Every physician understands the concept of side effects. They deal with them every day. In some cases, the side effect of a medication may be mild or only slightly inconvenient. In other cases, the side effect or possible complication could be very serious. That’s why doctors explain the risks and potential side effects of various treatment options to their patients. So what does this have to do with health care reform? Well, I was thinking the other day that there hasn’t been much discussion about the very real side effects of health care reform. I don’t think that the general public (and physicians for that matter) truly understand how the new world of health care reform is going to affect them in some very negative ways. Now I’m not talking about the political spin of death panels or anything like that. I am talking about a significant market place shift and how the insurance companies are likely to respond to this new environment.
In order to explain this in a way that everyone can relate to, I want you to imagine that your rich grandfather has recently passed away. In his will, your grandfather leaves you controlling interest in a local HMO. So you wake up and find yourself the new CEO of Premier HealthCare, a local HMO that covers 100,000 people in your area. In 2 years, the major parts of health care reform will take effect. You meet with your management team and begin planning for how you will operate in this new world, specifically, with the new State Health Care Exchanges. What follows is the input and advice that you receive from your management team.
Financial Review: Your CFO explains to you that the company is doing well for a small, local HMO. Your administrative costs are under control at 12% of revenue. Your Medical Expense is coming in at 85% of revenue, which is producing a profit margin of 3%. High fives all around for doing great and making a whopping 3% margin.
Sales and Marketing: Your VP of Sales tells you that growth is good even in a bad economy. Your membership is up by 5% this year. Again, pats on the back and high fives all around.
Medical Management: Your Medical Director says that things are going well. Your medical trend is under control for the time being.
At this point, you’re feeling pretty good about taking over this business. Then comes the bad news. The team now turns their attention to the future and what health care reform will mean for the business. Your CFO and Director of Underwriting give you a quick lesson in insurance theory, risk and adverse selection. You are told that 5% of your members (or just 5,000 people) consume 50% of all of the medical expenses you pay out. These are primarily chronically ill people. Then they walk you through some numbers that reveal some terrifying news: If you add just 500 more chronically ill members, your entire profit margin will be eliminated. While this information is sinking in, they explain that part of the way you mitigate this risk is through things like pre-existing condition exclusions and lifetime benefit maximums. Unfortunately, these things have been eliminated under health care reform, so your company will be forced to carry even more risk.
Your VP of Sales tells you that the company has been reasonable with physicians and hospitals in its contracting efforts which has allowed you to have a very large network, but is also producing higher costs and premiums in the market place. She is concerned about being priced higher in the Health Care Exchange environment. Meanwhile, Medical Management is worried about their ability to control costs in the new environment and is warning you that utilization could spike in the future.
Finally, your CFO reminds you that under the new health care law, you are required to spend at least 85% of revenue on health care claims which means this last year of a 3% margin is the very best you can ever achieve unless you can figure out a way to reduce administrative expenses (i.e. cutting jobs). After this discussion, there are no high fives or back pats. You begin to wonder if they serve alcohol at these meetings. Now the meeting shifts to plans for the future. How are you going to survive in this new environment, and what strategies must you put into place to make sure the company your grandfather left you is still around in five years?
Before you begin your strategic planning, your Government Affairs Director describes the new Health Care Exchange environment that will be put into place in just 2 short years. He tells you that Health Care Exchanges are like big buying clubs with government regulation. The benefit plans will be defined by the Exchange and will be the same for everyone. So your company will not be able to differentiate itself by having better benefits nor will it be able to control costs by having less rich benefits. Large numbers of members will be in the exchange and this will include both individuals as well as employer groups. They will be able to select any carrier in the exchange and the other thing that will be different is the price and the carrier’s network since benefits are the same. At this point you begin to understand. In order to get more members you need to have a bigger network of providers and a lower cost than your competitors. You think you have this figured out. But wait, your CFO now starts to talk to you about the concept of adverse selection.
The CFO reminds you that it’s the very sick people who consume all of the health care dollars, so the trick is to get all the young healthy people to pick your plan and have all the sick people pick your competitors. The problem is that if you get too many sick people, that’s called adverse selection and it will kill your company. So how do you just get the healthy people to join your HMO? Well to answer that you need to understand how people pick an insurance company as well as the concept of price elasticity. There are two basic types of consumers in the health care insurance market; the price shoppers and the network shoppers. The price shoppers are typically younger healthy individuals who don’t think they will ever use their insurance but are purchasing because they are afraid of catastrophic issues or because of the individual mandate. These are the people you want in your health plan. They don’t care how big your network is or if you have the premier cardiology group in your network because they don’t go to the doctor.
The other type of member is the network shopper. They know they are going to use their insurance because of their current health condition or age. They probably already have a relationship with not only their primary care physician but also one or more specialists.
These members are typically high utilizers of health care, and they want to know that their doctors or hospitals are in the network. These are exactly the type of members that you don’t want to attract to your HMO. With this information in hand, the meeting now moves to setting a strategy for your new business. All eyes are on you, and you need to decide how you are going to move forward under the new rules of health care reform. You realize that they key to success is to only attract healthy price shopper members who don’t care about network while at the same time controlling and reducing your administrative expense so that you can hit the 85% requirement. As you think about all of this, the direction and strategy for your success becomes clear. You need to reduce your administrative expense, which means reducing your staff. Since you don’t want to reduce staff in sales or member services you propose cutting staff in areas like provider relations. You also need to reduce your medical expense so that you can be price competitive and attract the young and healthy price shoppers. This can be done by reducing what you pay to your physicians and hospitals and by eliminating the high cost providers. Eliminating high cost specialists and hospitals also has a side benefit of helping you with adverse selection. Let’s say there is a patient with advanced Rheumatoid Arthritis. If you don’t contract with his Rheumatologist, he isn’t going to select your plan. Another patient with MS who is receiving over $40,000 of Tysabri infusions every year won’t choose your plan if their Neurologists isn’t in your network. The young price shopping members could care less about your Rheumatology or Neurology network because they don’t need either of those specialties and probably don’t even know what a Rheumatologist is.
That’s it! The strategy for success is clear to you. You propose a strategy that involves fee schedule reductions, hard negotiations, termination of high cost (read high quality) specialists and hospitals, followed by the termination of many of your employees in areas like provider relations to reduce your administrative costs. The result will be a lower cost network that will appeal to the price shopping younger, healthy population that you want to attract. The negative side of this strategy is a smaller network so less choice for your members, the loss of some of the highest quality providers, and a reduction in the service you offer to your providers and members because of the staffing cuts. However, these are all acceptable side effects to make sure that your organization can survive the changes that are coming from health care reform. With the announcement of this new strategy, you are congratulated by your management team, and once again there is much back slapping and high fives all around.
Okay, now back to reality. Think this is simply an interesting story? Don’t think this could or would ever happen? I hope you are right, but I wouldn’t bet on it. I am already seeing signs from various payers that they are either getting ready to implement strategies just like this one or they already have begun implementing these strategies. I am seeing payers draw very hard lines in the sand when negotiating, including actual network terminations. Right now in North Carolina, Aetna HealthCare is out of network with Rex Hospital in Raleigh and the University of North Carolina Medical Center in Chapel Hill. I have had one managed care executive tell me point blank that in the future, they expect to have a smaller network of lower cost providers and that the days of choice ruling are over. I am seeing several payers approach negotiations with a “take it or leave it” approach. I am seeing smaller payers (3rd or 4th in market share) demanding most favored nations’ language to guarantee that they have the same rates as the largest payer in the market. I am also seeing payers upgrade their ability to profile physicians based on costs performance. Finally, I am seeing very large payers who are profitable and growing talk about layoffs and shrinking their companies.
Now, is it just me, or do these strategies seem to support the very scenario that I outlined above? This brings us back to the original question. Are there negative side effects of health care reform? Yes, I believe there are. While we all try to figure out what the health care reform law will do and what it won’t do, I believe we also need to be very aware of the negative side effects. As all physicians know, sometimes the side effects are worse than the actual problem. My fear is that this could be one of those times.
In order to explain this in a way that everyone can relate to, I want you to imagine that your rich grandfather has recently passed away. In his will, your grandfather leaves you controlling interest in a local HMO. So you wake up and find yourself the new CEO of Premier HealthCare, a local HMO that covers 100,000 people in your area. In 2 years, the major parts of health care reform will take effect. You meet with your management team and begin planning for how you will operate in this new world, specifically, with the new State Health Care Exchanges. What follows is the input and advice that you receive from your management team.
Financial Review: Your CFO explains to you that the company is doing well for a small, local HMO. Your administrative costs are under control at 12% of revenue. Your Medical Expense is coming in at 85% of revenue, which is producing a profit margin of 3%. High fives all around for doing great and making a whopping 3% margin.
Sales and Marketing: Your VP of Sales tells you that growth is good even in a bad economy. Your membership is up by 5% this year. Again, pats on the back and high fives all around.
Medical Management: Your Medical Director says that things are going well. Your medical trend is under control for the time being.
At this point, you’re feeling pretty good about taking over this business. Then comes the bad news. The team now turns their attention to the future and what health care reform will mean for the business. Your CFO and Director of Underwriting give you a quick lesson in insurance theory, risk and adverse selection. You are told that 5% of your members (or just 5,000 people) consume 50% of all of the medical expenses you pay out. These are primarily chronically ill people. Then they walk you through some numbers that reveal some terrifying news: If you add just 500 more chronically ill members, your entire profit margin will be eliminated. While this information is sinking in, they explain that part of the way you mitigate this risk is through things like pre-existing condition exclusions and lifetime benefit maximums. Unfortunately, these things have been eliminated under health care reform, so your company will be forced to carry even more risk.
Your VP of Sales tells you that the company has been reasonable with physicians and hospitals in its contracting efforts which has allowed you to have a very large network, but is also producing higher costs and premiums in the market place. She is concerned about being priced higher in the Health Care Exchange environment. Meanwhile, Medical Management is worried about their ability to control costs in the new environment and is warning you that utilization could spike in the future.
Finally, your CFO reminds you that under the new health care law, you are required to spend at least 85% of revenue on health care claims which means this last year of a 3% margin is the very best you can ever achieve unless you can figure out a way to reduce administrative expenses (i.e. cutting jobs). After this discussion, there are no high fives or back pats. You begin to wonder if they serve alcohol at these meetings. Now the meeting shifts to plans for the future. How are you going to survive in this new environment, and what strategies must you put into place to make sure the company your grandfather left you is still around in five years?
Before you begin your strategic planning, your Government Affairs Director describes the new Health Care Exchange environment that will be put into place in just 2 short years. He tells you that Health Care Exchanges are like big buying clubs with government regulation. The benefit plans will be defined by the Exchange and will be the same for everyone. So your company will not be able to differentiate itself by having better benefits nor will it be able to control costs by having less rich benefits. Large numbers of members will be in the exchange and this will include both individuals as well as employer groups. They will be able to select any carrier in the exchange and the other thing that will be different is the price and the carrier’s network since benefits are the same. At this point you begin to understand. In order to get more members you need to have a bigger network of providers and a lower cost than your competitors. You think you have this figured out. But wait, your CFO now starts to talk to you about the concept of adverse selection.
The CFO reminds you that it’s the very sick people who consume all of the health care dollars, so the trick is to get all the young healthy people to pick your plan and have all the sick people pick your competitors. The problem is that if you get too many sick people, that’s called adverse selection and it will kill your company. So how do you just get the healthy people to join your HMO? Well to answer that you need to understand how people pick an insurance company as well as the concept of price elasticity. There are two basic types of consumers in the health care insurance market; the price shoppers and the network shoppers. The price shoppers are typically younger healthy individuals who don’t think they will ever use their insurance but are purchasing because they are afraid of catastrophic issues or because of the individual mandate. These are the people you want in your health plan. They don’t care how big your network is or if you have the premier cardiology group in your network because they don’t go to the doctor.
The other type of member is the network shopper. They know they are going to use their insurance because of their current health condition or age. They probably already have a relationship with not only their primary care physician but also one or more specialists.
These members are typically high utilizers of health care, and they want to know that their doctors or hospitals are in the network. These are exactly the type of members that you don’t want to attract to your HMO. With this information in hand, the meeting now moves to setting a strategy for your new business. All eyes are on you, and you need to decide how you are going to move forward under the new rules of health care reform. You realize that they key to success is to only attract healthy price shopper members who don’t care about network while at the same time controlling and reducing your administrative expense so that you can hit the 85% requirement. As you think about all of this, the direction and strategy for your success becomes clear. You need to reduce your administrative expense, which means reducing your staff. Since you don’t want to reduce staff in sales or member services you propose cutting staff in areas like provider relations. You also need to reduce your medical expense so that you can be price competitive and attract the young and healthy price shoppers. This can be done by reducing what you pay to your physicians and hospitals and by eliminating the high cost providers. Eliminating high cost specialists and hospitals also has a side benefit of helping you with adverse selection. Let’s say there is a patient with advanced Rheumatoid Arthritis. If you don’t contract with his Rheumatologist, he isn’t going to select your plan. Another patient with MS who is receiving over $40,000 of Tysabri infusions every year won’t choose your plan if their Neurologists isn’t in your network. The young price shopping members could care less about your Rheumatology or Neurology network because they don’t need either of those specialties and probably don’t even know what a Rheumatologist is.
That’s it! The strategy for success is clear to you. You propose a strategy that involves fee schedule reductions, hard negotiations, termination of high cost (read high quality) specialists and hospitals, followed by the termination of many of your employees in areas like provider relations to reduce your administrative costs. The result will be a lower cost network that will appeal to the price shopping younger, healthy population that you want to attract. The negative side of this strategy is a smaller network so less choice for your members, the loss of some of the highest quality providers, and a reduction in the service you offer to your providers and members because of the staffing cuts. However, these are all acceptable side effects to make sure that your organization can survive the changes that are coming from health care reform. With the announcement of this new strategy, you are congratulated by your management team, and once again there is much back slapping and high fives all around.
Okay, now back to reality. Think this is simply an interesting story? Don’t think this could or would ever happen? I hope you are right, but I wouldn’t bet on it. I am already seeing signs from various payers that they are either getting ready to implement strategies just like this one or they already have begun implementing these strategies. I am seeing payers draw very hard lines in the sand when negotiating, including actual network terminations. Right now in North Carolina, Aetna HealthCare is out of network with Rex Hospital in Raleigh and the University of North Carolina Medical Center in Chapel Hill. I have had one managed care executive tell me point blank that in the future, they expect to have a smaller network of lower cost providers and that the days of choice ruling are over. I am seeing several payers approach negotiations with a “take it or leave it” approach. I am seeing smaller payers (3rd or 4th in market share) demanding most favored nations’ language to guarantee that they have the same rates as the largest payer in the market. I am also seeing payers upgrade their ability to profile physicians based on costs performance. Finally, I am seeing very large payers who are profitable and growing talk about layoffs and shrinking their companies.
Now, is it just me, or do these strategies seem to support the very scenario that I outlined above? This brings us back to the original question. Are there negative side effects of health care reform? Yes, I believe there are. While we all try to figure out what the health care reform law will do and what it won’t do, I believe we also need to be very aware of the negative side effects. As all physicians know, sometimes the side effects are worse than the actual problem. My fear is that this could be one of those times.
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