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David cooperative faces Goliath medical industry

ALBUQUERQUE, N.M. — Some good, smart, sensible people have organized a health insurance cooperative called New Mexico Health Connections and received a $6 million loan from the federal government to get it up and running by October next year.

Once the start-up is completed, the government will provide another loan, for $64 million, to provide Health Connections with the capital it will need to underwrite health insurance. Companies like UnitedHealth and Lovelace secure such capital through investments, retained earnings and, in the case of UnitedHealth, by selling shares of stock.

Since I know and respect most of the people involved in Health Connections, it makes me uncomfortable to report that, judging from the synopsis of the group’s loan application found on its website and the answers they provided at a press conference earlier this year, there is little evidence that any of the founders knows how to run an insurance company. The synopsis says that among the cooperative’s immediate tasks is to figure out how to build a network of medical providers, decide what products to sell and at what price, figure out ways to manage disease and review provider performance. In short, the synopsis says the cooperative’s first job is to understand what it means to be an insurance company.

Maybe the company’s business plan says more, but Health Connections, concerned about letting competitors know too much, won’t release it.

Health Connections did hire someone who knows something about insurance companies, Martin Hickey, who ran the Lovelace system, including its insurance operations, before it was sold to Ardent Health Services. More recently, he was an executive with a large Blue Cross plan in upstate New York.

The promising news is that Hickey and his board of directors clearly understand that a major reason the nation’s health care is expensive, inefficient and wasteful is because medical providers have incentives to be inefficient, wasteful and to do as many things as possible to get the meter spinning as fast as possible. Health Connections wants to contract with clinics, medical practices and other practitioners who, instead of being rewarded for doing a lot of procedures, are willing to take payment for their success in improving care, avoiding unnecessary procedures and keeping the patient healthy.

There are some wonderful primary-care physicians, physicians’ assistants and nurse practitioners around who will take full responsibility for a patient’s health. They’ll decide if that skin discoloration needs to be seen by a dermatologist or an endocrinologist or no one at all; they’ll follow up with the specialist. They’ll maintain health records from all of the patient’s encounters with the system, they’ll make sure they know all of the drugs the patient is taking, and they’ll make it their business to know that the patient eats right and exercises.

Such practitioners are rare for two reasons. The technology they need to gather and evaluate the information to work like that is not generally available, and insurance companies and Medicare haven’t worked out a way to pay them for the time and effort it takes to operate a practice that way.

Since the cooperative is starting with a clean slate, Health Connections wants to begin life by helping practices build systems that, as the synopsis says, support “integrated care and address health outcomes as the pathway to a genuine improvement in quality and a reduction in medical cost inflation.”

Hickey says it’s the difference between rewarding a health delivery system that collects money for putting “heads in beds” — getting as many bodies admitted to the hospital or through the exam room as possible to generate as many billings as possible — and rewarding one for improving a community’s health.

The cooperative’s willingness to try this is why it got the federal loan, after the business plan was reviewed for soundness by both Milliman, which does actuarial work for insurance companies, and Deloitte LLC, an accounting and auditing firm.

Fans of cooperatives like to say that because they are nonprofit companies their motives are somehow more pure and their ability to contain costs is superior since they don’t have to reward investors. That’s bogus. The health insurers dominating the New Mexico market report profit margins of about 2 percent in a good year, and they spend 85 percent of their premiums on health care, in compliance with state law. The cooperatives’ value will be in their ability to try something entirely new.

I love the idea, but I’m still skeptical of Health Connections.

All of the local insurance companies want to build the same kind of system, but unlike the cooperative, they already exist, they already have the infrastructure they need, and they are fully staffed with people who know what they’re doing. They are working on accountable care organizations and medical homes, just like Health Connections plans to. They are trying to build the computer systems that will allow such operations to work, and they are working on payment approaches to reward medical providers for health-care improvements.

They are stymied by the medical industry. Insurance companies have to contract with providers, and providers control the market because there are not enough of them. They dictate the terms during negotiations with insurance companies. They make a lot of money with the “heads in beds” approach and don’t have much financial incentive to change. Practitioners who would love to adopt quality improvement and build medical homes don’t necessarily have the computer systems to do it. Providers living in New Mexico’s many underserved communities have no network of specialists, therapists and aides to help them create a medical home.

Health Connections has the right idea. I fear they have no better answer to the monopoly-like power of the medical industry than do Presbyterian or Lovelace.

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