Healthcare Reform's Cost Precipice: Q&A With Dr. David Gruber of Alvarez & Marsal

U.S. healthcare expenditures are at record highs. In 2011, national healthcare expenditures reached a cumulative total of $2.7 trillion — totaling nearly 18 percent of the nation's gross domestic product. To many, this is of concern, as the growing costs appear to be unsustainable.

David Gruber, MD, believes the U.S. healthcare situation is actually approaching a "cost precipice," and disruptive transformation is needed to veer away from that precipice.

In May, Dr. Gruber, director of research with Alvarez & Marsal's Healthcare Industry Group, a global professional services firm, authored a report titled, "Getting Much Closer to the Cost Precipice." Dr. Gruber has more than 30 years of service as a physician and Wall Street analyst, working at companies ranging from Bristol-Myers Squibb to Johnson & Johnson.

In his report, Dr. Gruber looks at this "cost precipice" and the factors that have contributed to it. He also looks at today's modern solution — the Patient Protection and Affordable Care Act.

Here, he explains how his report — published before the Supreme Court's final ruling to uphold most of the PPACA — applies now as the PPACA is the law of the land. The PPACA, he argues, is about access and transferring the burden of rising costs away from low- and middle-income Americans, but it's not about transforming the healthcare delivery system as a whole. That's where hospitals need to come in.


Question: The Supreme Court upheld most of the Patient Protection and Affordable Care Act, except it narrowly read the Medicaid expansion. What does all of this mean for hospitals now?


Dr. David Gruber works at Alvarez & Marsal.Dr. David Gruber: The Supreme Court ruling upheld the individual mandate and allowed the states to decide for themselves whether to participate in expansion of the Medicaid program from 100 percent to 133 percent of the federal poverty limit without the risk of losing funding to existing programs. According to the Congressional Budget Office, the number of non-elderly Americans with health insurance coverage would increase by 32 million to 34 million, 17 million of whom would be Medicaid recipients if [all states] raised the FPL from 100 percent to 133 percent. About 46.5 million Americans were uninsured in 2009; uncompensated care totaled $39.1 billion, representing 6.0 percent of total hospital expenses.

Bottom line: More insured implies less uncompensated care. The PPACA recognizes this likelihood and reduces disproportionate share payments. The net result is a positive for hospitals.  

The PPACA also reduces the hospital Medicare market basket by 0.75 percentage points in 2016-2018, increases focus on hospital-acquired conditions and re-admissions, and pilots payment bundling via accountable care organizations and episodes of care.

The PPACA does not recognize that increasing demand for services, especially for those requiring primary care physicians, requires a parallel increase in capacity; a change in reimbursement from fee-for-service to capitation is essential, as fee-for-service begets volume not value; and lobbyists, especially those from the pharmaceutical and insurance industries, continue to have a disproportionate impact on policy that lead to higher than necessary expenditures.

Q: So how does the individual mandate as a tax affect hospitals? Is this more of an indirect impact?

DG: It's an indirect impact. Individuals who do not enroll in a health plan are subject to either a fixed amount tax or a percentage of income tax. In year one, it's a $95 [flat] tax per person; in 2015, $325 and in 2016, $695. It's a progressive approach to getting people to enroll in health plans, since many will not feel compelled to do so. The individual mandate tax could also be a percentage of taxable income — 1 percent in 2014, 2 percent in 2015, 2.5 percent in 2016.

So let's say you're a single person earning $50,000 — a figure exceeding the $43,320 threshold for a tax subsidy. Your penalty in 2016 is $1,500; coverage costs $6,000. So you make that choice $1,500 versus $6,000. It's about economics and personal choice, assuming likelihood of illness. Given community ratings, uninsured people with pre-existing conditions are likely to enroll in disproportionate numbers before those who are comparatively healthy.

As stated previously, increased insurance coverage implies less uncompensated care, partially offset by less disproportionate share hospital payments. The CBO estimates 16 million more covered lives outside of Medicaid by 2016. We believe this estimate is optimistic.

Q: Now that the PPACA is on the books and constitutionally the law of the land, what other portions should hospitals be focusing on? What are the major financial and clinical components?

DG: The PPACA targets hospital readmissions and hospital-acquired conditions. The CMS has estimated the cost of preventable readmissions at $12 billion per year. An estimated 19.6 percent of patients are re-hospitalized within 30 days, 34.0 percent within 90 days and 56.1 percent within 365 days. Contributing to hospital re-admissions include inadequate patient understanding of post-discharge medication use, minimal patient self-awareness of the signs and symptoms indicating a deterioration in clinical status, inadequate discharge planning from hospitals to primary care physicians and nursing home staff, and a lack of clarity regarding end-of-life preferences. 

A study in the New England Journal of Medicine determined that more than 50 percent of patients readmitted to a hospital were not seen by a physician within four weeks of discharge. Hospitals need to improve transition management, increase patient and family engagement and ensure a timely visit to primary care physicians. If a patient deteriorates, you want to catch it early.

An estimated 180,000 to 250,000 patients die each year from HACs. Infections alone account for 99,000 deaths per year. Other HACs include inadvertent falls, poor glucose control, blood incompatibility and blood clots. Hospitals need to enhance their quality and safety procedures, i.e., re-engineer their processes of care. The PPACA will reduce total Medicare payments by 1 percent to hospitals in the lowest-performing quartile.

The PPACA reduces the hospital market basket by 0.75 percentage points in 2016 to 2018. The market basket answers the question of how much more or less it would cost [the government] at a later date to purchase the same mix of goods and services that was purchased in a base period. The update varies by sector and has ranged from 2.0 and 3.7 percent in the past decade. A 0.75 percentage point reduction does not sound like much, but in actuality it represents a 30 percent reduction from historical annual increases. It's going to put additional pressure on hospitals to reduce costs.

The PPACA also supports pilot initiatives that create ACOs, an extension of the successful Physician Group Practice Demonstration Project that offered performance bonuses to 10 large group practices that met quality and cost-efficiency targets. An ACO may include primary care physicians, specialists, care extenders (nurse practitioners, physician assistants) in not only a group practice setting, but also networks of practices and partnerships or joint ventures among providers, hospitals, insurers and others. Requirements include a legal structure for payment distribution, a program commitment of at least three years and adequate primary care capacity to treat at least 5,000 patients. Hospital-led ACOs will be challenged by a mission historically focused on filling beds rather than on secondary prevention.

An episode of care for a specific condition may include care services delivered three days prior to admission, the length of hospital stay and 30 to 90 days post-discharge; alternative models may only be inpatient or include post-discharge services. A single bundled payment is determined by applying a discount to the total cost of care for similar episodes as defined by historical data. Payments are then allocated among all the service providers: physician, hospital, post-acute care, laboratory and diagnostic, etc. Shared financial risk will enhance care coordination, collaboration and transition management; clinical and economic outcomes are likely to improve. Episode of care payment bundling, as defined, focuses on high-cost procedures and fails to recognize the nature of chronic disease and its history of acute decompensation interspersed with periods of stability.

Q: In your report, you detail the costs of Medicare and other programs, and you actually say the U.S. healthcare delivery system is "inefficient and ineffective." PPAPA aside, how are hospitals going to be a part of a future system that is efficient and effective?

DG: Hospitals currently account for 31.4 percent of healthcare costs. Tremendous variation in hospital care intensity — length of stay, physician encounters — exists. Care delivery remains fragmented, with patient transition issues within hospitals, between primary care and specialists and across sites. Pricing remains opaque and has limited, if any, relationship to value. End-of-life care quality remains secondary to care quantity. Administrative activities unrelated to patient care remain excessive.

Hospitals will retain a critical, albeit less central, role in the future of a more efficient and effective care delivery system. Evidence-based medicine will result in fewer diagnostic tests, shorter length of stay and lower intensity of services. Improved patient quality and safety will reduce the number of adverse events. Non-emergent emergency department visits will be treated elsewhere. Capitation will focus hospital administration attention on outcomes and efficiency — and not revenue cycle management.

Hospitals need to become an integral component of an integrated delivery system focused on primary care, secondary prevention, the entire care continuum/process-of-care, operational efficiencies, patient/caregiver engagement and technology-supported self-care. A major opportunity exists to displace commercial insurers by contracting directly with self-insured employers.

Q: You mentioned healthcare overhead. Did the healthcare law go far enough to help hospitals and to improve overall access to healthcare? What about single-payor reform?


DG: The PPACA does not need to help hospitals, home care agencies, skilled nursing facilities, specialists and other stakeholders. It needs to disrupt the current system by shifting payment from fee-for-service to capitation and provide incentives to enhance value. Hospitals are a single, albeit important, component of a larger ecosystem that needs to address the physical, mental and social needs of people, not patients.

The PPACA increases access and does not adequately address costs — the fundamental underlying issue. Given the demographics of aging baby boomers, the day of reckoning will certainly arrive.

The U.S. is already a 50 percent single-payor system accounted for by Medicare, Medicaid, the VA, Department of Defense and other government entities. As the government has not been an efficient provider of services, it can recognize that the current system is broken and needs to be disrupted. It's a zero-sum game.

More Articles on Healthcare Reform:

Holding Children Harmless: How Current Medicaid Policy is Impacting Children's Hospitals

6 Key Issues Facing Healthcare in the Second Half of 2012

Post-Supreme Court Ruling: 19 Next Steps for Providers

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