The best book I’ve read to help understand the underlying dynamics of healthcare’s under-performance is David Goldhill’s “Catastrophic Care: Why Everything We Know About Health Care is Wrong.” Goldhill goes into great depth on the destructive dynamics of having what he calls “surrogates” — i.e., insurance companies — between us and clinicians. It’s not the simplistic demonization of insurance companies one often sees. In fact, Goldhill argues that health plans are acting quite rationally within an irrational set of circumstances.

While this article could be perceived as an attack on health plans, it should be viewed as an attempt to describe the implications of the irrational set of circumstances health plans have been put in as well as the logical response by employers. My friends at health plans/companies such as Aetna, Anthem, Cambia, CIGNA, Guidewell, United Healthcare and others know these dynamics better than I do and most are diversifying into new businesses. The critique in this article is of the health plans that aren’t being proactive.

For those health plans whose organizations haven’t internalized what I outline here, I’m regularly brought in by health plan executives to deliver a message that is sometimes best heard if it comes from an expert outside the company. At the same time, there are so many diversification opportunities, my talks are meant to inspire creative thinking about ways to capitalize on healthcare’s trillion dollar disruption and how to avoid zero-sum game thinking.

Health Plans Rational Response to Attempts to Limit Profits

ACA proponents held out hope that the Medical Loss Ratio cap(putting a max percentage that could go to non-care costs) would be an effective way to control healthcare spending. I’m no economist but the response was obvious. After a decade away from healthcare, the first piece I wrote after returning to healthcare was Health Insurance’s Bunker Buster not long after the passage of the ACA. One of the two reasons I expected health insurance companies to eventually get blown apart was that capping the “profits” of an insurance company at a percentage will simply encourage the health plan to increase the denominator. After all, they feel a duty to increase profits. The only way to do that is to accelerate the growth of healthcare spending. Goldhill came to a similar conclusion: The continued hyperinflation of premiums would accelerate the employer realization that they need to take matters into their own hands and disintermediate health plans. A growing number of employers are doing exactly that.

I had a chance to sit down with Goldhill recently for a fascinating discussion to inform the documentary I’m working on (as a subject matter expert) as well as to share with him some of insights captured in the Health Rosetta. While Goldhill did a stellar job on diagnosing healthcare’s major problems, he has a demanding day job as the CEO of the Game Show Network. He appreciated the fact that I’ve spent more time on the “prescription” for the problems. As an intellectually curious individual, Goldhill was determined to learn more about the components of the Health Rosetta such as value-based primary care and transparent medical markets that are among the only things that have achieved the Quadruple Aim — in particular, slayed the healthcare cost beast.

(Disclosure: As I’ve disclosed many times, the Health Rosetta is an open-source project that provides a reference model for how purchasers of healthcare should procure health services. In my role as managing partner of Healthfundr, a seed-stage venture fund, the Health Rosetta is the foundation of our investment thesis.)

What’s the Value of a Health Plan?

One particularly interesting part of the conversation was talking about the value of a health plan. I made the comment that any company over 100 employees or so is an insurance company in all but name. The wise ones are already self-insured. Goldhill made the point that any company providing health insurance to their employees is essentially “self-insured.” Why? He rightfully points out that if a company has claims over the amount that the insurance company planned to achieve their profit target, they’d simply get it back in the following year through increased premiums. Anyone who has had to buy health insurance for their employees knows this to be the case. It’s one of the reasons self-insuring and working with TPAs is appealing to many companies. Once they do this, transparency into what is actually happening proves to be eye-opening

HDHP and Self Insurance trends

HDHP and Self Insurance trends. Source: Cascadia Capital’s The Future Health Ecosystem Today report

This led to a broader discussion of the value of a health insurer. The first filter I put on anything in healthcare is whether it helps or hurts the achievement of the Quadruple Aim. We went through all of the “aims” to assess the story for traditional health plans:

          • Do health plans improve the care team experience? No. The #1 driver of doctor burnout is dealing with bureaucracy associated with insurance companies.
          • Do health plans improve the patient experience? No. As I havementioned a few times, the lowest consumer Net Promoter Score of any industry is given to the health plan industry.
          • Do health plans improve outcomes? Not that I’m aware of. I’d imagine there is some evidence of this somewhere but I haven’t seen it. In part, it’s due to the previous item — despite the good intentions of health plans, people don’t welcome random calls from their health insurer with someone they don’t know asking them questions ostensibly to help improve outcomes.
          • Do health plans lower costs? Resounding no. As mentioned earlier, lowering costs is against their economic interests. Goldhill does a terrific job of shedding light on that dynamic.

Estimates vary but I typically hear anywhere from one-quarter to one-third of healthcare spending goes to administrative/insurance costs (taking into account all sides of the equation except the patient side which is typically assigned no value). Naturally, one would expect commensurate value for that level of spending. In light of the Quadruple Aim assessment, it’s not hard to see the push for disintermediation.

This situation begs the question, “what do health plans do that couldn’t be done better by an algorithm?” It’s clear that the blue chip investors backing Collective Health such as Google believe algorithms will better serve self-insured employers than traditional approaches. There is only one thing that I can think of that an algorithm would be challenged to deliver — health plans have salesforces that are effective at selling to employers. Some will say creating a PPO Network is a key part of their value. That may have been true at one time when they may have negotiated special pricing with particular providers. Today, most PPO Networks are little more than glorified yellowpages. The high quality transparent medical markets, in contrast, have solved healthcare’s most vexing problem— pricing failure. It’s common for the prices in a transparent medical market to be 40% lower than a so-called PPO discount because the process is radically streamlined for all parties. The results are a huge benefit to providers, employers and employees in these situations.

If you look at the The 7 Organizations That Will Turn Healthcare Upside Down In 2016, one way or another they are coming hard at traditional health plans as they see their vulnerability. This isn’t lost on the wise health plans. One of the biggest players has made some major/smart moves with a new brand (Harken Health) and healthcare delivery system geared towards the public exchanges. Harken Health and ZOOM+ Performance Health Insurance are the two most compelling public exchange offerings I’ve seen — in a sense, they are Kaiser Permanente 3.0. Most of what’s on the exchanges are retreads of B2B offerings optimized for the era of underwriting and pre-existing conditions. Harken (via their partner, Iora Health) and ZOOM+, in contrast, are more than able to profitably handle exchange customers where there isn’t traditional underwriting. Unfortunately, many health plans haven’t woken up to the massive impact from the fact that millennials are now the biggest chunk of the workforce and are cleaning up the mess left by their Boomer parents.

Current health plans are so bad, some millennials would rather clean their toilet than understand their health plan. As I’ve said before, most employers are pouring more than enough money to fully fund a great health plan and a comfortable retirement. The reality of this is hitting millennials parents as most Boomers are finding their health benefits costing more and delivering less while they have woefully underfunded retirement accounts. Millennials won’t accept this appalling benefits status quo particularly when it’s not hard to find a model Health Rosetta benefits plan that some employers are using to get a far better value proposition.

When I speak at health plan-related meetings, I’m frequently asked to expand on the Health Rosetta Principles that specifically apply to new health plans (#80-89) so that organizations can direct their future investments appropriately. Wise health plans are recognizing that they need to decisively target/acquire startups that are on the rise and built for the new ecosystem. For the startups reading this, I wrote about how to address unsolicited offers. Paul Graham shared his perspective from the general technology arena. The health plans potentially acquiring startups benefit from understanding the perspective of the startups based on the advice they are getting. My friends at Cambia Health Solutions (parents of Regence Blue Shield that serves the Pacific Northwest) are putting their talk into action as you can see with their portfolio. They are rapidly learning what does and does not work. Others would be wise to follow their example before they are disintermediated. Judging by the number of calls I get to speak at financial analyst events, healthcare’s trillion dollar disruption is being scrutinized by the investment community as the market shakes itself out.

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