Globalization and the role of US health insurers

Thomas Friedman in The New York Times has written a seminal article on the (free registration required) impact of globalization on industrial competitiveness. Simply put, the web of fiber optic cables that now connects the world, coupled with the explosion in wireless connectivity, make borders, trade policies, and time zones completely irrelevant. And, the tremendous investment in education on the part of the Chinese, Indians, and others makes our lead in some areas of technology, science, medicine, incredibly tenuous.
Lots of adjectives, and you may well dismiss this as mere blog ranting. Before you do, note this. India passed its first comprehensive, enforceable Intellectual Property law last month.
Already, pharmaceutical firms, medical technology companies, software developers and the like are flocking to India, and deals are being consummated. India has a long tradition of excellence in science and math education, a highly motivated and ambitious workforce, lots of very experienced citizens presently working in the industrialized world, and many more scientists, mathematicians, physicists, and teachers than we do.
Companies are not investing in India just because it is cheaper. Yes, today the cost of labor is certainly less than in the US or EU, but the quality of the workforce, particularly in the sciences and technology, is rapidly approaching excellence. In the near future, we will find ourselves losing out to India and China not on the basis of cost, but due to their ability to compete head to head with our best.
IBM recently built an R&D center in China. After conducting an IQ test on graduates of the best universities in the country, evaluating the top 20,000, IBM selected the top 20. Unsurprisingly, some of their best research is now coming out of that facility. To paraphrase a Chinese researcher, when you are one in a million in India, there are a thousand others just like you.
What does this mean to you, or more accurately, why am I ranting about this in a blog that is ostensibly about managed care?
It frustrates me to no end that health plans, HMOs, the Blues, employee benefits purchasers, brokers and consultants don’t see the direct and vital link between health care and productivity. We are about to get our collective butts kicked by the rest of the world, in part because the health insurance industry does not understand that they are in the productivity business.
Medical guidelines, drug research, quality of care indicators, physician reimbursement, plan design and provider profiling focus on cost and highly questionable “quality” indicators. This is utter nonsense. If health care providers and payers want to be relevant, they had better figure out that their job, their reason for existence, is to enhance and improve the productivity of their customers’ workforces.
Stop thinking like a cost center and start thinking like a profit center. Or find your customers disappearing as they lose the competitive race to Indians and Chinese firms.


Innovative employer health care programs

Rapidly rising health care costs have led more than one employer to search for better ways to provide health care coverage for their employees. Perhaps the most innovative approaches I’ve encountered is that of Manatee County, FL.
I had the good fortune to sit next to Bob Goodman, director of the program, at lunch during a conference in Arizona on prescription drug management. It was one of the more interesting discussions regarding employee benefits I have had in years.
Here’s what Manatee County is doing. They are self-insured, self-administered, and self-managed. Goodman and his staff, numbering a handful of FTEs plus about a dozen contract workers providing case management and related services, handle claims, managed care, network contracting and relations, wellness, and program administration. Seems pretty standard.
The unique features are several.
First, employees are financially encouraged to develop healthy behaviors through different cost-sharing arrangements. Second, the County has implemented a full-service wellness center, focused on encouraging employees with health issues to take charge of their health before it becomes an expensive, unpleasant, and potentially fatal issue. Third, Goodman is hiring his own full-time internist to work in the wellness center, thereby ensuring quick access to medical care for county employees, who otherwise might have to take time off from work to obtain care for themselves or their dependents. Fourth, despite a rich plan design, Manatee County has enjoyed trend rates below 10% for several years. Fifth, Goodman is planning on opening a “captive” pharmacy, to better manage the only major expense category that his program did not directly address.
The program was initiated after the local government, frustrated by the usual non-solutions offered by their existing health insurer and broker after several years of rapidly rising health care costs, asked Goodman to come in and take a look. With his extensive background in TPA operations and management, and complete lack of any agenda, Goodman recommended the County blow it up and do it themselves. To his great surprise, they agreed, and hired him to lead the effort.
What does this mean for you?
If you are a health insurer or broker, a wake-up call; if you don’t provide solutions, real solutions, you will find some of your customers decide to take matters into their own hands. For those brokers willing (or more aptly capable) of true innovation, think about this as a separate business line. Of course, you’d better have someone like Bob Goodman on staff before printing up the marketing materials.
If you are an employer, you do have alternatives. Let me know if you want more information on Manatee County’s program. I’m planning on visiting their operation, and will report on the visit here.


HMO enrollment and open access

The backlash against managed care did not reduce HMO enrollment in the late nineties. Although there was a lot of “talk about backlash


Access v. Cost

For consumers, managed care is a choice between limited access to providers and premium costs; the greater the access, the higher the premium; the more limited the choice of providers, the lower the premium. In the late nineties, the so-called “managed care backlash” occurred when cost increases moderated, and consumers demanded access to any provider.
This spawned the “open access” HMO model, tiered benefit plans, and the explosion of PPOs. Now, with costs once more on a double-digit inflation path, there appears to be more willingness on the part of consumers to trade access for lower cost.
The Center for the Study of Health System Change released a national report entitled “More Americans Willing to Limit Physician-Hospital Choice for Lower Medical Costs“.
The Center reported that “Between 2001 and 2003, the proportion of working-age Americans with employer health coverage willing to trade broad choice of providers for lower out-of-pocket costs increased from 55 percent to 59 percent


Medicare pay for performance gets a push

Even though it’s just a small one, it is stilll significant. Rep Nancy Johnson (R) CT (my home state) is promoting a drastic change in the way Medicare pays physicians. Rep. Johnson is calling for a pay-for-performance scheme to replace Medicare’s fee schedule arrangement.
Details below, but in case you can’t read that far, think of this.
1. many state workers comp fee schedules are based on Medicare’s. What are the implications for state programs?
2. Group health reimbursement is often tied to Medicare as well…
3. Medicare is based on paying for services needed for and delivered to a population that is over 65. If the reimbursement arrangement changes, and it factors in some kind of “performance” metric, will it even be possible to adapt that to younger populations?
Now that your head hurts, here’s the details…
According to California HealthLine;
“Johnson said that, although physician performance measures and systems to collect data on performance are not perfected, lawmakers must move to address the issue because of scheduled reductions in Medicare physician reimbursements over the next several years. Elimination of the SGR (Sustainable Growth Rate) system “is the only possibility,” Johnson said, adding, “It’s unfortunate that we have to do this two years in advance of the technology.”
Johnson also indicated that lawmakers could enact “a one-year fix of physician payment while a more permanent system is being designed,” although she hopes to enact permanent revisions to the Medicare physician reimbursement system this year, CQ HealthBeat reports. She estimated that the replacement of a 1.5% reduction in Medicare physician reimbursements for fiscal year 2006 with a 1.5% increase would cost $11 billion over five years.”


Small managed care plans disappearing

A new report indicates what many have perceived for some years; the world of health care insurance is increasingly dominated by larger payers. Conning & Co.’s report indicates that larger insurers/managed care firms are buying up smaller ones in an effort to grow market share.
This is consistent with HSA’s own experience; as the larger plans seek to keep their stock prices moving up, revenue growth becomes increasingly important. Their growth choices are pretty limited –
1. grow organically by taking market share from a competitor by cutting price (a really bad long term plan) or
2. buy up other plans.
The acquisitions of FirstHealth, Oxford, Connecticare, et al are all indicative of this trend. Good news if you own a smaller managed care firm; bad news if you are a provider or employer operating in an oligopoly environment.
The health care market is rapidly maturing, and will come to be dominated by a selection of large players – Aetna, UHG, Anthem, and a few others.


Kaiser profits increase

Kaiser Permanente, one of the oldest and largest HMOs, reported net income for last year increased by 59% to $1.6 billion on revenues of $28 billion. The HMO’s membership (registration required – free) was up slightly to 8.23 million as well.
According to California HealthLine,
“Kaiser officials said the gain in net income was boosted by rate increases, improved operating efficiencies and lower pharmaceutical costs. Unexpected adjustments to pension and post-retirement costs, workers’ compensation and liability expenses also contributed to Kaiser’s financial performance, company officials said.
Tom Meier, vice president and treasurer for Kaiser, said member rates increased by 10% to 11% in 2004, less than the 13% reported in recent years. ”
The message here is we may be approaching, if not already at, the top of the cycle. Stock prices for publicly traded health plans are way up over last year (see Coventry and United HealthGroup), PEs are up as well, and managed care stocks are once again “strong buys.”
A couple of other “take-aways”.
1. Kaiser’s (KP’s) rates were up 10-11% last year, well above overall medical trend rates. This is likely a key to the improved profits, especially when one considers their increased spending on capital expenditures (up 30% as KP tries once again to implement an electronic medical records system).
2. KP operates the tightest form of managed care; the large group model (all docs are members of the Permanente medical group). If their rates are up 10-11%, what does that mean for less-tightly managed models?


HMO enrollment drops in New England

A new study indicates HMO enrollment in New England has declined over the past year. HealthLeaders-Interstudy (here’s hoping the new company gets a new name shortly)’s just-released New England Health Plan Analysis indicates that all states save New Hampshire experienced a drop in HMO participation.
There is continuing migration to PPOs,” said Paula DeWitt, HealthLeaders- InterStudy analyst. “Massachusetts has strong regional plans and will likely continue to be an HMO stronghold, but even it isn’t immune to the migration into more open-access products. In addition, while all New England states reported net profits through the third quarter of 2004, profits were down in Massachusetts, New Hampshire, and Rhode Island compared to the same period in 2003.”
Insurance Journal noted “The firm also reported on other factors at play in the managed care fiel. Tufts Health Plan has formed an alliance with national player CIGNA HealthCare to offer an open-access PPO-type product to large- and medium-size businesses. Medicare HMOs in New England are adding options and some are enhancing benefits for 2005. For example, Fallon Community Health Plan is offering a new option called Fallon Senior Plan Saver with no premium.”


Innovation in cost control?

Weiss Ratings (yes, I’m a big fan) released an analysis of recent changes to employees’ health plans, and there is a notable lack of innovation.
According to Weiss, “Higher prescription drug co-pays were cited by 34.3 percent of consumers polled, while 23.8 percent indicated higher co-pays for physician visits.” In addition, in perhaps the most drastic move to control health insuranc costs, 11.3% lost their health insurance altogether.
This last statistic may be inflated due to the nature of the study, so I wouldn’t generalize the result to a larger population. However, it is important to note the large percentage of respondents who saw an increase in costs shifted to them from the health plan. Call it “consumerism”, “accountability”, “burden sharing” or what you will, it is clear that employers are fast running out of ideas.


HMO profits up

Weiss Ratings reported very strong earnings from HMOs in the first half of 2004. Weiss, perhaps the most insightful of the rating agencies, noted that over half of the HMOs studied were financially strong, and the industry generated $5.8 billion in profits during the first six months of 2004.
The strong results were felt even among the less-well-off HMOs, as the number of plans considered “weak” financially dropped from 40% in 1998 to 17%.
Weiss did not provide any insights into the reason for the financial improvement, but strong premium growth generated by higher rates, better risk selection and exiting of unprofitable markets, and industry consolidation were likely contributing factors.
Interestingly, the financial improvement occured at a time when health care costs were continuing to increase at rates well above those for overall inflation. Some may note the contradiction here – the companies tasked with managing health care costs were generating big profits while failing to accomplish their appointed task.