J.-B.-Silvers-PhD-The-Future-of-Healthcare

Determine the first principles that will govern the steady state allocation of responsibility to the parties in the value chain that can best manage various elements of risk.. Time and

J B SILVERS, PhD

Mannix MMO Prof of Health Finance Weatherhead School of Management Case Western Reserve University

TIME & RISK :

The Future of Healthcare

Key Concepts and Skills

1.  Understand the redistribution of risk that is occurring under

the ACA in alternative payment models and new organizational arrangements

2.  Determine the first principles that will govern the steady state

allocation of responsibility to the parties in the value chain that can best manage various elements of risk

3.  Translate this changing environment into its strategic

implications for providers, payers and patients

Time and Risk—THE CHALLENGE

•  Finance is all about time and risk

§   Moving money back and forth in time

§   Reallocating risk among the parties

•  One could add flexibility to this dual goal

§   Creating and managing options

§   Ability to react to/anticipate changing conditions

•  If we do this well, value is created

§   If we fail, opportunities are lost and financial distress ensues

•  If we are creative, each party in the chain gains

Higher cost, chronic care

& high deductibles drive

But how can we design a system that does this well?

•  We have a choice of what to insure and what to finance

§   Basics of Insurance

– We insure events that are not predictable individually

but are in large numbers

– The key is getting a large group to spread the risk

§   Basics of financing

– We finance events that are known but occur over

multiple periods – The key is matching differences in the timing of cash

needs between borrower and lender (intermediation)

What have we done with both of these in health?

•  Mostly we have reallocated risk

§   High deductible plans move risk to patients

§   Value based payment moves risk to providers

•  But the ACA also has massively refinanced care

§   Premium subsidies shift funds from taxpayers to enrollees (much like employers always have

done for employees)

•  The question is how well have we done these

Who has the risk?

.Where is the pig in the python?

PAYER

•  First dollar coverage + cost-based payment meant that

only the payer bore any risk

•  We have been gravitating away from this simple model

(invented in Cleveland by John Mannix) for 50 years

Originally Insurers/govt were at the tail end of the python bearing all the risk

Who has the risk?

.Where is the pig in the python .NOW?

PATIENT

•  Some people think that the patient should have most of

the risk (skin in the game)

§   Should even poor people on Medicaid make payments into their HSA (i.e., finance their care over time) with high deductible plans?

§   Most employers agree employees should (HDHPs)

§   The Rand Health Insurance Experiment (HIE) confirms the impact of this for ambulatory care

Bankruptcy, Failure & Exit

Loss of Access, deferral of care

The problem is how much is too much?

PAYER

PATIENT

Too much risk to the payer or provider?

Too much risk to the patient?

So should the “pig” be somewhere in the middle?

Alternative objectives in financial contracting

1.  Stick it to weakest party

.use market power to avoid bearing risk

2.  Induce change in behavior to reduce risk

.assure “skin in the game” to create incentives

3.  Allocate risk re ability to manage it

.judge competence of each link in the value chain

4.  Create cushion to absorb residual risk

.make sure there are deep pockets backing us up

It all depends on what kind of risk exists

•  Very wide distribution of overall risk

§   Actual silver plan total cost per member per year

Of those with claims, median = $1500

5% of claims over

$12,000/yr

But where did these costs come from?

Function & Productivity

Treatment &

Service Cost Diagnosis

Patient Initiation

Incidence Rate

Normal

(median cost)

Telemedicine/ Retail

Compounding elements of financial risk

Diagnosis:

-knowledge -technology

Treatment:

-doc educ

-incentives -org structure

Service Cost:

-scale/scope -organization -mgt ability

Functionality:

-rehab serv -pat attitude

Audit:

-peer review -second opinion

Grouping:

-DRG -bundled/VBP

Fixed Pricing:

-MFS/PPS -incentives

Penalties:

-readmission -incentives

How do we reallocate risk: mechanisms

•  Fundamental building block is a contingent claim:

Option that pays in one state but not in another

Examples of financial contracts in healthcare

Underlying outcome (cost)

Too little risk

of loss? Too much risk

.that’s the easy part!

The tough part is predicting how the subjects of the incentives will react

and design the risk allocation accordingly

Examples:

•  High Deductible Plans:

§   Huge assumptions re patient’s ability to finance and manage all forms of risk

§   Assumes insurance and financing situation is the same for all income groups

– High income can finance front end, low income cannot

Examples:

•  Outlier Payments for high cost cases under DRG:

§   Payment assumes ability to manage

§   Financial signal too small and too distant from case to gain attention

Too little risk

Examples:

•  Value-based Payments:

§   Zero-sum assumes only question is allocating risk (rather than changing behavior)

§   Risk adjustment is very limited

– Forces demographic risk that cannot be managed – Metrics are myopic and limited to very imperfect electronic measures

Examples:

•  Accountable Care Organizations:

§   Huge incentives to bring outlier practices back to

mean (“outliers anonymous” support group?)

§   Little ability to gain if already doing well

§   BUT huge impetus to focus on reorganization across the boundaries (i.e., post discharge, etc.)

Too little risk

of loss? Too much risk

Examples:

•  Bundled Payment (BPCI, CJR):

§   Huge incentives to standardize paths and create focused factories

§   Big temptation to exclude more difficult cases

So how can we design systems to do this well?

•  First principles of financial design depend upon

§   Origin/driver of risk (demand, diagnosis, etc.)?

§   Size and nature of the risk?

– Binary (incidence rate, patient presentation, etc.) – Continuous (no event, median, 95 th %-ile)

§   Tools available to manage risk

– Education, information, feedback, incentives – Increase ability to manage (QI, 6 Sigma, etc.)

§   Cushion required to avoid distress

– Likelihood of adverse events compounding – Cash balances, contingency plans and sources, exit

We need to understand the many facets of risk

•  Actuarial Need to Spread Risk

–  We need to find a way to finance known costs over time

–  Chronic conditions and genetic knowledge reduce the random nature of insurable events and require financing

–  Pulling these out of the risk pool is one way (a la France) to avoid the death of health insurance as we know it now

•  Behavioral Economics Understanding of Decisions/Reactions

anchored (recent experience, current endowment)

•  Organizational Approach to Threats/Opportunities re Risk

Where will we be in steady state (if that’s possible)?

•  Silvers Rules of Equilibrium:

responsible party with the most knowledge regarding and ability

to manage that particular element of risk

–  Don’t ask docs to be insurance companies or insurers to make medical decisions

(behavioral) and must be managed accordingly

–  It’s not about just spreading risk around but about encouraging appropriate behavior

distribution of responsibility and risk in a competitive market based on value maximization

–  Whoever does the best job of sharing risk will create the most value

So where will we wind up?

•  Less risk to patients and more information to help with decisions

•  More risk to systems (not to components)

advantage

information/incentives should win

•  More government and system assumption of financing where

insurance can’t work

•  But managers will have to be very creative in distributing risk

Thank you!

jb.silvers@case.edu