The West is Different

This post would be a lot easier to write if I could just say ‘California’ instead of the ‘west’ as I think it really is mostly about California, but I must be faithful to the truth and not take liberties.  But if you want to think ‘California’ as you read this, you would probably be mostly right.

An obtuse preamble, you are thinking.  Sorry about that. Let’s get to the story.

Mercer, the employer benefits firm, released an interesting note from their annual survey of employer-sponsored health plans. Historically, and this may surprise people not in ‘the west’ (wink), the premium on HMO plans has been higher than for PPO plans.

This makes sense when you think about a couple of things.  Coverage is generally a bit richer for the HMO plans and the employee cost sharing (co-pay, deductible) usually ranges from nothing to not much.  Both of these factor into higher premiums.

But, in 2017, for the first time the HMO cost dipped a smidge below the average PPO cost.  Then in 2018, it dropped more and was almost $1,000 per employee less.  The Mercer folks were curious as to what was going on and so was I.  In fairness, they were curious first and mine just came from reading their brief.

Initial thoughts were that HMOs draw younger, healthier populations, which they do – when you don’t use a lot of healthcare, the HMO restrictions are less bothersome.  But that has always been the case, so that does not explain the recent move in relative price.

Another thought was the loss of market share.  In 1996 33% of the covered employees were in an HMO.  In 2018, that was down to 14%.  Though not the answer, it pointed to it.

That contraction in market share was not equally distributed.  In the west, HMO coverage has actually grown with 38% of employees now covered by this type of plan, but everywhere else is down to about 10%, plus or minus a point or two.  Talk to anyone in the west, especially the far west, and they act like most patients are in an HMO.  Everywhere else, say ‘HMO’ and you may get asked, ‘Didn’t those get outlawed or something?’

OK, so HMOs are concentrated in the west.  How has that brought down the national average premium so much?  See, you are now curious as well, aren’t you?

The simple answer is out west, they do the HMO thing differently.  They more often use a ‘staff model’ with a capitation payment system (providers take risk and keep the upside savings), where the rest of the country treats HMOs like one more health plan, paying providers via a traditional fee-for-service arrangement.  Since the west is so much of the market, they bring down the entire average.

The take-aways?  Reimbursement models matter; size and scale and experience and accumulated competence in a given model matters; culture and consumer expectations matter.

And ‘the west’ is different than the rest of us.  But you knew that.


Quick reminder: Join me on Thursday, August 15 at 11:30 Eastern for my webinar, ‘Top 2 Ways to Control Your Destiny – How Medical Practices Grow Fiercely Independent in 2020.’ 

Click here to register.

The Juice and the Squeeze

The reading pile this week kept turning up digital topics, which is fitting since the ‘pile’ is not really a pile, but a folder on my laptop.  Today we’ll reflect on a few random and totally unrelated things tied to the technology side of your practice.  This post either reflects an attention deficit problem or the beauty of potpourri, depending on your point of view.

Talking about data breaches reminds me of my mom stripping us boys down to look for ticks after a day spent playing in the Arkansas woods – you don’t want to find one, but then again if they are starting to dig into you, you’d rather know sooner than later.  Healthcare continues to be a high value target for the bad guys and a recent study put the cost of a breach at $408 per patient record, and that does not even include the loss of business, the disruption to productivity, or the impact on your reputation.  Do the math.  Ouch.

The OIG continues to be more and more active here, with a record enforcement and settlement year in 2018. The cops are watching and expect you to do the same.  There is no such thing as ‘perfect security,’ so you will be held to the wonderfully amorphous ‘reasonable efforts’ standard.

Here’s a data point for you: hospitals spend 4-7% of their IT budget on cybersecurity. For the financial services industry, that number is 15%.  And yours is…?

CMS announced a new pilot program that will let providers hit a button and pull down all the claims your Medicare patients have with other providers.  This is a cool idea as you won’t have to rely on your patients remembering whether they have had an MRI or a flu shot or what other doctors they have seen (the average Medicare patient sees seven different physicians a year).

Now, is that a cool idea or not?  If you have the capability to parse the data and get the physician what they need, when they need it, this will be great.  But if this is nothing more than a big, fat data dump…well, I am guessing you will pass.

We applaud CMS for the step and it will lead to good stuff because someone will solve the data dump problem.  They are pushing commercial payers do to the same.  Sema Verma seems to be a one-woman healthcare reform machine.

Speaking of your favorite government department, another study found that a whole bunch of independent physicians are bailing on the whole ‘meaningful use’ thing.  Of the physicians who ‘attested’ for their EMR in the 2011-2013 timeframe, back when the payments for the use were meaningful, only 50% of them attested in 2015.  By comparison, that rate was 70% for physicians employed by the hospital.  Even with payment penalties for no attestation, it seems the compliance juice is not worth the squeeze.  I am sure Ms. Verma would like to remind you that she inherited that idea.

Unsurprising Results

Without question, your humble author confesses to suffering from confirmation bias, just as most humans do.  But it is so easy to set your filter to see only what you want to see when you are right.

‘Humble,’ here as an adjective, might be another of my cognitive issues that need to be explored at another time.

Regular readers know that we unabashedly trust the market over governments when it comes to…well, most everything.  We are not blind to the foibles of the market; it is just the competition here sets a low bar in terms of, well, most everything – efficiency, innovation, responsiveness, allocation of capital, etc.  Healthcare, in massive need of all the above, needs more market answers and less top-down dictates.  Thus, the pleasure in sharing today’s story.

A recent study by Harvard published in the New England Journal of Medicine and sponsored by the Boston Red Sox (OK, that last part is made up, but it seemed to go with the theme of the sentence) reviewed eight years of data related to the Alternative Quality Contract (AQC) of Blue Cross Blue Shield of Massachusetts (BCBS).

Several years ago, BCBS sat down with its providers and jointly designed the AQC.  The model pays physicians a global budget with a lot of incentives for quality – both process and outcome measures. There is both upside and downside risk for participating physicians (BTW, if there is no downside, there is no ‘risk,’ it’s just a bonus) and the incentives/risks are generally larger than in government value-based care plans.

If that sounds like a delegated capitation program, that is because it mostly is, though with better labels and marketing.  And even though the People’s Republic of Massachusetts is unique compared to most markets, still over 80% of physicians in the state participate in the AQC model.  The dogs eat the dog food.

While Medicare’s much-ballyhooed ACOs struggle to realize savings that even cover the bonus payments to providers, much less give taxpayers any real savings, the BCBS AQC model reduced costs by 12% compared to the control group while improving most every quality measure.

Going back to enrollees who have been under the new contract since 2009, the smart folks at Hah-vard found the average annual increase in medical claim costs was $461 lower than for members enrolled in a traditional fee-for-service plan and well below the Massachusetts average.

During the early years, savings were mostly achieved by redirecting referrals from high-priced to lower-priced providers (e.g. hospitals, specialists), but of late they have been driven by lower utilization of things like labs, imaging, ER visits and specialty drugs.

This is hard, but not that complicated.  Give independent physicians the right incentives and they can, and will, bend the cost curve while improving quality.

Is it biased if it is right?

What Do You Put in that Cell?

This is the second part in a series on the long-term math of overhead expenses.  Click here for part one.

Back to our imaginary financial model…why did I think it was a good idea to try to describe a spreadsheet in a blog post?

To review, we’re going to assume that what you get paid for a unit of service – a visit, a claim, a CPT, an RVU – is flat going forward.  Now flip to the expense side of the equation.

Yesterday I rudely pointed out that Medicare’s reimbursement rate in 2019 is actually, in real terms, lower than what they paid you in 1998.  During that same period, general inflation averaged 2.1% a year.  That is not a Venezuelan or Jimmy Carter kind of inflation, but compounded over two decades, it adds up.  Something that cost $100 in 1998 would now carry a price tag of over $158.

You know where this is going, don’t you?

Put a big fat zero in the cell for your future rate of reimbursement increase (and that is probably too optimistic) and put anything bigger than zero as the assumption for your rate of expense increase and it won’t be long before the divergence of those two lines starts to cause some real pain.  And many of you are in markets where a 2.1% salary increase for your staff ain’t nowhere close to what you have to provide.  Should I mention the annual increase in your health insurance premiums?  No?  Yeah, probably not.

Please forgive me for using what may sound like a self-serving example, but it is the world I know and the conversation I have with practices a lot.  Assume the all-in costs for your revenue cycle process are currently 5.1% of revenue.  You have a lot of people costs in there, so your assumption on annual increases is something bigger than zero.  Unless something else changes, it won’t stay at 5.1% for long.

Which gets to the final part of the exercise: What else would you have to believe to keep your rev cycle costs from really eating into physician income?  Here is the list:

  • You could beat the big revenue trend (zero increase in rates) and get better contracts. Some do.
  • You could turn on new revenue streams whose rev cycle costs are near zero. Nah, that is a delusion.
  • You could beat the big expense trend (costs go up every year). An even bigger delusion.
  • Your physicians and providers could crank more volume. That could happen.  You have a plan for that, or is it just a hope?
  • Your RCM team could get more productive, processing more claims per person. Speaking of having a plan, that one better come with a lot of technology investments.  You know that, right?

By the way, we could have done the same exercise for your clinical operations or general administrative staff or most any other bucket of expenses.  The math is the same.

Erosion is slow for a long time, then suddenly devasting.

The Forced Discipline of Excel

I am not sure how I ended up here, but I really like working in spreadsheets.  I tend to think in spreadsheets.  For a guy who talks a lot, you’d think my go-to application would be the word processor, but most often I default to a spreadsheet.

If I am at my laptop, odds are high there is an open spreadsheet lurking somewhere on my desktop.  Generally, I am graphing a set of data – yes, I use Excel more to make pictures than to stare at numbers.  But one of the things I most like about Excel is model building. A model is simply a numeric representation of some particular idea about the future – a set of inputs, a set of assumptions, some formulas that define how the inputs and assumptions interact with one another, then some outputs that show how the world would work out if all the math in the model somehow proved to be right.

The great thing about a model is that it forces you to take a stand on the assumptions.  When asking, ‘how much will this cost?’ or ‘how fast with that grow?’ Excel tolerates no wishy-washy answers like, ‘A lot’ or ‘I don’t know.’  Be right or be wrong, but you must be specific.  It is really good exercise for clarifying your strategic thinking.

So, I have a little modeling question for you about the financial future of your practice and the income of your partners.

The big question, the one we want our imaginary model to answer, is, ‘What is our overhead rate going to look like in five years?’  And the more important corollary, ‘What will that mean to physician income?’

As administrators can attest, physicians focus on the overhead question – a lot.  So, consider this a public service whether you are on the asking or receiving end of the question.

When we think of overhead expenses, it is right and best to think of them in terms of a percentage of revenue.   How much of our revenue do we spend on staff?  Rent? Billing? IT? Donuts?

So, let’s start with the revenue assumptions that go into our little model.

Odds are your reimbursement rates have been flat, at best, over the past several years.  We know the Medicare numbers.  In 1998, the Medicare conversion factor used to determine physician reimbursement was $36.69 per RVU.  This year, it is $36.04.  No typo there…two decades and the most important number in your Medicare reimbursement is technically, absolutely down a smidge.  Commercial rates are all over the place, but it is probably a safe assumption that your commercial rates, as a multiple of Medicare, were higher in 1998 than they are now, right?

Let’s set the assumption on future reimbursement rate increases to 0.

Dang, this will take more time than I thought, so we’ll continue with a surprise bonus post tomorrow. Two in one week!  Christmas in July!

Muffled Signals

I was a psychology major with no interest in being a shrink.  I liked business, but hated accounting.  I was either open-minded or confused.

One place that my conflicted interests have always come together is around pricing.  That pricing decisions – for any product or service – contain a mix of economics, psychology, marketing and raw chutzpah has always intrigued me.

I am drawn to, and collect, pricing stories.  One of my favorites involves the owner of a small boutique getting ready to go on vacation.  Fall inventory arrived and she needed to clear out some stuff to make room.  A shelf of knick-knacks had not been selling, so she left a note for the assistant to cut the price in half and put them on sale.  The note got misinterpreted and the price was instead doubled.  When the owner returned, she was delighted to see that her 50% off sale worked as every one of the items had sold.  She was more delighted, though curiously puzzled, when she found out what actually happened.

That kind of stuff is fascinating.

Pricing plays a lot of roles, but one of its most important is as the signaling device between producers and consumers.  How does our complex market economy work without gnomes in the back room orchestrating everything?  Pricing signals.

Pricing helps everyone know how to behave.  If there is a shortage, prices go up.  Consumers get the message to think about curtailing consumption; producers get the signal to make more.  It is a beautifully elegant mechanism that makes this big old machine work.  Sure, we lurch here and there, making or buying too much, not making or buying enough.  But amazingly, it all seems to find its way back toward the steady middle without anyone having to call a meeting.

I am thinking about pricing signals as we watch the legislative processes around surprise medical bills and prescription drug prices.  I am thinking about the value of price signals as we listen to presidential candidates pitch various versions of universal healthcare.  But what I am really thinking about is mufflers.

That is because all these ideas, in the name of wanting to eliminate some real pain for some real people, are mufflers on the signals sent to the market through the price.  And when muffled, the signals don’t do their job.

Put an externally imposed ceiling on the price of anything – rent, concert tickets, meds, physician services – and you blunt the signal to producers to make more of it.  So, they don’t.  And the very thing we needed to help bring the price down – more supply – doesn’t happen because the signal never got through.

Deep thoughts for a summer Friday, I know.  But as we collectively consider options to address some of these issues, just be aware that price controls by any other name are still mufflers and suppressors of the critical signals that make a market work.