Confessions of a Health Plan CEO

Confessions of a Health Plan CEO

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flying cadeuciiThe fact that I was once the CEO of a health insurer may cause you to read this with some skepticism.

I invite and challenge your skepticism.  And I will do my very best to keep this piece strictly factual and not stray into the ambiguities that necessarily accompany complicated matters.

So bear with me.

Health insurers are not popular.  No one wants to go to the prom with us.  We have been vilified by no less than the President of the United States.  Heady stuff.  Let us see if this vilification and what I call the cartoonization of insurers has served us well in the healthcare debate.  I think it has not, because for reasons I hope to make clearer, it has taken the focus away from the real causes of our cost and quality nightmares.

Health insurance started in the Depression with the Blues, although they were not at first called that.  They typically were formed by hospitals (the Blue Crosses) and physicians (the Blue Shields), so that some payment for services rendered might be, well, “insured.”  Provider self interest cloaked in the public interest.  Perhaps there was alignment.  And there was a Depression going on after all.

At first, the role of the health insurer was strictly financial.  The insurer financed all or a portion of covered health services, and far, far fewer services were covered then than today.  That’s all an insurer did or was expected to do.  It was not there to manage doctors or hospitals or patients or anything else.  Originally, this financing was done through “indemnity” plans, which allowed patients to see anyone they wanted, and paid a set dollar amount per service or per day of hospitalization (e.g., $50/day of hospitalization).  Thus, if you chose a more expensive provider, the difference was on you.  Insurers back in the day did not negotiate reduced fees with providers (“fee discounts”).  It was much more civil then.

Nonetheless, up to World War II, a very small percentage of Americans had health insurance.  One reason for this is that Americans spent very little on healthcare.  In 1929, Americans spent about 1% of GDP on healthcare; by 1966 when Medicare and Medicaid were adopted, it was 6%; today it is 20%.

By virtue of political accident, the employer-based system of health insurance came about through a confluence of two things:

  • During WWII, FDR’s National War Labor Board (which enforced wartime wage and price controls) ruled that fringe benefits, which included health insurance, were not subject to wage controls.  Exactly how this happened is unknown, but the result was that although wages were frozen, employers could spend more on health insurance, and the unions were all over that like white on rice.
  • The 1954 Internal Revenue Service codified that while the cost of health insurance could be deducted by employers, it was not income to employees.  A huge incentive that continues to today and has embedded employer based coverage in America as the norm rather than governmental coverage, which is the norm everywhere else.

After WWII, healthcare services predictably became more sophisticated and comprehensive.  Coverage also started to change away from strict dollar indemnity, to a percentage of charges and even more comprehensive coverage.  And as coverage increased, the provider market grew exponentially.  This was a symbiosis that fed upon itself because the use of employer-financed coverage disintermediated the user of services (patients) from its payment.

By the mid 1970’s, almost a decade after Medicare and Medicaid were enacted, we started experiencing a health insurance cost crisis.  The public outcry was fierce, state legislatures responded, and health insurance regulators were statutorily empowered to control premiums and health insurers.

Health insurers were called in on the carpet about the premium increases.  Why were they paying doctors and hospitals whatever they wanted?  We were accused of getting too cozy with providers.  The public and regulators and legislators demanded that insurers negotiate harder bargains with physicians, hospitals, and other providers.  And in response, insurers started doing just that, slowly at first, and then more and more aggressively, to the point that today, the once friendly relationship between insurers and providers is downright toxic.

A quick (and true) story illustrates today’s circumstances:  My company, Blue Cross & Blue Shield of RI, was and still is the primary (some would say dominant) insurer of Rhode Islanders.  It negotiated hard bargains with physicians and hospitals, in part using its size as leverage.  After all, that is what legislators, the public, and regulators demanded.  Occasionally, in negotiations, we would reach impasse with say a hospital.  The disagreement would get public, “top of the fold” news in the Providence Journal, and the media and politicians would be quick to side with the hospital and against the insurer.  Hospitals are, after all, warm and fuzzy and they save lives.  We were castigated for using our leverage to strike hard bargains on behalf of our subscribers and employers.  [Wasn’t that our job?]  Pressure mounted on us to cave in.  The hospital might even send postcards to patients with warning of dire consequences should Blue Cross not give the hospital what it was asking for.  And if I tried to garner support from said employers, what do you think happened?  They bailed, saying, “Just fix it.”  No one goes to the prom with the health insurer.

My story illustrates the total lack of logic-integrity when it comes to reactions by the public or elected officials about health insurance or insurers.  The employers knew why we were taking a hard line with that hospital.  It was for their benefit.  Why else would we endure such unpleasantries?  It would have been far more pleasant to give them what they wanted, shake hands, and go golfing.

To further drive this point home, let us talk about how health insurance and premiums work, because most people cartoonize and don’t realize what’s at play here.

There is self-insurance and insurance.  Employers of a sufficient size can self insure, which means they pay the actual claims of employees and dependents, and pay the insurer a fee for administering the plan (and making available to that hard bargain fee discount with providers that it was excoriated for getting).

Or employers can fully insure against healthcare costs.  In that case, their premiums consist of actuarially calculated amounts to cover projected claims expense plus an administrative charge.  The self-insured employer knows it pays exactly what it incurred for claims.  The fully insured employer gets a fixed premium (budgetable) which may be the same, greater, or less than the actual costs in any given year.

If you take all classes of coverage, the cost components of coverage are approximately 90% claims expense and 10% administrative.   While every million dollars count, it becomes immediately apparent that to put a real and lasting dent in healthcare coverage costs, something must be done on the 90% claims expense side.  There’s no way around this.  And yet year after year after dreary year, politicians, media and the public focus on the 10%, ignoring the 90%.  While I accept that appearances count for something, reality really counts for more.

Let’s view this another way.  My annual operating expense budget was about $250 Million.  About 65% of that was people (salaries, fringes, etc.).  Another significant portion was fixed (building, technology, pencils (how quaint), etc.).  If by magic, we could cut 10% out of our operating costs, we’d reduce rates by $25 Million.  At the same time, our claims expense was close to $2.5 Billion.  Thus, what an employer would see as a result of our $25 Million cut is a 1% reduction of rates, for one year.   This is a one time reduction.  And I would have fired perhaps 100 employees, and my service would have suffered.

To further highlight the unreality, when I attempted to outsource some of our technology costs (and jobs), I got a call from the Governor’s office demanding reconsideration.  I reminded the Governor’s representative that they had switched State of RI employee coverage from Blue Cross to United Healthcare because our administrative expense component was higher than United’s.  It’s an unfortunate reality that to cut costs, one must impact people costs (jobs, salaries, fringes).  That logic was lost on that administration.

Back to the claims expense.  In addressing our cost conundrum, we have no alternative other than reducing claims expense (or at least mitigating increases of claims expense).

Claims expense consists of:

  • Price (the fees or payments paid to providers);
  • Use (the rate of use of services per person per year); and
  • Mix (the relative expensiveness of services, e.g., PET scans rather than x-rays).

What more might we do on the price (fee) side?  We’ve driven the hard bargains.  We have no support for driving even harder bargains.  Even Medicare, which is truly the 8000 lb gorilla and has threatened for over a decade to drastically reduce physician fees, every single year, backs down.  Realistically, fees cannot be significantly reduced.

What more might we do on the mix (relative expensiveness) of services?  Probably nothing short of rationing, which is so un-American.  When new miracles arrive, the demand for coverage is enormous.  That route avails us nothing.

What’s left?  The only thing left is the rate of use of services per person per year.  And what are we to do there?

Well, after politicians and regulators told insurers to keep the fees as low as possible, they then tasked insurers to do something about the rate of use of services.  They focused mostly on fraud and abuse because those were safe.  Sotto voce, however, the message was: “Do something about over use of services.”

[Incidentally, before we move on, I’m sure you’ve heard it said how unacceptable it is that health insurance premiums are increasing at 3-4 times the rate of inflation, right?  And it does seem a terrible thing.  Cartoonization again.  Comparing apples and oranges.  Inflation is measured by CPI, which in turn measures increases in the price of a market basket of goods and services, such as the price of a gallon of gas, loaf of bread, a new home).  Price and only price.  Health insurance premium increases have a price increase component (fee increases), a rate of use component, and a mix (relative expensiveness of services) component.  If fees increase say 3% a year, and the rate of use increases say 10% a year (which it has), and the mix perhaps 1% a year, you can see how we get to double digit increases in premiums rather quickly, each year.]

There are two approaches to this problem:

  • On the provider side:  It’s called “managed care.”  No one seems to like it.  In the 1990’s, this was the bane of HMOs with bean counters limiting or denying care, and getting between doctors and their patients.  Denzel Washington famously acted a part (John Q) of a Dad whose son was denied care by an HMO.  More public outrage; more legislative backlash.  Admittedly HMOs handled that poorly.  We pulled back from that with a kinder gentler managed care, and the results have been near double digit increases in the rate of use of services over the last 15 years.  And when insurers impose new constraints on providers, such as pre authorization, everyone howls.  And I dare you to try to call something not “medically necessary,” much less win a dispute in court on that issue.

Moreover, health insurance never was designed to cover everything, even if medically necessary.  And yet somehow, the public and elected officials seem to think it should.  That begot so-called “mandated benefits,” legislative orders that insurers cover things that previously were not covered (e.g., in vitro fertilization; drug and alcohol treatment; IV Lyme Disease treatment; wigs for chemo patients; batteries for cochlear implants).  Are some of these things good for people?  Sure.  But each mandated coverage increases premiums.

The insurer shows up at the legislative hearing opposing the mandate and is lambasted by providers, very sympathetic patients, and the legislators.  Outcome almost guaranteed.  And why are we opposing such mandates?  The more mandates, the more business we get, and the higher the premiums.  Seems at first blush to be in our interest.  Hmmmm.  We were trying to keep premiums down.  But the public, the media and elected officials can compartmentalize those issues amazingly.

There recently has been federal recognition of the need to do something on the provider side.  Obamacare introduced Accountable Care Organizations, recognizing that the historical method of paying providers (“fee for service”) that reimburses for things done is a major driver of our out of control costs.  Under fee for service, providers are paid for things done.  The more things done, the more paid.  The result is predictable.  We have a volume based production system in America because that’s how we pay.

We will over time move to a bundled payment system (to address costs, if done right) and incentives for quality of care and outcomes (to address our poor quality of care).  That is good, but progress is slow, and the provider community is very slow to adapt and adopt.  This is understandable given the physician culture of autonomy and volume production that has existed for decades.  To move to a coordinated care model focused on patient outcome rather than volume can be scary.

Lastly it has been said by no less than the head of CMS (Medicare/Medicaid) that as much as 30% of our healthcare expenditures are useless waste and error.  If we spend over $3 Trillion on healthcare, this is a $1 Trillion waste of money, perhaps the largest single untapped resource in America today.  Yet the culture of physician autonomy resists quality of care and outcome measures (much less their publication) and electronic health records, but these are desperately needed to address waste and error.   Insurers and the federal government are leading the move away from fee for service and toward required electronic medical record use.

  • On the patient side:  I testified before RI’s Joint Oversight Committee on Healthcare in 2004 that the group most responsible for our out of control healthcare costs were us, the patients.  That we were living unhealthy lifestyles of rampant obesity and diabetes, and were not accessing the healthcare delivery system appropriately.  The headlines next morning?  “Blue Cross Blames Subscribers For Rate Increases.”  Well…true as far as it goes, but not particularly helpful to the cause.

So what happens when, in response to unhealthy lifestyles and improper access, employers or insurers implement workplace wellness programs with penalties for non-compliance?  Legislatures gear up and outlaw penalties and even water down incentives to “good faith efforts” rather than results.  This by no less than Title VII, the ADA, and GINA.  We react as if people are incapable of taking proper care of themselves.  We fail to hold people accountable for things within their control.  Again, not helpful.

Then there are the skeptics who claims that such programs do not belong in the workplace at all.  That they are invasive and demeaning, and don’t result in a positive ROI.

The point is that any time anyone (usually the insurer) tries to do anything meaningful (and to be meaningful it must be disruptive), roadblocks are raised and no one supports the insurer.

Health insurance today is not really insurance.  It has morphed to something different.  Traditional insurance spreads a risk of the cost of a large unpredictable loss among a group of people who each share such a risk.  Fire insurance is a good example, where insureds each pay a small amount (premium) to cover a small risk of a fire loss, and the insurer spreads that risk over hundreds of premium paying insureds.

Health insurance turns this on its head.  With the exception of hospitalizations and a few other items, health insurance is not about paying a relatively small premium to cover the risk of a very large loss.  In health insurance, we pay a very large premium to cover mostly predictable and indeed inevitable smaller expenses.  Health insurers have become fiscal intermediaries between providers and subscribers—not insurers.

Someone I know once remarked that to blame health insurers for the cost of healthcare is like blaming oil delivery companies for the high cost of home heating oil.  Perhaps not a perfect analogy, but you get my point.

So to summarize:  the cost of health insurance is almost solely driven by the cost of healthcare.  The cost of healthcare is driven by the claims actually paid out by insurers to doctors and hospitals for care given to patients.  Claims increases are mostly driven by increases in the rate of use of services.  When  disruptive efforts to change this paradigm are successfully opposed time after time, it underscores the futility of the role of insurers.

And yet they are so easy to portray as villains, and someone has to be the villain.  Don’t they?

Jim Purcell is the former CEO of BCBS of Rhode Island and before that a trial lawyer. Today he arbitrates and mediates complex disputes.

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36 Comments on "Confessions of a Health Plan CEO"


Member
Allan
Apr 25, 2016

“ Yet the culture of physician autonomy resists quality of care and outcome measures (much less their publication) and electronic health records, ”

Don’t blame the culture of physician autonomy. Blame the 1954 IRS ruling and the culture that wishes to believe health care is free or a right granted by the Constitution. The patients, insurers, and providers all benefit from one another. The system functions best when the three parties deal with one another directly, not through third parties and severe micro-management from the government.

Direct dealings let the parties know what each needs and desires. The patients will tell the insurers and the providers to keep costs down. The insurers will let everyone know what is actuarily possible and if they gouge other insurers will take their place. The providers will rapidly change their behavior to meet the patient’s needs. After all, it is the patient that owns or should own his own hand selected insurance. All three parties are upstanding entities in our society.

The EHR is a wonderful thing if created for the individual that needs it. However, if the EHR is a creation that does not satisfy enough of the user’s needs and is forced upon the user don’t be surprised at the resistance seen. Same for medical treatment plans. They are great when they meet the individual patients needs and desires. The patient must have the ultimate say based upon personal responsibility.

Member
Apr 25, 2016

Mr. Purcell, when I brought up the issue of non-profit vs for-profit accounting models you more or less blew it off with this…

“On not-for-profit, a point can be made that there is fairly little difference. As non profits, hospitals and insurers such as many Blue Crosses should be held accountable for giving back to the underserved. Many times they are not. And yet, although say my former Blue plan was non profit, we did pay federal income tax (at a reduced rate), state premium taxes at the full rate, and full property tax. Sooo…. At least the non profits are free of the dividend machine and in theory can afford to take the longer view.”

This morning I came across a critique of the Tiebout Model of economics (no, not the football player, the economist Charles Tiebout) by blogger Bryan Caplan who is connected with Geo Mason U and Mercatus, which leans libertarian every time I come across a link. He observes that differences along the non-profit/for-profit continuum may be small, but the economic implications are serious. He includes elected officials, the very ones who craft and employ tax policies that animate the impact of taxation on the so-called “market.”

>> Tiebout implicitly assumes that non-profit competition works the same way as for-profit competition. It doesn’t. If a business owner figures out how to produce the same good at a lower cost, he pockets all of the savings. If the CEO of a publicly-held corporation figures out how to produce the same good at a lower cost, he pockets a lot of the savings. But if the mayor of a city figures out how to deliver the same government services for lower taxes, he pockets none of the savings. That’s how non-profits “work.” <<

It begs the question whether policy makers have much incentive to disturb their respective state and local markets beyond surfing a few headlines aimed at attracting voters. Far be it from them to rock the economic boat, so your noting that the profit/nonprofit sectors are not much different is spot on.

He concludes with this:

"…the desire for re-election often gives local politicians perverse incentives to pursue redistributive and/or wasteful policies. In the Tiebout model, a mayor who tried to replace over-educated, overpriced high school gym coaches would see his locality swell with residents and investment. In the real world, however, a mayor who tried to do this would be called a monster and thrown out of office.

"If you're a populist, you should be delighted by this outcome. If you're an economist, you should be horrified. No matter how you evaluate the outcome, though, one thing is clear: contrary to the Tiebout model, local governments are not analogous to perfectly competitive firms. Not even close."

Back to my suggestion that big local non-profits are, in fact, de facto money laundering mechanisms for a multitude of for-profit enterprises. Local hospitals that replicate the economy of scale and "in-house" vertical models of KP, Mayo and a few others have a good chance to keep costs under control. But by scattering the mission all over the countryside creates something like a gold-rush for entrepreneurs for whom healthcare has as much (or more?) to do with making money than delivering healthcare.

Member

Jim, thanks for the fact-based historical review! Your point of plan focus on beneficiaries “accessing the delivery system more responsibly” is a key shift in how MCO’s have spent their administrative dollars until recently. The key opportunity areas appear to be in post-acute care transitions back to the community rather than by way of SNFs, avoidance of lower level ED visits through redirection back to primary office settings, medication compliance management, and better use of lower cost labs and imaging centers. What makes you believe most of these initiatives will translate into anything more than a one-time benefit that is lost at the time of provider contract renewal? Medication management may be the only initiative with long term sustainability for cost reduction?

Member
Apr 24, 2016

Thanks for the comments. Your question equates to: even if we do save some money, where do the savings go? In theory, we’re trying to reduce costs in order to lower the cost of coverage (usually reduced premiums). But when providers demand that most of the savings to their way, that gets lost. Of course, we cannot ask providers to do more in order to be paid less…sooo… Nothing short of a complete change in how we pay for care will do the trick. I think. Along those lines, IF we reduce ER use by say 25%, that revenue is lost to the hospital which has to either make it up some other way or change how it does its business. You’d hope for the latter, but that happens too seldom.

I don’t see that I’ve really answered your question very well. Let me ponder that one.

Member
Barry Carol
Apr 24, 2016

If we reduce ER use by 25% and / or manage to reduce hospital admissions by better managing chronic diseases like CHF, diabetes, asthma and mental illness, some hospitals will have to downsize or close as the need for inpatient beds will shrink and each remaining hospital can support a larger population than it could before. A reduction in the aggregate number of inpatient hospital beds and other capacity including ER bays should reduce costs for the healthcare system.

Member
RidhiSharma
Apr 24, 2016

Wow, this is really a great post. Appreciate your effort on sharing your experience and views with us.

Regards,
Ridhi
http://www.currae.com/

Member
Adrian Gropper, MD
Apr 23, 2016

This post completely misses the patient perspective. You explain the insurer’s predicament, the government’s, the providers, and even the employers. What you gloss over, along with the other “stakeholders” in this frustrating stand-off, is the patient perspective.

Patients have no idea of actual quality or cost. The health plans, the one group we would think should be all about “the numbers”, have done almost nothing about it. Provider contracts are secret. Health records are controlled by hospitals instead of patients. When it comes to my personal information, health plans themselves have some of the worst interfaces I have ever used. Health plans are mostly opaque with respect to their quality metrics and formularies. Major businesses, like athenahealth have been founded to reverse-engineer byzantine health plan practices.

Competing health plans, as opposed to Medicare for All, might or might not be a good idea, given how readily politics can corrupt either strategy. But, at least, a single payer plan would eliminate the need for secrecy in health plan contracts and practices. As a matter of fact, the need for political control over a single payer plan would promote the essential transparency patients and voters need to make the hard resource allocation decisions we face. Medicare, clearly, has led in transparency of cost and to some extent, quality although a lot more could be done.

On the other hand, competing health plans could be more efficient than single-payer (and politics) at allocating, dare I say rationing, scarce resources. To have a hope of doing that, health plans would need to shift control of health records away form the “providers” and to the patients themselves. This would give patients and patient advocates a fair shot at transparency of cost and the opportunity to get independent decision support to advise patient choice and measure outcomes.

Hospital controlled health records and health information exchanges are not serving either patients or health plans. The HITECH EHR incentives and Meaningful Use regulations have not served patients (or physicians) particularly well. Health plans need to step in and support patient controlled health records if they want to compete as our allies.

Member
Apr 23, 2016

Fair comment. I agree regarding more patient focus. It’s just that my article was already overlong. I’ve struggled with the “need” for secrecy of negotiated rates with hospitals and large physician groups. There are two issues: (1) If Hospital A knows that we paid Hospital B 10% more, A would negotiate up to B’s level–inflationary; (2) if we negotiated a lower rate than say United, we’d prefer United not know that. Even so, the time for price transparency has arrived, and we have to move off it being all about the fees paid, and onto doing something about utilization of services. Your observations are good ones.

Member
Adrian Gropper, MD
Apr 24, 2016

Jim, I think you missed my main point. Health plans need to help patients take control of their entire health record in order to open it for _both_ quality and cost.

Member
Apr 24, 2016

I’d like to hear your ideas on that. I did miss your point.

Member
Adrian Gropper, MD
Apr 24, 2016

Hospitals are using control of the patient’s health record strategically to manipulate the health plan landscape. Under HITECH and Meaningful Use, the hospitals have consolidated control over decision support, quality measures, interoperability, and even something as personal and critical as advanced directives http://www.chilmarkresearch.com/2016/04/22/sidestepping-the-silos-for-advanced-directives/ Health plans, along with physicians and patients have been disenfranchised to the extent that we now have “data blocking” and “measurement of interoperability” on the congressional agenda.

The health plans themselves may not be trusted to control the patient’s health record for obvious conflict-of-interest reasons but health plans could collaborate or differentiate themselves through their support for patient-controlled health records. The health plans would benefit form improved reputation, increased transparency of quality, and support for broader innovation in health care delivery, including telemedicine.

A patient-driven health information economy is possible and timely: http://www.nejm.org/doi/full/10.1056/NEJMp1512142 and some proof of concept work using modern internet standards has been done https://www.youtube.com/watch?v=QX2JbYg2TZI&feature=youtu.be

What do you think it will take for health plans to begin supporting initiatives like HIE of One?

Member
Apr 24, 2016

You’re way beyond me on this. I’ve saved your links and will look at them. Quick answer to your question: Don’t know.

Member
Tom Emerick
Apr 23, 2016

Jim, great paper. I strongly agree with what you wrote. I ran large sell-insured health benefit plans for 35 years and faced the same barriers. It’s human nature to strongly desire to consume more but at ever lower prices…alas. I was hauled before hearings in Congress twice for trying to implement modest measures to control costs and control increases in employee payroll deductions. Small minded people like to vilify whoever writes the check, but choose to ignore the root causes of high health insurance premiums, e.g., the high cost of health care. Lately the worm is just starting to turn but it’s probably too late.

Member
Barry Carol
Apr 23, 2016

That was a really good article.

One subject of interest to me that you didn’t discuss was the impact of market power of large hospital systems and physician groups. How much more did your company pay powerful providers than less powerful providers even when the quality of their care was comparable at best? Presumably, an insurer would much rather see me get my MRI at a non-hospital owned imaging center for $500 than at a leading academic medical center for $4,000. No? How much variance was there in how much Rhode Island Blue Cross paid various hospitals in your service territory for heart surgery, hip and knee replacements and other common procedures?

As a patient, I always found it frustrating that it is virtually impossible to find out what anything costs ahead of time. Doctors don’t know either. Why are contract reimbursement rates hidden behind confidentiality agreements? What’s the downside of disclosing them?

Finally, I would be interested in your thoughts about the potential of tiered insurance networks to steer patients toward the most cost-effective high quality providers by imposing significantly higher coinsurance liability if they want to go to a more expensive provider. How much lower would the premium need to be as compared to a broad network plan with uniform coinsurance to make patients perceive the tiered option as attractive enough to choose it?

Member
Apr 23, 2016

Barry, thanks for the comment. Several thoughts:
1. On price transparency, see Adrian’s comment above and my response.
2. Large “must-have” hospital systems could negotiate easily 30% better reimbursement. Some better reimbursement might be warranted (and I have conflicting thoughts about teaching hospitals), but not that much absent quality and outcome data that warrants it. Most of the big systems push you toward stickiness of relationships and traffic rather than quality, cost, and outcomes.
3. The tiered system is something I like. It fosters competition at the right level (amongst the tiered providers), BUT (and it’s a big but) it must be based upon fully accepted quality, cost, and outcome standards and data, fully published. Then you tier and used deductibles to steer people to the higher quality, outcome, and lower cost providers. After the lawsuits are resolved.

Good comments.

Member
Barry Carol
Apr 23, 2016

Jim – Thanks for your very informative response.

As you noted, it is certainly appropriate to pay some hospitals more than others if they can demonstrate superior quality in terms of better outcomes, fewer hospital acquired infections, fewer preventable readmissions and the like. With respect to doctors, as a patient, I expect to pay a seasoned veteran who has built an excellent reputation more for his knowledge and expertise than a rookie just out of training. Conversely, even within the same practice, a junior doctor should be billing at a lower rate than his more senior colleagues while he builds his practice and gains experience just as junior law firm associates bill at a lower hourly rate than senior partners.

If actual contract reimbursement rates were completely transparent and could be ascertained quickly in real time so the most cost-effective high quality providers could be identified, it should work to the advantage of the health insurance industry collectively even if it reduces the prior competitive advantage that might have been previously enjoyed by some of the larger competitors. In theory, there is no reason why hospitals, doctors and other providers couldn’t be tiered just as prescription drugs are and have been for some time now.

I wonder than if insurers could effectively differentiate themselves based on factors like how user friendly their website and individual patient portals are, how quickly patients can talk to a real person to get their questions answered or problems resolved, how good their nurse health line is and how well they can build value based provider reimbursement models to more effectively manage care. It could be that there would only be room for two or three or four competitors in most states but I don’t see that as a problem. That’s the way it works in most categories of retailing and that market seems to function perfectly fine complete with transparent pricing.

Jim – Thanks for your very informative response.

As you noted, it is certainly appropriate to pay some hospitals more than others if they can demonstrate superior quality in terms of better outcomes, fewer hospital acquired infections, fewer preventable readmissions and the like. With respect to doctors, as a patient, I expect to pay a seasoned veteran who has built an excellent reputation more for his knowledge and expertise than a rookie just out of training. Conversely, even within the same practice, a junior doctor should be billing at a lower rate than his more senior colleagues while he builds his practice and gains experience just as junior law firm associates bill at a lower hourly rate than senior partners.

If actual contract reimbursement rates were completely transparent and could be ascertained quickly in real time so the most cost-effective high quality providers could be identified, it should work to the advantage of the health insurance industry collectively even if it reduces the prior competitive advantage that might have been previously enjoyed by some of the larger competitors. In theory, there is no reason why hospitals, doctors and other providers couldn’t be tiered just as prescription drugs are and have been for some time now.

I wonder than if insurers could effectively differentiate themselves based on factors like how user friendly their website and individual patient portals are, how quickly patients can talk to a real person to get their questions answered or problems resolved, how good their nurse health line is and how well they can build value based provider reimbursement models to more effectively manage care. It could be that there would only be room for two or three or four competitors in most states but I don’t see that as a problem. That’s the way it works in most categories of retailing and that market seems to function perfectly fine complete with transparent pricing.

Member

Jim,
Excellent piece, although there is one way out of the box I wish you had mentioned: the huge movement of employers to high deductible plans linked to Health Savings Accounts.

Here is quote from a WSJ article (publication date 9/2012….the migration to these plans has grown since then):

“JP Morgan, Chrysler, Wells Fargo, and Whole Foods are making choices similar to GE’s, adopting high-deductible plans as a way to slow the growth of health-care costs. in 2012 about 19% of covered workers were enrolled in plans that required families to pay more than $1000 before insurance kicks in……..A 2011 RAND study showed that families that switched to high-deductible plans spent 14% less on health care than those on conventional plans.” and as GE adopted these plans for its own employees “Total health care costs for the company fell 15% in the first year.”

The WSJ piece went on to explain how this movement was hurting GE’s imaging business as cost conscious patients became more prudent users of imaging as well as other services.

Member
LeoHolmMD
Apr 23, 2016

HHS/government will not assume the role of villain ( at least not towards patients ).They need a third party for this function. They are trying to unload this burden on physicians. With certainty, we will be far less sucessful than insurers. Utilization can be addressed through cost sharing and the much more difficult job of culture change. Right now, the culture is moving the wrong direction: more screening, more drugs, more ads, more visits, more covered services, medicalize everything, monitor everything. Not sustainable.

Member
Perry
Apr 25, 2016

Indeed Leo. This is the problem.

Member
Apr 23, 2016

You have my sympathy, Mr. Purcell. It more or less corresponds with something I put together a few years ago…

Act One — The Trainwreck

*Scene One* opens with the creation of employer-sponsored group insurance to help employees share the costs of hospital charges. Physicians hated the idea, fearing that if hospitals became too important to health care they would be in competition with private practices, and in the aftermath of the war they feared the idea of cost controls. The political compromise was that all hospitals had to be made non-profit. Blue Cross was enacted.
*Scene Two* finds the doctors discovering how group insurance enabled hospitals (a resource without which they could not work) to pay their bills more smoothly, so they opened the way for another kind of group insurance for “medical services” not provided by hospitals. Blue Shield was created.
*Scene Three* takes place in the Sixties when someone discovered that for-profit hospitals could be for health care what McDonald’s was to hamburgers. By then it didn’t take long to get past those old non-profit notions.
*Scene Four* sees medical costs getting out of hand. Too many people are demanding too much attention from too many specialties and too many drugs are hitting the market with too many marketing schemes and the insurance industry is growing like a Ponzi scheme. But industry professionals saw the handwriting on the wall. HMO’s and PPO’s were created.
*Scene Five* — Everybody hates HMOs so much that the tax laws had to be adjusted so that all medical premiums (which once were part of every taxpayer’s itemized deductions with virtually no limit) were capped for individuals but made “pre-tax” on employer “flex-plans” while every dime of medical costs became a business expense for the employer, and “self-insured” became the order of the day.
Everybody with insurance was happy. As long as insured people paid deductibles and copays they were like all-you-can-eat patrons at a buffet. The actual costs were no longer of any importance to the people seeking health care. All they cared about was getting plenty of bang for their buck. Companies didn’t complain, since health insurance costs were just another journal entry on the balance sheets, and after COBRA came along, anyone who thought about leaving a job was terrified at the prospect of losing all their income at the same moment that their health care premiums doubled (or more). And as “benefits” don’t begin until after a probationary period company health insurance became the golden handcuffs.

[Job lock was now firmly established. Medical costs were growing faster than the country’s GDP could sustain. Small companies bunched together for group insurance, but many individuals and companies had to resort to high-deductible plans for catastrophic coverage and all other medical expenses had to be paid until then. MSAs and HSAs were tossed out like MREs to a starving regiment. And to make matters worse, millions of people not fortunate enough to be with one of the companies with health insurance were not insured at all. There was more. Much more. But the total picture was one of the train wreck which was Act One.]

Act Two — The Salvage Operation

*Scene One* takes place following the presidential election of 2008. Previous administrations had been trying with no success to slow down the speeding train. Both political parties had given it their best shot and failed, mainly because the insurance, healthcare, and drug companies were making so much money they didn’t see any need to put on the brakes. A handful of technocrats and policy wonks knew better, and a growing number of Congressional staff and research specialists were getting alarmed. A critical mass of many people from many quarters finally concludes “We are all in the same boat and the boat is gonna sink if we don’t do something to stop the costs.”
*Scene Two* is two years long. A historic political, professional, multi-faceted Congressional tug-o-war takes place which ends with a reconciliation between the Senate and the House of Representatives called the Patient Protection and Affordable Care Act. There was a lot of yelling and screaming because the final legislation was the result of “reconciliation” but most people forgot that is how most stuck laws get passed, including the Consolidated Omnibus Budget and Reconciliation Act of 1985. (COBRA)
*Scene Three* is a political whiplash from opponents of the new law. Many people hated it, including health care professionals. Few took time to examine the details and most who did were looking for weaknesses rather than strengths, in much the same way that sports coaches study opponents to locate vulnerable spots. The CLASS Act portion was abandoned almost overnight. So the challenge of what to do about the costs of long-term care will have to wait for some yet to be determined time in the future.

Act Three — The Launch of PPACA

I quit about that time (three years ago) because there were (and still are) too many jurors still out. There are still ten million or so Americans without health care, and in states refusing to expand Medicaid there are millions more who are not destitute enough to become Medicaid beneficiaries but whose incomes fall short of 400%FPL needed to qualify for premium subsidies (which you don’t mention, incidentally — the gold ring your industry caught when ACA passed).

Aside from the partisan sniping (and thanks for not going there) I would like to know your opinion about two issues.

First, do you think there is any way that good health care can be more widely distributed instead of having giant campuses crowded together in the most affluent parts of metroplexes? The typical community hospital is surrounded by endless acres of clinics, labs, surgical centers, private practices, retail operations (durable and disposable medical supplies and equipment), parking garages, landscaping and maintenance services, janitorial and other non-medical expenses — none of which could exist without that hospital.

Second, please say something to persuade me that the “not-for-profit” status of most of the giants (both providers and insurers) at the center of those plantations is not, in fact, an accounting sleight-of-hand enabling multitudes of those FOR-profit ancillary businesses I described tapping into a ginormous revenue stream, every dollar of which must originate just one place: someone’s medical bill. From a distance this is as much a tax-advantaged money laundering scheme as the now famous Panama Papers.

Member
Apr 23, 2016

Re wider distribution: We have to start becoming more virtual. The huge campuses remind me of the college education fiasco, where there is even less reason for the out of control increases in tuitions to support mega campuses, five star accomodations, and research facilities that make me wonder whether they really foster the primary mission.

On not-for-profit, a point can be made that there is fairly little difference. As non profits, hospitals and insurers such as many Blue Crosses should be held accountable for giving back to the underserved. Many times they are not. And yet, although say my former Blue plan was non profit, we did pay federal income tax (at a reduced rate), state premium taxes at the full rate, and full property tax. Sooo…. At least the non profits are free of the dividend machine and in theory can afford to take the longer view.

Member
Apr 23, 2016

Got it.
Thanks.

Member
Tom Emerick
Apr 23, 2016

Your description of how we come to be in the present healthcare funding mess is brilliant, Thanks.

Member
Apr 23, 2016

Thanks.

According to Wikipedia, Medicaid payments currently assist nearly 60 percent of all nursing home residents and about 37 percent of all childbirths in the United States. No one knows how many Americans are Medicaid eligible, and even if they did, they are a vast population for whom insurance discussions have zero meaning. They don’t even know the vocabulary. I was once an avid commenter here at The Health Care Blog but I got tired and stopped. I’m afraid America’s social safety net — like the rest of our state and national infrastructure — will eventually collapse (perhaps in the aftermath of some natural disaster or pandemic) and elected representatives will be obliged to take corrective action.

Meantime, insurance discussions are something of a recreational pastime for me. I never got to the good stuff — medical loss ratios, sales force expenses & bonuses, advertising, executive compensation packages, shareholder payouts, legal costs — the list of non-medical charges that must first appear on someone’s medical bill is endless. And we must remember to genuflect any time “private sector” is mentioned.

Had I not become an x-ray tech when the Army drafted me I would never have known how excellent the military medical service corps are, not to mention the VA hospitals and infrastructure. (Yes, I know about all the scandals, but I have friends and acquaintances whose medical needs are all VA managed and they are quite pleased with it, thank you.) [Incidentally, I read somewhere that Utah has become the first state to eliminate homelessness among Veterans.] My wisdom teeth were taken out by an excellent Army oral surgeon and I was happy to have it done at government expense. So I don’t want to listen to any of the negative foolishness about “government health care.” (Not to mention that in my post-retirement job as a senior caregiver I have had many assignment with retired military people with Tricare for life, for themselves and their survivors.)

Member
William Palmer MD
Apr 23, 2016

Jim, I loved your article….but….a few ideas:

1. Don’t we all, on average and in large groups, screw up, sin, greed away, commit fraud, whatever, at about the same homo sapiens rate?
Is it therefore, unfair, to single out providers? especially when…
2. We know that everyone likes to grow big and gain income and power and that insurance companies and hospitals and nurses and doctors all do this. You must like more money to go through your firm? correct? You want your firm to grow, right?
3. Have you shown fierce attempts to combat legislatures who mandates benefits? Eg. fighting acupuncture or IVF or biofeedback or hypnotism or aromatherapy or chemo drugs that add 2 months of lifespan? Or do you like that added money to go through your firm?
4. Have you thought about paying claims payments directly to patients and trust them to pay providers as in the indemnity of yore? Providers who were not paid would therefore be creditors for non-recourse loans, the collateral for which would be continued health care by that provider to the defaulting patient.
5. Have you tried to figure out ways for patients to shop a little
whilst paying down deductibles? Couldn’t this be done in CAT policies with HSAs by allowing patients who are facing large OOP payments to search for services outside the mother plan? There must be accounting ways to do this with health
credit cards or the like.

Member
Apr 23, 2016

Lots of questions. I’ll gently avoid the ones about human cupidity for now. My point on mandated benefits is that we DID show up with experts and we DID fight them hard. We were characatured as heartless, which I guess is ok. Sometimes we actually do what we’re supposed to, even if it’s not appreciated. Could we do it better? You bet.

On paying providers directly etc., it’s a fascinating issue and one that I don’t have enought room here to comment intelligently on. That’s basically non-par (non-participatory), and in that case, with some exceptions such as emergency rooms, we would pay the member directly and let them duke it out with the doc. Problem was that in our small state with the pressures, almost no one was non par. If you’re non par, you can charge the patient at your “charge” which typically is much more than the covered “allowance.” I’m not sure I answered your question. Back to indemnity?

Member
Apr 23, 2016

Lots of valid explanation of why it’s hard to be a health plan.

What’s missing here is an argument for how health plans could/should provide value in the future…or even why they should continue to exist.

Member
Apr 23, 2016

I’ve written that health plans should get out of the business of managing care and into the business of “patient compliance.” I know “compliance” is a politically incorrect term, but it’s at least accurate. We’ve ignored that side of the equation which contributes at least 50% to our excess costs. I think plans should differentiate themselves on how well they get their members to take better care of themselves and access the delivery system more responsibly. But that’s just me.

Member
Apr 24, 2016

p.s.
Jim, just to address my own question, IMO a lot of the root of the problem is the short-term economic structure of health insurance. I’m quoting from memory but the average plan experiences about 20% customer churn every year and the average tenure of a member is about 3 years.

This provides little economic incentive to invest in “patient compliance”, disease management, wellness, prevention, whatever you want to call it. Very difficult to get short term ROI with these approaches.

By contrast (again from memory) I believe that tenure of the average Kaiser member is around 14 years. This structure provides a much more aligned approach for health investment that will have a longer ROI to achieve.

A possible solution would be to break the bond between employment and health insurance…but that’s more a policy/legislative solution than it is something that plans could do on their own.

Member
Apr 25, 2016

“…break the bond between employment and health insurance…”
That is long overdue. As I described in “Act One” above, employment was the seedbed for health insurance in America. It was a great idea at the outset, but over time conflicts of interest became part of the ecology. The main fulcrum was (and continues to be) an innocent accounting feature making the employer’s “contribution” to family and individual coverage a business expense instead of employee compensation. I bet if employees had the option of getting that money in the form of wages, they would be more sanguine about whether the company group insurance (with it’s TPA surcharge) is still competitive in the exchange marketplace.

I’m also convinced that tax policy is a factor — specifically the percent of AGI required for medical expenses. There was a time when every dollar was deductible, but the percent allowed has grown to something like nine or ten percent of AGI, which is nutty. By the time someone is at that level, even with insurance, he or she is at the door of bankruptcy. There’s good reason (aside from the byzantine craziness of the tax codes) that most people now take the standard deduction.

Member
evanjgallagher
Apr 24, 2016

Great point about Kaiser, Vince. Jim, what are your thoughts on KP’s ability to sustain lower unit cost inflation and utilization over time? Is their model of integrated care, capitated payment, and tight partnership between an insurer and medical groups a path forward for the whole country? I know that at least over certain periods they have kept costs and rate increases lower than their competitors.

Or, as I fear might be the case, is KP more of an accident of history that cannot be spread to large swathes of the country due to entrenched physician and hospital culture, along with public fears of care rationing?

I’m alway surprised when these big discussions rarely mentioned Kaiser.

Thanks.

Member
Apr 24, 2016

Just being matter of fact here…. my take is that health plans tried that during the era of disease management with marginal results.

Right or wrong, health plans lost patient and clinician TRUST during the era of managed care. Memories are long. That doesn’t leave a lot of room to control or influence patient or physician behavior.

In your own words, “it underscores the futility of the role of insurers”.

Member
Tom Emerick
Apr 23, 2016

In my opinion future health plans and health insurance will be nothing more than wealth transfer mechanisms. That’s largely true today.