Common Response to Description of Managed Care Industry: "Sounds Like a Racket!"

Whenever I describe the managed care industry's profit-bloated role as the middleman in American healthcare, my listeners' common response is, "Wow, what a racket!"

People express real incredulity when they hear how Blue Cross, United Healthcare, Cigna, and Aetna are becoming increasingly monopolistic in their control of employer-sponsored health care plans by controlling the financing, administration, and delivery of employee benefits to tens of millions of employees and their dependents.

As the nearly "perfect" middlemen, these managed care behemoths have done an incredible job of keeping buyer and seller of health care completely isolated from each other. If you think that's an exaggeration, just ask any major employer to list the ways to access a network of medical providers. Or ask a major physician group to list the ways to access patients who are the employees and dependents of a local employer. In both cases, you'll get the same answer: Managed care company's PPO network.

After years of being held hostage by their insurance companies, employers have forgotten that they can go directly to doctors and hospitals for reasonable (and discounted) pricing on medical services. Without the middleman's cut to support enormous profit margins, that pricing can translate into additional savings for the employer and lower overall health plan costs.

By the same token, medical providers, who've been under the thumb of the commercial managed care industry for the past 20 years, have forgotten that they can go directly to local employers as the doctors and hospitals that can provide care to health plan participants. Without the middleman's continual "hammering-down" of reimbursement levels to maintain their profit margins, providers can obtain fair and reasonable reimbursements, while still saving those employers enough money to make it a good deal for everyone.

The notion that the managed care industry's involvement as middleman is a "racket" is supported by the stark disregard the industry demonstrates for employers and medical providers alike. The billions in profits inflating year after year are a real slap in the face to employers who are struggling with rising health plan costs and providers who are equally struggling with dwindling reimbursements.

To be fair, there was a time (maybe back in the 1980's) when managed care companies served a useful, necessary purpose as facilitators of managed care for employers. During those years, these same companies would develop ready-made networks of preferred providers who agreed to discounted reimbursements in exchange for "preferred" access to patients who were the employees and dependents. This saved the employer the time and cost of contracting with medical providers. At the time, there were reasonable "access fees" charged by managed care companies for "leasing" the PPO networks to the employer and most of the negotiated discounts actually showed up as savings in the employer's health plan bottom line.

Somewhere along the way, however, managed care companies and the insurance carriers that were starting to dominate the industry, realized they could skim a larger and larger portion of the difference between what they were paying doctors and hospitals, and the amounts they were ultimately charging employers. Even as they continued to whittle away at provider reimbursements, managed care companies were raising the insurance premiums and/or administrative fees charged to their employer clients. Mergers and acquisitions in the health insurance industry (and the resultant increasing monopolization) exacerbated the situation as employers had fewer and fewer choices for change. In the end, employers were left with few options except to cut benefits or mitigate increases by cost-shifting onto employees.

Ironically, but perhaps not unexpectedly, the very programs used most by employers for shifting more health care costs onto employees, such as consumer-driven health and high-deductible plans, showed up as insurance company products. The "double-dip" in that scenario is that the insurance industry has enjoyed huge profits from selling those products to their employer-clients, too.

I've said it before: It takes a special kind of employer to stand up to the managed care giants of American health care and say, "Enough!" It means leaving the comfort zone of having someone else largely run your health benefits program, albeit at a huge and ever-increasing cost. It means being willing to take back control of your health plan dollars and spend them as wisely as you would on any raw materials, processes, or services you would buy for your company. It's not hard to do and I provide plenty of information on my website about it.

No Matter How Health Care Debate Turns Out, Employers Must "Reform" Their Thinking About Managed Care

Regardless of how the current debate on U.S. health care reform turns out, employers who sponsor health plans will still face the same problems they had before the debate began: Rising costs and declining service from managed care companies.

It's time for employers to "reform" their thinking about managed care and stop allowing the giants of that industry to dictate the costs of healthcare and the accessibility to medical providers.

For most major employers, health plan costs represent the next largest expenditure after employee payroll. Ironically, the same companies that take extensive measures to control the costs of production and operations through careful vendor selection, negotiation, and oversight do relatively little when it comes to their own health plans. They turn control of those plans over to handful of increasingly monopolistic health insurance giants: Blue Cross/Blue Shield, United Healthcare, Cigna, and Aetna (BUCA, for short). What BUCA says, goes. Both in terms of the providers that make up their networks and the costs of their programs, employers have little choice but to take what is given them. Why? Because employers believe there's no other choice.

Used to be, there were plenty of health insurance choices. If an employer's health plan costs were rising to quickly or service was declining, an RFP could be issued and there would be lots of quotes from competing companies. Each competitor would have its own network of doctors and hospitals and its own administrative services. HR people could pick and choose the best vendor for the job. Some employers even combined networks and health plans to build solid programs. Sadly, those days ended long ago. There's been an incredible consolidation of managed care networks since the late 1990's with local and regional PPO's being gobbled up by BUCA, MultiPlan, and a few other behemoths.

Any employers who were going to switch carriers (two or three times, in some cases), to get better rates or networks, have already done so. And since switching more than a few times makes an employer an unattractive risk to other insurers, many employers have remained stuck where they are as hostages of their current managed care vendor. Choices have become so limited that employers give up on the notion of ever changing vendors. They throw up their hands and surrender to ever-rising costs. Defeated, their only hope is that their "captors" will come up with some solutions.

At best, the solutions put forth by the health insurance industry over the past 15 years have done little to control soaring health plan costs. Ideas, such as Consumer Driven Health Plans (CDHP) seemed viable, at least on paper, and were heavily pushed upon employers and the general public by the insurance industry as the answer to rising costs. Unfortunately, without a system that allows complete transparency of all medical costs and objective measures of provider quality, CDHP simply doesn't work. Ultimately, CDHP has become nothing more than a slick way to shift more of the costs onto employees, while allowing insurance companies to continue to reap huge annual profits at the expense of employers whose plans they handle. And that "reaping" will continue, as long as employers are distracted by token solutions promulgated by an insurance industry that blames rising U.S. medical costs, while ignoring its own profit-driven motives, as the major source of the problem.

The recent, "2010 Segal Health Plan Cost Trend Survey," predicts increases in the per-capita medical claims costs will range from 10.2% to 13.3%, depending on the type of plan. That's four times greater than the forecasted annual increase in average hourly earnings and sharply higher than the Consumer Price Index which has remained relatively flat over the past 12 months. Cost inflation for PPO plans, which represent 80% of all employer health plans, will rise by 10.8%, according to the survey. For employers who remain locked into BUCA or other managed care plans, 2010 will simply be another year of "biting the bullet" with regard to rising costs.

But, for employers who are sick and tired of swallowing another year of rising costs, while health insurance companies record new record profits, there are other solutions. Direct provider contracting is one of them. For years, I've talked about my clients, major employers that self-insure their health plans, have their own direct provider networks, and process claims through third party administrators (instead of insurance companies). These same employers are enjoying near zero medical inflation year after year. While clients of BUCA agonize over another year of cost increases, my largest client's annual per employee medical costs are 60% below the national average. Something about direct contracting obviously works very well, but it takes "reformed thinking" to see it clearly and evaluate its potential.

No matter how the health care debate turns out, employers who continue to suffer from rising health plan costs really do have a choice. Continue to suffer at the hands of the health insurance industry or reform their thinking about managed care. I encourage every CEO and CFO to look at where you are today and make the choice.

Held Hostage By Managed Care Companies, Employers Seek Escape Plan

Major U.S. employers are being held hostage by their insurance carriers/managed care companies and promises of freedom have worn thin. Despite healthcare reform debate, rising medical plan costs continue to pummel employers. Corporate health plan costs are projected to increase again this year by more than 6%*. Since 1999, costs have increased by 134%**, nearly five times the rate of inflation.

"Ironically, during the same 10-year period, private insurers posted record profits, while holding their employer-clients as hostages, feeding them only soaring costs, poor service, and lots of excuses."

Employers are desperately trying to escape their hostage situation. But one major east coast company may have found the way out. The privately-held company just celebrated its 8^th straight year without a medical cost increase. In fact, while other companies reduced benefits to lessen crippling rate increases, this employer, whose medical plan covers 45,000 lives, actually enriched its benefits program. Today, its annual health plan costs per employee are 60% below the national average. These astonishing results were achieved without a major insurance company’s help. They simply eliminated the managed care middleman entirely and contracted directly with doctors and hospitals.

Cutting out the middleman is an age old idea, but when it comes to employer health plans, insurance carriers still hold employers hostage. Large managed care networks, controlled by profit-bloated and increasingly monopolistic private insurers, have emerged as the only means of coverage for employers. They’re also the dominant source of patient revenue for doctors and hospitals, so medical providers are held hostage, too. Consequently, the middleman controls both sides of the healthcare equation and effectively prevents buyer and seller from doing business directly with each other.

Though highly effective, direct contracting is still largely unknown to CEOs whose companies are held hostage. Whipsawed by relentless cost increases, their benefit departments still rely on profit-centric insurance companies for cost-containment strategies, most of which are based on conventional managed care networks and cost-shifting onto employees. As true hostages of the big carriers, employers have been brainwashed into believing there’s no viable alternative to the carrier’s approach. They’re convinced that if the big insurers like Blue Cross, United Healthcare, Cigna, and Aetna don’t have the answer, no one does. But direct contracting proves otherwise.

Direct contracting creates a “win-win” business relationship between employer and medical provider, the true “buyer” and “seller” in the managed care equation. By cutting out the managed care middleman, the employer and provider eliminate the inherent disadvantages and financial shortcomings found in commercial managed care contracts. The direct agreement saves the employer money without shortchanging the medical provider. It creates a strong, stable, long-term, and mutually beneficial business relationship.

Employer-owned networks are comprised of doctors and hospitals that provide medical care according to the employer’s health plan. For instance, the east-coast employer mentioned earlier has direct contracts in place with more than 10,000 physicians and 80 hospitals across 15 states. Direct agreements give employees and dependents easy access to medical care, while paying those providers quickly, fairly, and without administrative hassle.

Direct contracting bears no resemblance to the complex, adversarial, and financially disadvantageous network agreements forced upon medical providers by insurance companies. Direct networks truly unite physicians and employers in the goal of providing accessible and affordable medical care to employees, without the obstacles and costs found in commercial PPO networks.

As an alternative to HMOs, PPOs, and other commercial managed care approaches, directly contracting is a proven solution for employers who are desperate for relief from soaring costs. For employers held hostage by insurance carriers, direct contracting is a bold plan of escape. However, for such a plan to work, it takes strong leadership and a willingness to endure risks along the way. But for those companies that do, the rewards of freedom from the carriers can mean huge savings, happier employees, and better control over future health plan costs.

* According to Towers Perrin's 2009 Health Care Cost Survey, the average corporate health benefit expenditure in 2009 will be $9,660 per employee--an increase of 6% over 2008 figures.

** Kaiser Family Foundation Employer Health Benefits 2009 Annual Survey.