All Risk is Local

flying cadeuciiWe all knew how this was going to go, or thought we did.   Fee-for-service payment for health services was going to disappear, and be replaced by population health risk-based payment (or as some term it, “capitation”- fixed payment for each enrolled life).  Hospitals and care systems invested substantial time and dollars building capacity to manage the health of populations, yet many are discovering a shortage of actual revenues for this complex new activity.  Was population health a mirage, or an actual opportunity for hospitals, physicians and health systems?   

The historic health reform law passed by Congress and signed by President Obama in March, 2010 was widely expected to catalyze a shift in healthcare payment from “volume to value” through multiple policy changes.  The Affordable Care Act’s new health exchanges were going to double or triple the individual health insurance market, channeling tens of millions of new lives into new “narrow network” insurance products expected to evolve rapidly into full risk contracts.   

In addition, the Medicare Accountable Care Organization (ACO) program created by ACA would succeed in reducing costs and quickly scale up to cover the entire non-Medicare Advantage population of beneficiaries (currently about 70% of current enrollees) and transition provider payment from one-sided to global/population based risk.   Finally, seeking to avoid the looming “Cadillac tax”  created by ACA, larger employers would convert their group health plans to defined contribution models to cap their health cost liability, and channel tens of millions of their employees into private exchanges which would, in turn, push them into at-risk narrow networks organized around specific provider systems. 

Three Surprising Developments

Well, guess what?   It is entirely possible that none of these things may actually come to pass or at least not to the degree and pace predicted.  At the end of 2015, a grand total of 8.8 million people had actually paid the premiums for public exchange products, far short of the expected 21 million lives for 2016.  As few as half this number may have been previously uninsured.   It remains to be seen how many of the 12.7 million who enrolled in 2016’s enrollment cycle will actually pay their premiums, but the likely answer is around ten million.    Public exchange enrollment has been a disappointment thus far, largely because the plans have been unattractive to those not eligible for federal subsidy. 

Moreover, even though insurers obtained deep discounts from frightened providers for the new narrow network exchange products (70% of exchange products were narrow networks, the discounts weren’t deep enough to cover the higher costs of the expensive new enrollees who signed up.  Both newly launched CO-OP plans created by ACA and experienced large carriers like United and Anthem were swamped in poor insurance risks, and lost hundreds of millions on their exchange lives.   As for the shifting of risk, it looks like 90% plus of these new contracts were one-sided risk only, shadowing and paying providers on the basis of fee-for-service, with bonuses for those who cut costs below spending targets. Only 10% actually penalized providers for overspending their targets.   

The Medicare Accountable Care Organization/Medicare Shared Savings Program, advertised as a bold departure from conventional Medicare payment policy, has been the biggest disappointment among the raft of CMS Innovation Center initiatives. ACO/MSSP enrollment appears to have topped out at 8.3 million of Medicare’s 55 million beneficiaries.   The first wave, the Pioneer ACOs, lost three-fourths of their 32 original participating organizations, including successful managed care players like HealthCare Partners, Sharp Healthcare, and Presbyterian Healthcare of New Mexico and others. The second, much larger wave of regular MSSP ACO participants lost one third of their renewal cohort .  Only about one-quarter of ACO/MSSP participants generated bonuses, and those bonuses were highly concentrated in a relative handful of successful participants. 

Of the 477 Medicare ACO’s, a grand total of 52, or 11%, have downside risk, crudely analogous to capitation.   As of last fall,   CMS acknowledged that factoring in the 40% of ACO/MSSP members who exceeded their spending targets and the costs of the bonuses paid to the ACOs who met them, the ACO/MSSP programs have yet to generate black ink for the federal budget.   And this does not count the billions care systems have spent in setting up and running their ACOs.   It is extremely unlikely that the Medicare ACO program will be made mandatory, or voluntarily grow to replace DRGs and the Medicare Part B fee schedule. 

And the Cadillac Tax, that 40% tax imposed by ACA on high cost employee benefit plans, a potentially transformative event in the large group health insurance market, which was scheduled to be levied in 2018, was “postponed” for two years (to 2020) by an overwhelming Congressional vote.  In the Senate, a 90-10 bipartisan majority actually voted to kill the tax outright, strongly suggesting that strong opposition from unions and large employers will prevent the tax from ever being levied.   Presumptive Democratic nominee Hillary Clinton has announced her support for killing the tax.    So the expected transformative event in the large group market has proven too heavy a lift for the political system. 

As a result, the enrollment of large group workers in private health exchanges, the intended off-ramp for employers with Cadillac tax problems, has arrested at about 8 million, one- fifth of a recent forecast of 40 million lives by 2018. Thus, the conversion of the enormous large group market members to narrow network products seems unlikely to happen.   As a recent New York Times investigation revealed, the reports of the demise of traditional group health insurance coverage (based on broad network PPO models) have been greatly exaggerated).

Can Care Systems Return to Business as Usual?   

Does this mean that the forecast rise of at-risk population health payment was a mirage and that health care managers can return to business as usual?   We would say, “Depends on the Local Market”.   We think the most effective strategies will be specific to individual payers and depend a lot on local insurance markets, the state political environment and the state of the local economy.  Judging the capacity for and interest by public and private payers in delegating risk to care systems is an art form.   

Our advice:

  1. Understand Your Local Market’s Demand for Risk Arrangements and Respond Accordingly

  2. Focus on operational excellence and improving the patient experience

Keep An Eye on Medicaid

1. Understand your Local Market’s Demand for Risk and Respond Accordingly. Our experience tells us that executing a risk assumption strategy successfully is highly dependent on local market conditions.  Local market forces are far more powerful than alleged national trends.    For example, in Portland Oregon, a mature highly penetrated managed care market, state policymakers compelled care systems to organize into so-called Co-ordinated Care Organizations and take population-level financial risk for state employees and the state’s Medicaid population.  In contrast, in nearby Seattle, also a mature managed care market, the demand for care systems to assume population-level financial risk has been extremely limited.

In markets such as St. Louis, Phoenix, Milwaukee and Chicago, commercial payers like Aetna and CIGNA have aggressively experimented with risk contracts with dominant healthcare systems to grow their market share in the commercial market, and attempt to claw business away from Blue Cross plans.   In other states, notably Massachusetts and Maryland, state health policy is encouraging all payers to delegate population-level economic risk to care systems.  Reading these local market trends accurately and responding intelligently to them is the key to an effective payment strategy.

2. Focus on Operational Excellence and Improving the Patient’s Care Experience.  Under any payment model, strategies which reduce waste (particularly of caregiver and patient time) and that reduce variation in how physicians manage common but costly problems will best position care systems to survive market transitions.  Assuring an optimal patient experience becomes paramount in defining a network and its brand.  For those in risk-based contracts, care systems will be working assiduously to divide the affected populations into manageable clusters with common problems (mental health, obesity, chemical dependency, etc.) and create medical-home style care models to address the unique needs of each segment.

3. Keep Your Eye on Medicaid.  Thanks to the 25% expansion of Medicaid by the Affordable Care Act, it is possible that by the bottom of the next recession, one in four Americans will be Medicaid patients!  Medicaid funding is highly volatile and tends to dry up in recessions, just as the number of Medicaid lives grows!   While Medicare and commercial payers have struggled to make the turn toward risk, we see state Medicaid programs as the most likely payer segment to adopt risk-based methodologies.  In some cases, the risk shift will stop at outsourcing to insurance carriers like Molina (now part of HealthNet), AmeriGroup (now part of Wellpoint/Anthem) and United Healthcare.  But in many others, population-level risk may be delegated directly to care systems by state Medicaid agencies, albeit at rates far below the actual incurrent cost of caring for Medicaid patients.  Organizing to respond to the next recession’s entirely predictable Medicaid funding crisis will probably require robust population health management strategies like medical homes and closer collaboration with community health centers and other public health entities.

We have both been in this field long enough to be skeptical about “megatrends”.   We should keep our eyes peeled for transformative events.  But, to paraphrase Tip O’Neill’s comment about politics, almost all the important things about healthcare markets are local.  Paying attention to the ecology of risk in your local market, and calibrating your strategy to the actual demand for new payment models is vital.  And while you are doing that, delivering care you are proud of and are willing to use yourself is the key to maintaining or growing your market presence. 

Jeff Goldsmith is National Advisor to Navigant Healthcare and Associate Professor, Public Health Sciences at the University of Virginia.  Bruce Henderson is Managing Director of Navigant Healthcare and Head of the Firm’s Payer Provider consulting practice.

11 replies »

  1. It would seem that health institutions are continually on the losing end of the quagmire known as the US healthcare system. We constantly deal with collections and shortages from INSURED patients that either refuse or simply WILL NOT pay their outstanding portions for treatment. Each year the overage percentage of non-collected goes up at least by double-digits!

  2. “and I assumed your outside of US surgery was such a case”

    At the time I was uninsured and hip surgery was $35K here in U.S. Through a internet hip forum I found out about resurfacing rather than replacement. There are not a lot of docs in the world doing this procedure but I found a very experienced and competent surgeon in India where I got the whole procedure for about $10K , including air fare, hotel, hospital. Think we’ll aver get that kind of competition in U.S.?

    When I went on Medicare hip surgery became possible here in U.S.
    without the 24 hour plane ride to India. I was lucky to get another qualified surgeon for resurfacing one state south of me.

  3. I had a similar and remarkable experience with MY hip right in my home town. It was as close to a perfect clinical experience as I have ever had, and I wrote about it last month: http://www.hhnmag.com/articles/7167-who-owns-what-happens-after-acute-care? It was a reason to hope that things are improving and that some institutions grasp the importance of delivering value for money for what they charge us and the payers.

    Getting all the little things right in a complex clinical encounter isn’t as sexy as participating in a cutting edge new concept like the ACO, but it will have much more meaningful results for the care systems that take the challenge on.
    And we will tell our family and friends. . .

  4. Peter,
    I think your experiences would make an excellent THCB submission. I think I remembered it because I am an advocate of reforming health care in such a way that people search for the best combo of price and quality for procedures….and I assumed your outside of US surgery was such a case (I think we see it differently)…But I am only assuming. While your out of pocket spending for the US surgery suggests that quality was the driver of that. In any case I think it would an instructive case study if you wrote it up and discussed what you based your choices on and implications for the System.

  5. “I thought I heard about an outside US hip procedure you had done before….but maybe I am confused…”

    Yes, right hip India as self pay, left hip South Carolina as Medicare, although the surgeon opted out of Medicare so cash pay to him.

    Both experiences were very good. Excellent nursing care with India having more nurses per patient than U.S. Each surgeon highly qualified at specialized surgery. Both operations went very well with good outcomes.

  6. Hi Peter,
    Sounds like a good experience….as I think many of us have had in the much maligned US system. I thought I heard about an outside US hip procedure you had done before….but maybe I am confused and it was someone else….but I do note “medical tourism” stories for folks with a plan that incentivizes them to shop for good quality care at a good price in medical care.

  7. “Right Leo. Nothing done heretofore has resulted in either a big improvement in the patient experience, or a big improvement in care.”

    Am I the exception? I don’t go to the doc that often, in fact I just use a local clinic staffed by nurse practitioner when I need a script and get great service. My latest visits to 1. Providence Hospital for hip surgery and 2. local hospital for ENT evaluation were great experiences – all with basic Medicare coverage.

    Providence Hospital for hip was a great experience from the hospital staff and service as well as my hip surgeon. At local ENT I was taken in at exactly my appointment time and seen promptly by the doc just after the 20 question health survey.

    Where are all these bad experiences related to ACA?

  8. The problem with the Medicare experiments is that they don’t appear to be saving any money, and if they don’t, OMB won’t permit CMS to expand them. The CMS Innovation Center has tried to manage this process by press release, and by hiring friendly program evaluators, and this has created a credibility problem with the industry with whom they need to co-operate.

    Factoring in the industry’s costs in participating in them, the payment reform experiments have been a costly failure (except,notably, for the Independence at Home demo). A new administration, especially a Clinton administration, ought to insist on an audit of the billions of dollars spent on CMS’s payment reform demos by a credible independent evaluator before moving ahead with any payment reform agenda.

    The real demand for risk arrangements, if it is to come, will come from hungry commercial insurers in specific local markets and, as we have suggested, from individual Medicaid agencies, triggered by the next recession.

  9. Right Leo. Nothing done heretofore has resulted in either a big improvement in the patient experience, or a big improvement in care. And costs for studies and medications continue to spiral out of control.
    Patients are angry at the system and many are taking it out on their docs, who are also angry and having trouble keeping up with all the changes and regs in addition to providing basic reasonable care.
    Houston, we have a problem.

  10. This is a very sharp analysis. Thanks! HHS/CMS plans/hopes to push VBP and risk-based payment harder over the next few years. This piece nicely presents the challenges involved. If Hillary is elected, they’ll be a good chance that can be enhanced….despite her cave in on the Cadillac tax. Yes, all healthcare is local…but national policies and reform momentum under the ACA and now MACRA will continue to create a foundation for a population risk environment.

  11. “Focus on operational excellence and improving the patient experience”
    This is almost impossible right now. Regulation is sucking all the air and resources out of the room. The patient experience has deteriorated on numerous fronts. That, accompanied by rising medical costs for patients, and rising fixed overhead costs reinforced by regulation for providers, has led to The Triple Miss.
    How exactly are “medical homes” with high inflexible costs supposed to handle nimble market changes? They are too bloated to scale down, and are bound by regulation to continue to raise the bar, raise costs, and endure reimbursement that is still effectively FFS.