Tag Archives: inflation

Why Healthcare Costs Soar (Part 3)

In Part 1 and Part 2 of this series, David Toomey and I described a wildly successful collaboration with Virginia Mason Medical Center (VM) and a few Seattle employers.

During the the time of the VM collaboration, we invited major physician groups to meet with the employers. One of the most memorable meetings was with the CEO and chief medical officer (CMO) from a very well-regarded physician group in Seattle that has high fees but low performance.

As you would suspect, the employers were better prepared for this meeting than they had been for the meetings with VM. When the CEO and CMO talked about their strong emphasis on quality, the employers asked about quality monitoring and the process of care. Rather than acknowledging opportunities for further analysis and professing an openness to collaboration, the providers responded with confidence about their model of care.

Afterward, the employers expressed concerns about whether this premier provider could improve care and reduce costs. We posed a couple of questions: Are you saying you don’t want this provider in the network? Are you really ready to tell your leadership that this physician group, which many executives use, is not in the top tier?

The employers were aware of the dynamics with network configuration and the trouble that businesses have when a provider is dropped from the network and even a few employees complain. The employers responded that they wanted to have additional meetings with this group, because of its reputation.

After a couple of follow-up meetings, the employers recognized that this group was not committed to the process of care that they expected. They decided that the group should not be in the performance-based network. Importantly, the employers were now equipped to discuss their rationale with their leadership teams.

The CEO of the provider group felt respected, because of the time the employers spent with him, even though he did not like the outcome. He eventually acknowledged the group had work to do.

Employers make purchasing decisions with suppliers every day. For some reason, the healthcare procurement process involves the carriers and other vendors but often skips the actual suppliers of healthcare (except in a fairly small, but rapidly growing, number of major corporations).

The big question is: Why are more self-insured employers not engaging directly with providers?

In a broad network, there will be a bell curve around performance. Most employers say they want quality providers in their networks, but half the providers in their broad-based networks are below average. While everyone espouses “quality,” the variation in care is significant, and the medical ethics around treatment often drive that differential. Healthcare is big business. It is time to reward employees and channel them to primary care physicians and specialists who are truly committed to medically appropriate care.

A major reason why healthcare costs grow faster than general inflation is because most self-insured employers are simply not dealing with healthcare providers in the way we have described in this series of posts.

Why Healthcare Costs Soar (Part 2)

This is the second of a two-part series, by David Toomey and me, on why healthcare cost growth has historically been much higher that general inflation. 

In the last blog post, we outlined the complexity of the network negotiation process and the challenging dynamics among the insurance companies, the providers and the employers. The majority of employers have not seen financial data or interacted with providers enough to understand the quality and cost variation within a network. The big question looming is what to do around contract negotiations tied to network access, patient disruption and costs.

David invited a half-dozen large, self-insured employers in a market to delve deeper into the clinical care and cost variation analysis. The intent was to share performance data with the employers, so they could understand the positive financial impact that could come from channeling members to higher-value providers.

Reports showed that, within physician groups, there was wide variation in physician performance. But this took time for the employers to grasp because their businesses were focused on a consistent consumer experience—each cup of coffee made the same way with the same ingredients.

After a basic grounding in the data, the next step was to have the employers meet with the largest systems and physician groups, so the companies could get a sense of these suppliers’ value propositions beyond just claims-based performance reports. The employers felt they were ready for the first meetings with a major health system that we will call “the provider,” which outlined its capabilities and introduced its mission statement as well as its commitment to patients.

After the overview, the first employer question was, “Who is your customer?” The provider’s response: “The patient, of course.” Second employer question: “Who pays the bill?” The pr

healthcare

Why Healthcare Costs Rise So Fast

This is the first of a two-part series, by David Toomey and me, on why healthcare cost growth has historically been much higher that general inflation. 

If you want to truly understand why corporate healthcare costs have risen faster than nearly anything else over the past 40 years, read this article.

In 2001, David was managing large accounts for a major carrier/TPA (third-party administrator) when the largest hospital system in the market issued a notice to terminate its relationship with the carrier, to begin negotiating for higher unit prices. (When hospitals want a very high fee increase, they sometimes start the process by terminating participation in a carrier’s network.) This notice began a tumultuous series of negotiations that involved the local press. The fee increase demanded by the hospital system was high single digits, above market and highly inflationary for the area. This system was already paid a premium because of its large market presence.

David moved quickly to engage major self-insured clients and educated them on the cost impact. They told him to hold firm, as they could not absorb the increases. When asked what they would do if this major hospital was not in the network of the carrier that employed David, many responded that they would turn to another carrier so as not to disrupt employees who used the hospital system!

There were no questions by employers on the quality of the hospital’s care or on its commitment to process improvement. Although they realized that they could not really afford the higher prices, they felt that avoiding disrupting employees (even in a fairly minor way, by having them use a different hospital system) trumps company profits and affordable payroll deductions. That position meant David had no leverage at all in negotiating with the hospital system.

As a result, employer and employee health costs ratcheted up in that market. That’s too bad, but this story is the norm.

We’ve seen this same scenario continuously in our careers. Even if a hospital or clinic is used by fewer than 5% to 10% of a company’s employees, getting complaints from employees—even just a few—trumps corporate profits, shareholder returns, rising payroll deductions, restraining rising deductibles and rising employee out-of-pocket health costs. Even though self-insured employers are the ultimate purchasers of healthcare, they usually just roll over when providers keep raising their charges year after year.

In every market, by definition, half the providers are below average. While company benefit managers profess to want the best-quality care for their employees, they willingly accept larger fee increases from the worst providers. Why? Avoiding a few employee complaints has always been more important than deleting poor-quality providers, ones with a high rate of harming patients. (By “harming patients,” we mean providers with high rates of misdiagnoses, high rates of prescribing bad or suboptimal treatment plans and high rates of infections, some of which are deadly.)

Sally Welborn, head of benefits for Walmart Stores, recently called for self-insured employers to take the lead in reforming how providers are paid and in making hard, value-based purchasing decisions. (The term “value” excludes providers that have a high rate of misdiagnosed patients and give them profitable but unnecessary treatments.)

Soon, you can read Part Two on how employers can obtain value from the provider community.

2016 Latin America Insurance Outlook

Despite sluggish economic growth and troubling inflation in key markets, the 2016 insurance market outlook for Latin America remains relatively bright. The rollout of new insurance products and distribution approaches at a time of low market penetration should drive strong growth for insurers. Insurance premium growth is expected to rise by around 6% to 7% in 2016 and possibly beyond should the economic environment improve as expected. At the same time, the emergence of end-to-end digital capabilities is transforming the Latin American insurance market. This digital market disruption will force insurers to make rapid revisions to existing business models to stay competitive and build market share.

Customer expectations rising

Commercial customers will continue to require more sophisticated insurance solutions in 2016, including coverage for business interruption, cyber security, civil unrest and errors and omissions. Latin American consumers, many of whom are young, cosmopolitan and tech-savvy, will continue to push for new insurance channels and services that fit their lifestyle. To respond, insurers will need to simplify and adapt products for Millennials and sharpen their focus on mobile and social media interactions. Evolving customer needs throughout the region are compelling insurance companies to rethink their strategies, processes and services. The rise of financial technology, or fintech, companies is causing insurers, particularly in the consumer insurance sector, to reconsider their business models and increase their investment in new digital technologies. Despite a desire to avoid conflicts with legacy models, insurers realize that flexibility, efficiency and innovation are critical for success in a more demanding marketplace

Competition heating up

The liberalization of industry regulation across Latin America has opened insurance markets to wider competition. The abundance of insurance capital has intensified competition from various directions: from global insurers seeking a foothold in the region to local insurers looking to expand cross country to entrenched insurers defending their turf. These competitive trends are keeping insurance rates flat through much of the region and, in some cases, pushing them lower. The most substantial rate decreases have been in non-catastrophe property.

Pockets of premium increases can be found in areas of instability, such as Venezuela. However, insurance capacity is very limited for Venezuelan political risk, with most risks dependent on the international reinsurance market.

As markets develop in Latin America, commercial demand is increasing for new forms of insurance coverage, such as environmental liability. The opening of the oil industry to the private sector in Mexico, for example, is exposing new oil exploration and production entrants to potential losses from environmental damages. But market capacity is still restrained in key markets, such as Brazil, where only a few insurers offer such liability coverage.

Read our Market Outlook for LATAM Insurance in 2016 to understand more about the dynamics facing the South America Market here.

Real Reason Health Insurance Is Broken

Healthcare is broken in this country; I don’t think I really have to convince too many people of that. Whether your political leanings are blue or red, whether you’re a senior citizen or a teenager, really whether you’re rich or poor — just about everybody senses that something is wrong with how we manage care. This is not a quality-of-service issue, not so much an access-to-care issue and not really a lack-of-options issue. No, the problem most Americans rightly recognize as being wrong in current system boils down to one word: price.

But how do you fix that? For 20 years now, I have tried to help employers manage their healthcare costs for employees and their families. For at least the first 15 years of my career, that job mostly entailed comparing options from the national and regional carriers, negotiating the lowest rates possible, making suggestions to help lower benefits to offset rising premiums and then preparing spreadsheets of all those options for our CEO, CFO and HR director. Basically, my job was to bring in bad news, but to try to bring in the least bad news. All to get new clients and keep old ones.

Any time a business owner would ask me, “Why are our premiums rising so much?” I’d turn the question around a bit and ask what she thought the causes were. Inevitably, I’d hear the same three things. First, those “staggering profits of the insurance companies.” Closely behind that is America’s notorious “increase in obesity.” Then third — every once in a while — someone would actually get closer to the truth and say the reason is that “medical costs are rising.” And all of these are true, no doubt, to one degree or another. But none explains how health insurance premiums have historically risen at a rate five times or more beyond normal inflation.

When pressed for an answer on higher premiums, I’d explain how we receive very little information from carriers (especially in the fully insured market), but you’ve got a higher-than-desirable loss ratio — or I might mention the aging employee population, declining overall health, new taxes and regulations perhaps related to the Affordable Care Act. Again, all those reasons, to some degree or another, have a real impact.

The one that kept coming closest to the truth, at least from an insurance insider’s perspective, is the steady rise in costs. Or, unfortunately, as most consumers see it, the outlandish profiteering manufactured from the suffering, confusion and fear of others.

To truly find a more meaningful answer — something consumers and advocates and carriers and even legislatures could theoretically one day use to craft a lasting solution — I started to look at the actual unit cost of medical care. That’s vital, because it strips away taxes, fees, insurance profits and many other considerations like America’s decreasing health, or the continued drop in smoking. It clears all that fog and gives you a hard-number comparison. And what I discovered was that we as a nation spend more per unit of care than the next seven most-expensive countries COMBINED.

That deserves repeating. Not only do we as a nation maintain the world’s most expensive healthcare system as a whole, but at the individual level you are likely to be billed more for the same procedure than similar patients in China, France, Germany, Canada, Malaysia, India and the U.K. if all their bills were rolled into one.

Comparisons

To put things in better perspective, I looked at other common costs we incur going back as far as before the Industrial Revolution. And what I found was that the price of a car has not wildly changed in all those years. Nor do gas prices rise against inflation. Meanwhile, prices of computers and technology have historically gone down. So how then do healthcare premiums justify such leaps?

Housing is a great example. Since 1970, housing costs have only gone up 15% — 15% in 45 years. In that same time period, medical care costs have jumped 1,800% — 18 times greater since 1970. How about since 1935? According to Federal Bureau of Labor Statistics, costs have risen 4,200% in that time.

When further comparing health insurance and healthcare itself against any other goods and services we might buy, I realized that Americans, in general, tend to apply common sense and rational thinking to many other purchases, but that much of that practice somehow goes out the window when it comes to medical care.

We’ve become very good at consuming health insurance, but does that mean we’re actually good consumers? The executives at businesses do what they’re supposed to: compare costs, co-pays and deductibles presented by their broker/consultant each year. And when these executives do decide which plans to roll out to their employees, they are good shoppers. They compare their employers’ costs with their spouses’ employers, compare against the Obamacare exchanges (or individual plans pre-ACA) and consider other important factors — your out-of-pockets, your deductible, your premiums….

The goal is to control overall healthcare costs. But look at other types of insurance.

Many of us likely will shop out our car insurance every few years. After all, 15 minutes could save us 15%, right? Yet we know that any savings only apply to the insurance. We don’t expect shopping around for our car insurance to actually affect the price of the car. But the price of the car does affect insurance: A higher price tag means more expensive insurance.

The same is true in healthcare. We CANNOT lower our healthcare costs by shopping our insurance. Our healthcare costs are not at all affected by our insurance costs. This has been proven with the “consumer-driven” model of insurance (which has had limited to no impact on premiums long term). Yet our health insurance costs are almost fully driven by our actual healthcare costs. As a matter of fact, a provision of the Affordable Care Act known as “medical loss ratios” practically guarantees this.

Imagine that your teenager just got his driver’s license. After some good old-fashioned consternation and badgering, you’ve agreed to let him take out the car out unsupervised for the very first time, only to go to the corner store to get some much-needed milk. You hand over the keys and try not to stress too much. Of course, less than 15 minutes later, you get the dreaded phone call: He’s been in an accident.

Rushing to the scene, you’re relieved to discover it’s only a fender bender. The other driver, seemingly a reasonable person, agrees to accept your offer to not file an insurance claim, and instead pay him directly for what appears to be, let’s say, $1,000 of damage. After all, you’ve got a $500 deductible, and a claim filed by your teenager just weeks after getting his license could jack your rates up much more than the difference. Or, worse, your carrier could drop you, jeopardizing your freedom completely! So paying out of pocket makes sense, right?

But would we do ever this with our healthcare? Can you imagine anyone walking into a cardiologist appointment, especially with a co-pay plan, and saying, “I don’t want my insurance company knowing I may have heart disease, so let me just pay the $500 charge instead of submitting the claim and paying the co-pay”?

And let’s look at how oddly blind we are to the actual quality of healthcare we receive. For instance, in an operating room, a strong argument can be made that the anesthesiologist is the second most important person on the surgical team. After all, when you’re under general anesthesia, it’s her job to control the machines that keep you breathing. She also controls how “under” you go. She makes sure you don’t go so deep that you slip into a coma, but, equally important, makes sure you don’t wake up mid-procedure. Yet, with all that responsibility in her hands, who among us has even known who the anesthesiologist would be until five minutes prior to being knocked out? After all, for such an important role, wouldn’t it be nice to develop a relationship with this doctor, and maybe even have her be the one who administers sedatives for future surgeries? Maybe you’d just like to know if she only graduated medical school last week? That might be pertinent, too.

Instead, we juggle our healthcare purchases like nothing else we buy. Imagine if we consumed hotel stays like we do healthcare. We might have a high-deductible “hotel” plan. Say we had a $500 deductible before our plan covered stays at 100%. So if I’m only staying one night, I might look into cost and quality, maybe compare rooms on Trivago. But what if I needed a hotel room for a week, or a year, and I knew I’d be hitting that $500 threshold no matter where I stayed, from the most rat-infested hotel to a five-star resort? Wouldn’t I be inclined to stay at the Ritz Carlton in a $1,000-a-night because I know I’m hitting my deductible either way.

One of the pushbacks I get is that we, as patients, are not doctors and must rely on the pros. After all, when faced with a major medical condition, we’re usually not in the best frame of mind to make intelligent decisions. “I should just trust my doctor” is a common reaction, maybe the most common. And a very understandable one. But I’d argue that dealing with a major medical condition is the exact time to be most involved. Most aware. Most informed. The stakes couldn’t be higher, and yet our awareness is disturbingly low.

If we bought houses as we buy healthcare, it’d be like finding a reputable real estate agent and then asking him to go ahead and pick out a neighborhood, a house and the price we’ll pay. We’ll just meet him at the closing. Sounds crazy, right?

Where Insurance Is to Blame

Please know that I’m not holding insurance companies blameless. I do, for instance, blame the insurance industry for a major shift in our overall thinking. I hold the industry responsible for creating an environment in which the cost of care, and therefore the quality of care, becomes irrelevant. This was mainly born out of HMOs, of course, which, you’ll recall, lowered costs tremendously at first, and were hailed as the cure to all that ails our system, before things went so horribly wrong.

Here again, comparison can be useful. A while back, I was in a meeting with service department workers at a car dealership. I asked if they’d agree that most people, when paying for their own repair, would care about both the cost and quality. Everyone nodded — of course they would. I asked how that differed from a customer whose car was still under warranty. In that situation, they told me, the customers generally don’t care at all about cost, and, in fact, will likely come to a dealership on a warranty job specifically BECAUSE it’s the most expensive. After all, someone else is paying, right?

What most people are unaware of — mainly because they don’t ask — is that you can get warranty work done at many non-dealer repair shops.

Most people think of their health insurance a lot like they do a car warranty. The total cost, the competitively and fairly priced service, and, to a large extent, how good the work is just doesn’t matter so much when we’re not reaching into our pockets.

Doesn’t that tell us precisely why the “consumer driven” model hasn’t worked?

The idea was that if our plans have us paying higher deductible and co-pays, we’ll care more about the overall cost. Yet in 2015, the highest out- of-pocket allowed by the Affordable Care Act is just $6,600. If I’m going in for a procedure that may range in cost from $25,000 to $125,000, what exactly is my incentive to go looking for a deal? Or even ask questions? Not when I know I’ll be hitting my $6,600 threshold regardless of where I go.

And we inherently associate higher costs with greater quality of care. Is that a fair assumption? Not with the system we have. Actually, the opposite generally proves true.

Transparency

All of these things keep coming back to a singular issue for me: transparency. We simply don’t have the information we need to make wise decisions. Like finding out how good a specific hospital is at replacing hips, or how much it actually charges compared with another facility.

However, I believe the reason this information is not systematically available is the same reason why, if it suddenly were available overnight, with the wave of my magic wand, there would still be little impact. What is that reason? Because today, under the system and mentality we have, there’s simply no consumer demand for it.

Let’s look at it from the pharmaceutical side. The cost at a retail pharmacy for the generic Lipitor can vary from $16 to almost $80, depending on where you go to. But if you have a $10 co-pay, or have already reached your 100% coverage, how can I convince someone to go three miles out of his way to get the lower-cost prescription? How do I get him to even ask the question?

Another argument I hear frequently when I ask customers to identify the problems with healthcare: “Isn’t it the insurance company’s job to control cost? Don’t companies set up networks for this very purpose?”

Yes, they certainly do. But look at what really matters. Walmart started a list of $4 prescriptions. Many other pharmacies quickly followed suit. Try showing your insurance ID card for one of those drugs next time you go. In most cases, you’ll find the insurance company would pay a significantly higher price. Why? Because you have much more power than the insurance company does. Having you be willing to spend your money at a store is far more compelling to the business than anything an insurance company can negotiate.

We treat our own health like a discount haircut. We basically know as much about the professionals and facilities charged with saving our lives as we do with the stylists at Supercuts. It’s an insanely ill-informed way to manage the most important thing we have.

What can I leave you with in terms of possible solutions? They do exist, even though the Affordable Care Act limits some options.

What needs to happen is we have to encourage patients to care about the quality AND costs of the care they receive.

I envision a day when I can go on my smartphone and, using a basic app, find all the suitable places for replacing my hip, how well they’re rated, how often they do the operation and, of course, how much they charge. How many of us would walk into a new restaurant without the benefit of any word-of-mouth or knowing anything about the specialties, pick from a menu but only find out the price when you get your check? We do that every day with sprained wrists, broken bones, personal addictions, genetic illnesses, respiratory issues and even open-heart surgery,

The bigger picture here is really using our consumer dollars to force providers — meaning hospitals, doctors, drug manufacturers, pharmacies, etc. – to compete on the cost and quality of the services they provide, like nearly every other provider of any products or service we buy.

We’ve seen it work: In areas of healthcare that insurance typically doesn’t cover, like laser eye surgery or even cosmetic surgery, the change is already happening. The costs in those areas have gone down considerably while the quality has increased.

Naturally, I recognize that making the comparisons available and getting consumers to use them would be a huge challenge. What can we do in the meantime?

Well, some tools do exist. There is an online service called MediBid that allows hospitals and providers to actually bid on your medical care. When providers respond, patients can compare costs and quality among those providers.

Another possible solution: Instead of an annual deductible of, say, $2,500, we could have a monthly resettable deductible of something like $200. How would that help? Well, it would give us, as consumers, a little skin in the game year-round. It would encourage us to participate in lowering overall costs by not applying the car dealership model to an already bloated and wasteful system.

Another push, an indirect result of the ACA, is more self-insured products. Many times, these are appropriate for smaller businesses. Not only does the self-insured employer have significantly more transparency on costs but also, more importantly, has real incentive to control those costs.

Some employers negotiate reasonable pricing and, if they use a service like MediBid and it results in a significant savings, may offer to pay the employee’s deductible and even cover any travel expenses.

One innovative carrier has actually tied physical activity to a patient’s out-of-pocket cost. Any adult on the plan can opt-in to wear a step tracker, like a Fitbit. If certain goals are met, people can earn as much as $4 a day, or $1,000 a year, off their deductible and out-of-pocket.

Which brings up the topic of wellness, which has become a real buzzword in the last five years or so. While I do agree that getting “well” can translate into consuming less care, wellness programs don’t address the fact that nearly all people will consume care at some point in their lives and that many diseases are completely unrelated to lifestyle. My approach, the one I believe in: More transparency on the healthcare process and a community of well-informed consumers can help lower costs and improve quality on all care.

Conclusion

I believe that 90% of our problems would right themselves fairly quickly if only patients had the right incentives. If only information were made readily accessible. If only patients were allowed to be consumers, to shop for based on quality AND cost, just as we do with nearly everything else we buy.

This change would naturally force providers to improve their quality and lower their costs at a far more rapid pace. The pattern of unnecessary and duplicate testing would go down. Prices would quickly become far more competitive, as they should be.

And I believe Americans would start to see a more direct link between their financial picture and the decisions they make about their own health. If all this happened, if we had the transparency we need, then that dollar menu at McDonald’s might not seem so affordable once we understand the health and cost impact a double-cheeseburger really has down the road.