Think Tank

Is California Ready for Health Care Profit Sharing?

Health care consumers, who have been helping to pay rising costs through increased health plan premiums, copayments and deductibles for several years, could see a financial boost by 2012 as a result of action at the end of last year by the federal government.

The Obama administration has issued new federal rules that require health insurance companies to spend a prescribed minimum of revenue on medical care. For some companies, it will mean less profit, lower executive compensation and limits on marketing and overhead expenses.

Although some states, including California, already have such requirements, the federal mandate, spurred by the new national health care law, includes some new provisions most states don’t address — such as rebates. Insurers failing to meet the threshold of spending at least 80% of premium revenue on medical care will have to pay rebates to consumers starting in 2012. HHS Secretary Kathleen Sebelius estimated that up to nine million people could get rebates worth up to $1.4 billion.

A related concept is value-based purchasing, which could reward consumers for helping insurers save money.

CalPERS and Anthem Blue Cross are introducing an innovative program this month that will establish a payment threshold for some medical procedures and services. The “value-based purchasing” system will establish a basic price for specific elective procedures and services and give members a list of facilities that will provide the service or procedure for that amount or less. If CalPERS members choose to patronize hospitals or medical organizations that charge more, the member will be expected to pay the difference.

For example, Anthem Blue Cross has determined that it should not be spending — and will not spend — more than $30,000 for a total knee replacement. If a CalPERS Anthem member chooses to have a knee replaced in a facility that charges more than $30,000, the member pays the difference. If a member chooses to have a knee replaced at a facility that charges $15,000, Anthem saves $15,000.

If value-based purchasing spreads, as many predict it will, would a logical next step be to reward consumers for choosing the low-priced alternative? Should the insured patient, or perhaps the employer who provides the insurance, share in profit earned by a patient’s informed decision?

We asked experts from several corners of the health care world — insurers, consumer advocates, employers and employer groups — to weigh in.

We got responses from:

Value-Based Purchasing Holds Great Promise

Value-based purchasing seeks to increase the value of employer and consumer health care spending, that is, to improve quality per dollar spent. Diverse organizations among the Pacific Business Group on Health have been at the forefront in advancing value-based purchasing. Examples include CalPERS’ use of high-performance provider networks and a new benefit program for orthopedic joint replacement procedures, Safeway’s introduction of benefit rewards for achieving healthy biometric values and General Electric’s promotion of consumer decision support services.

A value-based purchasing strategy may incorporate incentives for high-value choices through employee contributions, plan selection, provider selection, and member cost-sharing for outpatient, inpatient, and prescription drug benefits. Other areas of focus may include care coordination, health promotion and consumer-decision support. Wells Fargo and University of California, among others, use PBGH’s Plan Chooser to make potential out-of-pocket expense and differentiating health plan features more transparent for their employees. 

Many benefit design tactics are geared towards helping consumers make buying decisions based on value. Defining the health plan or provider choices for employees is just one path towards value. These are important first steps, but we also need to deliver better information to consumers. To promote genuine innovation that produces better value in health care, we collectively need to advance health care policies that:

  • Make health care costs transparent;
  • Measure and report clinical performance at a level that matters to a consumer’s choice of provider or treatment;
  • Support care coordination and clinical integration;
  • Pay for health care based on quality, not quantity;
  • Reward use of information technology that makes personal health data readily accessible to the consumer; and
  • Promote a competitive health care marketplace.

While seeking to create consumer awareness about the cost of health care, purchasers are also very concerned about encouraging beneficiaries to get the right care at the right time, such as access to primary care, use of preventive diagnostic care, adherence to maintenance drugs for chronic care. Advancing performance transparency and consumer information at a level that matters for decision making are central to the promise of value-based purchasing.

Financial Incentives an 'Iffy Proposition'

Incentivizing patient demand for fairly priced, quality health care is a worthy goal. But providing patients with big financial incentives to guide them to lower-cost surgery sites is an iffy proposition at best. Among other drawbacks, it risks the unintended result of creating untold thousands of not-truly-wanted surgeries.

Consider a 2001 study in which physicians examined patients and identified clinically appropriate candidates for joint replacement surgery. When those same patients were asked whether they would want the surgery, only a modest 37% said they definitely or probably would go through with surgery. However, had each patient been offered $15,000 to go ahead with the surgery and choose a particular facility, imagine how many more might have opted to undergo the operation.

Implementing policies that point our system toward getting better value for our dollar should start with asking fully informed patients whether they even want the procedure. A 2010 New England Journal of Medicine study of several health plans, including California’s Health Net, found that offering patients a greater number of opportunities to participate in shared decision-making resulted in an 11.5% reduction in hospital admissions for preference-sensitive surgical procedures (prostate, hip, knee, back or uterine surgery and coronary revascularization).

For those well-informed patients who do choose elective surgeries, we should work to ensure that their physicians have access to the most unbiased, up-to-date scientific evidence about which procedures and implants work best.  In Sweden, with its mature joint replacement registry, joint revision surgery rates were cut in half by identifying best surgery practices and the highest-performing implant devices. California physicians and patients deserve the benefits that similar systematic research into our practices here could provide.

Finally, patients should have access to trusted, compelling data to guide them in choosing physicians and hospitals that reliably provide safe, high quality care.

While it is no secret in the health policy world that more expensive care is often not synonymous with better patient outcomes, many patients/consumers may still find this proposition counterintuitive.

Two Sides of the 'Value' Coin

Insurance benefit design and provider payments are two sides of the same “value” coin; “value-based benefit designs” that encourage consumers to make informed, cost-conscious choices should go hand-in-hand with “value-based purchasing” initiatives that incentivize providers to deliver high-quality, lower-cost care.  Medicare has gone farthest to promote this pairing in its Acute Care Episode Demonstration, which includes consumer incentives to choose provider teams who have agreed to reduce costs on an episode of care basis and to report quality metrics for the procedures.  Other current initiatives have tried to tackle discrete aspects of this relationship — as an example, the CalPERS initiative focuses primarily on plan benefit design — but to truly realize gains, we must focus on both sides of the value coin.

The Integrated Healthcare Association has launched a pilot of bundled episode of care payments, which establish a single payment for many components of an episode of treatment, such as a total knee replacement.  Bundled payments are designed to encourage financial alignment that will support delivery system and process re-engineering to improve the quality and efficiency of patient care. There are advantages for all parties involved: physicians maintain control of patients’ treatment plans and may increase revenue through shared savings arrangements with other providers; hospitals benefit from developing both stronger partnerships with individual physicians and the operational infrastructure needed to manage episode payments; and health plans will share in savings generated by quality and efficiency improvements made by providers. This pilot focuses on the delivery system, but there are also gains for consumers, to the extent that establishing a single price for a procedure is a critical first step towards endowing them with transparent price and quality metrics that facilitate true apples-to-apples comparisons between teams of surgeons and facilities.

This month, IHA will also begin work with pilot participants and thought leaders on benefit design models that can effectively translate these gains into consumer incentives.

As health care costs continue to rise over the coming years, cost-sharing increases are inevitable; the challenge for payers and plan sponsors will be to structure these increases in a manner that promotes value rather than bluntly increasing the cost burden on consumers.

The distinction should not be “high” versus “low” cost-sharing, but “intelligent” versus “unintelligent” cost-sharing.  Initiatives like that sponsored by CalPERS are an important first step in the right direction.