The Business of Health Care: A Persistent Search for Value

1. The Business of Health Care:A Persistent Search for Value Presentation to Health Management Conference International Foundation of Employee Benefit Plans August 8, 2005 Merton D. Finkler, Ph.D Lawrence University

2. Overview of Presentation • Introduction: Business Models and Markets • Health Care Spending Growth: Character and Distribution • Key Contracts and Risk Sharing Decisions • Recent Marketplace History • Choices for Purchasers • The Search for Value

3. Business Model Components • Objectives • Mission – Where value will be added • Benchmarks – Performance comparisons to be made • Ethics - Appropriate Behavior • How will objectives be achieved? • Core Competencies • Target Sources of Revenue • Choosing an Efficient Cost Structure • Implementation strategies • Short Term and Long Term Options • To Overcome Barriers and Rent-Seeking Opposition

4. Three Challenging Questions:Three Affirmative Responses • Is the Term “U.S. Health Care System” an Oxymoron? • Are There Toyotas in Health Care? • Does “Moneyball” Apply to Health Care?

5. Is the Term “U.S. Health Care System” an Oxymoron? J. D. Kleinke (2001) thinks so. • “Health care in America combines the tortured, politicized complexity of the U.S. tax code with a cacophony of intractable political, cultural, and religious debates about personal rights and responsibilities.” • Central reality: “the primary producers and consumers of medical care are uniquely, stubbornly self-serving as they chew through vast sums of other people’s money.”

6. Are There Toyotas in Health Care?Yes, But They Aren’t Easily Replicated • Toyotas symbolize both high quality and good value. • Molly Coye (HA 2001) notes that “Toyotas” will not exist in health care until the payment structure is changed to reward production of “Toyotas”. • “Industrial strength quality in health care” requires both an example of such quality and business incentives to yield it. • Localized examples exist: LA, SF, Seattle, MPLS-SP • Comprehensive, integrated, cost-effective care is not easily transferable across markets, the way cars are.

7. Does “Moneyball” Apply to Health Care?Yes, If Buyers Desire Cost-Effective Care • Michael Lewis (2003) argues that baseball GMs can field winning teams by using measurement and predictive modeling to determine which players to sign with a limited budget. • Measurement and predictive modeling are also essential to determine which health care components and practitioners can be combined to yield the best health outcomes given limited budgets.

8. Key Players: Wide Variation in Scope, Degree of Integration, & Geographic Context • Health plans – wide array of benefits and variation in provider network scope • Physicians – solo practice, single specialty groups, multi-specialty groups, groups linked with hospitals, core of integrated healthcare • Hospitals – individual and system members; various ownership structures • Pharmaceuticals – similar to manufacturers • In contrast w/ other components, no local barriers exist • Not address, for the most part

9. Degree of Integration of Providers Varies Greatly Across Markets • Full integration: Hospitals, MDs, and Insurance in one package: Kaiser Permanente has all 3 components available locally and a common incentive structure • Partial integration: Physician/Hospital alliances • Detroit, Henry Ford System • Twin Cities, Allina and Health Partners • Milwaukee, Aurora Healthcare • St. Louis, Washington University. • Non integrated. Most common, insurers contract with all health care providers – especially where Blue Cross/Blue Shield, Wellpoint, United Healthcare, and Aetna play a major role.

10. Geographic Orientation • Health Plans – local, regional, and national • 1990s managed care – many local and regional players; post 2000, consolidated nationals rise • Consumer directed – national players • Physician Groups – mostly local, some regional • Multiple and single specialty local groups • National PPMC movement rose and fell in the 1990s • Special case: travel to Mayo or Cleveland Clinics • Hospitals – mostly local and regional • Local and regional systems are commonplace • Many have a religious orientation • Tertiary component in regional systems • National chains influence diminished in last 10 years

11. Health Care Expenditures: A Few Recent Facts • HC$ = (price/service) x (services/person) x (people served) • 1990 – 2001 growth accounting breakdown • 33% - general inflation • 22% - medical price rises above inflation rate • 16% - population/ demographic change • 29% - intensity of service • Growth in inflation-adjusted HC$ per person driven by new technology and services per person • Average - 3.6% per year since 1960 but not smooth • Not Unique to the US (1960 -2002) • US HC$ growth = GDP growth + 2.7% • Other G6 countries HC$ growth = GDP growth + 2.0%

12. Growth in the Cost of Health Care

13. The 80 – 20 Rule is not far off 10% of people 70% of cost

14. 10% of the Population Accounts for 69% of Health Care Expenses

15. Which Cost of Healthcare Matters? It Depends Whom You Ask. • Premium only (insurance component) • Payments to the health care sector • Third party payments • Out of pocket expenses • Forgone tax revenues • (estimated at $188 B per year by Lewin) • Total Burden of Illness • Direct outlays for medical care • Foregone output – absenteeism and presenteeism

16. Health Premium Increases and Per Capita Health Cost Growth 1999-2003

17. Health Insurance Premium Increases vs. CPI and Wage Growth 1988-2004

18. Wage Share of Labor Compensation Has Declined Steadily Since 1968 Labor bears the burden of increased health care expenditures.

19. The Burden of Illness for Those with Chronic Disease – The Largest Opportunity • Working age pop. with chronic disease generates expenses 3 x non-chronic pop. • Those w/ chronic conditions account for 17% of population but 83% of health care $ • Burden of illness includes both outlays for medical services and lost productivity • Ave. impairment 2 to 11 days / 30 workdays • Total burden – over $1 trillion per year • Sources: CDC and R. Kessler (Harvard)

20. The Burden of Unhealthy Workers Varies Greatly Across Employers

21. It’s All About Contracts and Risk Sharing Decisions • Labor/Management Contract: Firm manages health benefits or shifts burden to employees • Company/Health Plan Contracts: Health plan defines benefit plan design/scope as well as provider network breadth • Provider/Health Plan Contracts: • Prepaid (capitation or salary) or Fee-for-Service • Fee schedules, discounts, and payment tiers are commonplace • RX/HealthPlan: tiers (typically 3), formularies, & discounts • Few plans relate to value or benefit of intervention • Variety of incentives for rebates and substitution • Direct Contract: Skip health plan but not risk bearing

22. Good Contracts Make Good Relationships • You get what you pay for : • More choice of provider, costs more • If procedures are rewarded, pay twice for errors • 1/3 of Medicare expenditures are wastefully spent • Louisiana ranks first in Medicare $, last in quality • Improved outcomes (pay for performance) • Short term incentives differ from long term ones • Coverage of primary and secondary prevention • Payment related to place of service and access • ambulatory versus inpatient coverage • ER coverage vs. clinic (timely access? 24/7)

23. What Role does Market Competition Play? It Depends on how Choices are Structured • How frequently are choices made? Are long term partnerships developed? • How many health plans are offered? • How much do provider networks overlap? • What incentives exist in the payment structure? • Are insurance brokers or benefit consultants used? How are they paid? • Is direct contracting with providers a constructive option? Who does the risk-bearing?

24. Health Plan Objectives and Tradeoffs • Market geographic scope and share • Short run cash flow • Long run profit • Mission – varies with degree of integration with health care provider • Role of insurance cycle – bounce between market share and profits as primary objective • Before 1990 – alternate three years of loss with three years of profit • Since 1990 – now closer to six years

25. Health Care Provider (MDs and Hospitals) Objectives and Tradeoffs • Target income or profit • Desired effort level • Reputation sought • Market share desired • Geographic influence sought • Profit and other missions • No margin, No mission yields “not only for profit” business objective

26. Market Competition – Mid 1990sManaged Care’s Influence Peaks • Strong cost containment incentives for providers (but not for consumers) • Narrow networks compete; reduced provider market power results • Competition among insurers – desire to increase market share – constrains premia • Optimism based on competing integrated delivery systems and prepaid care (risks totally shifted to provider community)

27. Managed Care Unwinds 1997 - 2003 • Health care inflation returns to double digits • Financial incentives weaken for all • Networks broaden in response to consumer demand and tight labor markets • Reversal of integration of delivery systems • Specialists consolidate • Hospitals consolidate • Health plans consolidate • Insurance profits rise to replenish coffers

28. Present Trends • Increased patient cost sharing marketed as consumer directed health care • Initial coverage and large deductible • Reduced dependent coverage • Tax incentives for high deductible policies • Development of “pay for performance” schemes • Tiered payment for providers and pharmaceuticals (65% of workers - HRET Survey-2004) • Improved information technology for health care management & consumer purchasing – National Health Information Network Program (est. $200B)

29. Cost Containment: Purchaser Choices • Target/control specific health care components • Seek increased efficiency of the delivery system (supply management) • Emphasize primary and secondary prevention • Provide financial incentives for patients to reduce their use of medical services (demand management) • Implement administrative controls on the use of services • Increase bargaining power by joining purchasing coalitions

30. Demographics Complicate Choices Those aged 45 – 64 spend roughly twice the amount spent per person per year by those 18 - 44

31. Chronic Disease Prevalence Rises More than Proportionately with Age Medical Expenditures Panel Survey 2001

32. Target Components: The Whack a Mole Response to Containing Costs • Benefit redesign: • Target fastest growing component (e.g., ER , RX) • Cost Accountant’s Revenge • If incentives slow the fastest growing component, a new fastest grower emerges • Substitution is inevitable & may be less efficient(i.e., more costly or less effective) • To avoid substitution, target total expenditures • Beware direct and indirect long term consequences • If total $ fixed, how are priorities set and resources allocated?

33. Identify Efficient Use of Resources • Identify and discourage high cost, low value services – use evidence-based medicine (EBM) • Decrease chance of expensive adverse events for those with chronic illness – disease management • Decrease the risk profile of population – primary prevention • Decrease bargaining power of healthcare providers – anti-trust and purchasing coalitions • Pay for good performance – compatible incentives • All options require strong, committed leadership at various levels since resources must be reallocated

34. Implement Primary and Secondary Prevention Strategies • Screen enrollees to determine risk levels • Offer incentives to sustain low risk • Provide performance-based disease management to contain moderate and high risk by reducing chance of adverse event • Educate enrollees to best manage chronic disease

35. Reduced Risk Means Reduced Cost Dee Edington

36. Prevention Also Requires Sacrifice • Payment comes before savings • Prevention not worthwhile w/ annual enrollment switching • Each program has a different payback period • Serious wellness programs require 3-4 years • Each population faces a different set of risks • Target prevalent risks in your population • Compliance (medical community and patient/consumers) requires both education and compatible incentives

37. Use Consumer Directed Health Care -Incentives for Patients to Economize • Health Savings Accounts • Response to OPM disease • Large deductible – low premium insurance • Increased cost sharing – consumer’s decide • Various amounts of information provided to improve decision-making • Tax subsidies with MMA 2003 • High deductible plans offered by 10% of firms (2004) - 27% of firms at least somewhat likely to offer by 2006 (HRET Survey)

38. Concerns about Consumer Directed Health Care (CDHC) • Attractive to young & healthy thus potential adverse selection if enrollees choose plans • If one CDHC plan, tradeoffs worsen for those w/ chronic disease until they reach deductible • Focuses on 50% who spend 3% of total $ • Money taken out of the general pool and given to individuals (e.g., $500 per employee) • Consumers don’t easily distinguish between cost-effective and cost-ineffective services

39. Use Administrative Rules / Managed Care – “Divide and Contract” • PPO, POS, and HMOs – Selectively contract • Deliver volume to a subset of providers in exchange for discounted price • Utilization controls of various sorts • Various degrees of prevention offered • Large number of structures – integrated or contracted • Given variety, hard to generalize – read the fine print • HMOs often feature fixed payment to providers, limited choice of provider, and directed practice • Offered good coverage for prevention • Kept $ growth low in the mid-1990s • Wide variation in ability to deliver quality care

40. The Backlash Against Managed Care • Rejected by those who wanted more choice –ifpaid for by entire insurance pool (return to OPM) • Tight labor markets forced firms to weaken controls in order to attract and retain laborers • Increased purchaser bargaining power induced providers to consolidate • Hospital systems evolved • Physician group practice thrived – no longer a cottage industry

41. Use Purchasing Coalitions to Increase Purchaser Bargaining Power • Insurance load factor falls from 40% to 6% (10k covered lives) • HIPCs – some state sanctioned • Problem: agreement on common benefit package & strategy • Two key survivors: • Pacific Business Group on Health • Patients’ Choice • Effects of ‘divide and contract’ • Some providers lose (and rebel) • Some players (providers and employers) drop out • Association Health Plans – Proposed current legislation • Exemption from state mandates for cross state plans • Problem: local delivery and variety of benefit preferences • Potential administrative nightmare for medical practitioners • Other sessions focus on this topic

42. Seek Value – Quality/$ spentWide variation exists across markets • NEJOM/Rand report indicates (2004) • Participants received only 55% of recommended care • Both under-use and over-use are commonplace • IOM report on the Quality Chasm (2001) • Between 44,000 and 98,000 die from mistakes in hospitals • Cost of preventable mistakes - up to $29B • MBGH report estimates the cost of poor quality as • 30% of direct health care cost - $1,350 per person • Indirect costs estimated at $350 per person • Ideally, reduce unnecessary hospital admissions • Ambulatory Care Sensitive Conditions

43. Medicare Spending per Beneficiary vs. Quality of Care Ranking (2001) CMS, Dartmouth College, and the Washington Post

44. Poor Care Coordination Leads to Unnecessary Hospitalizations Johns Hopkins University, Partnership for Solutions

45. Value-Based Purchasing and Pay for Performance (P4P) • Reward evidence-based “best practice” –Caveat Emptor! • Competing definitions (EBM) – See HA J/F 2005 –guidelines or standards determination • Process or outcome – which indicators are valid? • Apples to apples requires risk adjustment • “Your complications are my costs” • Numerous implementation barriers exist • Funding required to construct IT infrastructure • Key providers may not cooperate • Employers may not back with appropriate incentives

46. Pay-for-Performance Demonstrations Young et al., Overview of P4P, 2005

47. Four majors programs • Leapfrog – Targeted attempts to improve patient safety in the hospital (2000) • Medicare under Mark McClellan (MD, Ph.D) • Bridges to Excellence – a structured response to the Quality Chasm • Pennsylvania infection control initiative

48. The Leapfrog Initiative • Purposes: • Consolidate purchaser voice • Engage consumers and practitioners in QI –reduce preventable hospital deaths • Policy: Use EBM to identify 3 safety leaps • Computerized MD order entry (CPOE) • ICU staffing with “MD intensivists” • High volume hospital referrals • Implementation – incentive and reward toolkit • Results: • Limited hospital participation so far • Few purchasers make indicators part of P4P • Business case for adaptation of 3 leaps not yet accepted • Reward structure still modest • Leapfrog has changed focus from employer to health plan • Leapfrog is catalyst, but employers must decide to take the “leap”

49. Medicare Variation in Cost and Quality • Spending per beneficiary varies by a factor of 3 across counties, even after adjusting for age, sex, practice costs, and case-mix • Medicare spent more than twice as much per patient in Miami as in Minneapolis yet risk adjusted quality better in MPLS • Quality of care, based on 24 measures established by CMS also shows significant variation • Dr. McClellan – strong advocate for P4P demonstrations • Proposed 1 to 2% performance bonuses but will it withhold money from low quality providers? Not likely, politics won’t allow it. • Demonstration projects seek to change compensation system from one based on services provided to one based on health outcomes • “Real markets have ‘losers.’ • Without them, it is difficult to achieve much efficiency. In a political system, losers, potential losers, and even those who fell that they might someday be losers, often seek redress from their elected officials.” – Cooper and Vladeck

50. Bridges to Excellence: Rewarding Quality Across the Healthcare System • Seek STEEEP care – Safe, Timely, Effective, Efficient, Equitable, and Patient-centered Care • Group of stakeholders (including CMS, NCQA, large firms, health insurers, PBGH, and Leapfrog) reached consensus on how incentives might be used to • Reengineer care processes to reduce mistakes • Reduce misuse, overuse, and under-use • Increase accountability through release of comparative provider performance data • Initial results for AMI, health failure, and pneumonia are encouraging