The Healthcare Debate

By Jess Sweely

If you have been following the healthcare debate in this country you are probably more confused than ever. Healthcare is complex and it is obvious that the “Policy Wonks” don’t really understand the basic mechanics of healthcare in the United States.

In 1989, I was a co-founder of a Medicaid Managed Care Company that was successful in winning a contract to manage 80,000 + Medicaid individuals in Pennsylvania. This was a demonstration project to see whether Pennsylvania could save money by contracting out the management of the healthcare of this Medicaid population.

My partners and I were not healthcare professionals but businessmen who had experience with government contracts. The first thing we did was to assemble a group of healthcare professionals in the Pennsylvania and New York City areas that worked with this population. They consisted of Physicians, Nurses, Hospital Executives and other Healthcare Specialists. The purpose of working with this group was for us to understand the healthcare system that existed and how we could save the state money while providing better care to the members than the traditional “fee for service” system.

Healthcare has traditionally been provided on a “fee for service” basis, meaning that the recipient could go to any provider that was in the insured’s network to get care . There is no management of the quality of care in this model and no determination of medical necessity.

In the 1950 and 1960’s, the healthcare insurance companies were primarily “not for profit” organizations, i.e. Blue Cross/Blue Shield . The individual state insurance commissioners oversaw the system. Large corporations were self-insured and used a third party to manage their claims and network of providers.

As we peeled back the layers of the system we found that there were huge differences in how healthcare was currently provided.

Most hospital systems are “not for profit” but they obviously must make a profit to stay in business and continue to provide quality care to their patients. An insurer must have a network of hospitals, physicians, urgent care centers, pharmacies and other providers. This means having contracts with each of those providers. The contract sets rates and other contractual terms. The insurer must have a staff of provider representatives to manage these contracts. This is a costly process and is part of the administrative costs of an insurer.

A provider generally has multiple contracts with multiple insurers. All with different terms , conditions and rates. This means that the insurer must have a medical staff of doctors and nurses to review the standard of care provided by the providers and also the medical necessity of the care provided. This is also a costly process. This is in addition to claims processing. Because providers have multiple contracts with different rates, the providers generally submit their claims on a “billed charge” basis ( a series of charges that the providers use to submit their claims ). It is up to the insured to determine what should be paid based upon their contract with the provider.

We found, initially, that inpatient costs were the largest cost in the total costs. Pharmacy was second. As a result we needed to analyze the inpatient costs to understand the components. We found that teaching hospital systems were using the Medicaid population to teach their medical students. It was a common practice to admit them on a Friday even though nothing was going to be done until Monday. That resulted in three extra days of hospital charges that were not “medically necessary”.

If the occupancy rate of the hospital increased then you would see discharge rates start to increase in order to make room for the other patients. In essence, a lot of gaming of the healthcare system. Over time, inpatient cost went down but pharmacy costs went up. This was a result of rate increases, an increase in prescriptions being issued by physicians and the impact of direct television and radio ads run by the pharmaceutical companies for specific drugs.

Insurers generally negotiate with a Pharmacy Benefit Manager (PBM) to manage their prescription program. The PBM already has a network set up and costs negotiated with pharmacies. However not all costs are the same. One type of cost negotiated with a PBM is based upon average wholesale price plus a percentage (i.e 15%) plus a dispensing fee to the pharmacy. However there is no constant “average wholesale price”. This varies from each company.

In the end we were successful in reducing costs to the state and providing superior medical care to our members. In fact, our member costs were lower than what we were paying another insured for our own employees health care with essentially a similar network.

The current discussion of allowing individuals to buy health insurance across state lines is a “red herring”. Insurers would have to have networks in each state and the cost of managing that network is generally too expensive for the amount of business that the insurer would receive. Currently a number of states have passed legislation that allows for that but so far no insurer has participated.

Over the past, almost thirty years, insurers have consolidated, become larger and more profitable. The consolidation of all aspects of the industry continues and today most insurers are “for profit” organizations.

Hospitals have also consolidated and although there are a number of “for profit” hospital companies, the predominate number of hospitals are still “not for profit”.

In fact many hospital systems have begun purchasing physician practices again ( started in the 1980’s) to provide a feeder system to their hospital services. This didn’t work then and there is nothing to indicate that it will work now.

The healthcare world today is not a single model. There is a national model for Medicare, a state model for Medicaid, and a national model for Veterans Affairs.

Where are the insured’s in the healthcare discussion? They are conspicuously absent in this discussion. Many insurers own their own PBM,s, have interests in Physician Groups and Hospital Systems.

Prescription drug costs continue to escalate but no one is managing the costs. Each insurance company that has a Pharm D program for Medicare, negotiates separately with a PBM instead of using the leverage of the entire Medicare Program to negotiate at the National level.

Medicaid pharmacy costs are negotiated with the individual states where fee for service still is in effect or by the insureds if the state has contracted out their Medicaid population to an insurance company.

What is the answer? There is no “silver bullet” that will make everything ok. Giving block grants to the state is not the answer either. The states don’t have the infrastructure to manage a healthcare program for the general population as well as the Medicaid population.

A bi-partisan commission to review where we are and where we want to go needs to be established with the result being a road map for the next 50 years. There is no simple fix and it is about time that the powers in Washington, D.C. realize that.

There is no question that there are changes that need to be made to the “Affordable Care Act” but these changes need to be done on a “Bi-Partisan” basis also with the participants understanding the complexities that exist in the existing system. They also need to understand that this is only the beginning.

Change is difficult and takes time but it is time to start.