A Port in the Storm

Value-based health insurance may offer stability for employers in a marketplace about to be upended by more new federal policies

Back Longreads Jan 31, 2017 By Steven Yoder

In 2009, the California Public Employees’ Retirement System found itself up against dramatically rising health costs. Between 2001 and 2008, premium increases for the four plans the agency offered to Northern California members averaged 140 percent.

The group’s board decided to take on one big cost driver: hip and knee replacements. When they looked at how much those surgeries cost across the state, they found huge variations, from a low of $10,000 to a high of $110,000.

The average cost of those surgeries for CalPERS members fell by 26 percent, and the plan has saved the organization $3 million per year.

So CalPERS set a “reference price” for what they’d pay for those operations — a maximum of $30,000, which only one-third of hospitals exceeded. CalPERS’ members could go to any hospital for the surgery. But if they selected one that charged above $30,000, they were financially responsible for paying the amount above that price.

Members changed their behavior — most started getting their surgeries at the hospitals charging no more than that price, which CalPERS designated “value-based purchasing centers.” Hospitals changed, too. Initially, 48 hospitals agreed to the cap. In the next few years that number grew to 70. The average cost of those surgeries for CalPERS members fell by 26 percent, and the plan has saved the organization $3 million per year, says David Cowling, chief of CalPERS’ Center for Innovation, which studies new ways to make the organization’s retirement and health benefits sustainable.

Seven years after passage of the Affordable Care Act created a new world order in health insurance, it all may be upended. With a new administration in Washington, all or parts of Obamacare could be repealed and replaced. All the while, premium increases have continued apace: In the three years before the law was fully implemented in 2014,  median premium increases in the California individual market averaged just over 9 percent a year, according to the California Health Care Foundation. In the two years since implementation, median increases have averaged just over 5 percent annually.

Some of the best ideas for slowing down health care inflation, like the reference pricing model used by CalPERS, are coming from employers. Increasingly, they’re designing health plans that turn their employees into rational economic actors in a health insurance marketplace that’s had weak or nonexistent price signals and competition.

To date, the most common way that companies have tried to control rising health costs has been to shift them to their workers. Employees’ average annual deductible is now about $1,500 — versus just over $500 in 2006.

But such cost-shifting can boomerang. It’s one thing to have employees carry a 10 percent copay, but once they have a 20 or 40 percent copay, patients just stop going to the doctor, says Scott Kelley, president of Verus Insurance Services, an employee benefits consultant in Granite Bay. That may mean they don’t get chronic conditions treated, which lands them in the hospital with more serious complications and huge bills, driving up next year’s premium. And unhealthy employees are a drag on profits because they’re less productive and miss more days of work, according to multiple studies.

The alternative of “value-based health insurance designs” may offer better promise for slowing costs. These give patients financial incentives to choose health care that gets good results for the money spent and rewards incentives to doctors for providing it.

Paying Employees to Stay Healthy

In the simplest terms, value-based health insurance designs are those that align patients’ out-of-pocket costs with the value of the services they get, according to the University of Michigan’s Center for Value-Based Insurance Design. Patients are financially rewarded for healthy behaviors and for choosing cost-efficient, high-value tests and procedures. Doctors and hospitals do better financially when they keep patients healthy at a reasonable price.

Many value-based plans focus on preventing disease in the first place. Healthy employees have insurance claims too, but they’re smaller than those of unhealthy employees, says Dave Reynolds, CEO of Capitol Administrators, a Rancho Cordova-based third-party health insurance administrator and consulting firm. That’s why each year his company’s employees undergo biometric screening that checks their body-mass index, blood pressure, blood-sugar and cholesterol levels, and whether they smoke.

An employee’s $2,500 deductible is cut by $500 for each target metric they hit. That means someone who comes out ahead on all five indicators pays no deductible. Employees who can show they’re working on a condition — say a smoker who’s in a cessation program or someone with high cholesterol who’s taking their medication — can also still pass on that indicator. Healthy employees help put the brakes on premium inflation. This feature alone typically cuts an employer’s cost growth from 8 or 9 percent annually to 3 or 4 percent, Reynolds says.

Health insurance companies are also trying incentive programs like that one. Blue Shield of California, for example, offers a plan called Care Groove for patients with chronic problems like diabetes, cancer or hypertension, which can get expensive if patients neglect their treatment plan. At Blue Shield, a specialized care team uses evidence-based protocols to develop a care plan that the patient has to stick with, in exchange for lower premiums. That means things like taking medications as prescribed, keeping doctors’ appointments, and checking blood pressure levels and then reporting them to their care team.

The plan has real teeth — patients sign the care plan and are removed from the program if they aren’t compliant.

Encouraging Workers to Purchase Value

People typically decide on their next flat-screen TV or car by balancing quality and other features against price. But with many conventional health care plans, patients pay no attention to the prices for procedures, in part because they don’t know what the prices are. In many cases, contracts negotiated between health care providers and insurers forbid that data from being shared.

That’s changing. Employers are giving their workers tools to access price data and then rewarding them for choosing lower-cost providers with good quality metrics. Reynolds says one such tool, Healthcare Bluebook, lets employees look up the fair-market price for a procedure — say a knee surgery. If the employee chooses a lower-cost provider, the employer sends them a rewards check. When people start to get money for choosing lower-cost providers, “that gets around the office really quickly,” Reynolds says.

Another version of that approach are “narrow networks” — in exchange for lower out-of-pocket costs, patients get access to a smaller, hand-picked network of high-performing and lower-cost providers. That also means employees give up the full range of providers available in a traditional preferred-provider plan. Linda Hunter, senior vice president and employee benefits practice leader at Woodruff-Sawyer & Company in Sacramento, says narrow network plans typically run 10 to 20 percent cheaper than traditional PPOs.

Commercial accountable care organizations — groups of doctors and hospitals that coordinate their care to lower costs — also can sometimes offer better prices, which employees can be incentivized to use. For example, a doctor who recommends that a patient lose weight puts the patient in touch with a nutritionist and a health educator on the doctor’s care team.

In 2010, three groups — Hill Physicians, Blue Shield of California and Dignity Health — formed a commercial ACO-like network to serve the CalPERS population of 41,000 members in Sacramento. Through better coordination of care, the ACO actually cut Blue Shield premiums for CalPERS Sacramento members by about $40 per member per month in its first three years. Employers contracting with an ACO like that one don’t restrict their employees to the ACO network, as in an HMO. Instead they offer incentives like lower copays for those who choose to see doctors in the ACO, Kelley says.

But what happens to the quality of care when patients are incentivized to choose providers on cost? Value-based design proponents stress that patients need to get information on both provider quality and price when making decisions. (Some designs, such as narrow networks, include only providers with high-quality ratings.) Quality measures in health care still are a work in progress, but insurance companies, independent ratings services and government programs increasingly use them to evaluate providers. Doctors and hospitals get evaluated both on process — like whether an intensive care unit has a critical-care specialist on staff at all times — and outcomes, like the survival rate for their heart-attack patients.

Getting Started

Businesses that self-fund their health plans — contracting directly with healthcare providers instead of paying an insurance company to do so — have the most freedom to create innovative designs. That’s because in self-funded plans, employers see their health claims data and use it to get better value for every health dollar. “If you have a bunch of yoga instructors, what they want and need in their plan design will be different than if you have a bunch of truck drivers,” says Adam Russo, CEO of the Boston-based Phia Group, a healthcare consultant to employers in California and elsewhere.

Russo gives an example from his company, which has many younger staff with growing families. Phia looked at the cost charged by 50 area hospitals for delivering babies, which ranged from $8,000 to $50,000 and averaged about $30,000.

The company cut a deal with its employees who are expecting: If they choose from one of six area hospitals that have high quality ratings and charge about $10,000 per delivery, Phia gives them two free years of diapers and wipes from Diapers.com. At $10,000 per delivery and $7,000 for the diapers and wipes contract, Phia now spends $17,000 per delivery instead of the $30,000 average.

Of course, smaller employers can’t self-fund, in part because they can’t afford the outside expertise needed to set up a self-funded plan. But for these companies, Hunter says one option is joining a health insurance captive, which essentially lets a group of employers form their own insurance company and spread the risk. Another self-funding option is a “level-funded” plan. This allows an individual employer to contract with a plan administrator to whom they pay a set amount each month to cover their employees’ health claims. That replaces paying out an often dramatically fluctuating amount based on actual claims, as occurs under a regular self-funded plan. It’s a big help for companies with unpredictable cash flow. (Under all self-funded models, companies protect themselves against catastrophic claims through a contract with a stop-loss insurer, which takes over payments above a set amount.)

Whatever the model, employers interested in pursuing new strategies to control health costs should seek out a broker who understands self-insurance and value-based health care, Kelley says.

Better plan designs could bend the health care cost curve. Still, changes in the health insurance market can exert equal force in the opposite direction. For example, as big hospital systems increasingly gobble up smaller practices, they wield increasing market share that stifles competition. Of the 25 largest general acute-care hospitals in California, 17 are in Southern California. That market power is why premiums in San Francisco are up to 30 percent higher than in Los Angeles, according to Covered California. As in any market, monopoly power makes it harder to shop on price.

And the coming changes in federal health care policy likely mean stormy and unpredictable seas ahead. All that employers can do is control what’s in their power. Self-insurance and value-based designs are like being anchored in a port during a storm, says Mike Ferguson of the Self-Insurance Institute of America. “No matter what else goes on around you in the market, those approaches give employers better control,” he says. 

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