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March 2013

Universal Coverage Now: a Proposal by Kaiser Permanente’s George Halvorson

Today’s post describes a proposal for universal coverage outlined by George Halvorson, longtime Chairman and CEO of Kaiser Permanente, in his 2007 book Health Care Reform Now! Although the book is over five years old, I tremendously enjoyed reading it due to the author’s obvious in-depth knowledge of the health care industry, which offers a welcome contrast with some other health care books (no, I won’t name any names but let me say some management gurus like to jump on bandwagons). Halvorson’s expertise and his ability to explain his thoughts to a lay audience in a clear and engaging fashion make this volume one of the very best discussions on the present and future of health care in the U.S. that I have read.

His Universal Coverage Now! (UCN) proposal – discussed at length in Chapter 11 of his book – consists of four building blocks, numbered A, B, C and D. In his words:

  • “Part A of the UCN proposal sets up universal coverage as a mandated benefit.
  • Part B funds it.
  • Part C measures how well the program is doing and provides a context for accountability and continuous improvement.
  • Part D describes a specific benefit plan design for the uninsured that [Halvorson believes] will make the most sense at this point in our history.”

Part A: Individual Coverage Mandate

Individual coverage would come from several sources: existing ones such as employers, Medicare, Medicaid or a new one called HealthPrime outlined in the UCN proposal. Enrollment would be verified every year at tax filing time, when taxpayers “would be required to include written proof of health insurance as part of his or her tax filing.” The inability to show proof of health insurance would trigger “a process to sell coverage directly and immediately to the uninsured person” through a high-deductible plan. In terms of numbers, Halvorson estimated at the time of his writing that people with income more than three times the federal poverty level (“high income”) could enroll in a $10,000 deductible plan for approximately $100/month.  Halvorson also provides guidelines into changes in the Medicaid process so that all low-income Americans (with less than two times the federal poverty level) become eligible.

For low-income Americans making more than two times the federal poverty level, Halvorson envisions a system called HealthPrime, “in essence a Medicaid-like program for the low-income but not lowest income uninsured population”, which would be “administered in every state by the existing state Medicaid program infrastructure.” Community clinics would serve as core HealthPrime providers.

Part B: The Source of the Money

Halvorson believes that “universal health care would best be funded with a separate dedicated tax source – a dependable, highly visible, directly accountable source of funding.” He suggests two tax sources: a health care sales tax and what he calls an in-lieu sales tax. To justify the adoption of a health care sales tax, he uses the example of Minnesota, which has successfully implemented this approach for many years. The second tax (in-lieu sales tax) would be “charged to any employer who does not offer health care coverage for their employees.” Both taxes would be set at about 4% in Halvorson’s proposal.

Part C: Keeping Score

In Halvorson’s words, “several levels of information that can be made available from an insurance claims payment system could go a very long way toward filling the huge and unacceptable data deficit that now exists in health care.” Keeping score will be made possible by electronic health care data records. (Some eye-popping numbers: 0.5% of the population spends 1/4 of all health care dollars.  10% of the population spends nearly 70% of all health care dollars.)

Part D: HealthPrime Benefit Designs

The HealthPrime benefit package would emphasize primary care (in an alternative read of the statistics mentioned above, “90% of our population spends only 30% of our care dollars, and that 30% of our care is provided largely by primary care practitioners,” with obvious consequences for politicians eager to be reelected). The package would also have “first solid dollar-first visit benefits”, with some cost sharing at the level of “a $10 copayment for chronic care or prenatal visits and a $20 copayment per visit for all other acute care needs.” Prescription drugs would be set up on a similar basis.

The package would also “create a financial incentive for each patient to use preventive medicine in order to avoid [a costly hospitalization]” (“encourage primary care and discourage hospital stays”) through the use of a “disappearing deductible that kicks in after each patient has spent $2,000 for primary care and acute care prescriptions.” For instance, an asthma patient would have his office visits and his inhaler covered by the insurance, but would have to pay the first half a day of hospitalization himself [roughly $2,000] for emergency care that wouldn’t have been needed if he had adhered to his treatment. Alternative benefit features, such as a 50% temporary copay as opposed to a $2,000 disappearing deductible, could easily be incorporated.

While health care reform has made some progress since the book was published, it is far from being complete. The current political climate makes it even more important for us to hear what knowledgeable professionals like Halvorson have to say regarding the best avenues for health care reform in the years ahead.

Financing medical research

It was only a matter of time: securitization (the pooling of financial instruments to distribute risk, which played a role in the crisis because of its role in bundling mortgages) has been proposed as a tool to finance medical research, as explained in “Disease or cure?” (subtitled: “How securitization may help your health”), a January 26 Economist article.

Venture funding for medical breakthroughs has evaporated because of the more specialized markets of “new therapies based on genetic markets”, which means smaller potential payoffs, and sources of uncertainty such as the path of health-care reform in the US. As a result, the funding gap between basic research and approved commercial treatment, known in the innovation sphere as “the valley of death”, has become particularly acute in biopharma.

Jose-Maria Fernandez and Andrew Lo of MIT and Roger Stein of Moody’s describe a potential solution in a recent paper, based on creating a series of mega-funds of up to $30 billion, financed by securitized debt and equity, which would “hold illiquid investments in a range of private companies, products, patents, licenses, royalties – anything in medical research that may eventually produce a cash flow.” The idea is described in more detail here and here.

An advantage compared to the recent mortgage meltdown is that, in contrast with the erroneous assumption that housing prices could only go up, “no one is suggesting this set of underlying assets is safe.”

This should help attract the right set of informed investors to this new, intriguing financial instrument that could bridge an acute gap in bringing medical innovations to market.

More on episode-based payments

Episode-based payments, also called bundled payments, provide “a single payment for all services related to a specific treatment or condition (for example, coronary artery bypass graft surgery or CABG), possibly spanning multiple providers in multiple settings” (as defined here). The motivation, as for just about everything regarding healthcare payment reform, is to provide financial incentives for more effective resource allocation to mitigate inexorably rising healthcare costs, while taking into account risk factors that make some patients more difficult to treat or more expensive to treat than others.

The Health Care Incentives Improvement Institute published an issue brief about the status of episode-based payment implementation in the US, by M. Burns and M. Bailit, who reviewed all 19 of the early bundled-payments arrangements. Three models, launched in 2006, 2007 and 2009, respectively, brought attention to this novel payment approach:

  1. the PROMETHEUS payment model,
  2. the ProvenCare initiative by Geisinger Health System,
  3. the Acute Care Episode Demonstration by CMS [Centers for Medicare and Medicaid Systems].

A subsequent approach, launched by CMS in 2011 and called the Bundled Payments for Care Improvement Initiative, utilizes no fewer than four different models:

  • Inpatient stay only (discounted inpatient prospective payment system)
  • Inpatient stay plus post-discharge services
  • Post-discharge services only
  • Inpatient stay only (prospective set payment)

Conditions being bundled. The top reason for selecting a condition for a bundle payment, according to the study, was the cost of the procedure or the treatment. Ease in defining a bundle also played a role. Interviewees also commented they were likely to follow the lead of CMS in choosing bundles. The most common category of bundles consisted of inpatient procedures, followed by chronic medical conditions, especially diabetes. (While opportunities for cost savings are higher for bundles related to chronic conditions, they are also much more difficult to define.)

Bundle definition. Defining a bundle requires determining the services to be included, the episode time window and patient inclusion/exclusion criteria. This can require a significant amount of effort. Therefore, “[s]ome payers and providers have turned to pre-defined bundles,” especially the ones defined in the PROMETHEUS payment model: “seven chronic condition bundles, three acute medical bundles, five inpatient procedural bundles and six outpatient procedural bundles.” Procedural bundles usually begin 2 to 30 days before the procedure and end 90 to 180 days afterward.

Moreover, “patients with comorbid medical conditions who require significant health care services beyond the bundled condition or procedure are excluded from the bundle.” Other restrictions may be based on the age of the patient. Patients who have gaps in their heath insurance coverage are also commonly excluded from the bundle. A table in  further lists potential elements of an episode payment for major acute care as a function of the episode’s various phases: pre-admission, hospitalization, post-acute care and readmission. That short communication also discusses ways to transition to a full-fledged episode payment system.

Payment types.

Risk-adjusted rates, which vary according to the severity of the patient’s medical condition. For instance, “PROMETHEUS uses a multivariate regression model based on claims data and takes into account patient age, comorbid conditions and patient severity.”

Flat-fee rates, which are the same for all patients. This is less common, but may be justified when the patient mix is relatively homogeneous. Flat-fee rates are also easier to administer.

In both cases, payments can be made prospectively or concurrently. The most common approach is fee-for-service payment with retrospective reconciliation.

Risk arrangements. There are three types of risk arrangement, which progressively increase provider-borne risk to motivate providers to study and change their care processes: (a) shared savings, (b) shared risk and (c) full risk.

Alternative Quality Contract in Massachusetts

A new payment model that deserves its own blog post is the Alternative Quality Contract (AQC) pioneered by Blue Cross Blue Shield of Massachusetts in 2009, which is described in detail in this excellent white paper on Blue Cross’s website.

The AQC model can best be summarized as “combin[ing] a global budget for a patient population with significant performance incentives based on nationally accepted quality measures.” An important feature of the model is that participating hospitals and healthcare providers “agree to take responsibility for the full continuum of care received by their patients – including the cost and quality of that care – regardless of where the care is provided.” (Italics mine.) It is currently implemented only for members with HMO coverage, because HMOs require plan members to select a primary care physician.

The AQC model is based on:

  • A global budget (i.e., including primary and specialty care, pharmacy services, hospital care and any ancillary services) adjusted on the health status of the patient group and based on total historical medical expenses and with a predefined growth rate for each year of the five-year contract period,
  • An efficiency opportunity created by financial incentives to carefully allocate available resources, with providers sharing both upside risk (savings) and downside risk (deficits) with the payers [insurers], as computed every year based on the difference between total claims expenses and the global budget,
  • A quality performance incentive that rewards high-quality performance based on nationally agreed-upon measures of care.

A team of researchers from Harvard Medical School, led by Michael Chernew (who pioneered Value-Based Insurance Design, another payment reform model with significant potential), studied the performance of the AQC model in Massachusetts and concluded in a New England Journal of Medicine paper and a Health Affairs follow-up paper that the model had led to 2% slower growth in spending in the first year and 3.3% higher savings than in the rest of the network in the second year. The savings were even more significant for providers that had previously been paid using the fee-for-service model.

It is also valuable to learn about adjustments made to the AQC model after it came into operation. Initially, yearly increases in the budget were made in absolute terms with the goal to bring spending growth in line with general inflation growth at the end of the five years. This, however, meant that complex adjustments had to be incorporated at year-end to address issues outside the providers’ control, such as a pandemic or new government-mandated benefits, which resulted into a lack of visibility throughout the year as to how well the organization was meeting its target. The budget trend targets now “require the group to outperform the general trend by a designated amount.”

Starting in 2011, a group’s share of the savings or deficits generated depends on the size of those savings or deficits, with groups keeping bigger shares of high savings, for instance. Those quality payments are now defined in per-member-per-month terms rather than as a percent of savings so that groups achieving a given level of quality receive the same payment.

The white paper lists the following lessons learned from the AQC experiment:

  • Start with current spending levels, i.e., do not force providers to operate with an initial reduced spending budget.
  • Data is key to supporting change.
  • Long-term contracts encourage long-term investments.
  • Leadership is critical to success due to the sweeping changes in culture involved in implementing the AQC model.
  • Payment systems are most effective when aligned with patient incentives.

The Centers for Medicare and Medicaid Services (CMS) have cited the AQC as the inspiration for its ACO (Accountable Care Organization) Pioneer model, with its “shared-savings global budget tied to quality and patient outcomes.”

The Alternative Quality Contract has also received quite a bit of media coverage, for instance on the blog of Boston's local NPR station WBUR and on the Modern Healthcare website.

For more information about AQC, please refer to this January 2011 Health Affairs paper by Chernew et al, which provides an overview of the model, including a list of the measures involved in quality assessment, and "show how it surmounts hurdles previously encountered with other global-payment models." The authors conclude: "Pairing accountability for spending with accountability for quality,as the Alternative Quality Contract does, seems an important foundation or design principle for the reforms that will be tested in the years ahead."

Outsourcing and offshoring

The Economist published a special report on outsourcing and offshoring in mid-January, which highlighted how “[a]fter decades of sending work across the world, companies are rethinking their offshoring strategies.”

The main reason is that “the global labour ‘arbitrage’ that sent companies rushing overseas is running out… [t]here are still big gaps between wages in different parts of the world, but other factors such as transport costs increasingly offset them.” In addition, firms are now discovering that “manufacturing somewhere cheap and far away but keeping research and development at home can have a negative effect on innovation.” (Moving R&D along with manufacturing is not feasible due to the high risk of losing valuable intellectual property.)

But a key motivation in “reshoring” also lies in the desire of multinational companies to “mak[e] customized products and respon[d] quickly to changing local demand” in the many markets they now operate in. (Lenovo’s made-in-China, US-bound computers spend six weeks on a ship, which explains why Lenovo recently opened a manufacturing facility in North Carolina.)

General Electric belongs to those firms “which originally led the way in the offshoring of services” and “are now taking work back in house and onshore”, as well as General Motors, which “hopes to be doing 90% of the [IT] work inside of the firm” in a few years’ time.  (See in particular the “Coming home” article in the special report.)

While offshoring in its traditional sense is maturing, it is expected that companies will attempt to “distribute their activities more evenly and selectively around the world, taking heed of a far broader range of variables than labour costs alone.”

The article entitled “The next big thing” expands the view of reshoring beyond manufacturing and points out that developed countries are beginning to take back service-industry jobs too. While service jobs in the US are still going to non-US companies, those companies are responding to changing business conditions (“more and more [client] companies want IT and business-process tasks to be done locally, especially when the work is complex and strategic”) by “hiring in developed markets.”

But the US shouldn’t be overly optimistic as far as reshoring is concerned. “The best argument for locating activities overseas nowadays is to be close to fast-growing new markets, and it will only become stronger… Whereas in the past firms treated such markets as sources of cheap labour, they are now looking for a deep local presence.” (See “Shape up.”)

While reshoring is a welcome trend for countries like the US that have lost jobs to offshoring, it is also important to remember that “[m]anufacturing work will often come back only when it has been partly automated, so the number of jobs returning will be smaller than the number lost in the first place.” Also, reshoring may still not be cost-effective for some, even after generous incentives by local governments.

For instance, Dell opened a factory in North Carolina in 2005 with the promise by state and city government of financial incentives worth up to $280m, but pulled out in 2009 and had to repay “much of the $24m it had already received.” In 2007 Google declined to expand a server farm near the Blue Ridge Mountains in spite of a $260m package.

The most glaring weakness of the special report is its omission of the book Producing Prosperity: Why America Needs a Manufacturing Renaissance, by Gary Pisano and Willy Shih, which expands on the authors’ March 2012 Harvard Business Review article “Does America Really Need Manufacturing?”

This article presents the groundbreaking framework of the modularity-maturity matrix, a systematic approach that combines process maturity (the degree to which the process has evolved) and modularity (the degree to which information about product design can be separated from the manufacturing process) to define four types of innovation: process-embedded innovation, process-driven innovation, pure product innovation and pure process innovation, and identify in which types of innovation manufacturing can best be outsourced.

In spite of the omission of Pisano's and Shih's work, overall the special report is well worth reading.

Episode-based payments

Episode-based payments “reimburse providers on the basis of expected costs for clinically-defined episodes of care” (to use the definition provided here) Such payments “may also be adjusted for severity of illness and quality performance.” They represent one of the new payment models suggested to contain the cost of services while giving providers financial incentives; however, they are only in early stages of developments and many issues remain to be addressed, “including varying definitions of episodes, methods for calculating and distributing per-episode payments, and data infrastructure needs.”

Salient features of episode-based payments include:

  • Episodes of care are typically identified using computer software programs.
  • Expected costs are defined either using claims data or using expected costs of best practices.
  • The baseline payments may be adjusted depending on “whether care provided during the episode met evidence-based standards and/or whether desired clinical outcomes were achieved.”
  • Different payments are applied for different conditions.

Drawbacks are:

  • Episodes of care have currently been defined for a small number of conditions.
  • “It is unlikely that all patient care can be categorized into meaningful episode types for payment purposes.”
  • It is not clear how payments can be fairly attributed to individual providers for complex episodes of care.

Episode-based payments have been implemented by CMS for its Medicare Heart Bypass Center Demonstration (which operated from 1991 to 1996 and is documented in this 2001 paper in Managed Care Quarterly) as well as the Medicare Acute Care Payment System. It is also been tested by Geisinger Health System in Pennsylvania and also underlies a new system called PROMETHEUS.

Based on those test cases, there is some evidence that episode-based payment may have positive effects on cost savings, although researchers who have studied the beginnings of PROMETHEUS also point out that “the project has faced substantial implementation challenges, and none of the three pilot sites had executed contracts or made bundled payments as of May 2011” (Hussey et al, “The PROMETHEUS Bundled Payment Experiment: Slow Start Shows Problems in Implementing New Payment Models”, Health Affairs, November 2011, available here) due to “the complexity of the payment model and the fact that it builds on the existing FFS payment system.”