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Insurance, Health Benefits, and Health Care Financing Allen D. Feezor First off, it is a delight to be here and see so many good friends and colleagues with whom I have had the pleasure of working while I was in Washington. In fact, I think I attended, when I was on one of the IOM panels in 1988 or 1989, one of the first Rosenthal lectures. So it is a plea- sure being back at this time. Actually at the risk of maligning Marion, she misled you a little bit. The fact of the matter is that she did not swap a speaker for me to show up here, she just couldn't get anybody else to follow Don. And Don, after seeing your presentation and having read the entire report, I felt that you did a superb job of breaking it down and putting it in a definable fashion, which I didn't think you could do in a 30-minute period of time. The reason I so readily accepted Marion's invitation was that I would not be spending much time talking about the quality measures and try to be on a par with Don, but rather I would talk about where a third-party payer I should say an employment-based health plan is at this time, in the plight of desperation that we have. In that regard, I think if we can begin to move our health care system in many of the directions that are laid out in the Chasm report, it is something I and many other employ- ment-based health plans will welcome. There are two big caveats right up front. First, I am not an employer. I will frequently jump over to an employer role, but I run a health plan for 1.2 million public employees. Second, the observations you will hear about our health care system are my own. If they fall short of the intellectual stimulation that you might have hoped for, then they clearly are my own. 22

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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING 23 I am a little like a congressional staffer. If they turn out to be very stimu- lating, then they are obviously a product of the board with which I work. What I would like to try to do in about 20 minutes time, is to give you just a little bit about what calPERS is or is not. Having spent my formative years in policy and having seen calPERS made into a poster child for man- aged competition, I think I probably have to do a little bit of correcting on that and tell you what it is and, more importantly, what it is not. I would also like to spend a little bit of time talking about what the marketplace in California is like and the frustrations that many of us on the payer side are currently having. Third, I would like to finish with this, the 2002 bids, which I can tell you for the first time publicly what our rates will be are a little bit short of what Wall Street was expecting. But more importantly, we must cast that in a framework in which now we try to say, "What does this Chasm report mean to us?" I will give a very few observations about some par- ticular points I think the report made that are like water in a dry desert, and something that I hope will be picked up and run with more broadly. Finally, I would like to come back and say a little bit about what calPERS is trying to do not that we are unique, but that we may symbol- ize a little bit early the frustration of employment-based plans at this par- ticular time. I will start where I hope to end, and that is that payers that is, em- ployment-based coverages are facing about four options, especially as we face the next 6 to 10 years of double-digit inflation due to the aging of our population. The first option is not to provide that coverage. If you have not looked at the most recent Mercer Report, from 1993 to 2000, the number of em- ployers of over 500 that are offering retiree health coverage, that is, retir- ees over 65, has dropped from 40 percent to 26 percent, a significant drop that accelerated even more than we thought in the late eighties when that was happening. The second option is what I refer to as death by incrementalism: con- tinue to whittle away at the benefits, continue to whittle away, and try to shift the cost from the employer to the employee. This is something I have been engaged in myself with my self-funded plan this past year. That is not a good option, and also what I call death by incrementalism. You then hope and pray that things will get better and that the funding-pricing cycle will return to your favor. It probably will not, given some of the demographics we are looking at. The third option is what I call put the money on the table and run- that is, defining contribution strategies. Being a little bit harsh with that, there are a range of variations of where you provide a lot of employee

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24 CROSSING THE QUALITY CHASM support, decision making, and some prescreening of the options they would have. The fourth option is to try to find a way to get the current health care system and the current care management system to produce better value. I think the blueprints that the IOM has laid out, both in the first report and certainly in the latest report, set forth a call not just for improving quality, but a call for revolution in the design and delivery and the values that our health care systems promote, and I hope we will be able to deliver on that. What is calPERS? Most of you know the pension plan. More specifi- cally, we are a public employee health plan for 1.2 million people; that includes both actives and retirees. Retirees count for about 20 percent of my business. While my predecessor many of you may know Margaret Stanley referred to us as a TPA, we probably more closely approximate a multiple employer welfare arrangement. In that regard, I have 13,980 employers that I try to provide coverage for and it runs the gamut from a four-member mosquito abatement district to a 400,000 employer called the State of California. Pleasing all of them is an interesting task. Sixty percent of my enrollment is, in fact, state-based, and 40 percent are locals, local governments and education. Current expenditures for this year will be about $2.3 billion. The increase we were projecting, or that I was asked to approve this year before we started our negotiations with our HMOs and before we have done our calculation on our self-funded plans, is about $600,000 more dollars. Yes, that calculates to about 23 to 24 percent of the base, which is significant. Three-fourths of our enrollees are in 10 HMOs. Many of you may have read we are going to have three fewer HMOs next year. Actually we will have two fewer; we are adding one back. Three-fourths of our HMO population are in three HMOs: Kaiser; HealthNet; and Pacific Care. One- fourth are in our fastest growing plan, which is in fact our PPO plan, and it is fast growing because of two things: the first is a certain reaction to the anti-managed care public policy initiatives that were particularly preva- lent in California in 1999 and 2000; and the other one is, quite honestly, that almost all of the HMOs in California are withdrawing from the rural and nonurban areas. They only want to do business in those counties where they know they have the margins and the volume needed. Myth versus reality is very important. calPERS is a price maker. I know that Tom Elkin has served on some of the committees here as well, but Tom basically saw what we call a soft pricing market in the mid-199Os and opportunistically took advantage. Soft market? I would say it was a stupid market. Forgive me for this, but Kaiser was trying to give away or buy a lot of business. We had our commercial HMOs trying to increase their volumes and willing to bid any price, thinking they could make up that price by leveraging the providers. And quite honestly they were able

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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING 25 to do that because providers either did not know how to price their busi- ness or were not willing to listen to the laws of nature and economics. The reality is we are not a price maker, but we do take advantage of the mar- ket. We are an early price setter. The fact of the matter is, I get very frus- trated with my good friends at Kaiser when they come in with some high rates and two months later come in with some different rates. They say, Allen, you are the first of any of our major contracts that we have to nego- tiate with. Hence, we just have some plug figures when we start negotiat- ing with you and then we get serious. The fact of the matter is, because we are the earliest plan to go into the negotiation for the year 2002, and we are one of the larger ones, we are watched by Wall Street, especially in this day and time. Seven out of 10 of my HMOs currently are for-profit HMOs. Five out of 8 that I have next year will be for profit. Size means big discounts. The reality is that in the current market- place, profitability of business is more important. With Lifeguard, one of my best from my consumer reportings, one of my best in terms of physi- cian satisfaction, we accounted for 12 percent of their business. They could no longer afford to sustain the losses they felt they had to get in order even to be priced on our sheet. Hence profitability is important. In addition, and this is my favorite, we always talk about calPERS being so very big in California. We are the third largest payer for health care in California. Medicare is first; MediCal is about three times what I am poor payer by a long shot, but nonetheless three times the size. Then I like to remind my board that in fact there are five times the number of people who are uninsured in California than we have insured through calPERS, a pretty good driver in the marketplace itself. Although we were made the poster child for managed competition, the reality is until this year, until next week, and I won't know until the board concurs in it, we have never, at the group purchasing level, thrown out an HMO. Whether for quality, whether for price, we have said once you are there, you are there. Not a prudent purchaser. In addition, our enrollees, up until last year, have had very little cost sharing, either in terms of premium or in terms of benefit, and we are being brave enough to say that the office visit copay ought to rise to $10 next year. Value purchaser? In that regard I think we try hard. We spend better than $2 million a year in various surveys. The California Cooperative Healthcare Reporting Initiative (CCHRI) many of you are familiar with that not only profiles the plans, but we finally started moving to try to do something that the report speaks to: try to move it away from plans and to the individual providers. As it turns out, even with our profiling the plan during any open enrollment, I have less than three percent of my

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26 CROSSING THE QUALITY CHASM membership move. And we are now beginning to grapple with the issues of choice. The number one issue, of course, in health care in California right now is cost. Like parts of the rest of the nation, we are looking at some cost inflation coming back. But quite honestly I have told my board that it is going to stay with us. Given the demographics of our group, and it is not different from that of the Federal Employees Health Benefits Program or any other employment-based program, the fact of the matter is that last year when I stood before my board for the first time telling them what the future was going to be, having been there a total of 30 days and I prob- ably should have left after that prediction I told them my cost would be going up, doubling every six years. The fact of the matter is that it is now doubling every 4.8 years. Inflation is back. What are the drives? They are no different in some regards: an aging population; pharmaceutical costs; and utilization. In the two years pre- ceding this one, utilization in my self-funded plan was a 13 percent a year increase. Clearly, whenever there is a hiccup from the Balanced Budget Act, we are the first to get tagged for some additional resources. Probably one of the most significant drivers in California now is what I call the depressed provider reimbursement. Those good years when calPERS not only had no rate increases but negative rate increases in premiums, I am now paying for. Nonetheless, that is genuinely understood and a lot of the provider repricing is very significant. Seismic retrofitting. We essentially, in California, will rebuild all of our inpatient bed structure in the next 10 to 15 years. We have a chance for systems enhancement and engineering; we have the microcosm. What we will do in response to that is going to be a very big issue for us. There are 7 million uninsured. The good news is that the uninsured have not grown. The bad news is, in the 10 or 12 years of robust economy, we have not done a darned thing in public policy to deal with that. Pacific Business Group on Health is one of the lily pads, I guess, for the leap-frog initiative. I sit on that board. We are their biggest member. In fact, not only is Pacific Business Group on Health requiring its HMOs to inventory the level of readiness in terms of the three initiatives in the leapfrog, but their various hospitals are, and we are asking our own HMOs to do that. So we anticipate beginning to see that come back and haunt us in some rates. HMO profit expectations. One of the good things of living with the pension investment side of the house is that I get to see a lot of materials about some of the plans that I work with from a little different perspec- tive. There was a good reading this year: it was supposed to be a banner year. Buy HMO stocks, everybody said. But the reality is that the expecta- tions were that the premiums would be nationally around 15 to 16 percent

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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING 27 for the year. I will come back to this, but it has played a very big part in the prices we looked at this year. Then the anti-managed care initiatives in the legislature I talked about as being one of the others, and then this one is one that I had in the Gray column and I moved it over; you might pick up on that. We don't have blackouts or brownouts in California. We have Grayouts. For those of you who are a little slow, that is the governor's name. Quickly, just to give you an idea, it is interesting that we still have a very good buy in the West. This is the West, not just California. That's the good news. The bad news is that we had the second highest increase last year in health care costs. HMOs are still a bargain in California. This shows that the farthest to the left is in fact the current price of the average HMO- and not surprisingly since that is still a deal the enrollment trends in California versus the West, versus the rest of the nation. In terms of en- rollment in HMOs, we are about 1.5 times what the rest of the West is and about two times more than the nation. And my group is even higher than that at about 77 percent. Let me run through some key changes in the health care market, be- cause I want to get to some comments about our current procurement payment practices. Kaiser is no longer the leader. One of the great suc- cesses in calPERS in California has been that we had Kaiser. They are 35 percent of my enrollment. Kaiser, because of its heritage, because of its size, because of its economies, has always been one of the lowest-cost plans. It has been the cornerstone and the bedrock of employment-based coverages in the West. As Kaiser was unsuccessful in its expansion, as it in fact tried to recoup some of those losses that have been so painful in the mid-1990, in the last three years, Kaiser has moved from my lowest-cost plan to my second highest. They have assured me they will move back to their point of competitive position, but they don't ever anticipate being back at the lowest. That is a reality that many of us in the California mar- ket have to deal with. Provider mergers and the clout that the mergers have provided is another factor. If I had enough perspective, enough distance, I could have enjoyed, from a public policy perspective, the battle between Sutter and Blue Cross, because that was fascinating. On the one hand you had a health system stating that the cost of delivery of a normal baby for a HealthNet patient has got to be approximately what it is for a Blue Cross patient, so we are not going to recognize big discounts just because you are big and have purchasing clout. On the other hand, you had a system that has been one of the darlings of Wall Street, that is, Blue Cross, and Leonard has gotten good marks, for in fact having and exercising his big discounts. If I had had 40,000 people who were without coverage, I would have thought that was a very interesting debate.

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28 CROSSING THE QUALITY CHASM The for-profit trend we have talked about. The real issue now, and I will come back to this, is: this is why we are beginning to doubt that man- aged care organizations have the will they have the ability but the will to manage. Long-term commitments needed for healthy outcomes are not present in a marketplace where, as the report points out, the relationships are based on annual contractual arrangements. The 2002 bidding process is very important. We have not only the highest rates, but we have the greatest disparity in the requested rates from what we call our target rates. And those are not target rates our employers wanted to pay. Those are target rates for which my staff works very hard in projecting the expenses, following the medical expenses and trends, of each plan that we deal with; there is even a geographic rating, on the demographics as well as the kinds of services. The rates being re- quested were almost two times what the target rates were. We asked the plans to bid under various scenarios: current bid; high-low option; alter- native; and then one in which we said you get to design your own plan. Mr. HMO, you get to design your own plan, all the innovations that you would like. I will come back to what we found on that. Second was there were no statewide HMOs. We asked if any of them would like to take all of our business statewide, being given an exclusive. Nobody is either that crazy or that ambitious. We have a constant erosion from our nonurban areas. About 10 percent of the population, 15 coun- ties, and 10 percent of the calPERS population do not have an HMO op- tion. calPERS has historically made choice among plans instead of choice among quality providers or provider systems. That is coming back to haunt us now as we try to move our enrollees away from that idea. Our enrollees do not understand quality, even though we have a tremendous number of measures and expenditures in the area of quality, and getting them to even think in those terms is very important. Medicare plus choice we no longer have. Only two of our eight HMOs have it. We really have found now what, in fact, is most surprising- that almost none of our HMOs seem to have any real strategy in terms of targeting costs, improving quality, or repositioning themselves in the mar- ketplace. When we ask them to design their own plans, to tell us how to deliver care but just simply keep it within X amount of dollars, 95 percent of the responses were cost shifting to the enrollees, which reminded me of some of the indemnity carriers in the late 1980s. The fact is that most of the strategies of the HMOs appear to go PPO. Interestingly enough, at precisely the time we are talking about trying to find volumes of business to more cost-effective care givers, we find our vendors going the other way in terms of broadening their networks even further. Finally, the current market focus is contrary to the longer-term com-

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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING 29 mitments and investments needed in NIS or in terms of provider relation- ships we think to be successful. So that is where we are. I can now jump to a couple of comments on the report and then I will probably will stop, rather than talk about some of the initiatives in the QUA that we are doing at calPERS. First, the quality did not start the revolution. It was the fact that we paid too much and we didn't have a say in what we were getting, I think. I agree that we need fundamental change and we need a revolution. But I think to go beyond health policy types and to go beyond professionals in the business, we have got to get a currency that spreads it more widely to get the fundamental change. And I think the report points to it in terms of talking about the effectiveness and the efficiency as well as the safety. If we take the initial report on errors at face value, when we do a back-of- the-envelope calculation on the number of calPERS lives that are poten- tially lost each year, in my plan, depending on which numbers you want to use, between 100 and 200 of my enrollees die because of errors or prob- lems. The second thing I would suggest is that we need to remember that at least the commercialization of our service industry is still relatively new. Eight years ago we were talking about a government-designed health care system. We rejected that and gave license to entrepreneurial energies of which we are still seeing the fruits. Hence, it may be that instead of trying to define our industry in a more narrow frame, as well thought out as it might be, the pressures are almost to the contrary, particularly given the . . .. economic Incentives. The two points in the study that I think are absolutely on target are the implications of our migration from acute to chronic care. I don't know that many people, perhaps outside the distinguished panel that put the book together and a few others, who really understand the implications of that. What is calPERS doing with regard to that? I have access to some pretty good health benefit consulting folks, and I called them and not a single one could tell me what benefit design changes to make, let alone as the report suggests, what reimbursement changes should be made to accommodate that point of moving to chronic. We have a lot of work to do, and the report is beautiful for pointing that out. The second aspect is reinserting the individual and his or her social family in the center of care and care management decisions. I will speak for myself. I have always been a little concerned about a lot of the conser- vative thought that wanted to move immediately to putting money in the hands of the uneducated uneducated with respect to health care and perhaps unmotivated, and expected somehow to control costs and pro- duce better outcomes. The fact is that the report, the study, suggests that

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30 CROSSING THE QUALITY CHASM with a total change and with a supportive delivery system you can make that move. I think that is something we are going to have to think about and work very hard on. Certainly the reengineering of our physical as well as our human re- sources is something that will be an indomitable task, and it is one that I don't know, having just left an academic health center last year, we have even begun to think about. More remains. I think if there is an area that causes me some concern in the report, it is the idea that inviting a free flow of information is a way of improving care, is moving away from blaming for errors in terms of using it for quality improvement, and is absolutely where we need to go. But I don't think we can expect that to be done significantly in advance of tort reform or legal reforms in dealing with the issues of privacy and con- fidentiality. I am pleased that one of the latter recommendations is that the Institute will in fact be looking at the legal reform issue as well. Finally, dissemination of best practices in evidence-based manage- ment with current competitive markets is something I would like to see the Urban Institute or the likes deal with, because I don't think we have really thought it through. If you take away the proprietary nature of this sort of innovation, and you make that information broadly available, what does that do? How do providers compete? How in fact do you help your payers compete if you are going to? If one of the rewards is to move more volume to the centers of excellence, or to the better producers of care, then my concern is what impact does that have in terms particularly of rural care and care distribution in our country. I think there are some questions that should be brought out of that. The final point is that the committee's work was good in saying that it is absolutely essential that third party payers get into the picture, and I think it is essential that we be part of that. Many of our providers are currently conflicted, if you think about it. They have in their books of business both capitation and fee for service payment: it is not a bad hedge strategy. We do that in our investment, and maybe they are trying to fig- ure out which way this is going to go. The reality is that we do need some dramatic changes in our payment system. Keep in mind that when we start thinking about that, the biggest impact payer, without any doubt, in fact is government. If we consider particularly the opportunity in the prospective payment system in terms of outpatient payments, we will have an excellent onnortunitv to take into consideration some of the reports. The employer's commitment is likely to be cyclical. If you are asking an employer to put some additional money on the table for quality im- provements, as Pacific Business Group has tried to do in terms of its ini- tiatives, if you try to do that during good economic times, where there is a

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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING 3 tight labor market and fairly static premiums, yes, that is probably some- thing that we would be interested in doing. If, on the other hand, it is in a downturn, where the labor market is getting looser and if premiums in fact are on the rise, which is our current situation, then your answer is going to be something different. Having said that, rather than asking payers to put more money in the pot by producing better outcomes, and that is ultimately what the report is about, it is right on target. I have a board that won't be happy when I have to go before them next week and ask for about $350 million more next year. The first question they will ask is this:, "Allen, for that money, can we get better performance and better practice?" And I think that is what it is all about. Should the money accompany the individual as essential decision maker? I think that is something a lot of the employment-based coverages are poised to do, although like me, they are a probably a little uncertain about doing it in terms of a free defined contribution strategy; but in the right environment that is likely to happen. One point on which I would differ a bit: not only are longer-term relationships between provider and plan and employer group desirable, but I would argue that the individual himself should have a longer com- mitment to his provider to the extent possible. They should always be free to move for dissatisfaction, but I spend more than $2 million a year for open enrollment. I sort of bombard people with a great deal of paper about why they should move and make changes, and why they should be un- happy, and as I said 97 percent of them seem not to be motivated to change. Maybe I simply ought to let them change any time during that time, and only do a really concerted effort every three years. New payment forms are a must, and as we move from an encounter to relational care, not only what we pay for, but how we make those and what kinds of incentives must also change. Then, finally, I think the report was a little bit conservative in saying that perhaps it is too early to try for episodic chronic care reimbursement schemes. I can tell you without any hesitation that the likes of Tom Davis at Verizon, Peter Lee at Pacific Business Group on Health, and Allen Feezor at calPERS are poised and ready to begin to try some of that from the private sector side. So we would look forward to that. I had a few more minutes on what we are going to be doing in making some changes, but in light of both the hour and the need to get to some more substantive questions, I simply will say thank you very much and look forward to the panel discussion.