We all knew how this was going to go, or thought we did. Fee-for-service payment for health services was going to disappear, and be replaced by population health risk-based payment (or as some term it, “capitation”- fixed payment for each enrolled life). Hospitals and care systems invested substantial time and dollars building capacity to manage the health of populations, yet many are discovering a shortage of actual revenues for this complex new activity. Was population health a mirage, or an actual opportunity for hospitals, physicians and health systems?
The historic health reform law passed by Congress and signed by President Obama in March, 2010 was widely expected to catalyze a shift in healthcare payment from “volume to value” through multiple policy changes. The Affordable Care Act’s new health exchanges were going to double or triple the individual health insurance market, channeling tens of millions of new lives into new “narrow network” insurance products expected to evolve rapidly into full risk contracts.
In addition, the Medicare Accountable Care Organization (ACO) program created by ACA would succeed in reducing costs and quickly scale up to cover the entire non-Medicare Advantage population of beneficiaries (currently about 70% of current enrollees) and transition provider payment from one-sided to global/population based risk. Finally, seeking to avoid the looming “Cadillac tax” created by ACA, larger employers would convert their group health plans to defined contribution models to cap their health cost liability, and channel tens of millions of their employees into private exchanges which would, in turn, push them into at-risk narrow networks organized around specific provider systems.
Three Surprising Developments
Well, guess what? It is entirely possible that none of these things may actually come to pass or at least not to the degree and pace predicted. At the end of 2015, a grand total of 8.8 million people had actually paid the premiums for public exchange products, far short of the expected 21 million lives for 2016. As few as half this number may have been previously uninsured. It remains to be seen how many of the 12.7 million who enrolled in 2016’s enrollment cycle will actually pay their premiums, but the likely answer is around ten million. Public exchange enrollment has been a disappointment thus far, largely because the plans have been unattractive to those not eligible for federal subsidy.
Moreover, even though insurers obtained deep discounts from frightened providers for the new narrow network exchange products (70% of exchange products were narrow networks, the discounts weren’t deep enough to cover the higher costs of the expensive new enrollees who signed up. Both newly launched CO-OP plans created by ACA and experienced large carriers like United and Anthem were swamped in poor insurance risks, and lost hundreds of millions on their exchange lives. As for the shifting of risk, it looks like 90% plus of these new contracts were one-sided risk only, shadowing and paying providers on the basis of fee-for-service, with bonuses for those who cut costs below spending targets. Only 10% actually penalized providers for overspending their targets.
The Medicare Accountable Care Organization/Medicare Shared Savings Program, advertised as a bold departure from conventional Medicare payment policy, has been the biggest disappointment among the raft of CMS Innovation Center initiatives. ACO/MSSP enrollment appears to have topped out at 8.3 million of Medicare’s 55 million beneficiaries. The first wave, the Pioneer ACOs, lost three-fourths of their 32 original participating organizations, including successful managed care players like HealthCare Partners, Sharp Healthcare, and Presbyterian Healthcare of New Mexico and others. The second, much larger wave of regular MSSP ACO participants lost one third of their renewal cohort. Only about one-quarter of ACO/MSSP participants generated bonuses, and those bonuses were highly concentrated in a relative handful of successful participants.
Of the 477 Medicare ACO’s, a grand total of 52, or 11%, have downside risk, crudely analogous to capitation. As of last fall, CMS acknowledged that factoring in the 40% of ACO/MSSP members who exceeded their spending targets and the costs of the bonuses paid to the ACOs who met them, the ACO/MSSP programs have yet to generate black ink for the federal budget. And this does not count the billions care systems have spent in setting up and running their ACOs. It is extremely unlikely that the Medicare ACO program will be made mandatory, or voluntarily grow to replace DRGs and the Medicare Part B fee schedule.
And the Cadillac Tax, that 40% tax imposed by ACA on high cost employee benefit plans, a potentially transformative event in the large group health insurance market, which was scheduled to be levied in 2018, was “postponed” for two years (to 2020) by an overwhelming Congressional vote. In the Senate, a 90-10 bipartisan majority actually voted to kill the tax outright, strongly suggesting that strong opposition from unions and large employers will prevent the tax from ever being levied. Presumptive Democratic nominee Hillary Clinton has announced her support for killing the tax. So the expected transformative event in the large group market has proven too heavy a lift for the political system.
As a result, the enrollment of large group workers in private health exchanges, the intended off-ramp for employers with Cadillac tax problems, has arrested at about 8 million, one- fifth of a recent forecast of 40 million lives by 2018 (https://www.accenture.com/us-en/insight-new-private-enrollment.aspx) . Thus, the conversion of the enormous large group market members to narrow network products seems unlikely to happen. As a recent New York Times investigation revealed, the reports of the demise of traditional group health insurance coverage (based on broad network PPO models) have been greatly exaggerated).
Can Care Systems Return to Business as Usual?
Does this mean that the forecast rise of at-risk population health payment was a mirage and that health care managers can return to business as usual? We would say, “Depends on the Local Market”. We think the most effective strategies will be specific to individual payers and depend a lot on local insurance markets, the state political environment and the state of the local economy. Judging the capacity for and interest by public and private payers in delegating risk to care systems is an art form.
Our advice: Understand your local market’s demand for risk arrangements and respond accordingly, and focus on operational excellence and improving the patient experience.
Keep An Eye on Medicaid
Understand your Local Market’s Demand for Risk and Respond Accordingly. Our experience tells us that executing a risk assumption strategy successfully is highly dependent on local market conditions. Local market forces are far more powerful than alleged national trends. For example, in Portland Oregon, a mature highly penetrated managed care market, state policymakers compelled care systems to organize into so-called Co-ordinated Care Organizations and take population-level financial risk for state employees and the state’s Medicaid population. In contrast, in nearby Seattle, also a mature managed care market, the demand for care systems to assume population-level financial risk has been extremely limited.
In markets such as St. Louis, Phoenix, Milwaukee and Chicago, commercial payers like Aetna and CIGNA have aggressively experimented with risk contracts with dominant healthcare systems to grow their market share in the commercial market, and attempt to claw business away from Blue Cross plans. In other states, notably Massachusetts and Maryland, state health policy is encouraging all payers to delegate population-level economic risk to care systems. Reading these local market trends accurately and responding intelligently to them is the key to an effective payment strategy.
Focus on Operational Excellence and Improving the Patient’s Care Experience. Under any payment model, strategies which reduce waste (particularly of caregiver and patient time) and that reduce variation in how physicians manage common but costly problems will best position care systems to survive market transitions. Assuring an optimal patient experience becomes paramount in defining a network and its brand. For those in risk-based contracts, care systems will be working assiduously to divide the affected populations into manageable clusters with common problems (mental health, obesity, chemical dependency, etc.) and create medical-home style care models to address the unique needs of each segment.
Keep Your Eye on Medicaid. Thanks to the 25% expansion of Medicaid by the Affordable Care Act, it is possible that by the bottom of the next recession, one in four Americans will be Medicaid patients! Medicaid funding is highly volatile and tends to dry up in recessions, just as the number of Medicaid lives grows! While Medicare and commercial payers have struggled to make the turn toward risk, we see state Medicaid programs as the most likely payer segment to adopt risk-based methodologies. In some cases, the risk shift will stop at outsourcing to insurance carriers like Molina (now part of HealthNet), AmeriGroup (now part of Wellpoint/Anthem) and United Healthcare. But in many others, population-level risk may be delegated directly to care systems by state Medicaid agencies, albeit at rates far below the actual incurrent cost of caring for Medicaid patients. Organizing to respond to the next recession’s entirely predictable Medicaid funding crisis will probably require robust population health management strategies like medical homes and closer collaboration with community health centers and other public health entities.
We have both been in this field long enough to be skeptical about “megatrends”. We should keep our eyes peeled for transformative events. But, to paraphrase Tip O’Neill’s comment about politics, almost all the important things about healthcare markets are local. Paying attention to the ecology of risk in your local market, and calibrating your strategy to the actual demand for new payment models is vital. And while you are doing that, delivering care you are proud of and are willing to use yourself is the key to maintaining or growing your market presence.
About Jeff Goldsmith
Jeff Goldsmith is National Advisor to Guidehouse Healthcare and Associate Professor, Public Health Sciences at the University of Virginia. Bruce Henderson is Managing Director of Guidehouse Healthcare and Head of the Firm’s Payer Provider consulting practice.