HEALTH PLANS: Three Inconvenient Truths: The Future of Health Plans in a Connected World

In the same vein as Wyden’s speech to AHIP yesterday, this is the talk I gave to the Western Regional Conference (a group of Blues plans) on October 14, 2007.

Hello my name is Matthew Holt and I’m here to tell you the truth. Now I know that you are a bunch of senior executives at health insurance companies, so you may not be very used to that….

I also understand that the person I’m replacing as a speaker here is Governor Arnold Schwarzenegger, who starred in some famous movies involving the end of the world and invasions by aliens, predators and terminators–something which might seem metaphorical to you after you’ve heard my talk.

I’m here today to tell you three potentially inconvenient truths.

First, you’ve done very, very well for the past several years. But the chances that you will be able to keep running your businesses in the same manner in a decade or so are very low. In fact if you keep running your businesses the same way the chances are good that you won’t be in business. That may not matter to those of you close to retirement, but it probably does matter to everybody else.

Second the world is changing under your feet, and if you intend to be a health insurance company that contributes value to society, you have to understand the changes that are happening in that wider society.  I’m not just talking about American Idol and the ability to track minute by minute developments in the life of Lindsay Lohan, although of course that’s a crucial component of societal change. I’m talking about the significant advances in technology and business leading to significant changes in the way we purchase, consume and—yes–produce health-care services.

Third, I’ll tell you some potentially good news.  Although I’m essentially on the same speaking circuit as the Liberals who think that Hillary Clinton is too right wing, I’m here to tell you that there is a role for an intermediary between the consumer and the healthcare system, and that intermediary need not be the government. That’s because, if the right incentives are created, healthcare organizations — on both sides of the payor – provider divide — can substantially add value to society, by improving the healthcare delivered and the health outcomes produced at a substantially lower cost.  But this is only good news if you’re prepared to fundamentally change your organizations, so that, when society finally demands better performance from its healthcare system, you are ready.

So first, why do your businesses need to change?  To be fair, it’s
by no means guaranteed that I am right.  The naysayers and the doom
merchants have been saying that the American health care system was on
an unsustainable course for a couple of decades now, and if I look
around the room I see plenty of executives running very profitable
companies — albeit most of them officially non-profit — using the
same old techniques of underwriting, price discrimination, and
aggressive provider contract negotiations, that served your
predecessors well 20 and 30 years ago.

The problem is that with a brief exception of the Phantom
managed-care quote unquote "revolution" in the mid-1990s, it’s been
completely unnecessary for health insurers to attempt to systematically
change the behavior of the providers who service their members. And
make no mistake, that’s a very, very hard thing to do. So here’s the

This is the chart of the increase in health care costs as a share of
GDP over the past few decades. Of course in the past few years, the
slope of that chart has got worse. And that has been during a time when
the economy as a whole has been growing. This hasn’t mattered a whole
lot to the health insurance industry, and it’s even managed to keep a
bigger chunk of that increase! (You call that reducing your MLR). But
there were two signal events at the biggest for-profit health insurance
company United Healthgroup that symbolized what happened to the health
insurance business after the failure of the Phantom managed-care
revolution. The first was in 2001 when United Healthcare gave
up its policy of utilization review. That was a signal to the provider
community that health insurers were simply going to turn round and pass
on costs to employers, and to the government.

The second was in late 2003 and concerned this character, Patrick
Rooney, the founder of Golden Rule insurance company. Rooney may not be
the worst example—in fact I think Mega Life and Health whose CEO sits
on the AHIP board may be worse–but Rooney is the biggest symbol of how
to run an extremely profitable insurance company by making sure that
you don’t sell health insurance to anyone who might actually need it.
While many of you in this room over the years have been opposed to some
of what Rooney and his cohorts have been up to, that didn’t stop United
Healthgroup making him almost a billionaire when they bought Golden
Rule in 2003.

And of course the man behind both those decisions, Bill McGuire, may
well be joining several other CEOs at Club Fed due to his backdating of
stock options—another symbol of greed run amok.

So the leaders of health insurance today are a gang of billionaires
whose major interest is in avoiding covering the care of sick people
while looking out only for themselves. And they’ve been successfully
characterized as that by Michael Moore.

We don’t have to argue the merits or the veracity of Moore’s
analysis to understand that there’ll be little sympathy for health
insurance companies or their executives in the future.

So what does that future going to be like? Insurers have
traditionally had big and small employers as customers. The problem is
that the workforce has changed–fewer and fewer Americans are receiving
insurance at work. And as the cost of care skyrockets the insurance
they are receiving is costing them more and covering less.

The remarkable thing is that unlike in the 1990s when insurance
coverage at work increased as the economy boomed and labor force
increased, since 2001 the absolute number of Americans covered by
employer health insurance has gone down as the numbers in the workforce
has gone up.

There are two results from this. First the number of un- and
underinsured has increased, and more people had been forced into the
absolute gong show that it is the individual health insurance market.
And despite what your consultants may tell you, they are not happy. 

Second, the number of un and underinsured has not increased
dramatically more only because of expansions in Medicaid and now
re-famous S-CHIP programs.

There are two consequences from this general trend.

First the number of middle income Americans who experience some
discontinuity of health insurance coverage has gone up dramatically.
When the CEO of Safeway can’t get insurance for his son, you know this
has reached up well into the middle class.  That has obvious political

But it also has less obvious political implications. That’s because
the major protection that health insurers, the healthcare system, drug
companies and the rest of corporate America have been afforded by the
last 30-odd years of laisser-faire government, have largely been the
result of a strange coalition between upper income business interests
and the lower-middle-class religiously motivated voters who are the
core of the Republican vote. 

If, as one drug company CEO mentioned to me, your best bet is to
hope the Republicans keep the White House in perpetuity — even
ignoring the morass the present occupants of the White House have
created in Iraq — the demographics of the issue do not favor
Republicans. That’s because the baby boomers are getting older, while
their employment and their health insurance are getting less secure. So
those core Republican voters who are middle-income white males in the
South are now becoming those people in their 50s who are more and more
concerned about their health.

Pollsters will tell you that most Americans think the Democrats are
a better bet on healthcare than Republicans. In fact, many liberals are
now quoting recent polling data which suggests the overall philosophy
of the nation is now as liberal as it was during the Johnson
administration. If this is true, at some point in the next decade
you’re likely to be facing a government which will not automatically
espouse free-market solutions — especially to a problem that the free
market has yet to show it can cure.

The second consequence of this trend is that regardless of the
political party in charge, more people and a greater share of the
healthcare system are coming under the government’s budget, and
therefore being paid for by the taxpayer—or more accurately by the
taxpayer and the Chinese central bank.

Peter Orzsag, the Congressional Budget Office director, has been
walking around Washington, telling the story that on its current course
the increased costs of  Medicare and Medicaid are likely to take up
essentially all discretionary spending (and much more) in the
government budget within the foreseeable future. 

As I just told you, health insurance companies have not seen
significant growth in the employer market and instead have been looking
to government programs, especially Medicaid and Medicare to increase
their top & bottom lines. And we know how controversial that is.
Well, if you believe the CBO, it is a reasonable assumption that at
some point that spigot will have to be turned off. At some point
society as a whole will become really concerned about the amount it’s
spending on health care–and with the baby boomers filling Medicare it
may well be relatively soon. Perhaps coinciding with the next recession
– when health care costs tend to grown much faster than the economy

But looking around the world no free-market solution has ever really reduced the cost of health care.

But government funded systems have. In both Japan and Canada in the
1990s the absolute dollars spent on health care went down. So it can be
done—even it’s not likely to be very pleasant. But even the American
government can make cuts if it has to, as it did with defense spending
in the early 1990s. If we get to that stage, more politicians may echo
the cry of “what use are those insurance companies taking their 30%
cut.” And it’s not hard to see the electorate agreeing with them.

Okay. I’ll agree that this is a bleak scenario. It is quite possible
that instead we could muddle through and health insurers could keep
doing what they’ve been doing. But on the other hand the demographics
of the baby boom, and the relentless rise in the cost of health care
are unlikely to change. And if health insurers can’t prove their value
to employers, the government and consumers, why should they be kept
around? The industry as it now behaves is unsustainable.  And as Herb
Stein once said, if something is unsustainable, in the long run, it
will end.


So now to my second point—the change in technology and society. This
I am going to make very briefly. As the baby boom has aged, American
households have got richer, better educated  and far more savvy about
using information technology. There is generally a new type of
consumer, and this of course is best illustrated by the incredible
growth of the Internet, and more recently the use of online social
networking — — that’s all your kids on MySpace and Facebook

This consumer is already seeking healthcare information online
voraciously, and is now expecting the same type of immediate
self-service and gratification from the healthcare business that it
gets from many others online. And frankly, many of you to this point
have done a pretty lousy job in that regard.

The good news is that because healthcare is only an occasional
problem for the majority of the younger baby boomers, and those below
them, and because the decision maker on healthcare has been the
employer, the government, and the provider — not the end consumer —
health care organizations have got away with this so far. But the
demographic trends are marching in this direction, and just as they are
having increasing concerns about the security of their health coverage,
those baby boomers are bringing their increased expectations to the
healthcare system.

And then there’s more, and this news gets worse. The combination of
more drug and high-tech treatments, and increased diseases like
diabetes & asthma particularly amongst the still significant
numbers of lower income Americans means that both you’re going to have
to do more with less and answer to have higher expectations from those
you’re serving.

And to be clear, there’s no real reason it has to be a health insurance company doing that “serving”. 

More than a decade ago my IFTF colleagues made this chart describing
the five core functions of a health insurance plan.  I won’t go through
all the functions, but you can see that many other kinds of
organization can put together those services. For example two weeks ago
Microsoft announced that it was creating “HealthVault” in which
consumers can store all their health information. You can be absolutely
sure that Google and a host of others are right behind them, and I
don’t have to tell you how many more people go to their websites to run
their daily lives, than go to yours. Not to mention the half trillion
dollars in market cap that these non-healthcare companies bring to the

Later this morning you will have some examples of non-health
insurers providing services which fit well into my five functions. And
of course at some point the question is, why do you need a health
insurance company to provide those services at all?

My third point is a call to action. There are significant problems
with the healthcare system that I don’t think the government or
consumers by themselves can fix. In most things, you pay more, you get
better quality!

The chart from Jack Wennberg’s group at Dartmouth shows the regional
variations in cost caused by the huge variations in clinical practice.
And people outside the health wonkery realm are beginning to pick this
up — it’s no accident that this subject has appeared in the New York
Times several times this year and is the subject of Shannon Brownlee’s
new book Overtreated.

We also know that the treatment of Americans with chronic conditions
is almost unbelievably inconsistent and that that poor care is
responsible for a huge chunk of healthcare costs.

Sorting out this mess is your job.

That includes–the use of information technology and data to detect
this waste, the development of new incentive systems for providers, and
the creation from scratch of advisory and motivational systems for

These are all needed to improve the care being delivered and the outcomes being produced.

To my mind, that is the only feasible long term role for health intermediaries.

No question, it is much easier to play pricing games, to avoid
insuring sick people, and to stick the big increases to your customers.
But if you can’t do that any more, then you have to prove to your own
customers – and society as a whole — that your role as intermediary
between consumers and providers is doing three things:a) saving money by reducing inappropriate care, b) improving healthcare process by promoting appropriate care, and c)
(eventually) improving overall health outcomes by helping to figure out
what motivates people to improve their health decision making.

And I fully expect you to be scored on your performance in doing all three of these tasks

I wish you luck in pursuing our future, I hope to be back here in 10
or 15 years time to hear how your organizations rose to that challenge.
Because if you fail, we may all be doing very different things in 15
years time.

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James SheehyEmily HardingpcbKS Jeffery, MDdan walter Recent comment authors
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James Sheehy
James Sheehy

Hi Matt,
Some insurers, like UnitedHealthcare, are already leveraging evidence-based medicine to reduce waste in the system and drive down costs. What do you think of their efforts?

Emily Harding

To expand on one of your suggestions that the medical establishment was just going to have to deal with the increase of chronic and degenerative conditions, I might have included a method of doing so. I would have proposed that consumers begin to be told by their medical doctors that, having received training only in Allopathic western medicine, (which by definition teaches how to address SYMPTOMS of disease with drugs and surgery), they have limited ability to help them regain their health once diagnosed with a chronic and degenerative disease– as all they were taught to do is to manage… Read more »


Insightful comments on making surgeons salaried. I had tended to think of it as a general change for all physicians, but on reflection it probably does make sense to first turn to physicians who work in the hospital to change the reimbursement system. You need a large organization to take on the responsibilities of structuring the employer-employee relationship in a productive and stable way. A hospital could do exactly that.

KS Jeffery, MD
KS Jeffery, MD

PCB – you raise some very valid points, and it is precisely this dilemma of serving two masters that leads to many of the issues we face today. In the scenario I was raising, it would be shared money (physician AND patient), to be spent on healthcare. The amount a doctor stood to gain by practicing cost-effective, evidence-based medicine for any one patient would be small – ideally so small as compared to what the patient themselves stood to gain from frugality that we might actually find ourselves working to persuade patients to PURSUE testing or treatment. However, multiplied by… Read more »

Barry Carol
Barry Carol

Dr. Jeffery, A couple of points. First, I personally have no problem with the government establishing a Comparative Effectiveness Institute modeled after the Federal Reserve that could make judgments about the relative efficacy of various drugs, devices, and medical procedures and base both coverage decisions and copays on those judgments. I think it would also be useful if the medical profession studied medical practice in other developed countries as it relates to end of life care. In the U.S., we don’t seem to know when to stop. Correct me if I’m wrong, but my perception is that, aside from cancer… Read more »


KS, Do you think patients would tolerate a transparent system where physicians benefit financially from limiting testing and other interventions? There is so much information asymmetry between patient and doctor regarding the need for medical services for given problems that, as much as we wish it were otherwise, it usually comes down to trusting that the doctor is acting in the patient’s best interest. If patients feel there is a chance that the doctor’s financial interest might be influencing recommendations, there is a gigantic wedge of distrust and suspicion thrown into the relationship. Patients tolerate current fee for service incentives… Read more »

KS Jeffery, MD
KS Jeffery, MD

rbaer – Thanks for your question – I really should clarify what I mean. When I say “bottom up”, I am referring strictly to the immediate participants in the specific healthcare encounter – typically a physician and patient. In contrast, “top down” refers to any other position seeking to impact the encounter, one that is not directly involved in the encounter. Thus, when United Healthcare sought to influence physician behavior through utilization review, this was a top down approach. United Healthcare neither delivered nor received any healthcare; they simply sought to impact it. Similarly, CMS in setting the minimum SGR… Read more »

dan walter

My wife went to Hopkins for a cardiac procedure. Go here for details: http://adventuresincardiology.wordpress.com/)
They screwed it up and almost killed her. Her bill came to over $120,000. I called the insurance company and told them what happened. They just paid it without asking any questions.


“I rather favor an approach that impacts directly step two, and I wish it would be by the patient and physician themselves, of their own accord.” I read all your posts and I am still unsure what you means in practical terms … let’s say, a patient with migraine headaches wants a brain MRI, which is not really a necessary test in an otherwise neurologically intact individual … what would be your suggested approach? The doctor convincing the patient that it is an unnecessary test (counselling)? Copay/self pay that makes the exam unattractive to the patient? The former would be… Read more »

KS Jeffery, MD
KS Jeffery, MD

jd and Peter – Thanks to both of you for your comments and feedback. Some very good points are being made. I think on the whole we are in agreement that medical utopia is a mirage, but whether we’re talking Canada, the US, the UK, Germany, or most anywhere else, I think we also can all agree that ample opportunity exists to create a system that more closely aligns societal expectations with economic realties. It is my belief that the essence of the debate centers on the choice between a “bottom up” approach (spending restraints integrated AT the point of… Read more »


“My foreign colleagues seem to spend as much time decrying their ‘systems’ as do my American colleagues, and with wholly valid reasons.” KS Jeffery, I am a Canadian living in the U.S. who has used both systems. My first real experience with the U.S. system, other than paying premiums, was when I needed cataract surgery. The experience with BCBS for this minor event was so distasteful that I am now uninsured/self-insured by choice and will avoid care here. I can go back to Canada or to India and pay cash for a fraction of the cost here. No Canadian ever… Read more »

John Norris

Seems like a well reasoned lecture…I hope you can give us a sense of how it went over! Perhaps discussions ended up being similar to these comments?


What I said in both posts was that we should in general expect that health care will take a larger share of national GDP due to economic and social forces outside the industry itself. A system like ours that is so bloated and performs so much of the wrong care at too high of a price has some “fat” that can for a time be trimmed to counterbalance this long term economic trend. Realistically, I think the best we can hope for is to freeze the expense on our medical-industrial complex, but if we do that for a decade we… Read more »

KS Jeffery, MD
KS Jeffery, MD

jd – If I’m understanding you, you posit in your earlier post and in the first 2 paragraphs of this most recent that the amount the US as a whole spends on healthcare is OK, even expected. I follow that this may not be an unreasonable position to entertain, for all this spending keeps many, many people employed driving the economic engine of healthcare. I don’t think many would agree, however, nor do I, that 16% of GDP in 2007 – heading to 25% of GDP in 2025 – is an “OK” level for healthcare spending. (CBO report, Nov 2007).… Read more »


KS Jeffery, I really don’t think it is meaningful to accuse the US health care industry of having costs that go up every year as an indictment of US health care, nor is it meaningful to point out that other nations also have costs that go up pretty much every year as an indication that these systems do not have costs under control either. We should expect that health care will take up a modestly increasing share of GDP at this stage of economic development for advanced nations. As I said, the share of GDP for things that involve industrial… Read more »