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The Impossible Dream: Health Insurers Will Improve the Health Care System

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The Times reported recently (Reed Abelson, Health Insurers Making Record Profits as Many Postpone Care, May 13, 2011) that "major health insurers are barreling into a third year of record profits." A major reason for their "success": utilization is down among their policy holders and, therefore, care providers are submitting fewer bills than expected. Policyholders did not suddenly become healthier, however. Instead, the cost-sharing required by the policies they can afford has become so burdensome that many deny themselves beneficial care.

Studies show patients have trouble differentiating between services they really need and those they can safely do without. As a result, many become sicker unnecessarily and require services they could have avoided if they had taken care of the condition before it became too serious to ignore. When that happens spending is higher than it would have been.

Despite their good fortune, insurers want approval for double-digit rate increases because "they expect costs to rebound." That's an easy one: we can consider higher rates when their profits abate. We might even feel better about it if, in the meantime, they stepped up to the plate to help make the health system better. Here is some background.

Our system relies on private health insurers. Until fairly recently, the system was dominated by the many not-for-profit Blue Cross and Blue Shield Plans, but now, many insurers are for-profit companies. Promoters of the insurance marketplace idea expected that, to attract customers, competing insurers would need to find ways to improve their offerings and lower their prices, and everyone would win. Unfortunately, that storybook notion never worked in practice. Instead, although insurer profits grew dramatically, so did the problems of rising costs, inadequate access, and declining quality of care.

Insurers' first goals are to make a profit and grow the value of their shares. Yet, to achieve them, they have only 3 ways to differentiate themselves in that marketplace: (1) they can influence who buys their policies, encouraging those likely to need fewer services and discouraging those likely to need more; (2) they can adjust benefits and coverage rules, usually by limiting the amount of services covered or increasing cost-sharing; and (3) they set prices.

When insurers succeed in spending less of their premium revenues on care, a secondary effect is to reduce provider income. That is, doctors, hospitals, and others lose cash needed to keep up with the latest developments, maintain and modernize their equipment and facilities, and invest in information technology. In other words, the health care delivery system continues to deteriorate as providers search for ways to make up the lost income. For example, they might diversify -- perhaps, to earn fees for participating in clinical trials (which can also create conflicts of interest). A side effect of that approach is to divert providers' attention from their patients' medical needs, thus eroding the quality of care, which already is unreliable enough.

Society's goals, on the other hand, are to "bend the cost curve," improve access, and avoid undermining quality further. That means changing utilization decisions made by patients and their doctors. The key to success in that regard lies in the second way that insurers can differentiate themselves, setting the rules for coverage. Here is what they should do to improve the system: (1) contract only with Accountable Care Organizations (ACOs) -- these are organizations of providers that take responsibility for meeting the care needs of patients who enroll with them -- and (2) pay them a risk-adjusted "capitation" rate for each patient who enrolls instead of a fee for each service provided.

If ACOs are paid for "taking care of patients" instead of for individual services, then, they can aggregate their capitation payments into a budget, and figure out the best way to use it to care for their patients. Here are three examples: (1) reach out to patients with chronic conditions to increase the chances that they obtain routine tests and their underlying condition does not get worse; (2) hire nurses to do home visits with bed-ridden chronically ill patients to avoid expensive hospitalizations by preventing bedsores and the infections that follow; and (3) invest in electronic medical records and decision support modules which provide primary care physicians with current information about patient conditions they don't see often.

Paying ACOs by capitation changes the incentives, which is central to increasing access, improving quality, and controlling costs. Yet, while forming ACOs and paying them by capitation are necessary steps, another critical ingredient is patience.

The reality is that behavior changes leading to new utilization patterns take time to achieve. But investor-owned insurers have no patience. Therefore, they will not create plans that would transition over time to a better societal reality. They understand incentives, but their time horizon is too short -- usually no longer than the next quarter. Yet, unless we make the investment, the only ways to keep expenditures under control are to induce patients to use fewer services. But that will undermine access and quality of care because, as we saw earlier, most patients don't know which services they can safely avoid and which they need to use.

Society's interest is clear and so is the path to get there. How bad do the problems need to get before we finally face the reality that investor-owned insurers do not want to be part of the solution?

Professor, Boston University School of Management and Author of Still Broken: Understanding the U.S. Healthcare System, (Stanford University Press, 2010.)

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