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how doctors became subcontractors

11/12/2015

In our healthcare system, the “middleman” is not who you think.

During my recent podcast interview, I remarked that third-party payers are not, in fact, intermediaries between doctors and patients. In reality, it is the physician who has become a “middleman” in the healthcare transaction or, as I argued, a subcontractor to the insurer.

Important as it is, this reality is not well recognized—not even by physicians—because when doctors took on this “role” in the late 1980’s, the process by which healthcare business was conducted did not seem to change in any visible way.

When health insurance was first introduced on a large scale in the 1940’s and 1950’s, a patient would see a doctor and pay the bill directly. The doctor would issue a receipt and the patient would submit the receipt to the insurance company for reimbursement. The insurance company was, in that sense, a financial intermediary since it would enable the patient to afford the care and see the doctor.
Overtime, as the cost of medical care began to rise rapidly, a practice evolved whereby physicians would take it upon themselves to submit the claim to the insurance company and would not require patients to pay upfront.
In that sense, doctors were making an advance to patients, and the money they received from insurers could still be considered a “reimbursement.” If the insurer did not pay, or only paid a portion of the bill, the physician could submit the remaining balance on the bill to the patient. The insurer was still a financial intermediary.

The situation changed fundamentally in the late 1980’s when contractual arrangements began to take effect between doctors and insurers.

Medicare abandoned the practice of paying doctors the “usual, customary, and reasonable fee,” but instead imposed a fee schedule and business rules that physicians were obligated to accept in toto.

Private insurance companies followed suit and began to formalize contractual agreements with physicians. These agreements would similarly tie payments for services according to a predetermined schedule of fees.

But these new contractual agreements—which are standard arrangements today—did not visibly alter the practice by which physicians would submit a claim to an insurer after a patient encounter. It continued to be the case that, for the most part, patients would not pay the total bill upfront¹ and that, subsequent to the visit or procedure, a physicians would submit a claim to the insurer.

Since that time, though, the money physicians receive after services are rendered can no longer be considered a “reimbursement.” In fact, that money is truly and simply apayment for a service the physician has provided according to the terms of his or her contract with the insurer.

And to see more clearly how that payment sanctions a sub-contractual relationship between doctors and insurers, consider the overall scheme of healthcare financing as it has been set up since the 1980’s:

In the case of private insurance, employers pay premiums to insurers in exchange for a promise to provide “healthcare benefits” to certain employees. In turn, private insurers hire doctors to enable them to fulfill that promise. The doctors are essentially subcontractors in the healthcare benefit enterprise and the subcontract is typically called a “provider agreement.”

In the case of government insurance, “society” funds the government in exchange for a promise to provide healthcare benefits to certain classes of citizens. In turn, the government hires doctors as subcontractors to enable them to fulfill that promise. The subcontract is called the Medicare (or Medicaid) provider agreement.

The foregoing should make it clear that the persistence of the term “reimbursement” conceals the nature of the relationship between insurer and doctor. The evolved relationship between insurer and doctors also explains why the term “healthcare benefits” and “health care” are frequently conflated:

A “healthcare benefit” is a vague promise to pay for actual healthcare services.

But having healthcare benefits in no way guarantees that one will receive
anything resembling true care, since the provider agreements do not specify, except in very rudimentary ways, what exactly can be considered “health care,” let alone “quality” health care.

It should be readily apparent that an arrangement where physicians operate as healthcare benefits subcontractors to insurers, and not as primary agents to the patient, is not healthy for anyone.

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is the patient the one with the disease?

2/10/2015

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“The patient is the one with the disease.” This medical aphorism, often quoted as rule number four from Samuel Shem’s 1978 novel, The House of God, has probably been around as long as medicine itself. Its point is that doctors need to learn to accept their own vulnerability and fallibility before they can devote themselves fully to the care of their patients. And so long as medicine was built on the relationship between two parties, patients and doctors, the rule worked reasonably well.

More recently, however, the party is being transformed into a crowd. A third player is increasingly encroaching on the doctor-patient relationship, and more and more doctors are beginning to suspect that it may be the vector of much of contemporary healthcare’s pathology. Who is the third party? Its precise identity is often difficult to pin down, but its seat in the doctor’s office and at the patient’s bedside is often occupied by a hospital, a health insurer, or a government agency.

This third party usually does not see individual patients. Instead it sees aggregates, such as rates of mortality, disease incidence, and the utilization rates of particular tests, procedures, and pharmaceuticals. It tends to be particularly interested in parameters such as efficiency, safety, cost, and revenue. Because it is largely blind to individuals, however, its risk of developing certain disorders is dramatically increased. And when it falls ill, both patients and doctors suffer.

Before patients and doctors can respond effectively to such pathologies, they must first recognize that they exist. One of the first steps in recognizing a disorder is applying a name to it, and one physician who has taken up this challenge is Adam Ratner, MD, one of the founders of the San Antonio-based non-profit, The Patient Institute. Ratner, who has been struggling to clarify the nature of these pathologies for many years, believes that healthcare is in the midst of an unrecognized epidemic.

Ratner’s compendium of healthcare disorders runs into the dozens, but exploring just a few of them illustrates the value of the general concept. He calls one of the most prevalent disorders hypermetricosis, the belief that the act of measuring makes things better. The symptoms are everywhere: doctors and other health professionals are being required to spend more and more time obtaining and reporting data, such as vaccination, smoking cessation, and diabetes control rates.

The problem, however, is that such measures do not define good medicine. A good doctor is defined by more than just a set of statistics. A good doctor is also caring, curious, dedicated, and a good listener. When hypermetricosis takes hold, more and more time and resources are focused on the measurable, at the expense of everything else. “In extreme cases,” Ratner says, “the condition can degenerate into malignant hypermetricosis, in which the human side gets lost completely.”

Another such disorder is hypermechanosis. Many third parties envy the kinds of productivity and quality gains that have been achieved in other industries through the application of various forms of statistical process control. For example, six sigma focuses on reducing variation, usually treated as error. If only we could run medical practices the same way Toyota manufactures automobiles, Southwest flies airplanes, and Disney treats its theme park visitors, proponents argue, we could revolutionize healthcare.

But every patient with colon cancer, congestive heart failure, and low back pain is not the same, and this makes it problematic to treat reducing variation as the top priority. Patients and doctors are not identical to one another to the same extent as brake rotors, take offs, and roller coaster rides. As a result, the effort to equate quality improvement with reduction in variability may often do more harm than good. Says Ratner, “We must never treat human beings as widgets.”

A third disorder is hyperbureaucrosis, which in some cases can progress to malignant hyperbureaucrosis. It tends to arise from a sense that the healthcare system is broken. In fact, the afflicted argue, the so-called system may not be a system at all. So they seek to systematize it, moving authority away from those on the ground, patients and doctors. By centralizing authority, they aim to bring healthcare under the authority of those who see it from a much higher vantage point.

The problem, however, is that making medicine more systematic may in many cases undermine the care of individual patients. Too often it forces doctors and other health professionals to spend so much time memorizing, complying with, and proving that they comply with third-party regulations that they have little time and energy left to care for patients. “In some cases,” Ratner says, “those suffering from this disorder end up equating quality with compliance, as opposed to good patient care.”

A final disorder really represents a class of maladies, collected together under the general rubric of malalignment disorders. Among the groups whose goals and incentives may be malaligned are patients, doctors, hospitals, and payers. For example, most patients want to get better, or to avoid falling ill in the first place. But hospitals and health systems often want to increase their market share and profitability.

Problems arise, for example, when increasing market share and profitability take precedence over the needs of individual patients, or when physicians are incentivized to adopt practice patterns that benefit their employers but not their patients. “In the final analysis,” Ratner says, “good health care should be defined by the needs of each patient. And the people most likely to be focused on patients are the ones who know each patient best – individual health professionals.”

What does all this mean to patients? Ratner believes the answer can be nicely encapsulated in a few words of advice. “The next time you see a doctor spending more time looking at a computer screen than the patient, charting care according to an algorithm rather than the specific clinical situation, following orders rather than writing them in the chart, or devoting more attention to the needs of the hospital or health system than to those of the patient, ask your doctor one simple question.”

“Could you be suffering the effects of hypermetricosis, mechanosis, bureaucrosis, or some variant of a medical malalignment disorder?” In other words, is the third party the one with the disease? If the answer is yes, then a conversation is in order. Such a conversation should begin with the realization that measuring, mechanizing, bureaucratizing, and realigning incentives are never the top priorities. “If we want truly good medicine,” Ratner says, “we need to recognize that sometimes it is the hospital and the health system – not the patient – that is suffering from the most serious disorder.”

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have doctors joined the working class?

12/19/2014

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On September 28, 1864, a little over 150 years ago, the first meeting of the International Workingmen’s Association (IWA) was convened at St. Martin’s Hall, London. Among the attendees was a relatively obscure German journalist by the name of Karl Marx. Though Marx did not speak during the meeting, he soon began playing a crucial role in the life of the organization, in part because he was assigned the task of drafting its founding documents.

The work of the IWA and Marx is increasingly relevant to the practice of medicine today, largely because of the rapidly shrinking percentage of US physicians who own their own practices. This moves physicians into the category of what Marx and his associates called, “working people.” According to data from the American Medical Association, in 1983 76% of physicians were self-employed, a number that had fallen in 2012 to 53%. And the trend is accelerating. It is estimated that in 2014, 3 in 4 newly hired physicians will go to work for hospitals and health systems.

To put this change in Marx’s terms, the rapid fall in physician self-employment means that a shrinking percentage of physicians own what he called the means of production. In his view, this alienates workers – in this case physicians – from other physicians, themselves, the work they do, and from patients. Whether we agree with Marx on every point, his writings on this topic provides a provocative perspective from which to survey the changing landscape of contemporary medicine.

As applied to medicine, the first form of alienation Marx highlights takes place between members of the medical profession itself. When physicians are paid by someone else, working in someone else’s facility and using someone else’s equipment, they begin functioning more and more as instruments of production, like workers on an assembly line. Before long, many tend to see each other largely as commercial competitors, overlooking any mutual professional interests they might otherwise share in common.

When fewer and fewer physicians are self-employed, those who employ them often begin to treat them like any other commodities that can be traded in a competitive market. When employers talk about hiring, they may do so in terms of FTEs (full-time equivalents), as though physicians were just undifferentiated units of labor. On more than one occasion, I have heard executives talk about the number of physician “bodies” they will need to adequately staff a facility.

The second form of alienation Marx predicted occurs within physicians themselves. Physicians are not just units of work – they are also human beings. When physicians are self-employed, they enjoy many opportunities to find personal fulfillment by helping their patients and communities from their own volition. Once they become employed, however, they often become objectified, merely carrying out tasks prescribed to them by someone else.

As a result, employed physicians find themselves spending less and less time thinking about the choices they can make to serve their patients and community, instead simply carrying out – and often resenting – the demands of those they work for. For example, when quality initiatives are imposed on physicians by employers and payers, the pursuit of quality may take on the character of an external demand, as opposed to something physicians freely choose because they believe in it.

A third form of alienation takes place between the worker and the act of working. As physicians lose control of the means of production, both physicians and the work they do often becomes commoditized. Decisions about what patients to care for, how to care for them, whose aid to seek in doing so, where such care should be provided, and how to determine the quality of the care delivered all tend to shift from the physician to the physician’s employer.

As the evaluation of physicians’ work becomes increasingly tied to compliance with externally imposed policies and procedures, physicians themselves derive less and less intrinsic psychological fulfillment from caring well for patients. This trend can be exacerbated by the widespread tendency of employers to use physician compensation as a way to influence and control the practice of medicine. Before long, some physicians may think more about their wages than about the patients they care for.

The final and perhaps most pernicious form of alienation occurs between workers and the product of their labors – in this case, between physicians and their patients. The commoditization of medicine promotes an attitude of mutual suspicion, often encapsulated as “Buyer beware.” Relationships between physicians and patients become superficial, transient, and largely commercial, which tends to erode trust, compassion, and the commitment to excellence in patient care for its own sake.

With time, physicians learn to think of themselves as healthcare providers, their work as healthcare delivery, and their patients as consumers or customers. The physician, in other words, becomes a mere vendor and the patient a mere purchaser. Seeing physicians and patients in this light leaves little room for the virtues of character and trust. It is difficult for physicians to take themselves seriously as professionals if patients treat them with the same suspicion as snake oil salesmen.

The signs of the alienation Marx describes might take many forms. One would be decreasing job satisfaction and increasing job turnover, which have been shown to have substantial effects on quality of care. Another would be increasing rates of burnout, depression, substance abuse, and even suicide attempts, which again affect the care patients receive. One simple indicator is the frequency with which physicians smile and express fulfillment and pride in their work.

Even if we do not agree with Marx on every point, it is difficult not to see in his 150-year-old writings provocative and in many cases prescient warnings regarding the present plight of the profession of medicine. If he is right, as the gap between physicians and what he calls the means of production widens, physicians will tend to become increasingly alienated from colleagues, themselves, their work, and above all their patients.

What remedy would Marx offer? Extrapolating from his 1864 IWA “Inaugural Address,” he would call on physicians to unite. He would encourage physicians to secure medicine’s means of production, through the ownership of their own practices. His objective would not be to secure higher wages or enhanced job security. Instead it would be to decrease alienation and promote conditions under which both patients and physicians are most likely to thrive.

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a closer look: physician-hospital alignment

8/12/2014

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A study by Stanford researchers in the current issue of Health Affairs is likely to intensify growing tension between health insurers and hospitals.

At issue: the impact of physician-hospital consolidation, or vertical integration as some academics prefer to call the trend.

The researchers analyzed 2 million claims submitted to insurers by hospitals from 2001 to 2007, evaluating the impact on hospital prices, volumes (admissions), and spending for privately insured, non-elderly patients. Using data from Truven Analytics MarketScan.

They constructed county-level indices of prices, volumes, and spending and adjusted for enrollees’ age and sex. “We measured hospital-physician integration using information from the American Hospital Association on the types of relationships hospitals have with physicians.”

What they found is not surprising: vertical integration involving physician-hospital consolidation results in better care and higher costs. They found hospital prices increased 2%-3% each time physician-employing hospitals’ market share increased by one standard deviation. And overall spending on services at the hospitals that employed physicians increased while the utilization of services (volume) at those hospitals didn’t change.

They concluded the following:

“We found that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians—ownership of physician practices—was associated with higher hospital prices and spending. We found that an increase in contractual integration reduced the frequency of hospital admissions, but this effect was relatively small. Taken together, our results provide a mixed, although somewhat negative, picture of vertical integration from the perspective of the privately insured.”

What’s the significance of the study?

1-Hospitals and physicians will bolster their position that vertical integration is necessary to improved outcomes. The shift from volume to value via accountable care organizations, bundled payments, medical homes, and value based purchasing require closer collaboration between physicians and hospitals.

“Clinical integration” is central to each, and payers– Medicare and private insurers– are promoting these risk-based contracting efforts energetically while cutting reimbursement rates for services aggressively. So the provider position is this: ‘We get better results. We built what you said you wanted.

It’s costly to make the change, especially while since Medicare and Medicaid don’t cover our costs, demand is soaring and our bad debt from the uninsured increasing. You told us to build it, but you don’t want to cover our costs.’

2-Payers now have proof that vertical integration is increasing costs. Timing is everything, and concern about health cost is growing. Last month, the Bureau of Economic Analysis reported that overall health spending in the first quarter, 2014 increased 9.9%, the highest quarterly increase since the 1980s, and following the 4thQ increase of 5.6%. The Stanford study’s finding supports a vexing concern shared by most private insurers: consolidation among providers increases their leverage in negotiating.

Insurance companies think providers are inefficient and wasteful, so adding bargaining leverage to their already suboptimal cost-management proficiency makes matters worse…for everyone.Ultimately these costs are passed through in higher premiums.

So insurers reason: ‘providers are vertically integrating to protect their financial interests at our expense’.

So what’s it mean?

1-Physician-hospital consolidation will continue, but payers will increase incentives for cost-efficiency as models mature. Efficiency measures linked to supply chain costs, staffing and productivity, workflow and lean operating models will find their way into contracts with payers for accountable care organizations and bundled payments—the two most prominent levers payers are likely to pull.

The relative weight of cost containment measures in calculating bonuses and savings will increase relative to other measures. These risk sharing models will not go away, but how payers measure their performance, structure incentives, and monitor consolidation efforts will change.

2-Regulators will pay closer attention to vertical integration and provider consolidation. the US Federal trade Commission and the US Department of Justice are alert to the potential for provider cartels that discourage competition and produce imbalance between private payers and providers. Recent rulings in Idaho, Georgia and others point to heightened scrutiny.

3-New models of provider-payer collaboration and gain sharing will emerge, especially around targeted high cost populations. combining the financing and delivering of care to better align incentives between payers and providers seems inevitable, but a pluralistic payment system makes it problematic in most communities.

In most industries, customers pay a price for a service and a provider (seller) delivers based on an expectation of quality, service and price.

In healthcare, the separation between payer and provider, and the lack of transparency about prices, costs and anticipated outcomes (results) lends to the mess we’ve created. Might vertical integration of financing and delivery be a solution? Might the pursuit of value in healthcare be enhanced if in each community where two or more entities that finance (sell insurance) and deliver (providers) compete?

In most communities, providers grapple with multiple private payers while responding to the mandates of Medicare. Could it be simpler? Might employers that provide employee health insurance coverage find it easier to contract if they dealt with entities that could produce and manage the full array of services based on a predictable cost structure linked to results?

And might carve-outs for specific high cost populations contracted by high performing, fully integrated systems be an answer for managing costs while improving outcomes? Time will tell, but something’s got to give.

In Section 2718e of the Patient Protection and Affordable Care Act, a 56 word mandate for hospitals is set to take effect this October: it requires hospitals to post prices for a list of products and services annually. Big deal. Hospital prices mean little since most health insurers negotiate discounts, and consumers without insurance coverage end up paying only a fraction of the posted price.

Publishing prices from the charge-master will not fix the mess.

So as health costs take center stage in the market, physician-hospital vertical integration is likely to increase as will criticism by payers that these are contracting cartels, not platforms that improve health and reduce cost synchronously. At the end of the day, based on the Stanford study, both are right. But being right doesn’t fix the problem.

Righteous indignation never results in a solution; rather, innovative, bold, fresh ways to clean up the mess is needed. That’s where we are.

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The Doctor Crisis

7/7/2014

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Doctors get blamed a lot these days — blamed for aversion to change, for obstructing innovation, and for being self-centered. This familiar litany asserts that in the nation’s drive to transform health care, physicians are part of the problem. While it is undeniable that doctors are part of the problem in some places, it is equally undeniable that they are leading innovation in many places and must be part of the solution everywhere.

We may well be in the midst of the most unsettling era in health care and that turbulence is bone-jarring to physicians. There is a doctor crisis in the United States today – a convergence of complex forces preventing primary care and specialty physicians from doing what they most want to do: Put their patients first at every step in the care process every time.

Barriers include overzealous regulation, bureaucracy, liability burden, reduced reimbursements, and poorly designed care delivery systems.

On the surface the notion of a doctor crisis seems altogether counterintuitive. How could there be a “crisis’’ afflicting such highly educated, well-compensated members of our society?

But the nature of the crisis emerges quite clearly when we listen to doctors. Ask about the environment in which they practice and you hear words such as “chaos,’’ “conflict,’’ and “dysfunction.’’ Based on deep interviews with doctors throughout the country, the research firm Harris Interactive reports that a majority of physicians are pessimistic about their profession; a profession Harris describes as “a minefield’’ where physicians feel burned out and “under assault on all fronts.’’

Have terms this extreme ever been used to characterize the plight of physicians in our nation? Burnout, chaos, conflict, dysfunction, minefield, under assault. How can the nation transform its health care system under such disturbing conditions?

The existence of the doctor crisis demands that the broad community of health care stakeholders recognize the import of the crisis and acknowledge that solving it is a prerequisite to achieving excellence in access, quality, equity and affordability.

Important steps toward a solution have already been taken. Innovative organizations are shifting the burden of non-doctor work to other team members enabling physicians to focus on more complex cases and manage population care while medical assistants, nurses, receptionists, clinical pharmacists all work to the peak of their considerable skill.

A foundational belief is that fixing the doctor crisis is a prerequisite to achieving access, quality, and affordability throughout the United States.

Ridding the lexicon of the burnout-chaos-conflict-dysfunction-minefield-under assault syndrome requires not only recognition and acknowledgement of the crisis, but also a belief that solving the crisis is one of the most patient-centered steps we can take.

What Defines a Physician Today?

The evolution of the physician’s role in our society has accelerated rapidly in recent years. The days when a doctor’s responsibility to patients began and ended within the clinic walls are gone.

In the Information Age, physicians take responsibility not just for individual patients but also for managing populations of patients. Physicians serve as healers on a much broader scale than ever before.

At one time, the healer did his or her work in the exam room. The new healer works in a clinical team with electronic medical records, clinical registries, and a team of skilled staff.

The old promise was we are sorry you are sick and we will use our skill to make you well. The new promise is we will do everything we can to make sure you do not get sick in the first place, but if you do get sick we will provide compassionate care that is supported by the best available knowledge and science.

In the book, The Doctor Crisis, the authors define the new physician role as that of a healer, leader, and partner. This is an ambitious and necessary expansion of the doctor’s portfolio taking responsibility for all six of the Institute of Medicine’s essential elements of quality – care that it is safe, timely, effective, efficient, equitable, and patient-focused.

Is this fair? Is it reasonable to ask doctors to become something more than they have been? Most physicians already feel overwhelmed–understandably so. They are asked to do too much in a system that too often thwarts their efforts as much as it enables them.

It must be emphasized that physician as healer possesses the strong clinical skills needed to deliver excellent care in a compassionate, healing way. In many ways, physician as healer embodies many aspects of the traditional definition of a good doctor.

The healer role extends from the patient to his or her family and recognizes both the physical and emotional issues at stake. The healer acknowledges that great clinical care must always be patient-centered and that shared decision making with the patient is essential. The healer understands the concept of nothing about me without me.

Skilled healers are deeply knowledgeable about the best practices for the most common ailments, and they apply standard work–proven, reliable treatments–in such cases, knowing that it is safer and more reliable and that unwarranted variation means care that is not only suboptimal but also unnecessarily expensive.

Healers also know that many of their patients do not fit easily into a best-practice category. These doctors are skilled at personalized, customized care for each individual patient who needs it.

Dr. Amy Compton-Phillips of Kaiser Permanente sums it up well: “Skilled healers–no matter their specialty–take care of the person, not the problem. Orthopedic surgeons, for example, are not physicians for a body part. They are physicians for a person. This is complete care. It’s when physicians across the spectrum take the position that a healer’s role isn’t to heal a problem, it is to heal a person.”

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ACA 101: an employer's search for advice

6/2/2014

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In ancient Athens, the philosopher Diogenes wandered the daylight markets holding a lantern, looking for what he termed, “an honest man.”

It seems since the dawn of the consumer economy that customers and buyers have traded most heavily on a single currency – trust.

Three millennia later, our financial system still hinges on the basic premise that the game is not rigged and any trusted intermediary is defined by a practitioner who puts his client’s interests ahead of his own.

Anyone responsible for procurement of healthcare may feel like a modern-day Diogenes as they wander an increasingly complex market in search of transparent partners and aligned interests. The art of managing medical costs will continue to be a zero-sum game where higher profit margins are achieved at the expense of uninformed purchasers.

It’s often in the shadowed areas of rules-based regulation and in between the fine print of complex financial arrangements that higher profits are made.

Are employers too disengaged and outmatched to manage their healthcare expenditures?

Are the myriad intermediaries that serve as their sentinels, administrators and care managers benefiting or getting hurt by our current system’s lack of transparency and its deficit of information?

Who’s to Blame the Failure to Rein In Healthcare Costs?

In his recent column, “Yes. Employers Are To Blame for Our High Medical Prices,” Princeton political economist Uwe Reinhardt controversially lays partial blame for the healthcare cost crisis at the feet of employers.

Reinhardt suggests that some employers have been passive, uninformed and in some cases, unable to muster the internal energy to get their own leadership teams to commit time to becoming more informed purchasers of health services.

Where corporate procurement might realize aggressive discounts from vendors, healthcare has remained outsourced to insurers who have been largely unsuccessful in controlling rising costs and conflicts of interest.

Poor procurement arises out of a failure to act properly – to be informed, to be prepared and to ask the right questions.

Some critics of our broken system complain that employers are simply getting poor advice from consultants, agents and brokers who often move at the speed of disruption-averse clients.

Some point to government for public-to-private cost-shifting, poorly conceived legislation, and poor regulatory oversight over an industry that has witnessed the rapid consolidation of hospitals and insurers into an oligopoly of control that is difficult to deconstruct.

As the next phases of reform plays out across public and commercial markets, unintended consequences, odd alliances and new conflicts of interest will arise out of the ground fog of purchasing choices. Employers without a firm grasp of the key elements of healthcare cost-management are likely to fall prey to flavor-of-the-month stop gap solutions or Trojan Horse cost-shifting schemes that may control employer costs but will do little to ameliorate underlying negative trends.

Will Self-Centered Fear Reveal the Worst of the Industry?

Healthcare industry stakeholders are scrambling to remain relevant as the locomotive of Obamacare leaves the station. Players once considered essential stewards and stations along the tracks to controlling healthcare costs are worried that they may soon be bypassed. Disintermediation is weighing heavily on anyone who sits in between those that deliver care and those who consume it.

The national vision seems clear: universally affordable health coverage leading to lower costs for both the private and public sectors.

And while we are at it, let’s toss in a free flat-screen TV.

Employers are naturally cynical to the legislative complexities of the ACA and are having a tough time trying to figure out how to use the momentum of health care reform to make changes that will insulate them from future cost increases. But, it’s hard to know which direction to go – especially when opinions diverge around the likelihood that market-based reforms can lead to sustained low single-digit medical trend.

It’s getting hard to know whose opinion to believe, and worse yet, what is motivating their point of view.

The anxiety around disintermediation is causing many stakeholders to explore how to move up and down the services value chain in an effort to carve out a permanent role as a participant in the new age of healthcare delivery.

In doing so, many firms are discovering inherent channel conflicts and developing facilities that may cannibalize their own existing business models to survive the digital transformation of an analog industry.

If we believe that any 2.0 version of a solution should be better, faster and cheaper, we should be excited about the changes that lay ahead. The challenge for employers will be to see through to the institutional incentives that are causing many players to pivot into new business models – consultants selling products, hospitals selling insurance, insurance companies becoming providers, and employees being asked to become consumers.

Just how muddy is the water getting? Consider the following positions.

Hospitals

As inpatient admissions continue to decline and larger healthcare systems find themselves burdened with brick-and-mortar overhead and high unit costs, there is pressure to continue to pivot into integrated health delivery and higher volumes of ambulatory and outpatient services. So far, so good.

With healthcare reform, these same hospitals are being encouraged to form risk-bearing Accountable Care Organizations (ACO) to help manage population health of retirees and share in the subsequent savings that could be achieved by focusing on value instead of volume.

It seems an easy jump to turn an ACO into a commercial venture offering employers the ability to contract directly with the large hospital system as their medical home – essentially becoming an HMO, bearing risk for the health of its members.

Incentives change from treating illness to keeping people healthy. The big problem is most of the hospital systems putting their toe in the water of these risk arrangements are also the most expensive hospitals in any PPO network.

Will these hospitals be able to achieve competitive unit cost and low year-on-year trend increases, or will they simply reduce some cost by disintermediating insurers but continue to charge higher costs for services?

Once risk shifts to integrated healthcare delivery systems, expect more liability arising out of alleged conflicts of interest and rationing of care.

Insurers

Many argue that insurers, not unlike banks, have become highly risk averse and are rapidly moving toward a new role as health service and technology infrastructure providers. Most insurers have failed to become trusted consumer brands. Much of this distrust is arguably deserved given their historic insensitivities to customer service and business practices that left purchasers unable to decipher the complex and seemingly arbitrary calculus of pricing and claims payment policies.

Most small and mid-sized employer renewals have become frustrating annual rites of passage.

Truth be told, most fully insured employers are beginning to understand that healthcare is like a Las Vegas casino – if you play long enough, the House always wins. The deck is further stacked against business as employers are often scared away from more efficient financing methods like self-insurance to fully insured, bundled programs where all health services are provided through a single insurer including RX, behavioral health, chiropractic and radiology.

Bundling affords insurers ample pricing mobility to move required margins across a range of services to achieve their profit targets. While there is nothing illegal with these business practices, it does give rise to healthy cynicism regarding the industry’s commitment to achieve affordable care over personal profit. As one healthcare executive commented, “Look, our job is to hide the Easter eggs and your job (as an advisor) is to find them.”

Public managed care stocks are enjoying 52-week highs as Wall Street clearly sees no signs of near-term pricing pressure. Optically, the new insurer business model, which is now expanding into Medicaid and Medicare, gives the appearance that insurance firms are operating at lower margins while their health service subsidiaries report record growth and profit.

It’s hard to trust a vendor who is both serving clients as claim payer and providing services through a subsidiary for undisclosed transfer pricing. This practice will give rise to conflicts of interest as payers pivot into providing care.

Consultants

Large consulting firms have long-since laid claim to the high ground of objective employer advocacy. As retiree medical and RX costs began to balloon in the late 2000’s, consulting firms saw value in carving out elements of these costs from insurers — creating owned and managed facilities to purchase drugs and offer defined contribution retiree exchanges.

A rush of mergers and consolidations introduced additional services to traditional Human Resource and Employee Benefits consultants offering outsourced administration and defined contribution exchanges for active employees. The success of these first-generation facilities led to higher margin annualized revenue streams and a pressure to expand proprietary product solutions into a culture that had historically been agnostic to solutions and vendors.

As employers express interest in exchanges and alternative delivery models, consulting firms see an opportunity to leverage their trusted relationships to steer clients to owned and operated facilities. While clearly believing their owned solutions offer a better mousetrap, the fee for service consulting community is now confronted with a business model conundrum.

Do we create products and proprietary facilities to meet the profitable and growing demand for administration and service platforms? If so, will our own consultants consent to steering our customers to our own facilities?

To add additional pressure, Wall Street has rewarded public consulting firms like Aon and Towers with valuation uplifts – increases in market cap well ahead of actual enrollment, creating internal pressure to promote these facilities to deliver on analyst expectations. Analysts are convinced that the majority of employers will convert to exchange-based purchasing in the next decade and in doing so, they are seeking to invest in firms that seem positioned for future purchasing trends.

The administrative services that accompany many proprietary online enrollment platforms will benefit exchange managers, creating almost captive relationships as employers see higher frictional costs moving from one exchange to another. Employers may essentially be stuck paying annual administration and commissions as part of an exchange-based relationship.

Where a consultant should play the role of trusted advisor to help choose the exchange that is best for their client, firms will now be pushing their people to endorse their own exchanges, and in some cases, promote financing arrangements that defy decades of empirical data — in particular those exchanges that are encouraging employers to convert from self-insurance back to fully insured financing as a means to promote purer competition between carriers.

Befuddled HR professionals are increasingly torn between long-term institutional relationships and a nagging suspicion that their consultant is now promoting a model out of self-interest. Now armed with hammers, it appears that every client is beginning to go look like a nail.

Now armed with hammers, it appears that every client is beginning to go look like a nail.

Brokers/Agents

Brokers and agents have long enjoyed a too-cozy rapport with their HR and Benefits counterparts in small and mid-cap America. In the world of middle-market brokerage, generalists are often advising generalists and relationships routinely trump fiduciary accountability.

Brokers leverage relationship-based trust and are often heavily influenced by how they are remunerated.

Some brokers prefer fully insured plans as administrative costs, taxes, fees and commissions are commingled and not as visible to a cursory review of costs. One could argue that commissions by their very nature create conflict of interest. The continued practice of volume and contingent-based bonus payments also clouds the broker’s ability to claim total objectivity.

Most relationship-based employers do not question or understand their broker’s remuneration arrangement or in some cases, may knowingly pay higher commissions to their broker so the broker might serve as an outsourced benefits staff – using headcount that HR could never successfully justify internally because of finance and staffing controls.

Healthcare 2.0 will be characterized by data – lots of data and an increased dependence on compliance and technical resources that will shake the traditional transactional broker profit model to its core. Informed clients will desire transparency and accountability for all services, and judge value based on a numerator of outcomes divided by a denominator of cost of services.

Brokers will need to be able to demonstrate actionable interventions, improve clinical trends, assist with optimal financing arrangements (including actuarial support for plan value-setting and financial forecasting), provide strong communications and HR support for concierge and employee engagement tools, and understand healthcare economics expertise to hold insurers accountable for achieving network discounts while limiting hidden margins and fees.

Transactional placement skills will be table stakes as the 2.0 broker reinvents themselves as a solutions provider with no embedded conflicts of interest. The big question remains: Is it possible for the broker’s goals to align completely with the client’s goals?

Human Resources

A Human Resources manager facetiously shared with me, “I got into the business because I really liked people and I hated math. I now spend my days with a calculator trying manage a massive human capital spend and I don’t really like people.”

If you watch where most HR and Benefits Managers’ feet go, it is not in the direction of disruption and greater intervention into the personal and consumer healthcare habits of employees.

America’s C Suite has been surprisingly unwilling to spend the time with HR to understand the root causes of their healthcare costs and instead condones what is now a regular and unimaginative annual cost-containment exercise of cutting benefits and increasing contributions as a means to achieve a workable healthcare renewal price point.

While Professor Reinhardt’s gentle rebuke of HR may have been a bit undeserved, it is not completely without merit. Structure has long since trumped strategy in employer healthcare plan management. A good renewal sees very little changing, when in fact, change must occur if behavior is going to change.

“Disruption” is a broad, amorphous HR term used to describe anything that creates additional work in the form of employee complaints and additional distractions from the job of doing one’s job. To avoid the steeper slopes of the healthcare cost-containment mountain, those charged with overseeing Human Capital have travelled the easier, well-trod trails of cost-shifting, resulting in the erosion of take-home pay.

Given that 90% or more of America’s HR and Benefits professionals are responsible for healthcare but are not rewarded for delivering low, single-digit medical trend, it’s no wonder that their focus is on where they do get rewarded – limiting noise, smoothing feathers and keeping the planes and trains of human capital running on time.

One HR Manager related, “It’s hard to get management to focus on the complexities of healthcare spend. They want to see the year-over-year costs and whether their doctor is still in the PPO network. They don’t have the attention span or interest in tackling all these issues.” Sound familiar?

So Who Can An Employer Trust?

Trust and transparency must be the currency that anchors the employee benefits marketplace of tomorrow. No one in a corporate HR and Benefits role can afford to be seen as a friend and not be seen as a fiduciary.

Stakeholders – insurers, consultants, brokers, providers – are all scrambling to preserve their roles as trusted B2B advisors while nervously anticipating a growing consumer market.

While public exchanges limp along and blue states and red states fight over the notion that reform is succeeding, employers will be on their own for the foreseeable future – forced to revisit their vision, strategy and structure for healthcare and benefits. In the end, it’s all about aligning incentives.

If a CEO tells his/her HR team that 2015 bonuses hinge on managing medical costs to a 3% trend or less – without raising contributions or reducing benefits – one wonders whether friends will become overnight fiduciaries.

In the months and years ahead, employers will find themselves wandering among the tall trees of monolithic insurers and a dizzying new roster of online and consumer engagement tools. It will be all about alignment of interests and holding people accountable for results – not bedside manner.

Purchasing will require a lot of homework, faith and a strong sense of the corporate values of the partners you choose to help you shape your plans.

If ever there was a time for honest, unfiltered advice, it’s now. The search is on for affordable healthcare and for stakeholders who are beholding only to their client’s interests to get costs under control.

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