Medical Economics

Will Inflation Eliminate Private Medical Practices?

When the inflation rate rises, different professions are affected differently. One of the most vulnerable is the private practice physician and the recent rise in inflation may just be enough to close many private practices and force those physicians to become hospital-employed.

In a previous post in 2019, I laid out the argument that all physicians should be afraid of inflation. At that time, inflation was just a hypothetical possibility – something that would likely happen at some time in the remote future. But now, inflation is a reality and it is causing financial pressures on physician practices.

Inflation results when there is an increase in the cost of goods. Some inflation is good and is a sign of strong consumer demand, growing worker income, and low unemployment rates. The ideal inflation rate is around 2% per year. But when the inflation rate is too high, consumers cannot afford to purchase the same amount of goods and services. As a result, in a free market, workers will demand higher wages in order to maintain a constant purchasing power. However, people on fixed incomes lose their purchasing power since their incomes cannot keep pace with inflation. Although retirees are the group of people who are most often mentioned as being harmed by high inflation, physicians in private practice are also essentially on fixed incomes.

Physician reimbursement is not a free market system. When inflation affects a restaurant, a grocery, or a retail store, that business can increase prices overnight in order to keep up with expenses. However, physicians cannot increase the amount that they get paid. Physician income from professional fees primarily comes from two sources: the government (through Medicare and Medicaid) and commercial health insurance companies. The U.S. Congress sets Medicare payments each year for every physician service. Commercial insurance companies negotiate contracts with physicians that typically set the fees for several years in the future. Most physicians will have a “fee schedule” that allows them to change their charged amount for any given service. The charged amount on the fee schedule for any given service is set at an price higher than their highest paying commercial insurance contract. However, for all practical purposes, no one pays the amount of the fee schedule since it only applies to uninsured patients and most of the uninsured negotiate reduced amounts on an individual basis because of financial hardship.

Medicare payments do not keep up with inflation

The amount that Medicare pays a physician for a given service or procedure depends on two things: (1) the Medicare conversion factor and (2) the Medicare RVU schedule. The conversion factor is the amount that Medicare pays a physician for each RVU. The RVU schedule is how many RVUs Medicare assigns to each physician service or procedure. Every November, Congress sets the conversion factor for the upcoming year and over the past 20 years, it has been essentially flat.

In 1998, the Medicare conversion factor was $36.69 per RVU and in 2022, the current conversion factor is $34.61. In other words, the conversion factor is 2 dollars less today than it was 24 year ago! However, the inflation rate has resulted in us now needing $67.22 in 2022 in order to purchase $36.69 worth of goods & services in 1998. The net effect is that in terms of purchasing power, 1 RVU is worth half as much today as it was in 1998.

The Medicare RVU schedule varies from year to year depending on what types of services Medicare wants to promote. Over the past two decades, Medicare has been tending toward emphasizing primary care and de-emphasizing procedure-based specialties. Therefore, Medicare has increased the RVUs for outpatient office visits and reduced the RVUs for procedures. However, neither office visit nor procedure reimbursement has kept up with inflation. The graph below compares the reimbursement for a level 4 new outpatient visit (CPT 99204) in Ohio from 2000 to 2022 compared to the effect of inflation during this same time period. During this time, a new outpatient visit lost 25% of its value due to inflation:

In order to increase the RVUs for outpatient visits, Medicare had to take those RVUs from other service and consequently, procedure reimbursement has lost even more value. Two common procedures performed by outpatient physicians are knee injections (CPT 20610) and EKGs (CPT 93000). Between 2000 and 2022, reimbursement for performing knee injection fell from $70.53 to $63.79. When adjusted for inflation, this represents a 49% loss of value.

EKGs lost even more value. Between 2000 and 2022, reimbursement for performing an EKG with interpretation fell from $27.63 to $13.91. When adjusted for inflation, this represents a 72% loss of value.

…and office expenses keep rising

At the same time that inflation has eroded the value of Medicare reimbursement, physician practice overhead expenses keep going up. Doctors have to pay more for office rent, utilities, and office staff salaries due to inflation. As a consequence, what many physicians take home at the end of the day in income for performing outpatient services has fallen.

As an example, in 2005, the average rent in the U.S. was $12.12 per square foot. By 2020, the average rent increased to $19.27 per square foot. In 2000, the average LPN annual income was $29,100 and by 2021, it had risen to $48,070. In 2000, the average RN annual income was $43,900 and by 2021, it had risen to $77,600.

So, what can the private practice physician do?

With inflation accelerating overhead expenses and with Medicare payments not keeping up with inflation, there are only a limited number of options for the private practice physician who depends on receipts from clinical practice to stay in business.

  1. Retire. For many older physicians, this is the most appealing option. However, that assumes that they have been able to save up enough in their retirement portfolio. Over the past several years, many physicians reduced their annual retirement saving contributions in order to pay their mounting office expenses in the setting of reduced or unchanged Medicare payments.
  2. Stop accepting uninsured patients. Currently 8.6% of Americans lack any form of health insurance. Most of these people are either unemployed or work in low-income jobs that do not provide health insurance. Many private practice physicians require payment in advance for patients without health insurance who seek healthcare and most of these patients do not have the money to pay for physician services.
  3. Stop accepting Medicaid and Medicare. Physicians can usually negotiate higher rates from commercial insurance companies than they get from Medicare. In theory, these negotiations could result in reimbursement that could keep up with inflation. However, given the large percentage of Americans who are covered by either Medicare (18.4%) or Medicaid (17.8%), this is impractical for most physicians, particularly older primary care physicians whose patient panels have aged as the physicians have aged. Currently, 15% of physicians do not accept new Medicare patients and 1% of non-pediatric physicians do not accept any Medicare patients (nearly half of the latter physicians are psychiatrists). Medicaid pays physicians even less than Medicare and currently, 29% of physicians do not accept new Medicaid patients.
  4. Concierge medicine. Concierge physicians charge patients a monthly or annual retainer fee in exchange for enhanced care such as immediate availability to office appointments and longer office visit times.. These physicians will typically have much smaller patient panel sizes than other primary care physicians – by some estimates approximately 1/7th the size. Because these fees are charged directly to the patient, most patients contracting with a concierge physicians are wealthy.
  5. Increase patient volumes. In medical practices, there is little room for increased production. There is a limit to the number of patients that a physician can safely see per hour and the prospect of working more hours per week is unpalatable given that the average physician already works an average of 52 hours per week. Although there can be some improvement in operational efficiency by optimizing patient throughput and improving electronic medical record utilization, most private medical practices have already instituted these measures.
  6. Join the Veteran’s Administration. The VA is attractive to many physicians in private practice, particularly older physicians. For those working in VA outpatient clinics, there is generally no weekends, no night call, and no overhead expense. VA physicians have an average salary of $230,000 per year and after 5 years of employment, are eligible for a retirement pension. As a result, many physicians in private practice can have a higher annual income and better retirement benefits by moving to the VA.
  7. Become hospital-employed. For many physicians in private practice, this is the only realistic option. Currently, 70% of physicians are employed by hospitals or corporate entities and the overwhelming majority of new physicians completing their training become employed by hospitals rather than enter private practice. The Stark law prevents hospitals from subsidizing private practice physician salaries. However, hospitals can subsidize salaries of those physicians who are employed by the hospital.

2022 is a very bad year for physicians in private practice

Over the past 2 years, the Medicare conversion rate fell from $36.09 per RVU for 2020 to $34.61 for 2022. In March 2022, the annual inflation rate reached 8.5%, the highest rate in 40 years. For many physicians in private practice who were barely getting by a year ago, this surge in the inflation rate combined with a reduction in this year’s Medicare conversion rate will be too much to financially bear.

In a free market economy, quality is the most important determinate of cost – the best chef commands the highest wage and the best architect commands the highest fee. Since the creation of Medicare in 1965, physician practices become less and less susceptible to free market forces. The inexperienced physician and the physician with 30 years of experience get paid exactly the same by Medicare. Similarly, the worst physician in the community gets paid by Medicare the same as the best physician. The recent increase in inflation will likely force many physicians away from private practice employment models and move medicine even further from a free market workforce. We are spectators to the extinction of the private medical practice.

April 18, 2022

Hospital Finances Medical Economics

Hospitals Should Embrace Working From Home

The COVID-19 pandemic has forced many businesses to adapt to employees working from home and hospitals are no exception. When the pandemic is over, should these workers continue to work from home? In many cases, the answer is yes. Before COVID, teleconferencing usually meant calling in on a multi-line telephone system. These systems were clunky and often either did not work at all or had acoustics that were so bad that many participants could not be heard. The pandemic fostered a technical revolution in telecommunications that now permits high quality video teleconferencing. Simultaneously, the widespread use of electronic medical records made remote patient care feasible. There are several key advantages of working from home that can result in a competitive advantage for hospitals and other businesses that embrace the concept.

Reduced office space requirements

Everyone wants their own office. Employees gauge their value by how many square feet they have, how many windows they have, how nice the office furniture is, and what kind of view their office has. When we hire a new doctor, the first question we get asked is usually “Where is my office going to be?”. But hospitals are far more than just doctors and nurses, there are a whole cadre of support staff necessary for operations, revenue cycle, quality, compliance, etc. The bureaucracy of American healthcare has grown dramatically over the past 3 decades and with it has come the need for more and more of these support staff. In addition, as hospitals have increasingly expanded outpatient clinical operations, there are even more administrative staff necessary to oversee these non-hospital-based activities. And every one of those employees wants an office.

As hospital census grows within a confined building, patient care space encroaches on office space. When new hospital additions are built, the emphasis is on return on investment in square footage and there is relatively little direct return on investment for individual offices (as opposed to clinical space). As a consequence, office space is often relegated to decommissioned patient care areas or repurposed windowless basements areas. Many hospital operations have been moved off-site to dedicated office buildings in areas where real estate is less expensive.

Office space is costly. A standard office is about 150 sq ft and even a standard cubicle is 48 sq ft. Here in Columbus, Ohio, office space rents for an average of about $22 per sq ft per year. Therefore, the cost of individual offices is expensive:

  • Standard office = $3,300/year
  • Small office = $2,640/year
  • Cubicle = $2,056

And these costs do not include the additional cost of square footage devoted to common space such as hallways, break rooms, waiting areas, and bathrooms! Once you add in the cost of these common areas, office furniture, and utilities, the cost of maintaining on-site administrative offices in the hospital is staggering.

When staff work from home, they no longer need individual offices and so these overhead costs drop considerably. The hospital can then dedicate a much smaller amount of space for “hoteling” offices or cubicles that can be used by many different physicians or administrative employees during those times that they must be physically in the hospital.

Reduced employee transportation and parking costs

Based on typical travel distances of 5 to 13 miles to commute to work in the United States, most people spend $2,000 – $5,000 per year to commute. In addition, many hospitals (particularly in urban areas) require staff to pay to park on-site. Last year, my cost for a campus parking garage pass was $1,200. These costs do not appear on hospitals’ financial statements but they do appear on the employees checking account statements. I estimate that my cost of parking and driving to work was $3,000 per year but that is partly because I already had a car. If I did not already have a car and needed to get one just so I could commute, then my cost would be $9,000 per year.

For the employee, these personal expenses are significant. By eliminating or reducing these costs, the hospital can pay that employee a lower salary and that employee can still have the same net disposable income. If the hospital continues to pay the original salary, then for the employee, it is like getting a several thousand dollar a year raise.

Employee residence flexibility

How often have you had a highly valued employee resign because their spouse got a job in another city? Or because they needed to move to be close to an aging parent out of state? Or because they wanted to be near the mountians/ocean? Or because they were tired of the weather in your city? Or because they wanted to move to a more rural area? Or because they move closer to a city? Not only do you lose an experienced employee but the average cost to replace an employee is equivalent to 6-9 months of that employee’s salary. That works out to $30,000 to $45,000 for a typical non-physician hospital employee.

A few years ago, a radiology colleague of mine moved to New Zealand where he could read x-rays and CT scans over the internet during the daytime in New Zealand that were being done at night in Ohio. He was happy because he could live in his dream location and the hospital’s radiology department was happy because the Ohio-based radiologists no longer needed to do night shifts reading films. Remote working was a win-win for everyone in this case.

By working from home, employees no longer need to be in the same city as the hospital. They don’t need to be in the same state or even the same country. This allows many employees to permanently move to a different part of the country. But it also allows those employees to travel more while working at the same time. For example, a few weeks ago, my wife and I rented a house  on the coast in Northern California. Two of our daughters joined us – they both worked remotely by day and we were able to have family time together in the evenings and weekends.

For many employees, this flexibility allows them to buy a home in a less expensive community, move to a better school system, or be happier because they were able to move closer to friends and family.

Better job applicant pool

In the past, when the hospital posted a job opening, the applicant pool was limited to people who either already lived within commuting distance of the hospital or who were willing to move within commuting distance. This necessarily restricted the applicant pool and as a result, the hospital often ended up with a less than ideal employee for that job. By allowing employees to work remotely, the applicant pool increases in size exponentially. The hospital now has access to people who live outside of the community and would never have applied for the job in the past.

This can be particularly important for hospitals in smaller communities or rural areas where the applicant pool for most jobs is particularly small due to the size of the local population.

More productive employees (maybe)

Employees who are sequestered alone at home can have fewer distractions from co-workers who want to chat. They can walk 20 feet to get a cup of coffee in their kitchen versus taking an elevator to the cafeteria and waiting in line for 5 minutes. They can join a meeting with a mouse click rather than walking to a different building on the hospital campus. They don’t have to spend the 55 minutes per day that the average American spends commuting to work. All of these can increase employee productivity.

However, in some situations, employees working from home can have reduced productivity. For example, if the employee has children at home and they are multitasking work with childcare. Of if the absence of those on-site chats with co-workers reduces the opportunity for mentoring and collaboration.

Some have argued that virtual meetings are less effective because remote attendees can be less engaged when no one can see them. This is especially more likely to happen if virtual meetings become more like webinars, when a single presenter armed with a few dozen PowerPoint word slides talks non-stop for 60 minutes. One way to counteract this is to about Steve Jobs’ 3-point formula for conducting meetings:

  1. Keep the number of participants small – ideally 3 to 5 people
  2. Keep the agenda short – no more than 3 items
  3. Keep the length short – no more than 30 minutes

Fewer sick days

Employees who are moderately or severely ill should not work. However, during the COVID-19 pandemic, many employees were required to stay home for 14 days because of isolation requirements after an exposure. Some had mild or asymptomatic COVID infections but had to remain on home quarantine for 10 days. Those employees who could work from home did not need to stop working in these situations.

Our workplaces are also the site that many employees acquire infections such as colds and the flu. Less face-to-face exposure to co-workers means fewer of these infections and consequently, fewer sick days.

Studies prior to COVID-19 showed that people working from home used fewer sick days than people working on-site at an office. However, studies have also shown that people working from home were more likely to continue to work when they were sick than people working on-site at an office. Sometimes, working remotely while having a mild illness can be appropriate. For example, when an employee has a mild cold that has minimal impact on productivity but the employee is discouraged from coming to the hospital in order to prevent infecting others. But there has to be expectations that when a remote employee has more than just a mild illness, they should use sick time.

Hospital jobs amenable to working remotely

  1. Telemedicine. Not only does the provider (doctor, NP, PA, nurse midwife, etc.) not need to be in the office, but the registration staff and nurses don’t need to be there either. Psychologists, speech therapists, and dietitians can also frequently work remotely.
  2. Phone triage nurses. Many outpatient practices use triage nurses for patient calls. Hospitals use triage nurses for inter-hospital transfers. In neither situation does the nurse need to be on-site.
  3. Schedulers. Even before COVID-19, many employees who scheduled office visits, hospital admissions, and procedures worked from home.
  4. Revenue cycle staff. Coding and billing staff are often the first to be moved away from the hospital campus to an off-site office building. Working from home is a natural transition.
  5. Pre-admission screening. Similar to revenue cycle, staff who screen pre-operative and pre-procedure patients for insurance coverage do not need to be located on-site.
  6. Compliance staff. The nurses or administrative staff who do quality and compliance only need access to a computer and a phone.
  7. Case management. Certain elements of case management require the case manager to have face-to-face meetings with inpatients. However, other elements only require access to the electronic medical record. Separating these responsibilities permits some case management staff to work from home.
  8. Social services. Social workers who are primarily responsible for outpatients can often work from home.
  9. Office assistants. Many of the tasks that would have in the past be classified as secretarial do not require on-site presence. Some of these tasks include answering phones, doing transcription, preparing reports, and making schedules.
  10. Technology support. Every hospital needs computer savvy people to solve password problems, trouble shoot electronic medical record access, and generally help out technologically-impaired hospital staff. As long as they have computer access, they can do most of their work anywhere.
  11. Purchasing staff. This can include everyone from those who prepare contracts with hospital vendors to supply chain employees responsible for purchasing supplies and maintaining inventories.
  12. Recruiters. Just as an increasing number of new employees will be working remotely from distant locations, recruiters can use virtual communications to recruit these employees.
  13. Communications and marketing. In the past, a lot of this work was done by phone and COVID-19 has shown that the majority of this work can be done virtually.
  14. Interpreters. For years, hospitals and physician offices have used interpreters/translators by telephone or internet connection when providing care for patients who do not speak English.

Hospitals allowing remote working have a competitive advantage

Flying into Phoenix from California earlier this month, I saw mile after mile of office buildings with empty parking lots… at noon on a Thursday. It is because of the mass migration of employees from offices to remote working brought on by the COVID-19. The pandemic has given American workers a taste of what it is like to work from home. Many of those workers like it and do not want to go back to the office. Our nation’s hospitals are no different than those office buildings in Phoenix. Certain jobs require employees to be physically present, such as doctors, nurses, and respiratory therapists providing inpatient or procedural care. However, an increasingly large number of employees do not need to be physically present in the hospital. Those hospitals that can adapt to the new paradigm of remote employees will be successful. Those that try to go back to “the old days” when all employees were expected to work on-site in the hospital building will not be able to compete for the best workers.

Supervisors, managers, medical directors and CEOs are mostly older with decades of comfort working in an office. Many of the employees working for them are younger and more adapted to working remotely. It is incumbent on those of use who are hiring employees to remember that it is about what the employee wants, not what we are accustomed to.

October 28, 2021

Epidemiology Medical Economics

Should You Mandate Employee COVID-19 Vaccination?

“Individual freedom!” has been the rallying cry of a highly vocal but increasingly small minority of Americans who oppose COVID-19 vaccines. Most of these anti-vaxxers represent the intersection of ignorance, arrogance, and obstinance. But should you require them to get vaccinated if they are your employees? In a free market economy, businesses with vaccinated employees have a competitive advantage over businesses with unvaccinated employees.

COVID infection is costly

A study from the City University of New York found that the average direct medical cost of a symptomatic COVID-19 infection is $3,045. Infections that require hospitalization are considerably more expensive than those that can be managed as an outpatient. A report from CMS found that the Medicare payments for a COVID-19 hospitalization was $24,033 (this does not include co-pays that the individual is responsible for). A study in JAMA Open Network this week found that the average out-of-pocket co-pay for a COVID-19 hospitalization was $3,804. A report from the Kaiser Family Foundation found that the average cost of COVID-19 hospitalization for commercially-insured patients with pre-existing medical conditions is estimated to be $20,292 (commercially-insured patients are younger than Medicare patients, have fewer medical co-morbidities, and tend to have shorter hospital stays – all resulting in lower cost per hospitalization than Medicare patients).

In addition to direct medical costs, there is a cost of lost worker productivity during their infection. Recommendations by the CDC are persons infected with COVID-19 should not return to the workplace for at least 10 days from the onset of symptoms. Those persons who are immunocompromised or who require hospitalization for more severe COVID-19 infections should not return for 20 days. Asymptomatic persons who test positive for COVID-19 should not return to the workplace for 10 days from the date of the COVID-19 test. In total, COVID-19 absenteeism is quite costly to employers.

Unvaccinated employees cost more

Vaccines are effective in preventing COVID-19 infection. Overall, unvaccinated persons are 6.1 times more likely to test positive for COVID-19 than vaccinated persons. That means that unvaccinated persons are 6.1 times more likely to be absent from work for at least 10 days. They are 6.1 times more likely to incur the $3,045 direct medical cost of the average COVID-19 infection. The graph below shows the COVID-19 case rate per 100,000 for vaccinated and unvaccinated Americans of working age.

Vaccines are even more effective in preventing severe infection; most of the people hospitalized for COVID-19 infection are now unvaccinated. The CDC reports that unvaccinated COVID-infected persons are 12 times more likely to require hospitalization than unvaccinated persons. Preliminary data suggest that unvaccinated persons are 20-30 times more likely to require ICU admission for COVID-19 infection than vaccinated persons. The graph below shows hospitalization rates per 100,000 for vaccinated versus unvaccinated persons.

Older unvaccinated workers are even more likely to require hospitalization. The CDC reports that in August 2021, persons age 50-64 were 30 times more likely to require hospitalization if they are unvaccinated versus being vaccinated. Currently, the cost of those hospitalizations is being borne by commercial insurance companies and by Medicare. However, in the future, this will translate to higher health insurance costs and higher Medicare costs. These costs will then be transferred to employees by higher health insurance premiums and higher Medicare payroll taxes

Not only are vaccinated employees more likely to be hospitalized with COVID-19, but they are also more likely to die if they get COVID-19. In August, the overall death rate was 11.3 times higher in unvaccinated than vaccinated persons. Dead employees not only result in the cost of replacing them but they also generate life insurance payouts that then result in higher life insurance premiums for the business. The graph below shows the number of COVID-19 deaths per 100,000 in vaccinated versus unvaccinated people of working age. One implication of this graph is that it is safer for a company to hire a 70-year-old vaccinated employee than to hire a 30-year-old unvaccinated employee from a COVID-19 death risk standpoint.


Unvaccinated workers who are exposed to COVID-19 also incur higher lost productivity costs than vaccinated workers. Recommendations by the CDC are that unvaccinated employees exposed to COVID-19 quarantine at home for 14 days from the date of exposure. However, vaccinated employees do not need to quarantine and can continue to work as long as they wear a mask. These worker absences can be very costly to the employer who continues to pay the worker who is off work (“sick time”) and has to additionally pay someone else to do that worker’s job (often requiring expensive overtime pay). Because of the different quarantine requirements, it is far more costly to the employer if an unvaccinated employee is exposed to COVID-19 than if a vaccinated employee is exposed, even if the employee has no symptoms.

If vaccines save so much money, why don’t we just mandate them?

Vaccine misinformation has permeated the American public and has spilled over into American politics. Intuitively, one would have thought that Republicans would have been more pro-vaccine than Democrats given that Republicans historically were aligned with business and were in favor of policies that reduce business costs. Furthermore, Republicans historically opposed legislation that places constraints on the free market. Paradoxically, during the COVID-19 pandemic, Republicans have fought against vaccinations that could have lowered costs to businesses. Republicans have also introduced legislation that would prevent individual businesses from requiring employee vaccinations – even when businesses believe that having 100% employee vaccination can give them a free market competitive advantage over other businesses. As a consequence, when it comes to COVID-19 legislation, Chambers of Commerce have been aligning themselves with Democrats rather than their normal alignment with Republicans.

Most Americans are already vaccinated. As of this week, 66% of us have received at least one dose of a COVID-19 vaccine. Because many children are not eligible to be vaccinated, a better metric is the percent of adults who are vaccinated – currently 79% of Americans over age 18 have received a vaccine and 96% of Americans over age 65 have received a vaccine. The people who are vaccinated are not the ones who are vocally protesting against vaccine mandates – it is the minority of Americans who are not vaccinated that are making all of the noise. They are also the ones who are filling up our hospitals, increasing costs to employers, and increasing costs to Medicare and insurance companies. Getting these Americans vaccinated is not just good for our country’s health but it is good for our nation’s businesses. So, how to best get them vaccinated?

The mandate versus the nudge

A mandate is a directive requiring an employee to do something. A nudge is a more subtle means of influencing employee behavior without imposing a mandate. An example of a nudge applied to COVID-19 would be to make it easy for employees to get vaccinated by giving them paid time off work to get vaccinated. A nudge can be as simple as providing education about COVID-19 and vaccines in the workplace. Some employers use the nudge of paying their employees to get vaccinated and in Ohio, we have a free tuition lottery that vaccinated teenagers are automatically enrolled in. Public shaming can be a powerful nudge, for example requiring unvaccinated employees to wear masks at work but allowing vaccinated employees to work mask-free, making it clear to all who is and is not vaccinated. But perhaps one of the most effective nudges is to transfer the costs of COVID-19 to unvaccinated employees.

This was the approach taken by Delta Airlines which increased insurance premiums by $200 for unvaccinated employees. So far, 90% of Delta employees are now vaccinated and Delta projects that 95% will be vaccinated within the next month. On the other hand, United Airlines mandated vaccination and currently has 96% of its employees vaccinated with 3% having a medical/religious exemption to vaccination and only 1% of employees refusing vaccination. American Airlines and Southwest Airlines are also mandating vaccinations but their company policies are being stymied by a Texas law prohibiting businesses with headquarters in Texas from requiring vaccinations. This represents a fascinating social experiment: whether the mandate is more effective than the nudge. Over the next year, we will have an answer to this question and future economic analysis will show us which is the most cost-effective: the Delta Airlines strategy or the United Airlines strategy.

The difference between a mandate and a nudge is that a mandate eliminates choice but choice is inherent in a nudge. As a species, Americans rebel when being told what to do and are passionate about having the freedom of choice. In the song Growing Up, Bruce Springsteen said this better than anyone when he sang: When they said “sit down”, I stood up. The nudge can influence us to change our behavior without requiring us to change our behavior. But there are situations when the mandate is essential, for example, in the military on the battlefield.

When is the mandate better?

The danger of a vaccine nudge is that it may not be effective and if the business needs all of its employees to be vaccinated in order to be competitive, relying on the nudge could put the business at a competitive disadvantage. As an example, elective orthopedic hip replacement surgeries are very lucrative and are mostly performed in people over age 65. These older people have COVID phobia (which is why 96% of them have received a vaccine). The hospital that boasts that all front-line employees are vaccinated will be at a competitive advantage to attract people needing a hip replacement surgery compared to a hospital with unvaccinated nurses and doctors.

Many, if not most, businesses actually welcome legislated vaccine mandates. When the mandates come from the government, then the employer does not have to take responsibility for the mandate and can tell employees “Hey, this requirement is from the government, I’m just the messenger…”. Furthermore, with government mandates, a business does not need to worry about losing employees to its competition over vaccine requirements. If only one restaurant in town mandates vaccinations, there is a danger that the serving staff may quit and go work for a different restaurant rather than get vaccinated but if the State Health Department mandates that all restaurant employees in the state get vaccinated, then those serving staff will be unable to get a job anywhere if they remain unvaccinated.

In states with a high percentage of the population vaccinated, it is easier for employers to mandate vaccination because the pool of unvaccinated employees is relatively small to begin with. The implication is that if you have employees who quit rather than getting vaccinated, there will be ample other workers out there who are vaccinated and who you can hire to replace them. Thus, it is safer for a business owner in California to mandate vaccinations than for a business owner in West Virginia. The graphic below shows the geographic variation in vaccination status.

Similarly, within each state, there are regional variations in vaccination rates that can affect the worker pool and thus the willingness of a business to invoke a vaccine mandate. For example, in Ohio, it is more feasible for a restaurant owner in Delaware County, where 68% of the population has received a vaccine, to mandate employee vaccinations than in Holmes County, where only 15% of the population has received a vaccine. The restaurant owner in Holmes County will have a difficult time finding vaccinated applicants to replace unvaccinated workers who quit because of a vaccine mandate. In the graphic below, Delaware County is the darkest shade county in the middle of the state whereas Holmes County is the lightest shade county.

Another situation where vaccine mandates may be preferable is when mandates can mitigate personal injury litigation. Ever since COVID-19 vaccines have been available to all adults, there is a risk of getting sued if a customer becomes ill or dies from a COVID infection acquired at a business. In many situations, causality can be hard to prove. For example, it can be hard for a customer to conclusively prove that he acquired COVID-19 from an infected bartender at the pub that the customer was in for 45 minutes one evening. However, hospitals may be uniquely vulnerable since patients hospitalized for several days with non-COVID-19 conditions are as a group more susceptible to having severe COVID infections and hospitals have robust epidemiology measures in place that can effectively trace disease contacts. In the future, a hospital will likely be held responsible in civil court for patients who become infected from an exposure to an unvaccinated nurse with COVID-19.

When is the nudge better?

The danger of a vaccine mandate is that some recalcitrant anti-vaxxer employees may decide to quit. For many businesses, this may actually be a good thing if those individuals have a history of being disruptive or otherwise being problem employees in the past. But in other businesses, a large number of employees quitting because of a vaccine mandate can lead to worker shortages, reduced business production, and unfavorable public relations. The wise employer will find out which employees are unlikely to get vaccinated before the employer roles out a vaccine mandate. Strategically timing a vaccine mandate after researching employee vaccination status may provide the company with a rare opportunity to eliminate undesirable employees without having to deal with a protracted human resources battle over alleged unlawful job termination.

In some businesses, particularly those with a small number of employees, relentless education will eventually sway all but the most rabid anti-vaxxers. Once all of the existing employees are vaccinated, then the business can adopt a proof of vaccination requirement for all new employees, thus getting the benefits of the mandate without losing any employees.

Sometimes, the incremental nudge can be highly effective. With the incremental nudge, employee choice is preserved but over time, the consequences of choosing to be unvaccinated become incrementally more onerous for the employee. An example is as follows:

  • Step 1: Education about COVID-19 vaccination in the workplace
  • Step 2: Paid time off to get vaccinated and recover from any vaccine-related side effects
  • Step 3: Pay an incentive of $100 to every vaccinated employee
  • Step 4: Requirement that unvaccinated employees wear masks at work but vaccinated employees are not required to wear masks
  • Step 5: Requirement that unvaccinated employees get weekly COVID-19 nasopharyngeal swab tests
  • Step 6: Requirement that unvaccinated employees get daily COVID-19 nasopharyngeal swab tests
  • Step 7: Increase health insurance premiums for unvaccinated employees by $500 per year
  • Step 8: Increase life insurance premiums for unvaccinated employees by $500 per year
  • Step 9: Mandate vaccination

By the time the employer reaches step 8, only the most hardened anti-vaxxers will remain unvaccinated. This will be a relatively small percentage of employees and will mostly be disruptive employees that the employer would like to have an excuse to get rid of anyway. Therefore, step 9 could be mandating vaccinations and then terminating those few remaining unvaccinated employees. This allows the employer to time the mandate strategically in order to selectively cull the employment roster.

The future is right around the corner

In the very near future, there will be two kinds of people: those who are vaccinated against COVID-19 and those who either have had or will have COVID-19 infection. This pandemic is different than the SARS, MERS, and Ebola outbreaks – in those outbreaks, the virus was able to be contained locally until no new infections occurred. COVID-19 today is too widespread throughout the world and has long past the time when it could be locally contained. This pandemic is also different from the 1918 influenza pandemic and the 2009 H1N1 pandemic – in those pandemics, the inciting virus eventually disappeared and was replaced by other, less deadly strains of the virus. COVID-19 does not show any signs of going away or being replaced by a less deadly coronavirus.

Thus, it appears that COVID-19 is going to be with us for a long time and unless all nations can mount a universally successful vaccination campaign, as was done with polio, COVID-19 may be with us indefinitely. But it is clear that vaccination is the only way out of a perpetual pandemic. The good news is that the number of unvaccinated people is dwindling as the tolerance of the vaccinated for those who are unvaccinated also dwindles.

October 20, 2021

Medical Economics

A Modest Proposal To Fix American Healthcare

Using the definition that value = quality ÷ cost, Americans get the least value in healthcare of all nationalities in the world. Per OECD data, U.S. healthcare cost per person is the highest in the world at $11,072 per year; the next closest is Switzerland at $7,732. But the U.S. trails other peer countries in most measures of quality of medical care. In other words, we pay more and get less.

A Kaiser Family Foundation survey found that most Americans are in favor of a national health plan. However, the three words that create the most political polarization among Americans with regard to healthcare are: “Medicare For All“. The reality is that Medicare is already a national health plan for 44 million Americans over age 65, Medicaid is already a national health plan for 74 million low income adults, and CHIP is already a national health plan for 7 million low income children. Add in 9 million Americans covered by the Veteran’s Administration and 9 million covered by the Federal Employees Health Benefits program and it turns out that 44% of Americans are already covered by one national health plan or another. When looked at by expenditures, according to CMS, 73% of all U.S. healthcare is currently paid for either by the government or by individual households:

One of the problems with our existing national health plans is that they all too often pay for health care for preventable medical conditions; had these conditions been prevented in the first place, then the overall cost to society would be less. For example, if an uninsured person does not have their hypertension and diabetes diagnosed and treated, then they become a financial burden on society when they develop kidney failure and require dialysis (Americans requiring dialysis are automatically eligible for Medicare, and thus paid for by taxpayers). Or if an American has unrecognized hepatitis C at age 45, that person can develop cirrhosis requiring a costly liver transplant later in life when they are now over age 65 and on Medicare. Or the low income woman who lacks access to birth control has an unintended pregnancy that results in delivery costs charged to Medicaid and child healthcare costs charged to CHIP.

Although I believe that the United States will eventually have a national health plan akin to “Medicare for all”, there are too many powerful economic and political forces that pose a barrier to overnight adoption of a national health plan. Most notably, opposition can be expected from health insurance companies, pharmaceutical companies, some hospitals, and some doctors who all benefit from private health insurance (which generally pays more for any given medical service than Medicare does).

Therefore, I believe that the first step toward improving U.S. health outcomes while reducing U.S. health costs per capita should not be “Medicare For All” but should instead be “Preventive Care For All“.

The Affordable Care Act already requires Health Insurance Marketplace plans and Medicaid to provide a group of preventative services to all covered individuals, without co-pay. For adults, this includes services such as 14 different vaccinations, blood pressure & diabetes screening, and HIV prevention medications for high-risk persons. For women, this includes services such as birth control, breast cancer screening, and bone density screening. For children, this includes services such as vaccinations, well-child visits, and autism screening. People who have Medicare, Medicaid, CHIP, or commercial insurance through a Health Insurance Marketplace plan already get preventive care at no additional out-of-pocket costs. The problem is that uninsured Americans do not have access to preventive care, unless they pay for it with their own money. So, who are these uninsured?

Currently, according to a report by the Kaiser Family Foundation, there are about 27 million uninsured Americans who are nearly all between ages 18 -64. Children of parents without commercial insurance are mostly eligible for healthcare coverage through CHIP and adults 65 and over are eligible for healthcare coverage by Medicare. In short, the typical uninsured person in the United States is non-white, low income, employed, and lives in a South or Mountain West state:

  • Race: 41% White, 38% Hispanic, 13% Black, and 4% Asian.
  • Income: 21% fall below the Federal Poverty Level (FPL), 28% fall between 100-200% of the FPL, 34% fall between 200-400% of the FPL, and 17% have an income greater than 400% of the FPL.
  • Work status: 73% have at least one family member working full-time, 11% have a part-time worker, and 15% have no one in the family working.
  • Age: 85.4% are between ages 18-64 and 5.6% are younger than age 18.
  • Citizenship: 77% are U.S. citizens and 23% are non-U.S. citizens.
  • State of residence: In Medicaid expansion states, 8.3% of the population is uninsured whereas in states that did not expand Medicaid, 15.5% of the population is uninsured. States with the highest percentages of uninsured persons are in green and the next highest percentages in dark blue in the map below:

When an uninsured person is discovered to have a medical condition that requires treatment, such as kidney failure, unintended pregnancy, or metastatic breast cancer, one of the first things the hospital will do is to get that person enrolled in Medicaid or Medicare in order to cover the costs of chronic dialysis, pregnancy, or chemotherapy. For those patients who are not eligible for Medicaid or Medicare, the hospital will generally provide “free” medical care. However, nothing in health care is really free, so, the hospital has to charge more to the commercial insurance companies in order to pay for treating the uninsured. Consequently, employed American taxpayers eventually end up paying for medical care for the uninsured, either directly through taxes or indirectly through health insurance premiums.

Prevention costs less than treatment

The costs of preventable medical conditions is staggering. Dialysis costs about $90,000 per year per person. Delivery costs of an unintended pregnancy is about $15,000 (and that does not include costs of pre-natal care or health care for the next 18 years for the child). The cost of treating breast cancer in the 24 months following diagnosis is $72,000 for stage I but $183,000 for stage IV.

However, the cost to diagnosis hypertension and diabetes (before they cause kidney failure) is about $40/year. The cost of birth control pills to prevent unintended pregnancy is about $200/year. the cost of a mammogram is about $300/year. When it comes to preventable medical conditions, for the American taxpayer, it is a “Pay me now or pay me later” proposition… and it is a lot cheaper to pay for preventive care now rather than pay for the medical condition later.

How to pay for it

The greatest resistance will come from those opposed to increasing taxes to pay for someone else’s health care. It is true that in the short run, Preventive Care For All will require increased federal expenditures that will consequently require increased taxes. I would argue, however, that in the long run, Preventive Care For All will pay for itself by:

  • Reduction in expenditures by Medicaid and Medicare for medical conditions that could have been prevented
  • Reduction in Social Security disability payments for Americans who leave the workforce early due medical conditions that could have been prevented
  • Reduction in CHIPs expenditures for healthcare for children resulting from unwanted pregnancies due to lack of access to and information about birth control
  • Increase in income tax and payroll tax receipts from American workers who are able to stay in the workforce by avoiding unwanted disabling medical conditions

Seen this way, Preventive Care For All is a national investment that will cost us more now but more than pay us back after several years.

Humans have created a myriad number of ways to tax ourselves but taxes can be broken down into three basic types: (1) taxes on what you earn, (2) taxes on what you buy, and (3) taxes on what you own. Healthcare in the U.S. is primarily funded by the first of these types, taxes on what you earn. Commercial health insurance is usually paid by a combination of employee pay deductions to cover premiums for employer-sponsored health insurance plus an employer contribution that is derived from the employee’s benefit package. Medicare is paid for similarly by employee and employer payroll taxes. Payroll taxes are divided into two buckets: Social Security at 12.4% (which is only taxed on the first $142,800 in income) and Medicare at 2.9% for people making less than $200,000/year and 3.7% for those making greater than $200,000/year. Medicaid is a bit different and is paid for jointly by the Federal and State governments. I would propose paying for Preventive Care For All by increasing the Medicare component of payroll taxes.

Inevitably, progressives will argue that increasing payroll taxes on earned income hurts low-income persons. My counter argument is that by funding through payroll taxes, the wealthy pay more than the poor and furthermore, Preventive Care For All will primarily benefit low-income families.

Equally inevitably, conservatives will argue that increasing taxes takes more money from those Americans with higher incomes. My counter argument is that by funding through payroll taxes (rather than regular income taxes), all American workers contribute by an equal proportion of income and furthermore, Preventive Care For All will ultimately reduce future Medicaid and Medicare expenditures, offering the possibility of decreasing payroll taxes in the future.

Americans hate taxes, and I am no different. However, if you take the view that premiums Americans pay for employer-sponsored health insurance are simply a tax paid to a commercial insurance company rather than a government, then it is clear that we are already paying an enormous tax bill for healthcare in the United States. The best way to reduce that tax bill is to pay for prevention so we do not have to pay for disease.

How to implement it

As a starting point, the group of preventative services required by the Affordable Care Act could be made available to all uninsured Americans with a family income less than 400% of the Federal Poverty Level (currently, the Federal Poverty Level is $12,880 for an individual and $26,500 for a household of 4 people).

There will be groups that object on moral or philosophical grounds, such as anti-vaxxers who object to using government money to cover vaccinations and some religious groups that will object to using government money to cover birth control. My response to the anti-vaxxers is that they are just nuts. My response to the religious objectors is that America’s abortion problem is mostly an unintended pregnancy problem and reducing unintended pregnancies is the best way to non-controversially reduce abortions.

It could also be a disincentive for some lower income workers to purchase full health insurance since they would be able to get preventive care for free from the government. This could be addressed by an income-driven co-pay for the program. For example, no co-pay for family incomes less than 100% of the Federal Poverty Level, a $200/year/person co-pay for incomes 100-200% of the FPL, a $300/year/person co-pay for incomes 200-300% of the FPL, etc.

Another implementation barrier would be deciding who would provide the preventive care? It would be difficult to turn this over to existing primary care private physician practices. Many of these physicians already do not accept Medicaid patients due to the low reimbursement and a preventive care program paid by the Federal government would likely also be hard to break even on. Furthermore, once a full-service primary care physician establishes a preventive care relationship with an otherwise uninsured patient,  that physician will feel morally (and possibly legally) responsible to treat any chronic medical conditions that the physician identifies, even if he or she will not be paid for that care by the uninsured patient.

Personally, I believe that this type of preventive care could be ideally provided by groups of nurse practitioners, physician assistants, and nurse midwives. Preventive care is largely protocol-driven which is ideal for advance practice providers. Furthermore, there would not be a moral or legal requirement for such a preventive care office practice to manage chronic medical conditions or answer sick-calls from patients. Instead, these practices would function similarly to health screening fairs currently sponsored by hospitals, religious groups, and social service organizations.

“An ounce of prevention is worth a pound of cure”… Benjamin Franklin: February 4, 1735

By preventing many chronic medical conditions and by screening to identify other medical conditions early, Preventive Care For All would reduce overall American healthcare costs, keep lower income workers in the workforce, and improve the quality of health in the United States. In other words, Preventive Care For All would improve the value of American health care. We would do well to heed the words of one of America’s Founding Fathers…

August 11, 2021

Medical Economics

Anti-Vaxx Is Anti-Business

In the summer of 2020, unemployment in the United States soared. People stayed home and businesses shuttered. Over the course of the COVID-19 pandemic, some businesses were affected more than others. Airlines, hotels, arts & entertainment, restaurants, oil & gas, auto parts & service, and recreational facilities were among the hardest hit.

Some people blamed business closures not the pandemic but instead on their governor’s or mayor’s public health orders. As a consequence, many politicians lobbied to pass laws restricting their governor’s or public health authority’s ability to impose these public health orders. Their argument is that if people did not have to wear masks and practice social distancing, that businesses will open back up and quickly return to normal capacity. But it is not the public health orders that are hurting businesses, it is the pandemic itself.

To get those businesses back open, customers’ fear of acquiring COVID-19 has to be eased. A person who goes out to eat at a restaurant, gets on an airplane, or spends a couple of hours in a movie theater wants to be sure that it won’t cost them their life. Customers want to feel safe and workers want to feel safe. The best way to create that perception of safety is to get everyone vaccinated against COVID-19.

Some U.S. demographic groups are suspicious of vaccination and many within those groups have stated that they will not get vaccinated. As vaccine availability increases, these vaccine hold-outs will likely find themselves at a competitive disadvantage in business. How many people would go to a restaurant if their waiter is wearing a button that says “I’m proud to be a COVID anti-vaxxer”? As a larger percentage of Americans get vaccinated, those people who refuse to get vaccinated will increasingly be viewed as the ones holding back economic recovery.

If a customer gets salmonella or hepatitis A from contaminated food at a restaurant, there is the potential for liability of that restaurant. At the least, customers will avoid it and at worst, there can be civil litigation for damages from the sick customer. So far in the COVID-19 pandemic, businesses really have not faced liability because the infection is literally everywhere. Once the pandemic is better controlled in the United States, outbreaks of COVID-19 will be able to be traced to source locations, similar to outbreaks of salmonella and hepatitis A. Civil litigation may be more likely in that situation, particularly if a business owner went on record as being opposed to vaccination. At that point, it will become very expensive to be an anti-vaxxer.

The fastest way to get business such as restaurants, hotels, movie theaters, and gyms back up to full occupancy is to end the pandemic. We cannot make the pandemic end simply by passing legislation declaring that it to be over – the fastest way to make it end is to vaccinate all eligible people as quickly as possible.

Pro-vaccination = pro-business

April 7, 2021

Medical Economics Physician Finances

2021 Medicare Physician Fee Schedule Winners And Losers

Every year at this time, physician practice administrators hold their breath and wait for the annual relative value unit (RVU) revaluations by Medicare. This year, Medicare was delayed in releasing the “final rule” that dictates how physicians will be paid and the final report was not released until earlier this month (December 2020). As in past years, some specialties will have increased revenue and some will have decreased revenue. Here is the projections for the RVU changes in 2021.

So, why are there so much differences between specialties? There are two reasons. First, with the 2021 Medicare Physician Fee Schedule, the evaluation and management codes for outpatient visits were revised with a result that office visits are more highly valued than in the past. Medicare is required to keep overall physician reimbursement constant so when outpatient visits were more highly valued, other procedures and services necessarily had to be lower valued. Therefore, those specialties associated with a lot of outpatient office visits will see an overall increase in their Medicare payments. For this reason, endocrinology, rheumatology, hematology/oncology, and family practice will all see double digit increases from Medicare

Procedure-oriented specialties such as surgical specialties will see a decrease in Medicare payments. Because of the increase in RVUs associated with outpatient E/M codes, the Medicare “conversion factor” (the amount that Medicare pays physicians per RVU) will drop from $36.09 to $32.41 in order to stay budget neutral. Overall, this translates to physicians getting paid 10% less per RVU in 2021 than in 2020. Therefore specialties with no E/M billing (such as pathology and radiology) will see a significant drop in income and surgical specialties that have most of their RVUs from surgical procedures and have a lower percentage of their RVUs from E/M billing will also see a drop in income.

Every year, different physician specialty societies lobby for increasing their own specialties’ compensation. In that sense, doctors as a profession are a group of competing special interests.

For physicians in solo or small group private practice, a decrease in total RVUs has the biggest impact on physician income since those physicians still have the same overhead expenses in 2021 as they had in 2020. If that overhead expense is half of total revenue, then a 10% drop in total revenue can translate to a 20% drop in physician income. Therefore, radiologists and pathologists in solo or small group private practices will see the biggest drop in take-home income. I anticipate that in this group, there will be increasing pressure to become hospital-employed next year as a consequence of the significant drop in private practice income.

For physicians who are hospital-employed, a decrease in the work RVU has the biggest impact on physician income since those physicians typically have the work RVU as the measure of productivity by which the hospital bases their income. Therefore, critical care physicians, anesthesiologists, and radiologists who are hospital-employed will see the greatest drop in their income.

The annual changes in physician reimbursement has a big financial impact on current physicians but also has a quieter impact on future physicians. As medical students see changes in compensation among specialties, the invisible hand of capitalism will affect the decision about which specialties those students choose to enter. One way of assessing medical student interest in different specialties in in the National Residency Match Program data. In the 2020 residency and fellowship match, the specialties with the lowest fill rates were nephrology (62%,), geriatrics (50%), and infectious disease (79%). Specialties with the highest fill rates were radiology (98%), dermatology (98%), otolaryngology (99%), plastic surgery (100%), and thoracic surgery (100%). In the future, we can expect students to be drawn to those specialties that have an increasing reimbursement and away from those with lower reimbursement.

American medicine is not a free market economy. Each year, Medicare can have a big impact on the compensation among different specialties as well as the interest in students entering those specialties, simply by changing the RVU valuations and the conversion factor. In 2021, we will see some of the biggest changes in recent years.

December 23, 2020

Academic Medicine Medical Economics

Why Are There So Many Asian Physicians In The U.S.?

People of Asian descent comprise 5.6% of the American population but Asian Americans comprise 19.8% of all U.S. physicians. Two things happened this week that led me to think about this statistic and why Asian Americans are so disproportionately represented in American medicine. First, I listened to the America’s Test Kitchen podcast, Proof, about why there are so many Chinese restaurants in the U.S. (quite fascinating and worth a listen). Second, I listened to this week’s MedNet webcast on Racism and Racial Bias in Medicine that included an exploration of why African Americans are under-represented in U.S. medicine. Part of my interest is because of my own Chinese heritage (albeit only 1/8th).

Several years ago, there was a lawsuit against Harvard University by a group of Asian students who were denied college admission and claimed that the University discriminated against Asian applicants who had superior admission test scores and grades than applicants of other races. The allegation was that Harvard made it harder for Asian applicants in order to keep the percentage of Harvard students who were Asian from becoming too high. The press surmised that Asian American students have a culturally-driven higher study ethic than students of other races. But I think that the reason for the high percentage of Asian students at elite U.S. universities and the high percentage of U.S. physicians who are Asian American has a deeper and darker cause that has its roots in immigration laws that paradoxically were created to keep Asians out of America. As the law of unintended consequences dictates, those laws ultimately resulted in Asian Americans being more academically successful and more overly-represented in American professions such as medicine.

The Naturalization Act of 1790

One of the first laws of the new U.S. government was the Naturalization Act of 1790 that limited naturalization to “free white person[s] … of good character“, thus excluding Asians (as well as anyone else who was not from Europe). This law essentially banned Chinese from immigrating to the United States but this was in many ways a moot point since travel by ship to the Eastern seaboard of the country from China via the Atlantic Ocean was very difficult and expensive. Not until the country’s westward expansion opened California to development did travel from China to the U.S. via the Pacific Ocean become feasible.

The next major event that affected immigration and naturalization of Asians occurred in 1868. That year, the first section of the 14th amendment to the U.S. Constitution stated: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” The implication was that even if a non-white immigrant to the U.S. could not obtain citizenship himself or herself, their children could become citizens if born in U.S.

The Chinese Exclusion Act of 1882

The California gold rush attracted many Chinese to the west coast of the U.S. where they worked in mines and then when the mines played out, they worked in railroad construction. But soon, these laborers were competing with American citizens for labor jobs and often accepting much lower wages thus making it harder for white Americans to find work. This created a lot of hostility by many Americans toward Chinese immigrants. Notably, 140 years later, that same hostility would be directed against Latin American immigrants who are perceived as “stealing” jobs from other Americans.

The Chinese Exclusion Act of 1882 was enacted to appease this hostility. The act barred Chinese laborers from immigrating to the U.S. and also made Chinese immigrants ineligible for citizenship. The only exceptions were for Chinese merchants and teachers. At the time, Chinese were subject to racial discrimination equal in many situations to Blacks. In fact, in in 1896 Supreme Court case, Plessy v. Ferguson,  Justice John Marshall Harlan wrote in his dissent: “…the Chinese race is a race so different from our own that we do not permit those belonging to it to become citizens of the United States.”.

Because the Chinese Exclusion Act limited immigration to merchants and teachers, the act essentially barred Chinese women from immigration since at the time, the vast majority of merchants and teachers were men. Indeed, by the end of the 19th century, Chinese men in the U.S. outnumbered Chinese women 27 to 1. Many of these Chinese store owners and teachers married white women since there were so few Chinese women in the country. One of those men was my great-grandfather, who came to the United States from China in 1873, opened a Chinese laundry, married a white woman (my great-grandmother), and ultimately became the president of the Chinese Merchant’s Association of America (but that is another story).

The unintended consequence of the Chinese Exclusion Act was that it selected out only educated Chinese men from immigrating to the U.S. And when these men married and had families, they instilled the importance of education into their children. The unwritten message was that if you were Chinese in America, you had to have an education to economically survive. Racism against Chinese created a more educated and middle class Chinese population in the U.S. In contrast, racism against Blacks in the U.S. resulted in Africans being brought to America as slaves and education of their children was suppressed in order to maintain a population of unskilled enslaved laborers.

Many of these Chinese merchants opened restaurants. Chinese restaurants proliferated because their owners had to sell better food at a lower cost than other American restaurants since they had no other employment options than to be a merchant, even if it meant making a lower income by selling inexpensive food.

The Immigration and Nationality Act of 1965

After World War II, the Chinese Exclusion Act was repealed, in part because China had been a U.S. ally during the war. However, immigration from China was limited to only 105 Chinese immigrants per year. The Immigration and Nationality Act of 1965 eliminated national origin, race, and ancestry as basis for immigration. Importantly, it created a “special immigrant” category that was not subject to quotas – included in this category were foreign medical graduates. The implication was that if you wanted to immigrate to the United States, you had to go to medical school first.

Currently, 25% of U.S. physicians are foreign medical graduates. The more medical schools a given country has, the more physician immigrants that country can send to the U.S. There are 348 medical schools in India offering an MBBS degree. There are 154 medical schools in China that offer an MBBS degree and 50 of these teach in English. In contrast, there are only 160 medical schools in the total of the 48 countries in Sub-Saharan Africa; consequently, India and China are capable of producing more medical graduates that can then immigrate to the United States than other countries can.

One of the best predictors of whether or not a person will become a doctor is whether their mother or father was a physician. In the United States, 20% of doctors have a parent who was also a doctor. I’m a perfect example, a third-generation doctor, with my physician-father a descendent of one of the Chinese immigrants affected by the Chinese Exclusion Act. Medicine is the family business.

The counter productivity of Chinese racism

For a century after the inception of the United States of America, Chinese were usually disdained and immigration from China prohibited. For the second century of our country, some Chinese were tolerated, but only those who were well-educated and entrepreneurial. As a result of policies and laws to keep Asians out of the U.S., we now have a disproportionately high percentage of Chinese and other Asians occupying the ranks of physicians. And given the propensity for children of doctors to become doctors, the percentage of doctors who are Asian American will likely grow in future decades.

Racism is always morally wrong. And racism is always bad policy. There can be unanticipated consequences of racism that result in exactly the opposite of what racism intended… your doctor is likely going to be someone like me, a son of a son of a daughter of a Chinese immigrant.

October 30, 2020

Medical Economics

United States Healthcare Expenditures

Every year, CMS publishes the National Health Expenditure (NHE) data; the most recent information was updated in December 2019 and reports data from 2018. The NHE gives important insight into how Americans spend their money on healthcare. For example, in 2018, health expenditures increased by 4.6% to an average of $11,172 per American. This represents a startling 17.7% of our gross domestic product. The growth in spending was not uniform, however – Medicare spending increased faster than any other source:

  • Medicare spending grew by 6.4%
  • Private health insurance spending grew by 5.8%
  • Medicaid spending grew by 3.0%
  • Out of pocket spending grew by 2.8%

To put that in context, in 2018, the U.S. annual inflation rate was 1.9%. The average household income rose 0.8% during this period. In other words, the average American’s health costs increased 6 times more than their annual income increased in 2018.

The report shows that although Medicare spending increased the fastest, total expenditures are still the greatest for private health insurance. Overall, the total national health expenditures were $3,649,400,000,000 (i.e., $3.6 trillion). Of that:

  • Private health insurance = $1,243 billion (34%)
  • Medicare = $750 billion (21%)
  • Medicaid = $597 billion (16%)
  • Out of pocket = $376 billion (10%)
  • Other Federal (CHIPs, Veteran’s Administration, Department of Defense) = $138 billion (4%)
  • Other governmental (Indian Health Service, worker’s compensation, etc.) = $370 billion (10%)
  • Investment = $174 billion (5%)

The NHE report also projects expenditures over the next 7 years at an annual increase of 5.5% per year. This will reach an estimated $6.0 trillion by 2027. As a percent of gross domestic product, health expenditures will rise to 19.4% by 2027. Currently, about 10% of the American population is uninsured and this is projected to remain the same through 2027 (although this percentage is subject to change based on changes in Federal healthcare legislation).

State-specific per capita health expenditures are available through 2014 (data will be updated with the upcoming 2020 U.S. Census). Six years ago, in 2014, the average personal health expense per person was $8,045. There was considerable variation by individual states with Alaska being most expensive ($11,060 per person) and Utah being the least expensive ($5,981 per person). However, states could be grouped into regions with the states within those regions having fairly similar costs. New England states were the most expensive and Rocky Mountain states wee the least expensive. The data can also be analyzed by healthcare costs as a percent of each state’s gross domestic product – Maine ranked the highest at 22.3% of GDP and Wyoming ranked the lowest at 9.3% of GDP in 2014.

Not surprisingly, as people age, their health costs go up. In 2014, the average personal health care spending per American child was $3,749, per working-age American was $7,153, and per American over age 65 years was $19,098. Even though the elderly only accounted for 15% of the U.S. population in 2014, they accounted for 34% of total health spending. For all age groups, per person spending for females was higher than for males with an overall average of $8,811 per female versus $7,272 per male.

The U.S. has an almost insatiable appetite for health care. However the NHE projections through 2027 show that there is a limit to what we can afford. It may be time for our country to put our health care appetite on a diet.

February 19, 2020

Medical Economics Outpatient Practice

Prior Authorizations, Insurance Denials, and Physician Burnout

Insurance denials and insurance prior authorizations are the bane of existence for any physician who practices in an outpatient setting. The are at best an annoyance but last Friday, I had an experience that nearly made my head explode. At issue was the denial of a high resolution chest CT that I had ordered several months ago for a patient with interstitial lung disease who had deteriorating pulmonary function tests despite treatment. I wanted to determine if his interstitial lung disease was worsening to decide if his treatment needed to be changed or if he needed to be referred for a lung transplant. I entered the order into our electronic medical record with ICD-10 code J84.9 (interstitial lung disease) and typed into the “reason for the test” box that he had interstitial lung disease of uncertain cause with worsening pulmonary function tests. The patient’s insurance company contracts with a radiology test benefits management company (which I am going to call “Roadblock, Inc” so that the real company does not blacklist me) to review orders for radiology tests and then approve or deny the tests based on whether or not the tests meet evidence-based indications for that particular test. Last week, shortly before the CT was scheduled to be performed, I got an email from our office staff that the insurance company had called to tell us that Roadblock, Inc had denied the CT and then left a case reference number and the phone number at Roadblock, Inc for me to call. Here is a summary of my subsequent phone call to Roadblock, Inc:

  • 2:00 PM – I call Roadblock, Inc and am on hold for 2 minutes
  • 2:02 PM – A Roadblock, Inc customer service representative answers the call and takes down all of the information about the patient and the test that was ordered
  • 2:04 PM – She transfers me to the clinical review department. I am again placed on hold for 1 minute
  • 2:05 PM – A second customer service representative answers and again asks for the case number, patient’s name and birth date as well as my name and contact information. She informs me that the reason for denial is that the only approved indication for a high resolution chest CT is interstitial lung disease or worsening pulmonary function tests. She asks me if I would like to be transferred to the physician appeals department. I answer yes and am placed on hold for 2 minutes
  • 2:08 PM – a third customer service representative answers and I am again asked for the case number, patient name, and date of birth as well as my name and contact information. She asks me if the previous customer service representative told me why the CT was denied and I answered yes. 
  • 2:10 PM – I explained that the original order had the correct ICD-10 code for interstitial lung disease and additionally had the typed clinical information that the patient had interstitial lung disease with worsening pulmonary function tests. I pulled up the original date-and-time-stamped order from a few months earlier to confirm this and offered to fax it to her. The customer service representative stated that when the order was processed by Roadblock, Inc, that the indication for the test was not completed. I explained that the information that we sent to Roadblock, Inc included the correct ICD-10 code and the correct written indication for the test.
  • 2:13 PM – I then ask to schedule a “peer-to-peer” phone call with one of their physician reviewers. The customer service representative tells me that a peer-to-peer is not permitted for a test denial. The customer service representative acknowledged that the information that I had entered into the order and sent to Roadblock, Inc was the correct indication for a high resolution chest CT but that on the Evicor computer system, that information had not been documented and therefore the test had been denied.  
  • 2:16 PM – I asked for an appeal since the error was on the part of the Roadblock, Inc’s employee who had recorded the information that our office had sent to them. The customer service representative tells me that she is sorry but that appeals are not permitted. 
  • 2:18 PM – I tell her that I would send in a new order for the CT scan. She tells me that I am not permitted to re-order a CT when the original order is denied. She tells me that Roadblock, Inc’s policy is that I cannot order a new CT scan for a 2 month period after a denial. 
  • 2:20 PM – I ask to speak with her supervisor. She tells me that I can call the insurance company to see if they will make an exception to the denial. 
  • 2:21 PM – My head explodes and I tell the customer service representative that her company has failed this patient.

This is not a unique experience. Prior authorizations and denial appeals take up an enormous amount of physician and office staff time. A recent survey of 1,000 physicians by the American Medical Association found that 91% reported that the prior authorization process had a negative impact on patient care; 28% reported that prior authorization had resulted in delays of care that resulted in hospitalization, death, or disability; 86% reported that the prior authorization process placed a high or extremely high burden on their practice; and 88% reported that the prior authorization process has gotten worse in the past 5 years.

The Council for Affordable Quality Healthcare found that prior authorizations increased 27% between 2016 and 2019. Currently, the average physician has to do 34 prior authorizations per week and the total time cost to the physician and office staff is 14.9 hours per week devoted just to prior authorizations.

About 25 years ago, our pulmonary practice group held an all-day coding and billing session for all of the physicians. We hired a coding specialist from one of the major health insurance companies to come to teach us how to best document and code for the services we were billing with the thought that the best person to teach us about correct documentation and coding was a person from an insurance company coding department. She told us that the staff in her department were told to deny every 10th claim. If the physician appealed the denial, then they would simply approve the claim and move on. But the insurance company had found that most physicians do not bother to appeal claim denials and just write them off. By randomly denying claims, the insurance company was able to save an enormous amount of money.

Medication denials are a particular problem. Many drugs are members of a class of medications that are all relatively interchangeable for most patients. For example, statins used for high cholesterol, ACE inhibitors used for high blood pressure, and inhalers used for asthma. The insurance company will negotiate with the drug manufacturers to get the lowest price for one of the drugs in a class of medications. These drugs are then placed on the insurance company’s “formulary” of approved medications; if a patient is prescribed a drug that is not on the approved formulary, then the patient has to pay retail price for that drug out of pocket. I deal with dozens of different insurance formularies. Some insurance companies permit a computer interface with physicians’ electronic medical record so that physicians can tell right away if a medication that they are prescribing is on that insurance company’s formulary and then pick another drug from that same class if it isn’t. But many insurance companies do not permit an interface with the physician EMR. Although the physician can go to the internet and look up a formulary, most of these on-line formularies are not very user friendly and often require the physician to scroll through pages and pages of a PDF file to hunt for a drug that would be covered – this can take the physician 5-10 minutes to determine which drug is or is not covered. If a non-formulary drug is prescribed, the physician will usually get a letter in the mail that the prescribed drug is not on the insurance company’s formulary. The problem is that those letters do not tell the physician what drug in the same class is covered so the physician either has to spend time on the internet trying to determine what is covered or continue to randomly prescribe medications in that drug category until they hit on one that is covered. Furthermore, the insurance companies change their drug formularies every January and a drug that is covered one year will often not be covered the next year resulting in a flurry of denial letters being sent to physician offices all over the country every January.

Prior authorizations and denials are a great business model for insurance companies, radiology benefit management companies, and pharmacy benefit management companies. By creating a barrier to approving expensive tests such as CT scans and MRIs, they can reduce the number of these expensive tests that are actually done. By denying medications that are not on their insurance formulary, they can reduce the number of prescriptions that are filled.

The sad part of prior authorizations and denials is that most of the time, the physician can eventually successfully appeal the denial of a test or a prescribed medication, as long as the physician is persistent and dedicates the time necessary for the appeal. The net result is that these denials and prior authorizations create an enormous cost to physician practices with no real benefit to the patient. As a consequence, the American prior insurance authorization and denial system is a major contributor to the U.S. having the most expensive healthcare in the world but still lagging other countries in quality of healthcare.

A 2018 report from Harvard concluded “Physician burnout is a public health crisis that urgently demands action by health care institutions, governing bodies, and regulatory authorities. If left unaddressed, the worsening crisis threatens to undermine the very provision of care, as well as eroding the mental health of physicians across the country.” Some of the primary drivers of burnout is burdensome administrative requirements, excessive bureaucratic requirements, and consequences of electronic medical records. Insurance denials and prior authorizations fit squarely into these drivers of burnout.

Ironically, the payers that generally pose the least denials and prior authorizations are Medicare and Medicaid. I am generally a strong proponent of free market economic systems but in this case, the American health insurance free market has resulted in a broken system that is increasing healthcare costs to Americans and contributing to physician burnout.

January 25, 2020

Inpatient Practice Medical Economics

The Confusion About Medicare’s Two 3-Day Rules

Recently, one of our primary care physicians was telling me about one of his patients, an 85 year-old woman who had a knee replacement at a different hospital here in Columbus. She was in the hospital for 4 days after her surgery but was very slow to recover and was determined to be unsafe for discharge home without additional rehabilitation so she was discharged to a SNF (subacute nursing facility). She spent a week getting rehab at the SNF and then returned home only to find that she had a bill for the entire stay the nursing facility; Medicare covered none of it. She paid her bills but in doing so, wiped out most of her savings.

 She was a victim of the Medicare 3-day rule.

The 3-day rule is Medicare’s requirement that a patient has to be admitted to the hospital for at least 3 days in order for Medicare to cover the cost of a SNF after the hospitalization. If the patient is admitted for less than 3 days, then the patient pays the cost of the SNF and Medicare pays nothing. So, if this patient was in the hospital for 4 days, why didn’t Medicare cover the cost of the SNF?

It all has to do with when the inpatient stay clock starts and that has nothing to do with when the patient first comes into the hospital for a surgery or a medical condition. It solely depends on when the attending physician entered an order for that patient to be in “inpatient status” as opposed to “observation status”. Medicare considers a patient to be in inpatient status if that patient is anticipated to need to be in the hospital for 2 midnights and in observation status if the patient is anticipated to be in the hospital for less than 2 midnights. Observation status was originally intended to be used to observe the patient to determine whether the patient is sick enough to warrant being admitted to the hospital.

But observation status has evolved into a monster that no longer resembles its original intended form. It no longer matters whether or not the patient needs to be in the hospital, it is now interpreted as the duration of that hospitalization – less than 2 midnights and you are an outpatient and more than 2 midnights you are an inpatient, no matter how sick you really are.

The problem that physicians face is that it is often difficult to predict how long a patient will need to be in the hospital when they first show up in the emergency department for their acute medical illness or in the operating room for their elective surgery. That is why observation status was invented in the first place. However, when it comes to covering the cost of a SNF, since Medicare only counts those hospital days after the physician decides that the patient really does need to be an inpatient. Many patients end up having to pay the cost of the SNF if they spend fewer than 3 midnights after that inpatient order was written, even if they additionally spent several days in the hospital under observation status. Medicare will not count those observation days towards the 3 inpatient days necessary to qualify for a SNF.

Part of the confusion is that even though Medicare won’t count those initial observation status days toward the SNF days, Medicare will pay for the observation status days just like they were inpatient days when it comes to the initial hospitalization. That is because for the purposes of hospital payment, Medicare will pay for up to 3 days in the hospital prior to when an inpatient admission order was placed. In other words, Medicare uses a different 3-day rule in defining inpatient hospital coverage as opposed to defining inpatient qualifying days for SNF coverage.

If a patient is in inpatient status, then Medicare part A covers the entire hospitalization plus all of the medications administered during the hospitalization. However, if a patient is in observation status, then the hospital stay is not covered by Medicare part A but instead is covered by Medicare part B which requires the patient to pay a 20% co-pay for all of the charges plus pay for any medications administered during the hospitalization. Lets take some examples to see how this works for a patient admitted through the emergency department with pneumonia:

  1. A patient comes to the emergency department with pneumonia and the physician writes an order for inpatient status when first coming into the hospital. The patient stays in the hospital for 5 days (all 5 in inpatient status) and gets discharged to a SNF.
    • Medicare part A pays for the entire hospital stay plus any related outpatient charges for the 3 days prior to the inpatient order being written (i.e., the ER visit)
    • The patient has no hospital co-pay
    • Medicare part A pays for the SNF
  2. A patient comes to the emergency department with fever and cough but the physician is not sure if it is pneumonia at first so the physician writes an order for the patient to be in observation status when first coming into the hospital. Two days later, the physician determines that it really is pneumonia and changes the order from observation status to inpatient status. The patient stays in the hospital for 5 days in total (3 days in inpatient status) and gets discharged to a SNF.
    • Medicare part A pays for the entire hospital stay plus the ER visit and the 2 days in observation status.
    • The patient has no co-pay for the hospitalization
    • Medicare part A pays for the SNF
  3. A patient comes to the emergency department with fever and cough but the physician is not sure if it is pneumonia at first so the physician writes an order for the patient to be in observation status when first coming into the hospital. The physician later determines that the patient has pneumonia but does not change the order from observation status to inpatient status until 4 days later. The patient stays in the hospital for 5 days in total (1 day in inpatient status) and gets discharged to a SNF.
    • Medicare part A pays for the last 3 of the 4 days the patient was in observation status plus the day that the patient was in inpatient status.
    • Medicare part B pays pays 80% of the first of the 4 days the patient was in observation status and 80% of the ER visit.
    • The patient pays for 20% of all of the hospital charges for the first observation status day and 20% of the ER visit
    • The patient pays for all of the medication charges for the ER visit and the first hospital observation status day
    • The patient pays for the SNF (Medicare will not cover the SNF since there were fewer than 3 inpatient days)
  4. A patient comes to the emergency department with fever and cough but the physician is not sure if it is pneumonia at first so the physician writes an order for the patient to be in observation status when first coming into the hospital. The physician later determines that the patient has pneumonia but forgets to change the observation status order to an inpatient status order. The patient stays in the hospital for 5 days in total (all in observation status).
    • Medicare part B pays for 80% of the entire hospital stay plus the ER visit.
    • The patient pays 20% of the entire hospital charges plus 20% of the ER visit charge
    • The patient pays for all medications received in the ER and during the hospitalization.
    • The patient pays for the SNF (Medicare will not cover the SNF since there were fewer than 3 inpatient days)

Next, let’s see how Medicare applies the 3-day rule for an elective knee replacement surgery:

  1. A patient comes into the hospital for knee replacement. The patient has no significant co-morbid medical conditions.  The surgeon writes an order for the patient to be in observation status at the time of the surgery. The patient spends 1 night in the hospital and is discharged home the next day.
    • Medicare part A pays for nothing
    • Medicare part B pays for 80% of the surgery and hospital charges
    • The patient pays 20% of the surgery and hospital charges
    • The patent pays for all medications received in the hospital
  2. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure so the surgeon anticipates that the patient will need to stay in the hospital for more than 2 midnights after the surgery to care for the medical conditions. The surgeon writes an order for the patient to be in inpatient status at the time of the surgery. The patient spends 4 nights in the hospital and is discharged home.
    • Medicare part A pays for the entire surgery and hospital stay
    • The patient pays nothing
  3. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure so the surgeon anticipates that the patient will need to stay in the hospital for more than 2 midnights after the surgery to attend to the medical conditions. The surgeon writes an order for the patient to be in inpatient status at the time of the surgery. The patient spends 4 nights in the hospital but still need more rehabilitation so the patient is discharged to a SNF.
    • Medicare part A covers the entire surgery and hospital stay
    • The patient pays nothing
    • Medicare pays for the SNF
  4. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure but the surgeon thinks that the patient will only require one night in the hospital post-operatively. The surgeon writes an order for the patient to be in observation status at the time of the surgery. After 2 days, the surgeon changes the order to inpatient status. The patient spends 4 nights in the hospital and is discharged home.
    • Medicare part A pays for the entire surgery and hospital stay
    • The patient pays nothing
  5. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure but the surgeon thinks that the patient will only require one night in the hospital post-operatively. The surgeon writes an order for the patient to be in observation status at the time of the surgery. After 2 days, the surgeon changes the order to inpatient status. The patient spends 4 nights in the hospital but still need more rehabilitation so the patient is discharged to a SNF.
    • Medicare part A pays for the entire surgery and hospital stay
    • The patient pays nothing for the surgery and hospital stay
    • The patient pays for the SNF (Medicare will not pay for the SNF)

Confused? You are not alone. It is because Medicare actually has two 3-day rules and they work totally differently. When an observation status order is changed to an inpatient status order, Medicare will consider the 3 days prior to the inpatient order being written as being inpatient for the purposes of covering hospital charges. However, for SNF coverage decisions, Medicare will not count the 3 days prior to the inpatient order toward the 3 inpatient days that Medicare requires in order for Medicare to pay for SNF charges.

Medicare’s coverage rules are byzantine and indecipherable for the average patient. Even physicians often do not fully understand the nuances of the two 3-day rules. But if you want to make a patient unhappy with their hospital stay and with their surgeon, there is no better way than to slap that patient with an unexpected $20,000 co-pay and SNF charge after their elective knee surgery. It is incumbent on all physicians to get the inpatient status order correct as early in the hospitalization as possible to ensure that Medicare appropriately covers inpatient charges and SNF charges. If there is any chance that the patient will need to go to a SNF after hospitalization for a medical illness or a surgery, then the initial order should always be for inpatient status and not observation status.

July 13, 2019