Health Care Current: September 22, 2015

Back to the future: Is managed competition making a comeback?

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.

Back to the future: Is managed competition making a comeback?

When I was in graduate school, many of my colleagues and I were intrigued with the concept of “managed competition.” The idea, originally championed by Alain Enthoven, was that employers or groups of employers would allow their employees to choose from among a number of health plans competing on premium and quality.1 Then, ideally, consumers would be engaged shoppers and competition for their business would lead to better value. This concept also surfaced through "health insurance purchasing cooperatives" and in Medicare as "premium support".

Despite the academic appeal of Enthoven’s concept, however, many employers moved away from offering employees a choice of multiple health plans as the benefits of becoming self-insured became readily apparent. Federal laws that allow self-insured plans to avoid state regulations, including mandated benefit offerings, helped keep costs down and made these arrangements particularly attractive to many employers. From 2001 to 2010, the number of individuals covered by self-insured plans grew 24 percent, from 55.6 million to 69.2 million.2

But now the pendulum appears to be swinging in the other direction. As states and the federal government enter year three of public health insurance exchanges (HIXs), findings from the Deloitte Center for Health Solutions 2015 Survey of US Employers suggest that many employers are also reconsidering their health benefit strategies. One way they are doing this is through private exchanges (PIX)—online marketplaces that allow employers to shift health insurance coverage away from a defined benefit to a defined contribution. Like the managed competition models of the past, private exchanges present employees with a range of benefit packages (and sometimes plan sponsors). The employer makes a fixed contribution, so employees spend less of their own money if they choose a plan with a lower premium and more if they choose a plan with a higher premium. While many employers began using private exchanges for their retired population, many are considering expanding private exchanges to their active employees.

There is a wide variety of private exchange models. They are created by private sector companies, including health insurance companies and brokerage or consulting firms. The exchange can offer a variety of plans with different premiums, co-pays, deductibles, and coverage options. PIX platforms tend to have consumer-support tools, such as physician finders, user-friendly questionnaires to help identify appropriate plans, cost calculators, and access to ancillary offerings like health savings accounts (HSAs).

A key question about this new version of managed competition is whether private exchanges will drive competition and lower health care costs for employers and employees. The employer respondents are positive about private exchanges. In particular, employers believe they could help decrease costs and provide employees similar coverage but with higher quality and lower cost. Many employers believe that private exchanges could simplify the employer’s role in health care.

Of employers who have adopted private exchanges (11 percent of the respondents), only 8 percent say they are not satisfied with their current private exchange and only one out of five say it has not reduced costs.

Employers cited other benefits. For example, 45 percent of the respondents have seen higher employee satisfaction due to greater control in how they spend their employer’s contribution. Many people like choice, especially if they get the information they need in a clear way. Ideally, private exchanges could leverage some of the best lessons learned from behavioral economics about choice architecture to optimize consumer and employers’ outcomes.

This may only be the beginning of the shift to private exchanges. Thirty percent of surveyed employers that have not adopted one say they are interested in moving to private exchanges, and the majority of those interested (62 percent) say they are likely to move in the next 1-2 years.

As employers increasingly shift their focus toward private exchanges, health plans (and others designing and offering private exchanges) need to understand what they want and what concerns they have. Importantly, almost three-in-four of the surveyed employers prefer or may be open to an insurance carrier-sponsored exchange. As Deloitte recently explained in Private exchanges: Wolf at the health plan’s door?, health plans that ignore the private exchange market run the risk of being left behind.

  • Health plans may have less direct access to employers: Private exchanges are aggressively selling the value of their models to employers with an increasingly full suite of end-to-end benefits services. As more and more employers move to private exchanges, access to those benefits may be increasingly controlled by the exchange sponsor.
  • Plans may have less access to consumers as they shop: Most exchanges today equip employees to choose a plan one time per year. As private exchanges expand capabilities to support consumers year round, health plans may become further insulated from the consumer, which may shift any opportunities for providing additional products and services to the exchange.
  • Health plans may have a harder time differentiating themselves from the competition: Driving to simplify product comparisons for the consumer, some private exchanges have established standard benefit design specifications. Less variation in benefits means less product differentiation opportunities for plans and more price competition.
  • Unbundling some services further reduces profit and differentiation: Under some private exchange models, health plans may have a harder time demonstrating value. Certain models carve out pharmacy services, medical management, and/or wellness services. "Unbundling" may make the health plan a commodity that competes only on the remaining product components. This could strip out opportunities for profit and may make health plans less appealing to employers.

Despite facing these threats, private exchanges may be an important new opportunity for health plans and providers. An insurer can bring novel offerings to market, supported by an exchange platform. For example, Fairview Health Services and North Memorial Health Care partnered with Medica, a Minnesota-based health plan, to develop an accountable care organization-based group product offered through the “My Plan by Medica” private exchange.

Based on what employers have reported to us, private exchanges appear to be an increasingly popular platform for employers to deliver health care benefits to their employees. Will they continue to demonstrate value and make employers happy? It may be too soon to tell if private exchanges will fulfill their potential, but if they do, they may significantly impact health plans’ role and value in employer-sponsored health care.

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Alain Enthoven, Health Affairs, “The History And Principles Of Managed Competition,” January 1993,
2 Michael Brien and Constantijn Panis, Deloitte FAS and Advanced Analytical Consulting Group, Inc., “Self-Insured Health Benefit Plans: 2013,” February 14, 2013,

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My Take

By Sarah Thomas, Research Director, Deloitte Center for Health Solutions, Deloitte Services LP


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Hospital discharges decreased from 2013 to 2014

Modern Healthcare recently analyzed data from the American Hospital Directory to find that hospital discharges fell 8.4 percent from 2013 to 2014. This suggests that treatment may be transitioning away from inpatient settings. Overall, the US had 28.6 million hospital discharges in 2014. But the rate varied by state. The state with the greatest decline had 52.4 percent fewer discharges.

Analysts attribute this drop in hospital discharges to a number of factors:

  • Changes in discharge reporting processes
  • Improvement in transitions in care to avoid readmissions penalties
  • Changes in population-level demographics; for example, states with higher rates of smoking, obesity, and certain chronic diseases have higher rates of hospital utilization, and states with larger non-Hispanic white populations have more hospital discharges; the latter may be due to that population’s higher average rates of employer-sponsored coverage

Related: The Deloitte Center for Health Solutions 2015 Survey of US Health System CEOs found that value-based care is driving health systems to focus on outpatient care. Payments tied to value and efficiency will likely drive health systems to shift their focus away from more costly inpatient services. The survey respondents said they expect inpatient services to become a cost center – rather than the revenue generator they have been – in just 10 years. In order to continue meeting consumer demands, health systems may need to consider offering more outpatient services and making them more convenient to meet consumer demand.

(Source: Sandler, Michael, Modern Healthcare, “Hospital discharges down in 2014,” September 12, 2015)

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Implementation & Adoption

Survey: Medical schools teaching future physicians about health care costs

A recent study from the Association of American Medical Colleges (AAMC) found that 129 of the 140 medical schools that responded offered required courses on health care costs in their 2013-2014 curricula. Nearly 40 percent of the respondents said their school offered at least one elective course on the subject.

The National Public Radio article covering the survey highlighted how University of California, Los Angeles is covering the topic of cost in many daily lessons. In addition to learning about clinical medicine, medications and prescribing, and diagnoses, future physicians will be taught how value plays into all of these aspects of practicing medicine.

Historically, many physicians have not discussed costs associated with the treatments they prescribe. Sarah Thomas, Research Director of the Deloitte Center for Health Solutions, recently explained that results from Deloitte’s 2014 Survey of US Physicians show that this trend continues, as only 53 percent of physician respondents said they were comfortable discussing costs with patients (see the My Take from September 1, 2015 Health Care Current). Still, about two-thirds of physician respondents said they consider comparative clinical and cost-effectiveness information when making treatment decisions for their patients with high cost-sharing. With the significant changes occurring in health care delivery and reimbursement and a greater focus on health care costs, many medical schools have begun to recognize the importance of educating their students on health care costs.

Moreover, 58 percent of consumers believe that physicians should provide this information. Health care reform has increased the importance of value considerations in care delivery. Patients with high deductible health plans or large copayments or coinsurance structures are becoming more cost-conscious.

(Source: National Public Radio, “Medical Schools Teach Students To Talk With Patients About Care Costs,” September 20, 2015)

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Health Affairs: Behavioral economics principles could solve common problems with physician incentive programs

Much research has focused on how behavioral economics impacts the way consumers interact with the health care system. This can include consumers’ participation in wellness programs or adherence to treatment plans. However, there has been less focus on how behavioral economics can be used to change physician decision-making.

A recent Health Affairs blog post explains the authors’ view that common physician payment incentives have failed because they ignored the principle that people are not rational decision makers and do not respond or respond in unintended ways to traditional incentive models that are based on carrots and sticks. To correct for this, the authors outline several ways that health plans or health care systems are applying behavioral economics to incentive models.

(Source: Anne-Marie Audet and Mark Zezza, Health Affairs, “How Behavioral Economics Can Advance The Design Of Effective Clinician Incentive Programs,” September 15, 2015)

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Study: Innovation in diabetes care could benefit from accountable care reforms

A study published in this month’s Health Affairs on non-communicable diseases explores policy reforms that may reduce barriers to high-value, disruptive innovation in diabetes care. The study evaluated diabetes care innovations focused on wellness, prevention, and management through community-based care models and changes in information technology. The researchers evaluated innovations in the US, India, and Mexico due to those countries’ high prevalence of diabetes and diverse health systems, social factors, and income levels.

While diabetes treatment models have improved outcomes for patients, policy barriers often keep innovative care models from reaching populations that could benefit from them. The researchers evaluated three innovative models and the barriers they have faced. While all three face institutional and regulatory barriers, financial barriers are the most prohibitive.

The authors highlighted policy reforms that could reduce these barriers, including greater adoption of add-on or subscription payments and bundled provider payment models, integrated funding streams and infrastructures, and stronger diabetes performance measures. Program developers may need to collaborate with providers, patient groups, and community organizations to demonstrate the value of the innovation to the appropriate agencies.

(Source: Andrea Thoumi, Krishna Udayakumar, Elizabeth Drobnick, Andrea Taylor and Mark McClellan, Health Affairs, “Innovations in Diabetes Care Around the World: Case Studies Of Care Transformation through Accountable Care Reforms,” September 15, 2015)

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CMS: Medicare Advantage enrollment reaches more than 17 million

Last week, the US Centers for Medicare and Medicaid Services (CMS) reported that 17.7 million individuals are enrolled in Medicare Advantage (MA). This is an increase of more than 7 percent over last year, when 16.5 million people were enrolled in MA plans. MA plans are attractive to many enrollees because they often offer low premiums and extra benefits such as hearing aids.

The Medicare program rates MA plans using a five-star quality rating system. MA plans with at least a four-star rating receive a 5 percent bonus, and plans with lower ratings receive no bonus. In 2015, 72 companies had plans with at least four stars, and seven companies had plans with a five-star rating. CMS will release star ratings for 2016 on October 8, in time for open enrollment, which runs from October 15 through December 7.

Related: CMS recently announced it would be testing a new cost-sharing model through MA, called the MA Value-Based Insurance Design (MA-VBID) initiative (see the September 15, 2015 Health Care Current). Typically, MA health plans are required to offer uniform benefit and cost-sharing designs to enrollees. The MA-VBID program will allow plans in seven states to test four new design models.

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MedPAC begins fall session with discussion of post-acute care and Medicare Advantage star ratings

Earlier this month, the Medicare Payment Advisory Commission (MedPAC) held its first fall meeting to discuss issues and policy questions facing Medicare. At these meetings, MedPAC staff present to the Commissioners about research and policy options for the Medicare program. The recent meetings covered a variety of topics.

Unified payment system for post-acute care
The Improving Medicare Post-Acute Care Transformation (IMPACT) Act of 2014 requires MedPAC to develop a payment model for post-acute care settings. To do this, MedPAC is using data from the Post-Acute Care Payment Reform Demonstration that CMS ran until 2011. The demonstration tested a common patient assessment tool and looked at how outcomes differed across four post-acute care settings.

Today, there are four separate payment systems for skilled nursing facilities, home health agencies, inpatient rehabilitation facilities, and long-term care homes, even though all settings provide similar services. A new payment system for post-acute care would base payments on patient need, rather than site of service. It would also seek to align payments more closely with the costs of care. MedPAC analysts said that a new, unified payment system for post-acute care would need to be adjusted for home health agencies because their costs are lower. MedPAC noted that a new payment model would inevitably shift payments between patients, providers, and settings, so some would see higher revenue and some would lose revenue. MedPAC is required to submit its recommendations on a unified, cross-setting post-acute care payment system to Congress by June 30, 2016.

Factors affecting variation in MA plans’ star ratings
MedPAC is investigating how demographic variables impact MA plans’ star ratings. Star ratings for MA plans are based on 44 quality measures. However, there is growing concern that star ratings may reflect socioeconomic factors of the enrollees if a plan enrolls large populations of low-income individuals with high levels of chronic disease or other issues affecting care patterns.

A previous MedPAC report found that plans with more young, disabled enrollees have lower star ratings. MedPAC is considering how disability status and dual eligibility may affect quality ratings. To analyze this, MedPAC looked at 19 out of the 42 measures that are not case-mix-adjusted. It found that six of the 19 measures showed differences between low-income enrollees. MedPAC considered several different strategies to alleviate this, including separately calculating scores for peer groups of plans based on their enrollee population and setting thresholds and performance levels based on population groups.

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On the Hill & In the Courts

Senate hearing centers on health IT

Last Wednesday, the Senate Committee on Health, Education, Labor, and Pensions (HELP) held the fifth hearing in a series focused on health information technology (IT). During the hearing, Chairman Lamar Alexander said that he believes the final rule for Stage 3 of the Meaningful Use (MU) program should be delayed until January 1, 2017.

Chairman Alexander’s timeline calls for immediate adoption of the modified rules already proposed for Stage 2 of MU. He said that Stage 3 requirements would be phased in more gradually, depending on how well providers are implementing the requirements at that stage. The proposal is intended to give the federal government, physicians, and hospitals ample time to prepare for rollout.

However, others disagree with Chairman Alexander. Eric Dishman, Intel fellow and General Manager of the Health & Life Sciences Group, suggested that delaying MU would slow progress toward greater information exchange. Instead, Dishman recommended establishing common standards for data metrics that are not found in traditional electronic health records (EHRs), such as claims, imaging, and genomic data. Creating these standards could drive an innovation model that improves patient outcomes.

Background: MU is an incentive program that was created to encourage widespread adoption of EHRs and meaningful use of the technology. Eligible professionals and hospitals must meet specific criteria, outlined in three programmatic stages, to receive incentive payments.

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Senate HELP committee holds meeting on state of biosimilars

Last week, Dr. Janet Woodcock, Director of the Center for Evaluation and Research at the US Food and Drug Administration (FDA), testified before the Senate HELP Committee. The hearing focused on the FDA’s progress in the creation and regulation of a biosimilar pathway. It came shortly after CMS proposed to use a single billing code for biosimilars and their reference products.

Much of the discussion focused on issues around billing codes and interchangeability. If CMS finalizes the guidance on billing codes, Woodcock indicated that the FDA would work with the agency to develop a process, possibly using coding modifiers, to track who receives biosimilars and biologics.

Interchangeability, or the ability of a biosimilar to produce the same clinical effects on both safety and efficacy as its biologic counterpart, has also been an ongoing topic of interest for biopharmaceutical stakeholders. Many argue that the lack of clear guidelines on substitutability and interchangeability with reference biologics will cause physicians to exercise more caution in prescribing biosimilars until they gain comfort with the quality and efficacy of biosimilars. Several lawmakers asked Woodcock to comment on the FDA’s progress in establishing interchangeability guidance.

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The state of state innovation in health care

Last week, POLITICO hosted a panel to discuss state innovation in health care. CMS waivers and incentive programs are giving states the flexibility to develop innovative ways to increase access to care, improve care quality, and contain costs. The panel included Patrick Conway, acting principal deputy administrator and chief medical officer at CMS, Charlene Frizzera, senior advisor at Leavitt Partners, and Joy Wilson, director of health and human services policy at the National Conference of State Legislatures.

The Affordable Care Act (ACA) established 1332 “State Innovation Waivers,” which are similar to Medicaid 1115 waivers and will allow states to redesign their health insurance systems for the exchange population beginning in 2017. Originally, they were designed for states like Vermont and Oregon, which were proposing single-payer systems and other reform of their health systems. However, the panelists said other states have begun to consider these waivers as they seek to modify how they implement ACA provisions like the individual and employer mandates.

Many factors need to align in order to transform care delivery in states. States that have greater alignment among provider groups, better data utilization and feedback, a culture open to change, and a process for continuous learning may be more successful with demonstrations. Beneficiary satisfaction is likely to be key moving forward, and political support from state legislatures may also help make state innovation programs more successful.

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Around the Country

CBO: Most states would not elect to expand small group definition

Last week, the Congressional Budget Office (CBO) released its estimate for Protecting Affordable Coverage for Employees (PACE), a bill that would allow states to roll back the ACA's mandatory expansion of the small group market in 2016. When scoring the bill, CBO projected that most states would not expand the definition of small employers. As a result, CBO projects that federal revenues would increase $400 million over the next decade.

The small group market has traditionally included employers with up to 50 employees. The PACE bill would allow states to continue using their current definition for employers in the small group health insurance market, instead of expanding the definition to employers with 51-100 employees, which the ACA mandates beginning in 2016 (see the September 15, 2015 Health Care Current).

If the bill passes, CBO expects most states would keep their current definition, exempting most employers with between 51 and 100 employees from the ACA requirements. This would also mean that those employers would be unable to provide coverage through a Small Business Health Options Program (SHOP) exchange. Premiums could increase for some if the SHOP exchanges are unable to encourage competition and reduce premiums over time. On net, the agencies predict that premiums for employers with 51 to 100 employees would be lower in most years. This would reduce employees’ non-taxable compensation and increase taxable wages.

(Source: Congressional Budget Office, “Estimate of H.R. 1624, the Protecting Affordable Coverage for Employees Act, as introduced,” September 2015)

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Wellness centers highlight evolving business models for hospitals

Wellness has been a buzzword in health care for a long time. After years of experimenting with different approaches and strategies, hospital-based wellness centers are becoming an integral part of some hospitals’ population health management programs. The shift from volume to value-based care is accelerating, and prevention is playing a role. As a result, hospitals have shifted their strategies around wellness centers away from basic fitness centers to become part of a medically integrated population health model. Many are doing this by staffing these centers with exercise physiologists and other multi-disciplinary staff that consider health risk factors and tailor programs to the patient. In the process, most centers are also designed to generate revenue.

The Medical Fitness Association surveyed members to find that wellness centers affiliated with hospitals offer return-on-investment between 6 and 10 percent with contribution margins (revenues minus variable expenses) around 30 percent. Hospital wellness centers often have more specialized staff than local gyms and they may be integrated into an employee benefit plan at host hospitals. They also can attract members of the community by hosting wellness programs for other employers. Although organizations such as the Medical Fitness Association provide benchmarks, standards, and general guidance, hospitals are structuring and financing their wellness centers in many different ways. Many larger hospitals are internally funding these centers. Smaller regional and rural facilities may have an equity or retail partner.

New hospital payment models focus less on narrowly defined acute care episodes. As payment systems continue to evolve to bundled services or capitated arrangements, investing in wellness may make financial sense. Providers are no longer being paid based on the quantity of services used, rather they are being paid based on the quality of those services. As a result of federal and state initiatives, many hospitals are emphasizing preventing readmissions and ER visits. Focusing on lifestyle factors for a population of patients, such as how often they exercise, their nutrition, tobacco habits, and stress levels, is critical. It is not possible to adequately address lifestyle in a couple of short visits every year, so medically integrated fitness centers may help encourage patients and increase outreach to the community throughout the year.

Related: The September 15, 2015 Deloitte Health Sciences Dbrief, “Patients as consumers: How engaged patients could reshape health care,” focused on the imperative for a consumer-centric model in health care. Meeting this goal will likely require understanding the consumer better – their values, preferences, and how they are experiencing the health care system. Critical approaches mentioned during the discussion included the need to:

  • Encourage individuals to be engaged while managing their health
  • Help individuals set and track their own health and activity goals 
  • Educate individuals about the wealth of existing wellness and care resources available today
  • Help individuals connect and collaborate with non-clinical care team members

Hospital-based wellness centers are one strategy to engage consumers around their health and help hospitals achieve value-based goals.

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Breaking Boundaries

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