Nearly 160 million individuals are covered by employer-sponsored health insurance, accounting for about 50% of the U.S. population. However, the cost of such coverage has increased by 20% in the last five years and 43% in the last decade. As of 2022, the average cost is $22,500 for family coverage and nearly $8,000 for single coverage.
Employers have tried a number of value-based initiatives to tame ever-rising healthcare costs, such as high-deductible health plans, workplace health programs, onsite or near-site clinics, Centers of Excellence, bundled payment, high-performance networks, and direct contracting with health systems.
There may not be a silver bullet for cost control, but the data so far points us toward a new model that combines advanced primary care and a narrow but quality specialty/hospital network.
High-deductible health plans have potential negative consequences on employee health.
According to the academic literature, these health plans reduce overall healthcare spending and to some extent, low-value imaging or laboratory services. However, they also discourage employees from receiving necessary services and medications, which disproportionally affects those with chronic medical conditions and leads to suboptimal care and high out-of-pocket spending. The long-term consequences of high-deductible health plans on employee health remain unclear.
Some existing value-based initiatives have produced notable success, whereas others have not; the successful initiatives do not offer complete solutions for employers.
For example, workplace wellness programs have been adopted by about 60% of employers. They did not save employers money; nor did they improve health outcomes. Nevertheless, programs that manage manifest diseases have generated a positive return on investment.
About 20% of employers use onsite or near-site clinics. A limited number of studies on onsite or near-site primary care clinics show that they can reduce emergency room visits, hospital admissions, and the total cost of care by $60 – $170 per member per month.
Nearly half of employers offer Centers of Excellence where employees receive major services or procedures such as cardiac procedures and cancer treatments. The Centers of Excellence approach is often combined with bundled payments. Typically, co-pays are lower and travel expenses are reimbursed if employees select these providers. Despite some employers claiming better outcomes, existing studies failed to show the effectiveness of the Centers of Excellence in terms of outcomes and spending.
About one in six large employers use high-performance networks of providers. Nevertheless, no academic studies have examined whether these networks are effective in improving outcomes and generating savings.
These observations are confirmed by a 2022 review of employer-led efforts in which the authors reviewed studies that examined both quality and costs. These include initiatives that focused on high-deductible health plans, alternative payment models, primary care, low-value services, health plan choices and redesigning pharmacy benefits to improve chronic disease management and value. The results show that promoting primary care and redesigning the pharmacy benefit structure are most likely to improve outcomes, lower spending, or both.
The successful initiatives – onsite clinics, chronic disease management, or pharmacy benefit redesign – are incomplete solutions for employers because they cover only one aspect of care.
Direct contracting has regained its popularity among large employers but does not generate much savings by itself; it is the underlying capitation payment that makes the difference. Although promising, the current direct contracting model has its limitations.
Direct contracting between large employers and healthcare systems is not new; it emerged in the 1990s, but for some reason, the model became irrelevant by the early 2000s. The then-famous direct-contracting initiative – the Minnesota-based Buyers Health Care Action Group was acquired by an insurance company in 2004. However, in the last several years, it has regained some momentum. As of 2022, nearly 10% of large employers are using direct contracting.
The amount of savings from direct contracting itself is likely to be limited. It may lead to some savings by cutting out the middleman – aka, health plans. Even large self-insured employers currently using direct contracting have to rely on third parties to design benefits, manage claims, measure care quality, and provide re-insurance.
Rather, potential savings would come from the capitation payment behind direct contracting, under which contracting providers are incentivized to be efficient, but more evidence is needed to confirm its effectiveness. Little has been researched on direct contracting. The only peer-reviewed analysis on this topic is a 20-year-old study of the Buyers Health Care Action Group. It suggests that such a model increased outpatient and pharmacy costs but reduced hospital costs without compromising care quality. A recent non-peer-reviewed report indicates that General Motors’ Connected Care saved 17% in healthcare spending.
The current direct contracting model holds promises, but it tends to work for large employers whose employees are concentrated in certain geographic locations, e.g., General Motors or Boeing. For smaller employers or large employers with their employees scattered throughout the country, the cost of direct contracting with local providers is prohibitively high relative to healthcare spending.
In addition, because large healthcare systems own specialty and hospital care – from which the savings would most likely derive, the current direct contracting model such as that between General Motors and the Henry Ford Health System has limited potential for savings. The reason is simple: hospitals will not go as far as to lose money in order to generate savings for employers.
The Lean Value Model – capitation-based advanced primary care with a narrow but quality specialty/hospital network – holds the greatest promise.
An ounce of prevention is worth a pound of cure: strong advanced primary care should be the foundation of an effective healthcare system. In the U.S., primary care needs to be strengthened, with its spending accounting for 5 to 8% of total spending compared to 14% in Europe. Advanced primary care is critical to long-term provider-patient relationship building, wellness and prevention, timely care access, and chronic disease management. See our previous article on Amazon Care vs. One Medical for a detailed discussion.
Given that primary care accounts for a small proportion of total healthcare spending, the system savings will be generated from reductions in unnecessary and inappropriate specialty and hospital care as well as in prices paid for this care.
To materialize potential savings and maintain or improve care quality, we propose the Lean Value Model: a combination of advanced primary care (e.g., One Medical) and a narrow but quality specialty/hospital network. Under this model, capitation payments are used, and primary care providers manage specialty/hospital care for patients. Capitation is necessary to incentivize providers, and a narrow but quality specialty/hospital network is needed to ensure quality and more importantly, lower prices. The savings will primarily be generated from a “narrow” network to ensure price negotiation power and reductions in unnecessary and inappropriate specialty/hospital care. The model is lean in that it is efficient and of value because it offers great care to patients.
RosenCare – operated by Florida-based Rosen Hotels & Resorts – is a great example. It has an on-site facility that provides comprehensive primary care and a tiny but quality specialty/hospital network. Its annual healthcare cost per covered life is about $5,500, over 30% lower than the national average of $8,000. Yet, their members have only a co-pay of $5 for primary care visits and $20 for specialist visits, zero deductibles, zero co-insurance, no co-pays for 90% of medications, and a maximum out-of-pocket cost of $750, among others. See our previous article on RosenCare vs. Haven Healthcare for more details.
Of course, more evidence is needed to verify the Lean Value Model’s effectiveness; the findings from RosenCare are not from a peer-reviewed academic publication. Nevertheless, compared to other existing value-based initiatives, the Lean Value Model holds the greatest promise to create a dynamic and efficient healthcare market not just for large employers but also for medium and smaller ones.
By adopting the Lean Value Model, existing primary care innovators can generate tremendous savings and contribute to a high-value healthcare system.
There are a number of primary care innovators in the market, including but not limited to One Medical, ChenMed, Oak Street Health, Hint Health, Crossover Health, and Village MD. These innovators can build a narrow and quality specialty/hospital network, expand their risk management function, and serve both large and small employers. Traditional providers can also re-invent themselves and adopt the model.
To serve the medium- and small-employer market, some form of intermediary is probably unavoidable due to the need for economies of scale.
Scale is important to make it work for medium and small employers. On the demand side, these smaller employers can form purchasing groups; on the supply side, primary care innovators can scale and take on risk or existing provider networks can adopt the Lean Value Model and scale.
There is a role for intermediaries such as traditional health plans, third-party administrators, and care management entities because it is unlikely employers can take the contracting and care management process in-house. Note that even large self-insured employers have to use third-party administrators or other intermediaries to process claims and/or manage care for their employees.
Direct contracting with providers is currently used by large employers, but there is no reason that it cannot be used by purchasing groups of smaller employers. The use of a certain form of contracting is not critical and depends on the efficiency it generates; for instance, it might be more efficient to contract through health plans or other intermediaries than direct contracting.
Which employers will likely become adopters of the Lean Value Model?
It depends on employee preferences. How much do they want to spend on health care? Are they going to switch jobs due to health benefits? Which employers are likely early adopters of the model? We will discuss these issues in our future articles.
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