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A Practical Solution For Rewarding Efficient Providers

December 23rd, 2009

We offer a practical solution to the issues that Jack Wennberg and Shannon Brownlee raised in their November 17th blog, “The Battle Over Rewarding Efficient Providers.”  We combine our experience in areas of law and patient care, respectively.

American health care is in real peril of being swamped by surging costs.  President Barack Obama’s budget director, Peter Orszag, put it well:  “If we fail . . .  to move toward a high-value, low-cost health care system, we will be on an unsustainable fiscal path, no matter what else we do.”

To get this done, we have to change to a referral system that rewards high-value, low-cost health care.

The key to our solution is to look outside the government programs initially.  It is technically difficult and politically threatening to change how doctors, hospitals, and other providers are paid–from payment for volume to payment for patient value.  As our first step, we focus on the 100 million people with self-insured benefits — 2½ times as many people as Medicare covers — whose decisionmakers are outside the political and lobbying process of Medicare and other government programs.  Just as importantly, they have the legal freedom and flexibility to experiment, innovate, and act.

The key to our solution rests on a little-recognized but critical legal distinction between state-regulated insurance and self-insured employee benefits.  Contrary to the popular use of the term “insurance,” only about half of the 260 million Americans with health benefits have state-regulated health insurance or HMO coverage.  The other half have self-insured benefits that are not regulated or taxed by the states as a matter of state insurance law.

Total Americans with Health Benefits 260 million
Individual Insurance (state-regulated) 20 million
Medicare 40 million
Medicaid and Other Government Programs 40 million
Employee Benefits 160 million
¨       State-Regulated Insurance 60 million
¨       Self-Insured 100 million

In this self-insured and “unregulated” group, approximately 100 million have self-insured employee benefits paid for by employers or collectively bargained funds, including VEBAs (Voluntary Employee Benefit Associations), Taft-Hartley plans, and state and local governments.  By contrast, people enrolled in traditional insurance and HMO plans are barred from seeking the best and lowest-cost care because these plans are handicapped by state regulations, unfunded state-mandated benefits, and state-licensing restrictions that limit competition to only insurance companies and HMOs licensed in a state, all of which prevent individuals and companies from seeking lower-cost options.  The costs imposed by the 50 state insurance regulations are large, as demonstrated by the Medicare Part D program that was enacted to make sure state barriers to insurance competition did not apply.  As a result, Medicare Part D costs have been much lower than estimated because of interstate insurance competition.

It is estimated that billions of dollars could be saved annually by addressing efficiency and overutilization.  The best medical organizations that exercise coordinated care have demonstrated both savings and consistent high quality.  The Dartmouth Atlas Project has documented that expensive medical conditions can be treated at lower cost by provider teams with documented best outcomes.

Across the country, there are not-for-profit group practices in which physicians are paid a salary and have no financial incentive to overtreat or overtest patients.  They offer team treatment similar to what Michael Porter and Elizabeth Teisberg call “integrated practice units.”  By this method, all the medical and surgical specialists involved in the treatment of one or multiple organ system diseases collaborate to achieve the best possible outcomes for patients.  The Cleveland Clinic, for example, now offers coordinated care through more than 20 different collaborative “institutes.”  Each institute publishes quality and outcomes data to help the public and physicians make informed choices about and when to refer patients for the best care.  As a practical and political matter, however, how can the public take advantage of these cost-lowering and improved patient care opportunities?

Past history shows that some of the most important and beneficial changes in provider reimbursement have emerged from self-insured employee benefit programs.  In the 1980s-90s, self-insured employee plan innovations were successful and led other private and public payers to slow the growth of government and private health care expenditures.  The Congressional Budget Office confirmed that this was “the slowest rate of growth in over 30 years.”

Today we have the opportunity is to accelerate innovation for the self-insured employer and collectively bargained programs of 100 million people, including the approximately 20 million people with self-insured state and local government health benefits.  If more patients sought treatment for their condition from the most efficient and effective patient teams, and these patient teams could be paid for patient value rather than for providing more services, it would reduce the cost of health care.    Savings could be (1) cash savings and (2), when applicable, accrual savings under Financial Accounting Standards Board (FASB) 106 for private programs and Governmental Accounting Standards Board (GASB) 45 for state and local governments with retiree benefits.  Then the best provider patient teams (lower costs, better outcomes) could be rewarded from the savings for exceptional results.

We do not have to wait for the federal government to pass laws and implement reforms.  When government does act responsibly, it could stimulate even more innovation, for example, by bundling payments by disease, forming acountable care organizations, creating value-based insurance design, and other process improvements.  Whatever shape health reform takes, Americans will have more responsibility for their health care,  including wellness.  As information regarding quality and cost becomes more accessible to the consumer, patients will become more knowledgeable.  The informed consumer will seek the best value when patients have a monetary incentive to find the best care.   Consumerism will mean greater patient sovereignty, especially for serious illnesses.

Our idea is summarized as follows:

  • Our 100 million Americans with self-insured benefits could be offered the option of treatment by a patient team that offers that best outcomes for their condition(s), as decided by the employee benefit program.
  • Patients would have access to information allowing them to determine which patient teams offer the best results for their particular disorder and have new benefit incentives to use them. We anticipate that many patients would choose this option both for cost savings and for the higher probability of good outcomes.
  • Legally, reimbursement for patient value, rather than for providing more services,  can take place without state insurance department approval as long as capitation and other premium-like payment methods are not used.  Thus patient teams, insurance companies, and others would have an incentive to experiment with and develop new payment methods based on high quality and lower costs.
  • The patient team idea would encourage state insurance reform, including increased interstate insurance competition and reduced (ideally eliminated) unfunded benefit mandates.  This would result in lower costs and more options for small employers and individuals.  These reforms specifically need to be extended to the new ideas of accountable care organizations and nonprofit cooperatives. These ideas add competition such as the Medicare Part D program and would not be blocked by state barriers to interstate insurance competition.
  • These innovations could be adopted by Medicare and Medicaid and might reduce national and regional variations in cost and care.

Federal and state policymakers have opportunities, at little cost, to stimulate and support fast adoption of this path to payment for value.  By making outcomes and payment readily available for pilot programs, “bundled” payments for value will reduce spending.  The definition of accountable care organizations should be expanded to take advantage of the legal flexibility of self-insured programs.  Successful innovations in the 100 million self-insured programs could lead to adoption in Medicare, Medicaid, and other government programs.

Peter Drucker once said that “the best way to predict the future is to create it.”  Let’s create our health care future by giving patients a path to greater value.  That would be the ultimate in pay-for-performance.

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3 Responses to “A Practical Solution For Rewarding Efficient Providers”

  1. Dan Smith Says:

    This is ‘pie in the sky’ and not very practical. Let’s talk about a real down to earth solution that has been around for decades, but prevalent in other industries. Why has the concept of state Medical Public Service Commissions (PSC’s) not surfaced? We have seen in other areas where there is limited supply and major costs issues that PSC’s can do a good job. Let’s turn the problem of healthcare costs over to state PSC’s.

    In so doing there are numerous hidden benefits that you would not expect at first blush as follows:

    1. PSC’s will determine the basic cost of each Medical Charge Code used by providers to bill insurance. If the current medical charge code manual is not specific enough for some procedures, new medical charge codes can be added to help narrow these costs. Then these determined costs will be adjusted for inflation annually until reviewed again and a new cost basis set. In addition, the PSC will calculate a market adjusted mark-up percent for fair and reasonable provider profits for the coming year. The provider mark-up percentage will be determined by a new market ‘check and balance ‘ mechanism which is unavailable with any other method of cost containment. More on this later.

    2. Because some Zip Codes have inherently higher costs than rural areas, the co-pays may vary by Zip Codes to offset these cost differentials so the Medical Charge Code cost basis can be leveled across the state. These office visit co-pays would be standard across all insurers in a Zip Code and paid by the patient. These co-pays should not deter patients from seeing their doctor.

    3. The PSC eliminates provider networks and provider service contracts. Thus, competition between providers is increased because insurance no longer delivers a pool of patients. Patients can go anywhere in the state and use their insurance because all insurers pay the same for identical services as set by the PSC.

    4. Insurers now compete solely on the price of their policies because the doctors/hospitals are no longer tied to their networks. All insurance is accepted by the doctors/hospitals because they all pay the same PSC rates.

    5. The elected State Insurance Commissioner may increase insurer competition quickly, if needed, by soliciting outside insurers to come into the state and compete. There are no network or provider service contract requirements.

    6. The PSC can greatly reduce the over prescribing of medical services by the way the provider mark-up (profit) percentage is determined. It can tie the profitability of the providers to the profitability of the insurers. If the profitability of the insurers decline because of the overuse of medical services, then the mark-up percentage for the providers is reduced on every Medical Charge Code. The providers will then think twice about how they prescribe healthcare because it now directly affects their profits. This one feature alone will cut healthcare costs significantly.

    7. Tying the provider mark-up to the net profit margins that private insurers earn in the state creates a healthy ‘check and balance ‘ mechanism. If provider costs go up, profits of both go down. If profits go up above what the average state business earns, the State Insurance Commissioner can intervene and license new outside insurers to compete and lower premiums, if necessary. But both the insurers and providers have a right to earn a reasonable profit, so the elected State Insurance Commissioner will only increase insurer competition when it becomes necessary to reduce average insurer profits for the benefit of the public when these profits noticeably exceed what other state businesses earn.

    Note: If insurer profits surge due to the more efficient delivery of healthcare, then the insurer can invoke a mechanism to reduce gross profits with offsetting insurance policy premium reductions. This results in a lower net profit for the insurers which the PSC will use to determine the provider mark-up percentage for the coming year. Thus by lowering premiums, the insurers gain a direct cost reduction for the coming year from a lower provider mark-up percentage and a greater market share potential in the state. This allows the insurers and providers to earn fair and reasonable profits and policyholders to pay lower premiums.

    The State Insurance Commissioner will post the annual profit margins for each state insurer and compare prices for similar products. Policyholders can determine for themselves if their premium rates are fair. If not, some policyholders may react by dropping their insurer for a new one during the end-of -year sign-up period while retaining their same doctors/hospitals.

    8. The PSC does not make healthcare decisions and does not affect the doctor-patient relationship. The full time job of the state Medical PSC is determining the cost of Medical Charge Codes. The PSC will standardize these codes to make filing claims easier for doctors/hospitals.

    9. The above discussion on computing the provider mark-up percentage eliminates the current adversarial relationship between providers and insurers and lets market forces determine the common profit. Another more simple but less ideal approach would be for the PSC to set the mark-up percentage based on some other criteria. The choice of method would be up to each state.

    10. As you will note, the previous discussion portrays the Medical PSC as more a state Price Commission than a regulatory body. The role that this PSC plays in each state would be up to the state legislature and could evolve over time.

    The state Medical PSC concept has amazing potential. Not only does it break the bond between doctors/hospitals and insurance companies, but it offers a ‘check and balance ‘ system to spread the wealth among providers, insurers and policyholders. Without a doubt, this approach has never been contemplated before and will position the American Healthcare system to control costs as healthcare is expanded by Washington. Congress does not know about this brilliant idea. Please write/call your state and federal representatives and tell them that we must have state Medical PSC’s.

  2. acavale Says:

    I am not exactly sure how consumers get any control of the system based on the authors’ ideas. Further, the authors fail to recognize the basic fact that utilization of services is dependent on consumer behavior as much as it is on provider behavior. As long as the consumer is not aware of and is not involved directly with financing of care in some way, there is no way of bending the cost curve.

    It is quite expected that a former Cleveland Clinic physician will tout his former employer’s benefits. However, the vast majority of care is provided by small practices in the communities. Unless efficiencies are brought to the level of community practices, and patients and doctors are directly involved in the decisions about health care financing, it will be an exercise in futility. I find it very disingenuous for the authors to expect that physicians should only practice in a non-profit environment. I wish they could preach the same for their Attorney colleagues and other professionals such as Accountants.

  3. Matthew Holt Says:

    Hmm. If this was such a great idea, what was to stop those self-insured groups from doing it for the last 20 years. Nothing. Why haven’t they done? Because employers are spineless in aggressively trying to cut health care costs. Apart from about 15 minutes late on a Thursday in 1993 when Tom Elkin at Calpers tried to put his foot down, employers have very rarely cared about health care costs in the way that they’ve cared about cutting costs in the rest of their business. And as soon as the labor market tightened in the mid-1990s all those ideas about cutting costs went back to little noticed discussions at HR executive conferences.

    The same things Weller and Loop are saying now were said by countless advocates about “market reform” in the mid-1990s. (Including by JD Kleinke famously in the pages of this august journal). The overall answer is that major reform has to come from the government, because if they don’t do it, no one else will.

    Whether the government can actually do major reform is another question.

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