Blog Featured on Health Leaders Media Podcast

I was interviewed last week by Les Masterson, senior editor of Health Leaders Magazine, for his podcast.  This is the URL for the podcast.   Les interviewed me based on this posting, from March 1 on "The Future of Health Plans." 

Moving Beyond Fee For Service (Part Three of Three)

In the previous two posts, I reviewed perverse incentives of fee for service payment in health care, and discussed some of the key elements to make a transition from fee for service operationally an politically feasible.   In this post, I will examine four efforts to provide a platform to pay something other than straight fee for service for health care.


  1. BCBSMA Alternative Quality Contract

In 2007, Blue Cross Blue Shield of Massachusetts announced its “alternative quality contract.”  The contract requires groups of physicians (and generally their affiliated hospital) to accept a “standard global budget” (a.k.a. capitation), and accept a limit to the inflation rate of this budget. In return, providers are able to earn as much as a 10% bonus for achieving certain quality standards – which would be set for five year periods (and the level of performance required to gain reimbursement would be fixed for the entire five years.)  


BCBSMA initially had difficulty recruiting provider organizations for this program, although they have successfully recruited more groups to this contract over the last few months.    Here is a link to a presentation from BCBS. 



PROMETHEUS  has designed evidence informed case rates for a limited number of types of episodes. Providers would agree to accept as payment in full an amount that would support all evidence-based care.  This would be calculated in part by determining the level of potentially avoidable complications – and funding improved reimbursement, increased evidence-based care, and savings for employers out of these avoided complications


Pilots began last month, and will pay fee for service up front, with a reconciliation at the end of each year where providers would gain upside, but would not take “risk” on downside.  An advantage of paying for episodes is that this does not discourage providers from caring for those with serious illnesses.  However, the payment system is not “simple,” and it won’t be easy to extend this to a substantial portion of a practice.  A substantial amount of medical care, especially complex care of patients with multiple comorbidities,  will not fit easily into this model.

PROMETHEUS gained substantial funding from the Robert Wood Johnson Foundation, and has found a number of employers and health plans very interested in piloting this payment method.   (Disclosure: I served on the PROMETHEUS design team)

  3. Patient Centered Medical Home

Patient Centered Medical Home  would pay providers a fixed fee in exchange for providing increased patient coordination, in addition to paying fee for service for all medical care delivered.  There is huge interest from the provider and the employer community for this concept, and a few pilots suggested cost savings that could justify incremental payments.    There is also concern that this model might exacerbate the shortage of primary care physicians, and that larger implementations will fail not replicate the savings demonstrated in the small pilots.


Patient Centered Medical Home blends fee for service and capitation, and might help physicians think of their panel as a population, rather than feeling responsible for patients only when they have an appointment scheduled.


  4. Multispecialty Group Practice

Historically, many multispecialty group practices have the breadth of practice which makes accepting a capitation easy.   Some were founded as the delivery portion of staff-model health maintenance organizations, and others have tight ongoing relationships with one (or more) health plans.   Most are affiliated with hospitals.


Interestingly, Medicare Advantage plans are a major source of capitation for many multispecialty groups, and Medicare Advantage plans are under major pressure from Congress because of studies suggesting that Centers for Medicare and Medicaid Services (CMS) is overpaying by 10% or more.  There is some evidence that multispecialty groups offer better outcomes than a traditional medical community with independent physicians in small practices. Many community health centers are similar to multispecialty groups, and many also are well-equipped to accept bundled payments.   “Free care” patients are actually the extreme of capitation – with a payment rate of zero.


Health care reform is more likely to succeed if it includes payment reform, and diminishes the prominence of fee for service incentives.  But the current system works well for many of its participants, so this transition won’t be easy.  

Moving Beyond Fee For Service (Part Two of Three)

In the last post, I reviewed some of the perverse incentives of fee for service payment for medical care.   In this post, I will talk about some of the key elements to a transition away from fee for service.   In the final post in this series, I will examine four efforts to provide a platform to pay something other than straight fee for service for health care.


 Even if fee for service payment doesn’t encourage the most integrated, high value care for our patients, there are good reasons that fee for service endures (and indeed made a substantial rebound after many capitation efforts foundered in the late 1990s).


1)      The current level of organization of ambulatory providers is not well suited to accepting capitation or bundled payment.  Small groups should not take bundled payment or capitation, because their numbers are small enough that impressive success or ignominious failure might be due to chance, rather than actual clinical performance.

2)      Risk adjustment has historically been inadequate, encouraging providers to be reluctant to recruit or retain the sickest and most needy patients.  It’s less expensive to take care of healthy patients than very sick patients, even with very impressive care coordinatioin.

3)      Many capitated health plans, especially those in California, paid provider organizations a percent of total heath care premium.  Over the years the health insurance plans were willing to sell insurance for too low a premium to offer sustainable capitation rates. 

4)      While fee for service might be suboptimal as the major payment mechanism, there are good reasons to pay fee for service for evidence-based services that are historically underutilized.  For instance, we would not want to see the cost of human papilloma virus (HPV) vaccine ($360 per course, indicated for all young women) built into a capitation, as this would discourage aggressive provider efforts to deliver more of this vaccine.    

5)      The physicians who are big winners in capitation are relatively quiet about this, for fear their capitation payments would be cut. The physicians who are big losers can’t shut their mouths – giving the impression that physicians all hate capitation.


How could we move toward making capitation politically acceptable, possible to operationalize, and make it more likely we will improve care rather than make care worse in the transition?


1)      Encourage consolidation of ambulatory practices, so that there are the critical mass of physicians more likely to be able to accept bundled payments.  Current efforts to encourage or even force adoption of electronic medical records has the impact of discouraging solo or small independent practices, for which these systems are usually unaffordable.   Government can do this through differential payment to those providers who have greater infrastructure (which are more likely to be larger practices). 

2)      Not offer “cost of living” increases in fee for service reimbursement, making bundled payment more attractive to providers.

3)      Continue to invest in robust risk adjustment – so that the sickest patients are not harmed by a transition away from fee for service

4)      Fee for service generally increases access, so efforts to move to a bundled system will need to measure impact on access and incorporate incentives to maintain or improve access.

5)      For bundled payment to have a substantial impact on the delivery of care, bundled payment must represent a critical mass of total reimbursement. That’s a challenge, since for many adult physicians Medicare is the largest payer, and there are structural impediments to Medicare offering payment other than fee for service.

6)      To protect patient access, I believe that it’s optimal for bundled payments or capitation to represent less than the entire practice revenue stream. My experience in a multi-specialty group with about half capitation and about half fee for service was excellent – the group did not try to “churn” or increase rate of service because of the large capitated base, but strived to increase access to benefit from fee for service patients.  Patients individually went back and forth between capitated and fee for service plans, so there was no practical way to discriminate.  I don’t know what the optimal mix is, but policy-makers shouldn’t fret about a portion of ambulatory revenue remaining in fee for service.

7)      Any type of bundled payment will need to be a work in progress.  Standardization will be required, but we will need flexibility for bundled payments to change as we gain experience with them.  We will also need to change payments with the advance of medical knowledge.  We wouldn’t want to retain elements that encouraged delivery of certain services by carving them out of a capitation, for instance, if the medical literature revealed that those services did not benefit patients.  

8)      It will be critical to avoid imposing large income losses on physicians immediately.  This will constrain the cost savings possible, but will make it les likely that providers who would be net losers would sabotage the transition.

9)      The new payment system will need to be simple enough that it can be explained in a paragraph or less.  Payment methodologies that require hundreds of pages of rules are not likely to be transparent.  There is a tradeoff here;  a simple payment system will not include all the different adjustments that many would like.  

Fee For Service: The Problem (Part One of Three)

Commentators ranging from leaders of provider organizations, to academics to health plan executives  to government administrators have focused on fee for service payment methodology as a major cause of health care inflation.   Fee for service really does encourage too much, and I’d like to share a metaphor.


Imagine if we paid Toyota not for a finished car, but by the bolt.  You can envision an automobile brimming with bolts just like minivans are brimming with cupholders.   The bolts would add cost, add weight, and they might be ugly.  But worse still, each bolt is a potential point of failure.  You might catch your clothing on a bolt – or a bolt might loosen and cause noise or even mechanical damage.  The fee for service system that encourages us to do too many uncoordinated procedures encourages us to deliver extra visits and extra diagnostic tests.  Each of these is costly and takes away from our patients’ productive time.  Worse still, each extra step we put into a patient’s care adds handoffs, decreases reliability, and increases the chance of medical error.   Just like those extra bolts in the automobile, unnecessary uncoordinated care puts costs too much, and also puts our patients at risk.


Some examples of fee for service payment at work:

1)      1. Disease Management:  There is good evidence that provider-based disease management interventions can be quite cost effective.  However, hospitals across the country have made initial investments in disease management during good times, and have pulled back when it became clear that preventing hospitalizations might be a social good, but was costly to hospitals unless they faced a shortage of beds for high-margin elective care.

a.       University of Pennsylvania canceled its dozens of disease management programs in the late 1990s when it became clear that the money they were saving was lost revenue for the system.  (Linkto this is Harvard only, and the article is Burling S. Ounce of prevention proves a costly cure. Philadelphia Inquirer. 1999 Nov 29. I cannot find this article in publicly-accessible web, but email me if you'd like a copy)

b.      Beth Israel in New York cut out its diabetes disease management programs abruptly when it made the same discovery. 

2)     2. Imaging is increasing at a much higher rate than all other medical services.   The fee for service system, coupled with very high margins on a per test basis, encourage excess investment in imaging technology.  Once the investment is made, utilization is likely to increase.

3)      3. There is little coordination among providers in most medical communities, leading to repeated laboratory and other diagnostic tests.  Regional health information exchanges can help prevent this, although most RHIOs are having a hard time finding funding (since those duplicating the tests are generally being paid handsomely for this) 

4)      4. Many providers insist on “decoupling” visits. For instance, a patient might be asked to return for a follow-up visit to discuss a laboratory or imaging finding, or a patient might be instructed to make a follow-up appointment for a procedure (such as ear wax removal or minor dermatologic procedure) to allow for higher billing than if this procedure was performed at the time of the initial visit.   “Max-packing,” or dealing with all of a patient’s issues at today’s appointment, has been shown to improve access and adherence, and can save valuable patient time and effort.

a5    5 . There is also evidence that the current fee for service structure does not reflect what we actually value from health care.  Distortions in market prices persist, such as the national Medicare CPT code fee schedule.  Once a price for a service is set, it is rarely adjusted to reflect the evolving market for competing services.  Newer, cheaper-to-produce innovations in delivery or technology do not lead to lower prices;  prices are not changed if a procedure is found to be ineffective.   This engrains current practice patterns and disengages payment from what evidence suggests should become the standard of care. As the private market tends to follow Medicare's lead, distortions in fee schedules are propagated throughout the system. 


         Fee for service has its problems, but it also has its adherents.  Small, independent practices have a hard time accepting any type of bundled payments – so large swaths of the current delivery system are not optimal for capitation, episode payment, or other methods of bundled payment.  As long as it appears the fee for service system is sustainable, it will be very difficult to move to a more integrated payment system. 


There is an emerging consensus that the current system is not sustainable – which opens the door to payment reform that moves us away from fee for service.    I have two upcoming posts on this issue – the next will detail some of the requirements to make a transition operationally and politically feasible, and the last will review some of the current efforts to transition from fee for service.

 (Thanks to Cecilia Gerard, graduating from Harvard School of Public Health this spring,  for valuable comments and adding to the text of this post)



Obama Administration Suggests the Veterans Administration Should Bill Private Insurance

The Washington Post reports today that the Obama administration suggested that the VA could save a half billion dollars annually by billing private insurers for the cost of treatment of veterans for service-related disabilities. 

This is an impressively bad idea.   Some private insurers might insist that veterans get treatment "in network," and the VA specializes in the care of service-related injuries, while many contracting hospital facilities do not.  This could compromise quality of care. 

Further, this would not "save" a half billion dollars - it would merely transfer the cost to the private insurers, which would therefore have to raise their rates to cover this new cost.  The results could be especially devastating to self-insured employers who lost the service of their loyal employees to the military, and then got socked with a big bill for treatment of war- or service-related disabilities.

Congress has apparently already rejected this idea.  Good.

Massachusetts Faces the Bill for Covering the Uninsured

Yesterday, the New York Times featured front page coverage of Massachusetts’ health care reform.  The effort was lauded as “boldest state health care experiment in American history” for reducing our uninsured rate to 1/6 of the national average.  The article also noted that there is currently a commission reviewing options for payment reform, and that the state can only afford near-universal coverage if health care spending increases are moderated.    


Yesterday’s Boston Globe had an op-ed piece by Jim Mongan, the CEO of Partners, who said four efforts would help us control health care spending.

1)    Transition payment away from “fee for service.”   Of course, this won’t be easy to do – since much of our delivery system is fragmented and providers will have a difficult time accepting (and dividing up) bundled payments.  The Massachusetts payment reform commission is taking this seriously, and the local Blue Cross Blue Shield plan has an alternative contract that has a “standard global budget,” otherwise known as capitation.  I’m enthusiastic that this is a real key to reining in health care inflation, but there are a lot of devilish details to work out. I’ll talk in a future blog about some critical issues in the conversion from “fee for service” to some type of bundled payment.

2)    Better use of healthcare information technology.  There is a real debate about the impact of HIT on costs, and an op-ed in the Washington Post  points out the lack of empiric evidence that electronic medical record really lower cost or improve quality.  I can’t imagine practicing in an environment without an EMR, but I wouldn’t want to count on the associated cost savings.

3)    Disease management for high risk patients.  Medicare’s randomized control trials yielded encouraging results in terms of quality, but disappointing results in terms of net savings.  We need to get better at identifying patients for disease management programs, and make these programs much less expensive.

4)    Comparative effectiveness research.  I’ve covered this issue in an earlier blog. We should clearly invest in research in comparative effectiveness, but the cost-savings will depend upon how we use the results.

I’d like to add a fifth suggestion to help control medical costs, which is outside of the medical care realm.  We should invest in improving the overall health of our population.    Let’s be honest, we smoke too much (17% of adults in Massachusetts – fewer than the national average but still far too many), we don’t exercise enough, and we weigh too much.  We need to rethink tax and farm subsidy policies to discourage tobacco use and extra calories on a national level.  On a state level, we need infrastructure investments in “built environment” and zoning changes to make it easier to exercise.  As spring is arriving, I’d like to see some shovel-ready bike paths. And of course hospital executives would like to see lower spending on double-wide beds.


Payment reform really will be key, though – and there are two good times to do payment reform. The first is when there is a surfeit of “new money,” so no one has to lose. The second is when most providers believe that the current system is unsustainable, and are fearful that if they don’t come to the table they might lose even more.   That’s where we are now – so it’s a good time for some real payment reform.  

Should We Set Goals?

The Boston Globe had an interesting article yesterday on academic research in the business literature on goal-setting. Academics at Harvard, Northwestern and University of Pennsylvania recently published a paper called “Goals Gone Wild.” (note that free signup is required to download 28 page research paper, which is entertaining and informative reading)

“Goals Gone Wild” recounts many instances where clear goals tripped companies up, causing lost reputation, lost profits, corporate bankruptcy, and even deaths.   At Sears Auto Repair, stretch goals for revenue led mechanics to bill for work not needed or performed. At Enron, the goal of maximizing revenue led to managers ignoring profitability.  Ford set a goal of a new car that was under 2000 lbs, cost less than $2000, and was available for 1970 model year, and the company produced the self-immolating Ford Pinto which cost 53 lives.  Goals can encourage cheating (Chicago teachers penciled in student answers on a high stakes test in Freakonomics), and might also inhibit learning (air traffic controllers with straightforward goals were less likely to develop new ways to address safety concerns). 


The authors (Ordoñez, Schweitzer, Galinsky and Bazerman) point out that goal setting can be harmful because goals can be

·        Too specific

·        Too narrow

·        Too numerous

·        Too challenging, and

·         Have inappropriate time horizons

What does this have to do with managing health care costs?


I spent a number of years designing and negotiating “pay for performance” contracts, and I’ve also designed and implemented physician compensation systems. This article made me think critically about the work we’ve done to create the right goals and the right incentives in health care.


First, let’s examine physician compensation. On a system-wide level, we have a fee for service payment methodology which accomplishes exactly what we would expect – the system pays for more units of service, and we deliver more units of service.   In physician practices, compensation is generally on the spectrum between fixed salary and entirely productivity – and we see higher productivity when this leads to higher physician income.  That’s good, to the extent that patients value access, and we don’t have enough of many types of doctors.  That’s bad, though, when a patient has to return to a rheumatologist to review a (normal) x-ray since the physician insists on a billable office visit when there is no incremental value to the patient.  


I have heard from many physicians that any effort to develop a “perfect” compensation system is fruitless, since physicians should be driven by professionalism, not financial incentives.  The answer, as is often the case, is the middle ground.  Financial incentives alone don’t drive performance – and  the combination of appropriate pay, the right resources, and professional satisfaction are all critical to delivering the right care to our patients. 


The authors of “Goals Gone Wild” note that we tend to understand intrinsic motivation (“I want to provide good care to my patient because that’s why I became a physician”) but we exaggerate the impact of external motivation. (If it was all about the money, absolutely no one would go into child psychiatry.) 


I remember heated discussions about whether “pay for performance” goals should be outcomes (such as diabetic control) or process measures (such as whether or not patients had screening for diabetic kidney disease).   Ordoñez, et al, would have recommended “learning goals” (process measures) rather than “performance goals” (outcome measures).   I believe they would be especially critical of outcome goals if they were possible to manipulate, such as the UK NHS pay for performance system, where physicians can exclude individual patients from their measurement). 


I also remember heated discussions about whether we should have just a few measures to allow us to concentrate on those, or whether we should have a broad range of measures to be sure enough patients were benefiting from our efforts.  I argued for a limited number of measures a few years ago, and have more recently migrated toward preferring enough different measures in pay for performance to encourage system redesign.  “Goals Gone Wild” reminds me of the hazard of having too many goals. 


Goals are clearly a good idea in some circumstances;  Ordoñez et al use a medical metaphor, and suggest we should  “conceptualize goal setting as a prescription-strength medication that requires careful dosing, consideration of harmful side effects, and close supervision.”  This is sage advice for those designing physician compensation and pay for performance metrics.





Scrambling to Pay for Health Care (and Foregoing Needed Care)

More news about patients foregoing care due to the national economic malaise.   USA Today has a heart-wrenching article yesterday citing many anecdotes of patients opting to delay needed therapy.  The headline is from a Gallup poll commissioned by the disease management company Healthways showing that surveys of  over 350,000 Americans over the last year show that 21% are “scramble[ing] to pay for medical [and]drug bills.”   The survey also showed that 1/3 of people skipped all dental care last year.

Contrary to what many say, skipping preventive or curative therapy now will not increase overall health care costs over the population, since most medical care we provide is cost-effective rather than cost-saving.   What we will lose is the individual, family, and societal value of the health care that is being skipped.  We are likely to see more preventable morbidity, disability, and even mortality.  See a previous blog on this from last fall before there was general agreement that health care is not recession-proof, and a Washington Post article pointing out how a terrible recession caused huge health care losses in Russia.

This is further evidence that managing health care costs is not important just as a matter of national economic.  Managing health care costs is also critical to maintaining and improving the quality of health care.

Hope vs. Reality: Annals of Internal Medicine on Obama Options

Annals of Internal Medicine has an excellent summary on its web site of the Obama Administration’s options to control health care costs. The article is entitled “Hope vs. Reality”

In essence, the authors point out that the keys to controlling costs are

- Controlling price The US has lower utilization than most developed countries – but dramatically higher costs per unit. Lower prices are not very popular with providers!

- Regulating insurance to decrease underwriting and other administrative costs. Insurance regulation can be very unpopular with insurance plans – see an interesting op-ed piece on this from the LA Times.

- Overall explicit budget caps. Budget caps seem fine in theory. However, they can become very unpopular once people realize that it might be their own care which would be foregone under such a regimen. 

The authors note, as I have in this blog, that the popular “solutions,” including HIT, disease management, prevention, P4P and comparative effectiveness, will only yield limited short-term savings.

"Tontine" Health Insurance: A Misdiagnosis

Two law school professors advocate Tontine Heath Insurance plans in today’s New York Times.   These plans would pay a “dividend” if patients did not use non-preventive services over a five year period, and Baker and Siegelman suggest that this would help overcome the resistance that “young invincibles” have to making a “bad investment” in health insurance.   


I think the authors have misdiagnosed the problem.  Perhaps some young adults don’t purchase insurance because they feel it’s a bad investment; more don’t purchase insurance because it is just too expensive and they have competing financial needs.  Reserving dollars to pay dividends to policy-holders who had no claims would make insurance even more expensive, unless you believe that the potential of a dividend would bring in massive numbers of beneficiaries with few or no expenses, or  would convince policy-holders to forego discretionary treatment. 


Remember that among all adults 19-64, the 50% of patients with the lowest medical bills represent only 3% of all medical costs, so there just aren’t a lot of savings to be had amongst the healthy beneficiaries.  On the other hand, the 10% of patients with the highest bills represent over 2/3 of all medical expenses, and the Tontine scheme would not do anything to lower costs of this population.   I believe that this asymmetry of spending is even more extreme in the 19-29 year old group than in all adults.


In this era of plummeting 401Ks, the young (or others) should not be looking to health insurance as an investment vehicle. In fact, as the life insurance market has shown us, it’s better to separate the core insurance function from an investment vehicle. That’s why term life insurance products are more prudent and have become vastly more common than “whole” life policies that couple life insurance with an investment.


Health insurance, for the young and for most others, should be a bad investment unless you are unlucky enough to have a significant illness.  The social pooling function of health insurance dictates that the premium dollars of the healthy will pay for the costs of caring for the sick.

Silver Lining

There is a lot of sniping at Massachusetts’ health care reform. The fact that the sniping comes from both the right and the left probably means that we’ve done something right in our state, although the combination of continuing health care inflation and the declining economy will make it hard to sustain the increased rate of coverage of Massachusetts residents. In this post, I’ll review some of the critiques of the Massachusetts plan, and offer some optimistic musings about how the “Great Recession” could make it easier to make health care affordable.

This weekend, the Boston Globe offered an op-ed by Susanne King, a western Massachusetts psychiatrist who complained that health care reform failed to meet five critical tests posed by the Institute of Medicine. She noted that health coverage in Massachusetts is

- - Not universal (but we’ve cut the uninsured rate by more than half)

- - Still tied to employment (not clear where the money will come from if employers are out of the picture),

- - Not affordable for patients (admittedly, we have a long way to go – but reform of the individual market is real progress here)

- - Not affordable by society (I agree with the author here)

- - Doesn’t guarantee access (But it takes years or decades to train additional physicians in fields like psychiatry and primary care, and our problems in Massachusetts are not worse than those elsewhere in the country).

On the right, the National Center For Policy Analysis continues its tirade against the Massachusetts law –and ironically cites researchers including Steffie Woolhandler and David Himmelstein, ardent supporters of a single payer system. The complaints from the right and left are eerily similar.

For Massachusetts’ health care reform to be sustainable, the overall rate of medical inflation must come down considerably. I’ve pointed out before that all that medical inflation is someone’s income; therefore, doctors, hospitals, pharmaceutical companies, and others will fight aggressively to avoid losing income. That’s why despite real efforts at reform we usually end up with the status quo.

On the optimistic side, here are some reasons why this might not be as hard as we’ve all been worrying to lower health care inflation. I know that the “Great Recession” has already led to very significant pain and financial and personal losses; I also believe that it will offer a chance to lower medical inflation. Talk about a silver lining!

1) Volume Decreases in Medical Care:

- Informally, my colleagues say that they have seen dramatic declines in elective diagnostic and therapeutic procedures and hospitalizations, though Thompson Reuters doesn't see things as quite so dire. These declines will lead to lower overall medical costs. I wouldn’t be surprised to see some health plans reporting outsized earnings on insured business, too, because actuaries had counted on higher utilization.

- Americans are not only having second thoughts about buying a new car – they’re also thinking twice about their copayments for medications and for office visits. The increased consumer copayments and deductibles will lead to more self-editing of care in 2009 than it did in past years as our perception of wealth declines precipitously. Since most medical interventions are NOT cost saving, foregone medical care will general result in health care savings, although it might also lead to worse clinical outcomes.

- Decreased medical procedures could also lead to increased surplus capacity in the medical system, which is likely to lead to decreased prices

2) Sin Taxes

The Congressional Budget Office doesn’t think that raising taxes on tobacco or on sweetened drinks will decrease the federal budget deficit – but I think that this will have a measurable impact on the total cost of medical care. Tobacco taxes are on the way up, and the relationship between tobacco cost and initiating smoking is irrefutable. A recent study in Colorado Springs showed that acute myocardial infarction in the community went down in just a single year after an indoor tobacco ban. Now that’s medical cost savings! Although I don’t know of a study that shows that raising the price of soda lowers use, I do know that the relative decrease in the price of soda over my lifetime is strongly associated with increased use of corn-syrup sweetened beverages. . We don’t have a great medical answer for obesity besides for bariatric surgery, so any public health approach to decrease caloric intake is welcome.

3) Evidence Based Medicine

- This will take longer, but investing $1.1 billion of the stimulus on effectiveness research could have a substantial impact on medical costs. New drugs and devices are priced based on perceived value, so explicit studies of comparative effectiveness might lower asking prices even before the studies are complete. This is because manufacturers will want positive results from comparative effectiveness studies, and positive results are more likely with lower prices.

4) Decreased Expectation of Fee for Service Revenue

- Many commentators have pointed out that paying fee for service leads to higher utilization, but the health care delivery system is not optimized to pay for meaningful bundles or capitation at this point. The deflationary pressure on prices in general could make fee for service less attractive, which could lead to better opportunities to bundle payments. Of course, much of the delivery system is not at this point especially well positioned to accept capitation or bundled payments.

The Future of Health Plans

It’s been a bad week for health insurers – most of them lost substantial value in the stock market this week after the Obama budget was released, causing investor worry due to lower payments to Medicare HMOs.  Further, the economic funk and rising unemployment will lead to a decrease in the number of Americans insured through the private marketplace, and continuing “buy downs” from comprehensive coverage to policies with higher deductibles and copays.  These plans are also far less profitable to the insurers.


Perhaps the biggest threat to health insurers is the possibility that health care reform could allow those under 65 without disabilities to “buy into” Medicare.   Proponents argue that Medicare has low transactional costs, obtains high levels of provider discounts and offers excellent choice to its patients.  How does Medicare achieve these economies?

(1)Medicare spends less than commercial health plans on administration as a percentage of premium – in part because it need do no marketing to attract enrollees, and in part because the premiums are so much higher for the Medicare population than they are for those under 65 (so administration costs shrink as a percentage of total costs.)

(2)Medicare does not do “network contracting” as private health plans do.  All licensed physicians who have not been convicted of fraud are eligible to join – and to do so they must agree to follow a uniform set of Medicare rules and to accept Medicare reimbursement rates. 

(3)Hospitals have long collected data showing that they lose money on Medicare, and make this up by obtaining high rates from commercial insurance plans.  It’s a classic example of cost-shifting.  If the commercial plans didn’t exist, we would either have to take billions out of our inpatient facilities, or Medicare would have to pay substantially higher rates.  


Today’s NY Times has an article by Reed Abelsonon how health insurers are positioning themselves for health care reform. The article contrasts the approach of United Health Care, which boasts of diversifying its business, with Aetna, which promotes itself as a company that can actually influence the delivery of health care.


Without diversifying out of health insurance, how can health plans add value and continue to prosper in the coming years?


(1)Empower patients

Engaged patients who know about their illnesses and their medical care have better outcomes, and sometimes they even prevent medical errors.  Health plans are excellent at marketing, and know how to get the attention of their enrollees.

(2)Convert vast quantities of data into information to transform health care

Some commentators decry the inaccuracy and lack of timeliness of claims data.  But my experience is that claims information is very complete, since few providers fail to bill for their services. Unfortunately, electronic medical record data tends to be unstructured and is documented differently from system to system.

(3)Promote innovative payment methodologies for providers

The current predominately fee for service reimbursement encourages additional units of service, and does not encourage coordination of care.   Medicare is statutorily mandated to pay fee-for-service, and based on its size alone would have a hard time moving ambulatory care into episode based payment or capitation.  Health plans have to compete with each other for patients and for provider networks, and the existence of multiple competing insurers makes it more likely we will see innovation in payment methodology.  

(4)Develop selective networks

Medicare is too big to develop exclusive networks, and the political fallout from excluding a major hospital or a large group of physicians from Medicare would be huge.  Health insurers can develop selective networks for a broad range of patients, or can develop selective networks for narrow groups such as patients who require organ transplantation or inpatient behavioral health care.   Multiple competing insurers are key to this type of innovation.


Medicare made some substantial strides in promoting transparency over the last few years   But health plans have put dramatically more information on the web about provider quality.  Health plans should make their data available to state agencies or collaborative to do reporting, and should continue their efforts to educate their members about where to get the highest quality, cost-effective care.

(6)Promote evidence-based care

We have adequate evidence of the efficacy of too few medical decisions. But even where the evidence is in, our health care system remains unreliable.  We treat few diabetics to blood pressure, blood sugar, and cholesterol goal, and we send patients out of our offices with blood pressure which is often too high.  We miss vaccinations and cancer screenings. We give patients medications that are dangerous in combination, and medicines that are dangerous in the context of an individual patient’s coexisting medical illnesses.   Health plans should use claims and other data to identify opportunities to improve care for individuals and populations, and implement programs to alert providers and patients to opportunities to deliver better health care.



Health care reform will mean enormous changes – and much disruption in the health insurance market.  There will be plenty of opportunities for innovative health plans to add value and use their expertise to improve the quality and the cost-effectiveness of care.