24 May 2019
Dear Interested Readers,
The Cost of Care, Workforce Shortages and the Need For Innovation
The title of the Strategy Healthcare post earlier this week, “Maybe We Should Look For More Healthcare Professionals at Dunkin Donuts” may have sounded a little cynical to you. It was really an attempt to get you to begin to think about the fact that we are running out of ways to lower the total cost of care and that workforce shortages and new expenses are working against the objectives of the Triple Aim. There are two driving realities. One is that the American public seems to be approaching the breaking point in their ability to pay for healthcare. They are worn out from trying to manage their increasing out of pocket expenses for premiums, copays, co insurance payments, deductibles, and drugs experienced even though they thought they were “COVERED.” The other reality is that hospitals and health systems have used up most of their financial degrees of freedom to effectively generate new revenue and are sitting on their financial beach watching an incoming tsunami of red ink.
The conversation up to now in most systems has been an overwhelming focus on the revenue aspects of financial performance. To a much lesser degree there has been some focus on the cost side of finance in our more progressive systems. The largest component of cost in any healthcare organization is the “personnel line.” The strategy of many systems has been to try to hire well known surgeons and other specialists who can be marketed to attract more patients for the procedures they need with the hope that they will grow volume and revenue. It is not too much to say that in the extreme cases all thoughts of mission and the people we were created to serve have been lost in the pursuit of financial stability in a game that can never be won.
Filling OR schedules and filling beds is the primary goal of any organization that seeks financial security by increasing revenue. Those high performing specialists drive further expenses in personnel and facilities which means that these same institutions are investing in their infrastructure and staff with the hope that the sum of their efforts will eventually be more revenue. Pursuing their “return on investment” drives increases in price and utilization that are experienced as an increase in the total cost of care that is borne by all consumers. Upgraded facilities with new bed towers with private rooms, new cath labs, operating rooms with robotic capabilities, and updated diagnostic radiology capabilities and radiation therapy facilities with proton beam and XRT capabilities are seen as necessary to attract enough patients with commercial insurance to cover the growing costs. Even when continuous improvement techniques like Lean are applied to operations, it is often true that one of the first and most popular applications of the technique is to work for greater efficiency in the “revenue cycle.” Quality improvement through P4P efforts is an attempt to use the carrot of revenue to motivate systems to invest in efforts that might benefit patients and reduce costs generated by the waste of overuse and misuse of procedures to generate revenue. Suffice it to say, most boards of hospitals and health systems are very focused on the efforts of their management teams to generate a positive margin because Sister Kraus taught us over thirty years ago that if there is no margin, there is no mission. When everyone in a board meeting, or management meeting, gets engrossed in the discussion about finance, there is often some small voice that will ask, “Are we forgetting about the patient?”
The sense that good things don’t last forever was one of the first things I learned as a child. I had to quickly eat my ice cream cone before it melted or before one of my siblings wanted a big bite that would reduce my pleasure by a substantial percentage. Either way, I had to deal with a sense of loss and longing for more. I realized that it was rare to enjoy the satisfaction of having enough and simultaneously know that there was more available from where the first one came. I am certain that Trump’s “Make America Great Again” slogan brings back the illusion in the minds of many in his base of a “paradise lost.” It feels to them like there was once a time when we all had more than enough before something evil and un American stole it all away.
It is mind boggling to realize that the cost of care for the average American family in 2017 was $18,764 a year. That cost is amazingly high. More amazing is to realize that it represents $13,050 dollars from employers, and that an average family’s out of pocket costs are $5714. Collectively we spent 3.4 trillion dollars to cover less than 90% of the population. The cost of care and out of pocket costs are estimated to rise at a rate of 5.6% at least through 2025.
After the question of whether or not the president gets re elected, the most interesting issue for me in the 2020 election will be how voters will demonstrate their dissatisfaction with their increasing burden of healthcare costs. For perspective let’s think back to a happier day. Trump supporters are right when they remember a time when some lucky folks literally paid nothing for their healthcare. The fact that many people were not so lucky was not their responsibility or concern and did not seem to threaten their own experience. Their employers either used the tax advantage of a robust health benefit as a way of attracting great talent, or their union had enough clout to force the employer to pony up with plans that covered everything. Those were the good old days, the days of wine and roses, so to speak. As the poet, Ernest Dowson predicts:
They are not long, the days of wine and roses:
Out of a misty dream
Our path emerges for a while, then closes
Within a dream.
Trump is being quite strategic when he calls up that nostalgia with his slogan “Make America Great Again,” and makes empty promises about the great care they will enjoy again. He senses that many of those wearing his red MAGA hats are thinking about the cost of their healthcare and are pining for the good old days when it was virtually free to them. There is no question that the average consumer who was fortunate enough to have total “coverage” in those “better” days has definitely lost something that they would love to get again.
Tuesday’s post was an attempt to show that while we were working to increase revenue, the cost of care, especially those costs related to the personnel line, were increasing at a faster rate. If healthcare costs are going to go up at a rate of 5.6%, there is no way revenue will increase by any amount close to that number so we are destined to fall further and further behind. So if costs are rising faster than our success at growing revenue what remaining degrees of freedom do we have to bring the two into harmony? The answer that seems attractive is to use technology and innovations to change how we deliver care to improve the cost structure while we improve access and quality. The Triple Aim is an inclusive “Triple Dream” that would be associated with financially stable institutions for care delivery. One possibility that remains available is to innovate in ways that reduce the expense in the personnel line by redesigning care to deliver a better product with fewer doctors and nurses than our current practice routines require while utilizing less expensive workers who know the community to support quality and improved outcomes. The greatest barrier to that strategy is that it requires all of us to change how we work and for patients to accept changes in how they experience care. Chronic disease management is source of expense that is particularly amenable to population health approaches that utilize community health workers (CHWs). That solution is particularly attractive since we are finding, especially in rural and inner city practices, that we can’t find and hire enough doctors and nurses to manage patients in the conventional way of frequent office visits and hospitalizations precipitated by ineffective management efforts. Professionally guided programs of self management of chronic diseases have been shown to lower the cost of care while improving outcomes.
I know that at least one “interested reader” was following the situation that I is was trying to describe, and had a name for it. He wrote:
Gene, some of what you are talking about is a function of the economist Baumel’s “cost disease,” i.e., in service industries like health care and education, over time, costs increase at a faster rate than any achievable efficiencies based on size, technology, etc. Therefore, over time, the consumers of such services have to pay more, or get less, or, most often, pay more and get less.
The link above is to Wikipedia. I found much more clarity about Baumel’s cost disease in his obituaries. He died at age 95 in May 2017. The Vox obituary was particularly interesting as the excerpt below will demonstrate.
In the 1960s, Baumol was trying to understand the economics of the arts, and he noticed something surprising: Musicians weren’t getting any more productive — playing a piece written for a string quartet took four musicians the same amount of time in 1965 as it did in 1865 — yet musicians in 1965 made a lot more money than musicians in 1865.
The explanation wasn’t too hard to figure out. Rising worker productivity in other sectors of the economy, like manufacturing, was pushing up wages. An arts institution that insisted on paying musicians 1860s wages in a 1960s economy would find their musicians were constantly quitting to take other jobs. So arts institutions — at least those that could afford it — had to raise their wages in order to attract and retain the best musicians.
The consequence is that rising productivity in the manufacturing sector of the economy inevitably pushes up the cost of labor-intensive services like live musical performances. Rising productivity allows factories to cut prices and raise wages at the same time. But when wages rise, music venues have no alternative but to raise ticket prices to cover the higher costs.
This became known as Baumol’s cost disease, and Baumol realized that it had implications far beyond the arts. It implies that in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise. And this is exactly what the data shows:
Decade after decade, health care and education have gotten more expensive while the price of clothing, cars, furniture, toys, and other manufactured goods has gone down relative to the overall inflation rate — exactly the pattern Baumol predicted a half-century ago.
Another interesting article from the University of Chicago’s Booth School of Business was published about the time Baumel died. It explains the “disease” and then polls prominent economist for their opinion about Baumel’s theory:
...Chicago Booth’s Initiative on Global Markets asked its panel of US economic experts to evaluate Baumol’s most famous theory, and it fared strongly: 59 percent of the experts polled agree that “rising productivity in manufacturing leads the cost of labor-intensive services—such as education and health care—to rise.” When the responses are weighted according to how confident respondents’ are in their responses, 88 percent agree with the statement.
There may be a flicker of hope expressed in the opinion of David Cutler, the eminent healthcare economist from Harvard who voted “uncertain.”
David Cutler, Harvard
“This is true for sectors without technological change. Health care has a lot of tech change.”
Response: Uncertain
In my judgement Cutler is right as long as healthcare is using its technology to lower the cost of care. As we apply technology to care delivery we must be certain to use the efficiencies that we gain to lower the cost of care. If we just keep doing what we have been doing for the last 75 years and function as ignorant beneficiaries of Baumel’s observation the outcome will be as he predicts. Our costs will rise, we will increase prices, and as my very astute “interested reader” points out:
Therefore, over time, the consumers of such services have to pay more, or get less, or, most often, pay more and get less.
Back in the days between 2006 and 2012 when the state legislature was passing a series of laws that many in Massachusetts healthcare felt were repressive and culminated in the decision to create a Health Policy Commission and the directive that annual healthcare cost must be less than the annual rise in the “state GDP,” I quipped that the voters and the Massachusetts business community were having a conversation with their healthcare providers using the legislature as the their megaphone. I was optimistic at the time that pressure applied through the political process would lead to a substantial reduction of costs. I was working with the hope that our organization might make a difference by demonstrating that by working with the Triple Aim as our goal we might low the cost of care by eliminating waste, focusing on quality and safety, partnering with institutions that shared our sense that our missions called for efforts to reduce the economic burden of healthcare on individuals, employers, and taxpayers, and utilize creative workflows and clinical engineering to create sustainable value for both patients and professionals. Needless to say, there have been only small successes. The momentum for rising costs continues to be shifted to consumers. The cost of insurance has mostly been within the guideline of the state GDP, but as Baumel predicted for the price, less is delivered, and many consumers are getting less and paying more.
Baumel’s observation was that in manufacturing the increasing productivity of workers coupled with technology allowed businesses to lower their prices and raise their wages as the cost of producing an individual unit went down. Businesses lower prices to gain larger markets. They do that when there is real competition. We all have observed that healthcare markets do not really work because of a “functional conspiracy” to avoid transparency and an OPEC like consensus to never lower price.
This is where “Stein’s Law” aligns with Baumel’s disease. Stein’s law, as I mentioned in Tuesday’s post as well as in other posts, posits that if something can’t go on forever, it won’t. Let me ask you, at what price and what level of reduced value will the system collapse? What will save us from the destination that lies at the end of the road we are traveling? What lies ahead? How will the current situation end or change as Stein’s law predicts?
A post from the Commonwealth Fund and an article in the New England Journal two years ago from Eric C. Schneider, M.D., and David Squires, M.A. entitled, “From Last to First — Could the U.S. Health Care System Become the Best in the World?” begins by describing our deficiencies, but presents what is possible. They say yes we can, if…They did not talk about Baumel’s disease but they did point out it was possible if…we could only do four things:
- The first challenge the U.S. health care system must confront is lack of access to health care…If people are uninsured, some delay seeking care, some of those end up with serious health problems, and some of them die.
- The second challenge is the relative underinvestment in primary care in the United States as compared with other countries.
- The third challenge is the administrative inefficiency of the U.S. health care system. Both patients and professionals in the United States are baffled by the complexity of obtaining care and paying for it. Clinicians and their staff spend countless hours completing documentation to prove that insurance coverage is active, that benefits and services are covered, that services were delivered, and that payment or reimbursement occurred.
- The fourth challenge is the pervasiveness in the United States of disparities in the delivery of care. People with low incomes, low educational attainment, and other social and economic challenges face greater health risks and worse health in all countries, but especially in the United States, which has a less robust social safety net than other high-income countries.
Many of the proposals that will come before us in 2020 will be directed at these four objectives, but Scheider and Squires needed a fifth point. We must lower the cost of care. The first four bullets will surely add costs. We will see the personnel line in budgets go up, if we can find enough professionals, and we will see the cost of care and workforce shortages cancel our well meaning objectives. If we continue to focus on our worries about our own finance concerns and if we don’t find a way to use technology and systems engineering to focus on the patient to improve the experience and cost of care, we will surely continue to suffer from Baumel’s cost disease.
It’s The Memorial Day Weekend, It Must Be Spring
I hope that you have big plans for the first weekend of “summer.” I do. There are trails to hike, fish to catch, and friends to enjoy. My wife also has plans for me to help her “get in” her garden. I have already hauled 400 pounds of mulch and topsoil from her car to her raised beds. Every New England gardener knows that you shouldn’t do your planting until the Memorial Day weekend.
The Red Sox are catching fire and have an important series in Houston that I will be obligated to observe. For reason I can’t understand the Bruins are in some extensive holding pattern waiting for their Stanley Cups Finals with the St. Louis Blues, but then I really do not understand hockey. I grew up where ice was rarely seen outside of a glass. I lost interest in the NBA finals when the Celtics exited.
Last week I caught my first “rainbow” of the year. My fishing is off to a slow start because of the weather. We have had a typical New England spring. Some days are nice and then there is a dusting of snow followed by three days of rain. That makes fishing something to delay until a better day. I hope the weatherman is right. He predicts “better days” for the weekend. I think that we have been through the worst of it. New Englanders look forward to Memorial Day because most of the days after Memorial day are more like spring.
The picture in today’s header was taken recently from the trail along Great Brook as it approaches Pleasant Lake. I’ll be back on the trails this weekend. I have a new net to put over my head to block the little flies that buzz around my face, a sure sign of Spring. A couple of buddies and I have challenged ourselves to do some of the 4000 foot mountains in the state. We have forty eight of them which should give me a goal that will keep me on the trails until I’m 80.
Whatever you do this weekend set aside a few minutes to remember those who gave their lives to make all that we enjoy possible. Simultaneously, consider re dedicating your efforts to honor their sacrifices by working to preserve and improve all that they gave us. We must believe that the Triple Aim, a return to civility, and the embrace of a more generous treatment of our neighbors are possibilities that will profit everyone.
Be well, take good care of yourself, let me hear from you often, and don’t let anything keep you from doing the good that you can do every day,
Gene
