Self-Directed Health Plans: Alternatives to Managed Care Enabled by New Technologies.

NEW APPROACHES TO organizing, purchasing, and financing health care services are rapidly emerging as viable alternatives to the managed care model. These include HealthMarket's self-directed health plans (SDHPs), which represent a new paradigm for health insurance. These plans also succeed in creating financially viable freemarket solutions to many problems facing America's health care system.

These approaches are made possible by a convergence of trends:

* Improved Internet-based patient education tools.

* Emerging capabilities to finance health care services using episode allowances, rather than capitation or traditional managed care strategies.

* Widespread dissatisfaction among consumers with the managed care concept and an increasing willingness to consider new alternatives.

* Employer attraction to defined contribution strategies for fixing health benefit liabilities.

Self-directed health plans become even more likely as the Internet drives price and quality transparency within the health care services sector, just as it has in virtually every other sector of the American economy.

Starting in January of 2001, insurers and health plans will begin offering our plans in selected U.S. markets, giving patients and their physicians the autonomy to make decisions regarding which services should be provided and from whom. These plans remove most elements of managed care, including gatekeepers, pre-certification review, second opinions, concurrent review, and case management. Instead, self-directed health plans let patients and physicians decide how insurance funds should be spent. While this approach intuitively leads to wildly escalating health care costs, it employs actuarial strategies that are expected to reduce the cost of insurance.

Managing costs without managing care

To understand how self-directed health plans will manage costs, it is helpful to divide health care spending into: (1) routine services, (2) acute and chronic care, and (3) catastrophic care. SDHPs use different strategies for each of these categories.

I. Routine services, such as office visits and diagnostic tests, are difficult for managed care organizations to control. Gatekeeper strategies and capitation arrangements generally cost as much to administer as they save in health care spending. At the same time, they aggravate the more than 80 percent of insured subscribers who consume less than $500 annually in health care services.

Perhaps equally compelling, insuring routine health care services is a poor use of the premium dollar. These services are highly predictable and arguably should be funded through a medical savings account or out-of-pocket. Attempting to control routine services is a waste of time and it's better to simply reimburse providers on a fee-for-service basis.

2. Acute and chronic care services are where the engines of managed care work the hardest. Seventeen percent of the insured population consumes more than 63 percent of the medical dollars when obtaining acute and chronic care.

Most studies of health service utilization have shown wide variance in resource consumption for acute and chronic care patients with virtually identical conditions. Certain regions can be two to four times as expensive as other areas, and even physician groups a few blocks away from one another in large cities can have widely disparate resource consumption patterns for treating the same condition. The managed care model, whether driven by capitation or case management, attempts to reduce these variances by controlling physician behavior.

Self-directed health plans are managing acute and chronic conditions by creating an allowance for the "episode" of care. For instance, a man who decides to have a radical prostatectomy for his prostate cancer would receive an allowance equal to the average cost for treating this condition in his geographic region. Depending on the design of his insurance plan, costs exceeding this allowance may be borne entirely by the patient, or for a slightly higher premium, he may have a maximum exposure of $500 to $1,000. Either way, there is a strong financial incentive for the patient to pay attention to the cost of health care and to work closely with physicians in making sure they are not wasteful.

Disease management companies, integrated delivery systems, individual practice associations, and some physicians groups are already offering package pricing for selected episodes. This form of reimbursement is less risky than capitation for health care providers. Rather than taking the risk for an entire population of patients, providers are simply agreeing to deliver a limited range of services to patients with a specific diagnosis-all at a fixed episode, or case rate. Case rates have been common for transplants and other expensive interventions, but are just now being utilized for less expensive acute and chronic care conditions.

3. Catastrophic care services, including neonates, transplants, and traumas, are still believed to be best handled within centers of excellence. Self-directed health plans are contracting with them and making those services available. However, subscribers are free to opt out of the program and seek service wherever they choose--however, their reimbursement will be limited to an episode allowance. For instance, a heart transplant may have a $150,000 allowance limit for patients seeking care elsewhere. However, there will be no limit, and thus no out-of-pocket exposure, when using the center of excellence program.

Insurance actuaries are particularly fond of the episode allowance model of reimbursement for acute and chronic care. Self-directed health plans can achieve wider variability in premium price levels. Also, the "schedule" of episode allowances increases the predictability of health care costs. Perhaps most significantly, SDHPs introduce more patient responsibility for spending decisions and budgeting. Any physician who has ever participated in a capitated reimbursement program knows that he or she is only partially responsible for excess utilization. Patients drive a considerable amount of the demand for health services. The managed care model of payment, with limited co-pays, encourages excess patient demand for services.

Emerging market for episodes of care

Self-directed health plans will be less expensive than managed care programs and offer greater predictability in health care spending. For health care providers, SDHPs' reliance upon episode allowances will create a new market for packaged or bundled services.

Essentially, providers will be paid to provide solutions, not just treatment. This could represent a new model in which physicians accept a risk-adjusted payment and provide a warranty that they will do whatever necessary until the patient has reached the reasonably expected health status. For instance, orthopedic groups may be required to provide warranties for hip replacements. This is a radical departure from the fee-for-service or capitation system.

Early adopters buy into concept

Initial buyers of these plans will be early adopters who are seeking more control over health care spending and want to get rid of the managed care oversight. Insurers expect that subscribers who pay their own insurance premiums will be attracted to these programs. Additionally, Internet-savvy employees within large groups and "new economy" companies, in which all employees have access to the Internet, will also be interested in this alternative to conventional managed care offerings.

As more providers offer package pricing for these plans, more people will join. Providers offering fixed, episode-based payment rates will attract these first buyers and position themselves for the onslaught of enrollees that will be drawn to these programs.

The purchasing power of an HMO--in the hands of individual patients

Self-directed health plans will become dependent upon Internet-based exchanges, where patients can quickly determine the actual price providers are willing to accept for specific services. Consumers can go online and find prices for virtually any other product or service they purchase in the American economy--but were only very recently empowered to view negotiated payment rates for physician services.

Online exchanges are now publishing negotiated payment rates, obtained from networks of providers, such as PPOs, IPAs, and integrated delivery systems. Within a few years, consumers will be able to log onto these exchanges, look up a physician in their neighborhood, determine the lowest discounted rate available to them, and discover a range of quality information about that physician. Some exchanges are planning message boards for every physician in America, where patients can enter their comments as they do on popular websites, such as eBay or Yahoo! Patients will soon have access to information about volumes, patient satisfaction, educational background, and sanctions about every health care provider.

For providers, these exchanges can be a welcome alternative for offering their services. Managed care plans pay the top physician at the nation's leading teaching hospitals the same as a recent graduate of the same hospital's residency program. This is not fair. The best physicians should be paid more. Unfortunately, the patients are in managed care plans and the only way to obtain reimbursement is through these monotone financing schemes.

Online exchanges introduce variable pricing, in the same way it exists in every other sector of the American economy. Better doctors, with the highest patient satisfaction, highest volume of services, and best outcomes can receive higher reimbursement. Additionally, variable pricing by time of day, or day of the week, will attract increasingly price conscious patients who have limited funds available to them in an episode allowance.

Health care exchanges represent the first small step in allowing physicians and patients to directly access one another. They will be a threat to health plans that don't embrace them and recognize their inevitability.

Patient experience--information tools

Patients are being empowered with information at an unprecedented pace in health care. They will soon be able to go online to evaluate provider performance, determine the best pathway for their treatment, and access leading edge ombudsman services--making them smarter consumers of health care and increasing their prospects for health and healing. Quality information will be organized from Medicare discharge abstracts, patient surveys, and, most importantly, voluntary reporting by health care providers.

The leading health care exchanges already allow individual physicians, medical groups, and hospitals to self-report volume and quality information. This honor system will surely be abused, but will reward providers who are the earliest to post their credentials.

Decision support tools will proliferate over the next few years. Most health plans today run 24-hour nurse lines that utilize standardized decision logic from companies such as Access Health. These tools, and new ones financed by venture capitalists, will increasingly empower patient self-care for more complicated services.

Other companies, such as Active Health, have developed systems that scan laboratory, prescription, and claims data to identify patients with selected conditions and to initiate outreach services to support their decision-making, as well as find provider mistakes and alert physicians. Self-directed health plans are embracing these new technologies. Many are making disease management services an optional a-la-carte service. Instead of acting as the "heavy" in attempting to steer patients, the SDHPs use disease management companies as "ombudsmen" to foster improved patient care.

Episode allowances--new financing tools

Regression analysis on massive health care claims databases has enabled our SDHPs to define episodes of care, which are codified into computer programs that are applied to medical claims. These systems identify patients entering an episode of care and contact them via email or telephone, to remind them of their episode allowance and ask if they need help in managing their health services.

Organizing payment for services into episodes is about the most complex challenge in the health services sector. Fortunately, experts have refined their ability to "risk adjust" patients, based on co-morbidity or other complications. These extenuating circumstances increase the episode allowance for each patient on a real-time basis.

Patients who know they are entering an "episode" can choose an existing team that has agreed to a fixed reimbursement or create their own and assume the financial risk associated with exceeding the episode allowance.

Technology--the driving force

None of this would be possible without the software and hardware necessary to build these administrative systems. As three-tier systems architecture has evolved and application portability through software such as JAVA has become standard, systems can be quickly developed in a modular fashion to accommodate this new approach to health care organization and financing.

These administrative systems must be developed for use by multiple insurers and health plans, essentially creating the "operating systems" for this new generation of health insurance plans. Rather than trying to become an insurance company that dominates the market for a new type of product, the smarter path is to focus on becoming experts on the technological challenges associated with creating and administering self-directed health plans.

Managed care--midlife crisis

Self-directed health plans are made possible by consumer anxiety over managed care. But employers and health plans themselves are struggling with the legislative onslaught against managed care and the liability associated with many of these new laws and regulations. HIPAA, the Patient's Bill of Rights, and class action lawsuits are making managed care less attractive to the very companies that deliver these services.

What doesn't work as expected in the managed care model? For starters, gatekeeping, pre-certification, and even capitation were all attempts to modify the behavior of practicing physicians. None of these strategies can be viewed as an unqualified success.

Within those markets where capitation became the dominant form of health care financing, widespread insolvencies are becoming common. California is the best example of this carnage. Very few medical groups, individual practice associations, or other provider organizations that are accepting global capitation have the necessary resources to meet risk-based capital rules established by the National Association of Insurance Commissioners.

No surprise, given that a shrinking portion of the insurance dollar has been going to the provision of health care within these capitated models. Many health plans pay just 85 percent of the collected premium to a delivery system accepting the majority of health care financing risk. After these delivery systems, IPAs, and ISDNs spend 15 percent on their own administrative services, there is less than 70 percent of the original premium dollar available for health care services. Consequently, many physicians in these capitated arrangements are becoming familiar with adjusted fee-for-service payments that are well below Medicare payment rates.

But health care providers aren't the only ones unhappy. Patients clearly want something different. Virtually every other component of an American's life has been enriched with more choice, freedom, and personal control. Health care remains an arcane field in which patients don't know the price of services they receive, are completely incapable of determining the qualitative differences among providers, and have no "skin in the game" when it comes to managing spending. This is dysfunction of the highest order and it should surprise no one that the system fails on so many fronts.

Employers will lead change

Employers may be most upset. Premium inflation has accelerated to shocking levels. One of the nation's largest national health plans recently enacted 33 percent rate hikes, on average, for its entire block of business in the small employer segment. Ten to 20 percent premium increases are not uncommon in the middle market and even the largest, most influential employers are finding premium rates rise 8 to 12 percent.

Their employees are still protected by the boom economy. Few employers are willing to pass these costs on to employees, in the midst of such a tight labor market. However, any slowdown in the macroeconomic performance of the American economy will accelerate the focus on health care costs and lead to changes in the way employers are managing health care benefits. This is the same dynamic that accelerated HMO growth in the late 1980s and early 1990s.

Employers are particularly attracted to the concept of defined contribution. Shifting their pension liabilities to a defined contribution model saved employers from a financing debacle. Health care now represents the same crushing liability that caused employers to shift away from defined benefit to defined contribution strategies within the pension arena.

Large employers also have the power to demand change. They are starting by demanding more data from their health plans to identify which providers and provider groups are more expensive. They also use this information to measure quality. Large employers are in a position of power to promote the shift to episode-payment arrangements, by implementing self-directed health plans and using their market muscle to encourage local delivery systems to offer package pricing for episodes of care.

Employers also see episode-based payments as a first, small step toward direct contracting with health service providers. This fits with the way many larger health care providers already view themselves. Many hospitals, physician groups, and specialty service providers are already attempting to market directly to the patient, yet the managed care financing system does not reward this type of marketing. Patients often have no freedom to seek services from any provider, but instead must remain in a small network of capitated providers. Thus, advertising by providers becomes a waste of money. Conversely, episode allowances give patients freedom to shop for services. This rewards providers who promote their services directly to patients and, ultimately, gives them more control over their destinies.

Good news for health care professionals

Self-directed health plans represent a return to a simpler time, when there was less oversight by managed care plans and more control by physicians in how health care was delivered to their patients. These plans eliminate gatekeepers, pre-certification requirements, and concurrent review services.

However, they introduce real world responsibility--most significantly, budgets for each episode of care. Fortunately, for providers, this is consistent with how they understand the health care system. Orthopedic surgeons understand how to manage costs associated with a hip replacement, but have difficulty participating in capitation programs in which over-utilization and excess spending may be caused by providers in their IPA, but over whom they have no control. The plans also offer a wider range of premium levels, while encouraging a greater focus on quality.

Most significantly, episodes encourage a focus on healing, not just treatments. Intrinsic to the idea of episode reimbursement is the idea that a provider team should deliver a "solution" to a patient. Although success can never be guaranteed in health care, physicians will have powerful motivations to think not just about their treatment actions, but how the patient can achieve healing faster.

Few people believed the Internet would have much impact on the delivery of health care services. However, combined with technological advances in how computer systems are structured and implemented and knowing what doesn't work in managed care from bitter experience, the Internet is being used to create a new paradigm of alternative health insurance products. These products hold the potential to change for the better the face of health care as we know it.

Stephen F. Wiggins, is Chairman and Chief Executive Officer of HealthMarket, Inc., a pioneer in self-directed health care. Prior to founding HealthMarket, he also founded and served as Chairman of the Board and CEO of Oxford Health Plans. Under his leadership, Oxford grew to become one of America 300 largest corporations achieving revenues in excess of $4.3 billion. Wiggins sewed on President Clinton's Healthcare Commission that drafted the Patient's Bill of Rights.

KEY CONCEPTS

* Self-Directed Health Plans (SDHPs)

* Defined Contribution

* Medical Savings Accounts (MSAs)

* Episode Allowances

* Episode-Based Payment Rates

* Internet-based Exchanges

Few people believed the Internet would hove much impact on the delivery of health core services. However, combined with technological advances in how computer systems are structured and implemented and knowing what doesn't work in managed care from bitter experience, the Internet is being used to create a new paradigm of alternative health insurance products. These products hold the potential to change for the better the face of health care as we know it. Self-directed health plans will be less expensive than managed care programs and offer greater predictability in health care spending. For health care providers, SDHPs' reliance upon episode allowances will create a new market for packaged or bundled services. Providers will be paid to provide solutions, not just treatment. This could represent a new model in which physicians accept a risk-adjusted payment and provide a warranty that they will do whatever necessary until the patient has reached the reasonably expected health status. This is a radical departu re from the fee-for-service or capitation system.

                      Health Care Spending Categories
Percent of Percent of Health                        Payment Coverage
Population Dollars Spent
1%         25%                    Catastrophic      Fully covered
                                      Care
                                                    Episode or treatment
17%        63%                                      allowances
                             Acure and Chronic Care
                                                    Subject to fee
                                                    schedule limits or
82%        12%                  Routine Expenses    payments deducted
                                                    from an MSA
HMI's Self-Directed Health Plans Feature Episodes of Care which
uniquely focus on acute and chronic care, the largest slice of
the healthcare pyramid.