The Power of States as Public Purchasers

Watch for more states consolidating their purchasing power and coordinating with private payers in payment reform.

By Ian Morrison

Much attention has been paid to private employers’ growing activism in managing health care costs and taking a more direct and aggressive stance in engaging the delivery system. But private employers have two big problems: First, they have difficulty acting in concert, and second, they don’t generally have many lives in one place. States are large employers, they run large Medicaid programs, and some have their own health insurance exchanges.

Increasingly, states including Washington and Arkansas are using this combined purchasing power to transform the health care marketplace and coordinate their payment reform efforts with private purchasers. Public purchasers (acting in concert with willing private purchasers) can have a powerful influence on health care transformation.

The Role of Public versus Private Purchasers

Everyone knows that Medicare is the big dog in health care. Indeed, for inpatient care, Medicare frequently accounts for a majority of patients. And certainly when Medicaid is included, public purchasers nearly always account for a majority of patients on both an inpatient and outpatient basis. So when Medicare changes the way it pays providers, we all pay attention, as we should.

On a revenue and margin basis, it’s a different story. Commercial insurance is the financial lifeblood of American health care delivery system — hence the focus in past columns on the role that private purchasers (particularly large self-insured employers) play in changing the rules of the game. (See, for example, my H&HN Daily column, “Urgent Care.”) [http://www.hhnmag.com/articles/4024-urgent-care]

The rising costs of health care premiums for employers and the looming Cadillac tax have caused employers to introduce new benefit designs such as consumer directed health plans and to become more active in their engagement with the delivery system in reference pricing experiments, centers of excellence initiatives and targeted accountable care organization contracts.

But as noted in the introduction, even large, self-insured employers have dissipated their power. First, they struggle to act in concert and bring their true purchasing power to bear. To be fair, it is complicated. Large national self-insured employers come in many different flavors, with workforces of varying blends of income, education, age and health care status. An aging, unionized, Rust Belt workforce is a little different from Facebook, whose employees’ health needs focus more on acne medication and lollipops for owies.

Large employers also have different corporate values and priorities: some paternalistic and others Darwinian in their attitude toward human resources. And it turns out that the CEO’s wife’s OB/GYN has outsize influence on many corporate benefit commander cialis avis decisions. So it is really hard for large employers to pool all their purchasing power and sing from exactly the same hymnal, if I may mix metaphors.

The second power leakage for self-insured employers comes from their lack of geographic concentration. Take Facebook again, which is headquartered in my town: Menlo Park, California. It has grown 48 percent in the last year to 10,000 employees, but only about half are in the Bay Area. Five thousand lives is a tiny drop in a big Bay Area bucket.

More traditional Fortune 500 companies may have hundreds of thousands of employees but they are spread over many regions and countries with very little concentration in one city. Think GE, IBM, big box retailers and banks. There are exceptions: Disney has big concentrations of employees near its theme parks in Orlando, Florida, and Anaheim, California, as does Boeing in Seattle and Southern California, Intel in Albuquerque, New Mexico, and so forth. But they are truly the exception rather than the rule.

So who does have big geographic concentrations of covered lives? Answer: state and local government. Whether it is employees and dependents of state agencies, municipal workers and dependents, school boards and state universities and their faculty and dependents, state correction officers, or retirees of all of the above, you are talking about a lot of humans all in one place. Add to that state Medicaid rolls and state-based exchange enrollees, and pretty soon you are at a third or more of all health care even without Medicare.

State-Based Purchasers Flexing Their Muscle

States have long recognized their purchasing power and influence on health and retirement benefits. CalPERS, for example, purchases over $7 billion per annum of health care in California alone and continues to be a major innovator in health care purchasing. It has conducted reference pricing experiments and created active managed competition marketplaces that have kept rate increases in check. In 2015 Kaiser reduced rates to CalPERS by nearly 4 percent. (Kaiser and other plans had modest rate increases approved for 2016 with almost half of the increase due to recent increases in pharmacy costs.)

Cities, too, have flexed their muscle. In 2014 the City of San Francisco battled health plans (again, particularly Kaiser) on rate increases. In response, Kaiser recently decided to drop rates by 2 percent in fiscal year 2015–2016 and freeze rates during fiscal year 2016–2017.

In Massachusetts state purchasers employed narrow networks to reduce costs to state employees. Montana started regional clinics to provide more direct access to the uninsured, and it encouraged state workers to use these clinics.

While states have flexed their muscle in purchasing health care for workers, retirees and dependents, it is not all sweetness and light. The public sector has its own issues, primarily the challenge of heavily unionized workforces. Nationally, union penetration in the private sector labor force is at historic lows, around 6 percent, while among state and local employees, school teachers, firefighters, cops and corrections officers it exceeds 30 percent, according to the Bureau of Labor Statistics.

Historically, unionized public sector workforces have bargained for rich health benefits to compensate for what were perceived as lower wages. (Hence the perverse economics and politics of the Cadillac tax, whose framers thought they were whacking over-compensated Goldman Sachs bankers only to find out that the people with the richest health benefits in America were New York firefighters and Los Angeles schoolteachers.)

Despite Governor Scott Walker withering out of the Republican primary as road kill in the Trump juggernaut (“You’re fired, you were a disaster in Wisconsin”), the fiscal conservative wing of the Republican party would dearly love to put enormous pressure on state and local government to dramatically reduce what are perceived to be excessively generous health and retirement benefits. So the scrutiny on state employees health care costs will likely intensify in the next election cycle.

And then there is Medicaid. With 71 million, Medicaid now has more enrollees than the entire population of France. If it were its own country it

would be the 20th largest in the world by population. If it were its own economy it would be the 25th largest, edging out Argentina. And this year Medicaid spending will exceed the entire global revenue of Wal-Mart by $50 billion. It is a big screaming deal.

Medicaid is growing rapidly as a share of state budgets (despite massive federal support) both in states that expanded Medicaid and those that did not. And because there are still a lot of people uninsured nationally who earn less than 138 percent of the federal poverty level, it could get even bigger if Democrats win in 2016. States will have a big problem, even with continued federal help, and Medicaid spending will crowd out other needed investments in infrastructure, K–12 education, state universities and criminal justice systems.

Case Study: Washington State

So it is against this backdrop that you have the good folks in Washington State. The Washington State Health Care Authority oversees Medicaid and health benefits for state employees, and is responsible for more than 2.1 million of the state’s 7 million residents. A 2013 CMMI Innovation planning grant catalyzed the authority to develop its Health Care Innovation Plan. This plan, according to the authority, “builds on Washington’s unique blend of entrepreneurship and collaboration. It seeks to channel health plan and provider competition toward value without dictating lockstep adherence to specific payment or delivery system models.”

The Healthcare Innovation Plan laid out three key strategies:

The Health care Innovation Plan identifies a number of “foundational building blocks” including: robust quality and price transparency, activated and engaged individuals and families, regionalized transformation efforts, accountable communities of health, leveraged state data capabilities, practice transformation support, and increased workforce capacity and flexibility.

Through the advancement of common measures, strategic agendas and clinical processes the Washington State Health Care Authority has set a goal of moving 80 percent of the state’s activities to value-based purchasing by 2020 and galvanizing the commercial market to reach 50 percent by 2020.

Working with a network of health plan partners including Regence, Premera, Group Health and local Medicaid plans, the authority seeks to advance the goals and principles laid out in their innovation road map. They also sought to encourage providers to develop accountable care models.

In particular, The Seattle Times reported on June 8 (http://www.seattletimes.com/seattle-news/some-state-workers-to-see-new-option-for-health-care-coverage/) that for upcoming open enrollment for 2016:

“The Washington State Health Care Authority, the agency that manages benefits for public workers through the Public Employee Benefits Board (PEBB), has signed deals with the UW Medicine Accountable Care Network and the Puget Sound High Value Network to provide coverage to PEBB members….

“Beginning in November, PEBB members can choose one of the accountable care programs among a variety of insurance options. … The accountable care options initially are limited to workers in King, Snohomish, Kitsap, Pierce and Thurston counties. The state’s goal is to enroll 50,000 PEBB employees in one of the new programs, officials said.

“The program is expected to expand statewide in 2017. PEBB covers about 355,000 public workers and family members.”

These two ACO-like networks (one anchored by the University of Washington, and the other composed of Virginia Mason and others) are being offered in a region where Boeing and other large employers have entered into similar direct ACO relationships.

The Washington State Health Care Authority is acting strategically as a purchaser in the marketplace to help transform the overall health care marketplace toward higher performance that is accountable for cost and quality. It is also encouraging the private sector to follow its lead in value-based payment. But how widespread are such efforts?

All Payer Transformation Led by States

An excellent review of various state efforts to coordinate payment reform was conducted by researchers from the Pacific Business Group on Health in a research brief supported by the Millbank Memorial Fund. (http://www.pbgh.org/storage/documents/Milbank_-_PBGH_Report_FINAL_2_17_15.pdf)

The report documents initiatives to advance multipayer payment reform that are underway in several states. For example:

Implications

Watch for states to play a greater role in driving payment reform in the programs they pay for (Medicaid, exchanges and state employee groups) as well as influencing and coordinating with private purchasers to follow the same path. The goal in all cases is to transform health care delivery for higher performance on the basis of cost and quality.

All health care is local. By acting locally, we might actually achieve the transformation we all hope for.