Dump the Business Model

flying cadeuciiThere are no winners in the fee-for-service game.

It’s time to toss the whole business-as-usual model — for your own good and the good of your customers.

The emerging Default Model of health care — the “consumer-directed” insured fee-for-service model in which health plans compete to lower premiums by bargaining providers into narrow networks — not only does not work for health care’s customers, it cannot work. This is not because we are doing it wrong or being sloppy. By its very nature the Default Model must continually fail to bring our customers what they want and desperately need. Ultimately it cannot bring you, the providers, what you want and need.

Take a dive with me into the real-world game-theory mechanics of the health care economy, and you will see why. It’s time to rebuild the fundamental business models of health care.

The Default Model Health Care Game

It’s a little easier to find our way around an economic model by picturing it as a game and asking: “What defines winning for each player? What does each player need to do to win?”

Health plans: For health plans, winning means surviving, succeeding and growing as a business. But there are a couple of rule changes now. Health plans used to be able to stay more profitable by pushing down their medical loss ratio (MLR — the percentage of premiums actually paid out for medical care), by “rescinding” the plans of people who cost too much, and by refusing to cover anyone with pre-existing conditions.

Now they have to take everybody, can’t toss them out, and their MLR has to be at least 80 percent (or 85 percent for large customers). So their administrative expenses, advertising, executive salaries (and the profits and stock price of the for-profits) are all tied to a percentage of the actual costs of health care. Hmmm. If they were confronted with a way to make health care cost half as much, would they be interested? Would they make it a top priority? No. They have no incentive to actually drop the real costs of health care.

On the other hand, the only way they can grow is by capturing more market share in a highly price-sensitive market. So they have an incentive to keep premiums low enough relative to each market to keep and even gain market share. And the market share rodeo is replayed each year.

Their way out of this dilemma? Put together narrow networks based on lower fee-for-service prices for each item. To do this, they must (it’s not optional) re-negotiate every year with every provider — often even during the year — and even over individual bills. So the health plans cannot promise to actually cover who they say they are covering, or even the procedures they say they are covering, much less that they will cover them next year. Nor can they promise to the providers that they will actually pay what they say they will pay, nor that they will stick to that price next year.

This is not a result of playing the game badly, but of playing it well. It is built into the structure of the game.

Providers: Providers win by surviving, continuing to provide great service to their service populations — and expanding and changing enough to serve the newly insured. To win at this game, providers must play hard to get with the private payers. They must either opt out of these low-cost networks (which they can do if they are in some way indispensible in their market, or get their customers in some other way). Or, having agreed to accept the low fee-for-service reimbursement, they have to cut their internal costs so they at least believe they are making money, and then make it up on volume.

“Believe” is a key word here, because most health care providers do not do cost accounting deeply enough to know their total cost of ownership for their products. “Volume” here includes not just more customers (greater market share), but performing more items from the approved list (more unnecessary tests and procedures) and performing more of the big-ticket items. In other words, they have to cut costs internally while doubling down on the waste and overtreatment that characterize the fee-for-service regime. So while agreeing to lower fee-for-service prices, the providers cannot truly promise lower actual costs.

Physicians who are not on staff are strongly tempted to game the system by bringing in higher-priced out-of-network colleagues as co-surgeons, or referring the patient to out-of-network colleagues, or performing other sleights of hand that hugely burden the patient with unforeseen, uncovered costs.

Providers have little incentive to develop long-term relationships with patients and families or to prevent next year’s diseases (by helping patients stop smoking, for instance) because they can’t say for sure that they will be in the network next year. Given deductibles and co-pays and co-insurance, using health care is still an expensive proposition for the consumer. So providers using the Default Model have little incentive to offer truly lower-cost health care (prevention, active relationships, medical management, real no-horsefeathers-necessary and helpful medical care).

The providers cannot promise lower costs, cannot even give real prices and have no incentive for prevention, as long as they stay in the fee-for-service game. Again, this does not come from playing the game badly, but from playing it well. The game is structured so that the provider cannot really win as long as the provider sticks to the Default Model game, because all payers (government and private) will continually seek lower fee-for-service prices. To bargain from a strong position, both sides must intentionally keep the relationship mercurial, must keep the networks always in flux. This puts the provider in a very narrow, unstable situation. The best the provider can hope for is a stalling, rear-guard action.

How to Win: Purchasers and Consumers

If you are older than about 45, you probably remember the classic 1983 film WarGames, in which the artificial-intelligence computer in charge of strategic nuclear war (nicknamed Joshua) thinks it is playing a game called Global Thermonuclear War. The teenage computer geek David Lightman (played by a young Matthew Broderick) madly tries to get Joshua not to blow up the world. With the help of his co-conspirator Jennifer (Ally Sheedy), he challenges it to a game of tick-tack-toe.

At the climax of the film they are sitting in NORAD headquarters, watching the computer play tick-tack-toe thousands of times at the same moment that it is moving through the steps of the game Global Thermonuclear War, counting down to a real world-destroying conflagration.

Jennifer: What is it doing?

David: It’s learning.

Ultimately, from playing tick-tack-toe the computer comes to the realization that there are games that have no winner, that the only way to win the game is not to play it.

Purchasers: Employers and other large purchasers are beginning to see that this is true of the Default Model for producing lower-cost, high-quality, reliable access to health care: By its very nature it cannot give them truly lower costs, higher quality or reliable access. The only way for purchasers to win is not to play the game.

So, many of them are self-funding their health care and searching for ways to not play the fee-for-service, narrow network Default Model game. These ways include bundled prices, reference prices, medical tourism contracts, Centers of Excellence contracts, on-site clinics, direct pay primary care, captive accountable care organizations — all of which in one way or another opt out of the fee-for-service Default Model and instead pay directly for the desired medical results at an agreed price without paying for wasteful unnecessary overtreatment.

Consumers: The Default Model makes the term “consumer-directed” laughable because it takes away the consumer’s real choice. The consumer cannot choose based on price and quality; that choice is done for them. They can go only to the in-network physicians and institutions, and there are usually darn few in the network to choose from. The consumers have to take what they can get and be glad of it.

Individual consumers have few opportunities to participate in the strategies (such as reference pricing and captive accountable care organizations) the big purchasers use. The closest they can come is combining really high-deductible catastrophic health plans with direct-pay primary care or retail care.

Consumers do not trust the health care system and do not feel they have any real consumer power, because they are typically asking the system (the combine of payers and providers) eight major, life-changing questions, and getting no answers that they can trust from anybody. These eight questions are:

  • Am I actually covered for the institutions, facilities and doctors that you tell me I am covered for?
  • Will I be covered for them next year?
  • Will my specialist, on whom I have relied for years, and who has taken my insurance for years, suddenly be out of the network?
  • When I choose an institution and physicians who are in-network, will someone sneak in an out-of-network doc with a huge fee?
  • Will my premiums go up unreasonably, at a time when I read that the real costs of health care are nearly flat?
  • Will you come up with some fine-print reason that I am not covered for something I was told I am covered for?
  • If I get surprised by huge medical bills caused by fraudulent inclusion of out-of-network docs, by balance bills, or by denial of coverage for something I was told was covered, will you help me? Or will you say it’s not your problem?
  • Can you guarantee through my arrangement with you that I will not be financially ruined?

The health care system, payers and providers playing the Default Model Game, are delivering an unreliable, unguaranteed, financially and medically dangerous product to their real customers — the large purchasers and the consumers of health care.

This is not stable.

How to Win: Change the Game

How can hospitals and health networks win this game? Only by imitating Joshua: Find a different game to play. Stop thinking of payers as your customers. They are financial organizations that stand between you and your customers. If they are not helping you move beyond the Default Model, they do not truly have the best interests of either you or your customers at heart. I have never met a health care executive who would say, “I got into this business to make sure the insurance companies stay profitable.”

The Default Model is their game, designed to do just that. You don’t have to play it anymore. That’s not your circus, that’s not your monkey. Set a goal of getting out of the fee-for-service business as much as possible. Provide your large customers (employers, pension plans and other large purchasers) the products and non-fee-for-service financial arrangements they are looking for, product line by product line, region by region, population by population. Then find or invent ways that individual consumers can take part in the same strategies as the large purchasers — even if this means inventing your own insurance mechanism tailored to the needs of your institution and its real customers.

Drive down internal costs and bid actual prices that you know you can support. Drive toward a future that is not supported by wasteful overtreatment in a fee-for-service world, but as much as possible by multiple revenue streams that pay you directly for real, necessary, helpful medical care supported by long-term, trusted relationships. That, after all, is why we got into this business: to provide for the health and well-being and financial well-being of the millions of people who depend on us so heavily.

52 replies »

  1. What’s up, all is going perfectly here and ofcourse every one is sharing facts, that’s genuinely
    good, keep up writing.

  2. Excellent post. I absolutely appreciate this website. Keep writing!

  3. If its a serious space, write a serious article. You’ve conveniently ignored some of the most important factors in healthcare economics, and that demands a strong retort. Please tell me how an article that suggesst providers “[invent] their own insurance mechanism” AND doesn’t mention “risk”, is a serious aritcle?

  4. Okay,
    re ” code-driven, insurance supported, paying for items picked off a list largely at the determination of the provider.”
    Agreed….the degree that all services are constrained by medicare induced coding I agree…..but this is really not provider driven…it is providers complying with bureaucrat intervention of what is billable.

    In common discussion this is viewed as “fee for service” vs new models such as capitation type ACO plans. But real fee for service is fine….it works for all other professions and for medical services free from the medicare induced restrictions….i.e. lasik, plastic surgery, and dental….where the freedom of providers and customers has led to reductions in fees and lots of value add innovation.

  5. It is all about the “greed” of the patient. They are all Munchausens, since they pay nothing for anything.

  6. Fee for service would work fine for arm’s length transactions — where the patient has time to review the ‘bid’ and check out other options.

    As all of us know, medicine has many transactions which are not arm’s length.
    Not just the obvious ones like a patient coming in on a stretcher, but almost any surgery where it is more important for the patient to trust his doctor than to haggle over what fee the second surgeon should get.

    People with no insurance or lousy insurance have faced these surprise bills for years. As deductibles get higher, and networks narrower, more and more middle and upper class persons are exposed to price gouging.

    The answer is firm national consumer protection laws. California, Illinois, and Ct have some decent laws in this regard, MN and Col also.

    I would love to have seen Obama put it on the line and defy the greediest surgeons. Or the AMA actually regulate its members, as is done in Canada and Germany. No luck so far, natch.

  7. What does a network accomplish, other than screwing the out of network docs and their patients? Is there better quality?

  8. Okay, but that’s not usually the way it’s talked about in healthcare. There has been a great deal of discussion of bundled care, and reference pricing (which involves bundling) and medical tourism (which also involves bundling) and a number of other payment models as variants on or as opposed to fee-for-serivce. FFS in the usual conversation is meant to describe what I am calling here the Default Model — code-driven, insurance supported, paying for items picked off a list largely at the determination of the provider.

    It’s a very big difference, because most of the abuses and outright fraud drop away if you shift the way you pay. If you are paying for an operation under a narrow-network fee-for-service plan, and without your knowledge the surgeon slips in a co-surgeon who works in his group but is (intentionally) out of network, you could end up on the hook for $100,000 or more in uncovered costs. If it was a bundled payment, it wouldn’t matter how many extra surgeons they used, or unnecessary MRIs, or how many hospitalists pooped in and glanced at your chart while you slept, you still pay the same.

    So it’s not a distinction without a difference.

  9. Agree COMPLETELY with Granpappy Yokum – nothing at all wrong with FFS as a concept. It worked fine for many years, (like 80?).

    It all went wrong was when patients stopped caring how much stuff costs, since they weren’t paying the bills. Insurance stopped caring which doctor was “good” when they discovered they could find some docs who would do the appendectomies and C-sxns for cheap. Doctors stopped caring how many tests to order when lawyers incentivized them to order every possible one imaginable.

    Hawaii can’t find docs because every patient has Medicaid, thus everything is free. ER’s are packed because they are just 24/7 walk-in free clinics. No incentive to actually make an appt to see the PCP.

    Rural southern states are oddly just the same, we have just as much obesity (thus HTN, diabetes, and CV dz) just no volcanos, beaches, or tourists. Its exactly the model of what NOT to do.


  10. Joe,

    Buying a service at a pre determined price, or buying a bundle of packaged services the provider gives at a set price is simply a form of fee for service.

  11. Generally denial of needed care by a capitated system can kill people, but excessive care that are artifacts of the FFS system generally provide marginally positive care.

  12. Actually even in those professions, a lot of work has a pre-determined price, like how much to do a simple will, how much to do personal taxes). Much of the rest of the work is done on a bid basis — the architect works up a proposal, the civil engineer puts in a bid. You only typically get into ongoing just-keep-billing-me situations in the big, complicated situations in which the professional can’t really tell what will come up — and healthcare will be much the same.

  13. Doesn’t it seem natural to you that the patient will want the best trained physician for the disease if the patient is not responsible for the bill? Don’t you think the problem lies in the fact that procedures are frequently over valued and cognitive abilities almost always undervalued? Granpappy Yokum has it right. It is not FFS that is the problem rather that the fee is determined by a bureaucracy and I will add that the payment is further complicated by a third party payment.

    As an aside there was a study at Dartmouth that compared the treatment of acute cardiac patients. The specialists had better outcomes than the generalists. Therefore for the most serious problems perhaps the specialist is needed, but not necessarily for run of the mill problems.

  14. > 1. If insurers are negotiating all the time to get charges down, then why do premiums keep going up?

    They do that to keep them as low as they can. And it is worth noting that this year on average across the country, premiums in the Exchanges went up to at all, deductibles only slightly.

    > fraudulent out of network bills and similar price gouging?

    … can only exist in a fee-for-service system. They are artifacts of that system.

  15. Bill, just to be clear, when I say what “winning” is for any one player, I am not advocating it. I am describing how they see it.

  16. Thanks you for the writing advice.

    I suggest your read the piece more carefully, check your arithmetic, your logic, and finally your manners before replying to anyone else here. This is a serious space.

  17. You are correct that there are many tripwires. Here is the key lever, though:

    >if any of them threaten current hospital cash flows

    I talk to hospital CEOs and execs literally every day. Most of the ones I talk to are convinced that their current cash flows are already threatened. The transition will be difficult. Ian Morrison characterizes it as having one foot on the dock and one on the boat. But most people in the hospital business are convinced that they have to develop new business streams, they just aren’t sure how.

  18. The new way of doing things would be highly varied, not as monolithic as the Default Model. In most parts of the market there would be much more consumer choice. You will notice that most of the things that Purchasers can do that I mention actually give the consumer (employee/patient) more choices, not less: They can use the on-site cliic, or the regular doctor downtown. They can take the knee package trip to California or get it done locally — always with different prices and incentives, of course. So that the Purchaser’s market power is mostly their power to aggregate the consumers’ market power and provide them more ways of exercising it.

  19. Big purchasers need not be employers. Insurers insure many other types of groups.

    Additionally tying insurance to the employer causes job lock and means that when a person, who has been insured and working all his life, gets sick he has a high chance of losing his job and becoming uninsured the first time he needs insurance.

    Let’s started treating the individual as an interested party and let the individual get the tax break. He can always turn that tax break over to the employer if the employer is offering a better deal than he can get.

  20. I know what you’re talking about, Joe, and I agree that “big purchaser” weight is necessary. Where we diverge is in thinking that US employers should fill that role. Short- and medium-term, they’ll have to.

    But I work toward – as in, this is my daily work, much of it unpaid, but driven by the goal of shifting this freakin’ Queen Mary of a mess we’re in – the idea that building health/system literacy in and amongst consumers will turn *consumers* into the “big purchaser” of healthcare coverage, and healthcare.

    As Barry Carol says in the comment-from-another-thread that BobbyG posted above, “The reason is that they [employers] don’t really want to be in the business of providing health insurance to employees and their families and the only reason they are is an accident of World War II history when health insurance benefits were offered as a way to get around federal wage controls.”

    This isn’t just me spitballing on a random idea that seized me. I’ve been writing/thinking/advocating it for years.

    To wit: http://mightycasey.com/employer-plans-doa/
    And: http://www.disruptivewomen.net/2010/11/23/a-modest-proposal-on-health-insurance-reform/

  21. Every “clean sheet of paper” observation and prescription starts with the same problem: We are not starting with a clean sheet of paper, and we are not going to. I used to do that — I’ve been writing about healthcare for 35 years. But I’m getting old, and I am entirely focused on getting something done.

    Any scheme that would require that everyone who can set policy or legislate or lobby would just step back and look at the system for the good of everybody, and then act sensibly for everyone’s good — right. We have serious stuff to do and we can only do it i we find the way the system as it is can be shifted and is shifting for the better. The biggest piece of that is the power of the big purchasers to lever the providers away from the fee-for-service business model.

  22. Here’s the problem with taking employers out of the loop: We consumers wold lose our most powerful ally. I know that sounds screwy, but here’s what’s happening: Employers, who forever have simply been shopping for the lowest group premium, have begun to wise up that there are all kinds of things that they can do to the market directly if they self fund, things I list up there under “Purchasers.” Most of these things consumers cannot force on their market, but employers (large employers or groups of small ones) and other large purchasers can — and they are. And when they create these other market mechanisms and force providers to compete for them, they will become available to the average non-group consumer as well.

    So in this hunt to seriously drive down costs, I don’t want the big purchasers taken out of the picture.

  23. Nothing wrong with FFS; everything wrong with FFS dominated by the corrupt RUC that grotesquely overvalues some procedures and by the insurers that then allow an outrageous facility fee to be added on.

    I don’t order too many MRIs (it’s a pain in the butt to get the pre-auth); the major insurer in my area pays about 500% too much for MRIs by forcing me to schedule them at the most over-priced hospital-based facility in my five county area.

  24. Bob,

    I think I understand what you are saying, and to a point I agree. We have built a cult around specialties, and they have become the norm and to a degree “standard of care”. But some of this has become ingrained in patients as well, which is also part of the problem. I see many folks for work related injuries, back pain especially, who are expecting MRIs and Ortho consults. I patiently explain that unless other findings are present, neither will change the course of treatment. Yes, if both primary care and specialist went to med school and did residency, many things will be equal, however there is something to be said for those extra years of training and experience.
    But I do agree many things can be handled by the “Family Doc”.

    On the liability issue, I have always tried to do what is best for the patient regardless of my fears or concerns, but then again I have never been sued.
    For those that have, or have had close freinds or colleagues sued, I think it is much harder to have a relaxed attitude about those cases, particularly ER docs. I also find it somewhat hypocritical that there is a huge push for the use of Guidelines and Evidence Based medicine to reduce costs, when no attempt has been made to ease the potentnial liablility burden from following those guidelines.
    Honestly, I think the biggest problem is not necessarily fee for service, but third party payers. Many primary care providers are bypassing that system by going to Direct Care. Is that the best way for health care to go? I don’t know, but as a doc, I could certainly see the attraction.

  25. No I haven’t seen anything about the provider-owned plans premium rates vs others. Ditto the 2nd issue to see if they are do exactly what they did in the 90s and giving their own providers notably higher reimbursement rates.
    I have only seen a few pieces on the CO-OP rates which do seem notably lower and doing quite well overall including a lot of grumbling from Blues plans in their respective markets.

    I am pretty dubious that CHI’s intentions are to essentially be ‘break even’ or 1% net operating margin and if they are then they stuff a lot of things under their model and mission in various categories to appear unprofitable. I really want to follow up with them a bit more and see. I have been trying to get access to their numbers from Moody’s but to no avail.

  26. I am loving this blog and the comments;

    Dear Perrry,

    I think you make sense and I found myself “feeling” your comments; the problem is not fee for service entirely is it? Except that your fee for service is cheap (meant as a positive) and the Cardiologist’s not (and follow up tests that do bring them dollars are at a premium dollar for little marginal value [that is another problem]). You and I as primary docs (even though I was a primary care oncologist) contribute by moving the patient down the line to the high cost areas. You have the right, the IQ, and the ability to work up a patient with chest pain; you do not need the cardiologist. That is part of our contribution to this issue of high cost/marginal benefit medical care; we think we need things we don’t. I know of no evidence that any subspecialty physician has a higher IQ than others. We set them up as they are now exalted and we need to stop thinking that way if we are to help patients rather than our system. Subspecialty medicine is a big part of our problem as it is organized by organ system, in my view, and we need to rethink and reallocate their dollars. Also, while you are correct and I do understand your comments about liability, etc. If we make decisions to protect us rather than the patient, then we may be bigger part of the problem than we realize.

  27. I have a little problem with the consistent theory that many doctors are doing more “high ticket” items to get paid more in this fee for service system.
    First, most independent small primary care practices do not own labs, imaging services, etc., and by law are not allowed kickbacks, so there is no incentive to order more tests/procedures to make money. When I started out in Family Medicine (which I am no longer doing) I worked at the hospital where I trained, so naturally I referred most of my imaging, testing and specialist consults to providers affiliated with that hospital. Not for any financial gain on my part or the hospital’s, but because those were facilities and consultants I knew and trusted.
    Yes, there have been and are some primary care practices which may take advantage of this system but they are few and far between, and in danger of serious legal consequences.
    Secondly, one could argue that specialists play the volume game, and no doubt some do. However, if I am sending a patient to a cardiologist for chest pain, the consultant would be hugely remiss not to go to the fullest extent to rule out a major cardiac issue. This is as much a result of the nature of consultants, our liability system, and patient expectations rather than solely physician greed. Don’t doubt for a minute that doctors are not aware of the astronomical costs of medical care, they and their families are patients too.
    I think Paul has a good point about the nature of medical services and expectations that has a negative effect on the fee for service system.

  28. Dear Don, I hope I get your point correctly; I agree with you; only by changing who is in control of the demand for benefit and price (patient), nothing much may change. There are ideas out there to change the power structure of negotiation. I will go to the site you proposed and look forward to learning more.

  29. Based on my most involved stint with the Blues as a corporate buyer here is why the Blues had such a price advantage: they had a market share in the mid 60’s…..no provider….whether hospital or group practice or whatever……could afford not to give the Blues the lowest “negotiated” price for services….that allowed the Blues to offer the best medical insurance prices around. The hospital execs hated it…..the Blues were the top dog and their execs saw themselves as benevolent kings who oversaw the well being of the medical system in the region…..

    There were 2 cardiology groups who really disliked each other for a variety of reasons…..but they got so tired of the Blues controlling things they merged…..so they wouldn’t have to kow tow to the Blues. In these types of situations then the Blues would work with the hospitals to hire their own specialty groups to compete with the independent providers.

    I believe in many parts of the country the insurers and the hospital systems are oligopolies…..a few insurers, one with dominant power…..and a couple hospital systems. So it becomes a Game of Thrones situation with monopoly-like providers contend with big monopsony (single buyer) like purchasers for power and control.

    Re the Game of Thrones comparison…..I am now visiting the area I am talking about and I am amazed at the opulent Castles the hospital systems are building…..while the area struggles economically….they clearly have no shortage of capital to invest.

  30. Thanks for the interesting and informative comments MG.

    Do you have any information or data on how the premiums for health insurance policies offered by CHI and other hospital owned systems entering the health insurance business compare to the mainstream carriers for comparable coverage? Also, how do the reimbursement rates that the hospital receives from its own captive insurer compare to what it’s paid by the mainstream carriers?

    While I get the concept of population management and controlling as much of the continuum of care as possible by keeping it in house, I don’t see how the captive insurer can undersell the mainstream carrier unless there is a big difference in reimbursement rates. If there is, then revenue would presumably be squeezed on the hospital side as the captive insurer gains market share. Is the ultimate goal of an organization like CHI, assuming it can execute its strategy, to do everything it seeks to do but not make any money or maybe 1% of revenue at best and, if so, is that sufficient to sustain their model and their mission?

  31. What about the third way and providers entering the insurance market themselves? From the stuff I have seen from Advisory Board and a few others places between 1/3 to 1/2 of the largest 100 IDNs in the US either already have at least one health plan offering or are planning to offer at least one in the next 3 years.

    Some of the recent data too it is has had some really nice results including for Providence Health in NM and Sentara Health in VA. Granted most IDNs simply can’t make a living through their own health plan but it certainly seems like they are moving en force to dis-intermediate payers and I can’t blame them.

    Optum, Aetna, and Humana bought up a bunch of health IT tools and assets that the providers who are engaging with them in ACO relationships generally aren’t using at all in any capacity. Providers do want some help with risk identification/risk identification, care coordination, and actuarial/network management but since those payers can only provide insight into their prospective patients for a provider that causes huge limitations in these arrangements. Yeah it is great to have insight and help on the 20-30% of patients served through a Medicare Advantage/commercial product with a private insurer ACO partner but what about the rest?

    To me the most single most interesting IDN to follow as a bellweather for the industry right now aren’t the for-profit hospitals (HCA, Tenet, etc) or Kaiser/Geisinger/Intermountain/etc of the world but Catholic Health Initiatives for several reasons.

    This was a decent update on them a few days ago and to me they are the best living example to follow to see if you can turn the hulking IDN ‘battleship’ quickly enough to avoid running a ground or sinking. They have their own health insurance products in several markets and have been aggressively shifting their payment streams from inpatient to outpatient.

    In the process, they are taking a beating and have taken a couple of rating hits. To me they are the organization to watch to see if a really large multi-geographic NFP IDN truly can make the changes required including to a value-based design and thrive.


  32. Barry,

    I guess it depends on how large the regional IDN is but a couple of thoughts on this issue:

    1. Even just getting the claims and clinical data together to report out on several various clinical quality requirements is quite a burden and takes up a lot of time. Calculating efficiency metrics is even that much more difficult.

    Also the issue too of getting reliable cost data from non-owned assets especially post-acute and behavioral providers.

    2. If a hospital has a health plan, they will have this actuarial experience in house but there are a couple of issues. The first one is how are the health plan and hospital set up. If they are two separate organizations with two reporting structures, it is sometimes difficult and challenging for the provider side to access the insurer’s actuarial services. The second one is getting the actual claims data for enough lines of their business to actually run the predictive analytics you are talking about. The third one is that none of the risk-group adjusters have yet adequately addressed adding in clinical and claims/cost data so any actuarial predictions still have the same limitations they did say 5-10 years ago.

    There are probably only about a dozen IDNs today really moving towards and making progress on it.

    3. Sadly I think an awful lot because you need some expensive and source resource talent (data analysts/report writers, BI/data architects), the right leadership place to empower them including pushing back on their own health plan folks if they own a plan, and a mixture of BI and reporting solution to enable this. Even then in the end a lot of this work will end up being done in Excel or SQL. Most IDNs today are running several BI applications and tools and even if they have a sophisticated enterprise data warehouse that has most of the necessary data it still is a messy and complicated process to setup and iron out the kinks.

  33. Paul :
    Excellent point
    The method is fine
    The application by self- serving leaders is flawed
    We keep trying to introduce new systems when we know intuitively leaders can screw up the best system
    The guy in the mirror looks at himself last

    Would you agree that negotiating fees are the number one difference in premiums and why the Blues have such an advantage?
    If so we need to design a slingshot to defeat Goliath
    We cannot beat the Blues head to head
    But we will beat them by changing the terms and conditions in which we operate – complying with the wishes of the wise author
    National Prosperity Life and Health will positively disrupt health care financing in 2015
    To learn more go to nationalprosperity.com
    Don Levit

  34. Allan, I do feel that what you say is economically true about marginal costs. The problem is that scads of health care good samaritans are rushing into the health care sector–as we can see on this blog–to help us. And they all have good arguments that they should become, themselves, factors of production. Alas, then we have higher marginal costs, willy nilly. And the may be needed costs.

    It’s the porters on the Everest expedition who are beginning to eat more than the patients and doctors so that the utility function of health care–the pictture as seen from space–is to provide jobs for administrators, insurers, government agencies, EHR entrepreneurs, consultants and billers.

  35. Fee for service works for you and your service provider when you are hiring attorneys, architects, civil engineers, accountants, landscapers, constructions builders etc etc etc….but not in medicine? Hmmm….Maybe the problem is something in medical services is mucking up the just fine fee for service system that has worked well for decades in all the other professions?

  36. Great post, Joe.

    One question and one opinion, for now.

    1. If insurers are negotiating all the time to get charges down, then why do premiums keep going up?

    Maybe premiums would go up even taster if the insurers were not bearing down on charges.

    Or maybe the insurers are keeping the negotiating profits to themselves.

    2. Who will protect the insured from fraudulent out of network bills and similar price gouging?

    That is mainly a duty of the state, through pro-consumer legislation. New York recently passed laws against surprise billings. California has banned most forms of balance billing in ER’s since 2009.

    But in the awful American federalist world of state’s rights, these protections are not nationwide.

  37. Bill, wouldn’t you say that success occurs when all competitors reach as close as possible to their marginal costs where the market is stable until new discoveries are made which bring us back into the competitive market?

    Such stability would mean the end of all those good guys trying to place themselves in between the patient and physician just so they can take a bite of big tuna.

  38. “There are no winners in the fee-for-service game.”

    That is a pretty sweeping statement for anyone to make. Maybe Joe’s definition is a little imprecise. Maybe Joe means something else. Who knows.

    Whether one likes Medicare or not, traditional Medicare is fee for service, a fee is paid for a service. Can one really say there are no winners in Medicare?

    Some interesting points are made in the middle of this dialogue, with a conclusion that seems confused, but then again if the basic premise is wrong the conclusion cannot be accepted.

  39. You illustrate well, Joe, the cacophonous clanging between the mission many physicians believe we serve–the fascinating exploding science we try to apply to people–and the banal goal of business to grow and make more and more dough every year.

    They don’t mix very well.

    Eg you define winning for a plan as “surviving, succeeding and growing”. Why growing? The patients do not expect when paying their premiums to promote the growth of a business. You are eating off their premiums. Isn’t this enough? Nor do tax payers expect government to grow by their contributions. They expect government to serve. Patients expect plans to serve, not to become world wide financial behemoths. Plans can win by staying, by remaining stabile, by not growing, by maintaining. This is what premium payers and tax payers expect. They are not happy to be funding exciting financial ventures.

    Everyone in health care is going to win when we can make more accurate diagnosis, when molecular biology leads to intelligent interventions, when we understand aging and youth and cancer and mental disease and rheumatic and arthritic processes– ie when medicine becomes chemistry, not when it becomes a successful business. As a spin off of this, it will THEN become successful financially.

  40. This article seems timely, since all providers are lining up to jump ship from their payer partners and take on risk! Yeah right! Is this a joke? In fact, I did not even find the word “risk” mentioned in the entire piece. Probably not good if you’re telling providers to ditch their payers. Also, interesting that you leave out hospitals – the group that has absolutely NO INCENTIVE (unless driven by payers, of course) to lower medical costs. You’ve obviously never been in a hospital/payer negotiation, because if you had, you would know that it’s a constant battle to get providers not to jack the fees by doubt digit percentage points. Come on don’t be so naive! Also, your point about payers and not being incentived to actually lower medical costs is just flat out a lie. That’s the only way they can make MONEY!!!! With a defined MLR, and (in most states) no ability to raise rates (bc of prior approval), lowering medical costs is how payers make money! Just because MLR is now fixed, does not mean that the incentives disappear. What kind of logic is this? If payers had the opportunity to cut medical costs in half, it would be THEIR ONLY PRIORITY. Of course, they’d be required to spend at least 80 cents on the dollar on medical care, but they’d still stand to make a ton of money. Hmmm, seems like good incentives, groups that are paid more to keep people healthy and medical costs low. What kind of world are you living in? Don’t ingnore these facts. Also, throw that hypotehtical at the docs. Let’s say that tomorrow they are offred the chance to cut medical costs in half? They would all FREAK OUT. BC, suprise, suprise, that’s how they make money. I’d suggest talking to a payer and better understand jsut what financial risk you’d be taking on if you brush them aside and then amend your piece. I think you’re going to find it’s a little harder than the typical physician “imagines.”

  41. Dr Kirschman
    Good points about insurance commissioners having a hard time thinking out of the box
    It took over 4 months for thebTexas Dept of Insurance to realize that our patented product is so out of box that they finally realized we are an excepted benefit not subject to the ACA
    We expect insurers to give us grief but those that are qualified could sell our product
    Distribution is important
    To learn more go to nationalprosperity.com
    Don Levit, CLU,ChFC

  42. If I were the CEO of a good size regional hospital system and wanted to move away from the fee for service payment model, the first three questions I would ask are: (1) what will it take to get our cost accounting system to the point where we have a good handle on what each of our service offerings actually costs us, (2) is our ability to forecast medical claims risk good enough to assume the financial risk inherent in capitation and bundled payment models and (3) if it isn’t, what will it take to get us there and how much will it cost?

    Entering the insurance business is one logical approach for hospital systems if they are willing to embrace capitation and population health management. There is a question of what’s the minimum patient population needed to make that work. Kaiser, for example, has about 9 million members and the vast majority of those are in CA. Their insurer is large and on the same team as the providers. Just as Kaiser hasn’t been able to fully replicate its CA model outside of CA, it will be quite a challenge for other hospital systems to move toward Kaiser’s model even if they have adequate critical mass. It will be especially challenging if most of the doctors who practice in those hospitals are not hospital system employees but independent contractors with practice privileges.

    As a patient, I want price and quality transparency, at least for care that is shopable, and I want to be protected from gouging for care that must be delivered under emergency conditions. If I’m later presented with bills that I wasn’t told about ahead of time, I shouldn’t be responsible for paying them.

  43. Barry Carol makes a nice observation on another THCB thread:

    Barry Carol says:
    January 21, 2015 at 2:29 pm

    “I wouldn’t expect large employers to improve health insurance coverage anytime soon no matter how much their profits increase. The reason is that they don’t really want to be in the business of providing health insurance to employees and their families and the only reason they are is an accident of World War II history when health insurance benefits were offered as a way to get around federal wage controls. In 1954, the Supreme Court affirmed that such benefits are not taxable income to employees.

    I think both healthcare and health insurance would be less expensive if the current tax preference were phased out and other taxes were lowered to ensure that most people in the bottom 75%-80% of the income distribution don’t pay any more in combined federal income and FICA taxes than they do now and salaries were raised by an amount roughly equal to the prior employer contribution on an age adjusted basis.

    We would be better served if people buy health insurance that best meets their needs and pay for it with after tax dollars just like they pay for auto, home, umbrella liability, life and, for a small number, long term care insurance with after tax dollars. Insurer customer service would also be a lot better if they perceived that the individual insured person was their customer and not the employer. I know such an approach would be a steep uphill slog politically because the unions would oppose it with everything they’ve got and much of the rest of the workforce probably wouldn’t like it either if, for no other reason, they would be trading a known quantity for an unknown one.

    If we were starting with a clean sheet of paper, we would never design a healthcare and health insurance system that looks anything like the one we have. We would probably have something that looks more like the Swiss model but with more coverage choices including higher deductibles”

  44. What dollar proportion of “health insurance” is ACTUAL “insurance” (financially ruinous risk hedging) and what proportion is expensive, inefficient 3rd party intermediated “pre-payment”? Seems like a lot of the ACA was just a re-arranging of the AHIP deck chairs.

  45. All good ideas, though after 21 years in the business, I have my doubts about their survivability in cold reality if any of them threaten current hospital cash flows.

    It would take a very courageous and different-thinking State insurance commissioner to allow a new out-of-the-box insurance product to hit the market. Also, the other insurance companies would definitely put up a significant number of road blocks to anything that will interefere with their cash flow.

    Also, given the multiple local, state, and federal regulations along with certifying agencies, (Joint Commision, CAPHS and its variants, NCQA, etc), there would need to be a large significant investment of upfront cash and personnel for a project whose ROI is in doubt. Look to the track record of ACOs as producing a minimal, if any, savings in healthcare costs overall despite the investment.

    Finally, there is the medical negligence attornies who would be waiting to sue a health system and doctors who stray from the “community standard of care” whenever there is a bad outcome in the new system.

    With this many tripwires, it’s not a wonder that many just keep on keeping on.

  46. Joe, I am just at the beginning of understanding fully your post. It rings important and I will spend some time digesting. Your last paragraph makes sense but in doing what you hope, some of the interventions you pose as consequences of the old system may be needed to get what you want in the new system (i.e., limiting who provides care to cheaper alternatives, clinics, salaried employer hired physicians)? Also, all of the old seems “supply side” to me which seems a major or at least a contributing cause of our present mess; we may never get better unless patients can make their medical care purchases based on their preferences and knowledge of what they will get from the care. I spend my money based on my balance of benefits and risks by knowing how an item works, but in medical care, I don’t see that presently possible. Would a demand side plan, or a hybrid plan, work better in the long run? Thanks for your post.

  47. LOVE the “8 questions” – have lived that set of questions, both as a caregiver and a patient, for a long time now. And your call to change the game is right on target.

    Here’s something I’d like you to consider adding to your prescription: ending employer sponsored insurance. That’s the central feature of the game that’s allowed it to turn into Joshua from “War Games” – it’s the bedrock of the MLR game, of the narrowing networks game, of your punchline “I got into this business to make sure the insurance companies stay profitable.”

    Making health insurance the same sort of marketplace that other common types of insurance – auto and home, for example – would get us to an actual market, as opposed to the crazy game of shift-the-marbles (expensive populations, regions with high chargemaster rates) currently in view from sea to shining sea.

    Patients/consumers ARE the game changer. But in order for us to really take the reins, we have to … take the reins. That will only happen when the current steering committee is stopped from taking us off a cliff.