University of California, Irvine
Graduate School of Management
Health Care Management Distinguished Speaker Program
October 2, 2001

Dr. Paul Ellwood, “The Father of HMOs”

The following comments are not absolutely verbatim quotes, but were reconstructed from notes taken by me during Dr. Ellwood’s presentation:

Dr. Ellwood stated that he has written off managed care companies. But he is ready to try refrom again. He believes that reforms will be far more complex, and that the task will be much more difficult.

He has developed a new acronym for his concepts of future reform, although he states that this is a work in progress.

His acronym: HEROIC, as follows:

H: Health system, with an emphasis on the health component rather than on financial incentives. We should consider that the new form be not-for-profit. (He mentioned that he is disgusted when a managed care executive goes to Wall Street and brags about raising premiums and reducing benefits.)

E: Evidence based medicine. Physicians must agree to follow principles of evidence based medicine. Consumers must agree that evidence based care is sufficient. As an example, they should not an MRI when evidence based medicine does not support its use.

R: Responsibility. Patents need to assume more responsibility for their own health and for the costs of health care. He did state that there is danger that the defined contribution will be too low.

O: Outcomes accountability. Outcomes accountability is absolutely necessary to assure high quality.

I: Information technology. Health care is lagging in information technology. Information technology is demanding, complex and costly. It interferes with “clinical productivity” (i.e., income generation). But information technology provides the glue that holds the health care system together.

C: Commitment. We will be able to identify individuals that will acquire specific disorders. A health care relationship will need to be sustained, with a lifetime tracking and alerting system.

He said that we can design a better health care system, but the problem is getting there. We do not want to put cost containment in front of the system that assures health. We must develop an American health system that hails who we are.

Comment: Listening to Dr. Ellwood, he was obviously very disappointed that the managed care revolution did not fulfill his dreams of quality, efficiency and integration, that would improve outcomes through evidence based health care. He is disappointed that his concepts were developed primarily into a business model rather than a health care model. He believes that we can go back and design a model that will incorporate his concepts, although the implementation will be difficult. It is interesting that in informal conversations after his presentation, a few individuals commented that he had implicitly (but not explicitly) endorsed single payer reform.

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The New York Times
October 1, 2001
Letters

To the Editor:

(editorial, Sept. 28):

An additional indirect but major economic effect of the Sept. 11 terrorist attacks may be in health care policy. The economic slowdown that had dramatically increased unemployment in August has been accelerated by the attack to the point of inducing a full-fledged recession.

Most Americans who have health insurance get it through their work. When the slowdown began, 43 million Americans had no health insurance.

As unemployment grows, the families of laid-off workers will add many more millions to the ranks of the uninsured. Perhaps when we get to 50 million or 60 million uninsured, it may at last be politically acceptable to discuss universal health insurance.
JAMES J. FLORIO
Metuchen, N.J.
The writer was governor of New Jersey, 1990-94.

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The Washington Post
September 29, 2001
“”by Dana Milbank and Richard Morin

“And, for the first time in three decades, a majority of Americans said they trust the federal government to do the right thing – a sharp but perhaps temporary reversal in the way citizens view their political institutions. Nearly two in three respondents said they trust the government in Washington to do the right thing either ‘just about always’ or ‘most of the time,’ the poll found. That is more than double the percentage who expressed such confidence in a Post-ABC News survey in April 2000, and more than three times the proportion who said they trusted the federal government at the low point in 1994.”

“Some see hope for a lasting change in public attitudes. ‘I think there is the potential that Sept. 11 will turn out to be a turning point for civic America,’ said Harvard political scientist Robert Putnam, whose book ‘Bowling Alone’ last year documented the decline in civic engagement and trust. ‘It’s a horrible tragedy, but there could be some good coming from it if it causes us to become . . . more aware of the obligations we have to other people and more open-minded about the role of government.'”

Robyn Webb, 26, a high school math teacher who lives in Mount Laurel, N.J.:

“I have a renewed respect for the federal government, absolutely. People see that the government is one of the only avenues we have to get some things done. It puts renewed hope about the government and their capabilities to do things.”

http://www.washingtonpost.com/wp-dyn/articles/A42864-2001Sep28.html

From the poll, conducted September 25-27:

16. How much of the time do you trust the government in Washington to do what is right? Would you say just about always, most of the time, or only some of the time?

13% – Just about always
51% – Most
35% – Only some
01% – None

http://www.washingtonpost.com/wp-srv/politics/polls/vault/stories/data092801.htm

Comment: The Washington Post has listed the responses over the years to this inquiry. The current responses supporting trust in the government are a very dramatic turnaround from prior polls. In fact, the last time that there was this level of support was 1966, the year Medicare was initiated. Although this poll was primarily directed toward our military response, the one medical question asked suggests that this trust may be very real. Three-fourths of respondents opposed postponing action on prescription drugs for seniors.

It may be that tragic, shocking events evoke introspection and values clarification. Clearly, we do understand again what really is important. We recognize our own personal needs as we recognize our needs as a community. We place values over substance. The lines separating the private element from government blur when we look at our values. We see a need not only for ourselves but for all of us to have adequate food, shelter, education, health care, and the enjoyment of our varied arts. At times like this we see that the private sector alone has not been able to assure that these fundamental needs will be there for all of us. Perhaps the government, our government, does have a role in assuring that the private sector ensures, not equality, but equity in meeting these needs. Equity is not a construct of the marketplace, but rather it is a construct of a society joining together as a government. In health care, the marketplace can excel at delivering health care, but the government is needed to inject equity. Universal health insurance is possible only with government action. Shouldn’t we take a serious look at that, when trust in our government is at a 35 year high?

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The New York Times
September 28, 2001
by Robert Pear

Over all, the number of people without health insurance declined by 551,000, to 38.7 million last year, from 39.3 million in 1999, the bureau said. The proportion of people without coverage declined to 14 percent, from 14.3 percent.

The Census Bureau said it had made technical changes that tended to reduce the number of people listed as uninsured, so the figures for 1999 and 2000 are not directly comparable with those for earlier years. In conducting interviews, the bureau said, it now asks follow-up questions to help people recall whether they have insurance.

Several economists and health policy experts said the declines were unlikely to continue this year. Tens of thousands of people have been laid off, the economy has weakened, and the cost of health care and health insurance has shot up.

Kate Sullivan, director of health care policy at the United States Chamber of Commerce:

“We now have very different economic conditions. Employers are experiencing the highest premium increases in a decade. I expect to see an increase in the number of uninsured in 2001 because people have been losing their jobs. An unemployed worker cannot easily afford coverage.”

http://www.nytimes.com/2001/09/28/national/28INSU.html

Comment: HHS Secretary Tommy Thompson stated yesterday that current proposals for the uninsured include modifying COBRA benefits for the recently unemployed, and expanding the Medicaid program. Although both of these efforts should be supported, they will hardly impact the problems of inequity, cost containment, affordability and access. In these difficult times, reform that will contain health care costs is clearly in the national interest. We can contain costs, while improving access and reducing inequity, by enacting a program of publicly-administered universal health insurance. This should be elevated to the status of emergency legislation.

Health Affairs (web exclusive)
September 26, 2001
by Bradley C. Strunk, Paul B. Ginsburg, and Jon R. Gabel

Abstract:

This paper provides an update on trends in health care costs since 1999. Although the growth rate in overall costs has been stable since 1999, the trend in costs for hospital services rose, while that for prescription drugs declined, although it remains extremely high. Increased growth in hospital costs reflects the retreat from tightly managed care and labor shortages. The discrepancy between premium trends and cost trends has increased, which reflects the health insurance underwriting cycle. If these trends continue, likely responses by employers would lead to consumers’ facing higher out-of-pocket costs and an increase in the number of uninsured persons.

In a release from the Center for Studying Health System Change (HSC), Paul B. Ginsburg, Ph.D., the president of HSC:

“The volatile combination of rising costs, increasing premiums and a slowing economy have set the stage for consumers to pay more for care and an increase in the number of uninsured Americans.”

http://www.hschange.org/CONTENT/373/ (The full report is available at the HealthAffairs.org link in this article.)

Comment: So is the glass half full or half empty?

Half full? * Increases in health care costs are not as great as the current premium increases would indicate since the premium increases reflect, in part, the health insurance underwriting cycle. * The trend in increasing costs for prescription drugs has declined. * The increases in hospital costs reflect a retreat from tightly managed care, most likely a transitional adjustment.

Half empty? * The trend in costs for prescription drugs remains extremely high, in spite of a decline. * The growth rate in overall costs has not improved since 1999. * The premium equivalents of self-insured firms, which tend to reflect true health care costs, dampening the effect of the insurance underwriting cycle, rose at 9.5% in 2001, well in excess of inflation.

Or maybe the glass is clear full or clear empty?

Clear full? * (No evidence.)

Clear empty? * True health care costs continue to increase at a rate significantly greater than the rate of inflation. * Consumers (i.e., patients) will assume a greater share of the financial burden of health care. * Current trends will increase the numbers of uninsured.

Obviously, the health care economics glass is clear empty. We do not have in place any mechanisms that are capable of preventing true health care costs from escalating beyond the rate of inflation. We have saturated the capacity, or at least the will, of the purchasers of health plans to absorb any more increases in costs. We are increasing the financial burden of the patient-consumers, a major segment of whom lack the levels of disposable income that will allow them to absorb the increased costs. Worse yet, there is no prospect of adding one drop to the empty glass as long as we depend on the current market models of health care asset allocation which have drained the glass dry. With an empty glass, we have nothing left but to chew up and spit out the patient-consumers, a cruel, inhumane, heartless substitute, when the glass could be filled full by merely adopting a publicly administered, universal health insurance program.

The Boston Globe
September 25, 2001
“Kennedy to Launch Drug Program” by Rick Klein

“Former US Representative Joseph P. Kennedy II today will launch a private drug-discount program that could save elderly and poor consumers thousands of dollars in medication costs.”

“Kennedy said he has negotiated substantial discounts in drug prices with drugstore chains through his nonprofit Citizens Health Corp., a subsidiary of Citizens Energy Corp.”

“Kennedy’s announcement comes after several years of failed attempts to get the state to move forward with its own bulk-purchasing program. The Legislature has required the administration to establish bulk purchasing each of the past two years, but no major steps have been taken.”

“In the summer, the administration of Acting Governor Jane Swift appeared ready to embrace the concept, at least on a limited basis. But those efforts now appear stalled However, Swift administration sources said they will meet to discuss whether they can work with Kennedy’s plan to offer discounts to seniors enrolled in Prescription Advantage, the new state-sponsored drug insurance plan for the elderly and disabled.”

Alan Sager, Ph.D., a professor at the Boson University School of Public Health:

“This sounds like a well-intentioned effort that could help some people, and on balance, it’s probably worth doing. Unfortunately, it can tackle only a very small share of the problem of unaffordable medications.”

http://www.boston.com/dailyglobe2/268/metro/Kennedy_to_launch_drug_program+.shtml

Comment: Joseph Kennedy’s effort to improve access to pharmaceuticals, through private efforts to make them more affordable, is most admirable. But what will happen? Other efforts to contract discounts will compete. With no other mechanisms to contain costs, the pharmaceutical industry will merely grant discounts from an artificially inflated wholesale or retail price. An example of the perversity of this process is the current process by which pharmaceutical firms grant Medicare a discount from the Average Wholesale Cost (AWP) which has proven to be an artificial construct that the industry has used to assure that high drug prices are maintained.

Also, other entities will be demanding the same discounts, including federal and state programs, such as Prescription Advantage, pharmacy benefit managers, and any other element that must pay for pharmaceuticals. Lacking control of the process, the balloon phenomenon is operational – push in here and it bulges out there – shifting costs so that the industry does not have any net reduction in revenues. Who pays for these shifting costs? They are funded by everyone who requires prescription drugs, but the funding is inequitable at a time that we are attempting to improve equity in our health care system.

Fee controls through contracting by health plans and through government action have been relatively effective in limiting the profits of physicians, hospitals, laboratories, and radiological services to a level that have allowed fair but not excessive profits. This is because the joint private and government control of these sectors of health care is almost complete. On the other hand, the pharmaceutical industry still has a large sector of patients that do not have a private or government intermediary to control the market. This sector includes a major segment of the Medicare beneficiaries, the uninsured, those covered by privates plans that do not offer pharmaceutical benefits, and those that must purchase a significant amount before their plans kick in. This has left the pharmaceutical industry with an intact balloon, allowing unlimited cost shifting.

Pharmaceutical costs are the greatest inflationary element in health care today. When other sectors of health care are subjected to price controls, why should this industry be insulated?

Is there room for price reductions that will allow fair profit for the pharmaceutical firms? Clearly there is. This industry has also been egregiously wasteful in administrative and marketing costs, much of which could be eliminated. Drugs should be selected based on medical benefit. Physicians should be updating their knowledge through legitimate continuing education rather than by accepting sales pitches of this industry. Copy cat drugs should be funded based on their real value rather than based on their patents and success of their marketing programs. R & D should be directed to new breakthroughs rather than for the purpose of extending patents via copy cats. Perhaps the most important change that needs to be made is to make drugs available to every person that genuinely needs them. The marginal costs to expand production to meet this need are almost negligible. Diluting average costs with this very low cost expansion of production would have the greatest impact on reducing the per prescription price of drugs.

The United States has one of the least equitable health care systems of all industrialized nations. Inequity is particularly a problem in our allocation of pharmaceuticals. The solution is simple. Establish a publicly administered, universal health insurance program. Require the pharmaceutical industry to end waste, to produce value, and then to negotiate for rates that meet their legitimate costs and still provide a fair profit. The pharmaceutical industry would thrive, but, much more importantly, more patients would thrive.

News Release
Congressman Pete Stark
September 21, 2001
Rep. Pete Stark Statement on Medicare HMOs’ Abandonment of America’s Senior Citizens and Persons with Disabilities”

Congressman Pete Stark:

“Independent analyses have long shown that we over-pay private plans under Medicare, relative to what their costs are. Just last year, we enacted legislation that gives Medicare HMOs an additional $32.5 billion over the next 10 years. We are told that it would go into extra benefits, but it has not. Instead, it is lining shareholder and CEO pockets, while Medicare beneficiaries are again left in the lurch. It is unconscionable to spend more of our scarce resources on this part of the program when millions of Medicare beneficiaries lack coverage for prescription drugs. We need to be working to improve Medicare for all beneficiaries.”

Comment: Increased funding of Medicare HMOs is an issue that has survived the reshuffling of legislative priorities. House Ways and Means Chairman Bill Thomas, on September 21, released a statement that indicates that they intend to move forward with legislation that would increase funding for Medicare HMOs. This is with the concurrence and support of Thomas Scully, Administrator of the Centers for Medicare and Medicaid Services (CMS, formerly the HCFA).

The Ways and Means Committee release is available at: http://waysandmeans.house.gov/press/2001/september/9-21-01.htm

In spite of misleading rhetoric, the facts are not in dispute. Initially, Medicare HMOs were successful in directing marketing to a relatively healthy subset of Medicare beneficiaries, thereby escaping much of the economic burden of higher cost, less healthy patients. Since they were awash in unspent taxpayer dollars, they were required to either return the excess funds, or spend them on patients or on their own industry. Thus those that joined HMOs experienced greater benefits, especially the inclusion of pharmaceuticals, and lower out-of-pocket expenses. And there were still plenty of funds left to enrich the shareholders and administrators of these plans. But studies did confirm that the taxpayers were not receiving value for this investment because of diversion of funds away from patient care and into inefficient, private health plan bureaucracies.

In response, Congress slowed the rate of increases in payments to HMOs. In the meantime, their HMO patients were growing older and more expensive, squeezing the profit margins for the HMOs. Congress then granted additional funding, but not enough to allow the HMOs to continue with their extravagant bureaucratic wastes. Thus HMOs continue to withdraw from unprofitable markets. As a result, those Medicare beneficiaries that joined HMOs are losing the extra benefits of pharmaceutical coverage and lower out-of-pocket costs.

The response of Rep. Thomas and others is to support legislation that will provide funding for these benefits, and provide adequate profit margins for the HMOs. There are two very important issues here. One is that they are perpetuating an inefficient system that is wasting taxpayer funds by diverting them away from patients and into the HMO industry. This violates a fundamental duty of Congress to reduce waste of taxpayer dollars.

The other issue relates to the fact that Medicare beneficiaries should have pharmaceutical coverage and lower out-of-pocket costs. But that should apply to all Medicare beneficiaries, not just to HMO plan members. Thomas and his colleagues want to limit those benefits to individuals that will join the organizations owned by his friends in the industry. What better marketing leverage could you have than to provide a gift of taxpayer funds to managed care companies for extra enticements for patients, while prohibiting the entitled patients that remain in the more efficient, traditional Medicare system from receiving those same benefits?

Medicare was established as an equitable system. It is a blatant abuse of the legislative process to end equity by granting tax payer funded enticements to be used for unfair marketing advantage of an abusive managed care industry.

Congress has a moral obligation to correct both of these wrongs. They need to end the waste of taxpayer dollars diverted to inefficient private bureaucracies. And they need to assure equitable access to care for all Medicare beneficiaries by preventing financial barriers to care. They can do this best by adding a pharmaceutical benefit and by reducing out-of-pocket expenses. If they did this, the superfluous HMO bureaucracies would go away. Then maybe we’ll be ready to seriously consider Medicare for All.