THE DEMAND FOR HEALTH AND
HEALTHCARE
ALTERNATIVE PAYMENT MECHANISMS
Medical Loss Ratio
• What is it?
• Why is it important?
My new company!
Schu’surance
Bringing surance to insurance
My first contract!!
• 500 employees at Trinity
• $16,000 per policy
• $8,000,000 in Revenue
Schu’surance
Bringing surance to insurance
How do I make money?
Total
Revenue
=
$8million
500
X $16,000
$8million
Schu’surance
Bringing surance to insurance
15%
Suppose over the course
of the year there are
$6.8million in claims I pay
out
Total
Revenue
=
$8million
85%
$6.8m in claims
So I “lost” $6.8 million
leaving me with $1.2 million
Or a MLR of 6.8/8=85%
Schu’surance
Bringing surance to insurance
Claims = price of care
multiplied by the number of
episodes. So how do I make
money?
Either by pushing down P –
negotiating better prices with
providers
TR
claims
Price x Quantity
Or Pushing down Q – denying
claims, or keeping people
healthy
Or pushing up the annual
premium
MLR and the ACA
The Medical Loss Ratio
provision of the ACA
requires a MLR of 80%
for most insurance
companies that cover
individuals and small
businesses
For large group plans
the ACA sets the MLR at
85%
Schu’surance
Bringing surance to insurance
Profit+admin
costs
Insurance is a middle man between
the consumer/employer and the
provider.
What value do they bring?
TR
“Loss”
Price x Quantity
The insurance company
manages risk
first bargains with providers,
builds a network (EOS?)
Care coordination,
prevention, education???
Then turn around and sell that
network to consumers/employers
Schu’surance
Bringing surance to insurance
Profit+admin
costs
TR
“Loss”
Price x Quantity
Is there a better way???
The demand for Health and
health care
• But first, let’s take a step back and look at
health care from the consumer’s perspective
– Where does the demand for health care come
from?
– How does insurance affect demand?
How to think about the good
• Health is the good, but health is “produced”
• We all have some reservoir of health that we
want to make as big as possible, all else equal.
• Health is a durable good
• We are endowed at birth with a stock of
health and the rest of our lives we make
choices that affect that stock.
The Production of Health
• Health is the thing that brings us satisfaction – it
is determined by a number of things:
Environment
Socioeconomic
Status
Lifestyle
Health Care
Health
Status
Other
The Production of Health
University of Wisconsin/RWJ Study on the determinants of health outcomes:
Physical
Environment, 10
Clinical care, 20
Social and
Economic
Factors, 40
Health
Behaviors, 30
Health Status
The Production Function
Health Care Inputs
The Demand for Medical Care
• How is health care demand different?
– Not medical care per se that consumers want but
health
– The consumer produces health. Medical care is a
derived demand
– Health is a durable good, thus the demand for
health care involves a time allocation problem
The Demand for Medical Care
• How is health care demand different?
– The demand for health has two aspects
• Pure consumption effect – it feels good to feel good
• Pure investment effect – health is desired because it
increases our productivity
– The demand for health care is uncertain
Production Possibilities
Health
H2
H1
X2
X1
Other goods and
services
The Demand for Health Care
• Remember health is produced
– Genetics
– Diet
– Exercise
– Prevention
– Environment
– Health Care
The Demand for Medical Care
Price of Care
Supply
$150
$100
$20
Demand
2
3
5
Quantity of Medical Care
How does insurance affect
demand?
Price of Care
Suppose there is a 20% coinsurance rate
Without
Insurance
With Insurance
$100
$20
3
8
Quantity of Medical Care
Moral Hazard in the Market
Price of Care
Supply
Without Insurance:
$100*3=$300 expenditure
$150
$100
With insurance: $150*5=$750
expenditure
$50
3
5
Quantity of Medical Care
Moral Hazard in the Market
The more price-sensitive the consumer is the larger the moral hazard
effect will be
Moral Hazard in the Market
Price of Care
Supply
$150
$100
True demand
Perceived
Demand
3
5
Quantity
If consumers under-value health care, the moral hazard inefficiency is reduced
Solutions to Moral Hazard
• Co-pays and Deductibles Reduce the Effect
– Both have been increasing in recent years
– Gives patient more “skin in the game”
• Managed Care and Capitation
– Provider given incentive to ration care
– Gatekeeper
• Health Savings Account
– Consumer now faces “full marginal cost”
Rand Health Insurance Experiment
Rand Health Insurance Experiment
Rand Health Insurance Experiment
Rand Health Insurance Experiment
• Relative little effect on the health of the population
– Poorest patients with free care saw improvements in
hypertension relative to those with coinsurance
– Free care marginally improved vision for the poorest
patients
– Free care also increased the likelihood among the poorest
patients of receiving needed dental care
– Serious symptoms were less prevalent for poorer people on
the free plan
• Patient satisfaction largely unaffected (except for group
in HMO)
Insurance and Health Spending
• Clinical Care accounts for only about 20% of Health
• Yet we spend about $3 trillion on health care each year
– The purpose of insurance is to protect the consumer from risk
– But also pushes the consumer to produce health through
healthcare (moral hazard)
– The consumer is shielded from true costs
• Tax treatment
• Employer
• Community rating
Experience vs. Community
Rating
• Unlike life or auto insurance, health insurance tends to
use community rating over experience rating.
• Why?
• Experience rating tends to reduce moral hazard and
focuses on individual risk
• Community rating creates an externality and
encourages over-use, but lowers costs for the sick
• Employer wellness programs and other tools are now
being implemented to move away from pure community
rating
• But it is a slippery slope
Too Much Insurance?
• Is insurance too generous?
• Car insurance does not pay for routine maintenance
• It does not pay if you blow your engine because it ran
out of oil
• It covers the risk of an accident
• Yet health insurance tends to pay for the routine things,
why?
– Tax treatment encourages generous insurance
– Easier to distinguish accidents from routine for autos than for
health
– Fairness/ethical issues
What is Insurance For?
• Protection from Risk?
– Risk makes us uneasy, we are willing to pay to have
the ease of mind that insurance provides
– About “me and my risk”
• Financing Mechanism?
– Health care is expensive, but most of us won’t need
it in a given year.
– About “us”
• Social Insurance vs. Individual Insurance
What do you think?
• Should insurance be experience or community
rated?
• How do we balance the need to cover risk yet
efficiently produce health?
All the incentives…
1. Insurance tends to shield the consumer from price
sensitivity. The consumer inefficiently produces
health. “I want it all”
2. Payers worrying about moral hazard tend to pay
more for “doing things” rather than talking.
–
–
Acute care vs. chronic care
behavioral health vs. physical health
3. Suppliers have incentive to do more based on 1
and 2 above as well as legal concerns.
Life Expectancy and Per Capital
Spending (2013 OECD)
85.0
84.0
Spain
Italy
83.0
Israel
Korea
Greece
Life Expectancy at Birth
82.0
81.0
Japan
Switzerland
France
Australia
Iceland
Sweden
Luxembourg
New Zealand
United
Finland
Kingdom
Ireland
Portugal
Slovenia
Norway
Canada
Netherlands
Austria
Germany
Belgium
Denmark
80.0
79.0
Chile
United States
Czech Republic
78.0
Estonia
Poland
77.0
Turkey
Slovak Republic
76.0
Hungary
75.0
Mexico
74.0
0
1000
2000
3000
4000
5000
6000
Per Capital Health Care Spending ($PPP)
7000
8000
9000
10000
We’re #11!!
From Volume to Value
Profit
Volume Driven
Chaos Zone
Value Driven
Time
The Allocation of Risk
in an Insurance Contract
• Fee-for-service
– the payer holds all the risk. Providers get paid for everything
they do. When patients are sicker, providers maker more money
• Capitation
– The providers hold all the risk. Providers get paid a capitated
rate to take care of a fixed population. When patients are
sicker, providers lose money
• Health Savings Accounts with a High Deductible
– Risk is shared between the consumer and the payer. The patient
has an incentive to stay healthy (at least up to the deductible)
• New payment models attempt to SHARE RISK
Schu’surance
Bringing surance to insurance
Suppose I go to Jose, CEO of
HCHSA-Tenet and offer him
$5.5 million to take care of
my people
$8m
$6.8m
Can you do it for $5.5?
Schu’surance
Bringing surance to insurance
Alternatively instead of
charging $16,000 for a policy,
suppose I go to Dr. Anderson
and offer:
pay me $8,000 for a policy
that has a $5,000 deductible
and a 30% coinsurance rate
$8m
$6.8m
Then put $8,000 into a
savings account that can be
used for health care
expenditures
Supply Side Incentives
(or “Value-Based Purchasing”)
Level of
Provider Risk
ACO
BP
VBP
P4P
FFS
Type of Plan
Full
Capitation
Value-Based Purchasing
• Value-based purchasing is an attempt to incentivize
suppliers to produce a more efficient service.
– Differentially rewards or punishes providers based on
performance against predefined process and outcome
performance measures
– Purpose is to create a link between reimbursement and
quality/satisfaction/efficiency
•
•
•
•
•
Pay-for-Performance
Tiered pricing
Capitation, Global Payment
Episode of Care/Bundled Payment
Shared Savings
Medicare target percentage of payments in
‘FFS linked to quality’ and ‘alternative
payment models’ by 2016 and 2018
Supply Side Incentives
(or “Value-Based Purchasing”)
Level of
Provider Risk
ACO
BP
VBP
P4P
FFS
Type of Plan
Full
Capitation
CMS Adds Efficiency Metric to VBP
Program
Medicare VBP Program Domain Weights
10%
Clinical Process
25%
Patient Experience
40%
Outcomes of Care
25%
Efficiency
20%
45%
70%
30%
30%
30%
30%
FY 2013
25%
FY 2014
20%
FY 2015
FY 2016
• 1,700 hospitals – 55% of those graded – earned higher payments
• Fewer than 800 of these hospitals will actually receive extra money
– Readmissions
– HAC
• penalties for 1,360 hospitals
Medicare adding physician payment
• Value based payment to move to physician payment
• 50% of Medicare payments will be through
alternative payment structures by 2018
MACRA
• Medicare Access and CHIP Reauthorization Act
– Spring 2015
– Repealed SGR formula
– Begins in 2019
– Zero-sum game
MACRA
• Two-Track Payment System
– MIPS: Merit-based incentive Payment system
• Modified version of existing fee schedule with enhanced
p4p incentives
–
–
–
–
Clinical quality (30 percent)
Resource utilization (30 percent)
Meaningful use (25 percent)
Clinical practice improvement (15 percent)
» TBD
Zero-Sum Game
MACRA
• Two-Track Payment System
– APMs: Alternative payment models
• Providers may qualify to participate in this track.
• Not clearly defined yet but includes various
“accountable” models which require physicians to take
on risk
• Additional 5% in bonuses available to encourage
participation in APMs
Bundled Payment
Level of
Provider Risk
ACO
BP
VBP
P4P
FFS
Type of Plan
Full
Capitation
Bundled Payment
• A form of capitation – instead of per member
per month, it is per episode of care.
• Purchaser disburses single payment to cover
certain combination of hospital, physician, postacute, or other services across an episode of
care.
Bundled Payment
• Provides an incentive for multiple types of
providers to coordinate care, reduce expenses,
avoid unnecessary services, and improve
patient health
A great theory, but…
Bundled Payments for Care
Improvement Initiative (BPCI)
• Testing 4 different models based on episodes
that involve an inpatient hospital stay
– Two focus on care provided during the stay
– The others also include post-acute care
– Intention is to be flexible for providers to meet the
needs of their specific community
Model Explanation
Model 1
Model 2
Model 3
Model 4
Eligible
Participants
Physician
Groups, acute
care hosp paid
under IPPS
Model 1 Plus
Model 2, plus
post-acute care long-term care
providers
hosp, inpatient
rehab, home
health
Clinical
Conditions
All Medicare
DRGs
Select inpatient DRGs, proposed by applicants
Provider
Payment
IPPS payment
less discount
for Part A
Retrospective Bundling –
compared to target
Quality
Measures
All hospital IQR
measures, plus
others
Proposed by applicants, with CMS ultimately
establishing a standardized set
Model 1
Participants
Prospective
Bundling
Models 2 and 3 most popular
(less than 10 doing model 4)
Comprehensive Care for Joint
Replacement Model
• MS-DRGs 469 and 470 (Major joint replacement
or reattachment of lower extremity)
• The average Medicare expenditure for surgery,
hospitalization, and recovery ranges from
$16,500 to $33,000 across geographic areas.
• Episode begins with admission and ends 90 days
post-discharge
• Includes all related items and services paid under
Medicare Part A and Part B for all Medicare feefor-service beneficiaries
Where the CJR Participants Are
(788 hospitals in 67 markets)
Accountable Care Organizations
Level of
Provider Risk
ACO
BP
VBP
P4P
FFS
Type of Plan
Full
Capitation
The ACO
• Accountable Care Organizations take a hybrid
approach. Or Shared Risk (shared savings)
• An evolving concept: Stepping stone to full capitation?
• ACO – a group of health care providers that work
together to manage and coordinate care for a group of
patients across the entire spectrum of care and accept
responsibility for the quality and cost of that care
The ACO
• Can be sponsored by hospital systems, physician groups,
insurers, or community-based organizations.
• ACO is assigned a population of patients that they are
“accountable” for, along with a global budget
• Once the year begins, each episode of care is billed
under an agreed upon FFS rate
• If, at the end of the year, total spending is below the
target, the ACO shares in these savings
• If, however, spending is over the target, the ACO must
repay a portion of this.
The ACO – essentially a side bet
• Suppose the risk adjusted global budget is
$5million
• The ACO agrees to a 50/50 risk share
• The year goes on under Fee-for-Service
• If at the end of the year these patients spent
$4.5million, the ACO would get an additional
payment of $250,000
• If, however, they spent $6million, then the ACO
would pay back $500,000
The ACA and ACOs
• Two separate Medicare ACO programs:
– Medicare Shared Savings (MSSP)
• 33 quality measures in four categories
• Two options:
– Track 1: shared savings only. Up to 50%, no downside risk
– Track 2: shared savings and risk. Can share in up to 60% of savings, but will
also share in losses (not exceeding 60%)
– The Center for Medicare and Medicaid Innovation created the
Pioneer ACO program
• More advanced and flexible version for those who already had
experience in coordinating care
– Most evidence suggests improved quality but little evidence of
much savings
• Some concern that this will crowd out Medicare Advantage
Medicare ACOs, mixed results
“..as currently designed…the MSSP
applies too many “sticks” and offers too
few “carrots” to participating providers
and, possibly, to those entities
contemplating MSSP participation.”
Rick Pollack
Executive Vice President, AHA
Next Generation ACO Model
• Prospective attribution
• Rewards quality
• Offer benefit enhancements that directly improve the
patient experience and support coordinated care;
• Allow beneficiaries a choice in their alignment with the
ACO
• Smooth ACO cash flow and improve investment
capabilities through alternative payment mechanisms.
Total Public and Private ACOs
Source: Leavitt Partners
only 7.8 million are part of the Medicare
ACO programs
Source: Leavitt Partners
ACO Forecast
• Leavitt Partners, December 2015
– With MACRA: 105 million covered lives by 2020
– Without MACRA: 68 million
– With “Financial Failures”: 41 million covered lives
– With “widespread support”: 171 million
An Example
Baylor Scott & White Health
Merger Creates Largest Not-for-Profit Health Care
System in Texas and the 12th Largest in the US (in
revenue)
•
•
•
•
•
•
•
•
•
•
Health Plan/Members *
Quality Alliance/Members*
Assets
Revenues (annualized)
Hospitals
Patient Care Sites
Licensed Beds
Affiliated Physicians
– Physician FTEs
– Adv. Practice Provider FTEs
Employee FTEs
Community Benefits **
* Includes NTX and CTX employees and their dependents
** Represents 12 months of data
1 / > 238k
1 / > 248k
$9.3B
$7.3B
52
>880
5,410
6,000
1,674
1,205
39,000
$664mm
Baylor system footprint
Scott & White system footprint
Scott & White Health Plan footprint
Developing an Adequate
Provider Network
Category
Total
Physician Members
NTX Division: 3,041
CTX Division: 1,050
ACO Partners: 510
(PCP 1,052) 23%
(SCP 3,549) 77%
NCQA ACO Accreditation
Becker’s Top 100
SK&A Top 30 ACO
4,601
Expanding the BSWQA Network
 Physicians:
38 PCPs, 124 Specialists
 Facilities:
4 hospitals  1 ASC  1 Pain Mgmt  4 Urgent Care
 Locations:
Dallas area
 Physicians:
56 PCPs, 30 Specialists
 Facilities:
8 hospitals
 Locations:
Mansfield • S. Dallas • OB/GYN (Richardson)
 Physicians:
229 PCPs, 33 Specialists
 Facilities:
Dallas Children’s Medical Center  Ambulatory Care
Pavilion  Children’s Medical Center at Legacy
 Locations:
Dallas • Plano
Improving Access-to-Care
Consumer Oriented
Access Points
Traditional
Access Point
Consumer-driven access initiatives reach beyond
traditional access points
76
Office Visit
Retail Clinics
Team-based
Patient Access
Care
Center
eVisits
Extended Hours
Telehealth
ED
Clinically Integrating the Care
Through Data and Analytics
Provider
Credentialing
Employed EHR’s
Billing Data
• Specialty
• Practice
• Organization
GE Centricity
Allscripts
Epic
BSWQA Data
Warehouse
Monthly Contract Data
CMS
United
SWHP
Cigna
Humana
Aetna
Membership,
Medical Claims,
Rx Claims
•
•
•
•
•
Members
Providers
Medical Claims
Rx Claims
Measures
Explorys Supermart
Unique Patient ID
Measure Computation
Attribution
dbMotion
Affiliate EHR’s
• Participate in Medical Staff
Activities
• Case Volume
• Continue to grow volume
• Drive the bottom line
• Focus on quality as a member of
the medical staff
• Quality committee
• Accept Referrals
• Be available
• Loyalty
• Keep the volume
Value-Based Role
Transactional Role
Redefining Provider Accountability
and Engagement
• Engage in the relevant ACO
activities
• Access
• Development and adherence to
protocols
• Readmission improvement
• Patient satisfaction
• In-Network Utilization
• Only do what is necessary
• Focus on utilization (rates /1,000)
• Site of Service
• Align PCPs with Specialists and
transfer the care
• Participation must be earned
Engaging Patients
Term
Definition
Gaps-in-care
Evidence-based, chronic disease care
Transitions
Successful hospital/ED discharge and PCP followup
Disease
Management
Assessment, motivational interviewing, successful
self-management
Managed in the practice (PCMH)
Co-managed by health coordinators
and practice
Co-managed by RN care managers
and practice
Post Acute Care
 BSWQA’s narrow network of Post Acute providers guide
patients to higher quality and lower cost options
 Reduce inappropriate readmissions
 Improve Medicare Spend Per Beneficiary (MSPB) in CMS Value
Based Purchasing (VBP) program
 Assist in Length of Stay (LOS) management
Projected Covered Life
Growth Summary
Existing and Newly Signed Contracts
# of Covered Lives
Jan 1, 2016
Jul 1, 2016
Jan 1, 2017
Jan 1, 2018
Baylor Scott & White Employees
59,000
59,000
60,000
62,000
Commercial Product
30,000
35,000
40,000
70,000
Commercial Attribution
120,000
120,000
135,000
165,000
Medicare Advantage
16,500
18,500
22,000
10,000
Medicare Shared Savings Program
65,000
65,000
80,000
80,000
290,500
297,500
337,000
387,000
Jan 1, 2016
Jul 1, 2016
Jan 1, 2017
Jan 1, 2018
Cigna – ACO Model
--
25,000
35,000
45,000
Scott & White Health Plan – ACO Model
--
50,000
75,000
100,000
Blue Cross Blue Shield – ACO Model
--
--
50,000
60,000
--
75,000
160,000
205,000
290,500
372,500
497,000
592,000
Total Expected Lives
New Potential Contracts
Total Potential New Lives
Total Projected Lives
Finance/Delivery Model
(Payor/BSWQA Collaboration)
82
Our Aim: A model of care that delivers on convenient access to services  high-value
episodes of care through standardized, coordinated care  in-network retention across sites
and services
Financing mechanism
 Claims management
 Member customer service/Digital portal
 PBM
 Utilization Management
 Benefit design encouraging
 Patient loyalty to the system
 Provider alignment

Comprehensive, Coordinated, Care Delivery
 Primary/Specialty care providers
 Hospitals/Post-Acute care facilities
 Preventive Health/Disease Management
 Care Coordination
 Risk stratification/predictive modeling
 Health Information Exchange
 Performance accountability
Proposed Value-based Payment Models
 Shared savings – initially and then evolving to…
 PCP cap or glide to risk
Will these supply-side incentives
work?
S&P 500 Health Care Index vs
S&P 500: June 2005 to July 2015
350
300
250
200
150
100
50
0
6/30/2005
6/30/2006
6/30/2007
6/30/2008
6/30/2009
6/30/2010
S&P 500 Health Care (Sector) (TR)
6/30/2011
6/30/2012
S&P 500 (TR)
6/30/2013
6/30/2014
6/30/2015