HMPI

Medical Surge: Lessons for a Pandemic from Mass-Casualty Management (Baruch College, Indiana University, 3/16)

Alex F. Mills, PhD, Zicklin School of Business, Baruch College, and Jonathan E. Helm, PhD, Kelley School of Business, Indiana University

Abstract

Contact: Alex.Mills@baruch.cuny.edu

What is the message?

Three steps that hospitals can take today to prepare for COVID-19 or any similar pandemic are (i) limit predictable variability by cancelling or smoothing elective surgeries in advance of an epidemic’s impact rather than waiting until inpatient units are overwhelmed, (ii) centralize staffing, resource-planning, and allocation decisions, while employing healthcare coalitions to quantify and locate scarce resources like ICU beds and ventilators, and (iii) prepare a plan for triage guided by the principle “do the greatest good for the greatest number”.

What is the evidence?

The observations are based on recent research in healthcare operations management, as well as the authors’ own discussions with healthcare providers.

Timeline: Submitted: March 13, 2020; accepted after revisions: March 14, 2020

Cite as: Alex F. Mills and Jonathan E. Helm. 2020. Medical Surge: Lessons for a Pandemic from Mass-Casualty Management. Health Management, Policy and Innovation (HMPI.org), volume 5, Issue 1, special issue on COVID-19, March 2020.

What is “Medical Surge” and Why Does It Matter?

Medical surge is the ability to rapidly increase the supply of medical services in a community to care for a volume of patients that is larger than normal. Medical surge is one of four core capabilities in the Hospital Preparedness Program1. We draw lessons from the operational literature in surge capacity, mass-casualty management, and healthcare operations management that can be applied to improve medical surge in the context of a pandemic.

Much research on operational measures to create surge capacity has been done with mass-casualty incidents in mind. Both mass-casualty incidents and epidemics pose challenges to the healthcare system that are primarily operational rather than clinical. Healthcare providers usually know what kind of care the patients need, but lack the resources to provide it. Many of the lessons from mass-casualty management can also improve the management of an epidemic in the context of the four-phase emergency response framework consisting of mitigation, preparation, response, and recovery (see Figure 1)2.

In this article, we use these lessons to outline specific operational steps hospitals can take at three points to respond to an epidemic: in the mitigation phase before resources are severely limited; from the preparation phase into the response phase when resources become severely limited; deep in the response phase when resources are completely overwhelmed.

 

 

Figure 1

Mitigation Phase: Shift Gears

Before resources are severely limited: Minimize controllable volume and variability in hospital workload by limiting or smoothing elective surgeries and planned admissions in preparation for epidemic response.

Efforts to improve medical surge capacity often focus on increasing supply by calling in additional personnel, using physical space not generally designated for patient care, and modifying standards of care3. The demand side of the equation deserves equal attention, especially in the time period before resources are completely overwhelmed, which is when actions to control demand have the most impact. To limit demand, researchers have proposed two types of actions: (1) early disposition of existing patients, and (2) controlling new demand. Because pandemics have a gradual onset as compared to mass-casualty incidents, procedures for early disposition of existing patients (point 2) 4,5 are less relevant, while actions to control new arrivals (point 2) take on greater importance.

Elective surgeries and other planned admissions have two impacts on hospital operations: volume and variability. The presence of elective surgeries increases the overall volume of patients in the hospital, which affects the number of available inpatient beds, but the additional variability induced by these arrivals is more pernicious because it has a cascading effect throughout the hospital.

Elective surgeries are scheduled based on the convenience of the patient and provider, not the hospital (see Figure 2, which shows the arrival pattern for elective surgeries at one hospital the authors have worked with). As a result, these planned arrivals are concentrated together, artificially creating resource scarcity at key times of day and days of the week6. The effect of this predictable variability can be felt not just in inpatient units where these patients are hospitalized, but also in the Emergency Department, where lack of inpatient beds at key times worsens boarding and redirects resources away from arriving patients. Smoothing arrivals by spreading out elective surgeries reduces costly actions such as early disposition and increases surge capacity7.

Figure 2

Canceling or postponing elective surgeries and planned admissions in advance of an epidemic, before resources are severely limited, will delay the impact of the epidemic on a hospital’s operations. Equally important, for planned admissions that cannot be deferred, smoothing workload reduces the impact of these predictable arrivals on resources that are needed for epidemic response. Smoothing reduces large swings in hospital occupancy that cause the hospital to be overloaded at certain times and underloaded at others. Because overloading is the greatest concern in an epidemic, mitigating actions can substantially improve responsiveness, access, and quality of care for affected individuals. Much of the benefit from workload smoothing can be obtained by reshuffling surgery schedules across weekdays, for example moving some surgeries from Tuesday to Friday, though complete workload smoothing may require some electives to be performed on weekends or overnight to minimize the strain on the hospital’s resources that are needed to respond to the epidemic.

Preparation Phase: Getting Ready to Respond

When resources are severely limited: Centralize and coordinate decision-making on physical resources and staff.

As an incident evolves and demand increases, responsibility shifts from individual hospitals to hospital networks and the community. In this mode of operation, centralizing information and decision-making becomes the most important operational step that healthcare providers and communities can take, because any single hospital is ill-equipped to deal with a large-scale pandemic. Specifically, centralization enables healthcare organizations and communities to most effectively deploy their full set of care resources, avoiding misallocation caused by variability in geography and volume caused by disease spread through resource pooling. Effective incident response requires two critical resources: physical and human. Here, we highlight several innovative operational mechanisms that can facilitate pooling and optimal deployment of both types of resources.

Physical resource management: Understanding the location and capabilities of each available physical resource within a community is the responsibility of healthcare coalitions. A healthcare coalition is a “group of individual healthcare organizations in a specified geographic area that agree to work together to maximize surge capacity and capability during medical and public health emergencies by facilitating information sharing, mutual aid, and response coordination”8. As part of our research, the authors have worked with MESH, a healthcare coalition in Indianapolis, IN that facilitates information gathering and sharing among dozens of healthcare providers in central Indiana. A key role of healthcare coalitions is to support community response by enabling sick patients to be taken to facilities that will be most likely to be able to care for them. In the absence of structured information sharing via healthcare coalitions, hospitals tend to be reluctant to share detailed capacity information, citing concerns about competition9.

While emergency medical services typically have some visibility into available capacity of Emergency Departments, we demonstrated that more granular information provided by a healthcare coalition regarding the availability of beds in specific units (such as the ICU) can substantially improve the response to a mass-casualty incident9. A similar lesson can be applied to an epidemic.

For example, COVID-19 causes severe respiratory symptoms that often require ventilation and intensive care10. In responding to an epidemic of COVID-19, the geographical distribution of ventilators and ICU beds in a community likely will not match the geographical distribution of patients or the capacities of Emergency Departments. For example, using data only about Emergency Department capacity may direct a patient away from a hospital with a highly utilized ED, even though that hospital may have available ventilators or ICU beds, necessitating an unnecessary transfer later.

Sharing information on specific physical resources and providing centralized coordination will maximize the utilization of the community’s combined healthcare resources. This can reduce delay for patients in accessing care and maximize the number of patients that can be effectively treated during the pandemic.

Human resource management: Beyond the physical resources required to support treatment of patients, medical surge capacity also suffers if there is inadequate number of staff, such as nurses. Recent research in healthcare operations management has studied the trend toward centralized staffing in larger healthcare systems such as the Cleveland Clinic, Indiana University Health System, Kaiser Permanente, Denver Health, Seattle Children’s Hospital, and Intermountain Healthcare. The move to centralized staffing can significantly improve response to an epidemic by addressing geographic variability in healthcare staff.

A centralized staffing approach allows a health system to re-allocate nurses from their resource pool to areas with the greatest need, helping to maintain safe nurse to patient ratios. This system-wide approach mitigates common problems that lead to understaffing in certain hospitals, while other hospitals have sufficient or excess capacity. Along with centralized staffing comes centralized data-systems to enable a data driven approach using analytics models to predict staffing needs across the system and allocate resources most effectively11.

Centralized staffing also enables data-driven, proactive hiring of temporary nurse staff. With an accurate disease models, such as the SEIR model recently developed by the World Health Organization (WHO) for COVID-1912, it is possible to predict demand on a regional basis across time. A centralized staffing approach can facilitate the hiring of temporary nursing resources such as agency nurses and travel nurses13.

Because it can take between several weeks and two months to onboard temporary nurse staff, predictive models and data-analytics must be used to enable a proactive approach to best match supply and demand to the evolving dynamics of an epidemic. Leveraging a centralized data system can help health systems coordinate hiring and allocation of nurse staff to best match supply and demand across the network of hospitals, and the flexibility of centralized scheduling can most efficiently use the additional nurse staff to provide agility for healthcare organizations to quickly react to dynamic fluctuations in workload caused by disease spread.

Centralizing information and decision-making about physical capacity and staff is a critical operational step that providers must take to effectively prepare for and respond to an epidemic. Both healthcare coalitions, which coordinate a community’s healthcare assets, and hospital systems, which have the ability to centralize staffing decisions, play a key operational role.

Response Phase: Making it Work for as Many as Possible

When resources are completely overwhelmed: do the greatest good for the greatest number.

At some point in an epidemic, healthcare resources may become completely overwhelmed. In this situation, it is especially important to have a plan for allocating the available medical resources. Here, mass-casualty management provides a clear lesson: providers must shift focus from doing the greatest good for each patient to doing the greatest good for the greatest number14.

Consistent with this principle, a number of triage systems have been proposed for mass-casualty management15. All have one thing in common: they do not use scarce resources to treat patients who have little chance of survival, unlike in normal hospital operations, where the most severe patients always have the highest priority for treatment.

Recent mathematical modeling research has reinforced this idea and added additional context to our understanding of how to prioritize patients to maximize the total number of survivors16–18. When a resource limitation is expected to last a short period of time, priority should be given to patients who are deteriorating most rapidly; but when the resource limitation is expected to last a long time, priority should be given patients who have a high likelihood of survival if treated19. Because pandemics tend to last for a long period of time, in preparing for a pandemic the principle of “do the greatest good for the greatest number” translates into a policy of prioritizing patients who are most likely to survive in the event that resources become completely overwhelmed.

Looking Forward

Epidemics and mass-casualty incidents share a common feature. They pose an operational challenge to the healthcare system and require medical surge, an increase in the supply of healthcare services to meet increased demand.

Based on the lessons from research in healthcare operations management, we propose three steps that hospitals can take today to prepare for COVID-19 or any similar pandemic: (1) limit predictable variability by cancelling or smoothing elective surgeries in advance of an epidemic’s impact rather than waiting until inpatient units are overwhelmed, (2) centralize staffing and resource-planning and allocation decisions and employ healthcare coalitions to quantify and locate scarce resources like ICU beds and ventilators, and (3) prepare a plan for triage guided by the principle “do the greatest good for the greatest number”.

References

  1. Office of the Assistant Secretary for Preparedness and Response. 2017-2022 Health Care Preparedness and Response Capabilities. U.S. Department of Health and Human Services; 2016.
  2. Centers for Medicare and Medicaid Services. Emergency preparedness standards for medicare and medicaid participating providers and suppliers. 2013;78(FR):79081.
  3. Hick JL, Hanfling D, Burstein JL, et al. Health care facility and community strategies for patient care surge capacity. Annals of Emergency Medicine. 2004;44(3):253-261.
  4. Kelen GD, Kraus CK, McCarthy ML, et al. Inpatient disposition classification for the creation of hospital surge capacity: a multiphase study. Lancet. 2006;368(9951):1984-1990.
  5. Jacobs-Wingo JL, Cook HA, Lang WH. Rapid Patient Discharge Contribution to Bed Surge Capacity During a Mass Casualty Incident: Findings From an Exercise With New York City Hospitals. Quality Management in Health Care. 2018;27(1):24-29.
  6. Rothman RE, Hsu EB, Kahn CA, Kelen GD. Research priorities for surge capacity. Academic Emergency Medicine. 2006;13(11):1160-1168.
  7. Mills A, Helm J, Wang Y. Surge Capacity Deployment in Hospitals: Effectiveness of Response and Mitigation Strategies. Manufacturing and Service Operations Management, forthcoming. 2020. doi:https://dx.doi.org/10.2139/ssrn.2955766
  8. Barbera JA, Macintyre AG. Medical Surge Capacity and Capability: A Management System for Integrating Medical and Health Resources during Large-Scale Emergencies. US Department of Health and Human Services; 2007.
  9. Mills AF, Helm JE, Jola-Sanchez AF, Tatikonda MV, Courtney BA. Coordination of autonomous healthcare entities: Emergency response to multiple casualty incidents. Production and Operations Management. 2018;27(1):184–205.
  10. Xu Z, Shi L, Wang Y, et al. Pathological findings of COVID-19 associated with acute respiratory distress syndrome. The Lancet Respiratory Medicine. 2020.
  11. Wright PD, Mahar S. Centralized nurse scheduling to simultaneously improve schedule cost and nurse satisfaction. Omega. 2013;41(6):1042–1052.
  12. Pan J, Yao Y, Liu Z, et al. Effectiveness of control strategies for Coronavirus Disease 2019: a SEIR dynamic modeling study. medRxiv. 2020.
  13. Seo S, Spetz J. Demand for temporary agency nurses and nursing shortages. INQUIRY: The Journal of Health Care Organization, Provision, and Financing. 2013;50(3):216–228.
  14. Frykberg ER. Disaster and Mass Casualty Management. Springer; 2007.
  15. Lerner EB, Schwartz RB, Coule PL, et al. Mass casualty triage: An evaluation of the data and development of a proposed national guideline. Disaster Medicine and Public Health Preparedness. 2008;2(Supplement 1):S25-34.
  16. Sacco WJ, Navin DM, Fiedler KE, Waddell RK, Long WB, Jr RFB. Precise formulation and evidence-based application of resource-constrained triage. Academic Emergency Medicines. 2005;12(8):759-770.
  17. Mills A, Argon N, Ziya S. Resource-based patient prioritization in mass-casualty incidents. Manufacturing and Service Operations Management. 2013;15(3):361-377.
  18. Dean MD, Nair SK. Mass-casualty triage: Distribution of victims to multiple hospitals using the SAVE model. European Journal of Operational Research. 2014;238:363-373.
  19. Mills A. A simple yet effective decision support policy for mass-casualty triage. European Journal of Operational Research. 2016;253:734-745.

 

 

Graphic Insights: Predicting Coronavirus Risks (Carrot Health, 3/16)

Kurt Waltenbaugh and Won Gabriel Chung, MD, Carrot Health, Inc. [i]

[i] Carrot Health, Inc. is based in Minneapolis, Minnesota. The Carrot MarketView™ software platform incorporates social, behavioral, environmental, and economic barriers to health data to deliver a 360 degree view of the consumer, providing actionable insights to inform growth, health, and quality. Contact: https://carrothealth.com/contact/

Abstract

Contact: kurt@carrothealth.com

What is the message? Graphical tools can help predict the geographic intensity of COVID-19 risks.

What is the evidence? Analysis based on published data concerning risk factors for coronavirus infection, including smoking, COPD, high blood pressure, diabetes, age, and gender.

Timeline: Submitted: March 12, 2020; accepted after revisions: March 14, 2020

Cite as: Kurt Waltenbaugh & Won Gabriel Chung. 2020. Graphic Insights: Predicting Coronavirus Risks. Health Management, Policy and Innovation (HMPI.org), volume 5, Issue 1, special issue on COVID-19, March 2020.

Two Tool Kits When Disease Breaks Out: Medical Intervention and Data

Infectious disease outbreaks like the Coronavirus Disease 2019 (COVID-19) are frightening and disruptive. As a society, we have two major toolkits at our disposal to limit the spread of outbreaks, and to minimize their impact on health, life, and the economy.

Medical intervention: The first toolkit is direct medical intervention. Right now, public health officials, medical researchers and clinicians are working to quarantine people with the virus, discourage travel to impacted areas, and identify and treat carriers as quickly as possible. Testing kits are being distributed, and a vaccine is in development.

Data: The second toolkit is data. With the right data, public health personnel can turn panic and passivity into preparation and progress, directing intervention efforts and resources more effectively and appropriately.

In London in 1854, Dr. John Snow, an obstetrician, used data to trace incidents of cholera infection to its source: a contaminated well. With COVID-19, we already know the source of the SARS-CoV-2 virus, but we can use data to predict the vulnerability of a given community, should the outbreak arrive.

Carrot Health’s COVID-19 Risk Index

At Carrot Health, we use robust data analytics to predict and help manage the health risks of patients and members for our health plan and provider customers. We have developed a risk index that we believe can help providers, plans, communities, public health workers, and political leaders make more informed decisions around forecasting and managing the impact of COVID-19.

Our index predicts the populations and communities that are most susceptible to the negative impacts from an outbreak. In other words, we’re not predicting where and when a COVID-19 outbreak will occur – we’re identifying who is most vulnerable. This analysis can be used to help inform public health and intervention decisions at the national, regional and community levels.

As of March 11, 2020, scientific research on the SARS-CoV-2 virus is still limited. We based our initial index on research published in two recent studies published by the Journal of the American Medical Association[i] and the New England Journal of Medicine[ii]. These articles identified six factors that influence both the risk of the Coronavirus transmission and the severity of its impact, including: Smoking status; COPD status; high blood pressure status; diabetes status; age (increase in risk for those over 65); and gender (increase in risk for males).

As scientists and public health professionals learn more about COVID-19, our index will evolve. For example, current research suggests that approximately 2-4 percent of people with the virus die, depending on where in the world they live. So far, no children have died, and deaths are higher in males and much higher for those over age 65. New data and additional studies might change those assumptions. In addition, the actual infection rate may be higher than reported, which would mean that mortality rates could be lower than currently estimated.

With those caveats in mind, Figure 1 shows our predicted COVID-19 population risk index at the county level (red = high, green = low):

Figure 1. Forecasted COVID-19 Population Risk, County-Level

Examining the national map, we can see the age-related impact. Counties which skew older show up with higher risk levels. Older adults also show higher rates of chronic disease, specifically COPD, hypertension, and diabetes – which further increases their vulnerability.

We can learn a great deal by zooming in to the local ZIP code level. For example, Figure 2 shows forecasted risk levels in the Seattle metropolitan area (red = high, green = low):

Figure 2. Forecasted COVID-19 Population Risk, Seattle-Tacoma

As the map in Figure 2 shows, variations across a metro area can be significant. Identifying these more granular pockets of risk can help coordinate resources to protect those most vulnerable. With such insights, public health officials or and health providers can decide what kind of advance preparation is necessary. They can then determine where to divert scare resources like ventilators and test kits, should an outbreak occur. They can monitor specific populations or neighborhoods and move in more quickly when circumstances warrant.

Each year, 5 to 20 percent of the U.S. population gets the flu. If SARS-CoV-2 has a similar overall infection rate, the impacts will be enormous. Take Seattle as an example: in the scenario where an outbreak affects 10 percent of the at-risk population, we would expect 26,307 critical cases, and (assuming that resources are available for appropriate treatment of these critical cases) 5,266 deaths – and the relative risk to different sub-populations in different geographies is highly variable.

Looking Forward

These insights are not meant to inspire panic, but to promote thoughtful preparation. Data-driven insights will be critical in saving lives, deploying resources, and minimizing disruption, both for this public health crisis and for future ones. Ultimately, a vaccine will be produced and COVID-19 contagion may become a cyclical event similar to the current “cold & flu” season.

In the meantime, the United States remains less affected than some parts of the world — but we are more vulnerable. Our healthcare system does not promote prevention or early intervention. The combination of high cost deductibles and lack of sick days for employees discourages people from seeking or taking the care they need.

Fortunately, we also have powerful data tools at our disposal to better prepare and deploy resources, and a culture of helping those who are vulnerable. Carrot Health is making this research and analysis available to all of our customers to aid in their response to the communities they serve. We urge you to take good care of yourself, your loved ones, and your coworkers and community members during this time of uncertainty.

Please contact us if you are interested in learning more about your community.

 

Endnotes and References

[1] Carrot Health, Inc. is based in Minneapolis, Minnesota. The Carrot MarketView™ software platform incorporates social, behavioral, environmental, and economic barriers to health data to deliver a 360 degree view of the consumer, providing actionable insights to inform growth, health, and quality. Contact: https://carrothealth.com/contact/

[2] Dawei Wang, MD, Bo Hu, MD, Chang Hu, MD; et al. Clinical Characteristics of 138 Hospitalized Patients With 2019 Novel Coronavirus–Infected Pneumonia in Wuhan, China”. Journal of the American Medical Association, February 7, 2020. doi:10.1001/jama.2020.1585
https://jamanetwork.com/journals/jama/fullarticle/2761044utm_campaign=Carrot%20Health%20Insights&utm_source=hs_email&utm_medium=email&utm_content=84400289&_hsenc=p2ANqtz8H08DQVDgKLUjEHolzE_fRWXQvdt0lYwBBAxPGaNFrwpzILynzJ5tZKpkzg18V0QermOvdQ3mzphh4W7JoVkPzVhIYmwYmDJ_FdNUnGGaUxUgylk&_hsmi=84400289

[3] Wei-jie Guan, (et al.), for the China Medical Treatment Expert Group for Covid-19. Clinical Characteristics of Coronavirus Disease 2019 in China. New England Journal of Medicine, February 28, 2020.  DOI: 10.1056/NEJMoa2002032.
https://www.nejm.org/doi/full/10.1056/NEJMoa2002032utm_campaign=Carrot+Health+Insights&utm_source=hs_email&utm_medium=email&utm_content=84400289&_hsenc=p2ANqtz8H08DQVDgKLUjEHolzE_fRWXQvdt0lYwBBAxPGaNFrwpzILynzJ5tZKpkzg18V0QermOvdQ3mzphh4W7JoVkPzVhIYmwYmDJ_FdNUnGGaUxUgylk&_hsmi=84400289

Frontline Nurses See Opportunities for Change during COVID-19 Outbreak (Duke University, 3/16)

Mary Rochelle Phillips, MSN, RN, CCRN, Duke Regional Hospital- ICU Clinical Nurse II [i]

[i] The views and opinions expressed in this article are mine alone, and do not represent the opinions of my employer.

Abstract

Contact: mary.phillips@duke.edu

What is the message? We have opportunities to extend our current expertise to solve the COVID-19 pandemic and similar challenges in the future. Three strategies include crisis planning teams, telemedicine both into the community and within hospital walls, and revising traditional licensure requirements that are imposing barriers on using our skills.

What is the evidence? Experience on the front lines of hospital services.

Timeline: Submitted: March 15, 2020; accepted after revisions: March 16, 2020

Cite as: Mary Rochelle Phillips. 2020. Frontline Nurses See Opportunities for Change during COVID-19 Outbreak. Health Management, Policy and Innovation (HMPI.org), volume 5, Issue 1, special issue on COVID-19, March 2020.

On the Front Lines in the ICU

Last week was one of the most frightening of my career as a frontline nurse in the ICU: after caring for a patient during one of my shifts, we were testing for COVID-19 the following night, after which the patient was placed in isolation. My heart raced and had many “what-ifs” going through my head. But then I realized I was giving in to the hysteria and needed to start thinking critically.

Luckily, I am a member of one of the top hospitals in the country that has extensive infection protocols and guidelines in place. My facility established real-time data and action plans that are easily accessible to staff, patients, and the surrounding community. I appreciate our leadership’s transparency and how our organization has been successful in coordination and constant communication in response to COVID-19.

It is reassuring to know that I have the full support of my organization throughout this time of uncertainty so I can continue to serve and care for our patients and our community. Yet, our health system needs to improve if we hope to address this challenge and the others that will inevitably follow.

As a world society, we have driven through past challenges such as SARS, MERS, and Ebola. But, despite extensive health advancements following these outbreaks, the world is still highly vulnerable to the spread of infectious diseases. In response to the most recent Ebola outbreak, Bill Gates said in a TED talk “the world needs to prepare for pandemics in the same serious way it prepares for war”. At the same time, he also predicted that “we are not ready” for the next outbreak. This was five years ago. He was correct then and, unfortunately, is still correct now.

As history is our great teacher, now is the time both to react to think strategically about the long-term implications of our reactive approaches. Unfortunate as it is, the coronavirus outbreak is forcing us to adapt and innovate in real time.

A Nurse’s Perspective on Proactive Opportunities for Change

My experience on the front lines suggests three actions involving crisis planning, telemedicine, and flexible use of skills that can build on existing expertise in the healthcare system in order to make a big difference.

Crisis Planning Teams: As former U.S. President Dwight D. Eisenhower once said, “Plans are useless – but planning is indispensable”. The simple act of proactive planning helps us to become better prepared and more successful at responding to chaos. All healthcare systems need to maintain Crisis Planning Teams. The mandate of a crisis planning team is to identify policies, practices, tools, and technologies that, when implemented, will enable frontline healthcare staff to better respond to future outbreaks. As part of this activity, the team needs to simulate mock codes to hospital staff. We need both planning and practice in implementing the plans – and in knowing how to adapt when the world works in ways that the plans do not expect.

As we think about planning for crisis management, let’s take to heart a recent internet meme: “Remember how it feels like working as a health care professional during the COVID-19 pandemic? Remember the band playing on the Titanic while the ship was sinking, and they just decided to continue to play? Yes, that’s us!”

This is the inconvenient truth: the healthcare system is being overwhelmed by the influx of new COVID-19 sufferers, but we are still playing the same tunes — operating at the same capacity and using the same mindsets — as before the outbreak. We need to reduce the need to bail out the ship so rapidly by flattening the curve.

Epidemiologists use “flatten the curve” as a strategy to reduce the number of people who are simultaneously getting sick and overwhelming the hospital system, so that the number of patients stays below capacity. Tactics such as social distancing and limiting the frequency and size of public gatherings, including schools and sporting events, are some recent examples of effective ways of flattening the curve.

We cannot simply try to flatten the curve by forcing frontline staff to work harder. Instead, we need planning for surges that allow us to respond more effectively. If not, then mandatory on-calls, overtime, and nursing shortages — all of which I have experienced — will result and compromise both patient and staff safety. Therefore, flattening the curve by getting ahead of the game is a must.

Telemedicine beyond and within the walls: Telemedicine has huge potential to increase both the scope and safety of our responses. Reaching patients in the community maintains the safety of the hospital and staff while increasing access to care. This practice allows the patient to receive care remotely while simultaneously limiting everyone’s exposure to their underlying illness. It also allows the hospital staff to make referrals as needed.

In addition, with increased patient needs and staffing issues, telemedicine within the walls of the hospital will be beneficial in the ICU, as Margaret Rouse recently discussed.[i] For instance, having a remote critical care nurse from the telemedicine side can be an extra set of eyes for the primary care nurse at the bedside. Additionally, if the bedside nurse needed help inside the isolation room, he/she needs the ability to communicate with the other primary team aside from the use of portable phones or call bell. Nurses are natural innovators, and temporary solutions we came up with at my current facility include walkie-talkies and baby monitors inside COVID-19 isolation rooms. There are many opportunities to add more ways of communicating, both in real time and asynchronously.

Flexible use of skills: To be most effective, we need to use all the skills of all the people in the health care system. This means having flexible licensures among MDs, APRNs, and RNs so they can serve patients in multiple states. For instance, travel nurses should be redeployed to the hardest hit areas of the country.

Unfortunately, under current regulations, many of the hardest-hit states in the U.S. are non-compact states (e.g., Washington, New York, Massachusetts), meaning that doctors and nurses will have to reapply for licensure in the state before they can begin their practice. As a result, states with low numbers of COVID-19 cases and staff surpluses cannot reinforce the hardest-hit, non-compact states. We need to relax this requirement now to set up the ability for people to adapt more flexibly in the future.

Looking Forward

Effective solutions to the COVID-19 pandemic and similar challenges in the future will require both technical and organizational responses. Leveraging technology and analytics to drive proactive change helps mitigate the risks of uncertainties. We have more resources than ever to stay connected, make informed decisions, and support each other. At the same time, we need to rethink regulations and organizational norms that get in the way of our ability to use our technical and personal skills.

Let’s use our resources in the way that they can have the most impact. And most importantly, don’t forget to wash your hands.

[1] The views and opinions expressed in this article are mine alone, and do not represent the opinions of my employer.

[2] https://searchhealthit.techtarget.com/definition/Electronic-Intensive-Care-Unit-eICU

 

Making Lemonade Out of Lemons With A COVID-19 Exploration Course (UNC Chapel Hill, 3/16)

Markus Saba, Kenan-Flagler Business School, University of North Carolina at Chapel Hill

Abstract

Contact: Markus_Saba@kenan-flagler.unc.edu

What is the message? Business schools can respond in real time to provide insights about how to manage sudden shocks in healthcare needs.

What is the evidence? Experience of the Center for the Business of Health at the Kenan-Flagler Business School in replacing an on-site program with an on-line seminar.

Timeline: Submitted: March 15, 2020; accepted after revisions: March 16, 2020

Cite as: Markus Saba. 2020. Making Lemonade Out Of Lemons With A COVID-19 Exploration Course. Health Management, Policy, and Innovation (HMPI.org), volume 5, Issue 1, special issue on COVID-19, March 2020.

Like every business school across the country, UNC Kenan-Flagler Business School’s normal operations have been turned upside down as all classes were flipped to online virtual courses. Fortunately, Kenan-Flagler has the top ranked online MBA program, MBA@UNC, with 800 students currently enrolled. As a result of this program, students, faculty, and staff are familiar with virtual learning, and the infrastructure is in place to deliver high-quality, immersive online education – a capability that all programs in the business school leverage.

Making Lemonade Out of Lemons

To understand the implications of COVID-19, UNC Kenan-Flagler relies on its Center for the Business of Health (CBOH), which has deep expertise, capabilities and networks in the healthcare industry. The CBOH has been convening thought leadership on COVID-19 since the crisis began.

On the weekend of March 13 – 15 the school planned to bring hundreds of online students together for a three-day, in-person Summit in Vancouver, British Columbia. This event was cancelled one week before as a result of the coronavirus. Many students were attending the summit to earn their final credit prior to graduation. By collaborating together, the CBOH and MBA@UNC were able to act swiftly to provide a compelling program.

Under the leadership of Dr. Brad Staats, Professor of Operations, Faculty Director UNC Center for the Business of Health, Associate Dean of MBA Programs the decision was taken to “make lemonade out of lemons.” The in-person course was converted to online with a day-long program focused on the coronavirus entitled ‘COVID-19 Exploration’.

The course included lectures, panels, interviews, and workshops. In addition, asynchronous content was quickly developed – a mix of newly recorded videos by Professor Staats, exploration of current events articles, and questions to reflect on the knowledge. This prepared students to come to the event ready to learn as much as possible.

The agenda for the day-long virtual event included top-level health professionals, professors, and industry executives with deep knowledge and expertise regarding the current crisis. Topics ranged from understanding the current situation from a medical and scientific perspective to looking into development of testing and vaccines to discussing the impact on financial markets and supply chains. Figure 1 reports the agenda.

Figure 1: Agenda

The event was a tremendous success. In a manner that ensured student and faculty safety, we were able to engage students in a meaningful way. Students held workshops in online breakout rooms, panel discussions created interesting debates, and presenters answered questions in real time. The program explored ways in which business executives can effectively lead, manage, and navigate in the current crisis.

Students learned first-hand how a large hospital system is preparing for the current situation, the difficulties and challenges the laboratory sector is having in developing tests as quickly as possible, how best to manage corporate communications during a crisis, what is being done in the industry to develop vaccines and antivirals in a safe and quick manner, and finally how to analyze and assess what is happening in the financial markets, supply chains and various services.

In addition, the course covered important themes such as the importance of public private partnerships; industry collaboration with regulators such as the FDA, CDC, HHS, and NIH; how one-time fierce competitors collaborate in consortia to share information and resources; the importance of transparent communications; and the challenges of managing risk/benefit concerns with regards to safety and speed.

Finally, a key lesson from across each presenter was the need for kindness as we work with those impacted by the coronavirus.

Students were put into breakout rooms, held workshops, and asked questions. Key lessons learned were shared. The program was timely, relevant, and impactful — and to our knowledge, was the first business school course for credit on the coronavirus. As a result of the partnership between the CBOH and the MBA@UNC program, the business school was able to leverage its healthcare expertise and existing digital solutions to effectively and efficiently provide 150 MBA students with a unique and valuable learning experience.

Looking Forward

The COVID-19 challenge forced us to test a model that can be applied well into the future. We now know how to make lemonade. We will use this model in the future when we face new sudden challenge. In addition, this is now part of our ongoing toolkit for “regular” teaching. We are stronger as a result.

 

Strategic Implications of COVID-19 for Hospital Leaders: Four Teams (Stanford University, University of Toronto, 3/16)

Kevin Schulman, MD, MBA, Stanford University, and Will Mitchell, PhD, University of Toronto

Abstract

What is the message? Hospitals need to create four types of teams to divide up their response to the COVID-19 challenge: immediate challenge; remote services; external coordination; and scenario planning teams.

What is the evidence? Authors’ experience with multiple health systems

Timeline: Submitted: March 11, 2020; accepted after revisions: March 13, 2020

Cite as: Kevin Schulman and Will Mitchell. 2020. Strategic Implications of COVID-19 for Hospital Leaders: Four Teams. Health Management, Policy and Innovation (HMPI.org), volume 5, Issue 1, special issue on COVID-19, March 2020.

How Can Hospitals Divide Tasks In Order To Conquer COVID-19?

Fortunately, during our careers, most hospital leaders have not faced a crisis like the current COVID-19 pandemic. This fortunate experience also means that leaders of healthcare organizations are now learning in real time about the gaps in their planning processes and reaction ability. For those grappling with this crisis, we have highlighted some lessons learned from strategy studies and from other organizations.

Divide and conquer: Four teams

While the initial response to COVID-19 in many organizations has been an all-hands-on-deck response, it’s critical that we divide management tasks across different teams to allow us to focus on immediate needs as well as issues that are lurking around the corner as this epidemic and similar challenges continue. At the same time as hospital leadership addresses current demands, we also need to anticipate a rapidly changing operational and strategic environment. To do this, we believe that each hospital needs to establish four related COVID-19 teams: for immediate challenges; remote services; external coordination; and scenario planning.

Each of these four teams needs to report directly to senior leadership of the hospital. Where appropriate, it is useful to have overlapping membership across teams, to help coordinate their activities. In turn, the senior leadership of the hospital needs to act as the conductor, shaping and orchestrating the overall set of activities.

Immediate challenge team(s)

First, each hospital needs to create one or more immediate challenge teams. The role of these teams is clear – addressing the hourly, daily, and weekly tasks at hand. A familiar but not exhaustive list of tasks is determining the care needs and staffing implications of COVID patients; developing and communicating situational information internally and externally; addressing staff training and personal protection; and dealing with supply chain and operational challenges that result.

One of us is at Stanford, where COVID cases are on a rapid rise. The hospital has set up a cross-functional team that meets daily to address situational needs. After sending out individual e-mails about this rapidly evolving situation to faculty and staff, the hospital began to publish a single daily e-mail with essential information for providers, vetted by the cross-functional challenge team. This notice includes information on evolving hospital policies; services changes in response to the outbreak such as establishing a new outdoor, drive-through virus testing service; and other information that needs to be communicated to faculty, fellows and resident physicians. This notice is also linked to the local intranet, which may contain more detailed information on specific topics and links to resources such as the CDC website.

Remote services team

Second, each hospital needs a remote services team. Many of the services that we now offer patients in hospitals could be accomplished externally, whether at patients’ homes or in out-patient facilities. Continuing to ask those patients to come to a hospital for services raises obvious risks of congestion and infection. While some elective services can be delayed until the crisis subsides, others need to be dealt with to ensure patient health during the crisis.

All modern hospitals now have access to telemedicine services in one form or another, whether as internal practices or via external partners. This crisis creates an opportunity to ramp up and extend our use of telemedicine to new in-home and out-patient services. Indeed, it is likely that many of these services can continue to be offered after the corona crisis subsides, as a way of shifting appropriate care out of expensive and sometimes risky in-patient venues to more effective out-patient settings. The need to extend nascent telemedicine services during the crisis can help overcome organizational barriers that have slowed their current expansion.

As important as the technology backbone is the staffing model for the telemedicine service. A switch from in-person to a telemedicine service includes the development of SOP’s, training of staff, and building provider schedules to staff the service. While this is a challenge, the COVID-19 pressure creates an opportunity to overcome traditional barriers to dealing with these issues.

One hospital we are familiar offers telemedicine services in which specialists provide consulting services to remote communities in its region while guiding local clinicians in those communities to provide sophisticated care that is beyond their normal practice. This same hospital now has an opportunity to provide the same services to referring clinicians in its local community – explaining the criteria for COVID screening as testing becomes available, and explaining treatment and referral options as those issues arise. Beyond COVID treatments, the telemedicine applications can be used for other patient services. Bringing telemedicine local will avoid burdening the hospital with patients who do not really need to be there and also risk infection at the hospital. As it ramps up to address the immediate COVID needs, the hospital is working with its referring clinicians and with relevant payers to adjust the financial structure of their services.

External coordination team

Third, each hospital needs an external coordination team. The idea that all health care is local is an old adage – COVID is again bringing this issue to the fore, while highlighting the organizational complexity of local health care environments. The external coordination team needs to work with external stakeholders to link their hospital’s activities with those of other organizations in the health system that are engaged with the COVID-19 challenge.

Relevant external organizations include other hospitals, out-patient facilities, local and national public health agencies, political bodies, and many others. Joint responses can include designating specific COVID care sites or, as importantly, non-COVID care settings; shared efforts to support population health; ensuring the availability of post-acute care services; and developing regional telemedicine programs. The external coordination team will need to gauge where it makes sense to be the leader in facilitating system-based activities and where it makes more sense to follow the lead of other actors.

One of us recently was involved with a panel discussion of initial steps toward addressing the COVID-19 crisis, involving experienced leaders from multiple relevant organizations. Reassuringly, each individual had a compelling message of how their own organization was responding. Much less comforting, though, was the fact that each person’s organization faced real struggles in coordinating their activities with others. The external coordination team can address this lack of integration.

Scenario planning team

Fourth, each hospital needs a scenario planning team. The current challenging state will be part of a marathon as well as the immediate sprint. The epidemiology underlying this infection is unclear, with a tremendous uncertainty about impact over time. Given this set of challenges, a separate team should be established to begin the difficult scenario planning that will support further decision-making at the organization level.

These scenario exercises need to consider contingency planning for alternative cases including staff shortages due to illness or the lack of child care; financial implications of cancelling profitable elective services to care for critically important but less financially valuable COVID patients; operational issues such a co-location of infected patients; and availability of local nursing home beds for patient transfers. In light of the tremendous uncertainty, these scenarios should consider a broad range of outcomes, ranging from a rapid decline in cases to an evolving pandemic with new incident cases over an extended period of multiple months or even years until reliable treatments and vaccines are available.

One of us brought their children to Disney a few years ago. When a toddler (not ours) jumped into the pool before their parent, the lifeguard blew their whistle and jumped in. But the amazing thing was that the whistle signaled other guards to shift and cover the vacant chair because there could have been another child in the water. Disney’s training developed a procedure to address the immediate needs and also deal with the contingency. It’s a lesson that can help those on the front lines of this uncertain crisis.

Looking forward

Individuals throughout the healthcare system in countries throughout the world are committed to meeting the challenge of COVID-19. But success requires far more than individual effort. Hospitals and other parts of the healthcare system need to take systematic approaches to split up the burden of response, while working internally and externally to coordinate the activities that we require for a robust response to this challenge.

Word from the Editors

The U.S. healthcare system faces huge challenges. It is the most expensive in the world, imposes unacceptable constraints on access to a substantial proportion of the population, and delivers poorer outcomes on average than almost all peer countries, including shorter expected life spans. As the U.S. moves toward the 2020 national election, there is no shortage of suggested solutions for getting out of this morass. Yet the country is as far as ever from agreeing on a solution, with major disagreements both within and between political parties and other stakeholders. We need a road forward.

HMPI is delighted to offer ten articles by scholars and policy analysts that seek to break the partisan gridlock. None of these arguments is wedded to a specific solution. Instead, to the extent that the authors have preferred systems, they reflect the varied cultures and preferences of the states and communities in the country. In turn, and most importantly, the authors highlight practical principles with the potential to cut across partisan boundaries to help build workable solutions that will have broad-based support in the country.

Among the principles, four aspects stand out: measurement, competition, longer-term decision making, and distributed decision making. First, the authors highlight multiple opportunities to overcome the obscurity within which providers and payers within the U.S. healthcare system work. They identify feasible opportunities to measure health outcomes, healthcare processes, costs, pricing, and quality-cost combinations. Such improved measurement can serve as the basis for greater cost-effectiveness, quality discipline, and access facilitation in any reformed healthcare system.

Second, several of the authors highlight the benefits of competition in a healthcare system with a mix of public, private, and non-profit actors. Competition, in combination with transparent measurement of quality, costs, prices, and access, is likely to be an integral part of any solution that is viable in the U.S.

Third, several authors offer suggestions for how to overcome the short-term decision-making within the existing silos of the healthcare system. Current incentives over-emphasize immediate treatments of health problems rather than promoting health maintenance or taking life-cycle perspectives on superior and cost-effective treatments. The suggestions, including long-term insurance, bundled payments, and other tools, are relevant to multiple combinations of healthcare reform.

Fourth, the suggestions highlight viable opportunities for distributed decision-making within a nationwide healthcare system. For instance, block grants to states combined with national objectives can support local and individual choices about healthcare preferences.

Thoughtful people might disagree about whether the U.S. healthcare system is in a crisis. Unambiguously, though, there is widespread recognition that the country is far from achieving the benefits that the financial investments, technical skills, and innovative advances this country should produce as a matter of course. We believe that the ideas in this special issue of HMPI will generate conversations that can lead to strong solutions with bipartisan support. The U.S. is one of the strongest healthcare innovators globally – if not the strongest. It is time that the country also takes a global lead in creating a healthcare system that offers a robust combination of access, quality, and cost-effectiveness.

Will Mitchell
Professor of Strategic Management
Anthony S. Fell Chair in New Technologies and Commercialization
Rotman School of Management, University of Toronto
Affiliated Faculty, Duke Medical School, Biostatistics and Bioinformatics

A Reformed Individual Market for All: Using Long-Term Health Insurance to Limit Fragmentation

Michael R. Richards and Forest S. Kim, Hankamer School of Business, Baylor University

Abstract

Contact: Forest Kim Forest_Kim@baylor.edu

Cite as: Michael R. Richards, Forest S. Kim. 2019. A Reformed Individual Market for All: Using Long-Term Health Insurance to Limit Fragmentation. /Health Management Policy and Innovation, Volume 4, Issue 3.

Why Do Americans Disparage Private Health Insurance?

Disparaging private health insurance often feels closer to a time-honored tradition in the U.S. than a new policy movement. There is no shortage of prominent individuals, policymakers, and constituency leaders willing to lament, if not castigate, practices and outcomes found within the industry. But accompanying and detailed conversations around the key nuances and trade-offs between the existing state of affairs and alternative healthcare financing realities are often lacking.

Thus, it is unclear what the true appetite for “Medicare for All,” or more broadly, single-payer healthcare is among a fully informed voting U.S. population. Nevertheless, the current popularity of this policy platform offers a good excuse to reflect on the potential root causes of at least some of our collective dissatisfaction with private health insurance. More specifically, we need to ask a key question seemingly absent from the contemporary debate: have we ever asked the health insurance industry for the best it has to offer?

We should begin with a few non-controversial facts about health insurance firms. Private health insurance companies in the U.S. are sitting on mounds of real-time and historical data tied to the health status and medical service utilization for individuals, families, and larger populations. These data are valuable, and these firms possess relevant technologies and specialized expertise to put the data to good use. Whether an insurance delivery system involves private companies or a government-run plan, data-driven decision-making is a necessary ingredient on the path toward better outcomes and greater efficiency in U.S. healthcare.

We likewise need to be clear about what health insurance is and is not—without doing so, we risk setting up the wrong expectations from the outset. Health insurance is not a mechanism to buy things you want with someone else’s money. Among private plans, enrollees’ collective premium dollars are needed to cover the total medical care spend. Among public plans such as traditional Medicare, it is a combination of beneficiary contributions and tax dollars, with the latter footing the majority of the bill in most instances. [1] In either case, we are all paying for it one way or another and are therefore exposed to the financial downsides from excessive and inefficient consumption. [2]

Health insurance is also quite different from other forms of insurance, such as auto or life policies. There is no fixed payout tied to a well-defined contingency such as accidental automobile collision or early death. Instead, health insurance shields the enrollee from a large financial burden in the event of illness. Illness can be acute or chronic, though it is the burden and mismanagement of chronic disease that is arguably our most pressing population health and spending issue of the day. [3,4,5]

The Key Problem Is Fragmented Health Insurance Delivery

The previous statements help establish an inescapable fact: personal health is a long game. A staggering number of medical issues can emerge between birth and death, and some of them can have direct and indirect consequences that span the remainder of an individual’s lifetime. Thus, the potential gains from preventing disease when possible and minimizing the long-run damage when illness does occur should be clear and salient.

Ironically, and­­ somewhat tragically, we have made a series of uncoordinated but interconnected missteps that have largely incentivized health insurance companies to focus on the short run as opposed to the long run. Insurers typically concentrate on what a given enrollee might cost in the next year rather than the individual’s projected medical spending profile over the full life course, and in particular, how much is mutable. These short-run incentives are at odds with the nature of the health and healthcare problem and are the culprit for many of our private insurance complaints.

The prevalence of insurer-enrollee fragmentation in the U.S. healthcare system suggests it is closer to the norm than the exception. The Medicaid program is notorious for churn whereby individuals and families cycle on and off a Medicaid plan as financial circumstances and eligibility criteria fluctuate. [6,7,8] This is far from an ideal model for managing the health and well-being of low-resourced populations.

In parallel, employer-sponsored health insurance, by definition, is only sustained so long as the same employer-employee relationship is intact. A new job opportunity, a change in own or family circumstances, or an economic downturn and the insurer-enrollee link is broken and the individual migrates to a new plan or no plan at all. At the same time, we intentionally subsidize employer-sponsored health insurance plans through approximately $300 billion in forgone tax revenue per year, which makes the “favorable tax treatment of employment-based health benefits…the federal government’s largest single tax expenditure.” [9] Moreover, we do so in a regressive fashion whereby those in the highest tax brackets benefit the most from the federal tax code’s employer-sponsored health insurance largess.

Additionally, and regardless of how one has or has not been covered prior to age 65, at that age, we abruptly graduate an individual into our current U.S. single-payer program of traditional Medicare. Whatever entity shouldered the medically related financial risk at age 64 need not worry about the downstream consequences from age 65 onward—a time when the risks of severe and costly medical events are also higher. And even within the newly reformed and enhanced individual market courtesy of the Affordable Care Act, plan contracts are for one-year intervals, with its proponents encouraging individuals to switch as often as they like. [10] In fact, among the 3.6 million who reenrolled in a health plan through the Marketplaces in 2016, 60 percent had switched from their 2015 plan selection. [11]

Taken together, we have spent decades of health policy creating a health insurance delivery system that actively subsidizes and even openly advocates for fragmentation. Rather than use their data troves and analytic skills to prevent illness and manage chronic disease over the life course, we are inadvertently encouraging insurance companies to minimize a given enrollee’s direct medical spending over the next 12 months or less, with little regard to the downstream consequences.

These problems can manifest in strategic screening of prospective enrollees, skimpy benefit designs, aggressive utilization review, and many other issues. Each of these insurer behaviors is a regular and understandable source of ire for consumers and their political representatives, but they are also predictable when the typical enrollee will be with a plan for a few months to a few years. It can further encourage misaligned contracts across insurers as well, for instance, between medical insurers and specialized third party carriers such as managed behavioral health organizations and pharmacy benefit managers.

Ideally, health insurers would internalize the gains from successful and comprehensive management of an enrollee’s health across all domains of care. In the absence of a long-term relationship, however, there can be perverse incentives to rely on short-term cost-savings without a long-term perspective.

What Could Be Done? Realigning Incentives via Long-Term Health Insurance Contracting

In order to realign the incentives of health insurers with those inherent to population health management as well as encourage insurers to leverage their comparative advantages including significant data repositories and expertise, we need to move to long-term health insurance contracting. Although economists have been interested in and theoretically explored such contracts already, [12,13,14] mainstream health policy discourse has devoted little attention to it. We argue that its public hearing is overdue.

To be sure, there are technical considerations and trade-offs belonging to various implementation strategies for long-term health insurance. But long-term health insurance is possible, especially if adoption is system-wide. A necessary first step would be to move the full U.S. population into the individual market by doing away with employer-sponsored health insurance and the traditional public insurance programs—something that can benefit consumers even without long-term contracts. [15]

The federal government could then occupy two roles for which it is best suited: (1) setting the rules for market participation and (2) subsidizing the premiums for individuals and families that need it. For the first role, rule setting, the “managed competition” government activities could include setting minimum contract durations, determining qualifying events for no-cost plan switching, antitrust enforcement, and other such regulatory parameters for health insurance companies. The goal is merely to establish a contracting sandbox that applies to everyone, and then allow the companies to innovate and compete.

As for the second role, the U.S. government is already in the business of heavy subsidization for health insurance purchases. But they are not always equitable or optimal. Means-testing by financial circumstances, rather than discriminating by age in traditional Medicare or making no adjustments at all in employer-sponsored health insurance, is a clear improvement in terms of equitable design. Moreover, the federal subsidies can be dialed up or down as circumstances change without requiring a change in coverage plan or type. That is, the government would be directly supporting long-term commitments and health management, instead of health insurance fragmentation.

Intuitively, this would largely take the form of an expanded, though significantly modified, version of the individual market brought about by the Affordable Care Act. This is why we refer to it as “A Reformed Individual Market for All.”

Some might retort that population-wide traditional Medicare could accomplish much of the same. Perhaps. But relying on a government-run plan would forgo the otherwise powerful incentives for innovation in long-term health insurance design and delivery. We would have to assume that the short-termism of politics would not distort or override the long-run health and fiscal aims. History does not bode well in this regard.

Bipartisan Support: Appealing to Common Democrat and Republican Policy Objectives

Politics is the most influential factor for any health policy proposal or reform and has derailed plenty of initiatives over the years. When taking stock of some of the common, partisan health policy positions to date, however, transitioning to long-term health insurance contracts across the board has something for multiple political viewpoints, if done well. For centrist Democrats, universal coverage and redistributive measures are embedded within the structure—not to mention the formal tying of insurance companies’ profits to their long-term success in health promotion, disease prevention, and chronic disease management. For centrist Republicans, the market-oriented ingredients of private enterprise, competition, and consumer choice are all present—along with fiscal transparency and responsibility.

Thus, by embracing a competitive market place for long-term health insurance with universal participation, we can develop a policy pathway that leverages overlap in left-leaning and right-leaning objectives, as opposed to championing one while alienating the other. Making the case for it and the unavoidable transition period will not fit on a bumper sticker and may not excite the extreme partisans in either direction, but those features should not be barriers to serious consideration and honest conversations with the American public.

Looking Forward: Shift to Long-Term Health Insurance

A wholesale shift to long-term health insurance is a way to accomplish the core function of health insurance in the form of financial risk protection for consumers, while incentivizing health insurers to optimize prevention and long-run population health management for their enrollees. Our current, fragmented version of health insurance delivery is performing poorly on both fronts.

Despite the long-running frustrations with the U.S. health insurance system, it does not immediately follow that we must do away with private health insurers. Instead, we may want to rethink and reshape the implicit incentive structure we have set before them. Doing so can benefit all of us and simultaneously encourage our insurers to reconsider how they contract with healthcare providers.

The piecemeal and perverse incentives attached to the fee-for-service model would almost certainly be reduced, if not eliminated, throughout many care domains. The payment model replacements would likely be a variety of two-sided risk alternatives to help ensure that provider decision-making is taking a long-run, cost-conscious perspective. Incentive alignment between insurers, consumers, and providers is possible under a long-term health insurance framework, and importantly, all three groups can be happier with the end results. For the plurality of consumers—and hence voters—they may feel that the private health insurance industry is working with them, instead of against them, for the first time in modern U.S. healthcare history.

 

References

[1] Cubanski J, Christina S, Boccuti C, Jacobson G, Casillas G, Griffin S, Neuman TA. Primer on Medicare: Key facts about the Medicare program and the people it covers. 2015. Available from: https://www.kff.org/report-section/a-primer-on-medicare-how-is-medicare-financed-and-what-are-medicares-future-financing-challenges/

[2] Emanuel EJ, Fuchs VR. Who really pays for health care? The myth of shared responsibility. The Journal of the American Medical Association 2008;299(9):1057-1059.

[3] Mitchell EM, Machlin SR. Concentration of health expenditures and selected characteristics of high spenders, U.S. civilian noninstitutionalized population. 2015. Available from: https://meps.ahrq.gov/data_files/publications/st506/stat506.pdf.

[4] Hussey PS et al. Continuity and the costs of care for chronic disease. The Journal of the American Medical Association 2014; Internal Medicine 174(5):742-748.

[5] Anderson G, Horvath J. The growing burden of chronic disease in America. Public Health Reports 2004;119(3):263-270.

[6] Sommers BD et al. Insurance churning rates for low-income adults under health reform: Lower than expected but still harmful for many. Health Affairs 2016;35(10):1816-1824.

[7] Sommers BD et al. Medicaid and marketplace eligibility changes will occur often in all states; policy options can ease impact. Health Affairs 2014;33(4):700-707.

[8] Milligan C. From coverage to care: Addressing the issue of churn. Journal of Health Politics, Policy and Law 2015;40(1):227-232.

[9] Congressional Budget Office. Options for reducing the deficit: Reduce tax subsidies for employment-based health insurance. 2018. Available from: https://www.cbo.gov/budget-options/54798.

[10] HealthCare.gov, (nd). Renew, change, or update your health plan for 2020. 2019. Available from: https://www.healthcare.gov/keep-or-change-plan/choices/.

[11] Department of Health & Human Services, Assistant Secretary for Planning and Evaluation. Research brief: Health insurance marketplaces 2016: Average premiums after advance premium tax credits in the 38 states using the healthcare.gov eligibility and enrollment platform. 2016. Available from: https://aspe.hhs.gov/system/files/pdf/172176/2016HealthInsurance.pdf.

[12] Cochrane JH. Time-consistent health insurance. Journal of Political Economy 1995;103(3):445-473.

[13] Handel B, Igal H, Whinston MD. The welfare effects of long-term health insurance contracts. Working Paper 2017;1-56. Available from: https://eml.berkeley.edu/~bhandel/wp/DynamicInsurance.pdf

[14] Wiseman T. Competitive long-term health insurance, Journal of Health Economics 2018;58:144-150.

[15] Leemore D, Ho K, Varela M. Let them have choice: Gains from shifting away from employer-sponsored health insurance and toward an individual exchange. American Economic Journal: Economic Policy 2013;5(1),32-58.

 

The Transformative Potential for Price Transparency in Healthcare: Benefits for Consumers and Providers

R. Lawrence Van Horn, Vanderbilt University;  Arthur Laffer, Laffer Associates; and Robert L. Metcalf, Concert Genetics

Abstract

Contact: Larry van Horn larry.vanhorn@vanderbilt.edu

Cite as: R. Lawrence Van Horn, Arthur Laffer, Robert L. Metcalf. 2019. The Transformative Potential for Price Transparency in Healthcare: Benefits for Consumers and Providers. Health Management Policy and Innovation, Volume 4, Issue 3.

Price Transparency Will Improve Healthcare Markets

The U.S. healthcare industry, which at $3.6 trillion in 2018 represents almost 18 percent of the U.S. economy, lacks available real prices at the time of purchase, despite the fact that an increasing share of Americans purchase healthcare services out of pocket. We believe that price transparency will benefit consumers by reducing costs associated with revenue cycles and reducing misallocation of resources, which in turn can simultaneously create opportunities for providers.

The U.S. healthcare industry lacks meaningful prices

In today’s healthcare industry, the concept of a relevant, meaningful price for healthcare services has been lost. The prices proffered in U.S. healthcare are wrong. Today’s prices do not reflect a market clearing price and thus miss beneficial transactions for consumers and producers.

Any rational discussion of pricing is further confused by the dominant and ambiguous role of insurance. There are charged amounts, allowed amounts, patient responsibility net of copays, coinsurance, and deductibles, all of which confuse the consumer and are hidden or unknown at the time of purchase.

Prices charged do not reflect any apparent underlying logic aligned with consumer interests. Recent empirical research show that the actual transactional price of healthcare services varies all over the place within the same hospitals, across hospitals within a market, across state lines, and between cash transactions versus transactions covered by insurance. Price transparency is an essential precursor if we hope to improve the health of Americans in a financially responsible manner.

Consider the following example. The average commercial price for a prostatectomy in Washington DC is $33,285, with a range from $18,151 to $60,853, a difference of more than 330 percent. [1] An individual with a family deductible of $7,000 and 20 percent coinsurance would face out-of-pocket costs of between $9,230 and $17,770 using their insurance. However, a pure cash price alternative is available at $13,968. [2] Hence, if the insurer’s negotiated rates are in the top quartile, the individual would be better off paying cash.

This example highlights both the significant price variation as well as the potential for up front transparent cash prices to benefit consumers. These findings suggest that the healthcare market is dysfunctional as a result of market failure due to a lack of price and quality transparency available to consumers at the time of purchase.

With 30 percent of the employed workforce now in high-deductible health plans, households are being been transformed into at-risk, cash-wielding consumers. After deductibles are met, many individuals are still subject to coinsurance payments. Thus, negotiated prices are crucial to decision-making and providers increasingly must receive payment directly from patients. Taken together, out-of-pocket “patient responsibility” is now the third largest payer in most U.S. hospitals. Consumers—even determined consumers—cannot discern in advance the price they will pay for basic medical services.

Forty years of expanding third-party insurance has created a payment apparatus that is opaque to a consumer. Contracts are based on unit of services, Current Procedural Terminology codes, or Diagnosis Related Groups that do not conform to common sense ways in which patients would purchase medical care. Furthermore, contracted rates between payors and providers are protected as proprietary and confidential elements despite patients being enjoined financially to their terms ex post. In other markets such as hotels, airlines, and higher education price discrimination is common, but not even in the darkest recesses of the market such as payday loans do we require consumers to pay prices not discernable in advance. Quite simply, this is a problem where transparency regulation is a reasonable intervention.

The move to high deductible health plans

One of the most significant shifts in healthcare demand over the last decade is the steady rise of high deductible plans. Of the 153 million commercially insured individuals, 82 percent have a health plan with a minimum annual deductible, paid by the member, before coverage begins. The average annual deductible is $1,655, up 41 percent since 2014 and 162 percent since 2009. The percentage of households impacted by higher deductibles is growing fast—70 percent of single coverage deductibles exceed $1,000 and more than 30 percent exceed $2,000, up from 18 percent just five years ago. [3]

This shift to high deductibles has created a large and growing segment of consumers paying cash for healthcare services. In 2017, consumers spent $365 billion out of their own pockets [4]. This is less than Medicare ($660 billion) and Medicaid ($521 billion), but greater than any single private insurer. At the same time, there are now more than 25 million Health Savings Accounts that hold $53.8 billion in assets, up 19 percent over the previous year. [5]

Non-value-added healthcare expenditure is high

U.S. spending on healthcare is 17.8 percent of GDP, considerably greater than ten other similar countries, where the mean is 11.5 percent. The major drivers of higher spending are not demographics, social determinants, public health spending, or over-utilization of healthcare services, although each of those items vary, but rather higher administrative costs and higher prices.

A 2019 article estimated the total cost of waste in U.S. healthcare to be as high as $935 billion, about 25 percent of total spend. The largest two drivers of waste were administrative complexity ($265.6 billion) and pricing failure ($240.5 billion). [6] Administrative costs accounted for 8 percent of healthcare spending, versus 1 percent to 3 percent in other developed countries. U.S. healthcare service prices are substantially higher than comparable counties, driven primarily by input prices and pharmaceutical spend that are twice that of other high income countries. [7]

Price transparency offers business opportunities for providers

Price transparency promises major business opportunities for providers. The healthcare marketplace has increased in complexity in both terms of service and organization over the last 40 years. This complexity has distanced these organizations from their consumers and the industry has lost sight of consumer preferences, consumer experience, and the practical constraints on the consumer’s ability to pay. This mismatch between producers and consumers of healthcare services leads to an opportunity for a new entrant to simplify, cut prices, and radically change the industry structure.

Three components combine to create this unprecedented opportunity for providers to transform healthcare markets: 1) the move toward high deductible plans in the employer sponsored market, 2) the presence of significant non-value-added activities in and around heath care transactions, and 3) the extreme price variation and high price levels in healthcare markets. As price transparency expands, either by government mandate or market pressure, a growing body of research suggests that average prices to consumers will decline. More importantly, price transparency fosters a market-driven environment that rewards innovative provider models.

This is the path of creative destruction and disruptive innovation supported by free markets. For providers with distinguished brands or services differentiated in terms of quality, cost, or both, this is a moment to seize a once-in-a-generation opportunity to lead, transform, and benefit consumers and themselves.

Healthcare Price Variation Has A Major Impact on Consumers

Consumers increasingly are facing higher out-of-pocket costs

As high deductible plans proliferate, consumers will increasingly face the full price of medical care services until their deductible is met. This price could either be hidden price, one negotiated in secret between payor and provider or, with greater transparency, it could be a price posted up front by the provider. Numerous studies have indicated that the price level will change depending on the path taken.

A 2019 report by the RAND Corporation analyzed price variation in hospital services using employer-sponsored private health plan claims data. Using Medicare pricing methodologies, including the imbedded adjustment for patient populations, regional variations in cost, and other factors such as research costs, the study recalculated employer sponsored claims as if they were Medicare claims. This effectively created an adjusted baseline price for facility and state-by-state comparison. Hospital prices, combining inpatient and outpatient services, varied significantly by state, ranging from a low of 150 percent of Medicare (Michigan) to a high of 300 percent (Indiana). Prices ranged even more for outpatient services, where the maximum reimbursement was 600 percent of Medicare. [8]

A new comparison of bundled cash prices to commercial reimbursement for similar services

While prior research has documented both the price level and price variation paid by commercial insurers relative to Medicare, to date there has not been a comparison with cash prices for similar services. We performed such a comparison of bundled cash prices for a subset of services compared with commercially reimbursed amounts for the same service bundles.

We began by obtaining a sample of more than one billion claims for commercial insurers for July 2017 to July 2019. [9] These claims were then bundled into services by incorporating the most common professional and institutional claims that are associated with the procedure. From this information we calculated the allowed amount, which is the true price.

We performed the same exercise for cash payment of equivalent services over a similar time frame utilizing data supplied by MDSave, the largest cash transaction platform in the U.S. MDSave allows providers to place transparent cash prices in the market and, in turn, enables consumers to purchase a bundled healthcare service online thereby mirroring consumer e-commerce experiences in most other sectors. The consumer receives a voucher for the service at the chosen provider and the provider receives reimbursement from MDSave within a week of service delivery. This is a largely frictionless transaction.

Table 1 compares the spread between cash and insurance in prices for the same 15 bundled procedures. We compare select lab, imaging, and routine procedures. We chose to report the 25th and 75th percentile interquartile ranges as this middle 50 percent of the respective distribution is the most conservative comparison.

Several observations are noteworthy. Focusing first on individual price levels, the 25th percentile for cash is lower than the insurer price in about half the cases. With two exceptions, however, the 75th percentile cash price is less expensive than the insurer price, often substantially. Thus, the cash price tends to be lower at the higher end of the price range.

Second, we constructed a market basket of services, weighted by the relative frequency of procedures, and quantified the difference in the average cash versus insurer price. On average, the cash price was 39 percent less expensive for the same market basket compared with the insurer price.

Third, the mean interquartile spread is 22 percent for cash compared to 77 percent for insurance. Hence, there is significantly more variation in the distribution of insurer prices for the same service. Moreover, insurer prices are frequently higher at the high end.

Why the comparisons matter

The results of the studies are important. If there were little variation in price, the cost of not shopping would be low. For example, few individuals engage in active search for gasoline prices as the market is competitive and the variation is low, with price variation mainly driven by location differences.

By contrast, the healthcare evidence here suggests that, given the significant price variation in the insurer market, consumers are significantly disadvantaged if they do not shop. It is not plausible for service or quality differences to warrant such price variation. Instead, this data is consistent with a market characterized by limited price competition.

Again, these differences are important. The RAND study estimated that shifting prices from the 75th percentile to the 25th percentile would reduce hospital care costs for employers by 40 percent. This would have a major impact on healthcare expenditures, because hospital care accounts for 44 percent of total personal healthcare spending for privately insured individuals.

Impact Of Transparency On Prices

A limited body of peer-reviewed literature has further quantified the impact of transparency on healthcare prices. James Robinson and Timothy Brown analyzed a 2011 price transparency program with California Public Employees Retirement System enrollees. In this program, enrollees were provided with procedure-specific shoppable prices for hip and knee replacements, as well as a list of high quality, low cost facilities. Furthermore, if the enrollee elected a high cost facility, he or she was liable for any amount above the reference price. In the first year of the program, employees chose low cost facilities 21.2 percent more frequently and high cost facilities 34.3 percent less frequently. Prices at low cost facilities remained constant and high cost facility prices declined by 18 percent. [10]

A 2014 article analyzed claims data for three common services—laboratory tests, advanced imaging, and clinician office visits—comparing a cohort of employees that used employer-provided price transparency platforms with those that did not. Use of the price transparency platform resulted in lower reimbursement prices in all three areas, albeit with greater reduction in laboratory and imaging than in clinician office visits. [11] Similar results were found in a 2019 study of the Kentucky Employee Health Plan [12] and by Hans Christensen and colleagues. [13]

The Southwest Airlines Analog

Southwest disrupted the airline industry

Southwest Airlines provides a useful example from another industry. Consider the airline industry in 1970, before Southwest. The industry was highly regulated, complex, and inefficient, with prices so high that most consumers could not afford to fly. Along came a visionary, Southwest Airlines founder Herb Kelleher, with an entirely contrarian perspective. He believed that if air travel could be reimagined, reengineered, and delivered at far lower cost, new consumers would flood into the market.

Kelleher had a fundamentally different belief about underlying demand and demand elasticity for airline travel. The existing market incumbents, oriented toward business travel, assumed a relatively inelastic demand for air travel. Kelleher’s conjecture was that the demand for recreational travel was huge, but price elastic. Reaching this market required radical changes to services, delivery, production, distribution, and pricing.

Incumbents argued that the changes were heresy and that regulation was necessary to prevent collapse of the industry. Those same incumbents sued to prevent Southwest from offering low-cost and regulatory-exempt flights within the state of Texas. Because of this opposition and regulatory inertia, four years passed before Southwest could fly its first flight. This path to launch was so arduous that Kelleher described the first flight as his “proudest moment in business,” which he celebrated by crying and kissing the airplane. [14]

Forty years later, we know that Herb Kelleher was right. Airline prices have dropped by half and Americans travel by air five times more frequently. [15, 16]

Reduced air travel prices have not come at the cost of safety, reduced wages, or lower customer satisfaction. Air travel is also safer now than ever before. [17] Southwest pilots are the most productive and among the highest paid in the industry. [18, 19] Southwest Airlines has the highest customer satisfaction of any U.S. airline. [20]

Consider the parallels in U.S. healthcare

We believe there are logical parallels to the U.S. healthcare industry. Consider regulation and complexity. Healthcare regulation today is greater than that of the airline industry in 1970, as healthcare is regulated in each state and by multiple national governing bodies. Also like the 1970s airline industry, healthcare processes and systems have grown to staggering levels of complexity. The healthcare industry continues to invest in infrastructure and services that a cash-paying customer would not value, further increasing costs.

Now compare the price state of healthcare. A baby delivery in 1960 was 1.6 times the price of a flight from Chicago to Phoenix. Today a normal baby delivery is 30 times the price of such a flight.

The Size Of The Opportunity Depends On Elasticity Of Demand

Ultimately, the size of the opportunity in healthcare depends on the elasticity of demand. While estimating elasticity is difficult, research suggests the demand for medical care is relatively inelastic. Randall Ellis and colleagues estimated elasticities, depending on the type of service, to range from -0.02 to -0.44. [21] If demand is relatively inelastic, reflecting these estimates, the opportunity is smaller. Most benefits of price transparency would be limited to reduction in administrative costs.

As noted above, however, even in this more limited case, the opportunity is massive. Administrative waste in healthcare is estimated to be twice the size of the U.S. airline industry. [22] By charging cash-paying customers upfront, even at lower prices, providers can differentiate and remove downstream costs. Simplifying payments would also go a long way to address some of the worst aspects of health, including harassing and suing indebted patients. [23]

Yet healthcare demand might actually be more price elastic. Amanda Kowalski estimates demand elasticities between -0.76 and -1.49, significantly higher than prior estimates. [24] This estimate places us in the world of Southwest Airlines circa 1970.

The cash pay market for healthcare is already large, at more than $300 billion per year, and will continue to grow. Even at moderate price elasticities, the opportunity is substantial. Price-sensitive consumer demand, not government regulation, will drive the industry to a new equilibrium in service, venue, and price.

Looking Forward: Price Transparency Will Benefit Consumers and Create Opportunities For Providers

In industry after industry, consumer-driven innovation has led to improved customer experience and cost reduction. Even in regulated, capital-intensive markets with high barriers to entry, such as financial services, telecommunications, energy, and transportation, consumer-led innovation is spurring transformation. Healthcare should be next.

One might expect that reducing prices for healthcare services would result in lower physician salaries or net income to providers. However, such reductions will not necessarily occur. Given the estimates of pricing failures and administrative waste, simplification of the revenue cycle that addresses both issues holds the promise for a bright future.

Fifty years of insulation from consumer-driven demand signals has brought minimal health gains at massively increased costs. Consumers and healthcare leaders should be seeking to become and empower agents of change. Who will step forward as the Herb Kelleher of healthcare?

 

References and Notes

[1] Estimates based on authors’ analysis of 835 ERA information in the Washington DC market.

[2] Reported on MDSave.com, accessed 12/4/2019.

[3] Claxton G, Rae M, Damico A, Young G, McDermott D, Whitmore H. Health benefits in 2019: Premiums inch higher, employers respond to federal policy. Health Affairs 38 (10), 2019: 1752-1761.

[4] 2017 National Health Expenditures, Center for Medicare and Medicaid Services. [accessed 2019 December 5, 2019; available from: https://go.cms.gov/2qfLsDz ]

[5] 2018 Year-End Devenir HSA Research Report, [accessed Dec 5, 2019; available from: https://www.devenir.com/research/2018-year-end-devenir-hsa-research-report/ ]

[6] Shrank WH, Rogstad T, Parekh N. Waste in the U.S. health care system: Estimated costs and potential for savings. Journal of the American Medical Association 322(15), 2019, October 7: 1501-1509. This study reviewed and consolidated 71 estimates from 54 unique peer-reviewed publications, government reports, and other literature.

[7] Papanicolas I, Woski L, Jha AK. Health care spending in the United States and other high-income countries. Journal of the American Medical Association 319 (10), 2018:1024-1039.

[8] White C, Whaley C. Prices paid to hospitals by private health plans are high relative to Medicare and vary widely: Findings from an employer-led transparency initiative. Santa Monica, CA: RAND Corporation, 2019. https://www.rand.org/pubs/research_reports/RR3033.html

[9] These claims are electronic remittances (ERAs), otherwise known as 835 transactions.

[10] Robinson JC, Brown T. Increases in consumer cost sharing redirects patient volumes and reduce hospital prices for orthopedic surgery. Health Affairs 32(8), Health IT, Payment & Practice Reforms, August 2013. Available from https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2013.0188

[11] Whaley C, Schneider CJ, Pinkard S, Kellerman G, Bravata D, Kocher R, Sood N.

Association between availability of health service prices and payments for these services. Journal of the American Medical Association, 312 (16), 2014 October 22-29: 1670-6. Prices declined by 13.93 percent (laboratory tests), 13.15 percent (advanced imaging), and 1.02 percent (clinician office visits).

[12] Rhoads J. Right to shop for public employees: How health care incentives are saving money in Kentucky. 2019 March 8. [accessed 2019 December 5; available from: http://bit.ly/2Rg5uJj ]

[13] Christensen HB, Floyd E, Maffett M. The effects of price transparency regulation on prices in the healthcare industry. [cited 2019 December 5; available from: https://www.bakerinstitute.org/media/files/event/01ce2e80/HPF-paper-AHEC-Floyd.pdf ]

[14] Herb Kelleher, quoted in “17 powerfully inspiring quotes from Southwest Airlines founder Herb Kelleher” by Peter Economy. [accessed 2019 December 5; available from: http://bit.ly/2LeOVd4 ]

[15] Thompson D. How airline ticket prices fell 50 percent in 30 years (and why nobody noticed). The Atlantic, 2013, February 28. [accessed 2019 December 5; available from: http://bit.ly/34FuFst ]

[16] International Civil Aviation Organization. Civil Aviation statistics of the world and ICAO staff estimates: Air transport, passengers carried, United States. [accessed 2019 December 5; available from: http://bit.ly/2OFmnv3 ]

[17] Aviation Safety Network, Flight Safety Foundation [accessed 2019 December 5; available from: https://aviation-safety.net/statistics/period/stats.php?cat=A1 ]

[18] MIT Global Industry Program, Airline Data Project. Total pilot and copilot average block hours per month, 2018. [accessed 2019 December 5; available from: http://web.mit.edu/airlinedata/www/Employees&Compensation.html ]

[19] MIT Global Industry Program, Airline Data Project. Total pilot wages & salaries and benefits & payroll taxes per pilot employee equivalent, 2018. [accessed 2019 December 5; available from: http://web.mit.edu/airlinedata/www/Employees&Compensation.html ]

[20] J.D. Power. 2019 North America airline satisfaction study. [accessed 2019 December 5; available from: https://www.jdpower.com/business/press-releases/2019-north-america-airline-satisfaction-study ]

[21] Ellis RP, Martins B, Zhu W. Health care demand elasticities by type of service. Journal of Health Economics 55, 2017: 232-243.

[22] The U.S. domestic airline industry reached $146.6 billion in revenue per year according to the IBISWorld Domestic Airlines in the U.S. Industry Report, June 2019. [accessed 2019 December 5; available from: http://bit.ly/2P7SBOy ]

[23] Makary M. The price we pay: What broke American health care and how to fix it. Bloomsbury Publishing, 2019.

[24] Kowalski A. Censored quantile instrumental variable estimates of the price elasticity of expenditure on medical care. Journal of Business & Economic Statistics 34(1), 2016: 107-117.

 

 

 

 

Block Grants Can Match National Health Care Goals to Local Differences

Mark V. Pauly, the Wharton School, University of Pennsylvania

Abstract

Contact: Mark V. Pauly pauly@wharton.upenn.edu

Cite as: Mark V. Pauly. 2019. Block Grants Can Match National Health Care Goals to Local Differences. Health Management Policy and Innovation, Volume 4, Issue 3.

Several Healthcare Goals Have Widespread Acceptance in the U.S.

There are some propositions about improvements in the healthcare and health insurance system on which I think there is general agreement in the U.S. Across the political spectrum, there is near universal agreement on three goals for the system: access, in which all people in the country have access to all cost-effective care; high quality and safety; and efficiency such that the real resource costs of providing quality appropriate care be as low as possible and grow as slowly as possible over time.

A fourth goal is not shared by strict single-payer advocates but is held by many moderate Democrats and independents and virtually all Republicans. This is the goal of choice. Because people differ, it is desirable that they have choices about how to receive care and how to finance it along with enough information to make those choices. [1]

The fourth goal—of choice—captures several related objectives.

  • Consumer value: Choice of provider should reflect individual consumer values.
  • Financial protection: Choice of insurance should involve adequate financial protection combined with incentives conducive to the first three goals.
  • Appropriate use: Incentives should increase the use of care that is underused, relative to the cost-effective quantity, reduce the use of care that is overused, and choose quality that reflects any trade-offs between cost and quality.
  • Cost-based decision-making: Incentives to patients and providers need to take cost into account when deciding on how to deploy or use resources.

Proposal

How might these goals be achieved in a way that is politically feasible in a setting where parties disagree at the federal level, and in a way that nevertheless comes close to the efficiency goal of lowest cost to satisfy diverse preferences?

These goals can be achieved by a system on national healthcare block grants administered by states in a way acceptable to each state’s voters, subject to nationally determined performance measures.

Differences in Healthcare Preferences

Individual preferences

Individuals as consumers and voters have varying preferences about the values they place on different social healthcare goals—which are high or low priority, which are essential, and which can be sacrificed if compensated by higher achievement of another goal. Many differences in an individual’s preferences over health policies are intrinsic to that person and not the result of misinformation, indoctrination, or errors in logic.

Some differences are related to strongly held prior beliefs about what does and does not work well—such beliefs may eventually yield to evidence but not easily. Some of the differences are associated with differences in incomes or command over resources within acceptable bounds and some are due to differences in preferences given income. Some are related to trust of collective choice or the market, as well as values and esthetic preferences on what constitutes an attractive social order.

People with different preferences often cluster geographically. Majorities in some states have a taste for collective choice and majorities in other states trust individual choices in markets. People also place differences on assessing the probabilities of different outcomes. For example, people differ on how likely they think it is that a for-profit hospital or insurer will provide high quality for the price, or be able to have lower cost levels or growth.

Differences across states

Each state in the U.S. has a method by which it makes collective choices, generally beginning with popular vote translated into policies implemented either by the houses of the legislature and the executive. For example, some states elect insurance regulators while others have the executive branch appoint them. While it is well known that no mechanism for aggregating diverse preferences about collective activities can ever be perfect, we will assume these processes are stable in place and are accepted as reflecting the “will of the people” in that geographic area. [2]

We assume that the welfare of the population of any state is of greater concern to voters in that state than the welfare of populations in other states, but that some concern extends to those populations as well. [3] The “external” concern can be expressed through the central or federal government in the form of rules that govern how any funds provided by the federal government to a state are spent. It can also be expressed by federal matching ratios, although that has the risk of subsidizing waste.

National Objectives That Take Differences into Account

Here we take the simple approach that the views of those in the rest of the country can be captured by specifying for each state a set of metrics or goals—such as proportion uninsured, premiums and subsidies for higher than average risks, use of cost-effective care, and levels or rates of growth in medical spending. Conditional on achieving these goals, the idea is that a state may choose any method to do so and any other program features its democratically elected political decision-makers prefer.

For example, a state may impose price controls on hospitals or doctors as long as doing so does not result in levels of use of care below the cost-effective level, or it may permit risk rating of all insurance as long as it maintains target levels of coverage of all insureds and high-risk insureds. Choice of metrics to reflect concerns of citizens of other states will need to be made by some agreed upon set of rules. There may be “constitutional” rules to choose metrics that bind all states, but they should be kept to a minimum in terms of number and intrusiveness.

Mechanisms for Allocating National Healthcare Resources to States

Block grants

Block grant amounts from the national budget, potentially administered by the Department of Health and Human Services, would be made available to each state as long as it met the standards for outcomes. Some formula tied to income, poverty, and current spending would be used to determine the amount of the grant.

The state would have to spend the grant amount on health, but if it spent more it would bear the full cost of that additional spending and recoup the full savings from any spending reduction down to the level of the grant. If a state fell short of those standards, some sanction or mandate would have to be imposed, but it should be one that led closer toward rather than further away from the outcomes.

For example, consider the controversy over work requirements for able-bodied adults under Medicaid. I am sure that a majority of voters in some states are concerned that such a policy might discourage deserving people from applying or remaining in the program while in other states majorities think such a policy will increase the value and dignity of work habits. Let states add requirements if they so choose but evaluate the effect on Medicaid enrollment, uninsureds, health outcomes, and work effort. If a state administers a work requirement such that bureaucratic delays and excessive strictness drive many into being uninsured, it would be penalized, while if other states are willing to count the feeling some have that work is unpleasant and stressful as a medical condition, they would have to spend more of their state’s money to pay for a heavier case load.

Criteria and options

Using block grants conditional on achieving goals and allowing different states to make different calls on how to attain those goals is a better way of resolving controversy than political argument at the national level which, even if resolved, will necessarily lead to more uniform and less preference-sensitive outcome than permitting states to do different things. This approach is a way to get policy moving toward achieving universally held goals.

Targeted funds. The block grant funds and the rules are to apply primarily to low-income people and high-risk or sick people. There is no implication that insurance for the average-risk middle class and above needs to be of major concern because they buy it on their own, ignoring the tax exclusion.

Insurance options. States specifically could choose different methods for making insurance more attractive to consumers by taking smaller bites out of consumer budgets relative to the benefits insurance provides. Premiums could be lower for lower risks as a way of offering coverage that provides true expected value to them.

Political vs. consumer choice. Grants to states give state politicians more freedom of choice and they might or might not respond by giving consumers more choice. If limiting consumer choice discourages coverage, penalties would kick in, as would occur if offering more choice confused consumers and they declined coverage.

Consumer value metric. We need to consider whether a metric for how closely what consumers value matches the insurance and care delivery options they face can be constructed and be included as one of the criteria. If some reasonably large subset of consumers is highly dissatisfied, it could be offered the option of using markets in other states, but it would be better to reward better matching directly.

Options for high-risk populations. High risks could be given the option of coverage at premiums reasonably related to their incomes by a number of devices among which states could choose, including high risk pools, reinsurance, requirements for guaranteed renewability at class average premiums, or community rating—subject to the proviso that coverage levels be sustained for lower risks as well as higher risks.

Financial risk protection. Protection against financial risk—even if there is no impact on health—by insurance markets in a state could be a performance criterion. The goal would be to protect wealth as well as health.

Competition. States could choose to have competitive insurance plans supplied by private commercial firms, private nonprofits, or the public sector as long as regulations and subsidies were neutral and goals of coverage and consumer satisfaction were attained.

Information sources. Private or public competitive suppliers of additional information on insurance plans and medical care suppliers could be chosen by states, as well as methods to encourage sellers to provide accurate information on low priced products.

Insurance and jobs. Consumers ideally could choose to take jobs that come with particular insurance plans or receive funds they could use to buy individual insurance with the same tax owed either way. States are limited in the extent they can offset the tax exclusion so some federal policy changes may be needed—and many are better than the appropriately maligned “Cadillac tax.” [4]

Looking Forward: Block Grants Suit Bipartisan Objectives

This state-based approach of block grants is consistent with the national structure of the U.S. and with the goals of many stakeholders. Both Republican and Democratic think tanks and policy organizations have been paying more attention to using the states to break at least some of the logjam that seems sure to persist at the federal level.

 

References

[1] Haislmaier E, Moffit R, Owcharenko Schaefer N. The health care choices proposal: Charting a new path to a down payment on patient-centered, consumer driven health care reform. The Heritage Foundation 2018 July 11. Available from: https://www.heritage.org/health-care-reform/report/the-health-care-choices-proposal-charting-new-path-down-payment-patient

Brownstein R. The democratic push for a ‘public option on steroids.’ The Atlantic 2018 April 26. Available from: https://www.theatlantic.com/politics/archive/2018/04/health-care-public-option-medicare/558965/

Waldman P. Democrats are making Republican arguments about health care. Why? The Washington Post 2019 July 26. Available from: https://www.washingtonpost.com/opinions/2019/07/26/democrats-are-making-republican-arguments-about-health-care-why/?noredirect=on&utm_term=.d6e51db38d9a

Nwanevu O. The Democratic divide on the future of health care. The New Yorker 2019 June 28. Available from: https://www.newyorker.com/news/our-columnists/the-democratic-divide-on-the-future-of-health-care

[2] Arrow KJ. Social choice and individual values. New York: Wiley; 1951.

[3] Pauly MV. Income redistribution as a local public good. Journal of Public Economics 1973;2(1),35-58.

[4] Dorn S. The Cadillac Tax: It’s time to kill this policy zombie. Health Affairs 2019 June 28. Available from: https://www.healthaffairs.org/do/10.1377/hblog20190617.795057/full/

 

Healthcare Finance in America: Fixed and Variable Cost-Based Pricing

Bruce R. Neumann, University of Colorado Denver

Abstract

Contact: Bruce R. Neumann Bruce.Neumann@ucdenver.edu

Cite as: Bruce R. Neumann. 2019. Healthcare Finance in America: Fixed and Variable Cost-Based Pricing. Health Management Policy and Innovation, Volume 4, Issue 3.

Introduction   

Healthcare financing in America is a mess. Patients and their families cannot discern the expected costs of treatment, nor can they understand the bills they receive. There is little actual competition among healthcare providers. There is increasing centralization and takeovers of physician clinics and medical practices. Many mergers and acquisitions create two or three large networks that dominate most regional healthcare markets. There is evidence that healthcare markets often behave as oligopolies and that competition at the local level does not benefit patients or their families. [1]

From a finance perspective, there is no control or limit on facility fixed costs. Rates are set prospectively without regard for actual costs. After switching to prospective payment systems, we now ignore the concept of “cost recovery” or cost reimbursement other than in governmental programs such as Medicare and Medicaid. [2] Patients in different insured or managed care plans, along with private pay patients, are charged radically different amounts for the same services. Hospital rate “chargemasters” are “black boxes” that are not available to patients and are often not understood by the providers.

As argued recently in a legal case: “Hospitals use a complex, confusing, deceptive, and corrupt chargemaster-based billing system to allow them to price gouge various groups of vulnerable patients.” [3] There is no transparency concerning hospital rates or prices. There is no reconciliation of the facility costs charged to different plans, payers, or patients. Many citizens believe that healthcare is a public good, such that basic healthcare services should be available to all at a reasonable and predictable cost. In order to achieve this objective, change is required.

Objectives

The objectives of my proposal are to improve the transparency and accountability of America’s healthcare system. Improved accountability and transparency would provide patients and their families a clear advance indication of how patient charges are determined. It would help eliminate unneeded duplicate services and grossly overstated charges. My compromise proposal would help identify slack in the pricing and rate-setting processes and propose changes that might be acceptable to each political party.

Democrats’ proposal

Many of the current presidential contenders are proposing governmental rate or price caps, especially on pharmaceuticals. Democrats have always had an appetite for government control of the healthcare system, so price controls are a natural solution to consider. Democratic legislatures often favor local and regional cost commissions and planning boards. This proposal would implement regional healthcare planning boards that must approve healthcare rates and prices and any proposed expansions, reductions, or mergers. This option might appeal to Democrats, but it would be ineffective and burdensome if the underlying changes proposed below were not also included.

Republicans’ proposal

Republicans appreciated competitive markets and encouraged health insurers to compete before the ACA implementation, and they continue to do so under the ACA. A GOP-based proposal might be to encourage competitive healthcare markets by identifying a set of low-cost high-quality (LCHQ) providers. LCHQ providers would consist of the best 25 to 30 percent of each region’s providers. These providers would be eligible for favorable government financing and nonprofit tax-exempt status. Providers not identified as LCHQ would not be eligible for government financing (or guarantees) related to expansion of facilities or services offered by such providers. New facilities, new locations, or new services that are not LCHQ would not be eligible for nonprofit tax-exempt status. This would limit the expansion of the healthcare system to only the “best and brightest,” which would ensure “expansion of the fittest.” The majority of healthcare providers would stop trying to be the biggest game in town; the drive to acquire or merge would be limited to those who demonstrate that they control costs and provide high-quality services. Competition to achieve LCHQ status would prevail.

Compromise Proposal

My compromise proposal combines elements from each proposal above. The compromise provides a more efficient and effective solution based on separate treatment of providers’ fixed and variable costs.

I was motivated to develop this proposal after reading news reports about a Denver-area hospital charging $1,800 to pierce a child’s ears. Compared to the cost of piercings in most other settings, such a charge is exorbitant. This high charge consists of a variable portion that covers the cost of labor and materials associated with piercing, likely less than $100, and certainly a small proportion of the total. The remainder of the charge is a “facility charge” that represents the infrastructure of the healthcare provider associated with its fixed costs (e.g., physical structure, equipment, marketing, and other administrative costs). Such facility charges are undermining the healthcare system and patient perceptions of fairness, efficiency, and efficacy in our healthcare system.

Variable costs

The first component focuses on variable costs that would form the basis for a competitive market. It is relatively easy and straightforward to identify variable costs, using statistical and accounting tools, and then apply regionally based mark-up ratios to translate variable costs into patient charges based on diagnostic (DRG) or ambulatory (AVG) patient classifications. This plan would identify variable cost norms based on the LCHQ best practices in each regional market and then use a regionally based mark-up percentage to cover fixed costs, inflation, and return of capital.

These all-inclusive rates would serve as rate-caps that would permit and encourage healthcare providers to compete based on rates and prices that are cost-based and more easily understood. My plan bases competitive rates on the variable portion of patient costs including an inflation factor, using regional medical price indices, and a return on capital matching the inflation factor, with a fixed maximum such as 5 percent. In other words, by encouraging competition based on variable cost based–rates, healthcare prices would be more transparent and more comparable across providers.

Minimal governmental intervention would be necessary to identify markup percentages applied to the LCHQ-based variable cost caps. Republicans should appreciate and encourage this component as pricing would be much more transparent and predictable and competition would be necessary.

Fixed costs

The second component specifies that providers would be limited to recovery of actual fixed costs. In other words, fixed costs should no longer distort healthcare prices, nor encourage expansions that stimulate rapid price increases. Fixed costs are more difficult to translate into patient charges, and they are more difficult to track across different payers, different plans, and different segments of the healthcare system. However, the key to improving our healthcare system’s finances is better control of fixed costs in pricing and rate setting algorithms.

My proposal ensures full recovery of Medicaid-eligible fixed costs, regardless of hospital or non-hospital location. A set of “pass-through agencies” would manage fixed costs and monitor reimbursement of providers’ fixed costs. These new regional agencies, called Healthcare Cost Commissions (HCC), would identify each provider’s actual fixed costs and would approve proposed changes to those fixed costs. HCCs would monitor whether each provider recovers its fixed costs each year and would collect and retain any excesses. On a short-term basis, HCCs would provide financing to cover shortages for a maximum of three years. After that time, if the provider cannot “true-up” its accounts, the HCC would exert more stringent controls.

HCCs would operate as planning commissions, similar to Certificate of Need [4] authorities, but “with teeth” and would eliminate unwarranted expansion and duplication of services. HCCs would not be able to hold funds longer than four years and would be required to distribute any retained funds to projects or organizations that would improve access to rural healthcare or preventive services in any location. Democrats should appreciate this component with its strict governmental controls. All citizens should appreciate the elimination of overcharging for fixed costs and using any such overages for rural services or preventive care.

HCCs would control and rationalize the rampant expansion of healthcare providers’ facilities and attempts to take over independent providers and medical practices. This proposal limits the huge expansion in providers’ fixed costs and in the charges related to fixed costs, such that the rate of increase in healthcare prices would decrease. This proposal removes the distinction between hospital and non-hospital facilities while removing the incentive to provide all healthcare services in a hospital facility. Removing this distinction would decrease the incentive to merge with or acquire other providers, which may decrease total fixed costs in the region and it would encourage providing more services in non-hospital settings with attendant lower costs.

Regional public utilities

This proposal reorganizes the healthcare system as a public utility with pricing based on an approved rate base. It regulates healthcare finances on a regional basis—not necessarily on a state or local basis. For example, the Quad cities in Illinois and Iowa or Kansas City (Missouri and Kansas) constitute a regional market, as does the entire corridor along Lake Michigan from North of Milwaukee to East of Gary, Indiana. A regional healthcare market now extends along the Rocky Mountains from Wyoming to New Mexico. Similar examples abound elsewhere; large regional markets also exist within states, such as in Los Angeles, San Francisco, and Seattle. Even though there are two large regional markets in California, they are dissimilar and better managed as regional utilities and not by a single state agency.

Rural areas have different cost structures and labor markets and should be separated and treated differently from urban market areas. Furthermore, rural areas generally provide a limited array of services. Each HCC would be responsible for access in its surrounding rural areas, as negotiated with its adjacent HCC neighbors. Rural providers would not be subject to the same limits imposed in metropolitan regions; there would be more flexibility.

Cost benefits

Each HCC would cover its overhead by including a separate component in the allowable fixed costs to cover its anticipated operating costs. The costs of the HCC agencies would be less than the current administrative costs associated with rate negotiations, rate discounts, and billing issues associated with in-network and out-of-network providers as my plan eliminates many of these administrative burdens. The HCC overhead should be at least cost-neutral, with the potential to generate significant overhead reductions.

Looking Forward: Distinguish Between the Variable and Fixed Costs of Healthcare

This variable and fixed cost framework would have a major impact on redesigning America’s healthcare system. It would lead to reshaping the dialogue around healthcare reform. It would eliminate price gouging in the emergency room, as described in a 2013 study that found that ER’s charge on average between 1 and 12.6 times what Medicare pays for emergency care. These ER bills were more than 340 percent of what Medicare covers, specifically $4 billion in ER charges versus $898 million in Medicare allowable amounts. [5]

 

References

[1] Ozcan YA, Luke RD. A national study of the efficiency of hospitals in urban markets. Health Services Research 1993;27(6):719-739.

[2] Green, EP. Payment systems in the healthcare industry: An experimental study of physician incentives. Journal of Economic Behavior & Organization 2014;106(4):367-378.

[3] Nation G. Hospitals use the pernicious chargemaster pricing system to take advantage of accident victims: Stopping abusive hospital billing. Drake Law Review 2018;66(3):645.

[4] Certificate of Need (CON) was an effort to contain costs, improve quality, and increase access under federal Public Law 93-641 as part of the Health Planning and Resource Development Act of 1974. CON was generally ineffective because it had no linkages to ongoing costs or prices, nor did it include analyses of historical fixed and variable costs or rates proposed by CON applicants.

[5] See: https://www.fiercehealthcare.com/finance/emergency-care-costs-rise-health-care-cost-institute?mkt_tok=eyJpIjoiT0RCbE9Ua3dPR1UwTURVMSIsInQiOiJDUTFydkNFRWFCXC9Ic1c1ZUNMWUIrSVwvMkQ0VHdvZlwvRlRjcjF1MGhwV1FtMUF2aks4VlNUZ1BDNnVqUkJcL0plYTNKUVwveGFONVJ1UFwvNGFqSlFrK2lvOU1vWW1qXC9hK3dIY0F6VTJEWjNWYnA5N0JcL3duNm94cE9GTXNMc3VkWnlmIn0%3D&mrkid=745430&utm_medium=nl&utm_source=internal