restorers, skin-grafters & calibrators: a five-year forecast for large employer cost sharing

Arnie Milstein MD, MPHMercer Human Resource ConsultingPacific Business Group on Health

Restorers, Skin-grafters & Calibrators: A Five-Year Forecast for Large Employer Cost Sharing

December 3, 2003

2003 A. Milstein MD

Mercer Human Resource Consulting 2

Why are Large Employers Re-Examining Cost Sharing?

Health benefit plans are rated the “#1 cost problem” in CEO surveys (BRT 2003)

Health benefit plans are rated “the #1 compensation/ benefits objective” in surveys of American employees

Tighter managed care and government regulation of cost are regarded as not viable

Large public sector employers and Taft-Hartley purchasers face a similar challenge

2003 A. Milstein MD


Three Employer Cost Sharing ArchetypesMost Offer Incremental Consumer Decision Support

Archetype Problem Definition Preferred Tool

Restorers “restore higher beneficiary share of health benefits cost”

Unintended and/or imprudent purchaser cost share creep over prior 30 years

Hollow out benefit coverage within all health plan options

Skin-grafters “get more beneficiary skin in the game”

Moral hazard Offset hollowed out benefits with portable spending account

Calibrators “calibrate beneficiary cost-share to discretionary inefficiency”

Beneficiary selection of inefficient options

Incentivize selection of efficient (and, perhaps, higher quality) options before and after plan enrollment

2003 A. Milstein MD


Forecasted Private Sector Trajectory & Its Yield(Assumes availability, precision, and consumer grasp of health care performance measures will steadily increase)

‘02 ‘05 ‘08

Higher

CalibratorsPredominate

Skin-grafters Predominate

RestorersPredominate

Value of Health Benefits (“health gainper dollar”)

Lower

2003 A. Milstein MD


To Whom Does the 5-Year Forecast Not Apply?

Many small employers

Large employers with mostly unskilled labor forces

Large desperate employers without labor agreements

2003 A. Milstein MD


Question 1

Q: What fraction of average per beneficiary health care spending will employers pay?

2003 A. Milstein MD


Question 1:

What fraction of average per beneficiary health care spending will employers pay?

A: Enough to attract and retain the required labor force.

– This fraction is decreasing in today’s weaker labor market and economy.

– Employer indirect cost savings from employee health care consumption will partly offset an employer’s total spending calculation, but be significantly discounted because it is less visible in employers’ financial accounting systems.

2003 A. Milstein MD


Question 2

Q: How will a beneficiary’s amount and percentage cost share be linked to individual beneficiary distinctions?

2003 A. Milstein MD


Question 2:

How will a beneficiary’s amount and percentage cost share be linked to individual beneficiary distinctions?

A: More will be paid by (1) service users; (2) those with dependents; (3) the more affluent; and (4) those making certain types of selections which increase spending.

2003 A. Milstein MD


Question 3

Q: Which beneficiary selections will carry a higher cost sharing burden?

2003 A. Milstein MD


Question 3:

Which beneficiary selections will carry a higher cost sharing burden?

A: (Pre-2004 – focused on bundled, annual beneficiary selections)

Insureds selecting

– A richer plan of benefits;

– A less efficient health plan (premium divided by enrollees’ predicted cost risk);

– Not to complete an annual health risk appraisal*.

*rare, but increasing

2003 A. Milstein MD


Question 3 (continued):

Which beneficiary selections will carry a higher cost sharing burden?

A: (Post-2004 – focused on unbundled, continuous beneficiary selections)

Beneficiaries selecting

– Not to participate in personalized program(s) to reduce risk of illness and/or cost;

– A less longitudinally efficient (a/o lower quality) provider;

– A less longitudinally efficient (a/o lower quality) treatment option.

2003 A. Milstein MD


Participation inHealth Management

Estimated Static Savings from Insureds Selecting More Efficient Options(by year 3, while preserving or improving quality of care)

7.3%

5.1%

0.9%

0.0%

12.2%12.7%

1.9%

5.0%

17.0%16.3%

3.7%

6.5%?

?

?

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

MoreEfficient Providers

More EfficientTreatment Options*

More EfficientPlan Administrator

LeanerCoverage Level

Net

Per

cen

tag

e P

oin

t R

edu

ctio

n i

n C

om

mer

cial

Sp

end

ing

low est.medium est.high est.

* Potential is large, but evidence base is weak.

Observation A:Predicted Increased Cost Burden Allocations Among Insureds Aligns with Locus of Largest Unharvested Efficiencies

2003 A. Milstein MD


1

0.8

1.21.1

1.2

11 1

1.2

0.9

A B C D E Unit Price Longitudinal Efficiency

(average adjusted total cost per acute episode and/or per year of chronic illness)

Observation B:Unit Prices are Poor Proxies for Longitudinal Efficiency

Tomorrow’sPreferred Providers

Today’sPreferred Providers

Adapted from Premera Blue Cross 2003 A. Milstein MD


Observation C:High Longitudinal Efficiency and Quality are Compatible (Applies to selections of providers & treatment options)

Higher LowerMD Longitudinal Efficiency Index

(total cost per case mix-adjusted treatment episode)

Low QualityHigh TCO(Nightmare Suppliers)

MD

Qu

ali

ty I

nd

ex

(ou

tco

me

s o

r %

ad

he

ren

ce

to

EB

M)

High QualityLow TCO(Dream Suppliers)

Low QualityLow TCO

High QualityHigh TCO

L

ow

er

Hig

he

r

50th %ile

50th %ile

Adapted from Regence Blue Shield

2003 A. Milstein MD


Question 4

Q: How much of the estimated incremental cost burden from sub-optimal selection decisions will be paid by the beneficiary making the decision?

2003 A. Milstein MD


Question 4:

How much of the estimated incremental cost burden from sub-optimal selection decisions will be paid by the beneficiary making the decision?

A: All of it, subject to income-tiered limits based on the “20/20 ogre test.”

(This is the heart of the Calibrator archetype)

2003 A. Milstein MD


Question 5

Q: Will employers transfer to beneficiaries the estimated incremental cost of sub-optimal selection decisions in a bundled fashion via annual (or multi-annual) selection of plans (or “sub-plans”); or in an unbundled fashion via continuous beneficiary selections after plan enrollment?

2003 A. Milstein MD


Question 5:Will employers transfer to beneficiaries the estimated incremental cost of sub-optimal selection decisions in a bundled fashion via annual (or multi-annual) selection of plans (or “sub-plans”); or in an unbundled fashion via continuous beneficiary selections after plan enrollment?

A: Both. Unbundled (AKA “point-of-care”) opportunities to select more efficient options will receive more emphasis because (1) they have been previously underused and (2) their easier “trialability” by beneficiaries is likely to improve consumer acceptance.

Purchaser emphasis on unbundled cost-sharing is reflected in early purchaser choices of “consumer-directed plans.” Most purchasers are opting for HRA plans or tiered plans which emphasize variable cost-sharing at the point-of-care.

2003 A. Milstein MD


Question 6

Q: Will higher quality be subsidized by employers?

2003 A. Milstein MD


Question 6:

Will higher quality be subsidized by employers?

A: Yes, until the inflection point where higher quality unavoidably incurs higher longitudinal net costs, after netting out indirect illness cost savings accruing to the employer. Beyond the inflection point, the implications of higher quality options will be transparent to beneficiaries, but higher quality is unlikely to be subsidized.

2003 A. Milstein MD


The Quality-Efficiency Inflection Point

Higher

Lower

Quality

Lower HigherEfficiency

2004

2010

2018ImprovedUtilizationEfficiency

(Fisher, Wennberg)

ImprovedProductionEfficiency

(James, Berwick) InflectionPoint

Four SeasonsHealth Care

Beneficiaries’ cost share will be higher if they select higher quality providers

Beneficiaries’ cost share will be lower if they select higher quality providers

2003 A. Milstein MD


Career Counseling for Your Niece/Nephew:What Knowledge Vacuums Need Filling for Cost Sharing to Optimize Social Welfare

Health economists (esp. researchers on consumer price elasticities beyond demand for care and for hospitalists)

Health psychologists (esp. researchers on non-rational decision making and quality-cost tradeoffs)

Health ethicists (fine turners of the “ogre test”)

Health care operations engineers (chasm-crossing pilots/ inflection point extenders)

2003 A. Milstein MD

restorers, skin-grafters & calibrators: a five-year forecast for large employer cost sharing

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