A Kinder, Gentler Approach to Managing Health Care Risk

Health care’s purchasers crave certainty. But complexity – and therefore uncertainty – rules. Assurances are hard to come by.

The most common question asked by prospective clients of my onsite clinic/medical management firm is how much less their employee health benefits will cost if they deploy our services. They often expect that we’ll review their claims history and nail down what their health care will cost once we’re involved. Looking in the rear view mirror can inform the future, but it isn’t foolproof.

The Complexity of Health Care Risk

The challenge here is that so many different mechanisms contribute to the need for care, the ways care is accessed, the ways care is delivered, and the ways it is priced. Even mechanisms that, in isolation, are strong, often are inadequate in the context of larger cost drivers.

This means that while predicting results in general terms is straightforward, doing so with any precision or specificity is a challenge. My firm can point to consistent previous performance with other clients, and show that in most cases we generate a 15+ percent overall savings on group health expenditures, net of the clinic investment. And we can detail how our management of the process is both broader and more targeted than the management of risks before we arrived. But while we’ll sometimes guarantee certain performance targets, we also know that the cards can and will sometimes fall against us.

Even Useful Management Approaches May Prove Inadequate

In the onsite clinic sector, vendors often describe the savings they’ll generate in terms of “replacement” costs. They may argue, for example, that a clinic office visit will cost $X less than on the health plan network. Drugs and labs will cost $Y less in the clinic’s dispensary than they would outside.

This is certainly true. Many primary care services can be delivered more cost effectively in a clinic than in a conventional primary care practice that is trying to optimize the revenue opportunities available through fee-for-service reimbursement.

But a clinic’s unit cost savings may not be large enough to reduce overall health plan costs. Health plan performance is shaped not just by clinical management, but also by financial and administrative influences. Even good primary care, which we know creates positive impacts throughout the system, isn’t an adequate check on a system that, over decades, has developed many often subtle ways to extract more money than it is legitimately entitled to.

The failure to address the robust mechanisms that underlie care and cost may account in part for the fact that, even with the addition of screening, care managers and other components, most medical homes developed in traditional primary care practices have been unable to demonstrate measurable savings or health improvements.

Vectors Of Health Care Risk

It can be useful to list some of the drivers of risk, as a way of developing a broader strategy.

Of course there are the conditions that require care. Health care must tend to the entire range of health experience: pregnancy, injuries, diabetic episodes, incontinence, heart attack, arthritis, neurological disease and everything in between. Frailties can come on us suddenly, in a stroke or a fall, or be progressive and chronic, as with asthma or cancer.

In groups or regions, these issues may be spun by cultural tendencies. Some behaviors generate or exacerbate health conditions. And, as the Dartmouth Atlas makes clear, health care providers in different markets may respond to the same conditions with entirely different care and cost patterns.

But our health system also has financial incentives that encourage overtreatment, drive up pricing, keep information isolated, and steer patients to particular sites, often independent of appropriateness or performance. Quality and cost results can vary wildly, depending on which doctor was seen, whether information could be seamlessly exchanged, whether the care was coordinated, and many other factors.

Layer on top of this whether people are willing to engage in their own health. Will they participate in approaches that are designed to identify problems and follow a regimen to manage ongoing conditions?

We also know that incentives can influence lifestyle, how care is accessed and how it is adhered to, and therefore the health outcomes and costs that result. Carrots and sticks can encourage patients to follow rules built around what’s known to work: doctors and services that offer the best value, letting the primary care physician be your patient advocate and guide, bringing specialty information back to the primary care doctor.

And then there’s just plain poor health and bad luck, which drive catastrophic cases, the fastest growing area of health care cost. People in automobile accidents or suffering major illness. Munich Re recently reported that the percentage of cases that exceed $1 million grew seven-fold over the past decade. Many high cost cases involve misdiagnosis and mismanagement that result in poor quality and excessive cost, one reason behind Walmart’s recent Center-of-Excellence contract announcement.

Multi-Vectored Problems Require Multi-Vectored Solutions
The deeper point is that much of this turmoil can be managed more effectively but that doing so requires a multi-focused effort. The emerging models for improving care and cost can’t only rely on primary care, or selecting better doctors and hospitals, but will leverage incentives, data-driven narrow networks, volume-based contracts, clinical decision support, care-neutral reimbursement, and a host of other mechanisms that can bring health care back into homeostasis.

In other words, the new way of managing care isn’t just about replacing a higher cost service out on the plan with a lower cost one in the clinic. It’s about changing the care patterns and many of the structures that support that care. It’s about better ways to manage the processes that undergird care and cost. And while it may be difficult to precisely forecast the result each time, it isn’t hard to understand that the path to that result is less rigged, better for the patient and better for the purchaser.

Brian Klepper, PhD is an independent health care analyst and Chief Development Officer for WeCare TLC Onsite Clinics. His website, Replace the RUC, provides extensive background on the role that the AMA’s RVS Update Committee has had on America’s health care cost crisis. This essay originally was published inMedscape Connect Care and Cost Blog.

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19 replies »

  1. Thank you, Brian. This is very helpful.

    Only one last quibble, I am not certain that the incentives in most of Europe (NHS excluded) are that different, seeing that fee for service is the most common way of paying doctors.
    Maybe we should look at the model from 25 years ago and see why it got corrupted over time…. I have my theories, of course…. 🙂

  2. Yes, MD as Hell, as I’ve said on many occasions the patient gets the short end of the stick. The current system structure and incentives cause patients to get a lot more procedures, including surgeries, than they need, often with significant risk and harm attached. It also causes them, as purchasers, to pay double what patients in other industrialized countries do for what is often poorer quality care.

  3. Margalit –
    I couldn’t agree with your comments more. And don’t we really want to INCREASE the utilization of primary care?

  4. Margalit,

    You don’t get any argument from me on large risk pools – unfortunately, its impossible to do away with the concept of risk. You can only have very large pools and try to dilute its impacts. That said, the current political environment is not receptive to monkeying with a structure that’s been very good to the most influential players. You can have the best ideas in the world, but the policy world isn’t going to consider them unless they accrue to the benefit of the guys in charge.

    Don’t waffle on the term appropriateness. There are many, many different ways to check and balance, and purchasers shouldn’t have to simply take the word of the guy who’ll cash the check that the surgery is appropriate. This is why 2nd opinion, and other guideline-based checks are often desirable.

    And then there’s mis-diagnosis and mis-management. Mayo finds that a significant percentage of the transplant patients referred to them don’t need a transplant at all, and they send them home without one.

    As you point out, cost is a combination of unit pricing and utilization. And to your point, I’ve recently seen data showing health systems that have increased the pricing of specific common procedures – e.g., colonoscopies – 300% in two years, presumably to compensate for dropping procedure rates associated with the recession.

    Do a little digging, and you’ll find there’s an extensive credlble literature on US over-utilization. And it makes logical sense, given the differences in incentives between the health systems in the US and other industrialized nations. As I’ve described before, we can see an extraordinary difference just in the primary care referral rates between the paradigm we replace – conventional FFS practices where the visits are around 10 minutes, and 25-35 percent of patients are referred – and ours which uses a 20 minute visit. Our docs refer about 12-15 percent of patients. Once the patients are referred, the financial incentive of the specialist is to do diagnostics and procedures, so the act of reducing unnecessary referrals – these patients are typically conventional primary care cases who would never have been referred 25 years ago – dramatically impacts downstream service utilization.

    But you don’t have to take my word for it. Take a look at Rita Redberg’s article a couple years ago in the NYTs, call Squander Medicare’s Money (http://www.nytimes.com/2011/05/26/opinion/26redberg.html?_r=0). Dr. Redberg is a cardiologist at UCSF and the Editor of Archives of Internal Medicine. Or read Shannon Brownlee’s Overtreated (http://www.amazon.com/Overtreated-Medicine-Making-Sicker-Poorer/dp/1582345791/ref=sr_1_1?ie=UTF8&qid=1361217531&sr=8-1&keywords=brownlee+overtreated). Shannon works with the Dartmouth Atlas folks. Or take a look at Tom Emerick’s Cracking Health Costs (www.crackinghealthcosts.com). Tom is the former VP, Benefits for British Petroleum and Walmart.

    Hope this is helpful.


  5. Brian,
    I am looking at other countries, not just different regions in this one country, and what I am seeing is based on OECD averages for each nation.
    1) Utilization is inline with everybody else, with few notable exceptions.
    2) Unit prices are orders of magnitude higher than everywhere else.

    Overall price is equal to utilization times unit price and you can reduce either one to lower your overall price.
    What perplexes me to no end is the obsession with reducing utilization/volume, not surgically where needed, but across the board in broad strokes, as a measure to control prices, instead of trying to reduce unit pricing.
    Furthermore, everything we are doing now is actually increasing unit pricing, and the larger the provider systems become the easiest it will be for them to increase unit prices, precisely to compensate for our obsessive reductions in volume.
    The net result will most likely be that only very wealthy individuals will be able to afford those few expensive units, and volume will be slashed by putting complex medical services out of reach for average folks, who will be showered with preventive care, screenings and lifestyle advice, but that’s about it, because the system is not geared to providing the much maligned “sick care”.

    To answer your question, appropriate care is a very nebulous term and implies that someone other than the individual gets to decide what is appropriate. The way things are going, this power is being transitioned from doctors and patients to organizations empowered with “managing” both patients and doctors.
    The replacement of fee-for-service implies a decision maker that is neither the patient nor the doctor. I question the motives of this “management” layer, and btw, it is absolutely ludicrous to believe that in this day and age, corporations need to acquire monopolistic market shares in order to have data available to them.

    Just so that I don’t criticize without offering an alternative, I would encourage small business, thousands and thousands of them, charging fee for service, just like we pay for everything else without inflationary effects, and I would break up those mammoth health systems into the smallest functional pieces. And finally, but not necessarily, I would do away with the entire concept of risk by creating a single pool of patients where expenses can be accurately predicted and budgeted for, through price controls.

  6. Peter,

    While I agree with you that people often have their priorities out of kilter, health care does not cost $20. Last year’s Milliman Medical Index showed that the average family of 4 now spends north of $20K/year. I have clients in Wisconsin that are currently spending more than $19K/employee, and that doesn’t include the employee’s out-of-pocket costs. Much of this cost is unnecessary and inappropriate, and stems from predatory unit pricing – see todays LA Times article (http://www.latimes.com/business/money/la-fi-mo-medical-bills-20130201,0,3225077.story) – and over-treatment.

    Most doctors aren’t, as you put it, on “salaries.” Their income derives from piecework, so the more they do the more they make. This means that most don’t get paid to manage the care process, but to deliver services. So in the case of many specialists, the $500K comes as a result of generating billable services. Fewer services, less money.

    In any case, it doesn’t matter whether you and I agree on this. The kinds of market forces many of us are behind will rationalize the system, making it harder to do inappropriate care. Costs will come down as a result.

  7. Margalit,

    That would be true if your assumption was correct, but it isn’t. Waste is not concentrated in just a few areas. It is rampant in the specialties, because most specialists earn the lion’s share of their income on diagnostics and procedures. Specialists in most regional medical centers also are paid as a percentage of what they prescribe, so there is a symbiotic relationship that foments excess.

    Your argument also ignores that tremendous practice variation between physicians within specialty and markets for a given condition, with episodic costs typically and consistently ranging 6x-8x between the highest and lowest cost specialist. This phenomenon is rooted in a disregard for evidence, which results in wildly different outcomes, most of which don’t turn out optimally for patients or purchasers.

    Your outrage at “coming down like a ton of bricks” is sweet, but it forgets that this carnage has been going on for decades, and that its the single most destabilizing element of our economy.

    The mechanisms I’m describing are aimed at nothing more than accountability, transparency and driving the right care at the right time. Its going to mean that doctors and other health industry folks who have been making a lot of money for a long time that they really shouldn’t have, will suddenly make less, and that the benefit will accrue back to patients and purchasers.

    So long as we’re not attacking or limiting appropriate care, why would any of that be objectionable?

  8. Brian,

    Thank you for your thoughts. I really dont think $500,000/yr is too much at all as i often find that people don’t prioritize correctly. They would rather have things (clothes, computers, entertainment……) than pay for their health care. People bulk at 20.00 copay which is ridiculous as they willingly pay 20.00 for so many other ‘things’. I don’t see physicians salaries as the burden at all.

  9. Brian,
    We sort of know which services are most likely to be inappropriate and unnecessary, or at least overused compared to other developed countries. It’s not doctor visits, certainly not primary care doctor visits; it’s not hospitalizations; it’s not length of stay; and it’s not most other procedures. It’s expensive scans and some semi-elective stuff.
    So why are we coming down as a ton of bricks on people that a) derive no financial benefit from the excess and b) are the most logical venue by which to curb this excess, if and only if, they are empowered to check the power of those who cause the excess and benefit from it?
    Why are we forcing these independent checks and balances to become financially dependent on those whose greed they should regulate?
    It makes absolutely no sense to me, as a citizen, to remove this layer of defense, as thin as it may currently be. It’s almost like going to court with an attorney hired and payed by the other side….

  10. Nothing is wrong with $500k/year, Peter, if the value you provide is very significant and appropriate. But in a system where we know that as much as 55% of the services are inappropriate and unnecessary, it may be excessive for an entire class of professionals to consistently make more than 10x the household income of the national population, and more than 20x the income of 1/3 of the population. Keep in mind that this reimbursement has not been established, as Jeff Goldsmith recently pointed out, by market forces, but through administrative mechanisms. In other words, they’re artificial.

    It’s a pretty good gig if you can get it. But its only one component of an array of related health care costs that are similarly valued, and it has created an inordinate, destabilizing burden on the rest of the US society.

  11. Janie,

    No, the extremely modest reimbursement cuts by CMS and the health plans has not caused increases in volumes. Those volumes have been generated by the unit pricing of specific services that has made them so lucrative. (See https://thehealthcareblog.com/blog/2013/02/06/the-untouchables/ or https://thehealthcareblog.com/blog/2012/08/01/why-medical-management-will-re-emerge/). The data on this phenomenon are overwhelming and definitive.

    When you say that “doctors are not getting rich on these gigs,” it depends on which doctors you’re talking about and what you mean by rich. Practicing physicians aren’t in Bill Gates or Warren Buffett’s league, but orthopedic surgeons, radiologists, cardiologists, dermatologists, ophthalmologists and other specialists can often expect to make more than $500K/year, which is pretty comfortable in most Americans’ book. Primary care physicians, not so much.

    As to the health IT problem, see this recent piece. http://careandcost.com/2012/12/27/an-archipelago-of-health-information-islands/. EMRs and associated tools won’t be of real value in managing patient care until they’re connected, and the HIT vendors have systematically blocked that.

  12. Margalit,

    Under the old paradigm, it was very difficult for small or large Centers of Excellence (COE) to be identified, known and influential. The proliferation of data has made the golden pockets of medicine you allude to much more visible and accessible, and relatively small organizations like Virginia Mason in Seattle have suddenly been propelled to the spotlight as a result. The COE program pursued by groups like Walmart, Lowes, Pepsico and others, has effectively served notice that appropriateness, value and a willingness to be transparent on quality, safety and cost will matter to purchasers. It also serves notice to regional providers that many patients will be outsourced elsewhere unless systems improve. This is all positive.

    I’m involved with many health systems that claim to be moving down an ACO path, and I see very few who are doing anything meaningful. So long as they continue to be paid through FFS, their incentive to is to do as many services as they can be paid for, rather than to drive appropriateness. Just as real interoperability is required for us to get to real care coordination, real medical management will require putting providers at financial risk.

    I can understand your desire to see small independent physicians maintain their autonomy. That would be fine so long as we change the incentives associated with our model of financial reimbursement. You know that I’ve advocated for a long time for “care-neutral” reimbursement designs, that pay providers to manage process, not deliver services. This is the most sensible way out of our cost crisis, but of course it would be rejected by everyone in health care, who have been riding high on inappropriate services for decades now. Unfortunately, there are significant capital requirements to acquiring and operating the infrastructure associated with effective medical management, so it becomes harder and harder for independent physicians to be as effective in that environment. There are some strong large multi-specialty group practices around the country, but they’re competing with health systems with much greater resource bases.

    In other words, the current environment favors consolidation, not independence, Larger organizations will favor excess in the short term, but efficiency in the long term. Smaller, independent entities will provide generally mediocre performance, but will be forced by the market to join larger entities that can afford the tools/skills required for management.

    This doesn’t mean that its desirable, only the logical result of a maturing health care marketplace.

  13. Brian, I don’t think that we are living in a Golden Era of Medicine, but I do believe that we used to live in an era that made it possible to have Golden pockets of Medicine, albeit inequitably distributed amongst our people.
    What I would have liked to see is the identification and expansion of these pockets of excellence, including the tiny ones that no one wants to discuss, into larger and larger areas, until everybody has access to excellence.
    Instead, what I see is a new paradigm based on meaningless and very loud slogans (e.g. value instead of volume, patient-centered, accountable care, etc.), a paradigm that has not been tried before here or anywhere in the developed world, and a paradigm that shifts the locus of control from many individual doctors to a few too-big-to-fail corporations. Forgive me if this makes me a bit skeptical….

    This is not in any way addressed to what your firm is doing, which sounds like a great model, but one that is not really in the mainstream of the ACO bonanza. And this is also not an indictment of properly designed and deployed technology (i.e. medical devices, pharmaceuticals, diagnostics and software to service them all), which I believe will eventually resolve the cost issues anyway.

  14. Funny, just as the wage and price freeze of the 1970s caused the worst inflation in our country’s history, the continued cutting of and uncertainty in physician payments by CMS and most insurers, have caused the volume oddity you describe. Innovation has been up front and center, enabling tests and reports to be done quicker enabling the volume to increase so that those signing the orders can continue to pay their mortgages.

    Doctors are not getting rich with these gigs. the hosptial executives and insurance executives are, while the patients are the grist for their cash registers.

    You forgot to mention one huge risk to the entire system and patients, that being the unregulated HIT devices that cause errors, fail to improve outcomes, and increase costs, actually, automating the generation of reports and more.

  15. It is pretty clear that the current structure has encouraged dramatic excess and mismanagement, which has translated to relatively poor quality at ruinous cost. This isn’t up for debate; there’s a literature that has documented this.

    I disagree with your thesis that we’ve been living in a Golden Era of Medicine and now we’re headed for Babylon. Americans have been living in an era of poor accountability and profiteering at the expense of patients and purchasers. Some physicians are good, but others are not, and if you’re unfortunate enough to lack resources or not be connected to the local doctors’ fraternity, there really aren’t a lot of mechanisms to help you understand and navigate away from potential disaster.

    My firm tends to hire physicians in their forties and older, and we haven’t seen any erosion of skill associated with using clinical decision-support tools. If anything, our docs have access to MUCH more patient information than they’ve had access to in the past, and they love this because they believe it allows them to make better decisions.

    Migrating to a system that is more transparent about quality, cost and safety helps our doctors understand who they want to steer to and away from. It provides more measures of performance (in terms of achieved quality/episodic cost across a severity-adjusted population). And in our system, the doctors operate outside of FFS reimbursement, which removes the financial incentives that drive so much inappropriateness.

    All this strikes me as a a healthier environment that can allow good doctors to be better and, equally important, help us identify poor doctors, encouraging course correction and stronger skills rather than simply living with the dumbed down care that has been so pervasive for the past 40 years in the US.

    In other words, there’s every reason to think that the future will be much better medicine than the past, not just because of IT, but because there are market forces that will make the system more accountable and value-focused, characteristics that medical and health care industry lobbies have fought against for decades.

  16. There are some that recommend even more dumbing down of doctors, by cutting medical education requirements and such, as a vehicle by which to advance a health care system of uneven quality to one of standardized mediocrity for all but the 1%, with the added benefit that there will be no one knowledgeable enough left to complain.

  17. Your premise is based on the flawed assumption that the new generation of doctors actually know how to care for a patient. Do they know what care is? Is their clinical judgment any good? Or are they merely excellent at clicking on order sets cause they think someone with an infiltate has pneumonia? The dumbing of America’s doctors began with the compuerization of care and the worst cases of neglect began cropping up at the amebtime, about 9 years ago.