Educational workshop presented by WealthTrust-Arizona and world-renowned guest Robert K. Smoldt, Chief Administrative Officer Emeritus at Mayo Clinic and Associate Director of Healthcare Delivery & Policy Programs at Arizona State University. Mr. Smoldt has been involved in health care administration for more than 30 years and is currently pursuing U.S. health reform in close partnership with Mayo Clinic’s Emeritus President and CEO. At this workshop Robert examines a number of general statements that are, in his view, fallacious.

1. General Fallacies About Improving U.S. Healthcare

2. Robert K. Smoldt Associate Director, ASU Healthcare Delivery and Policy Program Emeritus CAO, Mayo Clinic Wealth Trust Scottsdale, Arizona October 12-13, 2011

3. Three general aims for all health systems Some of the claims for meeting these three aims don’t meet the Smoldt common sense test

4. Fallacy 1: If physicians didn’t make so much money, the health cost problem would be gone

5. Source: nytimes.com; Laugesen and Glied, “Higher Fees Paid…….”, Health Affairs 30. No 9 (2011) 1647 -1656.

6. Average orthopedic surgeon pre-tax earnings (2008) Source: Laugesen and Glied, “Higher Fees Paid…….”, Health Affairs 30. No 9 (2011) 1647 -1656.

7. Are U.S. primary care doctors underpaid? Source: Laugesen and Glied, “Higher Fees Paid…….”, Health Affairs 30. No 9 (2011) 1647 -1656.

8. Average primary care pre-tax earnings (2008) Source: Laugesen and Glied, “Higher Fees Paid…….”, Health Affairs 30. No 9 (2011) 1647 -1656.

9. Specialist compensation vs. GDP per capita (2004) US$ ’000s Source: U.S. Health Care Spending: Comparison with Other OECD Countries, CRS report for Congress, 2007 GDP per capita Specialist compensation 20%

11. Components of U.S. health spending (2008) Source: http://www.kaiseredu.org/Issue-Modules/US-Health-Care-Costs/Background-Brief.aspx?referrer=search Physician services

13. Fallacy 2: If we just put in price controls and lowered the price we paid providers, the U.S. healthcare cost problem would be solved

14. “ It’s the price, stupid” by Gerald F. Andersen, et. al. Source: http://content.healthaffairs.org/content/22/3/89.full.pdf

15. Total Cost = Price Per Unit of Service X Use Rate of Services

16. Let’s examine each component individually Total Cost = Price x Use Rate

18. *Payment ij = Payment for service “i” (e.g., chest X-ray) in geographic area “j” (e.g., Danville, PA) Source: “Part B News: A Plain English Guide” The formulas to determine what Medicare pays for physician services are complex Payment ij = RVUi 1  [(GPCIw j x w i %) + (GPCIoh j  oh i %) + (GPCIm j  m i %)]  CF Payment ij = Payment for service “i” (e.g., chest X-ray) in geographic area “j” (e.g., Danville, PA) CF = conversion factor CF 08 = -10.1% CF 08 = CY 08  MEI 08  UAF 08  0.33 UAF 08 = Target 07 – Actual 07 Actual 07  0.75 + Target 4/96-12/07 – Actual 4/96-12/07 Actual 07  (1 + SGR 08 )

19. Total prices set* What was one reason we started this formula approach in the mid-1980s? Primary care underpaid 1,418,656 *21,026 line items and 1-449 geographic areas Medicare Part B prices

20. The complexity of price controls “ No matter how simply you begin, your controls will get more complex and voluminous. We started with…3 ½ pages of regulations and ended with 1,534. In an effort to correct one inequity, you create another.” C. Jackson Grayson Jr. Chair, U.S. Price Commission (1971-1973 ) Source: Wall Street Journal, 29 Mar 1993 Hospital cost reports for Mayo Clinic, Rochester hospitals for a single year

22. So Medicare price controls have added complexity. But has it also led to a lower rate of cost growth than rest of healthcare?

24. Despite the complex price-setting efforts, Medicare excess cost growth has outpaced that of the non-Medicare population Excess cost growth* (percentage points) *Excess cost growth refers to the number of percentage points by which the growth of spending on Medicare, Medicaid, or health care generally (per beneficiary or per capita) exceeded the growth of nominal gross domestic product (per capita) Source: Peter Orszag, “New Ideas About Human Behavior in Economics and Medicine”, Eighth Annual Marshall J. Seidman Lecture, Harvard Medical School, 2008

25. There is some evidence that private insurers are better at controlling costs than public payors

26. GDP per capita (nominal) Healthcare expenditures per capita (PPP$) Change in growth Growth in healthcare expenditures vs. GDP in the United States (1990-2009) Source: OECD, 2011 Everyone wants healthcare costs to grow in line with GDP; this has already happened during the HMO era Managed Care

27. Commercial payors have shown more success at managing healthcare spend and utilization Total spend per enrollee Medicare ratio McAllen to El Paso Commercial ratio* McAllen to El Paso 0.93 0.84 1.86 1.31 Indicator *Blue Cross and Blue Shield of Texas **Per 1,000 enrollees; Medicare ratio calculated based on hospital discharges in the last 2 yrs of life Source: Franzini et al.: “McAllen And El Paso Revisited: Medicare Variations Not Always Reflected In The Under-Sixty-Five Population”, Health Affairs , 2010; Dartmouth Atlas of Healthcare, 2007 Inpatient utilization** Outpatient spend per enrollee 0.69 1.32 Inpatient spend per enrollee 1.10 1.63

28. Why don’t price controls work in healthcare? The same reason they don’t work elsewhere in the economy

29. Price controls: Grayson’s maxim “ Add (price) controls and you will see ‘new’ services appear. Expect ‘unbundling’ of services with the price of individual units, when added together, totaling more than the original services.” C. Jackson Grayson Jr. Chair, U.S. Price Commission (1971-1973) Source: Wall Street Journal, 29 Mar 1993

30. The Medicare price control cycle

31. Price controls do not lead to lower total spending Source: Letter to Medicare Payment Advisory Commission from Herb B. Kuhn, Director, Center for Medicare Management, CMS 4/7/06 as referenced by Dr. Stuart Guterman, The Commonwealth Fund Annual % change SGR-related expenditures/ fee-for-service beneficiary Physician fees 7.4 3.4 7.4 -0.7 -2 -1 0 1 2 3 4 5 6 7 8 1997-2001 2001-2005

32. *2007 data Source: The Commonwealth Fund, Multinational Comparisons of Health Systems Data, 2010 MRI scan and imaging fees (2009) Dollars Medicare already pays 40% less for imaging than Canada and additional rate cuts have been proposed

33. Healthcare reform reliance on across the board reductions in Medicare payments has severe implications for providers and patients "... the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be LESS THAN HALF of their level under the prior law. Medicare prices would be considerably below the current levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result." Source: Annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2011

34. Problem with present Medicare line item price control approach “ The secret is not, however, to re-jigger 10,000 prices in 3,000 counties so that we get them ‘right’ once and for all (until medical knowledge or technology or input prices change again).” Dr. Len M. Nichols (New America Foundation) testimony to U.S. Committee of the Budget, June 26, 2007 “ The secret is to pay for what we want – health – … while bundling ever-larger sets of services into one payment, which frees clinicians and providers to find the most efficient way to deliver health, given our particular circumstances.”

35. Medicare is committing significant effort to price paid per unit of service, when use rate is actually the more important variable The use rate is the direct function of the medical practice style in the delivery system

36. Let’s examine each component individually Total Cost = Price x Use Rate

39. Dr. Elliott Fisher et al., Conclusion on quality and cost: “ Efforts to improve the quality and cost of U.S. health care have focused largely on fostering adherence to evidence-based guidelines, ignoring the role of clinical judgment in more discretionary settings. … Clinical judgment, not clinical guidelines, should be the focus of policy efforts to improve the quality of care and address disparities in spending.” Source: Health Affairs, May/June 2008

40. Case study: Elyria, Ohio Percutaneous Coronary Interventions, HRR (2007) Rate per 1000 enrollees Source: Dartmouth Atlas of Health Care Baltimore, MD 12.4 Cleveland, OH 11.2 Houston, TX 10.1 Rochester, MN 8.0 Boston, MA 7.0 Elyria 26.8 Locations of top 5 U.S. News Best Hospitals: Heart & Heart Surgery 1 11 21 31

42. When attempting health cost containment, remember why robbers rob banks

43. The high concentration of healthcare costs Source: “Health Care Costs: A Primer”, Kaiser Family Foundation, 2009 100% 100% 20% 80% 10% 64% % Total population % Total healthcare spending 1% 20% 80%

45. Fallacy 3: The U.S. needs more physicians to improve access to care

46. U.S. has a similar supply of physicians Physicians per 1,000 population (2009)* *For US and UK data refer to practicing physicians, defined as those providing care directly to patients; For Canada data refer to professionally active physicians, including practicing physicians plus other physicians working in the health sector as managers, educators, researchers, etc. (adding another 5-10% of doctors) Source: OECD Health Data, 2011

47. Canada and UK have more generalists and fewer specialists than U.S. Density per 1,000 population (2009)* *Primary care includes: General practice, general pediatrics, obstetrics and gynecology; Specialist care includes: Psychiatry, medical group of specialties, surgical group of specialties, other Source: OECD Health data, 2011

48. Trade offs – fewer specialists in other countries part of longer waits there Percent of population waiting for specified periods for care (2010) Source: 2010 Commonwealth Fund International Health Policy Survey in Eleven Countries 21 UK 25 Canada 19 UK 41 Canada 7 U.S. 9 U.S. Wait ≥4 months for elective surgery Wait >1 month for specialist appointment 0 10 20 30 40 50 60

54. Healthcare is a minor determinant of the overall health of the population Source: McGinnis et al: “The Case For More Active Policy Attention To Health Promotion”, Health Affairs , Mar-Apr 2002 40% Behavior 10% Health Care 15% Social circumstance 5% Environmental exposures

55. Life expectancy in the U.S. varies widely Source: OECD Factbook 2010: Economic, Environmental and Social Statistics; statehealthfacts.org Life expectancy at birth, OECD countries vs. best and worst US states (2005) Years OECD average U.S. average Top 10 OECD Bottom 10 OECD

57. U.S. health system has some of the best and some of worst mortality outcomes in the world Mortality amenable to healthcare: Deaths before age 75 that are potentially preventable with timely and appropriate medical care (International data 2002-2003, State data 2004-2005) Deaths per 100,000 population U.S. Top 5 states Minnesota Bottom 5 states *Top 5 states: MN, UT, VT, CO, NE; Bottom 5 states: LA, MS, AR, TN, AL; excludes District of Columbia data Sources: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2009; Nolte and McKee: “Measuring The Health Of Nations: Updating An Earlier Analysis”, Health Affairs , Jan-Feb 2008

66. ICU results: Mortality 30 25 20 15 5 0 Jan 02 Feb 03 Mar 04 Apr 05 May 06 Jun 07 Jul 08 10 Hospital Mortality (01-01-02 to 01-31-09) Percent Least squares fit

67. ICU results: Use rate Length of stay (01-01-02 to 01-31-09) Days 6 5 4 3 2 1 Jan 02 Feb 03 Mar 04 Apr 05 May 06 Jun 07 Jul 08 Least squares fit

68. Banner Health pre and post iCare ICU Measure ICU days ICU mortality Risk adjusted result -31% -30%

71. Huge system variability in healthcare resource utilization *Based on Inpatient days and Inpatient physician visits among chronically ill Medicare beneficiaries; excludes District of Columbia data Source: Commonwealth Fund State scorecard, 2009 Hospital care intensity index, last two years of life (2009)* States All states median Bottom 5 states Top 5 states Rate Ratio to benchmark (Top 5 states average) 0.556 0.949 1.289 Benchmark 1.7 2.3

72. Even teaching hospitals show wide variability in outcomes and utilization *COTH = Council of Teaching Hospitals and Health Systems; n = 269 COTH member facilities; excludes COTH member VA and Children’s hospitals; excludes facilities with <50 actual deaths in 2009 Source: https://www.aamc.org/members/coth/ ; MedPar 2009 Best hospital in category Worst hospital in category Teaching hospital average Mortality ratio >1.0 = better than expected LOS ratio >1.0 = better than expected 1.34 0.63 1.01 2.06 0.65 1.02 COTH hospitals*

73. Integrated systems have more efficient resource utilization – as much as 40-50% less: ICU utilization *Rounded Source: Dartmouth Atlas of Health Care Region (HRR) La Crosse, WI Temple, TX Salt Lake City, UT Danville, PA Integrated average United States Miami, FL Los Angeles, CA Integrated systems Days* Ratio to benchmark (integrated average) 1.2 1.5 1.8 2.5 1.7 3.7 10.1 7.5 Benchmark 2.1 5.8 4.3

75. Who can do more to improve U.S. healthcare? Members of Congress or you?

76. Healthcare is a minor determinant of the overall health of the population Source: McGinnis et al: “The Case For More Active Policy Attention To Health Promotion”, Health Affairs , Mar-Apr 2002 40% Behavior 10% Health Care 15% Social circumstance 5% Environmental exposures