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OCR for page 22
Insurance, Health Benefits, and
Health Care Financing
Allen D. Feezor
First off, it is a delight to be here and see so many good friends and
colleagues with whom I have had the pleasure of working while I was in
Washington. In fact, I think I attended, when I was on one of the IOM
panels in 1988 or 1989, one of the first Rosenthal lectures. So it is a plea-
sure being back at this time.
Actually at the risk of maligning Marion, she misled you a little bit.
The fact of the matter is that she did not swap a speaker for me to show up
here, she just couldn't get anybody else to follow Don. And Don, after
seeing your presentation and having read the entire report, I felt that you
did a superb job of breaking it down and putting it in a definable fashion,
which I didn't think you could do in a 30-minute period of time.
The reason I so readily accepted Marion's invitation was that I would
not be spending much time talking about the quality measures and try to
be on a par with Don, but rather I would talk about where a third-party
payer I should say an employment-based health plan is at this time, in
the plight of desperation that we have. In that regard, I think if we can
begin to move our health care system in many of the directions that are
laid out in the Chasm report, it is something I and many other employ-
ment-based health plans will welcome.
There are two big caveats right up front. First, I am not an employer.
I will frequently jump over to an employer role, but I run a health plan for
1.2 million public employees. Second, the observations you will hear about
our health care system are my own. If they fall short of the intellectual
stimulation that you might have hoped for, then they clearly are my own.
22
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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING
23
I am a little like a congressional staffer. If they turn out to be very stimu-
lating, then they are obviously a product of the board with which I work.
What I would like to try to do in about 20 minutes time, is to give you
just a little bit about what calPERS is or is not. Having spent my formative
years in policy and having seen calPERS made into a poster child for man-
aged competition, I think I probably have to do a little bit of correcting on
that and tell you what it is and, more importantly, what it is not.
I would also like to spend a little bit of time talking about what the
marketplace in California is like and the frustrations that many of us on
the payer side are currently having.
Third, I would like to finish with this, the 2002 bids, which I can tell
you for the first time publicly what our rates will be are a little bit short
of what Wall Street was expecting. But more importantly, we must cast
that in a framework in which now we try to say, "What does this Chasm
report mean to us?" I will give a very few observations about some par-
ticular points I think the report made that are like water in a dry desert,
and something that I hope will be picked up and run with more broadly.
Finally, I would like to come back and say a little bit about what
calPERS is trying to do not that we are unique, but that we may symbol-
ize a little bit early the frustration of employment-based plans at this par-
ticular time.
I will start where I hope to end, and that is that payers that is, em-
ployment-based coverages are facing about four options, especially as
we face the next 6 to 10 years of double-digit inflation due to the aging of
our population.
The first option is not to provide that coverage. If you have not looked
at the most recent Mercer Report, from 1993 to 2000, the number of em-
ployers of over 500 that are offering retiree health coverage, that is, retir-
ees over 65, has dropped from 40 percent to 26 percent, a significant drop
that accelerated even more than we thought in the late eighties when that
was happening.
The second option is what I refer to as death by incrementalism: con-
tinue to whittle away at the benefits, continue to whittle away, and try to
shift the cost from the employer to the employee. This is something I have
been engaged in myself with my self-funded plan this past year. That is
not a good option, and also what I call death by incrementalism. You then
hope and pray that things will get better and that the funding-pricing
cycle will return to your favor. It probably will not, given some of the
demographics we are looking at.
The third option is what I call put the money on the table and run-
that is, defining contribution strategies. Being a little bit harsh with that,
there are a range of variations of where you provide a lot of employee
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CROSSING THE QUALITY CHASM
support, decision making, and some prescreening of the options they
would have.
The fourth option is to try to find a way to get the current health care
system and the current care management system to produce better value.
I think the blueprints that the IOM has laid out, both in the first report and
certainly in the latest report, set forth a call not just for improving quality,
but a call for revolution in the design and delivery and the values that our
health care systems promote, and I hope we will be able to deliver on that.
What is calPERS? Most of you know the pension plan. More specifi-
cally, we are a public employee health plan for 1.2 million people; that
includes both actives and retirees. Retirees count for about 20 percent of
my business. While my predecessor many of you may know Margaret
Stanley referred to us as a TPA, we probably more closely approximate
a multiple employer welfare arrangement. In that regard, I have 13,980
employers that I try to provide coverage for and it runs the gamut from a
four-member mosquito abatement district to a 400,000 employer called
the State of California. Pleasing all of them is an interesting task.
Sixty percent of my enrollment is, in fact, state-based, and 40 percent
are locals, local governments and education. Current expenditures for this
year will be about $2.3 billion. The increase we were projecting, or that I
was asked to approve this year before we started our negotiations with
our HMOs and before we have done our calculation on our self-funded
plans, is about $600,000 more dollars. Yes, that calculates to about 23 to 24
percent of the base, which is significant.
Three-fourths of our enrollees are in 10 HMOs. Many of you may
have read we are going to have three fewer HMOs next year. Actually we
will have two fewer; we are adding one back. Three-fourths of our HMO
population are in three HMOs: Kaiser; HealthNet; and Pacific Care. One-
fourth are in our fastest growing plan, which is in fact our PPO plan, and
it is fast growing because of two things: the first is a certain reaction to the
anti-managed care public policy initiatives that were particularly preva-
lent in California in 1999 and 2000; and the other one is, quite honestly,
that almost all of the HMOs in California are withdrawing from the rural
and nonurban areas. They only want to do business in those counties
where they know they have the margins and the volume needed.
Myth versus reality is very important. calPERS is a price maker. I
know that Tom Elkin has served on some of the committees here as well,
but Tom basically saw what we call a soft pricing market in the mid-199Os
and opportunistically took advantage. Soft market? I would say it was a
stupid market. Forgive me for this, but Kaiser was trying to give away or
buy a lot of business. We had our commercial HMOs trying to increase
their volumes and willing to bid any price, thinking they could make up
that price by leveraging the providers. And quite honestly they were able
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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING
25
to do that because providers either did not know how to price their busi-
ness or were not willing to listen to the laws of nature and economics. The
reality is we are not a price maker, but we do take advantage of the mar-
ket.
We are an early price setter. The fact of the matter is, I get very frus-
trated with my good friends at Kaiser when they come in with some high
rates and two months later come in with some different rates. They say,
Allen, you are the first of any of our major contracts that we have to nego-
tiate with. Hence, we just have some plug figures when we start negotiat-
ing with you and then we get serious. The fact of the matter is, because we
are the earliest plan to go into the negotiation for the year 2002, and we
are one of the larger ones, we are watched by Wall Street, especially in
this day and time. Seven out of 10 of my HMOs currently are for-profit
HMOs. Five out of 8 that I have next year will be for profit.
Size means big discounts. The reality is that in the current market-
place, profitability of business is more important. With Lifeguard, one of
my best from my consumer reportings, one of my best in terms of physi-
cian satisfaction, we accounted for 12 percent of their business. They could
no longer afford to sustain the losses they felt they had to get in order
even to be priced on our sheet. Hence profitability is important.
In addition, and this is my favorite, we always talk about calPERS
being so very big in California. We are the third largest payer for health
care in California. Medicare is first; MediCal is about three times what I
am poor payer by a long shot, but nonetheless three times the size. Then
I like to remind my board that in fact there are five times the number of
people who are uninsured in California than we have insured through
calPERS, a pretty good driver in the marketplace itself.
Although we were made the poster child for managed competition,
the reality is until this year, until next week, and I won't know until the
board concurs in it, we have never, at the group purchasing level, thrown
out an HMO. Whether for quality, whether for price, we have said once
you are there, you are there. Not a prudent purchaser.
In addition, our enrollees, up until last year, have had very little cost
sharing, either in terms of premium or in terms of benefit, and we are
being brave enough to say that the office visit copay ought to rise to $10
next year.
Value purchaser? In that regard I think we try hard. We spend better
than $2 million a year in various surveys. The California Cooperative
Healthcare Reporting Initiative (CCHRI) many of you are familiar with
that not only profiles the plans, but we finally started moving to try to
do something that the report speaks to: try to move it away from plans
and to the individual providers. As it turns out, even with our profiling
the plan during any open enrollment, I have less than three percent of my
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26
CROSSING THE QUALITY CHASM
membership move. And we are now beginning to grapple with the issues
of choice.
The number one issue, of course, in health care in California right
now is cost. Like parts of the rest of the nation, we are looking at some
cost inflation coming back. But quite honestly I have told my board that it
is going to stay with us. Given the demographics of our group, and it is
not different from that of the Federal Employees Health Benefits Program
or any other employment-based program, the fact of the matter is that last
year when I stood before my board for the first time telling them what the
future was going to be, having been there a total of 30 days and I prob-
ably should have left after that prediction I told them my cost would be
going up, doubling every six years. The fact of the matter is that it is now
doubling every 4.8 years. Inflation is back.
What are the drives? They are no different in some regards: an aging
population; pharmaceutical costs; and utilization. In the two years pre-
ceding this one, utilization in my self-funded plan was a 13 percent a year
increase. Clearly, whenever there is a hiccup from the Balanced Budget
Act, we are the first to get tagged for some additional resources. Probably
one of the most significant drivers in California now is what I call the
depressed provider reimbursement. Those good years when calPERS not
only had no rate increases but negative rate increases in premiums, I am
now paying for. Nonetheless, that is genuinely understood and a lot of
the provider repricing is very significant.
Seismic retrofitting. We essentially, in California, will rebuild all of
our inpatient bed structure in the next 10 to 15 years. We have a chance for
systems enhancement and engineering; we have the microcosm. What we
will do in response to that is going to be a very big issue for us. There are
7 million uninsured. The good news is that the uninsured have not grown.
The bad news is, in the 10 or 12 years of robust economy, we have not
done a darned thing in public policy to deal with that.
Pacific Business Group on Health is one of the lily pads, I guess, for
the leap-frog initiative. I sit on that board. We are their biggest member.
In fact, not only is Pacific Business Group on Health requiring its HMOs
to inventory the level of readiness in terms of the three initiatives in the
leapfrog, but their various hospitals are, and we are asking our own
HMOs to do that. So we anticipate beginning to see that come back and
haunt us in some rates.
HMO profit expectations. One of the good things of living with the
pension investment side of the house is that I get to see a lot of materials
about some of the plans that I work with from a little different perspec-
tive. There was a good reading this year: it was supposed to be a banner
year. Buy HMO stocks, everybody said. But the reality is that the expecta-
tions were that the premiums would be nationally around 15 to 16 percent
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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING
27
for the year. I will come back to this, but it has played a very big part in
the prices we looked at this year.
Then the anti-managed care initiatives in the legislature I talked about
as being one of the others, and then this one is one that I had in the Gray
column and I moved it over; you might pick up on that. We don't have
blackouts or brownouts in California. We have Grayouts. For those of you
who are a little slow, that is the governor's name.
Quickly, just to give you an idea, it is interesting that we still have a
very good buy in the West. This is the West, not just California. That's the
good news. The bad news is that we had the second highest increase last
year in health care costs. HMOs are still a bargain in California. This shows
that the farthest to the left is in fact the current price of the average HMO-
and not surprisingly since that is still a deal the enrollment trends in
California versus the West, versus the rest of the nation. In terms of en-
rollment in HMOs, we are about 1.5 times what the rest of the West is and
about two times more than the nation. And my group is even higher than
that at about 77 percent.
Let me run through some key changes in the health care market, be-
cause I want to get to some comments about our current procurement
payment practices. Kaiser is no longer the leader. One of the great suc-
cesses in calPERS in California has been that we had Kaiser. They are 35
percent of my enrollment. Kaiser, because of its heritage, because of its
size, because of its economies, has always been one of the lowest-cost
plans. It has been the cornerstone and the bedrock of employment-based
coverages in the West. As Kaiser was unsuccessful in its expansion, as it
in fact tried to recoup some of those losses that have been so painful in the
mid-1990, in the last three years, Kaiser has moved from my lowest-cost
plan to my second highest. They have assured me they will move back to
their point of competitive position, but they don't ever anticipate being
back at the lowest. That is a reality that many of us in the California mar-
ket have to deal with.
Provider mergers and the clout that the mergers have provided is
another factor. If I had enough perspective, enough distance, I could have
enjoyed, from a public policy perspective, the battle between Sutter and
Blue Cross, because that was fascinating. On the one hand you had a
health system stating that the cost of delivery of a normal baby for a
HealthNet patient has got to be approximately what it is for a Blue Cross
patient, so we are not going to recognize big discounts just because you
are big and have purchasing clout. On the other hand, you had a system
that has been one of the darlings of Wall Street, that is, Blue Cross, and
Leonard has gotten good marks, for in fact having and exercising his big
discounts. If I had had 40,000 people who were without coverage, I would
have thought that was a very interesting debate.
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28
CROSSING THE QUALITY CHASM
The for-profit trend we have talked about. The real issue now, and I
will come back to this, is: this is why we are beginning to doubt that man-
aged care organizations have the will they have the ability but the will
to manage. Long-term commitments needed for healthy outcomes are not
present in a marketplace where, as the report points out, the relationships
are based on annual contractual arrangements.
The 2002 bidding process is very important. We have not only the
highest rates, but we have the greatest disparity in the requested rates
from what we call our target rates. And those are not target rates our
employers wanted to pay. Those are target rates for which my staff works
very hard in projecting the expenses, following the medical expenses and
trends, of each plan that we deal with; there is even a geographic rating,
on the demographics as well as the kinds of services. The rates being re-
quested were almost two times what the target rates were. We asked the
plans to bid under various scenarios: current bid; high-low option; alter-
native; and then one in which we said you get to design your own plan.
Mr. HMO, you get to design your own plan, all the innovations that you
would like. I will come back to what we found on that.
Second was there were no statewide HMOs. We asked if any of them
would like to take all of our business statewide, being given an exclusive.
Nobody is either that crazy or that ambitious. We have a constant erosion
from our nonurban areas. About 10 percent of the population, 15 coun-
ties, and 10 percent of the calPERS population do not have an HMO op-
tion.
calPERS has historically made choice among plans instead of choice
among quality providers or provider systems. That is coming back to
haunt us now as we try to move our enrollees away from that idea. Our
enrollees do not understand quality, even though we have a tremendous
number of measures and expenditures in the area of quality, and getting
them to even think in those terms is very important.
Medicare plus choice we no longer have. Only two of our eight HMOs
have it. We really have found now what, in fact, is most surprising-
that almost none of our HMOs seem to have any real strategy in terms of
targeting costs, improving quality, or repositioning themselves in the mar-
ketplace. When we ask them to design their own plans, to tell us how to
deliver care but just simply keep it within X amount of dollars, 95 percent
of the responses were cost shifting to the enrollees, which reminded me of
some of the indemnity carriers in the late 1980s. The fact is that most of
the strategies of the HMOs appear to go PPO. Interestingly enough, at
precisely the time we are talking about trying to find volumes of business
to more cost-effective care givers, we find our vendors going the other
way in terms of broadening their networks even further.
Finally, the current market focus is contrary to the longer-term com-
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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING
29
mitments and investments needed in NIS or in terms of provider relation-
ships we think to be successful.
So that is where we are. I can now jump to a couple of comments on
the report and then I will probably will stop, rather than talk about some
of the initiatives in the QUA that we are doing at calPERS.
First, the quality did not start the revolution. It was the fact that we
paid too much and we didn't have a say in what we were getting, I think.
I agree that we need fundamental change and we need a revolution. But I
think to go beyond health policy types and to go beyond professionals in
the business, we have got to get a currency that spreads it more widely to
get the fundamental change. And I think the report points to it in terms of
talking about the effectiveness and the efficiency as well as the safety. If
we take the initial report on errors at face value, when we do a back-of-
the-envelope calculation on the number of calPERS lives that are poten-
tially lost each year, in my plan, depending on which numbers you want
to use, between 100 and 200 of my enrollees die because of errors or prob-
lems.
The second thing I would suggest is that we need to remember that at
least the commercialization of our service industry is still relatively new.
Eight years ago we were talking about a government-designed health care
system. We rejected that and gave license to entrepreneurial energies of
which we are still seeing the fruits. Hence, it may be that instead of trying
to define our industry in a more narrow frame, as well thought out as it
might be, the pressures are almost to the contrary, particularly given the
. . ..
economic Incentives.
The two points in the study that I think are absolutely on target are
the implications of our migration from acute to chronic care. I don't know
that many people, perhaps outside the distinguished panel that put the
book together and a few others, who really understand the implications
of that. What is calPERS doing with regard to that?
I have access to some pretty good health benefit consulting folks, and
I called them and not a single one could tell me what benefit design
changes to make, let alone as the report suggests, what reimbursement
changes should be made to accommodate that point of moving to chronic.
We have a lot of work to do, and the report is beautiful for pointing that
out.
The second aspect is reinserting the individual and his or her social
family in the center of care and care management decisions. I will speak
for myself. I have always been a little concerned about a lot of the conser-
vative thought that wanted to move immediately to putting money in the
hands of the uneducated uneducated with respect to health care and
perhaps unmotivated, and expected somehow to control costs and pro-
duce better outcomes. The fact is that the report, the study, suggests that
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CROSSING THE QUALITY CHASM
with a total change and with a supportive delivery system you can make
that move. I think that is something we are going to have to think about
and work very hard on.
Certainly the reengineering of our physical as well as our human re-
sources is something that will be an indomitable task, and it is one that I
don't know, having just left an academic health center last year, we have
even begun to think about.
More remains. I think if there is an area that causes me some concern
in the report, it is the idea that inviting a free flow of information is a way
of improving care, is moving away from blaming for errors in terms of
using it for quality improvement, and is absolutely where we need to go.
But I don't think we can expect that to be done significantly in advance of
tort reform or legal reforms in dealing with the issues of privacy and con-
fidentiality. I am pleased that one of the latter recommendations is that
the Institute will in fact be looking at the legal reform issue as well.
Finally, dissemination of best practices in evidence-based manage-
ment with current competitive markets is something I would like to see
the Urban Institute or the likes deal with, because I don't think we have
really thought it through. If you take away the proprietary nature of this
sort of innovation, and you make that information broadly available, what
does that do? How do providers compete? How in fact do you help your
payers compete if you are going to? If one of the rewards is to move more
volume to the centers of excellence, or to the better producers of care, then
my concern is what impact does that have in terms particularly of rural
care and care distribution in our country. I think there are some questions
that should be brought out of that.
The final point is that the committee's work was good in saying that it
is absolutely essential that third party payers get into the picture, and I
think it is essential that we be part of that. Many of our providers are
currently conflicted, if you think about it. They have in their books of
business both capitation and fee for service payment: it is not a bad hedge
strategy. We do that in our investment, and maybe they are trying to fig-
ure out which way this is going to go.
The reality is that we do need some dramatic changes in our payment
system. Keep in mind that when we start thinking about that, the biggest
impact payer, without any doubt, in fact is government. If we consider
particularly the opportunity in the prospective payment system in terms
of outpatient payments, we will have an excellent onnortunitv to take into
consideration some of the reports.
The employer's commitment is likely to be cyclical. If you are asking
an employer to put some additional money on the table for quality im-
provements, as Pacific Business Group has tried to do in terms of its ini-
tiatives, if you try to do that during good economic times, where there is a
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INSURANCE, HEALTH BENEFITS, AND HEALTH CARE FINANCING
3
tight labor market and fairly static premiums, yes, that is probably some-
thing that we would be interested in doing. If, on the other hand, it is in a
downturn, where the labor market is getting looser and if premiums in
fact are on the rise, which is our current situation, then your answer is
going to be something different.
Having said that, rather than asking payers to put more money in the
pot by producing better outcomes, and that is ultimately what the report
is about, it is right on target. I have a board that won't be happy when I
have to go before them next week and ask for about $350 million more
next year. The first question they will ask is this:, "Allen, for that money,
can we get better performance and better practice?" And I think that is
what it is all about.
Should the money accompany the individual as essential decision
maker? I think that is something a lot of the employment-based coverages
are poised to do, although like me, they are a probably a little uncertain
about doing it in terms of a free defined contribution strategy; but in the
right environment that is likely to happen.
One point on which I would differ a bit: not only are longer-term
relationships between provider and plan and employer group desirable,
but I would argue that the individual himself should have a longer com-
mitment to his provider to the extent possible. They should always be free
to move for dissatisfaction, but I spend more than $2 million a year for
open enrollment. I sort of bombard people with a great deal of paper about
why they should move and make changes, and why they should be un-
happy, and as I said 97 percent of them seem not to be motivated to
change. Maybe I simply ought to let them change any time during that
time, and only do a really concerted effort every three years.
New payment forms are a must, and as we move from an encounter
to relational care, not only what we pay for, but how we make those and
what kinds of incentives must also change.
Then, finally, I think the report was a little bit conservative in saying
that perhaps it is too early to try for episodic chronic care reimbursement
schemes. I can tell you without any hesitation that the likes of Tom Davis
at Verizon, Peter Lee at Pacific Business Group on Health, and Allen
Feezor at calPERS are poised and ready to begin to try some of that from
the private sector side. So we would look forward to that.
I had a few more minutes on what we are going to be doing in making
some changes, but in light of both the hour and the need to get to some
more substantive questions, I simply will say thank you very much and
look forward to the panel discussion.
Representative terms from entire chapter:
health benefits
