Payor Restructuring: Cost Containment and Sharing Approaches

ABI Health Care Committee News / Volume 9, Number 1 / February 2012
by: Eric Huebscher

Editor's Note: This is the first article in a series of three on health care restructuring efforts by a wide range of health maintenance organizations.

It should come as no surprise that health care failures are not solely centered on hospitals, provider groups and ancillary care services. There have also been failures by the insurers (though far fewer in number). While failures of hospitals and payor groups can be attributed [1] in large part to managements' inability to effect changes in reimbursement structures and overly burdensome debt structures, the insurer failures are invariably a result of actuarial predetermined premiums not matching the expected administrative expense, medical utilization estimates and poorly managed business operations. The insurers have implemented several initiatives over the years in an attempt to either control those costs or discourage perceived unnecessary use of services. No discussion on health care would be complete without some mention of the documented fraud that covers all segments of this industry. The case against the executives of Tampa, Florida based Wellcare is a prime example the industry principles gone wrong. There are some who argue that tighter controls over fraud would go a long way in reducing health care enterprise failures, as well as reducing overall expenses to the system.

In the nearly 40 years since President Richard M. Nixon enacted the 1973 Health Maintenance Organization Act [2], society has struggled to balance an almost incurable appetite for the highest quality of medical care—with the dismay and often anger over the ever-increasing expense. The HMO Act created a model in which an insurer was responsible for providing comprehensive care for a set premium. However, data confirms that the cost of health care has outpaced spending in virtually every component of the nation’s gross domestic product. Over the past several years, health care as a component of GDP has increased from 16 percent to 18 percent—to a total of $1.8 trillion, or approximately $60,000 per U.S. citizen.[3] Health care inflation is seven times the rate of consumer inflation).[4] These factors, among others, result in increased premiums for individuals while reducing disposable income to those receiving the services. Over the past 15 years, insurers have tried to shift costs to the insured and reduce the unnecessary use of specialists and diagnostic care. When the HMO Act was legislated, the number of individuals enrolled in such plans was less than four million, or less than 2 percent of the U.S. population of 211 million. Twenty years later, the number had only increased to eight million, about 3 percent of what was then a population of 257 million.[5]

The common thread in all health insurance models is a desire to contain costs within a set premium structure by controlling the distribution of services while building up networks of doctors and hospitals. It would appear that these sets of initiatives have not worked as planned as we have watched the expense profile balloon, conceivably contributing to the growth of the uninsured population. Given the continuing escalation of costs, the current administration enacted a set of major health care initiatives[6]—most of which will not go into effect until 2014—that attempt to rein in costs and more importantly, are intended to significantly shift large numbers of uninsured to the insured population. The funding of these initiatives are predicated on untested significant savings in other areas of health care. The fundamental question is: Will costs continue to increase at an unparalleled pace without a cohesive check-and-balance system, or will we enter a new phase of controlled expenditures, expanded coverage and a more deliberate and effective fiscal approach to our collective health care needs?

These statistics alone are one thing, but how does the U.S. health care system compare with the cost structures in other countries? According to World Health Organization rankings of 30 developing countries, the U.S. has the highest gross domestic product cost ratio per person.[7] In that group, the U.S. life expectancy is lowest for both men and women. Other measures also indicate an inverse correlation between cost and benefit, confirming that spending more does not translate into better care or improved quality of life.

The cost and delivery of health care has been and will continue to be on the forefront of most political agendas. At times, it has polarized our society between those who receive benefits vs. the legislators and insurance companies that try to decide what services should be covered. Doctors want higher reimbursements and insurance companies want less oversight and regulation, but those goals are not consistent with those of the citizens who demand better, expanded and more affordable care and who pay for, and receive that care. Considering all of the past legislative initiatives and those currently enacted, is it possible to alter these dynamics without a fundamental wholesale change to the entire system?

Early-stage, traditional HMOs provided insurance for individuals using a group of doctors and other medical professionals. However, all visits and other professional care must be within the traditional HMO-provider network in order to be covered by the policy. In nonemergency situations, the primary care physician within the HMO is intended to coordinate care and act as a gatekeeper for referrals to specialty providers and other services through the use of referrals. When the concept of referrals was implemented by HMOs, the intent was to reduce unnecessary visits to specialists while encouraging the primary care physician to treat more common medical problems. At the same time, HMOs were incentivizing physicians not to refer patients to specialists out of their primary care networks. These misaligned incentives only further pinned the patient between the doctor and insurance company while at the same time increasing the amount of time between diagnosis and treatment. Based on my direct experience, it also significantly increased the administrative cost burden to provider offices, while simultaneously necessitating the HMOs to add staff for handling referral approvals.

The data presented herein and my personal experience with the existing health care system do not suggest that the "referral" system has resulted in improved care, reduced costs or resulted in more efficient utilization of services. We have our own stories of arguing with our doctors for a referral to see a specialist. A key question needs to be asked: What would happen to the health care enterprise cost/benefit structure if the system were revamped on a broad scale and referrals were no longer an insurance requirement, a concept already embraced by some insurance companies?

The next articles in this series will discuss other payor-directed concepts. Those include the introduction and use of copays to shift premium expense from the insurer to the insured as well as the use of the "pre-authorization" mechanism for certain services. Finally, the cost of end-of-life care and the overall impact on the healthcare system will be addressed.

Next Article:

Payor Restructuring: Cost Containment and Sharing Approaches - Part 2

1. North General Hospital Bankruptcy; Southern District of New York, July 2010
2. Kaiser Health News; October 2011 - [View Source]
3. Imaging 16% to 12% - Milliman Research Report; Bruce Pyenson, FSA, MAAA; Kate Fitch, RN, Med; Sara Goldberg, FSA,
   MAAA; February 2009
4. Health Leaders Media; January 2012 - [View Source]
5. US Population Statistics - [View Source]
6. Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended; Richard S. Foster, Chief
   Actuary CMS; April 2010 - [View Source]
7. Imaging 16% to 12% - Milliman Research Report; Bruce Pyenson, FSA, MAAA; Kate Fitch, RN, Med; Sara Goldberg, FSA,
   MAAA; February 2009