B&H talks to... Charles Crispin, Evergreen Re

He's president of Evergreen Re, a managed-care consulting firm and reinsurance broker. Evergreen's annual survey of the finances of managed care prompted a wide-ranging conversation with B&H Managing Director Rick Service and Managing Editor Andrew Kardon.

Capitation is no longer the weapon of choice for controlling health care costs. The fifth annual Evergreen Re Managed Care Indicator found that 44 percent of multiple specialty physician groups were involved in capitation last year, down sharply from 53 percent in 2000, and a high of 73 percent in 1999. Multispecialty groups have fallen from a similar high and stood at 61 percent in 2001. Hospital participation in capitation fell to 31 percent last year, down from 46 percent in 2000 and 53 percent in 1999.

Evergreen, a privately held consulting, reinsurance and data analysis firm, suggested that the popularity of referred provider organizations for employer sponsored plans and the shrinkage of Medicare Plus Choice participation were causes for the decline.

To explore these and other issues in health care, B&H spoke with Evergreen President Charles Crispin, who developed the company's Managed Care Indicator study to measure provider involvement in risk contracting.

Here are highlights of that conversation.

Business & Health:Obviously employers are seriously concerned about costs. Capitation has been one of the basic methods used to contain costs, but it seems to be waning. What's going on?

Charles Crispin: What the study has found and what we've seen out in the commercial market is that capitation for single specialty is certainly decreasing, but multispecialty capitation has remained surprisingly strong. Of course, on the hospital side we've seen a decrease in capitation, and it will continue to decrease.

B&H:What's your take on the reason for the decreases?

CC: On the hospital side, what you've seen over the last several years is a lot more very organized consolidation among systems and the ability, therefore, to leverage in their contracting. At the same time, the vast majority that serve commercial populations have simply realized they can make more money on fee-for-service. Charge master inflation is running very high. For major catastrophic cases–the $200,000 to $250,000 range–inflation is 30 percent to 40 percent on billed charges.

With this increase in leverage they are able to negotiate more favorable discount terms. For example, they may have had a contract that said: "We will be reimbursed per diem for certain types of bed days, but if an admission exceeds $100,000 in billed charges, you will pay us a percent of charges instead." And it was perhaps 65 percent of charges. With the leverage that's out there right now, you're seeing that stop-loss provision change, so that in the event an admission is over $75,000 billed charges, you might be reimbursed at 70 percent.

B&H:And on the physician side?

CC: Three to five years ago, we were all talking about the glut of physicians. Now there's a shortage of specialists again. That's been reported based on a number of factors: physicians retiring, completely fed up with the system and they'd made their hay. Others went on disability. I think some of the press might have scared away some students from going to medical school. All that dried up supply quite a bit, so specialists are in shortage, and specialists' fee schedules are again pushing up, and that's fairly pervasive nationally.

B&H:Any regional variations?

CC: You certainly have pockets—southern Texas, for example—where there are dramatic shortages of physicians. Certain states—Pennsylvania is one—have malpractice insurance crises going on, which is driving specialists out of those markets. As you limit your supply, your price goes up. It's basic economics.

On the hospital side there are certain regional situations. In New Mexico, for example, the number of facilities performing transplants has continually decreased, and there's a possibility that there might not be any transplants performed there in several years. If the federal government decides to direct more organs to certain academic centers, that could increase the negotiating leverage of those centers. On the other hand, there's a glut of hospitals in the Philadelphia area. So yes, there are variations. I think we all learned many years ago, when the last effort to create a national health policy failed, that health care is extremely local.

B&H:On the whole, health care has lagged behind other American industries in its investment in information technology. Do you find any change in attitude?

CC: Absolutely. And I think the study points to that. The provider organizations involved in capitation today are certainly fewer, but they are larger and more sophisticated. And they have said: "Well, we do have a choice. We can make these investments. We can hire very high quality financial managers. We will make certain that our clinical and financial data are at least beginning to talk to each other. It's going to be darned expensive, but we want to stay in this game, we want to have some better control over our destiny." Other organizations simply decided that they weren't going to make those investments or they went out of business before they had the opportunity to make the decision.

But go back to your initial premise–employers are extremely concerned about cost and capitation has traditionally been one of the main vehicles to control cost. Regardless of whether the provider community is under a capitation or fee-for-service arrangement, they need to be efficient. And without significant technology investments and the ability to marry clinical and financial data for decision-making, they will not be able to maximize their efficiency. That will create greater stress on smaller provider groups than larger ones.

On the health plan side, the National Association of Insurance Commissioners implemented a risk-based capital guideline and the majority of the states have now required it. If you have a certain size membership and a certain amount of risk that you're fully insuring, then you need to have sufficient capital to be able to operate your business so that you can afford to make these investments. Everyone is much more focused on profit. They always were, but I think there were a lot of blind steps into capitation by providers. They made assumptions that a deal was good, without doing any true form of due diligence from an actuarial standpoint.

B&H:What about HIPAA?

CC: HIPAA's a major issue obviously, and it has been somewhat of a moving target. Large health care providers and health plans have had to operate under major privacy laws for many, many years. So the notion of privacy is nothing new. For many smaller organizations, it's going to be a tough nut. On the employer side, they're going to have to look very seriously at the third party administrators with whom they're doing business. For example, some of the smaller TPAs may be stressed to make the investments that will be necessary in just their IT systems to provide all these privacy protections and whatnot.

B&H:What about financial risk among employers?

CC: I'm terribly disturbed by the number of small employers that are self-funding their health care benefits. That's just fraught with peril. I personally believe you should have at least 300 employees before you consider self-funding your insurance plan, and I can tell you that we hear of groups, way too frequently, of as low as 10 employees, that are self-funding their benefit plans. I just think that is absolutely crazy.

I also think there's a lack of attention on the part of a number of employers who are self-funding as to the real benefits of the TPAs they're choosing to work with. A lot of the decisions are simply made based on the administration fee as opposed to what the expected net cost would be. What's being done under that fee? How well is the care being managed? Are they accessing best price? What do the contracts of the underlying provider network look like? That's the vast majority of the expense to the employer. It's not the TPA administration fee.

We're already seeing that employees are being required to share a greater burden of the cost through higher deductibles, higher co-pays, and things of that nature. I think that we've only scratched the surface. All of us as employees who have a company health benefit plan will be sharing significantly higher portions. In the retail prescription drug area alone, there are just some magnificently wonderful drugs out there, and they're darned expensive. I think that we're going to continue to see major cost shifting to the consumer side. I don't see any way around that frankly.

B&H:What can employers do better to mitigate the financial impact?

CC: Better management of that whole retail drug spend could result in better management of the medical costs. A dramatic minority of health plan sponsors, which employers are, audit their retail pharmaceutical expenses annually. Research proves that two to three percent of all retail drug expenses are related to members who are not even eligible under the plan, and another six to nine percent are wasted because of inappropriate prescription refill criteria and things of that nature. So, there's a lot of low hanging fruit for better management to give, particularly very large employers, much better balance sheet protection.

B&H:Any number of employers are convinced that lots of those new and expensive drugs are prescribed mostly because a patient has seen an ad for them and badgered his physician into writing the prescription.

CC: Well, pharmaceutical companies are obviously very intelligent and have very robust marketing departments, and they realize that marketing drugs is much like selling Coca Cola. So, yeah, [direct to consumer advertising] has certainly increased demand. I'm not an expert on clinical protocols of different drug efficacies, but it's clear that different drugs can be used in similar situations, and some of those drugs cost a lot less than others. And research does suggest that physicians don't necessarily understand the cost of the drugs they're prescribing. I do believe that to be generally true.

B&H: Any other big-ticket items?

CC: In terms of specific disease states, employers need to be looking at the whole area of organ transplants and tissue transplants. Tissue transplantation has been extended for many different or new disease states—existing treatments being applied to new diseases, if you will. But that's an effect on trend. Inappropriateness of transplantations for certain members is potentially a liability problem for employers. Withholding of transplants for members whom should receive a transplant. FHP several years ago, had a sixty million dollar judgment against them, for something of that nature. There's Hepatitis C and the epidemic that we're facing now. In the next several years it's predicted that Hepatitis C may increase the demand for liver transplants by five times.

Beyond supply and demand for organs, there's the whole area of controlling expense and managing transplants. I think 40 percent of transplanted organs or tissues reject because of lack of drug compliance. If you have an organ reject, then you've got a train wreck on your hands. Transplantation is an explosive cost to start with but if you have rejection you have a whole bunch of other costs just to keep the patient alive, and/or for retransplantation. So the whole management of that area can be much better served.

B&H:You mentioned inappropriate transplants. Could you give me an example of what you're talking about?

CC: Well, you might have an individual who perhaps has some sort of cirrhosis condition, leading to a liver transplant. And arguably that individual, for that transplantation to be successful, needs to quit drinking. You know organs are very, very valuable, they're limited and we need to make sure that we're putting those organs into the right bodies. It's going to be very interesting to see how the whole thing with UNOS [The United Network of Organ Sharing] plays out with regards to how they're going to try to distribute organs differently. If they're going to concentrate on the sickest people, well is that going to lead to poorer outcomes? So there's a whole lot of issues in a very specialized area, and I think it needs to be very seriously considered in terms of better managing that risk and perhaps fully insuring that risk alone, even when you're self-funding the balance of your benefit plan.

B&H:Do you think we may come to the point where we say to people, "Look, either live in a healthier manner or we can't give you this liver, this kidney, this heart."

CC: I personally believe that's appropriate.

For more information about Evergreen Re and its services for HMOs, health care provider groups and large employer groups, please call (888) 811-5280, visit www.evergreenre.com or e-mail reinsure@evergreenre.com.

B&H talks to . . . Charles Crispin, Evergreen Re.

Business and Health

2002;14.