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   Looking for savings in all the wrong places
  Most of the cost reduction efforts in healthcare originate with insurers and they place the blame of high costs always on other stakeholders. Providers, for example, were blamed for excessive and unnecessary procedures performed in fee for service medicine. Insurance companies embraced managed care to curb these excesses, but the costs continued to rise. What gives?
  A pilot study of the Medicaid managed care program in New Mexico revealed a fundamental flaw in the current cost reduction efforts. In New Mexico, healthplans are paid a capitated premium based on calculations by an actuary, hired by the state, and the healthplans in turn pay providers in multiple different ways. The important point is that when it comes to the state's Medicaid costs, there is only one item that is significant and that is the premium paid to the healthplans, for each enrollee, as calculated by the actuary. Focusing on payments to providers, or changing their practice patterns or devising success based incentives will have absolutely no immediate effect on costs. Medicaid costs will reduce only when the premium paid to the healthplans can be justifiably lowered.
  Why then are actuarial premium calculations not being challenged in the cost reduction programs? It is partially due to conflicts - because cost reduction efforts are led by insurers, and lowering of premiums is not in their financial interest. But it is also because there is a serious technical challenge in trying to decipher premium calculations.
  Actuaries use different proprietary algorithms to calculate premiums and they never share the details of their work, treating them as trade secrets. Any variations in premiums are always explained as people being "sicker," without providing any precise definition or measure of sickness. The inability to compare premiums, because the calculational details are missing, is a significant technical barrier to challenging premium amounts so as to justify and negotiate lower rates.
  There is one other argument in support of examining premium calculations. For the best ROI, it makes strategic sense to tackle costs at the top of the food chain, in this case the healthplans that receive 100% of the premium, rather than focus on physicians who, at about 15% of premium, earn the least. A beneficial side effect is that when premiums are lowered, insurers cannot afford to be on the side lines of cost reduction efforts anymore. They will be driven by self-interest to explore multiple ways of encouraging providers, ancillary service institutions and pharma companies to become cost-effective - furthering the goal of cost reductions downstream as well.
Copyright 2006, 2011, 2019. Physmark, Inc. Corrales, NM.