Mature businessman with computer in the office.

The first portion of a three-part series takes a look at the competing interests of the primary players in the healthcare arena.

American healthcare’s “thought leaders” tell us we should be striving for a frictionless healthcare system. This purported system would serve patients and improve the relationship between payers and providers.

Indeed, across the country, providers and health systems strive to deliver a frictionless experience for patients. The phrase “frictionless healthcare” certainly evokes a warm fuzzy feeling, with visions of tropical blue skies, warm sandy beaches, and the relationship between patients, providers, and payers being sprinkled with pixie dust.

To be fair, some aspects of the experience, such as buying a health plan or scheduling an appointment with a provider, really have made significant positive strides towards achieving a frictionless state, but what about the provider-payer experience? In the provider-payer relationship, the “frictionless healthcare” experience has been more like a hurricane-battered beach, where storm clouds abound and the relationship between the parties sounds like fingernails on a chalkboard.

There is no denying that a frictionless payer/provider/patient relationship is an admirable goal, but is it truly achievable, while still meeting the unique business case of each participant? Who wins? Who loses? What do providers have to surrender for the payers to be satisfied, producing this frictionless relationship? Since the financial aspect of healthcare is indeed a zero-sum game – someone keeps the money – this vision presents severe challenges.

In this three-part series of articles, we will first start by understanding the rules of engagement for the payer and provider. In the second installment, we will focus on the payer and provider behaviors that support their respective business cases. Finally, we will identify ways for providers to position themselves in the frictionless relationship payers are attempting to establish without sacrificing their own business needs.

In 1992, author John Gray published an enormously popular book, titled Men are from Mars, Women are from Venus, about improving relationships. The book focused on understanding and appreciating the differences between men and women, suggesting that each group stop expecting the other to act and behave a certain way.

The same analogy applies to the payer-provider relationship. You could say that payers are from Mars and providers are from Venus. The provider sets out with a goal to provide quality healthcare services that improve the health of the patient. Providers focus their efforts on quality, safety, and compassion, to promote wellness, relieve suffering, and restore health. Providers also provide care regardless of whether the patient can pay – in some cases, they are legally bound to do so. In fact, the majority (57 percent) of hospitals are nonprofit. So, while hospitals look to make money on their services, it is to ensure that they cover the cost of providing care, to keep the doors open.

The payer, on the other hand, has two jobs: manage risk and make money. Maybe it’s three jobs, actually – make their investors in the public market happy by hitting revenue, profit, and growth goals, quarter after quarter. Actually, payers study risk extensively to ensure that they collect enough premiums to cover enrollees’ medical costs, while still securing a profit for the effort, because the payer’s ultimate goal is to optimize profitability and/or shareholder value.

Both business cases are fair and reasonable. One is not bad or evil; it is business, and it is their mission. You can argue that providers and payers could not exist without each other. Unfortunately, the payers’ mission inherently creates friction with the provider’s mission. Expecting the payer to be motivated by restoring health and relieving suffering is a bit like expecting a Martian to act like a Venusian. Risk management seeks to minimize loss through prevention or containment, so it makes sense that the payer would have a vested interest in preventative healthcare. Sounds like we have found a common goal for our Martian and Venusian, doesn’t it?

The problem with preventative care is that it minimizes loss in the long run, but doesn’t have much immediate return on investment. It is a common goal, but it certainly does not let a payer meet its objectives quickly and efficiently. While smoking cessation programs and weight-loss incentives may prevent loss, it must be a sustained effort, and then it can take decades to pay out. Payers exist in an environment in which the average member stays with a given plan only a few years, so long-term cost containment strategies simply do not make great business sense, except as a marketing tool to make plans more appealing to employers or Medicare beneficiaries searching for a Part C program that fits their needs.

Truthfully, payers manage risk by aggressively managing the medical loss ratio. The medical loss ratio (MLR) is the share of total healthcare premiums spent on medical claims and efforts to improve the quality of care. The remainder of the premium is the share spent on administration costs and fees, as well as profits earned. The Patient Protection and Affordable Care Act requires that health insurance plans spend a specified percentage of premiums on medical claims, or else pay cash rebates to policyholders. The goal of this requirement was to ensure that premiums paid were actually being used to pay for medical care. Unfortunately, payers have been able to navigate around this requirement in a number of ways. One example is that many payers have established subsidiaries that provide care or other administrative services to the payer and its members. As a result, the MLR requirement is met by paying itself for services that qualify under the MLR, thereby shifting profitability away from the insurance division of its business, and allowing profit margins to expand while avoiding the MLR restrictions.

Meanwhile, providers struggle to find a safe discharge for a person in need. The provider needs revenue to pay the bills and keep the doors open, but the first objective is usually quality of care and good outcomes, even if the margin takes a hit. I’ve often heard providers say that they think payers are reasonable. Anyone who has been on the phone with a payer discussing a difficult and costly clinical issue and heard the language change from “our member” to “your patient” would beg to differ, though.

Can payers and providers work together in a frictionless environment? Not if providers must consent to incessantly evolving tactics that reduce their revenue. The balanced approach to frictionless healthcare would require payers that are willing to accept a profit margin that does not continue to grow.

Given the profit demands of public markets, payers will never tell their investors, “Look, this is the best we can do on our profit margin, because we need to pay fairly for medical services.”

When the Martian and the Venusian both understand the other’s mission and language, we can truly start to understand what the common “frictionless” solutions accomplish – and who wins. In the next segment, we will do just that.

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