Monday, October 5, 2009

Do Health Insurers Add Value?

“We need to really spank them.” There we were, in a conference room in a hotel in Philadelphia, a bunch of insurance company bureaucrats, listening as a well-paid consultant outlined our future. This was several years ago, when it became clear that managed care, after some initial success, was failing to control costs in the healthcare system.

The consultant’s “them” – the Other – was the patient. And the new tool – which we would use to spank patients – was called consumer-directed plans. The central idea behind this new tool was that individual consumers didn’t know how expensive health care really is. So we would show them by shifting a lot more of the cost onto their shoulders.

I had my doubts. Not about selling the plans to employers. After all, as the individual’s share of the cost went up, their share would go down. That’s not a tough sell in corporate America. My concerns centered on the unexamined assumption that improved knowledge of costs would alter a patient’s behavior. Would someone in the middle of a heart attack actually stop and shop for the cheapest emergency room? Or even want to go to the cheapest emergency room? Death trumps money, or something like that.

In medicine, we’re often dealing with forces far more powerful than a balance sheet.

I had been a fan of managed care. With its emphasis on wellness and preventive care, I thought there was a real chance to bend the cost curve down. And the messages were simple, the actions within an individual’s control: stop smoking, wear a seat belt, eat right (five servings of fruit and vegetables a day). Get a mammogram, and (gasp!) maybe get some exercise.

All these changes in behavior ran up against deep-seated habits: I didn’t think they would be easy. But I knew they worked.

The real flaws in managed care were less obvious to me at the time, but in hindsight they’re clear.

A Command Economy

First of all, the managed care system was effectively a command economy. This means that a few people at the top make all the decisions. The classic example is the old Soviet Union, with its bottlenecks at the top, where people made decisions slowly and often badly, at least partly because they didn’t have the right information.

In managed care, the insurance companies took on the command role, effectively telling doctors how to practice medicine, often in great detail. Of course this also meant that the range of options available to the patient was restricted.

This could be annoying, often in small ways. I remember years ago going to the doctor with an inflamed cyst on my neck. I wanted it lanced. I had had a similar cyst on my shoulder, years before, and lancing the cyst had worked fine. It did not occur to me when I went to the doctor that I would not get my wish. Instead, my physician, my healer, looked me in the eye and told me that lancing involved a surgeon, and surgeons involved money, and I was going to take aspirin and use warm compresses until the inflammation went away. Which I did. I’m still annoyed. If he’d offered me a range of options, and outcomes, and prices – in other words, a market economy – I think I would have been happier. I might even have taken his advice.

Capitation Completes Role Reversal

The managed care system reached its logical culmination with something called capitation. The insurance companies correctly saw that the fee-for-service system – in which the doctor is paid for each service performed – gave doctors a strong incentive to provide extra services. The command economy was supposed to eliminate this, but it didn’t. And so came the idea that the insurer would pay a set fee for each patient in the doctor’s care – capitation. (Caput means head in Latin, but the doctor actually got the whole body.)

By doing this, the insurers effectively shifted the risk to the doctors, all while continuing to tell them what they could or couldn’t do.

As a result, we had doctors trying to be risk managers, taking out reinsurance so they could stop their loss if a very sick patient threatened to cost more than the fixed rate the insurer was paying under capitation.

So the doctors were in the insurance business, and the insurers of course were effectively practicing medicine with their treatment mandates. It was a neat role reversal. Nobody was doing what they went to school to do. I mentioned this to one of the benefits gurus at work – a vice president. He smiled at me and said, “Bill, it’s not that simple.”

The Romance of Complication

It never is. I’ve often marveled at the love of complication that one sees in insurance companies. Executives habitually defend this complexity by saying they’re providing choice, but I think they just like it.

Years ago this impulse may have been manageable, but with the advent of computers the situation has gotten entirely out of hand. I remember I was at another meeting, this one also about the birth of consumer-directed plans. A very nice vice president from Connecticut was showing how we could empower consumers to build their own plans. In this model every possible option in a plan was placed on a grid, and the consumer was allowed to choose at every point. I believe the grid she was showing was 10 x 10, but this was only a simple example. She looked lovingly over her shoulder at the PowerPoint slide, then looked back at us and smiled. She loved her new toy.

So do these choices influence consumer behavior, or simply confuse the hell out of people? And let’s think about the poor people who work at the company, as call reps and claims processors. It’s not that hard these days to design a plan that’s impossible to administer.

The higher ranks of insurance companies are largely populated by accountants and actuaries. There are lawyers, of course, and even the occasional doctor, but mainly the people in the executive suites like to play numbers games. They think, they know – here’s that unexamined assumption again – that they can use price to influence behavior.

Economic Man and Behavioral Economics

Why are insurance executives so sure they can use price to drive behavior? Because they learned it in school, in economics class, where they met “economic man,” the rational actor who lies behind untold numbers of algorithms, always choosing the best product at the lowest price.

I do wish insurance companies employed more economists. Economic man is an older model. His rationality – his intense numeracy – has been significantly modified in recent decades by the rise of behavioral economics. The joke about the old economic man algorithms was, “That looks great in theory. I wonder how it works in practice.” Behavioral economics goes into the field and observes behavior, then attempts to explain it. It turns out that vendor relationships are “sticky.” In other words, people have loyalty. They may even have trust, say in their doctor. Price is not the only consideration. Who knew?

So playing with numbers only gets you so far. Human psychology – very messy, numbers people don’t like it – often gets in the way of rational decisions. Here’s the second shoe – I alluded to it before. It’s the structure of medical care. While people may shop for a good price when the situation is routine and when they can actually find out what the price is beforehand – I’m thinking of buying a new pair of eyeglasses – a visit to the doctor’s office may not be like that. You may go in complaining of shortness of breath, thinking it’s some kind of nasty cold, and the next thing you know you’re hooked up for an electrocardiogram. Did you remember to ask for the price sheet on that? Then, of course, there are the emergencies. You were crossing the street on a green light, and a driver busy writing a text message knocked you flat. You’re unconscious. How do you ask the ambulance driver for his price sheet?

We live in a world where information is often imperfect (something Hippocrates noted), and where the decision maker is occasionally unconscious. Take that, Economic Man.

Where to Now?

Insurers actually seem to perceive the failure of their efforts to use price to influence behavior. A sign of this is the new push – really, it’s all the rage – for wellness programs. You may remember that wellness was a big deal back in the days of managed care. Then, of course, the idea was that wellness would be managed by doctors and nurses sitting face-to-face with patients. Now we have four-color pamphlets and 24-hour help lines. Why? Because insurance companies don’t pay for doctors to chitchat with patients. They only pay for services rendered, and you’d better have the right ICD code on your claim. (ICD stands for International Classification of Diseases.)

It’s been an interesting several decades in healthcare – a long and winding road. I’d be tempted to feel sorry for the insurance companies if they didn’t have so much money. They’ve made a number of efforts to control costs in the system. They’ve basically failed. They have tried to fill roles better suited to physicians, and things haven’t gone very well there, either.

I haven’t even talked about the uninsured because, for the insurance industry, they are what economists call “externalities” – they simply lie outside the machine that makes the money.

If we look at the situation clearly, we have to ask ourselves, how are the health insurers adding value? Remember: Spanking doesn’t add value.