California AB171 & AB254: And we wonder why healthcare costs in CA continue to increase?

One of the largest drains on every states budget is healthcare cost.  California has historically been in the top of state healthcare expenditures due largely to its past of providing one of the most generous sets of program benefits in the country.  Both Governor Brown and Secretary Dooley deserve a tremendous amount of credit for acknowledging the mounting problem of healthcare costs and taking steps to begin the process of addressing it.

Healthcare costs in the U.S. are estimated to top $3 trillion this year.  That is a significant increase from the estimated $2.4 trillion in 2009.  The Affordable Care Act (ACA), aka Obamacare, is supposed to be lowering the costs and improving efficiencies for healthcare.  While it can be argued, and it has vociferously, that it is early in the process and the projected savings will begin in the next four to five years, there are some significant indicators from the administration in Washington DC that more and more of the promised savings will not happen.  This will spell further disaster for states like California that already shoulder a disproportionate share of the healthcare burden of our population.

Before we can discuss AB154 and AB171, let’s review some broader recent decisions and data that have a direct impact on California’s projected healthcare costs.

Part of the plan to afford the care under the Affordable Care Act was to appropriate revenue from the purchase of healthcare and penalties for non-purchase of policies.  The governing method to assess the fees and assure collection was the IRS.  Within months of its passage the government had to admit that the idea of the IRS administering this program’s revenue would not work and that segment of the legislation was repealed.  This now begs the question how will this revenue be assured?

As we are all painfully aware, there is some disagreement over whether or not the Affordable Care Act’s mandate to purchase insurance is constitutional.  Scholars, pundits, and constitutional lawyers on both sides are already at polar opposites over the issue with each side quoting chapter and verse as to why, or why not, it will be upheld or declared unconstitutional. The reason for the gulf in the interpretation of the underlying law is its base on a prime case called Wickard v. Filburn from 1942 that started the justification for the federal government’s expansion into what had prior been clearly state jurisdiction.  Any non-lawyer’s reading of the case simply defies common sense—this will be a very sticky wicket indeed. If the Supreme Court declares the mandate unconstitutional then much of the insurance reform inherent in the bill falls apart. Another large segment of projected saving will revert to increased expenses ultimately burdening the state both directly and indirectly.

The U.S. Secretary of Health and Human Services, Kathleen Sebelius, has recently ruled that the CLASS Act—a segment of the bill that was designed to expand options for people who become functionally disabled and required long-term services and support—is not affordable by the definition under the act and therefore it has been suspended.  Where will these costs fall if the federal government stimulates the expectation but fails to provide the funding?

A major part of the projected savings was though the requirements of Accountable Care Organizations (ACO’s).  In the bill they were projected to provide a savings of approximately $333 million per year, or just about $1 billion over three years. The CBO recently announced the results of a 20 year study focused on disease management and value based payment methods that fundamentally negate most, if not all, of the assumption on which these projected savings were based. In fact the study indicates they will potentially increase costs.

Another main point of the Affordable Care Act was to eliminate treatment disparity.  Who wants to argue for disparity? No one!  But even CA Secretary of Health and Human Services, Dianna Dooley, has said publically that “…we all need to get used to the idea that disparities will exist.”  I commend her for this statement because it is unequivocally true.  There is a basic law of diminishing returns that says that you will spend 80% of your money trying to arrest 20% of the problems.

Another key segment area of the ACA savings plan is Insurance Rebates. The act maintains that it has teeth to control the insurance industry profits because of its ability to mandate rebates for fees in excess of the medical loss ratio that the U.S. Secretary of HHS sets.  In the first place, the rebate amount is a mere trifle compared to the $3 trillion national expense.  More importantly, rebates have been mandated by the federal and state governments of Pharma for years.  Rebates do not lower costs at all.  Rebates in this bad play are methods to redirect money from the general consumers of the products, prescription drugs in this case, to other areas that the federal government, or the state, wants to spend them.  They do nothing but increase the cost in an arbitrary and specious way and obscure the real cost of care in America.  If monies flow in payments to the drug companies, and then flow back to the states, and the states, like California, can redirect these monies back to the programs or the general fund to fund more patients, it amounts to nothing more and a consumption tax.  A look at the California budget shows that about ½ of the drug spend for some programs comes through mandated rebates.  Sure this is a good thing for the participants in the programs, if like California the moneys flow back to services—not all states do this, some pay for other infrastructures—but it is not good for understanding the real impact of these programs economically as the myriad of convoluted funds flow become impossible to track or account effectively.  Frankly, the $3 trillion in health costs for the U.S. is not likely even close to $3 trillion because it is an unintelligible mix of both invoice pricing and actual reimbursement payments.  And for those who do not know, a healthcare provider typically is getting reimbursed from eleven cents on the dollar to twenty-two cents on the dollar for services they bill—and they seldom can predict the amount.

Yet another key segment of savings under ACA was the premise that hospital readmissions will reduce.  The plan is to select a series of specific disease states and for the government to begin to select measures that will allow for adjustment, read penalties, to hospitals that have higher than the selected measures for readmission.  Houston, we have a problem.  One of the biggest drivers of healthcare cost is age related illnesses.  Since 1964, when we created Medicare and Medicaid, the lifespan has increased from about 70 years old to almost 83 years old today.  The effect of this increased lifespan has been to significantly increase the cost of care in one’s life and shift the cost curve of lifetime health expenses to our last few years of existence. A recent Kaiser study now indicates that almost 85% of our lifetime expense for healthcare will be made in the last 5 years of life—and the trend is still increasing.  We are aging, our culture of how we manage our elderly relatives has shifted from family responsibility to outsourced solutions (nursing homes), and we now are more focused on quality of life than just life as the basis for our expectation of care.

Let’s stay on the topic of re-admissions for another moment because this is a big one.  One of the assumptions that drive the belief that we can reap savings by setting measures and penalties is that and assumption is that the reason for the readmission is that hospitals get more money for readmissions. As a result, they are not doing much, or enough, to improve the outcomes in the first place.  But this is a false assumption for many reasons.  To illustrate the issue, let’s discuss Hospital Acquired Infections.  The premise is that Hospitals are sloppy or slipping when it comes to hygiene and if they simply do a better job following antiseptic protocols to reduce infection, then these unnecessary costs will go down.  The people drawing this conclusion do so from the basis that healthcare is more of a cause and effect system, a static system, where we have fixed cures for most of what affects us.  This is one of the main cores of why we keep thinking we can make progress if we just keep doing X process more and better…. But the problem is, the practice of healthcare, after all, actually is largely a war with other species (bacteria, viruses, and other complex pathogens), a war with our environment, (accidents, violence, and pollution) and also a war with ourselves (diet, exercise, work habits, and sleep). From time to time, we can see gains for ourselves in these battles, but our mortality assures us that we will all eventually lose the war. Basic biology and the laws of nature have stacked the deck against us. Innovations in technology, science, and medication have helped many of us delay the day of our ultimate surrender, but these advances have also fostered the false belief that no price is too high to pay for an extra day or week of life. Related to infections, we are losing this war as our chemical and biological weapons have continued to become less and less effective. The protagonists, other species, have evolved resistance to our weapons and the remaining available chemistries’ at our disposal have become more toxic to us who take them. Hospital readmissions will likely continue to increase.

Lastly, ACA relies heavily on projected savings from the mandate of conversion to Electronic Health Records (EHR’s).  While EHRs are a good thing and will very likely improve patient outcomes, any projected savings, should they even materialize, will be negligible.  How can I predict this so definitively?  If you look at where the healthcare dollar is spent only about 12 cents is spent in administrative costs today as it is.  The percentage that may be gained in efficiency from conversion to electronic records will likely be 10% to 20% of that number which would yield about 1.2 cents, to 2.4 cents, for every healthcare dollar.  The current plan for EHRs does nothing to change the current HIPPA regulations and as such the sharing or coordination of care though the transportability of these records between providers and sponsors is very expensive and practically prohibitive.  The application of technology has always been made with the promise of increased productivity and lower costs but an honest assessment of the past 40 years shows that overall lower cost and significant gains in productivity are the exception not the rule.

The largest cost drivers, where EHRs could have a major influence, are in the areas of duplicated services, defensive medicine, fraud, and abuse.  By many estimates, on both sides of the political spectrum, only about 33 cents of the governmental healthcare dollar is realized in services—about 60 cents is lost in these areas.  There is little debate on this total number across the aisles.  There is large debate as to whether the costs are larger in the fraud and abuse area or in the duplicated services/defensive medicine areas.  This debate is moot as EHRs could have the potential to drastically reduce these aggregate costs if, and only if, they are coupled with mandated coordination of care and benefits across all available sources.  By the way, I don’t mean single payer.   Single payer is a great sound bite but the term likely does not really describe what people are seeking.  Do we really want all care to come from a governmental source—eliminating choice, volunteer treatment, faith based programs, non-profits, philanthropic sources, corporate sources, etc.?  When I have had this discussion with various legislators, both state and federal, the answer invariably has become; well no, of course not!  What most really seem to want, and what is necessary to make this all work, is a central point of administration with the ability to connect the providers around the patient as the center point in a kind of virtual care team.  This is relatively inexpensive, does not initially even require full HER implementation to achieve significant savings, and provides a great role for state government to play.

With this as a backdrop, we come to the last big issue facing why healthcare is continuously increasing in cost and the issues with AB154 and AB171 drastically put at risk California’s healthcare future.  AB154 is legislation recently approved by the Assembly that will require private insurers to cover diagnosis and treatment of mental illnesses (it appears all mental illnesses on the books).  AB171 requires coverage of developmental diseases such as autism.  The Assembly also approved legislation to cover oral chemotherapy and mammography regardless of age.  While I applaud the sentiment, these kinds of actions that constantly increase the overall coverage of anything, and everything, which can ever affect anyone as they perpetuate their long risky walk through life to older and older age, in conjunction with the items previously discussed, are setting California up for a perfect storm.  As the ACA projections continue to fall apart and as the federal cost for healthcare programs like Medicare and Medicaid continue to increase, states like California will be left in the crosshairs of larger expectations for treatment and less, perhaps no, federal money to pay for it. Already the president refers to Medicaid as a state program.  I guess he forgets that both Medicare and Medicaid are just parts of the federal Social Security Act of 1964.  Of course, the states consider this a federal program and due to the increasing drain on state budgets some are trying to figure out how they can again opt out of this federal program.

Our largest issues come down to the following things.  We no longer truly insure health care to preserve basic life.  More and more we are requiring insurance to cover “quality of life.”  We have extended though technological gains the amount of time we can spend on the planet to the point that we are now on average way beyond the period where our bodily systems effectively fight the healthcare war.  As we have gained the additional ten more years of life from the past forty years of technical and medical accomplishments, we have moved into a new reality that to preserve our quality of life during this extended period we are consuming consuming more and more of our resources.  Unfortunately, much of what programs like Medicare and Medicaid are now paying for are not the actual costs of care.  They are paying for the things we purchased during the former years to improve our quality of life way beyond the realm of healthcare.  These programs are really funding the earlier purchases of larger screen flat panel televisions, vacations, 2nd homes, new cars.  They fund the things that, prior to 1964, we typically did not purchase because we knew we needed the money for our elderly rainy day funds.  We were worried that we would need to pay for the catastrophic accidents and illnesses that fate dictated we would face as we aged. Today we are all free to make these lifestyle purchases because the threat of elder catastrophe is now covered by entitlement.

This is not an argument to go back to the way it was, not an argument to eliminate these programs, not an argument that we should die earlier.  I know of no one that wants to see people die younger, suffer more, or live in destitution.  The point of this article is to bring to the front the dilemma.  It is here we need to develop a better dialog and, as Ben Franklin said, “find compromise, through tolerance.”  It is here we also need to start to focus our hard decisions on where personal responsibility ends and our safety net begin.  Until we do this, California faces the coming perfect storm and like all other state will likely face it alone without federal help.  The decisions we make on items like AB154 & AB171 while laudable are significantly increasing expectations and hence our risk of future economic collapse.  Remember it was Albert Einstein who said, “Insanity is doing the same thing over and over again and expecting different results.”  Wait, is this why AB154 is being passed?

I commend the Governor and the Secretary for their effort to begin to address this dialog.  While there are many who want to lay blame for everything at their feet, I find in both inappropriate and counterproductive.  Both have had long records of public service.  Both began, perhaps, more on the side of idealism but they have each arrived at pragmatism based on hard one experience and dedication to effective solutions.  I can’t think of any I would rather have trying to help California move these issues forward.  That said it is time we all begin to recognize the depth and diversity of the problems, reset our expectations and all become responsible for the solutions!

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About Thomas W. Loker

Meet the Author - Thomas Loker is a Startup Consultant and Advisor at SYDK.ORG, Angel Investor, Mentor and Advisor at Keiretsu Forum & Venture-Med and an established operations guy with serial successes with startups, transitional companies and turnaround situations. He has had a long career serving in the fields of science, technology and healthcare related industries. He is an active board member in both for-profit and not-for-profit companies. Tom has written numerous articles in the areas of healthcare, technology, politics and the economy. He is currently the principal author of Health Reform 2.0: Beyond partisan divide lies pragmatic solutions – a whitepaper focused on moving beyond the partisan rhetoric of the ACA (Obamacare) to a simple, efficient, effective, accessible and affordable healthcare system. He maintains a passion for serving the underserved and has founded, supported and worked in various companies to serve the most fragile among us. Because of his expertise on the business of healthcare, he was invited to conduct multiple congressional briefings on healthcare reform in Congress, meeting with more than 100 congressional representatives. He has been a guest on HuffPost Live to talk about health care issues, and is a frequent keynote speaker on the topic for many groups and events. Prior to his latest book, The History and Evolution of Healthcare in America: The untold backstory of where we've been, where we are, and why healthcare needs more reform, Tom published “Delusional Ravings of a Lunatic Mind”—a collection of essays on healthcare, politics and their interaction with the economy, available at Amazon, Barnes and Nobles, and other bookstores. Tom's passion for Music is currently expressed by his role as VP Operations and General Manager of David Victor Presents. See www,davidvictorpresents.com to find out more. You can find Tom online at: Website: http://www.loker.com Blog: https://tloker.wordpress.com LinkedIn: http://www.linkedin.com/in/thomaswloker Photography: http://www.loker.net

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