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Dr. Donald Saelinger: To fix healthcare system, get down to specific problems and specific solutions

Second of two parts

The number of hospital admissions has decreased significantly over the last few years with many treatments and surgical procedures moving to the outpatient setting. Additionally, financial support that hospitals have traditionally received from the government for drugs (called 340B) and physician fee support (called OPPS) is about to dissipate.

More, the Certificate of Need regulation which restricts the ability of competitors to build facilities in a given market is about to go away.

Lastly, a regulation requiring hospitals to post publicly, the master charge list is about to be implemented by the Department of Health and Human Services.

Some of these changes are good news for patients and may reduce costs but are not good for the financial health of hospitals. Hospital prices are by far and away the most significant factor in the escalating cost of care. Hospital prices grew 42% from 2007 to 2014 according to the Health Care Cost Institute. There has been profound consolidation among hospitals in many markets which provides market power and ability to raise prices.

Dr. Donald Saelinger

From the physician perspective, in recent years the typical medical student graduate emerges from medical school with student debt in the range of $200,000. Most physicians are in their early 30s before they begin to generate income, as the result of many years of training. This then drives them into hospital lead integrated delivery systems and Accountable Care Organizations (ACO) with a reasonable and predictable revenue stream. The independent practice of medicine will soon be a dinosaur.

This, however, is generally a good move, as there is stability for the physician, adequate support and technology (EMR) that independent physicians could not possibly afford. Most physicians particularly specialists are well paid however their compensation is usually based on the amount of work that they perform or the number of procedures that they do. This is called the relative value unit (RVU) system. The more RVUs that a physician racks up in a given period of time, the higher his/her compensation which incentivizes physicians to order a lot of tests and do a lot of procedures which can decrease quality and increases cost.

A more reasonable approach would be to devise a compensation formula that incentives value (Value Based Reimbursement). This requires that physicians, along with staff and non-physician providers function as an integrated team, using established data-driven guidelines for patient care and follow them 100% of the time.

High quality, well-paid primary care physicians are the backbone of the delivery system in countries that have higher healthcare value. If physicians and hospitals are paid purely for treatment and the number of patient contacts and procedures rather than disease prevention, there is no financial incentive for keeping people healthy, reducing errors and complications, or avoiding unnecessary care. Combine this environment of fee-for-service with unconstrained patient choice and generous coverage, the recipe is perfect for high utilization and ballooning costs.

With regard to the structure of ACOs and Integrated Delivery Systems, it is my opinion and that of many other healthcare consultants that the most effective structure is that the physicians are employed by a wholly owned subsidiary of the hospital system rather than direct employment by a hospital. This allows the physician group to have physician-driven, patient-focused but separate governance and leadership but with consistent mission and vision to the “mothership.”

The pharmaceutical companies, on the other hand, have become rather greedy in their pricing, using the excuse of high drug development costs as the rationale for outrages prices. Politicians have recently taken note and may well begin to regulate some of these outrages practices. Prescription drugs have taken a larger and larger share of each premium dollar over the past 10 years which in turn reduces the compensation for other providers of care.

The insurance companies must sell their plan to employers and individuals as well as to government at a competitive price. Health plans have huge administrative costs which usually amounts to 18 to 20% of the premium dollar. They control cost by requiring prior authorization for many drugs and procedures. The effort is mildly successful but it adds significant administrative cost to the physician’s office as it takes large amounts of time for doctors and their staff, usually on the phone, attempting to get preauthorization for certain treatments and procedures. These same insurance companies routinely deny coverage for procedures and medicines.

From the politician perspective, there is a deep ideological divide with regard to health care. The Affordable Care Act (Obamacare) was passed with no Republican support and it has been significantly dismantled by Republicans with no Democratic support. Politicians seem to value campaign contributions more than keeping their voters alive and healthy

The following is an attempt to summarize the major causes and potential solutions to the substantial value (cost and quality) deficit that American healthcare provides.

1. Administrative costs: The number one reason our healthcare costs are so high is the astronomical administrative costs of running our healthcare system. About one-quarter of healthcare cost is associated with administration, which is far higher than in any other county. A few examples of outrageous administrative costs include insurance company administration (usually 20%), hospital administration (million-dollar-plus annual compensation packages to hospital administrators and integrated delivery system leaders), physician office expenses often the result of regulation and insurance company demands.

2.  Drug Costs: In most countries, the government negotiates drug prices with the pharmaceutical companies but when Congress created Medicare part D, it specifically denied Medicare the right to use its power to negotiate drug prices.

The Veteran’s Administration and Medicaid, which can negotiate drug prices, have the lowest pharmaceutical product costs. The Congressional Budget Office has found that just by giving the beneficiaries of Medicare Part D the same discount Medicaid recipients get, the federal government would save $116 billion over 10 years. Think of what the savings might be if all Medicare recipients could benefit from Medicaid-negotiated drug prices. The more leverage the buyer has, the lower the price becomes. That is true in every industry. In health care, the United States doesn’t utilize that leverage as much as other countries do.

3.  Defensive Medicine: Doctors are afraid they will get sued, so they order multiple tests even when they are certain they know the diagnosis. A 2010 Gallup survey estimated that $650 billion annually could be attributed to defensive medicine. Everyone pays the bill on this with higher insurance premiums, co-pays, and out-of-pocket costs, as well as taxes that go toward paying for governmental healthcare programs.

4. Expensive Mix of Treatments:
American physicians tend to use a more expensive mix of treatments. According to a 2014 report by the Organisation for Economic Co-operation and Development (OECD), when compared with other developed countries, for example, the United States uses three times as many mammograms, two-and-a-half times the number of MRIs and does 31% more Caesarean sections. This results in more spending on technology in more locations. Another key part of the mix is more people in the U.S. are treated by specialists, whose fees are higher than primary-care doctors when the same types of treatments are done at the primary-care level in other countries. Additional Americans receive more medical care than people do in other countries, not so much in terms of doctor visits, however if a person has a heart attack in the United States, they’re much more likely to get open heart surgery than they are in most other countries.

In Ontario, which is part of the Canadian healthcare system, there are 11 hospitals that do open heart surgery. Pennsylvania has roughly the population of Ontario and it has over 60 hospitals that can do open heart surgery. So there’s no way you can operate on as many people in Ontario as you can in Pennsylvania even if you operated around the clock.

It is interesting to note that life expectancy or one-year mortality after a heart attack is the same in the two countries.

5. Wages, Work Rules and physician compensation formula: Wages and staffing drive up costs in healthcare. Specialists are commanding high reimbursements, and the over-utilization of specialists through the current process of referral decision-making drives health costs even higher. Moving physician compensation away from RVUs and to a value-based system will provide significant savings. Physicians and hospitals are currently reimbursed “per click” i.e. each procedure and each test and each pill has a master charge list price and it usually has no relationship to the actual cost. This system should be replaced by a risk-sharing value-based system such as capitation, i.e. the integrated delivery system (which includes physicians, hospitals and ancillary services) are paid a certain number of dollars per member per month (PMPM) and the PMPM rate varies depending on the age and sex and sometimes the previous health conditions of a given patient. This, in turn, encourages doing the right thing by the established guidelines. It takes away the RVU seeking behavior.

6. Branding: “There is no such thing as a legitimate price for anything in healthcare,” says George Halvorson, the former chairman of Kaiser Permanente. “Prices are made up depending on the payer.” Providers who can demand the highest prices are the ones who create a brand everyone wants. “In some markets, the prestigious medical institutions can name their price,” says Andrea Caballero, program director at Catalyst for Payment Reform, a nonprofit that works with large employers to get some control on health costs. The Affordable Care Act (ACA) has pushed back to some degree against the high costs created by branding. For example, in some markets, the high priced branded hospital systems are being excluded from Medicare Advantage Plans.

7. The Bottom Line: Most other developed countries control costs, in part, by having the government play a stronger role in negotiating prices for healthcare. Their healthcare systems don’t require the high administrative costs that drive up pricing. As the global overseers of their country’s systems, these governments have the ability to negotiate lower drug, medical equipment, and hospital costs. They can influence the mix of treatments used and patients’ ability to go to specialists or seek more expensive treatments.
So far in the U.S., there has been a lack of political support for the government taking a larger role in controlling healthcare costs. The Affordable Care Act focused on ensuring access to healthcare but maintained the status quo to encourage competition among insurers and healthcare providers. This means there will be multiple payers for the services and less control over negotiated pricing from providers of healthcare services.

I suspect that many of these changes will become reality in the next few years.

Disruptive innovation is difficult in any discipline however Americans do have the right to high quality, cost-efficient health care and changing the business model is the first step. We must continue the process of abolishing the fee for service business model to a primary care driven, highly integrated team approach with significant risk sharing. Such a change will result in better health care for our communities at a significantly lower cost.

See Part I here.

Dr. Don Saelinger is a distinguished physician, an internist, and gastroenterologist, who founded Patient First Physicians Group in NKY in 1976. He sold it to St. Elizabeth Health care in 2009. It became St Elizabeth Physicians and Dr. Saelinger became Sr. VP of St. Elizabeth Medical Center. He retired from St. Elizabeth in 2010 and has been involved in various consulting roles for Healthcare business and policy around the country. He has also been involved with various locum tenens (definition: one filling an office for a time or temporarily taking the place of another) positions in Gastroenterology. He recently retired as GI section chief and Medical Subspecialty division chief at Straub Medical Center and Hawaii Pacific Health in Honolulu, Hawaii, and has returned to locum tenens roles in Gastroenterology and healthcare business consulting. He is the oldest of ten children o William and Marcella Saelinger of Northern Kentucky. See his full bio here.

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