Health Care Industry

What do you do when your business costs continue to rise far faster than inflation, but raising prices will just lose you more customers? If you’re a health-insurance executive, you suffer. And unless you’re willing to consider some pretty radical changes in how you do business, you have to contemplate the possibility that your company — and even your entire industry — may face extinction.

Of course, relatively few health insurers, whose problems in this respect are virtually unique, are willing to acknowledge such a dire prospect. Over at the Health Care Blog, however, Maggie Mahar and Niko Karvounis make one of the best cases I’ve yet seen that health plans aren’t just in a slump — they’re in a full-blown existential crisis. The whole piece is worth reading, but here are some highlights:

• Raising premiums to account for increasing medical costs is likely to drive more businesses and individuals to drop healthcare coverage altogether, because “[p]remiums are just too high already.”
• Insurers aren’t just seeing revenue growth slump and share prices fall — roughly 50 percent for the latter since last year in many cases — they’re also starting to cut back on their offerings. UnitedHealth Group, the largest health insurer in the U.S., is slashing 4,000 jobs and eliminating one of its major brands, Uniprise.
• Congress now seems likely to eliminate the 13-17 percent subsidies Medicare now pays insurers for participation in the Medicare Advantage program over the next year or so. (Legislators recently overrode a presidential veto to trim those subsidies for part of the Advantage program, and the remainder is still on the chopping block.)
• Too few insurers “manage” healthcare in ways that actually improve quality and cut costs by eliminating needless procedures and hospitalizations. “[M]ost of today’s for-profit insurance companies don’t manage care, they just manage reimbursement. They don’t think like doctors — but like accountants.”
• Adoption of the term “medical-loss ratio” in the 1990s reflected an insurer mindset that regarded all patient care as undesirable expenses — “regardless of whether the care was necessary or unnecessary, life-saving or totally ineffective.”
• Administrative costs soared as giant insurers like WellPoint and UnitedHealth grew via acquisition. The Kaiser Family Foundation found that costs per insured individual rose to $421 in 2003 from $85 in 1986 — a fourfold increase over that period.
• Consolidation has also eliminated any incentive to compete on quality in many markets. In 2006, one insurer held a majority market share in 56 percent of major U.S. regions.

As a result, the authors write:

[T]oday insurance companies seem stuck in an enormous hamster wheel: unable to make the profits investors expect, without incentives to truly innovate, and unwilling to think beyond Wall Street’s very short-term view of success.

Of course, the companies have largely brought these problems on themselves, with the consequence that a majority of Americans wouldn’t mind seeing health insurers simply legislated out of existence. There’s still a chance that some companies might be able to reinvent themselves as evidence-based partners to patients, instead of opponents, in ways that would give them a competitive advantage and restrain healthcare costs. (Aetna is probably farthest down this road, although its progress is still pretty halting.) But time is pretty clearly running out on the industry’s existing business model.

The Golden State’s branch of the AMA is pushing a bill that would require California health plans to maintain “medical-loss ratios” of 85 percent or higher. According to the California Medical Association, nine of the state’s major health insurers had loss ratios lower than that level. Had every insurer met the proposed limit, they would have spent more than $1 billion on benefits in the year ended June 30, 2007.

Medical-loss ratios are one of those through-the-looking-glass terms beloved by the health-insurance industry. The figure refers to the percentage of insurance premiums spent on claims — that is, on actual healthcare expenses. To the insurance industry, such spending is a “loss” because it eats into profits. To just about everyone else, of course, such spending is the reason the industry exists in the first place.

Of course, the CMA isn’t exactly impartial on this particular issue, because additional health-plan spending largely flows into the pockets of its members. And while there’s definitely a public-policy argument to be made on the question of how much insurers actually spend on healthcare, it’s far from clear that an organization as self-interested as the CMA should be the one advancing it. (Not to mention the fact that it seems a bit unsporting to kick insurers when they’re down and their future looks almost unreservedly bleak.)

The bill in question — SB 1440, sponsored by state senator Sheila Kuehl — is apparently still stuck in committee and doesn’t seem to be going anywhere particularly quickly. For a critical analysis of this sort of approach from the right side of the aisle, StateHouseCall.org has the goods.

Update: It’s also worth noting that the California legislature also recently passed a bill giving state regulators additional power to fine insurers who don’t pay hospitals and doctors.

Pickpocket image via Flickr user matiasjajaja, CC 2.0

Emergency-room crowding is one of the most visible problems hospital administrators face, and it’s also a fairly expensive one. Yet most hospitals have been hesitant to address it, in part because federal law requires doctors to treat anyone who turns up at the ER.

As is true of healthcare in general, a small fraction of people account for a huge percentage of the costs in ER care.  Known colloquially as “frequent fliers,” these individuals visit the ER repeatedly throughout the year, often because they’re chronically ill, uninsured or alone — or some combination of all three. A recent study in Camden, N.J., by Jeffrey Brenner, a professor at the University of Medicine and Dentistry of New Jersey, concluded that just one percent of ER patients at the city’s three hospitals accounted for 10 percent of all admissions — and $46 million in costs over five years. (The New Jersey Star-Ledger story doesn’t say what percentage of total ER costs these patients accounted for, but I’d bet it’s far more than 10 percent.)

Brenner is unusual in that he’s spearheaded an effort to reduce both costs and unnecessary ER visits with a small team consisting of a nurse practitioner, a social worker and a community-health worker. That group seeks out ER frequent fliers — which they formally call “super users” — and tries to help people manage conditions like diabetes or liver cirrhosis and to sign up for insurance when it’s available. Results are difficult to gauge at this point, although a similar program in San Francisco claims to save $1.44 in direct hospital costs for every dollar spent.

Other hospitals are taking similar piecemeal measures. A recent study by the Center for Studying Health Systems Change found that many hospitals are now trying to proactively screen out non-urgent ER patients by hiring nurse practitioners to refer them to outpatient clinics.

(Hat tip: Fierce HealthcareFinance)

Image of frequent-flyer cards by Flickr user caterina, CC 2.0

Private auditors hired by Medicare have been scouring hospital and doctor records for the last few years in search of overbilling, waste and fraud. Paid on a contingency basis, which gives them a natural incentive to be aggressive, such “recovery audit contractors” identified more than $1 billion in improper Medicare billings in six states between 2005 and March 2008.

Hospitals are already complaining about the hassle of dealing with RACs, and consultants have stepped up to offer administrators crash courses in preparing for and dealing with RAC audits. Critics have other problems, too — among them the fact that overhead costs consumed almost 20 percent of the recovered sums, much of that reflecting contingency payments. Several influential congressmen have asked the Government Accountability Office to review the RAC program (PDF link).

(For those interested in more detail, Medicare also offers a detailed report and background materials on the RAC program.)

Of course, Medicare seems to have no shortage of billing controversies to clear up. A separate congressional investigation recently found that since 2000, the agency has paid almost $100 million in claims to doctors who just happened to be dead at the time.

(Hat tip: WSJ Health Blog)

Congress overruled President Bush’s veto of the latest Medicare bill, sealing a big victory for doctors over insurance companies. As we noted last week, the bill puts off an automatic cut in physician fees by limiting subsidies to insurance companies. (Paul Krugman, I should note, offered a take similar to mine on the potential impact of the Medicare battle on healthcare reform.)

The Medicare bill, however, has a number of other implications for industry. In particular, it includes various incentives to push doctors toward digital prescriptions, or “e-prescribing”:

The bill calls for Medicare incentive payments for e-prescribing of 2% in fiscal 2009 and 2010, 1% in 2011 and 2012, and 0.5% in 2013. Beginning in 2012, Medicare payments to physicians not electronically prescribing would be reduced by 1%, then 1.5% in 2013 and 2% in subsequent years. The legislation also requires reporting of any e-prescribing quality measures established under Medicare’s physician reporting system. While the provisions pertain only to Medicare, other health insurers often follow Medicare and implement similar policies.

So maybe that uphill battle pharmacies and IT vendors have been waging on e-prescribing will get a little easier, although I’ve long suspected it will take a Medicare mandate — that is, for the agency to insist that it will only reimburse doctors who are using e-prescription systems — to get the idea across.

The bill also suspends yet another Medicare pilot project aimed at holding down costs by requiring competitive bidding for durable equipment.

Meanwhile, anyone who thinks this issue has gone away needs to take another look. At the Health Care Blog, inside-the-Beltway healthcare policy watcher Robert Laszewski is already counting down to the next scheduled doctor-fee cut:

The recent Senate and House vote to kill the 10.6% physician fee cut only defers the problem for 18 months. On January 1, 2010, the Medicare physicians are slated to get an automatic 21 percent fee cut!

[…]

So, we have 18 months to just keep heading toward the next cliff (this one twice as big at 21%), let the system degenerate (cash, balance bill, or a crisis in access as docs stop taking patients), or actually start taking some constructive steps forward.

(Note: This is a post submitted by BNET member Peter Lucash, whose bio appears below. To submit your own post, click here.)

It looks like physicians have gotten a last minute reprieve from a 10.6 percent fee cut that really would have sent physicians away from Medicare. The annual battle is getting tiresome, and while the Republican Party clings to the fantasy that the “free market” is the fix for health care, those who work in the industry know better.

OK — say you’re a physician practice. Now what? While you’re not getting a cut, you’re not getting an increase either. I work with physician practices, and wrote a book on business planning for medical practices, and this situation today screams for a five-year business plan. So let’s plan.

• Do a “walk through.” The first target of your work is to improve your back office procedures. There has to be a way to speed things up so you can handle more patients with the same staff, and with less hassle for patients and physicians. So become a “patient” and experience all of the related paperwork, processes and other work that surrounds an office visit, from calling for an appointment (how about online appointment setting?) to the final settlement of the bill (online bill payment?).
• Add some services. Even basic lab tests can add a few dollars of revenue to the average office visit.
• Add clinicians. Nurse practitioners and physician’s assistants can handle many visits, are well received by patients, and enable physician-owners to profit from the work of others.
• Market. Target your promotion to insurance carrying patients, building your reputation, referrals and patient flow.
• Make a financial plan. Physician personal income will be essentially flat over the next few years, unless Congress stirs and puts in some incentives for physicians, rather than leaving it to insurance companies. Your financial plan is a rough budget, going out over three to five years. The sobering reality of how your future looks will help you make the hard decisions — whether to expand, to borrow in order to invest and grow the business, and how to be business smart.

Here’s the free market at work, as the folks who actually can make health care more efficient are the physicians, not the insurance companies. Managed care did its job, but it’s burned out — no more ideas, and no more savings to be had.

Now is the time to start making notes — ideas, observations, dreams, goals — of where your are and where you want your practice to be. Your plan will evolve from here — it’s hard work, and you will have to make hard decisions, but the time and work is your key to building the practice that you want and deserve.

Peter Lucash has over 30 years of business experience, principally in healthcare. He is the author of two books and writes the Medical Practice Business Blog for All Business.com.

Although the news was overshadowed by the dramatic return of Sen. Ted Kennedy, the Senate’s veto-proof approval today of a complex Medicare bill represents a striking political victory by doctors over health plans — one that could bode badly for insurers if healthcare reform becomes a priority after the presidential election.

For a detailed rundown of the issues presented by the bill, you’re probably best off checking out Robert Laszewski’s recent — and long — piece at the Health Affairs site. In the meantime, though, here’s the shorthand version:

• Under a 1997 Medicare provision called the “sustainable growth rate” formula, doctors faced a 10.6 percent fee cut as of July 1.
• Congress, as it has done every time such a cut loomed, promised to block it.
• To make up the revenue lost by restoring physician fees, congressional Democrats targeted the Medicare Advantage program — a system set up in the 2003 Medicare reform under which the government pays private insurers a subsidy of 13-17 percent to handle Medicare coverage for some seniors, including that for prescription drugs.
• President Bush threatened to veto any bill that touched Medicare Advantage, which had greatly fattened profits at insurers — at least until recently.
• Lobbyists for doctors and insurers took over from there.

Last month, the House passed a bill that restored the fees by cutting the Advantage insurer subsidies by a vote of 355-59 — a huge and unexpected win given that the same bill had earlier failed in the Senate. Laszewski attributes the shift to “enormous heat” from the physicians’ lobby on Republicans, who have generally supported the Advantage program as a stalking horse for Medicare privatization.

Today’s similarly lopsided 69-30 Senate vote renders Bush’s veto threat largely meaningless, as it exceeds the two-thirds majority needed to override. (Of course, you can’t discount the effect that Kennedy’s return from brain-cancer treatment might had on shifting the votes of his colleagues.) More to the point, it seems likely to embolden healthcare reformers, who generally consider the Advantage program a costly and unneeded sop to insurers that couldn’t otherwise compete with the federal Medicare program.

None of which is particularly good news for insurers, who are already on the ropes as medical costs climb faster than they’re able to raise premiums. On the plus side, some may take the opportunity to pull out of Advantage, which has recently been a drag on the bottom line at companies such as WellPoint and Humana. On the negative side, Barack Obama has promised reforms that would, among other things, bar insurers from denying coverage on the basis of illness or pre-existing conditions, which certainly wouldn’t make life any easier for them. (John McCain’s far less detailed plan might be kinder to health plans, but stands little chance of passage unless Republicans were somehow able to regain control of Congress — an unlikely prospect at the moment.)

Image via Flickr user Waldo Jaquith, CC 2.0

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I missed the meeting late last month of the Healthcare Financial Management Association’s Annual National Institute (HFCA ANI to the initiated). Fortunately, however, the invaluable Anne Zieger of Fierce HealthFinance did make it, and reported on new challenges in managing hospital and healthcare-system finances from Las Vegas:

• Hospital CFOs are increasingly required to address a broad range of healthcare-policy issues in addition to their core financial responsibilities. Among them: The increasing numbers of under- and uninsured patients; pay-for-performance initiatives that cost more but so far haven’t improved the quality of care; a new technology arms race that may trigger a new wave of hospital consolidation; and demands for transparency and proof of community benefit. (The related Ernst & Young report [PDF link] is available at the company’s Web site.)
• Yet another ranking of hospital quality and cost-effectiveness gave medical systems high marks for quality, but mixed reviews on costs (which are notoriously opaque). See also the WSJ Health Blog, which among other things points out that this report — like many others — measures hospital quality by looking at “process” improvements such as giving patients aspirin following heart attacks, and not by examining whether patients got better or survived.
• Surviving increasingly aggressive Medicare cost-recovery audits is emerging as a major concern of hospitals. Consultants suggested several tactics that included getting administrative systems in order, conducting proactive error and fraud reviews, and establishing “utilization review plans” that measure care against Medicare guidelines.
• Competition for outpatient services is heating up in new areas, including dialysis, eye surgery, diagnostic imaging, radiation treatment and physical rehabilitation services. As a result, hospitals are trying to forge closer relationships with doctors (including by boosting their acquisition of physician practices) and building out new outpatient clinics to serve as “feeder” systems. (We’re previously written about some of these trends in the context of physician-owned specialty hospitals.)
• Paying physicians at hospitals is more complex than it seems. The basic problem: Hospitals want to attract doctors with high payments — which in most cases involve non-salary compensation — but have to avoid looking like they’re paying kickbacks for patient referrals. Surprise — that means lots of benchmarking against national and regional total-compensation standards.

Prime Healthcare Services, a fast-growing Southern California hospital chain, has come up with a neat trick to boost its bottom line.

Shortly after acquiring a new hospital, the chain typically cancels its insurance contracts, after which its patients are typically considered “out of network” for insurance purposes — meaning Prime can charge more for treatment. So when a patient is taken to the emergency room, for instance, his or her insurer is still required to reimburse the hospital, but only up to a “reasonable and customary amount” that’s typically lower than the hospital’s fees. Since it can’t collect the remainder from insurers, Prime has taken to billing patients directly for what can be a fairly huge medical bill — sometimes as high as $50,000.

This practice, known as “balance billing,” is outlawed in some states and banned by Medicare and many health plans, although its legal status in California is unclear. That hasn’t stopped the state’s Department of Managed Health Care from suing Prime (PDF link):

“Prime Healthcare’s ongoing practice of putting consumers in the middle of billing disputes between providers and health plans is the largest example of this egregious practice we’ve seen to date and it must be stopped,” said DMHC Director Cindy Ehnes. “Consumers who have purchased health coverage in good faith deserve to know that it will cover them in a medical emergency and not result in crushing medical debt.”

Recent litigation between Prime and California health plans has revealed in excess of 3,500 instances of consumers receiving balance bills from Prime. Many have received letters from a debt collection agency, controlled by Prime, demanding payment.

Prime, unsurprisingly, insists that its practices are legal and accuses the state of siding with HMOs against hospitals and patients. And it may be right, at least in the first part — a quick read of the LA Times story linked above, the DMHC’s filing and Prime’s response suggests that the department could be on shaky legal ground. While the DMHC argues that an existing state law prohibits balance billing, it also makes the odd argument in its press release that a recently failed healthcare-reform bill proposed by Gov. Arnold Schwarzenegger “would have banned this practice by hospitals.”

In any case, we’ve seen variations on the patient-gouging theme before. Prime’s almost certainly won’t be the last.

An old health-insurance scandal just keeps on giving at UnitedHealth, which today settled a shareholder lawsuit over the way it backdated stock options for its former CEO Bill McGuire and other execs. The insurer will pay $895 million to resolve claims by Calpers, the giant California public-pension fund, that the move defrauded investors by illegally inflating the value of McGuire’s options — which at one point were reported worth over $1 billion.

UnitedHealth was undoubtedly eager to put a steady drip-drip-drip of revelations about the backdating scandal behind it. In one filing, lawyers for the company insisted that McGuire, a doctor, had “no formal training or degrees in finance, accounting or law,” and therefore didn’t know that backdating was wrong. Documents unearthed as part of the case included a memo from McGuire defending the practice as far back as 1999 and emails from corporate officials who expressed alarm when they realized they hadn’t yet stopped backdating options. (The WSJ Health Blog has the entire set, in case you’re interested.)

So, big sighs of relief this morning around UnitedHealth’s Minneapolis headquarters, right? Not exactly. The company also announced a big drop in its expected earnings this year — its second such revision this year. The culprits, as has been the case all year long, are higher-than-expected medical costs (read: claims payments to the sick) and its inability to raise premiums fast enough.

UnitedHealth is hardly alone in watching its business melt down this year, since the same is true for almost every major insurer save Aetna. While the individual causes vary — some insurers miscalculated demand for drugs under their Medicare plans, while others are getting hammered by defecting businesses unable to meet the burden of insuring their employees — the root problem is the same one that extends across healthcare: Medical costs continue to soar, and no one seems to know how to get a handle on them.

UnitedHealth and its brethren will certainly try and stem the bleeding with a major premium hike for 2009. It may work in the short term, but the cure is likely to be worse than the disease, since higher insurance costs will force more businesses and individuals out of the market. Insurers will undoubtedly keep trying to squeeze more money out of fewer customers, but since that’s pretty much the exact opposite of a growth market, it’s hard to see how it will end well.

In short, insurers may soon find themselves playing the doctor in that old joke — you know, the one famous for saying, “The operation was successful, but the patient died.”