• Hospital-insurer integration, ctd.

    Austin linked to a story last week by Sarah Kliff about hospital-insurer integration in Massachusetts, where a hospital chain is offering an insurance product in conjunction with an insurer that compels the insured to use only chained-owned hospitals. Sarah surmised the goal was to reduce premiums by limiting choice, but Austin was unsure and noted potential alternative motivations.

    • To control referrals, capturing a larger share of patients than it would otherwise
    • To raise the costs of other insurers by charging them more than the integrated product for access to the hospital chain
    • To offer a more price-competitive product by cutting out the administrative costs of hospital-insurer negotiation and streamlining coordination
    • To avoid the challenging negotiations with other large and powerful insurers (like Blue Cross/Blue Shield)

    Several folks were tweeting about this asking for examples of hospital/health system-insurance integration, and I think Duke University’s employee health plan offerings are a type of hybrid integration. The 2011 options with major medical premiums are shown below (vision and dental not shown).

    Duke Select (HMO) and Duke Basic (HMO) could be seen as health system-insurance integration because they are self-insured plans that constrain your choice of physician and hospital (Duke providers, and either Duke University Medical Center or an affiliated hospital). Blue Care (HMO) is a Blue Cross/Blue Shield NC plan that provides a more expansive choice of physicians and hospitals that includes Duke providers, but offers other choices. Most notably, it allows persons to seek health care from UNC health care (hospital is 8 miles down the road; but Duke and UNC practices are often on opposing street corners in Wake, Durham and Orange Counties). The Duke Options PPO model is a plan that includes coverage nationally and internationally and is typically chosen by employees who live overseas/travel a great deal in their jobs.

    There are some other differences between the plans as highlighted in the table below, namely co-pays for office visits and annual deductible.

    To simplify, let us compare the family premiums of two of the options: The Duke Select plan (integrated self insured option) that has a more constrained choice of provider as compared to the Blue Care network organized by BCBS NC. The two plans have identical co-pays for physician visits, have no annual deductible and no co-insurance annual maximum.

    • Duke Select, integrated product with less choice: $373/month employee premium ($971/month total premium)
    • Blue Care (BCBS NC), more choice: $467/month employee premium ($1,313/month total premium)

    Duke Select and Blue Care have the same cost share structure, different premiums, and appear to otherwise differ only by the choice of provider. The more limited choice plan has a lower employee premium, ($94/month less), but the total premium is $342/month lower. This means that Duke is paying around $250/month more to provide an insurance option (Blue Care) to its employees that allows them to get health care from other than Duke. If all the total premium differences was the responsibility of the employee, that might support choice of provider as the full story, but that is not the case. Something else must be going on.

    I do not think this is related to lifetime maximums, but am looking into that. Of the motivations listed by Austin above, I think #1 (control referrals) is a likely motivation with a similar hospital (UNC) so close. A modification of motivations #2 and #3 above is also plausible, with two possibilities. The first is that Duke is tolerating paying a higher premium than they can produce internally via self insuring to establish that premium (and the unobserved insurer to Duke payments) necessary to buy access to health care at Duke. On the other hand, BCBS NC could be saying this is what we charge other employers for access to this set of network choices and BCBS knows that Duke cannot get away with only offering Duke care options to their employees, so they must pay the higher premium. I am not sure who has the most power here. I am going to stop here and see if anyone has other ideas, but it seems like something other than, or at least in addition to a choice/premium tradeoff is going on here.

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    • I am going to guess that Duke is trying to get people into its plan by underpricing it, initially, relative to BCBS.

      Scale counts for a lot in health insurance. Duke’s plan must be smaller than BCBS NC. They have fewer people to spread their fixed costs over, so that’s why they’re probably more expensive right now.

      However, I figure that Duke thinks that if it gets sufficient scale, its tighter control over medical services will enable its total premium to be cheaper than BCBS or a comparable commercial plan. So, Duke is undercharging now in an effort to get a majority of their folks onto their plan, and then they’ll be able to control costs better.

      Another possibility is that BCBS NC could be an inefficient insurer for whatever reason. I’m NOT saying that they are, I’m just saying that this could be the case.

      For the record, I’m insured through the DC/MD/VA BCBS, CareFirst. I hate their HMO, it’s a piece of junk.

      • @Weiwen Ng
        a quick search shows BCBS NC has 3.3 million covered lives; Duke has about 60,000 employees if you count all of the various medical operations (the Univ has about half of that). I don’t know how many of Duke’s employees accept cover and what the sorting is into plans.

        • True. But full self insurance can work well with as few as 5,000 employees (although more will be better, all else equal). That, combined with tighter control over care delivered, makes me think that Duke thinks it can still hold costs lower if it gets enough people into the self-funded option.

          I say that because EBRI says that 89% of workers in firms of 5,000 workers or more are in self-insured plans:

          http://www.ebri.org/pdf/FFE114.11Feb09.Final.pdf

          • @Weiwen
            thanks for this useful reference

          • I’m not sure why you say that numbers in the self-insured plan make a big difference. With 60,000 employees and probably 120,000 total insured by Duke (including dependents), the number choosing the self-insured option is going to be more than large enough to be an efficient population to manage, even if it is as small as 500 employees.

            The reason is that almost certainly the management of the self-insured plan (claims processing, utilization management, care management, etc.) is being outsourced to a TPA (Third Party Administrator) or a health insurer offering an ASO (Administrative Services Only) product. Either way, administrative costs for the population are roughly equivalent to administrative costs of a plan insured by a managed care company (that is, a health insurer in the usual sense).

            Duke is very unlikely to be administering most components of this self-funded plan, and the company that is has pretty good economies of scale.

            • @Jonathan H
              Your analysis is correct about outsourcing third party admin; I do not know about the cost differences between doing this and going with BCBS, Aetna, etc. I am looking into how many employees choose which plans, but a quick ‘down the hall survey’ show majority are in one of the Duke Select plans. Dealing with the third party admin is similar to a health insurance company in practice. For example, one of my kids had fairly serious orthopedic sports injury last year. Later there was a dispute about whether an MRI or CT scan was needed for follow up to see if a surgery several months later was needed, and it the was the same flurry of paper and phone calls to get it resolved. The most interesting aspect of the dispute to me was I asked a Duke surgeon how much the MRI would cost if not paid for/covered by insurance….and he said I have no idea.

    • Very interesting post, very informative and it raises a lot of interesting questions.

      As an Financial Executive and someone who has managed this process in the private sector, it seems the economically rational course for Duke to take would be to fix its subsidy at whatever level it has decided it should be for the plan it would like its employees to subscribe to. In the case of Duke Select this would be $598.00 ($971 premium cost minus $373 employee contribution).

      It would then apply this subsidy to any other plan, giving the employee the choice of paying the higher difference amount for greater choice. This is what I did as in my role in having financial responsibilities for benefits for a group of privately held companies. It also seems to be the correct market solution to providing a value to higher choice.

      The fact that Duke is acting economically irrationally and paying a greater subsidy for the Blue Cross plan would seem to be explained by the fact that Duke is a non-profit and is doing so in order to provide a better benefit to its employees. In short, the policy may be explained by benevolence on the part of Duke and not for any economic reasons.

      Note: Admitting benevolence on the part of Duke by a UNC grad such as myself is difficult, but intellectual integrity has won out over school pride.

      • @Sid F
        one other unique thing about this example is that about half of Duke’s overall employees are in the medical field (the other half work for the Univ). Some medical workers may strongly prefer not to seek care from the same place they work. This would argue the beneficient angle for Duke overpaying, but also that they probably have to provide a non Duke option in a practical sense.

    • Follow Up:

      I assusme these rates are for family coverage. What does the data and comparsions look like for individual coverage?

      • @Sid F
        are for family. The table gives individual and also child premiums, which I think have basically the same story but I didn’t actually look as closely as I did at the family cover since my family has Duke Select family (my wife declines State employee health plan; she works for UNC hospitals).

    • After reading this blog for a few years you might think I would finally be inured to the US health care “system.” But as an outsider looking in I’m still stunned by the cost of service with manifold restrictions,

      As a high income single person my monthly premium is topped out at $60.50/month. The maximum premium for a family (of any size) is $121. People with lesser incomess might pay 90%, 50%, 10% or even 0% of those maximums.

      And for that I can walk into any hospital, emergency room, GP office or walk-in clinic in Canada, without worrying about networks, co-pays, or anything else.

      Yes, I pay for it in taxes. But my tax load doesn’t seem significantly different from Americans in approximately my situation, And if you add in up to $1000/month for health care insuracne (or more, subsizied or otherwise) suddenly my tax + helath care load pales.

      The Canadian system may not be perfect, but the flaws are for the most part manageable. (Most of the myths have been dealt with already in TIE – i.e. hip replacements for the elderly.) Even wait times, perhaps the biggest problem, are not what they seem. The last time I was wheeled into an E/R (car accident) my time to see an E/R physician was on the order of 10 seconds. And there were no questions about my finances.

    • Don- Have you considered that it is actually cheaper for Duke to provide service for its employees this way? They are not paying BCBS for their admin costs and profit. They can be certain that all providers are participating providers. They can probably reduce the frequency of unnecessary studies and procedures better with an integrated program.

      Steve

      • @steve
        It would make sense that it could be cheaper for Duke to provide care via its delivery system and efficiences gained via self insurance, not paying profit (or excess revenue in the case of 501 c 3 BCBS NC). After reading through the comments and thinking a bit more about it, I think the reason they are paying more for another option is simply because some subset of employees don’t want to get care from the place they work. One colleague in med center emailed me and noted that she has a complex chronic illness that is not obvious and unknown to most of her co-workers and that she strongly prefers to receive care for it somewhere other than the same institution in which she works. And Duke could be paying higher premiums out of either benevolence toward employees and/or need to do this to remain competitive for employees.