A Conversation With Jeff Goldsmith, PhD: Finding Success in Change

Health plans can capitalize on a range of shifting market forces, but should also refine programs for improving care, says this well-known author and consultant

John Marcille

Health care reform and a long list of surprising market shifts have created clear opportunities for health plans to improve their bottom lines. Increases in Medicare Advantage enrollment, evolving physician networks, providers’ willingness to negotiate discounts, and a growing individual market are just some of the places to look, says Jeff Goldsmith, PhD, president of Health Futures, a consulting firm, and associate professor of public health sciences at the University of Virginia.

Jeff Goldsmith, PhD

But the insurers that ultimately come out on top will be the ones that figure out how to take better care of members, finding new and more sophisticated ways to define and address risk, he says. “The highest and best use of managed care is what you do inside populations with large amounts of avoidable illness represented.”

Goldsmith has been studying the health care market and identifying trends for 40 years. He has been national adviser for health care at Ernst & Young, director of planning and government affairs at the University of Chicago Medical Center, and a fiscal and policy analyst for the governor of Illinois.

Goldsmith is the author of four books and many articles. He lectures on a range of health care topics at the Wharton School of Finance and the University of Virginia. He is frequently quoted in the press and serves on the editorial boards of Health Affairs and Managed Care. Goldsmith earned a bachelor’s degree from Reed College and a doctorate in sociology at the University of Chicago. He spoke recently with Managed Care Editor John Marcille.

Managed Care: What will the new composition of Congress mean for the Affordable Care Act?

Jeff Goldsmith, PhD: For all of the huffing and puffing, the ACA is going to remain largely intact, and that isn’t just because the Republicans don’t have enough votes to kill ACA. Plus it would be suicidal politics to take coverage away from 10 million people. But Republicans could certainly do a lot of damage to the law. The Independent Payment Advisory Board and the Patient-Centered Outcomes Research Institute are unloved and imperiled pieces of the ACA. The medical device excise tax and the Prevention and Public Health Fund are also vulnerable, as is the CMS Innovation Center. The Supreme Court is actually a much bigger threat than a Republican Congress.

In the last five to seven years, you’ve seen the executives of large health care enterprises vault over the surgeons and radiologists in the food chain.

MC: It’s not a popular law overall.

Goldsmith: My daughter Amelia is an ACA navigator in Virginia and has spent the last 15 months signing people up for health insurance. She says everyone has a strong opinion about the law but almost no one knows what’s actually in it for them. The administration committed so much political capital to making the ACA happen that when they finally got the billed signed, they basically said, “We’ve got to pivot to the economy right now and didn’t bother to explain to people what was in their own bill. They permitted the opponents of this law to define it.” Even people who are massively helped by the ACA have a negative opinion of it.

MC: How did insurers make out under reform? Was it net positive?

Goldsmith: This is turning out a lot better than many people expected. For the previous decade, fully insured lives for our commercial insurance sector were going down by 1 million a year. Anything that produced new commercial customers for these companies had to be positive. However, other public policy changes have helped the industry as much as the ACA has. The significant growth in Medicaid managed care and in Medicare Advantage has made a more significant contribution dollarwise.

MC: And that is in spite of the ACA rate controls and MA cuts?

Goldsmith: The Congressional Budget Office forecast that the changes in Medicare Advantage rates embodied in the ACA were going to take Medicare Advantage enrollment down as low as 6 million. It is now 16 million, 30% of the program. MA is the future of Medicare.

MC: And Medicaid enrollment has grown.

Goldsmith: The sharp lurch of Medicaid enrollment toward private health plans is something that was going on before the ACA was enacted. It was a response to governors around the country needing to do something about their Medicaid spending even before the recession. But the increased involvement of private insurers in these two public programs markedly increases the cyclical risk to the industry. In other words, when we have another recession, the capitation rates that states are paying to health plans to manage Medicaid lives are going to be reduced. It’s inevitable.

MC: How will that affect beneficiaries? Is quality of care going to decline?

Goldsmith: The rate reductions will pinch, but quality has been rising. Anything that can be done to better organize how care is provided to these two large government-funded populations can only help beneficiaries. The only way you are going to be able to sustain Medicare and Medicaid long term is to identify the pockets of health risk within those populations and to do something proactively to address them, and to control episode costs better when people do get sick.

MC: Are you seeing evidence of that?

Goldsmith: It is why I thought decisions like WellPoint’s to acquire CareMore or DaVita to acquire HealthCare Partners were important. These were incredibly sophisticated managed care organizations that focused a lot of energy on sick populations and that also had significant public enrollment. The intellectual property in organizations like that is going to be incredibly valuable long term, even if there are challenges in scaling the organizations up.

MC: You mentioned targeting pockets of these populations.

Goldsmith: I am in a narrow-network MA plan, and I have had a couple of conversations with my carrier about them sending a nurse to my house to examine me and talk about my health. I declined. I am really healthy. I will probably have a different answer for the person calling to send the nurse to my house in 10 years. Right now, I don’t need the nurse or a medical home. But a lot of people my age are already in serious health trouble. The real art form here is realizing that the risk is lumpy and in fitting the care model to the specific constellation of the patient’s risk. Figuring out how to segment the risk and building the care models that fit that risk most closely is really going to be the secret. One size, one scheme, does not fit everyone.

MC: With so much change and uncertainty in the market, where else should insurers be focusing on in terms of business strategy?

Goldsmith: Nearly everybody in Washington underestimated the rate of growth of the individual insurance market — and they still are. CBO said it would rise to 29 million as a result of ACA. I think it will be more like 40 million. The small group market is rapidly collapsing into the individual market via the exchanges. A lot of the large group market will also individualize through private exchanges as big employers attempt to create an off ramp as they approach the Cadillac tax in 2018. So I think 40 million is an intermediate stopping point on the way to at least 60 or 80 million. The next recession will contribute a further wave of exchange-eligible folks.

MC: How can insurers adapt?

Goldsmith: What does it mean to be an effective actor in a consumer market? It is actually both simpler and harder than people think. The fundamental fact of the health care consumer now and in five years: They don’t have any cash. So this idea that you create a benefit structure where the family has $5,000 of their own money at risk before they get actual coverage is not going to work. A lot of them don’t have the $5,000. People are going to not get care that they need. They are going to not fill prescriptions that we want them to fill and use, or not follow up on referrals.

MC: This is so obvious. Why don’t people talk about this?

Goldsmith: I don’t know. I was a big advocate of consumer-directed health care because consumers do need skin in the game, but the issue is where and how much do you want their skin exposed? You don’t want them to not take their medications or not go to the emergency room for a condition like a stroke that could leave them crippled. Enrollment in consumer-directed health plans has been almost dead flat for three years, according to the 2014 Kaiser/HRET survey. How do we get the risk that we are shoving off onto families in this model to be manageable risk and encourage them to make healthy decisions instead of just saying that all use of health services is a problem and that all illness is somehow their fault?

MC: Health plans have adjusted benefit structures in areas such as preventive care.

Goldsmith: Some have, but we are just not there yet. Why don’t we start paying people to show up for all their prenatal visits? Why don’t we give people cash incentives to renew their prescriptions, or to find a cheaper place to have their hips done, not just by making the copayments go away but by writing them a check? If consumers are reducing the downstream risk of a serious medical event or saving the insurer money, we ought to give them a piece of the saving. Send them positive signals about what you wanted them to do. My MA carrier sent me a $50 voucher recently, but for the life of me, I couldn’t figure out what I did to get it or how to get another one — and I am not unacquainted with our health system. Maybe that nurse would have told me. Clearly people are beginning to grope toward this idea that simply having a $5,000 fence between me and the medical care system probably isn’t a good benefit design. But they haven’t yet sent me a clear set of economic signals about what they want me to do. That’s the heart of it.

MC: The plan could be providing something you value?

Goldsmith: I shop at Walmart. I like the idea of saving $2,500 a year on things that are essentially commodity items that Walmart can buy cheaper than anyone else. Health insurers that win are going to be the ones that can create demonstrable reductions in out-of-pocket outlays for their subscribers — to do the equivalent of what Walmart is doing for me. If my health insurer can figure out a way for me to avoid spending $2,500 I would rather not spend on medical care, I am going to re-enroll.

MC: We keep hearing about lifestyle changes and decisions.

Goldsmith: Some illness is our fault; most of it isn’t. The real waste in our health care system is what happens after people do get sick and require acute intervention. That intervention is poorly scripted and poorly managed and there are still incentives operating within the provider community that are inducing care that probably isn’t producing value for society. It is our response to the illness that isn’t our fault where many billions of dollars are wasted.

MC: Cost increases have been low for a while. You have a talk entitled “Is the Health Cost Dragon Dead or Sleeping?” Which is it?

Goldsmith: The pause in cost increases is durable. The dragon might be on extended holiday in the Seychelles. We are going to be in mid-single digits for a very long time. This has been a remarkable last six years, and unlike the CMS actuaries, I don’t think it’s over. They forecast that 2014 would be a 50 percent acceleration in cost growth. I don’t see it. We have had four-and-a-half years of boomer enrollment in Medicare, and yet Medicare costs are barely growing at all per beneficiary. I don’t see technologies out there that are sufficiently powerful to break it loose. I don’t see anything except Sovaldi, the hepatitis C drug, that is breaking out on the up side.

MC: And Sovaldi, even at $84,000 for a course of treatment, is going to reduce costs in the future.

Goldsmith: It certainly is, at a very steep price. People don’t think about all of the liver disease that we have avoided. We cured a horrible disease that affects 3.2 million people, and every one of those folks was eventually going to lose their liver unless something else killed them first. We actually need to start curing diseases. Alzheimer’s disease would be my next candidate. Let’s get busy. Let’s cure Alzheimer’s and then we can complain about the cost.

MC: I’m with you. And speaking about complaining, are salaries in health care appropriate?

Goldsmith: In the last five to seven years, you’ve seen the executives of large health care enterprises vault over the surgeons and radiologists in the food chain. A lot of physicians are rejoining the middle class in terms of income levels. What’s happening to advanced practice nurses vs. primary care physicians is really interesting. Certified registered nurse anesthetists and masters level ICU and surgical nurses are making north of $200,000 in some markets. Market forces are adjusting what people are getting paid to their value. On the issue of executive salaries, some of these big health systems are $10 billion to 15 billion operations — and they are a lot more complicated than a typical $10 billion corporation. So is paying those guys $5 million a year paying them too much? They don’t get stock options. Some of the big insurers are $60 billion to $80 billion companies. There’s a lot of capital at risk and a lot of investor equity at risk in how those organizations perform. The argument that executive compensation is out of line because these organizations have scaled up to the size they are is a little bit hard to swallow. Compensation is not where the waste is. The waste is in all the layers and the unnecessary bureaucracy and the wasted time and motion in medicine.

MC: Are hospitals going to keep buying physician practices?

Goldsmith: There has been roughly a 50 percent increase in the number of physicians employed by hospitals in a decade. It has been an economic disaster for the hospitals. According to the MGMA, in 2013 the average hospital-employed doctor lost the hospital $206,000. Physician economic risk is surging into hospitals. There’s a lot of soul searching going on right now about how many of these contracts hospitals can afford to renew and at what price. A lot of the big losses were due to the collapse of private cardiology that took place in the wake of the Deficit Reduction Act cuts in high-tech imaging. All of the sudden, the practices that were dependent on imaging were no longer viable and they were all for sale. For a hospital, it really wasn’t a negotiation. If your leading cardiology group comes to you and says, “We really can’t remain private any longer and we would love to come work with you if we can work out a really good long-term salary guarantee. Would you like all of our procedures or none of them?” That happened all over the country. Hospitals ended up with guns to their heads making these terrible contracts — with cardiologists, oncologists, and orthopedists — the imaging-dependent specialties. It wasn’t just primary care physicians that couldn’t find a place to go. Reducing those physician practice losses may be the single most important thing that hospital executives are trying to do in an environment where their top line isn’t growing.

MC: What’s the answer?

Goldsmith: One big question people are going to be asking is, “Do I need to employ them or can I contract with large groups to provide my physician services?” For a significant chunk of the so-called hospital based physicians, there are alternatives available in the form of national groups, and in some cases regional groups. Another piece is, “If I am in managed care contracts, where there is some risk to me, do I really want to pay my physicians on the basis of relative value units — RVUs? Would that encourage them to order more tests or to hospitalize patients? It may damage my ability to be eligible for performance bonuses or to make money under a capitated contract.” There is going to be tremendous pressure on hospitals to rethink the compensation model.

MC: What will the new models look like?

Goldsmith: The footprint of physician employment is probably going to shrink somewhat. So what structures are going to emerge in the physician community to absorb some of the docs who don’t want to be employed by the hospitals? That’s where a lot of the uncertainty is. I think you are going to see a lot of large regional physician groups emerge. In Florida and a lot of other places, 10- and 20-person groups are merging into 100-person groups. You get up to 100 people, and you really do have the administrative support and scheduling flexibility to begin taking on younger physicians who don’t want to work 100 hours a week.

MC: Are super-large groups going to have increased bargaining power with the payers?

Goldsmith: Payers are going to welcome an alternative to having the hospitals control all of the doctors. It is powerfully in the insurers’ interest to support those independent physician groups because they are probably going to have lower overhead and lower per-capita medical costs.

MC: And less propensity to refer to hospitals and hospital-based services.

Goldsmith: Correct. It’s going to be a challenge because there has been a lot of mistrust between physicians and insurers historically. But the idea that payers could be completely dependent on hospitals for hospital and physician services really narrowed their bargaining power.

MC: So this improves the insurers’ position?

Goldsmith: There’s a lot of potential leverage available to insurers for having some diversity in that physician base, particularly if bundled payment emerges as a viable concept. It would be a disaster if the only potential receptors/managers of the bundles were hospitals. Physician groups are fully capable of organizing physician-centric care models that manage patients for oncology, for joint replacement, and for some of the complex episodic care that best fits the bundling model. And insurers have a tremendous opportunity to foster multiple choices for their patients if they are willing to share some of the savings with them. They have to make sure that physicians are at the table and that they have an opportunity to participate in the new care models.

The idea that ACOs work and multiply and somehow evolve into capitation is just a mass hallucination. It isn’t going to happen.

MC: You like bundled payment?

Goldsmith: I am really bullish on bundling, in major part because of the Geisinger and CalPERS experiences. I think we are going to see a diversity of payment models. But one trend I am not buying is the move to population health payments. When I go to health care meetings right now, it’s almost unanimous that we are going to move from fee-for-service to population health, which to me means capitation. I don’t see capitation growing at anywhere near the rate that it would need to grow to be even a tiny fraction of the total provider payment in the country anytime soon. Most of the commercial ACO deals that are happening — the non-Medicare ACO deals — aren’t capitation. There aren’t a lot of these deals and nearly all of them are one-sided risk with fee-for-service playing loudly in the background. There’s a discount on the front end and an opportunity for the provider to earn back some of the discount by checking the right boxes. But the idea that ACOs work and multiply and somehow evolve into capitation is just a mass hallucination. It isn’t going to happen. The vast majority of providers are not now and never will be risk-bearing enterprises.

From an insurer’s standpoint, it is difficult to find a more favorable contracting environment than the one we are in.

MC: What is affecting contracting talks right now?

Goldsmith: From an insurer’s standpoint, it is difficult to find a more favorable contracting environment than the one we are in. Remember back to the birth of the PPO, when there was a tremendous amount of anticipatory discounting by providers. They were willing to give discounts because they were worried they were going to be locked out of narrow networks or were greedy and wanted to grow at their neighbor’s expense. Well, of course, almost none of them were locked out of those networks; they just gave up huge chunks of their previous rate structure. I think that’s happening again except that some providers are getting locked out this time. Insurers are trying to lower their per-unit cost of procuring hospital and physician services. There’s a lot of panic pricing going on in the hospital world right now, because many hospital executives really believe that if they give a huge discount, they will be rewarded with increased volume. Hospitals are giving up discounts far in excess of potential rewards that are going to accrue from new volume coming in. I think that is one of the things that will help health plan earnings and keep the cost trend from rising.

MC: Thank you.

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