Insight, analysis & opinion from Joe Paduda


Health care inflation 2004

Health care inflation was 8.2% in 2004 for privately insured Americans. This was 2.6% higher than overall economic growth, and almost twice as high as the general rate of medical inflation (4.4% in February) . The largest driver of health inflation was outpatient hospital, which increased 11.2%, while drug cost inflation moderated somewhat, coming in at 7.2% for the year.
The Center for the Study of Health System Change authored the report that is the source of these data, noting:
“Trends in four of the five spending categories


A new scandal in workers compensation

CorVel and Gallagher Bassett are the subject of a highly critical article in the South Florida Sun-Sentinel, that could be subtitled “When bad claims management and bad managed care meet bad employers, it’s bad news.” In this case, Broward County School District’s internal audit uncovered a raft of problems with the District’s $34 million annual workers compensation program. The article itself looks like it was co-authored by Carl Hiaasen and Dave Barry, two of South Florida’s keenest observers and funniest writers.
Iin addition to the District itself, the two entities receiving the harshest criticism are CorVel, the District’s managed care “partner”, and Gallagher Bassett. GB receives slightly more than $2 million a year to “manage” the program, while CorVel was paid $2.7 million during the 2003-2004 school year. Here are some of the more interesting quotes from the article in the South Florida Sun-Sentinel which reviewed an audit of the workers comp program by District auditors.
“Examples of waste or botched oversight range from using a pediatrician to treat adults to paying a claims investigator for working more than 24 hours a day, three times in one month
“Auditors are also sharply critical that Itasca, Ill.-based Gallagher Bassett subcontracts medical duties, such as selecting doctors and assigning patients, to another firm, CorVel Inc. of Irvine, Calif., but will not give the district a copy of the agreement to evaluate.”
“In one example cited, the firms (CorVel and Gallagher Bassett) spends (sic) $2 million a year to assign a field case manager to supervise nearly every case no matter how minor, a service that usually includes escorting patients to a doctor’s office. Other workers’ compensation companies usually reserve that level of service for catastrophic cases, said Reilly and Shaw. In one case, the district paid a case manager $2,800 to accompany an asthma patient at the doctor’s office.
Auditors chose five doctors at random from CorVel’s list. One had four malpractice settlements since 1992. CorVel has only rejected two out of 1,200 doctors it uses, one for questionable service and one for demanding payment up front.
Additionally, referrals for physical therapy for specific patients were based not on a therapist’s track record, location near the patient or expertise. Instead, therapists were chosen alphabetically, based on which firm was next on an approved list, auditors said.”
In perhaps one of the more stellar examples of understatement, the report noted “It appears the district has taken a casual interest in the operations, resulting in higher direct costs including excessive medical, indemnity [lost time], litigation, monetary settlements, permanent impairment ratings and personnel costs associated with replacement or substitution for injured workers,” auditors wrote.
To quote Dave Barry: “and I’m not making this stuff up.”
One wonders if this will lead to an official inquiry, as the relationships between managed care entities, TPAs, and employers have been the recent target of subpoenas and news articles.
Actually, it is likely not a question of “if” but “when”.
What does this mean to you?
Make sure your managed care relationships are clear, explicit, and public, that all transactions are transparent, and you hire the right managed care firm. Unless you want to see your name in print.


Competing models of health care

The two competing economic models of health care are greatly influencing the debate on the future of health care in the US. One, hewing closely to the free-market standard, calls for consumer-driven decisions, free markets open to all investors in facilities, technology, and insurance. The other views health care as a unique good, one in which unfettered competition will never work and wherein market-based competition will lead to unacceptable social consequences. The latter model typically calls for more regulation and tighter controls.
An excellent perspective on this debate was brought to my attention by Peter Rousmaniere, a wise man and good friend. Steven Pearlstein of the Washington Post has written a great synopsis of the debate, one that is well worth considering. Using CMS Administrator Mark McClellan’s recent decision (or more accurately non-decision) on the licensing of ambulatory surgery centers (he decided to procrastinate) as his foil, Pearlstein frames the issues quite succinctly.
“When they are vilifying insurers and managed-care companies, physicians like to present themselves as Dr. Welby — selfless professionals whose medical judgments would never, ever be colored by their financial interests. But in lining up behind physician ownership of specialty hospitals, the doctors essentially acknowledge that they are just like the rest of us, their behavior swayed by even modest financial incentives.
You can’t have it both ways. And the way the people would have it is to pay their doctors well, put them in the central decision-making role in the health care system — and then demand that they give up the right to invest in MRI machines or specialty hospitals or get incentive payments from drug companies.”
Leaving aside Pearlstein’s claim to know what the people want, his arguments about physicians are on point.
However, I believe his analysis, excellent as far as it goes, misses a critical point. In all his discussion, and the national debate for that matter, on costs, process measures, outcomes, motivations, consumer-directed v. regulated, price controls and the like, there is no mention of the output.
I fail to see how an economic debate can serve any useful purpose if it does not consider what individuals or societies get for their expenditure. Think back over the last many years, and all the arguments you have heard and/or participated in, all the columns and studies and analyses and debates. Has anyone ever said, “well, we need to spend $X because it will increase the population’s productivity/functionality/quality by Y%, and that is a better return on investment than my opponent’s recommendation.”
Hell no.
This makes me nuts. The entire health care debate is almost useless, because we are arguing about process, about inputs with no appreciation for outputs and economic good.
Until and unless we engage in a debate about what health care should deliver, we are wasting time, words, intellectual capital, and newsprint.


Drug detailing, direct-to-consumer ads, and off-label use addressed

There are signs that drug marketing is beginning to change, as the FDA focuses on off-label use and some of the big pharmas cut back on their sales forces. This may well be as part of big pharma’s efforts to defuse some of the harsh criticism leveled at them by physicians, consumer groups, and health plans frustrated with pharma’s aggressive marketing tactics.
David Wilson’s Health Business blog notes that Wyeth and Pfizer have both announced plans to cut sales staff. The reasons are:
1. “Mirrored sales teams –the practice of sending multiple sales reps to the same doctor to talk about the same drug– are causing a backlash from doctors and also making it hard to measure the effectiveness of individual sales people
2. There is little new to talk about –because of fewer product launches and in the case of Wyeth the curtailment of uses for its hormone replacement therapy. (Could it be that the more a doctor knows about hormone replacement therapy the less they will prescribe?)
3. The availability of efficient, effective outsourced sales forces available from Ventiv, Innovex and PDI have enabled pharma companies to reduce fixed costs.”
The issue of pharmaceutical detailing has been extensively addressed in DB’s MedRants, a highly entertaining and informative blog authored by physician Robert Centor. Centor has also commented on the recent decision by Bristol-Myers-Squibb to impose “a ban on advertising its new drugs to consumers in their first year on the market, adopting voluntary restrictions that go further than what is anticipated in an industrywide advertising code to be announced next month.” Centor notes
“The optimist in me hopes that the outcries from physicians has influenced their policy. The skeptic in me believes that they understand the DTC drug advertising carries both risks and benefits. Big Pharma has a major image problem. TV drug ads generally hurt their image. ”
As to the issue of off-label use, this is a significant area of concern for many payers, including workers compensation insurers. In my firm’s “Second Annual Survey of Prescription Drug Management in Workers’ Compensation”, payer respondents noted off-label use as a significant concern. Typical was the use of Actiq as a pain med for musculoskeletal pain. Actiq is a brand drug used for break through pain associated with cancer; thus its use in workers comp is the very definition of “off-label”.
What does this mean for you?
If big pharma is finally getting the message, that bodes well for a “decrease in the rate of increase” in pharmaceutical inflation. However, these companies are the ultimate capitalist organizations (that is not intrinsically bad) so they will seek to maximize their returns. And we all know who pays for those “returns”.


Ohio Bureau of Workers Comp scandal widens

Ohio’s workers compensation scandal continues to grow, heading off in ever-more-interesting and bizarre directions every day. The fallout is both political and financial, and has reached the governor’s office.
Here’s the latest information from our friends at “Workers Comp Insider” and other sources. It appears the Bureau of Workers Comp, the entity that oversees the state’s monopolistic workers comp insurer, has lost somewhere around $215 million in funds. These losses were due to investments in rare coins (!); with shady investment manager Alan Brian Bond; and in a hedge fund that was amazingly adept at losing large sums and charging high fees for that ability.
In one of the more entertaining chapters of this growing story, one of the key players suffered an alleged burglary at the home of Michael Storeim that resulted in the loss of significant


Ohio Bureau of Workers Comp scandal hits the big time

The growing scandal in Ohio surrounding the Bureau of Workers’ Compensation‘s wildly inappropriate behavior has officially hit the big time. Initially surfaced by local press, and blogged on several occasions at Workers Comp Insider, the mess has just hit the national press. BWC’s investments in rare coins, affiliation with a politically-connected investment manager, apparent desire to hide losses totaling over $200 million, and perhaps even worse is covered in Paul Krugman’s column in today’s New York Times (free registration required).
Here’s one of Krugman’s more trenchant observations:
“We’re not just talking about campaign contributions, although Mr. Noe’s contributions ranged so widely that five of the state’s seven Supreme Court justices had to recuse themselves from cases associated with the scandal. (He’s also under suspicion of using intermediaries to contribute large sums, illegally, to the Bush campaign.) We’re talking about personal payoffs: bargain vacations for the governor’s chief of staff at Mr. Noe’s Florida home, the fact that MDL Capital employs the daughter of one of the members of the workers’ compensation oversight board, and more.”
One has to admit, this is lots of fun for outsiders. Perhaps now that Michael Jackson has returned to his devoted fans and home/amusement part/daycare center, and Scott Peterson has left the headlines, the press will focus on this mess, bringing notoriety and “human interest” to our little corner of the world. Imagine, workers comp will be the center of the cocktail party or soccer sideline discussion, enabling the cognoscenti (that’s us) to dispense our wisdom and hard-won knowledge to listeners eager to get in on the latest. I can see Peter Rousmaniere on “NightLine”, Tom Lynch on “Larry King Live”, Larry Dorman on Greta van Susteren, Jon Coppelman on “The Daily Show”


California HMO costs

CalPERS has managed to hold HMO rate increases for 2006 to 8.7%, while PPO increases are up 9.5%. CalPERS is widely recognized as one of, if not the most, effective negotiators with managed care plans, so their achievement will set the standard for other employers/unions/etc as they begin their negotiations with their health plans. According to their website,
California Public Employees’ Retirement System … provides retirement and health benefits to more than 1.4 million public employees, retirees, and their families and more than 2,500 employers…”
The 8.7% is the lowest increase since 1999; with 2005 rates up 10%, 2004 16.4%, and 2003 a mind-numbing 24.1%. Of particular note is that benefit design was essentially unchanged as were copayments and prescription drug coverage.
When health plan rate increases negotiated by a very savvy, and very large, payer are more than three times the overall rate of inflation, and when that is trumpeted as good news, you know we are in trouble.
What does this mean for you?
Hold on to your wallet – if you can keep your rate increase below 11% without significant damage to your benefit design, congratulations.


Part D Prescription – budget buster?

Well, our officials in Washington have lost their minds. How else to explain the requirement by Medicare officials that the new Medicare Part D programs “”offer a surprisingly generous array of prescription drug choices”?
Pharmaceutical firms are likely ecstatic about the news, as the “open formulary” combined with the prohibition against the Federal government negotiating drug prices means that there is likely to be many drugs offered at what the pharmas will deem to be appropriate prices.
CMS Administrator Mark McClellan,and Babette Edgar, a pharmacist at CMS both claim that the diverse population covered under the Medicare and Medicaid programs necessitates a diverse formulary. According to a New York Times article cited in California HealthLine, the original cost assumptions for the Part D program may have to be reworked, as they assumed a narrower formulary. The result – costs will be higher than previous projections. Here’s the quote:
“In 2003, the Congressional Budget Office estimated that the Medicare prescription drug benefit would cost $395 billion over 10 years, but earlier this year, CBO raised the estimated costs of Part D drugs to $849 billion between 2006 and 2015 (California Healthline, 3/11). According to the Times, CBO cited the federal formulary requirements as one factor in its higher estimate.
CBO Director Douglas Holtz-Eakin said the agency’s estimates so far have assumed that Medicare drug plans would use “restrictive formularies” to help control spending. He added, however, that with the broader drug lists being required by the government, CBO “now expects that prescription drug plans will be slightly less effective at controlling drug spending than we had previously assumed.”
CMS denies costs will be driven up, citing the plans for the Part D vendors to use cost control mechanisms similar to those used by commercial plans. The problem with that statement is that Part D vendors are specifically prohibited from using many of these techniques, such as prior authorization.
The last estimate indicated the program, originally forecast to cost $395 billion over ten years, will actually cost just under $900 billion over the same period. With these “unforeseen changes” costs may get close to the trillion dollar mark.
What does this mean for you?
I’m not sure; but if the Chinese decide to stop providing loans to the Federal government, it is either higher taxes, drastic cuts in other governmental programs (it is tough to get $100 billion by cutting HeadStart or NASA budgets), or cancellation of the program.


Physicians in workers compensation

There are several signs that indicate a growing awareness of the importance of the physician in managing workers comp injuries. While many in the industry have paid lip service to the treating physician, their actions have been louder than words. Utilization review requirements, onerous communications protocols, invasive medical management procedures, requirements that physicians provide care at a discount to an already-low fee schedule are representative of the way physicians have been treated by the community.
Now, that is starting to change. Here’s the evidence.
–a major workers comp insurer is considering using a PPO network that includes physicians paid above the workers comp fee schedule. This despite their long-held and loudly trumpeted historical attachment to large discount-drive networks.
–another carrier is closely examining its data to identify the physicians with the best outcomes. The plan is to pursue a contractual relationship with those physicians that is predicated not on discounts but on results.
–large employers such as Supervalu have been working directly with certain providers in specific locations that they deem to deliver excellent care. Again, outcomes, not discounts, are the measure of quality.
–a large Longshore-Harbor Workers insurer has arrangements with many physicians where they pay a negotiated rate that is typically above the fee schedule. This gets them prompt, effective treatment, speeds communications, etc.
Choice Medical Management, the fastest growing workers comp care management firm in the Southeast (also a client) has been recognizing the physicians of the year for several years. This year the number of physicians nominated and the volume of nominations have been significantly higher than in years past, forcing the company to adopt a more streamlined method of evaluating nominees.
This is great news, but a few items do not a trend make. The encouraging sign is that this growing recognition appears in large carriers and small carriers, in TPAs and at employers, among adjusters and execs.
What does this mean for you?
If you don’t have a physician-centric approach to managed care, it is time to start thinking about how you are working with the people who have the most influence over your claimants.


workers comp in Iraq, Ambulatory Surgery Centers, and other topics

Workers’ Comp Insider has a fascinating post on workers comp in Iraq. Jon Coppelman discusses safety issues, premium rates (as high as $80 per $100 of payroll, for people making $100k a year!), the “competitive bidding” situation between AIG and ACE, and other intriguing points.
I highly recommend it.
Another interesting post discusses the costs and benefits of Ambulatory Surgery Centers, with particular attention paid to safety issues. An issue not covered in the post or resources on the post is the issue of ASCs siphoning off the profitable, private pay patients from hospitals, leaving hospitals with sicker, poorer patients. The result, hospitals’ outcomes go down, costs go up, and profits disappear.
Another post in Medpundit lead me to a great article about an American’s experience in the British health system. One quote from the article (originally in the Wall Street Journal) in the Medpundit post is particularly telling:
“There is much better teamwork among doctors, nurses and physical therapists in Britain. In fact, once a week at Queen’s Square, all the hospital’s health workers–from high to low–would assemble for an open forum on each patient in the ward. That way each level knows what the other level is up to, something glaringly absent from U.S. hospital management.”

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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