Health care is on a roll: Costs are moderating, coverage is expanding and quality is improving. I guess those death panels are starting to work.
But it is not enough. We need to pick up the pace. As we keep emphasizing in these columns, we have hit the wall of affordability in American health care: The average American family cannot afford the average premium. The recent CalPERS health care premium rate agreements in California are testimony to this. Reinvigorated competition among health plans wrestling for a share of CalPERS' $7 billion-plus health spend has led Kaiser to reduce its rates by 4 percent for 2015. That's the good news. The bad news is that Kaiser's health maintenance organization family premium in the Bay Area is more than $22,000 per year (the highest priced HMO option is nearly $29,000). Median household income in America is slightly higher than $52,000.
Affordability is the key and urgent need. The theme of urgency was one of the big lessons from the annual Health Forum–AHA Leadership Summit, held in July in San Diego. I am proud to have acted as the synthesizer and moderator of the event for more than 15 years, and this meeting was one of our best. The issue of urgency came up a lot.
Malcolm Gladwell brilliantly told the tale of how true innovators (often the Davids battling against the Goliaths) have a strong sense of urgency. They feel the need to change more intensely than the rest of us and often are disagreeably dissatisfied with the status quo that doesn't move fast enough for them.
The health care field needs that sense of urgency. The people who may make this real are the private purchasers, and remember: They provide the entire financial margin for the health care delivery system.
The Voice of the Purchaser
At the summit, I moderated a panel of leading private purchasers from CalPERS, Walmart and Disney to give attendees an opportunity to hear the voice of the purchaser directly. These purchasers are leaders among their peers and trendsetters in the health benefits marketplace. They spoke with a clear voice: They want the American health care system to reduce costs and improve quality, and do it soon.
While increases in corporate health care costs (like all health spending) have slowed to around 5 percent growth rate, many employers are deeply concerned that they have experienced decades of annual 5–10 percent increases with no measurable improvement in quality or service.
Purchasers are of one voice on a number of issues that should promote a sense of urgency among hospitals and health systems:
It's not just about cost. While cost and affordability are extremely important to purchasers, they are not their sole concern. Purchasers are looking for evidence of significant and measurable improvements in quality and service, gains that match the continuous value improvement they expect from other vendors. Purchasers like Disney who pride themselves on delivering a delightful customer experience that is prompt and courteous expect their providers to deliver the same. Many purchasers like Disney and Intel are looking at on-site and near-site clinic options where they can be assured that timely and responsive care can be delivered with minimal disruption to valuable employees' time.
A strong preference for integrated care. Surprisingly to some, given purchasers' demonstrated and increasing use of preferred provider organization–like products and high-deductible plans, purchasers actually would prefer to have highly valued integrated care delivered everywhere they have employees. The reason they are pursuing many of the initiatives described, such as centers of excellence, is that across the country, high-performing integrated care is either unavailable or unaffordable.
Purchasers are nearing the limits of cost sharing with associates. Many purchasers have slowly but inexorably raised the employee's burden of health care costs, often enabled through so-called consumer-directed health plans with greater deductibles and co-payments tied to transparency tools and wellness engagement initiatives. Some purchasers with historically generous plans still have some running room with this strategy (and the Affordable Care Act has legitimized Bronze and Silver levels of actuarial values that are lower than many of the more generous employer-sponsored plans).
The next frontier for some employers includes retiree benefits and spousal benefits where employees are increasingly responsible for their own costs. But overall, the sense I have from many purchasers, including the panelists at the summit, is that they are nearing the absolute limit of cost burden for associates when employee costs are 10–30 percent of total wages for low-income workers in retail and service industries. Couple that with unionized workforces that have long-standing contract prohibitions against higher levels of cost sharing and there is a growing sense that simply passing the burden to employees is not the end game.
The punch line is simple: It's the health care delivery system that has to perform better.
"We are not paying the Cadillac tax." If minimum actuarial values and limits on cost sharing are one end of the spectrum of the purchaser's problem, the other end is the so-called Cadillac tax, due to start in four years. The Cadillac tax is an excise tax on high-cost health plans offered by employers. Beginning in 2018, health plans that cost more than $10,200 for an individual or $27,500 for a family plan will be subject to the tax, which is 40 percent of the amount that exceeds those thresholds. For some private purchasers, the tax could be enormous.
Congress' intent was to start to claw back the deductibility of health benefits over a certain threshold (an approach many economists of different stripes support). It sounded good to stick it to the bankers at Goldman Sachs. But it turns out that the people who have the richest health benefits are schoolteachers and firefighters in high cost–high wage areas like New York and California. They would reach the threshold first.
Private purchasers are adamant that they will not pay the Cadillac tax, and they will take action to prevent paying it: move costs to employees as far as they can, consider options like private exchanges, and become much more activist in managing the costs of the delivery system. The Cadillac tax may be vulnerable politically but, even if it were repealed, it does not alter the basic problem that the costs of health benefits are too high, particularly for low-income workers.
The Cadillac tax is still the law, and if employee benefit managers are going to keep their promise to their chief financial officers that they won't have to pay the Cadillac tax, then they better have started on the path of more active management of the delivery system. Employers feel the urgency, and they are taking action.
Options for Activist Purchasers
Purchasers are pursuing a number of options to more actively manage health care costs, quality and service. While many of these initiatives are mediated through the health plans that serve them, purchasers are not entirely thrilled with the performance of their plans and are willing to take action both directly and indirectly. For example, Pacific Business Group on Health members some years ago were frustrated by the health plans' lack of innovation and created a "breakthrough plan" with the help of a startup called Definity (later purchased by UnitedHealth Group). Health plans quickly followed suit in emulating the breakthrough plan's features in their own offerings.
So, purchasers can influence plans to take action, but increasingly they are engaging more directly with the delivery system not only in their contracting, but also in the information and incentives they are creating for their employees to engage with the health care system. Here are some of the key trends we discussed at the summit and are seeing in the marketplace:
Transparency and consumerism. Almost all sophisticated purchasers are actively encouraging their employees to shop around for health care by providing them with transparency tools that encourage employees to seek out providers that are of higher value (lower costs and higher quality). Tools like Castlight are becoming extremely popular among large employers.
Castlight provides employees with clear and accurate information on the true cost consequences of picking providers. This is not just wishy-washy stars and bars ratings or the lunacy of the chargemaster prices. No, this is accurate information on what it will cost you to go see Dr. Johnson vs. Dr. Taylor given where you are in your deductibles and co-payments for the year and the actual contracted rate that Drs. Johnson and Taylor will be paid by your health plan. In other words, it is information about the real cost to you, given to you before you make the choice, not some "gotcha" surprise months after the event when you finally get the provider's bill.
Purchasers are particularly interested in applying transparency tools to the "shoppable conditions," such as maternity care, orthopedics and even cancer care. (Castlight and its competitors in the space are not without their own challenges, given that many of the major health plans steadfastly refuse to provide them access to plan data. A battle then ensues in which the purchaser insists that they want the Castlights of the world to have the data.)
The bottom line is that more and more privately insured patients will have real-time information about the cost and quality implications of selecting providers, and they will have strong financial incentives to select higher-value options. The old provider line of "don't worry, your insurance will pay for it" no longer applies in the emerging marketplace.
The new wellness. In all the surveys of employers, wellness tops the list of initiatives. But this is not the old-school wellness of subsidized gym memberships or ineffective anti-smoking pamphleteering. The new wellness is more activist, some might say Stalinist, where the employee will be induced to engage in his or her health and wellness. These actions might include financial incentives to complete health risk appraisals; incentives to take a minimum of 7,000 steps a day, and verify same by synching their pedometer with their computer and the company's health plan every night; and requirements to enroll automatically in wellness coaching if their body mass index exceeds some threshold.
It will be harder not to engage as an employee; providers, in turn, may feel the effects of this trend both positively in terms of better compliance and adherence by patients, and negatively in terms of potentially lower volumes.
Value-based benefit design. Sophisticated employers are realizing that dumb cost-shifting to employees may be counterproductive. Value-based benefit design is intended to create incentives for compliance and eliminate financial barriers to beneficial care. The classic examples are waiving co-payments and deductibles for necessary preventive and maintenance drugs for diabetics. More and more purchasers will use value-based benefit design to shape the health-seeking behavior of their employees.
Intense focus on heavy users. Almost all employers have done the math on their heavy users. Like any insurance pool, about 5 percent of patients account for 50 percent of costs. Purchasers are focusing more on those heavy users and targeting them for additional services, including weight management, smoking cessation, disease management and behavioral health initiatives. In extreme cases, some employers have prohibitions on hiring smokers. I have not heard of any weight-based prohibitions, partly because it likely would violate the Americans with Disabilities Act provisions.
Interestingly though, a recent Kaiser Family Foundation tracking poll found that more than 70 percent of Americans were against health plans or employers charging higher premiums for heavy users such as those that were overweight — not surprising, given that 70 percent of us are overweight.
Reference pricing. CalPERS pioneered the use of reference pricing in their Anthem PPO in California where they targeted hip and knee replacement. About 40 California hospitals agreed to a maximum hospital price of $30,000 for hip and knee replacement, and if you the patient wandered off to the other 400 hospitals doing it, you paid the entire difference in cost — at the extreme about $90,000 more. Well, no actual CalPERS member had to pay that because all the expensive hospitals ended up taking the $30,000 price. Volumes moved immediately to the 40 hospitals, and prices came down overall for CalPERS members in all hospitals.
So, why doesn't CalPERS do more of it? CalPERS did indeed save a few million dollars but, remember, they buy $7 billion worth of health care a year. A few million is not even a rounding error. They urgently need substantial change such as a 4 percent rate reduction per member per month like they got from Kaiser. Other private purchasers remain enthusiastic about reference pricing as a tool to trim the price outliers in a marketplace. But overall, it is a shot across the bow of providers to signal that private purchasers mean business. For them it is urgent.
Centers of excellence. Walmart is the Fortune 1 company. If it were a country, its gross national product would edge out Poland as the 24th largest economy in the world (and, by the way, the Poles are pissed about it). Walmart has more than 2.2 million associates globally (1.4 million in the United States) with a total of 1.1 million associates and family members in the United States receiving health benefits. Walmart is a big deal in health care as both a purchaser of health care and increasingly as a deliverer of both pharmacy care and primary care.
Sally Welborn, the senior vice president of global benefits at Walmart, is a nationally recognized leader in health benefits. Walmart has received a lot of attention for its pioneering centers of excellence model in which it contracted directly with a number of regional centers for orthopedic and cardiac care. These recognized names, including the Cleveland Clinic, Virginia Mason in Seattle and Baylor Scott & White Health in Texas, receive a bundled payment for the care and are responsible for evaluating appropriateness of surgery.
Walmart associates can go to their local providers for care and pay the appropriate co-payments and deductibles, or they can be flown to a center of excellence with a family member at zero cost to them. Interestingly, between 30 and 50 percent of the cases are deemed inappropriate for surgical intervention, which says that a lot of surgery in America may be marginally indicated and even inappropriate.
The Walmart approach is growing as other Pacific Business Group on Health employers such as Lowe's and McKesson have joined the program. But interestingly, when I asked Welborn: "Walmart doesn't own an airline. You wouldn't be flying associates and their family members to Cleveland if there was bundled, appropriate, integrated care available everywhere Walmart is, would you?" Welborn eloquently replied: "Ya think?"
Narrow networks. Purchasers see narrow networks as a necessary next step to eliminate the cost outliers and to send clear signals to the value players that if you deliver value we can bring you more volume. And if plans are not the right intermediary for the narrow network, larger purchasers may take it into their own hands.
Going direct. Jim Hinton, current American Hospital Association chair and CEO of Presbyterian Healthcare Services in New Mexico, joined our panel to describe Presbyterian's pioneering direct-contracting initiative with Intel. Intel views health care like any other vendor: Quality has to go up and costs have to go down, and vendors sign a blood oath to that effect in multiyear contracts. Jim described this as a learning opportunity for providers to see how seriously private purchasers take the need for value.
In many markets, including Disney in Florida, or Boeing in Seattle (who recently contracted directly with Providence Health & Services), private purchasers are reaching out to delivery systems directly to craft exclusive accountable care organization relationships that emulate the principles of the Intel-Presbyterian arrangements.
Private exchanges. While none of our panel members were contemplating the use of private exchanges anytime soon, they all understood why some of their colleagues were considering them. Walgreens is a stellar example. Again, Walgreens has a direct interest in health care as a provider of pharmacy and primary care services, but it recently has moved all employees to a private exchange model offered by Aon Hewitt.
We'll feature an in-depth review of the Walgreens story in a future column. But suffice it to say here: It's going well. And as Tom Sondergeld, chief architect of Walgreens private exchange strategy told me: "Yes it's going well … and we won't be paying the Cadillac tax."