In the 1950’s, you had to buy a box of Post’s Sugar Rice Krinkles cereal to get your free Dick Tracy Magic Decoder.  So, it really wasn’t free.

Today, I’ll give you a truly free magic decoder.  Granted, you don’t get to eat a bowl of milk-soaked crunchy sugar.  And you get to decode value-based care (VBC), not Dick’s far more interesting crime-stopper message.  So, maybe truly free is not all it is cracked up to be and you’d be better off buying a box of cereal.

VBC, the mother acronym that has given birth to many other acronyms, can be confusing, so let me give you my personal short-hand that helps me cut through the consultant-speak.  It seems there are two basic varieties of VBC and then a million variations of each.

First, there are arrangements where a group of providers have substantial financial risk for cost and care that goes beyond what they directly deliver.  Maybe it is capitation; maybe is it a Medicare shared savings program through an ACO; maybe it is a bundled payment for a surgery or episode of care.

The thing that knits all these together is that some provider at Point A in the process can do something different that reduces or eliminates a cost at Point B in the process and then gets to pocket some of the savings from that action.

For example, a surgeon (Point A) moves a case from the hospital to a lower cost ASC (Point B), reducing the total cost of that surgery.

The key here is the relatively short, very direct connection between the action at Point A and the cost reduction at Point B.  The moment this link gets long or fuzzy, then we can fit everything in the world into VBC.  Some smart (aleck) watch telling me to stand up every 60 minutes because that might reduce my risk of some chronic disease 30 years from now could be good advice but does not make the watchmaker a VBC provider.

This is capital letter VBC, the type of arrangements that can really move the needle.  It empowers and rewards providers for rethinking the entire delivery channel and eliminating costs that add no value.  That is very different from payers reducing cost by just saying ‘nyet’ to patient care.

For the patients who have complex issues that drive a lot of cost, we need providers with the scope, authority, and incentive to ‘manage’ their care.  For well-boxed episodes like certain surgeries, we want to motivate those closest to the work to eliminate non-value-added costs.

Whatever we want to call this, sign me up.

Then there is everything else masquerading as VBC that is either a) a good idea, but of a different order, b) much ado about nothing or c) a lame marketing attempt to sneak something into the VBC tent because that is where the cool kids are supposed to be.

Now, let’s make the case for why we should still want (better) fee-for-service healthcare.

Firefighters, insurance policies, your IT disaster recovery plan, toilet plungers…things we pay for that we hope to never use.  I think Congress also goes on this list, right there with the plunger.

We are digging into why we have a split between value-based care (VBC) and fee-for-service (FFS) medicine, and (spoiler alert) working toward making our case that this is a good thing that should continue.

We’ve noted that costs are not at all equally distributed, with a small number of people accounting for a lot of cost and most people consuming little to no healthcare resources in a given year. But let’s go back to that headline number – average cost per capita – for a little bit of inconvenient truth-telling.

With the election of President Obama, we collectively said, ‘Hey, we’ve got a problem here.’  Someone opened a trunk and offered us some value-based care and a cheap Rolex as the elixir to solve our woes.  Yet, the year-over-year chart shows this metric has gone up every year, just as it did before the VBC magic beans.  It is now 50% higher than it was when we kicked off the Big Reform. I am not arguing VBC is not helping, just asking that we tap the breaks on just how magical the magic pill might really be.

That being said, let’s look at where VBC makes a lot of sense.  But that requires teasing out another nuance that we’ll unpack.

For me, there are two broad buckets for various VBC schemes.  One is still mostly FFS at its core (providers get paid for providing), but with some form of quality or outcome kicker.  The other, the one with some real teeth, is when we reward providers for not providing services.  Like firefighters, we want them playing checkers instead of fighting fires.

Are we far enough removed from the 1970s HMO trauma that we can just call this second form ‘capitation’ to be more direct, or do we still break out in hives at the sound of that word?

Quick story to illustrate why this is a good idea, the very best of VBC, something we should embrace.

A large primary care group that is capitated with their Medicare Advantage plans parks their own nurses in the ERs of the hospitals in their area.  When one of their members shows up, these nurses work with the ER docs to not admit the patient unless absolutely necessary.  They get them scheduled the next day with the PCP, get them care at home, get them a monitor or some meds…whatever is needed that doesn’t require being admitted.

Simple math…the group makes money in its share of the savings by not providing unnecessary care…hospitals are expensive…don’t use if at all possible.

So yes, it is a good thing to work to not deliver a lot of care, especially for those at the high end of the spending distribution.  That is value.

But that answer does not work universally.

We are exploring the divide in healthcare between those who only live in a value-based care (VBC) world and those whose thinking about VBC is limited to whether the hyphen is required.  We are really trying to understand why that might be the case, other than the SOB doctors clinging to their fee-for-service (FFS) filthy lucre.

It is worth noting that many equity investors are backing various VBC plays. VBC is their calling?  VBC is a ‘right’ and it is their mission to bring it to everyone? Can we dispense with that canard and try to have a real conversation about what is happening and why?

Last week, we channeled our inner Vilfredo Pareto, the Italian economist who in 1895 noted that wealth was not evenly distributed and gave us the 80/20 rule that more formally carries his name, and noted what we (two uses of the royal ‘we’ already…just in case this blog gets sued, I want to spread the risk to myself as well) believe is, maybe, the single most important healthcare economics bumper sticker:

5% of the population accounts for 50% of the total cost.

Vilfredo, we are right on track…the top 20% of individuals account for 82% of all expenditures.

Let’s spend a quick minute on this, the hard to solve, end of our skewed distribution curve.

Some of these are one-off cases that just ‘actuarially are’ – the $2M neonate, my buddy who was nearly killed in a head-on crash by a driver high on meth (Happy ending – next month, to demonstrate that he really can walk again, he will escort his daughter down the aisle and give her away). These are the miracles of healthcare, but life does not come cheap.

Most of the people on the expensive end of the tail are old or sick or both.

Not a little old, like ‘old enough to look at the brochure for the seniors-only community without shame, but the frail elderly.  A newly minted Medicare beneficiary doesn’t suddenly start costing a boatload more.

And not a little sick, but multiple chronic diseases and many comorbidities sick.  Really sick.

Yes, the first tends to lead to the second, which is why the last year of life is frequently so much more expensive than those that precede it.

Here is one specific example of just how skewed the skewness is…and a little more math for our English majors.

There are about half a million Medicare beneficiaries with end-stage renal disease (ESRD).  Out of its $800 billion budget, Medicare spends almost $50 billion a year on ESRD.  That is over 6% of all Medicare spending.  And for those who like to quote stats at cocktail parties…that means that ERSD spending by CMS accounts for a little more than 1% of the entire federal budget. One condition, 1%.

So yes, we need a different model for the people who are going to incur such disproportionate costs.  Thus, the birth of VBC.

More next time.

One of the lasting positives that I take from US politics over the past decade is the steep reduction in my consumption of news reporting.  They just made it too compelling to instead listen to 1970’s rock instead. Not only is my peace of mind and mental health better, my intelligence and knowledge have improved.  Yes, yes, it was a low bar, but we’ll take the gains, regardless.

Like the kid in ‘Talladega Nights’ who was ‘all jacked up on Mountain Dew,’ living on too many headlines and bite-sized stories – even if they are true – is dangerous.  You have as great a chance of being misled as being truly informed.

An example is one of top line healthcare numbers that most frequently gets quoted in drive-by news stories – per capita spending is now about $12,000 annually.

Simple math if you can manage those confusing zeros to know your trillions from your billions…about $3.8 trillion divided by 320 million people.

The 12k headline is handy.  It is big, twice as big as whoever is next; a lot bigger than it used to be.

And yes, it is true.

But deceptive.  Averages like this can be.  Especially in the case of extreme skewness.  Your challenge is to use ‘extreme skewness’ in conversation today. Double points if you can work it in with your teenager.  Maybe something about Cardi B’s Instagram followers.  Statistics and Cardi B all in one post.  That is why you subscribed here, isn’t it?

Here comes one of the most important starting insights about US healthcare, one that is necessary to begin to understand the issue we are exploring over a couple of weeks: why does one half of the industry think value-based care has taken over everything while the other half puts all this VBC chatter in the same category as the recent spike in UFO sightings that has the Pentagon abuzz.

Yes, we spend about $12,000 per person per year on healthcare.  That comes to almost $4 trillion dollars.  But 5% of the population (about 16 million people…less than New York, more than Illinois) accounts for half of that spending.  The same simple math says this group rings in at almost $120,000 per person, 10x the average.

More simple math (come on, English majors, don’t be scared…you can do this) shows that everyone else, 300 million+ people, incur about $625 each.  No need to worry about the confusing zeros here.  There are none.

$625.

People spend more on coffee.

More so, about one in five people in the US don’t even touch the healthcare system in a given year.  $0 per person.

This economic reality, these extremely skewed data, is a fundamental reason behind our split, parallel payment and care delivery universes.  With this reminder as our starting point, next week we’ll explore why it drives us to what we have.