Where Will Health Plans Find The Next Generation of Savings?

Health costs are rising. UM has played out. Finding efficiencies in health care will be more challenging than ever, but three models offer a glimpse of the future.

Michael D. Dalzell

Managing Editor

Haven’t you heard?” asks a smiling nurse. “Health insurance is out. HMOs are in,” she intones in a 1985 television commercial touting a Washington-area managed care plan. The innovation that HMOs promised patients — coverage for preventive care, low out-of-pocket expenses, and an end to mind-numbing paperwork, not to mention cost containment for purchasers — was a welcome cool breeze in an overheated health care system.

And for a while, everything worked, even if what was called “managed care” — managed cost — wasn’t exactly what Paul Ellwood & Co. had in mind. Purchasers got comfortable with 2- and 3-percent premium increases, and a period of complacency set in. “In the ’90s, I don’t know that you could identify much that was innovative,” says Clive Riddle, who once ran Tenet Healthcare’s California HMO and is now president of Managed Care On-Line.

The party ended one fateful day in 1997, when Oxford Health Plans’ stock swooned 62 percent. Oxford’s poor information systems had masked a surge in health costs that the HMO was struggling to pay. Before long, it was evident this was an industrywide problem, which worsened when the managed care backlash forced HMOs to relax restrictions. The short-term fix was higher premiums, but the long-term stability of the industry remains in doubt; according to Weiss Ratings, fewer than three dozen plans are driving overall industry profits.

The industry realizes that it needs to get creative — or perish, at least in the form it has taken. Employers won’t stand long for double-digit premium hikes. With much of the fat already wrung out of care delivery, where will health plans find that next generation of cost savings?

Slowly but surely, innovation is taking root in product offerings and care delivery. While plans may be entering a period of trial and error, three themes seem constant: Consumers will pick up more of the tab; electronic initiatives will create efficiencies in administration and care; and plans will pay more attention to members’ individual needs.

Cost shifting

It is dawning on the industry that the popular and political firestorm that gave patients new freedoms also presents an opportunity: Give the people what they want — let them direct more of their care — but educate them about the responsibilities and consequences. “We need to provide information to people to help them support choices, both what’s clinically right for them as well as the financial choices,” says Jonathan T. Lord, MD, chief clinical strategy and innovation officer for Humana.

For all the pluses that first-dollar coverage has brought to health care, it has insulated patients from the real cost of care. “The most popular copayment plan is still $5 for a physician office visit, which was the most prevalent copayment in 1980,” says Riddle. “Everything else has inflated considerably since then.” MCOL recently figured that the $5 copayment of 21 years ago, if adjusted for health care inflation, would be $19.17 now.

As people were being desensitized to cost, they weren’t absorbing managed care’s lessons about prevention and resource use, says Mark Weinberg, president of WellPoint Health Networks’ individual and small-group division. “If anything, they were becoming more acquiescent — letting the system manage their care — but becoming angry that they had no way to influence it.”

New products will change that. WellPoint, for instance, has created a set of plans for the small-group and individual markets (see Innovation #1) that encourages consumers to direct their own care, but injects a strong retail aspect. These plans preserve many of managed care’s positive features, such as easy access to primary care, but resemble indemnity coverage in terms of cost-sharing for many other services.

“If you think about indemnity insurance, the only way it could control costs was through economic barriers,” Cap Gemini Ernst & Young Peter Kongstvedt, MD, says, referring to coinsurance and deductibles. “The more one demands that medical management not be imposed, the more you move back to economic barriers.”

While cost sharing may not be all there is to the “consumerism” said to be coming to managed care, Riddle thinks “It will be the centerpiece of it.”


Just as consumerism can mean various things, “e-health” also is somewhat nebulous. Yet, however the concept is framed, few doubt its ability to save a considerable sum and bring administrative efficiencies — perhaps within the next two years.

Much has been said of health care lagging behind other industries in information-technology spending. The Gartner Group says that health plans spent 3.4 percent of gross revenues this way in 1999; financial services companies put up 6.1 percent. HMOs’ financial losses have stymied investment; in 1998, when Foundation Health Plan’s profits skidded, for instance, an innovative medical management system that would have combined customer service and physician support was redlined.

The Health Insurance Portability and Accountability Act, though, is expected to stimulate adoption of technology that will increase operational efficiencies, such as connecting plans’ outmoded systems to online applications. This scenario is ripe for unrealized savings, says Kongstvedt. “We’re working out that return-on-investment analysis, so I don’t have a hard number. But it is substantial.”

Cap Gemini’s May report, “How Health Plans Are Using the Internet to Reach Customers,” notes how seldom health plans have instituted even the simplest of administrative applications. Twenty-five percent or fewer of the health plan web sites it surveyed allow members to enroll or to change physicians, for instance.

Those who snooze may lose. Forrester Research analyst Bradford Holmes predicts that Internet-based companies will seize 3 percent of HMO profits this year, with most of that business coming from employers willing to let workers tinker with customization of benefits. By next year, 24 percent of employers could offer at least one e-health plan.

In an effort to get in front of the trend, Humana was planning to announce Sept. 11 that it would launch its first digital health plan (see Innovation #2). “We’re trying to attack administrative expense by having components that provide online self-service features,” says Lord.

Claims submission

Though claims administration is an obvious target for streamlining, Cap Gemini notes that just over a quarter of plans offer providers two-way claims adjudication. Truth be told, online claims submission has been an uphill climb, and not just because of a pre-HIPAA lack of communications standards.

“The people who thought health care was an easy Internet fix should have taken heed from earlier IT companies new to health care,” Health Strategies Network President J.D. Kleinke observed recently in a Health Affairs article, “Vaporware.com: The Failed Promise of the Health Care Internet.”

Processing a claim, he noted, is a complicated affair involving at least a dozen variables, including eligibility, benefits, provider status, preauthorization, and so on. “What they discovered at the heart of claims adjudication,” he wrote, “was a computing, content, and analytic nightmare.”

Bingo! says Riddle. “What we need is a fundamental change in the way employers provide eligibility information to plans,” referring to one of the biggest stumbling blocks to online claims. “It doesn’t matter how fast you can do the transaction; the problem is, employers often don’t report changes in their populations until well after the fact.” As an illustration, Aetna paid millions in benefits in recent years to people whose coverage had expired.

Still, Kleinke theorized, perverse incentives make obfuscation attractive. Blocking access to eligibility information, denying reimbursement pending additional documentation, asking providers for clarification after the fact — all, he said, are “administrative inefficiencies that pump the lifeblood of a health plan when the premium dollars to pay those claims are earning 10 percent on Wall Street.” The cost of “managing a mess,” as he put it, is “trivial compared to the investment gains associated with not cleaning up that mess in the first place.”

Medical management

So far, “There is little evidence that the Internet has had an effect on expenses, either way,” says Kongstvedt. “Anecdotally, a number of executives told us they thought the number of phone calls went up after they made information available on the Internet, though that might be a one-time event.”

Kleinke warned about Internet-driven demand. “The Internet is direct-to-consumer advertising in overdrive,” he asserts. “It will exacerbate health care’s fundamental problems … the same problems that managed care was supposed to fix.”

But in the same issue of Health Affairs, health care futurist Jeff Goldsmith was more hopeful. Medical management, he said, “will become instantaneous, embedded directly in electronic claims management.” The result will be similar to what United HealthCare did in 1999, when it abandoned utilization management in favor of an automated system that looks for exceptional patterns of care.

Nobody really knows where medical management is going, but indications are that outcomes-based models will be more important than ever. American Healthways contracts with health plans to provide “care enhancement” (see Innovation #3), a concept that is a lot further along than traditional disease management in terms of looking at a person’s comprehensive health care needs.

From a care-delivery standpoint, consumerism will mean involving patients more in treatment decisions. “When people are more engaged in their care, they end up using fewer resources because they have a sense of comfort and control,” says Humana’s Lord, who has studied this phenomenon at Dartmouth with John Wennberg, MD. “Comorbidities go down when patients are fully informed and proactive in the decision-making process.”

The next generation of savings for health plans, says American Healthways President Richard Rakowski, will come not from finding more services to cut, but by doing things right the first time to produce better outcomes. “I’d say that 35 to 50 percent of all activity in health care is related to rework — work that shouldn’t have to be done — because of people not following accepted standards of care.”

Riddle, of MCOL, thinks the creativity coming to the fore gives health plans an opportunity to hone their collective image. “If you’re seen moving forward with new programs and ideas, that’s a positive step. The industry needs to advance some things that are new and innovative.”

Innovation #1

Shifting decisions — and risk — to members

Plan: WellPoint
Strategy: Plans for small groups and individuals give members decision-making power, commensurate with cost
Progress: Strong initial sales

Cost-sharing has crept into managed care, with most of it coming in the form of employee payroll deductions. Studies, though, show that higher payroll deductions have no effect on utilization. It’s only when people see money leaving their pockets that they respond.

As health plans move away from tight medical management, industry thinking is that freedom shouldn’t mean free. This is especially so for the small-group and individual markets, where risk pools are small, benefits aren’t as rich as in large groups, and, premiums average 20 percent more.

That high cost leads individuals and small employers to drop coverage when prices rise. “We decided that we could no longer chase increasing costs with higher prices,” says Mark Weinberg, president of the individual and small-group division at WellPoint Health Networks. “Research showed that purchasers were not going to ride up the price scale. The healthier of them would drop out of the market entirely, driving even higher inflation.”

Instead, WellPoint moved in the direction of member self-management, whose goal to keep premiums down hinges on a strategy that gives buyers financial incentives to manage their own care effectively. “In the past, we’d ask what people want covered, we’d give it to actuaries, they’d price it, and that’s what we’d sell. This program is about defining what people are willing to spend out of pocket, especially people who are healthy, then creating benefits that fit within those price points. It’s the opposite of what we used to do.”

Two products resulted: PlanScape for individual purchasers, and FlexScape for groups of 2 to 50. Under PlanScape, the higher the monthly premium — from $30 to more than $100 — the richer a person’s benefit package and the lower the out-of-pocket costs. FlexScape, a variation on defined-contribution plans, makes the employee a retail purchaser. The employer selects a monthly premium and a series of benefit packages from which employees can choose. Those packages are translated into price lists for employees, who select a package of covered services based on what they’re willing to spend each month — from $5 to $100. In both plans, there is first-dollar coverage for physician office visits, generic drugs, and preventive health screenings. Flexible-spending programs and medical savings accounts can be used for tax breaks for out-of-pocket spending.

In addition to placing decision-making power with members by letting them decide what level of coverage and risk is worth the price of their health care choices, WellPoint hopes to reach those who previously had been without coverage. Numbers aren’t in, but Weinberg estimates that half or more of new purchasers were uninsured. “The uninsured are good business for us,” he says. “Eighty percent of those who make 200 percent or more of poverty have a health status that is better than those we already cover. Long term, that will bring premiums down.”

WellPoint seems to be onto something — selling 50,000 individual and small group plans a month in the seven states in which it does business.

Innovation #2

A paperless health plan

Plan: Humana
Strategy: Humana rewires its systems, in the process, rebuilding relationships with patients and providers
Progress: Launches in Memphis on Jan. 1

Humana Chairman David Jones told a group in June that he was reinventing the company he cofounded — again. “Sometimes,” he said, “you need to thoughtfully abandon yesterday’s success.”

The nursing home company-turned-hospital operator-turned-managed care company is now pursuing a business model that uses the Internet to change the way insurers interact with members and physicians. The first evidence of this will turn up in Memphis, where Humana intends to launch a “digital health plan” on Jan. 1.

Jonathan T. Lord, MD, Humana’s chief clinical strategy and innovation officer, says the plan, which eventually will be rolled out in other markets, is designed to ease interactions with physicians, consumers, employers, and brokers — removing hassles while saving the company significant administrative expense.

It’s not just a matter of “web-ifying” existing business, as Lord puts it. “This plan is built from the ground up, with a new way of thinking through some of the processes that support the work. That, coupled with an entirely new claims-processing engine that allows for employers and individuals to customize benefits and adjudicate claims instantly, and provide up-to-date eligibility information — those are huge changes in the way business is going to be done.”

Eligibility, of course, powers the whole claims train, and employers can use the system to add and delete members instantly. They’ll also be able to pay premiums electronically. For physicians, “As long as they or their staffs do an online eligibility check and we tell them the member is eligible, we’re not going to deny a claim later because of membership status,” says Lord. “We’re trying to deal with some of the things that have frustrated physicians.”

For members, the system offers online enrollment, as well as the ability to check benefits and claims statuses, print ID cards, and chat with a customer service representative. But for some patients, the real value of Humana’s new system may be in its medically oriented applications.

In time, the company will create, for each patient, a personal health profile — an online compilation of one’s entire claims history. From a convenience standpoint, it will save patients the drudgery of filling out information on a clipboard in the doctor’s office. Instead, with the patient’s permission, the physician can download a patient’s health profile, thus answering all the questions on the clipboard. From a safety standpoint, any information a patient might have forgotten to write down — medications being taken, for instance — is there for the physician to see.

Members can add personal health information. An example, says Lord, is herbal-supplement use. “That information can be uploaded to the profile, and the system will look for interactions with any medications being taken. That’s something we know often isn’t reported to physicians.

“It’s progressive and integrated systems thinking,” he says, “instead of looking at this in a silo fashion.”

Innovation #3

Care enhancement: holistic healing

Company: American Healthways
Strategy: Crunch data, then address costly conditions in total population
Progress: Measuring validity of outcomes

The first thing you should know about American Healthways’ care enhancement strategy: It’s not disease management. Don’t even go there. “The term ‘disease management’ dehumanizes the patient and puts a myopic focus on the disease, rather than the whole person,” says American Healthways President Richard Rakowski.

Care enhancement may be built on core principles of DM — surveillance, personal contact, adherence to treatment regimens — but it goes beyond. The idea, he explains, is to add a layer of care to help patients and physicians work with the nation’s disjointed health care system to ensure better clinical outcomes and, ultimately, reduce expenses for health plans.

At a personal level, nurses are at the core of the program, helping people who have one or more of 30 chronic conditions monitor their health, stay on or adjust a treatment plan, deal with psychological symptoms, navigate the health care system, you name it — not just for one condition, but across comorbidities. The nurses are given profile tests and score high for empathy. “With an empathetic bond, you get the member to spend more time on her own care, which improves outcomes,” says Rakowski. “That’s been known for 5,000 years in 50 cultures — it’s called healing.”

At a tool level, American Healthways takes claims data, pumps them through proprietary algorithms, and identifies members within a population who have any of those 30 conditions. In addition, it uses predictive modeling to find people who are close to having an event, such as a heart attack, and to intervene to try to prevent it.

“With those two groups, you’re effectively talking about everybody,” says Rakowski. “In a whole population, 15 to 20 percent has some combination of severe chronic diseases and other problems we call impact conditions. Another 10 percent are about to move into that group. Those people represent the majority of costs to a health plan.” Of costs that can be controlled, he says, about half are related to who’s doing what. “If you’re going to influence cost and outcomes, your best bet is to look at behaviors that are modifiable at the physician and patient levels.”

The program is sold on the basis of outcomes, which Rakowski defines as improvement of clinical measures, adherence to recognized standards of care, better patient and physician satisfaction, and a decline in total medical costs for a population. American Healthways uses outside vendors to measure outcomes, and has established a relationship with Johns Hopkins University, underwriting a program there to verify the validity of the outcomes and publish them in the medical literature.

Before winding up with American Healthways, Rakowski spent two years interviewing patients, nurses, physicians, executives, and others about the state of health care. “One of the interesting responses I got was, ‘As heartless as the banking industry is, at least it gave us ATM machines — so it’s easier to get our cash.’ Everything’s gotten harder with health care, though lifestyle pressures demand that there be more conveniences.” That, he says, is part of what care enhancement is all about.