Health Insurance's $4.4 Billion Bunker Buster

Health Insurance's $4.4 Billion Bunker Buster - Part I

Dave Chase, Contributor

CEO of Avado: Powering the disruptive innovators reinventing healthcare

English: President Barack Obama's signature on the health insurance reform bill at the White House, March 23, 2010. The President signed the bill with 22 different pens. (Photo credit: Wikipedia)

Aetna‘s CEO, Mark Bertolini, has been the most powerful voice in the health insurance industry articulating how their business model has been flawed. This is what has driven Bertolini to reinvent Aetna into what he has described as a “healthIT company with an insurance component.” [See also Aetna's Remarkable Reinvention Underway.] Obamacare has simply been an accelerant to an inexorable trend. If it is overturned, it will slow the change, but not necessarily alter it due to a push by employers who have been fed up with the “get less for more” bargain that is unique to healthcare costs unlike any other cost in their income statement.

In the first part of this two-part series, I will outline two under-reported facets of Obamacare that will have far-reaching impacts. In the second part, I will outline how DaVita has made a smart move with their recent $4.4 billion of acquisitions pushing them ahead of virtually all other healthcare provider organizations in the country.

Two portions of Obamacare have received relatively little attention and are a backdrop to DaVita’s prescient moves.  Taken together, these provisions could have a long-term effect that is going to be devastating to the traditional health insurance business while also creating huge new opportunities for them and others.  The first is the new “Medical Loss Ratio” (MLR) requirement. The second is allowing flat-fee primary care practices, also referred to as Direct Primary Care Medical Homes (DPC for short), to compete within the state-based insurance exchanges. The DPC models have a membership model that isn’t insurance-based and so they avoid the 40% or more of the costs associated with insurance that doesn’t positively impact patient well-being.

Medical Loss Ratio Will Drive Insurance Companies to Spike Rates or Opt Out

The new law requires health insurers, starting in 2011, to spend at least 80 to 85 percent of the premiums they collect on medical services or activities that improve the quality of care or else they have to rebate money back to consumers. (That percentage is the MLR.) The remainder can be allocated to administration or profits that don’t benefit patients (e.g., administrative overhead, advertising, etc.).

Many insurance companies have been operating at a 65% MLR (common in the individual and small business market). Consequently, the logical response is to to either jack up their rates or opt out of serving that end of the market. [Note that the large group market is closer to the target already.] It’s not hard to imagine that a small business or individual will look for an alternative if they are faced with a 40% rate increase. In many places such as those reported on by the NY Times, rates have dramatically increased. Sometimes it was through direct increases. Most of the time, it was a combination of a rate increase, coverage limitations and deductible/co-pay increases that obfuscated the full scope of the increase. [For more explanation of unintended consequences of MLR requirements, Forbes' Avik Roy highlighted impacts in Obamacare's MLR 'Bomb' Will Create Private Insurance Monopolies and Drive Premiums Skyward. Hallelujah!]

The better alternative for the buyer of healthcare is DPC combined with a high deductible wrap-around insurance policy. When a large employer has a concentration of employees in one location, they are also increasingly using onsite clinics. For smaller employers, DPC enables the similar objective of expanding access to primary care which employers, unions and others recognize as the best bang for the buck as outlined in “Primary Care Spring” unleashed by IBM.

Direct Primary Care Can Lower Costs by 40% or More

Allowing for DPC is the best example in Obamacare of what can actually bend the cost curve, as it removes 40+% of the cost out of the equation. Previously, that 40% has gone to insurance overhead and profits. This relatively little-known provision in the law creates an affordable new choice for individuals and businesses by allowing flat-fee DPC practices to compete within the state-based insurance exchanges. This is where many Americans and small businesses will be able to shop for health coverage beginning in 2014 although there’s no need to wait until then from a consumer perspective. Smart health insurers have begun to recognize that a way they will compete on insurance exchanges is based on price, so they are actively developing their DPC strategy since the combination of DPC and a high-deductible policy can lead to lower overall costs.

The DPC provision enables Americans to elect a more affordable health care option compared to traditional insurance plans — an alternative in which patients and/or employers pay a flat monthly fee directly to a primary care provider for all primary and preventive care, chronic disease management and care coordination throughout the entire health care system. Under the new law, a flat-fee DPC membership can be bundled with a new, lower-cost “wrap-around” insurance plan that covers unpredictable and expensive services outside its scope, such as specialist care, hospital stays or emergency room visits. Not unlike a health club, DPC practices allow unlimited use. Despite that, over-utilization hasn’t proven to be an issue. Further, since primary care providers don’t have to spend so much time and money on Rube Goldbergian insurance billing procedures, they are able to spend far more time with their patients.

Today, flat-fee practices offer affordable, high-quality health care at up to 40 percent less than the cost of traditional insurance, even when combined with a lower-cost “wrap-around” insurance plan. Benefits of DPC membership vary by provider, but typically include many of the following:

• Unhurried 30- to 60-minute office visits versus typical 10 minute appointments
• No limits for pre-existing conditions
• No deductibles or co-pays
• Open or accessible 7 days per week, with 24 hour cell phone and email access to a physician
• Low, predictable monthly fees plus savings on third-party wrap-around insurance plans
• On-site x-ray, laboratory and “first-fill” prescription drug dispensary
• Routine care including vaccinations, routine blood tests, women’s health services, pediatric care, on-site procedures and ongoing management of chronic conditions

When you start with a situation where two of the three parties (the patient and primary care physician) involved with a critical transaction are confused or unhappy and the cost to the consumer of that service is going up 20-30% every year, it is ripe for disruption. Talk to virtually any primary care provider (PCP) and they will tell you how challenging their professional lives have become. This has led PCP’s to leave their practices in record numbers with fewer medical students going into the field. Most still love the patient interaction side of the equation, but are extremely frustrated with how insurance has taken away their freedom to practice as they believe is best for their patients. [Dr. Ted Epperly, the recent past president of the American Academy of Family Physicians describes how this has created a shortage of primary care physicians (and other consequences) in his just-released book “Fractured: America’s Broken Health Care System and What We Must Do to Heal It.”]

To understand just how convoluted our health payment system is today, it helps to draw an analogy. What if homeowner’s insurance was like health insurance and was used for regular house upkeep such as having an appliance serviced. Each time we had an appliance serviced, it would require the same inspection, approval, paperwork, and billing hassles that we endure after a fire or major incident at our home. When you had the appliance guy come, he wouldn’t be able to tell you how much it was going to cost. Worse, he wouldn’t even know until he found out whether you were an entrepreneur or worked for a larger employer. If you happened to not work for a large employer, you would likely pay 30% or more than if you’d worked for a large employer since they get price breaks. Home contractors would spend an extraordinary amount of time filling out forms and negotiating reimbursement for every appliance serviced. The overall cost of homeowner’s maintenance would increase exponentially to cover the business overhead. Fewer Americans would be able to afford homeowner’s insurance, laying the groundwork for a national crisis. Sound crazy? This is how it America health insurance works today.

In its place, insurance companies will return to being insurance companies. By that, I mean insurance companies in every other realm underwrite risk for relatively rare items such as house fires, car accidents and the like. They don’t burden day-to-day items such as a visit to Jiffy Lube with the insurance infrastructure that would otherwise jack up the cost of those day to day items. When faced with a 40% increase in premium costs for a model they aren’t particularly satisfied with, it’s not hard to imagine individuals and employers moving en masse to a model that not only costs less but delivers a dramatically higher level of service. As a result, the MLR combined with DPC model is likely to blow a gigantic hole in insurance companies’ traditional business. At the same time, it opens up many opportunities that health insurers such as Aetna have already begun to capitalize upon.

Health Insurance's $4.4 Billion Bunker Buster - Part II

In the first part of this two-part series, I highlighted how the Medical Loss Ratio and Direct Primary Care facets of Obamacare would have far-reaching impacts beyond what most commentators have observed. Healthcare providers and plans (with a few exceptions) are still flat-footed on these critical game-changers. In contrast, DaVita has made some wise moves that should position them well for the future.

DaVita’s Multi-billion Dollar Acquisition Spree

Davita’s $4.4 billion acquisition of Healthcare Partners is further evidence of a radically altered health insurance landscape that is taking shape. DaVita is a dialysis powerhouse that has been expanding beyond its core to capitalize on the dramatic shifts reshaping healthcare. Healthcare Partners is the largest owner/operator of physician practices in the country. HealthCare Partners manages medical groups and physician networks under a system that rewards lowering health costs. Healthcare Partners’ focus on savings and improved outcomes drew DaVita’s interest because its model is “where the puck is headed for American health care,” DaVita Chief Executive Officer Kent Thiry told analysts on a recent conference call.

The Healthcare Partners acquisition comes on the heals of DaVita’s acquisition of ModernMed, a Direct Primary Care (DPC) practice. See news report here and company release here about DaVita’s new Paladina Healthdivision. The combination of aggressive moves in DPC with the Healthcare Partners acquisition could be a potent combination. [See also The Marcus Welby/Steve Jobs Solution to the Medicaid-driven State & County Budget Crisis for more on this game-changing healthcare delivery model that disruptive innvators such as Jeff Bezos and Michael Dell have invested in.]

DaVita’s moves are the best example I have seen of a healthcare organization aggressively repositioning itself to leverage its resources into growing market opportunities.

Change with or without Obamacare

With or without Obamacare, it’s clear to this observer that healthcare is entering a deflationary period that has parallels with the reshaping of the media landscape.  Like healthcare, local media is another industry that has been dominated by market-specific monopolies and oligopolies and where massive capital investments represented a competitive barrier to entry. In newspapers, it entailed owning printing presses whereas in healthcare it has been owning large hospitals.

However, as I highlighted in Nimble Medicine Reshaping Healthcare, more and more medical procedures that could only be done in hospitals in the past can now be done outside of what is always the most expensive place to deliver healthcare. Instead, they can be delivered in healthcare settings such as those now owned by DaVita. This parallels what we have already seen in the local media where lower overhead businesses can thrive in a deflationary environment. Substitutes to newspapers such as Craigslist, OpenTable, Zillow and countless others have demonstrated one can still profit in a deflationary environment, but it can be nightmarish for incumbents.

 Once upon a time, we relied on newspapers for stock quotes, international news, real estate listings, sports news and much more. Today most people receive that information from sources other than newspapers. These alternative channels operate on a much lower cost basis and thus the advertising rates to reach the same number of people have dropped precipitously. It’s not surprising that the healthcare industry has thus far been able to successfully keep pricing as opaque as possible with the massive lobbying investment that has been made. Avik Roy reported recently how a Republican-controlled state (Arizona) government has kept a $250 procedure priced at $4,423. However, businesses being crushed by healthcare costs are fighting for price transparency by signing up for services such as Castlight Health’s price transparency tools. In light of this startup receiving a massive $180 million funding, it appears they are getting a strong response from their corporate customers.

Healthcare providers would be wise to learn from DaVita’s move. Many are focused on automating flawed healthcare reimbursement models as outlined in Health Systems Spending Billions to Prepare for the “Last Battle”. In contrast, DaVita is well positioned to apply their resources and expertise to capitalize on a promising model.

 Note: Dave Chase will be presenting on Patient Engagement during the Accountable Care Organization session moderated by author and Harvard surgeon, Dr. Atul Gawande at the HealthData Initiative “Health Datapalooza” event. The forum is hosted by the United States Chief Technology Officer, Todd Park. Chase’s presentation takes place on June 6, 2012 at theWashington DC Convention Center. He will be making himself available to Forbes readers during the event. He can be contacted at dave{at}avado[dot]com. Information on the event is at www.hdiforum.org.