Feb

When Medicare changes physician reimbursement – the impact on health plans

Posted by Joe Paduda on Tuesday, February 24th, 2009 | Comments

Medicare physician reimbursement will change next year. As I noted yesterday, it looks like cognitive services (office visits, etc) will be paid at higher rates, while procedures (surgeries etc) will see a cut in reimbursement.
Consider the fallout from the change. If things go as I think they will, the specialty societies and their allies will fight long and very very hard to minimize any reductions in reimbursement. But over time, their compensation will decline relative to generalist pay. And over time, the re-leveling will become reality – the generally-accepted-way-the-world-is. That process will take years not months, and be marked by ups and downs, resistance from providers and nastiness in negotiations.

What are the implications for health plans? Several.
The near term – the end of this year into 2011
Specialists will seek to replace lost revenue by increasing prices paid by and the number of services delivered to health plan members. Yes, cost shifting. This makes it even more important for health plans to invest in medical management, data mining, physician profiling and reporting. This new pressure to shift costs will manifest itself in a variety of ways – some obvious and some not.
Contracting will take longer, be tougher, and be even more acrimonious than it is today. Health plans will have to plan carefully, provide contracting staff with real, accurate data they can use to convey market share, provider effectiveness, and provider rankings. These last will be highly contentious; physicians will vociferously defend their practices and complain about metrics and methodologies. And in many cases they may have a case. But if they want to be paid more, providers will have to make a convincing case that they are worth it. The net – both parties will need more and better information.
The longer term
Health plans with smaller market share will be at an even-greater disadvantage. Providers will be increasingly picky about the plans they contract with, forcing small plans into a Hobbesian choice – agree to higher rates to fatten the provider directory, and suffer the consequences of the inevitably higher medical loss ratios. Or refuse to contract at higher rates and end up with far too few specialists.
Except for those health plans that are part of integrated delivery systems. These plans will (over time) flourish, especially if they ‘buy’ their physician services from one or a very few groups.
Over time, expect health plans to also reduce compensation to specialists (relative to generalists). The smart plans, those who can look beyond next quarter’s medical loss ratio numbers, will not try to keep generalist reimbursement low while also ratcheting down specialist pay. (Alas, there are far too few ‘smart’ plans.)
There’s a wild card out there as well. Those plans investing in medical homes will likely find their need for specialist services is reduced rather dramatically. While there’s been much talk about homes, there’s not been a matching amount of activity. The reimbursement change could trigger that, as it will drive more providers into primary care. If the need for specialists is reduced, as it should be with the home model, those same specialists will find they have little leverage.
What does this mean for you?
If you are a provider, be prepared to make the case that you are better than the competition. Payers, get serious about profiling and reporting. Primary care docs, change is a-coming.

Jan

What now for Coventry?

Posted by Joe Paduda on Wednesday, January 28th, 2009 | Comments

Friday will be Dale Wolf’s last day at Coventry. After diversifying the company into workers comp, Medicare Part D, Medicare Advantage and private fee for service, and individual insurance, he leaves behind a much different Coventry than the one he took over in 2005. Don’t shed too many tears for Mr Wolf, he leaves after earning over $13 million last year alone.
The health world is also much different. Insurance itself is rapidly approaching the unaffordable level, participation rates are dropping (fewer employees signing up at companies that offer insurance), the Bush administration’s massive attempt to privatize Medicare and Medicaid will likely be reversed, hospital costs are exploding, and national health reform is around the corner.
And Coventry’s stock is a quarter what it was a year ago, while solutions to the company’s problems look ever further away.
Lots to consider, but I offer these thoughts.
The CEO is out, two weeks before the company releases its 2008 earnings report. The 65 year old former CEO is back. The company is not looking for a new CEO. Coventry’s commercial business is hamstrung by the factors noted above. It is not doing so well in Medicaid and Medicare growth will likely slow considerably. The company has not shown any expertise in managing care; it appears to rely solely on price increases to manage medical inflation. It has stumbled badly twice in the last year, both times failing to accurately forecast medical costs.
There is some thought that the company may be for sale. I’m one who leans in that direction. Recent news makes it more likely the company will not be sold in its entirety, but rather sell off pieces/markets/health plans. There are just too many moving parts in the 2009 version of Coventry; this complexity would make a comprehensive due diligence effort long and miserable – and given Coventry’s historical inability to predict health costs, potentially inaccurate.
But it is cheap.
Never one to forgo an opportunity to say something that will come back to haunt me in the future, I’m going to go out on a thin and ice-bound limb and opine that Coventry will sell off some health plans, and perhaps the work comp and other specialty businesses (e.g. mental health). A little less likely is a sale of the entire company.
What is unlikely is Coventry is essentially unchanged a year from now.

Jan

Coventry’s Medicare business

Posted by Joe Paduda on Thursday, January 22nd, 2009 | Comments

Coventry’s presentation at the JP Morgan investor day last week was puzzling for a couple reasons. As noted yesterday, there was almost no discussion of medical cost drivers, either by CFO Shawn Guertin or Dale Wolf (Chairman and CEO) or by any of the analysts present.
The other puzzlement was the company’s continued emphasis on Medicare Advantage as a core business. According to Guertin, the company’s biggest success in 2008 was better than expected Medicare sales. He went on to note that this was one of Coventry’s key drivers; in terms of member volume, Medicare Advantage is a close second to group health followed by Medicare D. And, Coventry is spending about $45 million in 2009 to expand the company’s Medicare network footprint, which they call their coordinated care network. The network has to be built in 2009 so they can file the additional network coverage areas with CMS in 2010.
If I heard that right, they are looking to invest $45 million in Medicare Advantage, and it is a key driver of the company’s success.
Here’s more detail. Guertin noted that 2008 was an “exceptional year in Medicare Advantage”; they filed for 9 new markets, Medicare private fee for service (PFFS) growth was also solid and it will continue. Total membership is projected to hit 455k by the end of 2009 up from 380k in 2009. Leaving aside the potential for Congress and the new President to make dramatic changes in MA funding, Coventry’s strategy makes sense. They are currently conducting a detailed review of products and margins as well as the positioning around zero premium products (Medicare products that don’t require any additional premiums from members) and how they stack up in each market. They are growing in these products, the ones without rich benefits, but medical losses are around 90%.
So Coventry’s growth is in the right products; ones with lower risks and less rich benefits that are likely to be selected by people with lower health risks. However, their Medicare HMO business is doing better financally as it has an MLR significantly less than the PFFS’ 90% MLR. The strategy is to build out their networks in those areas with lots of PFFS members and hope to convert those members to the HMO, thereby taking advantage of the lower MLR delivered by the HMO. Currently about 58% of Coventry’s PFFS membership is in states with MA plans in existence – some percentage of that PFFS population will likely switch to an HMO product.
By converting members from PFFS to network products Coventry’s margins increase by five points, making the payback on the $45 million investment one year.
Guertin and Wolf did acknowledge the politics surrounding MA, but their acknowledgement did not reflect any real concern. Instead they noted their plans’ value proposition; with one saying: words to the effect that “there’s no question the enhanced benefits for seniors and overall reduction in medical expense for the system and society and better quality of care and life they get thru various health management program seniors…its indisputable that MA brings a lot of value”.
That may be the case. I’m not so sure it will be enough to prevent Congressional action to eliminate the MA subsidy.
I don’t understand why a health plan would bet it’s future on a business that may well change a lot and quickly.
Anyone?

Jan

Coventry Health – it’s about medical, folks!

Posted by Joe Paduda on Wednesday, January 21st, 2009 | Comments

It’s no secret that Coventry Health had a tough 2008. After several years of continued growth in profits, revenues, and market cap, management was nothing if not self-confident. Perhaps not self-aware, but certainly self-confident. That ended a little less than a year ago, with the announcement that financial results had suddenly plummeted due to higher medical loss ratios.
The earnings debacle of 2008 started in the spring and recurred in October with additional bad news. The overall impact was more analogous to total immersion in the Barents Sea (think Deadliest Catch) than a dash of cold water in the face. The result is not heightened alertness and awareness, but rather a serious case of hypothermia, with the accompanying symptoms of lethargy, impaired decision-making, and a rather tenuous prognosis.
As I said back in June; my sense is that Coventry’s management has been spending way too much time managing the numbers and nowhere near enough time managing medical. Those are not the same thing. Reflecting back on the calls I’ve listened to and management reports I’ve read, I can’t recall any detailed discussion of disease management, hospital expense management, outpatient utilization, or centers of excellence. There was a bit more discussion of facility costs in a lengthy equity analyst presentation last week, with CFO Shawn Guertin and Chairman Dale Wolf noting (this isn’t an exact quote but pretty close) “it is really clear that it [the biggest cost driver] continues to be facility [costs] – facility patterns of care and units cost – and we are going everything to plug any leak we can find to tighten everything down. It is a unit cost issue…” In response to a follow up question, Wolf said Coventry’s network discounts look “very very competitive” (compared to other larger competitors).
That’s great. Yet Coventry’s medical trend is still projected to be higher than (most of) the competition, and it doesn’t look like this is due to pricing.
I’d also note that (yet again) there was precious little in the way of insightful questions from the assembled equity analysts. A couple individuals asked questions that sorta addressed underlying cost drivers, but there was no real due diligence, no digging deep into the facility cost issue, and absolutely no question about or reference to utilization. This is particularly surprising; it is abundantly clear to anyone who has spent more than a few minutes examining health care cost drivers that utilization is THE key driver.
I’m also a little confused given Wolf’s comments that Coventry’s network discounts look good, yet in an earlier statement, Guertin noted facility unit costs were problematic. Perhaps I misunderstood.
Here’s the net. A somewhat-chastened management team wants analysts and investors to look forward to 2010, as that’s when all their efforts will bear financial fruit. Yet I don’t see any real evidence that they are paying any attention to their ‘cost of goods sold’. Sure, they know the numbers, the loss ratios, pricing, and the impact of all that on EPS, but there’s precious little evidence that they understand, or are addressing in any meaningful way, the underlying drivers of technology, chronic illness, utilization.
What does this mean for you?

Network discounts are not a managed care strategy.
Tomorrow we’ll address Coventry’s Medicare strategy.

Jan

The Ingenix settlement and physician income

Posted by Joe Paduda on Monday, January 19th, 2009 | Comments

FierceHealthcare reported last week that Aetna paid $20 million to settle charges related to its use of the Ingenix UCR database (their term is MDR). There will likely be announcements from other health plans of their settlement amounts; expect them to be in the Aetna range or less.
This is related but not really to the $350 million settlement for damages related to out of network claims dating from 1994. The settlement, announced last week, will result in UHC paying AMA $300 million to distribute to physicians. However, physicians will have to file claims to receive compensation; one MCM reader noted that in a related case her six-physician practice will receive a whopping $225.
In a related note, I’d remind readers that physician income has been flat to declining over the last several years. Why? Medicare increased fees by 13% from 1997 to 2003, while the underlying inflation was 21%. And, private payers’ reimbursement declined from 143% of Medicare’s rate in 1997 to 123% in 2003.
I’m thinking we now know at least part of the reason physician income was declining; unfairly low reimbursement from payers using the Ingenix databases.
We already know about health play overpayments – they’re called Medicare Advantage.

Jan

The future of health plans – predictions for 2009

Posted by Joe Paduda on Monday, January 12th, 2009 | Comments

This is one tough year to be putting on the swami hat and dusting off the crystal ball. There are so many moving pieces affecting the group health/individual/Medicare/ Medicaid world that it will be hard enough to analyze what happened after the fact, much less before.

Enough with the dissembling. Here goes.
1. Consolidation will accelerate. After a hiatus due to the still-slushy credit markets, big health plans will start acquiring second tier ones. Expect this to happen after mid-year, for reasons due not only to the credit markets but also to goings-on on Capitol Hill. Among the health plans likely to get attention are Humana, MVP Health Plan, AmeriHealth, and Priority Health.
1.a. Coventry will also be on the list; it has solid penetration in a number of second-tier and tertiary markets along with a strong workers comp managed care business. The company has been hamstrung by operating issues; if these appear to be under control it will likely be in play in 2009. Check their talk at the JP Morgan conference later this week for an early indication of progress. (Note I own shares in Coventry)
2. Health plans will split in their reaction to legislation pending in DC. Some will wail and whine, while others will look for the opportunities. Among those already reasonably well positioned are Aetna and UHG (particularly their AmeriChoice unit). Count on AHIP to bemoan the unfairness of it all, and ask for subsidies in the form of risk pools and governmental coverage of high cost claims.
3. Expect more scrutiny of healthplans serving Medicaid and Medicare populations, as the Feds are ramping up their efforts to crack down on abusive and fraudulent practices. The new Administration will want to send a message to health plans that an expansion of S-CHIP and other governmental programs is not a license to steal. There will likely be more Wellcares hitting the headlines in 2009.
4. Health plans will begin to focus more effort on being easy to work with – especially for providers. Increasing frustration with the administrative burden placed on them by health plans is causing providers to become more selective about participation; the health plans that are ‘low-maintenance’ will have better relations with more providers, and the ones on the other end of the spectrum will not. See the Verden Group’s reports for a heads-up on how health plans stack up in the eyes of providers.
5. The Medicaid population will grow substantially, as well the percentage enrolled in some variation of a managed care plan (currently above 60%). Health plans active in this market will do well – if they are priced right.
6. The economic stimulus plan is critical for health plans. Enrollment depends on jobs; with unemployment at a sixteen-year high at 7.2% and smaller employers dropping coverage as they attempt to stay afloat, expect enrollment to continue to drop thru mid-year. This will hit the big commercial plans hardest, although a few are somewhat insulated as the drop in commercial will be offset by growth in Medicaid.
7. Don’t expect much growth in the individual plans; they are unaffordable for many and restrictions on pre-ex make them unattractive for others. Until and unless the pre-ex and medical underwriting issues are resolved, growth will be slow – at best.
Check back in twelve months.

Jan

Misleading managed care headlines

Posted by Joe Paduda on Tuesday, January 6th, 2009 | Comments

Last week a study hit the wires indicating that managed care plans did not have better outcomes for carotid endarterectomies (CEs), a surgical procedure ostensibly intended to reduce the risk of stroke.
Here’s the headline from UPI – “No managed care link for stroke-prevention”.
A quick read of the headline and abstract leads the reader to the conclusion that managed care is ineffective. But there’s much more to it than the headline and brief synopsis. For starters, the data was ten years old. It was from one state (NY), that is not exactly known as a hotbed of managed care. And it lumps all kinds of ‘managed care’ – from group model HMOs to PPOs under the same category.
And the study’s conclusions are muddy. In fact, there had been a good bit of research into the procedure itself (it involves cleaning out the carotid artery (the big one in the neck that bad guys are forever threatening to cut in movies), and the data used indicated “the rate of inappropriate surgery dropped substantially from 32 percent in 1981 prior to the RCTs [randomized controlled trials] to 8.6 percent in 1998/1999 after publication of the clinical trials [by AHRQ].” Clearly, medical practice had changed dramatically over that period, due primarily to publication of data indicating the procedure “reduced the risk of stroke and death compared to medication alone among carefully selected patients and surgeons.”; the research also showed many patients did not benefit from the surgery.
It wasn’t that simple. In fact, the surgery rate had dropped in the mid-eighties after publication of research indicating the procedure had high complication risks. A decade later, additional research seemed to show that CEs did benefit some patients, and the rate shot up again, only to start a gradual decline.
What happened? Generally accepted medical practice changed. Was the rate different within “managed care’ plans? No. But why would it have been?
I worked for large managed care/health plan companies during the late eighties and early nineties, with responsibilities in customer reporting and managed care product development. We all knew there were probably too many carotid endarterectomies performed, but we didn’t really know which ones were inappropriate. The indications were rather uncertain, and it did appear the procedure helped some patients. What was not clear was which patients would benefit and which would likely not. The ‘choice’ we made was to encourage/mandate/require second surgical opinions (at that time the state of the art in managed care) to ensure the patient got at least one other physician’s views on the potential risks and benefits. There wasn’t much in the way of clinical guidelines that we could use to deny the procedure outright, and the legal risks of a denial were so high that this option was never seriously considered.
Truth be told, the managed care firms I worked for had little ‘control’ over medical practice. Sure, we had contracts with physicians, but our influence was minimal – we were ‘two inches deep and a hundred miles wide’. With little ‘market share’ in any one physician’s office, it was unlikely most of ‘our’ docs would pay much attention to directives from one of our Medical Directors. We did notice that our rate of surgeries was dropping, but did not have the data to know if this was occurring across the board and thereby due to our efforts (I’m pretty sure we took credit for the decrease…) or was driven by external factors.
Contrast our very loose ‘managed care’ with the much different model exemplified by group and staff HMOs – Kaiser Permanente, Group Health of Puget Sound, HIP, etc. I don’t know what the group/staff model HMO rates were, but I’d bet they were lower than my employers’.
In retrospect, it is obvious that external factors were the reason for the decline in my employer’s number and rate of carotid endarterectomies. In retrospect.
What does this mean for you?
There’s far too much superficiality in the press, superficiality that can distort public views of managed care and the effectiveness thereof. In this case, the headline, although nominally accurate, is highly misleading.

Jul

Coventry earnings call – the analysts blew it

Posted by Joe Paduda on Friday, July 25th, 2008 | Comments

I think I’ve figured out why analysts have been unable to accurately forecast health plan financials – they don’t know what questions to ask.
That’s the only conclusion I can draw after listening to the latest earnings call from Coventry Health. The mid-tier health plan company is still reeling a bit from last month’s announcement that it had been surprised by a sharp increase in medical costs, an increase that evidently had caught management by surprise.
Folks, this is a health plan company – one that claims “We deliver exceptional value every day, driving solutions that help people enjoy optimal health.”
One might think that a health plan company makes money by managing medical care for hundreds of thousands of Americans. Near as I can tell, Coventry isn’t a health plan, it is a transaction processor that makes money by pricing its insurance far enough above medical costs to administer the plans and make a bit of margin.
And from the questions that were asked ,and the ones that weren’t, it is pretty obvious Wall Street analysts think Coventry is a transaction processor as well. Out of the twenty or so questions after the management presentation, there was one – yes, one, that got anywhere close to actually inquiring about medical management. That questioner asked what Coventry could do or had done to deliver care to Medicare enrollees through an HMO at lower cost than thru the standard Medicare plan. Coventry Chairman Dale Wolf responded by noting that hospital days per 1000 members among Medicare HMO plans could be in teh 900-1300 range, compared to standard Medicare rates of around 3000 days/1000.
That was it. No follow up question as to how they could do that, what the long term implications were, how that affected pricing, what the techniques were that delivered such a great result and could those techniques be used for commercial members.
The entire conversation was about medical trend and how Coventry was fixing its pricing model to reflect higher trend, and if enrollment was going to decrease as a result. Not the factors causing medical trend and what Coventry was doing about it. Well, to be fair, there was a little dialogue about higher inpatient utilization and unit costs in Medicare, and higher hospital utilization on the commercial side. But if you were interested in Coventry’s solution to same, you’re out of luck. Not one analyst even asked.
If analysts don’t know to ask the company why their costs are going up and what they are going to do about it and how that will play out, what, exactly, are they ‘analyzing’?
There’s this thing in business called a sustainable competitive advantage – something you do really well, that is hard to do, that others don’t do well. This gives you an edge in the market, one that makes you a perennial winner. Coventry doesn’t have one, and neither do any of the other health plans. Because all they do is process transactions, adding no value.
Here are some of the questions they should have been asking.

What key indicators of medical trend do you watch closely?
Exactly what is your average inpatient days per thousand for each block of business and how does that compare to industry standards?
How about admissions per thousand?
what is driving trend? Is it unit cost (price per service), utilization (number of those services received by a member when they do get those services), frequency (percentage of members that get that service) or intensity (higher cost version of a technology or more expensive procedure type than expected)?
Which types of medical care are the biggest drivers; ancillary, physician services, pharma, inpatient, outpatient?
What is your plan to address those issues?
How will you measure results and when will you know if you’ve been effective?
What is Coventry doing about members with chronic conditions? How have your results compared to industry standards?

And the big one:
How would Coventry compete and win if it could not risk select and had to take all comers at a community rate?
Because that may well be the scenario Coventry, and all its competitors, face in two short years.
Note – this applies almost equally to most every health plan. In fact you could just about replace ‘Coventry’ with Wellpoint, Cigna, Humana, Blue Cross, etc and the same perspective would hold true.
Now I really am going on vacation.

Jul

New York gets real

Posted by Joe Paduda on Friday, July 18th, 2008 | Comments

Bowing to the reality of the market, the New York Work Comp Board has issued a revised pharmacy fee schedule for workers comp.
The previous fee schedule based WC pharmacy fees on Medicaid – a linkage that was problematic for at least a dozen reasons. Here are the major ones.
1. Medicaid has ‘positive enrollment’ – members’ eligibility is determined instantly, electronically. In WC, there is no upfront enrollment, therefore retail pharmacies don’t know where to send the claim, or even if the claim has been accepted by an insurer. Work comp requires a lot of manual work, while Medicaid is electronic and instant.
2. The Medicaid reimbursement schedule has been a political football of late, as state legislators, under pressure from declining revenues and increasing service demands, have looked to cut Medicaid costs by cutting prices paid for drugs. California’s decision to cut reimbursement by 10% has resulted in a political/judicial back and forth that is apparently still not resolved. By tying WC reimbursement to Medicaid, pharmacies, PBMs, and payers would be batted back and forth, not knowing from day to day what they should pay for drugs.
3. Medicaid has a formulary which reduces the cost of the drugs to the pharmacies. There is no such formulary in WC (except in a very few states such as Washington), and therefore drug manufacturers won’t give discounts in return for preference in a therapeutic class.
4. The Medicaid FS is actually significantly lower than the contracted prices PBMs pay retail pharmacies. Thus there is no benefit to payers, or retail pharmacies, in working with PBMs. This despite the strong evidence that PBMs, properly implemented and managed, can dramatically reduce utilization (the volume of scripts dispensed).
What drove NY to make the change? Access issues. Claimants were not able to get their scripts filled as pharmacies could not afford to do so under Medicaid reimbursement, and PBMs could not afford to operate in the state while losing money on every script.
That’s not to say the revised FS is much better. In fact, as the second lowest fee schedule in the nation, it represents an incremental improvement at best, and may not be sufficient to keep all stakeholders participating.
Cynics may point to California, and note that PBMs and pharmacies stayed in that market after the FS was based on Medicaid. True, but each state’s Medicaid FS is unique, and CA’s is significantly more reasonable than NY’s.

Jun

Health plans feeding at the Medicare trough

Posted by Joe Paduda on Thursday, June 26th, 2008 | Comments

Bob Laszewski has a great post today debunking the myth of Medicare Advantage and Medicare private fee for service.
Both were supposed to help reduce Medicare’s costs via a short-term subsidy enabling private insurers to get into the market, figure it out, and use their free-market skills to improve on a moribund, bureaucrat-run government health care program.
Instead it has turned into a gravy train for insurers, who have been getting fat on the subsidy. Meanwhile, physicians are facing a cut of 10% in Medicare reimbursement.
For once it would be nice if the so-called free market advocates would wipe the (taxpayer-subsidized) gravy off their multiple chins before they start spewing peans to capitalism.
Bob asks this key question:
“If the HMOs really want to effectively defend Medicare Advantage they need to demonstrate value. Where is the industry data showing that after five years in this recent version of Medicare Advantage, and 20 years all told in the program, the private sector delivers a better cost/quality result?”
I’d add they damn well better come up with a strong case and soon; health reform is coming. Between recissions, medical underwriting, and medicare advantage/pffs private insurers are making a compelling case – for single payer.

Category: Medicare and Medicaid