Health Care Costs and the OECD

The OECD has recently released several statistics on health care costs in the US and Europe. We present some of them here and we look at some insights which may be gained from them.

First we present the Table which shows the health care costs as a percent of a nations GDP. This is below.


















In the above we not that the US is at 15%. Thus at a $14 trillion GDP we have a $2.5 trillion health care costs. The next simple question is, is this because our physicians are paid more or are there other dominant factors. To address that question they have also presented other data.

The following shows the costs of physicians, general practice including internists and specialists as a percent of the average wage in a country.


















Note that the US is second here and the Netherlands is first. Austria is third and it is close to Luxembourg and Canada. For general practitioners the salaries of the top 8 are almost the same as a percent! The Netherlands total costs are 2/3 s of the US whereas their physician costs are a 1/3 more for general physicians. This anomaly persists throughout the data.

The conclusion is that it is NOT the physician that is causing the problem in the US. We have argued that it may very well be the chronic diseases such as those due to obesity that are indeed the true cause. The OECD also recently released a study on obesity.

The first chart below is for obesity in men. Obesity is a BMI in excess of 30. The US clearly dominates in this area with an explosive growth rate. The US has an obesity rate in excess of 30%. The relationship between diabetes (type 2) and obesity is almost 1:1. This means that we can expect almost 30% of the males in fiver years to have Type 2 Diabetes and then its consequences.

Sweden and France are at 5%, one third the number. This alone may account for much of the difference. We argue in our other White Papers that this was indeed the case.

















Now the second chart is for obesity in women. The results are the same. In fact women are even more obese! The impact on women can be even more severe in that is causes increased infant mortality and increases in breast cancer as well as the plethora of all other Type 2 Diabetes disorders.

















Now we look at overweight which is a BMI between 25 and 30. For men we show it below from the OECD study. The overweight category is a precursor of the obese stage. Most overweight persons become obese in 10 year time span. The results for men are shown below. 70% of US males are overweight! That means we can anticipate truly explosive health care costs unless we remediate this immediately!

















Finally the last is for overweight in women. The rates are comparable.

















The result is clear. The major reason for health care cost difference in our opinion are solely related to obesity and the resulting Type 2 Diabetes effects. This is a preventable disease. It can be resolved by taxing.

Imports and Exports: March 2009

The following are Figures demonstrating Imports and Exports through March 2009 from the DOL Data release as of today.

The Imports are shown below in % change per month. Note the drop in petroleum during the price explosion. Also note that the imports in petroleum in 2009 have returned to the pre spike values, leading one to suspect that the there may be increases in oil depending on general economic restabilization. However the other imports have returned very slowly to low negative values. The economy is till in a slow recovery by looking at the other import numbers.


















The Exports are shown in the following. These are the seasonally adjusted values so that the agricultural values are still showing weakness. Overall exports are weak showing that the other economies are still in very weak condition.



















No long term trends can be determined at this time.

Broadband Stimulus: Can It Ever Work

The more I read about the Broadband Stimulus the more I am concerned that this is just a waste of billions. Let me simply address the implementation issues:

Fact 1: There are a limited number of ways to provide broadband.

They are:

1. Fiber to the Home
2. Wireless: Licensed
3. Wireless: Unlicensed
4. Satellite
5. BPL: Powerline applications

Fact 2: If Fiber is used then is is necessary to obtain a Franchise.

You see in all the existing Franchise Agreements, or at least almost all, there are clauses that albeit non-exclusive, that the next public way provider, namely anyone using the public access, like telephone poles and buried systems, have terms at least as onerous of the cable provider or worse. Thus this means that unless we also abandon due process and equal protection clauses of the Constitution, yet we have already destroyed contract and corporate law, so why not the Constitution, the new entrant needs an equitable Franchise, and I would assume that towns and municipalities could not claim Sovereign Immunity protection. As we all know, or should know if we get into this business, the process for Franchising is costly, not covered by RUS financing, and worst of all takes years!

Thus we cannot see how any of these new players will ever get to deploy FTTH in an reasonable and cost effective manner.

Fact 3: Wireless which is licensed, like WiMax, requires a license.

This is a tautology that many people forget. Thus is you desire to deliver a broadband using a wireless system which is wide area effective such as WiMax then you need the license. That means you must buy the license from someone. hat is unlikely and if possibly quite expensive. It also takes time. Thus we see that any licensed system for any new entrant is highly unlikely. In physics one would call it impossible, namely zero probability!

Fact 4: Unlicensed Wireless requires significant local infrastructure for local interconnectivity. It may be quite costly for rural locations as specified by the law.

The Meraki systems and other mesh networks work well in some urban and many suburban markets. However they really do not work well in rural areas. The best effective radius of coverage is 500' and when homes are in wooded areas and there is a low density of homes per mile, this means that this system does not function either well or at all.

Fact 5: Satellite systems require satellites.

This is another tautology. Wild Blue is one of the systems using satellites. They also have limited capacity and they have delay problems as rates increase with TCP/IP protocols.

Fact 6: BPL requires power lines and this means that distribution is limited to rural power companies. BPL also suffers from significant interference with the Amateur Radio bands and is the subject to continuing litigation.

BPL has been proposed for years now as a major means for rural broadband. It has advantages and significant disadvantages. There is ongoing litigation from the ARRL trying to stop its deployment. The providers are usually the local power companies who really are late 19th century firms in nature who have not come to develop capabilities of 21st Century broadband companies. The culture mismatch is quite extensive. IBM recently announced its intent to try and serve 200,000 homes with BPL but one suspects this is a trial.

The conclusion from these above facts is simple; rural broadband may just be downright impossible. Perhaps there is some way to do it which gets around the above Facts but we have not seen it. We have performed over three dozen detailed Feasibility Studies in towns of the type in the Stimulus package and have had to just walk away. They are either physically un-doable, economically un-doable or politically un-doable. Colebrook, NH and Rindge, NH are typical of the economically and physically un-doable type. Unless you own the license for WiMax. Hanover, NH is politically un-doable, we have discussed our experience there.

Of course the legal and political limitations may be just written off if one selects the right politicians in the right towns and then one may get the desired results, albeit not in a manner which may be economically viable. Politically controlled businesses lack rack records of long term viability, just look at Fannie and Freddie.

Medicare: An Interesting Number

Now that I have been over 65 for a while and now that many of my friends are also, I read the paper in today's NEJM on the hospitalization of Medicare recipients with some surprise. The NEJM paper states that there were 13 million Medicare participants enrolled who were hospitalized in the year between 1 October 2003 and 30 September 2004. If one goes to the Medicare Site and look at the Medicare Trustee Report for that period one sees that there were:

"In 2004, 41.7 million people were covered by Medicare: 35.4 million aged 65 and older, and 6.3 million disabled. Total benefits paid in 2004 were $303 billion. Income was $318 billion, expenditures were $309 billion, and assets held in special issue U.S. Treasury securities grew to $289 billion."

This means that 32% of the Medicare participants were hospitalized at least once. That is one in three. That means that of the fifty or so friends in that age who I know and see somewhat frequently, enough so that if they were hospitalized I most likely would know, more than 16 of them should have been hospitalized! I can only think of one, and that one has been a chronic one for years. A closer look shows that of the 41 million only 34 million were 65 and older so it even gets worse, that is 38%! I wonder where all these sick old people are hiding out? The map in the paper shows a story which may or may not be correct. Clearly it reflects the data, no question there, but it may also reflect another tale. The picture is shown below from NEJM:



















The question is, does the lack of higher hospitalizations in the low states reflect healthier people, or have the sicker people moved, and why? There is still the lingering question as to where all these chronically ill people are. They are hospitalized not just seeing a physician. Just some food for thought. There are times when these numbers really get confusing....I will look for the old people like me this week when I go to New Hampshire to work the farm, they are probably out tilling the soil!

Changes in the Market

This is the performance of our bundle as we look at is as of today. It has made a turn back to almost where it was in December when we started.


















We are now just a bit under what we were at when we started. The question is, is this sustainable? Time will tell.

Medicare, Bundling, and Just Letting Them Die

There has been a flurry of proposals for paying and reimbursing under Medicare. One of the strangest proposals is the Bundling approach which seems to have originated out of a Medicare advisor group. We look at that proposal briefly.

MedPAC is a Government policy panel formed under law to do the following:

"The Medicare Payment Advisory Commission (MedPAC) is an independent Congressional agency established by the Balanced Budget Act of 1997 (P.L. 105-33) to advise the U.S. Congress on issues affecting the Medicare program. The Commission's statutory mandate is quite broad: In addition to advising the Congress on payments to private health plans participating in Medicare and providers in Medicare's traditional fee-for-service program, MedPAC is also tasked with analyzing access to care, quality of care, and other issues affecting Medicare."

In a 2008 paper in the New England Journal by Hackbarth and others, all part of MedPAC, the authors propose a "Bundled" payment system. This bundled system simply stated is that

"Under a bundled payment approach, Medicare would pay a single provider entity (comprising a hospital and its affiliated physicians) a fixed amount intended to cover the costs of providing the full range of Medicare-covered services delivered during the episode, which might be defined as the hospital stay plus 30 days after discharge. Bundling payments in this way should provide incentives to increase efficiency, coordinate in-hospital and post-hospital care, and, if combined with pay-for-performance initiatives, improve the quality of care."

MedPAC published a detailed report in 2008 on bundled care. This report is in many ways the blueprint for Bundled payments.

This bundled approach of MedPAC assumes that if one needs medical care in a hospital that the patient in some manner stops dealing with their physician and then enters into some yet to be defined agreement with a hospital which in turn provides the full "team" and a bundled price. Thus if you require an aortic heart valve replacement, or breast cancer surgery, or prostate cancer surgery, you first get the hospital to tell you what bundle you get.

They choose all physicians and surgeons and they tell you the procedures and they set the price, somehow in accord with Medicare. You just show up and pray that the person or persons who treat you have some idea what they are doing. You choice, your responsibility, your freedom as a patient is destroyed for the better good, in this case the hospital, which in turn reports to the Government!

A detailed paper by Fisher et al called Fostering Accountable Health Care states that:

"We then present a specific payment reform proposal for Medicare designed to foster the development of accountable care organizations (ACOs) and provide empirical evidence of the potential impact of this approach..."

They continue:

"We propose a voluntary and incremental program that would foster the development of ACOs. Our proposal builds on the current Physician Group Practice (PGP) Demonstration, a program in which large group practices are rewarded with a share of the savings they achieve in caring for their Medicare patients if they also achieve documented quality improvement. During the first two years of the program, the participating groups achieved major gains in quality and savings for the Medicare program overall."

They conclude:

" But other approaches to reducing the growth of health care spending and fostering integration face serious constraints and even stronger resistance. The political opposition to requiring all beneficiaries to join capitated health plans would likely be fierce.

Bundled payments reinforce the principle of shared accountability and encourage collaboration and coordination among providers but are unlikely to have much impact on the overall costs of care. Bundled payments will not discourage the provision of unnecessary services outside the context of the episode; nor do they necessarily reduce the provision of unnecessary or questionable episodes of care. And cuts in payment rates will be vigorously opposed as threats to providers’ ability to provide care to Medicare beneficiaries. The tensions that have to be managed include the difficult physician-hospital relationships pervading some markets, the increasing need to slow spending growth, and the widely held perception that cost containment requires income loss for some providers.

A promising middle ground. In this difficult environment, we believe that a voluntary payment reform designed around ACOs and shared savings offers an incremental and promising middle ground that could meet the interests of providers, beneficiaries, and taxpayers better than the competing alternatives. And interest in the approach is growing....."

In effect their proposal is in contradistinction to the bundled plan. The above highlights their view that the bundled plan would not achieve its goals.

There is also a paper called the Long Term Care Quality Alliance which presents a comparison of the following approaches:

1. Accountable Care Organization (Shared Savings or ACO)
2. Primary Care Medical Home
3. Bundled Payments
4. Partial Capitation
5. Full Capitation

This paper views many negative aspects of the bundled care approach. The paper promotes the ACO model which it defines as:

"The Accountable Care Organization (ACO) model establishes a spending benchmark based on expected spending. If an ACO can improve quality while slowing spending growth, it receives shared savings from the payers. This model is well-aligned with many existing reforms, such as the medical-home model and bundled payments, and also offers additional support (and accountability) to the provider organization to enable them to deliver more efficient, coordinated care. This approach has been implemented in programs like Medicare’s Physician Group Practice (PGP) Demonstration, which has shown significant improvements in quality and savings for large group practices."

This paper concludes on a positive note regarding the ACO approach:

"The ACO model is receiving significant attention among policymakers and leaders in the health care community, not only because of the unsustainable path on which the country now finds itself, but also because it directly focuses on what must be a key goal of the health care system: higher value. The model offers a promising approach for achieving this goal without requiring radical change in either the payment system or current referral patterns. Rather, fee-for-service remains in place, and most physicians already practice within natural referral networks around one or a few hospitals. By promoting more strategic and effective integration and care coordination, the ACO model holds substantial promise as a reform that offers a potential win-win for providers, payers, and patients alike."

The unintended consequences of a Bundled approach are many:

1. The Patient and Provider lose a Nexus: The relationship becomes one with the hospital and not the physician. It breaks the fundamental bond that is the cornerstone of health care.

The patient and the physician are an important nexus. The only physicians who have little to no contact with a patient are the pathologist, radiologist, and anesthesiologist. The surgeon has contact as does the other specialists. It goes to the heart of practicing medicine. The hospital has the least.

In my experience, hospitals are run by managers who care less about patients and more about their bottom line. They are not professionals as are physicians. The only fear a hospital administrator faces is possible loss of accreditation, which only comes after gross negligence if even then. The hospital is run for the benefit of the management and not the patient.

Teaching hospitals may be different in that they are run to produce new physicians. Thus the teaching hospital may be further out on the risk profile.

By placing the hospital at the focus as is done in a bundled approach one creates a barrier between patient and physician and further places the worst possible party in a position of control, the hospital administrator.

Hackbarth et al state:

"Bundling the payments for multiple providers would create incentives for providers not only to contain their own costs but also to work together to improve their collective efficiency. Providers accepting bundled payments would have the flexibility to develop entirely new approaches to organizing care and allocating payments among themselves in ways that could help them achieve efficient, high-quality care. They could then share in any savings gained by improving coordination, quality, and efficiency. "

There is no basis for this statement. They continue and state that perhaps some adjustments may be made. In fact by placing the hospital in the nexus one creates the most inefficient form as we have shown in our analyses.

2. It institutionalizes and memorializes the hospital at a time when the role of the hospital may be at a massive turning point with genetic medicine.

The Bundled approach places the hospital at the center of the model. We have argued that this entity is the most vulnerable to downsizing and change and is also at the heart of the explosion in costs. This is especially true for Medicare patients. Thus we see that placing such an entity at the core creates a tension for continuation of bad practices.

3. It creates massive problems with the issue of transfer pricing of services and creates the incentive for further padding by hospitals.

Anyone who has ever been in business, in a large multifunction company, has come to grips with the transfer pricing problem. Many business school doctoral theses have been written on the topic and many a corporate war has been fought over the issue. The price one unit charges another for a good or service is difficult to ascertain. This is difficult even when there is a market for the product. For the buying unit may easily say the internal price is too high and that they will go elsewhere. The hospital could do the same. They may say your physician is too costly so you must accept theirs or no surgery, just go home and die!

4. It drives good physicians out of the delivery of Medicare services further disenfranchising those on Medicare.

Physicians are opting out of Medicare in droves, as was reported by the New York Times. As the paper states:

"Many people, just as they become eligible for Medicare, discover that the insurance rug has been pulled out from under them. Some doctors — often internists but also gastroenterologists, gynecologists,... and other specialists — are no longer accepting Medicare, either because they have opted out of the insurance system or they are not accepting new patients with Medicare coverage. The doctors’ reasons: reimbursement rates are too low and paperwork too much of a hassle."

This means that with the system as it is already, it is becoming harder for medicare patients to find physicians which will take them. If one adds the burden of bundling then it becomes worse.

In our opinion, as we have stated many times in the past, the rearrangement of deck chairs, namely the many plans on how to cut costs via payment and control mechanisms miss the point. First, demand can be modulated, second, costs can be reduced by multiple means, third, genetic medicine will change the paradigm fundamentally and having the agent which will be changed the most in the middle will just delay this change, and finally, and only as the last step is the payment issue.

Let me pose a different issue, however. The plans discussed by Fisher, albeit well posed and meaningful, work for the majority of chronic and acute care problems, such as acute MI, heart valve replacements, and even hysterectomies. However, consider the following. A woman has a BRCA positive breast nodule which upon fine needle aspiration is determined to be a malignancy. She lives somewhere in New Jersey and she has the option, assuming that it still exists, to seek service through one of the Fisher like plans in the local hospital or she goes to Memorial Sloan Kettering in New York. Well, off to New York she would go! She may often have a greater chance of dying from nosocomial infection at some local hospital, I am not saying it would be the one in the town in New Jersey, before the cancer gets to her. The plans proposed by Fisher for Medicare would prevent her from going to a tertiary care facility, even if it could save her life.

My concern is that the on the average approach works on the average. Yet there must always be room for exceptions, yet the exceptions are always what Government seems so unwilling to deal with, it is inherent in any bureaucracy. I strongly believe that as patients become more aware and as medicine has centres of excellence, that patient choice, albeit at a price, must be maintained. The abuse that Fisher in his many writings presents can and must be eliminated but not at the price of patient choice.