An Expensive Knee Surgery

I counted sixty-three different people involved in her care. Nineteen were doctors, including the surgeon and chief resident who assisted him, the anesthesiologists, the radiologists who reviewed her imaging scans, and the junior residents who examined her twice a day and adjusted her fluids and medications. Twenty-three were nurses, including her operating-room nurses, her recovery-room nurse, and the many ward nurses on their eight-to-twelve-hour shifts. There were also at least five physical therapists; sixteen patient-care assistants, helping check her vital signs, bathe her, and get her to the bathroom; plus X-ray and EKG technologists, transport workers, nurse practitioners, and physician assistants. I didn’t even count the bioengineers who serviced the equipment used, the pharmacists who dispensed her medications, or the kitchen staff preparing her food while taking into account her dietary limitations.

Atul Gawande, writing about the resources required to complete his mother's knee surgery in this week's New Yorker article Big Med.

A Shortage of Doctors

We’re currently facing a doctor shortage in the U.S.  And a recent article in the New York Times pointed out how this shortage is about to get worse as we expand medical coverage to 40 million uninsured Americans.  The Association of American Medical Colleges estimates that by 2015 the country will be short more than 62,000 doctors, and that number will more than double by 2025. In addition to healthcare reform the article points to a few contributing factors that are causing the shortage:

1. Increased Medicare coverage for Baby Boomers (older people need more care).
2. Declining physician compensation – to make money, doctors have to specialize, leading to a shortage of primary care physicians.
3. Aging doctors are beginning to retire at a more rapid pace.

There’s no doubt that we’ll need more doctors in this country moving forward.  But in parallel, I believe it’s critical to continue to find ways to make the physicians we have more and more efficient.  I’m excited to see increasing amounts of early-stage capital heading to companies that have that goal in mind.

The Irony In The Supreme Court's Affordable Care Act Decision

There's a good column in the New Republic this week noting the irony that John Roberts decided to uphold the individual insurance requirement but struck down the expansion of state Medicaid payments.  Part of the Affordable Care Act would have required states to expand Medicaid eligibility if they wanted to receive increased federal funding.  They would have had to pick up a relatively small amount of the increase (10%) in return for big bucks from the federal government, but the court still struck it down. The statement made by the court in this decision essentially opens the door for states to fight any future changes that congress makes to Medicaid.  And this presents significant challenges for the federal government as it seeks to protect the viability of its investment now and in the future.  If the states begin to exercise too much individual control over the program, the federal government may opt to back off and simply run the entire program at the federal level.  Something that, ironically, Democrats would prefer.

It'd be ironic if a precedent set by the conservatives in a contentious healthcare debate ultimately leads to a more centralized government program.

Why The Healthcare Mandate Is No Big Deal

The piece of the Affordable Care Act that requires all U.S. citizens to have health insurance has caused quite a bit of controversy. It seems that a lot of that controversy is caused is by a lack of awareness of the details of the mandate. I’ve found that when I explain some of the details of the mandate to people that don’t like it they often end up realizing that it’s really not all that bad.

Let’s start with this: there are approximately 40 million people in the United States that don’t have health insurance.

And getting healthcare when you don’t have health insurance is super expensive. So when you don’t have insurance you tend to delay getting care until your condition becomes serious. Even when it’s serious, because you’re not insured, you still don’t get care through the appropriate channels, such as a Primary Care Provider or a specialist.  Instead, you very likely just show up at the emergency department of your local hospital (hospitals are required by law to give care to anyone that shows up at their emergency department, regardless of insurance or ability to pay). But emergency departments aren’t setup to deal with these people. They’re setup to deal with emergencies. They’re setup to stabilize a condition, not provide ongoing treatment or preventative care.

People without insurance that are getting care only when they’re desperate and through the wrong channels are costing the healthcare system lots and lots of money.  They’re waiting until they’re very sick to get care, they don’t access care through cost effective channels and, perhaps most significantly, when they get care from the emergency department they don’t pay their bills.

So who do you think pays for these inflated healthcare costs that are caused by the uninsured?  Answer: the insured.  In order to provide this level of care at no cost to the uninsured, hospitals must raise prices for the insured.

So Obama has proposed a solution that will alleviate the suffering for the uninsured and the suffering of the insured. This solution is a law that requires everyone to have health insurance.  The mandate.  And this is the controversial point in the Affordable Care Act.

But it shouldn’t be that controversial.  For a lot of reasons.  For one, nobody actually has to get health insurance.  If you believe that being uninsured is part of your freedom as an American, no problem. You’ll just have to pay a slightly higher tax rate each year (not more than a 1% increase). 

Also, of the 30 million that are uninsured, most are going to be getting insurance anyway as a result of some of the other components of the law such as expanded Medicaid to individuals with higher incomes and increased insurance coverage requirements for employers.

In addition, if you make less than what is required to file a tax return (somewhere around $9k/year) then you are obviously exempt from any tax penalty that comes from not having insurance.

So the fight over the mandate is really only about a group of approximately 7 million people (about 2% of the population). 7 million people that are costing those of us that are insured a lot of money because they delay care and don’t pay their healthcare bills.  And all the mandate is doing is asking those 7 million people to either get insurance or pay a slightly higher tax rate (not more than 1%) to make up for what they’re costing the system.  When you look at it this way, suddenly the mandate doesn’t seem like such a big deal.

Healthcare Tech Lessons: Capitation

Earlier I wrote about the differences between a managed care payment model and a fee-for-service payment model. Today I’m going to write about a specific managed care model called capitation. In a capitation model, healthcare providers (doctors and nurse practitioners) contract with a type of HMO called an independent practice association (an IPA). The IPA is a group of providers across a wide range of specialties that look to provide care for patients in their community. Patients enroll in the IPA and pay a fixed, monthly fee to have access to care from those providers. The IPA then pays each healthcare provider a set amount for each patient that’s enrolled. The provider receives this payment regardless of whether or not the patient seeks care.

So, in short, the bad news for the provider is that the payments are “capped”, regardless of how much care they provide. But the good news is they get paid even if they never see the patient. The amount of the payment the provider receives varies based on the expected healthcare utilization of the patient (factors such as medical history, age and gender are considered); though there are some capitation models where the payment is the same, regardless of the expected healthcare utilization.

The capitation model provides a few unique incentives for physicians and nurse practitioners:

1. Providers will consider cost when providing care. You don’t want to order treatments that cost more than the payment you receive.
2. There’s an incentive for providers to focus on preventative care. Healthy patients mean more profit.
3. There’s an incentive to avoid costly patients. So with a capitation model, the provider effectively becomes the insurer for the patient. They take on the risk of whether or not the patient is going to seek care. They can have good and bad years, depending on the amount of care patients need.

There are two major challenges when providers insure patents:

1. They’re providers, not actuaries or underwriters. As a result, they’re not as good as assessing risk as a traditional insurer and could take a loss as a result.
2. Risk fluctuation is a function of the size of the portfolio. Because a provider’s patient panel is limited by the capacity of the physicians in the IPA, portfolio size can be small and risky.

It'll be interesting to watch how the relationship between providers and insurers changes as changes in Medicare and Medicaid force more providers to adopt a capitation model.

Healthcare Tech Lessons: Fee for Service vs. Managed Care

Today, when a patient goes to their primary care physician with a health problem, they are referred to a specialist, generally in a hospital setting, and given a number of treatments.  The hospital then bills the insurance company or government for each of these treatments (this is what's called fee for service).  The hospital then pays the physician a salary or an incentive-based payment.  One of the reasons that the government is trying to shift the healthcare payment model away from fee for service (and towards manged care) is that it provides an incentive for providers to over-prescribe various treatments -- e.g. more treatments = more money.  

As we shift towards a managed care model, when a patient contracts an illness, the insurance company or government will pay a healthcare organization (what will be called an Accountable Care Organization, or ACO) a fixed lump sum.  This lump sum will then be split between all of the providers that provided treatment.

This change and its effects have been talked about at length.  But here are two effects that may not be so obvious:

1. It could put the Primary Care Physician (PCP) in the driver's seat.  Because the PCP generally has the best relationship with the patient, they could be the conduit for all healthcare payments. The savvy PCPs will setup their own Accountable Care Organizations where they take the payment directly from the insurance company or the government.  From there, they can dole out the appropriate share of the money to the specialists and hospitals.  Having physicians pay hospitals instead of hospitals paying physicians would radically change the power structure in healthcare as we know it.
2. In a managed care environment, there's an enormous incentive to keep costs down.  Because providers are going to receive the same lump sum payment for an affliction, regardless of how many prodedures they perform, the only way for them to profit is to lower their expense base.  As a result, to increase efficiencies, we may begin to see hospitals have floors that are designated to afflictions, rather than specialties.  That is, instead of having a radiology or dermatology or cardiology wing, there may be a diabetes or heart disease or lyme disease wing.  That would be a radical change in the way hospitals are run and costs are managed.

We can't underestimate the disruptive effects that are coming as a result of payment reform.

Healthcare Tech Lessons: Organizational Structures in Healthcare

Today I'm going to talk about the different organizational structures that exist in healthcare from the physician's point of view.  If you're a physician, you fall into one of three organizational structures:

1. Independent: the physician has their own practice and is responsible for all revenue and expenses.  Their success or failure depends completely on their own performance.  This is the traditional model but it's becoming more and more difficult to survive as an independent physician.  I've heard estimates that 30% of independent physicians are barely able to make payroll each month.  Rapid consolidations, declining reimbursements, increased technology and compliance requirements -- not to mention the recession -- have made it extremely difficult for independent practices.  As a result, every day more and more independent physicians are moving into the second type of structure.
2. Employment: the physician is employed by a health system, a hospital or some other healthcare organization.  This is the model that is heating up.  There's a massive shift in healthcare away from fee-for-service and towards managed care.  Fee-for-service is when a physician gets paid for each individual treatment.  Managed care is when a group of physicians are paid a lump sum and that money is split between individuals.  It's extremely difficult to survive as an independent physician in a managed care environment.  Health systems are employing massive amounts of physicians to drive referrals between physicians and to reduce costs through the economies of scale that come from technical and clinical integration.  As healthcare reform continues to reduce revenue to providers, the physicians that are not employed are going to have a tough time surviving.
3. Partnerships: partnerships are really every remaining structure.  Partnerships can be joint ventures, Accountable Care Organizations, physician alliance groups, etc.  It seems that as a result of the major reforms that are occurring in healthcare, a third, more equitable option such as a partnership is going to be the structure that begins to dominate.  But of course there are major unanswered questions that arise with these partnerships:  Who's in charge?  Who's going to get paid?  How are they going to split the money?  Who's going to drive decision making with patients?  Who's going to contract with the payers?

How and when the third option becomes the dominant structure in healthcare is a fundamental reason for the uncertainty in healthcare.  It'll be fascinating to watch all of this take shape over the next couple of years.

Healthcare Tech Lessons

Nat Turner had a good post the other day titled: Why aren’t there more traditional tech entrepreneurs in healthcare?  It’s a good question and a good post, check it out when you get a chance.  One of the reasons he cites for the lack of entrepreneurs in healthcare is “it’s really hard to learn the ropes”.  I’ve dabbled in healthcare technology quite a bit over the last 8 or 9 years but now I’m completely immersed in it -- working with a unique product and talking with healthcare executives on a daily basis.  And I have to agree with Nat -- it is hard to learn the ropes. Between the different payers, independent physicians, non-profit systems, for-profit systems, academic systems, Medicare, Medicaid, regulators, healthcare reform, meaningful use, EHR, different motivations and incentives, community considerations and more (never mind the clinical side)…to understand healthcare, you have to know a lot about a lot.

Over the last couple months I’ve picked up a multitude of information, insights and learnings that I think would be extremely valuable to tech entrepreneurs considering the space.  With that in mind, I’m going to begin using this blog as a place to store many of those learnings.  I’ll try to start with some of the practical basics and I’ll get more granular and complex as I go.  At a minimum this will be a good place to store my own learnings, but I hope others will find it valuable as well.

You're Going to Spend More than $2 Million on Health Care in Your Lifetime

Yesterday when writing about David Goldhill's piece on health care in the Atlantic, I noted that he noted that the average American will spend $1.77 million on health care in their lifetime (this includes their employer's contribution).  This is an astounding number.  I thought I'd do my own math.  And when I did, I actually got a number slightly higher than Goldhill's.

Here's my math.  Assume you start paying the average family health insurance rate of $12,000/year beginning at the age of 26.  You continue paying that rate until your death at, say, 85.  Assume the cost of health care increases at a rate of 3% per year.  Using the future value function in excel, that's a total of $2.02 million in health care payments over the 60 years that you're paying for health care. And keep in mind that this assumes that the rate that health care costs are rising is only 3%.  Given the increasing cost of health care over the last several years this is a very conservative number.  If health care costs continue to increase at their current rates, we could be paying twice that amount.

Some Health Care Insights

David Goldhill had a great and very long piece on health care in the Atlantic a few years back titled, How American Health Care Killed My Father. The premise of the article is that Goldhill's father catches a hospital-borne illness while in the hospital that eventually leads to his death.  Goldhill argues that had America had a consumer-centric health system in place, his father's death may have been avoided. I don't feel like diving in the consumer-centric argument today.  But there were a series of excellent insights that I took from the article that I want to call out.  Regardless of where you land on this issue, it's an excellent read and you should read the whole article when you get a chance. In the meantime, here were some of the most interesting insights for me:

• 100k people die every year from infections acquired while in the hospital
• the U.S. government spends almost 18 percent of our GDP on health care
• we spend 8 times as much on health care as we do education
• health insurance is a unique type of insurance in that it pays for all of our health care expenses, as opposed to just catastrophes
• this is the equivalent of paying for our gas with our auto insurance or our electric bills with our homeowners insurance
• most pregnancies are planned and known about many months in advance, yet they're financed the same way we finance an unexpected catastrophe
• the result of this unique insurance coverage has contributed to high costs; the average consumer could care less about the price of even the simplest procedure
• group health insurance was introduced in 1929
• employer based insurance grew significantly during WWII, when wage freezes prompted employers to expand other benefits as a way of attracting workers
• by 1954 most people still didn't have health insurance but that's when Congress passed a law making employer contributions to employee health plans tax deductible without making the resulting benefits taxable to employees.
• this led employer funded health insurance becoming by far the most affordable option for financing any type of health care
• for every two doctors in the U.S. there is one health insurance employee
• in 2007, the average health care insurance cost 12k per family up 78 percent since 2001
• the average American will pay 1.77 million dollars for health care, assuming growth rate of 3 percent a year, from age 26 to age 85
• hospitals may be shifting costs inappropriately to the ER to show the losses/investment they're making in charity care as most ER services aren't paid for
• when looking for an MRI he learned that prices vary widely between hospitals and that some hospitals wouldn't quote a price until the service was actually ordered
• some hospitals won't quote a price unless the patient is uninsured or is seeking financial assistance
• it's odd that it's been such a struggle to get medical records online, but that the billing for services that are included in that health record is all online and extremely sophisticated
• an individual would typically pay 2.5 times what an insurer would pay for the same treatment
• the price of LASIK treatment, an uninsured procedure, has nosedived over the last several years because it is subject to the forces of competition.
• conversely the price of an MRI hasn't changed, it's paid for by insurers and Medicare and thus not subject to traditional market forces that would make them less expensive
• the government has proposed investments in electronic health records of $50 million, only 2% of the health care industry's revenues
• but who's to say that doctors will adopt them, most of the benefit of this would go to patients, not providers, and patients aren't the real customers, insurers and the government are
• the bill for his father's five week stay was $636k -- $5k per night for the room, $145k for drugs, $41k for respiratory services,
• his family's share of the bill was only $992, the rest was paid for by Medicare at some huge discount

Sleep

Bill Maher made a great point the other night on his show.  He pointed out that that it seems that when relatively young celebrity deaths are drug related, it's most often partially caused by some kind of "downer", i.e. sleeping pills.  Whitney Houston, Michael Jackson, Anna Nicole Smith, Heath Ledger; all of them died from complications related to sleeping pills.  I looked back a few years.  Elvis Presley, Marilyn Monroe, Jimi Hendrix -- same thing.  The list goes on and on.

Celebrities with lots of fame and fortune are able to control nearly everything in their lives; what they eat, where they live, when they work, who they spend time with.  They control everything.  Except one thing: sleep.  

So it's not hard to understand why celebrities turn to pharmaceuticals to put themselves in control of the one thing in their lives that can't be controlled.

This is a scary reality, particularly as sleep aids such as Ambien and Lunesta are becoming more and more popular and readily available.  And it's not just celebrities that are trying to control their sleep.  These drugs are becoming a normal part of lots of people's lives.  The Today Show recently reported that 30% of women use some kind of artificial sleep aid.

One major danger associated with these "downers" is that users build up a tolerance and quickly need more and more of the drug to experience the same effect.  So even if the drug isn't technically addictive, the users become addicted anyway and have to ingest more and more to get to sleep.  So the use of these drugs can turn a minor sleep problem into a serious sleep problem.  Combine the use of these drugs with more common sleep aids -- alcohol or over the counter products -- and they can cause serious health problems.  They can quickly depress brain function and the central nervous system leading to unconsciousness, respiratory failure and death.  

I'm obviously not a physician.  And I recognize that when used properly sleep aids can impact people very positively, and they're probably very appropriate for patients with more serious sleep issues.  But sleeplessness is not caused by a lack of Ambien or any other drug.  It's caused by other factors.  Treating those factors, rather than covering them up with pharmaceuticals seems like the best bet to me. 

The best advice I've ever been given to cure sleeplessness is to simply stop trying to sleep.  Get up, read a book, write something, clean your kitchen.  Distract yourself from the thought of sleep and your body will most often get you back to bed when it's ready.  In the short term, this approach may lead to some sleepless nights and yes you'll have to give up some control.  But it's far safer than the artificial approach that seems to be taking so many celebrities before their time.

What's Driving Increasing Healthcare Costs?

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.

Healthcare & The Web

One of the things I'm a bit obsessed with is how we can better use the web to drive down the cost of healthcare.  With that in mind, I saw a post from Fred Wilson (the VC/Blogger) last week talking about healthcare and healthcare investment.  His simple point was that his VC firm hasn't found a large number of companies to fund in the healthcare space that fit their investment thesis.  In his words:

"But we haven't seen many large networks of engaged users emerging in healthcare. "

As usual, his post started a wave of comments -- 394 last time I checked.

Because I'm very passionate about this topic, I weighed in with my two cents and I thought I'd post my comment here (see below).

Over the next few years I expect that we'll see more and more companies using the power of the web (social, gaming, mobile, engagement, incentives, etc.) to address the healthcare problem.  And as a a result we'll see more and more capital (early stage and late stage) flowing into this space.

Healthcare: South vs. North

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.

Healthcare Costs

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.