This is the transcript of my recent podcast interview with Blue Cross Blue Shield of Massachusetts CEO Andrew Dreyfus.
David Williams: This is David E. Williams, co-founder of MedPharma Partners and author of the Health Business Blog. I’m speaking today with Andrew Dreyfus. He’s CEO of Blue Cross Blue Shield of Massachusetts. Andrew thanks for being with me today.
Andrew Dreyfus: It’s good to be with you, David.
Williams: I’ve heard that commercial health insurance premiums, including those from Blue Cross, are going to be almost flat next year. Is that true? And if so, what’s the reason for it?
Dreyfus: Not quite flat but close. We are seeing our lowest rate of increase in premiums in almost a decade. There are variety of factors behind that. We’ve seen this nationally: the slowdown in the economy has resulted in a general drop in use of health care services. That’s one reason. But I think the more important reasons here in Massachusetts have to do with some affirmative steps we’ve taken at Blue Cross.
Almost two years ago we asked hospitals and physicians to either reopen contracts or in new negotiations to agree to a much lower level of increase than in the past. The price or unit cost of hospital and physician care was growing in Massachusetts at five to six percent per year; that five to six represented about half of the overall cost, which is why premiums were growing at 10, 11, 12 percent per year.
We asked hospitals, in the interest of affordability, to reconsider those increases. We were able to get them to accept much more modest increases, more in the zero to two percent range. That has certainly suppressed the growth in premiums. Although those negotiations were challenging and difficult, we really appreciate that the hospitals and physicians understand that we’re in a new era and they have to make a significant contribution to health care being more affordable.
Around the same time as we asked on the price side for hospitals and physicians to be more modest, we also began to see widespread adoption of our new payment model, the Alternative Quality Contract (AQC), which is a global payment model with significant quality incentives. We began with a few groups in 2008 and 2009. We now have 75 percent of the primary care physicians and specialists in Massachusetts are accepting global payments. They’re caring for about 700,000 Blue Cross HMO members in Massachusetts and those contracts have very explicit goals for reducing the rate of growth.
When you combine the economy, the contracting pressure we put on physicians and hospitals in the fee-for-service world, and our new payment strategy, it’s a triple threat. Those three pressures have caused the cost to come down significantly.
Williams: It seems like 10 or 15 years ago there was a time when cost had been accelerating rapidly and then all of a sudden slowed down a lot. But then they started to rise fast again. Is there something different about it this time?
Dreyfus: There is a cyclical nature to cost and spending in health care. That’s one of the reasons why no one here is declaring victory. We’ve had a year or two of more modest increases, but we really want to see three, four, five years of sustained low levels of increases in the zero to three percent range before we would believe that we have somehow conquered or the inexorable health care cost inflation that we’ve seen over the last 20 years.
The people who look back at the last slowdown see a couple of reasons. First, there was some experimentation with different forms of payment. That was the early advent of what we think of now as managed care, and the early versions of managed care tried to restrict choice significantly. There was obviously a very strong and negative response from the public and from physicians, so a lot of those restrictions were loosened, which then caused health care inflation to increase.
I think we’ve learned the lessons of that last experience. We’re trying to be smarter about it this time, both in trying to maintain the level of choice that our members want and need and also building more powerful incentives into the system, especially for physicians to curb excessive care. In the 80s and 90s physicians felt like artificial limits were being placed on them, which they thought could result in deterioration of quality.
This time, we’re rewarding and providing incentives for better care. I think that has eased the skepticism or concern that physicians have, which I’m hoping will make these changes more durable than before.
Williams: Say more about quality. The Q in AQC stands for quality and I’m sure you take it seriously. But is it something that’s taken seriously by your providers and by your customers?
Dreyfus: I think it absolutely yes. Our new payment model, the AQC, is mostly discussed today in terms of saving money. But in fact, it was initially developed as much as a quality improvement as a cost saving tool. The paradigm shift in this payment model is that we’re asking physicians and hospitals to move out of fee-for-service, which rewards volume and intensity and complexity and move in to a system that rewards outcomes and quality.
In the past, physicians and hospitals earned their margin –and we certainly believe they should have a margin– based on volume. Now, they’ll earn their margin based on quality, and the quality bonuses are significant enough that they really catch the attention. For example, we were one of the early plans that developed pay for performance programs with hospitals and physicians. Typically we would add a one to two percent bonus on top of the fee-for-service payments. That got a little attention but not a lot.
Now it’s five, six, in some cases up to 10 percent bonuses they can achieve. So at the end of the year, a primary care physician is getting a very significant bonus for quality. It really changes the way they think, and they’re reorganizing their practices.
The other thing is the measures we chose for quality. There are 64 measures, half on the in-patient hospital side, half on the outpatient ambulatory side. They’re not in a black box back here in our offices at Blue Cross. They’re nationally accepted, nationally validated measures that physicians care about and believe in. The fact that they’re investing time and energy in creating systems that track and monitor improve on these measures demonstrates that real quality change.
We have a classic experiment here because we have a group of physicians who entered the contract early and then a group of physicians who did not. An independent analysis, which is being conducted by researchers at Harvard Medical School and various universities and funded by the Comonwealth Fund, has published in the New England journal results that show that quality has improved, costs are coming down. We’re looking forward to the results of the second year, which we think will be published in an academic journal this summer or fall.
Williams: Fifteen years ago or so when there was a slowdown in health care costs, employers were perfectly happy with what the HMOs were doing. But then when there was a backlash from the employees, employers didn’t really say anything. Everybody pointed their finger at the health plans and then things kind of spun out of control from there. Do you expect employers to play a different role this time around?
Dreyfus: I think there is a more significant role that employers can and will play this time around. I think your analysis is right that employers did stand back a little bit. The urgency of health care affordability for employers is much greater. It’s partly because they’re competing, to those employers who compete internationally, and they’re competing with companies whose healthcare costs so much lower, if they have any healthcare cost and in some cases they’re in national systems.
And also it’s just too great a barrier now to productivity and so a lot of small employers, for example, will tell you that they’re unable to new workers simply because adding a worker means adding maybe $15,000 per worker in added healthcare cost, let alone other employee benefits in custom they have. And so I think there’s an eagerness to get involved and I’d say that expresses itself in two principal ways.
The first is that when employers design benefits now, they’re really thinking how do we design a benefit that encourages our employees to stop and think about the cost, quality or total value of the care they’re getting. And so they’re using more plans that have more or greater cost sharing with consumers, they’re using plans that have health savings accounts or other devices for their employees to really think about that this is partly their money that they’re spending, not just some third party’s money that is invisible to them.
So they’re much more involved in designing benefits. We have some very popular new products, for example, that place the hospitals and in some cases physicians in different tiers depending on their cost and quality measures. There’s greater cost sharing if you go to a more expensive provider that doesn’t demonstrate a quality difference. We had those products for several years. There wasn’t a lot of take up. Now they’re the fastest growing products in our portfolio. We find that employers like it. It’s a way to keep their premiums low and engage their employees in the decision making about purchasing health care.
The second major way beyond benefit design is that employers are getting more involved in wellness, especially large employers. But we’re starting to see it come to the smaller employers as well. There’s a recognition that diet, exercise, and nutrition are big factors in determining people’s health. Obviously in some cases it may not pay off in a year or two. They may pay off longer term, but there is an interest in that and it also affects absenteeism at work, productivity at work.
So for example, here at Blue Cross, we’ve been very involved as a model employer, to get our employees much more involved. If you walk around the halls of Blue Cross, you’ll see everyone wearing pedometers like I have. We’ve been having a big contest here, which gets people extraordinarily motivated. We’re doing the same work with many of our customers.
The final piece of the employer engagement is there’s a broader recognition today that there are small number of patients in our system that driving a lot of our spending. One percent of our members drive about 20 percent of our spending, and five percent drive about 50 percent. While there are a few heart transplants or babies that are born early that require very intensive care or major traumas, the majority of the five percent are people with multiple chronic illnesses. Those are illnesses that in some cases can be prevented, in some cases that can be slowed, and certainly in all cases can be managed more effectively than we do today in our fragmented fee-for-service system.
So employers, when they evaluate the effectiveness of a health plan like Blue Cross, are really looking at what kind of resources are devoted to these expensive patients with chronic illnesses. How do you help the delivery system manage them?
Williams: We’ve speaking so far about private efforts in health care, but obviously governments are a huge factor: state governments and federal governments. What do you see going on now in the Commonwealth of Massachusetts? It seems as though the government is picking up some of the same themes that you have been working on.
Dreyfus: We’re obviously watching it very closely. Just to step back, our view is that, first of all, there is a legitimate public role for government to play in health care, to set standards, expectations, hold the system accountable. I think we’ll see a vigorous debate in our legislature in the next six to eight weeks over some bills that are currently being proposed that will add some new regulatory and reporting dimensions to our health care system.
Government is also a big payer of healthcare itself, through the Medicaid program and the Group Insurance Commission that pays for state and some municipal employees. So I think there’s a real opportunity, in this case, for government to copy or model the progress we’ve been making in the market. Sometimes government leads, in this case, government may be following, but I think there’s an ability for them to help accelerate the adoption of these kinds of new payment models in the market.
We are always cautious; the government can overreach and over regulate. We already have a fairly complex state regulatory structure with half dozen different state agencies that are involved in some oversight of the health care system, and so hoping there may be some rationalizing of those functions as part of this conversation.
In Massachusetts we passed a health care coverage bill in 2006. The leaders in the state who participated in that –and I was among them– made a very explicit political and economic decision to work on coverage first and to postpone the tough questions about cost, because past efforts here and around the country to deal with the coverage problem ended up being stymied or halted because they didn’t solve the tougher, more complex cost issues.
We said we’re going to do this sequentially, so coverage first and cost second. There were some early, more modest attempts to deal with cost for the last several years. I think now we’re going to have a bigger attempt to do that and I think it’s appropriately focused. Obviously if we allow health spending in Massachusetts to grow too rapidly, the extraordinary success we’ve achieved in coverage will be subverted. We don’t want that to happen.
Williams: People around the country have been hearing a lot about Massachusetts health care recently, especially in the Republican presidential primary. And now that Mitt Romney is going to be the nominee it seems we’ll probably be hearing even more about it. I’m curious what you hear from your peers when you travel around the country. What kind of comments and questions do they have about Massachusetts health care?
Dreyfus: I get a lot when I give talks to groups outside Massachusetts or groups that are visiting here. I often start by saying, hi, my name is Andrew Dreyfus and I’m from the future, because I do think there’s going to be a lot of change,like what’s happened here in other states and nationally. There’s a lot of mythology about what’s going on in Massachusetts. And so I have to spend a lot of time correcting the facts. People think that state spending has skyrocketed. In fact, state spending has come in about where we predicted state spending –so certainly some added cost for subsidies for low wage workers, but that was predicted and calculated.
Great shortages of primary care physicians is another mythology. That’s an issue that the whole nation will struggle with, but we have more primary care physicians per capita than any state in the country. There’s some concern around the country about the level of regulatory activity in the state and in some cases I agree with those concerns. But I think again, there’s a lot of mythology.
So I spend some time correcting misperceptions. Once a national health care leader said, “Well, Andrew, I’m not sure that your lesson is that valuable for us because it sounds to me like you’re really a public utility.” He was commenting on the level and intensity of the regulatory oversight and scrutiny we’re under. I don’t think we’re a public utility. There’s a lot more market oversight here than in other states and that makes people nervous. I think other states will choose to implement their reforms differently.
Even under the national model, there’s a certain amount of flexibility. So I think, for example, our exchange that we call the Connector has taken a pretty aggressive stance as a purchaser and in some ways as a second regulator. In other states, I think they’ll have more market-oriented exchanges, which will be more along the lines of Travelocity: Here are some plans, here are the prices, you go choose. And it’ll be interesting to see how that develops.
Williams: If the Supreme Court or Congress overturns the Affordable Care Act, either in whole or in part, what impact would that have on Massachusetts’ health care, overall, and on Blue Cross in particular?
Dreyfus: First of all, I hope that the Supreme Court or Congress does not overturn the law because I think that on balance of the law is very important, especially in extending coverage to the almost 15 million people in the country without the security of health insurance. Having said that, we would be the state that would be the least affected by a change in the national law.
For example, if the Supreme Court overturned the so-called individual mandate and decided it was unconstitutional, we have a mandate that’s based on state law and the state constitution. Legal experts have really not raised issues about the state’s ability to impose such a mandate. That mandate is relatively popular in Massachusetts and has been implemented with very little controversy. I think people will start talking about it more but I think we’ll be able to sustain that.
And again the rest of our reforms for the most part have been done on a state basis. There’s obviously been some additional federal Medicaid money that came in initially and there’ll be some more federal Medicaid money that will come in 2014 as part of the national law. So we would miss that money in Massachusetts because it could help further stabilize our system and allow, perhaps, some state funding to go to some other uses.
And I think if either the Supreme Court overturns it or a Republican President or Congress overturns it, we’re on a long wait again for a big national reform. Typically, it takes a lot to get this done. It took a lot for Congress and the President to do it. They barely did it. It was unfortunate that it was not a bipartisan initiative, which I think everyone had hoped.
It could take another decade to solve the problem. I also think nationally there’s a second issue that’s going to have almost as great an impact if soon after the election, Congress gets back to the issue of the deficit and the budget. Clearly both the Medicare program and the Medicaid program and some of the expansions that are anticipated in the Obama health care law could be faced with some cuts or put in jeopardy.
That’s a legitimate concern for our state as well. But with the market changes that we’re seeing in Massachusetts, our new payment models, some of the responses by the hospitals and physicians to integrate and merge and get larger and get more coordinated, I think those trends are here to stay.
Williams: As you mentioned, when you go around the country you describe yourself as being from the future, but here in Massachusetts, what sort of future do you expect five years or so from now? What do you think are the key health care issues that we’ll be debating in Massachusetts?
Dreyfus: It’s a hard time in health care to do predictions and scenario planning and strategic planning, but it’s obviously something we have to do. The kind of changes that we’re talking about –especially in the delivery of health care ( hospitals and physicians integrating, care being more coordinated, consumers being more engaged in care)– that’s a decade long transformation.
Five years from now I predict we’ll be halfway there. I think we will have much greater transparency about the cost and quality of care. Right now we think of these issues at the level of hospitals. I think we’ll get increasingly granular about that: how has this group of surgeons done versus that group of surgeons, or this group of gastroenterologists versus another.
I think that patients will start to become accustomed to engaging with their care more. We’ve seen patients increasingly using online resources to learn about their illness and to think about options for their care. I think that they’ll be more involved. I think health plans will have to increasingly find broader ways to create value in our health care system.
If you think about 10 years ago, the health plans essentially designed benefits and products that employers bought, negotiated contracts and built networks of hospitals and doctors and then processed claims against those benefits and that network. And that worked fairly well, and in Massachusetts plans are held to the highest standards of administrative efficiency in the country.
But over time, we will have to offer more than that. We’ll have to offer our customers a much deeper engagement in wellness and even more creative benefit design. With our hospitals and physicians, we’ll have to be deeper partners and we will probably increasingly be in the analytic and informatics business as much as we are also in the insurance business. We’re doing a lot of that now, a lot consultation to physicians and hospitals.
Then finally, I think we’ll be in a different position with our members. I think more of our members will probably be buying insurance directly from us because there are certain trends in the market, which may make it less of a wholesale market, which could describe the insurance market today. Most people are getting their insurance through their employer or through government. We may have a little bit more of a retail market and that is going to require us to build different capabilities and be more nimble, more agile, more online, more 24/7.
So I think in five years you’ll see health plans evolve in that way, with closer partnerships with our customers and our physicians and hospital and our members.
Williams: Andrew Dreyfus, CEO of Blue Cross Blue Shield of Massachusetts. It’s been a pleasure speaking with you today. Thank you so much.
Dreyfus: Thanks for having me.