Ian Morrison

If you are an optimist, as I am, you see growth in healthcare costs moderating, coverage expanding, and important progress being made on patient safety and quality. But even optimists cannot be complacent. We are just scratching the surface of what must be done to transform the healthcare delivery system. Remember, the baby boom is just starting the long march through Medicare (and for the vast majority of the eventually impoverished seniors, a significant tramp through Medicaid). It is also wise to take into account that healthcare premiums are swamping the finances of most middle class Americans and the businesses and taxpayers that support those health insurance premiums. And recall, we are on the edge of dazzling technologies that have the potential to extend life, cure disease, and ameliorate suffering but at a cost that could be staggeringly expensive as the recent case of Sovaldi shows us. No, we cannot be complacent we need to innovate our way out of this.

 

Sustainable Affordability: The Key Element of the Innovation Imperative

Healthcare affordability is the key challenge. We lull ourselves into complacency if we simply try to bend the trend a wee bit. Healthcare is already outrageously expensive and the demand pressures from an aging, obese, spoiled and demanding public will overwhelm our collective ability to pay for healthcare as it is currently conceived and delivered. Add to the demand side the creation of new technologies on the supply side: from genetically engineered drugs, to intelligent implantable devices, and new forms of prosthetic aides to mobility, well being and functioning…(none of which sounds cheap to me)…and you have a recipe for unit costs increasing and volume of units expanding.

Oh yes, and we are bringing 50 million more Americans into the fold with coverage expansion, slowly but surely over the coming decades, because we Americans are not really the heartless bastards we sometimes appear to be to the rest of the world. (I am writing this in Scotland so maybe I am tainted by the local views).

But while affordability is the key challenge, the solution is not just cost-cutting and re-engineering. Don’t get me wrong, we need to do those things but they will not get us to where we need to be. As one CEO in another industry I worked with taught me:   “You cannot re-engineer your way to greatness”.

Many organizations are on the important path of process redesign, supply chain rationalization, clinical process improvement, and “Lean”. All good, you had me at hello. But in many cases they will yield improvement that will be smothered by the forces of supply and demand outlined above. No, the true challenge is to create sustainable affordability through massively scalable innovation.

 

Leading Innovation

My long time friends and colleagues Dr. Molly Coye, Chief Innovation Officer at UCLA Health System and Dr. Wendy Everett, CEO of NEHI are pioneers in tackling this innovation imperative. I was honored to participate recently in their second annual National Healthcare Innovation Summit held at Harvard University Medical School in conjunction with HIMSS and Avia. The summit brought together Chief Innovation Officers and Chief Transformation Officers of leading healthcare delivery systems in a three day program that encouraged interaction between thought leaders and innovators in healthcare and many smaller entrepreneurial innovative companies and organizations that have promising and potentially highly scalable innovations. The values of such interaction is clear: we need to harness the innovation that entrepreneurial companies can bring and encourage large scale delivery systems to deploy them. All this must be done in pursuit of the noble Triple Aim of better healthcare, better health and lower per capita costs. Searching and sorting these innovations; evaluating, disseminating and connecting them to partners is very important work.

As these forums and other worthy initiatives across the country show, there is potential to bring large-scale innovation to healthcare delivery. I would offer the following observations about what to watch for on this journey.

 

The Trajectory of Silicon. In almost every other industry, meaningful innovation has occurred because contemporary information technology was deployed at scale. Moore’s Law dictates the power of semiconductors basically doubles every 18 months which has enabled many of the technologies that have transformed our lives. Getting on the innovation trajectory of silicon has been hard for healthcare, because healthcare delivery is not just about bits and bytes, yet that does not excuse us. Healthcare has been pathetically slow at incorporating contemporary information technology. I recall as a young analyst working in Vancouver B.C on behalf of the then new University hospital writing the justification for a Meditech electronic record system as part an all computerized hospital strategy in 1979! That was nearly 35 years ago, it is sad it has taken us this long to get with the program (if you pardon the pun). While meaningful use is no panacea, it has dragged the healthcare delivery system toward the future if not into it. We must get on the trajectory of silicon and use cutting edge technology to better effect. For example in Telehealth, companies like Teladoc provide remote access to physician consultation services on demand to more than 7 million members. Similarly, as Dr. Eric Topol teaches us the iPhone and its derivatives may become the key medical technology of the 21^st Century.

 

The Value of Clinical Innovation. We are on the cusp of a key societal debate about how to value clinical innovation. Scientists and industry pursue unmet medical needs, drawing on the best of emerging science and translating these technologies into meaningful innovation. We celebrate their success on the Nightly News and in the National Enquirer, medical breakthroughs we call them. But we don’t have a very good idea about how to deal with clinical innovation that is highly effective, incredibly expensive, with potentially huge number of clinically plausible patient applications. Biologicals or specialty pharmaceuticals have been the focus of this debate with the anti Hepatitis C-drug Sovaldi it’s epicenter. A drug that costs (read priced at) a $1,000 a pill and that could help millions of people is just the tip of a very big iceberg. Specialty pharma is no longer a rounding error for purchasers. A decade ago, specialty pharmaceuticals accounted for about 2% of the pharmaceutical budget growing at 20% compound per annum. Today the specialty pharmaceutical spend for most payers it is pushing 40% of drug spend and growing at 20% compound. United healthcare paid out $100 million for Sovaldi for their health plan members in the first quarter of this year alone. Industry supporters defend Sovaldi’s pricing as “value-based” because it is cheaper than the liver transplant it purports to deem avoidable. To me that’s nuts. It’s like saying that the telegraph should be priced at the same rate per bit of information as the Pony Express it replaced.

But I feel for the clinical innovators, they need to know what the rules are. What are we as a society prepared to pay for clinical innovation? On what basis? In the UK they are comfortable with making recommendations to cover therapies based on classic cost-effectiveness criteria such as Cost per QALY (Quality Adjusted Life Year) which sounds brutally calculating, but has the salutary effect of encouraging the manufacturers to lower their price to make the cut of deemed cost-effectiveness (typically around $50,000 per QALY). This all smells too much like death panels for most Americans. But we better figure this out soon or we will have a big problem. Imagine an effective but highly expensive neuro- surgical intervention for Alzheimers, or an effective xeno heart transplantation using Baboons raised on farms in Texas where the only limit was not organ donors but money. (By the way I raised this Baboon farm scenario with a Wall Street Journal reporter twenty years ago, and when he published it in a front-page story the next day I got an irate call from the head of heart transplantation at nearby Stanford telling me I was an idiot because it wouldn’t be baboons… it would be pigs. But you get my point.)

 

Scaling Emerging Models. Organizers of the Innovation Summit were clear that a key challenge for the future is finding scalable innovations. In healthcare we are spectacularly successful at pilots that never take off. Overcoming this dilemma needs commitment by health system leaders to deploy, at scale, promising innovations and putting the force of the enterprise behind them. All too often large scale delivery systems see innovations like Scout badges, little things they can point to that they have done but that are meaningless individually and collectively as a share of revenue or as a share of mind or strategic focus.

Disruptive Innovation Versus Distractive Innovation. Clay Christensen is a hero of mine. But I worry that his great insights and practical teachings may be lost in misuse, overuse and outright abuse of the term disruptive innovation.   For too many large health systems half-assed pilot projects are distractive innovations. And worse yet, the people they disrupt are not overpaid incumbents, but hard working clinical caregivers who are at the front-end of care but are bombarded with idea of the month projects overlaid on an already demanding workload.

Policymakers must support Innovation…Sometimes by Getting out of the Way. One of the key features of the ACA was the creation of a Center for Innovation within CMS, which I strongly support but we should not expect all innovation to come from the center or from government generally   A key role for policymakers is to develop an environment that encourages innovation by being less prescriptive not more, by eliminating regulations not creating more, by eliminating layers of bureaucracy not adding them. No one is regulating Apple’s App community developers and they seem to be doing just fine.

Health Plan Innovation: Reframing Markets. Health plans can play a key role in creating an environment conducive to delivery system transformation and innovation. At the Innovation Summit, Aetna CEO Mark Bertolini spoke eloquently about his vision for Aetna and all of US Healthcare where Aetna and others would enable consumers to select among (Aetna enabled) ACOs in private exchanges (I still think Obama’s public exchanges will be around too).

Business Model Innovation. As innovation experts such as Clayton Christensen and Larry Dobson teach us, most true innovation is not just in technology or service offerings but is rooted in business model innovation. Finding new ways to be paid is important: consumer subscription services, direct pay retail models, and sponsored offerings all have potential in healthcare. Advertising based plays get trickier because of the special sensitivity of patient specific information but they can exist as Web MD and others have shown.

Engaging Consumers. A common theme at the Innovation Summit and across the country is finding new ways to engage consumers in decisions and behavior around both health and healthcare. For example, Castlight provides tools to help consumers become more discriminating and motivated consumers for shoppable conditions. EOSHealthprovides tools for the chronically to engage more effectively in self-management.

Leveraging the New Digital Infrastructure: Social, Mobile, Cloud, Big Data and New Analytics. In Silicon Valley where I live the buzz is all about the new digital infrastructure that can enable all kinds of innovation. Many of the emerging healthcare innovators are leveraging these tools and applying them to consumer engagement, clinical process improvement and administrative efficiencies.

De-Institutionaliztion: Healthcare as a Social, Family and Community Responsibility. As we have explored in many recent columns, the shift from volume to vale and toward population health means that much of the future of healthcare will look a lot more like social work than medical care. But I am deeply struck on my trip to Europe that in Ireland, France and Scotland the social work dimensions of healthcare are not always delivered by government or formal healthcare institutions but are often driven and delivered by volunteer organizations and individuals, by a sense of family obligation to be care deliverers, by communities that support interaction. As we move to population health we need to develop and harness our own existing innovative American social and community based solutions for promoting health and delivering healthcare. The promotores in the Latino community being an excellent foundational example.

Engaging the “Big System” in Change. My final observation to the entrepreneurs of innovative start-ups and to the CEOs and Chief Innovation Officers of large healthcare delivery systems alike is focus on the Big System, namely the core delivery system and how it can be meaningfully transformed. Innovation should not be thought of like a myriad of little ornaments on a Christmas tree but rather as a means to re-think in a deep way how the whole delivery system can be redesigned at scale and with purpose to be higher performing. That is our work. That is the Innovation Imperative.

Obamacare has created significant change, especially for the net 10 million people who received coverage since last year, one way or another. But the obsessive national focus on score-keeping the coverage expansion (or lack of it) under Obamacare overlooks perhaps the bigger health care story, namely the massive change under way in the health care marketplace and particularly in the delivery system.

New Models of Care

There are four inter-related megatrends in the health care marketplace, over and above the coverage expansion efforts of Obamacare.

The first megatrend is toward accountable care in which systems are integrating to create systems of care that focus on care coordination, improving quality and reducing costs. In pursuit of the noble Triple Aim, surveys show that about 40 percent of the bed capacity in America lies in hospital systems that claim to be pursuing a broadly defined “accountable care.”

The second megatrend is consolidation. Across America we are seeing the rapid creation of 100 to 200 very large regional health systems that are bringing physicians, alternate site providers and regional competitors into ever-larger delivery systems. Fueled by financial, strategic and clinical integration imperatives, the consolidation is significant in most markets.

The third megatrend is population health. It is everywhere…even though most health systems are not yet fully engaged in confronting the consequences of making population health a priority. If you are truly serious about improving the health of a population, you probably wouldn’t start off with a bunch of expensive facilities and people delivering marginally indicated high-tech care to an over-served insured population. Nevertheless, population health is cropping up in the mission statements and strategic plans of some very large systems, and if these boards and leaders take these mission statements seriously then it will cause them to do things very differently from the way they have done things in the past (more on this below).

The fourth megatrend is health care delivery systems getting into the insurance business. Let’s be clear: The trend could all end badly as it did in the 1990s. As I said to an elite group of deans of medicine of our nation’s top academic medical centers recently, when asked if AMCs could take risk: “Two percent of a big number is a big number.” In other words making a 2 percent rate mistake on a $10 billion block of business is a $200 million hit to the bottom line — not for the faint-hearted. Nevertheless, health systems are pursuing risk strategies.

These four megatrends are connected in a narrative that goes something like this for these large integrated health systems: “If we are going to all the trouble of integrating care to improve quality and reduce costs, then why wouldn’t we want to benefit from all that hard work by getting a share of the premium dollar by taking financial risk for the health and health care for the population we serve?”

Often it is couched in the familiar tones of first-curve-to-second-curve transformation: from paying for volume to paying for value, from filling the hospital to emptying the hospital.

Sounds good. Now, how exactly are you going to do that?

 

Four Flavors of Risk

Many large systems are well on their way, and many of them are serious, sophisticated and committed to making this work. In the last six months I have crossed paths with many leaders who are on this journey and would offer this informal review of what I am seeing and hearing. I make no pretense that this is either a census of all the activity or a comprehensive review, but it represents interactions with leaders in many, many markets across the country. With that caveat I would suggest that there are four flavors of risk:

Legacy health plans.Those of you old enough to remember the 1990s will recall we did this provider-owned health plan thing before and it did not go well for most folk. However, there were a number of committed players who developed viable health plans as part of their strategy in the 1990s.

Some like Sharp in San Diego and Presbyterian in Albuquerque have been committed to a full-blown integrated system of care including taking both commercial and Medicare Advantage risk for the last 20-plus years. The future has just come toward them. Others like Intermountain Healthcare in Salt Lake City or Spectrum Health in Michigan have recommitted to emphasizing the role of their health plans as a strategic asset.

Recent health plan acquisitions.A number of health systems have recently acquired or created a health plan function. Some like Sutter, Dignity Health (through Western Healthcare Advantage) and Memorial Healthcare in Long Beach— all in California — have acquired a Knox-Keane license (the necessary regulatory framework for providers to take risk in California). These health systems are all pursuing strategies to attract both Medicare Advantage and commercial insurance business.

But this is by no means a Left Coast only phenomenon. In Boston, Partners Healthcare acquired Neighborhood Health Plan and in so doing has the platform to provide insurance products in the Massachusetts market. North-Shore Long Island Jewish recently obtained a commercial health insurance license in New York. And perhaps the biggest story to watch is the Baylor Scott and White merger in Texas, where two large sophisticated delivery systems, one with a long history of risk bearing, have come together to create a new regionally integrated system of care.

Health systems going deep on an ACO strategy. A large number of health systems are using both CMS accountable care organization pilots and commercial ACO arrangements as a step toward risk through a shared savings arrangement. I believe ACOs are transitional steps toward more enduring risk arrangements like capitation or global budgeting with performance corridors. But even if ACOs are transitional (I call them “training wheels for capitation”) they are an extremely important step in changing the mindset of providers away from volume toward value.

Many large health systems are pursuing this risk-based strategy using ACOs and/or insurance partnerships as the vehicle. Prominent examples include Montefiore in New York (which I will feature below), Steward Healthcare in New England, and Aetna Whole Health and its partners such as Aurora, Inova and Banner Health. These efforts are happening in diverse markets and provide health systems with an opportunity to offer a “private label” health insurance product in local markets, e.g., St. Elsewhere Health Plan powered by Optum or Aetna.

Health systems “go your own way.” The fourth flavor of health plan is a variant on this private label theme and it is the Evolent health offering. Evolent is a joint venture of the University of Pittsburgh Medical Center (UPMC), a powerhouse regional health system with its own powerhouse health plan, and the Advisory Board Company, which has grown to greatness by being the leading supplier of PowerPoint to the health care industry. Coming together as Evolent they can offer regional health systems a sophisticated back office for a private label plan. And the key advantage they have over national carriers offering a private label ACOs is that they are not a traditional insurer.

The Advisory Board Company has a large trusted Rolodex. UPMC has experience doing this. Neither of them

is known as a health insurer. And that is important because health insurers still rank just above tobacco companies, oil companies and Al Qaeda as the least trusted industries in America. Hospitals are near the top, just behind supermarkets. (If Safeway and the Mayo Clinic put together a health plan it might do well.) The Evolent offering is being taken up by health systems in Georgia (Piedmont/Wellstar) and Medstar in the Mid-Atlantic, with more to come.

The examples cited within these four flavors are all very large multibillion-dollar health systems. Many of these systems have publicly declared they will receive more than half of their revenue from risk-based payment over the next five years. They see growth opportunities in Medicare Advantage, in direct contracting with employers, and potentially in public and private exchanges (although few have dabbled in public exchanges to date, fearful of cannibalizing lucrative commercial insurance reimbursement). If these leaders are correct in their growth forecasts then this trend is a big screaming deal.

 

Making It Work: The Link to Population Health

So great: We are in the insurance business. Now we’ll show those insurance guys who skimmed 30 percent off the top how to run a store.

Here are some basics to remember now you are in the insurance business.

The Halvorson effect. George Halvorson, retired CEO of Kaiser Permanente, told a great story about being confronted by an angry woman at a town hall–style meeting on health reform. She was outraged at health insurers’ ever escalating premiums. George, ever calm, measured and correct, quietly stated:

“Health insurance premiums are the costs of care for the population being covered, plus an administrative fee.”

“Well that’s one way to look at it…” the woman said indignantly.

No, lady, that is the only way to look at it.

The reason health insurance premiums are high is because the underlying costs of care are high. When you are in the insurance business (or even the shared savings business) you have to fundamentally own that problem.

The 5/50 problem. In any insurance pool, whether it be commercial or Medicare, there is a basic rule that 5 percent of patients account for 50 percent of costs, and 50 percent of patients use next to nothing — most of them are not patients at all, just premium payers. From an insurer’s perspective you would like more of the latter than former.

Remember the obvious: Hospitals generally do not have warm and close relationships with healthy people; they are, however, magnets for sick people. About half to two-thirds of the heavy users in any given year persist in that group over time, generally the multiply co-morbid: with diabetes, obesity, chronic obstructive pulmonary disease, congestive heart failure and joint problems. The other smaller fraction are folk who get acute illnesses such as cancer and who may improve or expire in subsequent years.

Again, if you think like an insurer you have to ask what would make me attractive to the 50 percent healthy folk that I really want, and how to manage the 5 percent most frequent users. You better not get into risk unless you have the data and analytics, the predictive modeling tools, and the people who know how to use them. Otherwise you may find yourself short on healthy and long on sick.

Managing care looks more like social work than medicine. In my travels I am constantly inspired by the stories of how those sickest 5 percent of patients can be  managed better to improve their health and their lives and lower total costs of care dramatically. And in many cases the secret sauce looks a lot more like social work than medical care, as I described in a previous column, “Massively Coordinated Care.” (http://www.hhnmag.com/display/HHN-news-article.dhtml?dcrPath=/templatedata/HF_Common/NewsArticle/data/HHN/Daily/2012/May/morrison050112-1090001119. Here are a few recent examples from my travels:

The refrigerator. Art Gonzales, CEO of highly respected Denver Health, told me the story of the brittle diabetic patient who was constantly admitted to the hospital. Non-compliant with her medications, caregivers probed why she was not taking them.

“The medication has to be refrigerated” she said.

“So?” they asked.

“I don’t have a refrigerator.” She replied.

They bought her a refrigerator. She is a lot better.

The truck. A CEO of a hospital in Arizona told me the story of a young hot-shot hospitalist who challenged the CEO that he could cut readmission rates in half if the CEO got him an old pick-up truck. The CEO offered one of the nice white fleet vehicles to use, but the hospitalist insisted on a used pick-up truck because he was going to be driving into some low-income neighborhoods with high car theft rates.

The hospitalist made house calls to Latino patients a day or so after discharge. He spoke to all the family members

in Spanish and explained what happened in the hospital and what medications the patient was now on. It was a labor of love, unpaid. It cut the admission rate in half.

These examples and scores of others across the country point to the tremendous opportunity available to integrated health care systems if they open their eyes to new ways of thinking.

The Case of Montefiore

There is no more challenging health care market than the Bronx. Montefiore serves a community with a largely public payer mix (40 percent Medicare and 40 percent Medicaid), disproportionate poverty and immigrants from multiple cultures. Add its academic medical center role (in partnership with Einstein College of Medicine) with the responsibility of training the care givers of tomorrow and its medical staff that includes employed as well as community-based physicians and you might think all that would mean they would have an insurmountable task.

Yet Montefiore is a true pioneer. Not only was it the top performing pioneer ACO by most measures, it is quietly transforming care in the Bronx by accepting risk-sharing arrangements and pre-payment in partnership with health plans. A majority of its revenue comes on a risk basis, yet margins are up, patient satisfaction is climbing, clinical performance is constantly improving.

CEO Dr. Steve Safyer, trained at Montefiore, now leads this exciting transformation. A key to Montefiore’s success is the 1,000-person dedicated care management team of physicians (including many psychiatrists) — nurses, social workers and care managers who are constantly developing and improving the care pathways for their patients and offering help to patients and families improve their health.

Montefiore is headed to a target of 1 million lives at risk, and it is well on its way. While it has an insurance license, it prefers to have shared risk arrangements with insurers in which Montefiore gets a bigger share of premium to manage care.

 

Bridging the Risk Gap: Referral Management

If all this sounds daunting, it is. Getting into the risk business is not for the faint-hearted. But across the country leaders and their boards are going down this path. A key challenge is migrating the financials to a new risk-bearing business model: the classic first curve to second curve dilemma.

And here is the epiphany I have had in the last few months: This can be achieved by using referral management as the fee-for-service fuel to get you to capitation. Here’s how it works. Most health systems have considerable leakage of referrals. While they may have a primary care base or even a health plan, rarely do those plans or practices refer tightly within the network. The “leakage” can be 20, 30, 40, 50 percent.

Increasingly, I am seeing systems recognize this as an enormous opportunity to increase fee-for-service volume in the short run to build the financial fuel to take risk. Typically this involves setting up a centralized one-touch, call center–based, referral center to direct patients and primary care physicians to “our team.” The opportunity to keep revenue in house is enormous. I talked to one such system who claimed to have moved $1 billion in revenue in-house over a couple of years using this model (more than 10 percent of total revenue).

Clearly, not everyone can win. One person’s leakage is another person’s revenue. So expect the battles over market share, particularly in secondary service territory markets, to intensify dramatically over the next year as more and more systems take risk and seek a way to fund that transformation.

 

Ian Morrison, Ph.D., 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.

March 31, 2013, was the most important day in health policy, because it was the day I became uninsured. It happened in a good way: not through illness, job loss, divorce or tragedy like most Americans who lose insurance. No, I lost my insurance from a happy circumstance. Let me explain.

For 20 years I had purchased my insurance through a company on whose board I served, paying the full premium with my fellow directors who did the same thing. In 2011 we sold the company at a hefty premium to a strategic partner. It was a great deal for shareholders, employees and our new partner. The only problem was my COBRA coverage would run out March 31, 2013, nine months away from Obamacare taking effect. (If it ever did take effect, because remember there was a wee thing called a presidential election, not to mention important Supreme Court decisions between July 2011 and January 2014.)

A Cry for Help

In November

2012, a week before Obama’s re-election, I was moderating a panel of health plan leaders from the nation’s largest insurers including United, Anthem and Aetna at a national meeting in Los Angeles. The subject was supposedly the future of commercial accountable care organizations, but I took the opportunity to ask these executives (in front of an audience of 1,200 people) whether any of them would like to take a badly behaved 60-year-old Scotsman in the individual market in California. “Oh, by the way, all I want is a very narrow network that includes Stanford and the Palo Alto clinic.”

No one took the bait. Indeed, all of them looked at their shoes and muttered under their breath to each other:

“I’m not going to take him, you take him….Don’t make eye contact with him.”

It was an awkward moment.

Indeed, a former Kaiser executive jumped up from the audience and said, “You should have joined Kaiser when you had the chance.”

We moved on to other topics. It was a great discussion as I recall.

Several of the executives came up at the end and said, privately: “No hard feelings. Stay in touch.”

 

Under the Gun

Fast forward to February 2013. The deadline for the expiration of my coverage looms. I am super-busy post-election: Obama won and then “OMG they are really going to have to implement this thing!” Everyone is on tilt; the prognostication business is booming.

My wife, an old emergency room nurse (not old, seasoned) is on my case about getting coverage organized. Rightly, she points to the economic vulnerability to our family of not having health insurance. This is high-stakes stuff.

It is mid-February. I am in Seattle returning from speaking to Virginia-Mason’s board. The next day my wife and I are going to Mexico with a golf group to one of those all-inclusive resorts. I always say that the two greatest words in the Scottish language are “open bar.”

So, in anticipation of our trip, I promised my wife I would get my insurance application in progress before we left.

I get to the Red Carpet Club in the Seattle airport two hours before my flight back to San Francisco and spend the entire time completing an application on e-health insurance.com for a Blue Shield of California $6,000 deductible individual preferred provider organization product (my wife is on Medicare — another story for another day).

E-Health Insurance is a very well-designed website, but applying for individual insurance in California took forever in the pre-Obamacare market. Individual insurance was medically underwritten. You must answer questions like “list all the encounters with your doctors in the last 10 years for what purpose, for what condition” and then they probe “What was your blood pressure on those dates, your lab results, etc., etc.”

Who knows this stuff? I don’t even think my doctor keeps track of all this. So what you do is YOU LIE!

I complete the 60-page application, press the send button, catch my flight home and the next morning my wife and I head to Mexico with our group.

 

Mexico

We had a relaxing time in Mexico, until the fourth day. My kids couldn’t reach me, my clients couldn’t reach me, but Blue Shield of California’s underwriting department reaches me on my cell phone at 10:30 at night in Puerto Vallarta.

I believe it was an outsourced call center, and a fact checker nurse in Alabama was on the phone.

We had a lovely chat. She asked all the same questions that I put in the application blood pressure? (Lie.) Cholesterol level? (Lie.)

I was not trying to mislead her. I simply could not recollect 10-year-old data points, given that I rarely visit my doctor (because I feel great and the few meds I am on seem to work).

“You’ll hear in the next week or so,” she said.

 

Bad News in the Mail

We came home. In my mail on my return were three pieces from Blue Shield. Each in different formats said the same thing. I was denied coverage. Not once, not twice, but thrice. Thrice denied — it was positively biblical!

The explanation was pretty clear. Basically they said: “You’re a HONDA: hypertensive, obese, non-compliant, diabetic, alcoholic.”

None of this is true…but it is directionally correct.

Now what do I do?

 

My Man Sean

Mercifully, I had purchased stop-gap temporary insurance from the Russian Mafia as part of my original application, so I was not completely bare, but it would run out in August and I would be months away from Obamacare and exchanges up and running.

I got back with e-health insurance.com. The genius of their system is that you can always call a customer service rep when you are online and they will catch up with you on your application. This is great for those of us of advancing years.

I get my man Sean on the phone.

“Hi Ian; what’s up?”

“Well, Sean, I was denied by Blue Shield,” I said.

“Yeah, they are denying everyone,” he replied.

“Really,” I said. “So much for underwriting,” I thought.

“I should have sent you to Health Net. They’re taking everyone,” Sean offered.

“Really,” I said. “So much for underwriting,” I thought once again.

Sean sent me the details. Of course Health Net had a different electronic form, so I had to start all over again. Sixty pages online and an hour later of blood pressure (lies), cholesterol (lies). You know the drill.

I near the end. The application is almost complete. Then, two screens from the end, I reach a screen that asks, “Which farm bureau do you belong to?”

Oh, I must have made a mistake. But, I am not going back to the beginning. So I try all the permutations to advance to the next screen. I click that I am in a farm bureau, but I don’t know the name of it. Ah-ha! Fooled them. I made it to the payment page.

On the payment page it asks me to pay my premium and an $8 per month farm bureau fee. Now, I believe I have committed federal fraud.

I freeze. Then I call Sean…

“Hi, Ian, wassup?”

“Sean, I’ve done something wrong it’s asking me what farm bureau I belong to.”

“I should have told you about that,” he said.

“Told

me about what?”

“Well the way Health Net does this is that it is an association health plan for farm bureaus and you are joining a farm bureau,” he explained.

“But, Sean. I am not a farmer. I know nothing about farming. I don’t even cut my own grass,” I said.

Sean laughed. “Don’t worry, it will be fine,” he reassured me.

True enough. Two weeks later I get a Health Net Farm Bureau PPO Plan card in the mail. I was thrilled.

I was especially thrilled because that very day I was driving to Sacramento to give a talk to the California Hospital Association’s Rural Health Conference. I told them this story, held up my card and proudly declared:

“I’m a farmer too!”

 

It’s Not Over ’til It’s Over

In October I got two mail pieces from the Farm Bureau. The first was an invitation to play in their golf tournament in the spring of 2014. The second was a two-page letter explaining that the Farm Bureau plan was being canceled because of Obamacare and that I should contact the broker Keenan to explore my options.

I checked Covered California’s website to see the rates in the exchange for San Mateo County and my age. Covered California allows for anonymous shopping so it is a breeze to find out a rough estimate of premium. And because overpaid health care consultants are not eligible for subsidy there was no need to purchase through Covered California as long as I could figure out what the network differences were with the plans.

So I called the broker, Keenan. A very friendly woman, Joyce answered immediately. Yes she was familiar with the Farm Bureau cancellations and explained my options and prices. Prior to this I had badgered friends of mine who were senior executives at Sutter to let me know if the Palo Alto clinic was in any exchange network. Blue Shield only, they told me.

I checked this with Keenan. “Yes, Blue Shield is the same network in the individual market inside and outside exchange, but Anthem and Health Net is likely not, we don’t know all the details yet. And of course because of our law in California the prices are the same in and out of the exchanges for each carrier.”

“I can send you the referral to Blue Shield and you can complete the application on their website and pick the specific plan you want,” she said.

Most helpful.

It took me three minutes to buy the insurance online at Blue Shield’s website.

 

Reunited

I received an e-mail confirming my application with Blue Shield had been accepted (because Obamacare guarantees issuance). Ironically it was the day before I was addressing the California Association of Health Plans, whose current chair is the CEO of Blue Shield of California, Paul Markovich.

At the group dinner the night before my talk, I gave Paul the heads up that I was going to tell the whole shaggy dog story about thrice denied, the Farm Bureau, the whole thing to illustrate the good and ill of Obamacare.

The next day, he sat in the front row, with remarkable good humor. And didn’t even cringe when I told him:

“I’m back…….!”

 

Lessons Learned

The individual market was broken. A full 19 percent of Americans who applied for insurance in the individual market were flat out denied and never got coverage. Indeed, Commonwealth Fund surveys in 2011 showed that 45 percent of people who tried to buy insurance in the individual market were either denied or gave up even trying because of costs. Some who got coverage in the individual market paid prohibitive rates. But, many of the 15 million people who had individual policies were presumably happy. They may have been willing to take on greater risks, such as higher deductibles, that are deemed substandard under Obamacare. And they are legitimately angry that their coverage has been disrupted. But, it is important to stress that these folks are the beneficiaries of medical underwriting.

Anyone who made it through medical underwriting is by definition a better risk and would have had lower premiums than in a community-rated, guaranteed issuance world. (A half dozen states such as New York and Washington already had guaranteed issuance so individual plan holders paid astronomical rates before Obamacare and are now seeing big premium declines in those states, especially with subsidies.)

Kaiser Family Foundation surveys show that 45 percent of folk in the individual market are solo proprietors or small business owners like me. A further 19 percent are early retirees. They are more affluent than the population as a whole (indeed, about half of those in the old individual market would not be eligible for any subsidy or for Medicaid). The folks who are healthy and insured and benefitting from medical underwriting will (by definition) pay more if they get a cancellation notice, and they should have been told well in advance that this would happen.

But, the whole premise of Obamacare is that because of guaranteed issuance, community rating and subsidies through exchanges, the well subsidize the sick, the rich subsidize the poor, and the young subsidize the old. Some people call that socialism. I call it civilization.

I’d rather pay more and not be worried about being denied, and have millions more Americans join in that same sense of security. You shouldn’t have to become a farmer to get health insurance. It’s too much like hard work.

Ian Morrison, Ph.D., 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.

The pinnacle of American health care delivery is the large academic medical center (AMC). Envy of the world, they are at the confluence of excellence in clinical service, medical education and research. Just 141 medical schools and their 400 affiliated hospitals comprise the “triple threat” institutions that account for only 6 percent of hospitals but deliver 25 percent of the clinical care in the United States, 40 percent of the charity care, and the vast majority of specialized services such as comprehensive cancer care, trauma centers, burn units and pediatric intensive care. In addition they train 80,000 resident physicians annually and they conduct almost half the National Institutes of Health spending on research. They are a big deal.

Yet, AMCs seem to be constantly predicted to be in trouble. Precarious financing through elaborate cross-subsidies, town and gown clashes, lack of market relevance, tensions with other stakeholders, and uneven standards of performance have been mentioned in countless academic and industry reports over the decades. For example, one multinational effort in 2005 (the International Campaign to Revitalize Academic Medicine) brought together leaders from around the globe and engaged them in a sophisticated scenario planning effort that made us futurists drool. It pointed to all the ways academic medicine could stumble if it did not change.

More recently, high-profile academic articles and scores of consulting reports point to AMC vulnerabilities in a changing environment, even though many of them seem to be doing remarkably well. Is this time different?

This Time Is Different

Dr. Zeke Emanuel, distinguished oncologist and bioethicist, Obama health care advisor and now professor at the University of Pennsylvania, pointed out in an interview that AMCs confronted real change during the Clinton health reform years (when Emanuel was also closely involved), but reverted to their past behavior as the huge threats of managed care receded. “Absolutely, this time is different, precisely because of the impact of the [Affordable Care Act] and the market dynamics it creates through greater cost visibility to consumers through exchanges….AMCs are not going back this time,” Emanuel told me.

Emanuel is not alone in his assessment. McKinsey & Co.’s Brendan Buescher, a practice leader who works closely with flagship AMCs, points to the key vulnerability of what he terms the “soft underbelly of AMCs,” namely community-level clinical services that are being delivered at inflated prices to sustain the cross-subsidy to other mission-related functions such as teaching and research.

Buescher told me: “As the market moves more toward a retail value decision for purchasers and consumers, AMCs will have to adjust to the potential volume loss or present a significantly improved value proposition particularly for the 80 percent of services that community hospital competitors deliver at lower cost and with imperceptible differences in quality.” I will explore this key factor in more depth.

 

The Triple Threat Meets the Triple Aim

Traditionally, AMCs all have the same generic mission statement: “to be excellent in clinical service, training of new health professions and advancing medical science through research.” These are three big, hairy, audacious (and expensive) goals.

But the funding streams for these inter-related activities are all under assault, ironically in some cases, because of the broader pressures of the triple aim (better care, better population health and lower per capita costs).

Research (public purse). Historically, public opinion polls showed that Americans strongly favored increased spending on medical research. Indeed, NIH budgets basically tripled from $9 billion at the start of the Clinton administration to $30 billion by the end of the Bush administration. However, as Emanuel pointed out in a recent Journal of the American Medical Association editorial, as science becomes more of a polarized partisan issue, this broad amorphous goodwill toward medical research may not translate into sustained political support for NIH budgets. As the recent Washington debt ceiling lunacy revealed, Washington pols certainly don’t want to be seen to be cutting money off for kids getting cancer care at the NIH that particular morning, but they may be less interested in funding some obscure stem cell scientist’s megabillion-dollar lab for the next decade. By the same token, the staunch political defenders of AMCs in Congress (the Moynihans, Porters, Specters and Kennedys) are all gone. All that is left is sequestration and tough choices.

Research (private purse). AMCs often look to big pharma and big device manufacturers as “partners” (code for “send checks”) to help support the cause. Venture capital and technology licensing deals also have provided sources of income. But, as these industries deal with their own price pressures and value demands from customers, the funding may not be as generous. I live in Menlo Park, ground zero of venture capital, and most of the VC money in health care is moving away from expensive clinical innovation toward “better, faster, cheaper” solutions for a more value-conscious market.

Education (public purse). AMCs will likely have to fight a rearguard action to defend against graduate medical education cuts and to restore disproportionate share funding and its derivatives to offset the fact that half the country is not expanding Medicaid as planned. Polls show that regarding Medicare reform, the popular path is to cut provider rates, not raise taxes or cut benefits. Graduate medical education payments will be vulnerable.

Education (private purse). AMCs are at the intersection of the two highest priced services on the planet: American health care and American higher education. Both are likely to receive a dose of disruption over the next decade. Universities are wary of Kahn Academy–type innovations

and the host of massive online open courses (MOOCs) that have emerged. Sophisticated start-ups such as Coursera and Udacity are piloting business models to bring the Ivy League to the global masses and are growing rapidly. I am not saying your heart surgeon of the future will learn it all by MOOC, but you have got to believe that her undergraduate chemistry and her continuing medical education credits will not involve sitting in an expensive classroom or attending at a bedside in an AMC. Indeed, pioneers such as the Hofstra University in partnership with North Shore Long Island Jewish Health System in New York are launching a new medical school that brings contemporary learning and teaching techniques (such as simulation and case-based learning in the ambulatory setting) to develop a much more applied approach to the medical education curriculum.

Clinical service (public purse). Demographic and economic forces will create more (not less) dependence on government payment for clinical services. Medicare and Medicaid will grow substantially as a share of all patients with the increased pressure that will bring on overall margins for AMCs. Most health care leaders see these changes and exhort their institutions to “learn to live on Medicare level of reimbursement,” but for AMCs that may be an impossible “aspirational” goal requiring 30 percent to 40 percent cost reductions.

Clinical service (private purse). The biggest single threat to AMCs may be the shift to a more retail model of care in which patients will have significant incentives to pick sites of care based on value. The three biggest factors likely to impact private payment for AMCs are the growth of exchanges, reference-pricing initiatives and accountable care organizations’ direct strategies.

• The impact of exchanges. With so much media attention paid to the computer failures of the federal exchange launch, the public and the media have not yet become fully aware of how skinny the networks are underneath the exchange products. In California, only Anthem Blue Cross is including the University of California AMCs in their network, and Cedars-Sinai is not included in any exchange offering. If exchanges grow over the longer haul, as many (including me) believe they will, this will put significant pressure on price outliers like AMCs. In Harris Interactive Surveys consumers say they are willing to trade off lower premiums for narrower networks that exclude prestigious institutions (even patients with chronic conditions or those with cancer declare those preferences when they are asked if they would pay $100 to $200 more per month in premium). We will find out as the exchanges unfold over the next two to three years whether these stated preferences are reflected in the market place choices consumers actually make.
• Reference-pricing payment models. The reference-pricing models such as the CALPERS joint replacement reference-pricing scheme focus consumers’ attention on price outliers such as AMCs. As these models are extended to other shoppable conditions such as maternity care, diagnostics and routine imaging, price outliers will come under greater scrutiny. Similarly, many private purchasers (particularly self-insured employers and their administrative services only [ASO] partners) are becoming much more sophisticated in managing and negotiating out-of-network costs with institutions that often charge five to 10 times Medicare rates for services delivered outside of contracted networks.
• ACO direct strategies. But perhaps the greatest disruptive force will come from AMCs that recognize and embrace the shift from volume to value and are willing to be at risk for the populations they serve, as a cornerstone of their emerging strategy. The recent case of Stanford University is an excellent example of an AMC going direct (in its case with its own employees and the employees of the university) as a plank in its strategy for the future.

 

The Stanford Healthcare Alliance Story

In a recent interview, Stanford Hospitals and Clinics CEO Amir Dan Rubin told me about the new Stanford Healthcare Alliance, an ACO-like offering to the hospital’s own employees and to the university-covered population as a whole. Historically, Stanford’s benefits offerings to university employees have followed the “managed competition” teachings of the great Alain Enthoven. As a result, the contribution strategy has favored the low-cost plan, namely Kaiser. For individuals this has meant zero contribution from individual employees for the Kaiser option, with contributions rising with more open-ended preferred provider organization choices (such as those that included Stanford’s own providers) that cost employees several hundred dollars a month. In the past this has resulted in almost half of all Stanford employees picking Kaiser. However, starting in the next open enrollment cycle Stanford employees will still have the Kaiser choice, but there will be another low-cost plan stepping up to compete on a head to head basis: the Stanford Healthcare Alliance. Stanford has built an ACO-based product that uses its own network of physicians, the hospital and clinic infrastructure, as well as related delivery partners crafted with the help of its ASO administrator, Blue Shield of California. Stanford Healthcare Alliance will operate on a shared risk basis with an agreed risk-adjustment formula to protect against adverse selection. Stanford is stepping up to “eat its own cooking.”

Stanford’s Rubin sounds confident and excited at the prospect of competing in a value-based way. He frames the decision to aggressively step forward in accountable care as consistent with taking advantage of the assets in Stanford’s four “strategic domains”: complex clinical care, the growing network of ambulatory care, virtual care (Stanford’s Health Cloud initiative) and accountable care. The Stanford Healthcare Alliance is clearly in the fourth domain but will employ the expertise of the other three and will work with partners to develop and apply sophisticated population health, virtual visit and care management tools. This is not just about giving a professional courtesy discount on a fee-for-service basis and doing nothing to change the business model. This is going at risk and going into head-to-head competition with an experienced integrated system like Kaiser. And Stanford wants to succeed at this, not just survive the experience.

AMC Strategies for the Future

Stanford’s new initiative is being emulated across the country in different forms and flavors. But there are several other different strategies being pursued.

The big front wheel strategy. McKinsey’s Buescher uses a tricycle metaphor to describe the triple threat mission of clinical service, research and education. He says that “Some AMCs like Cleveland Clinic and Mayo have made it really clear that the big front wheel is complex clinical care, the other two are in support behind. In this model there is more alignment and integration and fewer competing interests.” In pursuit of this strategy both Mayo and Cleveland in different ways have built partnerships and networks of referral that support the growth of complex clinical care event though the mother ship is located in a city with declining volumes.

Triple threat regional giants. Some AMCs are simply so market dominant that they seem impervious to the obvious threats that skinny networks and tight public purses would imply. Many have war chests and momentum that will see them through sequester and value consciousness, if they exert enough self-discipline to redirect care to the lowest cost parts of their empire and manage their portfolios toward sustainable consolidated financial returns.

Special delivery. Some institutions that have a special niche may hit on the right combination of philanthropy and regional referral networks that keeps them in the phone book. But there may be fewer of them and some like the independent children’s hospitals that fall in this category may be swept into larger consolidated regional organizations. Or maybe there is a Louis Vuitton or Fortune Brands play in health care where all the boutique brands get economies of scale through one über brand? We’ll see.

 

Big Sophisticated Systems at Risk

Many of us believe that we are headed to an American health care delivery system that consolidates into only 100 to 200 very large integrated regional systems of care that are at risk for populations. They will be reimbursed on a capitated basis where consumers pick networks through Medicare Advantage–like products on an exchange. Many AMC and non-AMC health care systems are pursuing this vision. It is not yet apparent whether being an AMC is an advantage or a disadvantage in this race. But let’s be clear. This time is different; AMCs need to learn to play a new game.

Ian Morrison, Ph.D., 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.

 

The accountable care organization (ACO) movement took a hit when nine of the 32 pioneer ACOs turned back. The health care blogosphere (which I believe now accounts for 17 percent of the gross national product all by itself) lit up with spinning and spitting on the program from ACO boosters and critics alike. Why did some pioneers (arguably the smartest best qualified managed care players in the country) turn back from a program that they themselves helped shape? Well as they say on Facebook when it comes to relationship status: It’s complicated.

I talked to a number of the CEOs and industry notables involved and share below my synthesis of their off-the-record and candid insights.

ACO Pioneers: What We Know

A good starting point in understanding the ACO pioneer story is to read my friend and fellow futurist Jeff Goldsmith’s excellent piece (with attached references) that he posted. http://healthaffairs.org/blog/2013/08/15/pioneer-acos-disappointing-first-year/Jeff describes the similar flaws (some say fatal) of ACOs and the physician group practice demonstrations of 2005 through 2010. As one veteran health plan CEO told me: “It’s tough to be responsible for the care of a defined population when you don’t know who they are until after you deliver the care, they don’t know and don’t care they’re in it, and you let them go anywhere they want.” These were violations of three of Morrison’s 10 Laws of Accountable Care that I shared with readers when ACOs were launched.

The other key insight from Jeff’s piece is the surprising resilience of Medicare Advantage. As I will also argue below, the key take-away from all this pioneer experience should be that ACOs are not an end state, but, I hope, a means to an end. At their best they are training wheels for capitation. The end game should be clinically integrated organizations at risk for the care of a defined population with member incentives to stay in network and provider incentives to coordinate care, based on true and fair risk-adjusted capitation. The result is Medicare Advantage or some modernized derivative for all Medicare beneficiaries (and actually while you are at it, maybe all Americans, but that is a ways off).

Why Become Pioneers Anyway?

When the ACO program was first launched, there was significant blowback from advanced managed care organizations who would really have much preferred full risk-adjusted capitation for a new cohort of Medicare recipients. That was not being offered; indeed, the perceived “subsidies” to Medicare Advantage would be trimmed under the Accountable Care Act (ACA). Instead, ACO shared savings models were offered as a new alternative.

Against this backdrop, the pioneer program was born as a place for the Ninja warriors of coordinated care to do their thing. As one industry veteran told me: “The pioneer program was born out of patriotism and a little bit of greed.” In other words, the pioneers were trying to be supportive of the ACA and the ACO movement.

Even though the specifics of the program weren’t what the pioneers wanted, they thought they could make it work because they were confident in their ability to manage care. They thought they could make it work financially in the short run; in the long run, they were confident that they could convert happy Medicare beneficiaries from fee for service to Medicare Advantage. And let’s be clear: If many of those pioneer organizations were given full-risk adjusted capitation for the newly attributed, they would have probably done just that.

The other key point that Centers for Medicare & Medicaid Services and the Obama administration wanted to make clear was that beneficiaries always had a choice to go wherever they want. (“Member choice and flexibility was always the mantra from CMS,” one CEO told me.) Many of us thought being able to skate away to the Mayo Clinic and having the ACO financially responsible for that was a goofy idea from the beginning, but it was and is centrally important to the politics, optics and positioning of the ACO program.

Why Some Pioneers Struggled

All ACO pioneers reportedly improved quality slightly, and overall the ACO pioneers saved a little bit of money (about $80 million in the first year). This is consistent with the original ACO program estimate of approximately $800 million over 10 years. (Just to put that in perspective, the 2 percent sequestration cuts on hospitals took $43 billion out of hospitals over a decade. So if you were trying to control Medicare costs, which idea works better? Hum, let’s see….)

There are a number of reasons ACO pioneers struggled on the financials.

It’s tough to get better when you are already really good. Several of the ACO pioneers that dropped out or dropped back from pioneer status had among the lowest Medicare costs in the country, with low bed days per thousand, high levels of existing care coordination and sophisticated care management systems. For them, making financial improvement was a tougher bar. “There were no low hanging fruit left,” one CEO told me.

Advanced managed care markets will likely have older attributed patients. It is no accident, in my view, that many of the pioneers who turned back were in areas with extremely high penetration of Medicare Advantage plans: Southern California, New Mexico, Minnesota and Massachusetts in particular have Medicare Advantage penetration rates around 40 percent. In those states it was much more likely that the patients who were attributed to the ACO were older and sicker and more likely to be dual eligibles (a population that has a 30 to 35 percent higher utilization than traditional beneficiaries). Several CEOs confirmed that the proportion of frailer, older patients was significantly higher than the benchmarks that CMS had estimated.

If you didn’t tighten down the provider network, you might be in trouble. Some successful pioneers were able to make money even in advanced managed care markets by tightening down the provider network. In other words, by limiting the number of primary care physicians in the ACO to a restricted number of high performers, the risk of lower performance was minimized. Some pioneer ACOs that had bigger networks of physicians struggled more.

DRG+SNF=BAD. So you are a pioneer Ninja: You have fewer bed days per thousand than almost anyone in the nation and you have incredibly low lengths of stay. You achieve this by managing discharges and readmissions and emphasizing high utilization of skilled nursing facilities and alternate site resources. These are all good things for patients and taxpayers. If you were capitated for these attributed patients on a fair risk-adjusted basis, you would be making money, receiving gold stars and getting national awards. But if you are a pioneer receiving a DRG payment for the inpatient care of attributed patients, and you have all the skilled nursing facilities and alternate site costs on top, you don’t look so good to CMS. This is crazy. It is a classic case of no good deed goes unpunished.

Risk adjustors are key, and they are still inadequate. Risk adjustment is improving but it still does not adequately level the playing field to encourage true and effective care coordination. It is still way easier in America to dodge risk than it is to manage care (as we are finding out in ACO pilots and as we will find out in the exchanges). This problem will not go away until we have fair and valid risk adjustment methodologies. Why don’t we conscript all those Wall Street quants who brought us credit default swaps to work on this?

The data infrastructure is inadequate, too. Everyone I talked to said something like: “The data sucked; it was late, bad, dirty, not actionable; and we couldn’t integrate it with our clinical systems.” To be honest, most CEOs didn’t spend a lot of time talking about the data problems. It’s like the Scots and bad weather: You just take it for granted. I always told my kids not to expect any sunshine when visiting Scotland. The best you can hope for is “periods of brightness.” There are precious few periods of brightness in the ACO data infrastructure.

CMS personnel try hard, but they need more capacity. I heard incredibly flattering statements about the hard-working people at CMS and their eagerness to help. But I also heard from many sources that, while they are nice people who are working hard, they are a little overwhelmed and out of their depth. In fairness to CMS, a polarized Congress refuses to provide adequate resources to implement Obamacare generally, but when it comes to ACOs, it is not just a resource problem. As one CEO put it: “CMS is just not culturally or managerially equipped to be an effective health plan partner in the ACO business. At least in Medicare Advantage you have sophisticated national health plan intermediaries.”

The end game for true pioneers is Medicare Advantage, and ACOs look like a distraction. Some CEOs pointed to the core attraction of Medicare Advantage (even with the cuts in rates embedded in ACA) because of the alignment of incentives. While they participated in the pioneer for the good of the managed Medicare movement, the pioneer program may be a distraction from the central work of growing Medicare Advantage enrollment.

 

Program Positives

Look, there may be some real positives in this pioneer story. First, some pioneers in some markets made it work, and those that follow them (the settlers) will start to bring coordinated care to many unmanaged Medicare markets. National health plans in the ACO business will be key because they have the data to identify where to play and who to play with in each of the low-hanging fruit markets. They will be able to harvest the excess utilization and waste in uncoordinated markets and may succeed in further bending the overall curve of health care, nationally.

Second, the power of ACO experimentation is that different organizations went after this in different ways. Some focused on nursing homes, some focused on care transitions, some focused on restricted networks of primary care physicians. We need the policy and academic community to carefully evaluate all this and draw some conclusions about how to create true accountable care organizations. The information should be helpful.

Third, while a dysfunctional political system makes it impossible to change the ACA statute at least until after the 2014 mid-term elections, there are promising policy making signals about the future of Medicare. In particular, coalitions of organizations, including the California Association of Physician Groups, are working on proposals for Medicare that recommend a third way to Medicare that moves toward a world of fairer, risk-adjusted payment models that would engage beneficiaries and provide a transitioning model from fee-for-service Medicare. More to come.

Fourth, the message to the hospital and health systems field: Risk is not dead. Long live risk. Large health systems taking risk for the health and health care of a defined and engaged population is the future of Medicare. This may take policy and payment change, this may involve working with new partners in new ways, and it may look a lot like Medicare Advantage.

Harvard polls show that while the current elderly (those over 65) prefer fee for service over a managed care plan by a two-to-one margin (57 percent to 29 percent), the reverse is true for those 50 to 64 years of age. Four million baby boomers who grew up on managed care are about to enter the program each year for the next decade, and they are going to pick managed Medicare. Let’s give them what they want, but do it right.

We’ll thank the pioneers, even the ones that turned back, for their sacrifice and energy, and we’re hoping we’ll discover new ways to deliver high-quality accountable care as a result of their journey.

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.

 

I love California because it has the wine of France, the food of Italy, the weather of Spain, the golf of Scotland and the diversity of Beirut.

We are different in California. We have the greatest self-perpetuating, diversified regional economy in the world, which will never be broken. You bet against Palo Alto real estate at your peril.

Our health care system is also the center of attention these days. Let’s take a look why.

Context: The California Economy

The California economy is brilliant, relentless, democratic and cruel. It creates three types of jobs: (1) gazillionaires, (2) the marginally employed without health insurance and (3) union workers in health care and the public sector. Sure, when construction peaks and times are good, there are well-compensated plumbers and carpenters and a lot of marginally educated folk making money in real estate. But like the global economy in general, the basic thrust is that some people make a lot of money and most people don’t.

It is an Apple economy. On the back of an Apple iPad it says all you need to know about the future of the global economy in incredibly small writing: “Designed by Apple in California. Assembled in China.”

A very small number of people with good taste (and engineering skills) in Cupertino add all the value to Apple. True: There are tens of thousands of people who make $12 an hour working in an Apple Store, but frankly, they would work for nothing. Have you been to an Apple store? The workers are like the Moonies.

I have lived in Menlo Park, Calif. (ground zero of venture capital), since 1985. Most of my friends and neighbors are in the business of the new economy. My friend Arthur is a socialist and a serial entrepreneur who has used his software genius to redefine industries. He is an unabashed liberal, but his starting point in entrepreneurship is “Get rid of the people.” Especially highly paid people with health insurance. Arthur is not mean. He is kind by nature. Unintentionally, he is simply targeting waste: marginally useful employees with very expensive health care benefits who cannot possibly deliver the productivity improvement that great software can. Arthur is hot in Silicon Valley.

Perhaps to stem the tide against this economic Darwinism, the public sector and health care unions try to protect their members against the massive forces of income polarization, even if it ends up being expensive and inefficient for everyone as taxpayers.

So, the rich liberal software executives suck it up and write checks to stay here and it all works out and we balance the budget (eventually).

That is the California economy. That’s how we roll.

 

The California Health Care System

If you want deep detail on California health care there are lots of great resources. In particular, I have served on the board of the California Healthcare Foundation (www.chcf.org) for nearly a decade. CHCF is an invaluable resource on all dimensions of the California health care system. In particular, CHCF’s California Health Care Almanac is an ongoing compendium of studies and issue briefs that describe and inform the California health care landscape.

In addition, over the last two years, I had the honor of moderating the Berkeley Forum on Improving California’s Healthcare Delivery System for Stephen Shortell, dean of the School of Public Health at Berkeley, who chaired the forum. Steve brought together a fantastic group of health care CEOs and public sector leaders to develop a vision for California, given the state’s special circumstances. You should read the report in full here.

The Berkeley forum documented what makes us different in California: demographics (more diverse than most); unique delivery system structures such as Kaiser and the capitated-delegated model; the scale of our uninsured (nearly 7 million); and the Medicaid coverage challenge (we call it MediCal), where we reimburse providers at a very low level compared with most states.

In a nutshell, the forum envisioned significant expansion of coordinated and integrated care models to an even wider group of patients. Specifically, the forum endorsed two major goals for California to achieve by 2022: (1) reducing the share of health care expenditures paid for via fee for service from the current 78 percent to 50 percent; and (2) doubling, from 29 percent to 60 percent, the share of the state’s population receiving care via fully or highly integrated care systems. The forum also called for widespread physical activity efforts at one end of the health continuum, and reformed end-of-life care on the other.

Similarly, Governor Jerry Brown’s Let’s Get Healthy California Task Force, co-chaired by Dr. Don Berwick and State Secretary Diana Dooley, has expanded the state’s focus on the health of California from birth to death. Many great initiatives will flow from this work.

But the big reason most people across the country look to California these days is curiosity about our health insurance exchange and our unique delivery system’s response to it.

Covered California

California’s health insurance exchange (or marketplace, as we are supposed to call it now) is Covered California. It was enabled by state legislation in the wake of the passage of the Affordable Care Act under Governor Arnold Schwarzenegger’s leadership, and it has been early and aggressive in implementing its mandate; it is one of only six states that is an active purchaser state (among an even smaller number that actually behaves as an active purchaser).

On May 23, Covered California unveiled the plan participants and insurance prices for participants in the exchange in each of the 19 regions of the state. Covered California Executive Director Peter Lee described it as a “home run for consumers.” He has much to be proud of, and here’s my take on where we are:

Affordability is better than expected for the average consumer. Many doomsayers and a lot of actuaries were predicting horrendously high rates. Yet, Covered California has delivered rates on average around $300 per month, which is very favorable compared with the $450-plus average anticipated premiums in many other states.

With subsidies, these rates are very attractive to lower income folk and young people. Many worry (including a lot of people at the White House) that young healthy people will not sign up for insurance in the exchange and, instead, the older, sicker, pre-existing condition crowd will be hitting the send button on the stroke of midnight Oct. 1 when enrollment opens. That remains a real concern in California and across the country. But the combination of low rates and generous federal subsidies for lower income people means the true cost of a silver plan (a 70 percent actuarial value) is extremely inexpensive for low-income folk.

For example, in region 16, south Los Angeles, a 40-year-old individual at 150 percent of the federal poverty level (or $17,000 per year in income) has a choice of seven plans he could purchase, including the most affordable Health Net HMO for $40 per month, Blue Shield PPO for $86, or the most expensive Kaiser HMO for $123 per month. (Each plan has a federal subsidy of $202 per month attached to it.) We will find out

if $40 a month is cheap enough. It might well be.

We must understand what’s under the hood of these plans. While Covered California avoided horrible sticker shock, we don’t know if it has avoided network shock. The precise details of the networks underneath these plans have not been made public. (Presumably consumers will know on open enrollment Oct. 1, if not earlier, which doctors and hospitals are in which networks.) But independent observers speculate that most of the plans are pretty narrow networks. For example, it has been reported in the press that Cedars-Sinai, a prominent west Los Angeles health care system, is not included in any network, and competing academic medical center UCLA Health System is in only one (Anthem).

Observers also believe that Federally Qualified Health Centers such as Alta-Med are prominent parts of these skinny networks, which sets up an interesting situation for the uninsured who visit these clinics today. Will they be better off with insurance? Or will they simply be paying premiums, co-pays and deductibles for the same providers they saw when they were uninsured for a more limited financial contribution? Much of the word-of-mouth success of Covered California will depend on this precise experience of care for the previously uninsured.

Latino experience. In California 46 percent of the exchange-eligible population are Latino; nationally about a third of the uninsured are Latino. How Covered California reaches out and engages Latino consumers will be critical to the success of Covered California and will have massive national halo and ripple effects through Spanish-speaking media. Bear in mind that half of the uninsured 18- to 34-year-olds in the country are in just three states: California, Texas and Florida, and they all have huge proportions of Latinos in the key younger cohorts.

Molina. On this point, watch Molina Healthcare. It is a Long Beach–based health plan that was created by an enterprising Latino physician who saw an opportunity to serve Latino and other lower-income consumers through Medicaid plans. Molina is participating in five of the Covered California regions and has applied to be an offering in the federal exchange in Florida (and presumably in other states where they have managed Medicaid operations). Molina and other plans that had their roots in Medicaid may be the winners in this expansion market, just as was the case in the Massachusetts Connector.

Smokers aren’t to be discriminated against … say it ain’t so. In a weird twist that sounds like a headline from The Onion (the satirical website), California legislators opted not to impose the ACA provisions that allow the exchange to charge smokers an additional 50 percent in premium. Who was behind it? Public health and mental health advocates argued that such provisions discriminated against low-income people and the mentally ill (who are disproportionately smokers) and it would discourage them from enrolling. Seriously?

 

A Big Test for California…What Will It Mean?

Look, our experience is not necessarily generalizable to other states, for all the reasons we have described: Our economy, demographics, politics, delivery system structure and exchange characteristics are all quite different. Nevertheless, California will be a very big, visible test of Obamacare, and much will be made of the experience in wonkworld, the press and the political debate no matter if it is a triumph or a train wreck (or, even as I suspect, a wee bit of both).

Critics worry that the exchange is exacting a penalty on providers, and that it will lead to a race to the bottom on prices because of the competitive dynamics that a large new purchaser with skinny networks can bring to the market. Others argue that this is just the opening bid in a series of negotiations between purchasers and providers in a dynamic new marketplace where many new options such as direct contracting between employers and accountable care organizations will emerge on the one hand, and where public and private exchange mediated marketplaces with a more retail focus will emerge on the other. I think we will see all of those happen and will explore these options more fully in future columns. But, no matter what … watch California: We are really doing this, and we will find out soon whether it works, at least for us.

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

Health care costs are an enormous national issue. We agonize as a nation that we spend way more than most developed countries, that we have public programs that eat federal and state budgets, that our employer-based health care costs undermine our industry’s global competitiveness, and that middle class households haven’t had a wage increase in a couple of decades because of rising health care costs. So it would seem like good news to everyone that growth in health care costs was slowing.

But Is It Sustainable?

Economists all agree that there is evidence of slowing in the rate of growth. For example, in February 2013 the Congressional Budget Office announced that projected Medicare and Medicaid spending in 2020 would be some $200 billion, or 15 percent less than the office had projected only three years ago. In 2012 Medicare spending per beneficiary grew by just 0.4 percent.

Similarly, in the private sector, a recent Towers Watson and National Business Group on Health survey of large employers found that cost growth for active employees was at the lowest rate in 15 years, up only 5.1 percent in 2013.

While economists agree that the trend is bent in the short run, there is much more disagreement about whether these changes are sustainable. I recently had the privilege of moderating a panel on the role of health care in the federal deficit with three of the nation’s top economists who are experts in this area (Alice Rivlin of Brookings, Gail Wilensky of Project Hope, and Paul Ginsburg of the Center for Studying Health Systems Change). While we had lively debate on a number of issues, the consensus was that most economists are unsure whether the trend has truly been bent on a sustainable basis.

 

Why the Trend Has Slowed … at Least for Now

It is too glib to say “It’s the recession, stupid.” But all economists agree that the Great Recession took a toll on health care spending in direct and indirect ways. Because of loss of jobs, loss of wealth or loss of health insurance, many people were less likely to use health services (particularly those health services that were deemed discretionary), contributing to a slowing in volume.

Medicare cuts started happening as part of the Accountable Care Act (ACA), and many state governments were forced to cut Medicaid reimbursement rates in the recession, contributing to a slowing in reimbursement rates (for public programs).

Small businesses were forced to drop coverage as the recession continued, and millions of Americans lost jobs and health coverage in businesses large and small, causing the uninsured to swell to 50 million at its peak.

But the recession explains only part of the story. Other factors have contributed to the observed decline in the rate of growth:

The big benefit buydown. Quietly over the last decade, large corporations have been on a slow and steady “buydown” of benefits; this is benefit-consulting speak for “shift the financial burden to employees.” Much of this cost sharing has been sold in the guise of consumer empowerment and delivered through the vehicle of consumer-directed health plans, many with health savings accounts.

But research shows that the health savings account part of these plans is not what reduces costs but rather, the high deductible part. As the RAND organization has painstakingly demonstrated in its research, when people have to pay more out of pocket, they use less care (both seemingly necessary care, such as prevention, and potentially unnecessary or discretionary care).

Cost shifting to consumers certainly does reduce cost growth, but it is a blunt instrument. Recent provisions of the ACA place a floor under employer-sponsored plans to have an actuarial value of 60 percent. This means that, in the future, employers cannot cost-shift more than 40 percent of the costs of care to employees.

The benefit buydown also includes the progressive retreat from retiree health benefits to early retirees and post-Medicare-eligible retirees. Similarly, spousal benefits and dependent coverage are also likely to be trimmed back, according to recent surveys of large employers.

Frequency is down. The combined effects of recession and cost shifting to consumers are powerful forces reducing the volume of activity. But what is very interesting is that in all lines of insurance (property and casualty and even malpractice insurance), the frequency of claims is down.

Insurers scratch their heads when they try to explain this, and some believe that because there is an economic cost in time or money of activating insurance, people think twice when economic times are leaner. This phenomenon may explain why utilization is reportedly down in Medicaid plans, even though there is relatively little direct economic friction to utilization through cost sharing. Analysts point to the opportunity cost for low-wage workers of taking time off from work to visit a doctor (even though there may be little or no co-payment involved).

The patent cliff. The pharmaceutical industry has had a rough few years as many of its blockbuster medications came off patent and were exposed to merciless competition from generics. Generic substitution rates are at an all-time high, which explains the amelioration in the drug spending trend for chronic care medications in most health plans. (This is not true for specialty pharmaceuticals, which we will explore below.) A recent Accenture study suggests that the patent-cliff effect peaked in 2012, and the economic benefits to consumers may have peaked along with it.

The impact of Obamacare. Most analysts are pretty skeptical that there is much affordable in the Affordable Care Act, but that judgment may be unfair and hasty. Across the country, health system leaders are exhorting their organizations to “learn to live on a Medicare level of reimbursement.” This is more of an aspiration than a practical plan, because it requires taking 10 percent, 20 percent or maybe even 30 percent of costs out of the system.

Yet “learning to live on Medicare” is a prevalent strategic plank in the operating platform of most large systems. Spurred by the ACA, many systems are embracing this goal and doing the detailed work of improving throughput efficiencies, rationalizing the supply chain, and redesigning clinical processes for higher performance on both cost and quality. If everyone in hospitals is trying to take costs out, then maybe costs get taken out. Just speculating.

The Triple Aim and accountable care. Across the country, hospital leaders and even entire states are embracing some variant of the Triple Aim and committing to manage total costs, population health and the quality of the patient experience. Accountable care organizations (ACOs) may end up saving money. Similarly, many states across the country are discussing, if not fully embracing, efforts such as those in Massachusetts to have health care meet a growth target closer to the gross domestic product growth per capita.

Choosing wisely. Finally, there is a major movement in medicine toward a rediscovery of financial stewardship as part of medical professionalism. This trend is epitomized most notably in the Choosing Wisely campaign that has been embraced by a growing number of medical specialty societies. The reduction of harm and the elimination of waste, done right, may yield economic savings that can be substantial and sustainable.

 

A New Normal? Or the Empire Strikes Back?

While all these factors argue that we have perhaps reached a new normal of slower health care cost growth, it may be premature to declare victory. Look, we have flat lined temporarily before and bounced back to the trend. In particular, in the mid 1990s when Clinton care was being discussed and managed care was on a roll, cost trends ameliorated significantly, only to bounce back when Hillary’s plan collapsed and restrictive managed care got rolled back because of the consumer backlash.

Around the world, health care spending per capita tends to rise with national income. Economists deem health care a superior good. A society will spend a higher percentage per capita and as a share of the gross national product when national income rises. (This does not let us off the hook, by the way. The United States is an outrageously expensive outlier to this simple generalization.)

There are many reasons to suspect that without continued vigilance the inflationary costs trend may bounce back.

Coverage expansion. Let’s start with the obvious: The ACA aims to expand coverage to more than 30 million uninsured. While they are getting some care today, they are likely to cost more in the future, perhaps 25 percent to 30 percent more per capita for 10 percent of the population, or some 3 percent in an overall increase in total costs per capita. To put that in context, though, that increase is exactly half the rate of annual cost growth in health care, so it could theoretically be absorbed if the trends outlined above are maintained.

Aging. Of more concern is the aging of the population and the increase in the Medicare-eligible population, from 13 percent of the population today to more than 22 percent over the next decade. This will not come cheap as demanding, narcissistic baby boomers demand to have their knees, hips, hearts and maybe even minds fixed over the next 30 years.

Technology. New science will yield new technology. Whether it be personalized genomic medicine, advances in imaging, or transplantation and complex surgery, there are likely to be new and expensive technologies that will be hard for American society to resist.

Two related examples of this are the trend toward personalized medicine and the rise of specialty pharmaceuticals (often termed biologics). The cost of specialty pharmaceuticals has been growing at more than 20 percent per annum for the last decade and now has come to a point where it represents almost 40 percent of total drug spend in some health plans. Most of big pharma’s investment in R&D is targeted toward these complex, large-molecule drugs that are often focused on small populations, with annual cost of therapies in the hundreds of thousands of dollars per patient.

Prices. Much of the recent growth in health care costs has been in price, not volume. Continued massive consolidation in the delivery system concerns, in particular, private purchasers who worry that they will be asked to pay higher prices to compensate for the trend-bending activities of the government.

Robust economic recovery. Much of the slowing of the cost growth in health care can be attributed to the benefit buydown we discussed earlier. Corporate America was able to do that during a recession more effectively than if it was engaged in a war for talent. Remember that? If we see the economy picking up speed, the pressure to provide more generous benefits may cause employers to loosen the purse strings.

Job growth in health care. I was always taught that health care costs equal health care incomes. Judging by the robust growth in the health care sector, costs are not declining any time soon. Health care accounted for almost 300,000 of the 1.9 million new jobs created in the last year (over 15 percent of the total growth). And there are only isolated signs of slowing as part of the learning-to-live-on-Medicare mantra.

 

So What?

Overall, my judgment (for what it’s worth) is that this slowdown is real and is potentially sustainable if we keep the focus of purchasers (business, government and households) on this issue. I believe we have to slow the growth in health care costs or we will face horrible consequences in the form of unacceptably high tax rates or equally unacceptable economic Darwinism in health care. It is a threat to individual economic security, and in turn national security, through the pernicious effects on the federal deficit.

If sustained even for the next few years, slowing cost growth will create some interesting impacts:

Time for a budget breather? The budget deficits may seem less onerous, and there may be less pressure to act on major Medicare reform, if the Medicare meltdown seems less immediate.

Obamacare coverage expansion may get off the ground. Coverage could be expanded without bankrupting the treasury in the short term, particularly if many states are slow on the uptake of Medicaid expansion and exchange roll-out, postponing the associated federal costs of Medicaid expansion and insurance exchange subsidies.

The one-time sale on a sustainable growth rate fix. My friend and colleague Robert Blendon of Harvard University has pointed to an important opportunity for the Congress presented by the apparent slowdown in costs, namely fixing the sustainable growth rate problem. The deep cuts in payment to physicians under Medicare get waived every year with bipartisan support. Few in Congress want to cut doctors by 30 percent, and even fewer are willing to fix the problem permanently, because the number is too big over a 10-year period. If the cost trend is bent, then the problem becomes cheaper to solve.

But then you say, won’t the projected total costs go up as a result? You can see why this is tricky stuff, can’t you?

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.

 

January 2014 seemed so far off when Obamacare passed in March of 2010. Now it is around the corner.

There were a lot of benefits of phasing in implementation so that the big bang of coverage expansion was more than three years off. Specifically, the government could collect some revenue before coverage costs kicked in (not hugely popular with the revenue generators but it did mean the deficit didn’t balloon further). The relatively cheap step of covering 26-year-olds would reduce the uninsured and give the public a taste of benefits from Obamacare (it did and it is popular). Postponing the major Medicaid expansion and providing incentives to maintain Medicaid coverage through the recession kept Medicaid coverage expanding (a mixed blessing depending on whether you are paying for Medicaid through taxes or you’re on Medicaid because you are poor).

And then the Supreme Court threw a curve ball by saying the major Medicaid expansion was essentially optional for states (the foundation of coverage expansion is now optional; what a splendid idea to have an optional foundation — try that at home). Finally, and perhaps most importantly, the benefit of delay was that states would have valuable time to do the long and arduous work of establishing health insurance exchanges required by the law (most states didn’t bother with this aspect of the law, imagining — incorrectly, it turns out — that it would go away when the Supreme Court or the American electorate smartened up). So now you are up to date.

As of January 2013, KFF/Harvard tracking polls show that 52 percent of Americans still say we should “continue trying to change or stop” Obamacare (including 27 percent of Democrats who think the law did not go far enough). Conversely, only 40 percent of Americans say “let’s accept that it is now the law of the land and we should stop trying to block its implementation.” So implementation is in for an uphill battle against public opinion, and there are many ways the implementation can go horribly wrong.

 

The Worst Case Scenario

The core promise (and challenge) of Obamacare is coverage expansion through Medicare and exchanges. I will focus solely on these aspects here (in future columns I will deal with the health care costs issue in more depth). The latest Congressional Budget Office estimates, released in February 2013, peg the coverage expansion by 2022 at 27 million (12 million through Medicaid and 15 million through net expansion of exchanges, factoring in conversions from previous coverage). That could be an unreasonably high estimate. Here is why:

The weakness of the penalties. The major carrot for coverage expansion is 100 percent federal coverage for Medicaid expansion (at least in short run) and significant federal subsidies for coverage through health insurance exchanges. However, the major stick to encourage the uninsured to seek insurance through exchanges or Medicaid if they are eligible for coverage is the individual mandate. If you do not have health insurance you have to pay a fine through your income tax return. The fine starts at $95. A year! You do the math.

The cascade of sticker shocks. Sticker shock is just getting started. Because of the new insurance rules and the creation of exchanges, there are enormous one-time price dislocations in the individual and small group market. Insurers are already asking for 10, 20, 30, 40, even a 100 percent rate increases for certain products in these markets. Larceny? Extortion? Opportunism? Not really; it’s that pesky math again.

The cost of insurance premiums is the actuarially predicted costs of care for the population covered plus an administrative fee. If the administrative fee is regulated (as it is with the medical loss ratio provisions of Obamacare) and the products are becoming more standardized to explicit actuarial values (the precious metal bands we will all come to know and love), then the variation is about the costs of care and the actuarial risk of the pool.

Take a typical individual policy in the market that in many states has an actuarial value of around 40 percent to 50 percent (meaning the policy has high deductibles and co-insurance so that it covers about 40 percent to 50 percent of the expected costs of care). If you require that person to purchase at least a 60 percent actuarial value plan (bronze level), then the premium is going to go up, perhaps as much as 50 percent without factoring in medical cost trend and the risk that the person who is electing to be covered and not pay the fine is more likely to be sick.

So you kind of get it how those guys with green visors called actuaries tell their bosses that the premium has to go up 50 percent or so. Now the bosses have to explain in English to the customers, the press and the regulators that people must pay more for insurance. These conversations are not going well.

But this is just the beginning. Just wait until we see how much people have to pay in the exchanges after the subsidy. As I have reported in this column before, this can amount to several hundred dollars a month for a family, up to almost 10 percent of their income. Obamacare is not free. Trust me, I am a social scientist: Free is more popular with consumers.

Small employers drop coverage. Much is made of the theory that employers (particularly large employers) will dump their employees into the exchange and simply pay the fine. I will not repeat the arguments made in previous columns that this is overblown. But what is a real and present danger for Obamacare implementation is that insurance rates are going up in small group and the individual market.

Most uninsured people work for small businesses or are part-timers in big businesses (both categories are exempt from employer-sponsored mandates under Obamacare), and it is quite likely that many small businesses will get priced out as they have been consistently over the last two decades. We have reached a point where only one in six employees working in small business and making less than $15 per hour has employer-sponsored health insurance. The number of uninsured in this category could increase, because the only backstop to prevent coverage erosion is the exchange subsidy and the individual mandate (see $95 per year above).

Eligible but not enrolled. Studies show that Medicaid has a positive impact on the health, health care and economic circumstances of beneficiaries. Medicaid also enjoys surprisingly high satisfaction ratings among beneficiaries. However, millions of Americans are eligible for Medicaid yet do not enroll. Medicaid take-up rates vary across the country: For example, California has a take-up rate of 61 percent, Massachusetts 80 percent, and Washington D.C. 88 percent. This presents two problems for implementation: First, take-up rates will probably be lower than CBO estimates, and second, Obamacare doesn’t pay 100 percent federal dollars for the currently eligible who end up getting coverage under Medicaid. This, in turn, increases the economic burden on states to bring those existing eligibles on board.

The states that balk. Some states are going to take forever to expand Medicaid, and the low-income population in those states will not see much improvement in their health care coverage. Those states may also be slow on the implementation of the insurance exchanges, especially if the federal exchange fizzles for all the reasons I discussed in my last column. The net result may be total coverage expansion under Medicaid and exchanges closer to 16 million or lower by 2022.

The state exchanges screw up. Even states that are embracing exchanges could screw up on implementation. Experts point to vulnerabilities such as enrollment system complexity, adverse selection, lack of participating insurers and sticker shock on prices of policies, particularly for young people.

Young people are revolting. In polls, young people are the most likely to support Obamacare, but they will be the ones getting the raw deal. An actuary would say a 31-year-old should pay a seventh of what a 60-year-old pays, but Obamacare says a third. The result is that rates for young people will go up substantially in the exchange compared with offerings today. How will they react politically?

You can always go to an emergency room. Unfortunately, it is true that hospitals have to treat you if you turn up at an ER. But, let’s be clear this is far from ideal for patients, providers or payers (especially us taxpayers).

Rube Goldberg apparatus fails. Put all this together and you can imagine a scenario in which Obamacare through a combination of political opposition, public unpopularity and implementation disasters fails to deliver on the basic promise of coverage expansion. My friend and colleague Emily Friedman extended this story into a brilliant and wildly entertaining fable that leads to a single payer system (LINK Emily Piece). Maybe her fable becomes fact, but I just can’t imagine an American electorate willing to have an additional 10 percent of the gross national product flow through the federal government in the form of increased taxes to support such a scheme.

 

The Best Case Scenario

Look — it might not be that bad. There are many ways Obamacare could get implemented and coverage could get expanded pretty much as promised. Here’s how:

A new normal for insurance markets. Sure there will be short-term dislocations in small-group and individual markets. Hey what do you expect? We are moving toward a more regulated, community-rated insurance market that will involve short-term dislocations. But these are one-time effects. Small group rates are not going to necessarily increase by 20 percent per year forever.

The Brewer trigger. Governor Jan Brewer of Arizona, one of the most vocal opponents of Obamacare, plans on expanding Medicaid in compliance with the law, provided the federal government does not renege on the deal where it pays the lion’s share. This trigger may represent a face-saving way for Republican governors to expand Medicaid without putting state budgets at risk for a new entitlement. My understanding is that prominent Republican strategists are advising many governors how to navigate this difficult Tea Party terrain. And, just as I write this Governor Rick Scott of Florida announced he had secured a waiver to expand Medicaid, this is a signal event and more may follow quickly.

The Latino vote. Along with Brewer, Republican governors in New Mexico and Nevada have indicated they will support state exchanges and/or Medicaid expansion in recognition that there are significant and popular benefits in Obamacare for Latino voters. The recent bipartisan interest in immigration reform and the growing recognition of the power of Latino voters may be a very good thing for getting Obamacare off the ground.

The West comes through. The Western states have an opportunity to demonstrate that Massachusetts was not an aberration, that coverage can be expanded through Medicaid and exchanges. While there may be some stumbles, the Western states have skilled leaders in key positions that are committed to successful implementation. These states also have the benefit of continued federal financial support under continuing resolutions enacted in the law to establish state-based exchanges. If the Western states can pull it all off, then other states that hold off will have to answer to their electorates as to why they are not acting.

Health system leaders step up. In many states, from Wisconsin to Oklahoma, reluctant Republican governors philosophically opposed to implementing Obamacare are hearing from health system leaders that Medicaid expansion and exchanges may be good for the state. Many of these health system leaders are even offering provider-based taxes to create the matching state funds to sweeten the Medicaid expansion plans.

The gratefully covered. I am days away from being uninsured. My COBRA coverage will run out before you read this column (don’t ask unless you have an hour or two). I am applying for a $6,000 high-deductible health savings account with a nonprofit local insurer (which will remain nameless in case its underwriting department reads my column).

The insurer’s outsourced fact checkers reached me in the middle of the night (I was on a trip) to triple-check my blood pressure, my medications and my latest cholesterol readings. They hunted me down when neither my clients nor my children could.

I completely understand why they are interested in tracking me down, given the dysfunction that is the current individual insurance market. They are taking a significant risk insuring 60-year-old Scotsmen. So, I can’t wait for the exchange to open. In fact, I paid a kid $50 to hold my spot in line, and he is pissed that I am going to pay only three times as much as he is.

There are millions of hard-working self-employed Americans like me who are 60-plus and in the individual market and are denied coverage; there are millions more even harder-working Americans who make less than $15 per hour and need help getting coverage because illness can hit any one regardless of race, creed, class or economic circumstance. Obamacare will help all of us, and believe me, millions of us will be very grateful to have that security. That’s why this all has to go well. It is ugly, but it is better than any alternative that we have in front of us. Let’s make it work.

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

 

With the emphatic re-election of President Obama and the resignation by all that Obamacare is “the law of the land,” much interest and concern centers on a cornerstone of coverage expansion: health insurance exchanges. Public exchanges are off to a rocky start with many states that bet against Obamacare now scrambling to find a solution, including defaulting to a federally run exchange.

At the same time, large multistate employers are eyeing private health insurance exchanges (benefit marketplaces run by private sector intermediaries without benefit of federal subsidies) as a possible solution that may allow them to migrate to a defined contribution model of health insurance. Since private health insurance is the lifeblood of most health systems’ financial success, any changes in the private market caused by exchanges (both public and private) will have enormous short- and long-run implications on providers. What should you watch for as the story unfolds?

 

The Law and the Issues

Obamacare (also called the Affordable Care Act, or ACA) aims to expand coverage by growing Medicaid (to an estimated 16 million or so, if all states pursue the expansion as envisioned) and by providing subsidies for people to purchase insurance through state-based health insurance exchanges. Coupled with the individual mandate to purchase insurance and the requirement that businesses with more than 50 employees offer coverage to employees who work more than 30 hours a week, Obamacare optimists believe we will be well on the way to expand coverage to an additional 16 to 20 million beyond the Medicaid expansion. That’s the idea.

The theory survived Supreme Court challenges (sorta, more on this later) and was given further credence by the re-election of President Obama (as anticipated in my column written the day he was inaugurated in 2009). Now the clock is ticking for a go-live date of coverage expansion that is less than a year away. And most states are nowhere near ready.

There are two sets of issues to follow on the creation of exchanges; the first involves wonk issues of state and federal politics, policy, budget, and implementation challenges. The second set involves the likely behavior of market actors including employers, health plans and consumers.

 

The Wonk Issues

Medicaid’s slow-pedal expansion. The focus of the column is on exchanges, but you can’t think about exchanges without thinking about the Medicaid expansion, especially if you are a wonk. The Supreme Court decision opened the door for states to resist or at least slow pedal Medicaid expansion. The hope from the left is that red state governors may eventually come around to expanding Medicaid given that (on paper) the federal government picks up almost all the tab. (The federal government pays 100 percent of the expansion costs for newly eligible citizens for the first three years, sliding down to 90 percent after 10 years).

But red and blue states alike worry that the fiscal cliff discussions, austerity 2.0, or whatever other federal budgeting shenanigans we come up with over the next two or three years will undermine that deal and leave the states on the hook for a substantial share of a massive new entitlement program. It will therefore be no surprise if states take their sweet time to implement an expansion. And this would be consistent with the birth of Medicaid: It took 18 years for all states to join Medicaid. Arizona did it in 1982! Better late than never.

Similarly in Canada, Saskatchewan piloted universal hospital insurance in 1946 and was followed by a couple of other provinces. But it was not until 1957 that Canada passed the Hospital Insurance and Diagnostic Services Act that enabled provinces to receive 50 percent of  federal funding for universal hospital insurance.

Even then, it took almost five more years for all provinces to sign up. (Ironically, because pioneering Saskatchewan got federal help for their already existing hospital insurance scheme, it used the money to pioneer universal medical insurance for physician services in 1961. Yet the national Medical Care Act was not passed until 1966 [five years later again] to produce the national single payer system we would recognize today). So overall, Canada took 20 years to deploy its national program.

The irony, of course, in the halting U.S. coverage expansion is that the two states (after big dog California) that have the most to gain (and potentially be on the hook for expansion) are Texas and Florida, whose governors have been among the most vocal opponents of Obamacare. The financial stakes are substantial. For example, according to John Dorschner in a Nov. 28, 2012 post in The Miami Herald:

“…a Kaiser Family Foundation study showed that if Florida accepts Medicaid expansion, it will cost the state about $8.9 billion over 10 years to insure an extra 1.6 million people in the state-federal insurance for the poor.

“If Florida opts out of the expansion — as the U.S. Supreme Court allows states to do — the state’s Medicaid enrollment will still go up by about 370,000 people, with an added cost to the state of about $3.5 billion over 10 years, according to the Kaiser analysis….

“Once that group of 370,000 people is factored in for $3.5 billion, the additional cost of expansion would be a net of about $5.4 billion over 10 years to cover an additional 1.2 million people, according to the Kaiser analysis.”

Read “New study: Medicaid expansion could cost Florida $8.9 billion over 10 years” here. Forty dollars a month of state tax revenue to cover poor people seems like a deal to me, but on the other hand $5.4 billion over 10 years is real money compared with doing nothing.

The gap: too poor to subsidize. The reason exchanges are affected by Medicaid is that subsidies are available only for those with incomes between 133 percent and 400 percent of the federal poverty level. If states refuse to expand Medicaid to that level, millions of Americans will be left in the gap (like the 1.2 million people in Florida).

This could become a bargaining chip in national budget discussions: Why don’t you (feds) let us (states) scale back Medicaid expansion but give us some money for private insurance subsidies in the exchange? Problem is, private insurance subsidies for very low income people would be more expensive to the federal government than Medicaid expansion, but perhaps more ideologically acceptable to Red state governors.

Playing silly buggers (part 1). The Cambridge University Press English Dictionary defines “Playing silly buggers” as a British and Australian expression meaning “to behave in a silly, stupid or annoying way,” as in the normal usage example they cite: “There’ll be a serious accident sooner or later if people don’t stop playing silly buggers.” Well said. Many states have been playing silly buggers by flagrantly ignoring the law, passing spurious state-based attestations that they won’t comply, and launching myriad legal challenges in the hope of finding an Achilles’ heel that brings the entire Obamacare edifice crashing down. It hasn’t stopped with the election decided.

Look folks, this Rube Goldberg edifice of convoluted complexity that is Obamacare could come crashing down on its own. It just seems to me completely counterproductive to passive-aggressively undermine the implementation of a law, however clunky, that tries to improve the health care coverage, care and health of the least among us. We should be pulling together to make the best of this, not pulling it apart so it fails. Just saying.

The states that are ahead are thinking they are behind, so the states that are behind are really behind. California has been steaming ahead to implement its exchange. Sixteen other states are nominally doing the same thing. However, board members of these exchanges and astute local observers are both publicly and privately concerned that there is no way they can be ready in time for the open enrollment process in the fall of 2013. For example, states like Connecticut, Washington and Maryland are enthusiastic about implementation of exchanges but are in shock and awe at the implementation timetable when you actually have to do the work.

For those hold out states that did nothing or next to nothing to prepare, the situation is even more difficult. You just can’t bust an exchange out of your hat over a long weekend, as Governor Rick Scott of Florida found out over Thanksgiving.

The federal tanks are coming, really? Facing an impossible deadline? Call the federal government for help. Some 17 or so of mostly red states have come out post-election and said to the Obama administration: “OK smarty pants: you do it.” This will work really well, right? We have delegated significant authority to the states to decide non-trivial things like covered benefits and allowable deductibles in the exchanges, yet the states that seemed most likely to exercise restrictions in those areas are now looking to the federal government to install an exchange. Federal standards are likely to be more expansive than restricted; who will adjudicate that fight?

An exchange is not like a refrigerator or small appliance that you ship to Florida and plug in. An exchange requires massive back-office integration with existing multi-various state Medicaid systems. My back-of-envelope calculations (based on consulting contracts given to large system integrators for exchange implementation in a couple of states) is that the system integration budget nationally would be considerably north of $5 billion. Does the Obama administration have the money appropriated?

Experts say that the costs of operating exchanges will be covered by a 3.5 percent insurance surcharge for product going through exchanges. (Yet another delicious irony: We are charging a surcharge to make it cheaper. You can’t write jokes better than that.) But the system integration costs are an up front investment, so I am not sure how all this is going to work. Many Washington insiders and old hand system integrators are skeptical that the feds are capable of rolling out the federal exchange on time. (See, for example, Sarah Kliff’s excellent reporting on this in her Nov. 12, 2012, blog at the The Washington Post: “Is Obamacare too much for the Obama administration?”).

California. California is ahead and it is the biggest state with the most uninsured. It is the whole game. If reform, ACOs and exchanges all fail in California, national health reform implementation would be on the rocks. Governor Brown is so focused on budget and tax issues that making health reform work is way down on his priority list.

But, luckily the key player is the head of the California exchange, now called Covered California, Peter Lee (an old friend) who is unmatched in his smarts, energy and optimism. If anyone can crank up the Rube Goldberg machine to actually cover people and bring value-based purchasing principles into the market, it’s Peter and his very capable board. We are cheering them on, but early rumors are that most of the plans that get offered in the exchange will be either a high-deductible Kaiser product or skinny network high-deductible PPOs. And the public is not prepared for the after-subsidy sticker shock when all these things get priced.

Premium increases in anticipation of Obamacare disruption. The last wonky issue is that these exchanges are going to be constructed against a backdrop of massive premium increases in the small group and individual market in anticipation of the regulatory requirements of Obamacare. The reasons? A lot of plans out there have lower actuarial value than the Obamacare requirements; there are new taxes and surcharges that kick in; there is pricing power on the provider side because of consolidation; and most importantly, exchanges and Obamacare migrate the pricing in the individual market to tighter age-based rate bands.

Specifically, exchanges have to price by age on a curve that goes up a little bit each year of age from 1.00 for young people to 3.00 for 65-year-olds (all plans in the exchange have to use the same curve according to recently released regulations, and that’s good). But the 3:1 age rating (which was in Obamacare from the onset) does not reflect the actuarial reality that 64-year-olds are six to seven times as expensive as 30-year-olds, so younger groups and individuals will see premiums rise enormously while 64-year-olds may see a slight decrease.

For a thorough recent discussion of this, see the always savvy Bob Laszewski’s Dec. 5, 2012, blog “The (Not So) Affordable Care Act — Get Ready for Some Startling Rate Increases” at www.thehealthcareblog.com. The bottom line is that exchanges and Obamacare will be blamed in the media for causing rate increases even before the program gets off the ground. That is a big political and policy problem.

The Market Issues

Playing silly buggers (part 2). The next group to play silly buggers is employers. The game has already started. Large employers will definitely increase the use of part-timers and temps to avoid increasing the workers eligible for health insurance. Darden, Wal-Mart and other employers with armies of low-wage workers have already started to do it; more will follow. Because many corporations in retail, hospitality and service businesses have mostly low-wage workers, this is an appealing strategy for big players. Equally, small businesses under 50 employees who are exempt from the mandate to offer workers coverage will, in turn, face pressure from workers who will have to purchase insurance through the exchanges.

If exchanges are unaffordable, employees may clamor for coverage on a group basis, in order to activate the tax subsidies available to small businesses. However, there has been a longstanding secular trend toward the erosion of employer-sponsored coverage in small businesses under 50 employees. In particular, Commonwealth Fund surveys of employers found that only 33 percent of workers had employer-sponsored coverage in small businesses with under 50 employees, down from 42 percent in 2003. Among low-wage workers (under $15 an hour), only 18 percent had employer-sponsored coverage. Wow. We have a big gap to close in the sector where all the new jobs are supposed to come from.

Employers aren’t running away…yet. If there is any good news in all this, it is that employers will not all run for the exits in the short run. Long run, different story (more of which below).

A Harris Interactive Strategic Health Perspectives survey taken in the fall of 2012 asked employers of all sizes their attitude about providing insurance directly to their employees over the next five years. (See figure 1 below.) The good news is that 60 percent of employers (of all sizes) anticipate continuing to provide health insurance to their workers, and 13 percent say the exchanges may provide a coverage expansion opportunity. The bad news (if you worry about exchanges) is that 21 percent say they are actively considering strategies to migrate employees to exchanges, and that proportion remains pretty constant for small employers and jumbo employers alike.

 

Figure 1: While a majority of employers plan to continue providing health insurance to their employees over the next several years, about 1 in 3 employers may transition employees to exchanges.

 

Base: All Employer Health Benefit Decision Makers (n=303)

Q1418: Which statement below best describes your company’s attitude about providing health insurance directly to your employees over the next few years?

Base: All Employer Health Benefit

SOURCE: Harris Interactive, Strategic Health Perspectives 2012 Employers Survey

 

The self-insurance advantage. The ACA provides a slight advantage to self-insured employers because the health insurance tax is applied to only the administrative costs component of a self-insured employers health costs, not the premium equivalent if they were fully insured. This irks Kaiser and others, and provides a 3 percent to 4 percent advantage in the market for administrative services only (ASO) plans. That’s why, anecdotally, we are seeing a cavalry charge to self-insurance among ever small employers (some who have no business being self-insured). It will take just one tiny neonate in a small self-insured pool to change their mind, but then it is too late. Nevertheless, this self-insured advantage provides a market reason for employers to keep away from exchanges.

Private exchanges: a sleeping giant? I have always been skeptical about why private exchanges are a hot new thing. First, they don’t have federal subsidies attached to them. And second, there was nothing to stop their creation up to now and it didn’t happen.

But, I am coming around to the view that private exchanges will be a force. Why? Because large employers are weary of the costs shifted to them and the resulting cost shift to their employees. They are looking at a 50-state mish-mash of different public exchanges, and their C-suites wax lyrical about doing to health benefits what they did to pensions: shift from defined benefit to defined contribution. “Here is $10,000 a year more in salary forever, and here is an exchange run by Towers Perrin Crosby Stills Nash and Young; you pick what you want and have a nice life.” CEOs get misty-eyed at this.

The Harris Interactive Strategic Health Perspectives survey shows that 23 percent of employers say they are extremely or very confident that public exchanges may provide a viable alternative for their employees in the next few years (up from only 7 percent last year). But a larger proportion of employers, 28 percent, thought that private exchanges will present a viable alternative. This one will be fun to watch.

The long run private exit strategy. All this feeds into a possible exit strategy for employers in the long run: 2017 and beyond. If public and private exchanges are viable, if the law stands that large employers can join exchanges after 2017, if the Cadillac Tax kicks in, limiting tax deductibility of health benefits (or indeed gets accelerated through budget negotiations), and if underlying health care costs and premiums keep rising, then we may have all the conditions for a long run exit of employers from providing commercial insurance direct to their employees.

 

Three Scenarios

There are three possible scenarios for how public and private exchanges may change the landscape.

Scenario 1: Managed competition Nirvana. Some combination of public and private exchanges enables employers to create the transfer away from defined benefit health plans to defined contribution plans where consumers, depending on income and employer preference, would be in marketplaces where they pick among value-based provider networks. Consumers would have an incentive to pick lower cost plans or pay the difference themselves. This is the managed competition Nirvana that my friend Alain Enthoven conceived of decades ago. And it might not be all bad.

Scenario 2: Minor miracle. In this scenario, public and private exchanges grow as an important force and get off the ground to expand coverage to perhaps 10 to 15 million more Americans (no mean achievement). But the mainstream of health care for most non-elderly Americans is employer-sponsored commercial insurance, with all the good and bad of that. This seems the most likely path in the short run.

Scenario 3: Single player. A third scenario, a dream to some, a nightmare to others, is that public exchanges flourish, private exchanges do not. Exchanges grow in leaps and bounds and become the default insurance vehicle for most and there is enormous clout in the hands of three purchasing actors: Medicare, Medicaid and the exchanges. If they acted in concert in a value-based purchasing frame, that would have enormous consequences, some good and some bad, depending on where you sit. This is less likely in the short run, but maybe a reality in the long run. This would put enormous downward pressure on reimbursement rates.

 

Closing Thoughts for Health Systems

First of all: Don’t panic. Watch this stuff closely because it is important. The more exchanges grow and move the market toward retail decision-making, the more consumers will pick high-deductible plans and skinny networks. If exchanges, particularly concentrated public exchanges, grow, they may flex their market power in putting downward pressure on commercial reimbursement rates. And finally, think about how this interacts with your ACO strategy…a topic for another day.

Ian Morrison, Ph.D., 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.