On Monday the Supreme Court handed down a decision that may at first glance appear more relevant to the bad old days of managed care. In a decision authored by Clarence Thomas, who’s never seen an old irrelevant law he didn’t like, the Supreme Court sided with health plans and limited the ability of two Texans to sue their health plans in cases when the medical decision to change a course of care was, at the very least, highly suggested by the plans’ representatives rather than the patients’ physicians. Now it is ridiculous that a 1974 law passed about pension benefits with no thought given to health care at all has become a huge part of the current debate on health care. However, given that most plans have backed off from the kind of intensive care management that this decision was about, you might think that bar the political shouting this decision is mostly irrelevant for the future of how health plans behave. Jones the Policy Wonk would disagree, suggesting that we’re going to see a much meaner version of health insurance in the future. (I have shades of John Grisham’s The Rainmaker in my head). The Wonk writes:

Just to add onto all the fuss about Wellpoint’s merger with Anthem, California’s biggest newspaper The LA Times has a none too glowing analysis of the motives behind the merger. The point it hints at but doesn’t really follow through explaining is that both Wellpoint and Anthem have both kept their expansions to buying up other for-profit Blue Cross plans. As there’s usually only one Blues plan per state the newly merged company will be bigger nationally but not regionally. The region (or enlarged metro area) is of course where the power plays between plans and providers work themselves out. So in that sense the LA Times article is right, in that there’s no compelling economic rationale for the merger, other than to create a national company that can have the scale of a United or an Aetna. In some ways we are moving back to the big 5 insurers that were the "national" players in the 1980s, only that instead of Aetna, Travelers, Met, Cigna and the one I forgot (oh, yeah; Prudential), it’s United, Humana, Anthem/Wellpoint, and Aetna (albeit an Aetna that’s gone through many changes).

However, because health care contracts are regional, a national presence still isn’t that important in health care. So the lack of rationale for the merger also means there’s no national rationale for the FTC or anyone else to stop it. My sense is that once some of the more egregious pay-outs are scaled back, it will still go ahead. Wall Street seems to agree in that Wellpoint’s stock is still nearly 30% higher than it was when the merger was announced back in October last year .

In a quick update to a story I commented on last week, the payout to Wellpoint execs has got the big Kahuna of all shareholders, CalPERS (the California State employees’ pension system), in a tizzy. Calpers now plans to vote against the Anthem-WellPoint merger. Realistically this won’t stop the merger, and neither probably will the disapproval from the State government. But expect there to be some more to-ing and fro-ing between the state and Wellpoint.

However it’s hard to see what the state would usefully do with the extra money. There are already two huge Foundations in California pumping out (very good!) research and programs with the money from the Wellpoint conversion back in the 1990s. And realistically there’s not enough money available to solve California’s real health care crisis–the 25% uninsurance rate–even if Len Schaeffer gave all his marbles back.

The recent report from INSIDE CONSUMER-DIRECTED CARE cites an impressive 12.7% drop in PMPM medical claim costs in St. Luke’s Hospital’s first year of implementing a consumer directed health plan (CDH) for its employees. This seems especially impressive in a healthcare environment in which health-care spending per privately insured person increased 7.4% last year, down from a 9.5% rise in 2002.

But the question that the story begs is: Did PMPM costs decrease because members made “better” healthcare decisions (cost and quality transparency) or did they drop because fewer dependents of members were covered, out of network care was no longer covered, and members avoided care because of higher out of pocket costs?

Yesterday’s HSC report attributes the drop in overall spending to a reluctance for consumers to spend money on care and cost-shifting in pharmacy:

The rate of growth in health-care spending fell for the second year in a row in 2003 as demand for health services dropped because workers were forced to pick up more of the tab for their care and a surge from a change in managed care policies ebbed….The cost shifting was most prevalent in prescription drug plans…

This seems to be borne out in the St. Luke’s case where the hospital saw its employees pharmacy PMPM expenses plummet 20.4%, further proving the point that consumers are quite sensitive to differences in formulary cost (Enrollees at St. Luke’s have a $5 copay for generics, and 20% copay – $20 minimum and $50 maximum – for name brands).

While the CEO for St. Luke’s views the replacement of paying 100% of premiums for PPO coverage for its employees AND their dependents with paying premiums for CDH coverage (in a tight EPO network) only for employees as a way to “to enhance the hospital’s image as an employer of choice,” the result, according to Bruce Davis, a principal with Findley Davies, the consulting firm that designed the plan, was that many dependents of employees dropped coverage through St. Luke’s:

Prior to implementing the CDH plan last year, St. Luke’s employees – and their families – had rich health benefits. The PPO plan carried a low $150 annual deductible. Employees, even those with family coverage, weren’t asked to contribute to their premiums. Davis says one of the first steps to getting costs under control was to charge employees who wanted to provide coverage to a spouse.

‘We decided we didn’t want to be that generous any more because a lot of employed spouses had opted out of their own [employer’s health plans] and had coverage through St. Luke’s,’ Davis says. The result of the policy change was a 13% decrease in covered dependents.

The CDH plan has, however, taken steps to help employees make better health decisions by access and incentives for employees to use web-based health management tools and by making select preventative care exempt from the $20 office visit co-pay. While it is clear that these will cost Medical Mutual of Ohio, the administrator of the St. Luke’s EPO, less than the paper and phone-based health risk assessments and disease management programs, it remains unclear whether online HRAs and counseling will be more effective than their offline predesessors.

While St. Luke’s doesn’t know how much of their savings came from providing better or less care, it doesn’t seem to much care:

“After the first year with a CDH plan, utilization and claims costs have decreased significantly at St. Luke’s. Davis notes, however, that some of the change could be the result of fewer spouses who receive health coverage through the hospital. He says he has not yet determined how much of an effect the change has had.”

This begs some other questions:

If employers (like St. Luke’s) are achieving impressive decreases in costs through cost-shifting, tightening networks, and dropping coverage for dependents AND the national average spending per employee is increasing at a rate much north of inflation, how much is spending for employers who choose not to cost-shift, tighten networks, and drop dependents really increasing?

What will be the effects of CDH – in the medium and long term – on clinical outcomes?

While employers see impressive initial (year 1) gains by replacing traditional coverage with CDH, how will they manage costs in the future (when there is, presumably, not much else to cut/shift to employees)? (NOTE from Matthew: A question TCHB has asked before!)

So as a consequence of the Wellpoint/Anthem merger some two hundred plus top execs are going to get payouts that total between $150m and $350m, depending on whether or not they are kept on for three years by the new company. As you may have guessed this money won’t necessarily be shared out evenly. Len Schaeffer, the outgoing Wellpoint CEO (and former HCFA head in the 1970s) is likely to get a package of $76m, not of course counting the $184m in stock and options he’s already got.

Now the cynics among you might be thinking that ex-Wellpoint exec Ron Williams who went over to Aetna a while back and got a nice payout, should have stayed in southern California. But the real issue is that the California legislature, influenced heavily by the CMA and the Foundation for Taxpayer and Consumer Rights, is not happy! California legislators need to approve the deal, and that won’t happen with this kind of publicity.

UPDATE: California insurance commisioner John Garamendi hinted pretty strongly at yesterday’s hearings that he won’t approve the deal. It’s hard to believe that the whole thing will be scuppered, especially as there aren’t any real anti-trust issues in local markets because the two companies don’t really compete at present. But maybe Len will have to toss some of his pay-off back into the pot to make nice with the state.

A recent study from the Blue Cross and Blue Shield Foundation on Health Care and the Schneider Institute for Health Policy at Brandeis University has concluded that Emergency Rooms Overcrowded Due to Poor Contact With Doctors . It seems that, especially among folks with chronic conditions like congestive heart failure, pneumonia, chronic obstructive pulmonary disease, asthma, hypertension and diabetes, regular physician contact is a big factor in reducing ED utilization and costs. Imagine that!

But other study findings point to the difficulty that fully-insured plan members have in accessing their physicians:

“One in five ED visits were for selected low acuity conditions…such as sore throat and minor rashes. These are visits that can generally be safely treated in a physician’s office. The single most important contributor to the overall ED cost per member is the increasing proportion of members (10 percent) using the ED at least once.”

Added Blue Cross and Blue Shield Association Chief Medical Officer Allan Korn, M.D:

“Because the privately insured account for more than half of the recent growth in emergency department utilization, there may be ways to address the problem upstream and not just focus on the supply side…This new study provides a balance in understanding supply and demand issues and also sheds an important light on potential areas where insurers and physicians can work together to provide better patient care in more appropriate and less costly settings.”

The opportunity for secure patient-physician email communication of the type that RelayHealth provides part of the solution to this problem. Perhaps a “potential area where insurers and physicians can work together” is by following the lead of Blue Shield of CA and others in establishing rules and reimbursement for such service .

So when I told TCHB readers about Harris’ forecast for the year a few months back, it sounded like employers were confused by the consumer-directed health plan (CDHP) hype but somehow believed that it gave them a way out of paying for first dollar coverage, and was, following the death of managed care, the next big thing in terms of saving them money. My suspicion was that employers would try to slowly move employees to HRA/HSA based high-deductible health plans, and then gradually over time–particularly if the CHDPs didn’t produce their initially savings– gradually stop funding the HRA/HSA. This would be same thing as essentially only covering catastrophic insurance for their employees. Of course that essentially means reducing their benefits.

Well the latest KFF/Mercer poll, as reported in USA Today (hat tip to Don Mccane) suggests that in forecasting that this might be a gradual phenomenon, I actually gave employers too much credit (or too little depending on your viewpoint). The report says:

Mercer’s survey of 991 employers found that 61% would set the individual annual deductible for an HSA plan at $1,000. But 17% chose $1,500, 11% said $2,000 and 10% were above $2,000. Don’t expect employers to pay that deductible: The Mercer study also found that 39% would not put any money into the savings accounts for workers, while 24% would put in $500 a year, leaving it up to the workers to fund the rest.

In other words, the CDHP translates into direct cost shifting. When you parse the press release from Mercer (access to the survey itself is coming later), it looks like the employers, who are interested in CHDPs with a high deductible plan, are looking at it as an alternative to asking employees to pay up to 50% of the premium for a normal plan. (There’s also a lot of high-fallooting rhetoric about providing a savings plan vehicle for employees to use for health spending in their retirement years, but I don’t think any employees are really buying the notion that employers will care about them in their retirement).

Nearly half of large employers (48%) say that a likely motivation for offering an HSA would be to provide a savings vehicle for post-retirement medical coverage. Interestingly, significant portions of both those employers who currently offer retiree medical coverage and those who do not say they are interested in this use of HSAs (53% of retiree plan sponsors and 40% of non-sponsors). More than one-fourth of employers (26%) say they would offer the plan to provide a more affordable medical plan option for employees.

In fact, I think that Mercer (which is after all selling something) is a little too gung-ho about the ability that employers will have to force CDHP and their associated costs easily onto employees. The John Gabel study in Health Affairs a few weeks back suggested that the CDHP would have a modest impact. However, it’s clear that the cost-shifting direction is set, and that health care as an automatic employee benefit is at risk in the future.

The “free-marketers” behind the HSA movement, and their opponents who believe in some kind of community-rated tax-based social insurance system, will both take cheer from the apparent demise of the employer-based health insurance system. Both sides of that argument would like to see greater visibility to the tax-payer and/or the consumer as to what all this health care they are consuming actually costs. Employer-funded third party payment (of which Medicare is an extension, by the way) has been the cause of both healthcare cost inflation, the continued existence of the uninsured and all kinds of ridiculous anomalies and inefficiencies in the market-place. When health care is regarded as a freebie provided as a part of employment, all kind of bad things result. So theoretically the employee should be happy because they have for 50 years been giving up income in lieu of their health benefits–one reason that real wages in the US have been flat for 30 years.

But, and this is a major but, there is one set of actors here who severely disagree. To repeat a poll taken last year which I described here, when offered the choice 71% of employees wanted a combination of “health coverage & lower salary” compared to only 24% wanting a “higher salary & no health coverage”. In other words, health benefits as a part of employment are very popular amongst employees.

So if employers are going to try to cut benefits severely (and let’s face it they are unlikely to be adding increased wages in their stead) you can expect to see some very grumpy employees over the coming years. And even American corporations don’t necessarily want to make their employees that unhappy when it only saves them a modest amount of their payroll costs. So I think that Gabel is right and that the way this trend will play out is by no means automatic.

So three days after Wellchoice (the Old Empire BCBS) decides that it won’t buy Oxford Health plans, a bigger fish steps in. UnitedHealth decided to buy it instead for $4.9 Bln, which is roughly the price Wellchoice had agreed to pay. In some ways this make more sense and in some ways it makes less, and it reflects how the game has changed for health plans . Oxford gives United greater presence in the north-east and it gives it greater access to the Medicare HMO market, which was Oxford’s original strength. Now that the PDIMA Act is funneling more money to Medicare plans, it makes sense for United to want to grab its share. However, back in the day (i.e. before 2001) the goal of managed care plans was regional market concetration, so that they could grind local providers down on price by developing what Ian Morrison used to call “virtual single payer” capability in each market. It looked like Wellchoice was still going that route when it decided to buy Oxford , but decided that it was about to adopt a 90s strategy in a Zero’s world, and thought better of it. This encouraged analysts at Bank of America who gave Oxford a sell rating, based on its likely poor profit outlook. They won’t look quite so smart today to any of their clients who took them up on their advice!

As an aside. It’s good to see that the sanctity of Wall Street remains inviolate. Reuters reported at 4.11pm that United was going to buy Oxford, but looking at the day’s chart, you figure that the word got out about 40 minutes earlier! I wonder how that was possible?

The California Health Care Foundation released a report a few weeks back showing that medical groups are losing their clout to hospitals. Meanwhile, over the last few years hospitals have been exercising their new found clout against the plans, and now it appears that the end-payers (such as CalPERS) are not going to take it lying down. Matt Quinn wrote about the battle between CalPERS and Sutter (the big N. Cal Chain) in TCHB last week. This week legislation was introduced in the California assembly to stop provider systems from being allowed to force health plans to contract with every hospital in their network. Whether this meddling in the market will stand up to further legal scrutiny is open to question, or at least it should put some fear into WalMart (or anyone else who uses market clout to get a better deal)!

By the end of the week it appears that CalPERS is stepping back from the brink, but the market power of hospitals is only increasing as we head into the baby-boom golden age in the next decade, so don’t expect this story to be over too soon.

THCB‘s author’s anecdotes about HSAs seem to have been the Internet’s major source of information about consumer-directed health plans (CDHPs). We may be wandering slowly past that dangerous stage! Both Health Affairs and Forrester are out with some more information about them.

John Gabel from the HSC group has an article in Health Affairs which has a nice description of the HRA/high deductible plan, the consumer selected plan and the (as yet only existing in Powerpoint) “customize your own plan”. Gabel suggests that the analysis Harris provided THCB with last January is spot on. Employers have no confidence in CHDPs to either save much money or improve quality, but the CDHP may help them to continue to shift costs to employees–which is their main strategy. However, many employers are rightly worried that the CDHPs will ensure adverse selection against their overall risk pool. Currently only 2% of employees have access to an HRA, but Gabel’s team estimate that that number could increase to up to 30% in 2 years. Much more likely is a growth to 7-10% of employees over a slightly longer time period, roughly akin to the fast growth in PPO members in the 1980s.

Regular TCHB readers will know that I harbor deep skepticism about CDHPs even though I (sort of) have one myself. Brad Holmes from Forrester has some interesting new data about engaged consumers shopping for Rx and hospitals on price and quality. The data is well worth a look if you are working on creating services that are attractive to this upper-tier consumer group, which represents from 20% of the population, and is roughly akin to the “new consumer” group that IFTF has been telling you about forever (or since 1997).