Health care insurance executives have their hands full as they deal with the implementation of Obamacare, but they face even bigger challenges from more fundamental reforms driven by payers in the private sector.
They are dealing with what is often termed “disintermediation” — on several fronts. I dislike big, abstract words, but it applies to the revolution taking place as private companies change how they buy health care. It means getting rid of the middle man.
Health insurers are the ultimate middle men. They sit between the providers of care and the purchasers, and they traditionally have offered three functions: 1. Underwriting risk, 2. Setting up networks of providers who offer discounts in return for volume, and 3. Processing of claims and payments.
In the new world of health care economics, they are in danger of disintermediation for the first two functions.
Private companies are stampeding to self-insurance so they can control their own destiny as they manage their health care benefits. They don’t want to be in expensive insurance pools, hitched up to sluggish organizations that don’t aggressively manage care.
Already, 93% of large corporations with more than 5000 employees are self-insured, and almost 60% of all covered workers are in self-insured plans. The employers are taking on the health care risks, so the insurers are out of the underwriting game.
The health insurers do keep a piece of the game by offering stop-loss coverage, or reinsurance, to companies for big cases.
The second piece of disintermediation involves their discounted networks. Private sector payers are fed up with the chaotic prices offered by providers. Procedures can vary in a region by 300% to 400%. The ranges on prices are just crazy, even from hospital to hospital, clinic to clinic, in big care systems.
So the payers are demanding bundled prices, say $27,500 for a joint replacement. Further, they are setting caps on how much they will pay for a procedure — no more than $30,000 for a knee or hip replacement. Or, no more than $1500 for a colonoscopy.
These are called reference based prices (RBP), and they are being adopted by larger payers like Safeway, Kroger and CALpers, the California pension fund that buys health care for 1.3 million members. Wellpoint just announced it will initiate caps on 900 procedures in 2014.
That is a monumental shift away from medical bills that no one can understand.
The best medical providers, those that are good at what they do in terms of quality and costs, have no problem meeting those caps. Indeed, some are coming in with bundled prices below the RBP caps.
Even better, some hospitals and clinics are offering warranties with their bundled prices. If there is a “re-do” on a hip replacement, it’s on the house.
The next stage of payment reform is for those providers to post their bundled prices on a transparent web site. Get them right out there where everyone can see them, just like a real marketplace. The good news: it’s starting to happen.
Obviously, if providers post fixed prices, there is no place for discounts. The whole game of chasing discounts by pitting one network versus another goes away. Over time, the insurers could be out of the discounting function.
The health plans will still be ASOs – administrative service organizations – that do the transactions for companies. They are experts at computerized transactions. But that is a lesser role than they play today in servicing the private sector for health care.
Seeing a train, a new model of delivering care, coming down the tracks, some health plans are rapidly diversifying their businesses, including acquisitions of care providers.
Such disintermediation is what happens when disruptive business models take root. And there is no turning back. The current economic model for the delivery of care in America is just plain busted.
The private sector reforms will, of necessity, race ahead with little regard for the middle men being displaced.