It’s all in the contract – how payers are tackling the increasing costs of medical devices

by Torsten Bernewitz

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Rising costs for medical devices remain a big headache for health plans and their sponsors, as well as patients who will have to share the burden in some way. Although lately the growth of expenditures may have slowed a bit, the driver has not been better prices, but the postponing (or avoiding) of elective procedures in the light of the economic troubles, as well as some payer pushback based on studies that suggested that a significant number of implants may have questionable medical benefit.

The reprieve may thus be short term. The underlying factors for cost growth, the aging population on one hand and a stream of technical innovations on the other, are still there, and will continue to drive costs perhaps as much as 10% annually, in particular if the economy improves and when more people join the system by 2014.

Unless, that is, if this growth can be capped. And healthcare payers are looking for ways to do just this.

One way of doing this is through more effective contracting, both with providers and manufacturers. And although it may appear at first counterintuitive, manufacturers may benefit as well.

Healthcare checks and balances

Manufacturers, of course, are trying to maximize sales and profits for their products. This is legitimate and provides the incentive to keep innovations flowing. It is a necessary component of an efficient healthcare resource allocation process.

The payer provides the necessary checks and balances in this process. What is the product or service really worth? What is the net benefit of the procedure on health outcomes and patient experience? How much are employers and patients willing to pay, with the health plan as the intermediary to facilitate these choices.

Some payers simply peg reimbursement rates at some percentage of Medicare. But that is not negotiation, that is side-stepping the issue. It may leave money on the table that smarter negotiations could obtain.

Two strong negotiation partners make a better contract in the long term than a strong and a weak one. The manufacturer’s potential strengths - and thus sources of value - are the importance of the disease and the efficacy, safety and uniqueness of the product or service.

So what are the strengths that a health plan can leverage to create an effective counter balance?

I am planning to provide some thoughts about this question over the coming days.

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Payer-manufacturer collaboration – a sequel

by Torsten Bernewitz

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Yesterday we saw another example of payers and pharmaceutical manufacturers collaborating in new ways. The bug of creating new partnerships seems to be catching on as the different healthcare stakeholders realize that each of them are holding different pieces of the healthcare puzzle, and that they can really solve it only by putting them together in joint efforts.

Now it’s Pfizer partnering with prescription benefits manager Medco (http://www.thestreet.com/story/11289938/1/pfizer-establishes-precision-medicine-research-collaboration-with-medco.html).

Sanofi entered a similar collaboration with Medco in the summer, and of course a few days ago we had Pfizer-Humana and earlier in the year AstraZeneca-WellPoint. I shared more details about these examples in an earlier post (http://payer-strategies.blogspot.com/2011/10/adversaries-becoming-friends-payers-and.html).


And on the provider-payer side there is also a lot more love (http://payer-strategies.blogspot.com/2011/10/love-is-in-air-take-aways-from-ahip.html).

Interesting times!

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Love is all you need? Well, not quite: common elements and success factors of Alternative Delivery and Payment Models

by Torsten Bernewitz

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Yesterday I summarized some of the take-aways of the AHIP Shared Responsibility Summit in Washington (http://payer-strategies.blogspot.com/2011/10/love-is-in-air-take-aways-from-ahip.html). The conference showcased innovative two-way (provider-payer) partnerships, and even three-way alliances (provider-payer-employer), all built on the spirit of shared objectives, collaboration, and trust.

While “love was all around us”, the examples that were presented also pointed to the critical factors to make these relationships work and a win-win for all stakeholders, and highlighted the challenges that must to be addressed. I briefly mentioned these common elements and success factors yesterday; here are some more detailed observations:

1. Alternative models must focus on network performance, not on a particular provider group. Experiences with alternative delivery and payment models that engaged only one stakeholder group, for example primary care, have shown disappointing results. With hindsight, this is perhaps not so surprising. If we engage only one stakeholder group in an alternative model, the only real options are a) to drive down unit costs and b) to hope that favorable outcomes will translate into long-term savings. However, driving down unit costs is not a sustainable strategy, and payer-provider goals are misaligned anyway on this dimension - a likely recipe for failure. Better outcomes at the stakeholder level will likely come at short-term cost increases, or, like squeezing a balloon, will lead to cost shifting through patient selection. The two most important drivers of quality and costs are when and where to refer, and to leverage this dimensions, payers must engage the overall system.
2. New approaches need to accommodate the fee-for-service model, at least a little while longer. There is widespread agreement that the currently predominant fee-for-service model creates incentives for overuse, and consequently the alternative models aim to replace it with pay-for-performance and global payment approaches. However, from a pragmatic perspective, fully replacing fee-for-service will not be feasible in the near-term. First of all, CMS is forced by its statute to continue with fee-for-service. Secondly, on state level there are frequently significant regulatory barriers that would need to be overcome to move to bundles payment models on a broader basis. This is the case in many states, and the constraints vary across states. So if fee-for-service remains a fact of life in the foreseeable time, alternative models need to find workarounds. An approach that seems to work reasonably well is to create a “shadow capitation budget” (with all the bells and whistles of risk adjustment, trending, inflation adjustment etc.), still pay fee-for-service, but then calculate savings vs. the “shadow budget” and share any such savings with providers. Provided these incentives are significant enough, this appears to be very attractive to provider organizations.
3. Success can be achieved through the right focus and targeting. Across health plans, about 20% of the members generate 80% of the costs. Similar relationships exist across diseases, and most other areas of healthcare. The Pareto principle offers the opportunity to focus on the right areas for interventions to improve processes, outcomes and costs. It is no secret that healthcare costs increase exponentially across the wellness spectrum from healthy, to at risk, high risk, early symptoms and active disease stages. To manage costs, we need to identify and engage individuals before they move to the next higher cost cohort. This requires a holistic view and engagement of plan members, not just the “patient” subgroup.
4. Data sharing is a critical element to drive change and measure performance. A key feature of all alternative delivery and payment models is the pooling of data and analytics from payer and provider sources to create joint dashboards to identify trends, outliers and areas of focus, to establish goals, and to track performance. Many of the metrics on these scorecards provide stakeholders with a new perspective of the healthcare process, showing components that were previously obscured, or not shown together in combination. “You can only manage what you measure, and what is measured, gets done” – this statement can certainly be confirmed in healthcare, where a data driven, scientific approach is a hallmark of the culture.
5. Upfront payer investment is needed to get things started. All alternative delivery and payment models presented highlighted the need for initial payer investment and support to set the process in motion. Even provider systems that are already well organized, like Geisinger when they entered such an ADPM program, have to make significant changes to the way they work, and in particular the processes and systems managing data and money flows. Payer support can be in the form of supplemental fees – for example Cigna’s Initial Coordination Fee – and/or support though services and personnel. Of course, these incremental costs need to be offset in the mid to long term, and should be part of the considerations when cost savings are shared.
6. Effective governance is a key enabler for a smooth implementation. The leadership in both the provider and payer organizations needs to support the new model and give permission to get the initiative started – and then “get out of the way” to allow execution. Good governance and project management are key to success. It is important to involve all key stakeholders, however without making the process unwieldy and slow. This takes careful planning how stakeholder interests are represented in the various workstreams. We need to be very clear who is in charge of what. Legal needs to have a prominent place at the table. Alternative models touch on many regulatory issues – data sharing and bundled payments to name but two – and it is important to incorporate the legal perspective early in the process to avoid discovering later that certain model components are infeasible.
7. We must align goals and rewards between payers and providers, across the network, and between organizations and the individual. One of the flaws of the current fee-for-service model is that it sets the wrong incentives by encouraging overuse. To support working together on improving quality and costs, all stakeholders must share the same priorities and share in the gains in a meaningful way. Without this alignment the initiative will fail, merely shift costs around, or lead to suboptimal trade-offs. The best practice is to set concrete goals and targets (looking at relative performance vs. peers does not resonate well with physicians, but a clinically relevant target does). The financial upside opportunity must be significant to get the attention.
8. Alternative models require a culture and values of transparency and accountability. And in most cases, this will mean a significant cultural shift. Working together in new ways, and sharing data and information in common dashboards and scorecards, requires getting over some of the attitudes and assumptions that may be informed by past experiences. For example, previously adversarial relationships may prompt us to continue playing our cards close to our vest, or we may still try to catch each other out in the contractual fine print. Openness and sharing is also not well aligned with a culture where risk containment is deeply ingrained. Both partners need to abandon such notions, and this requires strong change management efforts.
9. Change management is therefore a key success factor. Moving to alternative delivery and payment models is not easy, it takes a long time, and in addition to technical challenges, significant emotional barriers need to be overcome. All payers and providers who have tried the new approaches report they encountered bumps on the road. To make the approach work, physicians need to buy-in and embrace it. Achieving this is at the same time the most important and the most difficult task. The new approach calls for standardization (not a good concept to win physicians), measurement and accountability (physicians are not used to being measured, at least not once they have left medical school), and the incorporation of costs in the evaluation (reminding physicians of their frustrations with managed care in the 90s). In addition, many physicians suffer from “change fatigue” through the many initiatives that are calling for their attention. However, while change can be very hard, it can be successful if we put the right conditions in place. This includes careful planning what and how to communicate, and finding and addressing the right emotional triggers that find positive physician response.

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Love is in the air - take-aways from the AHIP Shared Responsibility Summit

by Torsten Bernewitz

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A couple of week ago I mentioned examples how payers and drug manufacturers – typically on opposite sides of the negotiating table - are trying new ways of working together as partners instead of adversaries (http://payer-strategies.blogspot.com/2011/10/adversaries-becoming-friends-payers-and.html).

The love bug seems to contagious, as witnessed last week in Washington at the AHIP Shared Responsibility Summit that showcased an outbreak of new alliances between health plans and healthcare providers – stakeholders that usually eye each other with some suspicion. Ten case studies were presented, each highlighting some unique aspects of new partnerships between payers and provider groups and hospitals that are aimed at bending the cost curve and at the same time improving outcomes and patient experiences.

These new collaborations are still very much in their try-out stages. But while no dominant approach is emerging yet, there are some common insights into success factors and remaining challenges.

Two major shifts in thinking

The case studies highlighted two major shifts in thinking in the industry:

1. Containing healthcare costs and providing high quality care are no longer regarded as mutually exclusive objectives. In fact, the first experiences with alternative models show that cost savings are achieved through different (better and more efficient) healthcare delivery. This is a significant shift in the fundamental assumptions about the dynamics of healthcare systems, and it has a dramatic impact on payer strategy!
   It is perhaps interesting that a similar dramatic paradigm shift was forced on another large industry more than 25 years ago, when US car makers had to discover - almost at their peril - that the fundamental basis of their strategies was deeply flawed. When conventional wisdom seemed to suggest that you could either produce high quality but expensive, or cheaper but lower quality vehicles, their Japanese competitors outflanked them with inexpensive cars with superior quality (and better customer service on top).
   Fortunately (or sadly, if we think of the overall value of healthcare), there is no foreign competitor accelerating the momentum to make such a switch. But the discovery that better delivery can lower costs suggests that there may be an early mover advantage for payers who can get this right and turn it into a competitive advantage with their customers.
2. Payers and providers need to work jointly - as true partners - to achieve both objectives of better healthcare delivery at lower costs. This requires a new mindset – shifting the payer-provider relationship from the currently predominantly negotiation driven, and at times adversarial perspective to one of shared objectives, collaboration, and trust.
   Partnerships also require a longer-term commitment: alternative contracting initiatives typically run for about 5 years, compared to the 1-3 year duration of conventional contracts. Joint working recognizes that each partner holds different pieces of the puzzle, and brings different capabilities to the table that complement each other.
   Providers have the expertise in diagnosis and treatment choices that determine the clinical outcomes and the patient’s journey and experience along the way. Payers have extensive data about utilization, outcomes and costs. They can see their members in a holistic way, can track them from before they show up as a patient, follow their paths through the provider network, and monitor what happens to them afterwards. They have wellness programs and can work with employers.

Looking across the different examples that were presented, it appears that there are a number of common elements and success factors of Alternative Delivery and Payment Models:

1. Alternative models must focus on network performance, not on a particular provider group.
2. New approaches need to accommodate the fee-for-service model, at least a little while longer.
3. Success can be achieved through the right focus and targeting.
4. Data sharing is a critical element to drive change and measure performance.
5. Upfront payer investment is needed to get things started.
6. Effective governance is a key enabler for a smooth implementation.
7. We must align goals and rewards between payers and providers, across the network, and between organizations and the individual.
8. Alternative models require a culture and values of transparency and accountability.
9. Change management is a key success factor.

It is probably worthwhile to examine each of these elements in more detail (I will attempt this in future posts).

While the presenters showed nice improvements in both cost containment and quality, there are still at least three issues that remain challenging before these new models can be scaled up to a much larger scale.

1. Changing patient behavior remains a key challenge. Provider accountability and incentives, which are key components of the alternative delivery and payment models, do not change patient behavior. Engaging patients and families is hard, but if successful, tremendously valuable. To enhance success, alternative delivery and payment models should be linked to other payer strategies that aim at becoming more “consumer centric”, including patient messaging leveraging mobile technologies and social media, customizing services to specific consumer profiles and needs (for example consumers with low literacy and numeracy skills), and making the customer experience simple and transparent. Although the payer industry still has a long way to go to become really good at this, effective patient/consumer engagement is a key capability that payers can bring to the partnership table.
2. Standardization and accommodating the multi-payer perspective is still a largely unsolved issue. Perhaps with the exception of one payer dominating a local market, providers need to work with several payers. Alternative delivery and payment models require new metrics – on outcomes, quality, patient experience etc., and that creates a significant challenge. BCBSMA, for example, has 64 quality metrics in their Alternative Quality Contracting (AQC) model, a global payment model that uses a budget-based methodology, combining a fixed per-patient payment with performance incentive payments. CMS has 65 metrics, which seems like a close enough number, but unfortunately they are not the same. It is impossible for providers to deal with multiple sets of competing metrics. Standardization is a must, but this remains an unsolved problem. But the challenge may also create a first mover advantage: payers who can get their metrics footprint on a provider organization can influence how this organization thinks and, indirectly through what is measured and how, acts.
3. Sustaining success and momentum in the long-term is an ongoing concern. The experience with alternative care and delivery models has shown that in many cases cost savings and quality improvements could be achieved relatively quickly and easily. These encouraging results could be achieved through going after the low hanging fruit: leveraging provider cost differences across the network, and targeting the obvious inefficiencies and outliers in practice variations. While establishing an early success record is important to sustain momentum of the movement to ADPM, it also creates high expectations on the employer side that this trend will continue. It will be harder, and may take more time, to meet these expectations when payers and providers go after the next areas. BCBSMA’s Alternative Quality Contracting, for example, achieved savings in the first year mostly through price reductions, rather than use reduction. Efforts to drive further savings may have diminishing returns.

Thus, it seems, the first battles have been won, but a lot of work is still ahead to achieve overall victory.

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Adversaries becoming friends – payers and big pharma are pooling capabilities to tackle healthcare inefficiencies

by Torsten Bernewitz

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The relationships between pharmaceutical companies and health plans are usually not easy. They are parties sitting on opposite sides of the negotiating table, and frequently regard each other with suspicion.

But some change may be coming our way. If we want to stem the tide of ever rising healthcare costs, we need to get better at leveraging clinical evidence and comparative effectiveness data to steer the appropriate care, medications and services to the right patients, at the right time.

The different stakeholders in healthcare each hold different pieces of this puzzle. Payers have extensive data about healthcare utilization, outcomes and costs. Providers have the expertise in diagnosis and treatment protocols that determine the patient’s journey and experience along the way. Medical manufacturers have strong market research capabilities to understand provider and patient needs, attitudes and behaviors, the marketing skills to influence change, and the research and development capabilities to create new pharmaceuticals and devices to provide new solutions. Bringing all of this to the same table can be a win-win for everyone involved, including the patient.

This year we have already seen two prominent examples of different stakeholders working together in new ways.

Yesterday, Humana and Pfizer announced that they join forces in a five-year research partnership. The goal is to explore new ideas and ways to improve the quality, outcomes and costs of the healthcare delivery system, in particular for senior citizens.

Both organizations will bring together researchers and healthcare experts to study key issues and deliver interventions to reduce inefficiencies in the management of chronic conditions such as pain, cardiovascular disease and Alzheimer’s.

Humana expects to get from this collaboration a deeper understanding of their members’ needs, their behaviors, and the underlying drivers for health and well-being. The results could shape how Humana designs benefit and coverage plans, and what programs will be developed to influence how patients take their medications.

For Pfizer, the research will provide important pointers to influence pipeline strategy decisions. And of course they will get a better appreciation of how payers think and make decisions.

Earlier this year, AstraZeneca and WellPoint entered into as similar partnership to determine the most effective and economical treatments for chronic illnesses and other diseases.

In this collaboration, which is expected to run over the next four years, WellPoint and AstraZeneca will share and analyze electronic medical records, claims information and patient surveys from people insured by WellPoint and several regional Blue Cross Blue Shield plans.

The research will include prospective and retrospective observational studies on disease states as well as comparative effectiveness research of multiple treatment options. It will also highlight new therapies most needed for treating and preventing disease.

The companies plan to make their findings publicly available and to expand their partnership to include hospitals and other organizations.

These partnerships bear all the hallmarks of value-based relationships. They are significantly different from the key account management (KAM) and contracting strategies that usually characterize the approach of pharma companies when they interact with payer organizations.

This is not about selling products and/or services. It is not about pricing and rebating for access. Instead, it means bringing capabilities from both partners to the table to solve a problem or develop solutions together.

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Only half of the story – why payers should focus more on the consumer, but not at the expense of their attention to employers

by Torsten Bernewitz

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Since the Affordable Care Act was signed into law last year, there has been a lot of discussion that the health insurance industry will shift from a business-to-business market to a business-to-consumer model.

The reason is that consumers are expected to take a much more prominent role in health insurance choices. More individuals will enter the market through the individual mandate of the law. They will be better informed and they will have a market place that facilitates comparison-shopping.  Engaging consumers effectively will also be critical in influencing behaviors to help manage outcomes, which in turn is an important element in containing medical costs.

Consequently, industry analysts and consulting firms (e.g., BCG), investment groups (e.g., Psilos) and service providers (e.g., Connecture) talk about the “imperative” of sweeping changes in channels, technology, and partnership strategies to move to toward consumer-oriented business models.

They are probably right – healthcare “consumers” are becoming more important, and it will be necessary to find better ways to engage with them. In fact, better interactions with the end-customer might have served the industry well all along, even before the new law. However, they are only half right, and risk missing the other part of the story, which is just as important. We shouldn’t give up on employers as key customers just yet. Here’s why:

First of all, the numbers do not really support the hypothesis of a full transformation to a business-to-consumer approach. Today, about 145 million people in the US enjoy employer-sponsored health coverage, which is 56% of all insured, and 89% of the non-government market. Even in the very aggressive scenario that 30-40% of the people currently covered by ESI would move to the individual market, this would still leave between 90 and 100 million people insured through their employers, probably more if we factor in population and payroll growth. This is still 60% of the non-government market.

In the perhaps more likely scenario that only up to 10% of ESI covered people move to the exchanges, 130 million will be in the employer market – 80% of the non-government market and still a segment that is larger than Medicare and Medicaid taken together.

Thus, the employer market will continue to matter, and falling head-over-heels in love with the consumer – if it is at the expense the employers segment - would be a strategic mistake.

This does not mean, however, that the employers business will remain at the status quo (there is more discussion of the potential changes in the employers market in this post: http://payer-strategies.blogspot.com/2011/10/to-drop-or-not-to-drop-that-is-not.html).

Employers are rethinking their health benefit strategies. Depending on specific conditions like size, hiring and retention goals, labor market conditions etc., employers’ priorities and benefit strategies will change and diverge significantly.  Health insurers must keep the pulse on their evolving needs, create stronger differentiation through products and services, tailor their offering, and become more impactful in bringing the value proposition across. In many cases this means that insurers must get much closer to employers than they currently are.

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Coming through – facing the new market access hurdle in Germany, AZ receives encouraging news for Brilique

by Torsten Bernewitz

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A few weeks ago, I mentioned that the U.S. are not the only country working on healthcare reforms. I was referring to a new law in Germany that appears to have an effect on curtailing healthcare costs, in particular regarding pharmaceuticals (http://payer-strategies.blogspot.com/2011/09/reversing-rising-costs-for.html).

This new Germany healthcare law mandates early evaluation of the additional benefit of the drug in comparison to a corresponding established therapy, creating an additional hurdle pharmaceutical manufacturers have to take when they bring new products to the market. Savings are expected to reach the healthcare system 2 billion euros (~$2.7 billion) annually.

Shortly after regulatory approval of a new drug, a Joint Federal Committee (Gemeinsamer Bundesausschuss G-BA; self-governing body of physicians, dentists, hospitals and health insurance companies) rates new drugs on a range from 1 (“major additional benefit”) to 6 (“less benefit than comparator”).

While the new law has already created some casualties - the withdrawal in Germany of Novartis’ Rasilamlo and the decision by Boehringer Ingelheim and Eli Lilly not to launch Trajenta in Germany - a preliminary assessment report regarding the medical benefit of AstraZeneca’s clot buster Brilique/Brilinta (ticagrelor) for acute coronary syndromes (ACS), seems to be reasonably positive, at least for the more significant part of the market(http://www.worldpharmanews.com/astrazeneca/1815-brilique-receives-a-positive-preliminary-medical-benefit-assessment).

For patients with NSTEMI/UA (Non ST-Elevation Myocardial Infarction/Unstable Angina), which represents over 70% of the ACS patient population in Germany, a rating of 2 - “important additional benefit” - was assigned versus comparator Clopidogrel + aspirin.

For the smaller patient sub-populations with STEMI/PCS (ST-Elevation Myocardial Infarction/Percutaneous Coronary Intervention), however, the rating was 5 - “no additional benefit proven” versus comparators Prasugrel +aspirin and aspirin in monotherapy.

AstraZeneca will now respond to the G-BA regarding the initial assessment, after which the final benefit assessment will be performed by the GKV-SV (Federal Association of Statutory Health Insurance Funds). The decision is expected in 2012 (in the meantime, the product s already available in Germany).

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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

To drop or not to drop - that is NOT the question

by Torsten Bernewitz

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As most people in the industry are aware, there are diverging opinions about how the Patient Protection and Affordable Care Act (PPACA) may affect the market for employer sponsored insurance (ESI), which currently represents over 70% of the non-elderly uninsured, or close to 150 million people in the US.

In particular, the discussion has focused on the question if - and how many - employers may stop offering ESI. Answers to this question seem highly explosive from a political perspective, going at the heart of what the law wants to achieve and its chance to achieve it.

However, from the perspective of health insurers and payers (as well as other stakeholders in healthcare), this may be the wrong question to ask, may in fact be a red herring that could lead to serious strategic mistakes.

In this post, I want first to summarize the different positions, and then discuss why the black and white perspective is limiting and what might be better questions to ask.

When the PPACA was signed into law in 2010, the Congressional Budget Office regarded its effect on ESI as minimal, estimating that about 7 percent of employees who currently enjoy health insurance through their employer would have to move to the exchanges in 2014.

In June 2011, management consulting firm McKinsey made waves with the bold claim that this estimate was far too conservative. Based on an employer survey they had conducted earlier in the year, the firm concluded that the law would trigger a radical restructuring of employer-sponsored health benefits. 30 percent of employers – potentially even more once everybody fully grasped the implications of employer mandate, the new insurance exchanges, and the law’s system of penalties and subsidies - would “probably” or “definitely” stop offering health coverage to employees after 2014, pushing them to the individual market instead.

However, two further studies published around the same time challenged this view again. Both the Urban Institute and the Robert Wood Johnson Foundation identified health care cost savings to firms with fewer than 50 workers, as well as a small increase in the number of people covered by their employer-sponsored plans, indicating a stabilizing influence of the Affordable Care Act on small firm coverage, which has been eroding over the last decade.

A similar view was shared in another survey, this time conducted by consulting firm Mercer in July 2011. Although employers voiced concerns about rising costs, most said they remained committed to offering ESI. Only 8% of survey respondents were “very likely” or “likely” to stop offering medical plans after the insurance exchanges become available.

Finally, while the above surveys and studies are speculative and based on modeling assumptions and stated stakeholder intentions, there is one real data point: Massachusetts introduced an individual mandate and penalty structures similar to those of the PPACA in mid-2007, and experienced a subsequent increase in ESI coverage. Of course, there is also a debate whether the Massachusetts case is a representative indicator for the national level.

However the black and white perspective on ESI – whether “to drop or not to drop” – is perhaps missing the point. It may also lead to strategic mistakes. Those who conclude that ESI will not change dramatically may be tempted to call off the alarm and continue business as usual. Those who conclude that ESI will be dropped left, right and center, may shift too much of their attention away from one of their core (and very profitable) customer groups, the employers. Both groups will miss opportunities.

The fact remains that offering employer sponsoring insurance is very expensive, and that employers need to tackle this problem to maintain ESI as a meaningful and valuable benefit for employees. According to consulting firm Hewitt Associates, healthcare premiums have more than doubled over the last ten years, growing more than five times as fast as the median household income in the US during the same time.

The 2011 Milliman Medical Index shows that the cost of PPO coverage for a typical family of four has now reached $19,393, of which the employer pays almost 60%, or $11,385, and the employee covers $8,000+ in contributions and out-of-pocket costs. This is significant if we consider that the average household income in the US in 2010 was just about $50,000.

If the underlying costs continue to grow - and it is not clear how they will be stopped - employers will need to rethink their health benefits strategies. Employers offer health benefits primarily to recruit and retain employees. How much can they ask employees to share in the increasing burden through higher co-payments, co-insurance or deductibles without seriously damaging the value recruits and employees put on the offering? Especially, if potentially more competitive coverage options become available on the exchanges?

Employers, in particular large ones, may still feel “morally obligated” to offer health insurance coverage, or see health benefits as a way to signal prestige and industry leadership. So they will likely offer something. The question is thus not whether, but what to offer.

Very likely these benefit offering will not be the same as today. Instead, they will include wellness programs, employee incentives, rewards and perhaps also penalties based on biometric outcomes. There will be more choice. And more options will create more diversified employer as well as employee segments.

It is also probable that, as the exchanges evolve, the relative value of coverage that can be obtained on the individual market - compared to ESI - will change through the effects of economies of scale and stronger competition. Employers will watch this evolution closely, and continue to adapt their ESI strategies.

The key question for health insurers and payers is therefore: how can we get as close as possible to employers to help them navigate their health benefit strategies and leverage opportunities to cross-sell new insurance products, new services like health IT and data solutions, or medical and wellness management?
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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Stakeholder alignment - difficult but necessary

by Torsten Bernewitz

Payers who want to get closer to their end-customers must become excellent on four dimensions: consumer insights, consumer engagement, simplicity and openness and stakeholder alignment.

I discussed consumer insights, consumer engagement and simplicity and openness in more detail here:

http://payer-strategies.blogspot.com/2011/09/inside-consumer-insight.html
http://payer-strategies.blogspot.com/2011/09/consumer-engagement-making-difference.html
http://payer-strategies.blogspot.com/2011/09/simple-is-not-easy.html

Here are some observations about the fourth success factor: stakeholder alignment.

The experiences of many healthcare companies who are practicing it show that consumer marketing in healthcare is particularly complicated. There are many more stakeholders and influencers than in most other industries, and they don’t always align. In fact they may actively work against each other. 

In a recent study we were mapping the stakeholder and influencer impacts across the multi-decade diabetes patient experience (i.e., from at-risk to death). We found that patient journeys and stakeholder relationships were exceedingly complex, resulting often in conflicting and confusing experiences for patients, and likely poor outcomes as well.

It is important for health insurers to appreciate this complexity. The focus on consumers (or for that matter any other stakeholder in the healthcare supply chain ranging from providers over employers to the government) is not independent from the way we engage with the other stakeholders, and the way that they perceive us.

Pharmaceutical manufacturers had to learn this lesson the hard way, when they “circumnavigated” physicians and started to communicate directly to patients. Many physicians did not really appreciate patients questioning their decisions or asking for specific therapies because of something they had seen on TV.

Payers can experience these conflicts today, when patients redeem co-pay cards they received from their physicians, who got them from drug manufacturers. Payers are not thrilled by the distortions this creates to their benefit designs.

As health insurers move closer to the consumer, they need to take care to synchronize their consumer activities and communication with those to the other stakeholders in the healthcare chain.

For example, Cigna’s consumer engagement program includes mobile applications that locate the nearest pharmacies and emergency rooms and decision-support tools that compare quality and medical costs. Cigna also provides access to health coaches for chronic conditions like diabetes. This will only work well if providers are well aligned with the same protocols and priorities.

How easy will it be to create this alignment?

In fact it may be very hard. According to a recent study by the American Medical Association, nearly two-thirds of U.S. cities are dominated by two health insurers, and nearly half of all metro areas are controlled by one. In 60% of the 359 largest metro areas, the two largest carriers have a combined market share of 70% or more, and in almost half (48%) of cities, one insurer had a market share of 50% or more. Local market domination is critical to influence practices of healthcare delivery through contracting terms, guidelines, etc. For example, it helps to introduce new payment models to replace traditional fee-for-service contracts.

Of course the dominant players in these markets are not always the same. For the individual insurer, engaging providers may therefore be easier in some areas than in others. We will continue to see disparities in medical practices, protocols etc., and this will make consumer engagement, which requires overall consistency, potentially very challenging. This may be one of the reasons why companies like Cigna limit their push into the individual market only to select markets, where they think they can build a strong presence - in Cigna’s case currently only 10 states.
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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com