Medicare May Be Serving Seniors, but It’s Putting the Rest of Us in a Financial Death Grip

Information released this past week point out the damaging impact that government health-care programs are having on the commercial, health-insurance market, and the market for private health benefits.

The first bit of news comes from the latest Healthcare Economic Indices released by Standard & Poor's (click here for the indices).  The indices show that the average cost of health-care services covered by private-insurance companies jumped by nearly 7.5% for the year ending June 2011.  By comparison, the average cost of services covered by Medicare increased only 2.5 percent for that same time period.  Experts speculate that hospitals will likely continue to shift costs to private payers as government programs squeeze hospitals and doctors with lower reimbursements to manage their program shortfalls.

For every action, there is an equal and opposite reaction.  On Monday of this week, the National Business Group on Health released the results of a survey of its membership.  The news here is that large employers expect their health care costs to increase 7.2% in 2012.  Is it just coincidence that hospitals are increasing their charges to private insurers by 7.5% and that commercial health-care costs will be up by an expected 7.2% in 2012?

The secondary affect of these developments is that employers now plan to offer even more consumer-driven health plans in 2012.  Of those surveyed by the National Business Group on Health, 75% said they expected to offer a high-deductible health plan (HDHP) with a health savings account (HSA) in 2012, compared to 64% this year.  Realistically, we should expect all, large employers to offer HDHP/HSA products within the next two to three years.

Some time ago, the virtues and vices of high-deductible health plans used to spark fierce debates. Not now.  For the time being, those debates have been overshadowed by the reality of health-care costs that continue to rise, and to increase disproportionately for commercial insurance programs.  High-deductible health plans are now the default choice for employers seeking to shield themselves from the costs of commercial health insurance.

Far from being better purchasers of health care, the government simply establishes a price it is willing to pay, leaving hospitals and physicians to right size their income statements and balance sheets by digging into the pockets of their customers.  As long as employers continue to finance the lion’s share of the private sector health-care tab, they will adjust their benefit programs to achieve a premium price point that’s affordable.  This will drive the continued adoption of high-deductible health plans and health savings accounts.

In the short run, advocates of greater health-care consumerism are benefiting from the continuing cost shifting from government programs that’s taking place.  This phenomenon may be single-handedly creating millions of HDHP/HSA health-care consumers, who are learning firsthand how to become savvy health-care purchasers.  This may, however, simply be the proverbial “lipstick on the pig.”

Unless America’s government programs are reformed quickly, they will continue to crowd out private benefit programs and make them even less affordable.  The increased prices paid for services in the commercial market are, in reality, a hidden tax paid to support the solvency of the Medicare program.

Equitable, sustainable, payment system reform can’t come quickly enough.

Health Care Reform, the “Constitutional Hazard” and Innovation

It would be entertaining to hear health-care experts debate whether health-care reform has been a catalyst or deer edterrent to innovation within the health care market.  On the one hand, tremendous uncertainty exists as to whether or not the health-care reform law, in part or in the whole, will withstand the constitutional challenges now working their way through the lower courts.

On the other hand, there’s no denying that the reform act and the escalating cost of care in general have spawned a tremendous surge of activity as market participants seek to cash in on the stated – and perceived  – changes that will take place over the next three to five years.

The events of the past week further underscored the dynamic nature of health care in 2011. The 11^th Circuit Court of Appeals affirmed an earlier decision striking down the individual mandate as unconstitutional.  Admittedly, the ruling was a divided one. And though other courts have affirmed the constitutionality of the mandate, the 11^th Circuit’s decision reminded us once again that we really won’t know for certain whether the Affordable Care Act will stand until the U.S. Supreme Court issues a final ruling.

In the meantime, the regulatory machinery tasked with implementing the Act churns forward.  Almost simultaneously with the 11^th Circuit’s decision, The Department of Health and Human Services announced that it was awarding more than $185 million in “Exchange Establishment Grants” to 13 states and the District of Columbia to support state-level implementation of health insurance exchanges, that  must be operational by January 1, 2013.  Dozens of other major initiatives either have been or are being implemented.

All of which presents a real policy dilemma and what I call a “constitutional hazard.”  Should policymakers take a go-slow approach with implementation until the Supreme Court provides a final ruling?  Don’t look for the Obama administration to do so anytime soon.  Or should the Supreme Court hasten its review of the legal issues?  The Court has already settled this question, having already denied a request for an expedited review. 

All of this introduces the possibility that the Supreme Court judges may be asked to factor into their deliberation the fact that so much has already been done to implement the law. They could decide that a full and outright repeal, while perhaps the legally correct outcome, would be so disruptive as to be unwise.  This is the “constitutional hazard” confronting us today.

If ever there were a reason for health-care decision makers to take a wait-and-see approach, this is it.  Except that underneath the storm cloud of uncertainty hovering over the health-care market, a high level of innovation is taking place.

Consider, for example, the announcement last week by Walgreens that this fall, the company would begin marketing health insurance to its customers through its own version of a health-insurance exchange. Walgreens will partner with selected health-insurance partners and attempt to use its enormous retail footprint to become a one-stop shop for all health-care needs. 

To understand the potential significance of this, ask yourself: When driving down a busy street, what am I more likely to observe – an insurance brokerage, or a Walgreens store?  If consumers show a willingness to buy insurance from the same retailer that sells them prescriptions, we may soon see insurance brokers working for Walgreens.

Other companies are also putting their toes in the health-insurance exchange waters.  Aon, the large national insurance consultancy, announced earlier this year that it would create a health-insurance exchange for employers with more than 1,000 employees.  The value Aon seeks to create lets large employers exit the business of administering health-benefit programs.  In the Aon model, a large employer simply decides how much to spend on health benefits and lets Aon do the rest.  For their part, employees presumably get more choices to select from, and avail themselves of more professional, simplified administrative support.

Within the broad uncertainty of health care reform implementation, there are then, at least two significant trends emerging.

The first is the growth of the retail, health-benefit consumer.  Whether through state-sponsored exchanges, a Walgreens exchange, or an Aon model, consumers are likely to take on greater decision making authority for their health-care benefits and the costs associated with them.  This will occur as employers take steps to cap their exposure for health-benefit programs.

Second, market participants are aggressively re-examining their traditional business models and markets and are looking to grow into adjacent markets that expand their footprint.  This is the case with Walgreens, but they’re not alone.  Hospitals are becoming health systems, and many will also become insurers within their local markets.

Whether driven by reform or the pressures of the market, change is afoot in health care.  I will leave it to others to decide whether all this change represents true innovation.

The National Significance of the Highmark and West Penn Allegheny Merger

A health-care transformation is unfolding in Pittsburgh that has national implications for health care. Recently, Pittsburgh-based Highmark announced its purchase of West Penn Allegheny Health System (WPAHS), a five-hospital, health system that’s the second largest health system in the Pittsburgh area. 

With this announcement, the two organizations have begun to create a preview for what the future of health care may look like.  In fact, the merger of these two organizations offers a glimpse into the challenges that await health-care organizations that take bold steps to reposition themselves into the future.

Others are better positioned to ascribe the true catalysts behind this acquisition.  Nonetheless, it’s entirely plausible to suggest that Highmark was driven to this acquisition out of a fear that UPMC was simply becoming too large a force in the Pittsburgh health-care market.  If that’s the case, Highmark’s move can be seen as a defensive counter-response.  Having said that, Highmark and West Penn Allegheny describe another motive for coming together, one that is more far-reaching and significant.  Together, they describe their desire to create an integrated health-care system that marries the financing and delivery of care.

Why is this a big deal?  After all, there are examples of integrated health systems across the country that also market health insurance to the public. The Geisinger Health System is an example of such a model.  This one, though, is different.  Highmark comes to this acquisition already well entrenched in the health-benefit market.  Highmark’s health plan includes more than 3-million members and holds significant market share in Western Pennsylvania as a stand-alone insurer. 

Highmark also includes almost every hospital in the area in its network of hospitals and physicians.  This means that Highmark will have to manage a hugely difficult transformation.  The company occupies the leadership position in the benefits market and the market power that comes with this.  It is less clear that the Pittsburgh market will cede to Highmark the same position as an integrated health system.  Equally as significant, the company will eventually find itself in direct or indirect competition with many of the hospitals and medical professionals now in its networks.

Health plans have historically avoided ownership of health-care delivery systems for a couple of sound reasons.  Agreeing to managed-care joint ventures with hospital systems has been about as far as health plans have been willing to go, and most of these have not performed up to their promise.  In fact, these partnerships have underperformed because the two parties involved were not as aligned as they wanted others to believe. 

What’s more, health plans have sought competitively advantageous pricing from their partners, and health systems have sought competitively advantageous referrals to their systems.  Neither party has been truly able to make a difference in how care was priced or delivered.

In their own words, Highmark and West Penn Allegheny are attempting to create what health-care thought leader, Clayton Christensen, in The Innovator’s Prescription, describes as an integrated, fixed-fee provider system.  As such, Highmark and West Penn Allegheny are undertaking a tremendous change agenda.  In the future they describe –when  health-care practitioners will deliver care in a world in which revenues and resources are fixed, not variable. 

This doesn’t mean health care will be rationed.  It does mean the delivery of health care will be rationalized.  In other words, patients will be much more likely to receive care from professionals who are best matched to provide the care they need.

With this shift in focus, change of great magnitude is possible.  The new health system will be encouraged to make resource allocation decisions based not on how best to generate immediate revenue, but on how to best maximize fixed, scarce resources.  If accepted in the market, the new organization will be motivated to invest in the health of its members/patients to avoid longer-term costs.

It is too early to say whether this new, combined organization will be accepted into the Pittsburgh market or granted regulatory approval.  But if the answer is yes to these two stipulations, Highmark and West Penn Allegheny have the opportunity to create a “super” accountable care organization (ACO)–an integrated health system that’s also integrated into a large health plan. 

The rest of the United States will certainly watch this development closely for its impact on the immediate and long-term impact on American health care.  It’s also worth watching because of the significant leadership challenges and questions the combination of Highmark and West Penn Allegheny presents. 

Can the combined management bridge the cultural divide that has defined health-care payers and providers?  If so, how long will it take?

Can the combined management effectively integrate the two organizations into a seamlessly integrated health-care financing and delivery system?

And how quickly can Highmark and West Penn Allegheny abandon their current ways of thinking and redirect their focus toward population-based care delivery and long-term health management?

The nation should watch this game being played in Pittsburgh.  It doesn’t involve the Steelers or the Pirates.  But it is worth keeping a close eye on to see how it all plays out and how it advances a new form of health-care.