Squeezing the Balloon:  Thoughts on a High-risk, Low Margin Business

I recently ran into an old colleague who works as a consultant to one of the large national pharmacy chains.  We got to talking about the various clinical services that the pharmacy has explored over the years, beyond low acuity retail care.  It turns out that, after an auspicious start, the big national pharmacies are increasingly shying away from providing clinical care and are beginning to lease their in-pharmacy clinics to local healthcare systems to run.

22355239325_8d7596dccd_zNow, theoretically, the corner pharmacy is a perfect place to deliver healthcare.  But it turns out that the pharmacies have run into a barrier: simply, the margins on clinical services can’t compare to the margins on things like cosmetics.  Eyeliner, in some cases, generates a 90% profit–much of which goes to the retailer. No clinical service can deliver these types of returns.  As readers know, it’s uncommon to find any direct provider of clinical services that can generate anything beyond 7- 10% margins at the high end.  2-3% is more common.

Physician groups generate particularly unenviable returns:  here is one of my favorite charts from a American Healthcare post a couple of years back: Pricing Risk: What Margin Should Risk-Bearing Healthsystems Reasonably Expect?  The chart is from a 2014 AMGA report showing operating margin per physician nationally, by region from 2009- 2013.

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Operating Margin per Physician by Region

Why are clinical margins so squeezed?  How did healthcare become a high-risk, low margin business? What is it about clinical care compared to, say, cosmetics?

Here’s one hypothesis:  The problem lies in the clinical healthcare’s supply chain and it’s multiple supplier dependencies.  Everybody, from administrators, doctors, pharma, medical device makers, hospital bed makers and so on is at the table.  Every product, even if essential and fairly priced, also comes with supplier margin expectations.  Add enough suppliers (each with 20% margin expectations to keep their investors happy) and and the system begins to run out of money.

Of course, plenty of pricing is not fair.  Nowhere is this better illustrated than the recent drama over the pricing of epinephrine.  Mylan pharmaceuticals was accused of charging over $600 for what’s basically a 2$ medication when dispensed in vial form.  It’s a separate problem from medical inflation caused by innovation: medical advances will of course lead to higher healthcare costs.  We now treat, at great cost, metastatic melanoma and save lives.  The unfair pricing of a $2 medication is a different matter.


A wise colleague who has decades in the insurance business regularly explains that healthcare resembles a “balloon”.  If the dollars available for healthcare are relatively finite, then increases in the cost of everything from durable medical equipment to drugs to hospital beds, implants, surgical equipment and the like need to be offset by decreases in the cost of something else.  Squeeze one part of the ballon, and another part needs to give.

From the medical group’s perspective, most FFS medical groups have been relatively shielded from the increases in the cost of everything from Epi-pens to X-ray machines by what’s basically a payment firewall.  Physician charges have been paid from a different bucket of money than hospital and drug charges and physician salaries could traditionally be protected through aggressive negotiation with insurers and market domination. It’s led to factious relationships between insurers and providers.

In risk, though, the dynamic between the insurance company and the provider group is different.  In global cap (or at in the case of episodic risk payments) there is no firewall between payment buckets.  The risk bearing groups themselves need to figure out how to juggle the dollars to pay for $600 Epi-pens.  And, the amount of money available to pay for physician salaries and overhead ultimately depends on how effective the insurance companies are in negotiating vendor costs with suppliers. In the absence of national medical pricing policy, the insurance company is the only brake for the middleman.  The insurance company’s ability to drive down vendor cost is critical for risk bearing groups and is what will distinguish a good insurance partner from a bad one going forward.

This is increasingly important in a time of big increases in pharmacy costs.  The AMA reprinted a chart showing the rate of growth in various sectors of the healthcare system.  (Physician services, btw, represents about 15% of the national healthcare spend).

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This increased reliance on the insurance company to serve as the brakeman for vendor costs is one reason why I’m increasingly less concerned about health insurance company consolidation. If you’re in risk, what you want is a couple of big insurance companies administering your risk contracts.  The bigger the insurance company, the tougher the push-back on pharma and medical suppliers which is where the bleed is happening.

Of course, your other option is to get out of clinical services and into the eyeliner business… I hear that it’s easy money.

 

Photo: Art Gallery ErgsArt via Flikr, cc license.

 

On the “Bay State Boondoggle”

5822024293_6059e9d1ff_zThe Boston Globe recently ran an article discussing layoffs at Baystate Health, a large health system in Western Massachusetts.  The system is planing to lay off 300 employees to try to close a $75M deficit.  According to the Globe, the deficits are mainly driven by declining Medicaid reimbursement, but, more interestingly, by a $23M hit to Medicare revenue driven by a mistake made by Partners Healthcare, a health system on the other side of the state.

Here’s the fascinating backstory.

Under nearly impenetrable hospital payment rules, Medicare must reimburse a state’s urban hospitals for employee wages at least as much as it reimburses its rural hospitals. As a result, Nantucket sets the floor for wage reimbursements at hospitals across the state. And because Nantucket’s wages are high, due to its remote island location and steep cost of living, that has created bonuses for many other Massachusetts hospitals in recent years.

Tom Keane, writing for the Globe in 2013 noted that Cottage Hospital (which treats 150 inpatients a year) has a disproportionate effect on healthcare payments nationally:

The scam was, no question, wicked clever. Medicare is the federal program that covers health care for those over 65. Under its rules, labor-related payments to urban hospitals have a floor that is equal to wages at a state’s rural hospitals. In the Bay State, it turns out there’s only one such qualified rural hospital: the lovely Nantucket Cottage Hospital, just at the edge of the island’s historic district. Of course, we’re not talking some godforsaken region of Appalachia here, where land is cheap and wages crushingly low. Rather, Nantucket is the playground of the wealthy, and everything is exceptionally expensive

The deal (which was formalized in the ACA) became known as the Bay State Boondoggle.   It generated outrage in other states because CMS rules mandate that increased reimbursement in one area of the country has to be offset by reductions in others.  Thus, the $250-350M in additional payments received by Massachusett’s 81 hospitals came at the expense of hospitals in most other states.

It was no surprise when the presidents of the Missouri and North Carolina Hospital Associations suggested that “karma” was in play when Partners made a huge accounting mistake earlier this year.  Somehow, consultants hired by Partners underestimated wages at Nantucket Cottage, and submitted artificially low cost-of-labor numbers to CMS.  This meant that Medicare reimbursement fell dramatically for all hospitals in the state.  Partners apparently recognized the error, but their petition to CMS to allow for corrected data to be submitted was recently denied.  All Mass. health systems (particularly Lahey, Baystate and Partners) are dealing with the fallout.


 

What’s perhaps counterintuitive is that despite generous Medicare and commercial reimbursement, Mass hospitals aren’t getting rich.  Here is the 2015 CHIA report on acute care hospital margins in Mass: the statewide median is 2.9%

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Perhaps there is some irony in the fact that, despite the “boondoggle” rates, Nantucket Cottage had a total margin of -6%, driven by a -14.4% operating margin…

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You have to conclude that if reimbursement isn’t the problem, then costs must be. As I’ve noted, before, MedPAC sees excess capacity as the primary problem.  I think hospitals are starting to think this way as well.

After all, if this were all about the Partners accounting error, layoffs shouldn’t be necessary in Western Mass:  rates will reset again in 2017 so this would be a one-year pain point.   But, if you believe that there will be rationalization of reimbursement rates (due to intense pressure on Medicaid, increasing unwillingness of commercial payers to cross-subsidize Medicare, and a legislative solution to the Boondoggle) then getting costs under control is the only path forward.  Will the Baystate layoffs be a harbinger of things to come?

 

 

 

 

Cost is Ruining the Patient/ Healthsystem Social Contract

It’s Summer in Boston and the annual migration of Bostonians leaving town (replaced by carloads of tourists headed in) is underway.

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I’ve been keenly observing the influx of out-of-state license plates because it brings a wider sample of cars  to support my theory that the number of people applying collegiate stickers to their car windows has fallen dramatically.  Today, based on poor sampling science (my counting cars at a downtown garage) fewer than 5% of cars proudly display a college sticker.  This number seemed far higher a decade ago.

It turns out that my anecdotal observation actually tracks with data in the academic literature.  “Advancement” offices recognize that engaged alumni (presumably those that would put a sticker on their car) are declining.

According to the Council for Aid to Education, in 1990, 18 percent of college and university alumni gave to their colleges.  By 2013, that number was less than 9 percent— a record low and a trend that has persisted for more than two decades.

What’s interesting is that a very small number of donors contribute the bulk of the dollars: The University of Waterloo analyzed their alumni donations and found that <1% of alumni gave 78% of the over $150M dollars raised.  Here is their breakdown:

 

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The data suggest that a handful of donors are stuffing the coffers while the bulk of alumni have tuned out.  The Waterloo authors noted:

[It’s] a classic example of the 80/20 rule, except in our case it’s more like an 80/1 rule.


What’s behind this disengagement?

In a 2014 article, author Dan Allenbee argues that the rising cost of college has alienated many alumni.

Back when the cost of [the college] experience was relatively low, alumni felt like they had gotten a deal and were more willing to give back after they graduated… In the last decade, the price index for U.S. college tuition rates grew by nearly 80 percent—almost twice as fast as growth in medical care and more than twice as fast as the overall consumer price index, according to U.S. Labor Department statistics. Although tuition increases have slowed recently, data from the College Board suggests that federal aid has not kept up with rising costs, resulting in students and families pay- ing more out-of-pocket expenses. 

How we expect alumni to give back when they haven’t fished paying the original bill?

A 2016 piece in The Yale News argues that changing social norms seem to be a cause:

Alumni participation rates in giving hit an all-time low of 33.7 percent this year after dropping 25.61 percent in the last decade — the biggest fall in the Ivy League. And this decrease has primarily been concentrated among the younger classes: In the past 10 years, there has been an 11 percent increase in the number of alumni solicited, but a 26 percent decrease in participation.

“There [used to be] a supposition that there were things that you did,” Acting AYA Executive Director Jenny Chavira ’89 said. “And you did them because you did them.”


At a minimum, this trend in higher education serves as a harbinger for healthcare.  With the colleges, what we’re witnessing is the breakdown of a long-standing social contract between organizations designed to serve the community, and the people that they serve.  There is a silent majority who used to proudly display their allegiance to organizations and who now feel less affiliated.

If we believe that the weakening of the bond between social mission organizations and individuals is due to citizen’s perceptions that they aren’t getting value for money, then healthcare has a brewing problem.

This won’t be an issue of declining philanthropy: A few massive donations from a handful of benefactors will make up the gap.  The bigger long term issue for healthcare systems is declining consumer loyalty.  The erosion of the organization/ patient social contract can only lead to a future with fewer brand-name consumers and more buyers shopping for deals while “interlining” between systems (a trend that I wrote about last year).  Cost (or the ability to save a couple of bucks in a high-deductible plan) drives point-of-care decisions, for sure.  More important (and more insidious ) is the way that high cost/low value care impacts how patients feel about the patient/healthsystem relationship.

 

 

 

On the Interstitium

For years I worked as a pediatric emergency physician staffing the only Level One pediatric trauma center in what was (and is) one of the poorest states in the union.

Tragedy is a regular visitor in these kinds of places. Among the usual hordes of kids with sore throats, and bronchitis, and assorted rashes there were the true horror stories:  the children who arrived silent with fear after car crashes that battered their families, and the kids found face down in pools.

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At times like that our team would pull together, working quietly and with great purpose: around the bed would gather the nurses who had been at this for decades, the respiratory technicians, the wide-eyed residents, sometimes frightened parents who often looked as though they’d been torn apart atom by atom.

At those times, while we worked on tiny children, I often had the sense that we had somehow entered a different place defined by its amorphous nature, without walls or structure. Time was marked by the completion of tasks: the placing of a line, the passing of a tube, the addition of a medicine or the change to a ventilator setting.

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Blended FFS and Capitation: Healthcare’s “Protective Collar” Paradox

Over a couple of posts I’ve discussed how difficult risk contracts can be for healthcare systems transitioning from fee-for-service.

There are three main problems for systems trying to blend FFS and capitation-payment systems.  Two have been the subjects of earlier posts:

  1. Systems growing risk capability need to make big investments in population health and have to tolerate a transitional “straddle” period where the margins from FFS fall and the performance in risk hasn’t yet caught up with the cost of the risk infrastructure.
  2. Systems that take on a blend of FFS and risk contracts are generally loathe to differentiate services on the basis of insurance status.  This means that FFS patients receive receive care management interventions available to all patients but funded by risk dollars.  The improved wellness of the group’s FFS patients accrues to the insurer.

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Healthcare’s “Modern Movement”

For most of my childhood our next door neighbor, Nick, ran a niche sports magazine from his home.  Trained as an architect at the University of Toronto, Nick went on to work (for only a couple of miserable years) as an municipal architect with the city before dedicating himself full-time to sports.

One of Nick’s most memorable stories involved the Regent Park housing project near our home, which he had helped design.  Build in the 1950’s, Regent Park was an experiment in social engineering.  Always a tough area, after the War the City made big plans to raze Victorian era homes and install multi-story apartments instead.

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Regent Park, Toronto,  in the 1950’s, rising behind existing housing

By all accounts the attempt to improve living conditions gradually failed: only a few years later, the new apartment blocks quickly became run-down and I remember the area being hardscrabble through the 70’s and 80’s when I was a kid.

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Nick often commented on how Regent Park stood as an example of a profound disconnect between the social/ architectural engineer’s ambitions and the grim realities of poverty.

For him, nothing symbolized this disconnect more than the pass-through windows that the architects designed into each new apartment in the early 1950s.   The architects gamely imagined that the windows would allow hot roasts to be passed from the kitchen to the dining room during large family Sunday dinners. The reality of life in the “social housing” apartments was something quite different.

 


A lot has been written about the Regent Park development.  It stands (much like Chicago’s public housing projects) as an example of architecture’s “modern movement”.  This post-war urban planning philosophy arose in response to dreadful urban living conditions, and proposed orderly complexes as a way of “renewing” neighborhoods.

Urban designer Ken Greenberg writes about history of the “modern movement”.   Jann Pill, commenting on Greenberg’s work, notes:

The modern movement was motivated by what Greenberg calls “a sincere humanist urge” to address the substandard housing, overcrowding, pollution, noise, soot, disease, and other features of industrial cities that emerged after the Industrial Revolution. The modern movement was based on the premise that the methodical logic that had successfully applied inventive engineering to industry could also be applied to how people lived their lives.

The “modern movement” looked at housing as a technological and engineering challenge.

The early modernists believed that the primary roles of a city could be identified, in the same way as the mechanical operations of industrial processes can be identified. The belief was that after the roles would be identified, they could then be simplified, separated, and made to work more efficiently.

In a proposed scenario advanced by prewar and postwar modernist architects, people would be housed in “towers in the park” – high, widely spaced apartment blocks, with lots of green space surrounding individual buildings. Work would be performed in modern factories and offices. Recreation would take place in sports complexes. Cars would move people between zones. Greenbelts would separate the zones.

In the interest of minimizing “friction” and maximizing “efficiency” in what was called the Functional City, there was to be no mixing of zones or of functions. The application of these principles gave rise to large numbers of postwar “urban renewal”  projects based on slum clearance and redevelopment.

The result was a predictable conflict between the “city as machine” and the behaviors, desires and decisions of the humans who lived within them.


Working in healthcare, I’m often reminded of Nick’s pass-through window anecdote.  When I was much younger I worked as a paramedic and spent a lot of time in the homes of all kinds of folks. It was always disheartening to find detailed hospital discharge papers (specifying wound care, medications, repeat visits, PT/OT and the like) on the table in a kitchen with no food.   No surprise that the paramedics were back.

In this era of so-called accountable care, are we living through healthcare’s modern movement?  As I contemplate “quality” metrics that require “compliance” with medications, and improvements in diabetes markers–  I wonder whether the health administrator’s perspective of the world is comparable to that of earlier urban architects.  We spend time building processes and institutions to standardize healthcare delivery, to then be disappointed when we find that complex human behavior is inherently resistant to process.  Our idealized systems are divorced from human calculus.

As we build the healthcare systems of the future, maybe we should stop to evaluate the number of pass-through windows implicit in our plans…

 


Photo:  City of Toronto Archives.

 

 

 

Witness the Rise of the Matchmaker

My family and I just got back from a relaxing vacation put together by a travel agency that we found through Zicasso.  If you haven’t come across the site, Zicasso is a “matchmaking” website where consumers  describe a complex trip they’d like to take.

9496054340_8b68a80c80_zThe website has a roster of vetted travel specialists who focus on specific areas of the globe.  Three of these companies will respond to your request with a general travel itinerary and proposal.

For our trip to Asia, Zicasso matched us with three out-of-state “boutique” travel agencies who specialized in the region and who were incredibly knowledgeable.  We picked one of the proposals and ended up with an well put-together trip.  Every step along the way was expertly considered.

I’ve been giving some thought to this type of matchmaking site.  The genius of the site is that it makes travel agencies relevant again, because it makes narrow and deep knowledge available to a diffuse consumer population.

  1. Zicasso allows “experts” with narrow but deep knowledge to stay narrow.  The platform allows them to be connected to a large number of buyers looking for something very specific and complex.  As an agent, you could, for example, run a viable travel agency specializing in trips to Thailand from your home.
  2. The site empowers consumers.  Back in the day, if you decided to use a travel agency, you’d end up having to rely on the professed expertise of a generalist.  On a matchmaking site you compare offers, and also see reviews left by other travelers.

It’s an interesting trend, because in this era of wholesale “cutting out the middleman” and self-service on sites like Expedia, boutique travel agencies are in demand and seem to be doing a lot better than the generalist corner travel agency.

We’ve seen matchmaker sites before, or course. I’m reminded of the famous “when banks compete” ads from Lending Tree:

Dr. Jack Guttentag, a Wharton professor of finance (and curator of the excellent “The Mortgage Professor” website) has criticized Lending Tree as a lead generation site, with inaccurate and incomplete information.  Mortgages, Dr. Guttentag argues, are too complex and individualized for website offers to be accurate. He argues that the site is effectively a lead generator for banks that are willing to pay the largest finder’s fee.

It strikes me, though, that the key distinction between Lending Tree and Zicasso is that mortgages aren’t distinct enough.   Zicasso woks because it is matching consumers who have a very narrow need with agents who have narrow expertise.


The implications for healthcare are obvious, of course.

I first wrote about “skinny” or unbundled medical networks in 2014. My sense, at the time, was that transparency, innovation and specialization were leading consumers to “skinny platforms” in education and healthcare where narrow “star” performers competed against more expensive generalists.  This was particularly that case when patients needed something quite specific. I wrote:

We are seeing the emergence of “skinny platforms” which support a handful of superstars: it is a profound “distillation” of the product consumers are seeking…

… there will continue to be ample business for the top group of clinicians.  But not for everyone: “stars” will be leveraged to the extent that a “star physician” with charisma, a set of expert protocols and a focused team of advanced practitioners will unseat a cadre of lower-quality doctors.

Validating the premise of that early post, I recently learned about Best Doctors, a Boston based company that, among other services, connects patients with specific and complex medical problems to physicians who specialize in that area. The company provides referrals and second-opinions for 34 million members, most who are employees of companies that contract with Best Doctors.   The firm now has a database of 53,000 physicians.

For 25 years, we have asked physicians to identify the doctors they consider the leaders in their field. Today, our peer-selected network has more than 53,000 medical experts in over 450 specialties and subspecialties.

Witness the rise of interfaces between buyers and narrow+deep knowledge.  Witness the rise of the matchmaker…

 


Photo: Nick Kenrick via Flikr, cc search