be influenced by small gifts from parents. The dynamics are different in the classroom after all. But the Globe is remiss for not exploring this angle, especially in what’s billed as a news story. Even if restrictions were removed, I’d like to see the teachers receive brief education on the psychology of gift giving so they can be aware of the dangers.

I’d like to see the same for doctors, too.

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As a kid learning about the US Civil War I remember being particularly moved by the fact that it divided a lot of families who had some members on one side and some on the other. It’s not as dramatic and isn’t violent, but the fight over public sector benefits, especially retirement health benefits, has some of the same characteristics. In Pension Issues Spice Dinner Debates the Wall Street Journal examines how those who enjoy generous government benefits are facing off against those who don’t. It would be a serious enough issue if it were simply a matter of jealousy, but those sounding the alarm are also upset that these obligations are sapping municipal and state finances.

“I don’t expect guarantees from my employer,” says Ms. Izzarelli, 50 years old, an internal auditor of private pension plans at a firm in White Plains, N.Y. “When they hit hard times, I wouldn’t expect them to carry a lot of benefits that they can’t afford. I don’t think public workers ever look at the world that way.”

She didn’t have a receptive audience. Her two brothers are Connecticut state troopers, her father is a retired state trooper and her brother-in-law is a corrections officer…

Ms. Izzarelli’s father, Sam Izzarelli, 72, says that as a taxpayer he understands his daughter’s point about the cost of benefits and pensions, but thinks the state has to “honor the contracts that they have made in the past to people like me.”

This is more than just an academic question. As the Massachusetts Taxpayer Foundation reported earlier this week in Retiree Health Care: The Brick That Broke Municipalities’ Backs:

The 50 largest cities and towns in Massachusetts face a crushing $20 billion liability for retiree health care benefits that threatens to wreak havoc with local government services.

The report shows that many communities would have to raise taxes by 50 percent or more just to pay for unfunded liabilities. I worry a lot that the benefits structure in my town harms services already and that the crush will make things much worse in the future.

There’s no easy solution, but there are a few things that can be done:

• Face up to the issue and make it clear just how serious a problem we are talking about. Kudos to the Massachusetts Taxpayer Foundation for doing some of that
• Don’t cancel the health benefits, but pare them back to levels that are comparable to what the private sector provides. That means using modern managed care approaches that control costs without sacrificing quality
• Reduce benefits for new hires
• Substitute capital for labor, which will be easier to do once the full cost of a hiring a new employee is calculated

It’s true that governments have been foolish in how they’ve negotiated with public sector workers and haven’t been honest with the citizens about cost. And I understand why public sector employees and retirees think they deserve what they’re getting. In the business world, unsustainable labor agreements are sometimes resolved through bankruptcy or the threat of it. Better to deal with the issues now rather than getting to that scenario with municipalities and states.

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ICD-10 is a health care coding scheme that increases the number of diagnosis and procedure codes by an order of magnitude, permitting much more granularity for payers and providers. In this podcast interview, HealthEdge COO Ray Desrochers describes ICD-10 and why it’s taking plans so long to implement, and explains why ICD-10 implementation is the Y2K of health care. Ray’s optimistic that a combination of health care reform efforts, ICD-10 implementation and value based benefit design will finally begin to constrain the growth of health care costs.

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David Williams interviews HealthEdge COO Ray Desrochers [ 14:12 ] Play Now | Play in Popup | Download

In general I oppose the minimum Medical Loss Ratio (MLR) provision of the Affordable Care Act. If an insurer can help keep me healthy and out of the hospital and doctor’s office I’m happy to pay them to do so. But I have to admit I’m pleased that the new MLR rules are putting the squeeze on brokers. See Will health care law be a job-killer for insurance brokers?

Brokers usually serve smaller companies and individuals; they often receive 10 or 15 or even 30 percent of the premium as commission. The commissions are paid by health plans, which have relied on brokers to deliver the business and have been scared to alienate them. But those commissions are part of a plan’s administrative expense. When the going gets tough –for example as the total administrative cost is capped at 15 to 20 percent of premiums– plans decide they’d rather use those precious dollars to pay their employees, cover overhead costs and make profits rather than seeing cash flow out the door to brokers. Already commissions are being cut and brokers are starting to be forced to try to collect revenues from the companies that purchase health insurance rather than the health plans.

Although brokers claim to add a lot of value, in practice most have mainly just driven costs up. For example, it’s in most companies’ interests to stay with one health plan over a long period of time. It keeps transition costs low and makes longer-term interventions such as disease management pay off. But brokers tend to churn through plans. Switching plans frequently lets brokers earn more money: they can shop around for the plan that pays them the highest commission, and take advantage of the fact that commissions can be higher for new business than renewals. Switching plans also makes it look like they’re working hard, rather than being lazy by just recommending a renewal. Many small business owners have no clue how brokers operate and get taken advantage of as a result.

The coming health insurance exchanges and greater ability for small businesses and individuals to compare plans head to head will make it harder and harder for brokers to stay in business. Some really good brokers –and let me say clearly that there are some out there– can find a way to add value. But plans and purchasers are likely to be tougher customers in the future. That’s as it should be.

Repeal proponents have said the Affordable Care Act is “job-killing.” When it comes to brokers’ jobs they are likely right. I say Amen!

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