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U.S. Health Care and Halley’s Comet: Reflections and a Look Ahead

08/22/18

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Tom Robertson, Executive Director, Vizient Research Institute

Something in the newspaper caught my eye recently, which triggered a sequence of free-association thinking that ultimately led to a mixture of concern and hope for the future of health care. It was an almanac reference to the last close encounter with Halley’s Comet in 1986. Named for an English astronomer who was born in 1656, the 6-mile-wide chunk of rock and ice hurtling through space at 158,000 miles per hour intersects Earth’s orbit every 75 years. Contemplating the fact that I will be 105 years old when the comet next returns, I turned my thoughts to the health care system.

Public policy initiatives and private sector efforts targeted at slowing the rate of growth in health care spending have had mixed results at best, and we find ourselves on a path that most would agree is economically unsustainable. Nearly everything that we are currently trying, from bundled pricing to shared savings, we have tried before. With the stakes as high as they are, a look back is in order to avoid retreading ground that we have already covered.

The HMO Act of 1973 provided federal funding for the creation of health maintenance organizations (HMOs), a delivery model founded on the belief that fixed per capita payments – capitation – represented a superior alternative to traditional fee-for-service compensation. The HMO business model was simple: reduce inpatient hospital utilization and use the savings to expand coverage for outpatient services. Through most of the 1980s, the trade-off of lower inpatient utilization for richer outpatient benefits worked. In the 1990s, however, things changed.

No longer able to drive inpatient utilization rates lower to generate cash, health plans turned to price discounts from providers, predicated on the threat to move business from physicians or hospitals who refused to grant discounts to those who did. A period of intense fear – some would say panic – found providers granting steep discounts, ostensibly in the hope of attracting incremental volume but essentially in an effort to protect existing market share. 

A look back at the early 1990s revealed at least three critical mistakes from which lessons can be learned. First, managed care networks were assumed to have the power to redirect patients away from providers who failed to capitulate at the bargaining table. This assumption led providers to accept prices from insurers that were often below their average costs, a practice known as “marginal pricing.” The second mistake was the unshakable belief that capitation would displace fee-for-service reimbursement as the dominant payment mechanism. This led to a feeding frenzy in an attempt to own or control primary care physician (PCP) practices capable of attracting and serving captive populations. Networks of hospitals and physicians – particularly PCPs – were viewed as distribution channels, as if patients were easily directed like marbles rattling along wooden chutes and ladders. Venture capital flowed into the market as for-profit companies were formed to purchase PCP practices across the country.

The third and perhaps most expensive mistake of the early 1990s was the belief that health care providers had the innate ability to effectively manage insurance products. Thinly capitalized hospitals and health systems incurred enormous infrastructure costs to attract relatively small numbers of enrollees in direct competition with deep-pocketed commercial insurers, who had the experience, financial resources and scale to ride out cyclical downturns in premiums. The combination of adverse selection (provider brands attract sick beneficiaries) and an unprecedented slowdown in insurance premiums resulting from irrational pricing led to catastrophic financial results for many provider-owned health plans.

The notion of accountable care organizations (ACOs) that arose as part of the Affordable Care Act of 2010 leans heavily on the conceptual underpinnings of HMOs. ACOs share two economic shortcomings with the provider-owned HMOs which faltered 20 years earlier: selection bias and statistical claims volatility arising from small risk pools. The claims costs associated with 10,000 or even 25,000 attributed lives are remarkably unpredictable from one year to the next. An attributed population of 5,000 individuals is actually more likely than not to trigger unearned bonuses or undeserved penalties for an ACO based solely on the random fluctuation of claims costs.

A longitudinal view, linking the experiences of the 1980s and 1990s with current circumstances, leads to a paradigm-shattering conclusion. Risk sharing – the fundamental concept behind virtually every public policy initiative and payment scheme over the last 40 years – is ill-suited for the problem that we face moving forward. The billions of dollars in potential savings available through utilization reductions, even if realized, would only solve one-third of the middle class affordability gap. Price reductions in the range of 20 percent to 25 percent are unavoidable if the middle class has any hope of affording health care by the year 2030.

Transferring the risk for utilization to providers has been at the heart of nearly every effort to curb health care spending since 1973. The overriding economic driver behind runaway health care spending in the U.S., however, is price, not utilization. We can, and unquestionably should, reduce avoidable variation in care plans, improve end-of- life care by better aligning interventions with what terminally ill patients consistently tell us they want (and what they don’t want), and reduce fragmentation in chronic and complex episodes of care. Doing all of that, however, will only make a dent in the monolithic affordability crisis for working Americans. Health care will not be made affordable simply by transferring risk to providers. Somewhere between the dawn of managed care and the reemergence of 1970s ideas in the Affordable Care Act, the window closed on our opportunity to bring health care spending under control by managing utilization. Prices have reached the point of no return.

In 1909, toward the end of his life, Mark Twain told a gathering of friends, “I came in with Halley’s Comet in 1835. It is coming again next year, and I expect to go out with it.” Halley’s Comet came into view in the night skies over Hannibal, Missouri on April 10, 1910, and it reached its closest point to the sun on April 20. Mark Twain passed away the next day. Most of us who are in the later stages of our careers came into health care with HMOs and the managed care era of the 1970s and 1980s. Unless we loosen our grip on unsuccessful 40-year-old theories, we risk going out with them.

About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.

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