HFMA VIEWS

James G. Fouassier, Esq.
Associate Administrator of the Department of Managed Care at Stony Brook University Hospital, Stony Brook, New York           

Is health care a basic human right or is it a commodity, subject to all the vagaries and vulgarities of the commercial market place? As long as our political leaders seek a compromise between these two diametrically irreconcilable concepts there never will be a satisfactory or successful resolution of this dilemma. Add to this mix the incredible influence of health insurance lobbyists both in Washington and in our respective state capitals and practical long term solutions based on sound financial foundations are even less likely.

The “Massachusetts Plan” to cover the uninsured and underinsured is being hailed as a model by which the problem of covering the uninsured may be solved. Minnesota and California also have announced plans to adopt programs similar in principle even though the Massachusetts model has yet to be fully implemented and is totally untested and unproven. Pennsylvania’s governor recently announced his new “Rx for Pennsylvania” initiatives. For acute care hospitals the critical question is whether the cure is worse than the disease: will hospitals be able to survive and continue to treat significant portions of the uninsured and underinsured populations when the full financial impact of the Massachusetts plan finally settles in?

Although the details vary widely from state to state, under most current hospital reimbursement systems there is some reasonable reimbursement to providers for uncompensated care, treatment and services performed for the medically indigent. Some portion of the cost to providers of rendering uncompensated care is returned to the provider by way of standard financial factors based on the calculation and analysis of “bad debt” and/or “charity care.” It is critical to remember that “bad debt” and “charity care” cost reporting cannot and do not include discounted adjustments to actual charges based on contracted rate agreements with institutional third party “volume” payers such as insurers, but instead are based on reported real dollars unrecovered by a provider because of the inability or unwillingness of the patient to pay. Under plans such as those adopted in Massachusetts, the government does not truly subsidize the cost of uncompensated health care rendered to uninsured or underinsured populations but instead subsidizes the risk incurred by commercial insurance carriers in insuring those populations. The significance of this difference is compelling. Replacing current systems of government sponsored reimbursement programs with government subsidies to private insurers in the form of premiums for commercial coverage is nothing more than another raid on the public fisc by the insurance industry and will only result in even greater profits that will fuel an already frenetic and obscene gluttony.

Hundreds of millions of state and federal dollars now earmarked by the state governments for reimbursement to providers for uninsured or underinsured care (DSH, pool money and other adjustments and incentives) almost certainly will be diverted to premiums for health insurers agreeing to cover those populations in their new commercial products. It is unlikely that sums uncollected from third party payers covering the newly insured indigent patient, be it by denied claims or short payments, will be considered “bad debt” under revised definitions. Consequently, even if there were some residual funds set aside for traditional bad debt reimbursement, these significant losses would not be eligible for even partial recovery through current bad debt reimbursement methodologies. Since providers no longer will be able to recover most of their bona fide bad debt and charity costs the impact of such lost revenue will be dramatic.  

Since medical care for people newly covered by these plans will be paid exclusively through the private plans with no recourse to any “bad debt” reimbursement, providers virtually will be compelled to enroll in the new networks the insurance carriers will develop to cover their newly insured members. It is naïve to expect that the rates developed by carriers for these new products will be as competitive as more traditional commercial products: the premiums paid by the sponsoring government agencies will be low relative to premiums paid by individuals and groups (making it harder for the plans to squeeze out profits), and the plans know the providers will have to join simply to survive.  To make matters worse, in addition to being compelled to accept greatly reduced rates providers will incur the same burdens of the numerous technical authorization and claims submission requirements and the denials that go hand in hand with other managed care products.

Let us be frank. The plans administering these programs will be driven primarily by profit. Technical, substantive (clinical) denials, short payments and all of the other problems endemic in managed care generally now will encompass care to the previously uninsured and underinsured. If, as expected, the premiums paid by government are relatively low and the risk assumed by the plans to cover these recently uninsured and underinsured populations is high we can be certain that as much of that risk as possible will be passed on to participating providers in the form of increased technical and substantive denials. (1)

A comparison with terrorism and flood insurance may be relevant. In Louisiana the federal government had to step in with reinsurance and direct subsidies to insurers to cover the costs of insured damage from Hurricane Katrina, yet complaints abounded over short payments and improper denials. In the meanwhile, insurers continue to post record profits. In truth, there is no more “risk” for insurance carriers; it’s become a sure bet.

If government is contributing such a large share to provide health insurance for the medically indigent, should there not be some corollary control over insurance company profits? Better yet, why cannot the federal and state governments administer these programs directly or through fiscal intermediaries, as is the case with Medicare? Why is there always the presumption that government cannot manage anything as efficiently as the private sector? The reader would be surprised if he or she were to factor in the profits that insurance companies pull out of health insurance business and compare those profits against the so-called “inefficiency” of government. Most criticism of the “cost” of Medicare focuses not on the supposed inefficiency of the administration of the program but instead on the generous menu of services covered. Even the more vociferous critics of the program generally concede that the administration of benefits through fiscal intermediaries, compensated by fixed fees and not by profits generated by the aggressive management of risk, has proven its worth.

Recently Newsday’s Saul Friedman picked up on this theme in an article discussing planned changes in the New York State Medicare Part D EPIC drug program for seniors.  One of his major concerns is that:

. . . EPIC is exchanging a well-working government-run, single-payer benefit for  uncontrolled and  unsupervised private coverage with competing, profit-driven insurance companies, each of which  has different rules, different drug tiers depending on price and different co-pays.   Furthermore, Part  D plans may and do change their formularies with only a brief notice, and contracts with enrollees  may end after a year if the insurer's earning are below its expectations. (2)

On June 11, CNNMoney.com reported on a Fortune magazine article that the “big money” in Medicaid is moving into “pure play” companies that specialize in Medicaid HMOs, such as Amerigroup, WellCare, Centene and Molina, rather than the traditional players like United  and Wellpoint that handle the business as subsidiary operations. The four “pure players” covered in the story now manage five million members and collect $9 billion in annual premiums (presumably, most of these premiums come from the federal, state and local governments to cover medically indigent Medicaid eligible beneficiaries). CNN reports that the revenues of AmeriGroup in particular have risen at a rate of over sixty percent annually in the past decade, along with “generally stellar stock performance.” The report concludes with the expected observation that investors and executives in these companies have cleaned up.  The parent company of WellCare saw a $70 million investment return almost $900 million. Top executives at these companies have seen their cash compensation and stock options multiply by millions of dollars. (3)

In a speech on June 14, Democratic presidential candidate John Edwards said the country’s health care system is in crisis and his plan would require that all Americans have some form of health care. The insurance and pharmaceutical industries would be his first two targets for cutting health care costs because, as Edwards said, “Three out of every $10 in insurance premiums now go to patient care and the rest goes to administrative costs and profits.”  Edwards would mandate that 85% of all premiums go directly into health care.

Need I say more?

By eliminating insurance company profits from the paradigm many of the provider abuses endemic in commercial managed care may be avoided, more of the government’s dollar would go directly to the providers of health care services, and the government subsidy of health care for the uninsured and underinsured truly may be optimized.

1. “Prescription for Pennsylvania will strengthen oversight of health insurance companies and HMOs . . . . [which] will create a level playing field . . . by limiting premium increases, by establishing a standard basic health care package for individuals and small businesses, and by prohibiting insurance companies from driving up the cost of insurance based on certain demographic characteristics. For small businesses, insurers will be required to spend at least 85% of the premiums they collect to pay for health care.” Prescription for Pennsylvania, www.RXforPA.com. How insurers are expected to avoid losses and generate some margin of profit apparently was not factored into this equation. A carrier subscribing to this proposal will have to do some pretty creative UR, vigorously assert its perceived contract rights and hold a participating provider strictly to the terms of the agreement if the carrier expects to make any profit.

2. Saul Friedman, Family and Relationships, Newsday, May 26, 2007.

3. CNNMoney.com, “The Big Money In Medicaid”, Bethany McLean, Fortune Magazine,  June 11, 2007.

James Fouassier, Esq. is the Associate Administrator of the Department of Managed Care at Stony Brook University Hospital, Stony Brook, New York and a member of the Metropolitan New York Chapter. His opinions are his own. He may be reached at: jfouassier@notes.cc.sunysb.edu.

Dan DeLay
Senior Vice President, Supply Chain Analytics, VHA Inc.

Every week, my grocery list seems to expand. Not only do we have to replace the staples; milk, bread, eggs, but because of the adventurous nature of my family’s appetite, we often seek out new menu items. I know that we can broaden our meal options because our local grocery stores purchases products from all over the world--green grapes from Chile, eggs from local farms, lobsters from Maine and ground beef from the Midwest, not to mention the special ethnic food selections available in most megachains.

That is easier said than done. Someone in the organization has developed a process to match inventory with demand so that goods will move quickly and food won’t spoil. Deliveries are made every day, and somehow, they are able to do all of this, keep prices low and make a profit. Having an efficient supply chain provides less waste and keeps produce from rotting on trucks.

In health care, it’s not uncommon for hospitals to have shelves overstuffed with inventory that goes to waste.  For example, one hospital department carried $1.2 million in inventory, of which $200,000 worth was outdated or set to expire in less than 30 days. Another $500,000 worth of inventory had been sitting on the shelves for three to six months. The bad news is that this not an uncommon scenario.

The health care industry has always said that one of the reasons for inventory problems is that the industry is federally-regulated, deals with perishable items and people can die if items do not meet quality standards or are not where they should be. Grocery stores, in many ways, face similar changes.

To help hospitals improve inventory management, most of them have developed a process called “Supply Formularies.” According to the Leapfrog Group, standardizing processes, including the supplies that are used, increases the quality of care by decreasing chances of error. Standardizing supplies saves money through contract pricing and through operational efficiencies. 

Grocery stores are "milking" every last dollar from their inventories...hospitals can too.

Below you'll find some predictably mixed early reviews on Hillary Clinton's just-released healthcare reform proposal.

"What Hillary proposed is in many ways the Massachusetts plan gone national, and I think that's great.... We are the shot fired around the world again--there's a whole new movement in healthcare started by what we did here."
--Jonathan Gruber, economics professor, MIT, quoted in "In ways, Clinton healthcare plan resembles Romney's Mass. solution," The Boston Globe, Sept. 18

"That's a highly ambitious figure [Clinton's proposed $35 billion in savings].... It's not going to be achieved without some significant belt-tightening that's going to engender opposition."
--Robert D. Reischauer, president of the Urban Institute, quoted in "Clinton unveils new healthcare plan," Los Angeles Times, Sept. 18

"The new Clinton plan includes important ideas to make coverage more affordable; unfortunately some of the divisive rhetoric seems reminiscent of 1993."
--Karen Ignagni, president and CEO of America's Health Insurance Plans, quoted in "Clinton unveils new healthcare plan," Los Angeles Times, Sept. 18

"'She's gambling with some things in the right way--she's edging toward changing the basic tax basis of health care."
--Stuart Butler, the Heritage Foundation, quoted in "Clinton's Health-Care Plan Echoes Her Rivals, Not 'Hillarycare'," Bloomberg.com, Sept. 18

"She basically is ensuring that anyone happy with the status quo can hold onto the status quo, since anyone with private insurance can hold onto that insurance."
--Robert Hayes, the Medicare Rights Center, quoted in "Clinton's health care plan could backfire," Newsday, Sept. 17

"The bottom line on health insurance is either you have it or you don't and the question is: What happens if you don't?... There might be downside implications [of a mandate], but they kind of pale in comparison to what the downside is of not having insurance."
--Kenneth Raske, president of the Greater New York Hospital Association, quoted in "Clinton's health care plan could backfire," Newsday, Sept. 17

"Would someone please ask Hillary Clinton to stop coming up with health care 'reform' plans that are less attractive than the dysfunctional system she proposes to replace?"
--from "Clinton's Prescription for Another Heath Care Reform Failure," editorial, The Nation, Sept. 17

"Ms. Clinton, in setting out her route to universal coverage, adds some promising policy twists. The most interesting would limit the tax deductibility of employer-sponsored health plans for the wealthiest Americans, a sensible step toward fixing one of the most expensive and counterproductive parts of the tax code."
--from "Fixing Health Care," editorial, The Washington Post, Sept. 18

Richard L. Clarke, DHA, FHFMA
President and CEO, HFMA

It’s Friday and I’m on my way back to the United States from China. The flight leaves at 4:00 p.m. and arrives at 3:50 p.m. on the same day--arriving before I leave. International flights are fascinating.

What is more fascinating is the People’s Republic of China. The people (all 1.4 billion of them), culture, and unprecedented economic growth create a country full of contrasts, opportunities, and challenges--especially for its healthcare system.

The trip to China was part of HFMA Abroad, a program of international travel that includes both professional and cultural elements. Sixty-one HFMA delegates joined Joe Abel (HFMA’s Director of Professional Development) and myself on this inaugural trip to Beijing, Guilin, and Shanghai.

The facilities, services, and frankly cleanliness of the health facilities we toured were a study in contrast. We visited two private hospitals, a small rural hospital and clinic, and a public hospital that integrated traditional Chinese medicine (TCM) and western medicine. The new private hospitals were as impressive as any in the West. The public hospital was a study in contrast within itself because of the use of TCM along side of Western medicine. We were especially fascinated by the TCM hospital pharmacy, which dispensed prescribed herbs and potions that have been used for centuries. Physicians trained in TCM use a combination of this approach and Western techniques depending on the patient’s wishes and condition.

But the rural hospital is burned into my memory. The hospital was located in a small village outside of Guilin. The staff were very sharp and attentive to our questions about rural health care. They asked probing questions about healthcare delivery and financing in the United States. The tour of the hospital, however, revealed an old facility in desperate need of repair and a massive cleaning. Dirt, mold, and antique equipment were the lasting image. We were amazed that the educated, well-spoken staff had to work in such primitive surroundings. They did what they could with the resources they had available to serve a population that would otherwise go without health services. An amazing place.

Opportunities for U.S. healthcare companies appear obvious based on the somewhat limited services offered in the public sector. And government representatives indicated a willingness to embrace more private facilities to augment the public ones. The challenge for China is to update and modernize its healthcare delivery system without bankrupting the country. Currently more than 70 percent of the population have very limited or no health insurance. As China attempts to increase coverage and modernize its delivery system, demand for services may outstrip its capabilities to finance these services. It’s a delicate balance that the Chinese government must achieve to continue economic growth. The visit puts the U.S. efforts to achieve such a balance in perspective.

Scott MacStravic, PhD

Given our country’s propensity to declare “war” on things we are trying to eliminate, or at least dramatically reduce in our society – drugs, cancer, terrorism, drunk driving, etc. – there are at least prospects for a declaration of war against sickness. After all, what we mistakenly deem “healthcare costs” are almost entirely generated by sickness, since only about 5% or so relates to preserving, protecting, or improving health. And practically everybody deems such costs as outrageous, unaffordable, anti-competitive, and otherwise not in anyone’s best interests, save for sickness care providers.

Recently, Medicare announced a policy of no longer paying for “preventable” sickness care costs related to conditions that arise in hospitals as avoidable consequences of care, rather than conditions that patients bring with them. [R. Pear “Medicare Says It Won’t Cover Hospital Errors” New York Times Aug 19, 2007 (www.nytimes.com)] Imagine what would happen if it simply extended this policy to include all conditions that it figures patients, physicians, and other providers should have prevented in the first place.

There have been both tracking and reporting of “avoidable” hospital admissions that best care practices could have prevented through ambulatory care for years. While this has been used merely for quality measuring and reporting thus far, it wouldn’t take much to translate it into another category of “preventable” and therefore ineligible for payment sickness care. And while the current Medicare policy would only affect some millions of dollars in payment each year, this broader definition could take billions out of sickness care revenue, while doing nothing about providers’ costs, unless they eliminate or dramatically reduce such conditions.

While “procedure specialists” who depend as much on sickness care revenue and volume as do hospitals would also be affected, they could at least partially make up for lost sickness care revenue by becoming disease managers instead of merely disease treaters. Already, some insurers and employers are paying endocrinologists for managing diabetes patients, for example. While these payments by no means make up for the sickness care utilization and expenses that such management can prevent, it can at least motivate some specialists toward “prevention” vs. treatment alone.

As for primary physicians, their efforts to regain a position of power and prestige relative to “sickness specialists” has already led to a wide array of transformations. Their “medical home” concept, “chronic care model”, and TransforMED efforts all fit with the movement toward preventing sickness rather than merely treating it. The Family Physicians of Western Colorado, Grand Junction, for example, have demonstrated their ability to manage diabetes patients for only $104 per patient per year in “management” fees, though they failed to get enough payors to pay even these affordable costs. [P. Mohler & N. Mohler “Improving Chronic Illness Care in a Private Practice” Family Practice Management 12:10 Nov/Dec 2005 50-56]

Hospitals, by contrast, along with large physician groups and integrated health systems, have generally failed to either keep their costs low enough, or generate enough revenue to make comprehensive disease management programs work, even with diabetes, which has a huge population of patients and high sickness care costs to reduce. [I. Urbina “In the Treatment of Diabetes, Success Often Does Not Pay” New York Times Jan 11, 2006 (www.nytimes.com)]

On the other hand, hospitals and large physician groups are also major employers, and have as strong a reason as any other employer to manage their employees health, and perhaps their dependents as well. Many hospitals are already engaged in comprehensive employee health management (EHM) efforts, often saving millions of dollars in labor expenses, counting reduced absenteeism, presenteeism, and turnover, as well as sickness care costs. Fairview Health Systems and Vanderbilt Medical Center, along with Mayo Clinic are some examples. And Northwestern Medical Center in Chicago recently announced the opening of an Integrated Wellness Center that will serve local employers in EHM as an added source of revenue.

Given the fact that physicians are perhaps the strongest source of influence and motivation for patients to engage in personal health management efforts, or enroll in formal health management programs, hospitals and physicians should be strong contenders in the EHM and other health management markets. If they can get over their tendency to insist on high-cost approaches to care and adjust both the “quality” and cost of health management efforts to the potential savings for payors, they should be able to join in the war on sickness, instead of being bombed out of existence by it.

Although many hospitals and physician practices had a head start in the EHM market when they offered occupational health services, medical fitness centers, and similar “sidelines”, they will only be able to succeed in the full EHM market if they can create and manage comprehensive solutions that deliver the overall economic value that employers are demanding. And the EHM is by far the best market available, since the savings resulting from successful employee health programs are from two to five times as great as those from reducing sickness care costs alone.

Moreover, the kinds of health challenges that cause the most labor costs, productivity and performance impairment among employees are not traditional “sicknesses” that generate the most sickness care revenue. Hospitals and physicians could easily engage in EHM with relatively modest losses in sickness care revenue, at least in the short run. And since it will take a long time to develop the EHM market to its full potential, they may well be able to manage a good mix of health and sickness services as the balance shifts over time. It would enable them to at least be “combatants” rather than “victims” in any war on sickness that emerges.

Scott MacStravic, PhD

Whether HCOs choose to invest in employee health management (EHM) as part of their internal cost control strategy, as a revenue-generating new service line, or both, there are the same key numbers involved in all three. These are:

• The costs per EHM participant for the intervention
• The extent of reduction in costs achieved thereby
• The relationship between the two

In the simplest case, the cost reduction relates to lower sickness care utilization and expense. For HCOs with more effective measurement methods, cost reductions in disability and workers compensation may also be achieved. For the most effective HCOs, measures of reduced absenteeism, presenteeism and turnover, and perhaps even increased revenue due to direct (pay-for-performance bonus revenue) and indirect (resulting from happier customers, increased market share, etc.) can be achieved and measured.

For example, a Stanford study of disease/case management for heart disease patients focused on reducing participants’ risk of heart disease “events” and expenditures. An estimate was made that the cost savings resulting from avoiding such an event could be $40,000. The program costs, including an average of 14 visits with nurse coaches or dietitians, averaged $1250 per participant. The results of the intervention, as reported for the 17 months of the study, included lower blood pressure readings and other risk indicators that amounted to a reduced risk of coronary heart disease events equal to 1.6%. [“Stanford Study Highlights Cost-Effective Method of Lowering Heart Disease Risks,” Business Wire.com Aug 20, 2007]

This was found to be statistically significant, given the 341 patients participating, with half receiving the HM intervention, and half getting usual primary physician care alone. The question arises, however, if it was also financially significant. What was the estimated ROI from this investment? Based on just the figures given, the ROI would be 1.6% times the number of participants involved, say 170 as half of the total number, times the cost per case of $40,000.

The math is simple enough – 1.6% of 170 participants is 2.72 cases presumably avoided over the participation period. Since each case was assigned a cost of $40,000 in medical/hospital expense, the 2.72 cases avoided means a savings of 2.72 x $40,000 = $108,800. On the other hand, with 170 participants, each costing $1250 apiece for the HM intervention, the total program costs were 170 x $1250 = $212,500. From a financial perspective, the program was not a success, since it cost almost twice as much as it saved. The ROI ratio would be $108,800/$212,500 = 0.512:1, or a loss of 49 cents on every dollar invested.

Since these figures require knowing up front how many participants there will be, and what reduction in the number of cases there will be, they are more useful for evaluation than for planning. At the point of considering whether to invest in HM or not, and planning an intervention of any given type, there is a simpler way to approach the same challenge. It is called “numbers needed to succeed” (NNS) analysis. It depends on a combination of decisions and predictions made up front, rather than waiting to evaluate after the fact. [A. Linden & T. Biuso “In Search of Financial Savings from Disease Management: Applying the Number Needed to Decrease (NND) Analysis to a Diabetic Population” Oregon Health & Science University, Portland, OR (undated working paper)]

In the above example, if it is decided that an HM intervention costing $1250 is the one to be considered, and the predicted effect of this intervention is the reduction of 1.6% in the frequency of particular expenses, regardless of what these expenses come from, these are the only two numbers needed for NNS analysis. If the costs are $1250 per participant, and 1.6% of participants will yield the expected cost savings, then the amount of the cost savings needed for each such participant has to be $1250 divided by 1.6% = $78,125.

If the HCO is considering only one HM intervention, it can therefore look to see what the chances are that there will emerge from this investment as much as $78,125 in savings per case. If healthcare costs are only $40,000 for example, other costs, such as days absent and the lost productivity that means, short and long term disability costs, impaired productivity at work, for example. One study of over 200,000 employees, for example, found that employees at work who were recovering from a heart attack, had a 14% productivity impairment. [“Population Impairment Productivity Dashboard” (www.HealthMedia.com) May 6, 2007] This would amount to a loss of at least $8400 in output for a worker earning the average hospital employee wage of $60,000 per year, though it would depend on the hospital and labor market involved.

Moreover, there is known to be a “multiplier effect” for absent or impaired workers, in terms of their impact on team performance. This has been estimated at 1.4 for hospital nurses. [S. Nicholson, et al. “How to Present The Business Case for Health Care Quality to Employers” Applied Health Economics and Health Policy 4:4 2005 209-218] With such a multiplier, the economic loss from an employee recovering from a heart attack could be 1.4 x $8400 = $1176. When this amount is added to the $40,000 of avoided costs per case in hospital/medical costs, it is still only $51,176. If disability costs, days absent from work, impairment, and other costs ended up adding up to more than the $78,125 needed for breakeven, the program might be seriously considered.

On the other hand, there may be another HM intervention that has lower costs, say $500 per participant for illustration. If that program were predicted to reduce the frequency of adverse events by 1%, the amount needed in avoided costs to justify an investment in this alternative intervention would be only $500/.01 = $50,000. With a $40,000 start in terms of sickness care costs, finding the other $10,000 may not be as hard as finding the $38,125 extra needed for the original intervention.

By the same token, if there is a $200 intervention that would yield a .05% reduction in adverse cases, then the amount needed to breakeven on the program would be only $200/.005 = $40,000, the amount already specified as sickness care cost reductions expected. All other savings in disability, absence and presenteeism, in avoided turnover, plus any predicted increase in revenue that can be foreseen, would result in pushing the ROI above the breakeven point. In any case, the NNS analysis provides a useful tool for considering EHM, or any other investment whose costs and effects can be predicted on a per participant basis.