The golden brain

In Alphonse Daudet’s Lettres de mon moulin I have found a story that may sound rather bizarre. I shall summarize the story briefly.

golden brain

Once upon a time there was a child who had a golden brain.His parents only discovered this by chance when he injured his head and gold instead of blood flowed out. They then began to look after him carefully and would not let him play with other children for fear of being robbed. When the boy was grown up and wanted to go out into the world, his mother said: “We have done so much for you, we ought to  be able to share your wealth.” Then her son took a large piece of gold out of his brain and gave it to his mother. He lived in great style with a friend who, however, robbed him one night and ran away. After that the man resolved to guard his secret and to go out to work, because his reserves were visibly dwindling. One day he fell in love with a beautiful girl who loved him too, but no more than the beautiful clothes he gave her so lavishly. He married her and was very happy, but after two years she died and he spent the rest of his wealth on her funeral, which had to be splendid. Once, as he was creeping through the streets, weak, poor, and unhappy, he saw a beautiful little pair of boots that would just have done for his wife. He forgot that she was dead—perhaps because his emptied brain no longer worked—and entered the shop to buy the boots. But in that very moment he fell, and the shopkeeper saw a dead man lying on the ground. Daudet, who was to die from an illness of the spinal cord, wrote below the end of this story:
This story sounds as though it were invented, but it is true from beginning to end. There are people who have to pay for the smallest things in life with their very substance and their spinal cord. That is a constantly recurring pain, and then when they are tired of suffering . . .. Does not mother love belong to the “smallest,” but also indispensable, things in life, for which many people paradoxically have to pay by giving up their living selves?

You’re a mess but I’m o.k., I think?

Several years ago I attended a seminar called the Forum. It had been designed by Werner Erhardt, the inventor of EST. Since then Erhardt has collaborated with Harvard in the creation of a leadership program on integrity for the U.S. military.

The Forum stretched over several days and involved personal testimony by the nearly 300 individuals in attendance. As people approached the microphones, they divided neatly into two groups. Those who recognized they had personal issues deriving from troubled childhoods that spilled over into their adult lives and impaired their ability to function and be happy.

But, there was also a small group who got up and testified that they had idyllic childhoods and few problems. Then the group annealed and a deeper dive into the ocean of life occurred.

Everyone attending the Forum did so for a reason and at the heart of it was a dissatisfaction with where they were in their lives. For some it was unfulfilled development potential; for others it was recovering from setbacks and trauma.

Over the years I have often thought of the Forum experience. Like most of you I have read my fair share of self-help books that ranged from positive thinking to more clinical examinations of the issues. One book in particular is Alice Miller’s “Drama of the Gifted Child”. Alice Miller was a Swiss psychologist who spent a lifetime exploring the issues of narcissism and childhoods that left children poorly equipped.


One of the characteristics of this phenomena is the child who believes they had a great childhood, but upon further examination comes to realize much of their time and energy was in service to the parent’s ego and narcissism. These individuals often spend a large portion of their adult life playing by the rules their parents imparted to them until one of two things happen.

For the adult who has children of their own, they eventually come to realize how destructive excessive egotism and narcissism can be in the development of a child. In families where there are multiple children one of the children will be compliant and another will rebel. A cascade of unintended consequences can emerge. This is particularly true when divorce occurs and leaves the offending parent in charge.

In other cases the person arrives at middle life unfulfilled. Perhaps they obsessed about their career to the exclusion of other things. In some cases they had difficulty forming meaningful relationships. The realization that one’s potential may never be fulfilled or the realization that whatever role they occupy in the hierarchy of organizations can be purchased as a replacement in the open market is a sobering experience.

There is also that person who has satisficed, i.e. rationalized that things have gone pretty well all things considered. They just feel a need to add a few charms onto their bracelet. You know, a husband, baby, BMW, condo at Vail, etc. They have plotted and schemed all their life and are pursuing a turtle and hare competition. Only a major illness, divorce, death or some traumatic event will bring them to their knees and make they realize the folly of their ways. Even then they may see themselves as the victim of a random, one-time event.

The social fabric of modern families is obviously in tatters. Institutions including churches, schools, and employers treat their markets as an extractives industry and are largely mercantile entities. Their failure has placed the parenting of children in relief and front and center.

The plain and simple fact is that upon close examination few families are capable of parenting without contamination of the process from their own childhoods. It is the denial and dismissiveness that places an entire generation at risk.

The most conservative amongst us believe that the family unit is the best way to raise a child. In reality it might be the lesser of two poor choices. The family whose parents chose to work out their own issues first are rare indeed. Many parents view behavioral health as the place to drop their kids off to be fixed, the same way they drop their car off at the dealer to get the oil changed.

I have come to the conclusion that there is no easy fix. Adults simply must get a grip on their own personal issues before they take on parenting. At a high level this obviously includes addiction, narcissism, and character issues. And, it does not suggest that seeing a psychologist is the only way. There are a multitude of self help regimens such as journaling, meditation, reading and seminars that can offer assistance.

In many ways we are left with the advice of the classical philosophers who advised us to understand ourselves first and foremost. That is ironic because it might appear, in and of itself, to be self-centered. But, you have to start somewhere.

The greatest menace to children is the hubris filled adult who believes they had a perfect childhood and can just do a followup act to their own parents. I can almost guarantee that person the peeling the onion will reveal dysfunction galore. After all, if it works so well why are you attending the Forum or reading this blog. For validation?

When George met Henrietta


When Harry Met Sally… is a 1989 American romantic comedy film written by Nora Ephron and directed by Rob Reiner. It stars Billy Crystal as Harry and Meg Ryan as Sally. The story follows the title characters from the time they meet just before sharing a cross-country drive, through twelve years or so of chance encounters in New York City. The film raises the question “Can men and women ever just be friends?” and advances many ideas about relationships that became household concepts, such as those of the “high-maintenance” girlfriend and the “transitional person”

Anyone who has worked with members of the opposite sex knows the relevance of this topic. It is consistently the top reason for people blowing up their lives and leaving a debris field to be swept up by the divorce lawyers.

I have written about the issue. It is like an underground coal fire burning that seemingly cannot be resolved. One experience from my childhood does inform me more than others.


My grandmother Lucille had a younger sister named Henrietta. They had both left the dreariness of the family farm in Rhame, ND and emigrated to Montana. Henrietta married Harry and lived in Anaconda, Montana, home to the copper smelters. Harry was an incurable alcoholic who drank his weekly salary and died early. Henrietta was left to support herself and raise an only child. She opened a hair salon on her front porch and had a television tuned to the daily soaps for the girls to watch and socialize. But times were tough and the only way she could make a go of it was to do the hair on the stiffs at the local funeral home. Physically she resembled a grown up Orphane Annie with died blonde hair and curls. She was a kleptomaniac but my father tolerated her visits by putting locks on the freezers. She was, after all, family and my father’s aunt.

George_1966sheet metal tools

George entered the scene in the 1960s. He was a sheet metal worker who had ventured out to Montana to work on State buildings. His first wife had died of cancer at 54 and it devastated him. He sold everything, gave his three kids their half and headed for Helena, Montana. After the work petered out, George picked Anaconda as the place to retire. It’s a quaint town with small homes and tree lined streets.

George met Henrietta when he blundered into her shop to get his hair cut. She cooked him dinner and the rest is history. They became friends until death overtook them both. Henrietta always introduced George as her cousin. But, we knew all the cousins and he wasn’t a branch or leaf on the tree. My dad and the rest of the family adored George and we tolerated Henrietta.

In the early 1980s, I was in Butte on business. I went over to Anaconda to see George, who I hadn’t seen since college and military service. He took me to the nursing home where Henrietta was bedridden. He went there every day for 12 years. Her son had long ago stopped coming and was estranged from the family.

What struck me as odd was that on every visit George stroked Henrietta’s hair. She didn’t respond to language but purred like a kitten when her hair was stroked. I think it had some erotic overtones from the past. At any rate, George indulged her until the day she died. Upon her death and burial, George packed up and went back to Minnesota where he died and was buried beside his first wife.

As I think back on it, the relationship between Henrietta and George was pure love and friendship. On that visit, George and I finished off a bottle of vodka. He revealed that a day had not gone by that he had not thought of his first wife. He visited her grave twice a year.  Once a year with his children and once a year by himself after solo trips driven through the night.

If Henrietta and George had a sexual relationship my guess is it was the minimal part of their relationship. Perhaps reaching an older age allowed focusing on issues transcending the hardwiring of biology and the desires to procreate.

I am not sure this anecdote allows one to infer beyond the a particular situation. But, it does proves such relationships are possible and can be fulfilling. The conditions for success require two individuals, both of whom are more interested in the other person’s well-being, rather than fueling their ego or narcissm.

Another afterthought. Both Henrietta and George could have dealt with their initial losses by becoming victims and grief-stricken. That’s what most people do.  They often die just a few years beyond the loss of their original partner. But, both of these individuals became child-like. They lived a full 15 years beyond the life expectancy of their peer group. I doubt that it was genetics. It was emotional well-being. And, I doubt if either of their original partners would have wanted to deny them that final happiness.

Me. I just hope that if I end up in a nursing home that there is someone, anyone who will be willing to touch me and administer to my basic needs. If God sends angels to earth, he sent George to Henrietta and vice versa. I think that is as good as it gets.

Technology a tyrant in an era of weak health care management

The recent allegations of mismanagement within the VA are part of a greater pattern within the health care system. All of the health exchanges had major systems problems this past open enrollment period. And, some systems, such as the Colorado Benefits Management System that processes Medicaid applicants, have had problems for years.

Several common threads run through the tapestry of these system problems.

Our lives are now molded and shaped by systems and technology. There is little we can do without enduring the petty tyranny of systems. Th manager at Staples tells me that cash and check transactions are less than10 percent of his sales. It’s all credit or debit card.

Smart phones and tablets are ubiquitous and rule our lives. As users of these systems, it is often apparent that the nurses and doctors somehow figure out how to deliver high quality care in spite of the system.

The problem is often in the appointment scheduling, billing and administrative side of the shop. Administrative costs in the health care system are nearly 40 percent of total costs. And, these costs extend up and down the food chain.

Doctors, hospitals, insurance companies — every major player in the system has significant administrative costs, delays and problems.

You would think that the No. 1 concern of a business is to book a sale and get paid for it. But, during this year’s open enrollment period it took weeks for insurers to be in a position to accept payment.

Part of this problem rests in the evolution of the technology.

Hardware has evolved at a faster rate than software. Vendors leave application development to the open market and concentrate their capital investments on new hardware, operating systems and peripheral devices such as printers.

Hewlett Packard was once the premier manufacturer of medical monitoring devices. Today, they make 80 percent of their profit from the ink sold to keep printers running.

In 1969, Kaiser-Permanente came to Colorado. Against physician opinion, a contract was negotiated with Saint Joseph Hospital to provide inpatient care. At that time the impacts on SJH’s operations were minor but disruptive. So, Sister Mary Andrew brought in industrial engineers to flow-chart a mesh design that sustains to this day. Both Kaiser and Saint Joe’s had to accommodate each other, but the system was well designed.

Little formal design work is done today. User organizations are either coping by trying to milk old systems or they are installing off-the-shelf software that fails to accommodate the human interface.

I am appalled at the pervasive use of outdated operating systems such as Windows XP and legacy software, some of which ran on old AS 400 IBM mainframes in the1980s.

There is denial by management and policymakers as to the extent of the problem. The fix is almost always a request for millions of dollars, often to be dispensed to the same vendors who were the perpetrators of the problems. CBMS uses Deloitte and Connect for Health Colorado uses CGI.

We all somehow know that changing the administrator at the top of organizations will in and of itself not solve the problem. When a building falls down for lack of proper architectural engineering and construction, it’s time to go back to the drawing boards.

Frank Lloyd Wright claimed that you cannot be a great architect without great clients. The development of systems that interface at multiple levels in large scale organizational hierarchies and transcend numerous boundaries are “big-brain” projects. They necessitate involving highly skilled people and using hardened teams of professionals.

Federal Express, Hertz, UPS and organizations that rely on systems to be “force-multipliers” in their business realize this.

Several years ago, the British government and health system suffered a collapse of its systems. It responded by doing a 180-degree turnaround in its approach. It now uses open systems, transparency and internal teams to achieve its ends.

It is not trying to build systems using the low bidder, or even worse, the most politically connected contractor.

We have crossed the Rubicon and it is not a Jeep. It is a divide between an old way of doing business and the demands of the 21st century. We simply must design our way out of this mediocrity.

The use of agile approaches is well known. Leading technology organizations do it all the time. At the crux of the matter is the hollowed out nature of many of our organizations.

We hire managers without a deep or long track record in systems development and turn them into procurement officers.They let out bids to third parties but the shallowness of their skill sets does not allow them to manage the project.

Yes, there are transcendental skills a good manager can deploy. But, if you do not really understand at a deep level what it takes to build a large scale complex system, you will fail.

We send our military officers to war college. We don’t recruit guys and gals in suits to “manage” war. It takes requisite skills that can only be acquired over time through a combination of experience and education. It takes a commitment.

We have arrived at a moment in history where the system determines our success. Without a blending of high tech systems with the high touch human part of organizations we cannot succeed.

In the good old days, we could buy everyone a calculator or personal computer. Departments could kluge together solutions. And IT managers could conspire with IBM to produce bills and statements.

Today, the system is the organization. When it fails, the organization fails. You can force-feed the VA money all day long and you won’t get the job done. And, you can put wounded warriors in charge of the organization because they have stars on their collar and you will also fail.

In the end, this situation reminds me of Arthur Conan Doyle’s saying: “Genius instantly recognizes genius; mediocrity knows nothing higher than itself.”

If the high-level policymakers are a confederacy of dunces, they will continue to put people like Shinseki in charge, when he clearly did not have the skills to run such a system. And, if we do not think strategically about the role of government run health care systems relative to delivery of services by the private sector, we will also fail.

There is a compelling argument to reframe the VA’s problems and possibly voucherize the system like Medicare.

It can’t be any worse.

Relaxing the 50-life mandate

Behind relaxing the 50-employee mandate

By Francis M. Miller

It was Andy Grove, the president of Intel who coined the term, “Only the paranoid survive”. So call me paranoid, but I believe the recent relaxation of the 50-employee mandate has ulterior motives. It revolves around the Exchange’s desires to enroll individuals using the products and systems they have created.

There is little doubt that marketing to groups of any size is a different kettle of fish than the individual market. Individuals can be enrolled using Navigators and spreadsheet software. The group market, on the other hand, requires a consultative selling. The broker must do an assessment of the current situation, define long range requirements and analyze financial alternatives. This is definitely not what the navigators are geared up to do.  Navigators are not licensed; they cannot guide, only talk about plan designs. Individuals prefer not having a broker put the squeeze on them. Employer groups want to be consulted.

The Navigators will, by virtue of their constraints, tend to treat health insurance as a commodity and price will be the prime criteria for selection. If someone can show me how the qualitative nuances and subtleties of a policy can be communicated I might change my mind. My guess is the Exchange will be a cross between a flea market and a psychic fair.

The group market is different. A bell shaped curve of this market suggests groups with less than 10 lives dominate the market. But, certain segments such as restaurants, hotel and retail do have group sizes that can be far higher and they tend not to offer insurance. Some, such as Starbucks have traditionally offered insurance. But, others tend to skirt the issue by keeping their workforce temporary and below 30 hours a week. I believe many large big box retailers such as Wal-Mart are moving rapidly to liquefy much of their work force and make it part time.

So, how will this work? The individual mandate is not being relaxed. If an employee, part-time or non-qualified can’t get insurance at work, then he or she must buy it through the Exchange to get the subsidy. And, many employer’s plans are high deductible and have skeletal benefits, so they do not meet federal requirements. Many employees do not enroll in their employer’s health plan.

There is little doubt in my mind that the Exchange would be more than happy to have everyone buy their insurance in the individual market. Serving the group market would have to be done by brokers and consultants and the Exchange is not a friendly place.

The Insurance Industry itself has mixed feelings about all this. Some large companies have historically done very little in the individual market, except in the Medicare supplement and Medicare Advantage segments. They are tip-toeing into the individual market and are smug in their beliefs that they can retain their larger groups. If the individual market shows itself to be a profitable market,  the insurers will use the internet and call centers to sell the product through the Exchange. The mandates and subsidies may create economic deadweight loss for society but they are music to the ears of insurers.

We need to remember that insurance brokers get paid a high percentage commission on the initial sale. That commission can be 50%. But, the real value to being in insurance are the residuals paid for subsequent years that the policy is retained by the customer. This makes marketing the largest component of insurer administrative costs, right up there along with claims costs. Eliminating these commissions by the use of Navigators who are unlicensed is a major way for insurers to reduce their administrative costs and meet the new 85% medical loss ratio criteria set by the feds.

Pundits have been commenting on this mega-trend created by ObamaCare. In March, 2012,  Deloitte Touche’s Michael Raynor and Clayton Christensen wrote a piece entitled “Power to the People” in which they hypothesized the emergence of a robust individual market would be a major disruption to the health care market. It is well worth reading.

Those who seek to socialize risk are doing so in a variety of ways. Taxing the healthy and the young to pay the premiums of the old, poor and sick is age-old. A major percentage of income taxes at the federal and state level are channeled into paying the costs of Medicare, Medicaid, and Veterans. Now, the individual market will result in even more general fund dollars going to pay subsidies. The mandates will force an intergenerational transfer between young, healthy people and older, sicker people through the community-rated risk pool.

Historically, the best way to escape this community-rated “socialization process” was for an employer to remove his employee population and either do an alternative funding or self-insurance scheme. Under ERISA, a self-insured employer can design its own plan and the State of Colorado cannot interfere. These plans by and large transcend ObamaCare’s rules. This escape-out-the-back-door has been a safety release valve for a health care system experiencing cost shifting, mandated benefits and a drift towards socialization. It is the healthy groups that bail out. Now, the Exchange desperately needs those healthy individuals to keep premiums lower in the Individual market. If the healthy groups or individuals bail out for whatever reason, the pool’s health experience will deteriorate and premiums will eventually rise, creating a vicious cycle.

Most new jobs are being created by small groups. The larger groups have already escaped and are out of reach of ObamaCare. It is the middle ground, the under-100-life groups who represent the green grass on the other side of the fence for the Exchange. Should these employers abandon their plans and let their employees buy on the Exchange, so much the better. In my mind there is a fair chance that the 50- life mandate will NEVER be imposed. By the time the feds revisit the issue, those lives will be securely enrolled in Exchange-offered products and they will be receiving their subsidies. They won’t be as motivated by a day-late, dollar-short plan their employer puts together. And, if the employer can’t get a high percentage of his employees to enroll he may just scrap the whole idea.

This is just the tip of the iceberg on this matter.

A healthcare conspiracy theory

When Mad Magazine was still being published one of my favorite cartoons was Spy vs Spy. It was symbolic of a time when each nation had a spy trying to sabotage the other spy’s diabolical activities. I believe such a covert action has been secretly playing itself out in health care.


When the Affordable Care Act was enacted I read the law and came away stunned. It was remarkably well written. Way too well written to have been crafted by politicians.  No, they simply could not have written that bill!  Now, on the eve of the 2014 implementation I am even more convinced it was really done by outside third parties. The problem is that even K-Street lobbyists tend to be puppets-on-a-string. I have long wanted to know who was puppet-master, and now I think I know. The clues have led to William “Bill” Frist, a conservative Republican and a past Majority Leader of the U.S. Senate.

You might remember Bill Frist as the heart surgeon-turned-Senator. He is also the CEO of Nashville, Tennessee-based Hospital Corporation of America(HCA), and the son of its founder. HCA does business in Colorado as HealthOne.

It is my belief that Senator Frist, more than any single individual has been responsible for the failure of conservatives to ever achieve health reform. And, I believe he is the spiritual leader behind the Affordable Care Act. Mitt Romney had a part but he played second fiddle. Between these two supposed conservatives, they handed the American health care system over to the socialists on a silver platter.

We all have to remember that during the Bush years conservative Republicans controlled the three branches of government. They cut taxes and took us to war, twice. Why was nothing done in health care?

By the 1990s, the cumulative effects of public policy legislation in the 1970s and 1980s conspired to create a perfect storm in the financing and payment of health care. First, there was a wholesale acquisition of non-profit community hospitals in Colorado and across the country by holding companies such as HCA. Second, insurance companies and large self-insured plans and their TPAs scrambled as public entitlement programs negotiated fixed fee schedules and cost shifting began in earnest. This all led to healthy groups abandoning the old system in favor of self-insurance. Not buying insurance is a form of self-insurance for healthy individuals. Cost shifting caused different segments of the system to inflate disproportionately, accelerating the out-migration of healthy individuals and groups from the system. This left insurers like Blue Cross and the for-profit, high-cost hospitals gasping. For the past two decades they have desperately been trying to figure out how to get back in the game.

It is probably mere coincidence that Bill Frist was in the midst of a workout and turn-around of HCA when he entered politics. Even more bizarre–this all came at the same time when HCA (HealthOne) was  negotiating the largest fraud settlement ($2 billion) in U.S. history for overbilling Medicare.

It is now ironic that those segments of the health industry most grieving the loss of cost-based reimbursement and bemoaning the shift towards managed care found their first hope of salvation in Medicare Advantage HMO plans. By tightly integrating the insurance product using contractual relationships with providers this new hybrid approach between provider and insurer once again made health care profitable.

I now predict old fashioned managed care is being relabeled “accountable care”. But, it’s the highly integrated, contractual, and sometimes, ownership ties between provider and insurer that will serve as the alpha model for implementation of ObamaCare.

The social contract between the insurance/provider health complex and government is symbiotic. When markets fail, whether it is supply, demand or financial intermediary-induced, society turns to government to solve the problem. And, because government basically works best when it plays the role of purchasing agent or contract officer it routinely turns to institutional actors to do its bidding under contract. It no longer matters whether the U.S.  is waging war or gathering national security data. It is habitually farmed out to third party contractors who answer to bureaucrats.

The unstated quid pro quo is “you (government) pay us outrageous amounts and, mandate everyone buy the product and we(the insurer) will corral the providers in our networks. Once the gate is closed, we can impose price controls and utilization controls that would cause rebellion if government did it directly. Better to do the dirty work by proxy.

Who needs the freedoms of conventional market disciplines that are subtle and nuanced, when government can forcibly institute the carrot and stick approach of tax subsidies and penalties?  Why engage in surgery when a club will get the job done twice as fast? So what if it introduces trauma?

This has unknowingly led to a perverse form of adverse selection that is cannibalizing traditional insurance the way self-insurance gutted the risk pool twenty years ago.  People who are low utilizers and who wish to avoid paying premiums and deductibles will migrate to the new managed care offerings. This will cause premiums to rise even faster in the older, more established groups, causing more migration in the next round of enrollment. Eventually, though, you can run but you can’t hide and the only solution is a community-rated risk pool that completely socializes risk and justifies the conversion to a single payer system administered by the same wardens currently building exchanges and the cooperatives.

Look at the specific example of the Health Exchanges. They seek to offer the consumer low cost premiums and deductibles and a smorgasbord of benefits such as free wellness. To keep copays reasonable requires something happen in the shadows.  First, it is absolutely necessary to have large numbers of healthy people buying insurance that they will seldom use.  To get people who would otherwise self-insure to buy-in, government has to give tax credits and subsidies. And, that necessitates the consumer buy “approved” and “certified” insurance through the Exchange, not in the open market. The Exchange’s Board of Directors is comprised of the same select group which promotes managed, accountable care.  Small insurance carriers who might actually innovate the market are kept out. Eventually a “Law of Lemons” effect will take place.

While ObamaCare was being crafted, I believe Bill Frist and Mitt Romney and their confederacy of operatives from Nashville threw the American public under the proverbial bus to further their private equity interests. They had already donned sheep’s clothing and infiltrated government. They ended up making conservatives the laughing stock. The Republican Party has failed, not because of its treatment of illegal immigration but largely because of an inability to reform health care and education when they had the chance.  It is now a market controlled by oligarchs. You and I are mere wage slaves.

From now on, the health care you and I receive will be determined by some for-profit hospital or insurance company’s goal seeking financial model. Your doctor is no longer your loyal agent. You have a new Navigator who works for the Exchange. The provider’s contract is not with you but with the accountable care organization. They will arrange hospital financing and pay back the physician’s school loans. Health care has become an extractives industry lacking any sense of morality. Beware, the most dangerous people you encounter from this point forward are those who believe their own hype.

Financial problems at Denver Health: déjà vu all over again


The recent reports that Denver Health & Hospitals is financially stressed reminds me of an underground coal fire that seemingly burns on forever. When Frederico Pena was elected Mayor of Denver in 1983 he commissioned a Citizen Committee to study issues swirling around a troubled Denver General Hospital. Back then, as today, the City hospital along with University Hospital are the primary providers for indigents and the working poor.

As the citizen committee began to peel the onion on the city hospital situation, a lot was also happening at the federal level. Ronald Reagan had been elected president and the U.S. Congress passed the Omnibus Reconciliation Act of 1983. This act  allowed commercial insurance and public entitlement programs to switch from cost-based reimbursement and impose fixed fees on health providers. This ushered in an era of cost shifting.  ObamaCare hopes to fix the negative consequences of those public policies. In this in-between time, Denver Health is being stressed like never before.

When the Mayoral Committee reviewed Denver’s health system it quickly concluded it was of a very   high quality but financially distressed. By concentrating large numbers of poor, non-paying patients in a city-run hospital, the numbers didn’t work. Initially, some members of the Committee naively toyed with the notion of giving patients vouchers so they could be served by hospitals throughout the community. After all, there was a lot of excess capacity in the health system back then.

After many years of study, we now know hospital economics differ from typical business finances. You might think technology drives health costs. In fact a hospital is far and away labor cost intensive.  If you can staff the hospital exactly to meet demand everything balances out. Trouble is, hospitals are highly specialized. An oncology nurse does not work in the heart unit. The high degree of specialization in labor means that a hospital’s total costs are relatively fixed at a high level, whether there is one patient or 500 in-house. If the hospital could magically be operated at just the right level, its average costs per patient might be reasonable. Of course, that would also mean someone would have to pay the bill. If demand falls off and hospital staff idled, average hospital costs per unit of service jumps dramatically. And, if bad debts also rise because the mix of paying and nonpaying patients changes, big financial troubles develop very quickly. It’s a very tough balancing act.

Over the years, the Colorado Health Data Commission, the 2008 Blue Ribbon Commission, and the Colorado Division of Insurance all studied health costs. What we do know is that there is wide variations between hospital costs. But, premiums for insurance plans vary all over the place. And, there is a huge difference between what Medicare and Medicaid pay and what a self-pay patient is billed. This is due largely to shifting of costs between various categories of payers. Hospital systems are reimbursed below average by government and commercial insurers. They try and shift the difference to self-paying patients, but many of them can’t pay. It’s a health care system whose foundation is built on shifting sands. Large community hospitals usually make it work out by raising their sticker prices into the stratosphere they way  of auto dealers. We all know that nobody really pays that price. But, public institutions like Denver Health and University Hospital have no place to shift costs.

In theory, a typical community hospital should be able to take care of a certain number of patients for the incremental costs they might incur. If the hospital is already making money, what does it really cost to put one more patient in an empty bed? Mere pennies you would think. What happens if everyone who gets checked in is poor and can’t pay? When we concentrating the poor in one or two hospitals, it shatters the economic models. You simply need paying patients to defray the fixed costs.

This reasoning is even more relevant today, because the Colorado Health Exchange knows that to make ObamaCare work  they must get young, healthy people to buy insurance. Only by having a large pool of patients, some healthy and paying their way to balance out sick and poor patients can the system work.

The decision for the City of Denver to operate its own health system is both political and economic. It is political because when markets fail, as has health care, we turn to elected officials to be our loyal agents.  Community hospitals are still resistant to takiing care of poor patients at the marginal, incremental cost. And, insurance companies want to cherry-pick the risk pool.  Most health institutions are now run by either for-profit companies or part of a large system. Modern health care is run using goal-seeking financial models

We have to remember, Medicare and Medicaid were enacted because the markets had failed. It was not taking care of the elderly or the poor. In 1974, when Richard Nixon was President, the ERISA laws enacted allowed large corporations with healthy groups to pull out and self-insure. That destroyed the community-rated risk pool.  Laws enacted over the years created a favorable ecosystem for insured groups which attracts healthy patients. But, it also shattered remaining community-rated risk pool that served small groups and individuals. The lead to enactment of the Affordable Care Act in 2010.

As we move toward the 2014 the implementation of the Affordable Care Act, there will be some unintended consequences. I remain convinced that Denver Health and Hospitals will survive and thrive because it is a high quality institution with an important community mission. From the time when Frederico Pena was Mayor of Denver, it has been run professionally. I still maintain that if you wreck the family Rolls Royce on I-25 you want to be taken to Denver General. And, if you are a homeless person living under a bridge, you can’t find a better place to care for you. It’s a model we should all support.

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The most powerful idea in the world

Against all odds, the first decades of industrialization actually have something useful to say about their long term impact on the World’s climate–though it isn’t what either side in the global warming debate would probably endorse. It certainly doesn’t give much comfort to anyone who thinks humanity can be persuaded to spend any more for power than it has to: America and Europe might have finally so enriched themselves that they can afford to convert to wind, water and solar power, but neither China nor India is likely to choose either over coal costing one-tenth as much. If the history of steam power teaches anything, it is that the lower cost fuel option always wins. Right now, that option is about a trillion tons of easily mined, dirty, carbon-rich coal…..any comprehensive solution is going to have to do one of two things: figure out how to return all that carbon to where it was before humans learned how to exhaust it into the atmosphere–the technical term for putting carbon back is sequestration–or come up with a non-carbon-producing energy system that costs less than coal. Both options put the highest possible premiums on invention.–William Rosen, “The Most Powerful Idea in the World”.


Is Obamacare a case of the Pot calling the Kettle Black

During the past month several reports have been forthcoming regarding the variation of costs in the health care system. In the case of medical providers there is clear evidence of wide differences in costs and utilization both in terms of geographic region and between institutions.  When the Colorado 208 Commission studied the issue it also found that there were great variation between what insurers, government and individuals pay. And, recently, the Colorado Division of Insurance analyzed insurance proposals for the health exchange.  Again, wide variations in insurance premiums are being proposed. Are such differences evidence of profiteering? Or, is this an opportunity for consumers to take advantage of lower price offering.


The fifty year history on this matter is instructive.  Differences in costs at all levels of the health care system have increasingly been noticed as transparency in the health industry improved from computerization.  Jack Wennberg and Phil Caper employed computer-based claims data to compile the Dartmouth Health Atlas. And, Medicare has long used mandatory cost reports to track differences. The Business Coalition and Health Data Commission movement has focused on public reporting of these variations.

Soon after Medicare was enacted in 1965, health inflation became a problem because payment systems at the time reimbursed providers their costs. When ERISA was enacted in 1974, large corporate, union and public sector groups aggressively began to self- insure. This undermined the old community-based risk pools assembled by Blue Cross. The Omnibus Reconciliation Act of 1983 was passed as a solution to the mounting problems. (As an aside:  It is interesting to me that both ERISA (Nixon) and COBRA83 (Reagan) were passed by Republican administrations). The 1983 act ushered in an era of managed care and prospective price fee schedules. And, that brings us to where we are today: Republicans seeking to repeal Obamacare are the pot calling the kettle black.

All in all the set of public policies was well intentioned but it has been a dismal failure in terms of economics. Cost shifting has distorted, warped and tortured the market. We usually rely on the individual self paying patient to wring out the dead weight loss in a system but cash purchasers have  no bargaining power and they have abandoned the insurance market to the point where mandates and subsidies are necessary.  A lack of disciplining force in the health care market is obvious when the 12 leading socialized economies of Europe spend almost half what the U.S.’s competitive market spends. They average 8-10% of GDP and we spend 18%.

Reasons for variation are normally explained by differences in input costs, economies of scale, management prowess and profit-seeking attitudes. We will never eliminate all the differences that exist in human systems. It is a role of government to make sure that disciplined, countervailing forces exist. Gradually, over time, variations are reduced and we achieve the most efficient, high quality system possible.  In the case of health care two forces conspire to sabotage this goal. First, the consumer is by and large disconnected from direct payment of either the premium or the services rendered. Second, our desire to make sure that 100% of the population receives Cadillac care runs counter to market principles whereby the market rations based on the consumer’s ability or willingness to pay. Because of public entitlement programs and employer-tax-advantaged plans, the health care purchase is rendered an abstract transaction largely performed by third parties. Rationing thereby becomes a political act.

The second neutralizing force is the imposition of discounted, fixed fee schedules. This intervention almost always overpays low quality providers and underpays high quality providers. Health providers who are both low cost and high quality are punished by fee schedules imposed by government fiat or the insurance oligarchs. The additional volume and premium pricing that should reward our best providers is denied them. Prices in a natural, functioning market, are signals of quality and efficiency. A monopolized or heavily regulated market will cease to send valid signals and eventually all feedback becomes white noise. No provider is distinguishable from another and quality has to be assumed. Providers with high standards and ethics eventually either create a black market in concierge medicine or exit the market, leaving the consumer subject to the Law of Lemons.

The cumulative effect of health policy decisions since 1965 has rendered health care a brownfield. Sadly, Obamacare does nothing to make it green. There is little economic rationale within it that would hope to flatten the cost curve without the blunt trauma force of price regulation. Worse,  ACA imposes a perverse principle that is one of the cornerstones of socialism. By forcing young, healthy individuals into a risk pool filled with older, sicker patients it becomes a covert act of intergenerational transfer and taxation by another name.

This is all the more tragic because we should be taking deliberate steps to make health care a global export industry. The Planet Earth, soon to be filled with 8 billion people, desperately needs good health care. The U.S. should, by now, have positioned itself to take our advanced technological and educational capabilities and deploy them around the world. Instead, we have been out-foxed by socialist countries who spend half what we spend and they get better results. How do you compete when socialism is more efficient and effective than capitalism? During the eight years that both George Bush and Bill Owens, respectively, controlled national and Colorado state government, exactly nothing was accomplished.

In an ideal world, we would spend no more than 7% of our GDP and 5% of our workforce on domestic health care. To compete against socialized systems we simply must get more bang for the buck. Variations should  narrow over time. Health care organizations need to operate in an ecosystem where they are disciplined to have low administrative costs. Technology should lower costs the way it does in the personal computer market. And, institutions should be scaled to a level where they operate at optimal efficiency. In a virtuous cycle we, in the U.S., would buy consumer goods made in foreign countries. In turn, foreigners would use those dollars to buy the health care we provide.

The stakes of this game are very high. I have news for you. We are not going to reclaim the manufacturing base we have lost to foreign countries. And we are not going to deport the 50 million aliens who have infiltrated our economy. The twin effects of these trends has eliminated wage gains over the past thirty years and destroyed the middle class. An ongoing balance of payments deficit simply cannot continue forever. At best it cannibalizes our wealth and renders us impotent.

The root of this problem stems from two strategic blunders of epic proportions. First, during the past decade policy makers have been vascillating between an embrace of Adam Smith’s conservative and John Maynard Keyne’s liberal economic theories.(More pot calling the kettle black!) The problem is that neither of these two thread-bare concepts represent 21st century thinking.

The second great failure has been to put narrow specialists, cultivated during the industrial revolution, in charge of our society at a time when we desperately need generalists. When specialists attempt to solve complex, systems problems they almost always lack the requisite skills and we end up in the briar patch. Specialists cannot help driving into the future looking out their rear-view mirror. That is why their public policy initiatives are a always a day late and a dollar short. In the end, the kettle and the pot argue over distinctions without a real difference. The situation now seems impossible. We desperately need a finesse option.