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

1. December 3, 2003 Restorers, Skin-grafters & Calibrators: A Five-Year Forecast for Large Employer Cost Sharing Arnie Milstein MD, MPH Mercer Human Resource Consulting Pacific Business Group on Health 2003 A. Milstein MD

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

3. Three Employer Cost Sharing ArchetypesMost Offer Incremental Consumer Decision Support 2003 A. Milstein MD

4. Forecasted Private Sector Trajectory & Its Yield(Assumes availability, precision, and consumer grasp of health care performance measures will steadily increase) Higher Value of Health Benefits (“health gain per dollar”) Restorers Predominate Skin-grafters Predominate Calibrators Predominate Lower ‘02 ‘05 ‘08 2003 A. Milstein MD

5. 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

6. Question 1 Q: What fraction of average per beneficiary health care spending will employers pay? 2003 A. Milstein MD

7. 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

8. Question 2 Q: How will a beneficiary’s amount and percentage cost share be linked to individual beneficiary distinctions? 2003 A. Milstein MD

9. 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

10. Question 3 Q: Which beneficiary selections will carry a higher cost sharing burden? 2003 A. Milstein MD

11. 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

12. 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

13. Observation A:Predicted Increased Cost Burden Allocations Among Insureds Aligns with Locus of Largest Unharvested Efficiencies Estimated Static Savings from Insureds Selecting More Efficient Options(by year 3, while preserving or improving quality of care) 18.0% 17.0% 16.3% low est. 16.0% ? medium est. high est. 14.0% 12.7% ? 12.2% 12.0% Net Percentage Point Reduction in Commercial Spending 10.0% 8.0% 7.3% ? 6.5% 6.0% 5.1% 5.0% 3.7% 4.0% 1.9% 2.0% 0.9% 0.0% 0.0% MoreEfficient Providers Participation inHealth Management More EfficientTreatment Options* More EfficientPlan Administrator LeanerCoverage Level * Potential is large, but evidence base is weak. 2003 A. Milstein MD

14. 1.2 1.2 1.2 1.1 1 1 1 1 0.9 0.8 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

15. Observation C:High Longitudinal Efficiency and Quality are Compatible (Applies to selections of providers & treatment options) 50th %ile High Quality Low TCO (Dream Suppliers) High Quality High TCO MD Quality Index(outcomes or % adherence to EBM) 50th %ile Lower Higher Low Quality High TCO (Nightmare Suppliers) Low Quality Low TCO Higher Lower MD Longitudinal Efficiency Index (total cost per case mix-adjusted treatment episode) Adapted from Regence Blue Shield 2003 A. Milstein MD

16. 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

17. 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

18. 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

19. 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

20. Question 6 Q: Will higher quality be subsidized by employers? 2003 A. Milstein MD

21. 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

22. The Quality-Efficiency Inflection Point Higher Four SeasonsHealth Care Beneficiaries’ cost share will be higher if they select higher quality providers ImprovedProductionEfficiency(James, Berwick) Quality Beneficiaries’ cost share will be lower if they select higher quality providers 2018 ImprovedUtilizationEfficiency(Fisher, Wennberg) InflectionPoint 2010 2004 Lower Lower Higher Efficiency 2003 A. Milstein MD

23. 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