Health Plans Must Adapt to Changes—or Perish

HealthLeaders Media Staff, April 21, 2009

Health insurers will need to cut costs, increase efficiency, collaborate with providers, and change the way they pay physicians if they are going to thrive in the changing healthcare marketplace, according to Computer Sciences Corporation's report Next Generation Health Plan.

The Falls Church, VA-based global business and technology consultants suggest the Next Generation Health Plan faces a number of challenges:

  • Healthcare spending is expected to skyrocket from 16% of GDP in 2008 to 20% by 2020
  • Health insurance increases are rising faster than wages
  • Baby boomers are reaching retirement age
  • Members are expecting more coverage and offerings
  • The federal government may create a public insurance option

Insurers will need to adapt to these changes or perish, CSC warned.

The common thread in all healthcare issues is costs, and CSC suggested the Next Generation Health Plan must operate at maximum efficiency.

Health insurers have the greatest control over plan margin and overhead, but those costs pale in comparison to direct medical costs. Health plan medical loss ratio is often around 85-90%, which means the vast majority of money is going to direct medical care.

"You can squeeze the administrative and overhead bubble all you want and you are still going to be affecting a small percentage of the healthcare dollar," says Jordan Battani, principal researcher in CSC's Emerging Practices Group and author of the report, adding that rather than focusing on health plan overhead, insurers could work with providers to help reduce practice administrative costs that are influenced by health insurer programs and policies.

Health insurers have historically not been able to control costs because they have not involved providers, she says.

"If you're going to get at the inflation and escalation of healthcare costs, the payers have to partner more effectively . . . with people who are trained and are able to make clinical decisions. That's going to take some work for the industry to get to that place," says Battani.

Rather than health insurers trying to manage care on their own, CSC said the New Generation Health Plan will need to engage stakeholders and create integrated health management programs that combine traditional medical management with wellness, self-management, and disease management programs. Health plans could achieve this through providing incentives to providers and offering providers the technology and tools that help them provide care coordination.

Health insurers and physicians have rarely been on the same page and that friction has not helped healthcare. Instead, the Next Generation Health Plan must assist and enable providers to help them manage and moderate healthcare service demands, while providing incentives to spark an interest in primary care.

Battani predicts Medicare will lead the way in physician payment reforms, but suggests health plans should prepare to tweak physician reimbursements to send higher payments to primary care.

Battani says an important takeaway from the Next General Health Plan is that insurers shouldn't expect to discover new, untapped funding sources. Instead, they should reform payments, restructure care, and improve quality.

"The opportunity for bringing new money into the system to pay for things is very very limited. What really needs to happen is repurpose and redirect the funds that are available now," she says.

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