OP-ED

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.

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UmsetzungFree web hsotingexodus gods and kingss streaming hdKurzzeitkennzeichenMD as HELL Recent comment authors
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Umsetzung
Guest

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good, keep up writing.

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Yes! Finally something about free web hosting.

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Kurzzeitkennzeichen
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Kurzzeitkennzeichen

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

Bob Hertz
Guest

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,… Read more »

Whatsen Williams
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Whatsen Williams

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

lawyerdoctor
Guest

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… Read more »

Perry
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Perry

It’s a sad state of affairs indeed when Hawai’i is crying for physicians:
http://www.hawaii.edu/news/2015/01/20/hawaii-physician-retirements-could-worsen-doctor-shortage/

Granpappy Yokum
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Granpappy Yokum

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.

Bob McNutt
Guest

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… Read more »

Perry
Guest
Perry

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… Read more »

allan
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allan

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… Read more »

Perry
Guest
Perry

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.… Read more »

MD as HELL
Guest
MD as HELL

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

Bob McNutt
Guest

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.

MG
Guest
MG

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… Read more »

Barry Carol
Guest
Barry Carol

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… Read more »

MG
Guest
MG

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… Read more »

Joe Flower
Guest

Good points, and thanks for the reference, MG.

Don Levit
Guest

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 Bob: 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 –… Read more »

Paul Slobodian
Guest

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… Read more »

Joe Flower
Guest

Good points.

William Palmer MD
Guest
William Palmer MD

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… Read more »