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When patients get to buy their own health care


The time is coming when you&ll negotiate fees with patients, not insurers. You&ll tailor your practice to suit your target clientele. And you&ll have more opportunity to deliver high-quality care.


Cover Story
A New Day Dawns


When patients buy their own health care

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Choose article section... How defined-contribution purchasing works Exploring the new frontier in health care What does defined contribution contribute to doctors? What it will take to gain converts Getting the market going

The time is coming when you'll negotiate fees with patients, not insurers. You'll tailor your practice to suit your target clientele. And you'll have more opportunity to deliver high-quality care.

By Michael Parrish

If you yearn to redesign your practice, even to survive without managed care, take heart. After decades of discussion, defined-contribution health benefits have caught the eye of a substantial and growing number of employers. Most doctors have yet to be affected. But it's already high time to learn why proponents say these systems could let you take charge of your business side again—and to reforge the bond with your patients. "Particularly for primary care people, there may be light at the end of the tunnel," declares James R. Emshoff, executive in residence on the faculty of the Fuqua School of Business at Duke University.

Defined-contribution strategies are part of a powerful trend to consumrism in health care. They'll give patients far more say in choosing their health care, much as 401(k) plans gave employees more control over their retirement plans. Leading the charge are employers who are facing a new round of health plan premium hikes and are concerned about their employees' exasperation with managed care restrictions. And as many physicians become familiar with the defined-contribution concept, they see potential benefits for themselves, too, particularly in the areas of finance and patient care.

A central goal in defined-contribution arrangements is to return medical and financial decisions to doctors and patients, with minimum intrusion and administrative overhead from insurers. Direct purchase of routine treatment cuts out such managed care bottlenecks as claims forms. And in these new plans and marketplaces, doctors set their own fees and can customize their services to compete for employees' discretionary dollars.

"The beauty of the idea," says San Francisco internist William S. Andereck, "is that it puts at least some of the buying power—especially the added-on, discretionary buying power—back where it belongs, in the patient's hands." Andereck, chair of the California Medical Association's Solo and Small Group Practice Forum, urges doctors to evaluate the defined-contribution model. It's been a hot topic for the 9,000 doctors in his forum lately, and Andereck is eager for them to be a test group for the system.

Meanwhile, a crop of new companies has already signed up the first defined-contribution generation of patients, doctors, and employers (see below).

How defined-contribution purchasing works

Conventional employee health programs offer defined benefits. That is, the employer decides what health insurance, with what level of benefits, the company will offer. Physicians negotiate fees with insurers, not patients.

With defined contributions, the employer decides how much the company will spend on health care benefits for each employee. It's up to the employee how to spend that allotment. Typically, the employer deposits part or all of the company contribution into individual employee health-benefits accounts. Patients pay routine fees to doctors and other providers directly from these accounts, usually with a debit card that transfers the cash immediately. Any cash left in the account at year-end can be rolled over and saved for subsequent years.

Usually, a defined-contribution account is paired with a high-deductible catastrophic insurance policy. As they can with a medical-savings or flexible-spending account, employees can use the cash for a wide range of medical purposes, including office visits, copays, extended consultations with doctors, new eyeglasses, alternative therapies, or elective treatments such as laser eye surgery. The insurance kicks in when big-ticket outlays are incurred and patient expenses surpass the policy's annual deductible. Some plans also cover routine preventive treatments before the deductible is reached.

Employees who want a wider choice of doctors in their plan, or first-dollar insurance—which pays the entire bill, with no deductible—can take money from their individual accounts or have pre-tax dollars withheld from their paychecks to pay the higher insurance premium. Those who choose bare-bones insurance will have more discretionary money in their personal accounts.

Most of the new companies vying to operate in the defined-contribution arena are selling health plans aimed at replacing conventional insurance. They administer an employer's defined-contribution employee accounts, offer employees choices of how to spend that money—usually through a PPO or an online marketplace of individual doctors and other providers—and they manage the high-deductible insurance that is underwritten by established insurers or self-insured employers.

This gives employees direct control over much of their money and essentially makes them their own gatekeepers. Under such plans, patients can self-refer to a specialist, for example—without managed-care-style preauthorization—because they're paying for the consultation out of their personal medical accounts.

These new companies operate mainly online, where employees can compare insurance premiums and benefits, doctors' and hospitals' fees and services, and, increasingly, medical outcomes. An employee who has a question takes it to the defined-contribution plan, not to an employer or insurer.

Employees still buy their catastrophic insurance at the group rates employers have always received, which remain lower than rates on the open market. Remaining in an employee risk pool also ensures that chronically ill employees won't be denied insurance. At the same time, premiums paid to insurers are risk-adjusted so that no single insurer bears an unfair share of the cost of treating the sickest patients.

Instead of online marketplaces, aimed at helping employees decide how to spend their money, a defined-contribution company might operate an online cash-and-carry market in which employees use their accounts to shop for complementary health care goods and services not usually covered by conventional health plans. HealthAllies, a Glendale, CA-based online market, is already doing a brisk business listing participating physicians who offer discounted cosmetic surgery, laser eye surgery, infertility treatments, and acupuncture, in addition to primary care and conventional specialties. Patients place their selections in online shopping carts, a la the Internet merchant Amazon.com.

Cleveland-based HealthSync administers a defined-contribution marketplace for health insurance, just as Fidelity runs employer retirement investment plans. Employers decide how much they'll pay for employee health care. HealthSync offers those employees a wide variety of conventional and defined-contribution plans to choose from—with the insurance portion of each one priced at the employer's group rate. Premiums paid insurers are also risk-adjusted so that no single insurer bears an unfair share of the cost of treating the sickest patients.

What's more, the new health plans encourage physicians and physician groups to market themselves on their own terms. One such plan, developed by Minnesota-based Vivius, allows employees to individualize their provider network—choosing doctors and hospitals one by one. "We create a supermarket with 22 different 'aisles'—for family physicians, orthopedists, ob/gyns, hospitals, and so forth," explains Vivius Chief Medical Officer Lee N. Newcomer, who once practiced as an internist and medical oncologist and is a former vice president of health policy at the managed care giant UnitedHealth Group. "At Vivius," says Newcomer, "every one of those doctors has different prices."

Exploring the new frontier in health care

Most of the new companies have their own approach; Vivius, for example, lets doctors choose between fee-for-service payments and monthly capitation payments. Some skeptics note that many physicians aren't well-equipped to take on financial risk. But Newcomer points out that they take on only the risks associated with their own time and services. Pharmacy and catastrophic-disease risks are carried by companies with insurance expertise, which market their wares to patients in other aisles. And if the doctors set their fees too high for the patient market, or too low to cover their cost of doing business, they're free to adjust their rates.

A larger concern is the potential for employers to use defined-contribution plans to shift too much of their health care costs to employees. Some unions and consumer groups worry that employers could use defined-contribution accounts to lock in their health care expenses at a fixed level, and to transfer all future cost hikes to workers.

And perhaps some will. To employers, defined contribution implies a fixed expense. It helps them both limit that expense and more accurately predict it. At the same time, such plans could make patients less willing to seek treatment, since they'll be paying for it from their health care accounts—or their bank accounts.

Among health care experts, there's also some concern that defined-contribution plans might take money out of the health care system, unless employees made up the difference out of their own pockets. But most proponents don't expect employers to shift the full load of future cost hikes to their workers.

Uwe E. Reinhardt, a health economist at Princeton University, agrees that companies might be tempted to "play games" with their employees' share of health costs. But he believes that as more workers perceive their companies' health care contribution as part of their total compensation—not a free perk—companies won't want to look stingy. After all, they compete for workers with their total compensation packages. "Ultimately, in a tight labor market, there are limits to the cost-containment that can be had," says Reinhardt.

Portland, OR, family practitioner Dave Sanders agrees. Sanders and two other physicians founded Myhealthbank, a defined-contribution company offering plans to small and medium-sized companies. "That notion of fixing the contribution is just too short-sighted," he says. "It's not part of the intent of any employer I'm talking to."

Another concern has been that if employees are turned loose to buy health care, they'll forfeit the reduced rates of group risk pools under conventional employer insurance policies. Reinhardt acknowledges this possibility by dividing defined-contribution schemes into "maternal" and "you're on your own" models.

The maternal model resembles the Federal Employees Health Benefits Program, in which the federal Office of Personnel Management negotiates premium rates with insurers, then offers government employees a wide variety of health care options. In this model, private employers offer workers a wide choice of plans, but still negotiate with all insurers to keep rates based on company-specific risk pools.

Reinhardt sees the "on your own" model—in which employees would simply be given a voucher to buy care on the open market—as a less likely scenario. Employers would be reluctant to adopt this model, he says, since it "would basically be the kiss of death to the employer-based health system." It would be particularly hard on chronically ill employees, who would have trouble finding policies since their risk wouldn't be pooled.

Regina Herzlinger, a professor of business administration at the Harvard Business School and author of the forthcoming Consumer-Driven Health Care (Jossey-Bass, 2001), agrees that the switch to consumer choice will occur under the employer's umbrella. "Incentives for plans to enroll sick patients are very important in a consumer-oriented system," she says.

What does defined contribution contribute to doctors?

Most important, defined contribution makes the patient—not the managed care plan—the consumer again. "If patients choose to fire doctors," says Duke University's Emshoff, "it'll be because they're dissatisfied, not because the employer pulled the plug on a medical program."

A stable patient base is more cost-effective to a practice and helps to build loyalty and trust. "Continuity of care has a substantial economic value," adds allergist Joel M. Karlin, chairman of the board of Health Insurance Select, a company that expects to offer employers an online marketplace for conventional and defined-contribution plans later this year. "And branding is becoming important for health plans, clinics, and physicians."

More and more patients will pay their doctors in cash, proponents say. And more patient information and health care transactions will be on the Internet. For physicians' staffs, this will simplify billing, appointment scheduling, eligibility and referral processing, and other contacts with insurers, employers, specialists, and patients. Also on the plus side: avoiding the claims-processing and other overhead required by managed care saves money. Newcomer, of Vivius, estimates that doctors could see their overhead drop by 20 to 25 percent if their practice were allied with a Vivius-model plan.

As in other consumer-driven markets, market segmentation will allow doctors to find a practice niche of their own choice. Some solo practices and medical groups might still want to compete by charging low fees to a large panel of patients. Others might charge higher fees to affluent patients in a small "concierge" practice. No matter which route they choose, doctors will have the luxury of rethinking their options.

Admittedly, some of those options will look awfully familiar. Reinhardt predicts that defined contributions will create a four-tier, income-based US health system. The first tier, he says, will be the 42.6 million uninsured Americans. Tier 2—the likely dominion of low-income employees—will feature tightly managed HMOs with gatekeepers. Middle- and upper-class workers in a third tier will have more choice under PPOs and the new plans designed for defined-contribution benefit systems. The fourth tier, says Reinhardt, will be for those willing and able to pay for boutique medicine—the concierge practice—which he expects to flourish. "If you have 50 families, each paying a $20,000 annual retainer for 24-hour access to their doctor," he notes, "that's $1 million for fairly light work."

In any case, primary care doctors will have to size up their target clientele, and shape their practice to appeal to it.

The downside of defined contributions, as Reinhardt sees it, will be a form of competition—involving open pricing of services and comparative performance information—that may take doctors a while to get used to. Virtually everyone in the consumer-driven health movement believes that Web pages, the Yellow Pages, and toll-free call centers will sooner or later list a doctor's specific charges. Reinhardt believes this will place patients and their doctors across the bargaining table from each other. "The natural alliance lately has been the good physician and the good patient against the evil insurance company," he notes. Reinhardt predicts that "a real, efficient market with price and quality information will scare the pants off doctors."

As for quality information, Regina Herzlinger says, "Performance measurements cannot be collegial." Neither are they yet in a state of development that makes many doctors comfortable. William Andereck, of the CMA's Solo and Small Group Practice Forum, recalls a patient who came to his physician group to be screened for a cataract operation. At the time, primary care physicians in his group were being rated by standards that included whether they screened for domestic violence and asked patients if they wore seat belts. The patient told Andereck later, "It was a fascinating interview. I was asked which eye it was—and did I beat my wife."

Herzlinger sees great opportunity for medical "focused factories," which she has long advocated. These integrated teams of doctors, clinics, and hospitals would specialize in specific diseases and procedures. About three-quarters of the health care pie is spent on chronic diseases, Herzlinger notes. "And yet most people who have these diseases receive very poor care." In a marketplace, focused factories could compete for chronically sick patients—in part because many of their costs are fixed. Adding a few low-paying patients greatly increases profit while raising overhead only nominally.

What were once called integrated delivery systems could compete well for one-time procedures. Internist John Danaher, president and chief operating officer of Connecticut-based HealthMarket, one of the new plans, recently spoke with two big medical groups. Both liked the idea of competing in HealthMarket's marketplace to provide episodes of care. One hoped to attract patients by offering lower fees and good quality. The other wanted to show patients that its higher prices were worth it. "They saw our online exchange as an effective marketing tool," says Danaher.

And marketing, in most defined-contribution scenarios, would be free. "Discretionary specialties are spending a lot of money on marketing," notes Michael S. Sherman, an anesthesiologist and vice president for provider business development at HealthAllies, the cash-and-carry marketplace. "But even for conventional practitioners, we can bring high-quality patients, with good jobs and good credit, to our Web site. And the doctors get new patients without paying us a cent." HealthAllies makes its money by charging patients a small transaction fee.

In this new competitive world, marketing could be a more decisive factor than physician performance statistics when patients choose a doctor. Bedside manner, a willingness to be a wise guide to Web-based information, minimal office waiting times, convenient office hours, bilingual ability, ethnic sensitivity, and even the cleanliness of the doctor's lab coat will factor into that choice.

What it will take to gain converts

Optimists see employers making a major shift to defined contribution within a few years. "I don't think the whole world will go to defined contribution," says Vivius' Newcomer. "But there's clearly a segment of the employer market that's saying, 'This makes more sense for us.' "

Even pessimists see an almost inevitable shift that stretches over the next decade. Reinhardt believes that employers will switch, though the pioneering companies already promoting their plans may have jumped ahead of the market. "Everyone's been talking about defined contribution," he says, "and technically, corporations could make that move now—if they made their contributions generous enough." But Reinhardt predicts it will take a mild economic recession to spark mass conversion.

According to Jim Emshoff, "A defined-contribution program is a very small step for an employer to make; after that, it will be a couple of years before the really innovative plans start to take shape." Emshoff is founder and CEO of IndeCap Enterprises, a corporate outsourcing consultant. He predicts a smooth and fairly rapid evolution as employees learn to appreciate more choice—and as long as employers also offer them the option of keeping their old health plans.

Not all employees are eager to shop for a health plan yet. First Consulting Group, a Long Beach, CA-based health care and life-sciences consulting organization, released a report last June that found many employees wary of any changes in their wages or health benefits. "A large part of the problem," the researchers speculated, "may be lack of confidence that they could competently purchase health insurance on their own."

Employers are generally more optimistic about the change. In a study by the human-resources consulting firm William M. Mercer, released last October, 91 percent of 276 major US employers said they were interested in Web-based programs to enroll employees and help them choose physicians. But 70 percent said they weren't likely to relinquish all control of their employee health benefits—that is, to adopt Reinhardt's "you're on your own" model.

At the end of 1999, the accounting firm KPMG, working with Harvard's Herzlinger, polled almost 15,000 employees and more than 100 top executives at Fortune 1000 companies and found that 73 percent of employees and almost half the executives were interested in defined-contribution plans. More impressive, almost 80 percent of these large-company executives would switch to defined-contribution strategies in the next two years if tax laws were changed to give employers the same tax benefits they now get with conventional defined-benefits plans.

Meanwhile, among various endorsers of the concept are the AMA; Intuit, makers of Quicken personal-finance software; and Pittsburgh's Highmark Blue Cross Blue Shield. Last September, Highmark offered its 2.5 million members and 11,000 employees discounted computers and Internet access as a necessary step into the new defined-contribution world.

Most active are the small but growing companies—many of them founded by physicians—that are already making deals with employers and insurers around the country. When Dave Sanders' Myhealthbank opened shop last July, it had an agreement with Regence BlueCross BlueShield to offer employers 45 different insurance plans. Other companies promoting their variations on the basic idea include Cleveland's HealthSync; HealthMarket in Norwalk, CT; Definity Health in Minneapolis; Vivius, in St. Louis Park, MN; and HealthAllies, in Glendale, CA (see below).

Getting the market going

Defined-contribution arrangements are still in their infancy. But early adopters have been generally optimistic.

PreferredOne, a Minneapolis PPO, signed on in October as a provider for the new Definity Health plan. "There are a lot of positive feelings about these new ideas and new opportunities," says Phil Griffin, vice president of public policy. "Our physicians are struck by the problem that we all have: How do you deal with patients' lack of responsibility in the current system? Patients really don't have any buy-in or know what's going on." Under the defined-contribution system, it's their money and their buying decision.

Ridgeview Medical Center in Waconia, MN, is an employer that offered Definity Health as an option during open enrollment last November. Carol Embertson, director of community relations, reports: "More people signed up than we expected. People are really starting to see the benefits and flexibility of the plan."

The new defined-contribution companies still have plenty to slog through, and an inevitable period of consolidation as some concepts prove more resilient than others. But for the moment, says Ray Herschman of HealthSync, the challenge is to assemble a critical mass of employers, new health plans, and physician groups to make consumer-driven health care a practical reality. "The toughest part about getting a market going," says Herschman, "is getting a market going."

The author, who is based in Los Angeles, is a Contributing Writer to Medical Economics.

New companies offer variations on the defined-contribution theme

Health plans

HealthMarket (www.healthmarket.com). Launched last July, Connecticut-based HealthMarket expects to offer defined-contribution health plans underwritten by Centre Insurance, part of the Zurich Financial Services Group, in up to 48 states. HealthMarket uses an online exchange to let employees evaluate and buy services from any doctor who wants to be listed—the company's "virtual PPO." Physician groups and hospitals can also bid to provide bundled services for 80 specific episodes of care. More than 175,000 physicians have signed up so far.

Lumenos (www.lumenos.com ). For more than a year, Virginia-based Lumenos has been making deals with employers to provide a defined-contribution health plan. Currently focused on self-insured companies, the plan offers a health savings account coupled with catastrophic insurance. Its online Docs Plus directory lists physicians' services, fees, and—later this spring—outcomes information.

Vivius (www.vivius.com ). Employees assemble their own network of doctors, hospitals, and medical labs in what Vivius calls a "personalized healthcare system." Physicians and other providers, with actuarial help from Vivius, if requested, set their own fees. Doctors may opt for a monthly capitated payment, straight fee-for-service, or various combinations of fees and copays. Vivius formed its first partnerships with doctors late last year in Kansas City and in Minneapolis, where the Park Nicollet Medical Center has agreed to be a provider.

Definity Health (www.definityhealth.com ). Already up and running, this Minneapolis-based company administers a defined-contribution account—dubbed a personal care account—for self-insured employers. Definity has agreements with 320,000 physicians, including two PPOs—PreferredOne and Beech Street. The first employers to sign up are Aon, a Chicago-based international insurance broker; Ridgeview Medical Center, a Minnesota hospital and clinic system; and Medtronic, the world's largest medical technology company.

Myhealthbank (www.myhealthbank.com). This physician-founded, Portland, OR-based plan, which offers a variety of defined-contribution options from a single insurer, targets small and medium-sized employers. Its first contracts are with a printer and an advertising agency, with about 300 employees between them. Regence BlueCross BlueShield, Oregon's largest insurer, underwrites the plan. Physicians' practices and self-determined pricing structures are described on a Web-based marketplace.

Online marketplaces

HealthAllies (www.healthallies.com ). This company, based in Glendale, CA, offers doctors cash customers—employees with defined-contribution accounts, the uninsured, and those who want treatments their insurance doesn't cover. Laser eye surgery is a popular service offered through HealthAllies. Fees and practice information for thousands of doctors are listed, at no charge to the physicians. "Doctors get a Web presence if they don't already have one," says anesthesiologist Michael S. Sherman, vice president of provider business development. Fees are set by the doctors. "And they can afford to discount those by 30 or 40 percent," Sherman says, "and still bring in more revenue than from a typical managed care, Medicare, or Medicaid patient."

HealthSync (www.healthsync.com). Later in the year, when this ambitious online insurance marketplace is launched, it will offer medium-to-large employers a wide variety of conventional and defined-contribution health plans—everything from Cigna and Kaiser to HealthMarket and Vivius. HealthSync predicts that if its cafeteria business model becomes popular, doctors should have a better chance to build patient loyalty since they're likely to be affiliated with a plan available to job-hoppers. "We're creating portability," says CEO and founder Ray Herschman.

Health Insurance Select (www.healthinsuranceselect.com). By late 2001, this Denver-based company, co-founded by allergist Joel M. Karlin, will offer employers an online marketplace with a full range of conventional and defined-contribution plans. Health Insurance Select is also developing highly interactive software designed to help employees easily choose their own plan. And the company plans to contract with large physician groups to provide disease-management programs.


Michael Parrish. When patients get to buy their own health care. Medical Economics 2001;5:94.

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