TIME & RISK : The Future of Healthcare J B SILVERS, PhD Mannix MMO Prof of Health Finance Weatherhead School of Management Case Western Reserve University Copyright©2016 J B Silvers Weatherhead School of Management Case Western Reserve University Key Concepts and Skills 1. Understand the redistribution of risk that is occurring under the ACA in alternative payment models and new organizational arrangements 2. Determine the first principles that will govern the steady state allocation of responsibility to the parties in the value chain that can best manage various elements of risk 3. Translate this changing environment into its strategic implications for providers, payers and patients Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Time and Risk—THE CHALLENGE • Finance is all about time and risk § Moving money back and forth in time Đ Reallocating risk among the parties ã One could add flexibility to this dual goal § Creating and managing options Đ Ability to react to/anticipate changing conditions ã If we this well, value is created § If we fail, opportunities are lost and financial distress ensues • If we are creative, each party in the chain gains § And the patient/society is better off Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University What’s the difference: insurance vs financing? Insurance moves money across population pools as adverse events occur $$ $$ Savings (HSA) $ $ Borrowing (VISA Card) Unpredictable high cost events drove insurance need $$ $$ $ Higher cost, chronic care & high deductibles drive financing need Financing moves money back and forth through time Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University But how can we design a system that does this well? • We have a choice of what to insure and what to finance § Basics of Insurance – We insure events that are not predictable individually but are in large numbers – The key is getting a large group to spread the risk § Basics of financing – We finance events that are known but occur over multiple periods – The key is matching differences in the timing of cash needs between borrower and lender (intermediation) Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University What have we done with both of these in health? • Mostly we have reallocated risk § High deductible plans move risk to patients § Value based payment moves risk to providers • But the ACA also has massively refinanced care § Premium subsidies shift funds from taxpayers to enrollees (much like employers always have done for employees) • The question is how well have we done these Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Who has the risk? Where is the pig in the python? Originally Insurers/govt were at the tail end of the python bearing all the risk PAYER • First dollar coverage + cost-based payment meant that only the payer bore any risk • We have been gravitating away from this simple model (invented in Cleveland by John Mannix) for 50 years Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Who has the risk? Where is the pig in the python .NOW? • Some people think that the patient should have most of the risk (skin in the game) § Should even poor people on Medicaid make payments into their HSA (i.e., finance their care over time) with high deductible plans? § Most employers agree employees should (HDHPs) § The Rand Health Insurance Experiment (HIE) confirms the impact of this for ambulatory care PATIENT Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University The problem is how much is too much? Too much risk to the payer or provider? PAYER Bankruptcy, Failure & Exit Too much risk to the patient? PATIENT Loss of Access, deferral of care Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University So should the “pig” be somewhere in the middle? Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University But where did these costs come from? Incidence Rate Patient Initiation Diagnosis Treatment & Service Cost Outlier Post Acute/ Home Care Normal Post Acute/ Home Care Focused Factory Home Care/ Telemedicine Normal Telemedicine/ Retail Maintenance Telemedicine/ Retail Normal Telemedicine/ Retail Focused Factory Telemedicine/ Retail (>5%ile cost) Acute Chronic start (median cost) (very low cost) >$0 (median cost) (low cost) $0 Routine Function & Productivity (median cost) (very low cost) Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Compounding elements of financial risk DRIVER: Incidence: Pt.Demand: Diagnosis: Treatment: Service Cost: Functionality: -population -net price -knowledge -doc educ -scale/scope -rehab serv -disease -knowledge -technology -incentives -organization -pat attitude -org structure -mgt ability RISK MGT TOOL: Prevention: Cost Sharing: Audit: Grouping: Fixed Pricing: Penalties: -wellness -copay/deduct -peer review -DRG -MFS/PPS -readmission -public hlth -HSAs -second opinion -bundled/VBP -incentives -incentives Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University How we reallocate risk: mechanisms • Fundamental building block is a contingent claim: Option that pays in one state but not in another Resultant impact on me § Incentive payment § Option/insurance/limitation Exclusion range Hold harmless/maximum limit Full incentive (or partial) Underlying outcome (cost) Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Examples of financial contracts in healthcare Typical Insurance Policy Resultant impact on me Out-of-Pocket Maximum Resultant Loss Inpatient DRG Payment Outlier (Stop-Loss) Payments gain loss Cost DRG Pmt Deductible Underlying outcome (cost) Mandatory Preventive Care Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Resultant Loss Compound set of contingent claims Resultant Loss Cost Too little risk of loss? Too much risk of loss? Cost We can put together combinations of these financial options to construct any payoff incentive desired that’s the easy part! The tough part is predicting how the subjects of the incentives will react and design the risk allocation accordingly Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Examples: • High Deductible Plans: Resultant Loss § Huge assumptions re patient’s ability to finance and manage all forms of risk § Assumes insurance and financing situation is the same for all income groups – High income can finance front end, low income cannot Too little risk of loss? Too much risk of loss? Cost Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Examples: • Outlier Payments for high cost cases under DRG: Resultant Loss § Payment assumes ability to manage § Financial signal too small and too distant from case to gain attention Too little risk of loss? Cost Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Examples: • Value-based Payments: Resultant Loss § Zero-sum assumes only question is allocating risk (rather than changing behavior) § Risk adjustment is very limited – Forces demographic risk that cannot be managed – Metrics are myopic and limited to very imperfect electronic measures Too little risk of loss? Too much risk of loss? Cost Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Examples: • Accountable Care Organizations: Resultant Loss § Huge incentives to bring outlier practices back to mean (“outliers anonymous” support group?) § Little ability to gain if already doing well § BUT huge impetus to focus on reorganization across the boundaries (i.e., post discharge, etc.) Too little risk of loss? Too much risk of loss? Cost Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Examples: • Bundled Payment (BPCI, CJR): Resultant Loss § Huge incentives to standardize paths and create focused factories § Big temptation to exclude more difficult cases Too little risk of loss? Too much risk of loss? Cost Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University So how can we design systems to this well? • First principles of financial design depend upon-§ Origin/driver of risk (demand, diagnosis, etc.)? § Size and nature of the risk? – Binary (incidence rate, patient presentation, etc.) – Continuous (no event, median, 95th%-ile) § Tools available to manage risk – Education, information, feedback, incentives – Increase ability to manage (QI, Sigma, etc.) § Cushion required to avoid distress – Likelihood of adverse events compounding – Cash balances, contingency plans and sources, exit Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University We need to understand the many facets of risk ã Actuarial Need to Spread Risk Đ There will always be residual risk to be insured § But insurance is a poor way to finance known risks – We need to find a way to finance known costs over time – Chronic conditions and genetic knowledge reduce the random nature of insurable events and require financing – Pulling these out of the risk pool is one way (a la France) to avoid the death of health insurance as we know it now • Behavioral Economics Understanding of Decisions/Reactions § It matters how decisions are framed (gain/loss, sequence) & anchored (recent experience, current endowment) • Organizational Approach to Threats/Opportunities re Risk § Team versus individual § Near term versus distant Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Where will we be in steady state (if that’s possible)? • Silvers Rules of Equilibrium: § Risk is best handled at the level of the system and by the responsible party with the most knowledge regarding and ability to manage that particular element of risk – Don’t ask docs to be insurance companies or insurers to make medical decisions § Risks can be either objective (actuarial) or subjective (behavioral) and must be managed accordingly – It’s not about just spreading risk around but about encouraging appropriate behavior § Systems will evolve towards an economically appropriate distribution of responsibility and risk in a competitive market based on value maximization – Whoever does the best job of sharing risk will create the most value for payers, providers, patients and society Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University So where will we wind up? • Less risk to patients and more information to help with decisions • More risk to systems (not to components) § Physician ACOs, partnered bundled payment have initial advantage § But integrated systems with good physician management/ information/incentives should win § Some too large to be agile enough to manage risk (Coase’s Law) • More government and system assumption of financing where insurance cant work Đ Financing high deductibles, subsidizing cost sharing ã But managers will have to be very creative in distributing risk within organizations to get results .not good at it now Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University Thank you! jb.silvers@case.edu Copyright © 2016 by J B Silvers, Weatherhead School of Management Case Western Reserve University