Cost and Customer
What sacrifices do insurers need to make in order to control medical costs?
In November, United Healthcare will begin restricting a number of procedures from being performed in hospital outpatient settings. This relatively minor policy change reveals some interesting points about United, and about the healthcare system broadly.
On the surface, the policy is clearly an attempt to control medical costs. United will require a prior authorization for some planned surgeries to be performed in hospital outpatient settings. Because hospital settings tend to be more expensive than, say, ambulatory surgery centers, this will save money for United.
As the linked article explains:
UnitedHealthcare said the policy is meant to curb spending while still providing access to quality healthcare. CEO Dirk McMahon told investment analysts during the company's third-quarter earnings call Tuesday that the site-of-service efforts would save customers $500 million in 2020.
Let’s put that $500 million savings in the context of United’s massive medical costs (which were $145 Billion in 2018, according to their 10k). That’s about a third of a percentage point (i.e. 0.3%). Since their operating margin on their insurance business is ~10%, call it an earnings opportunity of 3%. That’s the upside.
Furthermore, high and growing medical costs are a major risk to United’s business, not to mention a systemic problem in care delivery, so there’s a strategic benefit in trying this out as well, and proving to the market that cost controls are possible.
United also gets to position this as a win for their patients:
On average, members may save up to $3,600 on common outpatient surgical procedures if performed at an ambulatory surgery center instead of an outpatient hospital facility, she said.
At least as far as the patients’ finances, it probably is a win: it’s plausible that most patients wouldn’t know how best to shop for surgical care. They’re going to trust the recommendation of a doctor who might be most comfortable performing in a familiar hospital setting, or simply be scheduled for the costlier hospital by an administrator without knowing about alternatives. As a result, they’ll pay more in coinsurance, and in the long run, in premiums. United is going to prevent those scenarios from happening.
Trade-offs reveal true priorities
Putting the expected benefits aside, there are some clear trade-offs involved for both payer and patient.
First, adding a prior authorization (essentially paperwork the doctor or nurse has to fill out in order to get certain costly procedures approved) creates an additional administrative burden for providers, who must now prove the medical necessity of the hospital setting. Prior auths aren’t a rubber stamp, they take real time and energy away from clinical care. Provider relationships are important to insurance companies.
Perhaps more important, the prior auth restricts a patient’s freedom to choose where their procedure is delivered, AND puts some burden on them to select a provider that meets the new requirement. Some patients will likely have their claims rejected as a result of the new policy. Which is to say the customer experience for United’s members is about to get worse.
To understand these trade-offs more deeply, take a quick look at the United's announcement. Right at the beginning, they outline their 'Triple Aim:'
UnitedHealthcare continues to work toward the Triple Aim of improved health and patient experience while reducing cost of care, including minimizing out-of-pocket costs for UnitedHealthcare members. As part of this effort, we are working together with providers to achieve better health outcomes, improve patient experience and lower the cost of care.
What stands out is that United clearly recognizes the importance of the customer experience, but they're still putting this policy out there. That means they're making a bet that there's enough cost improvement here to offset the poorer experience.
In fact, I think it’s worth questioning how important the customer experience really is for United. A company that truly competes on customer experience isn’t going to risk it for a 3% upside. That’s not to say the company doesn’t put any stock into customer experience, just that medical costs are a much more existential risk. And it’s also the case that members are willing to forego some of their current conveniences for cheaper care—medical costs for surgeries can be just as existential for patients. Finally, customer experience is hard to measure, especially when the “customer” purchasing coverage is often an employer or broker for the patient, rather than the patient itself.
For completeness’ sake, we’ll also mention the impact to quality of care. The linked article points to studies that outcomes are not worse in ambulatory surgical centers, at least for some procedures. And that’s plausible: after all, a facility that can focus on a narrow set of procedures should be positioned well to deliver them more successfully than a hospital that bundles an entire universe of procedures. On the other hand, you’d need to believe that outcomes could improve when a payer steps in to constrain the care decisions of the local medical team—all else equal, care would be the same at best.
So what do we make of this seemingly small action from the country's largest health insurer?
Cost control is both important and difficult. Even for the most powerful organizations, achieving meaningful cost controls requires implementing policies that work directly against their other goals.
The 'triple aim' may not always be achievable. Past a certain point, it may only be possible for a given medical product to achieve one or two of the three goals. (More exploration on this topic to come.)
When it comes to making trade-offs between cost, customer experience, and quality, expect most of the large, diversified insurance companies to focus on cost.
United will be watching closely for signs of pushback from patients—2020 plan renewals for members that file the prior auth, and especially those who have it rejected, will be closely scrutinized. Unless there is a measurable consequence, expect more such moves in the future, and for other insurers to follow suit.
How will the rest of the health care system react?
Health care behaves like an ecosystem: a change in incentives by one player can produce a non-linear or unpredictable change in other parts of the system. Some of those changes will offset, or amplify, the intent of the original change. Here’s one possible scenario.
United’s new prior auth will put some incremental hospital revenue at risk. Many are already in poor financial health, and the reduced cash flow from the affected procedures may cause them to raise prices on other procedures to compensate. This will result in more hospital groups buying up more outpatient providers—they’ll have to in order to recapture the demand that they’re losing—a trend that’s already happening.
Those hospitals might then raise prices for care happening in ambulatory centers, both to subsidize their higher-cost facilities, and because the higher volume of patients in those centers represents a change in demand that naturally pushes prices up. As these dynamics play out, perhaps the final price is lower than it is now, but perhaps it’s not.
These types of reactions by the system are what insurance companies, who control much of the payment infrastructure, are up against. And they’re what make the insurance business so interesting.