I’ve been reading a recent paper from the Committee for Economic Development, one of the less doctrinaire business research groups, that should give health care reform advocates (and opponents) food for thought.
“ Health Care in California and National Health Reform,” authored by health care economist Alain Enthoven and CED’s Joseph Minarik, was apparently written during the course of the lengthy debate on reform, with updates inserted after passage of PPACA. With an emphasis on CED’s own earlier proposals for reform rather than the new law, the timing of the paper’s publication was obviously less than perfect, but, even so, the findings are well worth examining.
The paper’s scope is limited to California, clearly not a typical state, given its considerable HMO enrollment and relatively low per capita health care spending, but one with the largest non-federal employer insurance exchange (CalPERS, the state employee benefit system), and the largest delivery system HMO (Kaiser), both of which have made great efforts to make health care more cost-effective. The paper includes reports of interviews with CalPERS administrators and employee benefits managers of major academic and business employers offering a range of health care coverage options to their employees, including a number who have adopted a managed competition model with fixed dollar employer contributions and choice of coverage from among a limited number of competing options.
There’s both good and bad news for health care reformers.
First, the good news:
Large employers who adopted a managed competition model, especially—like CalPERS—in conjunction with an insurance exchange, expressed great satisfaction (and indicated no employee dissatisfaction). Particularly for the large public and academic employers, the less costly options—notably Kaiser and other HMOs—have been the most popular with employees, in spite of their more limited choice of providers. Activist exchange administration can reduce costs, as CalPERS has demonstrated in pressing their major carrier to create a “value network,” in sponsoring a quasi-ACO, and in weeding out less effective plan options.
Now, the bad news:
In spite of the apparent success of managed competition in the largest employers interviewed, the California market remains dominated by what the CED paper’s authors call “cost-unconscious demand,” in the form of a single FFS plan or a choice of plans with the employer paying a percentage of the premium (as opposed to a fixed dollar amount).
Even with less costly options available, many employees choose more expensive (typically PPO) coverage, most likely because of greater flexibility of provider choice or because of existing provider relationships. In spite of its reputation for innovation in care coordination and IT, Kaiser’s premiums are only marginally lower than those of competing carrier HMOs (and, in one case, are slightly higher) suggesting that attempts in PPACA to simulate features of delivery system HMOs may yield smaller savings than hoped. (It is also possible that Kaiser could reduce its large group premiums further but sees no business reason to do so.) Hospitals can be key to health plan costs, with the most prestigious (and typically most expensive) often essential to the marketability of an HMO or PPO network. Hospitals have recognized this, with the most aggressive showing unwillingness to negotiate rates and—in at least one case—insisting that all hospitals in the chain be included. (In California, physicians have been equally aggressive in stifling competition by such approaches as backing a legal ban on physician hiring by corporations—such as hospitals.)
One question the paper suggests is: if the managed competition exchange model works as well as CalPERS and other employers cited in the paper believe, why haven’t large employers successfully grouped together to form their own exchange(s)? While small group exchanges have failed because of adverse selection, large groups should be able to avoid this problem. Possible answers include an unwillingness to cooperate with competitors, preference for self-insurance (avoiding state regulations and mandates), union refusals to modify coverage to fit a larger system, and a desire on the part of human resources executives to control their own benefits.
What does the CED paper imply for PPACA health care reform? Not a lot that’s encouraging, beyond the apparent success of the CalPERS exchange model. Exchanges are most efficient with a limited number of options; cost consciousness depends on individual subsidies (if any) being in the form of fixed dollar amounts; anti-monopoly measures may be needed to avoid creation of cost-effective networks being stymied by dominant hospitals or physician groups; and exchange administrators must be activist to minimize costs. Unfortunately, PPACA provides few incentives that might lead to any of these being achieved. Also, discouragingly, the relative rates of Kaiser versus its competitors suggest that innovations in payment methodology, care coordination, and IT, expected to be implemented for Medicare and then disseminated through the health care system, may produce only marginal savings.
Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies. He is editor of Health Care REFORM UPDATE .