Will Insurance Companies Die Off? I Don’t Think So.

Today’s Managing Health Care Costs Indicator is $55.2 billion

Click image to enlarge.  Source 

Ezekiel Emanuel and Jeffrey Liebman have a post in the New York Times this evening asserting that:

By 2020, the American health insurance industry will be extinct. Insurance companies will be replaced by accountable care organizations — groups of doctors, hospitals and other health care providers who come together to provide the full range of medical care for patients.

 I don’t believe it for a minute.

About the indicator above – it’s the market capitalization of United Health Group.  Here are the market capitalizations of the other major for-profit health plans:

Wellpoint	$22.4 billion
Humana	$24.6 billion
Aetna	$15.8 billion
Cigna	$12.1 billion
Coventry	$4.3 billion

From this link you can see the rise in United Health Group’s stock price over the last year.  There were similar increases at Humana and Aetna.  $134 billion in market capitalization doesn’t get erased in a mere 8 years – and that kind of market capitalization doesn’t ever go away without a fight.

There are many functions that health plans currently perform that would be better carried out by health care providers.  This is true of almost all medical management programs.  However, health plans perform some critical functions that won’t go away overnight. Here's why I don't agree with Emanuel's conclusions.

1)     Fee for service is not going away anytime soon, and health plans have the transactional engines that make fee for service possible.

a.      Many procedures will not fit well into capitation – and these will need to continue to be paid fee for service.   

b.      Many providers, both physicians and hospitals, are in rural areas where there is little competition.  It’s likely that ACO development in those communities will lag – and the population might be too small to pay anything other than fee for service

c.      Many patients are likely to travel among different accountable care organizations for their care. Someone will have to transact claims to assure payment of all parties

2)     The authors suggest that once ACOs are prevalent, we won’t any longer have to pay all those pesky claims. Au contraire.  Successful capitated groups need to track resource use as carefully as fee for service health care providers – so we’ll be completing claims for a long time to come.

3)     Health plans are aggressively diversifying.  Emanuel mentions that Wellpoint purchased a large Medicare outpatient practice, CareMore, in California.  Aetna is investing millions in its efforts to be the “back office” for providers establishing accountable care organizations. Cigna has also invested in a number of delivery systems, and most of the major national health plans have purchased boutique health plans that take risk on Medicare Advantage plans.

4)     There’s a long history of provider-owned health plans – and it’s not pretty.   Provider-owned health plans have generally failed in the past because they’ve had a hard time keeping their costs down.  Hopefully, ACOs will be different.  However, it’s too early to see how ACOs will perform in the real world.

5)     Emanuel and Liebman note that insurance plans are barely offering insurance even now – since most of their members are in self-insured employer sponsored health plans.  The insurance companies have figured out how to make these “administrative services only” accounts profitable – and some have actually migrated away from offering fully-insured plans in many markets

6)     The authors suggest that with 15,000 members an accountable care organization will be big enough to accept financial responsibility for its entire population.  In a non-Medicare population, that number is not actuarially stable, so the ACOs will need to buy some (perhaps expensive) reinsurance to be sure they will not go bankrupt providing care.

The state health exchanges could be a huge boost for local and regional health plans, which in the past have been locked out of a substantial portion of the market. These plans are more likely to be nonprofit, and the Affordable Care Act offers some advantages to nonprofits as well.

The health insurance industry will continue to evolve.  The Accountable Care Organization movement could mean a tectonic shift for insurers – but I don’t see them disappearing any time soon.

“Government Study Debunks Stroke Treatment”

Today’s Managing Health Care Cost Indicator is $20 million

It’s not often you see such a headline in the New York Times.  The paper is reporting on a paper published in JAMA that showed those with history of “prestroke” with proven blocked neck arteries who received surgery to increase brain blood flow had no fewer strokes than those who were treated without surgery.  The study was stopped early when there was not even a trend of improvement among those treated, and far more early strokes.

A JAMA editorial writer wrote that “doctors liked new technology, were paid well to use it and tended to believe in what they were doing, even without data.”

The thing is –the procedure worked!  Those who had the bypass surgery did have greater brain blood flow.  Unfortunately, the intermediate outcome measure (more brain blood flow) was not especially correlated with the desired outcome measure (fewer strokes.)

This is the kind of effectiveness research we need so that we spend precious health care dollars on services that genuinely improve health,  and the kind of research that only the government is likely to fund.  It’s a small investment –since if 24,000 Medicare recipients a year would have been candidates for this operation, the total cost if it was widely adopted would have approached a billion dollars.   But who besides government would spend $20 million to study this?  Alas, funds for the NIH are being cut,  and this kind of important research will be threatened.

There were two reports in the NEJM this past week also reflecting the importance of large, multi-year, government-funded studies of interventions that seem like a good idea, but had never been rigorously studied.  Alas, both also showed little of the financial savings promised by boosters.

RTI reported on the Medicare Health Support trial, which was terminated in 2008 when none of the disease management companies appeared to be on target to save as much money as their interventions cost.   The study is flawed, of course, since the information available to those companies about the “at risk” Medicare beneficiaries was often available far too late.  Still, most of us deeply believed that these programs would be more successful at preventing hospitalizations in the Medicare population, a target-rich environment.   


The other is a commentary about the Physician Group Practice Medicare demonstration project.  The groups improved quality substantially.  However,  high hopes of dramatic declines in health care spending were not realized.  2 of the 10 groups had savings of over 2% at one year, and half had savings of over 2% at five years.  These were all groups with robust infrastructure, committed leadership, and cultures of prudent use of resources.   This shows that creating Accountable Care Organizations from physicians in practices that are currently fragmented and disorganized will be very hard indeed.  

Baicker and Chandra go to the Federal Reserve

Today’s Managing Health Care Costs Indicator is $247,000

Katherine Baicker and Amitabh Chandra, both of Harvard, gave a paper to the Federal Reserve meeting in the Rockies last week.  The paper got a reasonable amount of press – but most of the focus was on the two pages where they challenge the conventional wisdom that accountable care organizations will necessarily lower health care costs.    

That coverage was accurate – but the paper was dramatically richer.

The title, “Aspirin, Angioplasty, And Proton Beam Therapy: The Economics Of Smarter Health Care Spending”  is a good place to start. Baicker and Chandra make the important point that we are purchasing high tech expensive medical care (like angioplasty and proton beam therapy), often when they haven’t even been shown to improve care.  On the other hand, it’s hard to get us to embrace inexpensive low technology innovations like aspirin to prevent heart attacks, or handwashing to prevent surgical infections.

They point out graphically that small incremental investments in low technology (aspirin and handwashing) could have huge health care benefits, while large incremental spending on high technology (angioplasty and proton beam therapy) would have only small benefits. A 1990s evaluation suggested that medical advances leave us currently paying about $247,000 per quality adjusted life year saved.

Curve A below represents appropriate productivity efficiency in health care, where investments are first made in low tech high return items like handwashing and aspirin.   This is a conventional economics efficiency frontier – each dollar is promoting further value, but the value declines with more investment as the marginal returns diminish.   Curve B represents an economists nightmare – where investments are prioritized to high technology which itself is either unproven or not shown to be of huge value, and later investments are made for the high value (but inexpensive) interventions like proton beam therapy for prostate cancer.  As you can see, each additional dollar does yield more social benefit – but we end up allocating extra dollars to health care, and we neglect schools or roads or other social needs.

Click image to enlarge.

Other key points from this paper:

• Expert opinion health care often cites that 30% of health care spending is % waste, but it’s hard to remove that waste
• The federal government’s tab is $250b annually to provide tax subsidies for employer sponsored insurance
• Americans have historically had first dollar coverage, which leads to more moral hazard and can lead to overuse of less valuable care.  Of course, we’ll see how this changes with the advance of high deductible health plans.
• Health insurance is “social insurance” which redistributes from the healthy to the sick.  For all the talk about accountability, we really don’t want to disrupt this redistribution.
• Income tax rates would have to increase by 70% to fully fund the cost of health care if it continues to increase at a rate 1% greater than overall inflation.  This type of income tax increase could lead to reductions of 3-14% in GDP. I found this number especially sobering.
• The authors point out that as long as Medicare and the FDA cannot consider cost when they determine coverage and approval, we will purchase lower value health care. 
• Information is a public good, and will require government investment to subsidize comparative effectiveness research.

Baicker and Chandra conclude that there are a few important steps to take to encourage smarter spending on health care

-        Public payers (Medicare and Medicaid) should bundle provider payments  

-        Patients should have more cost-sharing – but it should be nuanced to encourage more attention to the value of care

-        We should provide patients with far better information about the cost and quality of the care that they could receive.

Accountable Care Regulations: “Shared Savings” Means Return to Risk

Today’s Managing Health Care Costs Indicator is 429

The Affordable Care Act (ACA) specifies that Medicare will contract with accountable care organizations (ACOs) – groups of primary care and specialty physicians and hospitals that voluntarily coalesce and agree to take financial and clinical responsibility for all care of a population.  The ACA also states that these groups will be paid fee for service, but be able to “share savings” to the extent they are able to deliver care to Medicare beneficiaries for a lower price than expected. I’ll look at these proposed regulations through the lens of behavioral economics (see chart at the bottom of this post).

The regulations are 429 pages long.

“Shared savings” is a conundrum.  It’s hard to get providers to agree to “symmetrical risk,” where they would gain a profit if they deliver care below budget, but they would lose income if they spent more than the budget on a population of patients.  Frankly, we all really hate the potential for loss.  The “stick” of downside risk much more effectively motivates us to act differently because we so hate the possibility of losing. Therefore, downside risk is much more likely to fundamentally alter medical practice and lower resource cost.

In fact, if Medicare merely “shared savings,” this would likely increase costs because by randomness alone some groups would have apparent savings, but those groups with costs above budget due to randomness would be held harmless. Therefore, bonuses would be paid, and would not be offset by penalties.   As noted above, providers who are at risk for losing money are likely to be far more motivated to implement efficiencies in care delivery.

The regulations announced on Friday  use shared savings as a bridge to providers accepting some ‘downside’ risk as well as the potential for upside reward.  The draft regulations envision two shared savings model.

Model One:

Providers would obtain up to 60% of any savings beyond 2% of budget, and would face the potential downside risk if their actual costs exceed the projected expenses by 2%. Providers would have to provide proof they could repay up to 1% of total costs – which I think is the maximum potential provider exposure to loss, although I’m not certain.

Model Two:

Providers would obtain only 50% of savings beyond 2-3.9% of budget depending on size, and would transition to upside and downside risk as of year three. 

Contracts for ACOs require a minimum of 5000 Medicare beneficiaries, and the risk corridor gets smaller as membership increases.   CMS will require ACOs to report on 65 quality measures (domains are patient experience, care coordination, patient safety, preventive health, health of high risk populations).   Shared savings will be predicated on adequate quality performance, and might scale upward with better quality metrics.  Use of electronic records would be mandatory for at least half of the physicians. 

Some quality advocates will be disappointed that the proposed quality measures do not include outcome measures, such as mortality or complications.  However, outcome measures require sophisticated risk adjustment, and often require very large volumes to be statistically reliable. Many providers feel they have less control over outcomes than over processes.  Further, if providers effectively implement processes shown to improve outcomes, the better outcomes are likely to follow.  One problem with Pay for Perfomance was that with only a small number of goals providers were able to “teach to the test” and create workarounds rather than actually improving overall quality. The sheer number of measures makes this less likely in the CMS ACO proposed regulations.

I think that the ACO regulations have dodged a bullet in the initial legislation, which specified that savings would be shared. Instituting a corridor to account for randomness and requiring all groups to have downside risk by year three in exchange for participation will help be sure that groups are not getting a windfall just for being lucky, and will minimize taxpayer cost. Of course, elements that make this a better deal for taxpayers might decrease ACO uptake in the provider community.  I expect an avalanche of provider comment opposing downside risk.

One troublesome area where the ACO regulations stuck close to the legislative script is regarding patient attribution - which ACO will bear responsibility for each patient.  Patients will be retrospectively assigned to an ACO based on having the majority of their primary care at ACO-participating PCPs, who will not be able to join multiple ACOs.  This means that there is no limit to the free choice that traditional Medicare has offered, which is just what patient advocates want. 

However, provider groups won’t be certain for which patients they actually bear responsibility.  This will lower physician confidence that their own performance will have a large impact on the ultimate costs, which could also dampen provider enthusiasm.   Retrospective assignment is also bad news for ACOs that hoped to do aggressive management of the sickest of their ACO members.  They won’t be certain these members are their responsibility until after the end of the year!

My analysis of these critical ACO decisions through a behavioral economics lens:

	Impact on Provider Acceptability of Proposed Regs	Likelihood Providers will Improve Their Practices
Require providers to take downside risk by year three	--	+++	Supercharges provider motivation to change, but gives providers some time to develop infrastructure.  Providers really hate downside risk, though
Risk corridor so that neither first dollar losses or gains are transmitted to the provider	+/-	++	Shields providers from financial losses due to randomness alone, while preventing most unearned windfalls.
Maximum upside for providers is specified	-	+	Decreases the potential for a big win;  this is probably a good idea, but could dampen provider enthusiasm for ACO
Upside is dependent on meeting quality goals	--	+	Might be necessary to be sure providers don’t provide too little care, or their quality.  Providers will complain of the expense of reporting on so many measures. Decreases certainty of “winning,” so could dampen provider enthusiasm for ACO.
Process – not outcome quality goals	++	+	Providers are likely to feel more in control of whether they achieve incentive, and are thus more likely to improve their processes
Retrospective attribution	--	-	Providers will feel like result is less in their control

Three other references of note:

·        WSJ had a nice piece on Atrius Health, the nonprofit parent of Harvard Vanguard, and its ACO efforts 

·        Don Berwick’s introduction of the ACO rules is in the NEJM 

·        Ezra Klein published his rules on addressing health care costs yesterday   I highly recommend them.

 By the way, if you're interested in an ongoing set of links to articles that have interested me (not all of which I blog about), go to this Tumblr site.