It’s [Still] The Prices, Stupid

Inefficient markets create price differentials for identical goods. These price differentials frequently occur among markets dominated by oligopolies. Taking advantage of market pricing inefficiencies is known as arbitrage. Commodity traders frequently arbitrage by buying low and selling high. In inefficient markets for perishable goods, such as airline tickets, hotel rooms, or medical imaging, there is no opportunity to re-sell these goods. Thus consumers of these goods, such as health insurance companies, will attempt to buy at the lowest possible price to maximize value. Today we see many apps and websites, such as Expedia, that engage in improving these markets in airline and hotel industries. Stroll Health is one company attempting to scale this behavior to medicine.

Our current Hospital Outpatient Department (HOPD) payment schedule is one example of an inefficient market where identical CPT codes are priced very differently based on whether they are provided in a grandfathered hospital outpatient department or a freestanding outpatient medical center. Hospital accountants will justify this higher payment schedule by attributing social expenses such as police and training programs. Other HOPD supporters will claim they deliver relative value through higher quality (outcomes) that justifies (often disproportionally) higher prices. Yet increasingly “illusions about value: that we know what it means and can measure it, that the same things matter to all patients” are being voiced.

If the value numerator (outcomes) in healthcare is increasingly viewed as subjective and difficult to measure, we are left with no choice but to default to quantifiable metrics such as price and access. Policy discussions along the dimensions of price and access tend to make academicians anxious, as they fear “commoditization” of healthcare; but ironically the academic bastions of board certification and Maintenance of Certification have already made healthcare fungible, fungibility being one of requirements of a commodity. While commoditization continues to be used inappropriately in the medical field, it is time to accept that much of what physicians do is best differentiated by price and access, certainly not geography.

Hospitals, with support from organized medicine, are clinging to geographic HOPD structures in-order to boost their revenues. This strategy is not sustainable long term as markets and prices tend to be efficient. Sticky prices tend to equilibrate. Arbitrage often disappears.

Future healthcare strategy, or the creation of sustainable competitive advantage, must focus on customers; that is the needs of patients, providers, and payers. Access to compassionate and meaningful patient centered care, with respect for patients’ or their employers’ financial wellbeing is what the marketplace craves. The current trend of consolidation and monopolistic pricing practices from hospital systems may fail if patients become willing to travel or new competition enters a market. Thus, hospitals and medical societies who wrap their strategies around unsustainable market inefficiencies will face difficult futures as customers increasingly find value exclusively in price and access to services.

Yet as networks become increasingly narrow, access as an operational priority will fall away. Strategy will be distilled to price. To paraphrase political strategist James Carville “It’s the [prices], stupid.” Healthcare leadership can no longer ignore fundamental economics or our national mood of economically motivated political populism. Leaders who cling to grandfather’s HOPD business model will find themselves struggling as the working middle class becomes increasingly price sensitive in all markets. As the healthcare economy consumes a disproportionate amount of blue-collar employers’ and employees’ income, the sustainable strategy is to provide a fair price. Finally, because of narrow networks and limited substitution effect, any paranoia regarding perfect competition and a “race to the bottom” in healthcare is not likely to happen.

2017 was a hard year for retailers who could not match Amazon’s strategy of aggressive prices and ubiquitous access.   There is nothing special about hospitals and organized medicine that differentiates them from the failing brick and mortar retail sector. One hundred seven year old retailer L.L. Bean understood the central tenant of business, whether dealing in boots or biopsies, when he stated, “Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more.”

Beware of Rising Interest Rates

Interest rates are the most important economic influence on our economy; they reflect the value of money. Entities with excess money become lenders. Borrowers, such as hospitals or larger healthcare systems, exchange money from lenders based on this interest rate. During times of normal interest rates these rates include a premium based on the creditworthiness of the borrower, which is known as the risk premium.

In the past decade we have seen record low interest rates as central banks have used monetary policy to stimulate their economies. Most recently, and for the first time in history, some central banks have been using negative interest rates with the hopes of stimulating supply of money and economic activity.[1]

In low interest rate environments there are significant economic risks including:[2]

  • Hurting pensioners who are dependent on interest from savings
  • Encouraging speculative activities as there is cheap access to money
  • Indiscriminate lending by insurance companies, pensioners, and institutional investors who need income (aka “reach for yield”) and ignore risk premium
  • Increased assumption of debt by hospitals, firms, and governments

The last three items are important as we consider the economic health of the hospitals or radiology departments in which many of us work.

In an article on the debt crisis rolling from the real estate industry into other markets, The Economist notes, “there is plenty of evidence to suggest that rapid debt build-ups are the hallmarks of periods of indiscriminate lending that eventually end in tears.”[3] Should interest rates start to rise, rates of risky loans are likely to increase disproportionally as lenders become more discriminating thereby adding higher risk premiums on top of the already higher interest rates. Hospitals with debts that must be refinanced in the next few years may find themselves in a difficult position.

Furthermore increasing government regulation, uncertainty with the Accountable Care Act, or decreasing revenue from MACRA add to any pain of future interest rate increases as these additional burdens reduce operating revenue. Warren Buffet encapsulates this difficult dynamic when he states, “When the tide goes out you can tell who’s been skinny dipping.” The tide is already receding in our rural hospitals were 700 may be at risk for closing.[4]

On a national scale, in an uniquely American Shakespearean tragedy, one of our largest for profit hospital networks swallowed “a poison pill” as they struggle to refinance $2.2B in long-term debt due in 2018.[5] As Community Health Systems struggles to roll their debt forward, they plan on selling up to 25 hospitals[6] two of which have been in Easton and Sharon, Pennsylvania this past February.[7]

Case in Point

A medium-sized medical center in rural New England opened a new hospital in November of 2013, with the help of a $280m bond offering. At the time of the initial sale, these bonds received a middle-to-low investment grade rating from Fitch and Moody’s. The new hospital is aesthetically beautiful with a light-filled, spacious entrance, glass, tile, wood panels and a pagoda garden, featuring a waterfall and fountain. The floor plan is efficient, there are new computers and scanners, and the building is efficient to heat and cool. Yet, the annual cost to service this debt is approximately $20 million per year.[8]

Does $20 million per year buy you an improved business? Certainly the new building is a huge marketing asset. Yet does it help with management, cash flow, accounting, or organizational strategies? Probably not, most of these functions could be performed in a trailer with a dial-up modem.

Does $20 million per year buy you improved financial stability? The short-term trend for this institution is not good. In FY15 the hospital lost $24 million from operations. In 2016 they just broke even.

Does $20 million per year buy improved quality? Apparently not, the length of stay at this hospital has increased 11% over the past 4 years from 4.8 to 5.4 days.[9]

This hospital’s bond rating from Moody’s has dipped two steps below the “junk” threshold. Fitch has a negative outlook on the debt, which signals to investors that further downgrades are possible. When this hospital needs to roll their debt forward they may have to do so at higher rates, further compromising their cash flow and long term sustainability.

Takeaways

Radiology and Radiation Oncology are perhaps the most capital-intensive specialties in medicine. We are dependent on continuous investment in expensive equipment and IT infrastructure. Some debt is normal and can even be healthy. However, too much debt can be an unsustainable burden. The low interest rate environment of the past decade may have created scenarios where our hospitals or healthcare systems have taken on too much debt, risking their ability to deliver medicine into the future. As rates rise (or the proverbial tide recedes), a skinny-dipping hospital administrator is likely to expose him or herself. In the current environment of diminishing reimbursement and increasing regulation, the number of exposed administrators would be an especially gruesome event.

Ultimately, the choice of spending money on debt payments vs. patient care is tricky. From the perspective of a community and physician, there are significant risks to working in a highly indebted hospital. Finding a conservative, well-capitalized hospital in which to work is increasingly difficult.

A basic understanding of the financial and economic forces affecting our hospitals is essential as we plan and manage our careers. We need to be aware of our institution’s amount of debt, bond ratings (if they exist), and interest rate trends to appreciate the relative security and stability of our home institutions. A large amount of debt, or a low credit rating, may be a concern to a young physician choosing a future employer. Working at a veterans’ hospital may be attractive to physicians as the owner is the same organization that prints money. Thus, the parent organization of the Veterans Health Administration retains a nearly perfect credit rating.

[1] Bankers v mattresses. The Economist; November 28, 2015. http://www.economist.com/news/finance-and-economics/21679231-central-banks-are-still-testing-limits-how-low-interest-rates-can-go-bankers accessed November 30, 2015.

[2] Kliesen KL, Low Interest Rates Have Benefits… and Costs. Federal Reserve Bank of St. Louis. https://www.stlouisfed.org/publications/inside-the-vault/spring-2011/low-interest-rates-have-benefits-and-costs accessed November 18, 2015.

[3] Pulled Back In. The Economist; November 14, 2015. http://www.economist.com/news/briefing/21678215-world-entering-third-stage-rolling-debt-crisis-time-centred-emerging accessed November 16, 2015.

[4] Already troubled, rural hospitasl brace for effects of Obamacare repeal. CNN.com http://www.cnn.com/2017/01/17/health/rural-hospitals-aca-repeal-partner/ accessed February 22, 2017.

[5] Community Health Systems Adopts Poison Pill. Wall Street Journal https://www.wsj.com/articles/community-health-systems-adopts-poison-pill-1475532170 accessed February 22, 2017.

[6] CHS Stock Rallies After Chain Meets Guidance, Says It Will Sell a Total of 25 Hospitals, Modernhealthcare.com http://www.modernhealthcare.com/article/20170220/NEWS/170229996 accessed February 22, 2017.

[7] CHS to Sell 8 Hosptials to Steward Health Care. Beckershospitalreview.com http://www.beckershospitalreview.com/hospital-transactions-and-valuation/chs-to-sell-8-hospitals-to-steward-health-care.html accessed Februrary 22, 2017.

[8] MaineGeneral Health and Subsidiaries Annual Report http://emma.msrb.org/EP876101-EP678461-EP1080081.pdf accessed November 30, 2015.

[9] MaineGeneral Health Annual Financial Information for Period Ended June 30, 2016 http://emma.msrb.org/ER999130-ER781677-ER1182905.pdf accessed February 22, 2017.

Patient Centered Screening for Lung Cancer

This month the Journal of the American College of Radiology features an outstanding article describing barriers to lung cancer screening in the context of behavioral economics. This article offers a nice complementary perspective to Porter’s Five Forces where lung cancer screening barriers are analyzed using an industrial economic model.

The pictured ACR Lung-RADS matrix is deceiving in its simplicity.  This graphic represents decades of research, advocacy, and hard work from ACR members, staff, government, and academic partners. In my experience, most radiologists focus on the column labeled “Management”. However, few customers, either internal or external, appreciate the weight behind the management recommendations. Their attention, understandably so, tends to focus on the immediate desire to determine malignancy. Radiologists may do well to adopt a patient centered perspective and shift their focus to the column labeled “Probability of Malignancy”. After all, this information speaks to the underlying clinical concern.

Prediction and decision making is fraught with errors; breaking down future management into probabilities is the best way to combat errors and biases. Equipped with the probability information, customers are able to make the most informed decision about future management, thus combating the biases identified in the JACR article. Patients with a high deductible health plan can make rational decisions about when to schedule their next screening exam, if at all. Incorporating the probability information into a standardized Lung-RADS template requires no additional work for the radiologist after a one-time IT investment.

Shared decision making and patient centered care are important concepts changing the landscape of medicine. By increasing patient engagement, we expect better compliance and outcomes. Most customers do not expect radiology participation in this effort yet engagement with a radiologist has a unique power to impact patient experience. By delivering a more patient centered approach to lung cancer screening, we can impress our customers with the unexpected value of our expertise. Delivering probability information to our customers can enhance the value of radiology, rational acceptance of collective management recommendations, and improved morbidity and mortality.

The Importance of Human Resources in Customer Service

A contracted mobile CT scanner brought in to support a VA hospital CT construction project sits idle in a parking lot due to a lack of human resources. With a rumored cost to taxpayers of approximately $45,000/month there are no technologists available at the institution to run the scanner and provide veteran access to this important imaging service. Furthermore, the absent human resources has prevented timely access to CT services during second/third shifts, and weekends, affecting the Emergency Department and inpatient veterans who need scans. Many of these after-hours studies are being outsourced to a local private hospital, requiring the added cost of ambulance transportation.

Meanwhile, daytime scans are being performed on an in-house low quality 16 slice hybrid SPECT/CT machine, potentially displacing veterans who need nuclear medicine exams.

As the idle mobile CT unit continues to collect dust in the parking lot one employee quipped, “I hope that thing is gone before the snow flies or it will burn.”

Let’s hope it is another mild winter. More attention needs to be paid to the relationship between VA Human Resources and veteran access.  As Human Resources is the link between internal customers (employees) and external customers (veterans and their families), their mission is critical.

A Duty to Scan

Imagine a Veteran’s Hospital where taxpayers have provided tens of millions of dollars of CT and MRI equipment. Imagine that hospital has a 8-12 week backlog of veterans who would benefit from these exams and salaried radiologists ready to interpret the images and pass that knowledge back to the organization’s customers.

Continue to imagine there is a bottleneck; the technologists needed to move veterans through the scanners are not available. Does that Veteran’s Hospital have a duty to hire as many technologists as possible and maximize the capacity of those scanners? Does the hospital have a duty to scan, and is it negligent not to do so? If a principle mission of the Veteran’s Hospital is responsible stewardship of taxpayer resources, the answer is yes. Let me explain.

Currently our Veterans Administration has the ability to outsource clinical duties to private hospitals when demand cannot be met internally. However, when they do so in Radiology, taxpayers must reimburse a small piece of the investment that the private hospital made in their own scanner. This is known as the technical component of the fee and that private hospital will send a bill to the taxpayer that includes it. If the scanner at the VA were being run at peak capacity this technical component paid to the private hospital would be justifiable. However, if there is idle capacity in the hardware at the Veteran’s Hospital, taxpayers are effectively buying something that they have already purchased.

Stewardship of taxpayer resources would suggest there is a duty to scan within the VA system and that outsourcing of imaging is only appropriate when that VA equipment is being run on weekends and second shifts. It is critical to have an administration and Human Resources department that understands this duty.

Veterans Affairs Mission Statement: Set and Fixed in Metal

I took a course in marketing recently. The first lesson taught was the importance of knowing who you are as an organization. This knowledge, distilled into a mission statement, can serve as the central piece of what should be ongoing internal and external dialogues. If you do not know who you are, you are going to have difficulty with your employees and customers. But this knowledge alone is not enough. When you are not transparent about your needs, values, and intentions it is difficult to partner with anyone, be they the person at the counter, in the next office, or on the other side of your bed.

Most hospitals market poorly; this is often a product of not clearly defining, adhering to, or effectively translating their missions. Perhaps it is not surprising that our largest heath care system, the Veterans Administration, often struggles with marketing. Here is the VA mission statement as imbedded in a recent job posting.

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So, the VA’s mission goes back to the days of President Lincoln. While he may have been our greatest president and one of our greatest leaders, I am sure he knew nothing about modern medicine. Furthermore, the statement relegates women to the role of grieving spouse in a military where only men go into battle.

Thankfully, orphans of veterans are significantly less prevalent today than in Lincoln’s time. The vast majority of our veterans return alive; but the wounded are missing limbs and carry psychological scars that are not easy to diagnose or treat. These injuries greatly impact their families and children in a way Lincoln could not have imagined.

The job posting which carries this mission statement tries to make up for its inherent sexism with the tag line about caring for “the men and women who are America’s Veterans” but succeeds only in making it more awkward and wordy. Our military’s and country’s current values of equal opportunity and modern health care are not supported by this mission statement. How many outstanding healthcare workers and potential employees might be discouraged by its implied lack of sensitivity, or worse, awareness? It is time for our Veterans Administration to update their mission statement. In the process of doing so, they may clarify, inform, and unify their sense of purpose and identity. Distilling this awareness into a clear and concise mission statement may in turn elevate the organization and enhance communication between their employees, within the American culture, and with their veteran customers.