Health Care Is Reforming, Just Not in Washington

Business leaders see better value for the dollar before the end of the decade.

As lawmakers in Washington continue their debate over how to modify the U.S. health-insurance market, health-care investors and business leaders around the world need to see past the political drama and run their businesses with a view toward improving value in health care. If they succeed, it will make a bigger difference for the cost and quality of care — globally and for most Americans — than whatever action is taken by Congress.

We’ve just finished a study involving 300 senior health-care executives from leading companies in health-care services, pharmaceuticals, biotechnology and medical devices, along with top investors in the field. And it’s clear that they see big changes in the years ahead, driven largely by pricing pressure across the industry.

The pricing pressures, in turn, are expected to drive innovation. Interestingly, in the coming years, changes in how health-care payments are made are expected to be the most important form of innovation, though scientific breakthroughs will also play a critical role. What’s more, these leaders expect health-care companies to engage in new partnerships and collaborations — including with nontraditional competitors in the technology world, such as Google, IBM, Apple and Fitbit.

Most surprisingly, we found strong expectations that value-based payments for medical care will displace the traditional fee-for-service model, transforming the industry over the next five to ten years. Despite doubts after the recent presidential election that the movement away from fee-for-service would continue, more than half of American executives and four-fifths of American investors who responded to the survey after Nov. 8 said they believe the majority of U.S. health-care payments will be value-based before 2020 — that is, in less than three years, a stunning shift. And the industry still expects the government to lead the way; most respondents said the U.S. Centers for Medicare and Medicaid Services will drive the payment change, though many also see private health insurers playing an important role.

To be sure, there were differences among subsets of the industry. Pharmaceutical and biotech executives, for example, tended to be more skeptical about value-based payments, with more than 70 percent doubting they would prevail before 2020. These leaders clearly had other issues on their minds; they were the most worried about pricing pressure and political risks, especially in the U.S. Almost three-quarters of American pharma and biotech executives listed the “political environment” as one of the top three drivers of drug pricing pressure, for example, whereas only about 40 percent of European pharma/biotech executives did.

And while the 300 respondents broadly agreed that innovation through new health-care payment and delivery models and scientific breakthroughs can be expected in the years ahead, investors more so than executives also pointed to other forces, including improved diagnostics and personalized medicine, and more transparency in health-care pricing and quality.

Industry leaders also expect to see a lot of dynamism in health care. More than 40 percent of executives said new partnerships will help transform health care, including partnerships with tech companies and other nontraditional competitors. In fact, 80 percent of all respondents said nontraditional competitors will change the industry, either through new partnerships or other means.

Here again, people’s views varied depending on their particular business. About 30 percent of respondents in medical devices and health-care services said nontraditional players will transform the industry over the next few years, but only 14 percent of pharma and biotech respondents agreed. More drug and biotech leaders pointed to innovation in key therapeutic areas and scientific breakthroughs. Advances in oncology and central nervous system therapies are most needed medically, they said, and offer the greatest opportunity for innovation and growth. Gene editing, therapeutic vaccines and gene therapy top their list of disruptive technologies.

Against the backdrop of incessant political chatter over repealing and replacing Obamacare, we found an industry poised for dramatic transformation, led by innovation in payment models, science and technology, and supported by new competitors, new partnerships and other strategic transactions.

Our study, in turn, provides guideposts for both government and business leaders on the best path forward in delivering higher-value health care. The money we spend on medicines, for example, should increasingly reflect the higher-value innovations that executives and investors anticipate. And U.S. policymakers must satisfy widespread expectations that they will move toward value-based payments that reflect the benefits of investment in innovation.

Originally published at bloombergview.com on May 15, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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People Lie, But Search Data Tell the Truth

Looking to Google for a revolution in social science.

 

Seth Stephens-Davidowitz, a former research assistant of mine, would not strike most people as a revolutionary. Yet in his new book “Everybody Lies,” he argues persuasively for a mutiny in social science.

The problem should be familiar to anyone who’s followed political polling in the past few years, despite the successful predictions of Emmanuel Macron’s victory in France. Put simply, most people tend to lie on surveys and on social media, too. As a result, when we study people’s responses to surveys or what they say on social media, we come up with a misleading picture.

Rather than disparage surveys and social media posts, Stephens-Davidowitz points to a different way of understanding ourselves. In the ostensible privacy of online searching, he argues, we inadvertently reveal ourselves, and this digital truth serum offers the best way of finding out who we really are.

Examples abound. According to survey data, Americans overall are not particularly racist, and any racism that does exist is more dominant in the South — a view that is often endorsed by the media. Yet online searches reveal a remarkable number of racist inquiries by Americans, and these searches are in no way limited to the South. Indeed, the highest rates for racist searches are found in places such as upstate New York, eastern Ohio and western Pennsylvania. The true racism divide is not North-South, it turns out, but East-West, with limited racist search behavior west of the Mississippi River. This pattern correlates strongly with presidential election results; in the local areas with the highest share of racist online searches, Barack Obama substantially under-performed, and Donald Trump substantially over-performed.

Another example involves homosexuality. Survey data and social media profiles suggest the proportion of men who report being gay is roughly twice as high in Rhode Island as it is in Mississippi. Yet Google searches of terms associated with gay pornography vary little across the country, and are only marginally higher in Rhode Island than in Mississippi — suggesting that the survey results and social media profiles in some states may not reflect reality. Indeed, in the states where under-reporting may be larger, spouses tend to be more suspicious. The most searched-for term on Google after “Is my husband…” is not “cheating” or “depressed” but “gay,” and that question is asked far more frequently in states where the survey reports are low.

Many other myths are exploded in the book, some by search data and some by other evidence. The notion that violent movies cause violence? Not correct. The crime data show that violence declines before, during and after the showing of violent movies — perhaps because people who would be inclined to commit violence instead go to see the violent movie, and given the association between drinking and violence, the diversionary effect lingers because movie theaters generally don’t serve alcohol.

Another accepted idea, first offered by the historian James McPherson, is that the Civil War caused Americans to shift common usage from “the United States are” to “the United States is.” Nope again: A search of digitized books shows that there was no noticeable shift around the time of the war, and “the United States are” remained common for 15 or more years afterward.

Consider, next, the assumption that people start out liberal and become more conservative as they age. Again, not really. Instead, what seems to matter is an imprint effect that occurs when people are 18. Americans born in 1941, for example, turned 18 during Dwight Eisenhower’s presidency. And by about 10 percentage points, they have tended to be lifelong Republicans. A similar phenomenon applies to sports teams: A person’s favorite baseball team tends to be one that won the World Series during his or her childhood.

All of this would be merely amusing if it left us with only a collection of punctured myths. But Stephens-Davidowitz aims higher, writing that “Google searches are the most important dataset ever collected on the human psyche.” Therein lies the power of his new book: While acknowledging the limitations, Stephens-Davidowitz argues that big data can rescue social science from its garbage in-garbage out problem.

We are still early on this journey, but “Everybody Lies” provides the ballast to suggest it’s the right road.

Originally published at bloombergview.com on May 09, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Management Practices Matter More Than You Think

To understand macroeconomic changes, look at how individual companies are run.

Management consultants face perennial questions about what value they add to companies. But management practices go a long way toward explaining why some businesses perform better than others, an important new analysisshows. Perhaps management consultants are onto something after all.

Surprisingly large and growing differences across businesses in wages, productivity, capital returns and worker mobility may influence income inequality and even macroeconomic growth, many recent studies show. Now it seems management practices play a big role in explaining the variations across businesses, at least in manufacturing.

The new study, by a group of well-respected researchers, is based on a Census Bureau survey of about 32,000 U.S. manufacturing plants. The survey asked such things as how frequently managers track performance indicators, how quickly underperforming employees are reassigned or dismissed, and whether managers are promoted based solely on performance and ability.

The researchers used the companies’ answers to construct a management practices index, with higher ratings for plants that do such things as monitor performance, detail targets and tie management incentives to performance. Because the survey included multiple plants within individual firms, the economists were able to examine how practices vary both within companies and between them.

They found, first, that management techniques vary widely from plant to plant. Less than 20 percent use three-quarters or more of the performance-oriented management techniques, for example, while more than a quarter use less than half of them. Perhaps most surprisingly, the authors found that a little more than 40 percent of the variation in overall management practices occurs within the same firms.

They also found that the management techniques matter — a lot. The plants practicing more structured performance-oriented management are more productive, innovative and profitable. Every 10 percent increase in a plant’s management index is associated with a 14 percent increase in labor productivity, for example. And the relationships hold over time: The more performance-oriented a plant becomes, the more productive it is. Companies with higher management scores are also more likely to expand and to survive.

The researchers were able to compare the management approaches with more traditional explanations of business performance — things such as research and development, information-technology expenditures and workers’ skill levels. The authors lined up plants according to total productivity, and looked at differences between those ranking in the 90th percentile and those in the 10th percentile. Management techniques can explain 18 percent of that difference, they found, while R&D accounts for 17 percent; employee skills, 11 percent; and IT variation, 8 percent. In other words, management matters more than conventional explanations for performance.

Finally, the researchers looked into why management practices vary so much. They examined factors such as the competitiveness of the market in which a plant operates, the business environment (including state Right to Work laws), whether there is a college nearby, and learning spillovers from large multinational plants. All these other factors matter, but collectively they explain only about a third of the variation in management techniques.

Whatever the larger explanation, management practices vary substantially, even within manufacturing companies, and they cause big differences in performance. Those differences, in turn, have macroeconomic implications. Someone worried about why wage inequality has risen in the U.S., or why productivity growth has declined, may not immediately think to question why some companies are well managed and others aren’t. But increasingly, the evidence shows that those questions matter.

Originally published at bloombergview.com on April 11, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

No Raise? It’s Not You. It’s Your Company.

At top-performing firms, workers of all skill levels climb the income ladder.

The kind of company you work for makes a big difference to your chances of getting raises, new research has found. This adds to growing evidence that what goes on inside firms matters beyond their walls. Researchers have shown that company-level differences have become large enough to influence national productivity growth and overall wage inequality. The new study suggests they affect income mobility, too.

Having gathered data on workers and companies from the Census Bureau and the Social Security Administration, researchers John Abowd of the Census Bureau, Kevin McKinney of the California Census Research Data Center and Nellie Zhao of Cornell University categorized workers and their employers along three dimensions: skill, earnings and average company pay. Not surprisingly, they found some correlation between workers and firms. Low-skilled workers tend to work at low-paying companies, for example, and to earn low wages.

From Bloomberg View – Articles by Peter R. Orszag

The Wrong Way to Lower Health-Insurance Premiums

Republicans’ Obamacare replacement would bring lower-value policies.

For proponents of the American Health Care Act, perhaps the most encouraging nugget in the Congressional Budget Office’s otherwise critical analysis is that insurance premiums could fall by 10 percent on average by 2026. Even this prediction is more mirage than reality, however, in part because of an obscure concept known as “actuarial value.”

As many opponents of the Republicans’ Obamacare replacement legislation have already noted, for many people, the decline in premiums would be smaller than the cutback in their subsidies, so they would still end up paying more. And in any case, the predicted fall in premiums partly reflects a troubling rise in the share of older Americans without insurance, a change that would shift the enrollment pool to younger, less expensive beneficiaries.

From Bloomberg View – Articles by Peter R. Orszag

Selling Health Insurance Across State Lines Won’t Save Money

An idea that sounds easy is too complicated to work.

The effort to replace Obamacare faces increasing challenges, the more it is subjected to the harsh light of scrutiny. A good example is the proposal, apparently central to the Republican replacement plans, to allow people to buy health insurance across state lines.

This idea has been put forward as an elixir to all sorts of health sector problems. In his joint address to Congress, President Donald Trump argued that allowing people to buy health insurance in other states would “create a truly competitive national marketplace that will bring costs way down and provide far better care. So important.”

From Bloomberg View – Articles by Peter R. Orszag

Alexander Hamilton Loved Employee Ownership. So Should We.

By protecting jobs, worker equity plans support the whole economy.

Employee equity ownership of companies has been promoted in the U.S. since the country’s founding. After the Revolutionary War, Treasury Secretary Alexander Hamilton fostered the resurgence of the codfish industry by providing financial subsidies — but only for ships that had written profit-sharing agreements with their crews. This program, enacted in 1792, lasted until after the Civil War.

From Bloomberg View – Articles by Peter R. Orszag