Transcript The Business of Health Care: A Persistent Search for Value

The Business of Health Care:
A Persistent Search for Value
Presentation to Health Management Conference
International Foundation of Employee Benefit Plans
August 8, 2005
Merton D. Finkler, Ph.D
Lawrence University
Overview of Presentation
 Introduction: Business Models and Markets
 Health Care Spending Growth: Character and
Distribution
 Key Contracts and Risk Sharing Decisions
 Recent Marketplace History
 Choices for Purchasers
 The Search for Value
Business Model Components
 Objectives
 Mission – Where value will be added
 Benchmarks – Performance comparisons to be made
 Ethics - Appropriate Behavior
 How will objectives be achieved?
 Core Competencies
 Target Sources of Revenue
 Choosing an Efficient Cost Structure
 Implementation strategies
 Short Term and Long Term Options
 To Overcome Barriers and Rent-Seeking Opposition
Three Challenging Questions:
Three Affirmative Responses
 Is the Term “U.S. Health Care System”
an Oxymoron?
 Are There Toyotas in Health Care?
 Does “Moneyball” Apply to Health Care?
Is the Term “U.S. Health Care System” an
Oxymoron? J. D. Kleinke (2001) thinks so.
 “Health care in America combines the
tortured, politicized complexity of the U.S. tax
code with a cacophony of intractable political,
cultural, and religious debates about personal
rights and responsibilities.”
 Central reality: “the primary producers and
consumers of medical care are uniquely,
stubbornly self-serving as they chew through
vast sums of other people’s money.”
Are There Toyotas in Health Care?
Yes, But They Aren’t Easily Replicated
 Toyotas symbolize both high quality and good value.
 Molly Coye (HA 2001) notes that “Toyotas” will not
exist in health care until the payment structure is
changed to reward production of “Toyotas”.
 “Industrial strength quality in health care” requires
both an example of such quality and business
incentives to yield it.
 Localized examples exist: LA, SF, Seattle, MPLS-SP
 Comprehensive, integrated, cost-effective care is not
easily transferable across markets, the way cars are.
Does “Moneyball” Apply to Health Care?
Yes, If Buyers Desire Cost-Effective Care
 Michael Lewis (2003) argues that baseball
GMs can field winning teams by using
measurement and predictive modeling to
determine which players to sign with a limited
budget.
 Measurement and predictive modeling are
also essential to determine which health care
components and practitioners can be
combined to yield the best health outcomes
given limited budgets.
Key Players: Wide Variation in Scope, Degree
of Integration, & Geographic Context
 Health plans – wide array of benefits and variation in
provider network scope
 Physicians – solo practice, single specialty groups,
multi-specialty groups, groups linked with hospitals,
core of integrated healthcare
 Hospitals – individual and system members; various
ownership structures
 Pharmaceuticals – similar to manufacturers
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In contrast w/ other components, no local barriers exist
Not address, for the most part
Degree of Integration of Providers
Varies Greatly Across Markets
 Full integration: Hospitals, MDs, and Insurance in one
package: Kaiser Permanente has all 3 components
available locally and a common incentive structure
 Partial integration: Physician/Hospital alliances
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Detroit, Henry Ford System
Twin Cities, Allina and Health Partners
Milwaukee, Aurora Healthcare
St. Louis, Washington University.
 Non integrated. Most common, insurers contract with
all health care providers – especially where Blue
Cross/Blue Shield, Wellpoint, United Healthcare, and
Aetna play a major role.
Geographic Orientation
 Health Plans – local, regional, and national
 1990s managed care – many local and regional
players; post 2000, consolidated nationals rise
 Consumer directed – national players
 Physician Groups – mostly local, some regional
 Multiple and single specialty local groups
 National PPMC movement rose and fell in the 1990s
 Special case: travel to Mayo or Cleveland Clinics
 Hospitals – mostly local and regional
 Local and regional systems are commonplace
 Many have a religious orientation
 Tertiary component in regional systems
 National chains influence diminished in last 10 years
Health Care Expenditures:
A Few Recent Facts
 HC$ = (price/service) x (services/person) x (people served)
 1990 – 2001 growth accounting breakdown
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33% - general inflation
22% - medical price rises above inflation rate
16% - population/ demographic change
29% - intensity of service
 Growth in inflation-adjusted HC$ per person driven
by new technology and services per person
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Average - 3.6% per year since 1960 but not smooth
 Not Unique to the US (1960 -2002)
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US HC$ growth = GDP growth + 2.7%
Other G6 countries HC$ growth = GDP growth + 2.0%
Growth in the Cost of Health Care
The 80 – 20 Rule is not far off
10% of people
70% of cost
10% of the Population Accounts for 69% of
Health Care Expenses
Which Cost of Healthcare Matters? It
Depends Whom You Ask.
 Premium only (insurance component)
 Payments to the health care sector
 Third party payments
 Out of pocket expenses
 Forgone tax revenues

(estimated at $188 B per year by Lewin)
 Total Burden of Illness
 Direct outlays for medical care
 Foregone output – absenteeism and
presenteeism
Health Premium Increases and Per
Capita Health Cost Growth 1999-2003
Health Insurance Premium Increases
vs. CPI and Wage Growth 1988-2004
Wage Share of Labor Compensation Has
Declined Steadily Since 1968
Labor bears the burden of increased health care expenditures.
The Burden of Illness for Those with
Chronic Disease – The Largest Opportunity
 Working age pop. with chronic disease
generates expenses 3 x non-chronic pop.
 Those w/ chronic conditions account for 17%
of population but 83% of health care $
 Burden of illness includes both outlays for
medical services and lost productivity
 Ave. impairment 2 to 11 days / 30 workdays
 Total burden – over $1 trillion per year
 Sources: CDC and R. Kessler (Harvard)
The Burden of Unhealthy Workers
Varies Greatly Across Employers
Sum of median 1998 HPM costs across programs was
$9,992 per eligible employee
Group
Health
$4,666
47%

24
NonTurnover
Occupation
Unscheduled
$3,693
Disability
Absence
37%
$513
$810
5%
8%
Workers’
Comp
$310
3%
Best practice (25th percentile) – 26% HPM cost savings
The MEDSTAT Group
© 2000
It’s All About Contracts and Risk
Sharing Decisions
 Labor/Management Contract: Firm manages health benefits or
shifts burden to employees
 Company/Health Plan Contracts: Health plan defines benefit
plan design/scope as well as provider network breadth
 Provider/Health Plan Contracts:
 Prepaid (capitation or salary) or Fee-for-Service
 Fee schedules, discounts, and payment tiers are commonplace
 RX/HealthPlan: tiers (typically 3), formularies, & discounts
 Few plans relate to value or benefit of intervention
 Variety of incentives for rebates and substitution
 Direct Contract: Skip health plan but not risk bearing
Good Contracts Make Good
Relationships
 You get what you pay for :
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More choice of provider, costs more
If procedures are rewarded, pay twice for errors
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1/3 of Medicare expenditures are wastefully spent
Louisiana ranks first in Medicare $, last in quality
Improved outcomes (pay for performance)
Short term incentives differ from long term ones
Coverage of primary and secondary prevention
Payment related to place of service and access
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ambulatory versus inpatient coverage
ER coverage vs. clinic (timely access? 24/7)
What Role does Market Competition Play?
It Depends on how Choices are Structured
 How frequently are choices made? Are long
term partnerships developed?
 How many health plans are offered?
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How much do provider networks overlap?
What incentives exist in the payment structure?
 Are insurance brokers or benefit consultants
used? How are they paid?
 Is direct contracting with providers a
constructive option? Who does the riskbearing?
Health Plan Objectives and Tradeoffs
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Market geographic scope and share
Short run cash flow
Long run profit
Mission – varies with degree of integration
with health care provider
 Role of insurance cycle – bounce between
market share and profits as primary objective
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Before 1990 – alternate three years of loss
with three years of profit
Since 1990 – now closer to six years
Health Care Provider (MDs and
Hospitals) Objectives and Tradeoffs
 Target income or profit
 Desired effort level
 Reputation sought
 Market share desired
 Geographic influence sought
 Profit and other missions
 No margin, No mission yields “not only for
profit” business objective
Market Competition – Mid 1990s
Managed Care’s Influence Peaks
 Strong cost containment incentives for
providers (but not for consumers)
 Narrow networks compete; reduced provider
market power results
 Competition among insurers – desire to
increase market share – constrains premia
 Optimism based on competing integrated
delivery systems and prepaid care (risks
totally shifted to provider community)
Managed Care Unwinds 1997 - 2003
 Health care inflation returns to double digits
 Financial incentives weaken for all
 Networks broaden in response to consumer
demand and tight labor markets
 Reversal of integration of delivery systems
 Specialists consolidate
 Hospitals consolidate
 Health plans consolidate
 Insurance profits rise to replenish coffers
Present Trends
 Increased patient cost sharing marketed as
consumer directed health care
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Initial coverage and large deductible
Reduced dependent coverage
 Tax incentives for high deductible policies
 Development of “pay for performance” schemes
 Tiered payment for providers and pharmaceuticals
(65% of workers - HRET Survey-2004)
 Improved information technology for health care
management & consumer purchasing – National
Health Information Network Program (est. $200B)
Cost Containment: Purchaser Choices
 Target/control specific health care components
 Seek increased efficiency of the delivery system
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(supply management)
Emphasize primary and secondary prevention
Provide financial incentives for patients to reduce
their use of medical services (demand management)
Implement administrative controls on the use of
services
Increase bargaining power by joining purchasing
coalitions
Demographics Complicate Choices
Those aged 45 – 64 spend roughly twice the
amount spent per person per year by those 18 - 44
Chronic Disease Prevalence Rises
More than Proportionately with Age
Medical Expenditures Panel Survey 2001
Target Components: The Whack a
Mole Response to Containing Costs
 Benefit redesign:
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Target fastest growing component (e.g., ER , RX)
 Cost Accountant’s Revenge
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If incentives slow the fastest growing component, a new
fastest grower emerges
 Substitution is inevitable & may be less efficient
(i.e., more costly or less effective)
 To avoid substitution, target total expenditures
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Beware direct and indirect long term consequences
If total $ fixed, how are priorities set and resources
allocated?
Identify Efficient Use of Resources
 Identify and discourage high cost, low value services
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– use evidence-based medicine (EBM)
Decrease chance of expensive adverse events for
those with chronic illness – disease management
Decrease the risk profile of population – primary
prevention
Decrease bargaining power of healthcare providers –
anti-trust and purchasing coalitions
Pay for good performance – compatible incentives
All options require strong, committed leadership at
various levels since resources must be reallocated
Implement Primary and Secondary
Prevention Strategies
 Screen enrollees to determine risk levels
 Offer incentives to sustain low risk
 Provide performance-based disease
management to contain moderate and high
risk by reducing chance of adverse event
 Educate enrollees to best manage chronic
disease
Reduced Risk Means Reduced Cost
Dee Edington
Prevention Also Requires Sacrifice
 Payment comes before savings
 Prevention not worthwhile w/ annual
enrollment switching
 Each program has a different payback period
 Serious wellness programs require 3-4 years
 Each population faces a different set of risks
 Target prevalent risks in your population
 Compliance (medical community and
patient/consumers) requires both education
and compatible incentives
Use Consumer Directed Health Care Incentives for Patients to Economize
 Health Savings Accounts
 Response to OPM disease
 Large deductible – low premium insurance
 Increased cost sharing – consumer’s decide
 Various amounts of information provided to
improve decision-making
 Tax subsidies with MMA 2003
 High deductible plans offered by 10% of firms
(2004) - 27% of firms at least somewhat likely
to offer by 2006 (HRET Survey)
Concerns about Consumer Directed
Health Care (CDHC)
 Attractive to young & healthy thus potential
adverse selection if enrollees choose plans
 If one CDHC plan, tradeoffs worsen for those
w/ chronic disease until they reach deductible
 Focuses on 50% who spend 3% of total $
 Money taken out of the general pool and
given to individuals (e.g., $500 per employee)
 Consumers don’t easily distinguish between
cost-effective and cost-ineffective services
Use Administrative Rules / Managed
Care – “Divide and Contract”
 PPO, POS, and HMOs – Selectively contract
 Deliver volume to a subset of providers in exchange for
discounted price
 Utilization controls of various sorts
 Various degrees of prevention offered
 Large number of structures – integrated or contracted
 Given variety, hard to generalize – read the fine print
 HMOs often feature fixed payment to providers,
limited choice of provider, and directed practice
 Offered good coverage for prevention
 Kept $ growth low in the mid-1990s
 Wide variation in ability to deliver quality care
The Backlash Against Managed Care
 Rejected by those who wanted more choice –
if paid for by entire insurance pool (return to OPM)
 Tight labor markets forced firms to weaken
controls in order to attract and retain laborers
 Increased purchaser bargaining power
induced providers to consolidate
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Hospital systems evolved
Physician group practice thrived – no longer a
cottage industry
Use Purchasing Coalitions to Increase
Purchaser Bargaining Power
 Insurance load factor falls from 40% to 6% (10k covered lives)
 HIPCs – some state sanctioned
 Problem: agreement on common benefit package & strategy
 Two key survivors:
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Pacific Business Group on Health
Patients’ Choice
 Effects of ‘divide and contract’
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Some providers lose (and rebel)
Some players (providers and employers) drop out
 Association Health Plans – Proposed current legislation
 Exemption from state mandates for cross state plans
 Problem: local delivery and variety of benefit preferences
 Potential administrative nightmare for medical practitioners
 Other sessions focus on this topic
Seek Value – Quality/$ spent
Wide variation exists across markets
 NEJOM/Rand report indicates (2004)
 Participants received only 55% of recommended care
 Both under-use and over-use are commonplace
 IOM report on the Quality Chasm (2001)
 Between 44,000 and 98,000 die from mistakes in
hospitals
 Cost of preventable mistakes - up to $29B
 MBGH report estimates the cost of poor quality as
 30% of direct health care cost - $1,350 per person
 Indirect costs estimated at $350 per person
 Ideally, reduce unnecessary hospital admissions
 Ambulatory Care Sensitive Conditions
Medicare Spending per Beneficiary vs.
Quality of Care Ranking (2001)
CMS, Dartmouth College, and the Washington Post
Poor Care Coordination Leads to
Unnecessary Hospitalizations
Johns Hopkins University, Partnership for Solutions
Value-Based Purchasing and
Pay for Performance (P4P)
 Reward evidence-based “best practice”
–Caveat Emptor!
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Competing definitions (EBM) – See HA J/F 2005 –
guidelines or standards determination
 Process or outcome – which indicators are valid?
 Apples to apples requires risk adjustment
 “Your complications are my costs”
Numerous implementation barriers exist
 Funding required to construct IT infrastructure
 Key providers may not cooperate
 Employers may not back with appropriate incentives
Pay-for-Performance Demonstrations
Rewarding Results
Demonstration Sites
Unit of A/C
Geographic
Region
BCBS of Michigan
Hospitals
Michigan
Blue Cross of California
Individual MDs
SF Bay Area
Bridges to Excellence
Individual & Group
MDs
Cincinnati, Louisville,
Boston, Albany
Excellus/ Rochester IPA
Individual MDs
Rochester, NY
P4P - Integrated HC Association
Group Practices
California
Center for Health Care Strategies
Individual & Group
MDs
California
Mass. Health Quality Partners
Group Practices
Massachusetts
Young et al., Overview of P4P, 2005
Four majors programs
 Leapfrog – Targeted attempts to improve
patient safety in the hospital (2000)
 Medicare under Mark McClellan (MD, Ph.D)
 Bridges to Excellence – a structured
response to the Quality Chasm
 Pennsylvania infection control initiative
The Leapfrog Initiative
 Purposes:
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Consolidate purchaser voice
Engage consumers and practitioners in QI –reduce preventable
hospital deaths
 Policy: Use EBM to identify 3 safety leaps
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Computerized MD order entry (CPOE)
ICU staffing with “MD intensivists”
High volume hospital referrals
 Implementation – incentive and reward toolkit
 Results:
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Limited hospital participation so far
Few purchasers make indicators part of P4P
Business case for adaptation of 3 leaps not yet accepted
Reward structure still modest
Leapfrog has changed focus from employer to health plan
 Leapfrog is catalyst, but employers must decide to take the “leap”
Medicare Variation in Cost and Quality
 Spending per beneficiary varies by a factor of 3 across counties,
even after adjusting for age, sex, practice costs, and case-mix
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Medicare spent more than twice as much per patient in Miami as in
Minneapolis yet risk adjusted quality better in MPLS
 Quality of care, based on 24 measures established by CMS
also shows significant variation
 Dr. McClellan – strong advocate for P4P demonstrations
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Proposed 1 to 2% performance bonuses but will it withhold money from low
quality providers? Not likely, politics won’t allow it.
Demonstration projects seek to change compensation system from one
based on services provided to one based on health outcomes
 “Real markets have ‘losers.’
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Without them, it is difficult to achieve much efficiency. In a political system,
losers, potential losers, and even those who fell that they might someday be
losers, often seek redress from their elected officials.” – Cooper and
Vladeck
Bridges to Excellence: Rewarding
Quality Across the Healthcare System
 Seek STEEEP care – Safe, Timely, Effective,
Efficient, Equitable, and Patient-centered Care
 Group of stakeholders (including CMS, NCQA, large
firms, health insurers, PBGH, and Leapfrog) reached
consensus on how incentives might be used to
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Reengineer care processes to reduce mistakes
Reduce misuse, overuse, and under-use
Increase accountability through release of comparative provider
performance data
 Initial results for AMI, health failure, and pneumonia
are encouraging
Pennsylvania Hospital Infection Reporting
 Hospitals must report all infections to Pennsylvania Health Care
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Cost Containment Commission (PHC4) – starting in 2006
Vast under-reporting: Only 12,000 cases reported but 120,000
cases billed for
Estimated cost -$125M+ -Medicaid; $1B+ - private insurers (PA)
Hospital responses:
 Look at processes not outcomes
 Let providers fix it
 Don’t scare the public
PHC4 responses:
 “If you bill for it… you ought to be accountable for it.”
 Pittsburgh initiative – 84% reduction in infections from one
major source; 95% reduction in deaths from this source
Which Business Strategy for
Employers?
 Health care – a component of the cost of
labor - manage it
 Health care – a consumer responsibility –
shift it
 Health and productivity management – treat it
as central to business mission
 Some combination
Suggested Guidelines for Purchasing
Value
 Focus on the total burden of illness, not
component cost control
 Develop and nurture long term coordination
among patients, providers, and payers
 Identify health risk factors and choose health
programs and benefit designs to reduce them
Guidelines Continued
 Invest in the information (including evidence-
based guidelines) and communication
infrastructure for prevention
 Provide incentives for enrollees, providers,
and payers to reward performance consistent
with reduced risks and illness burdens
 Choose persuasive leaders who seek value
from health services & human capital
One Solution: Value + Choice
 Find value and support it.
 Make a fixed contribution to a flexible spending
account
 Provide at least 2 health plan options
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A focused narrow network that encourages prevention
and chronic disease management
(Consistent with HPM focus)
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Health savings account with high deductible and wide
choice of health care provider
(Consistent with consumer responsibility approach)
Pacific Business Group on Health
 Begun in 1989 – 50 large purchasers with 3 million covered lives
 Added CA legislated small employer purchasing pool (1999)
 Three targets
 Value-Based Purchasing
 Quality Measurement and Improvement
 Consumer Engagement
 Active participant in Consumer-Purchaser Disclosure Project –
”sunlight is the best disinfectant”
 Existent report cards have flaws and limited use
 2007 objective: publicly report, standardized comparative
information on providers
 www.healthscope.org – quality ratings for hospitals, medical
groups, and health plans
Business Health Care Action Group
(BHCAG) and Patient Choice
 Components
 Direct contracts with distinct, competing care systems
 Risk-adjusted provider bids to contracting authority
 Consumer incentives to make price and quality
conscious choices
 Result 1: In the Twin Cities, it is possible to use
competition to achieve pay for performance
 Result 2: Despite attempts to try elsewhere, Patient
Choice has been successfully transplanted to other
MSAs (attempts in Boston, Des Moines, Denver, St.
Louis, Portland, Milwaukee, and Sioux Falls SD)