The Choice Cascade

Strategic planning consultants are zipping around the country facilitating conversations among the heads of large hospital systems in the hope of diversifying risk and planning for an unknown future. 

We know healthcare cost growth is unsustainable, but we don’t know how Congress will shape future reimbursement. And that causes a lot of uncertainty—with our boards, our leadership teams and, of course, with the physicians and nurses who care for patients.

One term of art deployed in the dark rooms of strategic planning is the “choice cascade.” Imagine a white board with lots of arrows indicating how our decisions as leaders will position us in a competitive marketplace while also protecting our thin margins. Inevitably, hospital leaders discuss ownership of (or joint ownership of) a health plan.

Employer Costs Drive Self-Funding, the Cascade Begins

In suburban and rural areas of the country, hospitals continue to be important employers and economic engines. For some, the expansion of subsidized health insurance and Medicaid under Obamacare has primed the economic engine even further. But as hospitals acquire physician practices or organically grow their medical staffs, their employer costs rise, just like they do in any industry.

Our response? Set up a self-funded health plan. But unlike other industries that do this, we have a natural narrow network and the incentive to keep the majority of our employees in our network. The University of Kentucky and our academic medical center, UK HealthCare, chose this direction in the 1990s, and now our self-funded

HMO, which directs patients exclusively to our UK physicians, accounts for 59% of health benefits coverage for our employees. This is where the choice cascade starts.

Inevitably, strategic planners begin to think about how to use such a plan or network for competitive gains or defensive positioning. How might we partner with local primary care physicians who are still independent? How might we extend the network to serve our employees in secondary markets and at the same time align more closely with potential acute care partners? If we are in a market where value-based purchasing principles have taken root, then we might look upstream (prevention and wellness) or downstream (post-acute) to extend our network beyond hospital care. In this model, more complete and proactive care keeps people healthier and out of our emergency department, which means more cost savings for everyone.

Another possibility presented by the choice cascade is partnering directly with employers—this is where we need benefits brokers as we do this, frankly, with some naiveté. We’re unsure how employers might want to partner, but in general we hope to find mutual benefit in the employer-broker-provider model.

Besides helping us understand the potential opportunities with employers, brokers provide a comfort level to us in negotiations. While we are large employers, most hospitals continue to be nonprofits, or even nonprofits with faith-based cultures. And while each of us has experimented with direct contracts to provide patient care, we are most comfortable negotiating fee-for-service reimbursement rates with commercial payers. Negotiating in good faith with an employer seems like a different world, and it can actually be intimidating. 

The Ultimate Strategic Choice: Why We Said No

There are other avenues for entrance into the health plan market, but large health systems eventually reach the end of their choice cascade and must decide if they’re going to invest their resources in a health insurance strategy.

UK HealthCare said no to investing in a stand-alone health plan because we have little faith in our ability to truly understand what it means (at this point) to “insure risk.” A handful of hospital systems are indeed investing in the analytics and human capital needed to understand insuring risk, but the vast majority of us would be putting our organization in uncertain waters if we were to assume risk for broad populations, much less small sub-populations of complex patients with multiple comorbidities.

I may not be giving hospital administrators enough credit, but I worry that, when we discuss “Per Member Per Month trending,” most folks in the room think it is as easy as subtracting year-over-year change. And I’m pretty sure that, when these discussions are occurring, there isn’t an actuary within miles.

Remember, we have spent the last century building the largest sick care system in the world, caring for tens of thousands of trauma, acute care and chronically ill patients. Transitioning to helping hundreds of thousands or even millions of people who are well, and trying to avoid getting sick, is not done quickly or easily or without retooling the entire mission, vision and skill sets of leadership, management and front-line staff. 

Scale May Be the Determining Factor

While the future of healthcare reimbursement is fuzzy, staring us right in the face is the consolidation of the national health plans. The thought of being this close to having only three major national health plans has all provider-based strategists asking ourselves, “How big do we need to be to gain leverage at the negotiating table with these plans?” Some have hypothesized that, to survive, health systems will need to generate top-line revenue of $7 billion to $10 billion annually.

I believe both scale and market strength within a defined geography must be considered when hospitals evaluate their negotiating strength and their options for investing in health plans and insuring risk. 

But payer consolidation and competition between hospitals (or between hospital-employed physician groups and private, multi-specialty physician groups) will continue to push us to grow. Whether by combining assets or pursuing unique partnerships with other health systems, hospitals may become even larger employers with more complexity and a greater role in our community. UK HealthCare, for example, recently announced a new 54-hospital venture—the Kentucky Health Collaborative. The goal is to find unique ways to reduce costs in our hospitals and focus on building protocols and pathways for Kentucky’s patients to receive the best care possible across a mostly rural state.

The choice cascade will ultimately take every hospital leader to a decision point: focus on insuring risk or managing the care of individuals with acute and chronic needs. When the time comes, it’s important to remember what hospitals ultimately do—we care for people. And that focus should always be at the forefront of our decisions.