Healthcare Exchanges offer a way forward

In my last Healthcare blog¬†I argued that because of the structure of our payment system, the network effects of the providers, and reimbursement rules healthcare isn’t a free market. I believe that the exchanges in the Affordable Care Act aka Obamacare, actually offer a path forward that may take us closer to a freer market for healthcare than anything we currently have.

First I need to say that they are not an immediate silver bullet the exchanges only offer a way forward and do not guarantee any changes in the market. Furthermore, if the exchanges do provide the changes I’d like to see it will take time, several years in fact, for those changes to have a broader impact on the market.

What are the exchanges? They are essentially a market place where a customer can select a type of insurance with a specific network that meets their needs. How is this different than what we have had in the past? Well, typically health insurance has been only offered through your employer and you get what they offer. If you don’t have a full time job, you’re basically out of luck and paying a huge monthly premium. The exchanges level that playing field by increasing the pool of people that will be using those types of insurance and allowing across state competition for health insurance. For example, there’s only one Blue Cross Blue Shield provider across all the exchanges in the US. That’s a pretty big change.

Because there is competition based on meeting the needs of the customers there will be much faster feedback to the “plans” as they are called. If members don’t like a specific offering, they won’t make any money and the next year will be forced to make a different offering to attract more members. Furthermore, there will be switching across the plans as people realize they dislike certain features. I believe this will happen for several years until a “dominate” plan design emerges based on the success of those plans. Healthier members, low turn over, and acceptable level of revenues for the insurers. Expect these metrics to be similar to the mobile industry in the US (ARPU, Churn, etc..).

Because of the relatively fast feedback on the products in the market and the possibility to have at least three offerings on the exchange (Gold, silver, bronze), insurers can experiment with different types of plans and benefits. The most popular one at this point is something called Accountable Care Organization, which is somewhat similar to an HMO, but is supposed to be better (we’ll see). ACOs as they are called will have to keep track of the overall quality and re-admission rates with a goal of continually driving up quality of care and reduce re-admissions. Additionally, these are narrower networks of care than a traditional PPO that most people have become accustom to.

That’s fine, but that doesn’t really help with the fact that it’s a networked economy and that there’s still a huge imbalance of knowledge. Well, here’s where the insurers can changes things up. Instead of focusing on the narrow set of providers in their region, they can look to create a network based upon the specific of the member’s conditions and have those members go to the specialty providers that offer the best care for those conditions. Even if they are out of state or out of the country.

Granted this data is a bit out of date, however it’s likely to be accurate, according to the Innovator’s Prescription (pg 96) there are facilities that have become so specialized in certain conditions (hernia repair) that their cost to treat those conditions is $2,300 while a general hospital costs an average of $7,000 and has a much lower re-admission rate than the general hospital. With this in mind an insurer could use these specialty clinics and even fly their members to receive treatment and still save money.

This would dramatically change the shape of the network for the members of those insurers and improve overall care and results. It would also dramatically change the interaction with providers in the member’s region as well. Some hospitals are already feeling the pain in this such as Seattle’s Children’s Hospital (which is suing over being excluded).

I don’t think being exclusive it the right direction, I think creating a strong partnership with members through health coaching and care management can help drive better results and education between the provider, insurance company, and member.

This will require continual experimentation with the types of networks, the way the insurance companies interact with their members to take it from a confrontational interaction (from the member’s perspective), and how the providers plan to engage with insurers. There needs to be incentives to encourage providers to recommend non-traditional recommendations. Incentives to support healthy living for the members. Only experimentation in all of these areas can inform the insurers how to engage better to dramatically improve the health and reduce the cost of our nation.

Healthcare is not a free market

From the obvious department, amIright? Yes, but not for the reasons you think. Healthcare cannot and never will be a free market. There are several reasons for this that I will elaborate on here.

Healthcare consists of micro-regulation in the form of the reimbursement structure. This is an artifact of two different systems combining to make things worse. First, because the Federal Government is big and has two different programs one for Federal Employees and one of those in need Medicare/Medicaid (I’m combining them here for simplicity), there’s also the VA, but that has much less influence on healthcare. These two programs set the terms on how the government will reimburse or even pay providers for care provided. These are based on Current Procedure Terminology (CPT Codes) and not based upon your diagnosis. Essentially the government sets a price they are willing to pay for a procedure. As one of the largest market players, this influences all of the other payers (IE insurance companies). Many insurance companies use Medicare payment rates to set their own, which drives down the cost of a procedure to the point, in many cases, where it’s below the cost of the actual care. This drive providers to select more expensive and more procedures in many cases to make up the short fall. This payment model also makes it hard for new procedure methodologies to be adopted as they may not be paid for.

Healthcare is a network economy – nearly all care happens close to home. This is why groups like the ACLU argue that driving more than an hour for an abortion is an unnecessary burden on women. Because of the proximity of the majority of care (10.2 miles) this creates a local network of care based on the original provider a patient sees. When you receive a referral, there are a few different routes this can go, best doctor the the referrer knows, another doctor in the same clinic, or in the same care network (such as UPMC in Pittsburgh or Kaiser Permanente in CA). This drives an incentive to send patients within the network leading to mutual referrals or money staying within that care network even if there are better doctors for that specific patient outside of that care network. In addition to the Doctor’s network there is, of course, your insurer’s network which may be in direct conflict with the professional network that your provider has.

Imbalances of knowledge – in typical free markets there’s an assumption that everyone has the same amount of knowledge. In Healthcare, it is abundantly clear that this isn’t true. Most patients have little to no understanding of their diseases when they are first diagnosed. On the other hand, both their insurer and provider has an extensive knowledge of the disease. This limits how well the patient is able to correctly make decisions about their healthcare. It also pushes reliance to the provider whenever there is a disagreement between insurer and provider. The member can’t effectively participate in those conversations about care. Furthermore, there maybe little penalty to the patient if they fail to follow the prescribed course of care until much later where neither the insurer or provider can enforce a change of behavior to reduce costs for the entire system now through treatment rather than later when there are more complications.

These are but three cases that highlight the lack of free market mechanisms in healthcare. Even in cases where a patient wants to seek the best care it’s typically the patient’s responsibility to pay for it if it’s not with in the insurer’s network. In many cases these clinics can reduce systemic costs through lower point of care and lower likelihood of readmission after care.

Over the course of the next few weeks I will discuss Exchanges and their potential, how healthcare can be made more affordable using process improvement tools and other mechanisms. I plan on writing weekly on healthcare. If you have any topics that interest you please comment and let me know!