How an health insurer uses risk to define value (Value as risk series)

RiskLets continue with value as risk. If you missed it, here’s the first post.

Providers assert that insurers hold most if not all the cards, collecting premiums and denying payment while holding large datasets of care patterns. I’ve heard, “if only we had access to that data, we could compete on a level playing field.”

I am neither an apologist for nor an insider in the insurance industry, but is this a “grass is always greener” problem? True, the insurer has detailed risk analysis on the patient & provider. Yes, the insurer does get to see what all providers are charging and coding in their coverage. And the insurer can deny or delay payment knowing that a certain percentage of these claims will not be re-submitted.

But the insurer also has deep institutional knowledge in risk-rating their clients. Consider the history of health insurance in the US.  Advancing medical knowledge advanced treatment cost. When medical cost inflation exceeded CPI  insurers modeled and predicted estimated spend with hard data. If individuals had medical conditions which would cost more ultimately than premiums received they failed medical underwriting. The insurers are private, for-profit businesses, and will not operate at a loss willingly.

To optimize profitability, insurers collected data from not only the insurance application, but also claims data, demographic data from consumer data brokers, financial data, information from other insurers (auto, home, life), and probably now Internet data (Facebook, etc…) to risk-rate the insured. Were they engaged in a risky lifestyle? Searching the net for serious genetic diseases?

Interestingly, the ACA changed this to only permit 1) Age 2) Smoking 3) Geographic location as pricing factors in the marketplace products. The marketplace products have been controversial, with buyers complaining of networks so narrow to be unusable , and insurers complaining of a lack of profitability, which has caused them to leave the market. Because the marketplace pools must take all comers, and many who entered the pools had not had insurance, there is some skew towards high-cost, sicker patients.

Consider a fictional medium-sized regional health insurer in three southern states specializing in group (employer) insurance – Southern Health. They are testing an ACA marketplace product. The geographic area they serve has a few academic medical centers, many community hospitals competing with each other, and only a few rural hospitals. In the past, they could play the providers off one another and negotiate aggressively, even sometimes paying lower rates than Medicare.

However, one provider – a fictional two-hospital system – Sun Memorial – hired a savvy CEO who developed profitable cardiac and oncology service lines leveraging reputation. Over the last 5 years, the two-hospital group has merged & acquired hospitals forming a 7-hospital system, with 4 more mergers in late-stage negotiations. The hospital system changed its physicians to an employed model and then at next contract renewal demanded above Medicare rates. As such, Southern Health did not renew their contract with Sun Memorial. In the past, such maneuvers ended conflict quickly as the hospital suffered cash flow losses. However, now with fewer local alternatives to Sun Memorial; patients were furiously complaining to both Southern Health and their employer’s HR department that their insurance would not cover their bills.   Pushback on the insurer by the local businesses purchasing benefits through Southern Health happened as they now threatened not to renew! The contract was eventually resolved at Medicare rates, with retroactive coverage.

The marketplace product is most purchased by the rural poor, operating on balance neutral to a slight loss. As the Southern Health’s CEO, you have received word that the your largest customer, a university, has approached Sun Memorial about creating a capitated product – cutting you out entirely. The CEO of Sun Memorial has also contacted you about starting an ACO together.

           Recall the risk matrix:

www.n2value.com

 

Low Risk/Low return: who cares?

High Risk/Low return: cancelling provider contracts as a negotiating ploy.

High Risk/High return: Entering into an ACO with Sun Memorial. Doing so shares your data with them & teaches them how to do analytics. This may negatively impact future negotiations and might even help them to structure the capitated contract correctly.

Low Risk/High Return: Pursue lobbying and legal action at the state/federal level to prevent further expansion of Sun Memorial. Maintain existing group business. Withdraw from unprofitable ACA marketplace business.

As CEO of Southern Health, you ultimately decide to hinder the chain’s acquisition strategy. You also withdraw from the marketplace but may reintroduce it later. Finally, you do decide to start an ACO – but with the primary competitor of Sun Memorial. You will give them analytic support as they are weak in analytics, thereby maintaining your competitive advantage.

From the insurer’s perspective the low risk and high return move is to continue the business as usual (late stage, mature company) and maintain margins in perpetuity. Adding new products is a high-risk high reward ‘blue ocean’ strategy that can lead to a new business line and either profit augmentation or revitalization of the business. However, in this instance the unprofitable marketplace product should be discontinued.

 

For the insurer, value is achieved by understanding, controlling, and minimizing risk.

 

Next, we’ll discuss things from the hospital system’s CEO perspective.

 

Defining value in healthcare through risk

High-low-norisk

For a new definition of value, it’s helpful to go back to the conceptual basis of payment for medical professional services under the RBRVS. Payment for physician services is divided into three components: Physician work, practice expense, and a risk component.

Replace physician with provider, and then extrapolate to larger entities.

Currently, payer (insurer, CMS, etc…) and best practice (specialty societies, associations like HFMA, ancillary staff associations) guidelines exist. This has reduced some variation among providers, and there is an active interest to continue this direction. For example, level 1 E&M clearly differs from a level 5 E&M – one might disagree whether a visit is a level 3 or 4, but you shouldn’t see the level 1 upcoded to 5. Physician work is generally quantifiable in either patients seen or procedures done, and for any corporate/employed practice, most physicians will be working towards the level of productivity they have contractually agreed to, or they will be let go/contracts renegotiated. Let’s hope they are fairly compensated for their efforts and not subjected solely to RVU production targets, which are falling out of favor vs. more sophisticated models (c.f. Craig Pedersen, Insight Health Partners).

Unless there is mismanagement in this category, provider work is usually controllable, measurable, and with some variation due to provider skill, age, and practice goals, consistent. For those physicians who have been vertically integrated, their current EHR burdens and compliance directives may place a cap on productivity.

Practice expenses represent those fixed expenses and variable expenses in healthcare – rent, taxes, facility maintenance, and consumables (medical supplies, pharmaceuticals, and medical devices). Most are fairly straightforward from an accounting standpoint. Medical supplies, pharmaceuticals, and devices are expenses that need management, with room for opportunity. ACO and super ACO/CIO organizations and purchasing consortiums such as Novation, Amerinet, and and Premier have been formed to help manage these costs.

Practice expense costs are identifiable, and once identified, controllable. Initially, six sigma management tools work well here. For all but the most peripheral, this has happened/is happening, and there are no magic bullets out there beyond continued monitoring of systems & processes as they evolve over time as drift and ripple effects may impact previously optimized areas.

This leaves the last variable – risk. Risk was thought of as a proxy for malpractice/legal costs. However, in the new world of variable payments, there is not only downside risk in this category, but the pleasant possibility of upside risk.

It reasons that if your provider costs are reasonably fixed, and practice expenses are as fixed as you can get them at the moment, that you should look to the risk category as an opportunity for profit.

As a Wall St. options trader, the only variable that really mattered to me for the price of the derivative product was the volatility of the option – the measure of its inherent risk. We profited by selling options (effectively, insurance) when that implied volatility was higher than the actual market volatility, or buying them when it was too low. Why can’t we do the same in healthcare?

What is value in this context? The profit or loss arising from the assumption and management of risk. Therefore, the management of risk in a value-based care setting allows for the possibility of a disproportionate financial return.

www.n2value.com

The sweet spot is Low Risk/High Return. This is where discovering a fundamental mispricing can return disproportionately vs. exposure to risk.

Apply this risk matrix to:

  • 1 – A medium sized insurer, struggling with hospital mergers and former large employers bypassing the insurer directly and contracting with the hospitals.
  • 2 – A larger integrated hospital system with at-risk payments/ACO model, employed physicians, and local competitors which is struggling to provide good care in the low margin environment.
  • 3 – group radiology practice which contracts with a hospital system and a few outpatient providers.

& things get interesting. On to the next post!

Some reflections on the ongoing shift from volume to value

As an intuitive and inductive thinker, I often use facts to prove or disprove my biases. This may make me a poor researcher, though I believe I would have been popular in circa 1200 academic circles. Serendipity plays a role; yes I’m a big Nassim Taleb fan – sometimes in the seeking, unexpected answers appear. Luckily, I’m correct more often than not. But honestly – in predicting widely you miss more widely.

One of my early mentors from Wall St. addressed this with me in the infancy of my career – take Babe Ruth’s batting average of .342 . This meant that two out of three times at bat, Babe Ruth struck out. However, he was trying to hit home runs. There is a big difference between being a base hit player and a home run hitter. What stakes are you playing for?

With that said, this Blog is for exploring topics I find of interest pertaining mostly to healthcare and technology. The blog has been less active lately, not only due to my own busy personal life (!) but also because I have sought more up-to-date information about advancing trends in both the healthcare payment sector and the IT/Tech sector as it applies to medicine. I’m also diving deeper into Radiology and Imaging. As I’ve gone through my data science growth phase, I’ll probably blog less on that topic except as it pertains to machine learning.

The evolution of the volume to value transition is ongoing as many providers are beginning to be subject to at least a degree of ‘at-risk’ payment. Stages of ‘at-risk’ payment have been well characterized – this slide by Jacque Sokolov MD at SSB solutions is representative:

Sokolove - SSB solutions slide 1

In 2015, approximately 20% of medicare spend was value-based, with CMS’s goal 50% by 2020. Currently providers are ‘testing the waters’ with <20% of providers accepting over 40% risk-based payments (c.f. Kimberly White MBA, Numerof & Associates). Obviously the more successful of these will be larger, more data-rich and data-utilizing providers.

However, all is not well in the value-based-payment world. In fact, this year United Health Care announced it is pulling its insurance products out of most of the ACA exchange marketplaces. While UHC products were a small share of the exchanges, it sends a powerful message when a major insurer declines to participate. Recall most ACO’s (~75%) did not produce cost savings in 2014, although more recent data was more encouraging (c.f. Sokolov).   Notably, out of the 32 Pioneer ACO’s that started, only 9 are left (30%) (ref. CMS). The road to value is not a certain path at all.

So, with these things in mind, how do we negotiate the waters? Specifically, as radiologists, how do we manage the shift from volume to value, and what does it mean for us? How is value defined for Radiology? What is it not? Value is NOT what most people think it is. I define value as: the cost savings arising from the assumption and management of risk. We’ll explore this in my next post.