Health care reform will lead individuals to purchase their own coverage in greater numbers than the Congressional Budget Office predicts, and that will mean major changes and new opportunities for the insurance industry, says Jeff Goldsmith, PhD, president of Health Futures, and associate professor of public health sciences at the University of Virginia. “It is going to be a much more retail, consumer-oriented health insurance marketplace than anyone contemplated as a result of this legislation.” To get ready, health plans should take practical steps such as shoring up Web sites to make direct purchasing easier, exploring new marketing and contracting strategies, and finding out what healthy members want and need, says the longtime consultant and author. As Ernst & Young’s national adviser for health care, Goldsmith specialized in health system strategy for most of the 1980s and 1990s. Today he focuses on small technology companies and firms that are refining approaches to helping people improve their health. He also teaches in the Wharton School of Finance’s master’s program in business administration and serves on the editorial boards of Health Affairs and Managed Care. His new book, The Sorcerer’s Apprentice: How Medical Imaging Is Changing Health Care, with co-author Bruce Hillman, MD, is being published by Oxford University Press this month. Goldsmith, who also served as director of planning and government affairs at the University of Chicago Medical Center and as a fiscal and policy analyst for the state of Illinois, earned a bachelor’s degree from Reed College and a Woodrow Wilson Fellowship for graduate study. He completed a doctorate in sociology at the University of Chicago. He spoke recently with Managed Care Editor John Marcille.
Managed Care: You’ve been looking at the future of health care for years. What do you think about the Patient Protection and Affordable Care Act?
Jeff Goldsmith, PhD: I’ve read the bill twice, and I’ve spent the last four-and-a-half months trying to think strategically about how the legislation — if we can boldly assume that it is going to be implemented as written — is going to affect the major sectors of health care. I’ve been talking to health plans, employers, the drug research community, hospitals and health systems, the Navy, and the Veterans Administration. There are a lot of opportunities, but when people look at it, it’s like a massive hive of buzzing, flying critters. It’s very difficult to see a vision of what the future of the health care system might look like because we don’t have a clear idea of how many of these ideas are going to prove out.
MC: Does it have a chance of being implemented as it is written?
Goldsmith: The three-year-plus gap from now until the coverage expansion makes full implementation extremely vulnerable. And if the fiscal crisis that we’re in deepens, a lot of the savings that were anticipated to be plowed back into funding this expansion might end up being diverted into deficit reduction. Republican control over Congress could also dramatically alter the prospects for full implementation. So I don’t accept it as a given that the provisions will be implemented as written. That doesn’t mean it will be repealed, which is extremely unlikely. We’re not helping ourselves by expecting a bolt from the blue to take health care reform away.
MC: If it won’t be repealed, what changes could be made?
Goldsmith: Certain parts of the law are very vulnerable. I could see the Republicans attempting to overturn the individual mandate or de-fund some of the more controversial elements of the bill, such as the Patient-Centered Outcomes Research Institute, the state insurance regulatory expansion, or the Medicaid expansion. This is a very fragile enterprise.
MC: Yet you think if it were implemented, it would be a positive thing?
Goldsmith: I support the underlying premise of this legislation, which is that we shouldn’t have 17 percent of our population without health insurance, but it is hard to imagine a more unlovable approach to fixing that than this bill.
MC: What would have been a more lovable approach?
Goldsmith: I was a big Wyden-Bennett advocate, which would have taken employers out and created national insurance exchanges. It would have been far easier to implement and a much smaller fiscal risk. It is ironic that Wyden and Jim Cooper, two of the most knowledgeable Democrats on health issues, were completely ignored by their respective leaderships.
MC: What is the biggest challenge insurers face under reform?
Goldsmith: The biggest danger is political. The industry bent over backward to cooperate with reform, and it was rewarded with escalating overtly political attacks as the process faltered, and the administration and congressional leadership needed to shore up their political base. Those attacks are not going to cease. Health plan executives conducting business in this environment have to be aware that everyday business decisions that in another time might not have seemed remarkable might now end up as front page news. The current political climate for health insurers is like a room full of gasoline fumes. Who would have guessed that a few rate increases in the individual market in California would have blown up into a national issue and ended up salvaging the legislation?
MC: Is this political risk outweighed by opportunity?
Goldsmith: There is significant market opportunity here. The conundrum about whether the customer is the employer or the subscriber has made it very difficult strategically for health plans to become consumer-driven companies. But subscribers are going to loom far larger in the equation than they did before. There are powerful incentives for small businesses to cease covering their employees, because they will be able to get far more comprehensive benefits through the exchanges with the subsidies. If a company has fewer than 50 employees, there is no penalty for dropping coverage. A lot of small employers are going to say to their employees, Here, I’ll give you some money, go get the subsidies and get covered through the exchanges.
MC: Will people simply shop for the least expensive plan?
Goldsmith: That’s going to be a function of what people want, but I am terrified of the adverse selection risks in this law. The open enrollment provisions of the law are not restrictive enough to protect insurers from a surge in adverse selection. A 90-day waiting period is not enough, as the experience in Massachusetts has clearly shown. It does not take an enormous amount of people to wait until they know they are going to have a major medical expense, enroll in a plan, drop a $60,000 bill on the insurer, and then split, to cause problems. We are going to see a lot of that. And the penalties for dropping coverage or not being covered are inconsequential. If your unemployed 32-year-old kid living in your basement isn’t filing tax returns, how is the government going to know that he is not covered? Large employers will be under tremendous pressure to let their employees opt out of their group plans, and get cash instead to use in the exchanges. The lower the worker’s family income, the more pressure.
MC: How large do you think the individual market will get?
Goldsmith: The Congressional Budget Office CBO is out to lunch about how reform is going to affect the individual health insurance market. It suggested that the individual market is going to double. I think it’s going to triple, at least. We could have 50 million people in the individual market if the exchanges are set up as the law envisions them. People will want to use them because the subsidies are such a good deal. We’ll see the truly retail part of the health insurance market dramatically increase. We’ll also see a parallel opportunity to bypass the distribution system represented by insurance brokers.
MC: Brokers could be big losers here.
Goldsmith: They are going to be huge losers. The way in which the medical-loss ratio is set up provides a tremendous incentive to squeeze the brokers. A lot of insurers have been cautiously building up their Web sites and making it easier for people to enroll directly, but they aren’t overtly marketing those activities because they don’t want to upset the brokers and lose business. It’s pretty clear that the brokers’ scope and role in the health system are going to shrink.
MC: Will that make it a more efficient system?
Goldsmith: The purchasing of health insurance is not all that much more complicated than the purchasing of other insurance that has gone to a Web-based model. You can take a lot of the complexity out of it with a really good Web site with quality decision support. That’s basically what these insurance exchanges are going to be — Web sites.
MC: Are insurers gearing up for more direct marketing to consumers?
Goldsmith: I would be. Insurers should be thinking about strengthening consumers’ relationships with their plans. One of the classic problems for health plans is that their most profitable members are the people who never use their services. If they never use the services, the plans have no idea what they are thinking or how to help them. If health plans leave that where it is and don’t attempt to understand the large body of silent subscribers and what they want, when re-enrollment comes around, they will just disappear and the health plan will end up with a lot sicker group of people whom they cannot charge higher rates to because of the underwriting restrictions in the bill, such as the rate bands and guaranteed renewal. Managing the customer experience and understanding the needs of the entire subscriber base will become crucial to avoid being clobbered by selection problems.
MC: Are there other concrete steps insurers can take?
Goldsmith: There’s a logical sequence of activities, and one of them is attacking not only transaction costs but your overhead. We still don’t have an entirely clear vision of how the regulations are going to shape the medical-loss ratio, but any steps insurers can take to improve automation of customer service and claims management will drop through to the bottom line. Replacing call centers with automated customer management systems, reducing corporate overhead where possible, and doing a better job of managing contractors and consultants will be essential. Insurers should also re-examine their network contracting strategies. The fact that employers’ involvement may be shrinking is good, but it is also going to challenge insurers to think more about individuals. If the number of individuals in the marketplace does triple, it will create contracting options that do not exist in the current environment.
MC: What type of options?
Goldsmith: Selling tiered networks and closed panels and aggressively using cost sharing to steer individuals to the most cost-effective or best performing tiers is going to be much easier when the subscriber base consists of more individuals.
MC: Would individuals be more willing to agree to narrow networks if it kept costs down?
Goldsmith: If I could buy a less expensive product that only afforded me access to my community hospital and the doctors who practice at it, and did not include the university, I’d be on it in a heartbeat. Individuals don’t need access to every provider in a community. They just don’t want to be forced to switch providers. A lot of the reasons employers wanted broad networks were related to employee relations and political pressure from their boards, not necessarily the cost consequences. Large employers thwarted insurers’ use of their bargaining power.
MC: Will contracting with providers be affected?
Goldsmith: We are going to see a collision over rate negotiations with providers. Providers have interpreted the accountable care organization to mean that they are going to be in a globally capped world. They are out there buying up physician practices and executing mergers that are going to be very complicated and expensive to implement. They are incurring huge losses that they are attempting to shift to insurers.
MC: In the end, then, we’ll have some pretty large health systems that are in strong position to negotiate with insurers.
Goldsmith: If insurers don’t push back hard and develop an effective contracting strategy that holds providers accountable, then they are going to pay 100 percent of the cost of all of these integrations. Providers in very strong positions are making extortionate rate demands and basically saying, not only are you going to lose us from your network but you are going to lose half the doctors in this community because we now own their practices. The prospect of hospitals owning the entire physician community is going to be very expensive, not just for Medicare but for private insurers.
MC: Will more health systems become insurers as well as providers?
Goldsmith: The providers in that position today are mostly survivors of an enormous and largely unsuccessful wave of activities in the ’80s and ’90s where providers sought to become insurers and really couldn’t manage the fundamental conflict of interest between all those beds, all that debt, and their insurance risk. It’s not clear to me how many providers are going to step in now and be successful. It’s very hard work, and that conflict of interest is the hardest part of all.
MC: Have we learned anything from the systems that were successful?
Goldsmith: The main thing we learned is that you can do a heck of a lot if you own your market. Intermountain Healthcare has about 60 percent of the hospital beds in Salt Lake City. Geisinger Health System is the largest actor in the economy in the center of Pennsylvania. It’s good to be the king. If the price of the accountable care organization [ACO] experiment is creating hundreds of local provider monopolies like Geisinger and Intermountain, we are going to look back 5 or 10 years later and wonder if it was worth the price, particularly if costs get shifted onto the private insurance system.
MC: You are talking about providers shifting costs that are not covered by Medicare onto insurers?
Goldsmith: There’s a large part of the Washington policy community that sincerely believes that provider cost shifting does not take place. It’s baffling to me — an anthropological phenomenon. I’ve worked enough on the provider side of the market to know that if it weren’t for cost shifting, a lot of providers wouldn’t have any margins. I am very concerned about an explosive cost shift not only from the big ramp-up in Medicaid enrollment as a result of this legislation, but from the tidal wave of merger and acquisition activity that’s going on in the provider world right now, not to mention from the adverse selection opportunities discussed earlier.
MC: Should insurers also be concerned about new players entering the health insurance market?
Goldsmith: Consultants see the prospect of new entrants into the market. There’s something like $6 billion set aside to help set up these coop-style health plans. I’m not so sure. If we are going to see a tripling of the individually insured, however, we could see a lot more Assurant Health-type companies out there that are Web-driven and that have an ability to mass customize benefits within the underwriting restrictions in the legislation.
MC: We are hearing a lot about ACOs, and you mentioned that a fear of global capitation is one of the reasons hospitals are buying physician practices.
Goldsmith: I don’t think I’ve ever seen this level of hype surrounding a health policy idea in the more than 30 years I have been working in this field. It’s like mad cow disease. I am baffled by the ACO. There’s so much of an element of “world peace” in it. The reality is, some physician communities and hospitals have done this kind of thing. In Grand Junction, Colorado, and Canton, Ohio, providers have taken control of the delivery system and have made very tough decisions to try to manage costs. It took them 20 years. It’s very hard. They have to be willing to give things up. To suggest that very many places are going to be able to do this, that after 70 years of fighting, hospitals and physicians will all stand in a circle, join hands, and sing “Kumbaya,” just flies in the face of our market experience.
MC: What would it take for a community to succeed?
Goldsmith: Remember that this is a Medicare contracting opportunity; really, a “loss avoidance” opportunity. Medicare will contract directly with physician or hospital enterprises. The providers that are most likely to succeed already have mastered utilization control and management by offering health insurance to private employers in their communities. It’s going to be a layup for the people in Grand Junction and in Canton — or Geisinger or Intermountain, for that matter — to be able to do this because they have spent 20 years creating a data structure and clinical discipline that help them manage the cost of a population. In places like Dade County, Florida, or McAllen, Texas, lots of luck.
MC: How should insurers view this?
Goldsmith: It would be a mistake for health insurers to buy into the ACO model directly, or indirectly by absorbing all those integration losses. It would be far more productive for them to focus on improved care coordination for episodes of illness — for example, through severity adjusted episode payment or “contact capitation” — and on strengthening primary care by getting the medical home right. Those are the two key things they can do to get a more manageable cost trend.
MC: The patient-centered medical home is getting a fair amount of attention, too.
Goldsmith: That has a different set of risks. If you make the idea so complicated that only a huge, complex organization can actually implement it, that’s a recipe for private practitioners not being able to do this on their own. You would be conceding the field to these huge, 600-person hospital-sponsored medical groups. We’ve made the medical home too complex to scale. Its purpose is to figure out a way to double or triple primary care compensation in exchange for a new, more comprehensive care model.
MC: So simplifying the model is the answer?
Goldsmith: Yes. We are going to see a lot of companies emerge to provide both the information technology support and the care management systems that enable a small primary care practice to do this on its own. I detect a lot of enthusiasm for this idea across the health system.
MC: The concept is a good one?
Goldsmith: The medical home is a constructive idea, and getting primary care right is going to be crucially important to affording the baby boom generation when we enroll in Medicare and to managing the enrollment surge that will occur with reform.
MC: Should insurers be helping?
Goldsmith: A lot of them already are, and they have been pleased by what they’ve learned. They have to play their role in increasing primary care compensation, and they’ll get something in exchange. If primary care is done right, they will see a lot less duplicative testing, less emergency room usage, and reduced admissions to hospitals.
MC: Thank you.
You are going to see a lot of state and county medical societies get into the health plan business.
The industry bent over backward to cooperate with reform, and it was rewarded with a fusillade of overtly hostile political attacks from both advocates and the administration itself. Those attacks are not going to cease.