Fresh Perspective; Real Solutions

It's been nearly two years since the passage of the Patient Protection and Affordable Care Act, and the debate over this controversial piece of legislation is as contentious now as it was when it was being voted upon. Since PPACA was signed into law, we have seen the Republicans gain control of the House and acquire additional seats in the Senate. We have also seen a number of court cases either confirming PPACA as Constitutional or ruling that it violates the Constitution. All of this has led us toward an inevitable showdown in the 2012 election season.

Repealing "ObamaCare" has become a major campaign platform for each of the Republican presidential candidates. In my opinion, something very important is still missing from the discussion. We haven't heard any substantial details on what each of these candidates would do to replace it. Remember, all of the troubling factors that brought us to this point have not gone away. We still have a health care system that is breaking the bank and desperately needs to be fixed. With this in mind and with the upcoming elections just around the corner, there's no better time than now to once again examine this problem and to come up with some real solutions.

A combination of professional and personal factors puts me in a unique position to weigh in on this critical debate. First and foremost, I don't profess to have all the answers; I don't think anyone does. These problems are just too complex to be easily solved by any one person. What I will say is that I believe I have a perspective that differs from the others that we've heard. I hold a Master's Degree in Economics and a Bachelor's Degree in Business Administration. I have 18 years of experience working for various managed care companies and have held senior management-level positions with some of the largest managed care companies in the nation. I have also worked for a vertically integrated delivery system where the insurance company, hospital, and physicians were all under the same ownership. In 2004, I founded a physician advocacy group called Fulcrum Strategies, which has provided more than 7 years of experience as a physician consultant. In my role as president of Fulcrum Strategies, I now provide business consulting and managed care negotiating advice to more than 1,000 physicians in various specialties across the country. I am a small business owner who struggles with the cost and challenges of providing health insurance for my employees. On a personal note, I am the father of a son with autism. Since the therapies for autism are excluded from coverage under most insurance plans, I am painfully aware of what happens when a loved one needs care that insurance doesn't cover. This combination of these factors puts me in a unique position to weigh in on this critical debate.

Much of the health care reform debate has focused primarily on how the current system is broken. The discussion typically focuses on two main faults: high cost and inadequate coverage. The supporters of PPACA talk about the rising cost of health care, how our country pays more for health care than any other - and yet we are no healthier for it. They also point out that before PPACA 47 million Americans didn't have health care coverage, either because they can't get it or because it's too expensive, with the implication that they didn't have access to health care at all. Finally, they point out that if we don't do something the current cost trends, given the current levels of coverage, will eventually break the federal budget. Each of these statements has a varying degree of truth to it, but they do not tell the full story.

Let's start with an honest look at the current state of health care in this country. Without a doubt, the United States has produced a health care system where quality and access are second to none. The vast majority of the people in this country have access to state of the art care given by highly trained physicians without any of the waiting that many other countries face. For these people, money plays little or no role in the decisions that are made about their health care. If you have cancer and there is a very expensive drug or treatment that will help, you get it. If you need an advanced test like an MRI or PET scan, you get it. If your baby is born premature, you will get advanced and very expensive treatment; everything possible will be done to save the child's life. Simply put, for the vast majority of Americans there is no better place on earth to be if you have any medical need. The American health care system is like the finest five-star restaurant. The atmosphere is fantastic, the service is excellent, the food is out of this world and the wine list is extensive. All-in-all, it is a wonderful experience if you can afford it. Even for those who can't, a place will be made for you in case of dire need. In an emergency, anyone can still get in. We should be proud of the advances in medicine that we have pioneered and for the quality of the care our system can and does provide every day. The problem is that we Americans are victims of our own success. We have pushed the quality and access levels to such an extent that we've increased costs to a level that is not sustainable.

The challenge facing this country is how to keep the quality and access that we have built in our health care delivery system while extending coverage to as many people as possible all the while controlling costs at a level that is sustainable. This is a complex challenge that will require a very delicate balance. What is obvious is that we can't have all three. It's just not possible to maintain the same level of quality and access that we have now while extending coverage to millions of additional people while also reducing costs. Something will simply have to give. It is also very clear to me that the current legislation will not accomplish this goal.

ObamaCare:

The current legislation provides a number of changes to our system of insuring and financing health care in this country. Some of these changes like insurance reform are long over due. The plan will increase the coverage so that, when fully implemented, more Americans will have insurance coverage of some kind than ever before. Where it fails is in the cost control arena. Quite simply, if changes are not made, PPACA will accelerate the cost problems with heatlh care in this country and will make the inevitable train wreck happen sooner than later. It doesn't take a nobel prize winning economist to tell you that adding millions of people to the insurance system, increasing benefits and eliminating things like life time maximums will increase costs. Anyone who disagrees with this assertion should go back and take a refresher course in Econ 101.

The Problems with ObamaCare:

There are a number of problems with the legislation that was passed last year. There are also a number of areas where the debate about health care is failing to address the real issues in an intellectually honest way. Two of the major failures of the current legislation are its lack of cost control and its ignorance of the market's likely response. I'll discuss both of these problems and what we could do to help solve them.

Quality and Access:

The supporters of PPACA say that it addresses quality and access by not changing anything in the current delivery system. They hang their hat on the assertion that since they are not changing the delivery system in any meaningful way there should be no impact on quality and access. Simply put, they are counting on the current system to continue to deliver the same high quality and easy access that it currently does. In a vacuum this would be a logical assumption, but as an economist will tell you, nothing happens in a vacuum.

Let's examine PPACA and what it may mean to our future if fully implemented. Then we need to examine some better alternatives.

Coverage:

PPACA, when fully implemented, extends coverage to millions of Americans that don't have insurance right now. The plan is likely to extend coverage of some kind to as much as 98% of these people. This was one of the big talking points for the administration and something that the plan is actually likely to accomplish. There are several factors that drive this. The plan creates significant tax penalties for all but the very smallest businesses that don't provide insurance coverage for their employees. It also provides penalties for individuals who do not purchase coverage when it is available. There are also tax breaks for the working poor to help cover the cost of purchasing coverage. These three factors alone, however, would probably not be enough to extend coverage to the 98% level. The final part is the creation of State Exchanges and the expansion of Medicaid. These last two pieces will bring coverage to most American's and will reduce the uninsured in this country to a very small percentage of the population.

The problem of the uninsured:

Before we continue the discussion on coverage of the uninsured it would be helpful to truly understand the characteristics of the uninsured populations. By now, everyone has heard the number of 47 million Americans who are uninsured. Right up front, we need to recognize that there are not 47 million uninsured Americans. It's true to say that according to the latest census data there are 47 million "people" living in this country who are "currently" uninsured. Roughly 10 million of those 47 million people are not American citizens at all. Now, it's an entirely different debate to address what, if any, obligation we do have for providing insurance to people in this country who are not citizens. The point is, if we're to subscribe to the belief that health care is a right of all Americans, and that it is our obligation to provide affordable health insurance for every citizen, then we need to begin with 37 million uninsured Americans. Once we accept our new starting point, we'll need to further dissect that number. Again, according to the most recent census, there are some interesting statistics about this population. First, 60% of the uninsured population reported that they were in "excellent health." How many of these people could afford health insurance but are choosing not to buy it because they won't be using it? 16 million of the uninsured population reported a family income that is over $50,000 per year, which is higher than the mean family income in this country, and half of those 16 million reported making over $75,000 per year. I think it's fair to say that most, if not all, of this population could afford health insurance given their income levels. Another interesting statistic is that 45% of the uninsured population is uninsured for less than 4 months. These are people who are uninsured for a very short period of time while they change jobs or carriers. According to the Kaiser Foundation, the number of people who are uninsured for more than 1 year, do not qualify for Medicare or Medicaid, and make less than $50,000 per year numbers about 8 million. This represents about 3% of the population in this country. Now that we better understand the population that we want to impact, we can develop more efficient plans to address the problems.

Better Options for Coverage:

1. Transitionally Uninsured:

To address the issue of the 45% of Americans who are uninsured for a short period of time, (less than 4 months) I would propose that we use a format similar to unemployment benefits. It would be fairly easy to set up a benefit for those people who are losing or changing their jobs to provide a short-term coverage option. The government could pay individuals' COBRA premiums for a limited period of time to cover this transition. This would ensure that existing coverage is continuing to bridge the employment gap. In order for this to work, legislation would need to be passed that would make COBRA the same premium cost as the employer plan it is based on. This simple change would eliminate 45% of the uninsured problem.

2. Long Term Uninsured:

Addressing the issue of how to help the 8 million people who are uninsured for more than a year and are caught in the gap between Medicare, Medicaid and the employer sponsored system is a bit more complex and would require several steps.

a. First, we need to create insurance options for this population. This can be accomplished by making some changes to the current system rather than trying to create an entirely new system we'll call "GovCare." One possibility would be to require all insurance companies to offer and sell both individual and small group plans in every state where they are licensed to operate. Essentially, creating the individual and small business options would become part of doing business in that state. These plans would have very basic benefits that could be established by state or federal mandate. In addition, the plans would have to be community rated and the rates approved by each state's department of insurance, much like they already do for the rates charged by many other types of insurance. Finally, there would be no ability for carriers to deny coverage for any clinical or pre-existing condition. These basic benefit plans that would be designed to cover primary care, preventative care and catastrophic coverage, would help hold costs down. With this simple change, not only do we create options for the population most at risk, but we also create choice and thus free market competition and efficiency.

b. The next big hurdle is how to help this market segment afford insurance once a plan is made available to them. Given a plan like the one described above, and with a population of 8 million instead of the bloated 47 million figure, paying for it actually can be solved through tax credits and subsidies. How much would it cost? In 2009, the average per capita health care expenditure was just over $8,000. That includes the Medicare population, which is significantly more expensive than the non-Medicare population. However, if we use the number of $8,000 per year - which we know is overstated - and provide 100% coverage - which we know is also overstated - and apply it to the 8 million people who fit the category of long term uninsured, we come up with a price tag of $65 billion dollars per year. Again, this projection is grossly overstated given the assumptions above, but we use it to point out that covering the uninsured population is not that difficult, nor is it terribly expensive.

Cost Control

Where PPACA fails dramatically is in the area of cost control. PPACA is woefully short on details relating to cost controls and in my opinion doesn't get at the root causes for health care inflation in any meaningful way. This kind of wishful thinking and praying for the best is what created things like a 14 trillion dollar national debt. People, its time to stop praying for a miracle and to start dealing with hard question and difficult issues. If we wait much longer we may lose the chance to be the agent of change and rather have change thrust opon us. The market will react and respond to PPACA and we may not like the outcome.

How Can We Control Costs?

Controlling costs is where the rubber is really going to meet the road in this discussion. It's not only the most critical aspect of the problem with health care in this country, but it is also the most difficult to solve. The fact of the matter is that there is no way to provide the highest levels of care to everyone that wants it without breaking the bank. Every country rations care in some form or another. Some do it by access, some by quality; in the U.S. we do it by income level. There is simply no way to provide universal coverage without having to cut back somewhere else. Many people talk about making the system more efficient, citing the elimination of redundant tests, or the cost reductions garnered by giving access to preventative care to the currently uninsured as a means to pay for expanded coverage. While there may be some level of savings from each of these, it's nowhere near enough money to address the real financial concerns present in our system. To address the fundamental issues of cost in our current system in a long-term and sustainable way, we need to make some very difficult choices about how we want our health care rationed. Before we get to these difficult questions there are some less controversial changes that we can make that will help.

Tort Reform

One of the first things I believe we should do is pass major tort reform. A negative outcome in health care should not be a lottery ticket nor should attorneys make a career out of looking for such a winning ticket. I was talking to an executive of a large malpractice carrier who told me that his company spends more money on successful defense of malpractice cases than it does in all of its payouts put together. Let me restate that; a malpractice carrier spends more money on successfully defending frivolus law suits than it does in its payouts when a real case of malpractice occurs. Can you imagine how high your auto insurance would be if this were the case in that industry? Its time to deal with this issue and to limit non-compensitory damages to a realistic amount. This would not only reduce malpractice premiums but will also reduce some level of defensive medicine which is one of the drivers of unnecessary testing and procedures.

What About The Hard Questions?

Another adjustment that needs to be made is to raise the age of eligibility for Medicare and to make it an income-dependent benefit. The average life expectancy in this country has been steadily increasing, thanks in large part to our incredible health care system, and we are eventually going to have to reflect this change in the qualification age for Medicare. Moving the age from 65 to even 66 or 67 produces significant cost savings and will help shore up the Medicare fund. In addition, the coverage should be tied to income level - including the amount saved for retirement. This can be done by making those retirees with significant retirement savings pay an additional premium for Medicare coverage. I know that these ideas are not going to be popular and are not without controversy, but again, it's important to keep in mind that we cannot provide everything for everyone, the changes that I suggest are much better than the alternative kinds of rationing we see in the Canadian or British systems.

The final adjustment that I think we need to make will most definitely be the hardest to swallow. We are going to need to develop a way to ration coverage through clinical effectiveness and outcomes, rather than by simply cutting access. Currently, our country spends a staggering amount of money on care that is provided during the final few months of a person's life. We go to heroic measures to extend life even when the hope of saving that life is non-existent. These efforts by dedicated and talented health care professionals, while laudable, are also something that we simply cannot afford to cover if we are to try and provide essential care to everyone. At this point, I can imagine the thoughts that are running through your mind. Am I suggesting that we just let people die rather than provide care? Who decides who lives and who dies? How can anyone suggest such a thing? Before you jump to judgment, please consider the following details behind this idea.

Every day in this country, people die while life saving care is withheld from them for clinical rationing reasons and no one objects. Let me say that again. We are currently letting people die when life saving care is available and everyone involved understands. I am talking about the current process for organ transplants. We have a limited number of organs available for transplantation and the supply of organs is not great enough to satisfy the number of patients that need them. We have developed a rationing system where candidates are evaluated and then put on a list and prioritized. The system includes factors such as the likelihood of success and the potential for long-term survivability. Many of the organ transplant protocols will eliminate candidates based on age, comorbidities, and even things like harmful personal activities. An active alcoholic will be removed from the list for a liver transplant. This is a form of rationing and it directs the system to logical, non-financial choices of who may live and who may die. It is done to try and maximize the benefit given a limited supply. My question to you is how is rationing a limited supply of organs different from rationing a limited supply of money?

So, my proposal for fixing the cost issues around health care and putting Medicare back on track so that it doesn't consume the entire federal budget before I even get a chance to make use of it, is to develop similar clinical protocols to help physicians and hospitals know when heroic efforts to extend life should be undertaken and covered by insurance, and when they shouldn't. I don't think these decisions should be left up to the insurance companies or to the government. I also don't think it's fair to leave them up to individual doctors and families. Rather, I would look to the various clinical specialty societies to develop these coverage guidelines based on the most current data and information. Further, these coverage guidelines would be updated regularly as the science of medicine advances.

I completely understand that talking about withholding coverage feels very much like withholding care. In the abstract it is easier to consider, but it becomes very difficult when it's your loved one. I also understand how uncomfortable and morbid it can be to have any discussion on this topic. We want to provide everything to everyone, but I think we have proven that this approach leads to financial ruin and is no longer sustainable. If the system collapses, tens of millions of Americans would be left to their own devices to pay for the health care they need, making the current number of uninsured – no matter what number you start with – look miniscule. This idea isn't a great option; it's not even a good option, but rather, is the best option chosen from a number of unattractive ones. It really is the lesser of several evils.

So, as we watch the Supreme Court deal with the question of the individual mandate and as we approach the 2012 elections, I think it's time we take a serious look at PPACA, what it will do, what it won't, and ask ourselves, can't we do better than that? I don't know about you, but my fear is the cure of PPACA may be worse than the illness it was intended to fix.

A Chill is in the Air; It Must be SGR Time Again

I love this time of year.  The busy holiday season has passed and soon the winter air will give way to warm spring afternoons.  The only bad part about this time of year is the annual discussion about the Medicare SGR cuts.  Each year for the past several years it seems like the same old story.  The Sustainable Growth Rate projects massive cuts in Medicare payments to physicians.  Physicians rally around the cry: "Fix the SGR!"  Politicians do what they do best, which is grab some air time and make wonderful speeches blaming everyone else for this problem while doing nothing to actually solve it.  The parties to be in Washington play Russian roulette with the January deadline and then, in the end, they kick the SGR can further down the road for another 6-12 months and things go back to normal again. 


Now don't get me wrong; every year I hope against hope that someone in Washington will actually solve this silly problem once and for all.  However, like any good realist, I am not betting any of my money that a solution will actually happen.  I expect the same drama to play out once again this year.


What's really silly, in my opinion, is that most everyone knows the SGR is no longer a viable formula.  It's the modern health care equivalent of saying the world is flat.  Consider the following two pieces of information. 


1) At Fulcrum Strategies, we looked at each of our clients to determine what the average impact of a 27% reduction in Medicare rates would have on physicians' salaries.  Our clients range from primary care to medical and surgical specialties.  Some are very large groups and others are small to medium sized groups.  Grouping all of their data together produces a good cross section of the physician population in this country.  Based on this data, the average physician would see a salary reduction of over $70,000 per year if the 27.4% SGR cut took effect in January of 2012.  Can you imagine the backlash that would happen if the government picked any other profession and said they were going to increase their taxes by $70,000 per year per person?  How much traction do you think the American Attorney Surtax Bill would get if it raised taxes on attorneys by $70,000 per year? What's the difference between taxing a profession and just reducing their revenue?


2) Another example of how silly the SGR has become is the rate of payment for an office visit.  Under the new Medicare schedule, a new patient office visit would be paid at about $110.  If we assume that a doctor can see about 1 new patient per hour, when you add in the time for charting etc., and if we assume that the average overhead is 50% for most practices, that means that Medicare thinks doctors should work for about $50 per hour.  Right now the pharmacist at your local chain drug store makes more than $50 per hour and doesn't have the stress or risk of being a business owner.  Is this what we really want?  Do we really want the pharmacist who is filling the prescription to make more than the doctor who is actually writing the prescription?


So we all agree that the SGR will not be allowed to be implemented.  We also agree that given the problems with the budget, it's not so easy to just remove the SGR and replace it with an annual cost of living adjustment.  So what is Washington likely to do?  Well, one hint may be the recent discussions at the Medical Payment Advisory Committee (MedPAC).  In September, MedPAC considered a plan to replace the SGR with a 10 year fix.  The fix would freeze payments to primary care physicians at 2011 levels for the next 10 years.  Specialists would take a 5.9% cut for each of the next three years and then a freeze for the next 7 years.  While this sounds much better than a 27% cut right now, it still spells the demise of Medicare in my opinion.  Let's project this plan out 10 years and compare it to a very reasonable and conservative estimate of inflation.  If we assume only a 2% inflation rate in physician costs for the next 10 years, then a 99213 office visit which is paid at $68.97 in 2011 should be reimbursed at $84.07 in the year 2021.  Under the MedPAC suggested plan, this office visit code would still be paid at $68.97 for primary care physicians and $57.47 for specialists.  This means that primary care physicians would have lost ground to inflation to the tune of 22% over 10 years, and specialists would have lost 46% to inflation.  No business can survive when it falls that far behind to inflationary pressures.  So ask yourself, how many physicians can and will continue to see Medicare members under those circumstances?  One of our specialty clients asked what the impact would be if the 6% cut for the next three years that is recommended by MedPAC was implemented.  Well, for that particular client, it would mean a physician compensation reduction of $15,000 per year for the next three years on Medicare alone.  That is before practice cost inflation eats up even more of their revenue.  


So what do we do with this wonderful picture of the future?  Well, you could just shut off your computer and gaze out your window at the nice winter weather.  If that doesn't help, then I would suggest building a plan to focus on what you can do to make up for this very real potential of a Medicare reimbursement reduction.  Make your plan simple and focused.  Make it something that you can use to achieve real results.  I recommend starting with three major objectives: 


1- REDUCE YOUR COSTS: Begin identifying where you can reduce costs.  For example, can you renegotiate your lease for your office space and reduce your rent in exchange for adding a year or two to the lease?  Can you refinance your debt and reduce your interest expense?  Can you operate some part of your practice more efficiently?  Identifying ways to reduce costs can help to prepare for the future.  


2 - RENEGOTIATE YOUR CONTRACTS: Don't let a year go by without pushing for a raise from your commercial payers.  Your employees demand a raise every year and so should you.  If you need help with your contracts, please contact us (please visit our website, www.fsdoc.com, for our contact information).  Our negotiators have more than 80 years of combined experience on the payer side.  We are happy to review your group's data to determine if we can help.  


3 - FIND NEW SOURCES OF REVENUE: Are there things you are outsourcing that could be done internally?  Is there a profitable service you could offer to your patients?  This type of diversification strategy can help offset reductions in other areas.  Finding new and related sources of revenue can tremendously improve your practice's bottom line.  


My best piece of advice for any physician group, large or small, is to focus on these three key objectives and try to get something done in each area.  When you accomplish a task choose your next target and keep moving forward.  Setting goals in each of these areas and focusing on achieving those goals will help your practice prepare for what is likely to happen.  As always, if you need help in any of these areas, Fulcrum Strategies is here to help.  Let us know how we can assist your practice in preparing for 2012 and beyond. 

Will the last physician out of the exam room please turn out the light?

Imagine you are a college freshman with excellent grades and a bright future ahead of you.  You have the ability to choose the career path of your choice.  You find yourself in the office of the college guidance counselor, having a conversation about one of the possible career choices you could pick.  The conversation goes something like this:

Counselor:  “I really want you to consider a career in medicine.  I think with your intelligence and skills, you would make a great physician.  This career would be an excellent choice.”

Student:  “That sounds great.  Do I need a graduate degree?  I mean that’s a total of 7 years in college.”

Counselor: “Well, actually it’s a bit more than that.  You will need your bachelor’s degree plus a graduate degree plus several more years of training.  All in all, you will be spending 12 to 14 years getting your education.”

Student:  “12 to 14 years.  Wow, that is a lot of time!  I will be in my mid 30s before I get out and start my career.”

Counselor:  “You actually get started long before then.  You will be doing some on the job training for the last half of the 14 years.”

Student:  “That’s good.  So at least I will be making a good living while I am learning.”

Counselor:  “Well, not really.  You are going to be working...and actually working crazy long hours but you won’t really get paid much for all of it since you are a student.  To be honest, when you are done with all of this you will probably owe more than $200,000 in student loans.”

Student:  “So when I get done with all of that at least I will be making great money and not killing myself working 60 hours a week any more, right?”

Counselor:  “Well..not really.  The money is ok but you will still be working long hours.  Depending on what you do and how you specialize, you may have to work many nights and be on call a fair amount.”

Student:  “This doesn’t sound very good.  Can you tell me more about what life will be like in this career?”

Counselor:  “Sure.  Well, other than the long hours and being on call, you also get to look forward to a future of declining compensation, government red tape and bureaucracy, government audits and the possibility of having your whole industry taken over by the government sometime in the future.”

Student:  “Are you kidding me?  Why on earth would anyone devote 14 years to education, start working in your mid 30s, begin a career horribly in debt, only to face the kind of uncertain future that you just described?”

Counselor:  “I don’t know.  You are the fourth student today who has asked me that today.”

Student:  “How about talking to me about a career on Wall Street or in politics....”

Now, I know that this description is done a bit tongue in cheek.  I also know that many of the very best physicians go into medicine as a calling and a passion and not because it’s a great life or financial decision.  That being said, please consider what will happen if we don’t address some of these issues.  What are we going to do if we continue down this road and we can no longer attract our best and brightest students into the very demanding and important profession of medicine?  What we could end up with is a scary thought;  universal coverage for every American…and a shortage of physicians to provide care. Ask yourself: what does the future of health care look like if our best and brightest students decide to forego a career in medicine?

Five Things Every Practice Should Be Doing to Prepare for Health Care Reform

Living in North Carolina, like many other places that deal with the threat of hurricanes, we have gotten used to what others may consider an odd occurrence. Every year, when a hurricane is bearing down on one of our beaches, we are flooded with scenes of homeowners boarding up their windows and getting ready for the storm. Inevitably, these pictures show a calm ocean and bright blue skies. The point is that people who own beach houses know that when a storm is coming, the time for boarding up the windows and getting ready is before the storm, while the weather is still calm. Once the storm arrives, it’s too late to protect your house. We can apply that same analogy to health care reform. We are currently in that “calm before the storm,” and now is the time to shore up your practice and do the things that need to be done so that you will survive the future of health care.

Like a hurricane, no one can predict just how bad things will get for health care in the coming years or even when all of this will take place. What we can do is look at the factors and the likely glide path for some indications of what we will be facing. All the signs of a very large storm are present; you just have to put the pieces together. Consider this: we have a struggling economy with high unemployment and little to no growth. This places a significant burden on businesses that currently finance a huge amount of health care. We have a health care reform law that will significantly change the marketplace in 2014, when most of its provisions kick in. Through coverage expansion and Medicaid expansion, this law will add a projected 20 to 30 million people to the roles of the insured. These newly insured individuals will put stress on the delivery system, which in many areas does not have the capacity to absorb this new demand. We also have state budgets in trouble, placing pressure on Medicaid funding and programs; and we have Medicare expenses rising at a rate that is not sustainable, putting significant pressure on the federal budgets.

Consider this: in this current fiscal year the federal government will take in $2.4 trillion in tax revenue. Medicare and Social Security will consume $1.5 trillion in expenses. This means that more than 50% of the revenue we take in is used to pay for healthcare and retirement benefits. After you pay for Defense and the interest payment on the debt that we have already incurred, there is only $26 billion left in the coffers. That means we can pay for something like the Department of Agriculture whose budget is $26 billion, but all other government functions, such as foreign aid, the Department of Education, the Department of Homeland Security, unemployment, etc., have to be paid for through borrowing and accumulating more debt. The point of this illustration is to explain the obvious—that we will not get our federal deficit under control until we control the largest line item, health care.

Taking all of this into account, it appears that we have the makings for a very big storm. The demand for health care will go up, as it always has, while the ability to pay for it will be under serious pressure. At this point in the discussion, many of my physician clients start considering their retirement date if they are close enough to do that, and, if not, they start considering self-medication with anti-depressants. Once they get over this urge, we can move forward with a strategy for how to get ready for the brewing storm, and we start “boarding up the windows,” so to speak.

I believe there are five things that every practice should be doing to get ready. These five things, if done now, will help to ensure that you are prepared when health care gets rough in the future.

1. Operational efficiency: There is no doubt about it; the future of health care will put significant pressure on provider revenue. Practices will no longer be able to cover up inefficient business models with fee schedule increases. Medical groups and other health care providers are going to have to learn how to make do with less, and that means becoming more efficient in their business functions. Practices need to take a serious look at their overhead and look for ways to reduce the percentage of revenue that is required to run their practice. This doesn’t necessarily mean reducing staffing, although it may; in some cases it can mean learning how to add volume without adding expense. It can also mean looking at things like purchasing contracts, lease arrangements, or even consolidating debt to reduce expenses. It could mean taking full advantage of an EMR environment to reduce overhead and inefficiency. Whatever this looks like for an individual practice, it almost always boils down to one thing: professional management. The groups that are going to survive and thrive in the future are the ones that have solid professional management. I’m not talking about a practice administrator that has been with the group for 20 years, and started as the receptionist or billing clerk. While some of those individuals do grow into solid professional managers, most don’t. I’m talking about experienced professional executives with solid educations and backgrounds, who understand business efficiencies, strategic planning and how to run an efficient business in difficult times. In the same way that quality physicians produce the best health care outcomes; professional business managers produce the best business outcomes.

2. Battlefield intelligence: Ask any military commander what they need most in a difficult battle, and they will say intelligence. Knowing what the enemy is doing and what their strengths are can be the difference in winning or losing a battle. Health care is no different. Groups need to keep their ear to the ground and constantly seek new information. Try to keep an eye on what your competitors are doing, what the payers are doing, and what other groups or your hospital partners are doing. The last thing you want is to wake up and find out that your two largest competitors have merged, leaving you in the dust, or that your hospital has just hired four doctors in your specialty and now you are not needed for the ACO they are forming. Keeping up with the ever-changing marketplace will help you with your strategic planning more than almost anything else.

3. Gain market position: The other night I was watching a movie on HBO called “Too Big to Fail.” There is some real power in a title like that! In many cases, especially in difficult times, it’s often the larger businesses that will survive; in our case, it’s the larger physician groups. There are significant advantages to size, if well-managed. That is why my third recommendation for how to get ready for the coming storm is to gain market position. This can be accomplished through organic growth (adding new doctors right out of school), merging with other groups, expanding your geographic coverage, or cornering the market for a specific service or subspecialty. This market clout can be the difference between surviving the future, and not. Let me give you an example: I work with a client who has, over the years, gained significant market position. They are the dominate player in their specialty and have some sub-specialization that can’t be found anywhere else in the local market. Recently a payer approached them and forcibly told them they would need to take a 40% cut in reimbursement for one of the ancillary services they provide. My client calmly and confidently told the payer that yes, they did need to renegotiate the rates for this service because it had been several years since they had done so, but rather than take a 40% cut, they needed a 5% increase. My client then explained that without this increase, they would have to consider leaving the network completely. We ended the meeting by reminding the payer that without my client, there would be a huge hole in their network that could not be filled. A couple of weeks later, the payer made a new proposal of only a 20% decrease, we countered with our 5% increase. A couple of weeks after that, they proposed only a 10% decrease, again we countered with a 5% increase. Just last week we settled on a 3% increase. While experiences like this are not guaranteed, it is safe to say that had this client not established its market position, the outcome would have been dramatically different.

4. Marketing and customer service: A major part of the future of health care may revolve around attracting the kind of patients that you want, not just attracting patients. With the expansion of Medicaid, it is going to be crucial to avoid getting overloaded with low paying patients, and to attract your fair share of commercial insurance patients. These commercial insurance patients will be able to vote with their feet, and in many situations will do so. Given this, it’s important to have a well thought out marketing plan that includes a clear message and a logical delivery strategy. Simply putting an ad in the yellow pages isn’t going to cut it in the future. Marketing by itself isn’t going to be enough either. You have to back it up with solid customer service, so that word of mouth referrals are your friend and not your enemy. Giving careful consideration to how you treat patients as customers, as well as to the services and clinical care you provide, is a necessity in tomorrow’s health care environment.

5. Fill the silo with grain for the upcoming winter: I grew up in a farming community. Every farmer knows that you work all year to harvest enough crops to sustain the winter. Medical practices need to consider doing the same. If this has been a good year for you, consider what you can do to store some of that good fortune for the future. Pay off any debts that you have. Make sure you are not using the line of credit. Do whatever you can to prepare your group for what could be a “hard winter” in a couple of years. This is easier said than done because it means forgoing current salary and compensation for your doctors, but it will prove to be beneficial in the future.

While doing each of these five things won’t guarantee your success in an uncertain health care future, it does stand to reason that not doing them will increase your chances of having a very difficult time surviving when the storm arrives. Remember, boarding up the windows when the storm is already here is much harder than doing it while it’s still calm and sunny out.

The Negative Side Effects of Health Care Reform

Every physician understands the concept of side effects. They deal with them every day. In some cases, the side effect of a medication may be mild or only slightly inconvenient. In other cases, the side effect or possible complication could be very serious. That’s why doctors explain the risks and potential side effects of various treatment options to their patients. So what does this have to do with health care reform? Well, I was thinking the other day that there hasn’t been much discussion about the very real side effects of health care reform. I don’t think that the general public (and physicians for that matter) truly understand how the new world of health care reform is going to affect them in some very negative ways. Now I’m not talking about the political spin of death panels or anything like that. I am talking about a significant market place shift and how the insurance companies are likely to respond to this new environment.

In order to explain this in a way that everyone can relate to, I want you to imagine that your rich grandfather has recently passed away. In his will, your grandfather leaves you controlling interest in a local HMO. So you wake up and find yourself the new CEO of Premier HealthCare, a local HMO that covers 100,000 people in your area. In 2 years, the major parts of health care reform will take effect. You meet with your management team and begin planning for how you will operate in this new world, specifically, with the new State Health Care Exchanges. What follows is the input and advice that you receive from your management team.

Financial Review: Your CFO explains to you that the company is doing well for a small, local HMO. Your administrative costs are under control at 12% of revenue. Your Medical Expense is coming in at 85% of revenue, which is producing a profit margin of 3%. High fives all around for doing great and making a whopping 3% margin.

Sales and Marketing: Your VP of Sales tells you that growth is good even in a bad economy. Your membership is up by 5% this year. Again, pats on the back and high fives all around.

Medical Management: Your Medical Director says that things are going well. Your medical trend is under control for the time being.

At this point, you’re feeling pretty good about taking over this business. Then comes the bad news. The team now turns their attention to the future and what health care reform will mean for the business. Your CFO and Director of Underwriting give you a quick lesson in insurance theory, risk and adverse selection. You are told that 5% of your members (or just 5,000 people) consume 50% of all of the medical expenses you pay out. These are primarily chronically ill people. Then they walk you through some numbers that reveal some terrifying news: If you add just 500 more chronically ill members, your entire profit margin will be eliminated. While this information is sinking in, they explain that part of the way you mitigate this risk is through things like pre-existing condition exclusions and lifetime benefit maximums. Unfortunately, these things have been eliminated under health care reform, so your company will be forced to carry even more risk.

Your VP of Sales tells you that the company has been reasonable with physicians and hospitals in its contracting efforts which has allowed you to have a very large network, but is also producing higher costs and premiums in the market place. She is concerned about being priced higher in the Health Care Exchange environment. Meanwhile, Medical Management is worried about their ability to control costs in the new environment and is warning you that utilization could spike in the future.

Finally, your CFO reminds you that under the new health care law, you are required to spend at least 85% of revenue on health care claims which means this last year of a 3% margin is the very best you can ever achieve unless you can figure out a way to reduce administrative expenses (i.e. cutting jobs). After this discussion, there are no high fives or back pats. You begin to wonder if they serve alcohol at these meetings. Now the meeting shifts to plans for the future. How are you going to survive in this new environment, and what strategies must you put into place to make sure the company your grandfather left you is still around in five years?

Before you begin your strategic planning, your Government Affairs Director describes the new Health Care Exchange environment that will be put into place in just 2 short years. He tells you that Health Care Exchanges are like big buying clubs with government regulation. The benefit plans will be defined by the Exchange and will be the same for everyone. So your company will not be able to differentiate itself by having better benefits nor will it be able to control costs by having less rich benefits. Large numbers of members will be in the exchange and this will include both individuals as well as employer groups. They will be able to select any carrier in the exchange and the other thing that will be different is the price and the carrier’s network since benefits are the same. At this point you begin to understand. In order to get more members you need to have a bigger network of providers and a lower cost than your competitors. You think you have this figured out. But wait, your CFO now starts to talk to you about the concept of adverse selection.

The CFO reminds you that it’s the very sick people who consume all of the health care dollars, so the trick is to get all the young healthy people to pick your plan and have all the sick people pick your competitors. The problem is that if you get too many sick people, that’s called adverse selection and it will kill your company. So how do you just get the healthy people to join your HMO? Well to answer that you need to understand how people pick an insurance company as well as the concept of price elasticity. There are two basic types of consumers in the health care insurance market; the price shoppers and the network shoppers. The price shoppers are typically younger healthy individuals who don’t think they will ever use their insurance but are purchasing because they are afraid of catastrophic issues or because of the individual mandate. These are the people you want in your health plan. They don’t care how big your network is or if you have the premier cardiology group in your network because they don’t go to the doctor.

The other type of member is the network shopper. They know they are going to use their insurance because of their current health condition or age. They probably already have a relationship with not only their primary care physician but also one or more specialists.

These members are typically high utilizers of health care, and they want to know that their doctors or hospitals are in the network. These are exactly the type of members that you don’t want to attract to your HMO. With this information in hand, the meeting now moves to setting a strategy for your new business. All eyes are on you, and you need to decide how you are going to move forward under the new rules of health care reform. You realize that they key to success is to only attract healthy price shopper members who don’t care about network while at the same time controlling and reducing your administrative expense so that you can hit the 85% requirement. As you think about all of this, the direction and strategy for your success becomes clear. You need to reduce your administrative expense, which means reducing your staff. Since you don’t want to reduce staff in sales or member services you propose cutting staff in areas like provider relations. You also need to reduce your medical expense so that you can be price competitive and attract the young and healthy price shoppers. This can be done by reducing what you pay to your physicians and hospitals and by eliminating the high cost providers. Eliminating high cost specialists and hospitals also has a side benefit of helping you with adverse selection. Let’s say there is a patient with advanced Rheumatoid Arthritis. If you don’t contract with his Rheumatologist, he isn’t going to select your plan. Another patient with MS who is receiving over $40,000 of Tysabri infusions every year won’t choose your plan if their Neurologists isn’t in your network. The young price shopping members could care less about your Rheumatology or Neurology network because they don’t need either of those specialties and probably don’t even know what a Rheumatologist is.

That’s it! The strategy for success is clear to you. You propose a strategy that involves fee schedule reductions, hard negotiations, termination of high cost (read high quality) specialists and hospitals, followed by the termination of many of your employees in areas like provider relations to reduce your administrative costs. The result will be a lower cost network that will appeal to the price shopping younger, healthy population that you want to attract. The negative side of this strategy is a smaller network so less choice for your members, the loss of some of the highest quality providers, and a reduction in the service you offer to your providers and members because of the staffing cuts. However, these are all acceptable side effects to make sure that your organization can survive the changes that are coming from health care reform. With the announcement of this new strategy, you are congratulated by your management team, and once again there is much back slapping and high fives all around.

Okay, now back to reality. Think this is simply an interesting story? Don’t think this could or would ever happen? I hope you are right, but I wouldn’t bet on it. I am already seeing signs from various payers that they are either getting ready to implement strategies just like this one or they already have begun implementing these strategies. I am seeing payers draw very hard lines in the sand when negotiating, including actual network terminations. Right now in North Carolina, Aetna HealthCare is out of network with Rex Hospital in Raleigh and the University of North Carolina Medical Center in Chapel Hill. I have had one managed care executive tell me point blank that in the future, they expect to have a smaller network of lower cost providers and that the days of choice ruling are over. I am seeing several payers approach negotiations with a “take it or leave it” approach. I am seeing smaller payers (3rd or 4th in market share) demanding most favored nations’ language to guarantee that they have the same rates as the largest payer in the market. I am also seeing payers upgrade their ability to profile physicians based on costs performance. Finally, I am seeing very large payers who are profitable and growing talk about layoffs and shrinking their companies.

Now, is it just me, or do these strategies seem to support the very scenario that I outlined above? This brings us back to the original question. Are there negative side effects of health care reform? Yes, I believe there are. While we all try to figure out what the health care reform law will do and what it won’t do, I believe we also need to be very aware of the negative side effects. As all physicians know, sometimes the side effects are worse than the actual problem. My fear is that this could be one of those times.

Unconsitutional? Interesting....But Irrelevant

You may have read recently that another judge has ruled the individual mandate that requires all Americans to purchase health insurance unconstitutional:  Federal judge rules Obamacare unconstitutional 

 "The full text of the decision from Federal Judge Roger Vinson is not available yet, but according to reporters who've seen the decision, he's ruled the entire Patient Protection and Affordable Care Act unconstitutional. The ruling favors of the 26 state attorney generals challenging the law. The judge ruled the individual mandate that requires all Americans to purchase health insurance invalid and, according to the decision, "because the individual mandate is unconstitutional and not severable, the entire Act must be declared void."

- The SF Examiner

This is very interesting but also somewhat irrelevant.  Here's what you need to know. No matter which way this judge ruled or which way an appeals court is going to rule really doesn’t make any difference.  This case is going to the US Supreme Court where it will be decided and all previous rulings will have very little impact.  The Supreme Court with its current make up is likely to decide this case by a 5-4 vote. 

Roberts, Alito, Scalia and Thomas will all vote that the law is unconstitutional.

Breyer, Ginsburg, Kagan and Sotomayor will all vote that the law is constitutional.

Kennedy is likely to be the deciding vote.  That’s right, a 2,000 page piece of legislation that costs over $1 Trillion dollars is all going to come down to the vote of a single person.  Don’t you love Democracy?!

On a happier note, we better hope that nothing happens to Roberts, Alito, Scalia or Thomas between now and then because if you replace any one of those four with a democratic appointed justice like Kagan or Sotomayor and its all over but the shouting.

By the way, Kennedy was appointed by a Republican president but has been known to vote on some things in a more liberal way, so it’s not a foregone conclusion how the final vote will turn out.

The Governor called…and your execution has been postponed

How’s that for a cheery opening?  In all seriousness, though, it’s not far from the truth.  Just a few days ago, President Obama signed a bill that will delay any Medicare cuts from the SGR until 2012, giving physicians across the country a one year reprieve.  I think we could all hear the collective sigh of relief that was released once physicians learned of the delay.  So the big question now is what does this mean for physicians and what should they be doing in 2011?

First, you need to understand that no problem was solved by this act.  Yes, Medicare is still insolvent and is still an unfunded mandate.  The only thing that happened was that we put off the problem for another year.  In essence, the government paid a loan with a credit card.  The debt and the interest didn’t go away; it is just accumulating somewhere else and will need to be paid eventually.  In addition to this, we have states across the country looking at Medicaid budgets and needing to cut expenses in that area.  We have hospitals buying up practices to get ready for Medicare ACO’s, which is an idea that no one (including CMS) really knows much about or how it will work.  Finally we have that little piece of legislation that got signed this time last year.  Remember health care reform?  Well, that gem just hit a snag when a judge in Virginia recently ruled one of the major components of the law, the individual mandate, to be unconstitutional.  We await a ruling out of a court in Florida, and then will look for the various appeals until finally this legislation finds its way to the U.S. Supreme Court which will be the final step in its legal review.  To say that physicians are facing uncertain times is quite the understatement.  

Given all of this, my advice to physicians is to use this next year very wisely.  We have one year to get our house in order, so to speak.  It’s a little bit like what happens here in North Carolina during hurricane season when we start seeing that big storm looming out in the sea.  We aren’t sure if we will get hit or how bad it will be, but we prepare anyway.  Board up the windows; make sure you have batteries, food and water, and get ready to weather the storm.  Physicians should be doing much the same over the next year.

The three biggest things practices should be doing in 2011 include: revenue, efficiency, and planning.

Revenue:  Use this year to not only secure whatever revenue you can from your insurance contracts, but also to make sure the insurance companies can’t hit you with any arbitrary reductions.  Make sure your contracts are not based on “current year Medicare” but rather a fixed year.  Make sure the fee schedules are fixed and not based on a payer defined schedule.  Make sure you understand what they can and can’t do to affect your revenue.  Can a payer just decide to reduce payment for PA’s or other policy changes?  Finally, make sure your billing and collecting department is doing everything to collect what you are owed.  Keep a close eye on your bad debt, patient responsibility and denial rates.  It’s important to note that in the future, we won’t have the luxury of writing things off because we can’t collect them.

Efficiency:  It’s time for physician practices, both large and small, to do what every other business in a difficult economy has to do and that is become as efficient as possible.  Efficiency doesn’t necessarily mean cutting staff, but rather, taking a very serious look at your expenses and overhead and making sure there is no waste.  Even things like trying to renegotiate your office lease can help lower costs and increase efficiency.  This is critical because the future in health care is not going to have the margin of error that is required for inefficient practices to survive.

Planning:  I know I have talked about this in the past, but I will say it again.  One of the biggest things, in my opinion, that has hurt physician practices is the lack of planning in the two to five year horizon.  Most practices I work with don’t have a well-defined plan that outlines what they would do if something like the Medicare SGR cuts happened.  Many practices don’t know what their financials or doctors’ salaries would look like if those cuts took place.  Now that we have our reprieve for 2011, it’s a good time to start developing the planning models and financial tools to do this.  Once you have developed the models and tools, it’s time to sit down and plan for the future.  Is a growth strategy right for your practice, or should you get smaller?  Should you sell to a hospital or merge with a competitor?  What would you do if Medicare or your largest payer decided to cut your reimbursement by 10%, 20%, or even 30%?  All of these things should be developed and decided before the end of 2011 so you are ready for 2012 and beyond.   

It is my belief that the practices who use the next year wisely and plan for the possibilities that will most likely come in 2012 are the ones who are going to thrive and survive.  Those who don’t are going to have a very rough time adapting to the inevitable changes that are coming in health care.  

To end on a positive note, I would like to once again say thank you and happy holidays to all of our clients.  It has been and remains my distinct pleasure and honor to work with all of you.  The best thing about the work that we do here at Fulcrum is that every day we get to help dedicated, quality physicians.  In some small way, we hope that we are helping you so that you can help your patients.

From the entire Fulcrum family, we thank you for the privilege of working with your practice.