Ian Morrison

We are all very busy building massive accountable care behemoths to compete in the new future. Like medieval fortresses, with lords, knights and serfs aligned under a common flag, these new organizations will dominate the health landscape of the future. Or will they?

A counter trend is one in which payers (employers and health plans) are trying to unlock the value inside these massive fortresses, by identifying a subset of the knights and serfs, who are top quadrant (better and cheaper) than the rest of the organization, and encouraging patients to visit only them. Similarly, new organizations are being formed with health plans in direct partnership with physicians that are prepared to contract for the expensive services of hospitals and specialist providers for (the reduced volume of) specialty services, on an as-needed basis. Welcome to the spot market.

The great Wikipedia, from whence all true knowledge comes, defines a spot market as “a public financial market, in which financial instruments or commodities are traded for immediate delivery.” Willing buyers find willing sellers in real time. If supply exceeds demand, prices go down; if demand exceeds supply, prices go up.

For spot markets to function there must be transparency, real-time information on prices and motivated buyers and sellers who are willing to trade. Doesn’t sound much like health care, does it?

But wait, there are a number of forces that are coming together to create change toward a spot market for hospital and specialty services. These trends may have a big impact on providers and may challenge the movement toward massive accountable care systems.

The Reinvigoration of Skinny Networks

The idea of tiered networks is certainly not new. What is giving the high-performance network new life is the fact that health care costs (premiums and out-of-pocket costs) are now so high that consumers are willing to make real trade-offs between choice and costs.

My colleagues at Harris Interactive recently conducted an elaborate consumer trade-off survey to identify what consumers value most and what they are prepared to trade off to get it. The survey showed that consumers’ highest priorities were (in order): low monthly premiums, high technology such as MRIs (and they see no irony in those two top priorities together), keeping dependents on their plan, maintaining their current physicians, and access to inexpensive generic drugs.

What are consumers prepared to give up? The will give up access to prestigious academic institutions (throwing Cedars, Stanford and the Mass General under the bus in the process) and they will, on balance, give up choice of hospitals and, to a lesser extent, choice of specialists. (The rank order of these preferences did not change across almost all demographic segments including those consumers with chronic illness).

We interpret this survey as showing a greater willingness of consumers (even consumers with high health care needs) to accept skinnier networks than the market is currently delivering. In particular, the current high-performance offerings by health plans have been about only about 3 percent cheaper than the norm. What consumers really want, and what variation research tells us, is that a skinny network with only the high-performing providers could be 30 percent cheaper. Advice to health plans: If you build it, they will come.

Mining Variation

A second major trend favoring the creation of spot markets is the growing interest in variation on an all-payer basis. The Dartmouth Atlas work has shown us for 30 years the unwarranted variation in utilization of services for Medicare patients. Provider density (more specialists means more specialty services per capita) and provider preferences are the key drivers of variation. This rich analysis of service variation is being extended to all payer data sets (including commercial insurance claims data) and exposing similar inexplicable variation. For example, Stanford researchers found that the residents of Clearlake, Calif., have 15 times the rate of coronary angioplasty as those in neighboring Sonoma.

In a wonderful newspaper report on the original Stanford study of this phenomenon, journalist Emily Bazar tracked down some Clearlake patients who had stents inserted and had declined the suggestion from local cardiologists to have repeat procedures, even though they were asymptomatic. The patients told their doctors (in effect): “No thanks, Doc, I’m good, I’ve had enough for now. Two’s my limit…” (See “High Rates of Heart Procedures Seen in Clearlake,” San Francisco Chronicle, Sept. 4, 2011, www.sfgate.com.)

But, even more interesting are the new variation analyses using commercial claims data where price information is included. Commercial insurance prices vary much more dramatically than do Medicare reimbursement rates. As a result, formerly inexpensive geographic areas seen through the eyes of Medicare-only analyses (such as the Dartmouth Atlas) become expensive areas when commercial prices are considered.

So, for example, recent total cost analysis of medical groups in Northern California versus Southern California (conducted by the Integrated Healthcare Association as part of its Pay for Performance Initiatives) shows that Northern California has lower utilization of services but higher prices. Conversely, Southern California has higher utilization of services but lower prices. On balance, Northern California is more expensive: Price trumps quantity. It is the up to 10-fold variation in pricing of specialty services such as imaging, colonoscopies and surgical interventions that is fueling renewed interest in spot market initiatives such as reference pricing.

Reference Pricing Schemes

Reference pricing is a model of reimbursement in which payers pay a fixed price for a service and consumers are at risk for the total costs of care beyond that fixed price. Your choice whether you go to the more expensive provider.

A truly fine health care journalist, Julie Appleby of Kaiser Health News, in collaboration with USA Today, scooped me on reference pricing models in her article of Sept. 22, 2011, titled “Companies Steering Workers to Lower Priced Medical Care.” (Honest, check with my editor; I had this idea in the works for a while for this column.) I will not repeat her great points and the examples she cites, because I agree 100 percent with what she found are the important examples of the phenomenon. Just go read it at www.kaiserhealthnews.org. But, let me just reiterate the key message: Reference pricing can have a powerful effect on providers because it is a purchasing method that engages consumers with meaningful information and incentives at the moment consumers have to choose their location of care decisions.

For example, if you the California Public Employees’ Retirement System member want to pick one of the 45 high-quality hospitals in California that have negotiated a fixed-hospitalization payment of $30,000, there will be no additional costs for your knee replacement. But if you select one of the other 400 odd places in California that do it but do not participate in the plan, you the patient pay the entire difference in cost (maybe $20,000 to 30,000)! That will focus the mind. Lest you say “That’s horrible, patients are being effectively bribed to have hip and knee replacements in some Shell Station in Oakland,” let me tell you that Cedars-Sinai in the south and Stanford in the north are participating hospitals.

Now how many knees do CalPERS members have? Apparently, on average two each, but the annual replacement rates for the entire population is not a huge number. More important than the actual impact on volume is the signal it sends to providers: High price-setter beware. It is but a beginning, a shot over the bow.

Registries

As the idea of reference pricing spreads to other frequent high-cost elective services such as maternity care, orthopedic interventions of all types, colonoscopies and imaging studies, more and more science-based evidence will help patients and providers make better decisions. The creation of registries (large databases that capture information on clinical performance, including patient reported outcome measures) can help identify the high-performing method of care and the providers who deliver it. Cardiology has led the way, but orthopedics, gastroenterology and even oncology will follow.

New evidence will come from the fruits of the research investments being made in comparative effectiveness. While the enabling legislation forbids the use of comparative effectiveness research in making reimbursement decisions in public programs, there is nothing to stop private payers steering patients to high-performing providers, and they would be nuts not to do it.

Leveraged Group Practice

New multispecialty group models may provide a further boost to these spot market trends. For example, Kaiser’s Mid-Atlantic Permanente Medical Group under the leadership of Dr. Bernadette Loftus, has recently rocketed to the top of the charts in National Committee on Quality Assurance ratings. Unlike the mother ship of Permanente in California, Kaiser Mid-Atlantic does not have its own hospitals. Instead, it contracts with willing provider partners for those services.

Kaiser Mid-Atlantic is embarking on a new strategy of medical center hubs that combine sophisticated diagnostic and outpatient surgical services with the capacity to have up to 23-hour lengths of stay. These models could enable Kaiser to internalize an increasing amount of specialty care and may provide them (and others) with a replicable business model in hospital-dominant regions such as the Northeast.

Similarly, Optum Health (the artist formerly known as Ingenix, part of United Health Group) has set the provider world atwitter with its recent purchase of Monarch Health, a very large 2,300-physician IPA in Southern California. The smart people at Optum, in combination with the smart people at Monarch, may very well develop reproducible business models that improve the health of the populations they serve by streamlining care coordination, reducing use of specialty services and hospitalization, and applying business discipline across the revenue cycle. In addition, boutique firms such as Accretive Health are fast-rising stars that bring together HIT, business process and re-engineering assets that can enable provider groups to take risk and produce high clinical and financial performance.

Physician-led accountable care organizations may also provide a new force to reduce demand for hospitalization and specialty services in the Medicare population. While enthusiasm for CMS’s original Shared Savings Program has been underwhelming, we may still see some new entrants who find a way to make a good living by doing less, not more, for fee-for-service Medicare patients. And don’t forget about Medicare Advantage plans that have an even greater impact on demand and that I discussed in a previous column, “Medicare Disadvantage”).

All of these emerging models are not hospital centric, and they could put downward pressure on the overall demand for specialty and hospital services.

Over Capacity

But the greatest potential driver of the spot market may be the emerging overcapacity in health care. It’s true that expanded health care coverage will expand demand for services. And true that we have an aging population, and a seemingly endless appetite for new medical interventions. But Harris surveys of hospital executives reveal an astonishingly high proportion of hospitals planning for expansion (for example 72 percent of hospitals with new construction or renovation plans, 65 percent planning on expanding satellite facilities, and 48 percent adding new surgical or operating facilities). It reminds me of commercial real estate: Every developer thinks his or her office building will sell because tenants will come from the other guy. They can’t all win; it is a zero-sum game.

Many strategy consultants point to the ambitious expansion plans that neighboring competitors have in most markets across the country. The capacity being planned may create over-supply—powerful fuel for a spot market.

Watch This Space

My advice is to watch this trend toward spot markets very closely. A newly released AHA report “Hospitals and Care Systems of the Future” (which flatteringly draws on my Second Curve concept) provides an excellent road map of migrating hospital and health systems from volume to value. But migration toward value, not volume, may also create a perfect environment for spot markets to flourish.

The bottom line: Be high-performing and competitive on costs and quality at the procedure level, the service line level, the enterprise level and the population level, and you will have nothing to worry about.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.