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Conference on Drug Pricing Inject New Statistics Into Debate, Few New Insights (Part 2 of 2)

Posted on November 9, 2018 I Written By

Andy Oram is an editor at O'Reilly Media, a highly respected book publisher and technology information provider. An employee of the company since 1992, Andy currently specializes in open source, software engineering, and health IT, but his editorial output has ranged from a legal guide covering intellectual property to a graphic novel about teenage hackers. His articles have appeared often on EMR & EHR and other blogs in the health IT space. Andy also writes often for O'Reilly's Radar site (http://oreilly.com/) and other publications on policy issues related to the Internet and on trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business. Conferences where he has presented talks include O'Reilly's Open Source Convention, FISL (Brazil), FOSDEM, and DebConf.

The first part of this article described the upward pressures on costs and some of the philosophical debates over remedies. This section continues the discussion with several different angles on costs.

Universal access and innovation

It’s easy to call health care a human right. But consider an analogy: housing could also be considered a human right, yet no one has the right to a twenty-room mansion. Modern drug and genetic research are creating the equivalents of many twenty-room mansions, and taking up residence means the difference between life and death for someone, or perhaps between a long productive life and one of pain and deformity.

Universal access, often through a single-payer system, is in widespread use in every developed country except the United States. Both universal access and single payer are credited with keeping down the costs of health care, including drugs. It makes sense to link single-payer with lower drug costs, because of the basic rules of economics: size gives a buyer clout, as we can see in the ways Walmart lords it over their suppliers (documented in a 2006 book, The Wal-Mart Effect, by Charles Fishman). At the conference, Sean Dickson from the Pew Charitable Trusts gave what he called an “economics 101 course” of health care and how the industry diverges from an ideal market. (He did not come out in favor of single-payer, though.)

How much fat can be cut from pharma? My guess is a lot. As we saw in the previous section, profits from pharmaceuticals tower above profits in most industries. But we don’t have to stop by simply shaving payments to shareholders, or even management compensation. I know from attending extravagent health care conferences that there’s a lot of free cash floating around the health care industry in general, although it’s unevenly distributed. (Many hospitals, nursing homes, and other institutions are struggling to maintain adequate staffing.) In industries possessing such easy money, it does trickle down somewhat. Gaudino pointed out ruefully that health care is one of the few fields left that can give ordinary people a middle-class income, something we don’t want to lose even as employment continues to rise in that space. But easy money also leads to bloat, and this is almost certainly true throughout health care, including pharma.

Even so, projections of the cost of universal access are dizzyingly high, placing pressure on the historic universal access model in Massachusetts and forcing Vermont to give up single-payer. The pressures that could be applied to the health care field by the US government would certainly outweigh the negligible impact that Vermont–with its population of a mere 600,000–could exert. But it’s unlikely that the easy wins falling out of single-payer (squeezing drug companies, eliminating the administrative overhead of handling health insurance) could make up for the staggering costs of adding whole new swaths of a high-need, difficult population to government rolls.

What we need to lower health costs is an overhaul of the way health care systems conceive of patients, taking them from conception to the grave and revamping to treat chronic conditions. T.R. Reid, in his book The Healing of America, says that universal access must come first and that all the rest will gradually follow. I would like to have at least a strong concept throughout the health care system of what the new paradigm will be, before we adopt single-payer. And in theory, adopting that paradigm will fix our cost problems without the wrenching and contentious move to single-payer.

What non-profits can teach us

So how do we recompense manufacturers while getting drugs to low-income people who need them? Some interesting insights did turn up here at the conference, through a panel titled From Development to Delivery Globally. All three speakers operate outside the normal market. One is a representative of Gilead Sciences (mentioned earlier), whereas the other two represent leading non-profits in international health care, Partners in Health and the Bill & Melinda Gates Foundation. Nevertheless, their successes teach us something about how to bend the cost curve in traditional markets.

Flood said that Gilead Sciences made an early commitment to get its AIDS drug to all who needed it, without regard to profit. At first it manufactured the drug and distributed it in sub-Saharan Africa at cost. That failed partly because the cost was still out of reach for most patients, but also because the distribution pipeline was inadequate: logistics and government support were lacking.

So Gilead took a new tack: it licensed the drug to Indian manufacturers who not only could produce it at a very low cost (while maintaining quality), but understood the sub-Saharan areas and had infrastructure there for distributing the drug. This proved highly successful. I’m betting we’ll find more drugs manufactured in India over time.

Hannah Kettler of the Gates Foundation described how they set 50 cents as an affordble price for a meningitis vaccination, then went on to obtain that price in a sustainable manner. The key was to hook up potential buyers and manufacturers in advance. The buyers guaranteed a certain number of bulk purchases if the manufacturers could achieve the desired price. And armed with a huge guaranteed market, the manufacturers scaled up production so as to reduce costs and meet the price goal.

The Gates model looks valuable for a number of drugs: guarantee an advance market and start out manufacturing at a large scale to reduce costs. This will not help with orphan diseases, of course.

More generally, in my opinion, developed countries have to define their incentive to provide aid of any kind–medicine, education, microloans, or whatever. Is it enough of an incentive to empower women and keep population growth under control? To avoid social conflicts that turn into civil wars? To avoid mass emigration and refugee crises? What are solutions worth to us?

The contributions of artificial intelligence

Aside from brief mentions of advanced analytics by Gaudino and Taylor, the promise of computer technology came up mainly in the final panel of the conference, where Petrie-Flom research fellow Sara Gerke offered some examples of massive costs savings that AI has created at various points in the drug development chain. These tend to be isolated success stories, but illustrate a trend that could relieve pressure on prices.

I have reported on the use of AI in drug development in other articles over the years. This section consolidates what I’ve seen: although AI can potentially help at any point in an industry’s business, it seems particularly fertile in two parts of drug development.

The first area is the initial discovery of compounds. Traditional research can be supercharged by analyses of patient genes, simulations of molecule behaviors, and other ways of extracting needles from haystacks.

The second area is the conduct of the clinical trial. Here, techniques being tried by drug companies are variants of what clinicians are doing to engage and monitor patients. For instance, clinical subjects can wear devices with minimal disruption to their lives, and report vital signs back to researchers on an ongoing basis instead of having to come into the researcher’s office. AI can also find suitable subjects, increasing the potential pool. Analytics may reveal early whether a clinical trial is not working, allowing the company to save money by shutting it down early, and avoiding harm to subjects.

Of course, we all look forward to some marvelous breakthrough–the penicillin of the 21st century–that will suddenly open up miracle treatments at low cost for a myriad of illnesses. Current research is pushing this medical eschaton further and further off into the unforeseeable future. We are learning that the genome and human molecules interact in ways that are much more complex than we thought, that a lot is dependent on the larger biome, and that diseases are also cleverer than we thought and able to work around many of our attacks.

Analytics will certainly accelerate medical discoveries. In doing so, it could drastically reduce the costs of drug discovery, and therefore reduce risk and ultimately prices. But stunning new drugs for rare diseases could also vastly increase prices.

Baby steps

I’ll end with a few suggestions made by conference participants to create a more competitive market or reduce prices. Outside of explicit price setting (on which participants were deeply split), the proposals looked like small contributions to a situation that requires something big and bold.

  • Price transparency came up several times.
  • Grogan would like Congress to re-examine reimbursement for Medicare Part D (especially the donut hole and catastrophic coverage) to give both PBMs and vendors incentives to lower costs.
  • Gaudino said that Australia does a much better job than the US of collecting data on the outcomes of using drugs, which they can use to determine whether to approve the drugs. The U.S. payment system is more privatized and fragmented, making it impossible to collect the necessary data.
  • Caljouw praises the efforts of the Massachusetts Health Policy Commission, which has no power to set costs but meets with providers and asks them to reconsider the factors that lead to jacked-up prices.
  • Caljouw also mentioned laws requiring price transparency from PBMs.
  • Several participants suggested reversing the decision that allowed companies to air advertisements directly to consumers. (I’m afraid that if all the misleading drug ads disappeared from the air, a bunch of television networks would go out of business.)
  • Taylor cited pressure by Wall Street on drug companies to maximize prices without regard for the social impacts–an intense kind of pressure felt by no other industry except fossil fuels–and called for the extension of socially responsible investment to drug companies.

I’d like to suggest, in conclusion, that we may be focusing too much on manufacturers, who are taking enormous risks to cure difficult diseases. A University of Southern California study found that 41% of the price is absorbed by intermediaries: wholesalers, pharmacies, PBMs, and insurers. Whether through single-payer or through other changes to the health care system, we can do a lot without constricting innovators.

Conference on Drug Pricing Injects New Statistics Into Debate, Few New Insights (Part 1 of 2)

Posted on November 8, 2018 I Written By

Andy Oram is an editor at O'Reilly Media, a highly respected book publisher and technology information provider. An employee of the company since 1992, Andy currently specializes in open source, software engineering, and health IT, but his editorial output has ranged from a legal guide covering intellectual property to a graphic novel about teenage hackers. His articles have appeared often on EMR & EHR and other blogs in the health IT space. Andy also writes often for O'Reilly's Radar site (http://oreilly.com/) and other publications on policy issues related to the Internet and on trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business. Conferences where he has presented talks include O'Reilly's Open Source Convention, FISL (Brazil), FOSDEM, and DebConf.

The price of medications has become a leading social issue, distorting economies around the world and providing easy talking points to politicians of all parties (not that they know how to solve the problem). Last week I attended a conference on the topic at the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School.

On one level, the increasing role that drugs play in health care is salutary. Wouldn’t you rather swallow a pill than go in for surgery, with the attendant risks of anesthesia, postoperative pain opiates, and exposure to the increasingly scary bacteria that lurk in hospitals? Wouldn’t you rather put up with a few (usually) minor side effects of medication than the protracted recovery and discomfort of invasive operations? And even when priced in the tens of thousands, drugs are usually cheaper than the therapies they replace.

But drug costs are also deeply disrupting society. They are more and more dominant in the health care costs that take up nearly a fifth of the total output of the U.S., and the outsized demands that medications put on both private and public pocketbooks lead to drug pricing being a rare bipartisan issue.

Michael Caljouw from Blue Cross Blue Shield of Massachusetts pointed out at the conference that in Massachusetts, health care has skyrocketed from 20% to 45% of entire state budget in 20 years, and similar trends are found in other states. He says that an expensive new drug can “blow through” budgets set a year in advance. Bach cited statistics showing the prices for cancer drugs are rising exponentially, while the drugs get only slightly more effective over time.

Drug costs also eat into the limited savings of the elderly, dragging many into bankruptcy or poverty. As reported at the conference by Peter Bach of the Memorial Sloan Kettering Cancer Center, high costs drive away many patients who would benefit from the medications, thus leading to worse health care conditions down the line.

Similar problems can be seen internationally as well.

Petrie-Flom drew together a stellar roster of speakers and panelists for its one-day conference. However, when one shakes out all the statistics and recommendations, the experts turn out to lack answers. Their suggestions look like tinkering around the edges, just as the federal government did over the past year with new rules such as citing prices in drug ads and tweaking the Medicare Part D reimbursement formulas. Thus, I will not tediously cover all the discussions at the conference. I will instead raise some key issues while tapping into these discussions for fodder.

The loudest statement at the conference was the silence of the pharma industry. Representatives of everyone you could imagine with skin in this game appeared on the podium–insurers, clinicians, pharmacy benefit managers, the finance industry, regulators, patent activists, think tanks, and of course lawyers–with one glaring exception: drug manufacturers. I’m sure these companies were invited. But the only biopharmaceutical firm to show up was Gilead Sciences, and the talk given by Amy Flood, senior vice president of public affairs, was not about normal drug development but about the company’s commendable efforts to disseminate an HIV drug through sub-Sahara Afica. Given the intense political, social, and geographic contention over AIDS, her inspiring story had little in the way of models and lessons to offer mainstream drug development. I will cover it later in the section ‘What non-profits can teach us.”

Failure by the vast bulk of the pharma industry to take up the sterling opportunity represented by this conference to present their point of view, to me, comes across as an admission of guilt. Why can’t they face questions from an educated public?

The oncoming sucker punch

A couple days before the conference, Stat published a heart-warming human interest story about a six-year old being treated successfully for a debilitating rare condition, Batten disease. Rather than giving in to genetic fate, the parents pulled together funding and doctors from around the country, pushed the experimental treatment through an extremely fast-track FDA approval, and saw positive results within a year.

The tears tend to dry from one’s eyes–or to flow for different reasons–when one reads the means used to achieve this miracle. The child’s mother is a marketing professional who raised nearly three million dollars through crowdfunding. An article in the November/December issue of MIT Tech Review describes six other families who raised money for personalized genetic treatments. Another article in the same issue–which is devoted to big data and genetic research in medicine–discusses personalized vaccines against cancers, while a third lays out the expenses of in vitro genetic testing. This is not a course of action open to poor, marginalized, uneducated people. Nor is such money likely to turn up for every orphan disease suffered somewhere in the world.

I hope that this six-year-old recovers. And I hope the three-million-dollar research produces advances in gene science that redound to the benefit of other sufferers. But we must all consider how much society can spend on the way to an envisioned utopia where cures are available to all for previously untreatable conditions. As conference speakers pointed out, genetic treatments assume an “N of 1” where each patient gets a unique regimen. This doesn’t scale at all, and certainly doesn’t fit the hoary old pharmaceutical paradigm of giving a monopoly over a treatment for a decade or so in exchange for low-cost generic imitations for all eternity afterward.

Yet government needs to keep funding biotech research, and creating a positive regulatory environment when venture capitalists and other investors will fund the research. Joe Grogan of the Office of Management and Budget, keynoting at the conference, claimed that Germany used to have the pre-eminent biotech industry and let it shrivel up through poor policies. In the same way, biotech could leave the United States for some other country that proves welcoming, probably China.

Dueling models

Some panelists enthusiastically promoted what they openly and officially called Willingness To Pay (WTP) or “what the market will bear” pricing, but which I call “stick it to ’em” pricing. Others called for the price controls that are found in almost every developed country outside the U.S. Various schemes being promoted under the umbrella of “value-based pricing” were generally rejected, probably because they would allow the companies to inflate their prices. However, Jami Taylor of Stanton Park Capital suggested that modern data collection and analytics could support micropricing, matching payment to the outcome for each patient.

Interestingly, nobody believed that drug prices should reflect the costs of producing them. But everybody understood that drug producers must be adequately reimbursed. That is why people from many different perspectives came out in opposition to “charity” and “compassionate” discounts or rebates offered by many pharma companies, sometimes reaching 10% of their total expenditures. In a typical sequence of events, a company enjoying a breakthrough for a serious condition announces some enormous price in the tens or hundreds of thousands of dollars. After public outcry (or to ward off such outcry) they start awarding deep discounts or rebates.

Why are discounts and rebates poor policy? First, they bind the recipients to dependence on the company. This is why, according to Annette Gaudino of the Treatment Action Group, Médecins Sans Frontières rejected a donation from a manufacture of a vaccine.

More subtly, high list prices set a bar for future prices. They allow the companies to jack up prices for brand-name drugs by double digits each year (as shown in a chart by Surya Singh of CVS Health) and to introduce new drugs at inflated prices–only to take off the edge through more discounts and rebates.

Grogan would like Europeans to pay higher prices, following the common perception that US consumers are subsidizing the rest of the world. But other speakers contended that Europeans offer fair compensation that can keep drug companies sustainable. A recent administration proposal to force manufacturers to match foreign drug prices seems to take the same attitude.

Aaron Kesselheim of Harvard Medical School participated in a study that demonstrated the robustness of European price controls in a clever manner. He and colleagues simply examined which drugs were withdrawn from the German market by manufacturers who didn’t want to undergo their rigorous price-setting regime, run by the Institute for Quality and Efficiency in Health Care (IQWiG). The 20% of drugs that were withdrawn were those demonstrated to be ineffective or to be no better than lower-priced alternatives.

Gaudino also tried to slay the opponents of price controls with an onslaught of statistics. She cited a JAMA study finding that bringing a cancer drug to market costs well under one million dollars, less than half of the billions often cited. The non-profit Drugs for Neglected Diseases initiative (DNDi) can produce a new medicine for a total cost of just 110 to 170 million dollars. And the average profit for pharma companies has stayed level at around 20% for decades, far above most industries.

With all these endorsements for price controls, the shadow of possible negative effects on innovation hover over them. In the next part of this article, I’ll examine technical advances that might lower costs.

Healthcare Costs Video

Posted on December 1, 2017 I Written By

John Lynn is the Founder of the HealthcareScene.com blog network which currently consists of 10 blogs containing over 8000 articles with John having written over 4000 of the articles himself. These EMR and Healthcare IT related articles have been viewed over 16 million times. John also manages Healthcare IT Central and Healthcare IT Today, the leading career Health IT job board and blog. John is co-founder of InfluentialNetworks.com and Physia.com. John is highly involved in social media, and in addition to his blogs can also be found on Twitter: @techguy and @ehrandhit and LinkedIn.

In all the crazy discussions that are happening about healthcare, it’s always frustrating to me that so few of them talk about healthcare costs. Politicians are talking a lot about healthcare insurance and coverage. Those in healthcare IT talk about meaningful use, MACRA, and over regulation. No doubt there are challenges associated with insurance coverage and with health IT regulation. However, none of them will move the needle on how much healthcare is costing this nation.

Sometimes it takes a little bit of humor to illustrate the point and that’s what this video from Adam Ruins Everything does with healthcare costs:

Not exactly a Fun Friday video like we usually do, but kind of. The saddest part of this video though is near the end when she asks what can be done to fix the problem and he says nothing. Rolling back healthcare costs is the real issue with healthcare today and there are a lot of entrenched interests that want nothing to do with it.

Exchange Value: A Review of Our Bodies, Our Data by Adam Tanner (Part 3 of 3)

Posted on January 27, 2017 I Written By

Andy Oram is an editor at O'Reilly Media, a highly respected book publisher and technology information provider. An employee of the company since 1992, Andy currently specializes in open source, software engineering, and health IT, but his editorial output has ranged from a legal guide covering intellectual property to a graphic novel about teenage hackers. His articles have appeared often on EMR & EHR and other blogs in the health IT space. Andy also writes often for O'Reilly's Radar site (http://oreilly.com/) and other publications on policy issues related to the Internet and on trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business. Conferences where he has presented talks include O'Reilly's Open Source Convention, FISL (Brazil), FOSDEM, and DebConf.

The previous part of this article raised the question of whether data brokering in health care is responsible for raising or lower costs. My argument that it increases costs looks at three common targets for marketing:

  • Patients, who are targeted by clinicians for treatments they may not need or have thought of

  • Doctors, who are directed by pharma companies toward expensive drugs that might not pay off in effectiveness

  • Payers, who pay more for diagnoses and procedures because analytics help doctors maximize charges

Tanner flags the pharma industry for selling drugs that perform no better than cheaper alternatives (Chapter 13, page 146), and even drugs that are barely effective at all despite having undergone clinical trials. Anyway, Tanner cites Hong Kong and Europe as places far more protective of personal data than the United States (Chapter 14, page 152), and they don’t suffer higher health care costs–quite the contrary.

Strangely, there is no real evidence so far that data sales have produced either harm to patients or treatment breakthroughs (Conclusion, 163). But the supermarket analogy does open up the possibility that patients could be induced to share anonymized data voluntarily by being reimbursed for it (Chapter 14, page 157). I have heard this idea aired many times, and it fits with the larger movement called Vendor Relationship Management. The problem with such ideas is the close horizon limiting our vision in a fast-moving technological world. People can probably understand and agree to share data for particular research projects, with or without financial reimbursement. But many researchers keep data for decades and recombine it with other data sets for unanticipated projects. If patients are to sign open-ended, long-term agreements, how can they judge the potential benefits and potential risks of releasing their data?

Data for sale, but not for treatment

In Chapter 11, Tanner takes up the perennial question of patient activists: why can drug companies get detailed reports on patient conditions and medications, but my specialist has to repeat a test on me because she can’t get my records from the doctor who referred me to her? Tanner mercifully shields here from the technical arguments behind this question–sparing us, for instance, a detailed discussion of vagaries in HL7 specifications or workflow issues in the use of Health Information Exchanges–but strongly suggests that the problem lies with the motivations of health care providers, not with technical interoperability.

And this makes sense. Doctors do not have to engage in explicit “blocking” (a slippery term) to keep data away from fellow practitioners. For a long time they were used to just saying “no” to requests for data, even after that was made illegal by HIPAA. But their obstruction is facilitated by vendors equally uninterested in data exchange. Here Tanner discards his usual pugilistic journalism and gives Judy Faulkner an easy time of it (perhaps because she was a rare CEO polite enough to talk to him, and also because she expressed an ethical aversion to sharing patient data) and doesn’t air such facts as the incompatibilities between different Epic installations, Epic’s tendency to exchange records only with other Epic installations, and the difficulties it introduces toward companies that want to interconnect.

Tanner does not address a revolution in data storage that many patient advocates have called for, which would at one stroke address both the Chapter 11 problem of patient access to data and the book’s larger critique of data selling: storing the data at a site controlled by the patient. If the patient determined who got access to data, she would simply open it to each new specialist or team she encounters. She could also grant access to researchers and even, if she chooses, to marketers.

What we can learn from Chapter 9 (although Tanner does not tell us this) is that health care organizations are poorly prepared to protect data. In this woeful weakness they are just like TJX (owner of the T.J. Maxx stores), major financial institutions, and the Democratic National Committee. All of these leading institutions have suffered breaches enabled by weak computer security. Patients and doctors may feel reluctant to put data online in the current environment of vulnerability, but there is nothing special about the health care field that makes it more vulnerable than other institutions. Here again, storing the data with the individual patient may break it into smaller components and therefore make it harder for attackers to find.

Patient health records present new challenges, but the technology is in place and the industry can develop consent mechanisms to smooth out the processes for data exchange. Furthermore, some data will still remain with the labs and pharmacies that have to collect it for financial reasons, and the Supreme Court has given them the right to market that data.

So we are left with ambiguities throughout the area of health data collection. There are few clear paths forward and many trade-offs to make. In this I agree ultimately with Tanner. He said that his book was meant to open a discussion. Among many of us, the discussion has already started, and Tanner provides valuable input.

Symptoms of the Healthcare Debate

Posted on August 19, 2016 I Written By

John Lynn is the Founder of the HealthcareScene.com blog network which currently consists of 10 blogs containing over 8000 articles with John having written over 4000 of the articles himself. These EMR and Healthcare IT related articles have been viewed over 16 million times. John also manages Healthcare IT Central and Healthcare IT Today, the leading career Health IT job board and blog. John is co-founder of InfluentialNetworks.com and Physia.com. John is highly involved in social media, and in addition to his blogs can also be found on Twitter: @techguy and @ehrandhit and LinkedIn.

This healthcare cartoon seemed to capture my feelings about much of the healthcare debate that’s happening right now. It’s even worse thanks to the current presidential race.
Healthcare Cartoon - Symptoms of the Healthcare Debate

This cartoon might offer a much simpler explanation for the healthcare cost challenges we face:
Healthcare Costs in the US

A part of me just wants to turn it all off, but it’s a battle that’s too important to ignore. Have a great weekend!

The Health Insurance Demand Problem

Posted on July 11, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at kylesamani.com.

A family friend was recently admitted to the hospital after a traumatic motorcycle accident in Colorado. He’s not in great condition, but he’s hanging in there. In light of having just written this post about the cost of highly acute care, I couldn’t stop pondering about his health insurance.

Health insurance is a bizarre creature. Unlike other forms of insurance, people actually want to consume what they’re insured against, defying the very premise of the insurance model!

Confused? Let’s dive in.

No one wants to consume traditional insurance

People never file claims for traditional forms of insurance unless something bad has happened, like car or home accidents, natural disasters, or death (covered by life insurance). In some of these cases (like minor fender benders), the insured customer often elects not to file a claim in order to avoid a premium increase. When people do file traditional insurance claims, that means something sufficiently bad has happened, and the insurance system kicks in place to recoup the damages.

People do want to consume healthcare insurance

Healthcare insurance is a wildly different animal. Only a small percentage of total hospital admissions are highly acute, catastrophic cases. A large majority of the care delivery system services non-catastrophic cases, from preventive care to counseling, scheduled (and elective) surgeries, and skin rashes, for example. Patients want as much (non-catastrophic) healthcare as reasonably possible, and they want their insurance companies to pay for it.

This is a classic principal-agency problem. The person making financial decisions isn’t bearing the cost of those decisions; in fact, the person making financial decisions is empowered to blindly spend without thinking. To make matters worse, many healthcare providers encourage patients to consume costly diagnostics and procedures with little regard for value, knowing that insurance companies will pick up the tab.

Realigning incentives

As it currently stands, this system breaks most of the basic assumptions of capitalism: the principal-agency problem, pricing information, and ability to compare producers/providers.

Reducing demand and utilization of healthcare resources is impossible. Since patients are currently incentivized to demand unlimited care without caring about cost, supply will always find a way to satisfy demand. So, how can we realign the incentives to fix the system?

The only way to reduce demand is to make patients accountable for their own healthcare expenses. With the insurance customer suddenly conscious of the cost and value of their subacute healthcare consumption, providers will be incentivized to compete and offer lower costs.

Thus, insurance companies should provide patients “catastrophe-only” plans. These plans would fully and generously cover highly acute care needs, like trauma, cancer, or stroke care. However, like a vehicle insurance plan without comprehensive coverage, the cost of treating the medical equivalent of a keyed car (e.g. a purely speculative blood test) would fall to the individual.

As CEO of a company in the healthcare space, it pains me to know that I’m contributing to the healthcare incentive problem by providing employees with a traditional healthcare plan. But until healthcare insurers offer catastrophe-only plans, patients will continue to blindly consume. In fact, even the Affordable Care Act failed in this light; the national and state-based exchanges don’t offer a single catastrophe-only insurance plan. They are all bundled and are ripe for unbundling.

You Better Stay Healthy, or Else…

Posted on June 23, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at kylesamani.com.

As I read Jonathan Bush’s new book, Where Does It Hurt? the most salient problem that Bush discusses is that hospitals can’t effectively measure or attribute their costs. As a result, they can’t make good decisions since they don’t know how to attribute costs and revenues.

Although this has been widely known for sometime, the implications of this are particularly interesting. Since hospitals don’t know how much it costs to actually deliver care (especially multi-faceted, complicated care), their various revenue streams are effectively subsidizing their expenses in an almost random manner. Accounting for costs and attributing revenue is nearly impossible.

Bush notes that more focused care centers – such as standalone labs, imaging centers, and minute clinics – can afford to offer many of the same services as hospitals with equal or greater quality at a lower cost. They can achieve this because they have dramatically less operational overhead than hospitals and have staff performing the same core basic functions repetitively. Indeed, practice makes perfect.

There are hundreds of companies all over the country building healthcare practices based on this very premise: labs, imaging, procedures, home health agencies, ASCs, birthing centers, cath labs, urgent care, retail clinics, and more. Focused-centers are slowly eating away at hospitals by providing better services at lower costs.

Today, hospitals make enormous profits by dramatically marking up routine procedures and services. But that won’t continue forever. As the ACA pushes patients towards high-deductible plans so that patients act more cost consciously, they will seek the more affordable alternatives. Patients will not agree to pay a $300 ER copay and $2000 MRI when the urgent care center down the street offers a $99 copay and $400 MRI. As patients make better decisions, hospitals will lose some of their easiest, most profitable revenues: extremely marked up lab tests, images, procedures, etc.

What will hospitals be left to do when their easiest, most profitable revenue vanishes? They will shift focus to what they do best: performing miracles. Hospitals will compete for high-end services such as-complex surgeries and intensive care. However, because routine services subsidize the hospital’s overhead, they currently offer surgeries and intensive care at a “discount.” When hospitals can no longer subsidize their complex care with routine care, hospitals will raise prices for the highest acuity services that can’t be performed elsewhere. If you thought acute sickcare was unaffordable, think again. The cost of complex care is going to grow dramatically in the coming years.

Why Is It So Difficult To Reduce The Cost Of Care?

Posted on April 17, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at kylesamani.com.

By refusing to pay for readmissions within 30 days of discharge from a hospital, Medicare has sent a strong message across the healthcare industry: < 30 day readmissions should be avoided at all costs. As a result, providers and vendors are doing everything in their power to avoid < 30 day readmissions.

This seems like a simple way to reduce costs, right? Well, not quite…

The vast majority of costs of care delivery are fixed: capital expenditures, facilities and diagnostics, 24/7 staffing, administrative overhead, etc. In other words, it’s extremely expensive just to “keep the lights on.” There are some variable costs in healthcare delivery – such as medications and unnecessary tests – but the marginal costs of diagnostics and treatments are small relative to the enormous fixed costs of delivering care.

Thus, Medicare’s < 30 day readmission policy doesn’t really address the fundamental cost problem in healthcare. If costs were linearly bound by resource utilization, than reducing readmissions (and thus utilization) should lead to meaningful cost reduction. But given the reality of enormous fixed costs, it’s extremely difficult to move down the cost curve. To visualize:

Screenshot 2014-04-14 23.46.37

Medicare’s < 30 day readmission policy is a bandaid – not a cure – to the underlying cost problem. The policy, however, reduces Medicare’s outlays to providers. Rather than reduce (or expand, depending on your point of view) the size of the pie, Medicare has simply dictated that it will keep a larger share of the metaphorical pie for itself. Medicare is simply squeezing providers. One could argue that providers are bloated and that Medicare needs to squeeze providers to drive down costs. But this is intrinsically a superficial strategy, not a strategy that addresses the underlying cost problems in healthcare delivery.

So how can we actually address the fixed-cost problem of healthcare? Please leave a comment. Input is welcome.

A Few Compelling Health 2.0 Tweets

Posted on October 2, 2013 I Written By

John Lynn is the Founder of the HealthcareScene.com blog network which currently consists of 10 blogs containing over 8000 articles with John having written over 4000 of the articles himself. These EMR and Healthcare IT related articles have been viewed over 16 million times. John also manages Healthcare IT Central and Healthcare IT Today, the leading career Health IT job board and blog. John is co-founder of InfluentialNetworks.com and Physia.com. John is highly involved in social media, and in addition to his blogs can also be found on Twitter: @techguy and @ehrandhit and LinkedIn.

This week the Health 2.0 Conference has been happening in Silicon Valley. The #health2con twitter stream has been extremely active if you want to hear what’s being said at the conference. Here are a few nuggets of wisdom from the stream and my thoughts on them.


This is a scary idea to consider, but Francois is right about the cost of healthcare. So far I have seen little that’s working to drive the cost of healthcare down. Are feedback loops the right answer? I’m not sure, but I do think information on the costs is part of the answer.


I hope mobile health and sensors can go deeper than this. Although, I was probably drawn to the tweet because when I was younger I was hugging a girl when she asked, “Why is your heart beating so fast?” I guess she was way ahead of the sensor game.


Is this scary or exciting? I’d probably say 5 years, but otherwise agree.


Reminds me of when Farzad Mostashari asked, “Can Healthcare ‘Step on a Scale’ Today?” Data helps us realize reality.


Reminds me of the off stated, correlation does not equal causation.


Always a great reminder of what should really be the focus of healthcare: the patient.

Does Wellness Just Shift Costs as Opposed to Reduce Costs?

Posted on August 23, 2013 I Written By

John Lynn is the Founder of the HealthcareScene.com blog network which currently consists of 10 blogs containing over 8000 articles with John having written over 4000 of the articles himself. These EMR and Healthcare IT related articles have been viewed over 16 million times. John also manages Healthcare IT Central and Healthcare IT Today, the leading career Health IT job board and blog. John is co-founder of InfluentialNetworks.com and Physia.com. John is highly involved in social media, and in addition to his blogs can also be found on Twitter: @techguy and @ehrandhit and LinkedIn.

Whenever the discussions of healthcare costs come up, you always hear people saying that the reason healthcare costs are so high is because we have a sick care system as opposed to a healthcare system. If we’d just focus our efforts on promoting wellness, we could lower the costs of healthcare dramatically.

I’ve long been interested in the idea of wellness lowering costs. On face, the idea seems to have merits. If I’m on a wellness program and avoid a sickness, then I won’t have to use our healthcare system to treat that sickness. However, I’ve always wondered if all that wellness programs do is shift costs as opposed to reducing costs on the macro level. In the case described, maybe my wellness program just delayed the sickness by 5 years as opposed to making sure it never happens again. This would mean it was just a 5 year cost shift as opposed to a permanent savings.

I’ll admit that this is just a concept that I’m considering. I’m happy to be proven otherwise.

For example, if a wellness program helps people avoid something like obesity, then it’s possible that we could permanently avoid a whole variety of sicknesses and diseases that are caused by obesity. Considering the discount insurance providers give non-smokers, my guess is that something similar could be applied to smoking.

I imagine if we researched this in depth we’d find a mixed basket of results. In many cases I think wellness programs do just time shift the healthcare costs. However, if you attack the right wellness issues, then you could permanently avoid healthcare costs for specific diseases.

Has anyone done or know of research on this? Which wellness issues can really help reduce healthcare costs permanently? If we knew this, maybe we could focus much of our mobile health efforts.