Deflating The Healthcare Bubble

As we get closer to HIMSS13, I think back to some of my key takeaways from HIMSS12. One of the things I heard over and over again last year is that healthcare is in a bubble. Going into HIMSS13, with Bill Clinton as the keynote, it seems worthwhile to ask: Are we in a health care bubble? If so, is it showing any signs of popping or at least deflating?

One of the HIMSS12 speakers, Mark Blatt, MD, MBA, Worldwide Medical Director at Intel and Collaborative Health Consortium board member, said:

“To my mind … healthcare is in a bubble. When prices rise to a point where NOBODY can afford the product, the end is always the same. You have a crash, and that is the likely outcome in healthcare.”

During the eCollaboration Forum, Mark showed some compelling graphs about physicians going brokeLater that same day, Iora Health CEO, Rushika Fernandopulle, MD, on a panel with Esther Dyson, said:

“We don’t have a budget problem, we have a Medicare and Medicaid problem.”

Certainly healthcare spending looks like a bubble, the rise in prices has outpaced inflation since the 80s. But, in order to decide if we’re in a bubble, let’s take a look at what a bubble is and how we would know one if we saw one.

What is a bubble? Well, there really is no clear-cut definition, and there’s some debate in economic circles about whether you can have such a thing, but Bubbles trade in products or assets with inflated values. Normally you can only identify whether prices are inflated retrospectively after prices drop. The hard part is determining what “inflated” means when you are currently paying those prices.

What drives healthcare prices? In a word, the government. Total government spending is close to half of all health care spending, and Medicare reimbursement acts as a benchmark for prices across all of health care. Healthcare is not a traditional bubble because it’s not a true marketplace, it’s not a real economy. We don’t do much comparison shopping in healthcare based on price; a single payer sets the prices as opposed to the consumers of those products and services as in a traditional supply-and-demand marketplace. Indeed, Nate Silver recently showed in a recent fivethirtyeight post…”soon, we may cross an important symbolic threshold: when the overall majority of government expenditures are spent on, essentially, insurance programs.”

What causes (traditional) bubbles? Worthwhile reads on economics, bubbles, statistics and epistemology are Silver’s The Signal and the Noise: Why So Many Predictions Fail – but Some Don’t, and Nassim Nicholas Taleb’s (if you can get past the first third of the book and Taleb’s ego), Antifragile: Things That Gain From Disorder. I’ll go into more depth on these two in future posts, but to summarize, when bubbles happen, and when prices don’t reflect true value, bubbles can be linked to a few major problems:

1. Information asymmetries. In other words, people don’t have access to the same information. This is true in health care. Just try to find out how much a procedure costs, or get an itemized bill from your last hospital visit. This is hopefully changing, however, with things like All Payer Claims Data, Blue Button and the overall digitization of health info, making access to information and predictions based on that information easier. 

If it does continue to change, it could drop prices long term through “health promotion, prevention, patient engagement, and coordinated care rather than the current emphasis on high-cost, sporadic treatment of disease events that are largely preventable.” – Ralph Syderman, MD, chancellor emeritus at Duke University and immediate past CEO/president, Duke University Health System

2. Mistaking uncertainty for risk. Risk is when you can (confidently) give a number for the likelihood of some event happening, uncertainty is when you can’t. Bubbles are often built by mistaking the two. While Silver might argue that we can understand real risk, Taleb might argue that we are always operating under uncertainty (so bet that bad things will happen and you’ll win). 

The basic idea is that we can come up with algorithms that might lead us to predict the chances of something happening in the future, but if we’ve left out some important variables, we are actually operating under uncertainty. Of course, it’s difficult to tell if we’re missing an important variable in predicting future health care prices, but that’s pretty much the point, you can never know for sure. This could work in either direction, to modify future prices.

My own sense is that quality measures and consumer HealthIT might be more effective than we think at controlling prices, but that EHRs will make hospitals more “effective” at billing and driving up costs, at least in the near term.

3. More people have a stake in prices going up than in keeping them down. Incentives are aligned toward increased prices rather than “true” values. That was the case in the real estate bubble and financial crisis, and it’s almost certainly true in health care. Consumers are far removed from exerting any real price pressure on the system, although copays are going up and this will likely continue. I’d like to see more incentives offered to consumers to stay healthy, and I suspect we will as private insurers continue testing the consumer incentive waters.

Are prices set to drop significantly?

While there is some evidence that we may need to fix quite a few things to get prices aligned with value in health care and get away from less “inflated” prices, we likely won’t have a real market in health for one simple reason: There’s nothing on the horizon to change the fact that there are only a few purchasers of healthcare that can determine prices.

Because the market is not driving prices, it’s difficult to say we’re in a traditional bubble. A better way to look at it is whether there is a high likelihood for a significant drop in prices, and what constitutes a “significant” drop.

It’s established that health care prices are unsustainable. For most consumers of health care, it’s completely unaffordable if left to pay for alone. For a quick check of what the world was like when people had to pay for their health care risk, check out Nobel-prize winning paper “The Market for Lemons” (.pdf) on information asymmetries and how they lead to uncertainty from 1970. Some highlights on health care pricing:

“Generally speaking policies are not available at ages materially greater than sixty-five. . . . The term premiums are too high for any but the most pessimistic (which is to say the least healthy) insureds to find attractive. Thus there is a severe problem of adverse selection at these ages.”

“a 1956 national sample survey of 2,809 families with 8,898 persons shows that hospital insurance coverage drops from 63 per cent of those aged 45 to 54, to 31 per cent for those over 65.”

Can you imagine living in that world? I suspect that those over the age of 65 with insurance would be closer to 10% today, but it’s impossible to say what would have happened without Medicare-controlled pricing.

While we don’t have a true marketplace in health care and we won’t if we wish to keep (at least) 69% of our grandparents alive, the Affordable Care Act is attempting to make it more of a marketplace.

While still an artificial market, we’re slowly working toward a system where prices are more closely linked to quality. Beyond the ongoing experiment with ACOs, the most critical example of how changes are starting to affect the market is Medicare reimbursements for certain DRGs. In October 2012, Medicare started dropping reimbursement rates for hospitals that don’t meet certain quality benchmarks, “excessive readmissions” for heart attacks, heart failure and pneumonia. Some hospitals that are likely underperforming are already starting to feel the pinch and blaming Obamacare for layoffs. The penalties are reportedly designed to force low-performing hospitals that are unwilling to change out of business. That’s certainly a bubble bursting for those hospitals.

We’re going to hear a lot about layoffs from these hospitals in the coming months and years, but we’ll hear less often that the layoffs are happening because of poor quality and an inability to change to new incentive pricing models. If that’s popping the health care bubble, while there may be some pain in certain areas, particularly among hospitals performing poorly on readmissions, it may not be a bad thing for the overall health care system.

Does that count as a “significant” drop in prices? Depends on who you ask, but it will likely be small for the health care system as a whole, but life or death for the underperforming hospitals. Whether a bubble is bursting depends a lot on whether you stand on the inside or the outside.

Some early evidence suggests that attempts to control costs are already working, suggesting Medicare spending per capita is flattening, and that the aging population will do more to increase overall spending than per capita increases.

Leonard

A traditional bubble? No

Based on this, I don’t think we’re in a traditional bubble. If we are in a bubble, it’s a Medicare-created and controlled bubble that’s fundamentally different than traditional market bubbles. Prices may start changing direction, but they are highly unlikely to drop quickly. Therefore, the “shock” (if we are fortunate enough to contain spending) won’t be as dramatic as a traditional bubble, and, if we’re lucky, we’ll slowly deflate back to the ground of more affordable care as opposed to popping. Again, it depends on where you stand.

To do this right and create a soft landing while still reigning in prices, institutions will need to continue focusing on:

  1. Aligning toward quality care for both providers and patients.
  2. Opening up data stores through more data and digitization, more adaptive architectures and improved patient engagement to fix information asymmetries.
  3. Giving patients the tools they need to get and stay healthy under new incentives.
  4. Focusing less on billing codes and more on quality of care provided.

Meanwhile, Medicare/Medicaid will need to keep working on aligning incentives toward quality.

Final Note: It’s also important to mention that we may have a health care jobs bubble. Some are arguing that Meaningful Use and health care reform have caused an unwarranted increase in the labor market for healthcare. While this might be a similar kind of spending bubble, I think it’s different than the overall health care bubble we are in, although changes here, such as removing incentives that are in place, might be an even more severe shock to the market. ♦

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Leonard is Principal and Co-Founder at VivaPhi, an agency that solves multi-disciplinary business problems involving data science, software, biomedical science, behavioral science, health care, product design, community development, marketing, consumer engagement and organizational design. He has been quoted in Forbes and other top-tier publications for thought leadership on patient and consumer engagement. In addition to his role at VivaPhi, he is Chair of the Marketing and Communications Group for the Collaborative Health Consortium. Prior to VivaPhi he held the position of Vice President of Operations at Capitis Healthcare International as well as executive positions with several startups. He started his career as a software requirements analyst on Qwest Communication’s highest priority IT project while earning a triad of advanced degrees from the University of Colorado. These included an MBA, a Master’s of Science in Information Systems and a Master’s in Biomedical Sciences (Thesis on System Dynamics in Parkinson’s Disease). Leonard earned a Bachelor’s in Zoology from Miami University in Oxford, Ohio. He’s interested in how systems evolve, and how to help them evolve, in a variety of unique contexts. Connect with Leonard: @leonardkish, LinkedIn and Google+

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9 Responses to Deflating The Healthcare Bubble

  1. MightyCasey January 30, 2013 at 9:54 am #

    Outstanding post, Leonard! As I see it, the bubble in healthcare has been caused by 70+ years of paying for healthcare with what we’ve come to think of as “other people’s money” – not that it is, really, but it has come to be perceived that way in the American mind.

    Our healthcare system is built on managing and treating disease. Health only enters the equation once a disease state has been identified. That’s the main reason that the current system is so epically screwed, and why healthy people don’t see themselves as part of the system. It’s also why young people who are healthy don’t buy health insurance: that’s for sick people, right?

    “Healthcare reform” is, in its current iteration, “health payment reform.” In order for real healthcare reform to take hold, people of all health states need to recognize the need to engage with the healthcare system. Not because they’re sick, but because they want to get or remain well.

    We all need to buy our own insurance, with those who can’t afford it getting some kind of safety-net assistance. Access to insurance needs to be forever severed from employment – employers certainly can be part of the picture, but making them the single-payer in the US system (and that’s exactly what they are in the current regime) is crazy, and the most significant “job killer” out there. Healthcare itself has to get off their buy-my-pills-and-patches treadmill and on a path toward guiding us toward health, not just disease management.

    Healthcare in its current state is irrelevant until you get sick. Becoming the guides toward “staying well” – with evidence-based science, not the woo-woo that much of the current wellness industry consists of – is where the industry should be.

    We can get started by always asking “how much is that?” when buying healthcare products and services. That will start a revolution right there.

  2. Leonard Kish January 30, 2013 at 3:06 pm #

    Thanks! and thanks for the thoughtful comment. I hope the trend toward All-Payer Claims Data and opening up more data will start to change the picture toward transparency in pricing and we continue to improve incentives for better health.

  3. MightyCasey January 30, 2013 at 3:13 pm #

    Thank YOU, Leonard. I share your hope, and firmly believe that it’s only thru robust data access and real price transparency that we’ll be able to turn this aircraft carrier =)

  4. Theresa Schousek January 31, 2013 at 8:25 am #

    Leonard, you raise many great points. With due respect, I disagree that the finger can be squarely pointed at the government as the payor. I find that a rather simplistic and idealistic conclusion. Who would, in a strictly marketplace driven system, be motivated to drive *down* cost and level the playing field across industry? A non-profit, non-privately-owned system is necessary to gather reliable data, gather patient data, generate patient tools, and improve quality of care; all of which are costly and will drive *down* revenues, not increase them. If one looks at the government as the source of the problem, one may therefore derive that the fix would be to turn payment over to the private sector and industry. I disagree.

    A healthy ‘checks and balances’ system would level the playing field. The patient would become a stakeholder in their own care. Under the current system, however, data to align ‘quality care’ (as noted in 1. and 4. above) would need to be collected and rightfully available for stakeholder review. Would the current culture permit this? What motivation would they have?

    Industry owns the data. The largest database of private, patient data for aggregate analysis is owned by United Health Group. For the most part, industry owns the government. Medical device companies generate their own approval data and statistics; albeit, under scrutiny of the government.

    The deep mindset and culture within the medical business places the physician, surgeon, and specialist beyond the reach of critique. Errors and omissions are routinely swept under the rug. New technology, new drugs, more…more…more Physicians are required to see more and more patients…..900, 1200, now 1500 per physician….more, more, more.

    I agree that there will likely, and necessarily so, be an increase in the labor market for a different set of jobs. Lower wage and requiring more soft skills; effectively reproducing the true role of the ‘family physician’ under a different name. We currently have a tremendously ‘over-specialized’ industry which treats each person as, simply, the sum of their parts. An army, with too many generals, will not be so easily replaced with more foot soldiers on the front line.

    Call it what you will, bubble or severe shock, the system is due for a monumental systemic change. It must change. With iatrogenic death as a leading *cause* of death, we will either change the system or die.

    I am running out of children. Two of my four children are dead now, due, at least in part, to a deplorable series of iatrogenic causes. The life expectancy for US citizens is 5 years lower than that of the UK, Canada, and Australia; all countries with the dreaded single-payor system. One the one year anniversary of my son Nathaniel’s death, United Hospital announced the opening of their beautiful 240 million dollar facility for pediatric care. But where are the children?

  5. Leonard Kish January 31, 2013 at 1:08 pm #

    Theresa, thanks for the thoughtful response,

    First, I’m terribly sorry for your loss. As a father of two I can’t begin to imagine..

    Our second child was born overseas and our first was born here in Colorado. I appreciate the differences in health care quality and health care was a reason we moved back to the US. While our the “patient experience” at an overseas private hospital in an emerging economy was better, but I would not have wanted to be there had there been any kind of complications. I do trust the medical expertise here, but on the flip side there’s the issue that there’s all the incentives to always “do more” in the US due to the reimbursement structures and litigious climate.

    You’re right that sharing data with patients and getting them involved is critical, and no, there hasn’t been any incentive, but Blue Button, Meaningful Use, ACOs and readmissions incentives are moving the ball in that direction…The Pioneer ACOs came to the conclusion that that’s exactly what’s needed. http://www.forbes.com/sites/davechase/2012/06/12/pioneer-health-care-organizations-share-lessons-learned-and-challenges-ahead/

    I’m actually not trying to “blame” the government (OK, maybe historically, but not going forward), only trying to make the case that whatever you want to call it, it’s not a market when the prices are not set by those that receive the services via supply/demand. (The prices on the private payer side are individually negotiated and don’t reflect value either.) I’m not even arguing that it should be a traditional market if we want to insure our grandparents, a true marketplace would make health care completely unaffordable for the elderly.

    I am happy to see that, via ACA/ACOs, meaningful use criteria around patient engagement and the ACA readmissions incentives, we are getting closer to value-based payments in health care.

    It’s not inconsistent to say, however, that the antiquated reimbursement system and pricing have ultimately driven up costs because it is cost-based, not value-based, and that’s the same thing that’s driving more and more patients to be seen by physicians. Physician time is seen as a cost, they are reimbursed like costs, and therefore, the only solution is to try to get more revenue for that cost by increasing patients to physician time ratio. I give credit to the Federal Government, CMS, and both sides of the aisle who developed Obamacare for at least moving in the dirction of higher quality. Here’s good read on Medicare and other health care pricing from an economics angle. http://economix.blogs.nytimes.com/2010/11/26/how-medicare-sets-hospital-prices-a-primer/?smid=tw-share

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