New Healthcare Change Cycle Is Opportunity to Fix Problems

Will Laboratory Industry Exert Positive Influence?

CEO SUMMARY: Healthcare’s new cycle of change will be greatly influenced by geneomics, proteomics, the Internet, consumer-driven healthcare, and political decisions that affect the Medicare and Medicaid programs. The launch of a such a new cycle of change presents the laboratory industry with an opportunity. Timely input with key decision makers can insure that the long-standing problems concerning test coverage decisions, adequate reimbursement, and patient access to testing services can be corrected.

HEALTHCARE IN THE UNITED STATES is entering a new cycle of change—one that will radically alter many long-standing institutions and common business practices.

Some healthcare futurists predict this cycle of change will revolutionize every aspect of healthcare, from how health services are funded to the relationship a patient has with his/her physician. Moreover, many experts predict these changes will occur relatively rapidly.

For this reason, laboratory managers and pathologists should begin to track this cycle of change. Strategic planning sessions should include a review of global trends and influences in healthcare, along with trends specific to laboratory management and laboratory medicine.

Managed Care Experiment

The last healthcare change cycle is the “managed care experiment.” It demonstrates how specific political themes and business philosophies can frame the debate and push healthcare in a specific direction.

Starting in the mid-1980s, the nation launched an ambitious effort to introduce “managed care” operational models into healthcare. As an experiment, it was a disastrous failure. By the second half of the 1990s, consumers had resoundingly rejected the worst aspects of the primary managed care business model—the closed- panel, gatekeeper HMO. As well, both hospitals and physicians were left in financial turmoil, a consequence of accepting capitated and full-risk contracts with payers.

Consumers rejected the managed care plans offered to them for two reasons. First, this healthcare model actively strove to deny care to consumers who, under fee-for- service insurance plans, were accustomed to getting any and all healthcare services they felt appropriate. Second, consumers resented being forced to accept a limited number of in-network providers, along with restrictions on the ability to obtain second and third opinions.

Neither health insurance companies, employers, nor Medicare/Medicaid could sustain their experiment with managed care in the face of this consumer rebellion. The fallback option became PPO and POS plans (preferred provider organizations and point-of-service).

Ongoing Problems

However, recent years’ experience demonstrates that these types of health plans have failed to satisfy anyone. Consumers are still concerned about the cost of care, the quality of care, and access to the doctors they prefer. Employers are struggling to cope with four consecutive years of double-digit increases in their health insurance premiums. And within the Medicare and Medicaid programs, both federal and state governments are failing to provide the funding necessary to allow hospitals and physicians to fully recoup the cost of the care they provide to beneficiaries of these programs.

Consequences Still Remain

Most clients and regular readers of THE DARK REPORT are keenly aware of these events. I’ve summarized them above to establish agreement on a key point: that between 1985 and 1999 we lived through a distinct and identifiable cycle of change in the healthcare system of the United States. Further, another consequence of the experiment in managed care is that any number of medical procedures are now reimbursed at amounts which fail to adequately cover the full cost of providing those procedures.

Most lab managers and pathologists would agree with me when I say there exists an uneasy status quo in healthcare today. Providers have reservations about the intentions of employers and private payers. Budget constraints within the government cause Medicare and Medicaid program administrators to arbitrarily reduce the money paid to providers, whether through restrictions on when a procedure will be reimbursed, or through reduced levels of reimbursement.

This is a familiar story in the laboratory industry. Medicare takes the collective menu of tests and pays an arbitrary percentage of a “national price.” It has also failed to provide cost-of-living increases to the fee schedule in most of the past 15 years.

Glum View For Improvement

Are lab managers and pathologists frustrated with the Medicare and private pay situation that exists in healthcare today? You bet! Is there a popular belief that things will get worse before they get better? Definitely!

Simply put, every laboratory administrator and every pathologist has a vested interest to see that this cycle of change in healthcare generates positive improvements in today’s status quo. Existing problems can be solved. Medicine can again become a satisfying profession that provides adequate compensation to its providers.

Seeking Objective Solutions

I suggest that, with healthcare entering a new cycle of change, it is both appropriate and timely for the laboratory industry to become a voice for positive change. It is at the start of such a cycle that our industry has the maximum potential to influence events toward the right outcomes.

In the early days of the managed care experiment, laboratories failed to understand the ways this business model would fail, both in providing adequate recompense to providers and in meeting the needs and expectations of consumers. The consequences were devastating throughout the laboratory industry. That is why it is timely for our industry to have an influential voice in the current debate about “where do we go from here.”

What is the right starting point? In my view, there are four main drivers in the healthcare system today. The first is Medicare. In many ways, what Medicare does directly influences the decisions of private payers. Second would be employers. They pay for the largest portion of healthcare in this country. Third are the state Medicaid programs, which directly reflect unique attributes of each state. Fourth are the state health insurance regulators.

Each of these vested interests has its economic and political agenda. It is not for me to sort out the merits of each position. I would like to focus on one aspect of the debate on which I believe most laboratory executives and pathologists concur: Whatever the next shape and form the American healthcare system takes, laboratories will do best if both physicians and consumers are allowed to choose the laboratory—and lab testing services—that best meet their needs.

I’ve already noted how consumers want choice in healthcare. Both employers and politicians are sensitive to that concern. It is also acknowledged that physicians don’t like to be forced, by contract or other means, to use a specific laboratory that might not meet their needs and preferences.

The Right To Chose

For the laboratory industry, these are two important constituencies which support choice. However, buyers of healthcare (read: government, payers, and employers) often want to restrict choice for a variety of reasons. To help clients and readers of THE DARK REPORT understand some other dimensions of this situation, we are reproducing an essay written by Regina Herzlinger, the distinguished professor of business administration at Harvard University.

Herzliner brings out additional perspectives in the debate about how to reform our healthcare system which seldom get much attention. Her comments about the need for choice do mirror the laboratory industry’s interest in this subject. As well, the overall perspective in her essay is sure to stimulate energized discussions for any laboratory which includes this in their strategic planning sessions.

Regina Herzlinger’s Observations About U.S. Healthcare System

By Regina E. Herzlinger

WITH THE EFFECTIVE PASSAGE of the Medicare drug bill, we have just vastly enlarged the healthcare sector. This is the one-seventh of our GNP that is run Soviet-style: where the doctors who are uniquely qualified to create and manage health-service businesses are prohibited from owning more of them; where entrepreneurs often must pass a local government smell “test” before they are permitted to build new facilities; and worst of all, where government dictates the prices and exact characteristics of the insurance benefits for which it will pay. Most private health insurers follow Medicare’s lead.
• • •
Small wonder that healthcare costs rise at double-digit rates, while the rest of our economy perks right along. Back in the U.S.S.R.

The U.S. economy has boomed because brilliant entrepreneurs can enter it freely. If they succeed, they are appropriately lionized. A McKinsey report claims that the retailing industry was No. l in enhancing productivity, and credits Sam Walton’s WalMart for much of that increase. No. 2 was the finance sector, whose productivity was greatly enhanced by John Bogle’s dogged insistence on the wisdom of indexed, consumer-driven mutual funds. Yet, had Messrs. Bogle and Walton been forced to rely on government approvals to start their businesses and on government-dictated products and prices to earn their revenues, we might not have benefited from the productivity-enhancing innovations they created. Indeed, they would have been chopped off at the knees if they were in the health-care sector: It prohibits physicians, the healthcare equivalent of Messrs. Bogle and Walton, from owning their own facilities. The unattractiveness of these conditions explains why few of the 100 Harvard MBA students enrolled in my “Innovating Health Care” course plan to enter the trillion-dollar health-services sector.
• • •
Further, because Medicare prices are dictated by government and do not reflect marginal costs, capital is misallocated. Among other things, this has produced vast temples to cardiology, a service Medicare has overpriced; and shreds of services for emergency care, a service that Medicare has underpriced. And because Medicare dictates product specifications, it penalizes innovations. For example, Duke University’s Medical Center improved the health of victims of congestive heart failure and vastly reduced costly hospitalizations by integrating into one team the many different providers required for appropriate care for this disease—who normally do not communicate with each other—saving $8,600 per person. But Medicare pays Duke primarily for hospital-based care. There is no standard payment code for integrated care. In Medicare’s straitjacket, the more Duke’s innovation improved health and lowered costs, the more money the center lost.

The unattractiveness of these conditions explains why few of the 100 Harvard MRA students enrolled in my “Innovating Health Care” course plan to enter the trillion-dollar health services sector.

• • •
Technology innovators also are penalized by delays and mispricing. For example, Medicare waited for a full year to cover the implantable defibrillators that caused a 31% reduction in deaths, when compared to patients treated only with drugs. These high-tech, $25,000 devices can prolong lives for up to seven years. Without Medicare’s coverage, some of those who could not afford to pay out of pocket surely died prematurely. Yet positive coverage decisions still do not assure access. If Medicare sets inadequate prices, providers lose money. Its price for implanting the drug-eluting stents that prevent reclogging of an artery, for example, eliminates hospital profits. Providers who implant do it as a charitable act.
• • •
Sure, it is great that seniors will now have expanded access to drug benefits. After all, the purpose of health insurance is to enable people to use services that they could otherwise not afford. But, can we have our cake and eat it too? Yes! With an American Revolution that replaces the Medicare entrepreneur-strangling apparatus with a market-based system of determining supply and demand. Consider the following example of how it would work for victims of congestive heart failure:
An innovative provider like Duke could offer its program at 20% lower prices—the savings it achieved. Innovators in drugs and devices could freely market them to these providers, who would determine their value for the money.

Enrollees could then select from different programs that offer complete, integrated treatment of their disease. Healthcare clones of Consumer Reports would help them, just as people now get help buying computers and cars. Enrollees who opt for more cost-effective packages, such as Duke”s, could use some of the savings for costly, uninsured needs, such as long-term care.

As for government, in a consumer- driven healthcare system, such as Switzerland’s, its role is to risk-adjust payments, so insurers and providers are rewarded for caring for the sick. Governments also prosecute incompetent, fraudulent providers and help the infirm and indigent.

Some economists believe that the healthcare sector is optimally efficient: You can’t make this orchestra play any faster. To them, only a single-payer system that eliminates redundant insurers and rations care can control costs. But a growing number of consumer-driven entrepreneurial insurance plans, intermediaries and health-care providers disprove such views the old-fashioned American way—by increasing productivity. Such plans could be offered as options under the Medicare program.

In Medicare’s straitjacket, the more Duke’s innovation improved health and lowered costs, the more money the center lost.

In our traditional healthcare system, a typical corporation limits the choice of health insurance plans to a single, one-size-fits-all plan. But consumer-driven insurance plans are designed for individual needs. The Minneapolis-based Vivius program lets enrollees choose the plan that best fits their budget from an a la carte menu of doctors, hospitals, deductibles and co-payments.

Other plans let enrollees set aside funds in tax-free savings accounts for

Under the Medicare regime, however, the money is spent cruelly because it restricts care; and wastefully, because it shackles the innovators who represent the best promise for controlling costs, improving quality, and increasing the access to our healthcare system.

uninsured, important and costly benefits, such as drugs or long-term care expenses. The Illinois-based Destiny plan rewards health-promoting enrollees with lower costs. Some plans are relatively cheap; one provides insurance against catastrophic medical events for $1,500 for a single mom and two kids, unlike the typical $5,000 to $8,000 cost for such coverage. Sure, the plan has a $2,000 deductible, but it ‘s a lot better than no insurance at all! Entrepreneurial firms help consumers sort through their options with the aid of skilled personnel, computer programs and hard data about the quality of doctors and hospitals.

Then there are the productive providers. A Minneapolis-based employers’ consortium, BHCAG, permits doctors and hospitals to organize themselves into care systems, quote their own prices and
determine for themselves how to best pro- vide services. Innovative regimens like these reduce treatment costs by improving overall health.

Many people who favor centralized control defend the current state of affairs by scoffing at consumers’ abilities. Health care is “too complex” for the likes of us to negotiate on our own. Without their savvy help, we would get lost. But somehow, we consumers have steadily improved the quality and beaten down the price of computers, cars and other complex products without their limiting of choice.

Others ask where governments could find the money for sick people who would favor plans that give them freer access to care. Hello?! Medicare expends that money right now! Under the Medicare regime, however, the money is spent cruelly because it restricts care; and wastefully, because it shackles the innovators who represent the best promise for con- trolling costs, improving quality, and increasing the access to our health-care system. The competitive features of the new bill are a step in the right direction. But, if it went further, ending Medicare’s pricing and benefit stranglehold and recognizing physicians’ right to own facilities, we could replicate in our health care system the productivity gains we enjoy elsewhere in our economy.

Ms. Herzlinger is a professor of business administration at Harvard Business School and a senior fellow at the Manhattan Institute. She is the author of “Consumer-Driven Healthcare,” a new book soon to be published by Jose-Bass. This essay is appeared in the Wall Street Journal, which holds the copyright.


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