The Cost of Outliers

The Cost of Outliers

Malcolm Gladwell is well known for his book Outliers, about people who become extremely successful thanks to intense practice, good luck, and supportive situations that enable their early practice and skill development. If you have read his book, you probably have at least a little exposure to the idea that some people are unique and can have a surprising influence on the world. But one area you probably haven’t considered with the impact of outliers, unless you study healthcare economics, is in medical spending.

 

In his book The Opioid Crisis Wake-Up Call, Dave Chase explains the issues with outliers in our system. “Six to eight percent of plan members are spending 80 percent of the plan dollars,” Chase writes.

 

We probably imagine that our healthcare costs are so expensive because so many American’s don’t eat well and don’t exercise. I have argued in the past that we don’t support a universal healthcare system in our country because many people think the problem is that others are not taking responsibility for themselves and are simply fat and lazy, costing more for the rest of us. The reality is that a huge amount of our total healthcare spending, as much as 80% according to Chase, is from a tiny percent of the population. Our outliers are driving the cost of healthcare up at an alarming rate, and it is not simply because these outliers are fat and lazy.

 

The people who spend the most on healthcare mostly have rare diseases, congenital conditions, or need extreme emergency acute care. Chase writes, “They tend to have complex health problems, usually with multiple comorbidities.” Because we don’t recognize that most of our spending goes toward outliers, and because we are biased against a vision of fat and lazy people, we adopt policies that bankrupt these outliers who often were simply born with bad luck when it comes to health.

 

What is really detrimental to our system is that these outliers are often misdiagnosed. Chase writes, “In any given year, about 20 percent of the outlier group is completely misdiagnosed. This means that about 16 percent of plan dollars each year are being wasted on treatments for diseases the patients don’t have.” It will always be difficult to treat outliers. They are not typical patients, and have multiple health issues that interact in complex ways. But because we don’t make their care easy and because healthcare in the United States has so many barriers, we end up failing this population, and the errors and failures mean that we waste a huge amount of money and resources in their care. It doesn’t just cost the individual, but everyone on the healthcare plan.
Guidance Toward High Value Care

Guidance Toward High Value Care

In his book The Elephant in the Brain, Robin Hanson explains that a lot of medical care and healthcare services are more about signaling than about the value they bring to the patient in terms of improved health and effective management or treatment of a given condition. Healthcare has a lot of signaling, showing others that we make enough money that we can go do something for our health, pushing others to get care to show how much we value having them be healthy, and giving us or others a chance to show how much we know and understand the human body. However, not a lot of what we push people toward really demonstrates that it adds a lot of value.

 

This is a problem that Dave Chase thinks is a big contributor to our nation’s healthcare woes in his book The Opioid Crisis Wake-Up Call. Chase is critical of unnecessary services and a medical system that pushes people toward care, without providing means to ensure that the care we push people toward is actually valuable. He recounts a conversation he had with Dr. Martin Sepulveda, “indiscriminate provision of health care services – absent efforts to help people understand how to use those services – leads to voracious appetites from both patients and providers for services that add little value but add a lot of cost to the individual, company, and society.”

 

When a child runs to their mother for a kiss on a bruised knee, the kiss doesn’t actually add any value in terms of helping heal the child’s bruise. But the care provided by the mother does signal her love for her child, signals to the child that they are valuable and important, and signals to others that the child has allies who will aid them during a time of need. The example is extreme, but if you look close enough, you will see some of the same aspects at play in many of our healthcare interactions.

 

Increasing access to healthcare without helping people understand what care they should seek, without helping people understand what options they really have, and without guidance toward high value care, means that we will use healthcare in a wasteful manner. Paying providers just by the number of procedures they do, and not by how much they help patients, encourages unnecessary medical procedures. Telling patients that if they value themselves they will go to the doctor every time they feel a little off will lead to patients overusing primary care. And pushing people to the emergency room every time they say they don’t feel well could crowd our ERs and delay care for those who really need it. The problem is difficult to solve, and I want to acknowledge that it is hard to know what care is really appropriate and what is wasteful signaling. That is the point that Chase makes. Without more transparency and clarity in the system, we won’t really know what medical services we should and should not pursue, and we (along with providers) will likely overindulge in high-signaling low-value care rather than medical treatments that are really useful and meaningful.
Transparent Price Bundles

Transparent Price Bundles

One of the items that Dave Chase calls for in his Fair Trade for Health Care Plan in his book The Opioid Crisis Wake-Up Call is bundled prices. He wants pricing to be transparent and up-front so that patients know what services they are receiving, and he wants prices to be bundled for any procedures that we undergo.

 

As chase writes, “Imagine buying a car and getting a bill for the transmission six months later. You’d be livid, yet this sort of thing happens all the time in the healthcare industry.” If you have ever gone to an emergency room or had a surgery, you likely have experienced what Chase is talking about. You were probably billed for the procedure and the doctor who saw you, but then you might receive a separate facility bill some time later, or you might receive a separate bill from the anesthesiologist months after you thought you had finished paying everything from the procedure or emergency room visit that you had.

 

The amount of additional bills that keep rolling in from a single procedure can be frustrating and overwhelming. You likely get an explanation of benefits that to an ordinary person doesn’t explain much of anything, and then you get multiple bills from multiple entities with no clear explanation of why you are receiving another bill. The confusion can easily frustrated patients and prevent them from being able to contest what many see as unreasonable charges.

 

In Chase’s Fair Trade for Health Care, providers would have to be up front about any costs that patients are going to incur before a procedure or encounter. This would include bundling all prices together ahead of time to reduce surprise billing. A patient can try to anticipate charges, but if they can’t anticipate who will be billing them, they cannot truly have a sense of what a procedure will cost them. This is an unfair practice from healthcare providers and drives up costs for everyone.
Pharmacy Benefit Managers

Pharmacy Benefit Managers – Another Shadow Healthcare Actor

Unless you are a health policy person, I’m guessing you have not heard of pharmacy benefit managers, or PBMs. The Commonwealth Fund describes a PBM as “a company that manages prescription drug benefits on behalf of health insurers, Medicare Part D, large employers and other payers … by negotiating with drug manufacturers and pharmacies to control drug spending.” I always thought that pharmacy prices were set directly by my insurance carrier, in contracts that they had worked out somewhere along the line. But it turns out it is more complicated than that, and if you are like me, you will probably understand that PBMs provide some value, but also feel as though they are another actor doing little but driving the cost of healthcare up. For me, it is probably a bit unreasonable, but I hate PBMs.

 

In his book The Opioid Crisis Wake-Up Call, Dave Chase explains how pharmacy benefit managers negotiate rebates with drug companies and insurance carriers for specific drugs. However, the rebates don’t actually get back to the patients. Usually the insurance carrier and PBM are the ones who benefit from the rebate, and specific medications are pushed toward patients so the PBM and insurer can get the rebate. PBMs operate way in the back, and don’t get the same scrutiny as health insurance companies. They are hidden and shielded from risk, which means they have little incentive to put patients first.

 

“PBMs are typically paid by the transaction or employee; it’s not their money, so its not their risk,” writes Chase. “They may strive to handle claims quickly and efficiently, but their defenses against fraud and abuse of prescription drugs are antiquated. The shared responsibilities of the employer or government agency and the PBM create situations in which neither can see the whole picture. Criminals exploit this weakness, leading to a flood of prescription opioids on the street. The American insurance system has allowed this distribution explosion to occur, doing little to nothing to halt its growth.

 

The quote above highlights the misaligned incentives with PBMs, insurers, and governments or employers. PBMs that hide data, favor medications for unclear reasons, and don’t face a lot of direct risk have created lots of problems for the American healthcare system. I opened with a discussion of pricing problems brought on by PBMs, and Chase’s quote shows how they have also contributed to the abuse of prescription opioids. Chase’s book, with examples like the ones laid out in this post, paints a worrying picture of pharmacy benefit managers in the United States. It is partly the complexity they add in the system, and partly the shady behind the scenes deals they are a part of that make me dislike them so much. This type of confusing and apparently unethical role for PBMs is also part of the reason that a lot of people want a universal healthcare system that is able to negotiate drug prices and set specific limits on some costs. It might not save everyone a ton of money in the long run, but it might be more ethical and clarify some of the most confusing parts of the system.
Healthcare Brokers

A Hidden Obstacle in Controlling Healthcare Costs: Brokers

If you are a large company, you probably don’t have one person or department contacting various insurance agencies, hospitals, and pharmacies to get everything in place for the health insurance you provide to your employees. You likely work with a broker who is your agent in negotiating with insurance and healthcare companies. They help you understand the contract you sign with a carrier, and if you are going the self-insured route, they likely help navigate hospital and pharmacy contracts as well.

 

The broker you choose can greatly influence how much your company is going to pay for the health insurance provided to employers, for the administration of a self-insured plan, and even for individual services with providers. Brokers often position themselves as buyers agents, that is as representatives of the company looking to purchase coverage or administration, however, many brokers are simultaneously working for hospitals or for insurance agencies. What’s more, the hospital or insurance agency might compensate the broker more than your company, making the broker more of sellers agent than a buyers agent. Dave Chase highlights and explains this in his book The Opioid Crisis Wake-Up Call:

 

“Your business is just one piece of the total, but keeping it with the same carrier can boost the broker’s total compensation by 50% or more. Because this compensation isn’t specific to you, status quo brokers will often claim they’ve disclosed fees and commissions. But they are actually only disclosing your account-specific fees and commissions that may not even be the most significant piece of their overall compensation.”

 

If a broker is getting paid by an insurance carrier to keep your company with that carrier, then your chances of shopping around to find better alternatives are slim. Your broker is likely to encourage you to stick with your current carrier and accept whatever fee increase they present you with for next year’s coverage.

 

Chase continues, “Forward-looking brokers have sent me letters from insurance carriers saying they’d be fired when they spoke the truth about egregious practices the carrier was inflicting on the broker’s clients. This makes it clear that the carriers view brokers as a quasi-employee they can fire at will. In other works, they are working for the carrier, not your organization.”

 

The company that Dave Chase runs can help you identify trustworthy and high quality brokers. If you select a broker at random or just because you have a good relationship with them, you run the risk of working with someone who is not as independent as you think. The connections and world of insurance carriers and brokers is complex, and navigating it successfully on your own is challenging.

 

At another point, when addressing brokers, Chase writes, “You should always ask your benefits broker or claims administrator if a local hospital is a client, as that is a clear conflict of interest, especially when the hospital itself owns the insurance carrier.”

 

It is clear to me that the healthcare industry has too many entities that are tied together in unclear ways. If we hope to change the system in the future to be more equitable, to reduce prices, and to actually provide quality services, these status quo relationships will have to be broken up. That might be a task the government can solve, but Chase would argue that companies have the tools to do that work as well, they often just don’t utilize the leverage that they have.
The Specter of Rationing Care

The Specter of Rationing Care

American’s fear having to wait for anything. We want to order things from the comfort of our own home and have them delivered in two days. We don’t want to wait behind more than three people in line at the grocery store, and we don’t want to wait for medical care (to be honest these are all examples from my own life – not picking on anyone who isn’t like me here). Our fear of waiting is used as a reason against universal health coverage. We are told about Canadians who cross to the United States to have surgeries that they would have to wait several months to have in Canada. We are told that we won’t be able to schedule an immediate primary care appointment if more people were to have access to health care. And we are told that the high costs of medical care stop unnecessary care from happening, preventing us from having to wait to see a doctor.

 

However, these fears of waiting and the specter of rationing care presented to us in these scenarios is overblown. It is true that some Canadians chose to get care in the United States for elective procedures, but presenting that fact to us in isolation is misleading and done in bad faith. The reality of our waiting for care is much more complex. Dave Chase does a good job of explaining it in his book The Opioid Crisis Wake-Up Call, “People often raise the specter of rationing care. In reality, it’s overuse (i.e., unnecessary and potentially harmful care) that leads to reduced access by squandering enormous financial resources that would be better used for individuals who actually need care and can’t get it.”

 

We act as though our healthcare system is following good market incentives to find a good balance between wait times and receiving the right care. But we often fail to acknowledge that our healthcare system isn’t performing like an ideal market, and that it often pushes people to too much of the wrong type of care. Chase details this in his book with unnecessary back surgeries. Those who have a legitimate need for a back surgery might have to wait, because primary care providers get a bonus when they refer patients to orthopedic surgeons who are paid to operate. The right path for a patient might be physical therapy, but the money for the providers is in the surgery.

 

We should not raise the specter of rationing care when we are so wasteful with the care we provide through our current system. We waste a lot of money when we don’t have a concern about rationing care, and when we reward providers for doing more surgeries, prescribing more pills, and offering more treatment, even if the efficacy isn’t proven. In his book, Chase doesn’t advocate for a universal coverage system with healthcare covered by the federal government, but he does show how employers today can do more to ensure their patients get more of the good care (the effective PT and preventative check-ups) for free. This reduces the demand on the expensive and unproven treatments later on, and actually reduces the demand on the system for services that we are afraid of rationing.
Healthcare Price Transparency

Healthcare Price Transparancy

Have you ever tried to figure out what a healthcare procedure is going to cost you before you have the procedure? Almost no one can give you a straight answer, and it takes a long time to get a number at all because the doctor’s office has to check with your insurance to see what their agreement is, what you still have left with your deductible, and where you stand relative to your out of pocket maximum. The result is that consumers have very little insight into what they are actually going to pay or owe when they go to a check-up, when they need a new prescription drug, or when they have a knee operation at a local hospital.

 

In his book The Opioid Crisis Wake-Up Call, Dave Chase addresses the lack of transparency in healthcare pricing. Specifically looking at the ways that insurance companies hide claims data from employers, Chase writes, “They want to maintain the status quo. This means protecting pricing opacity at all costs. If you could see the prices you actually pay, you might begin to wonder why a hospital with a large market share but mediocre quality outcomes is paid exponentially more than a smaller, high quality provider in the same network.”

 

Healthcare price transparency reveals disparities in our healthcare system and shows that healthcare costs are often not connected with quality or health outcomes. Cost is somewhat arbitrary and usually negotiated without the person who will actually be receiving the service. If we could see the costs, then we would be more likely to shop around, either for different insurance or for different healthcare providers with more reasonably prices for services and treatments. I think our health spending is generally rather inelastic, but nevertheless, if we better understood pharmacy pricing, basic medical services, and major surgery costs, we could start to move toward options that offered higher value.
Medical Technologies

The Problem with Healthcare Technology

In my last post I wrote about hidden costs of the healthcare system in America. I wrote about tax breaks for employers who offer health benefits, and I wrote about third party insurance preventing the healthcare system from working like a pure market. This post introduces one consequence of the hidden costs of our system and the ways in which our system fails to act like a market: the high cost of medical technologies.

 

In The Opioid Crisis Wake-Up Call, Dave Chase writes, “We ended up focusing on a certain type of high-technology, acute medical care – which we financially reward far more than lower-level preventive and chronic care – without regard for the quality of the outcomes or value of the care.”

 

When I took a healthcare policy and administration class along with a healthcare economics class for my graduate studies, I was surprised to see a critique of advancing medical technologies as part of the problem of American healthcare costs. I live in Reno, under the sphere of influence of the Bay Area, where technological solutions to global problems are hailed as the cure-all, deus ex machina that we need for a peaceful and prosperous world. I always thought that better medical technology saved lives, made us healthier, and ultimately reduced cost by being more efficient and precise than older technologies.

 

As it turns out, new medical technologies are incredibly expensive, and often times the benefits that patients receive are only marginally better than what existing technology offers. In some instances those marginal improvements make the difference between life and death, but in many instances, the new technologies might only add a few months of life to a terminal diagnosis, a few additional months lived in pain and fear. In other instances, the new technologies might add a little more comfort or certainty in a patient’s procedure or diagnosis, but it is fair to question whether its really necessary and worth the additional cost.

 

The quote from Chase reveals that when we are shielded from the costs of care, and when we remove market aspects from the healthcare system, we adopte a mindset that healthcare equals expensive interventions with high cost technology. I had clearly bought into this narrative prior to my graduate studies. The alternative that Chase highlights in his book, which we have underdeveloped in the United States, is to move upstream, and take care of people at a preventative level before they are sick and before they need expensive technological interventions. Developing systems, structures, and norms for healthy lifestyles will do more to reduce costs than the development of new magical cures and technological fixes. Our priorities and the focus of our system is flawed, and a as a result we focus on high cost interventions within a system no one is happy with. Rather than develop a system that actually supports healthy living, we have fished around for quick, high-cost technological solutions to our health woes.