Monday, September 03, 2012

The best way to reduce risk

There have been a series of articles recently on the latest fad in health care, the acquisition or creation of insurance companies by provider organizations.  Here's one from the Washington Post.  The financial theory of the case is as follows:  If providers are going to find themselves with more at-risk contracts, why bother with an intermediary insurance company whose main goal in life is to extract a profit from the relationship between the provider and patients?  Instead, create your own insurance business and use it to internalize all of the costs and risks of the business, permitting you to shift costs back and forth between the provision of medical service and the insurance function, all as part of a common bottom line.

This is not a bad concept.  An oft-cited example, Geisinger Health System in Pennsylvania, has been successful with it.  But it is not easy, as noted in the Post article:

“Hospitals think this is a way to cut out the middle person, tailor care more closely and save a lot of extra money, but there’s a history to this and it generally doesn’t work,” said Howard Berliner, a visiting professor of health policy at New York University. “It winds up being incredibly complicated.”

For example, the Post notes:

As insurer, the health system may also have to make tough decisions that rub physicians the wrong way or reduce their income, [Michael] Dowling [CEO of North Shore-LIJ Health System] said.  “You can blame the insurance company now, but if you are the insurance company, now you’re the one telling your own doctors to do something they don’t want to do.”

In fact, Vince Kuraitis at the e-Care Management blog, says that this is something best avoided.  He suggests that health care executives should lie down until the urge goes away!  Why?  A summary:

This is the dumbest idea I’ve heard since “I’m going to invest all my money in Facebook’s IPO and get rich!” Here are six reasons why:

1) You’re too late.
2) You have bigger fish to fry.
3) Health insurance is a far more complicated business than you realize.
4) Becoming a health insurers will drain you of capital and management resources.
5) It’s beyond your core competencies and not in your DNA. Trust me.
6) Do you really want to risk waking the sleeping giants in your neighborhood, i.e., the existing health insurance companies?

For today, though, let's join the health system CEOs and drink the Kool Aid and put aside those minor issues of implementation and ask what conditions are necessary to make the overall business proposition work?  Size and scope.  You need to be large enough to amass a sufficient balance sheet to meet insurance reserve requirements, and you also need a patient base that is broad enough to create an effective risk pool to cover actuarial probabilities.

These conditions feed into an environment that has author Steven Pearlstein nervous, in another Washington Post article.  He notes:

Because there are often hospitals in each region that insurers must have in their networks to attract subscribers, dominant hospital chains are able to demand monopoly-like prices for their services. Insurers have responded by merging with other insurers in the hope of gaining negotiating leverage by becoming as indispensable to the hospitals as the hospitals are to them. To maintain their leverage, hospitals in turn have consolidated into bigger and bigger chains.

This arms race has produced repeated waves of consolidation that, rather than having led to lower prices, have led to higher prices, declining quality and less competition.

There is [a] reason to be skeptical about these mergers, not so much because they will reduce competition in today’s insurance market, but because they foreclose potential competition in an evolving health-care market in which one organization will provide both health care and insurance.

Neither Republicans nor Democrats have chosen to address these market power issues.  The Federal Trade Commissioner has said that his agency does not have the resources or political power to do so. I know of no industry in which unregulated market dominance has led to lower costs or greater customer choice.  Monopolies, after all, behave like monopolies.

Ah, but let's not worry.  These organizations will be too big to fail.


Barry Carol said...

I agree that hospital systems underestimate the complexity of assuming actuarial risk. I also agree on the need for a robust balance sheet, adequate reserves and a large patient base. What I wonder about is the potential for a hospital system to charge its captive insurer much lower prices for services than it can extract from non-captive insurers and use that competitive advantage to charge lower premiums to potential members for comparable coverage.

Presumably, the hospital’s captive insurer would also need to negotiate rates with outside providers for services it cannot offer and for emergency care provided outside of its network including when the member is traveling. While Kaiser has done all this, even it has not been able to fully replicate its success in Northern CA in several of its other smaller markets.

David Morf said...

How about an ACO of private & public self-insured employers to contract with stop-loss brokers and primary, dental, specialist, therapist, hospital, and public health units across a region to serve all employees and dependents with team-based, cross-silo, HIT-enabled community service and prevention units? The health goal is a regional population benefiting from person-focused wellness and preventive community health, measured by reductions across remedial cost, labor overhead, absenteeism, and presenteeism. Regional economic goals include increased work team resilience, flexibility, and productivity, leading to increased region-wide comparative advantages in global market share, jobs, and pay.

Hilary Cooke said...

In the absence of a large population of risk, the alternative is "quality" of risk. I could not see embarking on this unless a health system had the belief and commitment to carve out a preferred population in the community it serves.
Does it create a differential advantage? From a public policy viewpoint, is that the kind of differential advantage we are seeking in the context of health care reform?

David Morf said...

Hilary Cooke raises a valuable point in mentioning the need for a "large population of risk" to avoid a "carve out [for] a preferred population in the community." The idea of risk as a thing to share, not a thing to manage, runs inside the point being raised. The goal in the regional ACO notion is to manage risk by reducing the incidence of risk for remedial care demand by increasing the demand and supply of less costly and more effective preventive and wellness services. The use of employers to reach not only the employed population but also the dependents of employees is to expand the population. A necessary parallel element is to bring CMS populations and funds (Medicare and Medicaid) into the regional ACO framework so that the geography of the region (MSA or similar) is in the loop for preventive attention exactly to maximize positive health and minimize remedial need relative to each age cohort. The glue that assembles and sustains the effort is the human health-based regional economic health shared by the whole region as sketched in the prior post above. I think we might agree that the very last thing to be desired would be a "carve out" cultural, health, and economic environment. We're all in this together—health, wellness, and care for body and work alike.