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September 2013

Medicare Reform (2/2)

MedicareEssential graphic 1

(Picture credit: Commonwealth Fund website) In “Medicare Essential: An option to promote better care and curb spending growth”, also in the May 2013 issue of Health Affairs, K. Davis, C. Schoen and S. Guterman suggest an alternative to the current Medicare – with its separate coverage for hospital, physician services and prescription drugs – that would offer comprehensive, integrated benefits as well as incentives to choose high-value care. They make the following estimates:

  • Out-of-pocket savings from lower premiums and health care costs for a Medicare Essential enrollee would be $173 per month.  
  • Total health spending relative to current projections would be reduced by $180 billion.
  • Employer retiree spending would reach $90 billion during 2014-2023.

Given all the talk about bundled payments and better coordination of care, it is indeed curious that a possible redesign of the Medicare program has not received more attention in the media. The choice available to retirees is humongous, the differences between the various options are not clear, and many researchers in behavioral economics have found that too much choice leads to paralysis – ultimately, no choice or regret about the choice because of all the options left unexplored. (The most famous experiment is due to S. Iyengar and involves jam samples in a supermarket: “When choice is demotivating.” It is important to note her conclusion is not that there should be no choice at all. A moderate level of choice is good; however, too much choice is overwhelming for customers and here, potential plan enrollees.)

The separate prescription drug coverage (Medicare Part D) only came into effect in 2006, as a result of the 2003 Medicare Modernization Act, to make prescription drugs more affordable for retirees. This left the program only three short years to get off the ground before discussions regarding the Affordable Care Act took center stage. The ACA continues to hog the limelight with the current implementation of Health Insurance Exchanges, but it has always been obvious that enforcing mandatory insurance without structural cost reforms would do little to address the severe strains on the federal budget.

The authors have advocated for Medicare reforms before, in particular through a new program design they had called “Medicare Extra”. The first author in particular, who recently returned to Johns Hopkings after many years leading the Commonwealth Fund, has a rich experience in the real-life world of healthcare finance. The integrated Medicare Essential approach echoes the conclusions reached by the Medicare Payment Advisory Commission (MedPAC) in its June 2013 report to Congress, “Medicare and the Health Care Delivery System”.

Davis et al provide a summary table of Medicare Essential Benefits Design and Incentives in their Exhibit 2. Here are some snippets of their plan:

Deductible: hospital/physician, unified $250 deductible (does not apply to preventive care.)

Cost-sharing: $20 co-pay for primary care visit, $40 copay for specialist visit, 10% for lab or diagnostic outpatient (lowered to 5% in some cases such as ACO), 10% for other Part B services currently subject to 20% cost-sharing (outpatient surgery, durable medical equipment, etc), $50 copay emergency department visit unless urgent or accident.

Prescription drugs: 25% cost-sharing for non-preferred brands, out-of-pocket limit includes Rx drugs. Would use reference pricing (pay up to level of lowest-cost two drugs, patient would pay the difference unless provider justifies not using the lowest-cost drugs). There would be a nominal copay for generic drugs.

I think this idea has a lot of potential, in addition to being very timely, and hope it will serve as the starting point for a reform integrating the various plans of the Medicare program.

Medicare Reform (1/2)

HA-May-cover This post and the next one focus on important Health Affairs articles about possible Medicare reforms.

In “Public financing of the Medicare program will make its uniform structure increasingly costly to sustain”, by K. Baicker, M. Shepard and J. Skinner (May 2013 issue), the authors argue that “the one-size-fits-all Medicare program, with everyone covered by the same insurance policy, will be increasingly difficult to sustain.” They further show that “a Medicare program with guaranteed basic benefits and the option to purchase additional coverage could lead to more unequal health spending but slower growth in taxation, greater overall well-being and more rapid growth of gross domestic product.”

They quote a 2012 New York Times blog post by a Princeton professor, U. Reinhardt (“A Fork in the Road”), according to whom the US has reached a point where it must decide whether to “maintain the relatively egalitarian structure of Medicare but sharply restrict expenditure growth – presumably through cuts in coverage or reimbursement rates, or allow benefits to vary by income, with high-income people who choose more generous plans required to pay for the additional coverage out of their own income.”

Baicker et al have developed a stylized “framework to evaluate both current and future health care system structures and expenditures under different redistributions and insurance programs.” They assume that “there are different income groups and that individuals make choices about how much to work and how much to consume in health care versus other goods.” They measure the generosity of healthcare plans based on the services covered: “which treatments are covered for which specific disease categories, with increasingly generous (and expensive) plans working their way up the cost-effectiveness curve.” In their analysis, “under basic coverage [the approach they propose] the average tax-to-GDP ratio rises from 35.5 percent to 39 percent of GDP.” Under the status-quo approach, it would rise to nearly 50 percent of GDP.

While the approach the authors advocate is fraught with political pitfalls, it is already in effect for Medicare drug insurance, and Medicaid versus private insurance. It is also used in European countries, with most people buying supplemental coverage.

DARPA and innovation

Short post for today - I've been busy writing my book on engineering innovation so I have mostly prepared posts on healthcare reform for the blog (if you are interested in Medicare reform, you'll want to read the post that'll be coming online on Friday and the one next week), but I couldn't resist writing a paragraph about an article I read in the October issue of Harvard Business Review, "Special Forces" Innovation: How DARPA Attacks Problems, by Regina Dugan and Kaigham Gabriel. Needless to say that will make its way into the book as background research, since everyone agrees DARPA is the poster child of successful innovation at the interface of basic science and practical breakthroughs. 

Of course you might argue that Dugan and Gabriel, who served as director and deputy director at DARPA for less than three years before moving on to Google, might not be the best people to write articles on the essence of innovation at DARPA, given their short tenure, but the article is interesting nonetheless.

A key feature of the DARPA model, the authors argue, is the use of flexible, temporary project teams. "Th[e] intensity, sharp focus, and finite time frame [of projects of relatively short duration] make them attractive to the highest-caliber talent, and the nature of the challenge inspires unusual levels of collaboration." This is certainly true, but I am puzzled by the emphasis, elsewhere in the article, that engagements should be of only two years. I find myself siding with another HBR article, "Tours of Duty: The New Employer-Employee Compact", published in June, which argues that an ideal "tour of duty" is four years, structured as two years and then, if both parties agree to continue following a mid-tour review, another two years. I believe a two-year involvement incentivizes disengagement because, by the time dissension may grow or team issues arise, a year has often gone by and people can simply decide to wait out the end of their two-year contract instead of rolling up their sleeves and tackling the problems that may hamper the project. Counting on alpha performers to all get along because it's in the common good is perhaps a bit risky. If they're stuck with each other for four years unless they drop out at the half way mark, they will be more likely to work together, it seems.

One thing I did love about the article is the fact that most project leaders have PhDs and few have MBAs. It is high time we got rid of the preconception that PhDs can't lead. In the authors' words: "[Project leaders] rarely have MBAs. The skill set that you acquire in business school is often about defining the market opportunity, writing a plan, and then faithfully executing it. By contrast, DARPA and ATAP [the group Dugan directs at Google] are more focused on managing constant flux—building, replanning, changing tack, and moving talent in and out as project needs shift."

Also, if you have never heard of Pasteur's quadrant, the article provides a good introduction to the three quadrants of Bohr, Pasteur and Edison to describe basic science (the fourth one has no name because it is completely useless and unappealing). I didn't see the graph online, though, so you might have to take a peek at the print version or use the link above.

The article is a good read overall, and currently available for free browsing on the HBR website. If you care about innovation, this should definitely be on your must-read list this week. I'd love to know what you think!

The 100 most influential people in healthcare

Modern Healthcare published its annual list of the 100 most influential people in healthcare a few weeks ago. The inspiring Kathleen Sebelius, Secretary of Health and Human Services since 2009, occupies the top spot. At #2 is Oregon Governor John Kitzhaber. An emergency-room physician by training, he is being recognized for his efforts in developing coordinated care, especially for Oregon's Medicaid population. Marilyn Tavenner - the Administrator for the Centers for Medicare and Medicaid Services - is another civil servant at the top of Modern Healthcare's list. (The President of course is also included on the list, at #3.)

Among healthcare CEOs, Stephen Hemsley of UnitedHealth Group, Mark Bertolini of Aetna, Richard Bracken of HCA group (the largest for-profit hospital chain), Joseph Swedish of WellPoint and George Halvorson of Kaiser Permanente are unsurprising choices. Sister Carol Keehan, CEO of the Catholic Health Association of the United States, rounds out the top 10. It's the 8th time she appears on Modern Healthcare list - she also was selected as one of TIME's 100 most influential people in 2010.

Familiar names on the list include Arizona Governor Jan Brewer, Mayo Clinic CEO Dr John Noseworthy and Dr Delos Cosgrove of the Cleveland Clinic. But I'll end with Judith Faulkner, the founder (back in 1979) and CEO of Epic Systems Corp, at #13. Epic makes software for mid-size and large medical groups, hospitals and integrated healthcare organizations. With $1.6 billion in revenue in 2012 and 6,500 employees, Epic, headquartered in Verona, Wisconsin (near Madison) is clearly one of the major players to watch in the health IT sphere... and Lehigh Industrial and Systems Engineering department is proud to have two of its young graduates recently hired by Epic: Ernesto Vargas and Elyssa Spector, both Lehigh '13. No doubt they'll make us proud.

Measuring US drug innovation

HA-8.cover An article in the August 2013 of Health Affairs has an interesting take on measuring US drug innovation. The common wisdom is that pharmaceutical innovation has been declining, because “declining numbers of new molecular entities (NMEs) [are] approved in the United States each year.” The authors divided NMEs into three categories: first-in-class, advance-in-class and addition-to-class for NME approvals during 1987-2011 and concluded that “first-in-class approvals remained fairly steady over the study period” and represented in fact a higher proportion of approvals over the most recent decade.

Their Exhibit 1, however, perhaps paints a slightly more nuanced picture of their analysis. In it, you observe that all-NME approvals peaked sharply between 1994 and 1996 (rising from about 20 in 1994 to about 50 in 1996), which was mainly driven by addition-to-class NMEs. The number of all-NME approvals has been on a steady downward trend since, with a slight uptick since 2007, again mirroring the approvals of addition-to-class NMEs. The number of first-in-class NMEs has fluctuated between 3 and 13 a year, with a clear increase from 3 first-in-class NMEs in 2009 to 11 in 2011. But because of the small numbers involved, numbers can fluctuate widely without reflecting any underlying pattern in innovation.

Exhibits 2 and 3 show the NME approvals not only by year and subcategory (first-in-class, advance-to-class and addition-to-class), but also by pharmaceutical company type (large in Exhibit 2, small in Exhibit 3). A small company is defined as a company that does not belong to the top 25 in US sales revenue in a specified year based on IMS Health sales data. There were 3 significant peaks in addition-to-class NMEs for small and large companies. For large companies, those peaks happened in 1991, 1997 and 2001. For small companies, those peaks happened in 1996, 2000 and 2009. Interestingly, small companies seem to have had a better track record achieving NME approvals during the 1995-2007 period. Both small and large companies had low numbers in 2008-2009 (1-3 approvals) with a slight increase since 2010.

Overall the data presented in the paper suggests that there is not more cause for concern now than there was before. I wouldn’t go as far as the authors do when they state that “today we see a trend away from addition-to-class drugs and an increased focus on first-in-class drugs.” Just about any pharmaceutical company always wants to discover a first-in-class drug, and the focus is always on that, but whether those hoped-for discoveries materialize or not is the real source of randomness. We would need data on drugs in the pipeline (which admittedly might be difficult to obtain). I did enjoy reading about the authors’ analysis, and found it particularly interesting that only 70 percent of the first-in-class drugs identified by the authors received a priority review from the FDA, meaning that 30 percent of those first-in-class drugs were not recognized by the FDA as potentially leading to substantial advances. (32 percent of not-first-in-class drugs received the priority review designation too.) This perhaps illustrates the difficulty in assessing which drug is truly groundbreaking.

The federal government is making significant efforts to foster pharmaceutical innovation through the FDA Safety and Innovation Act of 2012, which established a new breakthrough designation program for highly promising drugs. Ultimately pharmaceutical innovation should be measured by the breadth and depth of the impact these new drugs have. Perhaps the impression that drug innovation has been declining is due to smaller target markets, with the “low-hanging fruit” of mass-market medicine long gone. The change in business models toward more personalized medicine could spur more instead of less innovation, though. I’d be curious to read a paper on that.

Lehigh's new management consulting club

Today I attended the kickoff meeting of Lehigh's brand-new management consulting club, to show support as one of the club's faculty co-advisers. (This was far more interesting than the committee meeting I also had today, but I digress.) The club's leadership team - Urvi Kumar, Aaron Curry and Jacob Cohen - did a phenomenal job organizing the event. After a quick introduction the students broke into teams and worked on a case study about a new car-sharing service. Each team then made 5-min presentations. I was very impressed by the quality of the comments student teams made about the business problem described in the case, which they'd had never seen before. They had outstanding ideas and fantastic insights. Sometimes it is good for faculty members to be reminded what students can do outside the classroom. The turnout was also excellent.

The club is very timely since PwC (an enthusiastic supporter of the club) recently announced it will start including a case-study element to its interviewing process. But beyond the obvious advantages on the job-search front, getting used to the case method also helps translate in-class knowledge to the real world, where employees have a lot of information at their disposal that may or may not be relevant to the problem they face, even when they don't pursue management consulting careers.

Urvi, Aaron and Jacob have a great lineup of events planned for the rest of the semester. If you're a Lehigh student and are interested in the club, feel free to contact them for more details (urk215, azc214, jyc214).