Insight, analysis & opinion from Joe Paduda

Jan
14

Health care costs reaching critical stage

In a rather stunning announcement, GM announced it’s earnings in 2005 would suffer a significant decline, due in large part to (free subscription required) GM’s increasing health care costs.
As a global competitor, GM is hampered by the US health care payment system, which is largely employer-driven. This has a direct, and very signficant, impact on its competitiveness. To quote the Times:
” G.M. is the largest automaker in the world by volume, but its profits are dwarfed by those of foreign competitors like Toyota and Nissan. The company is hampered on numerous fronts, including the obligation to pay health care and pension benefits to about a half million American retirees and their families. Competitors based in nations with socialized medical systems do not have similar retiree health care burdens. ”
By way of comparison, GM’s annual health care budget of approximately $73 BILLION is equivalent to about half of the UK’s National Health Service’s annual expenditures.
The silver lining in this funnel cloud is easily discerned – when companies the size and stature of GM are finding their earnings dragged down, and dragged down significantly, by health care costs, we are getting closer to the point where we must address our national health care cost crisis.
Health care is rapidly becoming an issue of global competitiveness.


Jan
14

Coventry-First Health – last barriers to the deal

January 28th is the date set for the First Health shareholder vote on the proposed acquisition by Coventry. With regulatory approvals out of the way, the vote should be a formality.
The last remaining obstacle was the outstanding shareholder lawsuit demanding more information about the deal, which executives get what benefits, and may even lead to a public airing of FH’s financial adviser.
The reasoning behind the lawsuit appears to be FH shareholders’s (and Coventry owners as well) objecting to FH executives’ payouts under the deal, coupled with a perception that FH may not have marketed itself effectively.
Regardless, the deal is done. The next, and much more interesting phase, will be to see what Tom McDonough, the Coventry exec tasked with managing the acquistion, does next.


Jan
13

Possible changes in Medicare

The Medicare Payment Advisory Commission released its recommendations for changes to Medicare, and they aren’t just playing around at the margins.
Key recommendations include –
–instituting a pay-for-performance scheme for hospitals, doctors, and home-care facilities (no details provided…)
–extend the moratorium on building specialty hospitals for an additional 18 months, which would end the prohibition at the end of 2006
–reduce hospital reimbursement below the overall increase of the market-basket 3.3% to just 2.9%.
Hospitals will certainly breathe a bit easier with the extension of the moratorium on construction, at least those hospitals facing competition from privately-funded ambulatory surgical, cancer, and orthopedic centers.
As suggested here before, prepare for a significant change in government-funded health care programs. And, prepare for the downstream effect of these changes as providers seek to recoup lost revenue from private payers.


Jan
12

Hospital Cost Drivers

Consolidation in geographic areas appears to increase hospital costs, without any apparent impact on quality. The latest issue of Health Affairs includes a report on an analysis that proves what many have thought for some time – the growth of health systems (as they acquire or eliminate independent hospitals) is associated with higher costs.
Note the wording – “is associated with”, not “results in”. Not that I’m trying to be circumspect, far from it – but the study stops short of proving a definitive linkage between consolidation and increased cost.
However, the study does conclude with the statement, “This analysis suggests that consumers were worse off as a result of hospital consolidations.”
The pace of consolidation has slowed, from over 300 hospitals merged or acuired in in 1997, to just over 100 in 2002. Thus, the consolidation wave may have peaked. That does not mean the impact has; oligopolies tend to test their pricing power carefully; the increased cost noted in the article may not be the final word.
One point that goes unmentioned – in all the rhetoric surrounding the typical hospital merger/acquisition, you always hear about how joint purchasing, contracting, and integration of IT and administration is going to save money.
When? and for whom?


Jan
12

What’s up for Medicare?

The newly elected government has big plans for Medicare, Medicaid, and other entitlement programs. Well, perhaps we should say not-as-big plans.
In California HealthLine (an excellent daily news source) yesterday, the following appears:
“White House officials and congressional budget leaders last week indicated that President Bush in his budget request to Congress “will try to impose firm, enforceable limits on the growth of federal benefit programs” while continuing to “give priority to military operations and domestic security over social welfare programs,” the New York Times reports.”
To those readers who have been with us since the beginning (I know, only two plus months ago…), this will come as no surprise. Quite simply, we cannot afford tax cuts, guns, and health care; and the two that appear to be winning are tax cuts and guns.
Where does that leave Medicare?
“Bush has said that his new Medicare law will hold down costs, but a 2004 actuaries report — signed by three Cabinet secretaries, including Thompson — concluded that the program’s long-term liabilities had increased by more than one-third, or $17 trillion, in a single year.” The article went on to note that Bush claimed the $500 billion Medicare Drug bill will save money by “paying for medicine that would prevent the need for expensive heart surgery”.
Sounds like pharma’s DTP (direct to presidents) campaign is working…
But seriously, it is puzzling that the federal executive and legislative branches are focused on Social Security reform when Medicare is significantly more impaired.


Jan
11

Health care now 15.3% of US GDP

Business Insurance magazine notes that health care costs are now over 15% of GDP – following is an excerpt from their article on same:
” In 2003, health expenditures in the United States climbed 7.7%, to $1.7 trillion, down substantially from a 9.3% growth rate in 2002, according to the U.S. Centers for Medicare and Medicaid Services.
Still, because health costs rose much more than the overall growth in the economy, health spending accounted for a record 15.3% of the GDP in 2003, up from 14.9% in 2002.
Of the nation’s $1.7 trillion health care tab, private payers, such as health insurers and self-funded employers, paid out $913.2 billion in 2003, an increase of 8.6%.
Hospital spending, which accounts for about one-third of national health care expenditures, climbed 6.5% in 2003, down from 8.5% in 2002. Spending growth for prescription drugs slowed significantly, with costs rising 10.7% in 2003, down from 14.9% in 2002. CMS attributed the slowdown in prescription drug costs increases to several drugs losing their patent protection and lower-cost generics becoming available and the expanded use of tiered co-payment plans, which give employees a financial incentive to use lower-cost generics. ”


Jan
11

Medical costs in auto claims

Medical costs for auto claims are rapidly increasing in at least three states studied by The Insurance Research Council. The highest growth was 122% in Colorado, followed by 60% in NY and 37% in FL over the 1997-2002 period. MI costs stayed flat.
Why? What’s different about these states?
–PIP claimants in the three “higher inflation” states (CO NY FL) were more than twice as likely to see a chiropractor than the Michiganders
–and when they did see a chiro, the average total charge was three times higher in CO and FL than in MI and NY (roughly $4500 v $1500)
–CO and NY claimants were twice as likely to see a PT as MI and FL claimants
One possible reason for these discrepancies is the limits on bodily injury claims – all the states EXCEPT MI have monetary thresholds that have to be exceeded before a suit can be filed. MI’s standard is verbal – “injuries that lead to serious permanent disfigurement, serious impairment of bodily function, or death.”
So, where’s the cause and effect?
It is possible (cynics say even likely) that injured parties in the dollar threshold states pile up the costs to exceed the threshold, which allows them to sue to get even more money.


Jan
10

Government’s role, cost, quality, and comparisons

Matthew Holt is a health care consultant, interested observer, and man of strongly held opinions, especially concerning health care and the payment for same. His latest missive is worth a read, regardless of your political leanings or views on socialized v. market-based health care.
Mr. Holt brings up several intriguing points around
— cost v. outcomes;
— the role of government v private payers; and
— who pays for innovation.
If you are pressed for time, print it for plane or train reading – it will get you thinking…


Jan
10

The cost of insuring the uninsured

Lost in the character assassination, sophomoric use of labels, political name-calling and sound-bites that passed for an election campaign was any realistic debate about the cost of insuring the uninsured. Bush’s effort was deemed to be too modest, while Kerry accused of bankrupting the system to cover the uninsured.
Now that the dust has settled, it’s likely that there will be little progress in this critical area – health care is not a key issue for most voters (who, after all, have health insurance either from private payers or thru Medicare).
With the politicians absent from the field, now is a good time to return to the issue.
The first question is cost – simply put, how much would it cost?
Fortunately “Health Affairs” published an interesting assessment in late 2003 by two of their editors…
“Using data from surveys of individuals, providers, and government programs, Jack Hadley and John Holahan estimate that uninsured Americans received $35 billion worth of uncompensated health care in 2001. Governments picked up $30.6 billion of the cost, while physicians’ and hospitals’ forgone time, profits, and philanthropy were responsible for between $7.5-$9.8 billion’s worth of care for uninsured Americans.
In a second article, Hadley and Holahan project that it would cost between $33.9 billion and $68.7 billion to cover the uninsured. The lower cost would be under a government program, which would likely pay providers less, while the higher cost assumes the uninsured are enrolled in private-sector insurance plans that pay providers more.”
There you have it. By way of comparison, consider we are spending significantly more than that in Iraq.


Jan
9

Intelligent reform of Medicare Rx…is it possible?!

There are rumblings that a large number of Republican representatives are pushing to reform the Medicare Prescription Drug Program. Hallelujah.
There are several problems with this ill-conceived and poorly-executed program. They are all related to a core issue – the plan is voluntary and appears to be structured to promote adverse selection; that is, only the people that need drugs will sign up for it. Here’s why.
1. The deductible is very low – $250 annually – and cannot be changed by any health plan.
2. Monthly premiums are estimated to be $35 per senior.
3. There is a late enrollment penalty (that only starts in May of 2006) that is 1% per month. To quote Bob Laszewski of Health Policy and Strategy Associates, you can “wait 30 months until you can make money off the drug plan and it will only cost you $10.50 more per month than if you had enrolled at the beginning.”
What does all this add up to?
Well, seniors will run the numbers. They will calculate what they are paying for drugs today, then add up program’s the monthly premium cost, deductible, their co-pay (25% of the cost of their drugs), and compare the two. Seniors that will “make” money will enroll, seniors that won’t benefit, will stay away.
This is not insurance per se; it is just a terrible business proposition.
Bob’s prediction is not many health plans are going to jump at the opportunity to sell these programs; he’s undoubtedly right.
So, the news that some Congressman have decided they don’t like the program is welcome news. It is somewhat distressing, but wholly unsurprising, that they waited until after the election to have this “ah-hah” moment.


Joe Paduda is the principal of Health Strategy Associates

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