What's Driving Increasing Healthcare Costs?

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A while back I read a great article on the health care cost crisis in the New Yorker by Atul Gawande.  The article is titled, The Cost Conundrum and I took some time to read it again today.  It's a long one.

It's so insightful that I thought I'd do a short post to call out the key points.  If you have any interest at all in health care I'd highly recommend giving it a read.

The article starts after Gawande learns that McAllen, Texas is one of the most expensive health care markets in the country.  In 2006, Medicare spent $15k per enrollee in McAllen, almost twice the national average.  

Gawande visits McAllen to find out why costs there are so high.  The answer is surprisingly simple and is outlined in this excerpt.

Health-care costs ultimately arise from the accumulation of individual decisions doctors make about which services and treatments to write an order for. The most expensive piece of medical equipment, as the saying goes, is a doctor’s pen. And, as a rule, hospital executives don’t own the pen caps. Doctors do.

He finds that doctors in McAllen are using their pens a lot.  They're more entrepreneurial and profit-minded than their counterparts in other markets.  And as a result are prescribing far more health care than an average market like El Paso, which is just a few miles away.

In 2005 and 2006, patients in McAllen received twenty per cent more abdominal ultrasounds, thirty per cent more bone-density studies, sixty per cent more stress tests with echocardiography, two hundred per cent more nerve-conduction studies to diagnose carpal-tunnel syndrome, and five hundred and fifty per cent more urine-flow studies to diagnose prostate troubles. They received one-fifth to two-thirds more gallbladder operations, knee replacements, breast biopsies, and bladder scopes. They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.

Doctors in McAllen are more likely to pursue referral fees from other health systems, be shareholders in their own practices and be involved in other business ventures.  More procedures means more revenue and more money in their pockets.

Gawande argues that the solution to higher cost markets doesn't lie with the payer issue, as most politicians seem to argue.  Regardless of who's paying, when doctors in certain markets are prescribing increasing amounts of care, the cost problem doesn't go away.  Instead, the solution, he argues, lies in the promotion of systems like that of the Mayo Clinic.  

The core tenet of the Mayo Clinic is “The needs of the patient come first”—not the convenience of the doctors, not their revenues. The doctors and nurses, and even the janitors, sat in meetings almost weekly, working on ideas to make the service and the care better, not to get more money out of patients. I asked Cortese how the Mayo Clinic made this possible.

It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focused first on what was best for patients, and then on how to make this financially possible.

The Occupiers and Capitalism

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On Sunday I had the chance to check out the Occupy Wall Street protest in New York.  It was a pretty amazing scene.  Check out this blog that’s posting updated photos.

I’ve been thinking a lot about what the protest means and if these people are really onto something, or if this is just the latest rant that will go away when cold weather finally hits the east coast.  

Last night I came across Thomas Friedman’s column titled, There’s Something Happening Here.  In it, Friedman proposes that these protests could be a signal that we’ve reached a tipping point in capitalism, he points out this argument:

…these demonstrations are a sign that the current growth-obsessed capitalist system is reaching its financial and ecological limits. 

Yes, the rich are getting richer and the corporations are making profits — with their executives richly rewarded. But, meanwhile, the people are getting worse off — drowning in housing debt and/or tuition debt — many who worked hard are unemployed; many who studied hard are unable to get good work; the environment is getting more and more damaged; and people are realizing their kids will be even worse off than they are.  

On the other hand, he looks at it  more optimistically: 

Yes, corporations now have access to more cheap software, robots, automation, labor and genius than ever. So holding a job takes more talent. But the flip side is that individuals —individuals — anywhere can now access the flow to take online courses at Stanford from a village in Africa, to start a new company with customers everywhere or to collaborate with people anywhere. We have more big problems than ever and more problem-solvers than ever.

As we consider these arguments, I think it’s critical to keep in mind economies are cyclical -- we have good times and we have bad times.  And occasionally, economies go through revolutions; in recent history, the U.S. economy has been through the agricultural, industrial and information revolutions – and we’re still in the thick of the last one, and we’re feeling the pain.  

In this most recent revolution, when most pessimists point to the bad news, they point to the unemployment rate.  But here’s an important statistic that often doesn't get talked about: the U.S. unemployment rate is 9%; for those with grad degrees it's 2%, college grads 4.5%, HS grads 9.7%, non-HS grads 15%. 

This data shows us that our economy is going through the painful transition that we’ve experienced in every economic revolution: a mismatch between our growing job sectors and our citizen’s talent (this particular gap is amplified by the housing crash that viciously eliminated scores of jobs for less educated American workers).  

In time, as it always does, the economy will naturally close this gap.  But we can and should do a lot to speed up the process: skilled worker training programs, changes in high school curriculums to include skills the economy needs, increased student loans for growth sectors, increased investment in growth sectors, to name a few solutions.

The “Occupiers” passion is inspiring and it underscores the important problems and real pain our nation is facing.  They have a good message and I’m glad their voices are being heard.  But as the conversation evolves into solutions, I hope it moves away from theoretical discussions on the merits of capitalism and the principles of taxation.  And towards more practical, easy to implement, solutions that get people back to work  in sustainable jobs that keep America competitive now and into the next revolution.

The Debt Ceiling and Politics

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I’m certainly not a political or economic expert, but the debt ceiling debate in Washington seems to be much more about politics than it is about the viability of the economy. A few facts to consider:

  •  Congress put the debt ceiling into place in 1917
  • The purpose was to cap the President’s ability to borrow and spend money so it wouldn’t get out of control
  • This was necessary back then because at the time Congress had little control over our budget
  • That has changed
  • Since the 70’s Congress has direct control over the budget each year (taxes and spending)
  • The ceiling, which is now at $14.3 trillion, has been raised nearly 100 times since 1917

From what I've read, most agree that raising the ceiling would have little material effect on the economy, good or bad.  Though it would be an important, high profile, symbolic event reminding all of us that the U.S. needs to quickly get its spending in check.  I think we’re all for that.

But most also agree that not raising the ceiling could be catastrophic for the economy (though there's no precedent for it as it's never happened).  We’d default on our debt payments, raising interest rates and damaging the credit rating of the United States.  The economy would almost certainly fall back into recession.

So why all the support for not raising the ceiling?  Why not just raise it one more time?  What’s the big deal?

The answer is simply politics.  This symbolic event is a fantastic opportunity to make the President look economically incompetent.  Putting up a big fight puts a huge amount of attention on the fact that our national debt is out of control and makes the President look bad as he ramps up his re-election efforts.

While I recognize the need for political posturing, not raising the ceiling makes no sense given the fragility of this economy.  It would be a classic case of the punishment not fitting the crime (only we’d be punishing ourselves).

As James Surowiecki writes in this week’s New Yorker, it’d be akin to "shooting yourself in the head for failing to follow your diet."  Let's hope Congress puts politics aside and sees it that way too.

What We Don't Know

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Donald Rumsfeld, former Secretary of Defense, said this back in 2002 when responding a to a reporter’s question about links between Saddam Hussein and terrorists seeking weapons of mass destruction.  It came up again Monday in a column in the Wall Street Journal. “As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns: the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult one."

I’ve always loved this quote; it’s very humbling and so true in business and life (and of course politics and war).

In short, there are things we don’t know that we don’t know we don’t know.

Healthcare: South vs. North

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I read yesterday that many are accusing Obama of trying to equalize the north and the south.  One example of this can be found in the recent news that several states are suing the federal government, stating that the healthcare bill is unconstitutional.  

Specifically they’re focusing on Medicaid (government funded healthcare for the poor and disabled). Generally, southern states are more restrictive on Medicaid payments; northern states are more generous.  The healthcare bill would allow the federal government to force the southern states to adopt the Medicaid standards of the northern states, but without any federal funding to pay for it.  This is what’s known as a “unfunded federal mandate”, and is a major reason why many believe that the bill is  unconstitutional.

Public Schools

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Would you invest in a company that:

  • Pays no attention to its competition
  • Rejects change
  • Doesn't allow managers to reward high performing employees
  • Pays employees less than they deserve
  • Doesn't allow managers to phase out low performing employees
  • Has little or no long term vision for success or strategic plan to get them there
  • Doesn't hold people accountable for short or long term success metrics
Neither would I.

Unfortunately, I'm not describing a stock, I'm describing our public schools.

I have a few close friends that are teachers.  I also spent 13 years sitting in public school classrooms, so I'm moderately qualified to write about this problem.

For the most part, the friends I have that teach in public schools seem to do it for the right reasons and they seem to be pretty good at what they do.  And there's no doubt that teaching in public schools can be extremely challenging and I sincerely admire the field they've chosen.

But it also seems that all of my friends that teach lack a high level understanding of what makes an organization super successful.  Things like ROI, six sigma, remove the bottom 20%, change management and many other fundamentals of a competitive industry are completely foreign to them.  They fundamentally don't understand business and its powerful forces and consequences.  My teacher friends joke my business friends that we all work in a big building on Wall Street.  "Isn't that what all business people do?"  In short, they have no idea what goes inside the walls of a competitive business.  Why would they?  Most have never spent any time inside of one.

Further, in their own profession they're simply not subject to the forces (profits, competition, lightning fast change) that drive businesspeople and force them succeed or die.

As a result, I would argue, our schools aren't moving forward.

In a competitive industry, if an employee doesn't add incremental value to the organization each quarter, it's only a few quarters before the employee is asked to leave.  If the company doesn't add incremental value each quarter, it'll eventually suffer a similar fate.

In public schools, if a teacher doesn't add incremental value to the school each school year, there are zero consequences.  If the school doesn't add incremental value each school year, there are zero consequences.

To me, this is the essence of the problem.  The former is a formula for success, the latter a formula for mediocrity.

I recognize that this is an extremely thorny issue and there are longstanding institutionalized competing interests that make fast change all but impossible.  And there are no easy answers.

But when considering issues like teachers' pay, tenure, charter schools, and school choice my thinking is guided by the difference between a formula for success and a formula for failure.  When i vote on these issues, I cast the vote that I think will get us further away from forced mediocrity.

Healthcare Costs

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Steven Burd, the CEO of Safeway, Inc. had a really interesting column in the Wall Street Journal a couple weeks ago outlining his company’s approach to reducing healthcare costs.  He included some fascinating statistics that I thought were worth pointing out:
  • Healthcare spending will represent 18% of GDP in 2009
  • 70% of all healthcare costs are confined to four chronic conditions (cardiovascular disease, obesity, diabetes and cancer)
  • Most instances of the above conditions are preventable
Safeway’s approach to reducing costs is simple.  They reward employees financially for taking preventative measures based on the four chronic conditions listed above.  If they pass a baseline test on each of the four factors, they can save as much as $780 and $1560 for families.  

Based on the work I’ve done in this area, it seems that it’s nearly impossible to generate reliable correlations between investments in promoting healthy behaviors and reduced healthcare costs for companies.  But I think it’s nearly impossible to doubt Safeway’s investment is a long term win employees, the company and the public.

Private Unemployment Insurance

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Combining the rampant fear of losing one's job with the limits on state-funded unemployment insurance, you'd think there would be a big market here.

The primary effect that this would have would be to reduce the general fear we have with losing our jobs. I suppose this a good and bad thing.

It would allow people to take more risks at work which has its benefits and dangers.

I'm curious why this product doesn't exist already.

Job Losses

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Today's Wall Street Journal and Financial Times front pages' declare that the U.S economy lost 2.5 million jobs last year -- the most since 1945 -- and the unemployment rate hit 7.2% in December. As an optimist, I'd like to take a quick look at the bright side of this horrible news by asking the question: why have so many jobs been lost? My answer: three reasons.

1. The fundamentals of the economy are weak and companies are adjusting expenses consistent with projected revenue reductions (after all, Wall Street only rewards profits).

2. Panic.

3. Smart executives are using the credit crisis and talk of a depression as an excuse to get rid of underperforming, redundant and overvalued human capital.

The bright side comes from #3. The fact is that most large companies are extremely inefficient, and most executives know it. Most large companies could probably produce the same results (maybe better) with only half of the employees they currently have. I've heard that all of the value of a company truly comes from the top 10% performing employees.

But for a myriad of reasons (morale, fear of lawsuits, bad press, etc.) big companies can't fire people. However, the doomsday news surrounding the credit crisis has presented smart executives with a market oddity (or what they might call, an opportunity). They can, more or less without consequence, massively reduce their headcounts and, conversely, massively improve the efficiency (and eventually profits) of their organizations. Job losses are a side effect of economic cycles. Profits decline and companies cut jobs, then profits increase and companies hire. 

Because of #3, which isn't a part of every cycle (at least not to this extreme), this cycle should complete itself much quicker than it normally would. That's is, profits declined, companies ruthlessly slashed jobs -- more than they have since 1945 -- profits will increase (that much faster) and companies will begin hiring (that much faster). Predicting what the economy will and won't do is ways a bad idea but I do think the above is legitimate. Combining these realities with the bailout and the new administration, it'll be interesting (and hopefully exciting) to see where we go from here.

2009

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I'm not one for New Year's resolutions but I do set goals and think the beginning of a new year is a great time to reset. 

This year I've laid out several detailed and ambitious goals. I won't list them on this blog but, at a very high level, I want to lead my team and career to the next stage of growth, get in better shape than I've ever been in my life, be a much better friend and travel to some wonderful places and do some wonderful things. 

For those of us with big goals and high expectations there's no shortage of big challenges this year. A crappy economy; a lack of time, energy and money; rapidly changing priorities and shifting markets. Many of us are hunkering down, waiting for the next shoe to drop. 
I can only imagine how Obama is feeling as he gets ready to take over. 
But it's in times like these when the greatest things happen. When the greatest people stand out. When the greatest progress is made. There's really no better time to step up, stand out from the crowd and lead the way. If Obama and I can do that in 2009, it'll be good year.

The Big Three

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It seems to me there are really two distinct issues around bailing out the automakers.

1. Should we save the employees?
2. Should we save the companies?

My answer to #1 is Yes and my answer to #2 is No.

It's important to recognize the distinction. Saving failing companies is bad for everybody (in the long run) and only delays the inevitable. If we're going to give away billions (in the short term), let's give it away in the form of unemployment and secondary education for displaced workers. 

We simply cannot continue to invest in or lend money to companies that lack vision, innovation and results. 

Credit Cards

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Because of the credit crisis, I've been force-fed so much information about the credit industry over the past few months.  I'm starting to feel like an expert and I don't like what I'm learning. 

The most recent horror story was a cover story in Business Week about companies that are reselling forgiven debts owed by consumers that have successfully declared bankruptcy.  That's right, a consumer declares bankruptcy, a credit debt is erased and then a few months later that debt is sold to a debt collector who goes after the consumer for payment.  Often, these consumers pay because they're just trying to get their credit back on track or the debts are held over their head as they attempt to secure new loans.  This is allowed to happen because credit card companies don't report that the debt has been forgiven (not surprising, there's nothing in it for them) and there's nobody overseeing the process.

In some ways, these companies are doing what drug dealers do; they're exploiting a human weakness for their own gain.  That is, they know that people want fast cash. They also know that people don't manage money well and bite off more than they can chew when it comes to easy credit.  To them, this is their one and only market opportunity.  They hand out easy money and when someone misses a payment or can't pay the balance they swoop in and make their millions (outrageous late fees, service fees, finance charges, etc.)

I'll never say that what they're doing is illegal but I really don't like companies that make their money because people are irresponsible.  Should they be allowed to continue what they're doing?  Absolutely, it's a free country.  But they should also be viewed as just as bad (if not worse) then the cigarette companies in their worst days.

Candidate Marketing

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The other night on 60 Minutes Hilary was asked how she stays healthy.

She said that she washes her hands as much as possible or uses a hand sanitizer like Purell and eats hot peppers. I wonder if Purell will see a spike in sales this week. I'm also curious if candidates deliberately try not to mention brand name products that they use; i.e. she might have lost votes from a lot of employees at Purell's competitors. Sounds silly but I'll bet they think about these things.

12 Reasons Why I Like Mike

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michael_bloomberg.jpg I'm sitting here watching Hilary and Barack on 60 Minutes.  For some reason they just don't get me excited.  I mean, I wouldn't move to Canada if one of them was elected but there's something missing from each.

Here are just a few reasons why I'd love to see Bloomberg run (and win!).

  1. He's a self-made man
  2. He has an MBA -- he's pro-business
  3. Amazing philanthropist
  4. He's from Massachusetts (so am I)
  5. He's a social liberal
  6. He's a fiscal conservative
  7. Supports government involvement in climate change and strongly in favor free trade
  8. He's short
  9. He got rid of smoking in bars in New York (this eventually spread throughout the U.S. and Europe)
  10. He has a 30 year plan for global warming -- what mayor has a 30 year plan for global warming?
  11. He's adapted his politics to the city he governs -- New York is a luxury city so people have to pay high taxes to live here
  12. He acknowledges that taxes are a necessary evil

In the end, I don't think he's going to run.  I wouldn't want him to be a spoiler and he wouldn't want be one either.  However, if there is a real opportunity -- even in 2012 -- I'd happily join his campaign.

Bloomberg

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Most of my friends know that I'm holding out on choosing a candidate until I'm certain that Mike isnt running. I simply can't imagine a better candidate.

After seeing Romney drop out, though, it occurred to me that Americans always seem to talk about wanting a businessman President but they never actually elect one.

This doesn't bode well for Mike.

Math, Science and America

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My company just held an all day recruiting event for computer science majors from top colleges in the Northeast; 48 students attended. Of the 48, there was 1 that was born in the United States.

What does this say about America and -- more importantly -- does it matter?  One thought...

Given the skepticism and short attention span of many young people, it's about time teachers stopped keeping the applications of algebra, calculus and trigonometry a secret. Telling students with artificial attention deficit disorder to "trust me, you're going to need this someday" is unlikely to work.  Let's start with easy to understand and cool applications -- flying planes, walking on the moon and building skyscrapers. We can back into the boring stuff.