Taking on the HMOs Minneapolis employers, in revolt, put health-care choices back in the hands of patients and doctors. Could this be a model for the U.S.?

[Guest guest]

Taking on the HMOs Minneapolis employers, in revolt, put health-care choices

back in the hands of patients and doctors. Could this be a model for the U.S.?

 

By Brian O'Reilly

February 16, 1998

 

(FORTUNE Magazine) – Don't like your managed-care company? Tired of

dispirited doctors processing the mob in the waiting room with all the care and

compassion of postal clerks? Tough. What are you going to do about it? Switch

doctors? Switch to another HMO? Oooh. Great idea. Boy, that should solve the

problem. Face it: You don't have much choice. About all you can do is endure it.

 

Then again, you could always move to Minneapolis.

 

For just over a year an ambitious experiment in overhauling the managed-care

mess has been quietly under way in the Twin Cities. No fewer than 26 of the

biggest corporations and employers in the region, including 3M, Honeywell,

Dayton Hudson, Pillsbury, and Carlson Cos., have started what doctors and

executives are calling a rebellion: They have banded together to bypass the

region's three huge HMOs, contract directly with doctors, and inject a massive

dose of plain old marketplace economics, which has been missing almost forever

from the health-care industry.

 

In this radically new scheme doctors are free to charge, organize, and operate

as they choose. But greedy or cavalier docs should suffer. Employees have to pay

extra for expensive doctors, and the employers also make sure patients know

which ones are overpriced or deliver poor service.

 

This consortium of employers is better at medical economics than at catchy

nomenclature: It is called the Buyers Health Care Action Group, with the

unwieldy acronym of BHCAG, pronounced " bee-kag. " If BHCAG works, the approach

could be powerful medicine for the U.S. health-care system, which got hijacked

by a managed-care approach that is little more market-driven than the old and

abused fee-for-service model. " A lot of people are watching to see how this

turns out, " says Ellen O'Connor, vice president of the Washington Business Group

on Health, an alliance of big companies worried about health-care issues. " This

is probably the major health-care experiment going on anywhere in the country. "

 

How does it work? Essentially all 2,500 primary care doctors and their doctor

groups in the Twin Cities are free to make their own rules on how they will

treat patients or let them see specialists, and free to set the prices they will

charge the employers. It's not a return to the old charge-anything,

doctor-as-god fee-for-service era, though. If a doctor charges too much or

delivers lousy service, just about everybody in town will know about it and will

have a powerful incentive to find a new physician. That's because the health

consortium distributes an annual " restaurant review " guide covering all the

doctor groups, dishing out one to three stars for a dozen quality-of-care

measures, and one to three dollar signs for price.

 

So, Dr. Plushbottom may conclude he is one fabulous physician and join a group

of doctors that decides to charge the 26 employers a bundle for its services.

Fine. But there's an economic catch: Nearly all 26 companies in BHCAG have

agreed to require a worker's family to pay $500 extra a year if he picks a

" three dollar sign " doctor group instead of a " one dollar sign " group. There's

another catch. What if the doctor group fares badly in BHCAG's annual survey of

patient satisfaction? The same thing that happens to every other merchant

charging high prices for crummy goods: Customers walk and revenues drop.

At least that's what should happen in theory. The fact is, it's too soon to

tell how the 100,000 or so participants in BHCAG's Choice Plus program will

actually behave in the face of far more economic and performance data about

their doctors than they've ever had. Patients may do nothing, concedes Fred

Hamacher, vice president for benefits at Dayton Hudson and a founder of BHCAG:

" We don't even know yet if health care is a market. " Employees participating in

the BHCAG program get to choose new doctors and groups each December, but the

results haven't been tabulated yet.

 

Already, though, the BHCAG approach is reshaping the medical marketplace in

the Twin Cities. The Quello Clinic, a big group of 90 primary care doctors and

four hospitals, was stunned to discover it got a lot of low ratings on customer

satisfaction last year. Patrick Taillefer, Quello's executive director, disputes

the accuracy of the survey but says it has triggered lots of self-examination

anyway. " We got together and asked, 'How are we coming across to people,' " he

says. " We looked at things like childhood inoculations and asked if there were

ways to deliver them sooner than we were. " Other physician groups responded to

the new scrutiny that BHCAG imposed too. " Just before we were about to print our

first guide, for 1997, a lot of doctor groups told us they were adding evening

and Saturday hours for the first time, " says Hamacher.

 

Why Minneapolis? Everywhere else in America, corporate managers are focused on

the core competencies of their business and are outsourcing every imaginable

chore. So why are all these giant Minnesota companies tackling something as

ambitious as overhauling the health-care system? Partly because employers there

have had a lot of experience with managed care: The Twin Cities area was where

Dr. Paul Ellwood, one of the founders of the entire managed-care movement, got

his start 30 years ago. As a result, about 90% of employed Minnesotans are in

managed care already--about three times the national average. BHCAG has a long

history too. It was formed in 1988 to grapple with health-care issues, and even

set up its own HMO back in 1991.

 

But what's really going on is a corporate rebellion against a near monopoly of

three giant HMOs--Blue Cross, Allina Health System, and Health Partners--that

has come to control 90% of the patients and doctors in the region, according to

the complaints of numerous human resource directors. With such a concentration

of suppliers, they say, competition among the HMOs is almost nonexistent, and

the prices they charge are rising. Virtually every doctor in the region has had

to join all three HMOs to survive, further homogenizing and standardizing

medical care into one big, undifferentiated commodity. " Doctors had no

incentives to deliver outstanding performance or operate efficiently. It's like

communist Russia, " says Dee Kemnitz, vice president of employee benefits for

Carlson Cos., a big marketing and travel services company. " The doctors can't

shine through if they are good or bad. "

 

To many employers it was as if the HMOs were thumbing their noses at them.

Steve Wetzell, an executive director of BHCAG, says that as the three HMOs

gradually bought out rivals or pummeled competitors like Prudential into

withdrawing, they became less cooperative with the employers who were paying

most of the workers' medical bills. " It was getting harder and harder to

negotiate with them, " he says. " They weren't doing enough to offer new services,

they all looked pretty much the same, and they refused to give us access to

information about where our money was going. " And though there is no evidence

that the HMOs colluded on prices, all three seemed to sense when they could get

away with charging more, says Wetzell. " The prices the HMOs charged might remain

stable for a few years, and then all three would raise their bids on new

contracts at the same time. " (Susan Flygare, a Blue Cross executive, says that

if the three HMOs raise prices in the same year, it's because

costs have risen similarly for all. " We're all dealing with the same doctors

and similar populations of patients, " she says. " All of us spend at least 85% of

premiums on medical care. " )

 

The employer group also realized that its early attempt at reform--setting up

its own HMO--wasn't much of an improvement over its competitors, according to

Hamacher, the Dayton Hudson executive. In 1995 a group of doctors participating

in the BHCAG-created HMO came forward to complain that BHCAG was unwittingly

penalizing the docs for developing more efficient ways of operating. The doctor

group had streamlined procedures for treating a common ailment: bladder

infections in women. Rather than have the women come in for a doctor's visit,

they could call a nurse, describe the symptoms, and get a prescription. The

women could diagnose the problem as well as the doctors, they had concluded, and

indeed, bladder infections were getting cured faster this way than before. Best

of all it cut the doctor group's cost of treating bladder infections by $250,000

a year. But the doctors didn't get a nickel of the savings. Instead the

employers cut payments to the doctors by $250,000 and

kept the savings for themselves. " It was an eye opener, " says Hamacher. " It's

the law of unintended consequences. Without realizing it employers had created

exactly the wrong incentives. And that sort of thing has happened over and over

again in managed care. "

 

The buyer group finally concluded that there would be no significant reform of

managed care until the doctors got far more control over the medicine and

economics of their practices. What they came up with is a novel hybrid of the

old fee- for-service approach and managed care's fixed-allowance, or capitation,

model. Doctors in a group can decide a sort of " hourly rate " at which they all

will perform procedures of various complexity. But BHCAG knows if the patients

going to a particular doctor group are sicker or healthier than average, based

on employees' prior year's records. BHCAG tells the doctors what it thinks those

1,000 or 5,000 patients will cost to treat next year, based on their average

health and the doctors' agreed-upon rate. Then, every quarter, the docs and

BHCAG go over the bills. If the docs have come in under the cost projections,

they may get a higher " hourly rate " for their work the following quarter. If

they are over budget, BHCAG looks to see if a

flu epidemic or something drove medical costs up and in that case doesn't

impose a penalty. But if medical bills are high because the doctors were

inefficient, ordering unnecessary tests or visits to specialists, they get a

lower rate the next quarter. It's a big improvement over the current

managed-care approach, where doctors get a fixed amount per patient per month

and can lose money if too many patients get sick. With BHCAG's Choice Plus

approach, docs get paid for any work they perform or order, and have months to

worry about developing new ways of cutting costs, if necessary.

 

This approach addresses another, more unappetizing, consequence of most

managed care: doctors chasing healthy patients and spurning sick ones that will

cost them money. Under existing HMO rules in most places, doctors generally get

paid a flat " per member per month " rate. Some doctor groups, especially large

ones, can negotiate more generous PMPM rates than others. But mostly the

payments reflect the average cost of treating all the patients in a region. The

doctor gets paid the same whether five or 50 of his patients actually show up

for treatment. Doctors, naturally, are motivated to attract the healthiest

patients, since they are the cheapest to treat. In fact, a doctor group unlucky

enough to attract sicker-than-average patients can easily go bankrupt, says

Wetzell, executive director at BHCAG. One doctor group in Minneapolis

specialized in diabetes for years and did fine under the old fee-for-service

approach. But when traditional managed care came along, offering

essentially the same price per patient to everyone, they got screwed, because

diabetes often causes a host of other serious problems, from blindness to nerve

damage to diminished circulation.

 

Doctor groups were stunned by the information and autonomy they got from BHCAG

under Choice Plus. " They were able to tell us that the 2,000 patients we were

getting through BHCAG cost this much to treat last year and would probably cost

such and such next year, " says Mark Fisher, president of St. Croix Valley

Healthcare, a group of 42 primary care doctors and 100 affiliated specialists

based east of St. Paul. " What they told us made us realize that what we had been

charging the HMOs to treat patients was a lot lower than most of the other

doctor groups. We were amazed. We'd never gotten any information from the HMOs

that told us whether we were expensive, low cost, or average. "

 

For the first time, too, primary care doctors got information on one of their

biggest costs: how much the various outside specialists they referred patients

to actually charged the HMOs. That lack of information about a specialist's

prices was one of the frustrating features of life in an HMO, says Fisher. If

the St. Croix docs sent a patient to a specialist who later billed the HMO

$3,000 for a series of procedures, while another specialist was charging half as

much for the same work, they wouldn't know who was cheaper. But the primary care

docs got penalized anyway. " At the end of the year the HMO would tell us our

costs for, say, cardiologists was way above normal, and reduce our

reimbursement. They wouldn't even tell us which doctor was overcharging. We had

to pay the bill, but we couldn't do anything about it. It was awful. " Since the

average primary care doctor refers patients for hospital and specialist

treatments costing well over $1 million per year, the stakes

are huge. It turned out that most of the specialists working with St. Croix

were within normal ranges, but one had been charging the HMO several times the

typical rate. At one of their periodic meetings the St. Croix doctors told the

specialist to lower his charges or he would get no more business from them.

 

The $64 trillion question, of course, is whether BHCAG's radical surgery can

truly transform managed care in the Twin Cities--or anywhere else. It's not

clear how things will turn out. Last year, when patients got price and quality

information about their doctors for the first time, few changed doctors. And

though Wetzell says results of the latest " voting " are not yet in, he doubts

that many patients will change doctors this year, either. " I think it's going to

take a few years before it sinks in to people that they can and should make a

choice. "

 

One of Wetzell's rivals at an HMO across town is less optimistic. Says Susan

Flygare, head of national accounts at Blue Cross and Blue Shield of Minnesota:

" I don't think there's any evidence that consumer behavior is being changed by

BHCAG's price and quality data. "

A few patterns in how customers respond to the doctor data have emerged,

though. " For most people the price information influences the choice of doctor

more than the quality information, " says Steve Ogren, a health-care consultant

for Deloitte & Touche in Minneapolis. " And obviously people who don't use the

health-care system much are very price sensitive. " Sicker patients, by contrast,

tend to gravitate toward the high-priced medical groups, figuring they will

deliver better service. And patients with lots of medical problems are generally

reluctant to switch doctors even if there is a cheaper alternative.

 

Disappointingly, the doctors participating in Choice Plus raised prices, on

average, this year. Some groups adjusted their prices and shifted into lower

price categories, but overall, rates went up about 10%. Why the drift up in

prices? Wetzell says many doctors may not have predicted their costs well the

first year or bid low just to begin participating and adjusted prices upward for

1998 when they had a better grip on costs. But Ogren wonders whether some

doctors were dismayed to discover that low prices didn't attract as many new

customers as they had hoped. " Maybe they just said, 'Sheesh, then let's raise

prices.' "

Human resource directors at a few big companies think doctors that raised

prices will have second thoughts. Says Kemnitz at Carlson: " In the past when the

employees' cost of medical care went up, they'd call up and complain to me. Now

employees are calling up their doctors and demanding to know why they raised

prices. And that's exactly what we hoped would happen. "

 

Will all this effort at reform ever spread to the rest of the country?

Health-care experts think it may be slow. Minneapolis is unusual, they say, with

a surprisingly large and close-knit collection of FORTUNE 500 companies. The

long history of managed care in Minnesota, and the high rate of participation in

it by employers, probably adds to their willingness to tinker with the system.

 

It seems inevitable, though, that as baby-boomers develop an ever-growing

collection of aches and ailments, they will demand more economic and

quality-of-care information from their doctors and managed-care companies,

making medical care a more competitive market. This, after all, is the

generation that had to learn the intricacies of investments, Morningstar, and

mutual funds--or face financial ruin at retirement. If baby-boomers ever realize

they are not immortal, managed care will never be the same.

 

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