Managed Care 2.0 – The Chrysalis


The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences. Stephen Dubner and Steven Levitt, Freakonomics

When The Patient Protection and Affordable Care Act (PPAC) and its companion legislation was ratified by Congress and signed by the President into law, there was a great expectation for sweeping change. Yet, change is a scary proposition for 180M Americans who believe the devil they know (employer based private coverage) is preferred to a government run system.

Seniors are suddenly doing the math and wondering if their beloved Medicare will default on their watch. More than 50% of these same seniors, when polled, shared they do not want a government run healthcare system ——even though Medicare is a government run system.  People are confused, angry and wary. Yet PPAC is now law and despite its obvious flaws and potential for unintended consequences, it is unlikely to be repealed or deconstructed.  For better or worse, it is the foundation for Managed Care 2.0.

Managed Care 2.0 – Reform is setting the stage for a new era of American healthcare – Managed Care 2.0.  In launching this new period anchored by expanded access and insurance market reforms, we are expecting to say farewell to the three decade era of Managed Care 1.0 – a barren stretch of fiscal and social desert marked by spiraling costs, misaligned financial incentives, massive underfunding of Medicare and Medicaid obligations, fraud, over-treatment, public to private cost shifting, historic rates of chronic illness and the slow erosion of employer sponsored healthcare leading to an astounding 40M Americans without insurance.

Where Managed Care 1.0 was a time characterized by consolidation of stakeholders, cost shifting, risk shifting and scorched earth, Darwinian battles on the supply and delivery side, Managed Care 2.0 will begin, as one pundit called it, “ the battle for the soul of medicine”.

Supporters of change contend that Managed Care 2.0 will be measured in years and not decades.  It will be a chrysalis period where private and public healthcare begin to transform from less efficient analog systems of manual, fee for service medicine to a brave new 3.0 world characterized by integrated delivery, population risk improvement, shared risk, quality measurements and transparency.

The building blocks of the Patient Protection and Affordable Care Act are insurance market and access reforms — legislation that unfortunately has little to do with moderating rising medical costs.  It’s not that those that conceived the legislation did not understand or consider more draconian steps toward achieving affordability.  However, no politician wants to break the news that Managed Care 3.0, the rationing of care, is inevitable. That next chapter of Managed Care would be far too scary a bedtime story for adolescent, recession sick America to hear.

The story would involve a future where tough decisions will need to be made about who gets how much care. There will not be clear heroes and villains. It will be set in an ambiguous gray world of ethical and moral dilemmas — do we reduce reimbursement to our revered doctors and hospitals? How can we assure that our best and brightest continue to practice medicine?  Do we cut Medicare? Will venture capital, public and private equity flee out of healthcare profoundly effecting research and development?  How do we tackle the march towards chronic illness of Americans who are obese and unable to take personal responsibility for their health? Should we ask all Americans for a durable power of attorney so we have the ability to make the hard choices about end of life care?

The great question that remains in this debate over healthcare reform is what’s next?  Most experts agree that current reforms that will characterize this period will do little to change the trajectory of rising healthcare costs.  Managed Care 2.0 will most likely be a brief metamorphosis period for the last private healthcare system in the industrialized world.

The question is what emerges from this 2.0 cocoon?

Pro or Con? To supporters of reform, Managed Care 2.0 must be characterized by public policy changes that accelerate the US’s migration to a single payer system.  This butterfly could only take wing after the introduction of a government rate authority, and a public option that can slowly take market share from private insurers who have not demonstrated an ability to control healthcare costs yet seem to have profited disproportionately from our dysfunctional system.

For opponents of an expanded role of government in healthcare, there is great concern over escalating public debt, dubious CBO estimates of savings, legislation that fails to address the cost drivers that are making healthcare unaffordable and a deeply held, cynical view that our public systems of Medicare and Medicaid achieve affordability through serial underpayment of doctors and hospitals, not through effective clinical oversight or controls.  This contingent argues that this period of Managed 2.0 must be dedicated to attacking root causes of rising costs, making tough, politically unpopular decisions about restructuring into a sustainable system that preserves quality through for profit incentives while creating regulatory guardrails tight enough to prevent inequity and imbalance.

Key Political Milestones – The period of 2010 to 2014 will witness insurance market reforms and expanded coverage. It will also be characterized by a continuing rise in medical costs and the possibility of small employers electing to drop coverage and pay penalties in lieu of proving coverage that will most likely be double those costs to not offer insurance.  A new and broader market of individual consumers will emerge challenging the notion of employer sponsored healthcare and B2B insurance models.  Most view the next decade of Managed Care 2.0 as a period where stakeholders will reorganize as the debate over how to finance and fix healthcare continues.

Reform advocates, supply and delivery side stakeholders will be heavily invested in 2010 mid-term elections.  Generally, major domestic policy decisions made in mid-term election years have not boded well for the majority party.  Yet, many predict that 2010 mid-terms will be less about anti-Democrat sentiment and more about anti-incumbency.  However, should the GOP make larger gains, the next phases of Managed Care 2.0 could find the momentum slowing toward additional public policy interventions and in its place, a bigger effort emerges to engage private stakeholders to play a bigger role in the affordability challenges that lay ahead.

Most experts seem to agree that if unemployment is running lower than 8%, the current administration stands a decent shot at a second term.  If the economy continues to stumble and current GDP growth is attributed more to cotton candy stimulus than substantive economic recovery, we could see a change in the White House and a course correction on policies regulating the next phases of Managed Care 2.0.

Managed Care 2.0 will find insurers and states locked in mortal combat over prior approval of rates.  As this is written, the National Association of Insurance Commissioners (NAIC) is drafting its recommendations for Health and Human Services on how to regulate loss ratios of insurers under PPAC. These will not be simple algorithms but a more complex calculus that affords states the latitude to potentially dictate insurers profits in certain lines of business. The ability for states to approve or deny requested rate increases will continue to be heavily politicized as insurance commissioners and governors use the bully pulpit of their roles as local regulators to attempt to control profit taking and in doing so, win populist support.

Will Managed Care 2.0 Lead to More Competition? – Where are the competitors you ask?  When insurers are raising rates, why are there no new entrants to steal market share as is often the case in other industries primed by a free market pump.  Simply put, the barriers to entry in a 2.0 Managed Care world still remain too high for new entrants.  The economics of provider contracting (which drive 80% or more of a payer’s costs) are such that a payer has to have membership to get the best economics from a provider.

Managed Care 2.0 will not see new players and additional competition. In many US markets that are dominated by a handful of players, the cost of building market share to achieve similar economics to the market’s largest competitor is too high — particularly for a public company.  You essentially can only enter a new market by purchasing a competitor – – which is expensive and carries enormous execution risk for the capital being employed.

Trying to unseat a deeply entrenched Blues plan with 70% market share and most favored nation pricing deals with hospitals, is an almost impossible feat for any new payer.  No insurer has the financial will to enter a new market against a giant competitor that controls as much as 50% of the individual and small group market — a market where margins are largest.   A further complication arises if that entrenched competitor is a not for profit sitting on huge reserves and you are a for-profit company expected to show earnings improvement quarter over quarter. No shareholder or private equity owner has the patience to wait out the price war that you would inevitably engage to take market share.

So, who can compete with a large competitor controlling a disproportionate amount of market share? United Healthcare?  Aetna? Harvard Pilgrim?  Kaiser? Bzzzzzzz!  Sorry, wrong answer.  It is the government.

Ah yes, the dreaded public option defined by some as “Medicare Lite,” ” Obamacare” or ” Death Panels for Granny”.  Expect during this 2.0 period that debate will resurface over the public option. Many believe that a public option is really the only viable way to create competition within markets where competition does not exist.  Other see it as a Trojan Horse leading to unfair competition where taxpayer dollars are used to subsidize the cannibalization of private care by a public plan with the ultimate goal being a single payer, socialized medicine model.

Where Is 2.0 Already Happening ? – The next chapter of the Managed Care 2.0 story is being read aloud in Maine, California and most interestingly in Massachusetts.

Already having achieved universal coverage through reform, the Bay State is seeing costs in its merged individual and small group pool continue to surge. In an election year game of cat and mouse, Governor Deval Patrick is restricting non profit insurers to live with rate increases well below those required to cover the costs of ever increasing medical utilization.  When Massachusetts passed reform, it covered all individuals but simply did not confront the underlying factors contributing to rising costs.  Before you shout, “Those damn insurers,” remember that 95% of Mass’ insurers are not for profit.

To add insult to injury, the Massachusetts legislature has recently proposed a bill that would require any physician seeking to be licensed in the Bay State to accept Medicare and Medicaid reimbursement levels.  It may be time for Kaiser to move into Massachusetts as the alternative employer of choice to the state.

Most new Massachusetts insureds can’t find a primary care doctor as too few are left after years of under reimbursement. This leaves our newly covered — many of who are chronically ill and require coordinated care — to access the system through the least efficient point of entry, the emergency room.  The state’s not for profit insurers are in a profound pickle.  They have statutory reserves that will soon be depleted if they cannot raise rates.  However, it is an election year and the governor is using an age old lever, price controls, to buy time, point fingers and escalate the debate.

Hospitals Will Navigate Managed Care 2.0 But… In 2.0, hospitals will benefit by the reduced number of uncompensated care cases and bad debt write-offs.  30M new insureds will continue to consume healthcare and may end up, as a result of a near term primary care crisis, accessing the hospital through the emergency room as their primary care point of entry.  Rural hospitals may not fare as well as a disproportionate number of their patients are covered under government plans that will be reducing payments.

Specialists will begin to see fee cuts as Medicare cuts begin to impact fee for service reimbursement.  The greater emphasis on restoring the role of primary care providers will see specialists in particular, increasingly disaffected as they lose optimism that no scenario of reform will ensure their ability to arrest the income erosion that they have been working so hard to address. Greater chasms will emerge within the provider community as primary care providers and specialists tangle over the resurgence of the gatekeeper and medical home models.

What Next? – Insurers understand that Managed Care 2.0 is just that — a next stage in an irreversible process of transformation.  Their greatest fear did not immediately occur — the establishment of a federal rate authority administered by Health and Human Services.  However, if minimum loss ratio thresholds prove inadequate to contain costs (and they will prove inadequate), we are likely to see the two headed beast appear that will be a harbinger of Managed Care 3.0 — rate controls and a public option. Prior approval of rates are already embedded in 50% of US markets.  Rate debate is happening with little imagination around the reality that guaranteeing America access without tackling affordability is like a flashlight without batteries — it doesn’t work.

My guess is by the time health exchanges are established for individuals and small employers in 2014, costs will have risen another 30%-40%.  The government will realize that $500B of Medicare cuts to finance access for new insureds did nothing to reduce its $38T unfunded liabilities. Medicare will continue to hurtle towards insolvency until the real cost containment legislation is passed. Managed Care 2.0 will be seen merely a detour on the road toward the inevitable — a radical restructuring of our entire system.

In this 2.0 era, the average cost for private insurance will increase with mandated coverage minimums and guarantee issue, non cancelable coverage. An individual above 400% of the poverty line will find it just as hard to afford coverage and may spend a large percentage of their discretionary income on health insurance.  Larger employers are likely to pull up their drawbridges and begin to slowly cut coverage — starting first with retiree benefits.  Mid-sized and smaller business will do the simple calculus around whether they keep or drop insurance. No one will want to be the first guy to drop coverage but no one wants to be the last guy who pays for the $15,000 aspirin as cost shifting hits its high water mark.

The middle class will take it on the chin as they always do.  At this point, we will rally around the cry for affordability.  The pitchforks and torches will once again appear and we will look for a common enemy. It will usher in a new era and it may very well set in motion the next phase of Managed Care – – an era characterized by the death of private insurance.

One thing is certain: the US healthcare system will go through inevitable transformation in this 2.0 period.  The beauty of whatever emerges from this chrysalis will most certainly be in the eyes of the beholder.

One thought on “Managed Care 2.0 – The Chrysalis

  1. Jason May 4, 2010 / 8:17 pm

    Thank you for writing this blog, I enjoy reading it very much.

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