Re-imagining our healthcare system

Harnessing the knowledge and common sense of our national community to fix the healthcare system

Over the past 25 years, our society, our community of neighbors and fellow citizens, has dedicated an ever growing portion of our total economic productivity to healthcare for ourselves and our fellow citizens. In the mid-1980s, healthcare accounted for 6% of GDP. Today, it accounts for 17%. Over this period, real GDP has grown by a factor 2.15x, so that in real terms, we, together, are dedicating nearly 6.1 times more resources to healthcare today (4.7 times more per capita) than we did 25 years ago. Yet, there is a pervasive sense of insecurity about healthcare among our friends, relatives and fellow citizens which is markedly attenuated compared to 25 years ago.

Ironically, this period of exponentially growing resources dedicated to healthcare and of growing insecurity in our populace parallels the Federal governments effort to control costs. The major construct for cost control, first applied to Medicare nationwide in 1983, has been the DRG (Diagnostic Related Group) system characterizing treatments received by patients in hospital settings. By paying for treatment by diagnosis

(with adjustment for age, severity, etc.), the DRG system sought to counter the most adverse and perverse aspects of our otherwise pervasive fee-for-service system for paying for healthcare. Given the market share power of Medicare, even 25 years ago, this initial effort at global payment for treating a disease, if not treating a patient, has

become embedded throughout our medical system. Given the escalation of healthcare expenditures , the question is: Where would we had been without DRGs. As with any by all the participants, movement by strategically focused providers to increase services not covered by DRGs until the system catches up with them, incentives for structural inefficiency, and, at the far end of the spectrum of behavior, fraud. Notwithstanding the efforts to control expenditures, both costs and insecurity have continued to grow. Perhaps it is time to re-imagine how healthcare is paid for and, in doing so, try to use frameworks that individuals know and understand and structures that already exist and can be repurposed to these needs.

large bureaucratic system, the medical payment system (note the compulsive effort to avoid the use of the term reimbursement) suffers, first of all, from gaming of the rules

misunderstanding of our everyday vocabulary, specifically the term insurance. The most fundamental meaning and origins of insurance is risk sharing all members of a cohort contributing to a common pool from which cohort members unlucky enough to incur a loss are aided in dealing with the loss. This is most clearly manifested by mutual insurance companies where, structurally, the policy holders own the residual value of the company, namely any amount of premiums not paid to those sustaining losses or used for operating expenses. A more limited aspect of insurance is risk shifting, most commonly applied to protecting against remote, but catastrophic losses. The epitome of this aspect of insurance is Lloyds of London where ultra-wealthy names who can afford a degree of losses are willing to assume a range of specific risks in order to profit if the adverse events do not occur. Unfortunately for our societal debate about healthcare, the meaning of insurance that prevails in our conversation seems to assume risk shifting to others rather than risk sharing amongst ourselves. In reality when an economic sector accounts for 17% of GDP (or probably even 6%), it is unrealistic to think that the risk, i.e. burden, can be shifted. In one form or another, if

The biggest challenge to developing consensus on needs and solutions is the extant

we try to shift the burden, we will only be passing cookies to ourselves. It is time to recognize that we, as a citizenry, can only share the burden and we need to rethink health insurance and deconstruct the various payment systems and their funding. No individual would ever think that their auto insurance policy would pay for an oil change, but the expectation is that a well office visit to the doctor is covered by the same insurance policy that covers a catastrophic illness for the middle-aged or the terminal illness for the elderly.

Health care is not a single, undifferentiated activity. It confuses the aspects of it to refer to it and to think of it in a global, singular sense. In its simplest segmentation, there are three distinct aspects to healthcare: (1) preventative care and normal maintenance; (2) response to catastrophic accidents or disease and (3) end-of-life care. Trying to take care of these three very distinct needs with one global solution is bound to fail through hidden cross-subsidies and mis-allocation of resources and is certainly likely to at least create confusion and inefficiency. In addressing the sourcing of and payment for healthcare, most American adults already possess relevant knowledge from other

aspects of their everyday lives, caring for and insuring their automobiles, purchasing life insurance. In re-imagining the sourcing and payment for healthcare, the relevant analogies might be: extended warranty maintenance contracts (primary care), auto

accident insurance (catastrophic illness or physical accident) and term life insurance (end of life care). If the responsibility for health care was to be segmented in this manner, the average citizen could recognize and understand the issues involved and could engage effectively

with his or her governmental representatives in establish public policy responses, remembering that public policy solutions should be grounded in sharing burdens rather than trying to shift burdens on others, who, in the end are us. The concept of an extended warranty maintenance contract in the medical setting could lead to medical practices offering pre-paid primary care. Catastrophic events are susceptible to actuarial rating to determine the cost of risk sharing across a cohort, even if individual risk profiles are excluded. However, even when community rating was to be applied, surcharges could be made for those not participating in primary care contracts on the assumption that they would be sicker at the point of an event requiring acute care. This would create incentives for use of structured primary care, improving health maintenance and enhancing disease prevention. If one thinks about it, payment for end-of-life care is essentially a life insurance policy paid immediately upon death for services received immediately before. As used here,

the term end-of-life care refers to the terminal hospital admission rather than longterm elder care, a subject that deserves separate analysis. It is useful to reflect that, in the US, the often quoted figure for the cost of the terminal hospital stay, the one in which someone usually comes in through the ER and always leaves via the morgue,

accounts for 25% of total healthcare expenditures annually and that the final year of life accounts for, on the order of, 40% of all healthcare expenditures. One expects that expenditures would be skewed toward the healthcare episode resulting in death, but the proportions in the US have to give us pause. How might we fund these distinct elements of healthcare, namely primary care, catastrophic illness and end-of-life? Looking at them in in order of their proportion of current expenditures, is there a way to fund end-of-life care other than from current period tax revenues? One approach that might considered is that, at birth, an amount is invested for each individual from the Federal treasury (meaning our shared contributions through taxation) in an age-

adjusted balanced portfolio of securities which is targeted to yield an amount, at

the anticipated actuarial date of death, equal to the cost of a typical cost of terminal stay at the time of birth, adjusted for broad anticipated inflation. As they mature, each individual and their family would have those finite resources to fund the final hospital admission. They would be free to purchase more services from other personal resources

and, perhaps, depending how the plan is structured, any unspent amount might transfer to the decedents estate. Providers might offer enhanced service options for the total value of the account balance as a way to attract patients and the final hospital stay would become an event that each individual would anticipate and plan for because there would be dedicated resources to deal with. There are a myriad of complexities that would need to be addressed such as transition issues for existing lives in being, premature death do to accident or disease and co-ordination of benefits with catastrophic health plans, just to name of few. The point is that the final hospital stay is a certainty just as death is. If life insurance policies can be constructed to pay lump sums to beneficiaries upon death of the insured, end-of-life care policies can be constructed to pay for the costs of the terminal hospital stay. The nature of the benefits and their limitations should be understandable by the average citizen.

Health services required in case of accident or disease can be determined actuarially across appropriately diverse risk-sharing cohorts. Since end-of-life services would have been separately funded through a single premium policy, we would now be dealing with something less than 60 to 75% of healthcare expenditures spread over 100% of the population, immediately making for structural affordability. Ideally hospital networks would offer these accident/disease policies as a means to maintaining a balanced revenue stream and geographical reciprocity arrangements among provider networks would be made to deal with the mobility of the population. To provide systemic stability, these accident/disease policies might be structured as three, five or ten year term plans. Perhaps the reference premium would be based on the assumption of no primary care with deep discounts for qualified primary care arrangements. To make it understandable to the average person it would be akin to a deep discount on

comprehensive auto coverage if a security system is installed in a car. For citizens in need, the community (government) would provide subsidies to create affordability and services to mitigate adverse events. Perhaps, failure to use services would result in loss of subsidies as a means to incentivize medical compliance.

Finally, primary care, the extended warranty service plan part of the system. The

discount or rebate from the accident/disease plan would give the incentive for and fund the purchase of a package of services. Physicians, whether in groups or networks would be incentivized to participate in some sort a capitated arrangement that would establish reliable sources of revenue with which to develop effective systems and resources to

attract and service a cohort of patients. Quality of service based on outcomes could be driven by the requirement for periodic accreditation to qualify for the accident/disease plan rebate. Execution of such a re-imagined healthcare system would not be without its challenges and complexities. But, by making the elements of the system understandable to the average person; by eliminating the structural us versus them nature of our current arrangement, we can go a long way toward establishing a more sustainable social compact to deal with such a sensitive matter as our individual health and mortality. Oleg M. Pohotsky Beverly, MA August, 2010 Oleg M. Pohotsky is Managing Partner of Right Bank Partners, a corporate governance and strategy consultancy. He currently serves as audit and valuation committee chair of Hambricht & Quist Healthcare Investors (NYSE: HQH) and Hambricht & Quist Life Sciences Investors (NYSE: HQL). His 30 year career in the investment industry has included both investment banking and private equity experience. His pro-bono activities are concentrated in the areas of US healthcare policy, corporate governance and commercial rule of law in developing economies. He is a graduate of Clarkson University (BSChE), University of Miami Law School (JD) and Harvard Business School (MBA). He is a member of the Massachusetts Bar.