Alice in ACA Wonderland


ImageAlice: Cheshire-Puss, would you tell me, please, which way I ought to go from here?

Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don’t much care where.

Cheshire Cat: Then it doesn’t matter which way you go.

Alice: —So long as I get somewhere.

Cheshire Cat: Oh you’re sure to do that if you only walk long enough.

Lewis Carroll, The Adventures of Alice in Wonderland

2013 has arrived and employers now find themselves on the other side of a looking glass facing the surreal world of healthcare reform and a confusion of regulations promulgated by The Accountable Care Act (ACA) and its Queen of Hearts, HHS Secretary Sebelius. Many HR professionals delayed strategic planning for reform until there was absolute certainty arising out of the SCOTUS constitutionality ruling and the subsequent 2012 Presidential election. They are now waking up in ACA Wonderland with little time remaining to digest and react to the changes being imposed A handful of proactive employers have begun, in earnest, to conduct reform risk assessments and financial modeling to understand the impacts and opportunities presented by reform. Others remain confused on which direction to take – uncertain how coverage and affordability guidelines might impact their costs.

If reform is indeed a thousand mile journey, many remain at the bottom of the rabbit hole – wondering whether 2013 will mark the beginning of the end for employer sponsored healthcare or the dawning of an era of meaningful market based reform in the US. HR and benefit professionals face a confusion of questions from their companions – – CFO’s, CEOs, shareholders and analysts.

How will reform impact our business? Will we take a hit to earnings as a result of penalties or the cost of having to expand coverage? Have we reviewed our strategies for modifying our employment practices to mitigate coverage risks? How will we offer benefits in 2014 and beyond? What financial and coverage considerations should guide our ultimate decisions? Do we think we can manage our healthcare costs to low single digit levels of annual medical inflation? Do we have the right funding strategy? What are our competitors likely to do?

It seems that questions only lead to more questions. For many, the future is less certain and for a few doomsayers, ACA is the final chapter in a narrative about a world of entitlements gone mad. Like Alice, benefits decision makers are asking, “Which way should we go?” – – to which the historical response for employers has been: “follow the path of least disruption”. Yet, ACA has set a new normal in motion and with it, the historical axioms of “do no harm” will no longer work in benefits management. There is no path to achieve the holy grail of affordability that does not carry some risk of delay, disruption, confusion and/or increased administrative complexity. The decisions one makes for 2013 will have an impact on costs and plan participation in 2014. It’s time to get moving but you’ll need some advice to safely cross Wonderland:

1. Think like a risk manager – Any risk management professional has been trained to first review risks, evaluate risk drivers, eliminate or mitigate the identified risks and find the most advantageous way to finance the risks. The roadmap to ACA compliance requires similar planning. Equipped with payroll, coverage and actuarial plan value estimates, any employer can quickly determine what, if any, penalties they may face associated with offering unaffordable or inadequate benefits to eligible employees. Once the risk is assessed, you can explore safe harbor and limited penalty scenarios as well as financing solutions designed to direct participants toward “win-win” scenarios that achieve savings for the employer while helping lower paid workers become eligible for more generous federal subsidies.

2. Strategy first, structure second – Planning for reform means understanding where you want to go. Do you believe providing healthcare is an essential part of the social contract between you and your employees? Are your business conditions changing – causing you to rethink what you offer to employees and how you pay for their benefits? Are higher per capita healthcare costs requiring you to think differently about providing compensation, benefits and retirement? Your total compensation strategy may require you to think differently about the road ahead. You may want to tie annual medical premiums to profits through a defined contribution approach. Strategy is essential. It dictates your direction and enables speed. Without it, you are merely running through the forest, hoping to find a path.

3. The reform roadmap requires you to either “play” or “pay” – While certain industries such as retail, manufacturers, hospitality and agriculture are already calculating the additional costs associated with reform, other employers are finding that they satisfy many of the requirements dictated under reform.

Most firms over 100 employees generally offer medical coverage that meets or exceeds ACA coverage and affordability requirements for the majority of their employees. They have little exposure to penalties. However, these same firms are plotting the coordinates of how reform may change the way they think about financing and offering medical benefits. If the Y axis of reform is “Play” (some version of employer sponsored healthcare) and the X axis is “Pay” (electing to pay a penalty either as a result of failing to meet affordability or coverage requirements), employers have a continuum of choices that range from Maximum Play (Cover All Eligible Employees) to Minimum Pay (Drop Coverage, Pay Penalties, Don’t Gross Up People For Lost Coverage). Each direction requires careful planning and an eye toward discrimination and coverage regulations dictated prior and post reform. One thing is clear: there is more than one way to navigate the Affordable Care Act.

4. Don’t feel guilty about reviewing pay or play scenarios – Reform gives any employer a rare opportunity to reexamine their employee benefits strategy. Management has a fiduciary responsibility to explore all the alternatives presented when business or public policy changes. There are obvious risks to course corrections that may steer you away from traditional employer sponsored insurance. They include the inability to attract and retain talent, effects on employee morale and one’s public image in the community. While over 85% of employers surveyed by the International Foundation of Employee Benefits confirmed their intent to continue to offer coverage, many are privately considering a different future. In the last two decades, employers have simply failed to rein in healthcare costs and have been stuck in a perpetual rut of health plan renewals that start with double digit increases and end with the shifting of costs to employees in the form of higher contribution requirements, reduced benefits or lower wages that arise out of lower profit margins eroded by health spending. The question remains: have you really tried to change? Reform will either happen for you or to you. It is essential that you openly discuss every alternative and that you have a robust multi-year dashboard that holds all stakeholders accountable to achieving low single digit medical trends.

5. Wellness is vital for any employer who desires to continue to offer sponsored plans: ACA offers expanded wellness incentives to employers who aggressively embrace health management improvement. If an employee chooses not to participate in an incentive based wellness plan, it remains unclear whether the act of having to pay a higher premium would make the employee eligible for a public exchange subsidy. Assuming that those who choose not to participate in wellness incentive plans are more likely to be less engaged employees, it stands to reason any employee that opts into a public exchange to avoid the accountabilities of a wellness based incentive plan could help an employer sponsored plan improve its own risk profile.

6. Understand public exchange benefits: Private insurers participating in heavily regulated public exchanges will be under intense political pressure to keep costs down. States and HHS have publically noted that double digit annual premium increases will be viewed as “egregious”. Most open access PPO plans continue to be plagued by double digit medical trends. It is likely that while community rated public exchange plans may actuarially mirror private plans, they will attempt to incorporate more stringent medical management controls such as mandatory primary care gatekeepers, narrower PPO networks and aggressive preauthorization oversight to limit overconsumption, fraud and abuse. Additionally, community rating will shift more premium cost to younger employees as age/sex rate bands limits exchange insurers ability to spread premium burdens to older participants. To the degree an employer is actively pushing employees toward a public exchange, the employer must understand that cost and coverage will not mirror private plans. The rules governing healthcare in the public exchanges may comes as a shock to previously coddled private insured patients while it will be a relief to the uninsured.

7. Defined contribution (DC) plans are a way to redistribute costs, not a path to improved affordability: If you do entertain the notion of migrating to a more defined contribution approach for employees, be certain to understand your options can range from a cafeteria style plan using a single insurer supported by on-line decision and enrollment support tools to a third party private exchange where employees are offered an annual stipend and a range of insurer choices. Cafeteria plans have been available since the early 1980s. Many of these plans failed because of their inability to simplify complicated administration and the natural adverse selection that arose when younger, healthier employees chose lower priced coverage options and redirected premium that might have helped offset claims into the purchase of alternative benefits. Choice will always help reduce employee heartburn when confronted with rising costs. People tend to value those benefits that they can choose for themselves. In the case of a single carrier defined contribution plan, the employer remains active as plan sponsor but has the ability to fix annual contributions while offering employees a greater range of medical and ancillary benefits choices. In the case of multiple carrier private exchange, the employer allows the group to fragment as insurers compete for participants. In these instances, it is more likely that an employer becomes an even more passive financial sponsor, defining annual subsidies but over time becoming less concerned over issues arising from excessive utilization, lack of engagement or rising costs. In a future dominated by DC plans, affordability becomes the employee’s problem.

DC is a cost shifting strategy. If plan costs grow at historical trends, employees will become increasingly disgruntled at the eroding value of the benefit dollars they receive to purchase benefits in the private exchange. Without active efforts to control costs, private exchanges will experience a similar limited life expectancy to the myriad unsuccessful state and private group purchasing based arrangements that have preceded them. Despite the risks, some industry experts view the move toward defined contribution medical plans as inevitable and a logical migration similar to the path taken by defined benefit pension plans toward the 401k savings plan.

Some firms will be intrigued with the notion of private exchanges as they allow management to refocus their energies on other strategic human capital priorities. There is increased recognition that national insurers are engaged in synchronized swimming with similar networks, unit cost contracts, and administrative services pricing. Some analysts believe that offering the choice of multiple insurers in a private exchange reduces employer leverage, undermines the ability to self insure and leads to the inevitable deconstruction of employer sponsored healthcare.The path through ACA Wonderland will invariably require crossing the bridge separating defined benefit and defined contribution plans.

8. Self-insurance is 20/20 vision– Health reform includes assessments that stakeholders will pass on to commercially insured and self funded plans. The preservation of group fully insured policies are essential to insurers profit models. The opaque practice of pooling fully insured risk often lead to the overcharging of employers. Many fully insured plans already contain inflated margin, administration and reserve charges as well as hide inflated broker remuneration. For employers under 300 lives, many insurers do not divulge paid claim data that might help an employer better direct their health management strategies. Despite ACA capping an insurer’s overall allowed loss ratio at 85% for their entire block of 50+ life insured accounts, any individual client can still run well below an 85% loss ratio and they may never know it. Self-insurance remains the most efficient method of financing healthcare – provided an employer understands its risk tolerance. Self-insurance, if structured correctly, can limit financial risk while maximizing transparency. Transparency leads to increased competition leading to lower costs. We estimate that post reform, an employer that chooses to self fund may avoid as much as 4% to 8% of additional expenses arising out of ACA insured plan fees, state premium taxes, margin loads for increased risk arising from compliance, the cost of complying with state mandated benefits and the lost opportunity cost arising out of one’s inability to understand what one’s true loss ratio is when negotiating a renewal.

Which way? The road through Wonderland will be serpentine and fraught with blind corners, misinformation, and strange characters. The future of employer sponsored healthcare and market based reform hinges on which direction employers choose to move. Those that understand where they are today and move with a blend of caution and resolve have a higher probability for making it through the looking glass. For those who remain behind, irritated by the hassles imposed by reform, the future will be considerably more complex. Will we eventually navigate this upside down world of regulation and change? Oh yes! But you have to first decide if you are looking for a way forward or a way out. How long will it take to arrive?

That will depend on whether you know where you are going…

Much Ado About Broccoli: The Constitution, Healthcare Reform and A Generation of Entitled Employees

The United States Supreme Court, the highest c...
The United States Supreme Court, the highest court in the United States, in 2009. Top row (left to right): Associate Justice Samuel A. Alito, Associate Justice Ruth Bader Ginsburg, Associate Justice Stephen G. Breyer, and Associate Justice Sonia Sotomayor. Bottom row (left to right): Associate Justice Anthony M. Kennedy, Associate Justice John Paul Stevens, Chief Justice John G. Roberts, Associate Justice Antonin G. Scalia, and Associate Justice Clarence Thomas. (Photo credit: Wikipedia)

As the Supreme Court debates the boundaries of government’s role in mandating the purchase of insurance, the discussion continues on whether the public or private sector is best positioned to drive market reforms necessary to meet our goals of lower costs and higher quality. As the son of a Phi Beta Kappa neo con who believes government should be the size of a sand gnat and as the husband to a British citizen who loves national healthcare and was born through a midwife, I often find myself lost in a political no man’s land with volleys being exchanged from the right and left.  To complicate Thanksgiving dinner further, thirty years of healthcare consulting, including a three-year stint in Europe, hospitalization for pneumonia in the NHS and a tour of duty as a senior executive for a national insurer has left me with my own conflicted convictions about  how we might fix our broken system.

On the eve of the Supreme Court determining the fate of PPACA, strong opinions are in full bloom like cherry blossoms along the Mall.  In his particularly sharp remarks to government attorneys, Justice Kennedy, considered a swing vote by many, cautioned that Congressional intervention to mandate citizens the “duty ( to buy coverage) to act “ was a slippery slope that sets dangerous precedent and impinges on individual rights. Justice Roberts added, “And here the government is saying that the Federal Government has a duty to tell the individual citizen that it must act … That changes the relationship of the Federal Government to the individual in the very fundamental way.”

Justice Scalia was quick to wade in after Justice Roberts questioning, ” what would be next in the role of the government dictating to its citizens ( if the mandate were to be upheld). “I will tell you the next something else (we will next tell Americans to do) is exercise, because we know that lack exercise contributes to illness.” It seems that this debate is indeed creating odd bedfellows as civil liberties advocates are joining conservatives in warning that the next thing the government will be telling people is that they cannot drink sugary soft drinks or that they have to eat broccoli.  It is hard to find a time when a conservative Justice and the ACLU share a common opinion about anything.

Private Versus Public – Who can Enforce Behavior? 

If legislators and American business want to reduce the cost of healthcare and engage an entire generation of entitled Americans, the practical answer to Justice Scalia’s rhetorical question is “Yes. Justice Scalia. We must mandate personal responsibility for healthier lifestyles.”

Most Constitutional and human rights advocates would agree that the government’s regulation of the “commerce of healthcare” can become a snare that can tangle any government’s legislative foot in a cat’s cradle of complications.  The need to legislate behavior in an effort to help reduce costs is simply a lap too far.  A government dedicated to reducing costs while preserving quality and competition would need to adopt practices currently employed and bearing fruit in the private sector to moderate medical trend and improve affordability.  The reality is many of these efforts – biometric testing, health risk assessments, population based plan designs, value based reimbursements – require a more prescriptive level of engagement by employees.  While the programs are strictly voluntary, it is clear that the cost of declining to engage in health improvement will begin to create a substantial cost sharing gap between those who participate and those who do not.

How Public And Private Payers Seek To Control Costs Fundamentally Varies

Medicaid and Medicare recipients are largely unmanaged.  Patients are free to access any provider who is willing to accept reimbursement and are generally not consistently under the care and coordination of a primary care provider. Fraud, overtreatment and instability among the chronically ill has led to extraordinary spending in public healthcare.  Unengaged and vulnerable patients freely access a system that has found it difficult to close gaps in care, manage compliance or offer visibility on the where to receive the most efficient care.

In the private sector, larger employers have begun to achieve lower per capita health care costs and market reforms by implementing programs designed to impact the unit cost of healthcare and the consumption of services. In the face of the recent recession, the private sector moved rapidly to de-leverage, right-sizing balance sheets and returning to profitability.  Larger firms have concluded that providing healthcare is neither a right nor a privilege but a benefit — an essential tool to attract and retain personnel.  In providing this benefit, there is an assumed  bilateral contract where each party takes responsibility for their role in health and healthcare.

Employers have done a poor job of enumerating expectations around personal health as many feel the idea of employment based health improvement reeks of Orwellian oversight.  Additionally, wellness and health management only works where there is a culture of trust and communications — two commodities often in short supply in a business environment often reducing staff, freezing pay and struggling to achieve year over year earnings growth.  Yet, firms have proven through the harmonic convergence of culture, communications and mutual accountability that medical trends can be reduced through health improvement.

The debate between public and private insurance inevitably breaks down when discussing how to best control costs.  A single payer system relies primarily on global budgets, rationed access and reimbursement based on a complex clinical and financial calculus that balances medical necessity and cost. Inevitably, the specter raised is whether restricted access to quality care suffers when rationed reimbursement is peanut butter spread across all providers who often have highly variable outcomes.  While every physician claims to have graduated first in their class, we know that some providers charge multiples of other providers but cannot clinically prove that their outcomes are significantly more favorable across a similar population.  The private sector has figured out that open access PPOs that promise 90% reimbursement for any in-network provider is contributing to the very problem they are trying to solve – paying for quality outcomes, not for units of care.

There is a case to be made that market based reforms can and would do a better job of preserving quality by reducing not only unit cost prices but also reducing consumption of services and preserving quality. The question remains whether the private sector has the will to convert an entire generation of reluctant and at times, recalcitrant employees who see open access, non managed healthcare as an entitlement.  Employers are now deciding whether they would prefer to take on the thankless task of redirecting employees and their dependents to narrower and more prescriptive primary care based networks or whether to drop coverage and abdicate the role of population health management to the government.

Several Supreme Court justices have already indicated that they do not believe government should play a broader role in regulating the “commerce” of healthcare. The question remains whether employers have the will and the skill to drive this process. Consider five reasons why the private sector needs to work harder to preserve employer based healthcare on the behalf of 180M working Americans.  In doing so, employers could end up preserving a system that rewards higher quality care and achieves lower cost without imposing universal reimbursement rationing.

1.     The Government Can’t Enforce Health Engagement.  Many Employers Won’t. There is a difference. – 50% of all private sector claims are driven by less than 10% of an employer’s population.  We know in many instances, these individuals develop chronic illnesses borne out of poor lifestyle choices.  The issues are difficult to solve for and are complicated by socio-economic issues such as lack of access to primary care, lack of access to healthier diet alternatives and a lack of education about the consequences of poor lifestyle choices.

Medicare and Medicaid do not have the means nor the ability to drive lifestyle based incentive plans or more prescriptively direct care for their recipients.  Less than 15% of Medicare is managed and those recipients are covered under Medicare Advantage plans that are driven by commercial insurers.  For Medicare to make advances, it would need to partner more closely with the very constituency that it vilified in an effort to get reform passed – managed care companies.  Meanwhile states are turning to managed care to help mitigate costs and improve care quality.  Medicaid costs are ballooning and without the ability to improve public health, better dictate access points, close gaps in care and manage the intensity of services being rendered while a patient is in the medical system, the public sector can only ration cost as a means of achieving cost management.

2.     Employers can design plans to reward engagement and health improvement – Employers are now committing resources to population health management – – conducting biometric tests, requiring health risk assessments, implementing rewards based plan designs that offer lower costs and richer benefits for engaged employees.  The result has been behavioral shifts that are fundamentally changing the way employees access care.  The combination of better tools to understand the variability of provider costs for similar procedures, education, rewards and disincentives have all combined to lower trends for many employers committed to driving loss control for healthcare.  The challenge for employers is true engagement requires time and resources.

3.     The Brokerage Community Has Done a Mediocre Job in Managing and Resourcing Health Improvement for Employers.  If you subscribe to the maxim that there are no bad students, only bad teachers, the sluggish move toward population health management, self insurance and aggressive loss management programs has as much to do with the limited intellect and resources of those advising employers as it does the employer themselves.  In the new normal, brokers must become advisors and have access to actionable data analytics, clinical resources, underwriting and actuarial services to more effectively forecast and show a return on investment for health.  The golden age of low transparency, limited access to claims experience, opaque premium and embedded broker remuneration is ending and giving way to an era of accountability where advisors will be paid for value and less for bedside manner and low value administrative support services.

4.     The Key To Quality is Reducing Higher Health Costs that Do Not Correlate to Better Outcomes – Employers have a lot of ground to make up.  After rebelling against HMO plans that had achieved close to zero trend in the mid-1990s but achieved it primarily by focusing on aggressive medical management and redirecting patient’s to lowest unit cost providers, employers demanded a more laissez faire system of access and oversight for employees. Choice and minimal third party intervention was the mantra which resulted in happier employees and annualized trends that swelled like waistlines to over 14%. As premiums soared, insurers and broker remuneration increased.

Over the last two decades, many employers have gravitated to larger, open access PPO networks that offer a wide range of provider choices for employees and also highly variable charges for similar procedures.  To complicate the need for consumer engagement, these variable charges are normally reimbursed at the same co-insurance or co-pay level – as long as they are incurred in network.  Often, the most expensive providers are perceived to be the best.  Employers must commit to narrowing networks and measuring quality based on outcomes over an entire episode of care.

The public sector equally rations reimbursement across all providers irrespective of outcomes or unit cost, shifting the burden to find a quality doctor to the patient.  The ability to reward quality with higher reimbursement while forcing greater transparency in outcomes and costs to better understand who is actually delivering the best care can only be achieved through extensive analytics and an employer’s willingness to begin to reward utility of better providers. While CMS has committed to pilot programs to begin to drive this migration to quality, the private sector has the ability to move more rapidly – but only if employers are willing to tolerate the disruption that this may visit on employees who prefer the status quo.

5. Rationed public reimbursement leads to cost shifting which undermines provider quality and accelerates lack of affordability in private healthcare.  Peanut butter spread reimbursement rewards mediocrity and creates the incentive to drive a higher volume of services to make up for rationed reimbursement.  As doctors and hospitals receive less from state and federal reimbursement, they will naturally attempt to shift these wholesale arrangements to retail commercial customers.  As medical trends spike in commercial health insurance, premiums become increasingly unaffordable with more employers choosing to drop coverage.  Private employers already pay an estimated $1.22 for every dollar of healthcare to compensate providers for public sector underreimbursement. The cycle eventually leads us to more employers dropping coverage and a larger and larger population of uninsured workers.  With 50M uninsured,  a call has rung across the land for public policy intervention to solve for the crisis of affordability and access.  Not unlike Dorothy in the Wizard of Oz, employers have always had the ability to reduce costs but have chosen to pass on cost increases and reduce benefits instead of tackling the more difficult and disruptive process of driving payment reforms and behavioral change.

It’s Now or Never– While CMS is attempting to change reimbursement methodologies to reward higher quality outcomes and to penalize poor management of services such as infection and readmission rates, the private sector still holds the trump card being able to drive more onerous consequences for poor medical delivery.  Determining medical necessity and driving reimbursement reform is tricky business and often disintegrates into political food fights as evidenced by contracting disputes that often arise between payers and providers.

When it comes to refusing to cover certain procedures or penalizing outlier behavior, commercial insurers find it increasingly more politically expedient to wait for CMS to change policy on Medicare reimbursement to provide air cover for their own policy changes. Historically, it has been in vogue for employers to blame insurers for certain reimbursement practices rather than take responsibility that payers are merely administering the employer’s plan document.  Employers need to own their medical spend and they need to reinforce with their employees the bi-lateral agreement that comes with financing care.  In the face of mounting pressure to reward engagement in the workplace, consumer advocates are now complaining that employers are becoming increasingly too prescriptive about population health management. Personally, I support the view of Steve Sperling of Hewitt who recently retorted to criticisms about employer driven health incentives, “House money, house rules.”

The healthcare system is changing as we debate the need for change.  The tectonic plates of hospital and provider delivery are shifting causing great upheaval and alterations in the strategies of large systems, community based hospitals and across a range of stakeholders.  According to a recent Credit Suisse report,  the US still ranks at 150% of the unit cost of services and a full 60% higher than other industrialized nations for overtreatment/consumption of services.  While we can boast higher cancer survival rates and a system of R&D that props up the innovation occurring across the globe, we are not getting enough value for our spend.  It is unsustainable. The Supreme Court now has the dubious honor of killing or upholding PPACA.  Irrespective of the outcome, private employers are our best chance to help fix the problem.

Given the nature of politics and the nature of human behavior in healthcare, it’s my belief that government can fix the cost problem rather quickly but would likely throw the babies of quality and public health improvement out with the notion of private reimbursement.  The private sector has the green light to drive market based reforms that can reduce pricing variability, reward quality and improve public health.  However, it’s a tall order at a time when companies are seeking to reduce administrative costs, are focused on the business of the their business and are lacking the will to burn social capital with workers by playing Big Brother when it comes to health improvement.

In one scenario, the government may want to reduce healthcare spending but really, at the end of the day, the Supreme Court is saying “you can’t. ” In the other case, employers have a golden opportunity to step up and start demanding value for their spend and force greater transparency and conformity around health improvement.  But up until now, they won’t.

Stalking the Public Option

Health care systems and single payer
Health care systems and single payer (Photo credit: Wikipedia)

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

I hear it restlessly moving off in the distance, the way spring struggles and finally gains momentum through the mud season.  It hesitates, sending subtle harbingers of change in the form of a warm wind or the scent of new growth.  The public option is stirring like a new shoot poking out of the decay of an old stump. With it, a next stage of reform is already forming even as Managed Care 2.0 struggles to gasp its first few breaths.

It is strange to be speaking of the next stage of reform years before the majority of Managed Care 2.0 regulations are due to take effect.  However, in the land of unintended consequences, no one can predict with certainty how healthcare is likely to evolve.  We do know that no one from the political middle, left or right is convinced that this first iteration of health reform will result into a system characterized by affordable, high quality care.  Managed Care 2.0 is merely a brief stage in the metamorphosis of the last private healthcare system in the industrialized world.

Some believe that the US’ best chance to salvage its mounting public debt, socioeconomic polarity and physical vitality is to eventually yield to a single payer system that can ensure coverage all of our citizens.  In that brave new world, those capable of opting out into private care, could do so on their own dime and on an after tax basis. Critics of single payer argue that an entitlement of this magnitude only stands to propel the nation toward record deficits, hyperinflation and economic ruin. The very thing that has made the US great, conservatives argue,  is its ability to avoid safety net entitlements that eventually become hammocks. One thing is for certain: Reform in its current form will do little to alter the supply side of the business.

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 doing the math and wondering if 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.  To attack the real crisis of affordability at this time is an even scarier proposition for politicians who want to be reelected. Yet, The Patient Protection and Affordable Care Act 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.

The building blocks of the Patient Protection and Affordable Care Act are insurance market and access reforms — legislation that 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 on wants to break that news to the American people. It would be too scary a bedtime story for adolescent, recession sick America to hear about a future where tough decisions will need to be made about who gets how much care.  The story would not have clear heroes and villains but be cast 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?

Is Massachusetts a Mature Version of Managed Care 2.0 ?

The next chapter of the managed care story is being read aloud 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 lisenced 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 insureds — many of whom 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.  If this were allowed to play out, the insurers would be unable to meet legal reserve requirements within 24 months and be out of business in the state — leaving the need for a single payer to assume responsibility.

Why is There Not More Competition Between Health Plans?

Where are the competitors you ask?  When insurers are raising rates 20%-40% for small business, 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 are 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.

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.

For example,  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 non 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 squatting like a toad with 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”.  Over time, it would represent a basic package of essential services consistent with so many other nationalized plans across the world.  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.  The goal: single payer, socialized medicine.  So who’s right ?

Why Not Introduce the Public Option In Markets With No Competition?

Here’s the dilemma: If a public option were to be created, its reimbursement would likely be linked to Medicare. If a larger percentage of insureds reimburse doctors and hospitals at Medicare levels, providers would revolt contending that public option reimbursement is inadequate to cover the true costs of care. Critics argue of rationed provider reimbursement note that US providers make 8.5 times the average salary of a worker in the US and only 2 times the average salary in other Western countries.  Our best and brightest seek medicine and in doing so, deliver some of the best care in the world. ” If I get cancer” asserts one anti-reformer, ” I want to be treated in the US where I have the highest probability for survival.” Naysayers argue that our outcomes are actually worse than other industrialized countries whose reimbursement systems have created systems that are characterized by primary care and smaller secondary and tertiary care systems.  “The US is the diametric opposite”, contends one critic, ” we lag many nations in critical public health indicators. In the US, the insured live longer.  Outside the US,  everyone lives longer – not just those who can afford healthcare.”

Doctors have long contended that like it or not, their ability to cost shift to private healthcare enables a less than optimal equilibrium that holds our broken system together. With a public option tied to Medicare, doctors would find a larger percentage of their patients policies reimbursing at lower levels.  This would be abetted by the fact that insurers would be losing market share to a lower priced public option alternative.  As public companies  they would have to continue to lower premiums to keep pace with a public option that has better economics or lose market share — either way suffering an operating profit death by a thousand cuts. Supporters for the public option view this economic transformation as an inevitability of eliminating waste, inequity and over-treatment.  The dollars are there, many contend, they just need to be redistributed.

The reimbursement differences between Medicaid, Medicare and private insurance are real and pronounced. We know in New Jersey for example, there are three levels of hospital pricing reflected in state regulations.  More than 500% of the federal poverty level (FPL) is considered retail charges.  Between 300% and 500% of the FPL can be charged at 115% of Medicare and below 300% of FPL is charged at the state Medicaid fee for service rate.  The range of costs that can be charged to uninsured individuals vary dramatically.  For example, the charges for back surgery for a 500%+ FPL patient range from $185,000 to a startling low of $13,000.  The reimbursement for an under 300% Medicaid patient averages around $5,800.  How one is allowed to reimburse hospitals and doctors determines much of their fate as a payer.

Should the government introduce a single payer, it would reimburse providers at lower levels than private insurance which would allow it to capture market share through lower costs resulting in lower premiums.  In 2014, consumers concerned about the rising cost of care delivered through newly formed state insurance exchanges, would seek the lowest price plan.  If that choice was a public option, many would be likely to try it on for size.  So far, so good?

There is a scenario where a large percentage of those currently privately insured move from an exchange plan to a public option exchange alternative. The more participants that join the public pool, the greater the purchasing power the government can wield in negotiating fee increases to providers.  As the economic advantage between a public option and private insurance widens, private insurers start to withdraw from markets.

Much of healthcare cost control is achieved through provider reimbursement contracting but it only goes so far.  As physician and hospital reimbursement decreases, fewer individuals stay in or enter medicine leading to reduced capacity.  Access to care becomes an issue resulting in a delivery system that is anchored by rationing and triage.  This transformation toward rationing access is inevitable in any system where there are limited resources and infinite demand. Many economists and health policy experts would argue that our current course is untenable and that managing healthcare within a finite annual appropriation is not a bad thing.  Affordability is, after all, a zero sum game.

Can The Public Option Compete Without Medicare Reimbursement?

If a public option is introduced but not allowed to index reimbursement to Medicare could it survive ? Certainly a public option not anchored by Medicare rates of reimbursement would experience the same challenges that any insurer experiences when trying to enter a new market.  A public option may have initial advantages due to lower administrative costs and non profit status but as a level playing field competitor, it requires additional infrastructure to pay claims and administer clinical, fraud and utilization management programs to control cost. Hospitals and providers would be reluctant to give a new public option better economics than private plans for several reasons — the knowledge that a stronger public option means reduced reimbursement over time, the awareness that any government plan allows less of an ability to negotiate rates and the recognition that a public option without members has no real purchasing power.  Like credit, one has to have it to get it. Competitive contracting economics come with leverage. Leverage is membership.  The more members you have, the better the rates you can negotiate.  No members, no competitive contracts.

Fear not, the public option has the advantage of using tax payer dollars to initially price premiums at a loss (charges for care will exceed premiums received ) until the it takes on enough membership to be self sustaining.  Initially insurers would try to cherry pick against the upstart public competitor, running off poorer risks to the public option.  However, the deep pockets of a public option funded by tax payer dollars can outlast any private plan.  The balance in the market shifts and the public option gains equal or better financial footing than its for profit foes. The twilight of private insurance is at hand in a 2.0 world.

Some question whether a public option can delivery similar clinical and utilization management as private plans to ensure cost effective delivery of care and limited abuses by providers trying to make up in quantity those dollars that they are losing in reimbursement. After all, unit cost discounts can only go so far.  The holy grail of medicine is managing care in a more integrated fashion, eliminating unnecessary treatments and keeping people healthy — none of which get rewarded through today’s treat vs. prevent chronic illness reimbursement system.

History suggests Medicare and Medicaid have not been nearly as diligent as private insurers in fraud, medical management and waste prevention.  In fact, while government run plans have an administrative cost that is one-third of private for profit insurers, fraud and abuse represent an additional 10% or $$100B per year. The savings achieved through razor-thin administration are bleeding out through the thousand cuts caused by laissez faire medical management. It’s a fair question to ask whether a single payer would really be able to manage care and outcomes or just manage access and reimbursement.

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 where we are asked to pick our poison — rate controls or a public option. Prior approval of rates are already embedded in 50% of US markets.  Rate debate is happening as we see Massachusetts and others grapple with little imagination around the reality that access without 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 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.

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 hard to afford coverage and may spend a large percentage of their discretionary income on health insurance.  Larger employers are likely to pull up the drawbridge and begin to slowly cut coverage.  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. A public option could provide the air cover employers need to slowly step away from employer sponsored coverage.

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.  And out of the woods, crashing across the growing chasm of cost will fall the public option.  It will be hailed as the panacea for competition and sentinel control over for profit players.  It will usher in a new era and it may very well set in motion the next phase of Managed Care 2.0 – – an era characterized by the death of private insurance.

Depending on where you sit, you will either be dancing around the bonfire or burning someone in effigy.  One thing is certain, more change is coming.

Confessions of A Blue Dog Insurance Gunfighter

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A Short History of Medicine

2000 BC — “Here, eat this root.”

1000 BC — “That root is heathen, say this prayer.”

1850 AD — “That prayer is superstition, drink this potion.”

1940 AD — “That potion is snake oil, swallow this pill.”

1985 AD — “That pill is ineffective, take this antibiotic.”

2000 AD — “That antibiotic is artificial. Here, eat this root.”

— Author Unknown

As the bar room brawl escalates in Washington, I cannot help feeling like I am watching a B Western. Reform is a stagecoach whose driver has been shot and is slumping unconscious in his seat. The horses are racing uncontrollably, dragging the reins on the dusty ground. Inside the carriage, people are screaming, fighting and yelling for help. Suddenly, the hero appears — crawling from the window and almost falling twice as he strains to shimmy across the unstable hitching to grab the reins. Will he succeed? Will the occupants be saved or will the entire coach hurdle over the cliff to certain destruction?

I have seen the movie many times and it always excites me as the hero tries to rescue the runaway stagecoach. However, invariably he falls under the wheels, or is hit by friendly fire — perhaps from the gun of some passenger named Harry or Louise who honestly believed he was going to get them killed, or maybe he is winged by an arrow launched by myriad indigenous, hostile stakeholders who resent the intrusion of yet another idealistic pilgrim into a land too vast and tribal to ever be tamed.

Let’s face it, reforming health care is as complex as the diseases medicine seeks to cure. Both sides of the aisle have a legitimate axe to grind and they are whetting their Bowie knives on the whirling debate about how we fix a system that is in desperate need of change. However, when you politicize change, you force rank priorities not in terms of what might have the greatest financial and social impact but by changes that would be most palatable to your constituency — even when you know, deep down, that those who elected you are part of the problem. In the end, a politician seeks to burn the least amount of political capital necessary — with constituents or their own party depending on who you feel is more important to your ultimate reelection. You try to rally people around a common enemy. You forge treaties and then you break them. You marginalize those who ask the tough questions. Perfection is the enemy of progress, you say. Perhaps this is why someone once said, “Politicians are like diapers, they need to be changed regularly and for the same reason.”

The landscape for this drama is stark and filled with shades of gray. If the United States was a corporation, it would be broke and the treasuries that finance its debt would be low-grade junk bonds — I mean “bottom of the barrel, make a sub-prime security look like a AAA asset,” junk. The United States will post a public debt of $ 7.7 trillion in 2009 and incur another $ 1.7 trillion deficit from increased spending and reduced income from a contracting economy. The deficit is slated by the CBO to swell to $ 11.5 trillion in 2014 — without expanding health care. In 2017, Social Security outflows exceed income coming into FICA (translation: We are broke). In 2018, Medicare trust assets are exhausted (translation: We are broke). While the generation that preceded us has been labeled the “Greatest Generation,” we may very well be named the “Profligate Generation.” We do not seem to be able to make the tough decisions about balancing budgets, reigning in spending and attacking the root causes of many of the costs that are slowly eroding the foundation of our economic viability.

Just as the automotive and airline industries are being crushed under retiree and pension obligations, the federal government, states and municipalities are panicking under swelling deficits and the prospects of raising taxes to finance health and pension funding shortfalls at a time when a fragile economic recovery would advise otherwise. Most state’s budgets earmark at least 60 percent of their annual spend for just two items — education and health care including obligations to provide medical coverage for retirees. So, all agree health care is a problem, but to the average pilgrim walking down Main Street — there’s so much noise and rhetoric, its hard to know what’s causing the problem and how we fix it.

Here’s one 25-year vet’s take on the problem — Health care reform must happen. The question is how do we fix it, who pays, who sacrifices and how do you achieve this without killing innovation and quality? The most efficacious cures to taming this wild mare of medical trend are too politically volatile for many in Congress who desperately want to be reelected.

50 million Americans have no coverage and when an uninsured or under-insured person falls through the looking glass of our current health system, the patient ends up having to pay full retail for health care – often resulting in a financial crisis or worse, personal bankruptcy. The government’s obligations for financing health care are skyrocketing and contributing to the growing public debt. Individuals and small business cannot buy affordable insurance because insurers work hard to avoid risks that might actually pollute their loss ratios. Regulation does not make provisions for the millions that are impacted by insurer underwriting practices. Many believe that medicine cannot be for profit as the manner in which providers get reimbursed creates perverse incentives and alters the way medicine is delivered. At the heart of this debate is how big a role should government play in refereeing this brawl. And since it has such a huge stake in the fight, can the government be impartial or will Congress and the Obama administration end up being revealed as a hanging judge for the insurance industry? As one pundit remarked, “this is a battle for the soul of medicine.”

Here are some additional inconvenient facts that complicate the debate right now in health care:

• Neither society’s nor the government’s houses are in order — Medicare and Medicaid spend more than 25 percent of it’s annual $ 1 trillion cost on the last six months of life. In many instances, these services do not improve length or quality of the patient’s life. Uh oh, this is where we start talking about death panels, right? No, but we need to decide who makes the call on what services are provided to our loved ones in these circumstances. Since most individuals are likely to face end-of-life care issues while on Medicare, the government makes that call on what they will and will not cover already.

The Centers for Medicaid and Medicare Services (CMS) now clearly see that they are not getting value for their health care spend in this critical area of end-of-life care. However, just raising the issue is tantamount to committing political suicide. There is no doubt as costs increase the government will have to reduce Medicare benefits or become more stringent on how it will reimburse providers for services. Whether you choose to offer America a public option or not, this is an economic fact of life. Yet, no politician will admit to this downstream reality.

So, why not require everyone to have a durable power of attorney and end of life counseling given that today’s end of life care is a complex algorithm of quality, time, cost and consumption of a limited pool of dollars? It all sounds fine, right up until the point that it is you or your loved one, and then all bets are off. This is where under-60 demographic says, “Pull the plug, pull the plug” and the over-60 crowd responds, “Ask not for whom the next plug is pulled, it will be pulled for you.”

• For-profit insurance creates conflicts but so does big government — Medicare and Medicaid averaged a mere 5 percent of cost for administration and this is being trumpeted as a much lower cost compared to the 15 to 30 percent insurers charge for administration. This statistic disguises a simple truth — 5 percent gets you little oversight, no evidence-based medicine guidelines or strong controls around fraud and abuse. As a result, as much as an additional 10 percent of total public spending, or $100 billion, annually is attributable to rampant fraud, waste and abuse in public health programs. This total cost of 15 percent actually exceeds the average cost of administration for commercial insurers (around 12 to 14 percent according to consultant Deloitte) because they utilize much stronger controls to manage fraud and waste.

The big problem is what insurers do with their savings — they keep them as profit and do not return them to policyholders in the form of lower premiums. Each year’s premiums are a new base line for next year’s increases. However, these are for-profit companies and the last time most of us checked, profit motive drives free market capital formation, investment and innovation. Proposals that call for taxation of insurers may see insurers merely passing these costs on to policyholders.

• Medicare and Medicaid keep costs down by cost shifting to the private sector — Medicare and state-funded Medicaid save money primarily by under-reimbursing providers and hospitals with the exception of primary care doctors who are actually paid less by private payers. Doctors and health systems who are underpaid by Medicaid and Medicare, cost shift to private insurance plans which contributes to higher medical inflation in private plans than Medicare.

• Private insurance must be regulated and managed in the individual and small group markets — Private insurers make a large percentage of their profit on small group and individual insurance. This is where underwriting practices are most opaque and likely to lead to medical underwriting where individuals and small groups are denied coverage or charged astronomical premiums as for-profit ( and non profit ) companies naturally rely on risk analysis to achieve profitable books of business. Greater regulation of individual and small group pricing, minimum loss ratios and community rating to ensure guarantee issue for all applicants can solve a large percentage of the issues surrounding insurance affordability and access. Insurers may not like individual and small group reforms but they are expecting it. Fix this one piece and you fix a massive hole in the coverage safety net. You do not need a public option to keep insurers honest, you need effective regulation – something that does not exist today. .

• Co-op or co-opt? — Forming insurance purchasing co-operatives for individuals and small business to buy affordable healthcare sounds great. However, the devil is in the detail. For some politicians, co-ops must be established to compete with private insurance. For a minority of Congress, co-ops would take the form of non-profit purchasing consortia that individuals and small business can join to more transparently choose between private plans.  Both sides lack details over how co-ops would actually reduce costs — other than offering the modest savings inherent to a non profit. Unless these purchasing groups are adequately regulated, any start-up co-op will either be disadvantaged to commercial insurers or financed by tax payer dollars to slowly erode private care.  .

A start-up co-op cannot force hospitals and doctors to offer them better rates than private insurance unless they have the ability to use Medicare’s fee schedule as the basis for setting reimbursement. Traditional barriers to entry for new insurers can be high because hospitals and doctors grudgingly discount rates based on how many members the insurer represents. The more members you have, the steeper the discounts. If a cooperative has no members, it will not initially be able to offer premiums lower than private insurers and will either write only the worst risks that insurers do not want, or underwrite new clients, but at a large loss. It is unclear who would finance this large front end loss but the odds are, many taxpayers would not want to underwrite the losses of a public plan attempting to displace their private insurance..

However, if a co-op is allowed to only reimburse at Medicare levels, the co-op’s lower administrative costs, non-profit status and lower provider reimbursement schedule will offer a more competitive alternative to private insurance. The co-op would begin crowd out private insurers as doctors cost shift higher charges to private insurers – who must pay more than Medicare and must negotiate these reimbursements annually. Employers, seeing their private insurance costs rising at a higher rate than co-ops will drop employer based plans — sending all their employees into the cooperative which in effect, becomes a single choice, public option. When the doctors, specialists and hospitals are no longer reimbursed at rates above Medicare because there is now only a single payer, quality and access will decline while rationing and restructuring of health care will accelerate.

• Disease and apathy are bigger problems — The top 10 private insurers made $12 billion in profit in 2008 and all insurers posted earning amounting to close to $30B. This compares favorably to $1 trillion in health-care costs incurred over the last decade by obesity related illness, $100 billion of annual smoking related illnesses and $ 50 billion for the cost of defensive medicine. The  Senate Finance proposal is supporting a $6 billion tax on insurers. How can you tax 25% percent of insurer profits and not expect that these levies will be shifted to policyholders?

The real litmus test for anyone (government or private payers) who wants to remain a stakeholder in our health-care delivery system should be their ability to demonstrate how they are best positioned to incent health improvement, reduce the rate of disease and restructure the incentives that currently drive huge clinical and quality variability, waste and over-treatment.

The problem with government playing the role of referee is politics. Politicians do not have the will to tell America to put down the Krispy Kremes and get on the treadmill. In the President’s recent speech, he mentioned insurance reform more than 20 times. He never mentioned obesity, personal responsibility, the cost of smoking, the cost of absenteeism or the state of America’s public health. Of the 60 million Americans with obesity related risk, more than two-thirds are covered by commercial insurance. Meanwhile, employers have been tip-toeing around the issue of wellness for years with very few committing to plan designs that measure key biometric factors like cholesterol and weight and then actively work to create programs to mitigate these risks in their workforce. We must usher in a new era of health management, but many can’t or won’t because they’re afraid of offending their employees, or getting sued for violating the Americans with Disabilities Act for playing big brother.

• Reimbursement reforms are the biggest single factor absent from this debate. We need to level the playing field between all payers — standardizing reimbursement for services and then focus on using data to reward, recognize and convey to consumers those providers who deliver quality and efficient care. We must eliminate public to private cost shifting and increase reimbursement to primary care doctors to manage the well, at-risk and chronically ill and their conditions. If you want to reduce costs, someone will need to get paid less and that means dollars need to be rerouted from specialty care to primary care. We should focus on slowing the conveyor belt of people who at one point were healthy and through lifestyle choices became chronic, and ultimately, catastrophically, ill. This can only be accomplished by changing incentives that currently reward treatment of disease to rewarding better health outcomes and promoting prevention at home, in schools and in the workplace.

In a period of great social and societal turmoil that calls for tough decisions to ensure our economic and personal survival, we need to be honest with Americans and share the facts: we can restore Medicare and healthcare to viability only four ways: 1) managing access to services – some call this rationing  2) reducing reimbursement to providers, 3) reducing the administration costs of the delivery itself 4) attempting to control the rate of chronic disease in America so those coming on to Medicare do not consume a disproportionate amount of services as they become eligible for the coverage.  Any reform solution will set in motion changes that will utilize each of these four paths to cross the high peaks of our mounting costs.  The question is which path offer politicians the least resistance versus which path leads to our long-term ability to control costs.

Any legislative change must impact all the stakeholders in healthcare.  In the Old West, a wanted poster would depict culprits and their confederates guilty of crimes.  If our health crisis were pronounced a transgression against society, this Dirty Dozen could be charged with major or misdemeanor lawlessness:

Consumers – 60M Americans possess a body mass over 30 (the average US male’s waist is 38”). We have bad lifestyles that lead to overconsumption of health services, unrealistic expectations, poor consumerism and litigiousness when we don’t get our way or have a bad outcome.

Insurers – Insurers engage in opaque business practices that are not understood by policyholders or regulators.  How one makes money in healthcare does not seem to be as important as how much one makes.  This mindset creates massive image problems.  Insurers have failed to help solve for the uninsured and have engaged in excessive profit taking in certain geographic markets and in the individual, small group insurance, Medicaid and Medicare segments.  Insurer reimbursement practices have contributed to driving community hospitals and primary care into near extinction.

Employers – Have been inconsistent stewards of their medical spend, with Human Resources focusing on limiting disruption to employees rather than driving tough love with at risk employees.  Very few C Suite executives take the time to truly engage in health management and instead look at insurance as a commodity instead of a program worthy of risk management.

Brokers/Agents – these intermediaries function as a highly fractured distribution system of less sophisticated players. Insurers loathe broker consolidation and enjoy the multiplicity of distributors as no player has enough clout to change insurer business practices.

Government – The federal government and states serially cost shift to the private sector through reduced reimbursement to providers. Politicians pander to the public instead of educating.

Regulators – Many are politically motivated, including state insurance commissioners who often see these roles as a springboard to Congress, Attorney General or a gubernatorial run. Career regulators are under-resourced and often under-educated to the complex,  well resourced insurers they are regulating.  Given the paucity of resources, regulators focus on high visibility issues ( those that will draw headlines ) versus high impact, complicated reforms.  Most regulators are years behind in regulatory audits.

Unions –Most bargained groups are rabidly protective of rich benefits and pension plans which feature limited or no incentives for participants to be good consumers of healthcare dollars or engage in healthy lifestyles. The problem is not the benefits, which one could argue were negotiated in lieu of wage increases.  It is the unwillingness of the unions to force their members to be more responsible consumers

Malpractice Plaintiff’s Councils – Medical liability has driven massive overconsumption of services and puts self-prescribing patients in the driver’s seat. Attorneys generally oppose torte reforms such as punitive damage caps that would lower the cost of liability for doctors and reduce defensive medicine costs.  The sentinel effect of lawsuits has not proven to reduce the variability of care delivered by doctors.  Some would argue, it has made the problem worse.

Specialists – (Pathology, anesthesiology, oncology etc.)  We love, trust and self refer ourselves to specialists at an alarming rate.  In doing so, we do not understand the referral and provider payment practices that we bypass and set in motion.  A disproportionate amount of dollars goes to specialty care in Medicare, Medicaid and private insurance limiting money available to reward and incent primary care.  Medical graduates in family medicine are down 70% while up over 50% going into specialties that promise higher rates of reimbursement – at the very time that we need more primary care providers to work with us to improve our day to day health.  Our system has been set up to treat our chronic illness, not cure it.

Hospital systems – As hospitals consolidate, big systems exert massive leverage on insurers driving higher costs.  There is an arms race mind set between competing systems driving investment in specialty services. Big health systems overshadow community based hospitals that may have equally effective outcomes at a much lower cost.  With union and community pressure agitating against any hospital closure – even those that are deep in the red, we have an over-supply of services that get passed back to patients in the form of greater intensity of services during hospital stays and higher retail charges. Ken Raske, head of the NY Greater Hospital Association –makes $ 1.2M a year as the bellicose advocate for major hospitals.  Dennis Rivera is one of the more influential political figures in Washington as the head SEIU 1199 – the United Healthcare Workers.

Pharmaceutical Industry – The pharma industry has done a masterful job redefining the definition of chronic illness to include millions more Americans with conditions like restless leg syndrome, BPH and situational anger disorder.  The industry is still a muddy puddle in its rebating practices and its interactions with pharmaceutical benefit managers (PBM) who purchase drugs wholesale and resell the same drugs at varying retail prices to groups based on purchasing size.  Have not totally embraced the use of generics to supplant name brand drugs and have often acted to protect brand names at higher costs. US patients still pay retail for drugs and in doing so, finance 100% of drug R&D while pharma charges the rest of the world wholesale for the same drugs.

Food Industry – Protected by a powerful lobby an Congressional subsidies, the agricultural and food processing industries have been busy getting us hooked on high fructose, processed food, sugar and high caffeine content sodas.  In 2004 – candy, restaurant, food and beverage ads of $ 11.26B dwarfed health eating advertising expenditures of $ 9.55M.  Ineffective food labeling, financial dependency of our schools on royalties from vending machine sales, expanding portions in restaurants and fast food, aggressive lobbying to minimize explicit communications on food content and risks – all contribute to a an obesity epidemic that has only one state in the US (Colorado) having a prevalence of obesity less than 20%.

Marshal Mad Max To The Rescue? –  There have been five different Congressional health reform bills proposed to corral and tame healthcare’s rising expenses – three bills in the House of Representatives (referred to as the Tri-committee bills) and two bills in the Senate ( Senate Finance and Health, Labor, Pensions and Education [HELP] committee) .  The challenge for many insiders watching reform gain steam is that taxes and legislation proposed to impact costs do not evenly impact those who drive them.

The House will consolidate their bills and pass a single integrated bill with a simple majority of 218 votes.  Nancy Pelosi has all but guaranteed these votes.  The Senate is more complex – requiring 60 votes to close debate to even allow for a vote.  Without 60 votes, a filibuster can wreck legislation.  Recently deceased (D-MA) Senator Ted Kennedy was vote number 60.  This is why the Massachusetts legislature revoked a longstanding rule to wait five months after the death of a senator vacates an open position.  In Massachusetts, the replacement senator, Senator Paul Kirk, was sworn in on September 26th.   The Senate now believes it has the requisite 60 votes unless any Blue Dog democrats get cold feet.

Republicans have really failed to offer any substantive alternative health reform plan.  There are amendment suggestions but it appears that the various bills – all tendered by Democratic leadership will be the framework for reform.

The Senate Finance Committee under Max Baucus (D- MT) has tendered a bill that is the most closely aligned with President Obama’s vision for reform.  Actually, no Republican on the Senate health subcommittee approved Baucus’ bill.  At 2:15am on Friday October 2nd, 564 requests for amendment had been melded into 130 and resolved with a final Senate Finance version of the Baucus bill voted on this week.  Key firefights last week included a bi-partisan defeat of two proposals for a public option and a controversial reduction of the penalty for individuals who do not choose to comply with an individual mandate to buy insurance. This weakened provision means that some people are more likely to wait to buy guaranteed insurance until they have a medical event.  The new law would require insurers to take all applicants and could give rise, as it has in Massachusetts, to adverse selection as the healthy uninsured may only buy coverage when they have a medical event and choose to pay a nominal penalty. It is the equivalent to mandating the purchase of property insurance but only mildly penalizing people if they wait to buy coverage until after their house is on fire.

Additional unresolved land disputes include whether employers should be mandated to offer insurance, whether the bill’s cost is further inflated to boost subsidies for low income individuals facing individual mandate penalties and fees imposed on insurers, expensive insurance plans, pharma and medical device manufacturers – – all taxes presumed to be passed on to consumers either directly or indirectly leading to higher costs.  The price tag for the bill as it heads into session mark-up remains around $ 900B.

Unfortunately, Marshal Baucus has to once again wander up a hostile street and try to forge a single Senate bill with the left leaning 1000 page Senate HELP version that still includes a public option.  Some pundits theorize that many senators are holding their fire until they can see the whites of the Marshal’s eyes – – during backrooms committee mark-up sessions.  Marshal Max is tough but it’s hard to know who is friend or foe.

Should the Senate not field a majority, they can conjure up a special procedural rule created in 1974 known as Budget Reconciliation. Reconciliation was created to facilitate the advance of contentious legislation that might otherwise be defeated by filibuster. Originally designed for legislation thought too radioactive to survive normal partisan politics (e.g. deficit reduction initiatives), the process was modified in 1996 to apply to any legislation – even if it increases the deficit.  It requires a simple majority of 51 votes to pass.  Senator Robert Byrd, (D- WV), a long-time defender of process and order in the Senate, proposed a litmus test for how and what items can survive the trap door process.  The procedural litmus tests, known as the Byrd Rules, determine whether items proposed in reconciliation are “extraneous”.  Many of the provisions in the Baucus health bill would not be considered extraneous if they could be proven to reduce costs – even if these changes radically altered our delivery system increasing taxes and crowding out existing stakeholders.

The Baucus bill is a good start in addressing the need for insurance reform but fails to address many of the other stakeholder’s who are contributing to medical inflation today.  Baucus and Congress have clearly targeted insurers as a primary focal point for reform proposing a tax of $ 6.8B that would most likely be passed on to policyholders.  The bill imposes control over how much premium load insurers can charge for age, sex and status such as smoking.

The bill has included the creation of non-profit co-ops to compete with private insurance but it is unclear how they could compete without incurring massive losses that would be offset by taxpayer dollars as “ start-up costs”.  There is an establishment of state insurance exchanges (Small Business Health Options Programs aka SHOP)  where individuals and employers up to 50 or 100 employees can access regulated insurance programs designed to offer affordable private solutions.  Insurance commissioners will be instructed by Health and Human Services to set up catastrophic coverage risk pools to cover certain high cost individual claims, design a common set of benefit pan designs that may become open to interstate competition and oversee the creation of non profit co-ops.

The big debate is over the inclusion of a public option that would essentially offer a Medicare like program to all uninsured, under insured and employees of employers who may not want to be covered under employer sponsored insurance.  There is great debate whether an expanded government plan with lower administrative costs would create healthy competition for insurers or begin a massive retreat of employers from offering insurance.  Most employers would prefer shifting the burden of escalating health costs and the tricky moral hazard of trying to manage lifestyles to taxpayers and the government.

While primary care doctors might see a near term reimbursement improvement under reform, most physicians would see a slow and steady erosion of reimbursement as the Federal government inevitably cuts payments to try to balance a Medicare Trust that is already out of money.  Medicare physician cuts of 21% are proposed to begin of 2011. It is simply not realistic to offer expanded Medicare benefits like additional prescription drug coverage at a time when there is not enough money to finance the existing benefits.

The Baucus blll calls for a tax on America’s richest benefit plans (those averaging over $ 8,000 per person and $ 21,000 per family.  Many of these plans are union benefits in towns, municipalities and governments. An Amendment was approved to offer a higher allowable taxable cost for retirees and those working in “high risk” jobs.  (aren’t all our jobs high risk these days?).  Baucus does not offer the public option but does establish subsidized non-profit cooperatives that would compete with private insurers. Congress would also impose controls on how insurers could underwrite programs offered within the insurance exchanges to reduce the slope of premium differentials that insurers charge to “ cherry pick” younger and healthier risks.  Younger insureds will pay higher premiums while older Americans may pay less.

Unless Congress gets medical trend under control, we will all have benefits costs that exceed these caps by 2016.  The proposed benefits tax cap will rise with the CPI.  Our benefits costs will rise with medical inflation (averaging 4 times the rate of CPI).  The Congressional Budget Office (CBO) estimates significant revenues raised by the tax cap in future years suggesting that they do not believe that this legislation does not to bend medical trend to become more in line with CPI.

Do not misconstrue this barroom brawl as wasted energy.  A version of health reform will pass and most likely before Christmas.  In 1994, Clinton’s health legislation failed because he chose the craft the legislation behind closed doors and then sprang it on a wary and uninformed Congress.  He also did not have an ally in Senator Moynihan, Chairman of the Senate Finance Committee.  In 2009, President Obama challenged Congress to divine a blue print which he in turn, would help contour and help through the bitter process of a final mark-up.  He also has an ally in a very effective Senate Finance Chair in Marshal Max.

This high noon show down is not over and my guess is a few good guys and bad guys may still get killer or wounded before the shooting stops.  You’ll have to judge the ending for yourself and prepare for a sequel once the 2010 mid-term elections are upon us.

Judge Harry Reid is now in session –  As Senate Majority Leader, Reid must merge Marshal Max Baucus bill with the Senate HELP committee bill to bring a single piece of legislation to the divided townspeople of Senate, USA to ratify.  Meanwhile, just over the border the House of Representatives is busy crafting their single bill that will be merged with the final Senate bill.  All four bill are more liberal than Baucus and include the controversial “ public option”. My guess is President Obama will work hard to help protect the more bi-partisan Baucus bill which means more fighting could lay ahead if the Democratic Caucus will not back off their insistence on the inclusion of a public option in any final bill.  Some old timers believe the public option is really a stalking horse for the Democrats and it will be yielded but only after concessions that may threaten the President’s goal of a deficit neutral solution.

The race for rapid resolution is on.  If the governor’s seats in New Jersey and Virginia fall to Republicans, the swing will frighten blue dogs under the front porch and force the Senate into Reconciliation as 60 votes will not be found. Some Democratic leaders may already sense this and are working to get the wheels greased to jam reform through Reconciliation – while on the outside still appearing confident that 60 votes are possible

The question that inevitably keeps coming up is what is missing from the health reform legislation and are we bringing the right people to justice as Marshal Max drives his legislation through Congress.  The sad fact is this legislation does reform insurance markets but falls well short of reforming the healthcare system.  Since insurance is by and large, a system of financing care, we will see lower insurer profits, streamlined and lower cost of administration but we will not see the primary culprits responsible for rising costs receive much more than a wrist slap.  If Marshal Max deputized me, I would :

1) Push Consumers to take more responsibility and design any public or regulated plans to require biometric testing (annual paid physicals testing five risk factors – smoking, glucose, cholesterol, weight and body fat), offer wellness incentives to business and employees, incorporate chronic care management and expand federally qualified primary care health centers into high risk, underserved communities to stabilize high risk populations – Baucus plan response : weak to non existent

2) Global case rates for hospitals – Pay a single payment for an entire episode of care and transfer the risk to the institution to manage the outcome. Hospitals need to be more at risk for the total amount of care delivered.  Infections and readmissions due to errors, mistakes or secondary infections must be covered under the total rate paid – Baucus plan response: Medium.  Focus is on hospital fee cuts but Medicare is moving toward case rate reimbursement.  Private insurance will draft behind Medicare.

3) Medical Home – Any new coverage extended to the uninsured or those choosing a public option must be delivered via a primary care, gate keeper network that gets paid for improving its population’s overall health status.  No more self-referrals to specialists.  Everyone must use a primary care doctor as their medical home – Baucus plan response:  Medium.  Medicare and the private insurer community are already piloting models for potential expansion into covered populations.

4) Wellness – Legislate a Healthy Workplace Act and create tax incentives for all employers to offer screening, biometric testing and health coaching.  Ensure that the Americans With Disabilities Act is not used by plaintiff’s attorneys to penalize employers for creating pan designs that shift cost to less healthy, noncompliant employees and their dependents. Baucus plan response: Weak.  Some health incentives but separate legislation is working its way through Congress.  The issue is around giving employers more cover fire from liability if they actively engage in managing employee health and well-being.

5) Individual and small group reform – Reform insurer pricing practices and put a cap on all profits and administrative costs at no more than 82%-85% of premium for the under 100 employee market.  Mandate the release of claims experience from insurers to all employers over 100 with a clear understanding that it does not violate HIPPA regulations. ( This has already been done in Texas ) Mandate all individuals to purchase insurance and have the cost of non-compliance indexed to the cost of the cheapest plan offered through the state’s insurance exchange.  Offer tax credits for those up to 300% of the poverty level to ensure people have subsidies to purchase coverage.  Baucus plan response: weak.  Politicians have rolled over and reduced the penalty for those choosing not to sign up for mandatory insurance.  The cost not to join is far less than the cost of insurance creating the real possibility (we have seen this in Massachusetts) where healthy people will wait to get sick before joining insurance plans.  Insurers, by law, will need to take all comers.  Expect insurers to dramatically increase the cost of individual insurance or exit the market entirely if the individual mandate is not strengthened.

6) Public option only for uninsured – If you offer a public option, offer it for only those who currently have no coverage and place then in a plan that requires medical home, wellness and compliance testing to manage chronic conditions and health coaching.   Do not load the basic public option with rich benefits that will drive up utilization and medical trend. Baucus plan response: uncertain.  Some states like Connecticut are trying to embrace designs intended to reduce medical trend.  Others like Massachusetts are enriching public benefits and mandating higher reimbursement levels.  Massachusetts now covers 98% of all its citizens and has by far, the most expensive healthcare costs in the US.  If affordability is the goal of reform, Massachusetts gets an F.  Federal reforms seem to be racing down that same slippery slope.

7) Employer penalty for dropping coverage – Employers should be penalized at a level greater than the lowest cost public option to avoid the rapid erosion of employer sponsored care.  Our goal is to keep a balance between employer sponsored and government sponsored plans. Baucus plan response: weak.  Some in Congress want employers to drop coverage so we default into a single payer plan.  Estimates of those employers who would drop insurance if a public plan was offered vary dramatically from 5% of employers to over 70%.  If your employer drops coverage because they see a cheaper opportunity to shift your costs to a public option, the promise that “ you can keep your own coverage if you like it” would not hold true.  For 160M Americans, it is their employer who decides to offer coverage.

8) Reimbursement and malpractice reform – Harmonize Medicare and private insurance reimbursement schedules achieving one reimbursement methodology that rewards higher quality performance and widely distinguishes between those who achieve good outcomes and manage health of the population and those providers who do not.  Offer medical malpractice protection to those doctors who adhere to evidence based medicine making it difficult to sue for malpractice when clinical guidelines are followed.  Baucus plan response: Dead on arrival.

9) Consumption tax on junk food ( VAT for FAT ) Baucus plan response: Silent and unfortunate.  The food industry is getting away as an accessory to the crime of obesity in America.

10) Tax the richest benefit plans at the employee, not insurer level – any individuals receiving benefits that exceed the annual cap will lose their deductibility for benefits above the level of approved cost.  This precludes insurers from cost shifting and acknowledges that insurers having been already subjected to profit caps on their small group, individual, Medicaid and Medicare plans. Baucus plan response: weak and getting weaker as concession are made to unions to exempt them from the taxes that would hit rich collectively bargained plans first and hardest.

11) Means test for Medicare – If we want to keep our Medicare benefits, we will have to pay for them.  Until reforms actually reduce the number of practices that drive waste and fraud in the system, Medicare will continue to devour a large portion of public spending.  Baucus plan response: Silent. Means testing – the increasing of the pro rata taxation to retired Americans who receive higher retirement income – is inevitable.  It is inevitable in this administration that this is coming.

Any final bill will suffer withering attacks from both sides of the aisle.  There is a great sense of urgency in Congress to push reform through before the 2010 mid-term elections potentially restore party balance to the House and Senate and fiscal conservatives regain control of the spending that has increased our pubic debt to an estimated $ 9T in 2009.

The wild west of healthcare remains an untamed landscape where the strong survive and justice does not always prevail.  There are hangings, bank robberies, land grabs, gunslingers, crafty lawyers, rigged decks, carpetbaggers, untamed regions and innocent pilgrims lost forever in the wilderness of bureaucracy.  There are triumphs, tragedies, heroes and villains. However, there is a new sheriff and posse in town and a disgruntled mob is gathering by the courthouse.  They are building a gallows and ready to string up the culprits.  The insurance industry sits in the county jail hoping for a fair trial while other offending parties are out on bail or roaming free.

The problem is trying to identify the real culprit.  The solution is neither as dire as the dime store depictions of the hard right with their catastrophic warnings of death panels and wholesale rationing nor is it as simple as expanding care for all and finding the money to do it by keeping “insurers honest”.  Whoever drives this change must be challenged to offset needed access to the uninsured with legitimate, difficult dollar for dollar reductions in cost. We cannot allow any plan to pass through Congress that takes out a second mortgage on our children’s fiscal future.

The taming of healthcare is like the domestication of the real west – sacrifices need to be made by people who understand that the integrity of a generation is defined by how much better we leave the world for the generation that comes after it.  We want our children to have a chance to meet or exceed our standard of living.

At this rate, unless we all own the problem and quit defaulting into fear based sound bites or idealistic nonsense that cannot be supported with hard dollars, we could end up in a fiscal Little Big Horn. We must push our legislators to move thoughtfully to adopt reforms that impact all the various stakeholders or this may become a Greek tragedy where we suddenly realized we lynched the wrong guy, let many accomplices off with little or no consequence and corrupted the future we were purportedly trying to protect.

Cat’s Cradle – Untangling the US Healthcare system


Should H.R. Stand for Health Reform?

Should H.R. Stand for Health Reform?

By Michael Turpin

There is a story of Winston Churchill addressing an exhausted and beleaguered group of young RAF pilots during the height of the Battle of Britain.  As he surveyed the demoralized men who had logged so many combat hours and had witnessed friends die in battle against a superior Luftwaffe, he stood silent and allowed a heavy pregnant pause to fill the air.  Churchill turned to the pilots and posed just two questions:

“If not you, than who?  If not now, then when? “

The primary purchasers of healthcare for over 180 million Americans are human resource and benefits professionals. The job description for most HR and Benefit professionals is managing human capital.  These increasingly difficult jobs strive to achieve a harmonic convergence of employee attraction, retention and development that leads to growth in revenues and profit.  Yet, when faced with increasingly inflationary healthcare costs and fewer choices to mitigate them, employers are increasingly taking the path of least resistance – passing on rising costs to plan participants rather than confronting more deeply embedded drivers such as poor lifestyles, lack of consumerism and a reluctance of stakeholders to be held accountable.  It’s time we grab our national health crisis by the folds of its own fat and force fundamental change. It is going to ultimately fall to human resource, benefit and other business leaders to deliver some tough messages to stakeholders who have failed to solve this crisis.

As we follow the healthcare reform debate in Congress, the silence from many employers has been deafening. The genesis of true market-based reform can only occur at the level of the employer. HR and benefits leaders must exert a level of influence over the debate. As we enter this era of tough love and economic survival, it’s time for those who are most experienced to speak up.  HR and benefits managers should consider the following eight steps as a means of seizing the high ground in driving market reforms in healthcare.

1)    Advocate “loss control for healthcare” – Most smaller and mid-sized employers feel they have little leverage or control over their healthcare costs.  Ironically, these same individuals are active and aggressive in managing the costs of occupational health through workers compensation loss control programs.  If clinical industry benchmarking data indicates that 6% of a workforce is normally diabetic and your claim data suggests less than a 2% incidence of diabetes within your claims, you may want to focus on determining whether you have a higher rate of undiagnosed illness using health risk assessments and predictive modeling instead of blindly assuming that your loss experience is tracking more favorably than industry norms.  You must design value based plans that remove barriers to care and encourage prevention. It is time we develop strategies to drive non-occupational health management as a course of business.  Call it “wellness”, “productivity improvement” or “presenteeism” – it is all about improving the health of our employees and their families.  The days of fencing with finance over the return on investment of a healthy workforce must be replaced by a corporate commitment to improve workplace health.

2)    Have an opinion – Too many HR and benefit industry professionals do not express their opinions about what needs to change.  Get involved in industry associations.  A friend who runs a major employer coalition in a large US city confided to me how difficult it was to get HR and benefit professionals to participate in roundtable discussions with insurers, hospitals and other key stakeholders.  Call it apathy or a lack of bandwidth. The absence of employers (particularly hard hit mid-sized and smaller employers) voicing strong opinions about how the next iteration of healthcare should evolve in each market creates a void that may soon be filled by politicians and academics who have a less pragmatic understanding of the irreversible downstream consequences of radical reform.

3)    Insist that double digit trend increases are unacceptable – For insurers to continue to deliver core trends in excess of 8% and fully loaded trends well into double digits indicates that payers have not delivered on promises to offer lifestyle changing medical, disease management and claims management impacts. Insurance company underwriting and trend setting practices are an opaque alchemy.  Any vendor who purports to offer health plan management services should have their remuneration tied to managing your medical trend.  In the final analysis, trend drives cost.   If the best that the for profit and not for profit healthcare industry can offer is double digit increases, it deserves to be replaced by an alternative system.

4)    Force the C Suite to get help amplify your message– Senior management, finance and HR must work in partnership to assess risks, seek to eliminate and/or mitigate them, determine which risks should be retained through self insurance and which should be defrayed through risk transfer.  The days of treating insurance renewals like the purchase of a car – “If they get to 10%, tell them we will renew.  Otherwise, put it out to bid” – must be replaced with a more thoughtful year long discussion on claim cost drivers and ideas to mitigate near term and longer range claim costs.  Benefits are an investment, not a commodity.

5)    Understand cost shifting is not cost containment – Managing healthcare expenditures does not mean merely cost shifting increases to employees.  It means engaging and communicating with employees around cost drivers, lifestyle obligations and plan changes that are designed to improve health. Many employers opt for open access networks allowing employees the ability to bypass primary care in favor of more expensive specialty care self-referrals.  These paternalistic designs limit disruption but drive higher medical inflation which in turn, requires more cost shifting to employees. With new claims and episode of care data helping to designate providers who deliver higher quality and lower cost outcomes, we can design a new healthcare system around superior providers and higher quality outcomes.  We can focus on rewarding primary care providers for keeping people healthy instead of bankrupting our system around a legion of medical specialties that are exponentially growing to serve the needs of tomorrow’s chronically and catastrophically ill.

6)    Develop a plan – When was the last time your broker or consultant sat down with you during your budget cycle and helped develop your cost assumptions for the coming fiscal year?  Every 100bps of medical trend saved translates into dollars contributed to earnings, shareholder value or private equity owner returns.  HR and Benefits can been seen in a much more strategic light when a plan is developed and followed – particularly one that drives so much annual cost and increases disproportionately to all other corporate costs each year.

7)    Participate in provider negotiations – Insurers are often maligned for their business practices.  While health plans are clearly focused on shareholders and profits, they are critical partners to managing medical trend.  Most insurers privately confide their lack of confidence that employers will support them if they get into a major fee dispute with a large hospital system or medical group. Larger hospital systems are banking on the fact that employers will not tolerate the noise from employees resulting from the loss of a major healthcare system from their network.  This lack of solidarity forces the insurer to agree to pay larger fee increases in contract negotiations – leading to higher medical trends for the employer.

8)    Calculate broker value as outcomes divided by cost -.  There are 28,000 consultants, brokers, financial advisers and agents delivering advice on healthcare to employers across the US.  Like any industry, there is wide variability among intermediaries.  Many of these middlemen are reactive, focusing on annual plan marketing, issue resolution and administrative support services for HR. In the end, the calculus of determining service value should be outcomes divided by cost.  If you cannot measure outcomes (e.g. year over year trend mitigation, claims and vendor performance management) and you do not know what your broker or consultant charges, it is impossible to determine the value of services.

The greatest single asset we possess in American business is our workforce.  HR and benefits are the ombudsmen and advocates for these human resources and must use benefit plans as levers to drive productivity and process improvement.  Sounds like a big responsibility?  It is.  While HR and benefit leadership may seem thankless in these dark days of recession, rising medical costs, declining profits and layoffs, it can be a highly rewarding platform for those capable of elevating themselves to the role of business leader – helping ensure the personal health of employees, their families and ultimately their company.