A recent program rolled out in United Kingdom highlighted another critical difference in the difference between the United States and the United Kingdom’s healthcare system and infrastructure (Reuters Article: England to make support payment available through COVID trace app). In this context, the program uses a nationally supported contact-tracing app to identify persons who have recently been exposed to SARS-COV-2, the virus that causes the COVID-19 disease. Those identified persons are offered a support payment of GBP 500.00 (~USD 665.00) to ‘encourage’ them to stay home during a self-quarantine period. The goal of the program is to prevent new infections.
We were asked if such a program made sense in the US context. Our answer is:
A well-designed program could easily exceed a “raw” cost-effectiveness ratio of 5:1 (dollars saved to dollars invested).
In the U.S., capturing the cost savings would be exceedingly difficult in any but the most narrowly tailored programs (such as those working exclusively within a state-level Medicaid program).
There are other lessons to be learned from where our analysis hit barriers for US applicability that could be used to drive improvement in stimulus design, healthcare system design, and beyond.
Our Analysis
The focus for the analysis was to develop a quick, direct, and easily understandable model for assessing a program like the one rolled out in the UK, in the US context, with different cost-basis, different healthcare system, and different focus.
There are Three primary questions:
Is the program cost effective and why?
Would it be applicable to the United States?
What can we learn through a comparison of the two nations?
Cost-Effectiveness
Are “Pay to Stay Home” programs cost effective? The simple answer is that it depends, but they certainly can be if they are designed the right way. The UK program seems to be a thrust in the right direction, but no US equivalent is easily achievable.
To analyze the economics, we created a scenario modeling program with publicly available data, focusing on the US, to assess a hypothetical program that administered roughly one-million incentive payments. We found that the program would average cost savings of roughly USD 2,500 per person paid to stay home, nearing a 5:1 ratio of five dollars returned per dollar invested. Simply, each dollar spent on incentivizing people to stay home that would not have otherwise done so, prevents five dollars of costs from being billed by medical providers to the various parties responsible for paying for those services.
The first issue is a programmatic one with two points (i) did people actually stay home, and (ii) was the incentive payment the reason they stayed home. We assessed that the same contact tracing app could be used to monitor, to a sufficient degree, that the recipient did actually stay home to assume this - but would require specific program design. We also assessed that if the person was recently exposed to the virus through contact tracing, it would be possible to programmatically design an evaluation of a person’s likelihood to stay home. Any assessment of the program would also have balanced that the payments could provide a perverse incentive for people to go out and ‘rack up numbers’ to qualify for the program. For both issues, our team assessed that program-design solutions could address the issues within the 5:1 margin of cost effectiveness allowed for and better focused programs could actually exceed these measures.
Overall a pretty good idea, but what is particularly interesting is how unequally weighted the program’s returns are towards a small group of super-spreaders responsible for the majority of hospitalizations. By the numbers the average savings across all persons was USD 2,500 per person, the median savings was just shy of USD 80. What that means is that, for most people, they were already not going to spread the virus, without spreading the virus they would not cause hospitalization, and without hospitalization, there wouldn’t be additional costs, so there is no cost-savings in prevention. There are, however, a small group of super-spreaders for whom the program is very cost-effective. Those super spreaders are likely to interact with many people, transmit the virus in much higher numbers, and cause many costly hospitalizations that could be prevented by urging those super-spreaders to stay home.
This indicates that is a possibility to improve the program’s cost-effectiveness by improved targeting and aligning the payments with the risks a person poses to spread the infection to persons in high-risk groups. For example, the base payment could be reduced to USD 250 dollars, while potential super-spreaders could have their payment increased to over USD 1,000 for a two-week period.
At this point, our team started to build the allocation models to run the numbers. We had to stop before we went too far down that path as our analysis had a surprising reality check in the difference between how healthcare finance systems are setup and what that means for “cost effectiveness”.
In the United Kingdom
Let’s start with the UK context where “pay to stay home” programs makes sense.
Funding in the UK comes from the population, primarily and near exclusively through tax revenue. The primary provider of medical services is the United Kingdom National Health Service (NHS). This creates a simple dynamic, the people all pay in on the basis of income, and the NHS provides a healthcare services to the entire population.
Financing, or how the cash flows are all wired together to make this work, is very simple in this model. Government taxes pay for medical services directly by paying for the NHS budget.
Medical services in the UK are provided largely by the NHS. Tax dollars eventually flow to NHS and provide medical services, administer programs and infrastructure, as well as funding many other programs in the UK - for better or worse. When medical costs rise, the system has to find more funding or push the UK budget to deficit. When costs go down, the system can run a surplus.
The key point is that there is clear financial attribution in the UK for a large enough portion of the population that paying people to stay home can work. The UK government can invest in the health and well-being of the population and if those programs work, they can generate a return on investment. Other countries with largely nationalized healthcare can take advantage of programs like this, design them and implement effectively for very healthy returns on investment.
“One clear consistent funding and financing system means clear cost and savings allocations are possible”
In the United States
In the U.S., things are much different, from how services are funded, to how financing manages discrepancies in cash-flows, resulting a messy system with little ability to implement similar programs.
Funding for healthcare services in the US comes from the population, just like in the UK. The people pay for it. In the US, those funding models are more complex. Each person may be paying into multiple funding streams for healthcare services that include:
Taxes. Federal, state, and even local taxes that can all fund medical service programs.
Insurance. The US legally requires all persons to have, purchase, and in effect fund healthcare services.
Direct Payments. Even after taxes and insurance, most medical services in the US come with a substantial direct cost to the consumer.
“There is no single nexus point for funding of government programs to capture investment returns”
The key to understanding US funding of the healthcare system is: there is no single nexus point for funding of government programs and any “Pay to Stay Home” program would require participation from multiple layers of government and the private sector to fully fund a program proportionate to the existing system for funding for medical services.
To recap, any one person in the US may pay federal, state, and local taxes that fund medical services, also be required to purchase their own health insurance, and then still be required to pay for their own medical services.
Financing for healthcare services in the US is also more complex than the UK system. While the UK can largely be treated as a single-party financing arrangement, where the UK’s (as a single entity)’s future revenues are what are used to pay down the UK’s expenses; the U.S. has many more layers. In the US there are several parties involved across the public and private sectors, and many of these parties are tied together through complicated contractual arrangements that were designed to transfer risk. Take the following examples as illustrative, where we will assume a person is hospitalized for COVID-19:
Self-Pay. For any uninsured person, there is typically no financing mechanism (unless if they are able to arrange a self-financed solution such as securing a loan). The costs of the uninsured typically fall to patient.
Preventing a traditional self-pay hospitalization would reduce a personal cost and the medical service provider’s operating cost. Ultimately even those unpaid medical bills are paid by the market through higher bills for everyone. Our team was unwilling to calculate any reliable market reductions in future-cycle cost. Even if they could be calculated, capturing those savings would be near impossible.
For COVID-19, the CARES act setup a program that covers a large amount of COVID-19-related medical costs for those who (i) visit a participating medical provider, (ii) qualify for, and (iii) effectively leverage the program. For this group, the U.S. Federal Government has financed pandemic care by using taxpayer funding and financing through bond markets, supported by the Federal Reserve’s aggressive bond-buying program.
So consider that even within this population group, tracking and capturing the savings from prevented medical visits is very difficult in the U.S., while in the UK, they merely track the operating budget of the federally funded and financed NHS.
Medicaid. Medicaid is a federally subsidized, state funded healthcare financing arrangement that uses a blend of federal and state tax dollars, financed through the federal and state bond programs, and supported by the U.S. Federal Reserve Bank’s bond buying programs. Those state programs often work with private insurance companies to administer the programs, for example UnitedHealthcare, the Blue Cross federation, and others. These private partners often have contracts in place that seeks to transfer limited risk to the private sector and create additional complexity in this system.
A Medicaid patient hospitalized for COVID-19 will incur medical costs, which are then covered by the private insurance company. Up to a point, that additional cost is absorbed by the insurance company, in that year. The following year, the insurance company can use that higher cost to secure higher rates with the State Medicaid program. The delay in prices following costs, effectively creates a very expensive financing mechanism for state governments. Additionally, if that COVID-19 hospitalization is prevented, the insurance company may be entitled to keep the savings as part of their contract with the state program.
Within this population group, there are little savings that could be captured by a national program without involving the federal and state governments as well as their private insurance partners - all of whom would have to be willing to give up their component of the savings.
Compare these two examples to what would happen if the US adopted the UK’s healthcare system. A single government entity with a clear budget and clearly the owner of the financial risk would have every incentive to and enjoy every dollar returned for programs that invest in public health issues, from COVID-19 hospital utilization reductions, to smoking cessation, to opioid-affected pregnancy prevention programs.
What We Do Know
At this point it is abundantly clear that the COVID-19 pandemic has real healthcare costs in the U.S. and that encouraging parties to stay home, take safety precautions, and abide other medical safety guidance have real monetary benefits. There is every opportunity to design and implement programs that have positive “raw” investment value. The single critical limiting issue for creating an investment opportunity in the U.S. context is the ability to identify, attribute, and capture the savings in an effective manner.