Payment Reform and Unit Costs
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The major driver of commercial health care premium increases is not the use of health care services, which accounts for less than a third of annual premium increases, but unit costs. In other words, the price of health care is driving up commercial costs more quickly than overutilization of services.
There are many reasons for this. Physicians and hospitals have begun consolidating into large health care systems with significant bargaining leverage. Many of these systems have brand strength that attracts consumers away from local, freestanding providers. Consumers value freedom of choice, have little tolerance for closed networks, are generally subsidized by employers and government, and are therefore relatively insulated from the cost of their health care decisions. Technology, like electronic medical records, robotics, and expensive diagnostic equipment, are affordable to large systems that pass along the costs but not necessarily the savings to consumers.
To address the problem of rapidly increasing health care costs many states are embarking on payment reform experiments designed to move away from fee for service payments to global payments. There are many attractive features to global payments, and these reform efforts should move forward. It should be remembered however that a global payment system will address the use of services, not necessarily the unit cost of services.
In fact, the kind of payment reform being considered in Massachusetts, which would require health plans to make global payments to Accountable Care Organizations (read: large, integrated systems), will potentially exacerbate our unit cost problem by increasing the leverage of large systems and accelerating provider consolidation. I have posted before noting that most physicians do not (yet) practice in large integrated systems and that many would be forced to do so if mandated to become part of an Accountable Care Organization. This consolidation exercise will only increase the bargaining leverage of large systems and will ultimately increase the unit cost of services. Efficiency savings gained through the receipt of global payments by Accountable Care Organizations will likely accrue to the system itself and will not pass through to consumers, absent strong public policies to require that the savings be used to lower premiums.
Although global payments could begin to address the problem of overuse of services by eliminating some of the perverse incentives inherent in fee-for-service reimbursement, we tend to forget our past dissatisfaction with capitation payment systems that led to the revolt against managed care in the late 1990’s. At that time the concern was that these global payment systems encouraged physicians to withhold care. Although some very high-quality health plans like this one were using pre-paid capitation payment systems at the time (and continue to do so with a few providers), this was not enough to prevent a resurgence of fee-for-service reimbursement.
If health care unit costs (i.e. the price of services, not the volume) are the big drivers of health care premium increases, then a shift in payment mechanisms will not do much to address the problem. If health care providers continue to consolidate into large systems and consumers continue to insist on unlimited provider choice and on-demand access, there will be a unit cost problem. A better approach for controlling costs as we experiment with new payment systems might be the right combination of consumer and provider-based cost savings incentives, data transparency, and stronger market consolidation policies.
Bruce - What prohibits you from paying the same FFS and/or capitation rates to all providers? Fear of losing Partners from your network?
Michael: Commercial health plans don’t set rates for providers, we negotiate them. In the interest of simplification we use fee schedules wherever possible. If our customers were interested in purchasing narrow network products, we would offer them.
Patients are low on the totem pole of decision making. What services are provided is mostly determined by hospitals, providers, drug companies, and medical device manufacturers. All this is done on the model of maximizing income not noting that your nearby facility is doing the exact same thing. The same service grows like topsy in a utilization area and now no entity can retrieve their costs without raising the so called unit price. In the end just about everyone suffers and especially the patients who have the least say in the matter.
It was insurers who got the contracting bug early and selected certain “brands” to attract patients. It followed that these consolidated institutions returned the favor by taking advantage of their created non earned superiority. Each part of the upper echelons of the health care system had a role in running our current system into the ditch. If you want support to pull you out some mea culpas are due so corrective action can be taken.
Bruce:
I remember when we first started selling HMO’s and it meant that you would not be able to see every single doctor or go to any hospital that you want, versus the Master Medical Plans from Blue Cross. Wasn’t that the point of the whole HMO concept, you don’t have all the network options but costs and premiums are kept down? Since that time, we have seen the Master Medical Plans disappear but now people think that that every doctor and hospital needs to be in their HMO?
Fallon has tried to offer two networks. Their larger network called Select and their smaller network called Direct that has a difference in premiums of 13%. When shown the difference in premiums, our clients for the most part go with the Select network.
The one thing I don’t understand, however, is why different co-paymens for different hospitals does not become more prevalent. Let the subscribers know if you go with an expensive hospital the co-payment is $1,000, but if you go to another hospital it is free. Just like we do for prescriptions, we have three tiered co-payments. Remember when there was only two tiers?
Bill Randell
Broker Operative
Bill@AdvantageBenefits.com
Mr. Randell you are defeating the purpose of your own overall argument. You can not tell the public you can offer choice at a decent price and then groan about it when they do exactly that. The public did not make up PPOs. Insurance companies did. Before that if they went “out of circle” they paid the penalty or paid on their own. The insurers are the victims of their own business plan.
They seemed to think there was money to be had by opening up the HMO network. With such “Master Plans” and without any greater costs to the system, they plowed ahead with no plan to curb medical inflation. A more global approach was lacking and premiums kept heading for the stratosphere. Even though the insurance companies understood perfectly well what they were doing, another potential profit center was just too tempting. The companies stood to increase revenue if they charged people who went out of network a higher premium. They hoped providers well conditioned to HMOs would transfer the same habits to PPOs. For the most part this did happen but the underlying issue of medical inflation, a product of too much deal making continued and costs soared.
Since employees come from different places such plans had to be offered to employers or the business was gone. My understanding is that PPOs are an equal or larger share of today’s insurance products. It probably also was the impetus for the rise in self insurance by employers. When PPOs finally priced themselves out of the market it became more feasible for employers to insuretheir own employees.
So to approach the problem now by penalizing subscribers for what was created by industry is absurd and will be self defeating. However keep it up and try to make such barriers to care even more burdensome and the public will finally clamor in a much louder voice for what is truly needed, Medicare For All.
Bill - Unfortunately, most customers do in fact want all hospitals and physicians in the network, which is why cost-sharing products are increasingly popular. The branding pull of the large systems makes it hard for a plan to exclude them, especially in eastern Massachusetts. We are selling more and more tiered physician office visit products, which is a way of doing what you recommend.
Dr. Green: I think you are forgetting that physicians and consumers led the anti-managed care charge.
Bill - The Tufts HMO Navigator product offered through the state GIC does have tiered hospital co-payments as you suggest. They used a formula to determine a hospital’s cost efficiency and quality score (obviously the accuracy of this formula is up for some debate) and then tiered the hospitals at a $600 co-payment versus a $300 co-payment with the idea people would migrate to the more cost efficient, higher quality hospitals with the lower co-payment. I don’t think this has had much of an impact on moving people in that product which I believe has something around 70,000 covered lives. The irony of that product for me has always been that members in Tufts Navigator do not have to select a PCP so there is no way of measuring the Navigator members’ cost and quality as they are not tied into any PCP or hospital system. I would agree that you could apply higher co-payments for care available at community hospitals that people prefer to have delivered “downtown” at a much higher cost…. OB deliveries would be a good example of that.
Dr Green:
Who are you calling Mr Randell? Bill is fine. You understand that a PPO’s are an equal or larger share of today’s insurance products? Nothing could be further from the truth.
Creating a tiered co-payment system for doctor and hospital visits is no different then the current three tiered prescription co-payments arrangements. Dr Green what is your answer to all of this? I am confused.
Medicare for all?
Bill Randell
You’re calling me Dr. Green, Bill, so I returned with polite discourse. That aside maybe Bruce can give us the PPO/HMO breakdown. I know for BCBS iit is about 50/50 and they are the largest insurer in the state.
Of course the solution for all this is Medicare For All. Why not? HMOs and Medicare are both American creations. You tell me which has the stronger support of the American people. Which has been more successful in delivering care without double digit increases? There is still a role for private insurers as they are presently pay the claims and also provide any desired supplements. I am not advocating throwing out the baby with the dishwater.
It was not subscribers who demanded PPOs but employers. The HMOs could not cover all the catchment areas of their employees. Employees have had very little say in what kind of insurance they get. A situation that still exists today. If there was some public movement I missed I will stand to be corrected. At present I know of none.
There is definitely differences between purchasing medicines versus which hospital is chosen. It is not patients who choose hospitals other than where their physicians have privileges or close communication. The patient again does not directly determine their hospitalization. It usually depends on the doctor they see. If they do select a particular hospital this is a product of “brand name” promotion by those institutions. Factual evaluation shows more than credible care is available at a number of other hospitals.
I forgot to comment on physicians’ opposition to managed care. It was not the concept that was objected to but the poorly thought out referral system, rejection of certain testing ordered by providers, and dubious guideline adherence much of which was not clinically or practically sound. The concept of being a manager of care to help patients make their way through a complicated system was an accepted model. I started my career when office visit fees had to be collected directly from the patient. The change to insurance coverage for such service was a welcome benefit. Any system has its faults but if we insist on all or none solutions no progress will be made. My view is to keep what is working for those who most need insurance(20% of the whole) and to keep the costs down for all.
“Of course the solution for all this is Medicare for All. Why Not?” Let’s see, where do I start….. you suggest adding the rest of the U.S. population to an already bloated Medicare program that presently has sixty TRILLION dollars in unfunded liabilities and a 10% rate of fraud and abuse? You complain about Health Plan profits but the percentage and scope of fraud and abuse in Medicare exceeds most plan profits by a wide margin. It is easy to be a popular federal program when you are allowed to run up trillions of dollars in future debt for our children and grandchildren. Again, let me make this clear… SIXTY TRILLION dollars is five times the current national debt and this is the program you want to expand to the rest of the country? Your generation continues to orchestrate the biggest ponzi schemes in the history of mankind on my generation…. having us pay in for Medicare and Social Security while both are clearly on a path to insolvency which will leave little or nothing for those of us not near retirement age. Personally, I would rather not contribute to either of these ponzi schemes, keep the money I make for myself and I will sign a statement that I will not seek any Medicare or Social Security benefits during my lifetime. That way I know I won’t pay in to programs I know will not be there when I go to collect.
Don:
Blue Cross at 50/50 between HMO/PPO?? Not even close. I will see if I can get that number. The split between those on fully insured versus self-insured is 50/50. My guess is that HMO/PPO is in the 90/10 range.
Medicare for All is your answer. Is this seriously your answer?
Bill Randell
Sean are you saying that we should drop Medicare and not finance it to move the liability to the paid column? We go through this exercise on a regular basis to figure out the formula to fund our national programs. Social Security for example. How come you don’t sweat the 20% increases of private insurance along with cost shifting to the subscriber. It is not Medicare that is ruining business or causing bankruptcy. Government programs pays for 60% of our health care bill and naturally with medical inflation the bill increases. You better go back and look at the definition of a Ponzi scheme. People for the most part are getting services for their money. Meanwhile $400 billion a year is wasted in the private sector. You don’t think our double digit unemployment has something to do with the cost of health insurance? To be real about plan profits you need to use actual revenue. The usual amount of revenue for insurers to do business is 11% to 30% of the premium. The other amount is for services to providers and is not part of their business. Their real profit is what they make on this 11 to 30% which exceeds 20%. If you look at the absolute amount of profits of private insurers they are on the top of the heap. Taking a percentage of all collections is Enron accounting. Most of it is not theirs.
Every other developed country seems to have the resources to fund their health care at half our cost. We should be able to do the same or are we that incapable?
It is absolutely absurd that you think you can carve out “your money” and the system will stay intact. Our problem now is that not everyone is paying their fair share. You do not buy a piece of medical care but contribute an amount to keep the system at a certain quality. Your pledge is a meaningless exercise.
My answer Medicare For All stands with over 60% of the American people and 59% of physicians. I stand with the rest of the developed world and those who have seriously studied other systems. No other choice stands to cover everyone and remove some $400 billion dollars per year to be used on proper services. I have also come to the conclusion that unless access to health care is removed from the usual economic equation this country will not achieve its greatest potential.
Don:
What is the difference between your “Medicare for All” and “Single Payer” idea? I believe they are in essence the same….
You are right, however, when you say “Our problem now is that not everyone is paying their fair share”. We need to increase the Medicare reimbursements to help the private payers.
Thanks
Bill Randell
Bill@AdvantageBenefits.com
MFA and Single Payer are much the same with a difference. Medicare incorporates private insurance alongside Federal coverage. Strictly speaking Single Payer would cut out private insurers altogether. I am seeking a stance that preserves that part of private insurance that works and using the largest pool of subscribers to keep costs down. Again it is not necessary to recreate the wheel. Others have succeeded in making this transition.
Even though I agree providers in some regions due to cultural reasons wound up with low reimbursements. It should be corrected My thought, however, was on the subscriber end. For middle income people health insurance is reaching 16 to 20% of their earnings while those in the upper levels of income contribute a much smaller percentage of their income. For example if you earn $500,000 a year a $14000 family plan is a 2.8% cost. Since everyone uses the same level of care there should be equity in terms of financial support. Of course politically this sets up the old canard of class warfare but it isn’t. By keeping the population healthy workers are more productive, increasing the wealth of all including the wealthy.
Don:
Let me get this right. You are proposing that the premiums that you pay should be directly related to your income similar to our graduated income tax system. In other words the more you make the more you pay for your health insurance.
For example:
• Assume you have two families of the same age with the same exact plan
• Family A earns 50,000 per year while Family B 500,000
• Assuming a flat 10%. The family A will pay 5,000 while Family B will pay 50,000
You think, however, that is fair and equitable because the percentage of their income paid in premiums is the same?
Speechless in Worcester,
Bill Randell
Bill@AdvantageBenefits.com
Isn’t that how Medicare works now. It is also how the uninsured are going to get insurance under the present bills in Congress. This is news to you? By the way the going rate will be about 6% which is $30,000 or some cap to be decided. If you are speechless then you get the drift of those who have to shoulder a 15 to 20% slice of their income. As for your example, however, family A is left with 45,000 while family B has 450,000, the later still in the top 1% of incomes in this country. I believe the price of citizenship is a healthy populace while some don’t. Is this where you stand?
For family A considering a family of four they would actually pay no premium since they are less than 300% of poverty. Yes this is the striking difference between the top and bottom of the income scale in this country. It becomes quite stark when you price it out.
Oh forgot to mention. If Family B owns a business with 10 employees with family plans there is actually a savings to that individual. If he or she pays a share at $9000 per employee that is $90,000 that they do not have to pay. They are actually $40,000 ahead again using your example. What is always forgotten is the big picture. It is this advantage that will make this country more economical sound here and abroad.
Don:
In essence you are proposing to add a 6% marginal tax on anyone earning over 300% of the Federal Poverty level. Let me revise my analogy based on your numbers for the two families of four with identical ages and insurance plans.
• Family A earns 45,000 of annual income. They would pay nothing for their premiums since they are under the 300% of Federal Income Poverty level.
• Family B earns 500,000 of annual income. They would pay $30,000 in premiums, 6% of their annual income.
One family pays $30,000 and the other pays nothing? That’s fair? I am also well aware that there is penalty for medicare recipients, if you earn too much money. Never thought it was fair to penalize someone who wants to work either?
Bottom line is that you want everyone to have the same insurance and if you make under 300% of Federal Poverty level, you pay nothing. If you make over 300% of the Federal Poverty level then you pay 6% of your income. Assume if there is a deficit then you just increase the 6% to 7% or 8% maybe even 10%.
Where do I sign?
Bill Randell
Bill,
The problem is focusing on a very narrow way of thinking. In a way you’re telling me the emergency room is adequate care. This would be a lower income person’s only real option if they cannot afford insurance. Your answer to my question seems to be that decent health care is only for those who have certain resources. However when these venues are used by the uninsured you pay for it in higher premiums and taxes. It is actually less expensive to cover them with adequate insurance. You pay less not more.
Further, perhaps with health insurance assured someone can earn enough to contribute directly. In the meantime their efforts do benefit others and keeping them healthy is only a benefit to others. I have seen many people come off Medicaid and become full paying citizens.
Taxes are the price of citizenship and promoting the general welfare. You see no plus for you or your family by having healthy workers? Can you be satisfied that there is 45,000 excess deaths a year among the uninsured? Not only do we lose the work effort of our fellow countrymen we also pay for it in spades.
So what is your solution?
Don:
45,000 excess deaths a year for the uninsured??? Where do you get these facts? Same place that you found that there is a 50/50 split between HMO/PPO subscribers.
This arguement is not about healthcare. I believe in Capitalism the unequal distribution of wealth. You believe in Socialism, the equal distribution of poverty.
Bill Randell
Bill,
Please do not tell me what I believe.
As for the 45,000 excess deaths among the uninsured it was on TV news and cited by many Congressmen during the health care debate. Here’s the study:
http://www.pnhp.org/news/2009/september/harvard_study_finds_.php
If you want to enter a peeing contest on capitalism I am happy to oblige. I have owned several homes, bought and sold several businesses successfully, and provided for my own retirement , all as a owner and entrepreneur. I have also developed my own EMR now functioning in 2 offices.
Even capitalists have to understand that their well being depends on the well being of all. It is called a society. Thomas Paine said: “No one joins a society to make themselves worse off.”
My discussions on providing affordable less costly health care is neither a socialist or capitalist argument. I have served both rich and poor. I was the only physician in my town seeing Medicaid patients. I still made out fine. I was a solo doctor and again made my way quite nicely.
You say the argument over economic systems is not about health care. Then why apply the capitalist culture of the deal to a service everyone requires for basic survival?
You owe me an apology, my friend You have made untrue assumptions about me. By the way Capitalism is not unbridled in this country and you can get burned if you try to rip people off.
Don:
Nobody questioned your home purchases or business dealings? Lets just end it right here.
Good luck on your Medicare for All plan that will impose a 6% marginal tax rate upon anyone earning over 300% of the Federal Income Poverty level, while anyone below that level will receive an identical plan for free.
Bill Randell
Well Bill, You stated I was a socialist, not the worst thing in the world, but the examples from my life was refuting your claim. I notice you had little to say on the study I linked.
What you call an imposition is actually a cost saving to every citizen. I have tried to show that the wealthy are actually winners in this situation. If the money is paid privately or through taxes for the same services, what’s the difference? By the way it is not my plan, but a carefully developed strategy over some 100 years. Nothing else has worked to bring access and decreased costs in this country. Instead of the dismissive remarks, what is your solution, my friend?