Vanderbilt Business

Bill of Health

The financial impact of health care reform

by Rob Simbeck | Cover, Fall 2010, Features | Comments | Print Print |

Dick DaftFour years ago Christopher Parks found himself facing an all-too-common dilemma. He and his mother, who was in the midst of cancer treatments, were sitting in her living room going through a stack of her medical bills and those of his father, who had died recently.

It is a telling indictment of the daunting complexity of health care billing that Parks, despite 17 years in the industry, felt as overwhelmed by the paperwork as did his mother. It was she who put the situation into words.

“She looked at me with tears in her eyes and said, ‘Honey, I want to know who I owe, what I owe, and if it’s fair,’” he says. “To hear someone who was in chemotherapy and heading toward hospice say that as she wrote out a check for $20,000—well, that was the moment I knew I had to do something.”

Billing represents one small corner of an American health care system known for flaws that seem inextricably bound to its undeniable strengths. In technology and drug development, quality of hospitals and physicians, availability and speed of delivery, it is the world’s gold standard. But it is staggeringly expensive, needlessly redundant, and too often out of reach for tens of millions who have little or no coverage.

For Parks, his mother’s plea was the starting point for a new business venture that has slowly and sometimes painfully refined its mission to bring light to the billing process for employers and employees.

For the rest of the health care world—often-competing constituencies including physicians, hospitals, insurers, pharmaceutical companies, device manufacturers and the investment community—the future is a complex and uncertain foray into a new health care universe. All of them must sort through the thousand pages of legislation, the politically charged implementation process and the legal wrangling that are all part of the Patient Protection and Affordable Care Act, the 2010 bill that will no doubt change American health care forever.

Parks

Parks

Parks admits that his journey, begun well before Congress took up the trillion-dollar health care bill, involved any number of blind alleys. “We spent two years getting it totally wrong,” he says. “We started off trying to give everyone tons of data points, information about cost, quality, utilization, what other people thought, and so on, and we created this wealth of broad decision-making information. The feedback we got from both users and employees was, ‘Oh, my gosh. That’s too much. I just need one thing answered.’”

The process was also hampered by the fact that large insurers and the government were simply loathe to share information. Ultimately the company he formed, change:healthcare, evolved to offer self-insured companies and their employees easily understood information on medical provider cost, quality, access and performance to help them make educated decisions.

Parks, the company’s President and CEO, sees the approach as vital in the face of legislation that greatly increases the pool of covered individuals, making their decisions an important part of any hope for fiscal responsibility. “With the increase in access to coverage, there will be increased demand and desire for both information and transparency, for more insight both to control cost and make choices,” he says.
A key element is the point at which potential savings prompt behavior change, and for that Parks turned to two friends at Vanderbilt Owen Graduate School of Management.

My simple problem with the health care legislation is that it wasn’t focused on cost, and we will have to address cost next year, the year after and every year going forward.

—Larry Van Horn

“Luke Froeb and Larry Van Horn surfaced as two really bright, insightful guys who know how to look at problems from different angles and who could help us evolve what we’re developing,” Parks says. Froeb, the William C. and Margaret W. Oehmig Associate Professor in Entrepreneurship and Free Enterprise, and Van Horn, Associate Professor of Management, have been studying pricing and behavior. They welcome the increased pool of information for examining a pivotal portion of the health care equation.

“My simple problem with the health care legislation is that it wasn’t focused on cost,” Van Horn says, “and we will have to address cost next year, the year after and every year going forward. The reality is people will have to pay more and make difficult decisions as part of a long-range solution.”

The change:healthcare approach, Van Horn adds, involves “trying to figure out the simplest, most concise way of solving the consumer’s problem by massaging the data behind the scenes and doing analysis. They’re trying to simplify the patients’ process, walking them through a thought process that is meaningful and important to them.”

That patient is the hub about which all else in the legislation and in the health care world revolves, and every constituency faces dramatic changes. The one with the most to gain, at least in the short term, is hospitals.
“We provide a fair amount of underfunded and unfunded care,” says Larry Goldberg, CEO of Vanderbilt University Hospital and an at-large board member of the Tennessee Hospital Association (THA). “The idea that there will be more coverage—with 32 or 36 million more Americans now having insurance—is very appealing.”

Larry Van Horn (left) and Luke Froeb are collaborating on a study examining how much the price of health care has to vary before consumers will change their purchasing behavior.

Larry Van Horn (left) and Luke Froeb are collaborating on a study examining how much the price of health care has to vary before consumers will change their purchasing behavior.

He and others are very aware, however, that those gains may well be short-term. “Obviously payment reductions and questions about how all this is going to be financed concern us a great deal,” he adds.

Members of the Hospital Alliance of Tennessee, an organization of the state’s nonprofit hospitals, are hoping the rollout of health care reform draws on the lessons of the TennCare program, which saw the state tackle managed care beginning in 1994.

“If you know the history of TennCare,” says Paige Kisber, the Alliance’s President and CEO (Goldberg is its Board Chair), “you know that it was the right idea in terms of attempting to bring insurance coverage to more people, but that it just didn’t quite work the way the state hoped. My understanding is that as this federal legislation was being crafted, they looked at what has happened in Tennessee and what is happening in Massachusetts.”

Early hopes for TennCare faded amid reports of fraud and sloppy management. Costs soared, and a 2003 study declared the program was not financially viable. TennCare has since considerably scaled back enrollees and coverage. For the state’s hospitals, even the best of times were problematic.

“With TennCare we saw more people insured, but it did not take away under-reimbursements, and charity care did not go away,” Kisber says. “The state had the best intentions, but there are so many other economic pressures. Given education, prisons and many other programs, you have to prioritize, and you cannot deliver all services to all people.”

That makes it especially important, according to Kisber, that the state’s health care history remain part of the equation. “As the federal government writes these regulations, they will seek public input, and we feel like that will give us the opportunity to bring our experience and expertise to bear on things like eligibility criteria,” she says. “That input will be vital at a time when there will be increasing pressure on nonprofits, and Congress and state legislatures will be looking to cut every penny they can.”

Kisber

Kisber

The economic environment for health care reform is clearly rocky for the federal government, which is adding trillions to a deficit many fear it can never repay. Add that to the fact that half a trillion dollars’ worth of planned Medicare cuts are part of the new federal approach, and investors have at least one clear starting point.

“I would be extremely careful about investing in any health care services sector or company that has significant Medicare exposure,” says Debbie Guthrie, MBA’79, Founder and CEO of Capitol Health Management Corp. in New York City. “It’s my view that Medicare reimbursement will continue to be reduced substantially over time—the economics simply do not work.”

The industry, she explains, has underlying structural problems that must be addressed.

“We should provide access to basic health care for every citizen,” she says, “and ultimately we may already have the ingredients to do that, but our delivery system has structural problems, with fragmented points of entry and reimbursement, which makes it impossible to know which Americans are getting excluded from the system and why.”

While she does support “comprehensive universal access and incremental insurance reform,” this legislation is, she says, “a mess,” adding that jealous guarding of turf by many other constituencies will make implementation, let alone cost savings, that much more difficult.

Guthrie is, not surprisingly, supportive of free market solutions in dealing with many of these problems. “I am very much a capitalist,” she says. “I believe the private sector will continue to take the lead, driving efficiency through innovation, which the government is incapable of doing. But nobody is taking a step back to understand and evaluate where the incentives should be aligned and which participants are truly delivering cost-effective health care. Everyone is protecting their turf just as everyone was looking for special deals. I don’t think anyone understands the full implications and the unintended consequences as the reform moves into the implementation phase.”

Guthrie is particularly troubled by the fact that the legislation “penalizes rather than supports specialists, which is counterproductive. If you have a cold and just need an antibiotic, you don’t really care, but if you have cancer or need heart surgery, you want to make sure you have the best physician you can get. Of course we want these specialists to keep working and have the financial incentives to do so. What’s happening now is that many of the top doctors are looking at the challenges on the horizon and are refusing to treat Medicare patients and are accelerating their retirement plans.”

Guthrie gets no argument from Dr. B. W. Ruffner, a Chattanooga oncologist who is President of the Tennessee Medical Association (TMA). “Certainly we wouldn’t come up with a public policy saying, ‘Pull out of Medicare,’ but there’s no question that some physicians are doing just that,” he says. “Concierge medicine is one option. Another is limiting your practice to commercial insurance, and yet another is retiring, and I’ve heard all three discussed.”

Ruffner

Ruffner

Ruffner cites the cuts scheduled for Medicare, which is “not self-sustaining as it is,” but says commercial insurance may have its own long-term pitfalls.

“A lot of these processes will start with Medicare, but the commercial side will quickly follow suit,” he says. “I think it already occurs when I’m negotiating contracts with Blue Cross. A lot of the metrics for those negotiations are based on Medicare, and that trend is going to take a quantum leap forward with the new exchanges, which will tend to have rules that come from Washington about what they can include and not include. Those physicians who say, ‘I’m just going to take commercial insurance and not Medicare,’ are going to find the two are converging.”

Ruffner says physicians are also wary of the legislation’s provisions for an Independent Payment Advisory Board (IPAB) appointed by the president. “Physicians are concerned that the group will be arbitrary in its efforts to control costs and that the health care industry—and this is as true of hospitals and device makers as physicians—will be affected negatively in due course,” he says.

Should IPAB feel costs are out of hand, it could arbitrarily institute cuts, which could only be overridden by a majority in the House and a 60 percent vote in the Senate. Those votes would have to be accompanied by equivalent Congressional cost-cutting.

Decisions on care, Ruffner maintains, need to remain with those who have expertise.

Our delivery system has structural problems, with fragmented points of entry and reimbursement, which makes it impossible to know which Americans are getting excluded from the system and why.

—Debbie Guthrie

“There’s no question in my mind,” he says, “that the best person to make those decisions about what’s appropriate and what’s not is a physician, but if the physicians don’t get together and work together, Uncle Sam will make that decision, and that’s what we’re seeing right now.”

If there is a positive, at least in the short term, it is directed toward one segment of physicians.

“The thing I agree with 100 percent is putting some incentives into primary care,” Ruffner says. “In Medicare, primary care payments are going to go up significantly. In Medicaid, one of the requirements is that regular office visits for Medicaid payments will be paid at the same level as Medicare. Apparently Congress recognizes the deterioration of primary care. There’s no question that if you’ve got a belly pain, costs to the health care system are a lot less if you start with a primary care doctor who knows you as opposed to going to the emergency room at 10 p.m. Building up the primary care infrastructure is a significant step in the right direction.”

Once that bottom-line relationship is nurtured, change:healthcare’s Parks hopes to contribute to an effort to tackle the problems of paying for care typified by his mother’s experience.

“What we do doesn’t fix the system, but at least it turns on a flashlight in a dark kitchen,” he says. “At least people will be able to see the table and that broken glass over there. It’s something to help you get your bearings. There are tons and tons of data out there. There are websites and booklets and pamphlets being generated all the time, but people are wondering, ‘How do I turn that into something relevant and easy to understand for one person?’ That’s the issue du jour.”

The Owen School’s Van Horn agrees that one part of the solution is going to come from the place where policy understands and intersects with personal choice. “I think that this is one small piece of generating insight into how individuals, when faced with different prices, will change their health care consumption decisions,” he says, “and that is the future of health care.

“We can’t afford to do what we’re doing now, and the reality is we’re all going to start paying more and have to make decisions based on how much things cost. From a policy perspective, understanding how consumers make those trade-offs and decisions is important.”

Any expansion of such ideas into savings across the industry will require more cooperation among parties sometimes known for their insularity. Ruffner describes one attempt:

“I would say the THA and the TMA are working very hard to cooperate with each other and to try to have a constructive dialogue about how to move forward with these things,” he says.

“It certainly doesn’t mean we agree on everything, but we recognize the importance of working together. We’re just two of several constituencies. There are the insurance companies, there’s big pharma, then there are the device makers, and each one of these is a very powerful group with a lot to lose.”

For investors, companies in any segment of the industry are going to have to prove themselves. “The companies that are going to succeed,” says Capitol’s Guthrie, “are those that have the ability to bring efficiency to the health care system, to deliver quality and free up enough money for solid patient care.”

This may be easier said than done for most, but as America’s health care system has proven time and again, those with ingenuity and determination are capable of rising to the occasion. Physicians, hospitals, pharmaceutical companies and others in the medical community have worked together before to solve some of the most challenging problems known the world over. The question now, though, is whether or not they can do the same for the very system they are a part of.

photo credit: John Russell

illustration credit: George Schill, SIS

Comments »

  1. ‘The question now, though, is whether or not they can do the same for the very system they are a part of.’

    I sincerely hope so.

    Thanks,

    James

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