Jack Welch ran GE with the philosophy: "If the rate of change on the outside exceeds the rate of change on the inside, then the end is near." The tide in the payer market may be turning faster than anyone expected, and it is not driven by the Affordable Care Act. Unfortunately, the rate of change inside many health systems is not keeping pace with this outside shift.


Examples of Major Trends

The purchasers of employee health benefits no longer can absorb the rate of increase in their health insurance premiums. Adding higher co-payments, deductibles and premium contributions have had only a modest impact on costs. Both commercial insurance companies and self-insured employers are implementing dramatically new plan designs that could have a major effect on the financial performance of physicians and hospitals. Some examples:

Expensive medical groups cut from city plan. On Sept. 26, 2012, a Los Angeles Times headline read "Cedars-Sinai and UCLA cut from Los Angeles health plan." While the hospitals still will be considered "in-network" for the beneficiaries of the City of Los Angeles' health plan, many of their affiliated medical groups will not. Noting that their physicians' costs were up to 50 percent higher than most physicians in the market and their quality of care was not measurably better, Blue Cross estimated that its "narrow" network excluding the Cedars and UCLA-affiliated physicians would save the city approximately $7.6 million.

Employees choose their benefits. On Oct. 25, the Pittsburgh Post-Gazette reported that Highmark, one of the region's largest health insurers, is expanding its "defined contribution" health insurance exchange product line, saying that the future of health insurance is one that moves away from employer-provided plans and toward consumer-selected health benefits.

This example mirrors the new health insurance benefit design that is being implemented by several self-insured companies like Darden Restaurants (Red Lobster and Olive Garden) and Sears. Darden senior vice president Danielle Kirgan said that the change is not intended to shift more health care costs to employees. Instead, it "puts the choice in employees' hands to buy up or buy down." Paul Fronstin, director of health research at the nonprofit Employee Benefit Research Institute, described this change in plan design as a "fundamental change … It is as if the employer is saying, 'Here's a pot of money, go shop.'"

In San Diego and other markets in California, this program has been in effect for many years. The managed care plans categorize providers into tiers, primarily based on the rates they are able to negotiate. To gain access to providers in the high-cost tiers, many managed care plans are requiring significant increases in co-payment contribution, higher deductibles and higher co-payments per visit.

Anecdotally, it appears that the beneficiaries are responding to these economic incentives, and some health systems that were able to negotiate the highest rates in the past are now conceding to no increase or even rollbacks in pricing. Officials at one health system told me that the rate increase from Medicare will be the largest rate increase from any payer next year. As these defined contribution plans proliferate, it is likely that the majority of Americans who have limited disposable income will be open to trade lower cost for their historical allegiance to the more prestigious and high-cost providers in their market.

Clearly the payers have gotten the message. A friend who is a senior executive at a Blue Cross plan wrote me the following email:

"A very prestigious hospital wanted a double digit increase. We said 'no' — that our customers could not afford the resulting premium increase. They started a smear campaign. It backfired, we eventually settled after allowing them to experience being out of network for a month.

"I contrast this with our recent deal with another major provider who is going all out with agreement to be our partner in the exchange, bundled payments, risk for quality outcomes, etc. This group will prosper … . Those that can't get over the old models will not."

Specialty surgery provided by centers of excellence. Virginia Mason, Cleveland Clinic, Geisinger Medical Center, Mercy Hospital Springfield (Mo.) and Scott & White Healthcare were selected by Wal-Mart Stores Inc. to provide cardiac and spine treatments to the company's employees with no co-payment or travel costs. This signals another major trend — the regionalization of high-cost, subspecialty surgery.

Walmart reports that it selected these health systems based on their demonstrated ability to produce high-quality outcomes and their willingness to negotiate a bundled payment rate for specific procedures. The specific procedures that will be covered under this program include coronary artery bypass grafting, heart valve replacement and repair, repairing heart defects, thoracic and aortic aneurysms, and spine surgery.

While the jury is out as to the ability to direct beneficiaries to a "super-regional center of excellence," it is highly conceivable that health plans will begin developing similar relationships within a state or region, directing patients in need of subspecialty surgical care to health systems that can offer superior measurable quality at an acceptable bundled rate.

Keeping Pace with Change

These three examples foreshadow the rapid changes that will occur in the commercial insurance market. Unfortunately, the pace of change in many health systems is a lot slower.

While Kaiser Permanente is focusing its energies on quality-based assessments for the appropriate use of such procedures such as MRI and CT, many health systems continue to focus on negotiating money deals with members of their independent medical staffs. These deals — joint ventures, co-management agreements, income subsidies, and so forth — will have only marginal impact, if any, on the total cost of care. For example, when a hospital buys a surgery center and then applies its provider-based payment rates, the cost of care actually increases.

In USA Today, George Halvorson, the retiring CEO of Kaiser, reported that its organization's efforts to improve the appropriate use of MRI and CT reduced utilization by 25 to 30 percent. (See "Kaiser CEO: Our model works," Oct. 24, 2012.) Most health systems with independent medical staffs lack the authority or culture to conduct such an assessment, never mind enforce the evidence-based criteria.

The solution requires health systems to move rapidly to a second-generation, clinically integrated network model. Many first-generation networks lack the competency or culture to deliver care that is low-cost with measurably better outcomes. Second-generation clinically integrated networks require bold physician leaders who are willing to take on the resistance from physician members who may perceive efforts to improve appropriateness and coordination of care as threats to their fee-for-service–based revenues. Such networks also will require the health system to make significant investments in IT, network infrastructure and disease management programs.

In addition, health systems must coalesce their production-based employed physicians from a collection of virtual private practices to a high-functioning, truly integrated medical group. Physician compensation must be tied not only to wRVU production but also to outcomes, care coordination and participation in the system redesign.

Homer said that "the gods must teach through suffering." This is true only for those who do not heed the early warnings in the market.

Nathan Kaufman is the managing director of Kaufman Strategic Advisors LLC in San Diego. He is also a member of Speakers Express.