THE RISE OF LOCAL, HIGH-VALUE HEALTH PLANS
Despite its deep flaws, the new health reform law, ACA, has three
aspects that make me optimistic about medical entrepreneurs being able
to surmount the law’s barriers and create a consumer-dominated,
market-based system of medical care and health insurance that will
ultimately deliver high-quality, affordable medical care to everyone:
1. The creation of consumer value
2. The rise of high-value local health plans
3. The achievement of effective disease prevention
In Part 2, I discussed the creation of consumer-value as a result of ACA eventually forcing most people to pay for their own, normally consumed medical services in lieu of their insurers. In this third of five installments, I address the promise of local health plans sponsored by high-value medical providers.
The Evolution of Health Insurance
Today’s massive national and regional health insurers are largely the
consolidated remains of about 600 local health plans that were created
during the 1970s and 1980s as a result of the government’s previous (and
now largely forgotten) major health reform law, the HMO Act of 1973.
Because these early, local HMOs were so effective at emptying America’s
hospital beds of the three quarters of all inpatients who didn’t need to
be there, they were able to offer better benefits for lower premiums
than the then-dominant indemnity health insurers. As a result, by the
mid-1990s, the indemnity model was utterly replaced by these HMOs and
their bastard offspring, the managed care organizations.
It’s important to recognize that all those local HMO plans were able to emerge and flourish only because of a single provision in the HMO Act that required every employer to offer its workers an individual, annual choice between the employer’s indemnity health plan and an HMO (if available). This transfer of health plan choice from HR managers to individual employees allowed innovative local entrepreneurs and providers to set up their own HMOs to outcompete the big guys and ultimately wipe them out. Quite simply, HMOs provided better value by offering increased benefits, coordinated care, reduced administrative hassle, and lower total medical cost. But when the federal dual-choice mandate was finally terminated, the creation of local health plans largely ended, allowing national managed care companies to acquire and consolidate the locals without fear of new ones cropping up to compete with them.
The cycle has now completed itself since managed care’s collapse a decade ago under the weight of its own inadequacies and excesses. That collapse led most carriers to revert to a modified, but lamentably unimproved version of the old, dysfunctional indemnity insurance model: PPO-based fee-for-service insurance that is constitutionally incapable of ensuring either high medical quality or affordable cost.
Back to the Future
Now, with ACA’s enactment, the government has once again enabled individual insurance choice by dictating the establishment of insurance exchanges beginning in 2014. These local marketplaces will initially be open only to individuals and employees of small companies, but, in time, to everyone. It is significant that the exchanges will operate alongside current mechanisms for Medicare and Medicaid beneficiaries to alternatively enroll in private health plans under Medicare Advantage and Medicaid managed care provisions. Together, these mechanisms will offer a brand new opportunity for local, high-value medical providers (see Part 2) to create their own health plans that facilitate high-quality medical care at competitive premium levels that no PPO-based insurer will be able to match—ever.
Sustainable Competitive Advantage
But unlike the HMOs that successfully exploited a one-time opportunity
to eliminate wasteful hospital utilization but had no second act, local
health plans sponsored by entrepreneurial, continuously innovating
high-value medical providers will be able to achieve sustainable
competitive advantage and deliver ever-improving patient value into the
indefinite future—all because consumers will have the annual option of
voting with their feet to abandon underperforming doctors, hospitals,
and health plans in favor of those that deliver high-quality care,
superior customer service, and affordable prices and premiums. And just
as local HMOs once displaced the old indemnity model, these new health
plans will do the same to today’s version. The currently dominant
national and regional carriers will ignore this risk at their peril.
Salvation of Primary Care
Local entrepreneurial health plans will also provide another major
benefit. They will offer the means to generously compensate primary care
physicians and to reverse the growing shortage of their numbers caused
by a government-dominated fee-for-service reimbursement system that
arbitrarily favors doctors-that-cut over doctors-that-think. Under the
current system, the primary care physicians who are most effective at
keeping their patients healthy and out of hospitals get not only the
lowest compensation but also a zero share of the hefty savings they
generate. But with their own sponsored health plans, that will change as
they are able to capture their fair share of the total system savings
they produce by providing effective, high-quality medical care.
A Perfect Calm
To summarize, as a result of (1) increased patient cost-sharing for normally consumed medical care (see Part 2) and (2) the ability of individuals to choose their own best-of-breed health insurance, we will finally have a critical mass of value-conscious consumers who simply won’t tolerate the exorbitant waste, misdiagnosis, maltreatment, poor customer service, and excessive transaction costs that afflict our current medical care financing and delivery system. We will witness the doubling of medical quality (as bad providers either get their acts together or exit the stage) and a halving of medical costs from the elimination of waste alone.
This brings us to a third major reform enabled by ACA that promises to deliver effective prevention of chronic diseases that consume three quarters of all medical costs . And it has nothing to do with the free preventive care foolishly mandated by the new law. I’ll cover that in Part 4.