Monday, August 9, 2010


The Committee for Economic Development, one of the less doctrinaire business research groups, recently released a paper that should give health reform advocates (and opponents) some food for thought.

The undated paper, “Health Care in California and National Health Reform,” authored by distinguished health care economist Alain Enthoven and CED’s Joseph Minarik, seems to have been written during the course of the lengthy debate on reform, with editorial updates inserted after passage of PPACA. With an emphasis on CED’s own earlier proposals for reform, rather than on the new law, much of the paper elicits a “but the train’s already left the station” reaction. Nevertheless, the findings, especially some of those embedded in the reports of interviews with major employers, are worth examining.

The scope of the paper is limited to California, with a focus on large employers who offer a range of coverage options. Although California is clearly not a typical state, given its considerable HMO enrollment and per capita health care spending 12 percent below the national average and close to 30 percent below New York and Massachusetts, many of the findings could be extrapolated to other states with large employer groups. Of particular interest in the context of reform, California has the largest existing non-federal employer insurance exchange (CalPERS, the state employee benefit system), and the largest delivery system HMO (Kaiser), both of which have made considerable efforts to make health care more cost-effective.

Perhaps inevitably, given that they would be quoted in a published paper, the employer interviewees expressed satisfaction with their approaches to employee coverage, even while noting their concerns about the continued escalation of health care costs. Also perhaps inevitably, none of the interviews produced any comparative quantification of achievements: for example, employer premium increases versus state averages. The reader must take on trust satisfaction with the managed competition model adopted by CalPERS, the University of California, Wells Fargo, Stanford University and others, although each of these clearly believes that this model is superior to their prior approaches.

Given these limitations, the interviews indicate some significant findings:

1. The largest and most cost-conscious employers interviewed (notably CalPERS and the University of California) have, as remarked above, each settled on versions of the managed competition model, with fixed dollar employer contributions and choice of coverage from among a limited number of competing options.

2. Particularly for the large public and academic employers, the less costly options have been the most popular with employees, in spite of their more limited choice of providers. However, even with less costly options available, many employees choose more expensive (typically PPO) coverage, most likely because of greater flexibility of provider choice or because of existing provider relationships.

3. Activist exchange administration can reduce costs, as CalPERS has demonstrated in pressing their major carrier to create a “value network,” in sponsoring a quasi-ACO, and in weeding out less popular plan options. It is also possible that competing with less costly HMO options forced otherwise more costly plans to lower their rates.

4. While carrier (network-type) HMOs have the advantage of flexibility over delivery system HMOs like Kaiser, they usually suffer from the disadvantage of sharing with PPOs the same physicians, who may be unwilling to change their approach to care (including controlling hospital admissions and drug use) to accommodate the HMO risk structure.

5. In spite of its reputation for innovation in care coordination and IT, Kaiser’s premiums are only marginally lower than those of competing carrier HMOs (and, in one case, are slightly higher) suggesting that attempts in PPACA to simulate features of delivery system HMOs may yield smaller savings than hoped. (It is also possible that Kaiser could reduce its large group premiums further but sees no business reason to do so. On the other hand, especially in CalPERS, which does not risk adjust, Kaiser might be expected to attract healthier—and therefore less costly—enrollees than its competitors.)

6. Hospitals can be key to health plan costs, with the most prestigious (and typically most expensive) often essential to the marketability of an HMO or PPO network. Hospitals have recognized this, with the most aggressive showing unwillingness to negotiate rates and—in the case of the Sutter group—insisting that all hospitals in the chain be included. (In California, physicians have been equally aggressive in stifling competition by such approaches as backing a legal ban on physician hiring by corporations—such as hospitals.)

7. In spite of the apparent success of managed competition in the largest employers interviewed, the California market remains dominated by what the CED paper’s authors call “cost-unconscious demand,” in the form of a single FFS plan or a choice of plans with the employer paying a percentage of the premium (as opposed to a fixed dollar amount).

One question the CED paper suggests is: if a managed competition exchange is the optimum approach, why haven’t large employers successfully grouped together to form their own exchange(s)? While small group exchanges have failed because of adverse selection, large groups should be able to avoid this problem. Possible answers include: unwillingness to cooperate with competitors, preference for self-insurance (avoiding state regulations and mandates), union refusals to modify coverage to fit a larger system, and a desire on the part of human resources executives to control their own benefits.

What does the CED paper imply for PPACA health care reform? Not a lot that’s truly encouraging, beyond the apparent success of the CalPERS exchange model. Exchanges are most efficient with a limited number of options; cost consciousness depends on individual subsidies (if any) being in the form of fixed dollar amounts; anti-monopoly measures may be needed to avoid creation of cost-effective networks being stymied by dominant hospitals or physician groups; and exchange administrators must be activist to minimize costs. Unfortunately, PPACA provides few incentives that might lead to any of these being achieved. Also, discouragingly, the experience of the largest California groups suggests that innovations in payment methodology, care coordination, and IT, expected to be implemented for Medicare and then disseminated through the health care system, may produce only marginal savings.

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