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Utah Association of Health Underwriters
Discussion Paper – 2008 Legislative Session
By Brad Kuhnhausen, Health Policy Consultant
Pre-Release 10/5/2007

Introducing Consumerism into Health Care Commerce

      Most proposals for health care reform talk about the importance of increasing competition in the marketplace. Yet on close examination, most proposals do nothing to engage the consumer into the process of health care commerce. In fact, most “cost containment” proposals involve nothing more than consolidating the purchase of health care into large pools. Unfortunately large pools “save money” by eliminating choices in the market.  Large pool advocates plan to “help” the doctors be more efficient, while eliminating administrative duplication. At the end of the day, these proposals wish to impose order on the market through committees of experts and concerned citizens.


      Unfortunately such proposals are counterproductive to true market reform because they perpetuate the main cause of health care inflation:


The control of health care commerce by the 3rd party payment system that is based on “procedure code-by-procedure code” claims processing.


      3rd party payers insulate the consumer from health care commerce. 3rd party payers alone know the pricing of services – and they treat their fee schedules as a corporate top-secret. 3rd party payers do not share information on provider outcomes to consumers. Their managed care co-payments hide the true cost of care from the consumer. They direct consumers to certain preferred providers and drug manufacturers based on bureaucratic assessment of value and marketing concerns. Collectively, they unintentionally create barriers to long term doctor/patient relationships as consumers face changing “preferred provider lists” throughout the course of their lives.


      UAHU believes that these behaviors by insurance companies are caused entirely by the unintended consequences of the procedure code based payment system. This system, originally conceived in the first half of the last century, causes patients and physicians to behave in wasteful ways. Unfortunately the natural reaction was to impose order on the market. That was exactly the wrong thing to do. We should have changed to a Consumerism payment system.


      3rd party payers impose on provider’s practice patterns by creating bureaucratic “best practice” protocol. They do so by refusing to pay the claims of doctors that do not follow regulations. Because providers deal with multiple carriers, each with their own unique best practice protocol, the provider has to treat patients with the same morbidity differently – including different formulary prescriptions. So the unintended consequence of 3rd party managed care is doubly ironic:


a)      Patients with identical conditions but with different insurance plans are required to be treated differently.


b)      Patients with identical insurance and the same diagnosis, but with different personal needs have to be treated exactly the same.


Finally, 3rd party managed care payers create obstacles to providers interested in entering a particular specialty. They protect their current preferred specialists by refusing the applications for new specialist no matter how qualified or efficient. While the claim of “we have all the specialists we need based on our patient volume” is true from their perspective, it is understandably frustrating for doctors trying to establish a new practice. This is an example of how “large pool” volume discounts reduce competition – by rationing their clients to a limited number of providers.


So in pursuit of the almighty large volume discount, we forgot one important economic reality. While volume discounts give a one time price break, they have not proven to affect the underlying inflationary trend. It could be argued that they actually exacerbate the problem because they insulate the patient from the doctor in the actual commerce of health care. So while managed care may have wrung out some inefficiency, it did not slow the increasing cost trajectory of our health care system.


The Characteristics of an Efficient Health Care Market


There are three main components to any efficient market:


·                          First, the buyer needs choices. The more choices available, the more efficient the market becomes.

·                          Second, the buyer needs accurate price information. If prices do not reflect the actual cost of the product or service, the market becomes inefficient and buying patterns are skewed.

·                          Finally the buyer needs to be able to evaluate the product or service so they know if it fulfills their needs or desires.


Health care commerce under the Utah 3rd party payment system has only one of the three characteristics of an efficient market: consumers do have choices. There are currently 6 major insurance carriers, many smaller carriers and the State HIP that participate in the small group and/or individual health care market. Among them, the Utah consumer has access to thousands of different policies and plan designs at many price points. Utah literally has the most vibrant and lowest cost health insurance market in the country.


Sadly, many of the touted proposals for health care reform would further consolidate the market and reduce choice. The Massachusetts Connector for example (according to the Massachusetts Division of Insurance) reduced the number health insurance plans offered in their state from 21 carriers offering 172 different plans to 6 carriers offering 26 different plans. Alarmingly, three of the fifteen carriers that chose to stop writing small group and/or individual business in Massachusetts are currently selling products in Utah (Aetna – the newest player in our Utah small group market, John Alden & MEGA Life). One would expect them to leave the Utah market, if the Exchange proposal passes, just as they did in Massachusetts.


Many of the Utah proposals would have a similar effect. UAHU believes that any proposal that would lower the number of choices for the consumer is counterproductive and should be rejected.


While we do have choices of insurance plans and to some extent, providers, Utahans do not have accurate price information about health care services. When consumers go to the doctor the price is based on the benefit design (co-payment, deductible and co-insurance), not the actual cost of the service. It has gotten so ridiculous that a provider locked into the 3rd party payment system cannot even tell his patient what his services will cost over the phone.


The consumer cost of a single prescription can range from under $5 to $20 to $100 or more depending upon the health plan (or lack thereof) of the patient – same drug, same pharmacy, multiple prices. These are not the signs of an efficient market.


Yet for providers that work outside of the 3rd party payment system, accurate pricing information is not a problem. Lasik surgery patients can see price information in their Sunday paper right next to the Home Depot advertisement. If one lives in an expensive zip code, mailers for discount Botox treatments and tummy tucks come weekly. And even though liposuction and stomach stapling procedures are major surgery, those providers do not find it problematic to globally price the complete treatment – including anesthesia, operating room and physical therapy. UAHU would argue that global pricing (a.k.a. episode of care pricing) is the natural state of health care commerce. It is the current procedure-by-procedure payment system that has suppressed the ability of consumers to see true prices.


(See the UAHU discussion paper on why episode of care pricing will lower prices and improve health care treatments & results.)


So while Utahans enjoy choices, they have skewed (inaccurate) pricing information. Consumers also have virtually no data about provider outcomes. It is clear that the 3rd party payment system cannot provide that data for two major reasons. First, no carrier has all the data. Since providers work with multiple carriers, no single carrier could produce a complete picture of a particular provider’s outcomes. Second, carriers should not publish outcome data – even if they are completely confident of the results – because doctors do not want to be rated by carriers. This is understandable because no provider should be rated by a private company that has incomplete information and a stake in the results. This is true even if the ratings are for “in house use only” – particularly if the rating affects the provider’s reimbursement rate or bonus.


Thus, it must fall to the government, working with professional provider organizations to start collecting and publishing objective outcome data. UAHU suggests that the Department of Health be charged with the task of requiring outcome data from the providers that they license.


Although it is true that fair outcome data is a complicated process, it is not impossible. The DOH should not rate or grade outcome data, but rather work with providers to make sure the data is pertinent and accurate. While it may be difficult to agree on fair outcome data, perhaps we can agree to at least start with “number of procedures” performed. More sophisticated outcome measures can be developed over time.


(See the UAHU discussion paper on how to develop consumer friendly outcome data for the market.)


Although UAHU believes that the unintended consequences of the 3rd party payment system have prevented the health care market from developing properly, we certainly do not advocate the elimination of that system. Rather, we believe that the 3rd party payment system can be reformed to promote Consumerism. We just have to change the payment relationship between carriers and providers and patients. We have to give consumers the tools to behave rationally in the market. Those changes will release the market forces that will ultimately tame the ridiculous cost spiral which is causing our national health care expense crisis. Consumerism can do this.


Introducing Consumerism


Virtually every modern health care proposal talks about the importance of introducing market forces into health care. UAHU has taken those sentiments as sincere and believe that market forces are the best way to reform health care. In order to accomplish this, we decided to describe the look of a true market health care system and propose and systematic and incremental way to introduce it into Utah. We call this new way of paying providers Consumerism.


Consumerism is an “outside of the box” solution – that looks better and better under close scrutiny. Consumerism is the only health care proposal that can reasonably argue that it can lower the underlying cost drivers of health care. Best of all, consumerism does not have to be suddenly imposed upon the system. It can be introduced one procedure at a time.


Consumerism is a world where the patient and doctor relationship is not directed by 3rd party bureaucratic rules and red tape. It is a system where the patient truly chooses the provider and treatment plan that appeals to them. It is a system where the doctor’s only concern is the patient’s well being. It is a system where insurance companies go back to being financial institutions rather being intermediaries between doctors and patients. It is a system that does not require government intervention in the payment process.  


Pure Consumerism exists when the following four economic conditions and behaviors exist:


1)      The provider is responsible to post a price for specific services and then publicly report the outcomes of their treatments.

2)      The insurance company is responsible to provide an appropriate amount of money for a particular treatment – with few strings attached.

3)      The patient is responsible to choose the doctor and treatment plan for their particular situation.

4)      The government is responsible for verifying the veracity of outcome data from all providers they license.


With those components, the market will come to life. The consumer will be directly responsible for paying the physician. The physician will be directly responsible to the patient for prices, treatments and outcomes. The insurance carrier and the government make sure the market runs smoothly and fairly.


      For one moment, let us suspend the concerns about the obstacles of implementing such a change into the system. Let’s focus only on the how and why Consumerism actually lowers the cost of health care and improves the quality and outcome of treatments. If we can agree that Consumerism does introduce positive market forces into health care commerce, then perhaps the road to accomplish that goal will seem worthwhile.


Creating a Consumerism Insurance Policy


      Consumerism is based on episode of care (or global fee) pricing coupled with outcome data. It is introduced into any current insurance policy, one treatment at a time. Any treatment that is converted from current benefits to Consumerism will immediately become less costly. Those treatments or conditions that do not lend themselves to Consumerism will remain covered under current benefits. Over time, the relative cost of Consumerism treatments will decrease compared to the rest of the health care inflation. In addition, the quality of outcomes will improve. This is more than opinion; it is common sense basic economics principles.


      Let’s take some specific theoretical examples.


Surgical Procedures


      Health insurers have statistics on the average total per procedure cost of a particular surgery. Let’s say it is $15,000, including the surgery, anesthesia, operating room, recovery and physical therapy. They also know that there are providers that have higher volumes, better outcomes and/or lower costs than average for that procedure. Those surgeons can be referred to as “centers of excellence”.


To introduce Consumerism, the carrier would announce that this particular procedure will now be converted from standard benefits to a new payment dynamic. The carrier is going to authorize their subscribers that need that surgery a Benefit Credit of $14,000 and let them spend it with whatever provider they choose. (Notice that the average cost of the surgery, by definition, just dropped $1,000.)


This would mean that the subscriber would be allowed to spend that Benefit Credit with any licensed provider, even those not on the preferred provider list. In this way, Consumerism would also help solve the “any willing provider” dilemma because Benefit Credits can be assigned to any global fee based provider, regardless of network affiliation. So instead of any-willing-provider, we would authorize payment to “any provider willing” to create a Consumerism treatment plan.


 The provider community now has the opportunity to wring out inefficiency in the market. The current “centers of excellence” will have no trouble bidding within the Benefit Credit budget because they are already the most efficient. Other providers that are currently not on the preferred list would now have the opportunity to compete fairly. If they can design their own global fee that would include the surgery, anesthesia, operating room, recovery and physical therapy, they would be eligible for Benefit Credits.  Less efficient providers will have to re-evaluate their cost structure. Fortunately Consumerism lets them do so in ways that the 3rd party payment system prohibits.


The current 3rd party payment system makes providers act independently. This causes each one of the patient’s treatment team (surgeon, anesthesiologist, surgical center & physical therapist) to try to maximize their own personal income by billing as many procedures as can be justified. Episode of care pricing, on the other hand, creates incentives for providers to work together efficiently. If the surgeon can create a cooperative team, they can focus on giving the patient the best possible care in the most efficient way possible. If they can globally bill at $13,000 and have excellent results, then they will prosper. (Patients comfortable with their published outcome statistics can have the $13,000 surgery and retain $1,000 from their Benefit Credit for future medical expenses.)


We have enclosed a New York Times article about the Geisinger Health System, cardiology specialty clinic that converted their practice to “episode of care” pricing. The article points out that the exact result predicted under a Consumerism system have come true with this surgeon: lower costs and better outcomes. Geisinger includes a 90 day guarantee with his global fee. If a patient has a less than optimal outcome, he fixes it for no charge. The only problem seems to be convincing the insurance industry to recognize the advantage of this new form of health care commerce. Astonishingly, only one insurer has authorized payment of his global fee – despite the guarantee!


For planned surgical procedures, Consumerism transparency creates the correct incentives in the marketplace to lower prices and increase quality.


Chronic Illness Management


      Health insurers also have statistics regarding the cost of properly managing chronic illness such as diabetes, asthma, multiple sclerosis, rheumatoid arthritis, glaucoma, and the list goes on and on. It is clear that these conditions cost less when properly managed by a physician with the full cooperation of the patient. Proper management does not just involve drugs and lab tests. It also means education, nutrition, and support – which are generally not benefits in the current 3rd party payment system.


      The fact is that the current 3rd party payment system discourages the proper management of chronic illness by providing benefits procedure-by-procedure rather than globally. It is a system that encourages providers to routinely order unnecessary tests or office visits because the carrier payment protocol allows it (or sometimes even requires it). Unnecessary tests generate needed income for the providers, which are denied payment for needed services like education, nutrition, and support.


      Chronic illness patients are also given the wrong incentives in a procedure-by procedure payment system. Every time they visit their provider they are charged – usually a co-payment. Every time they need lab work or some other diagnostic, they are charged again, but in those cases it may be a large deductible and then coinsurance. If the doctor orders a new test, the patient does not know the cost – and can’t find it out in advance. That creates anxiety. It makes it difficult to follow doctor’s recommendations because the patient does not know their financial burden until after it is too late.


      Consumerism corrects each of these counterproductive incentives. The solution is simple: outcome data, global pricing and appropriate Benefit Credits controlled by the patient.


      Providers should be able to design annual treatment plans for their chronic illness patients. These plans would include a certain number of planned office visits and tests as well as contingencies for acute treatments and unexpected developments. The cost of this treatment should be on an annual basis. The patient would evaluate the treatment parameters versus the annual cost and then take into account the amount of the Benefit Credit. A contract would be signed between the patient and the doctor that lays out the terms and conditions.


A typical global contract might include two visits a year and quarterly lab work to monitor the chronic condition. Also included may be a monthly disease support group meeting and periodic meetings with the nutritionist. The plan might include two additional visits a year for acute office visits – like colds. Extra visits would involve a $50 or $75 co-payment. The annual treatment plan may include the necessary ongoing medications and a small allowance for other acute prescription needs.


Because of the extra services, this global arrangement may cost more than the Benefit Credit allows, but that additional X dollars per year can be paid in monthly installments. That creates much less anxiety for the patient than the current procedure-by-procedure payment system. Since the fee is global, the patient “loses money” by NOT following the treatment plan.


This will allow providers to innovate and specialize. Doctors that want to specialize with a particular condition can do so in many different styles – each attractive to their particular patients. Doctors will no longer have to worry about being paid if their “best practice” philosophy diverges from the insurance company’s best practice rules. They just have to worry about quality outcomes and fair pricing – because both will be transparent.


There is also room for doctors to offer lower cost treatment plans. Such treatment plans may not include all the services described above, but if it is less expensive and has good outcomes, patients will respond. Still other doctors may expand services for additional fees. They could include house calls and/or guaranteed appointment times for those that want to pay extra for that convenience. In any case, it will be the patient that chooses which annual treatment plan to follow. The carrier doesn’t care because the Benefit Credit won’t change based on the patients choices – unlike the current procedure-by-procedure payment system.


      Patients will likely have better outcomes with global fee arrangements. Each patient, armed with outcome data and a Benefit Credit will be able find a treatment program that fits their personality and needs. Every doctor willing to post a global fee with some minimum standard services is eligible for the Benefit Credit. (The preferred provider list does not apply with Consumerism benefits.)


It is obvious that a patient choosing their ideal provider and treatment plan will be more likely to follow that plan. Because the fee is fixed, there is no need to avoid a visit or a test because of the cost. It has long been known that chronic disease patients are healthier and therefore cost less if they follow a comprehensive treatment regimen. Consumerism, unlike the current per-procedure system, creates the proper incentives for that to happen.


      Global pricing can also help with the uninsured. If a person has a global treatment plan contract for their chronic condition, then perhaps it is reasonable to purchase a very high deductible plan (such as the Necessary Benefit plan) for the other unexpected events. If the cost of a global treatment is $2,400 per year and a person loses coverage temporarily, then they will be able to continue paying $200 per month until the new coverage kicks in and be protected for the most important benefit they use.


      This also makes it easier to provide charity or public assistance. It is much more reasonable to fund an annual global treatment fee for a diabetic than it is to fund a full insurance policy or open the checkbook for procedure-by-procedure billings. A Necessary Benefit plan can protect against unexpected catastrophes to supplement chronic care annual fees when possible. If it is not possible, then at least the most pressing need has been addressed and the situation should not deteriorate for lack of proper care.


Other Potential Areas for Global or Annual Fees


·                          Maternity

·                          Family practice for “healthy” people

·                          Alternative medicine



How to Change the System


      There has to be a commitment by insurers and providers to change the system. Since it will take a year to gather outcome data (required for Consumerism to work) we would have some lead time on retooling our payment system. Perhaps a committee of providers and insurers, under the auspices of the Department of Health could define a process for encouraging global fee pricing. Together they could identify the most likely procedures and chronic treatment plans that lend themselves to global treatment regimens. Then, one-by-one we would introduce consumerism into the market.


Our initial thoughts for introducing Consumerism pricing would look like something like this:


·                          The DOH creates a “minimum global treatment regimen” for a particular surgery or chronic treatment plan.

·                          Once created and announced, participating carriers (hopefully including Medicaid and PEHP as well as private insurers and TPA’s) would be required (?) to create Benefit Credits based on their current average costs as well as actuarial and marketing considerations.

·                          Providers would be allowed to create treatment regimens that meet or exceed the minimum level. They would post a price for that service and register with the DOH for certification.

·                          Patients from any participating health plan would be allowed to choose between standard plan benefits and the Benefit Credit. They could assign benefit credits to any provider certified by the DOH.

·                          Private Citizens could also take advantage of the provider’s globally priced treatments without regard to insurance affiliation.

·                          As we learn more about the process of transforming into Consumerism, providers and insurers will be able to create their own global programs under broad DOH guidelines, rather than case-by-case approval.

·                          The State may want to pursue federal or private grants for Utah providers and carriers to help overcome the costs of re-tooling part of the payment system. Since Consumerism is the natural state of health care commerce, the learning curve should be reasonable.


      The process of paying for episode of care pricing is not new. The industry has 20 years worth of experience in global reimbursements. Medicare has been using DRG (diagnostic related group) reimbursements successfully for years. Under the DRG system, hospitals get a global fee instead of procedure-by-procedure payments. That has moved the provider incentive from “bill as much as can be justified” to “lets make that DRG payment profitable by being efficient”. We should expand on those lessons.


      Doctors also had an experience with a fixed annual “capitation” fees during the 1980’s. It was not a good experience, but for reasons that Consumerism overcomes. The problem with capitation is that it was the HMO that imposed the capitation. It was the HMO that determined the amount of the fee. The patient had no limitation on care and the doctor took the risk. The patient didn’t even know that a capitation arrangement existed, so they had no incentive to change behavior. No wonder it failed, because the only winner was the HMO.


      Under Consumerism, it is the doctor that determines the appropriate annual fee based on a specific treatment regimen. It is the patient, armed with a Benefit Credit, who decides which doctor, treatment and fee fits best. The insurance company stays out of it other than authorizing a fair Benefit Credit for the service. At the end of the day, everyone wins.


      There would be challenges. For example, complications and co-morbidity issues can drastically affect the fairness of a particular Benefit Credit. It is not enough to say “the diabetic benefit credit is $2,400 per year”. That may be enough for an adult onset diabetic with no co-morbidity. But it would not be enough for an overweight diabetic that smokes and is starting to lose feeling in their toes. Thus, patients with chronic conditions would need to have graded levels of morbidity with corresponding variations on the benefit credit amount. The Utah Medicaid program has experience with this graded morbidity payment process already. Their experiences can be built upon.


      Using benefit credits that are adjusted by levels of morbidity gives another opportunity to create market incentives for good health. Consider a person that is classified as “level 5” diabetic – whatever level 5 will be defined to be.  If the patient commits to an effective treatment regimen and their health improves to level 3 or 4, then we can lower future Benefit Credit amounts. That savings can be shared with the doctor and the patient as a reward for improving health and lowering the cost of care.


      Another challenge involves reinsurance (or risk adjusting), which would be needed for complications on acute treatments. For example with maternity, the current average cost (including complications) is about $6,500. Of that about $800 is attributable to rare but expensive complications. So if the provider was going to get a full benefit credit, they would need to guarantee that any complication was their responsibility. Or, they would be allowed to cede back some of the benefit credit to the carrier so the carrier would cover any complication. Reinsurance rebates from the carrier to the provider for better than average outcomes would also create proper incentives.


(Note: According to the article referenced above, the heart surgeon provides a 90 day quality guarantee for complications. If he needs to redo the surgery, it is on him, just as the Ophthalmologist does now for LASIK surgeries.)


      Each particular treatment and condition needs a thorough evaluation to move to consumerism. Many procedures will not be able to be reformed into consumerism at all. This would include accidents and sudden onset emergencies. It would also include conditions with widely varying outcomes or a high propensity of complications. In some cases, providers will not be able to come up with a fair way to bill globally that is less costly than the current system. Those benefits simply will not be transformed and will be paid under the current system.


      There are also issues to work on related to preferred provider contracts. How does carving out specific benefits affect the provider contract? How do the non-disclosure clauses of the provider contracts interfere with the need to post prices? Most of these problems have to do with the old system where pricing and outcome data is considered proprietary. Consumerism transforms that data from secret to transparent. That will be seen as threatening by some providers. Others will find it liberating.


      The more we can move to Consumerism, the greater the effect on prices. Perhaps in the first year we can only move 10% of the costs from procedure-by-procedure to episode-of-care pricing. The following year we can move more – as we learn from the early lessons. Eventually we can move as much as 40% or more of the system into Consumerism or as much as the Market will demand.


That’s when we will truly have an efficient market and prices will moderate, if not actually drop!