March 20 could prove to have been a seminal date in the history of healthcare purchasing coalitions.
The event that could shape their near-term course occurred at an unlikely time and place: in the waning hours of a Friday afternoon at the Fairmont Hotel in San Francisco.
After many attendees of the Palo Alto (Calif.) Medical Foundation's annual conference had departed to browse Union Square's shops, Margaret Stanley, healthcare benefits administrator of the California Public Employees Retirement System, unleashed a bomb. CalPERS, Stanley said during an otherwise mundane panel on benefits, was mulling direct contracting.
At the time, several healthcare benefits purchasing coalitions throughout the country had begun bypassing health plans to negotiate directly with providers, but that strategy had drawn scant attention.
The most visible practitioner was Minneapolis-based Buyers Health Care Action Group, which began direct contracting in 1997 for 27 of its 42 member employers, or about one-third of the 400,000 employees for whom it purchases benefits. Operating in one of the few managed-care-saturated markets in the country, BHCAG's Choice Plus plan had gathered a few trade publication and newsletter headlines about its efforts, and occasionally it would surface as a topic among benefits consultants.
But when Stanley said CalPERS liked what it saw in Minneapolis, the issue drew far more attention. With 1 million civil servant members, CalPERS is the undisputed 700-pound gorilla of coalitions, more than double BHCAG's size and second only to the federal government in scale as a purchaser. It's one of very few coalitions guaranteed to draw ink when they roar. While Stanley considered her remarks highly transitory, they were reported in the national pages of that Sunday's New York Times.
Although Stanley mildly backpedaled the following week, insisting her remarks had been quoted out of context, she confirmed CalPERS had received a legal opinion on direct contracting from its attorneys. They concluded CalPERS probably would have to obtain a limited HMO license from the state of California to contract directly. It has yet to apply for a license, possibly because obtaining one in the state is a grueling and costly process that requires a nearly religious level of commitment from an applicant.
Nevertheless, Stanley's comments have landed purchasing coalitions in the national spotlight. And it appears coalitions' 15 minutes of fame may be extended. Payers, particularly managed-care plans, have lost some of their cost-control momentum as they struggle with rising costs, slowness on the quality-reporting front and an uncanny talent for nabbing bad press. In contrast, coalitions are well-positioned to begin carrying the issue: Most share consumers' concerns and suspicions about carriers but also are able through massed enrollees to leverage health plans.
According to a 1996 survey by Smith Barney analysts, purchasing coalitions "will likely be a major factor in the evolution of the healthcare services industry." The survey estimated as much as 30% of all benefits could be purchased through coalitions before the end of the decade.
The nation's two major coalition lobbies, the Washington-based National Business Coalition on Health and the Brookfield, Wis.-based International Federation of Employee Benefit Plans, represent a combined total of 124 coalitions, which cover about 38 million people, or about one-sixth of the nation's insured population. However, officials at both organizations noted that not all coalitions are members, so their numbers are incomplete.
Catherine Kunkel, vice president of the NBCH, which represents 100 purchasing coalitions nationwide, notes that much of its membership is shifting away from focusing just on the bottom line. "Three or four years ago, they focused on discounts, but now they're much more knowledgeable in contracting methods," Kunkel says. "They're going beyond just prices for quality-improvement guarantees and in many instances performance guarantees. Some are even moving toward risk sharing."
Robert Trinka, a vice president with Miami-based healthcare consulting firm McKenna & Associates, succinctly summarizes the debate: "Many people just don't like HMOs. If they can find new ways to get their healthcare without them, they may just do that."
Indeed, some coalition executives openly chafe at the often proprietary nature of health plans.
"A traditional insurance company operates like a black box, with employers putting money at the top and hoping they would get value at the bottom. But there was no true way to tell," says Paul Pietzsch, president of the Des Moines, Iowa-based Community Health Purchasing Corp., which buys benefits for some 25,000 employees of 30 companies and began direct contracting in 1996.
"We thought the hospitals and the doctors kept all the data (on our enrollees), but to our amazement the insurers were, and they were keeping it to themselves," Pietzsch says.
Adds Steve Wetzell, the BHCAG's executive director of policy and public affairs: "If the customer is satisfied, they'll buy the product. If not, they will build it themselves."
Currently, customers have little room for satisfaction: The consensus among top benefits consulting firms is a 7% premium hike for managed-care plans in the next year, with indemnity premiums expected to rise 12% or more.
Pietzsch and Wetzell's concerns about value are not isolated: In a recent survey of 325 employers by consulting firm Watson Wyatt and the Washington Business Group on Health, one-third of the employers were concerned that cost pressures affected quality last year, compared with 28% in 1996. Among firms with fewer than 1,000 employees, which are prime coalition constituents, 45% thought cost concerns were eroding quality in 1997, compared with just 33% in 1996.
Added to that, recent federal legislation relaxed the way physicians can band together to do business. That has allowed for the rise of provider-sponsored organizations. Many believe PSOs-which allow physicians to enter directly into risk-sharing arrangements with payers-would be likely candidates to support the coalition cause. Eliminated in most cases would be the middleman healthcare insurer, meaning more dollars would go toward care.
PSOs, in one form or another, already function throughout the country. But not until last year did Congress pass federal law authorizing the formation of PSOs that are eligible for Medicare and Medi-caid participation. HCFA has yet to certify a PSO or even disclose a list of applicants.
"There's still a significant amount of fat that can be trimmed, and as PSOs become more feasible, they will be a model of the future for contracting," says James Conlon, an Albany, N.Y.-based consultant with the actuarial and consulting firm Milliman & Robertson. Conlon believes PSOs will replace the coalitions in the arduous task of cobbling together doctors.
Jacque Sokolov, M.D., chairman and chief executive officer of PSO Development Corp., a Los Angeles-based consulting firm, agrees. He observes that "there's a push on by purchasing coalitions to pursue direct contracting, and it will be more successful with a mature PSO model mainly because delivery systems will be far more sophisticated than they used to be."
Meanwhile, CalPERS joined the battle on premiums much as it did with direct contracting. Just a couple of weeks after Stanley's remarks, it grabbed headlines again by refusing to accept a controversial 12% premium increase from struggling Kaiser Permanente. CalPERS' board threatened to block Kaiser from accepting new enrollees beginning in 1999, but a compromise that allows a 10.75% hike was reached in mid-June.
Just what are the gains to be had by coalitions? Community Health Purchasing's Pietzsch says protocols for many treatments can be made more efficient in a direct contracting model. Community, which contracts with three major provider groups in the Des Moines area and southwest Iowa for its 28 member employers, has been able to demand changes in the way tests are administered for ailments such as urinary-tract infections.
The typical regimen in a market with low managed-care penetration-even for a patient with a history of UTIs-includes at least two office visits and a 90-day antibiotic prescription. Under Community's direction, patients can drop off a urine specimen for testing and immediately receive a less pricey 30-day prescription, followed by another specimen drop-off.
"From the patient's point of view, they're getting quick service," Pietzsch says. "From the employer's point of view, their worker doesn't have to take half a day from the office. The doctors are also happy because they have time freed up to examine more serious cases."
Meanwhile, Community defeated insurers' "black box" efforts by compiling its own patient data and satisfaction measures, allowing it to negotiate future rates with providers. It's publishing its first member satisfaction survey in the fall.
In Minneapolis, the BHCAG contracts with 25 provider networks. It motivates them to keep costs down by requiring them to formulate an annual budget for delivering care. BHCAG members are allowed to pick and choose among the networks whose premiums vary by as much as $450 annually. Lower-budget providers get more members during open enrollment-one network captured 57% more enrollees compared with the previous year. Networks with higher budgets have lost as many as 18% of their enrollees.
Overall premiums have fared relatively well against health plans: Annual increases average about 4% for the BHCAG, while they're flat for Community.
"With direct pass-throughs (of premiums to providers) and no hidden margins, we achieve better value," Wetzell says.
But direct contracting is not necessarily a universal can-do for coalitions, observers warn. McKenna & Associates' Trinka notes that direct contracting can work in a place like Minneapolis, where there are so many large employers. (The average participating company in the BHCAG has about 10,000 employees, and participants include such firms as American Express, Mervyn's, General Mills and Pfizer). But he says he doubts the same success can be replicated in smaller markets.
The NBCH's Kunkel shares Trinka's doubts.
"The model and demographics are different in every market, and every market has different degrees of managed-care penetration, so a totally uniform assumption can't work," she says.
Another potential obstacle for coalitions is the underlying assumption that many employers are still seeking cost over value when purchasing benefits.
"Employers talk value but still (choose) based on price, and they do it all the time," Dwight McNeill, president of WayPoint Health consulting firm in Barrington, R.I., told an audience last April at the National Managed Health Care Congress in Atlanta. "When I worked as a purchaser, you would brag about how premiums were kept low while benefits were pared back. (the BHCAG) is a model for the rest of the country, but employers still do miserably. They're still much more interested in saving money rather than lives, putting the livelihood of their shareholders above that of their stakeholders."
Another potential battleground for coalitions-the construction of universal formularies for health plans to control rising drug costs-appears to have fizzled.
"It's becoming a micro issue coalitions may not want to make decisions about," Kunkel says. "I could be wrong, but I have not seen a willingness to hammer out these types of details; they'd rather work on it in the context of the entire deal with the appropriate people."
And whether the data gleaned by coalitions are of great use for improving quality of care also remains a question. Phyllis Torda, vice president in charge of policy and product development at the National Committee for Quality Assurance, recently criticized the BHCAG's data-gathering efforts as too broad-based to be useful.
Coalition officials, however, say standards will become tighter and clearer in the coming years.
"We need to get our act together on standardized information, and we will," Kunkel says. "Once the true information age hits in healthcare, that stuff will be very doable."
In the meantime, officials say coalitions should be expected to continue tinkering with the basics.
"You can see multiple-year agreements, carrier placement strategies, carve-outs and more experimentation," Wetzell says. "It can come in a variety of different forms."