First for-profit med school nears approval

By Myrle Croasdale
American Medical News, October 1, 2007
With Rocky Vista University College of Osteopathic Medicine in Parker, Colo., one step closer to becoming the only for-profit, accredited medical school in the United States, it is generating controversy in the medical community.
Critics say a for-profit school will be beholden to investors and will scrimp on educational mission. Supporters assert that Rocky Vista must meet the same accreditation standards of other osteopathic schools. They also say the school’s educational outcomes will be the same as nonprofit schools.
“People are paying a lot of attention to this. There’s been a lot of discussion, and there are some very vocal people against it,” said Stephen C. Shannon, DO, MPH, president and CEO of the American Assn. of Colleges of Osteopathic Medicine.
The phrase “for-profit school” triggers a negative picture of a business making money from tuition while skimping on education, he said. Medical educators from DO and MD schools alike are watching to see if Rocky Vista transcends that image.
George Mychaskiw II, DO, chief of anesthesia at the Blair E. Batson Children’s Hospital in Jackson, Miss. said he believes a for-profit school within the osteopathic profession’s ranks erodes creditability. “This is a very unsavory situation,” said Dr. Mychaskiw.
http://www.ama-assn.org/amednews/2007/10/01/prsc1001.htm
About Rocky Vista University
http://www.rockyvistauniversity.org/about.asp

And…

For-profit medical school moves ahead

By Kathy Robertson
Sacramento Business Journal, January 6, 2012
A group of local doctors and investors have raised money, purchased a building and are aggressively preparing to start classes next year in Elk Grove at what could be the nation’s first for-profit medical school.
They say California Northstate University College of Medicine will offer an integrated approach that focuses on basic science and an understanding of how body systems work, what goes wrong and how to keep patients healthy. There will be two years of classroom study, followed by clinical rotations at area hospitals, doctor offices and clinics.
Chief executive officer Alvin Cheung declined to provide financial details about what he calls a private, proprietary institution, but backers have assembled a group of investors, including local doctors and pharmacists, to launch the new school.
“The scarcity of public funding compels folks with great interest in education to think differently,” Cheung said. “The alternative is a private funding source. We don’t call it ‘for profit’ because that does not characterize our motivation. We are here to be part of the solution to a large problem.”
Virtually every medical school in America is either public or nonprofit. Palm Beach Medical College in Florida, also a for-profit venture, is waiting for accreditation like Northstate. The only existing for-profit medical school is a college of osteopathic medicine in Colorado.
http://www.bizjournals.com/sacramento/print-edition/2012/01/06/for-profit-medical-school-moves-ahead.html?page=all
About California Northstate University College of Medicine
http://cnucom.org/index.php?option=com_content&view=category&layout=blog&id=16&Itemid=149
About Palm Beach Medical College
http://www.palmbeachmedicalcollege.com/index.php?option=com_content&view=article&id=46&Itemid=53

And…

R.I. House committee passes bill allowing for-profit medical school

By Gina Macris
Providence Journal, April 11, 2012
A bill enabling a new profit-making medical school to begin seeking approval necessary to open a campus and grant degrees in Rhode Island passed the House Committee on Health Education and Welfare Wednesday.
The proposed Rhode Island School of Osteopathic Medicine — as yet just a name — would create an estimated 300 jobs, pay taxes, and provide a medical education at roughly half the cost of a typical medical school said the Committee Chairman, State Rep. Joseph N. McNamara, D-Warwick.
The private colleges in Rhode Island oppose the proposal, with spokesman Daniel Egan saying for-profit higher education is a “predatory and troubled sector” that puts students second to shareholders’ interests.
http://news.providencejournal.com/politics/2012/04/ri-house-committee-passes-bill-allowing-for-profit-medical-school.html

PNHP’s model of a single payer national health program would eliminate the role of passive investors in health care since the interests of private investors must always prevail over the interests of patients – an untenable situation which makes health care expensive, inefficient and inequitable. Rather than shunning the for-profit model, we are now bringing the profit motive to our medical schools.
Since the schools will be able to push tuition rates up only so high they will inevitably look for other potential sources to increase profits.  Purchasing for-profit hospitals? Purchasing clinics? Marketing health care services? If there’s money in it we’ll see it. With the consolidation that we are seeing throughout the health care system today, why shouldn’t we expect the for-profit medical schools to want to be included in that package? What a cozy place for the investors. But what about the patients?

By Robert S. Kaplan and Michael E. Porter
The New York Times, April 14, 2012

Rising health care costs are busting the federal budget as well as those of states, counties and municipalities. Policy makers and health care leaders have spent decades trying to figure out what to do about this.

Yet their solutions are failing because of a fundamental and largely unrecognized problem: We don’t know what it costs to deliver health care to individual patients, much less how those costs compare to the outcomes achieved.

Because health care charges and reimbursements have become disconnected from actual costs, some procedures are reimbursed very generously, while others are priced below their actual cost or not reimbursed at all. This leads many providers to expand into well-reimbursed procedures, like knee and hip replacements or high-end imaging, producing huge excess capacity for these at the same time that shortages persist in poorly reimbursed but critical services like primary and preventive care.

We are currently working with several health care organizations, including MD Anderson Cancer Center in Houston, Children’s Hospital Boston, Partners Healthcare in Boston and Schön Klinik in Germany, that are beginning to figure out how to measure costs. They use teams of clinicians and administrators to identify all the processes involved in care, from a patient’s first contact with a health care provider through his or her inpatient stay and outpatient follow-up care. The teams then identify the quantity and unit cost of each resource — clinical staff, equipment, supplies, devices and administrative support — used in each process and add these together to learn the total cost of a patient’s care.

Understanding costs could be the single most powerful lever to transform the value of health care.  This would give payers and providers the data they need to improve patient care, and to stop arbitrary cuts and counterproductive cost shifting.

http://www.nytimes.com/2012/04/15/opinion/sunday/why-medical-bills-are-a-mystery.html?_r=2

And…

The Big Idea: How to Solve the Cost Crisis in Health Care

By Robert S. Kaplan and Michael E. Porter
Harvard Business Review, September 2011

The Cost Measurement Process

1. Select the medical condition (including the associated complications and comorbidities).

2. Define the care delivery value chain (charts the principal activities involved in a patient’s care for a medical condition along with their locations).

3. Develop process maps of each activity in patient care delivery (include all the capacity-supplying resources – personnel, facilities, and equipment – involved at each process along the path; identify the consumable supplies such as medications, syringes, catheters, and bandages).

4. Obtain time estimates for each process (in the future, we expect providers will use electronic handheld, bar-code, and RFID devices to capture actual times).

5. Estimate the cost of supplying patient care resources (compensation for employees; depreciation or leasing of equipment, supplies, or other operating expenses; deducting time for teaching and research; identify support resources necessary to supply the primary resources providing patient care; allocate the costs of departments and activities that support the patient-facing work).

6. Estimate the capacity of each resource, and calculate the capacity cost rate (number of days that each employee actually works each year, number of hours per day that the employee is available for work, number of hours per workday used for nonpatient-related work, such as breaks, training, education, and administrative meetings; for equipment resources measure capacity by estimating the number of days per month and the number of hours per day that each piece of equipment can be used; factors such as peak load demands, surge capacity, and capacity acquired for future growth should be accounted for).

7. Calculate the total cost of patient care. (In the final step, the project team estimates the total cost of treating a patient by simply multiplying the capacity cost rates – including associated support costs – for each resource used in each patient process by the amounts of time the patient spent with the resource. Sum up all the costs across all the processes used during the patient’s complete cycle of care to produce the total cost of care for the patient.)

Reinventing Reimbursement

If we are to stop the escalation of total health care costs, the level of reimbursement must be reduced. But how this is done will have profound implications for the quality and supply of health care. Across-the-board cuts in reimbursement will jeopardize the quality of care and likely lead to severe rationing. Reductions that enable the quality of care to be maintained or improved need to be informed by accurate knowledge of the total costs required to achieve the desired outcomes when treating individual patients with a given medical condition.

The current system of reimbursement is disconnected from actual costs and outcomes and discourages providers and payors from introducing more cost-effective processes for treating patients. With today’s inadequate costing systems, reimbursement rates have often been based on historical charges. That approach has introduced massive cross subsidies that reimburse some services generously and pay far below costs for others, leading to excess supply for well-reimbursed services and inadequate delivery and innovation for poorly reimbursed ones.

Adjusting only the level of reimbursement, however, will not be enough. Any true health care reform will require abandoning the current complex fee-for-service payment schedule altogether. Instead, payors should introduce value-based reimbursement, such as bundled payments, that covers the full care cycle and includes care for complications and common comorbidities. Value-based reimbursement rewards providers who deliver the best overall care at the lowest cost and who minimize complications rather than create them. The lack of accurate cost data covering the full cycle of care for a patient has been the major barrier to adopting alternative reimbursement approaches, such as bundled reimbursement, that are more aligned with value.

We believe that our proposed improvements in cost measurement, coupled with better outcome measurement, will give third-party payors the confidence to introduce reimbursement methods that better reward value, reduce perverse incentives, and encourage provider innovation. As providers start to understand the total costs of treating patients over their complete cycle of care, they will also be able to contemplate innovative reimbursement approaches without fear of sacrificing their financial sustainability. Those that deliver desired health outcomes faster and more efficiently, without unnecessary services, and with proven, simpler treatment models will not be penalized by lower revenues.

(Robert S. Kaplan is a Baker Foundation Professor at Harvard Business School.)

(Michael E. Porter is the Bishop William Lawrence University Professor at Harvard. He is based at Harvard Business School.)

http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1

Comment: 

By Don McCanne, MD

Robert Kaplan and Michael Porter are correct when they say that we need to understand costs rather than prices if we are to improve value in our health care spending. But is their
approach on analyzing our costs an efficient method that can be applied throughout our health care system?

Kaplan and Porter propose that we abandon billing based largely on historical prices for itemized services and products. Instead they propose that we continue to focus on the patient as the unit of analysis, but that we should do it around the patient’s medical condition. As an example, they would ask how much does each cost factor contribute to the total cost, but not the price, of a total knee replacement?

When a hospital bills for services what we see are the prices, not the costs. Kaplan and Porter recommend a meticulous microanalysis to break the charges down to the hospital’s actual costs. However, when a hospital purchases supplies and services, the hospital’s costs are the prices they pay for those supplies and services which are certainly higher than the costs for those supplying those resources. Thus this distinction between price and cost can be quite blurred, in spite of their efforts to tease them out.

From the cost measurement process that they describe above, you can see that it requires an inordinate amount of microanalysis, using teams of clinicians and administrators. It is very labor intensive, yet would those costs be applied to the total cost of the given condition in a given patient? Would the total cost include the patient’s fraction of the liability insurance for the hospital? Or the patient’s fraction of the amortized building costs for the facility? Or the costs of the visitor parking lot for their families and friends to use? Or the costs of marketing to the community? You can see that fixed costs can be difficult to assign to specific patients, and marginal costs may be quite variable.

Further, how many medical conditions would need a separate analysis? Would a total knee replacement in a younger, healthy individual have the same itemized costs as the same procedure in a patient with multiple chronic disorders that would have to be monitored or managed during the admission? How many sub-classifications would you need for total knee replacement because of the varying status of each patient? Can patients really be categorized accurately enough to assign a specific package fee based on actual costs? Or would each patient have to undergo the laborious microanalysis of their use of supplies and services?

If you do not do such a microanalysis on each patient, then you still end up with an inequitable assignment of costs because of the variability of patients within the same clinical presentation category. By the time you define enough clinical presentations that take into consideration all of the variables, you have almost an encyclopedic list to choose from. Then would the total charge still represent the hospital’s actual costs plus margin in each and every case? Certainly the hospital’s various costs are not fixed in time but represent an ongoing dynamic. How often would you have to repeat these labor intensive studies to make sure that they were current and accurate?

The flaw in this approach is that we are trying to pay for health care by using market principles rather than approaching patients from a public service perspective. We are trying to assign specific complex costs and prices to single individuals with specific given medical conditions, like commodities in markets. This typifies our profoundly wasteful system of financing health care – especially the administrative waste.

There is a far better way. Pay hospitals based on global budgets, much like we do with police, fire, libraries and other public or quasi-public institutions. All reasonable costs are budgeted with appropriate adjustments for needs such as surge capacity and the provision of extraordinary services. Individuals receive appropriate services without regard to the actual costs of the specific services consumed by teach individual. Patients simply get what they need. Efficiencies are attained through the budgeting process. A large hospital in the United States requires hundreds of billing clerks and other personnel, whereas a globally budgeted hospital, as they have in Canada, requires very few billing personnel simply because the costs have been paid through a global budget.

Instead of using market principles with package prices for individuals based on meticulous cost analysis, we should dump the market nonsense and take advantage of the efficiency and equity of global budgeting of hospitals. That is really only possible if we get rid of our fragmented financing system and establish our own single payer national health program.

Why Medical Bills Are a Mystery

By Robert S. Kaplan and Michael E. Porter
The New York Times, April 14, 2012

Rising health care costs are busting the federal budget as well as those of states, counties and municipalities. Policy makers and health care leaders have spent decades trying to figure out what to do about this.

Yet their solutions are failing because of a fundamental and largely unrecognized problem: We don’t know what it costs to deliver health care to individual patients, much less how those costs compare to the outcomes achieved.

Because health care charges and reimbursements have become disconnected from actual costs, some procedures are reimbursed very generously, while others are priced below their actual cost or not reimbursed at all. This leads many providers to expand into well-reimbursed procedures, like knee and hip replacements or high-end imaging, producing huge excess capacity for these at the same time that shortages persist in poorly reimbursed but critical services like primary and preventive care.

We are currently working with several health care organizations, including MD Anderson Cancer Center in Houston, Children’s Hospital Boston, Partners Healthcare in Boston and Schön Klinik in Germany, that are beginning to figure out how to measure costs. They use teams of clinicians and administrators to identify all the processes involved in care, from a patient’s first contact with a health care provider through his or her inpatient stay and outpatient follow-up care. The teams then identify the quantity and unit cost of each resource — clinical staff, equipment, supplies, devices and administrative support — used in each process and add these together to learn the total cost of a patient’s care.

Understanding costs could be the single most powerful lever to transform the value of health care.  This would give payers and providers the data they need to improve patient care, and to stop arbitrary cuts and counterproductive cost shifting.

http://www.nytimes.com/2012/04/15/opinion/sunday/why-medical-bills-are-a-mystery.html?_r=2

And…

The Big Idea: How to Solve the Cost Crisis in Health Care

By Robert S. Kaplan and Michael E. Porter
Harvard Business Review, September 2011

The Cost Measurement Process

1. Select the medical condition (including the associated complications and comorbidities).

2. Define the care delivery value chain (charts the principal activities involved in a patient’s care for a medical condition along with their locations).

3. Develop process maps of each activity in patient care delivery (include all the capacity-supplying resources – personnel, facilities, and equipment – involved at each process along the path; identify the consumable supplies such as medications, syringes, catheters, and bandages).

4. Obtain time estimates for each process (in the future, we expect providers will use electronic handheld, bar-code, and RFID devices to capture actual times).

5. Estimate the cost of supplying patient care resources (compensation for employees; depreciation or leasing of equipment, supplies, or other operating expenses; deducting time for teaching and research; identify support resources necessary to supply the primary resources providing patient care; allocate the costs of departments and activities that support the patient-facing work).

6. Estimate the capacity of each resource, and calculate the capacity cost rate (number of days that each employee actually works each year, number of hours per day that the employee is available for work, number of hours per workday used for nonpatient-related work, such as breaks, training, education, and administrative meetings; for equipment resources measure capacity by estimating the number of days per month and the number of hours per day that each piece of equipment can be used; factors such as peak load demands, surge capacity, and capacity acquired for future growth should be accounted for).

7. Calculate the total cost of patient care. (In the final step, the project team estimates the total cost of treating a patient by simply multiplying the capacity cost rates – including associated support costs – for each resource used in each patient process by the amounts of time the patient spent with the resource. Sum up all the costs across all the processes used during the patient’s complete cycle of care to produce the total cost of care for the patient.)

Reinventing Reimbursement

If we are to stop the escalation of total health care costs, the level of reimbursement must be reduced. But how this is done will have profound implications for the quality and supply of health care. Across-the-board cuts in reimbursement will jeopardize the quality of care and likely lead to severe rationing. Reductions that enable the quality of care to be maintained or improved need to be informed by accurate knowledge of the total costs required to achieve the desired outcomes when treating individual patients with a given medical condition.

The current system of reimbursement is disconnected from actual costs and outcomes and discourages providers and payors from introducing more cost-effective processes for treating patients. With today’s inadequate costing systems, reimbursement rates have often been based on historical charges. That approach has introduced massive cross subsidies that reimburse some services generously and pay far below costs for others, leading to excess supply for well-reimbursed services and inadequate delivery and innovation for poorly reimbursed ones.

Adjusting only the level of reimbursement, however, will not be enough. Any true health care reform will require abandoning the current complex fee-for-service payment schedule altogether. Instead, payors should introduce value-based reimbursement, such as bundled payments, that covers the full care cycle and includes care for complications and common comorbidities. Value-based reimbursement rewards providers who deliver the best overall care at the lowest cost and who minimize complications rather than create them. The lack of accurate cost data covering the full cycle of care for a patient has been the major barrier to adopting alternative reimbursement approaches, such as bundled reimbursement, that are more aligned with value.

We believe that our proposed improvements in cost measurement, coupled with better outcome measurement, will give third-party payors the confidence to introduce reimbursement methods that better reward value, reduce perverse incentives, and encourage provider innovation. As providers start to understand the total costs of treating patients over their complete cycle of care, they will also be able to contemplate innovative reimbursement approaches without fear of sacrificing their financial sustainability. Those that deliver desired health outcomes faster and more efficiently, without unnecessary services, and with proven, simpler treatment models will not be penalized by lower revenues.

(Robert S. Kaplan is a Baker Foundation Professor at Harvard Business School.)

(Michael E. Porter is the Bishop William Lawrence University Professor at Harvard. He is based at Harvard Business School.)

http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1

Comment: 

By Don McCanne, MD

Robert Kaplan and Michael Porter are correct when they say that we need to understand costs rather than prices if we are to improve value in our health care spending. But is their approach on analyzing our costs an efficient method that can be applied throughout our health care system?

Kaplan and Porter propose that we abandon billing based largely on historical prices for itemized services and products. Instead they propose that we continue to focus on the patient as the unit of analysis, but that we should do it around the patient’s medical condition. As an example, they would ask how much does each cost factor contribute to the total cost, but not the price, of a total knee replacement?

When a hospital bills for services what we see are the prices, not the costs. Kaplan and Porter recommend a meticulous microanalysis to break the charges down to the hospital’s actual costs. However, when a hospital purchases supplies and services, the hospital’s costs are the prices they pay for those supplies and services which are certainly higher than the costs for those supplying those resources. Thus this distinction between price and cost can be quite blurred, in spite of their efforts to tease them out.

From the cost measurement process that they describe above, you can see that it requires an inordinate amount of microanalysis, using teams of clinicians and administrators. It is very labor intensive, yet would those costs be applied to the total cost of the given condition in a given patient? Would the total cost include the patient’s fraction of the liability insurance for the hospital? Or the patient’s fraction of the amortized building costs for the facility? Or the costs of the visitor parking lot for their families and friends to use? Or the costs of marketing to the community? You can see that fixed costs can be difficult to assign to specific patients, and marginal costs may be quite variable.

Further, how many medical conditions would need a separate analysis? Would a total knee replacement in a younger, healthy individual have the same itemized costs as the same procedure in a patient with multiple chronic disorders that would have to be monitored or managed during the admission? How many sub-classifications would you need for total knee replacement because of the varying status of each patient? Can patients really be categorized accurately enough to assign a specific package fee based on actual costs? Or would each patient have to undergo the laborious microanalysis of their use of supplies and services?

If you do not do such a microanalysis on each patient, then you still end up with an inequitable assignment of costs because of the variability of patients within the same clinical presentation category. By the time you define enough clinical presentations that take into consideration all of the variables, you have almost an encyclopedic list to choose from. Then would the total charge still represent the hospital’s actual costs plus margin in each and every case? Certainly the hospital’s various costs are not fixed in time but represent an ongoing dynamic. How often would you have to repeat these labor intensive studies to make sure that they were current and accurate?

The flaw in this approach is that we are trying to pay for health care by using market principles rather than approaching patients from a public service perspective. We are trying to assign specific complex costs and prices to single individuals with specific given medical conditions, like commodities in markets. This typifies our profoundly wasteful system of financing health care – especially the administrative waste.

There is a far better way. Pay hospitals based on global budgets, much like we do with police, fire, libraries and other public or quasi-public institutions. All reasonable costs are budgeted with appropriate adjustments for needs such as surge capacity and the provision of extraordinary services. Individuals receive appropriate services without regard to the actual costs of the specific services consumed by teach individual. Patients simply get what they need. Efficiencies are attained through the budgeting process. A large hospital in the United States requires hundreds of billing clerks and other personnel, whereas a globally budgeted hospital, as they have in Canada, requires very few billing personnel simply because the costs have been paid through a global budget.

Instead of using market principles with package prices for individuals based on meticulous cost analysis, we should dump the market nonsense and take advantage of the efficiency and equity of global budgeting of hospitals. That is really only possible if we get rid of our fragmented financing system and establish our own single payer national health program.

Why Medical Bills Are a Mystery

By Robert S. Kaplan and Michael E. Porter
The New York Times, April 14, 2012
Rising health care costs are busting the federal budget as well as those of states, counties and municipalities. Policy makers and health care leaders have spent decades trying to figure out what to do about this.
Yet their solutions are failing because of a fundamental and largely unrecognized problem: We don’t know what it costs to deliver health care to individual patients, much less how those costs compare to the outcomes achieved.
Because health care charges and reimbursements have become disconnected from actual costs, some procedures are reimbursed very generously, while others are priced below their actual cost or not reimbursed at all. This leads many providers to expand into well-reimbursed procedures, like knee and hip replacements or high-end imaging, producing huge excess capacity for these at the same time that shortages persist in poorly reimbursed but critical services like primary and preventive care.
We are currently working with several health care organizations, including MD Anderson Cancer Center in Houston, Children’s Hospital Boston, Partners Healthcare in Boston and Schön Klinik in Germany, that are beginning to figure out how to measure costs. They use teams of clinicians and administrators to identify all the processes involved in care, from a patient’s first contact with a health care provider through his or her inpatient stay and outpatient follow-up care. The teams then identify the quantity and unit cost of each resource — clinical staff, equipment, supplies, devices and administrative support — used in each process and add these together to learn the total cost of a patient’s care.
Understanding costs could be the single most powerful lever to transform the value of health care.  This would give payers and providers the data they need to improve patient care, and to stop arbitrary cuts and counterproductive cost shifting.
http://www.nytimes.com/2012/04/15/opinion/sunday/why-medical-bills-are-a-mystery.html?_r=2

And…

The Big Idea: How to Solve the Cost Crisis in Health Care

By Robert S. Kaplan and Michael E. Porter
Harvard Business Review, September 2011
The Cost Measurement Process
1. Select the medical condition (including the associated complications and comorbidities).
2. Define the care delivery value chain (charts the principal activities involved in a patient’s care for a medical condition along with their locations).
3. Develop process maps of each activity in patient care delivery (include all the capacity-supplying resources – personnel, facilities, and equipment – involved at each process along the path; identify the consumable supplies such as medications, syringes, catheters, and bandages).
4. Obtain time estimates for each process (in the future, we expect providers will use electronic handheld, bar-code, and RFID devices to capture actual times).
5. Estimate the cost of supplying patient care resources (compensation for employees; depreciation or leasing of equipment, supplies, or other operating expenses; deducting time for teaching and research; identify support resources necessary to supply the primary resources providing patient care; allocate the costs of departments and activities that support the patient-facing work).
6. Estimate the capacity of each resource, and calculate the capacity cost rate (number of days that each employee actually works each year, number of hours per day that the employee is available for work, number of hours per workday used for nonpatient-related work, such as breaks, training, education, and administrative meetings; for equipment resources measure capacity by estimating the number of days per month and the number of hours per day that each piece of equipment can be used; factors such as peak load demands, surge capacity, and capacity acquired for future growth should be accounted for).
7. Calculate the total cost of patient care. (In the final step, the project team estimates the total cost of treating a patient by simply multiplying the capacity cost rates – including associated support costs – for each resource used in each patient process by the amounts of time the patient spent with the resource. Sum up all the costs across all the processes used during the patient’s complete cycle of care to produce the total cost of care for the patient.)
Reinventing Reimbursement
If we are to stop the escalation of total health care costs, the level of reimbursement must be reduced. But how this is done will have profound implications for the quality and supply of health care. Across-the-board cuts in reimbursement will jeopardize the quality of care and likely lead to severe rationing. Reductions that enable the quality of care to be maintained or improved need to be informed by accurate knowledge of the total costs required to achieve the desired outcomes when treating individual patients with a given medical condition.
The current system of reimbursement is disconnected from actual costs and outcomes and discourages providers and payors from introducing more cost-effective processes for treating patients. With today’s inadequate costing systems, reimbursement rates have often been based on historical charges. That approach has introduced massive cross subsidies that reimburse some services generously and pay far below costs for others, leading to excess supply for well-reimbursed services and inadequate delivery and innovation for poorly reimbursed ones.
Adjusting only the level of reimbursement, however, will not be enough. Any true health care reform will require abandoning the current complex fee-for-service payment schedule altogether. Instead, payors should introduce value-based reimbursement, such as bundled payments, that covers the full care cycle and includes care for complications and common comorbidities. Value-based reimbursement rewards providers who deliver the best overall care at the lowest cost and who minimize complications rather than create them. The lack of accurate cost data covering the full cycle of care for a patient has been the major barrier to adopting alternative reimbursement approaches, such as bundled reimbursement, that are more aligned with value.
We believe that our proposed improvements in cost measurement, coupled with better outcome measurement, will give third-party payors the confidence to introduce reimbursement methods that better reward value, reduce perverse incentives, and encourage provider innovation. As providers start to understand the total costs of treating patients over their complete cycle of care, they will also be able to contemplate innovative reimbursement approaches without fear of sacrificing their financial sustainability. Those that deliver desired health outcomes faster and more efficiently, without unnecessary services, and with proven, simpler treatment models will not be penalized by lower revenues.
(Robert S. Kaplan is a Baker Foundation Professor at Harvard Business School.)
(Michael E. Porter is the Bishop William Lawrence University Professor at Harvard. He is based at Harvard Business School.)
http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1

Robert Kaplan and Michael Porter are correct when they say that we need to understand costs rather than prices if we are to improve value in our health care spending. But is their approach on analyzing our costs an efficient method that can be applied throughout our health care system?
Kaplan and Porter propose that we abandon billing based largely on historical prices for itemized services and products. Instead they propose that we continue to focus on the patient as the unit of analysis, but that we should do it around the patient’s medical condition. As an example, they would ask how much does each cost factor contribute to the total cost, but not the price, of a total knee replacement?
When a hospital bills for services what we see are the prices, not the costs. Kaplan and Porter recommend a meticulous microanalysis to break the charges down to the hospital’s actual costs. However, when a hospital purchases supplies and services, the hospital’s costs are the prices they pay for those supplies and services which are certainly higher than the costs for those supplying those resources. Thus this distinction between price and cost can be quite blurred, in spite of their efforts to tease them out.
From the cost measurement process that they describe above, you can see that it requires an inordinate amount of microanalysis, using teams of clinicians and administrators. It is very labor intensive, yet would those costs be applied to the total cost of the given condition in a given patient? Would the total cost include the patient’s fraction of the liability insurance for the hospital? Or the patient’s fraction of the amortized building costs for the facility? Or the costs of the visitor parking lot for their families and friends to use? Or the costs of marketing to the community? You can see that fixed costs can be difficult to assign to specific patients, and marginal costs may be quite variable.
Further, how many medical conditions would need a separate analysis? Would a total knee replacement in a younger, healthy individual have the same itemized costs as the same procedure in a patient with multiple chronic disorders that would have to be monitored or managed during the admission? How many sub-classifications would you need for total knee replacement because of the varying status of each patient? Can patients really be categorized accurately enough to assign a specific package fee based on actual costs? Or would each patient have to undergo the laborious microanalysis of their use of supplies and services?
If you do not do such a microanalysis on each patient, then you still end up with an inequitable assignment of costs because of the variability of patients within the same clinical presentation category. By the time you define enough clinical presentations that take into consideration all of the variables, you have almost an encyclopedic list to choose from. Then would the total charge still represent the hospital’s actual costs plus margin in each and every case? Certainly the hospital’s various costs are not fixed in time but represent an ongoing dynamic. How often would you have to repeat these labor intensive studies to make sure that they were current and accurate?
The flaw in this approach is that we are trying to pay for health care by using market principles rather than approaching patients from a public service perspective. We are trying to assign specific complex costs and prices to single individuals with specific given medical conditions, like commodities in markets. This typifies our profoundly wasteful system of financing health care – especially the administrative waste.
There is a far better way. Pay hospitals based on global budgets, much like we do with police, fire, libraries and other public or quasi-public institutions. All reasonable costs are budgeted with appropriate adjustments for needs such as surge capacity and the provision of extraordinary services. Individuals receive appropriate services without regard to the actual costs of the specific services consumed by teach individual. Patients simply get what they need. Efficiencies are attained through the budgeting process. A large hospital in the United States requires hundreds of billing clerks and other personnel, whereas a globally budgeted hospital, as they have in Canada, requires very few billing personnel simply because the costs have been paid through a global budget.
Instead of using market principles with package prices for individuals based on meticulous cost analysis, we should dump the market nonsense and take advantage of the efficiency and equity of global budgeting of hospitals. That is really only possible if we get rid of our fragmented financing system and establish our own single payer national health program.

Prepared by Frank McArdle, Ian Stark, Zachary Levinson, and Tricia Neuman
Kaiser Family Foundation, April 2012
 
Key findings from this report include:
 
* For individuals ages 65 and older, Medicare is less generous on average than the comparison large  employer plans. The average benefit value of Medicare for a person age 65 or older in 2011 is 97 percent of the FEHBP Standard Option benefit value and 93 percent of the typical large employer PPO benefit value.

* Relative to the typical large employer PPO plan, Medicare provides somewhat more generous benefits for low-cost individuals ages 65 and older because of the relatively low Part B deductible for individuals who do not use inpatient care; however, Medicare is less generous than the typical large employer PPO plan for seniors with moderate and high costs. Similarly, relative to the FEHBP Standard Option, Medicare is slightly better for low-cost individuals ages 65 or older, but is notably less generous for moderate-cost individuals and somewhat less generous for high-cost individuals.

* Medicare’s average benefit value relative to the comparison employer plans has improved since we last conducted this analysis in 2007, largely because of the 50 percent discount on brand-name drugs in the Part D “doughnut hole” included in the 2010 health reform law, and also because the actuarial value of the FEHBP Standard Option has contracted over the past few years due to changes in its benefit design (mainly, the increase in the limit on out-of-pocket spending).  

From the Discussion

Medicare’s benefit value has nonetheless begun to approach the value of the comparison large employer plans, due in large part to the 50 percent discount on brand name drugs in Medicare brought about by health reform, as well as the contraction of the comparison employer plans’ benefit designs. The gap between Medicare and large employer plans could continue to narrow in the future as the health reform law phases in coverage in the “doughnut hole” or if employer coverage continues to erode.  
 
Adding a limit on out-of-pocket spending for inpatient and outpatient services and reducing deductibles would help to bring the Medicare benefit design in line with private large employer plans. The reverse is also true: increasing Medicare beneficiaries’ out-of-pocket costs – an idea floated during recent discussions about the national debt as a way achieve federal savings – could further widen the gap between Medicare and large employer plans and contribute to beneficiaries’ out-of-pocket spending burden.

http://www.kff.org/medicare/upload/7768-02.pdf

Comment:

By Don McCanne, MD

Supporters of a single payer national health program often refer to the model as “Improved Medicare for All.” This report demonstrates one of the more important reasons why we say that it needs to be improved. Medicare provides less value than the typical large employer PPO plan or the FEHBP Standard Option (the federal employees’ plan).

The largest difference is in the out-of-pocket spending. That difference is diminishing partly because of the increase in out-of-pocket costs for large employer and FEHBP plans (plus an improvement in the Medicare drug benefit). From a policy perspective, we are moving in the wrong direction. Deductibles and coinsurance should be eliminated from Medicare, and private plans, including FEHBP, should be eliminated altogether.

There are other reasons that Medicare needs to be improved. For example, it should be administered on a regional or state basis (with the support of federal funds) rather than by the federal government so that it is more responsive to local needs. The private Medicare Advantage plans should be eliminated because they reduce choice and waste funds. The Private Part D drug plans should be eliminated for the same reasons, folding the benefits into the publicly-administered program.

Incrementalists would suggest reducing deductibles and putting a limit on maximum out-of-pocket spending under Medicare, but if we’re going to fix Medicare, why not go for broke – an improved Medicare for everyone.

How does the benefit value of Medicare compare to the benefit value of typical large employer plans?  A 2012 update

Prepared by Frank McArdle, Ian Stark, Zachary Levinson, and Tricia Neuman
Kaiser Family Foundation, April 2012
Key findings from this report include:
* For individuals ages 65 and older, Medicare is less generous on average than the comparison large  employer plans. The average benefit value of Medicare for a person age 65 or older in 2011 is 97 percent of the FEHBP Standard Option benefit value and 93 percent of the typical large employer PPO benefit value.
* Relative to the typical large employer PPO plan, Medicare provides somewhat more generous benefits for low-cost individuals ages 65 and older because of the relatively low Part B deductible for individuals who do not use inpatient care; however, Medicare is less generous than the typical large employer PPO plan for seniors with moderate and high costs. Similarly, relative to the FEHBP Standard Option, Medicare is slightly better for low-cost individuals ages 65 or older, but is notably less generous for moderate-cost individuals and somewhat less generous for high-cost individuals.
* Medicare’s average benefit value relative to the comparison employer plans has improved since we last conducted this analysis in 2007, largely because of the 50 percent discount on brand-name drugs in the Part D “doughnut hole” included in the 2010 health reform law, and also because the actuarial value of the FEHBP Standard Option has contracted over the past few years due to changes in its benefit design (mainly, the increase in the limit on out-of-pocket spending).
From the Discussion
Medicare’s benefit value has nonetheless begun to approach the value of the comparison large employer plans, due in large part to the 50 percent discount on brand name drugs in Medicare brought about by health reform, as well as the contraction of the comparison employer plans’ benefit designs. The gap between Medicare and large employer plans could continue to narrow in the future as the health reform law phases in coverage in the “doughnut hole” or if employer coverage continues to erode.
Adding a limit on out-of-pocket spending for inpatient and outpatient services and reducing deductibles would help to bring the Medicare benefit design in line with private large employer plans. The reverse is also true: increasing Medicare beneficiaries’ out-of-pocket costs – an idea floated during recent discussions about the national debt as a way achieve federal savings – could further widen the gap between Medicare and large employer plans and contribute to beneficiaries’ out-of-pocket spending burden.
http://www.kff.org/medicare/upload/7768-02.pdf

Supporters of a single payer national health program often refer to the model as “Improved Medicare for All.” This report demonstrates one of the more important reasons why we say that it needs to be improved. Medicare provides less value than the typical large employer PPO plan or the FEHBP Standard Option (the federal employees’ plan).
The largest difference is in the out-of-pocket spending. That difference is diminishing partly because of the increase in out-of-pocket costs for large employer and FEHBP plans (plus an improvement in the Medicare drug benefit). From a policy perspective, we are moving in the wrong direction. Deductibles and coinsurance should be eliminated from Medicare, and private plans, including FEHBP, should be eliminated altogether.
There are other reasons that Medicare needs to be improved. For example, it should be administered on a regional or state basis (with the support of federal funds) rather than by the federal government so that it is more responsive to local needs. The private Medicare Advantage plans should be eliminated because they reduce choice and waste funds. The Private Part D drug plans should be eliminated for the same reasons, folding the benefits into the publicly-administered program.
Incrementalists would suggest reducing deductibles and putting a limit on maximum out-of-pocket spending under Medicare, but if we’re going to fix Medicare, why not go for broke – an improved Medicare for everyone.

Quote of the Day comment by Don McCanne
PNHP, December 21, 2010

As far as setting a threshold for selecting the level of unreasonable premium increases which would be reviewed, Health and Human Services (HHS) has decided that plans with less than 10 percent premium increases would not be reviewed. That is a level well in excess of measures of medical cost inflation. Imagine compounded premium increases of 9.99 percent per year on top of premiums that are already unaffordable.

An improved Medicare for all… has to be better than a 9.9 percent compounded increase in premiums that we would be mandated to pay to the perverse, intrusive private insurance industry.

https://pnhp.org/news/2010/december/is-hhs-serious-about-controlling-insurance-premiums

And…

Small Comfort: Health Care Costs Projected to Increase Less Than 10 Percent, First Time in Decade

Buck Consultants, A Xerox Company
April 5, 2012

Costs for all types of medical plans are expected to increase by 9.9 percent for 2012, according to a survey by Buck Consultants, A Xerox Company (NYSE: XRX).

In a national survey of 129 insurers and administrators, Buck measured the projected average annual increase in employer-provided health care benefit costs. Insurers and administrators providing medical trends for the survey cover a total of approximately 109 million people.

Health insurers use trend factors to calculate premium rates, and large self-funded employers use these trend factors to budget their future health care costs.

Buck’s National Health Care Trend – 24th Survey

9.9% – Preferred Provider Organization (PPO)

9.9% – Point-of-service (POS)

9.9% – Health Maintenance Organization (HMO)

9.9% – High Deductible Health Plan (HDHP)

http://www.buckconsultants.com/portals/0/publications/press-releases/PR-2012-NHCTS.pdf

Comment: 

By Don McCanne, MD

Buck Consultants has completed a survey of insurers and administrators showing that each and every form of employer-provided health plan is projecting cost increases of 9.9 percent. Is it a mere coincidence that all of these increases are just below the 10 percent threshold for subjecting insurance premium rate increases to federal government review?

Even though many employers self-fund their plans, the 9.9 percent figure supposedly represents projected increases in total medical plan costs for this year, and not just increases in health care costs. In recent decades, health care spending has increased at rates about 2 percent higher than the growth of GDP which ideally grows at a rate between 2 and 4 percent. The combined total is still less than the increases in insurance premiums, now pegged at about 9.9 percent.

How long can we anticipate having government-sanctioned 9.9 percent annually-compounded private insurance rate increases?

Regardless, isn’t it time that we eliminate employers and private insurers as intermediaries in our health care financing? We would give ourselves a much better deal through our own public financing system.

Is HHS serious about controlling insurance premiums?

Quote of the Day comment by Don McCanne
PNHP, December 21, 2010
As far as setting a threshold for selecting the level of unreasonable premium increases which would be reviewed, Health and Human Services (HHS) has decided that plans with less than 10 percent premium increases would not be reviewed. That is a level well in excess of measures of medical cost inflation. Imagine compounded premium increases of 9.99 percent per year on top of premiums that are already unaffordable.
An improved Medicare for all… has to be better than a 9.9 percent compounded increase in premiums that we would be mandated to pay to the perverse, intrusive private insurance industry.
https://pnhp.org/news/2010/december/is-hhs-serious-about-controlling-insurance-premiums

And…

Small Comfort: Health Care Costs Projected to Increase Less Than 10 Percent, First Time in Decade

Buck Consultants, A Xerox Company
April 5, 2012
Costs for all types of medical plans are expected to increase by 9.9 percent for 2012, according to a survey by Buck Consultants, A Xerox Company (NYSE: XRX).
In a national survey of 129 insurers and administrators, Buck measured the projected average annual increase in employer-provided health care benefit costs. Insurers and administrators providing medical trends for the survey cover a total of approximately 109 million people.
Health insurers use trend factors to calculate premium rates, and large self-funded employers use these trend factors to budget their future health care costs.
Buck’s National Health Care Trend – 24th Survey
9.9% – Preferred Provider Organization (PPO)
9.9% – Point-of-service (POS)
9.9% – Health Maintenance Organization (HMO)
9.9% – High Deductible Health Plan (HDHP)
http://www.buckconsultants.com/portals/0/publications/press-releases/PR-2012-NHCTS.pdf

Buck Consultants has completed a survey of insurers and administrators showing that each and every form of employer-provided health plan is projecting cost increases of 9.9 percent. Is it a mere coincidence that all of these increases are just below the 10 percent threshold for subjecting insurance premium rate increases to federal government review?
Even though many employers self-fund their plans, the 9.9 percent figure supposedly represents projected increases in total medical plan costs for this year, and not just increases in health care costs. In recent decades, health care spending has increased at rates about 2 percent higher than the growth of GDP which ideally grows at a rate between 2 and 4 percent. The combined total is still less than the increases in insurance premiums, now pegged at about 9.9 percent.
How long can we anticipate having government-sanctioned 9.9 percent annually-compounded private insurance rate increases?
Regardless, isn’t it time that we eliminate employers and private insurers as intermediaries in our health care financing? We would give ourselves a much better deal through our own public financing system.