Insight, analysis & opinion from Joe Paduda


Massachusetts’ workers comp problems

The state with one of the lowest fee schedules has been experiencing rapidly rising medical costs. The result of this trend has been that Massachusetts, long known for its draconian fee schedule, has seen total claims costs increase 10% from 2000-2002, after a period when costs were only going up 5.5% per year on average. The data come from the Workers’ Comp Research Institute, one of the preeminent analytical bodies in the WC world.
According to “Insurance Journal”,
“The major cost drivers of growth in the most recent year were continuing double-digit growth in medical costs per claim and very rapid growth in benefit delivery expenses per claim


Disabling disability

Jon Coppelman has written a great posting about the disability-enhancing powers of disability payments in “Workers Comp Insider”.
To quote Mr. Coppleman:
“In an article by E. J. Mundel at, a “meta-analysis” of 211 research studies from across the globe reveals that indemnity (lost wage) payments have a strong influence on medical outcomes. In all but one of the studies, workers receiving financial compensation for work-related injuries were almost four times more likely to have poorer long-term medical outcomes than uncompensated workers.”
If you are in the workers’ comp or disability businesses, read the posting. It provides a scientific foundation for the gut feeling that many of us industry long-timers have sensed for years. If people get paid to be out of work, it is harder to get (some of) them back on the job.
It’s just common sense.
What does this mean for you?
Probably makes you feel better that what you thought was going on really is.


Another COX-2 disaster

The latest casualty among drugs falling victim to over-promotion and under-testing is Bextra, Pfizer’s COX-2 inhibitor. This time around it is not just cardiovascular issues that are the problem.
Bextra appears to be linked to a significantly higher incidence of a serious skin reaction, a problem not found in the other COX-2s. This skin condition is what led the FDA to “request” that Pfizer pull the drug last week. Earlier, Pfizer was asked to add additional safety warnings to Bextra’s labeling, a move that fell short of a withdrawal request.
Reactions ran the gamut from shock and disbelief to “I told you so”; perhaps the most telling appeared in the New York Times:
Thalia Segal, a pain specialist at New York University, said, “We used to just put people on these drugs for life and not think about it, but we can no longer commit them to lifelong therapy with impunity. We have to use these medications judiciously and follow people more closely. We have to rely on a much more individualized approach” (O’Connor, New York Times, 4/8).
It is becoming painfully (no pun intended) obvious that the “side effects” of various medications can not only be quite serious, to the point where people die or suffer debilitating conditions, but also have been under-considered by administrators and big pharma alike. And, the treatment expense and other liability associated with these side effects will contribute to our rising health care costs. Over the short term, financial results of the pharmas will suffer (“Pfizer, which on Wednesday announced plans to reduce costs by $4 billion annually and restated 2005 earnings estimates, might have to make additional cost reductions to return to double-digit earnings growth by 2006


Medical technology facts and impact

Dr. Paul Ginsburg of the Center for the Study of Health System Change has stated that technology and the increasing income of the US population are the top drivers of health care costs. The two are interrelated, as health care is a “luxury good” as defined by economists, so the more income one has, the more “luxury” one can afford. While everyone “knows” this, they might not be aware of the “share” of the medical dollar that goes to technology.
Here are a few factoids that may put this in a little clearer perspective.
Total medtech market is about $200 billion annually, and is growing 10% per year.
Medical equipment costs account for 3-6% of total US health care costs.
For radiology, equipment costs account for 10% of procedure costs.
43% of the medtech industry is located in the US, 24% in the EU, and 15% in Japan. So, while we spend a lot for technology, we also benefit from salaries paid to US medtech company workers, taxes paid by the workers and their employers, as well as profits and downstream expenditures from these firms.
The history of the Magnetic Resonance Imaging machine (MRI) in the United States provides an excellent perspective on technology in health care. Originally approved by HHS for very limited use in a handful of settings, MRIs were quickly found to have much broader application than assumed in the original license (American creativity at its best). Physicians, manufacturers, and MRI owners were able to fill the available time slots with patients so quickly that a new, and quite large, market for advanced diagnostic imaging was created within a very short time. This is but one example of the ability of technology and technologists to find lots of new billing opportunities for their new creations.
Interesting sidebar
Qatar, a particularly wealthy Gulf oil exporter with a tiny population, will be spending $150 million per year on research and development. In fact, the Emir (leader) has set aside all income from a substantial portion of their liquid natural gas exports for investments in medical research. Qataris know their petroleum revenues will run out over time, and they’ll need to replace a substantial portion of those revenues. Medtech looks like a potentially promising source.
What does this mean for you?
If you’re a medtech company, prospects are rosy, although watch out for India. For the rest of us, technology is a curse if someone else is using it and you are paying for or attempting to “manage” its use; a blessing if your doctor is using it to diagnose or treat you or someone you love. Technology’s impact on costs is likely to increase over time, as new devices are created to perform new tasks and better perform tasks that used to be done by older (and usually cheaper) technology.


Cigna’s strategy

Cigna’s recent history has been marked by a (very) difficult, painful, and not entirely successful IT conversion/improvement initiative, known within the company as “transformation” – sometimes with several expletives preceding that term. A less well-known initiative, perhaps because bad news travels on wings, good on foot, is the company’s efforts to implement so-called “high performance networks“.
Rolled out last year in nine markets, and expanding over the next 12-18 months to a couple dozen more, the high-performance network is a revised and updated expression of the Exclusive Provider Organization, or EPO. The concept is simple; utilize health care claims data, corrected and augmented by various case-mix adjusters, episode of care groupers, and other black arts to figure out which physicians within what key specialties deliver the “best” care. Then, set up employee benefit plans with financial incentives for members to use those providers. Ideally, you would want to pay the high performers more, hassle them less, and thus build loyalty and perhaps even the foundation of a relationship based on something other than “if you don’t agree to my deal I won’t work with you”.
Cigna’s program concentrates their efforts on the nineteen specialties that consume 95% of the dollars spent on specialists. The company is using a number of markers of quality of care, including the efficiency of the hospitals where the provider has admitting privileges. Cigna is also starting to work with the National Council on Quality Assurance (NCQA) to incorporate quality of care indicators into their assessment.
Cigna is in a tough spot – hampered by systems conversions issues; and struggling to compete with larger foes with more resources, broader geographic coverage, more buying power, and lower costs of capital. It’s efforts to develop new and innovative provider relationships are laudable, but it all comes down to execution.
What does this mean for you?
Beware systems conversions, as they ALWAYS take much more time, deliver only part of their promises, cost bundles more, and can result in high levels of career mortality and morbidity for those managers unfortunate enough to be identified as responsible for the idea or implementation. As a rule of thumb, reserve 50% more than the cost of the initial project to cover unanticipated costs flowing from the project’s unknowable negative impacts.
Watch Cigna’s progress with high-performance networks. If this does not work, the company’s future will be in serious jeopardy. Regardless, there will be a wealth of lessons learned as a result of their efforts.


Globalization and the role of US health insurers

Thomas Friedman in The New York Times has written a seminal article on the (free registration required) impact of globalization on industrial competitiveness. Simply put, the web of fiber optic cables that now connects the world, coupled with the explosion in wireless connectivity, make borders, trade policies, and time zones completely irrelevant. And, the tremendous investment in education on the part of the Chinese, Indians, and others makes our lead in some areas of technology, science, medicine, incredibly tenuous.
Lots of adjectives, and you may well dismiss this as mere blog ranting. Before you do, note this. India passed its first comprehensive, enforceable Intellectual Property law last month.
Already, pharmaceutical firms, medical technology companies, software developers and the like are flocking to India, and deals are being consummated. India has a long tradition of excellence in science and math education, a highly motivated and ambitious workforce, lots of very experienced citizens presently working in the industrialized world, and many more scientists, mathematicians, physicists, and teachers than we do.
Companies are not investing in India just because it is cheaper. Yes, today the cost of labor is certainly less than in the US or EU, but the quality of the workforce, particularly in the sciences and technology, is rapidly approaching excellence. In the near future, we will find ourselves losing out to India and China not on the basis of cost, but due to their ability to compete head to head with our best.
IBM recently built an R&D center in China. After conducting an IQ test on graduates of the best universities in the country, evaluating the top 20,000, IBM selected the top 20. Unsurprisingly, some of their best research is now coming out of that facility. To paraphrase a Chinese researcher, when you are one in a million in India, there are a thousand others just like you.
What does this mean to you, or more accurately, why am I ranting about this in a blog that is ostensibly about managed care?
It frustrates me to no end that health plans, HMOs, the Blues, employee benefits purchasers, brokers and consultants don’t see the direct and vital link between health care and productivity. We are about to get our collective butts kicked by the rest of the world, in part because the health insurance industry does not understand that they are in the productivity business.
Medical guidelines, drug research, quality of care indicators, physician reimbursement, plan design and provider profiling focus on cost and highly questionable “quality” indicators. This is utter nonsense. If health care providers and payers want to be relevant, they had better figure out that their job, their reason for existence, is to enhance and improve the productivity of their customers’ workforces.
Stop thinking like a cost center and start thinking like a profit center. Or find your customers disappearing as they lose the competitive race to Indians and Chinese firms.


Why US health care costs are higher than other countries’

As we look around for “solutions” to the health care cost inflation problem, we often examine other countries to see how they are able to deliver better results in terms of health indicators (infant mortality, life expectancy, etc.) with so much less expense.
The thought is, if we just adopt a single payer, universal coverage system like the Canadians, or use strong controls and multiple insurers like the Germans, or set strict controls on pharmaceutical prices like most other countries, or restrict the acquisition of technology like many EU countries, or make the individual consumer pay much more for their health care like the Swiss, then we’ll solve the problem.
The fact is in the developed world, health care costs are increasing at roughly the same rate, about 2.5 points higher than GDP expansion. While there are years where the rate is higher for some countries than others, and the US’ rate occasionally bounces up for a year or two, over the long term, everyone’s costs are heading north at about the same pace.
The difference between the US and the rest of the developed world is twofold.
First, every other developed nation has universal coverage. The US has universal health care, it just isn’t funded by an insurance program for the so-called uninsured. Americans who do not have health insurance get health care, although it is paid for indirectly through taxes, surcharges on bills to insured patients, providers forgoing income and outright charity.
Second, we started with a higher base rate of inflation, putting our costs as a percentage of GDP significantly higher than other developed nations. In fact, the nation with health care costs nearest our 15.4% of GDP is Switzerland at 11%.
What does this mean?
We have much higher expectations of our health care system than most other nations do. We want the best, the most, the latest, regardless of the cost. Britons, Canadians, Italians, Singaporeans and Australians have more modest expectations. These expectations are perhaps the key drivers of our health care system. When patients are used to demanding, and getting, the best/most/latest, it is terribly hard to ratchet back their expectations. Yet if we don’t, we perpetuate the problem.


Rankings of state health care quality

The single most valuable governmental agency is the Agency for Healthcare Research and Quality.
AHRQ’s latest published research is the report on health care quality in all 50 states and DC. Measurements of over 100 indicators in 14 areas, the report indicates how each state compares in each area to national averages. AHRQ has tried to prevent interstate comparisons by releasing 50 separate reports, an indication of the agency’s desire to focus not on ranking each state but on identifying areas each state can improve upon.
Indicators included nursing home quality, percentage of seniors who receive flu shots (interesting metric given last year’s flu vaccine debacle), kidney dialysis effectiveness, suicide rates, counseling for medicare recipients who smoke on smoking cessation, and others. It will come as no surprise that no single state came out well in all metrics. In fact, there is remarkable inconsistency within states. Illinois is an example; according to the Chicago Tribune; “


Global Medical Forum Annual Meeting

A few semi-random observations from this excellent conference.
1. The rate of inflation in medical expenses in the EU is essentially identical to that in the US. This despite the major differences between the systems; drug and procedure price controls, very limited access to some new technology, end-of-life care restriction/rationing, and mandatory coverage. Yes, our expenditures are higher, but that is only because we started from a higher base. The EU’s costs are going up just as fast as the US’.
2. Generic drugs are much more expensive in the EU than in the US, partly because most countries in the EU set “reference prices” that effectively keep prices high when drugs come off patent. According to panelists in the session I moderated, this serves to reduce the incentive for drug companies to innovate, as their returns are quite adequate for absolutely no risk.
Compare this to the new drug development business, where 10,000 compounds are required to deliver one new drug, and the reference-priced generics look like a much better business.
3. The new intellectual property protection law in India, passed within the last couple of months, has already generated strong interest from pharmas in moving or locating drug R&D as well as manufacturing in that country. The highly educated workforce, 300 million-strong population of middle class consumers, and new patent protection will likely make India a very powerful force in pharma, and sooner rather than later.


Innovative employer health care programs

Rapidly rising health care costs have led more than one employer to search for better ways to provide health care coverage for their employees. Perhaps the most innovative approaches I’ve encountered is that of Manatee County, FL.
I had the good fortune to sit next to Bob Goodman, director of the program, at lunch during a conference in Arizona on prescription drug management. It was one of the more interesting discussions regarding employee benefits I have had in years.
Here’s what Manatee County is doing. They are self-insured, self-administered, and self-managed. Goodman and his staff, numbering a handful of FTEs plus about a dozen contract workers providing case management and related services, handle claims, managed care, network contracting and relations, wellness, and program administration. Seems pretty standard.
The unique features are several.
First, employees are financially encouraged to develop healthy behaviors through different cost-sharing arrangements. Second, the County has implemented a full-service wellness center, focused on encouraging employees with health issues to take charge of their health before it becomes an expensive, unpleasant, and potentially fatal issue. Third, Goodman is hiring his own full-time internist to work in the wellness center, thereby ensuring quick access to medical care for county employees, who otherwise might have to take time off from work to obtain care for themselves or their dependents. Fourth, despite a rich plan design, Manatee County has enjoyed trend rates below 10% for several years. Fifth, Goodman is planning on opening a “captive” pharmacy, to better manage the only major expense category that his program did not directly address.
The program was initiated after the local government, frustrated by the usual non-solutions offered by their existing health insurer and broker after several years of rapidly rising health care costs, asked Goodman to come in and take a look. With his extensive background in TPA operations and management, and complete lack of any agenda, Goodman recommended the County blow it up and do it themselves. To his great surprise, they agreed, and hired him to lead the effort.
What does this mean for you?
If you are a health insurer or broker, a wake-up call; if you don’t provide solutions, real solutions, you will find some of your customers decide to take matters into their own hands. For those brokers willing (or more aptly capable) of true innovation, think about this as a separate business line. Of course, you’d better have someone like Bob Goodman on staff before printing up the marketing materials.
If you are an employer, you do have alternatives. Let me know if you want more information on Manatee County’s program. I’m planning on visiting their operation, and will report on the visit here.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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