Health Care in 2019: The Bellwether Year
For decades, those of us focused on healthcare’s excesses have despaired at the elusiveness of reform, convinced that the problem was intractable. America’s vast healthcare industries – supply chain, health information technology, care delivery, and finance – have become the largest and richest business sectors. As health care’s wealth blossomed, so did its influence over policymakers, ensuring that every relevant law and rule was spun in its favor. The rules of the game became rigged, with America’s patients and health care purchasers so disadvantaged by policy that they became pawns within an opaque system that was impervious to change. We’re happy to report, later in this piece, that things are actually changing demonstrably in many areas.
The value movement emerged within this environment over the past five years or so. Hundreds of value-focused firms entered the marketplace, including many that had devised new ways to manage healthcare clinical and financial risk within high-value niches. Major health plans tended to dismiss these approaches; they make more if health care costs more, but health management alternatives offering better health outcomes and/or lower costs became increasingly attractive to organizations whose financial performance was tied to the management of health care risk. Self insured employers, stop-loss firms, captives, worksite primary care clinics, Medicare Advantage, and Managed Medicaid plans – all these represented opportunities for upstart health care risk managers.
Slowly, over time, more groups took a leap and replaced core health plan services with alternative management offerings – e.g., narrow networks, musculoskeletal care, cardiometabolic care, cancer management, drug management, PBM services – and ultimately even the largest, most powerful legacy health care organizations have felt the need to course correct. Consider the following developments that we’ve seen in 2019:
Updating Provider Networks
Last week, the Blue Cross and Blue Shield Association (BCBSA) announced that it would establish a national high performance network for its 36 independent Blue organizations. The press release noted that this is BCBSA’s “first new program to serve a nationwide marketplace in 25 years,” which presumably reflects a decision of some gravity. Considering that the Blues have for decades relied on very broad provider networks, it is fair to assume that narrowing those networks will have significant political implications as longstanding provider partners lose access to patients. Also, our understanding is that the Blues have been using the Cave Consulting Group’s Marketbasket system, a capable provider performance profiling tool. Building performance-based networks has been an industry promise for years, but rarely has it been brought to fruition. All in all, the BCBSA announcement is a bow to the traction that value-focused programs are getting in the market, and signals momentous disruption to a model that has been bulletproof for decades.
In a related effort, Optum, a subsidiary of United Health Group, has now acquired 45,000 primary care physicians and acquired or partnered with comprehensive services throughout the care continuum. This initiative is designed to control the whole supply chain, creating care capabilities comprised of their owned and many non-owned provider entities with which they share risk. Their plan requires that Optum adjudicate the risk in this model, which allows them to disrupt traditional fee-for-service hospital-dominated markets. Contracted payers merely help to facilitate claims. Optum is laser focused on getting people out of hospitals and into their contracted providers. It remains to be seen, though, whether these arrangements can perform competitively enough to maintain Optum’s dominant hold on their many markets.
Focusing in on Reference-Based Pricing
In the purchaser community, the North Carolina State Employee Health Plan, with 727,000 lives, will run out of money in 2023. Led by a charismatic State Treasurer, Dale Folwell, and arguing that hospital bills are often unreasonably high, the plan proposed moving to a Reference-Based Pricing (RBP) scheme, which would have dropped hospital reimbursement about 38 percent. Backed by the Republican legislature, the state’s hospitals closed ranks, accused Folwell of advocating for radical tactics, and refused to agree to his terms.
In the short term, the health plan’s efforts to move to RBP failed. But the health plan budget crisis hasn’t gone away and the problem continues to fester. No doubt Mr. Folwell has realized that there are lots of ways to skin a cat, and that other cost containment approaches – e.g., better managing high cost niches like cancer or cardiometabolic disease, performing claims review, managing drug spend – may be equally effective as RBP and less confrontational.
Leveraging Centers of Excellence
The Connecticut State Employees’ Health Plan also revised what they’re doing, putting the mechanisms in place to establish a statewide and national Centers of Excellence network that will be available to their 280,000 working and retired families. Working with data from a new statewide All Claims Data Base (ACDB), Remedy Partners, Health Advocate and Carrum Health, will identify the best performing facilities and physicians by procedure or condition category, and contract for those services through more efficient warrantied bundled pricing arrangements.
It is worth appreciating what the steps in North Carolina and Connecticut represent. State Employee Health Plans around the country are typically very large groups with generous benefits. In most cases they have been managed through conventional, often conflicted advisor and health plan relationships that have not done them any favors. Under growing financial duress, these plans have finally determined to leverage their collective purchasing heft and do something different. Those steps entail rejecting some health plan recommendations and often going around conventional arrangements, many of which have been more beneficial to the plan and providers than to the purchaser.
Cost Transparency Moves to the Forefront
Finally, note the landmark Rand Hospital Transparency Initiative, which highlighted the problem of commercial cost shift, especially at the hospital level, by comparing what Medicare and commercial purchasers (i.e., employers and unions) pay hospitals for the same services.
While the study found tremendous variation in commercial payment, in general, it found that employers pay 241% of what Medicare pays for the same services. For perspective, consider that the Medicare Payment Advisory Commission (MedPAC), an independent agency advising Congress, found that, broadly, Medicare reimburses hospitals at about 10% less than cost. Efficient hospitals lose about 2% on each Medicare patient, while the three-quarters of hospitals that lose money in Medicare lose about 18% on each patient.
Hospitals’ argument for the pricing differential is that they need higher commercial reimbursements to remain afloat. The result, intended or not, has been that non-government payers very handsomely subsidize Medicare’s below-cost reimbursements at a level that is difficult to justify and employers pay that cost.
The RAND study also highlighted for purchasers the huge value of cost and quality transparency. Purchasers can easily access this information to help them design high performance facility incentives and, in many cases, to negotiate directly with specific facilities. Version 3.0 of this study will be out shortly and will almost certainly accelerate market-based and policy change in the many states being added. Clearly, the release of this information has alarmed and motivated large, expensive hospitals around the country to suddenly be interested in cost and quality discussions. More importantly, it has created very public visibility (and concern) around hospital pricing and quality.
A couple years ago, when we first saw value-based efforts getting traction, we reminded ourselves that, even with these tremendous successes, the value market was a drop next to the ocean of more conventional health care arrangements. But recent events show that value is taking hold and shifting the strategies of both health care purchasers and mainstream industry players, moving us toward a better and less opaque system. We could see that clearly in 2019, and so we expect even better news in 2020 and beyond.
Brian Klepper is a health care analyst and Executive Vice President of The Validation Institute, based in Charlotte.
Jeff Hogan is Northeast Regional Manager of Rogers Benefit Group in the Hartford, CT area.