HMO Decline Threatens Payment Reform

Today’s Managing Health Care Costs Number is 16%

There is widespread agreement that moving away from ‘fee for service’ payment and toward capitation or bundled payment can help lower utilization, and help us control health care costs.  That agreement crosses ideological and partisan boundaries; troubles with fee for service payment are cited by both Democratic and Republican health care reform advocates.   (However, it’s been a larger portion of Democratic proposals, as Republican proposals have focused more on engaging patients in cost-sharing.)

The Affordable Care Act includes a bold proposal to move Medicare members into “accountable care organizations,” which could better accept bundled payments.   That’s a good thing – and Medicare is a big enough payer to have an enormous impact on the provider community.

But there is a trend that threatens to make bundled payment even more difficult to implement for non-Medicare beneficiaries.  

Most bundled payment or capitation programs are designed for HMO members – because it’s easy to attribute patients to a specific health care system.  The much-ballyhooed Blue Cross of Massachusetts Alternative Quality Contract is only administered for HMO members.   HMOs also tend to be fully insured – so that the health plan arranging the bundled payment or capitation can do so without asking for permission from dozens (or hundreds) of self-insured accounts which have the ability to design their own plans. Self-insured employers are leery of alternative payment mechanisms –and it’s difficult to arrange and administer capitation for a multitude of health plans with tiny differences.

HMO membership is half of its 1993 peak.

The pull to self-insured status is inexorable for employer-sponsored health plans because:

·         Employers can have a single benefit design across the country – which makes it easier to administer and facilitates employees transferring from region to region.

·         Employers don’t need to follow state mandates – which could  be expensive

·         Employers can also sidestep state regulations – which could be expensive in terms of both benefits and complexity of running a multi-state organization.

It’s also not surprising to see the decline of the HMO benefit design.   Who wants to be forced to seek referrals for specialty care – especially when these don’t appear to lower cost much, and when it appears that many primary care offices aren’t scrutinizing these anyway?  PPO product design offers more choice – and is especially attractive since HMOs with less choice aren’t a lot less expensive.

The rise of self-insurance and the move away from HMOs will make it substantially more difficult to implement bundled payment.   We’ll need creative ways to “assign” patients to different providers based on who actually performed services,  like the loyalty cohorts described by Dartmouth.  However, providers are reluctant to take financial responsibility for a patient population that is not clearly identified in advance.  Also, loyalty cohort methodology that works for those over 65 might not perform well in the population insured through employers.