Stitch Up An HMO

By Daniel Eisenberg

Bob Stevens knew something drastic had to be done. His company's health-insurance costs were soaring, up about 15% a year. At the same time, his employees were becoming increasingly frustrated by the lack of alternatives to the restrictive managed-care coverage he was buying.

And Stevens runs a hospital.

So last fall Stevens, the CEO of Ridgeview Medical Center, a $110 million-a-year hospital and network of clinics in suburban Minneapolis, opted for an experimental course of treatment. He offered his 800 full-time doctors, nurses, administrators and other personnel the choice of a new scheme called a "defined contribution" health plan, courtesy of a local start-up known as Definity Health.

Unlike a traditional, narrowly defined set of health benefits, this plan lets employees spend a portion of their allotted health dollars--usually around $1,000 to $2,000 a year--as they see fit. They can spend it on the deductible of a basic indemnity policy or opt for alternative medicine; if they don't use up their allocation before the end of one year, they can roll it over to the next. At best, Stevens guessed, perhaps an adventurous 10% to 15% of workers would take the leap; in the end, though, more than three-quarters signed up. The result, says Stevens, is that "we're creating savvy health-care consumers who are really thinking about their money."

And, it is hoped, spending less of it. An economic slump, made worse by the Sept. 11 terror attacks, is moving employers to shift more health-care costs onto workers, according to a new report released two weeks ago. But some bosses are starting to think their employees might be the best weapon in the war against health-care inflation. Much as 401(k) savings plans have supplanted old-fashioned guaranteed pensions, such consumer-driven health plans aim to shift the responsibility--and risk--of employer health insurance to the rank and file. "We've taught people that when they put down a $10 bill and an HMO card, they're entitled to everything," says Lee Newcomer, a managed-care veteran and now chief medical officer at benefits start-up Vivius. "If you give consumers a system indifferent to price, they won't worry about the price."

Several start-ups, from Lumenos and Vivius to HealthMarket, HealthAllies and MyHealthBank, are busy making that argument to employers. Major California insurer Wellpoint recently rolled out its defined-contribution option to small businesses, half of which don't provide health insurance at all, and Aetna just launched its plan, dubbed HealthFund. Though only about 5% of U.S. businesses, including Medtronic, Novartis and Textron, are testing some sort of defined-contribution health plan, more than 20% think it's likely they will offer one in the next five years, according to the Kaiser Family Foundation.

That doesn't necessarily leave everyone around the water cooler feeling chipper. Many employees view defined-contribution plans as just another corporate cutback dressed up as employee empowerment. To some degree, they're right. Theoretically at least, companies can--by paying a fixed amount each year instead of a percentage of ever rising premiums--better predict and control the price of health care, leaving workers to pick up the rest.

Cash transfers, the earliest and most radical form of defined-contribution plans to be laid on the table, have already got a cool reception. Under these schemes, employees would simply be handed the $4,000 to $6,000 that companies typically spend on their annual health insurance and left to buy an individual policy on the open market. But individual policies tend to be much more expensive than group ones. Buying the wrong kind of coverage could prove fatal. In the absence of risk pooling, older or chronically ill workers might not be able to afford insurance at all. And as the tax code now stands, the cash transfers would be treated as regular income.

The currently available models of defined-contribution plans aren't so Darwinian. Most give employees some kind of tax-free personal health account so they can manage their health-care dollars, along with a wraparound, high-deductible insurance policy for catastrophic and other care. Companies still negotiate rates and discounts on behalf of their entire work force. But because many of the most onerous restrictions of managed care--from pre-certifications and referrals to utilization review--are eliminated, the new plans hope to attract much bigger networks of physicians. Definity Health, for instance, has signed up renowned, choosy providers like the Mayo Clinic and Cleveland Clinic. Innovators such as HealthMarket, Definity and Vivius plan to let individual physicians set their own discounted rates rather than establish one flat, across-the-board price. The idea is that consumers, armed with a wealth of data on the Net, could then comparison shop.

"Eventually, the better doctors will get paid more," says Steve Wiggins, founder of Oxford Health Plans and now CEO of HealthMarket. Wiggins also wants to offer set rates for entire episodes of care--like heart bypass surgery--because you'd hardly be in a position to shop around if you needed one done in a hurry.

Vivius lets patients construct their personal provider networks with 22 specialists, from a primary-care physician to a cardiologist. HealthAllies provides a wide selection of discounted services not typically covered, from laser surgery and acupuncture to vision care and in-vitro fertilization. MyHealthBank, which has partnered with Regence Blue Cross/Blue Shield to focus on small employers in the Northwest, hopes eventually to offer consumers a debit card to have their visits to the doctor automatically paid out of their accounts. In such a competitive market, says Harvard Business School professor Regina Herzlinger, doctors will finally offer services that consumers really want, such as integrated teams to better treat chronic illnesses, which account for close to 80% of health-care costs.

Still, it's not at all clear how many consumers are ready to make so many complicated decisions--from designing their deductibles or premiums to researching and shopping around for the best deal in dermatology. "Isn't it a bit of a stretch to think that consumers can intelligently negotiate with doctors?" wonders Sally Trude of the Washington-based Center for Studying Health System Change. Perhaps, but considering how poorly the supposed experts have fared, don't consumers at least deserve a chance?