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.