Groupon, Chest Pain And Consumer Behavior

It was unfortunate – but not very surprising – to see the news this week that Groupon laid off a portion of their 10,000 employees. If ever there was a predictable bubble, it was daily deals. But it was fun while it lasted, and you can see why there was so much overinvestment in the space. Groupon’s pitch to merchants was to ask them to take a loss by making a super compelling offer that consumers couldn't resist. The offer would generate tons of new customers that would come back and make profitable purchases for years to come.  On the surface, it seemed pretty compelling.

With the Groupon news in mind, I spent some time this week thinking about the problem of hospital readmission penalties in the healthcare industry.  For those that don’t know, the government is trying to improve accountability and the quality of patient care by imposing financial penalties on hospitals that have high rates of 30 day hospital readmissions.  Depending on the rate of readmission, the government will reduce Medicare payments by as much as 1%.  For an industry with very thin margins, this is a pretty big deal.

One of the major challenges with hospital readmission penalties is that now doctors have to not only care for the patient effectively during the initial encounter, they’re now responsible for changing the patient’s behavior after they leave the hospital.

Here’s an example: imagine an older man that doesn’t take care of himself.  He smokes, eats fatty foods, lives a sedentary lifestyle and hasn’t visited a doctor in years. One day, a pain in his chest becomes so severe that he is forced to check himself into the emergency room.  After spending a couple nights in the hospital getting treatment, he starts to feel better. When he’s finally discharged, the doctor recommends that he stops smoking, follows a cardiac diet, takes a prescribed medication, and visits a cardiologist for a checkup every week for the next 6 weeks.

But this is a person that is not used to doing any of those things. The problem that caused him to appear in the hospital – severe chest pain – is not an immediate problem for him anymore.  He feels fine.  So the hospital is being asked to significantly change the behavior of someone without the initial (and powerful) motivator in place. As a result, he’s very likely not going to follow the doctor’s orders and he’s very likely going to reappear at the emergency room.

It occurred to me that this is the fundamental problem with the daily deal industry.  Groupon has the same challenge that hospitals have.  Just like severe chest pain, their deals change behavior. Most of the people that buy half-off skydiving, or cooking classes, or services at the super expensive nail salon, weren’t planning to do those things until they saw the deal sitting in their email inbox.  But because the deals are so compelling (50%+ off) they bought them anyway and, as a result, Groupon was able to flood their merchant clients with lots of new business.

But it’s because the initial deal is so compelling that it becomes nearly impossible for Groupon to reliably deliver on their ultimate promise of bringing their merchants new, loyal and profitable customers.  Just like severe chest pain, the daily deal changes behavior.  It forces people to do something that they wouldn’t normally do.  But without a continuous and powerful motivator in place (like chest pain or 50% off) the doctor can’t get the patient to come in for an electrocardiogram and the nail salon can’t get the customer to come back for a second manicure.

Healthcare: Big Government Vs. Small Government

James Suroweicki has a great column in the New Yorker this week laying out why he believes Romney’s healthcare plan won’t work. Regardless of your opinion on the matter, he calls out some important and unique qualities of the healthcare industry that should be considered when weighing both candidates’ plans; that is, weighing how much we should rely on the free market versus the government to solve the healthcare cost crisis.

I recommend reading the entire article but here are a few of the most notable things to consider:

1. Unlike most consumer goods, healthcare consumers don’t have the expertise to properly value one treatment, hospital, or doctor versus another.
2. Most major healthcare purchases are made by insurers, not consumers, so they lack a direct say on the price of a treatment.
3. One way for a buyer to get a seller to reduce their price is to walk away and not buy the product at all.  In healthcare, consumers can’t just walk away from treatments like they can a new car or a new cell phone -- they have to buy the treatment to survive.

These fundamental realities of the healthcare industry make this issue far more complex than the simple big government/small government ideologies that many of us use to guide our political and economic beliefs.

The Healthcare Mandate's Impact On Healthcare Costs

I read Goldman Sachs’ recent report on Election Outcomes and Potential Impact to Healthcare Stocks earlier this week.  Basically the report outlines what’s likely to happen to the different healthcare verticals in the event of a Romney win or an Obama reelection.  The vertical that will be most impacted by the election seems to be hospitals and health systems.  The reason is that the universal healthcare component of Obama’s Affordable Care Act will dramatically change the payer mix for most hospitals.  Suddenly 30 million people will have insurance on one day that didn't have insurance the day before.  That means that people who weren't inclined to get care are more likely to get care (more hospital revenue) and, perhaps more significantly, hospitals will get paid for the care that they give to patients that don’t have insurance (more hospital revenue). In addition to helping hospital stocks, the conventional thinking seems to the be that the healthcare mandate will also lower overall healthcare costs.  To illustrate that point, here’s a vicious cycle that’s currently driving up the cost of care that may be disrupted significantly with the roll-out of the mandate. Let’s use an imaginary uninsured patient named John:

1. John doesn't have insurance.
2. John gets sick.
3. John doesn't want to pay for care out-of-pocket so he delays seeing a doctor.
4. His condition gets worse.
5. His condition eventually gets so bad that he shows up at the emergency room and gets lots of acute (and expensive) care.
6. He doesn't have the money to pay the hospital so the hospital loses lots of money.
7. To make up for this lost money, the hospital charges its insured patients more for their care.
8. To make up for these price increases, the insurers raise their premiums.
9. Because of the high premiums, people drop their insurance.
10. Repeat.

By requiring John to get insurance, he’s more likely to seek care earlier, thus reducing the costs and losses to treat him, thus allowing hospitals to lower costs, thus allowing  insurance companies to reduce their premiums, thus allowing more people to afford insurance.

Of course what sounds good in theory may not work in practice. But it’ll be interesting to see how the mandate will impact healthcare costs should Obama win in November.

An Expensive Knee Surgery

I counted sixty-three different people involved in her care. Nineteen were doctors, including the surgeon and chief resident who assisted him, the anesthesiologists, the radiologists who reviewed her imaging scans, and the junior residents who examined her twice a day and adjusted her fluids and medications. Twenty-three were nurses, including her operating-room nurses, her recovery-room nurse, and the many ward nurses on their eight-to-twelve-hour shifts. There were also at least five physical therapists; sixteen patient-care assistants, helping check her vital signs, bathe her, and get her to the bathroom; plus X-ray and EKG technologists, transport workers, nurse practitioners, and physician assistants. I didn’t even count the bioengineers who serviced the equipment used, the pharmacists who dispensed her medications, or the kitchen staff preparing her food while taking into account her dietary limitations.

Atul Gawande, writing about the resources required to complete his mother's knee surgery in this week's New Yorker article Big Med.

A Shortage of Doctors

We’re currently facing a doctor shortage in the U.S.  And a recent article in the New York Times pointed out how this shortage is about to get worse as we expand medical coverage to 40 million uninsured Americans.  The Association of American Medical Colleges estimates that by 2015 the country will be short more than 62,000 doctors, and that number will more than double by 2025. In addition to healthcare reform the article points to a few contributing factors that are causing the shortage:

1. Increased Medicare coverage for Baby Boomers (older people need more care).
2. Declining physician compensation – to make money, doctors have to specialize, leading to a shortage of primary care physicians.
3. Aging doctors are beginning to retire at a more rapid pace.

There’s no doubt that we’ll need more doctors in this country moving forward.  But in parallel, I believe it’s critical to continue to find ways to make the physicians we have more and more efficient.  I’m excited to see increasing amounts of early-stage capital heading to companies that have that goal in mind.

The Irony In The Supreme Court's Affordable Care Act Decision

There's a good column in the New Republic this week noting the irony that John Roberts decided to uphold the individual insurance requirement but struck down the expansion of state Medicaid payments.  Part of the Affordable Care Act would have required states to expand Medicaid eligibility if they wanted to receive increased federal funding.  They would have had to pick up a relatively small amount of the increase (10%) in return for big bucks from the federal government, but the court still struck it down. The statement made by the court in this decision essentially opens the door for states to fight any future changes that congress makes to Medicaid.  And this presents significant challenges for the federal government as it seeks to protect the viability of its investment now and in the future.  If the states begin to exercise too much individual control over the program, the federal government may opt to back off and simply run the entire program at the federal level.  Something that, ironically, Democrats would prefer.

It'd be ironic if a precedent set by the conservatives in a contentious healthcare debate ultimately leads to a more centralized government program.

Why The Healthcare Mandate Is No Big Deal

The piece of the Affordable Care Act that requires all U.S. citizens to have health insurance has caused quite a bit of controversy. It seems that a lot of that controversy is caused is by a lack of awareness of the details of the mandate. I’ve found that when I explain some of the details of the mandate to people that don’t like it they often end up realizing that it’s really not all that bad.

Let’s start with this: there are approximately 40 million people in the United States that don’t have health insurance.

And getting healthcare when you don’t have health insurance is super expensive. So when you don’t have insurance you tend to delay getting care until your condition becomes serious. Even when it’s serious, because you’re not insured, you still don’t get care through the appropriate channels, such as a Primary Care Provider or a specialist.  Instead, you very likely just show up at the emergency department of your local hospital (hospitals are required by law to give care to anyone that shows up at their emergency department, regardless of insurance or ability to pay). But emergency departments aren’t setup to deal with these people. They’re setup to deal with emergencies. They’re setup to stabilize a condition, not provide ongoing treatment or preventative care.

People without insurance that are getting care only when they’re desperate and through the wrong channels are costing the healthcare system lots and lots of money.  They’re waiting until they’re very sick to get care, they don’t access care through cost effective channels and, perhaps most significantly, when they get care from the emergency department they don’t pay their bills.

So who do you think pays for these inflated healthcare costs that are caused by the uninsured?  Answer: the insured.  In order to provide this level of care at no cost to the uninsured, hospitals must raise prices for the insured.

So Obama has proposed a solution that will alleviate the suffering for the uninsured and the suffering of the insured. This solution is a law that requires everyone to have health insurance.  The mandate.  And this is the controversial point in the Affordable Care Act.

But it shouldn’t be that controversial.  For a lot of reasons.  For one, nobody actually has to get health insurance.  If you believe that being uninsured is part of your freedom as an American, no problem. You’ll just have to pay a slightly higher tax rate each year (not more than a 1% increase). 

Also, of the 30 million that are uninsured, most are going to be getting insurance anyway as a result of some of the other components of the law such as expanded Medicaid to individuals with higher incomes and increased insurance coverage requirements for employers.

In addition, if you make less than what is required to file a tax return (somewhere around $9k/year) then you are obviously exempt from any tax penalty that comes from not having insurance.

So the fight over the mandate is really only about a group of approximately 7 million people (about 2% of the population). 7 million people that are costing those of us that are insured a lot of money because they delay care and don’t pay their healthcare bills.  And all the mandate is doing is asking those 7 million people to either get insurance or pay a slightly higher tax rate (not more than 1%) to make up for what they’re costing the system.  When you look at it this way, suddenly the mandate doesn’t seem like such a big deal.

Healthcare Tech Lessons: Capitation

Earlier I wrote about the differences between a managed care payment model and a fee-for-service payment model. Today I’m going to write about a specific managed care model called capitation. In a capitation model, healthcare providers (doctors and nurse practitioners) contract with a type of HMO called an independent practice association (an IPA). The IPA is a group of providers across a wide range of specialties that look to provide care for patients in their community. Patients enroll in the IPA and pay a fixed, monthly fee to have access to care from those providers. The IPA then pays each healthcare provider a set amount for each patient that’s enrolled. The provider receives this payment regardless of whether or not the patient seeks care.

So, in short, the bad news for the provider is that the payments are “capped”, regardless of how much care they provide. But the good news is they get paid even if they never see the patient. The amount of the payment the provider receives varies based on the expected healthcare utilization of the patient (factors such as medical history, age and gender are considered); though there are some capitation models where the payment is the same, regardless of the expected healthcare utilization.

The capitation model provides a few unique incentives for physicians and nurse practitioners:

1. Providers will consider cost when providing care. You don’t want to order treatments that cost more than the payment you receive.
2. There’s an incentive for providers to focus on preventative care. Healthy patients mean more profit.
3. There’s an incentive to avoid costly patients. So with a capitation model, the provider effectively becomes the insurer for the patient. They take on the risk of whether or not the patient is going to seek care. They can have good and bad years, depending on the amount of care patients need.

There are two major challenges when providers insure patents:

1. They’re providers, not actuaries or underwriters. As a result, they’re not as good as assessing risk as a traditional insurer and could take a loss as a result.
2. Risk fluctuation is a function of the size of the portfolio. Because a provider’s patient panel is limited by the capacity of the physicians in the IPA, portfolio size can be small and risky.

It'll be interesting to watch how the relationship between providers and insurers changes as changes in Medicare and Medicaid force more providers to adopt a capitation model.

Healthcare Tech Lessons: Fee for Service vs. Managed Care

Today, when a patient goes to their primary care physician with a health problem, they are referred to a specialist, generally in a hospital setting, and given a number of treatments.  The hospital then bills the insurance company or government for each of these treatments (this is what's called fee for service).  The hospital then pays the physician a salary or an incentive-based payment.  One of the reasons that the government is trying to shift the healthcare payment model away from fee for service (and towards manged care) is that it provides an incentive for providers to over-prescribe various treatments -- e.g. more treatments = more money.  

As we shift towards a managed care model, when a patient contracts an illness, the insurance company or government will pay a healthcare organization (what will be called an Accountable Care Organization, or ACO) a fixed lump sum.  This lump sum will then be split between all of the providers that provided treatment.

This change and its effects have been talked about at length.  But here are two effects that may not be so obvious:

1. It could put the Primary Care Physician (PCP) in the driver's seat.  Because the PCP generally has the best relationship with the patient, they could be the conduit for all healthcare payments. The savvy PCPs will setup their own Accountable Care Organizations where they take the payment directly from the insurance company or the government.  From there, they can dole out the appropriate share of the money to the specialists and hospitals.  Having physicians pay hospitals instead of hospitals paying physicians would radically change the power structure in healthcare as we know it.
2. In a managed care environment, there's an enormous incentive to keep costs down.  Because providers are going to receive the same lump sum payment for an affliction, regardless of how many prodedures they perform, the only way for them to profit is to lower their expense base.  As a result, to increase efficiencies, we may begin to see hospitals have floors that are designated to afflictions, rather than specialties.  That is, instead of having a radiology or dermatology or cardiology wing, there may be a diabetes or heart disease or lyme disease wing.  That would be a radical change in the way hospitals are run and costs are managed.

We can't underestimate the disruptive effects that are coming as a result of payment reform.

Healthcare Tech Lessons: Organizational Structures in Healthcare

Today I'm going to talk about the different organizational structures that exist in healthcare from the physician's point of view.  If you're a physician, you fall into one of three organizational structures:

1. Independent: the physician has their own practice and is responsible for all revenue and expenses.  Their success or failure depends completely on their own performance.  This is the traditional model but it's becoming more and more difficult to survive as an independent physician.  I've heard estimates that 30% of independent physicians are barely able to make payroll each month.  Rapid consolidations, declining reimbursements, increased technology and compliance requirements -- not to mention the recession -- have made it extremely difficult for independent practices.  As a result, every day more and more independent physicians are moving into the second type of structure.
2. Employment: the physician is employed by a health system, a hospital or some other healthcare organization.  This is the model that is heating up.  There's a massive shift in healthcare away from fee-for-service and towards managed care.  Fee-for-service is when a physician gets paid for each individual treatment.  Managed care is when a group of physicians are paid a lump sum and that money is split between individuals.  It's extremely difficult to survive as an independent physician in a managed care environment.  Health systems are employing massive amounts of physicians to drive referrals between physicians and to reduce costs through the economies of scale that come from technical and clinical integration.  As healthcare reform continues to reduce revenue to providers, the physicians that are not employed are going to have a tough time surviving.
3. Partnerships: partnerships are really every remaining structure.  Partnerships can be joint ventures, Accountable Care Organizations, physician alliance groups, etc.  It seems that as a result of the major reforms that are occurring in healthcare, a third, more equitable option such as a partnership is going to be the structure that begins to dominate.  But of course there are major unanswered questions that arise with these partnerships:  Who's in charge?  Who's going to get paid?  How are they going to split the money?  Who's going to drive decision making with patients?  Who's going to contract with the payers?

How and when the third option becomes the dominant structure in healthcare is a fundamental reason for the uncertainty in healthcare.  It'll be fascinating to watch all of this take shape over the next couple of years.

Healthcare Tech Lessons

Nat Turner had a good post the other day titled: Why aren’t there more traditional tech entrepreneurs in healthcare?  It’s a good question and a good post, check it out when you get a chance.  One of the reasons he cites for the lack of entrepreneurs in healthcare is “it’s really hard to learn the ropes”.  I’ve dabbled in healthcare technology quite a bit over the last 8 or 9 years but now I’m completely immersed in it -- working with a unique product and talking with healthcare executives on a daily basis.  And I have to agree with Nat -- it is hard to learn the ropes. Between the different payers, independent physicians, non-profit systems, for-profit systems, academic systems, Medicare, Medicaid, regulators, healthcare reform, meaningful use, EHR, different motivations and incentives, community considerations and more (never mind the clinical side)…to understand healthcare, you have to know a lot about a lot.

Over the last couple months I’ve picked up a multitude of information, insights and learnings that I think would be extremely valuable to tech entrepreneurs considering the space.  With that in mind, I’m going to begin using this blog as a place to store many of those learnings.  I’ll try to start with some of the practical basics and I’ll get more granular and complex as I go.  At a minimum this will be a good place to store my own learnings, but I hope others will find it valuable as well.

You're Going to Spend More than $2 Million on Health Care in Your Lifetime

Yesterday when writing about David Goldhill's piece on health care in the Atlantic, I noted that he noted that the average American will spend $1.77 million on health care in their lifetime (this includes their employer's contribution).  This is an astounding number.  I thought I'd do my own math.  And when I did, I actually got a number slightly higher than Goldhill's.

Here's my math.  Assume you start paying the average family health insurance rate of $12,000/year beginning at the age of 26.  You continue paying that rate until your death at, say, 85.  Assume the cost of health care increases at a rate of 3% per year.  Using the future value function in excel, that's a total of $2.02 million in health care payments over the 60 years that you're paying for health care. And keep in mind that this assumes that the rate that health care costs are rising is only 3%.  Given the increasing cost of health care over the last several years this is a very conservative number.  If health care costs continue to increase at their current rates, we could be paying twice that amount.