The Future of Health Systems and Increasing Healthcare Productivity: In Conversation With Dr. Bob Kocher
Nikhil and I had an interesting discussion with Dr. Bob Kocher, the Venrock partner who helped write the Affordable Care Act while in the Obama administration and currently serves on the boards of companies like Aledade, Devoted, Lyra and Virta. We discussed how health systems will increase productivity, what drives healthcare costs, and his reflections on the ACA. You can listen to our conversation on Spotify or Apple Podcasts.
Bob shared his fascinating career journey starting as an MD in internal medicine residency before joining McKinsey where he was a partner and led the McKinsey Global Institute's healthcare practice. We discussed his original McKinsey cost study of where every dollar in the US health system goes including what surprised him and what’s changed in the 14 years since he published it. And Bob reflected back on some of his past annual predictions as well
Check out a full transcript of our conversation below:
We're excited to have Dr. Bob Kocher joining us. I'm sure it'll be a very wide-ranging conversation. Bob, thanks so much for coming on the podcast.
Thanks Jacob. It's really great to be here, and thanks Nikhil also for having me.
To start for listeners, I'm sure they're all interested in how you came on this path and what led you to the consulting route first, then to the policy side and then to venture and company incubation after that.
Through no planning on my part is the answer. My parents are lovely but very granola people up in Seattle. I, like everybody in my high school, went to the University of Washington when I graduated. And my mom and dad were like, “Now that you're in college you can do whatever is interesting.” And I took that kind of literally. At that time there was one MacArthur Genius Award winner and he happened to be a zoologist. He studied golden-mantled ground squirrel hibernation. I went down to his office as a freshman, 6th floor of Kincaid Hall, which is the far bottom corner of campus, where no one ever goes.
I said, “Hey, can I write about your research?” And he was so surprised someone came. He was like, “I can give you a job.” So I began working with him and a couple years later I had a degree in zoology, for which there is no recruiting, no jobs. I then did what all people do, which is I went to school more. I went another year and got a degree in political science and game theory. Then there were also no jobs. So then I take the LSAT and the MCAT. I did better on the MCAT, so I went to medical school.
I can't wait for this all to come together, where we figure out how everything you do now is related to zoology and game theory.
The success of the eastern ground squirrel over the western ground squirrel, which are the black ones who are beating out the gray ones, is a big battle that I'm watching carefully.
My thinking at the time was, I'll become a doctor. Seattle, where I grew up, has a really good cancer research place called Fred Hutch Cancer Research Institute, which was the pioneer in bone marrow transplants in the world. That seemed really interesting, so I thought maybe I would become a doctor and go back and work there.
I went to medical school, I did some science for a while at Howard Hughes, and then did medicine, and I began an oncology fellowship at Dana Farber in Boston, which is a wonderful place to be trained. As I was beginning that I began to have qualms about the future as an oncologist, in part because the professors who were teaching me, who were brilliant people, weren't very happy.
They didn't love their jobs. And I was like, “Wow, if you're a professor at Harvard Medical School and you're unhappy, is anybody happy?” It seems like that’s as good as it can get. They were always complaining about getting their grants and how terrible it was. And when you work inside these hospitals, which are super famous, the Mass General Hospital, the Brigham. These are treasures on the earth; they are incredible places. But when you work inside of them, it's really unorganized, there's a bunch of stuff that just doesn't happen right. While I was there, we had a horrible medical error where a person died from a chemotherapy overdose. And unlike when a Boeing airplane crashes and they all get grounded and they get fixed, the hospitals just keep going — they don't fix themselves.
As I was doing this training, I began to think, “Wow, I want to make the hospital work better.” It was the heroic work of the people and the hospital that resulted in patients getting extraordinary care. But so often it was because somebody ran up five flights of stairs to the lab to get the lab to run a test. Or ran a mile down the long hallway to find the neuroradiologist to read a study. Or overcame obstacles. And that didn't seem like a good idea. So I then was like, “I think I want to leave my fellowship and learn how to run a hospital. I asked the person running the hospital at the time how to get that job, and he looked at me with this look of amusement like, “Who are you? What are you talking about?” And Jim Mongan, who is a brilliant hospital leader, said I had to go get business training because I didn't know anything about business.
That was true. I knew nothing about business. He said to go to HBS. I went home and announced to my wife that I was going to go to HBS and she looked me with this look like, “I'm going to kill you.”
“The life to which I want to become entitled is not happening if you go take out $500,000 in debt.” So she said no. She had just gotten an MBA and also thought that MBAs were silly. I went back to Jim Mongan and said, “My wife won't let me go to HBS, what's plan B?” And he said to go to McKinsey. I was a little scared at this point to ask what that was, so I just said thank you and left. Then I googled it and I couldn't tell what it was because it says it's a consultancy — what the heck is that?
I was in the emergency room at the Brigham. I was being yelled at by a drunk patient who happened to have been a BU student who got taken to the emergency room. It was a Friday night. I was like, alright, I need to change. I went to McKinsey.com/careers and applied and magically they paged me (this was back when there were pagers) for an interview. I interviewed, they gave a case, I somehow made it through, and they hired me. When I got there I said, “I want to learn how to run hospitals.” They looked at me like, “Well, that's not what we do here. You made a big mistake.” And I said, “No, I'm serious.” And they said, “Great, you'll go where we tell you.” I then moved to Doha, Qatar, and we spent a year living in the Middle East working with hospitals all around the Gulf region. Then I went to India for six months and worked in Chennai. Then I went to Singapore. I ended up going to 22 countries over the next four years to work with hospitals.
When you do that you discover that all hospitals are screwed up. Nobody has figured out how to pay for healthcare in a way that makes it awesome, efficient and good. That got me on the path of: Okay, we should try to understand why that is. I then fortunately was able to do economics research at McKinsey and learn how to do economics. We ended up first studying a bunch of other countries and comparing them to the US. And you learn that nobody's awesome, but there are little pearls everywhere.
Then we focused on the US because the US spends an ungodly amount of money. In 2004 when we began doing that work, nobody knew how much we spent in total, and where it all went. There was just of a sense of: It's massive and there's this river and stuff happens but health doesn't seem to be getting better, and where it all going?
We did the first big study of where every dollar went in the US healthcare system and showed who made all the money. It wasn't obvious where the profits were being made and where the waste was. Then we counted up where the waste was and the last part of that work was: If you wanted it to be more productive, how would you pay differently? The answer to health policy is always: “You need to cover more people and make it more affordable, but then you have to make the system itself intrinsically more productive or we can't afford it.”
We did a bunch of thinking about how you redesign the economic incentives. Then I had the serendipity and privilege of working in that in government. That was in part because the work I did at McKinsey was peer reviewed by really good people who knew what they were talking about.
The peer reviewers of that work were Larry Summers, who ended up leading the economic team at the White House, Peter Orszag, who led OMB, and Zeke Emanuel, who led everything else. We worked together closely for several years. When Obama won, I had the privilege of getting to join, in part because we'd worked together on this topic for a while.
Then coming to Venrock was completely lucky. I worked with this guy named Todd Park, who's brilliant, who founded Athena Health and Devoted. He was the CTO for the US. My job was to recruit him into government. I met him during the transition for Obama-Biden. He was this amazing guy who brings joy to everything and is remarkable. His wife said he couldn't go into government because he had a job and a family and lived in California.
My job was to call him every day to tell him to come. And finally on March 18th of 2009, he said okay. He said, “I’ll come for a year.” He then came and stayed for the entire seven more years. When I was leaving government after two years because I did not make it as long as him, I was having lunch with him and asked him what I should do next. I didn't want to go back to McKinsey because the incumbents weren't super psyched about changing, and I wanted to work with people who thought the Affordable Care Act was good and were ready to move forward. So Todd said, “You should go do venture capital.” I looked at him like, “That's silly, because I don't know what that is, never met one.” The only companies I'd worked at before were McKinsey and Harvard — neither are entrepreneurial growth businesses.
He said, “No, you'd be great.” He called Bryan Roberts, who runs Venrock, and told Bryan to meet me. I think Bryan thought it was silly, but he met me and we liked each other a bunch and he said, “Why don't you come give us a shot?” So I moved up to California (this is 10 years ago) and joined Venrock. After a year and a half of meeting entrepreneurs and not loving the ideas, Bryan was like, “Why don't you just start stuff? If you don't like anything you're seeing, start some stuff that's better.” So I began finding smart people and co-founding businesses together. The first one was called Zenefits, which was an HRIS platform to help employers offer benefits and payroll. It was super successful and also kind of infamous.
Doctor on Demand was the next one we worked on. It's been really fun. I love figuring out what's a problem that can be solved and what's the business model that allows you to do it. And I love the team assembly of finding the right mixture of experience and awesome other skills to bring to it. So that's what I've been doing since. But the reason I tell you this story this way is so you can understand that there was no plan. It was always about learning and finding. I've been blessed to work with really smart people who've taught me a lot.
The whole theme is: I want to make healthcare work better, because we all need it and it needs to work better. I don't know what I'm doing next year. Right now I'm starting a really interesting business with a wonderful entrepreneur named Rahul Rajkumar, who probably you both know, who worked at CMMI and North Carolina Blue. He's had this vision of delivering awesome care for very complex patients. I spent the last year with him, asking “How do you do it? How do we build a business to do that thing?” And I love that. There's nothing that makes me happier than seeing these things become real.
I feel like you're a very zero one person. If it doesn't exist, you will it into existence.
Then there are people who are better than me at making it better. I think I'm good at hiring people and I'm good at teaching. The fun part is watching other people take the idea and make it better. Devoted Health, I helped started it and was Chief Medical Officer. Hired a young doctor named Neil Wagle, who's fucking amazing, who took all the concepts I helped start and made them so much better than they would ever have been if I were doing it. When I do my one-on-ones with him now, I get chills in my spine because it's like, wow, yeah, it's better. I love seeing that happen and I know that there are people better than me at that part, but I'm good at getting it started.
That's awesome. We could go deeper down any one of these slices, but I wanted to start with the McKinsey. When you did that study, like you said, we didn't have a sense of where the money was going in healthcare. As you started poring through the numbers, what surprised you about where you saw money flowing? If you think about when you did the study and today, what things are the same and what things are different?
More the same than different.
Some of the big surprises are, we talk a lot about drug prices being ridiculously expensive, and they are. But most of the money is going to health systems. People don't realize that a local hospital is a really expensive asset and it better be good, and it's usually not as good as it should be. Number two, chronic disease outpatient care — we do so much of it, more than other countries. It costs more. But when you slice US spending, half of it is going to a health system. And of that, most is going to outpatient chronic care. It's one big lesson. While drugs are super expensive, depending on what segment of the health system you're in, it's 5 to 15%. You could cut it by half and it doesn't change spending very much. It was a big surprise.
The margins on drugs are 80 to 90%, so the prices are probably too high in a market. But there's less use there than I had thought. Another one's the health systems. It's where most of the money goes but they really don't make any money. So besides drug makers, everybody else has a business that's really crappy where the profits are 2, 1, 5%. There's no money left over. So then you're left with the problem of: Wow, it's really expensive and they make no money. You have to then work on people. You have to get more productivity here. And every year, up until the Covid pandemic, nearly every month there was net hiring in hospitals and insurance companies. That means you're not getting productivity generally, because demand didn't change that much.
So you have a real people problem. And when you compare the US to other countries, we tend to have a lot more hospitals and they're small. That's pretty inefficient. Part of that goes to the Interstate Highway Act, where we decided that every American should live within 30 minutes of a hospital. But that means you have a lot of underutilized hospitals with people inside of them. So you have a structurally inefficient system. Another thing that we were studying was: What's the cost to American healthcare of having multiple payers? There's been a theme of: Should there be a single payer or a public plan? We tried to calculate the excess cost of having multiple payers versus the benefit. And the excess cost at that time was $145 billion a year. It's going to be a little more now. But it was less than I had expected, at least the way we counted it — the cost of having multiple payers.
You could talk yourself into thinking that multiple payers leads to innovation and some of them will adopt new things earlier. It's not an easy argument to say a single payer is going to be a lot more efficient. Although Medicare, of course, that's more admin. The last thing that was super interesting is we had great data when doctors start owning the supply, how their utilization changes. When a doctor buys an x-ray machine or a CAT scan or runs an endoscopy clinic, they use a lot more of it. So you can see before and after. It was fascinating to see how supply induces demand in healthcare. It shows another example of it not being a traditional market. Similarly, when you change the payments for something, if you lower the reimbursement by something, the units of that tend to go up to offset the revenue loss.
There were good examples of that in radiology where, about the time of the study, Medicare cut rates for certain types of studies and then the numbers of them just went up to offset the revenue loss. You see interesting effects like that. You see that in coding software, the disappearance of UTIs being replaced with sepsis. Sepsis is reimbursed at $30,000, way more than UTIs. You'd see interesting economic things that show that profit maximization at every level. Almost never was it true that the profits were maximized by delivering better care to people from some sort of outcome measure or more productive care.
Nor did you ever see people move very much based upon the price that they paid out of pocket or based upon benefit designs. We did these cool geo-maps that showed that people got 95% of their healthcare (this was 2005 but I bet it’s the same) within five miles of their house. So those notions of centers of excellence or marketability just didn't work. That's part of the problem today: we don't have lots of competition because the way antitrust works is that if a much bigger unit using what's called a Herfindahl index, which means that when we look at hospital mergers and things working big areas, even though people don't actually use a big area to get their supply. So we showed all these things and the question was: How has it changed?
Not much. The economics are kind of the same. We're mostly still in fee-for-service. We mostly have health systems taking the money. We mostly have not a lot of competition. Our disease outcomes aren't, at a macro level, better. Our life expectancy is a little worse, thanks to Covid. It hasn't changed too much. What has changed is more Americans are covered with insurance. We have about 50 million more people covered with insurance. People aren't going bankrupt from healthcare as much as they were before. If you're lower income it's much more affordable with both premium subsidies and cost sharing subsidies.
We've done a good job on the demand side. I think it led to more demand and that demand being more affordable. On the supply side, we haven't accomplished as much as I would've hoped towards making it more productive and affordable. We still have real problems with medical inflation and we haven't improved quality as much as I would've hoped. Now, there are lots of bright spots. In Medicare Advantage there's some extraordinary care being delivered by capitated providers. In every city in the country there are examples of local providers that do it really well. But we have it at scale.
It's super interesting. I think a big part of the answer you mentioned is the role of health systems and consolidation in some of this cost and a lot of the dollars flowing there, even if a lot of the margin isn't. One theme that's come up in our episodes previously is the role these systems play, and two different views of it. A lot of folks we've had on who are building risk-based businesses say, “Look, our number one goal is avoiding these hospitals.” Obviously, there's avoiding hospitalizations but also just avoiding that as a site of care. And that's a huge cost driver or a huge savings lever for a lot of these risk-based companies. Then a few weeks ago we had Sachin Jain on the show, and I thought he had an interesting counter perspective, which was that the systems are the only ones that can do value-based care.
The problem you run into with all these other folks is that they’re such silos that you know might see a patient, but then they have to get dialysis and that's not in your four walls, and they're the only ones that have a play forward here. I know your views have changed on this over time, and I think you've written about the role of systems. Where do you see these large systems going, and given what we talked about (that they have low margins to begin with), if there is volume that's taken away, where does that all lead?
That's a whole podcast. I wrote an infamous Annals of Internal Medicine article with Zeke Emanuel and Nancy-Ann DeParle in 2010 that basically said that there should be a lot of consolidation because of the Affordable Care Act, because the people that will make the most money in risk will be those who can control all the care to achieve productivity benefits and quality benefits by being a system. So I said there'd be more large systems and they're going to be stronger and argue that that is good. That article had several thousand negative comments. I think it broke the record for Annals at the time, for least liked article ever written.
I've never seen someone get ratioed on Annals. That's a first. Usually it only happens on Twitter. That's impressive.
Yeah, this really upset people. I had this hope that you would have large systems able to do group visits where you bring specialists and the primary doctor together. Or a patient with a suspicious breast lump comes into the clinic and we biopsy it and excise it today and take care of all this in one visit. Or where coordinated care for mental health primary care can be done at scale. In theory you could have a lot of new versions of things like Geisinger, Intermountain and Kaiser that takes risk and redesigns itself. And by having all the pieces you can design it in really cool ways. The problem is that that's a lot harder than raising prices. So in reality what happened was most of the systems didn't try to redesign themselves.
Most of them made a little optionality to see what an ACO would feel like and they didn't like it, so they didn't scale it and they said let's do more fee-for-service stuff. So when you look at the ACO numbers, it’s stunning how Johns Hopkins, which US News says every year is the number one hospital in the country, can't manage to save money in an ACO when the Aledade Delaware ACO is number one in the country, which is a collection of independent doctors. So it means that it makes no sense for them to do it. The economic incentives don't work. And when you push down further on it, the problem is that in all value-based payment models there's zero of some things, basically. The savings come from not using an ER and a hospital as much. They come from not using post-acute care as much, and they come from fewer referral specialists.
The way you do that is you tell the primary care doctor to do more. You say, “I want you to do higher level care, more of it, and see people more often.” And it's more work for the PCP. And the PCP then says, “Pay me, I'm doing more work, I earn more money.” But that’s money that used to go to these other people. And when you all work under one roof, nobody likes giving up their money. You have a real incentive problem and you're better off not doing it. So you just stay in the old model where if you're independent of that, you love it and you're stealing money from the health system to pay your PCPs more. So I wrote an op-ed in the Wall Street Journal which has the unfortunate title of How I Was Wrong About ObamaCare, which is not what the article's about.
I did not write the title. We make the point that these small independent ACOs crushed it and the health systems didn't. And we shouldn't count on health systems to change because they're fundamentally misaligned to do it. I think the way we need to help health systems evolve is to have them figure out how to pay their doctors differently. Most doctors who work at health systems who are specialists get paid on what's called RVUs, which are basically a unit of activity. And the more of them they do, the more money they make. They probably have a minimum number they have to do to keep their job. They're a target for them. They get their full comp and then they get a bonus if they do more. That's how almost every specialist is paid in the country. We have to change that.
If we give them a salary, like the VA does, then they do a lot less. The question is: What's the right way to pay them to get them to do the right amount of stuff? Because you don't want to have waiting times by having them not be incentivized, but you don't want to do as much as we're doing today. For hospitals we have to figure out how to help them get out of this quandary. I think the way for that to happen is to basically shift their business model from activity based to where they're getting a subscription payment from a health plan or from a risk bearer, where you go to them and say, “Last year I bought a thousand beds from you, I'll pay you that amount divided by 12 monthly for my volume.” And then the hospital has an incentive to figure out how you want to take care of them.
If you want to do it in the home, you want to do it on the outpatient basis, you do it but you get the money. I think you have to give them some model like that so they can get out of the mindset of “I need to fill the bed and make it higher acuity.” I think hospitals ultimately become ICUs and ORs. I think there's no way we're doing those things outside of really sophisticated facilities. And they do that amazingly well. I would never start a company to try to do an ICU in the home. There's no way we're ever going to do it as well as a hospital. Freestanding ORs can do some things but they're not going to do a Whipple.
I think hospitals should do those high acuity things and they should figure out how to have general medical admissions be done in your home or in the community. But I think we have to give them a payment model that works for them to do that, and the current ones don't make them win. So we have to come up with a better model. To me the incentive problem is super hard because no one will agree to lowering their salary willingly. So you have to come up with some system around that. And right now if you try to go to risk-based models for health systems, specialists can't make as much money.
Intellectually that model makes so much sense. You're probably on the ground with this all the time. Does it feel like we're going to make that transition? It makes practical sense if you were designing a system. At the same time, to your point, there are plenty of folks who benefit from the current model. I think a lot of these systems are powerful politically in their own communities; they're big employers. Does it feel like there's some sort of inflection point yet of making that transition or do you think we continue business as usual for the next 10, 20 years?
I'm also curious as to who actually helps make this transition. On the one hand you have private payers that potentially can do it, especially if they have really tight control on the PCP relationship. Or is it the government? I guess there's multiple people that can try to transition us to that system, but I'm curious who might practically do it.
I don't see it changing tomorrow, but in 50 years I think it will have happened. I don't think we're that close to a big inflection, to be honest. I think it will only come under much more economic stress. Now stresses are increasing a bunch, particularly for hospitals and insurance companies. And as we head into higher interest rates, maybe a recession, you might see them willing to revisit things that have been hard to revisit, especially doctor income for those that are employed. They’re a really hard one to get to. So I think it's not acutely happening. The large risk-bearing groups might begin to go to the hospital and say, “I'm going to offer you effectively sub capitation, but a subscription and will you take it?”
And in places like Florida or Southern California, you might have hospitals that are weak enough that they would be willing to take that deal. In Boston, for example, there's a famous medical group called Atrius which is now part of Optum. They would alternate between the Beth Israel and the Brigham and say I'm going to bring you a fixed amount of volume. I want to effectively run it myself, staff it myself and I'll rent it from you. And since both hospitals have extra beds, they would bid and they would alternate every now and then who would give them a better deal. I think you could start seeing that happen more and more, and over time the hospital might convert to more of a system where it's renting itself to these groups.
Because today these groups have their own hospital lists and their own rules so that might be the path in which it goes, but it's going to be very different across the country because they're going to be very different penetration to that type of care model. The insurance companies have a hard time because generally, the employers who are self-insured aren't willing to limit choice of their workers. So if you were to do a subscription agreement with a hospital and it's not the one that’s convenient for the employee, it's hard to imagine an employer telling them they have to drive a half an hour to a hospital that is not close to them. So I'm not convinced that commercial insurance companies will do it. I think it'll happen more in a Medicare-type world.
The other way to fix the specialist problem is to have fewer specialists. As they retire you cannot replace them and over time you can get to a place where, in a value-based arrangement, that person's still doing the same number of RVUs but across a bigger denominator of patients.
The morbid way to think about this is naturally, a lot of people are leaving medicine because of how burnt out they are and how many weird secondary effects there are from Covid. So we're going to have to become more productive. We don't have a choice because we have less labor. I remember talking to a company that was telling me that now they have to compete with Amazon warehouses as a place for medical assistants, because the Amazon warehouses pay more for medical assistants. So now you have productivity from other sectors pulling away from healthcare. So we have no choice but to get more productive.
That’s ultimately how you're going to get to the new model — through no choice. Labor supply constraints will lead you to think differently. If you're a specialist and there are fewer of you, you'd be happy to be at a capitated model because you can't do all the RVUs that are out there. So it's going to be more micro than macro. I think it's going to be local market and probably Medicare managed and Medicare will be the tip of the sphere.
Switching gears, you started doing these annual predictions at Venrock. Before it was a rite of passage for every VC to have to opine on their annual predictions.
I know, then Sachin copied us.
Now everybody is. You really kicked off the entire process. Are there any predictions that you look back on and you're like, “We saw this early,” or ones you look back on and you're like, “Yeah, we really whiffed on that?”
Well, thank you for asking. These predictions shouldn't be taken too seriously. It's what I think about at Thanksgiving every year and then I write it. Then I send it to Bryan and he adds one or two. It's what I'm doing on Black Friday because I don't need to go shopping. One prediction that we made so often that we made it an evergreen prediction was that nothing will happen with drug pricing. Then this year something kind of did. The Inflation Reduction Act, to my surprise, has, for the first time ever, the federal government negotiating prices for 10 drugs and that's super cool. I hope we do a good job and hopefully that's effective. So I guess I whiffed on that because I didn't think the politics was going to allow it to happen.
Well, you were right for many years.
I got nine years of right. But it was interesting to me because the politics of drug pricing is tough, because there was a bipartisan group of senators that didn't want it to happen. So it's interesting to me that the other stuff in the Inflation Reduction Act overcame the entrenched opposition to it. We looked at Medicare negotiations when we did the Affordable Care Act and there's no possibility that that could have passed. And it had been explored since. Even the Trump people tried, but they couldn't do it. So I thought that was an interesting thing that changed and it's going to be interesting to see how it happens.
There are a lot of concerns about how it may or may not impact how many drugs are developed and other things. It will be fascinating to see if there is a negative cost on things that are developed or not. CBO said it will still be a small, one-drug company, so there'll be a big negative impact. I'm not sure. I do think that we have the ability to use the current drugs we have so much more effectively that a lot of lives can be saved without new drugs by just delivering care better. So I'm hopeful.
Another one we got terribly wrong this year is we wrote that digital health IPOs will do even better than in 2021. Because in 2021 a bunch of them sucked. Now this year there's been none because the market closed. We also said the digital health M&A volume would double. There'll be a lot of M&A, but it's not going to be of high value. It's going to be more distress-type M&A, not high-price ones. When we add it all up, that one might not be wrong. Because Signify for $8 billion, and maybe Cano, and Walgreens just bought CareCentrix. So maybe, but it's not the market that I had expected. I was thinking it'd be a different market. We've been right about Theranos and Aduhelm multiple years in a row. We said Theranos was obviously not going to work before people knew it wasn't going to work. We were like, “Aduhelm doesn't work well enough to be paid for.” And of course that was right, so on those I think we were pretty smart.
I respect that you started with the wrong ones first. Most people put their best foot forward.
Weirdly, most years we get five or six of them right, and they're not meant to be. The reason why people read the article is I try to make them not obvious. I don't say obvious stuff, so I feel like batting 50% is pretty good.
Our listeners will get very mad at us if we don't talk a little bit about the ACA, since you're such a core part of it. Now that we're 14 years into the experiment and we've seen some of the stuff play out, what were some of the hypotheses you had when you were discussing and passing the ACA that you got right? And if you were to do it all again, what things would you try to include in it or put a higher emphasis on?
I think we got right the premise that the way to do healthcare policy legislation is to combine all of it together. By itself there's not enough support to change just coverage or just cost or just quality. So I think the construction of it was smart — to say to progressives, “We're going to give you a lot more people covered. And we're going to expand Medicaid and also create subsidized individual insurance.” But to the moderates, they're like, “But you have to cut Medicare. We have to make the Medicare trust fund solvent.” So they wanted us to go work on pay-fors and Medicare. There's not enough of either group to pass it, you have to get both of them on board.
I actually cared a lot about quality. Our chronic disease outcomes aren't what they should be. Our life expectancy is not what it should be. Our maternal mortality is not what it should be. We saw in Covid horrible disparities in care that have been structural and haven't been addressed. But there's not a constituency for that stuff. So you can only get that stuff done… make an innovation center in Medicare and release all the data as part of something that has those pieces to it. The beautiful thing about the Affordable Care Act is there's a whole bunch of stuff on delivery system reform and on incentive changes that allow all these companies to get started that are between those two things. But we couldn't have passed coverage expansion without a bunch of Medicare reforms and we certainly couldn't do Medicare reform without a lot of other stuff. Because anytime you try to change Medicare, it's described by an opponent as a denial of care to a senior — as a cut.
Even if those cuts are cutting unnecessary stuff, it's someone's income. So there's no popular cutting to Medicare that exists — it's only negative. I could write a book about all this stuff, but when you go cut it, nobody wants it to be cut. And adding more people to the system… perversely people who are in the system are like, “It might make me wait longer. I don't know if I want more people covered. Maybe I can't get to my doctor.” So you had to put it all together to get just enough good stuff to make everybody say, “I'll do it.” I think that was clever.
I think we did a good job at creating new payment models that people can try. I said earlier in the podcast, I wish that there was more penetration of them, but today there is. And the Trump folks doubled down on them. We have lots of variations of risks that you can go into on the primary care side. We have bundled payments for specialists. You can be full cap if you'd like to be in Medicare. Commercial payers have mostly emulated these models so they're available across the system. We did a bunch of hammer reform. It couldn't have happened without some sort of bigger vehicle to do it through.
We have certainly covered a lot of people and that's been a wonderful thing. That's why during the Covid recession we didn't have a lot of death from people losing coverage. They were able to get covered. So that's been really important. That part's really good. Something I would change is we were really concerned when we did the Affordable Care Act that we had to pay for it all, and that the US government couldn't support a larger deficit. There was a belief that if our deficit spending went up, that we'd have high interest rates and low economic growth. That wasn't right. We learned in the Trump administration that you can cut taxes by $7 trillion and have the economy grow a bunch, and that our interest rates don't go up, and that we have more capacity to spend.
We spent about $10 trillion during Covid to stimulate the economy and now more money, thankfully on infrastructure, the Inflation Reduction Act, and climate change. It hasn't had much of an effect on interest rates. The inflation today is not driven by all those policy choices; there are other things that are driving it, I think. Knowing that, we wouldn't have said that the Affordable Care Act has to cost only $1 trillion, not more. The score of the Affordable Care Act was $960 billion over 10 years. Then our offsets totaled $970 billion. We paid for the whole thing. If you look over the 10-year period, the pay-fors were larger than estimated. It more than paid for itself. The ACA has been free from a net spending perspective.
The problem with the ACA is that up until Covid, if you were buying a bronze plan, your deductible was pretty high. So if you weren't poor and getting a cost-sharing subsidy, you were paying like $6,000 and your deductible was $5,000. It didn't feel like you were getting a lot of coverage because you paid for the first dollar — you paid a lot. Except for preventive care, you paid. And while you wouldn't go bankrupt from cancer, you paid a lot. It didn't feel like as good a deal as it was to people who were not very sick. I would've extended the subsidy schedules up higher on the income spectrum so that everybody got some premium subsidy. I would've given more generous cost-sharing subsidies so more people got them to make it feel more affordable for the consumer. On the demand side.
On the supply side, I think I would've made some of the risk-based payment models not optional, but mandatory. Today all the CMS programs are optional, so you go into them if you feel like you're going to win. As a result, people who go into them are self-selected. So I would go to mandatory policies. I'm pretty sure that the current team at CMMI and Medicare are thinking that way about having mandatory new payment policies, so you'd move into risk. But that was something we didn't feel like we had the political capital to do. I wish we did medical malpractice reform, because doctors still complain about it every day. It wouldn't have cost much to put it in. I think we could have come up with a fair system that was equitable to patients and fair to doctors. But there wasn't support from the doctor groups who didn't agree on how to do it and nobody else cared enough.
So I wish we did that too. But net it has worked better than anyone would've expected, and even better than I would've predicted because we didn't get to make edits to it. On every other bit of legislation ever passed you do annual technical corrections to it. Because of the politics of the ACA, it was written one way and never fixed. There were of course court cases over it but it didn't get any refinement. So it's pretty great that it worked as well as it did.
That’s a compelling point. You see a lot of the impact of it on Covid a decade later, where coverage was super important. I want to make sure we get to move into our quickfire round. This is a fun one where we're going to throw some quick questions at you and get your takes. First question: We all go around the digital health circuit and hear the same themes thrown around. What's one thing that you think is over-hyped within digital health right now and one thing that's correctly hyped?
Over-hyped I think is Medicaid as a really good business. I think it's really hard to actually build businesses in Medicaid that work because of the churn of the population, because of the challenges of engaging them. Because they have a bunch of things that make it harder for them to engage. The payment levels on an absolute basis are so low. There's not risk adjustment.
Under-hyped I think is how effective treatments are for mental healthcare. People think that people who have severe mental illness or substance use disorder or depression or anxiety have a really bad diagnosis that can't be managed well. And we have great evidence-based treatments for most mental healthcare. They work as well as our drugs for cholesterol. If you deliver access and high-quality providers to people in mental healthcare, they can have really well-managed lives.
This is why you see so many SMI models pop up. But you can't have them go to Medicaid, apparently.
I think it's really hard.
Second quickfire: Is there a company that's not in the Venrock portfolio that you really admire?
I admire Tom Lee. We did not invest in One Medical because I couldn't figure out how he was going to acquire patients cost effectively. And we didn't invest in Galileo but I think he is brilliant. So I guess I wish I invested in One Medical and Galileo.
He was a good podcast guest we had on earlier. If we gave you a magic wand that allowed you to pass any policy change you wanted, what would you do?
Oh my gosh. I don't know.
You know too much, that's the problem. We'd have to give you a very powerful magic wand.
I think I would work on cost sharing, except I would redesign insurance to have less cost sharing for patients in it. I don't believe that most diseases are choices that people made or bad life decisions. I think our genetics are why a lot of things happen to us. So I think it's really unfair that if you're born with — I'll take an easy one — type one diabetes, every year you're going to need a bunch of healthcare and to buy a bunch of insulin. So every year you're going to hit the out-of-pocket max. That seems really unfair to me because that money can't go into an IRA for your retirement or be used for other things. So I would love to redesign insurance so that we have less skin in the game for people who have no choice.
Yeah. It’s interesting that we have so many levers for preventing people from unnecessarily consuming care. There's cost sharing, there's prior auths. They start interacting with each other in weird ways. One of the debates I find myself getting into with people is: The amount that the patient feels directly in terms of what they spend in a given visit is not actually what they are paying. In a lot of ways they end up paying indirectly to taxes and all that kind of stuff.
If you end up designing something that reduces the out-of-pocket costs that a patient feels, is it solving the issue of the spend going up on the other side? We see this even today, where you have catastrophic coverage for Part D. Drug companies will play games to get you past that cost sharing thing to then have someone else foot the rest of the bill. Is cost sharing the issue?
I would love to work on redesigning the way a health insurance benefit product is designed. Because I don't know any person that wants to go actually experience healthcare. It is not fun. It is often painful. Nobody would prefer to be sick, or have pain, or have any disease.
I believe when we were getting involved with Doctor on Demand, insurance companies would be like, “Well, if we make it really easy to see a doctor people will just go see them all the time.” And that's totally not true. There are almost no bored people who want to go talk to a doctor. So I would try to redesign the model the way the insurance product is designed, so that with things where you have no control and need care, you're not paying a lot because you should get that. And things where there's judgment or elasticity, we can then think about what the right amount is for you to pay for those things.
But nobody has thought a lot about elasticity in healthcare demand. I feel like you shouldn’t be punished for inelastic things that are not your choice. I would play around with that, and redesigning insurance products to be much more fair. Also, nobody knows what co-insurance and deductibles and co-pays and out-of-network benefits are. It's so complicated. And then there's the things that you mentioned — there's prior authorizations. I'd try to simplify it dramatically. That would be what I try to do from a policy perspective.
I've become the person who gets texts from their friends like, “What's a prior auth and why do I need this?”
Yeah, and when you're in the micro circumstance of having to wait for somebody to decide if you need something that you know need, it's a pretty terrible thing. Because it's delaying care. You know you need it. It is going to get approved. But a lot of work happened to get it approved, and it's a silly system.
Yeah. Well Bob, this did not disappoint. It's incredible to jump around to a bunch of different topics with you. You're as knowledgeable as it gets on this stuff. I'm sure folks are wanting to learn more about you, about Venrock. What's the best way for them to do that? And for folks that love podcasts I want to make sure you get a chance to plug yours as well, which we both listen to.
I will. Thank you. Well, you can read more about me. I have a blog called Better Healthcare Sooner. You can get to it from my bio page on Venrock. If you click Email Me on my Venrock page, it will come to me and I will answer your email. That's how to get ahold of me.