Tag Archives: preferred provider organization

PPOs and the $444 Box of Kleenex

#The Affordable Care Act requires every health plan to offer benefits free from most annual and all lifetime dollar limits. If you have a self-insured plan, you may feel the direct impact of this a little more immediately (although many employers still do not recognize it). Even employers that are fully insured should realize they are the insurance company anyway. The only benefit those employers get is delaying the impact of employees’ healthcare spending until their next renewal date. But employers pay dearly in the form of a complete lack of information on exactly how that money is being spent. As a result, companies should start to look at the health plan ID card as an unlimited corporate credit card. Which then raises the question: Who is monitoring that spending?

That unlimited credit card rings up charges like a $444 box of Kleenex (described on the hospital bill as a mucus collection device) and $1,000 toothbrushes, and those are the trivial problems, the ones that can draw a chuckle. Those trivial things need to draw attention to a much broader problem, such as $10,000 surgeries that employers blindly pay $180,000 for.

With the majority of the workforce having a high-deductible plan, every day that goes by it’s less and less “other people’s money” and more of the employee’s, so we’re starting to see legal activity — even before a formal declaration from the Department of Labor that health benefits must be managed by employers with the same level of scrutiny as retirement benefits. [For more detail, you can download “ERISA Fiduciary Risk Is the Largest Undisclosed Risk I’ve Seen In My Career” — a chapter that was added to the recently released new edition of the CEO’s Guide book.]

Most employers use networks as their primary strategy to control that spending. Carrier networks love to tout their average discounts. “We save plans 60% on average off billed charges!” Well, there are two major problems with networks.

First, what is that discount off of? Generally it is off the “ChargeMaster” rate. What is the ChargeMaster, you ask? The ChargeMaster, also known as charge description master (CDM), is a comprehensive listing of items billable to a hospital patient or a patient’s health insurance provider, with highly inflated prices — several times that of actual costs to the hospital.

The ChargeMaster typically serves as the starting point for negotiations with patients and health insurance providers of what amount of money will actually be paid to the hospital. It is described as “the central mechanism of the revenue cycle” of a hospital. We have seen a billed charge of $1,000 from a hospital for a manual toothbrush. 60% off that is still one expensive toothbrush. We found a $444 charge for a “mucous collection device” later found to be a box of tissues. Not to mention, the billed charges vary so dramatically, even within the same facility that a finite percent off an infinite number has zero credibility. While one ex-hospital CEO describes the ChargeMaster as archaic fiction, it does play into the general obfuscation designed to keep healthcare costs growing.

[Please add your comments below if you have other real-world examples like the $1,000 toothbrush, $444 box of tissues, etc. Or share on social media articles and examples with the hashtag #PPOGate, which people are using to highlight how blind faith in PPO networks has inflicted pain on the working and middle class.]

You might think that all hospitals have similar Chargemaster prices. Nothing could be further from the truth. The Huffington Post did a story when treatment costs were first made publicly available from a federal database in 2013, in which they found the cost to treat COPD (chronic obstructive pulmonary disorder) in the New York City area can range from $7,044 to $99,690. Herein lies the fundamental problem: Back when we had richer health plans, patients didn’t care about the cost, as long as insurance covered it. Now that we are being left with these crazy-high deductibles, we are blaming the insurance company for the plan design (and the cost thereof) that leaves us with this exposure.

See also: Medicare Set Asides: 10 Mistakes to Avoid  

Every facility that participates in Medicare and Medicaid is required to file their actual cost, all in, with the Centers for Medicare and Medicaid Services (CMS), and anyone can access this data for a subscription fee. In Charlotte, N.C., the two largest hospitals systems file their cost for a CT scan as being between $75 and $90. Their average billed charge to a health plan? Between $1,800 and $2,700! The hospitals claim they have to charge higher prices to private insurance plans because of the below-cost care they provide to Medicare and Medicaid patients and the “free” care they provide to the uninsureds through the emergency room. Well, uninsured ER rates have dropped significantly under the ACA (and actual ER usage has gone up), and ER rooms are highly profitable to the hospitals for those who have insurance, so shouldn’t there be a positive overall impact on the private insurance pricing? Also, if I go a buy a car, and get a super deal from the dealership, will you be OK being the next customer in the door and being told you have to overpay because the dealer gave some stranger before you a really good price? I think not.

The second problem with PPO networks is that nearly every network contract prohibits the plan (and the employer, by extension) from auditing a bill. The contract actually prohibits the plan from even requesting an itemized bill! All they can get is what’s called a UB, or a universal bill. You can see the form here. Other than the information on who the patient is and whom to pay, the UB only shows total charges and diagnosis. As long as the diagnosis is a covered condition under the plan, the discount gets applied, and the bill gets paid. Bills on this form can easily be hundreds of thousands of dollars. When we have asked for an itemized bill (that the insurance company can’t ask for), we have found pregnancy tests on men and charges for 16 surgical screws when only four were used, just to name a few “errors.”

We have heard firsthand stories where an insurance executive sat down with hospital executives and said, “We need a bigger discount from you guys,” and the execs said no way. So the insurance exec said, “I don’t think you understand…you can bill us more, and it can even net out to more than we pay you now, we just need to say we have a bigger percent off.”

Another perverse incentive to be aware of that came as a result of the ACA is called the medical loss ratio. Under this provision, insurance companies must spend between 80% and 85% of the premiums they receive for medical care for the insureds. If they spend less than that, they must provide a refund. Prior to this law, carriers could keep the difference for profit, so they had stronger encouragement to keep costs down. Now, the only way they can charge their customers more, and thereby boost profits, is if the underlying cost of care also goes up.

We’re not blaming the insurance companies. They had to bow to the pressure of their customers (employers) because, if that big local hospital system left their network, they thought customers would leave in droves. (Pittsburgh schools are proving that assumption wrong with a good plan design and collaboration with their teacher union — details are in the CEO’s Guide book that you can download free.) The insurance companies are in a tough spot. If they try to “manage” the care — i.e. pre-certification, tiered drug formularies and narrow networks — their customer base gets ornery. And employers are loath to be seen as getting involved in their employees’ healthcare.

I bet most employers don’t want to tell employees where to sleep or what car to drive, either, but I imagine they nonetheless have parameters around how much can be spent for rental cars and hotels when traveling on the company dime.

Fortunately, there are employers all over the country that have wised up and tamed the out-of-control healthcare cost beast. They are spending 20% to 55% less than a typical employer on a per capita basis. Paradoxically, they are finding the best way to slash healthcare costs is to improve health benefits. There are several examples in the CEO’s Guide book that range from school districts in the Rust Belt to a municipality in the Midwest to a small manufacturer in the heart of oil country to a hotelier in Florida.

Another statistic carriers love to tout is their auto-adjudication rates (in other words, automatic and prompt payment of claims as they come in). After all, higher auto-adjudication means the providers get paid quicker. And that means fewer headaches for providers and employees. But that also suggests that a 94% auto-adjudication rate means that 94% of the time no one is looking at the bill even to the limited level the contract permits. The same company will reject an expense report submitted by an employee missing a $62 restaurant receipt and then blindly pay a $100,000 medical bill without any detailed review.

So let’s review:

  1. Although carrier networks have some influence over the discount, they have little over the starting price.
  2. Hospital charges are filed on a UB (universal bill), and the plans are contractually prohibited from asking for an itemized bill.
  3. If the plan requests any audit at all, they are required to pre-pay the claim, often at 100%, and are then subject to the hospital’s own audit procedures.
  4. Networks are forced to accept these terms, or their customers will leave because they do not have a broad network.

See also: Healthcare Data: The Art and the Science  

Sounds like the fox is watching the henhouse. The abuses that can and do exist under this model are egregious (see Chapter 6 from the book, PPO Networks Deliver Value — and Other Flawed Assumptions Crushing Your Bottom Line). Different strategies are just starting to take shape and mature that expand whom your employees can see by removing the network completely and letting them go wherever they want. When the network contract is gone, the plan sponsors can deploy much more aggressive strategies to not only reduce the fraud and abuse but significantly reduce costs on the legitimate charges. Some employers are contracting with providers directly and, more often than not, with a local hospital looking to compete against the behemoth health systems.

Under ERISA, plan sponsors (the employer) have a fiduciary responsibility to protect plan assets. Because many network contracts prohibit the plan from auditing the bill, and the few that do require 100% of the allowed charges to be paid before an audit can begin, how can a plan sponsor meet its fiduciary requirement under ERISA to be good stewards of plan assets? Old-line benefits brokers continue to advise their clients to sign such egregiously one-sided contracts — those benefits consultants are going the way of the dodo bird but leave their clients exposed in the meantime. I can say with 100% certainty that plaintiffs’ attorneys are gathering their ammunition for these ERISA cases. When you combine the fact that healthcare’s hyperinflation has been the overwhelming driver of 20-plus years of wage stagnation and decline and look at the impact on household spending in the graph, the pain inflicted on the working and middle class is palpable.

Smart employers and their benefits consultants are avoiding having a target on their back by taking action now. By applying the best practices captured in the Health Rosetta and various other tools that will be highlighted in the forthcoming book CEO’s Guide to Restoring the American Dream – How to deliver world class healthcare to your employees at half the cost, there are many tools to provide employees a world-class health benefits package without giving a blank check to the healthcare industry.

Written with David Contorno, President, Lake Norman Benefits

Workers’ Comp: the Best of Both Worlds

I kicked off this series by detailing my argument for why physician quality is the single most important aspect of a claim — efficient and effective care is far more impactful than discounted care. Now, I want to expand on this idea by delving further into the relationship between the preferred provider network (PPO) and the exclusive provider network (EPO).

First, let’s understand what is meant by EPO. The narrow definition of the term is a network that is the exclusive option for providers. In workers’ compensation, it most accurately describes programs like the MPN in California, the HCN in Texas or the PPP in Illinois. These are all examples of models where the insurer or employer can define an exclusive list of providers from which an injured worker must choose their doctors. In a broader sense, I think of the EPO as the listing of doctors and ancillary providers that are going to be included in elite programs. This includes the list of doctors you would want to use every time you create a workplace poster or the list of doctors used in any channeling program like initial triage. Think of it as the doctors you want to use any time you have the opportunity to either direct, contain or influence selection of a provider. Ideally, the goal of an EPO should be selecting the best available providers to drive improvements in outcomes.

And improved outcomes should be at the heart of the relationship between PPO and EPO. Over the past decade, outcomes-based networks have become a well-adopted and proven model for dramatically improving a claim population’s overall costs, lost time and litigation, but many organizations struggle with the roll of PPOs in this model. They are also curious as to how to leverage the best of both worlds — PPO and EPO — to drive better outcomes and better pricing moving forward.

Separating “Who” and “How”

The idea of using both PPOs and EPOs to improve outcomes has been somewhat confounding to date. As discussed in Part One of this series, the primary goal of the PPO is to contract with as many providers as possible to drive the best purchase prices for medical and ancillary services. In the absence of any controls over care, the PPO serves its customers best by including poor-performing doctors, courtesy of more available discounts. With controls (and strategies to leverage those controls) for outcomes in place, however, the game changes, and the roll of the PPO needs to be reconsidered.

See also: Why So Soft on Workers Comp Fraud?  

In this environment, PPOs and EPOs coexist in an important balance. The EPO needs to determine “who” to work with, and the PPO provides the mechanism for “how” you work with them.

Consider the following table:

Hopefully, it quickly becomes clear that the “best of both worlds” model is not only achievable but also makes things like vendor selection and program management easier.

Under this framework, the value proposition and role of the PPO is clarified: The PPO is the source of doctors who have been properly vetted through credentialing practices and contracted to provide care, typically at a favorable price. This function could be offloaded to your bill review vendor if it is positioned to resell networks, or you can take on the task of deciding which combination of PPOs gives you the best bench to select doctors from in each jurisdiction. On a case-by-case basis, you may find barriers with a certain jurisdiction or PPO vendor, so some research may be necessary to determine how to manage selecting a subset of providers from a list of preferred providers.

Once you’ve built your bench of “available” doctors, the next step is to select the doctors that are going to be invited into the elite program, or EPO. The most effective method for selecting doctors for an EPO is outcomes-based. Depending on the program, it may be necessary to have processes and documentation for decisions related to the inclusion or removal of doctors from your elite programs. This is more important in situations where the decision to exclude a provider will prevent them from being able to treat your injured workers. Think MPN exclusion. It’s not really an issue when you are just selecting three doctors to be on a workplace poster.

The core message is: Think differently about the purpose of your PPOs; they have a specific value proposition when you are working with an EPO strategy. Use the PPO to build your bench of available doctors, and use your EPO to decide which doctors are the ones you want your injured workers to use.

See also: Healthcare’s Lessons for Workers’ Comp  

The age of accountable care is upon us — in both comp and group health. Data science and access to big data has enabled a level of accountability that did not exist a decade ago. If you do not have a strategy for using quality as a primary factor in determining who should be seeing your injured workers, you are missing the boat. Having a framework for how to separate who you work with (EPO) from how you work with them (PPO) helps get you started on the path to an outcomes program or provides an easier perspective for how you manage and improve an existing program over time.

Next Steps

Once you have your framework in place, you need to determine the right balance of quality and quantity. To do this, quantify the difference between good and bad doctors. There are a lot of tools available to help you do this. Then, determine how many doctors you need of each type in a given geography to fully service workers. Next, eliminate those doctors whose outcomes don’t make the cut from your network. As long as you have enough good doctors available who can also provide a discount, there is zero benefit to having a deep bench. Once you make smart cuts, emphasizing quality over quantity, watch your savings and worker satisfaction with their care dramatically improve.

Next up: outcomes strategies for each type of jurisdiction. In Part Three of this series, I will dive into three types of jurisdictional models and look at the differences between states. Stay tuned!

This article was first published in Claims Journal.

What Matters in Workers’ Comp

Is this claimant supposed to be off work? Did I get enough discount on the services? Were those services even necessary? I would argue that the question everyone should be asking instead is: Who is your doctor? After all, the physician is the person who sets all of the other wheels in motion — wheels that influence things from quality of care to how long an employee is out of work and the ultimate cost of an injury.

Throughout the past 15 years that I’ve spent managing networks and working with top companies developing custom solutions, one thing has consistently held true: Physician quality matters … A LOT. In fact, provider quality is shown to make the single greatest impact on a claim. It’s something that shouldn’t be overlooked, and yet all too often it is.

Numerous studies have shown that good doctors make a difference. There is a huge discrepancy in claims associated with doctors who score well on an outcomes basis versus those who don’t. The average costs associated with a problematic D- or E-rated physician, compared with a rock star A- or B-rated doctor, are astounding when you really dig into the data.

It is even more profound when you factor in case mixing and adjust results based on severity or type of claim.

See also: The State of Workers’ Compensation  

A wealth of information now exists on physician quality, and many different models, from simple to complex, can provide useful insights into which doctors can be associated with better outcomes. Carriers and employers should apply this data to think more aggressively about their networks.

The PPO Dilemma

Before we get there, however, let’s look at what’s going on with preferred provider organizations (PPOs). PPOs are the most common strategy used to control costs in our market. A PPO’s value comes from providing a negotiated discount on a medical encounter. Once you have entered into business with the PPO, its primary revenue source comes from matching your bills to a pre-negotiated discount — and the PPO gets more matches by contracting with more doctors. Therefore, if the PPO only contracts with the doctors who show the best outcomes, the PPO loses significant amounts of revenue any time bills come in from uncontracted doctors who don’t perform as well in outcomes.

As such, all discount networks must contract with as many doctors as possible to ensure they don’t lose revenue by missing a hit on a bill. A perfect PPO would include 100% of doctors who pass the base qualifications of credentialing. But, as shown in the prior illustration, there is a huge difference in outcomes between the top half and bottom half of the PPO’s doctors.

I don’t fault PPOs for this — PPOs do offer a clear value in reducing purchase costs per episode. They also must contend with multiple factors from jurisdiction to jurisdiction that will always limit how choosy they can be. There is a role to be played by discount networks, but that role is not the full picture of how to bend the curve on claim costs.

“Savings” Don’t Always Reduce Costs

Here is a simple concept: If a cheap pair of shoes costs 30% less than a high-quality pair, I might save money on the initial purchase, but, if the cheaper pair of shoes needs to be replaced twice as often, my savings on each transaction doesn’t lower my total shoe cost.

Applying this logic to medical care, let’s look at two patients — one going to a discounted doctor and one going to a full-fee-schedule doctor. Let’s assume a typical ratio of 7:5 visits between high-scoring and mid-tier doctors (the real difference is typically higher). Patient A goes to an in-network doctor selected at random from an approved list of providers that generates a 5% savings off each bill. Patient B is sent to a doctor with a high outcome score but no discount. The average bill from each doctor is $100. After the first visit, Patient A has cost $95, and Patient B has cost $100. The payer for Patient A saved $5, and the payer for Patient B has saved $0. By the time Patient A has been to his/her seventh and final visit, medical care cost $665, with PPO savings of $35. Patient B’s care wrapped up after five visits, costing $500, with $0 in PPO savings. This showcases the problem of using percent of savings as a metric – longer duration and $165 more in total medical costs reflects $35 in savings over Patient B. The metric is flawed because the more you spend the more you save.

The point to consider is that network savings are the shiny object that distracts from the difference in total costs. I am not arguing against leveraging savings where available; rather, I want to underscore that quality at a higher price point can significantly outpace discounts when you look at the total cost of a patient in any market.

All health markets suffer from the cost of care that requires too many visits or the additional costs of a second necessary procedure to repair a bad surgery. In workers’ comp, this is exponentially compounded when you factor in the costs of temporary disability as a result of poor recovery and permanent disability stemming out of failed procedures.

The Path Forward

The best way to start down the path forward is to separate the decision about which doctors to work with from how to work with them. The who should be determined by some level of quality metric while the how is figuring out which PPO or contractual relationships get you the best access to doctors who will get you the best results. This means you should first find the doctors who perform well on your chosen metrics, and then look at the PPO or combination of PPOs that get you contractual access. It works in the opposite flow as well; you can look at the total population of doctors available through your network vendors, then pick who you want to work with from that list.

See also: Even More Tips For Building A Workers Compensation Medical Provider “A” Team  

In part two of this series, I will go into the concept of right-sizing networks and the relationship between PPOs and exclusive provider organizations (EPOs). Pick the doctor, and then figure out which network or combination of networks provides access. It may require a little more work and data science on the front end, but the outcome is well worth it.

As first published in Claims Journal.

How to Best Use Provider Networks

We are all familiar with preferred provider organizations (PPOs), and many have utilized either subset networks (exclusive provider organizations) or other iterations to control escalating medical claim costs. While these approaches to provider networks had proven successful between 1970 and 2010, based on the impacts of the Affordable Care Act (ACA) they may no longer be sustainable in their current configuration.

There are simple strategies that build on the current model for provider networks and that may help improve a health plan’s performance, and I will get into those shortly. But first let’s develop a common understanding of how PPOs contract.

The marketability of a PPO is based on reducing the cost of claims and providing access to a large number of providers. Typically, PPOs use a variety of cost mitigation techniques including discounts, per diems, case or global rates and relative value schedules (RVS). For a PPO to negotiate its greatest savings, it must enroll a large number of members and be able to steer utilization.

When negotiating for professional services, a PPO typically works with two models, though a third could be added when specialty care is involved. The first model is a discount off billed charges. This is a relatively easy agreement to secure because it doesn’t affect the provider’s practice unless highly utilized. The second model is based on a relative value schedule (RVS), which was implemented in the late 1950s when the California Foundation for Medical Care established a cost for services and applied factors by region. This model was known as the California Relative Value Schedule (CRVS). A similar approach was implemented by Medicare under the title of Regionally Based Relative Value Schedule (RBRVS), which has become a standard for contracting of professional services today. As a result, most professional contracts are now based on Medicare RBRVS plus 10% to 30% depending on the region, type of provider and enrollment population. In some cases, specialty providers may contract based on fixed fees, or a variation of other methods.

Contracting with institutions is very different. In a traditional PPO, hospitals may contract through either a discount off what is billed, fixed per diems for room and board, ICU or CCU or a combination. The discount model is relatively straightforward. A contract that includes per diems will typically have a number of variations such as an “outlier.” The outlier or hospital deductible is a dollar threshold that, when exceeded, triggers re-pricing. In outliers’ purest form, the claim reverts back to a discount off billed charges to first dollar. Some contracts may allow the re-pricing to begin with amounts above the outlier, but this is not the standard.

In situations where treatment is standardized, such as childbirth and knee replacement surgery, a PPO may contract on a case rate basis, which establishes a fixed reimbursement for all care associated with the event. Some of the charges that may fall outside of the event would be physical therapy, durable medical equipment and medications. There will be other treatments, including transplantation, that may include case or global rates. While case and global rates may appear similar, they can vary greatly by network and provider organization. In some cases, the application of a case rate does not limit the claim liability to the contracted amount. As an example, we had an experience with a national network where the $1.8 million transplant charge was paid at $1.3 million even though the PPO had a $250,000 case rate.

This method is not characteristic of case or global rate practices, but consultants and clients should be mindful of exposure as it could affect the plan’s claim reserves and medical excess coverage.

The Affordable Care Act continues to affect claim costs in both fully insured and self-funded environments. Overall claim trends appear to be manageable, although some specialty care and acute care hospitals have changed billing practices as a result of unlimited lifetime benefits. An example is dialysis, where the total cost per patient has skyrocketed. In an audit of dialysis claim costs, we have identified two national provider groups as being abusive in the billing of services. Claims that prior to implementing ACA would average $28,000 to $40,000 per patient per month are now ranging between $60,000 and $105,000 per patient per month. These patients have not been of major concern to PPO contracting managers because of the low volume of claims. As a result, networks have settled for discounts of 15% to 35% off billed charges. Depending on the patient’s diagnosis, Medicare pricing could come into play, resulting in allowable charges closer to $10,000 per month, which may stabilize the group’s overall health plan spending. These and other tools will be discussed in future articles.

In addition to contracting for cost control, most PPO agreements include claim filing requirements and auditing authority. In today’s electronic age, the use of clearing houses such as WebMD have significantly improved claim submission and processing times. As a result, many PPO contracts may require the professional provider to submit claims within 30 to 90 days of treatment, or sacrifice reimbursement. The same principle may apply to institutional contracts, though the timeline for submission may be 90 days. In some cases, a PPO contract may allow an institutional provider to submit claims for a premature birth or transplant patient as long as 150 to 180 days following discharge. Risk managers, consultants and claim payers need to be aware of exceptions to the claim submission rules as they could create a non-reimbursable event if the medical stop loss policy run-out period ends before the processing of the claim.

As part of the due diligence process, it is in the client’s best interest to identify any barriers to audits of financial and medical appropriateness. A number of provider networks surrender the client’s audit authority to secure greater pricing concessions. While pricing concessions are important to the overall claim spending, it only takes one catastrophic claim to hurt a health plan’s performance. Many leaders in the PPO industry understand the need for transition, but it could take a few years to re-engineer existing provider contracts in the areas of auditing for appropriate pricing and care setting, cost to charge, captitation or other non-discounted approach to re-pricing, as well as a reduction in network size to efficiently manage the consumption.

Now that we have a common understanding of PPO contracts and we agree that change will take time to implement, let’s briefly discuss simple strategies using the current PPO model that may help improve a health plan’s performance. A strong PPO can assist clients in controlling costs when the plan design encourages people to use in-network providers. Therefore, when offering a PPO, it is appropriate to include a minimum 20% differential benefit between in- and out-of-network providers. Additionally, providing for deductibles and out-of-pocket amounts will drive patients to network providers. To avoid emergency room frequent fliers, a health plan should have an appropriate co-payment as an inducement to have patients seek care in a clinical setting.

In reviewing our block of business, which includes commercial employers, public agencies and healthcare clients, we have determined that over-utilization is not a significant concern. We have identified a number of areas where a properly crafted plan document coupled with specialty vendors may aid in the control of high-dollar claims. For example, implementing a dialysis management program can reduce average claim cost by 70%.

Beware of vendors who require a percentage of savings, as their fees could double the net claim amount. Consider the addition of domestic medical tourism. While medical tourism is a hot topic, and many of these vendors redirect care outside of the U.S., a number of employers are finding local solutions through direct contracting of specialty care and adding these under domestic tourism provisions.

An employer might include the addition of cost-plus or in-network allowable amounts and the maximum allowable reimbursements for out-of-network claims. One final concept is to utilize an exclusive provider organization-type plan design packaged with a PPO network. Essentially, the health plan would only offer in-network benefits unless care is on an emergency based outside the network’s service area.

This is the first in a series addressing all forms of provider networks. Future articles will introduce the reader to establishing local networks, direct provider contracting and capitation of medical groups, which generates provider engagement in health outcomes and financial management. Recent discussions with leaders of a number of national PPO networks found that many are currently attempting to apply these principles with varying success.

End of Health Insurers As We Know Them

I want to start by saying that I am knowingly writing an article that is going to throw fuel on a fire. Being from New England, this article strikes me as the equivalent of writing an article in the Denver Post that says New England Patriots quarterback Tom Brady is better than Denver Broncos quarterback Peyton Manning. Letters will be written. Darts will be thrown. So, I will make sure I put on my steel vest before I publish.

I already started writing on this topic, in a recent article titled, “Apple HealthKit – The Next Step to the End of Employer-Based Health Insurance.” In this article, I will provide a more detailed analysis of why the premise presented in my first article may come true — that within five to 10 years employers will be out of the health risk business. I will then provide a plan for what I think benefit brokers should do to prepare. Taking action may be the difference between those that survive and thrive in this new health insurance world vs. those that may struggle or even fail.

What do I mean when I say employers will be out of the health risk business? To repeat what I said in my last article, “By health risk, I mean the cost of the employee’s health insurance will not be priced by the employer. It won’t be a function of average age of the employee population, claims experience or any of the standard underwriting/pricing rules today.” In fact, health insurance will most likely become an individually purchased product, and the insurers of the future may not be the companies that dominate the market today.

As a consultant to benefits brokers, I educate them on technology and advise them on how they can maintain a competitive position. My future depends on brokers’ remaining significant, so I am as concerned about their future as any broker would be. If you study the significant market events over the past few years, you get a picture of what the future may be like. While many may think Obamacare is the big market change, I believe that the health insurance market is going to change much more dramatically and that, while the government may be nudging things along, competitive market forces will drive the change.

So let’s get to the point. I believe that within five to 10 years health insurance will be delivered primarily through staff model health maintenance organizations (HMOs). These will be Kaiser-like plans where the providers of care will also be the risk takers/insurers. Individuals will pay a fee directly to a healthcare system that will be responsible for the health, wellness and treatment of the person. Employers may still give employees money to pay for some of the cost, but they won’t be in the “risk” business. We are beginning to see this evolution today through the expansion of what people are calling accountable care organizations (ACOs). However, the future will go well beyond the limited risk sharing of today’s ACOs.

Four Catalysts to Change

If you had been in the health insurance business in the ’80s, you would say we tried this before, and it didn’t work. Well, today, things are different. There are four major differences that will be the catalysts for the coming changes:

Changes in consumer buying behavior

In the ’80s, employers often paid for 100% of an employee’s health insurance and a large part of the family’s. When cost wasn’t an issue for employees, they looked at access to providers as the No. 1 variable. So, all the HMOs and preferred provider organizations (PPOs) tried to expand their networks to appease more people. Today, cost is the No 1 issue. As a result, we are seeing networks shrinking to save cost.

Expansion of government health insurance programs, combined with the reduction in Medicare and Medicaid reimbursements to providers.

If I am a healthcare provider and am getting less money to perform services on a growing population, then I need to do things differently. I need to get money from healthy people and from people needing less care. I would also need to keep people healthy or provide care in more cost-effective settings.

Advancing mobile technology

With advancing technology, it will be easier for providers to have real-time access to a patient’s medical information. Things like weight, blood pressure and blood glucose levels can be measured in the home, sent via Bluetooth to a mobile device, and immediately be available to the primary care physician in the individual’s web-based medical/wellness record. Other health metrics will also soon be possible. Systems can automatically notify the responsible physician of any changes in the metrics that warrant attention. Information will help provide proper treatment in a timely manner.

Change in tax laws, allowing personally purchased insurance on a pre-tax basis

With Republicans taking over Congress, the idea of making an individually purchased insurance policy tax-deductible is now on the table. While this is not a necessary catalyst for change, it certainly would put the nail in the coffin and get employers out of the health risk business.

Not only is there a perfect storm forming for the coming changes, but I believe the majority of the participants in today’s healthcare market will welcome this change. We have all heard the saying that “healthcare should be between the doctor and her patient.” We know the government wants this. I think employers, employees and healthcare providers would want this, too. It is the insurers, and by extension benefits brokers, that may not want this. However, as we all know, there is little sympathy for the insurance companies.

Employers would want this because I don’t think employers got into the health insurance business after World War II to be in the position they are in today. While I don’t think they mind giving employees money to pay for health insurance, they don’t want their profit margins affected by the health of their employees. Bad claims experience, and their profits go down. Every year, they agonize over the health insurance renewal, deciding whether to charge their employees more or make changes in plans (delivering bad news, either way) or absorb increases in the business. I don’t think employers want to be in the wellness business, either. They may want to provide wellness programs to make people feel better, be more productive at work or boost morale, but not to control or reduce healthcare costs.

Employees want change, too. Do employees want their employers asking for things like health risk assessments? My health should not be my employer’s business. To me, there is a slippery slope as it is. I do want my physician to care about my health. I want my doctor to know my weight and blood tests and care whether I got a colonoscopy when I turned 50. I often joke that I get an email from Jiffy Lube saying that my car is due for an oil change, but my doctor never sends me an email to get a check-up, test or whatever is needed to keep my engine running the right way.

I believe doctors and other healthcare providers want change, too. They want to practice health care. This would include helping their patients make the right lifestyle decisions and keeping them informed about what is good for them vs. what is not. Providers don’t want the paperwork. They don’t want third-parties telling them what to do, and they are getting tired of reduced reimbursements from the government.

The Market Reacting

I am not the only one using the term “Kaiser-like.” Emanuel Ezekiel, one of Obama’s healthcare advisers, expects healthcare insurers to be obsolete by 2025. According to Ezekiel, “ACOs and hospital systems will become integrated delivery systems like Kaiser or Group Health of Puget Sound. Then they will cut out the insurance company middle man — and keep the insurance company profits for themselves.” (Source: New Republic – March 2014)

Now, I am not going to just listen to Emanuel as my source. I am listening to the market. Hospital systems have been acquiring physician practices and entering the insurance business across the country. In my own backyard, there was this acquisition highlighted in the Boston Globe.

State insurance regulators Friday signed off on Partners HealthCare System Inc.’s acquisition of Neighborhood Health Plan, a transaction that will put the state’s largest hospital and physician organization into the health insurance business for the first time.” (Source: Boston Globe September 2012)

In Massachusetts, this is very big news. Partners HealthCare owns some of the leading hospitals in the country, including Mass General and Brigham and Women’s Hospital.

Hospital systems getting into the health insurance business is not limited to Massachusetts. In New York, New Jersey, Pennsylvania, Maryland, Michigan and all across the country hospitals are getting into the health insurance business. (See Kaiser Health News.)

Concurrently, insurance companies are getting into the healthcare business. According to Hospital and Health Networks Magazine January 2012, the following insurers have made healthcare acquisitions:

  • WellPoint bought CareMore.
  • Optum bought Orange County’s Monarch HealthCare and two smaller independent physician associations (IPAs).
  • United Healthcare acquired a multispecialty group in Nevada in 2008.
  • Humana purchased Concentra, which provides occupational care and other medical services.

Aetna Making Moves

What I have find most interesting is the acquisitions by Aetna and some of the comments by CEO Mark Bertolini. Let’s first look at some of the comments Bertolini has been making over the past few years.

“The end is near for profit-driven health insurance companies. The system doesn’t work, it’s broke today. The end of insurance companies, the way we’ve run the business in the past, is here.”

“We need to move the system from underwriting risk to managing populations,” he said. “We want to have a different relationship with the providers, physicians and the hospitals we do business with.”

In his presentation titled “The Creative Destruction of HealthCare,” he states:

“Not too far away from now – in the next six to seven – 75 million Americans will be retail buyers of healthcare. And they’ll come to the marketplace with their own money and either a subsidy from their employer or a subsidy from their government. And it doesn’t much matter – they’ll be spending their money.”

Aetna is not just talking. If you look at Aetna’s acquisitions and partnerships over the past few years, you can see that Aetna is preparing for the future that Bertolini describes. The company has spent billions of dollars acquiring technologies that can be critical to the future in managing healthcare and healthcare information, including:

  • iTriage – Mobile App for employee to check symptoms – Find doctor – Make appointment
  • ActiveHealth – View and update personal health record (PHR) – Personalized alerts and content – Communicate with doctor
  • Medicity – Promotes coordination of care – Real-time patient data

(Source: Aetna 2013 Investor Presentation)

According to Aetna’s website, Aetna was ranked #52 on InformationWeek’s 2013 list of the 500 leading technology innovators, surging ahead of many of the top names associated with technological innovation. Aetna ranked first among health insurers.

To move to this new model, healthcare providers will need to add capabilities that insurance companies currently have. For example, hospitals provide care but don’t have the actuarial skills to price their patient population in the event they were to get into the risk business. Many also don’t have the capital to assume risk. Those with enough capital can simply buy an insurance company. Others will have to partner with an insurance company that has the capital and reserves to share risk and provide the needed services.

So if I am an insurance company, I can either buy providers to stay viable or provide some products, services or capital that the new healthcare systems will need. Buying hospitals or physician groups across the country can be very expensive. So it may appear that a company like Aetna is setting itself up to be the technology, actuarial, reinsurer and other service provider for these future healthcare systems. I won’t claim to know if Aetna thinks the market will move as far as I am saying, to a Kaiser-like model, but the company certainly is preparing for a different healthcare model.

Some may think that this is somewhat what insurance companies are doing today. Here is the critical difference. Today, the risk-sharing arrangements are still in a fee-for-service environment. In the future, a hospital system may be in close to a 100% capitation environment (where the system receives a set amount per period for each person covered by the arrangement). Provider systems that purchase these services or develop a risk-sharing relationship with an insurance company in such an environment can’t have two such relationships. They will need a single risk pool to properly manage the population and risk. There won’t be a Blue Cross version, a United HealthCare version and an Aetna version of a local ACO/staff model system.

A good example of healthcare financing is my own healthcare. Since I moved back to Massachusetts 16 years ago, I have had the same primary care physician and used the same hospital facility on a number of occasions. Yet I have had seven different health insurance programs. Assuming an average insurance premium of $10,000 per year for my family, over the 16 past years I have paid $160,000 in premiums. I understand insurance, spreading the risk and all the other insurance arguments about where that money goes, but think of how it could be different if all $160,000 went to the system that was actually providing care to my family and me.

What Benefit Brokers Can Do

Okay, so the world may change. What would I do if I were a broker today to prepare for this change? First, change does not happen easily and overnight. The whole country of healthcare consumers, distributors and providers will need to adapt. As a benefits broker, your buyer may no longer be the employer but the employee. If this is the case, then some existing services may not be needed.

  • No more risk analysis/actuary and underwriting
  • No more claims analysis tools
  • No more wellness programs to reduce healthcare costs
  • No more disease management programs
  • No more company medical renewals

Before someone points out the obvious to me, I will say that I do know that most groups with fewer than 100 employees are community-rated and those with more than 100 employees are experience-rated. Small employers are still faced with balancing budgets based on their healthcare renewal. This anxiety will go away.

Most of these types of services are a core competency of many of the national benefits firms and the larger independent brokerage organizations. These services are viewed as key differentiators. For these firms, change may be even more dramatic because providing these types of analytical skills is part of their culture.

So let’s talk about the things brokers can do. I am going to break this down to a list of tasks.

1.       Understand what the players in your market are doing – Brokers should start analyzing their local medical market and see what the providers are doing in this area. Have they made acquisitions? Have they created new partnerships? What is their leadership saying publicly? Whatever they say or do, believe them.

2.       Add an employee call center – Employers will welcome the support in helping employees move to a new environment. Provider systems will welcome and pay for the support in helping those same employees navigate the market.

3.       Add personal financial consulting – It is estimated that close to 40% of employees lose some productivity at work because of financial stress. The healthcare insurance purchase is going to be a major decision for an employee, and it should be made in the context of an employee’s entire financial position.

4.       Understand the new technologies – How many of you who have read this up to this point understand what Aetna’s technologies for the consumer are? Do you know how to “Bluetooth” your weight from a scale to a smartphone? The place of employment can also be a great place to help employees with technology to track health information. Could an employer have a scale at work that is Bluetooth-enabled to send a person’s weight to their smartphone? Could the employer have a blood pressure machine at work? How about setting up a private room with teleconferencing capabilities so an employee can consult a doctor face-to-face via the web without leaving the place of employment? Could a broker make himself available to consult employees one-on-one as to how this whole system will work?

5.       Develop technology engagement and education strategy – After you learn what you need to know about the new technologies, are you ready to deliver? I believe the provider systems (the new Kaisers) will welcome the opportunity to educate the population through the employer. At the employer level, you can reach a large amount of people fairly easily. And the employers will care that their employees understand this new healthcare delivery system. Employers don’t want stressed employees, because stressed employees are not as productive. I believe employers and these new provider systems will pay to help these individual consumers.

6.       Invest in new internal technology and processes – If your entire infrastructure is geared around engaging the employer, then things will need to change. Can you record a phone call? Can you engage in online chat with an employee? Are you prepared to sell individual insurance? To sell a high volume of individual policies and service employees, you will need extremely efficient internal operations.

7.       Start thinking about helping employers exit the risk business – Rather than advise employers how to control costs and mitigate risk, should you start advising them on how to get out of the risk business? I guess private exchanges and defined contribution plans are the start. However, if the healthcare market changes, the pace will accelerate because there will be more options for the employer to get out.

8.       Engage new providers – Carrier reps are always calling on brokers, but these new organizations may not call on brokers in the same way. You may need to reach out to them. If you have something of value for the new provider system, you will need to engage the carriers.

To move to this new model, it will require that brokers invest in technology and people. To attract the provider systems benefits, firms will need to have the services, size and scale to deliver. Most independent benefits firms either don’t have the capacity or capital to move to this model. They will either have to sell to a larger firm or join forces with peers who share the same vision and are willing to collectively invest in preparing for the future. The national firms and larger independent firms with the capital and resources will need to have the will to change.

In today’s environment, many brokers may not feel the need to make these changes. Other firms have already started preparing for a much different future. For example, several national firms have opened call centers for employees. Whether that is for a future market I have described, or simply to service employees today, I don’t know, but the centers are a sign that the benefits game is changing.

I may not end up being right with my market predictions, but my advice is to pay close attention. There is change going on out there, and I think a picture of the future is being drawn that looks much different from the healthcare market today.