By IAN MORRISON

Back in the early 2000s I was on the board of the California Health Care Foundation and one day the German Minister of Health paid CHCF a visit as part of a learning tour of American healthcare. Mark Smith MD CHCF’s CEO invited me to join the meeting with the minister. She was a delightful person who didn’t speak much English, but because she was accompanied by her handler/translator we managed to communicate just fine. Mark and I tried to explain to the Minister how the American healthcare system worked, and we got to the point in the conversation about the money. The essence of the “game” we described was that commercial insurers (particularly self-insured employers) paid a significant multiple of cost (sometimes in excess of 300% of costs) in order to make the math work for providers. We explained that the game works only if these purchasers paid much higher prices. I don’t speak German, but I think she said: “What The F**k?!”. Exactly.

As we enter the Post COVID world, a key question is: Will healthcare simply restart this game? Or make it even more extreme, in fact, by providers turning to those commercial insurers and self-insured employers to make up the difference for the COVID “Elective Collapse Recession” that has so traumatized provider’s finances including hospitals, specialists, primary care, and dentists leading to job cuts, furloughs, salary reductions and bankruptcies of providers.

A number of recent articles have pointed to how the game works. In particular, the always superb New York Time’s columnist Sarah Kliff’s review of the Mayo Clinic and the other highflying institutions whose excellence is rewarded not by value based reimbursement but by high prices for commercial activity under a relatively benign payor mix (industry code for “don’t see a lot of poor people, uninsured or on Medicaid”).

Mayo is not alone. Every hospital I know plays a variant of this game. Some in less generous environments like Arkansas live leaner to the bone to make the math work, lucky to make 130% of Medicare on the commercial side. A tiny few, like my friends at the Benefis Health System in Montana, through passionate focus on operational excellence and a run lean culture, actually can make money on Medicare. But they are exceptional. Many if not most hospitals with more dominant market positions are able to generate in excess of 300% of Medicare on their commercial contracts including many of the country’s leading academic medical centers. And many titrate down their public payment patient mix to keep the game going. As I used to joke to hospital CEOs of financially struggling hospitals, “just move your hospital to the affluent suburbs”. Some did.

RAND has documented in studies of actual paid claims for commercial insurance that on average hospitals charge 241% of Medicare across the 25 or states covered in the analysis. I’m sure all these institutions make wonderful use of the money subsidizing research, uncompensated care, and the salaries of employed physicians especially academic doctors who are teaching the next generation. But all of these worthy activities are enabled from money derived from the game.

George Halvorson, former Kaiser CEO, proposed recently on The Health Care Blog an alternative funding scheme using a 20% payroll tax (paid equally by employer and employee) that would be used to fund a Medicare Advantage type program for All. (I proposed a similar solution twenty years ago in Healthcare in the New Millennium:  Vision, Values and Leadership, Jossey-Bass 2000, pp 231-2).  It might be a better alternative, but I am not sure we can get from here to there and especially by demanding high paying enterprises like Apple, Google and Facebook embrace a 20 percent payroll tax.

In the wake of COVID, hospitals have received one-time financial support from the Federal government to shore up both costs of care for the afflicted by the disease and for the financial damage of suspended clinical operations. Ironically, the share of non-COVID case-related reimbursement was distributed proportional to net patient revenue, in other words revenue gained in the game.

Absent a meaningful alternative like Medicare Advantage for All, to date employers have been complicit in the game and (while not exactly thrilled) have tolerated it for decades. Their coping mechanism has been to transfer the burden of rising costs and prices to their employees progressively over the last 20 years through the magic of high deductible healthcare. Sharing the pain with their employees and making them miserable in the process as workers face the weird reality of rising out-of-pocket costs, surprise bills, and denials of coverage.

Health plans see no real reason to change the game. They can make money on managing Medicare and Medicaid and are eager to do so, while commercial small group insurance is even more profitable. But the majority of Americans with private health insurance, over 60% by most estimates, are employees and dependents of self-insured employers including giant corporations such as Boeing, Disney and Walmart. Insurers typically charge on an ASO (Administrative Services Only) basis charging about 3% to manage networks and pay claims. But remember 3% of a big number is a big number. So plans are not exceptionally motivated to change the game.

All this works if self-insured employers rejoin the game post-COVID. But will they?

Ironically, employers have seen their health spend per employee drop dramatically in the Covid shut down by as much as 20-50%, but it is cold comfort if you are an in an industry that may have seen revenue plummet and you are now facing financial collapse and lay-offs: think airlines, hotels, hospitality and virtually all non-Amazon, non-Grocery retail.

Unemployment claims are up over 36 million, many of those jobs are not coming back in the next 12 months. In fact, I have gone as far as saying that January 2020 was the all time high in level of employer sponsored coverage never to be reached again. A full 10-40 million Americans are likely to migrate to Medicaid and the uninsured rolls in the next year as we stagger back to some kind of an economic recovery.

But as we return to a New Normal, employers are deeply concerned that they are going to be asked to pay higher prices in 2021 as providers try to make up losses. They fear greater consolidation in healthcare as weaker players capitulate and strong, regional health systems get even stronger with greater market power and control over primary and specialty care.  And they are concerned that some of the positive short-term regulatory relief (enabling telehealth and scope of practice easing) will be rolled back, post Covid. Let’s hope not.

Don’t be surprised to see employers step up to this moment and finally do what they have not done to date, namely massify their economic firepower and act in a concerted way to change the game. After all, they are the financial lifeblood for the entire healthcare system.

Employers could demand greater accountability for performance on measures of outcome, appropriateness, and demand a focus on ubiquitous technologically sophisticated primary care.

They could turbo-charge efforts to codify Centers of Excellence models as the means of accessing appropriate, high quality, elective services using mandatory or highly incentivized benefit designs to have patients patronize only select high performers. To date the Wal-Mart and PBGH Center of Excellence models have saved money not so much by price discounting but by reducing inappropriate care by 20-50%.

COVID is like high deductible health care. It is a blunt instrument that has reduced appropriate and inappropriate care in probably equal measure (we don’t know yet in the case of COVID-foregone electives).  But I don’t think employers will just go back to endorsing access to elective healthcare at ever escalating prices without asking some tough questions. 

If you are a plan or a provider. Don’t just assume that the game just comes back. There may be new rules.

Ian Morrison, PhD is an author, consultant and futurist in Menlo Park, California