Rick Swanson Vice President CAPG Challenges for 2006 Rick Swanson Vice President ICE Annual Conference November 8, 2005

California’s Health Care Gamble: Can We Afford the Trend Toward PPO? Challenge #1 California’s Health Care Gamble: Can We Afford the Trend Toward PPO? Caiifornia Association of Physician Groups

The Market Share Shift Has Begun Caiifornia Association of Physician Groups Source: California Health Care Foundation

Business Wants to Reduce Health Benefit Costs: The Driving Forces Business Wants to Reduce Health Benefit Costs: Shift From Employer to Employee Path of Least Resistance: High Deductible Benefit Design Caiifornia Association of Physician Groups

HMO PPO What’s the Big Deal? The Choice is NOT as simple as the first-year’s savings Caiifornia Association of Physician Groups

More Than A Product Name HMO PPO Organized Care Disaggregated Care Prepayment Fee For Service Payment Efficiency Reward Efficiency Penalty Outcome Incentive Increased Services Incentive Embedded Care Processes Over-layed Care Processes Caiifornia Association of Physician Groups

California HMO Premiums remain highest-value health care purchase Caiifornia Association of Physician Groups Source: California Health Care Foundation

California HMO Premiums remain highest-value health care purchase Source: California Health Care Foundation Caiifornia Association of Physician Groups

CA Results in Hospital Use Rates Are Superior to National Rates Population 2003 Source: Kaiser Family Foundation Caiifornia Association of Physician Groups

Caiifornia Association of Physician Groups Hospital LOS Management is Material Driver of Results – Particular in Medical Admissions 2003 Caiifornia Association of Physician Groups Source: OSHPD Inpatient Discharge Databases 2003

Employer Response: The Means and the End High Deductible Reduce Benefits Savings Accounts Common Wisdom PPO Design FFS Payment Chosen Path Undermine Delivery Model Performance Consequences Caiifornia Association of Physician Groups

Management Principles At Work in Organized Delivery Systems Strategic Resource Allocation ROI Mentality Staff Recruitment and Teamwork Organized to Optimize the Whole Organized Delivery functions according to management principals – the same type of principals which make any business successful: Strategic Resource Allocation – where can we spend our capital in ways that reduce cost of care? i.e. urgent care centers developed to reduce hospital cost Staff Recruitment: What types of care givers will optimize the cost/quality equation? Data Driven: One can only manage what is measured – measurement in order to systematically improve ROI Mentality: Seeking investments which in technology, fixed assets and additional labor which will reduce cost and increase quality Optimizing the Whole – seeking to manage the totality of the care $$, not just maximize an individual part (i.e. one type of service). For example, to say “keep drug cots down” is an incomplete goal – in fact, increasing drug costs in certain categories (i.e. beta blockers) will reduce overall costs. Focus on the whole. Incent Improvement – CQI-type principals Leverage Technology – info systems in an individual practice keep records. Info systems in a group or organized setting coordinate care, capture relevant system data and provide for documented outcomes. Leveraged Volume assures that maximum purchasing power is brought to play in purchase of everything from supplies to specialty services. Data Driven Incent Improvement Organizational → Individual Leverage Technology & Volume Caiifornia Association of Physician Groups

What Gets Lost in the Shift? Strategic Resource Allocation ROI Mentality Staff Recruitment Organized to Optimize the Whole Data Driven Incent Improvement Organizational → Individual Leverage Technology & Volume Copyright © 2005 CAPG

Pay for Performance Systemic Quality Improvement First Year Results Prevention Increase of - Breast Cancer Screening 135,000 - Cervical Cancer Screening 150,000 - Childhood Immunizations 10,000 - Diabetes Testing 18,000 Disease Management Avoidable Deaths - Asthma 800-1000 - Diabetes 4,300-9,600 - Heart Disease 6,900-17,000 - Blood Pressure 15,000-26,000 Total Avoidable Costs $250 Million 112 Medical Groups 40,000 Physicians  Copyright © 2005 CAPG

Reality Not Threat: Cost Increases 50% of Members selected a Clinic that changed from Physician Capitation to Fee-For-Service on 1-1-2004 10-Month Experience Periods Members Covered Physician Capitation Physician FFS Claims Outpatient FFS Claims* Total M.D. Capitation & Claims 3/03 – 12/03 3,260 $2,124,577 $252,180 $298,491 $2,675,248 3/04 – 12/04 3,127 $1,454,009 $1,795,638 $674,616 $3,924,263 % Change -4% -32% +612% +126% +47% * Includes diagnostic x-ray and lab outpatient surgery. Barney & Barney Caiifornia Association of Physician Groups

The Incomplete Economics Deductible-based FFS plans were the norm in the early 1980’s when cost trends topped 20% - what will be different? Caiifornia Association of Physician Groups

The Incomplete Economics Deductible-based FFS plans were the norm in the early 1980’s when cost trends topped 20% - what will be different? The care requiring the most management – and the most patient engagement – occurs AFTER the first $1000 is spent Caiifornia Association of Physician Groups

The Incomplete Economics Deductible-based FFS plans were the norm in the early 1980’s when cost trends topped 20% - what will be different? The care requiring the most management – and the most patient engagement – occurs AFTER the first $1000 is spent Physicians control up to 87% of health spending. FFS/PPO options only incentivize increased spending Caiifornia Association of Physician Groups

Consequences: Disproportional Effect Because of Cost… All CA Income <25,000 Did not obtain a preventive service 17% 24% Did not visit doctor for known condition 15% 20% Did not follow medical advice 16% 23% Disproportionately affects low wage-earning employees – resulting in under-care Effects of under-care ultimately cost the system more 2004* *Source: California Health Care Foundation Caiifornia Association of Physician Groups

Long Term Success Requires Alignment on Direction Cost & Quality Incentives Consumers Providers Co-insurance to engage in long- term care financing Radical RX design Incentives for Achieving Disease Management Goals Healthy Lifestyles Selecting of high-performing provider Avoidance of poor-performing providers Prepayment for overall cost management Reward for total health care cost/outcome management Incentives for Prevention Technology Promotion of Healthy Lifestyles Performance in Disease Management Demonstrated Improved Outcomes Copyright © 2005 CAPG

Putting The Patient In The Middle #2 Balance Billing Putting The Patient In The Middle Copyright © 2005 CAPG

Balance Billing Knox-Keene Act Copyright © 2005 CAPG

Balance Billing Knox-Keene Act Non-Contracted Hospital Based Physicians Copyright © 2005 CAPG

Balance Billing Knox-Keene Act Non-Contracted Hospital Based Physicians Request Billed Charges from Delegated Medical Groups for Patient Services Copyright © 2005 CAPG

Balance Billing Average Billed Charges = 326% of Medicare Allowable (at 50th percentile) Copyright © 2005 CAPG

Balance Billing Average Billed Charges = 326% of Medicare Allowable (at 50th percentile) What If Payment Negotiations Fail? Copyright © 2005 CAPG

Balance Billing Average Billed Charges = 326% of Medicare Allowable (at 50th percentile) What If Payments Negotiations Fail? Non-Contracted Providers Balance Bill The Patient (anti Knox-Keene) Copyright © 2005 CAPG

Balance Billing Patients Complain to Health Plan Copyright © 2005 CAPG

Balance Billing Patients Complain to Health Plan Health Plan Complains to the Delegated Medical Group Copyright © 2005 CAPG

Balance Billing Patients Complain to Health Plan Health Plan Complains to the Delegated Medical Group Most Plans Require Groups to Pay Full Charges or be ‘Cap Deducted’ Copyright © 2005 CAPG

Balance Billing Conclusion: Blank Check for Non-Contracted Providers Copyright © 2005 CAPG

Balance Billing Conclusion: Blank Check for Non-Contracted Providers Absolutely No Incentive to Contract Copyright © 2005 CAPG

Balance Billing Conclusion: Blank Check for Non-Contracted Providers Absolutely No Incentive to Contract Patients Caught in the Middle Copyright © 2005 CAPG

Balance Billing Conclusion: Blank Check for Non-Contracted Providers Absolutely No Incentive to Contract Patients Caught in the Middle Higher Medical Costs = Higher Employer Premiums Copyright © 2005 CAPG

#3 SACRAMENTO New CAPG Office in Sacramento Opened September 15, 2005 Copyright © 2005 CAPG

#3 SACRAMENTO New CAPG Office in Sacramento Opened September 15, 2005 Bill Barcellona, Vice President for Government Affairs Copyright © 2005 CAPG

#3 SACRAMENTO New CAPG Office in Sacramento Opened September 15, 2005 Bill Barcellona, Vice President for Government Affairs Increased Public Policy Presence Copyright © 2005 CAPG

#3 SACRAMENTO New CAPG Office in Sacramento Opened September 15, 2005 Bill Barcellona, Vice President for Government Affairs Increased Public Policy Presence Goal: A Level State Playing Field Copyright © 2005 CAPG