By Sy Mukherjee and Clifton Leaf
February 22, 2017

In 2009, the surgeon-journalist extraordinaire Atul Gawande wrote a conversation-changing feature for The New Yorker called “The Cost Conundrum: What a Texas town can teach us about healthcare.” If you haven’t read it, you should. If you’re curious at all about what’s driving runaway healthcare costs today, reading this old Gawande piece will be the best 7,800-word investment you make.

Gawande compared the healthcare expenditures in two southern border towns in the Republic of Texas—McAllen and El Paso—which have nearly identical demographics. Though the health status of their overall populations is roughly the same, McAllen spent far more for healthcare per citizen. Indeed, as Gawande reported, providers in McAllen billed more to Medicare per capita than any other place in the country except Miami. Medicare spent a whopping $15,000 per McAllen enrollee in 2006. In El Paso, by contrast, the government health agency laid out about $7,500 per enrollee that year—or a little under what Medicare paid per capita in the typical American city in 2006 (about $8,000.) In 2010, according to a study done this past April, the figures were $13,648 for McAllen Medicare enrollees versus $8,714 for those in El Paso.

Why the huge difference, you wonder? Well, as Gawande explains: “Compared with patients in El Paso and nationwide, patients in McAllen got more of pretty much everything—more diagnostic testing, more hospital treatment, more surgery, more home care.”

The physicians in McAllen hospitals weren’t bad or necessarily greedy or even wholly conscious of their outlier ordering when it came to medical services. They were simply incentivized to order more, and so they did.

Last week, a follow-up of sorts was published in the New England Journal of Medicine—not by Gawande, but rather by MIT economics professor Amy Finkelstein and three colleagues. The study didn’t get the attention it deserves, in part because it was drowned by the news of the CRISPR patent ruling, and in part perhaps because the authors hid their work under a We-dare-you-not-to-read-this headline: “Adjusting Risk Adjustment—Accounting for Variation in Diagnostic Intensity.” But this, too, is amply worth reading.

In our Rube Goldberg concoction of a national healthcare system, payments from Medicare and other agencies to providers are adjusted based on a complex risk-assessment system that factors in the baseline health status and demographics of the area. The thinking behind this is reasonable: Providers who live in places where there are a lot of older and sicker people shouldn’t be penalized for the effort to properly take care of them. (Here’s Medicare’s 75-page explainer on risk adjustment: Definitely NOT worth reading.)

But like virtually everything that we do in the healthcare realm, it’s (a) excessively complicated, and (b) has unintended consequences. And one of those consequences is that areas where providers have a “proclivity for making diagnoses and recording them,” as Finkelstein and her colleagues put it, end up looking sicker than they are, and therefore get proportionally higher Medicare payments.

The authors have a terrific term for this proclivity: “diagnostic intensity.” And even better is that they took the time and energy to sift through all of Medicare’s 306 “hospital referral regions” in the country and figure out where the distortions are—which is to say, where the risk adjustments are based on actual differences in health status as opposed to differences in, say, diagnostic and prescribing practices. (They also suggest a new adjustment to the adjustment system that, they say, can correct the distortions.)

We’ve long known that when we pay doctors for quantity, not quality, that’s what we get. As Gawande wrote some eight years ago: “Imagine that, instead of paying a contractor to pull a team together and keep them on track, you paid an electrician for every outlet he recommends, a plumber for every faucet, and a carpenter for every cabinet. Would you be surprised if you got a house with a thousand outlets, faucets, and cabinets, at three times the cost you expected, and the whole thing fell apart a couple of years later?”

Somehow, we’re all still living in that weird healthcare house.

Tons of news below from Sy. It’s been a busy day.

Clifton Leaf
@CliftonLeaf
clifton.leaf@fortune.com

DIGITAL HEALTH

HIMSS 2017: VR therapeutics to alleviate pain?  The Healthcare Information and Management Systems Society (HIMSS) 2017 meeting has already produced plenty of newly unveiled partnerships by tech giants like IBM and Samsung, many geared towards making care for large patient populations more effective. But providers are conducting their own intriguing experiments. For instance, Cedars-Sinai has been testing out virtual reality’s potential to improve patients’ hospital experience and reduce pain. The health system’s Director of Health Services Research, Brennan Spiegel, told attendees the hospital’s been testing out the tech to treat everything from anxiety and pain to hypertension. The initial study has been pretty small – but it does suggest that, particularly in older patients who aren’t as used to the idea of VR, it can effectively reduce pain scores more than transmitting similar videos and programs through 2D screens. Cedars-Sinai is also conducting larger stage trials whose results should be available by the end of the year. In other HIMSS-related news, telecom firm Avaya announced a new partnership with electronic medical record software provider Epic Systems to create an appointment reminder system for patients.

Merck, Wayra UK announce Velocity Health digital health winners. Four enterprising digital health projects have been named the winners of Merck and Wayra UK’s Velocity Health program, which accelerates development of promising digital health innovations with a jolt of cash. The two winning initiatives are dubbed Our Path and Quit Genius, and they tackle two of the most common lifestyle-management problems in health care: making sure type 2 diabetes patients stick to a healthy diet, and getting smokers to quit. Like many similar digital health efforts, the two programs will focus on tracking tools and an online support community to help patients achieve their goals. (PharmaTimes)


INDICATIONS

Carl Icahn acquires stake in Bristol-Myers Squibb, fuels takeover speculation. Bristol-Myers Squibb shares spiked as much as 4% yesterday (and are up nearly 3% in early Wednesday trading) after reports emerged that activist investor Carl Icahn has taken a substantial stake in the pharma giant. As with many of Icahn’s investments, the news immediately fueled speculation that Bristol-Myers could be a takeover target. Icahn reportedly is impressed by the company’s pipeline and believes that those experimental treatments, combined with recent setbacks that have sent the drug maker’s stock plunging over the past 12 months, could make for a perfect M&A storm by offering a promising product line for a relatively low price to interested purchasers. (Fortune)

The state of biopharma M&A in 2016. Life sciences market research firm Evaluate’s EP Vantage unit is out with a new analysis of biopharma M&A in 2016. And the numbers represent a bit of a retrenchment from recent years. To be fair, part of that is thanks to a monster 2014, when the average biopharma deal was valued at $827.6 million. That dropped to $684.6 million in 2015 and then to $659.6 million in 2016, according to EP Vantage – but that’s still a far cry from 2012, when the average deal was just $371.3 million. One likely factor driving the trend? A relative drop in megadeals (the two biggest M&As of 2016 were Shire’s $32 billion Baxalta acquisition and Pfizer’s $14 billion buyout of Medivation).

Flu vaccine effectiveness essentially a coin flip this year. In an interim update, the Centers for Disease Control finds that this year’s flu vaccine has been 48% effective (as measured by whether or not it has successfully prevented hospital visits for the flu). That’s more or less in the middle of the range that’s been seen in the past 10 years. One glaring exception? The abysmal 19% efficacy rate from two years ago, when the vaccine stockpile didn’t match up with one of the major influenza strains going around. The CDC also warns that flu season isn’t quite over yet and will last another couple of weeks. 145 million doses of the flu vaccine had been distributed by the beginning of February. (CDC)


THE BIG PICTURE

Same sex marriage legalization may have cut teen suicide attempts. Johns Hopkins researchers suggest that states which legalized same sex marriage prior to the Supreme Court’s landmark 2015 ruling on the issue saw a noticeable decline in teen suicide attempts. In fact, in the 32 states which legalized gay marriage, suicide attempts fell 7%. The effect was even more pronounced (14%) among youths who identify as sexual minorities. By contrast, there was no such dip in the states that did not sanction same sex marriage. While many other factors may be at play in the trend, the researchers suggest that policy makers in other nations should consider the mental health repercussions of marriage equality, which may reduce stigma and bullying among young people. (Fortune)

Testosterone is a mixed bag for aging men. A rash of randomized control trials suggests that testosterone therapy to treat aging-related conditions in men isn’t necessarily effective. For instance, testosterone didn’t lead to memory or cognitive improvements compared with placebo. And when it comes to cardiovascular health, use of testosterone treatment may have actually hurt health through an increase of coronary artery plaque. However, testosterone did show promise when it comes to both anemia and bone health. Bottom line: it’s still unclear that testosterone therapy’s benefits outweigh its risks. “Testosterone misuse will not simply disappear for lack of logic or evidence as none was needed to get it started—rejuvenation fantasies thrive on hope without needing facts—and educational efforts are essential,” wrote Dr. David Handelsman of the University of Sydney and Concord Hospital in Australia in an editorial accompanying the study. (ArsTechnica)

Drug theft is rising at the VA. A new Associated Press analysis of government data finds that drugs are disappearing at an astonishing rate from federal hospitals – especially the ones that care for the nation’s veterans. In fact, drug loss or theft incidents climbed to 2,457 last year. That’s a ten-fold increase compared with 2009. Perhaps unsurprisingly, many of the instances involved addictive medications such as opioids and ADHD treatments. Read the Associated Press’ full report here.


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