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August 3, 2010

Update: Health Insurance Exchanges – A Solution for VEBAs

 

What’s a VEBA?

VEBA stands for voluntary employees’ beneficiary association, a trust fund established solely to manage and provide employee benefits, including healthcare coverage.  While VEBAs have been around since the 1920’s, they have been used sparingly, until recently, when several large, long-lasting industrial corporations have used them in employment negotiations with their unions as a way of fixing the value of future retiree healthcare benefits.

Explain?

In past decades most unions negotiated a compelling set of retiree healthcare benefits to cover many of the healthcare expenses excluded from Medicare.  Over time the life expectancy of retirees has expanded beyond initial actuarial expectations and healthcare costs have grown at a rate in excess of overall inflation, resulting in enormous and unexpected costs for retiree medical, so much so that in the case of the US automotive industry these costs began to erode global competitiveness.

Over the past few years corporations including the large autos have been able to work with their unions to renegotiate the form of retiree benefits, converting from a “defined benefit” structure, where benefits are fixed and the costs vary depending on utilization and market prices, to a “defined contribution” structure, requiring the benefits to vary based on a fixed funding budget.

In the case of the United Auto Workers Union (UAW) this led the auto companies to establish and fund the UAW Retiree Medical Benefits Trust, which is, to my knowledge, the largest VEBA in the US, with a reported asset value of over $45 billion including large equity stakes in General Motors, Ford and Chrysler.  According to press reports this VEBA is now responsible for providing life-long healthcare benefits for 800,000 retired auto workers and their spouses.  This deal was cut in the face of a potential collapse of the US auto industry and it remains to be seen as to whether the VEBA has enough assets to fund its potential obligations to the union’s retirees.

Some numbers, please…

“We believe we’re saving our clients over $500 million each year while providing as good or better benefits for retirees. The group model is the evil here; it is a wildly inefficient way to deliver what is available via guaranteed issued coverage in the individual market” Bryce Williams, CEO, Extend Health

Back in May I posted The Coming Age of (Health Insurance) Exchanges about, in part, Bryce Williams’ company, Extend Health, an operator of the largest private Medicare insurance exchange.  The post provides a reasonable amount of detail on how an exchange works and why it should be expected to deliver more value for the healthcare dollar.

Recently, Employee Benefit News published Private Exchanges Have Potential to Breathe New Life Into VEBAs, an article that details the work of Extend Health in saving both corporations and its individual retirees healthcare costs through its exchange model where retirees over the age of 65 purchase individual Medicare Advantage and Medicare Supplemental insurance plans using funding provided by their prior employers.  This results in 25%-40% savings to the corporations, an average of 30% savings in out-of-pocket costs to the individual retirees (about $500 per year) and a 96% retiree satisfaction rate.

Implications for the VEBAs?

Given the savings that Extends’s Medicare exchange model has generated for corporations, it only makes sense that it would make a useful tool for a VEBA, with a goal to extend the life of its funding as long a possible by earning a return on unused capital and purchasing healthcare for its constituents as efficiently as possible.  Current data suggest that the exchange should create 20%-30% greater buying power for the VEBA’s over a typical Group Model.

You can read the Employee Benefit News article here and access my prior post on healthcare exchanges here.

 

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May 11, 2010

The Coming Age of (Health Insurance) Exchanges

Bryce Williams, CEO of Extend Health, a Psilos portfolio company, has written an interesting piece for SHRM (Society for Resource Management) that explains the primary benefit of a heath insurance Exchange, namely its ability to allow individual purchasers of health insurance to buy exactly what they want in a competitive market (buzz words to keep in mind: personalization, choice, competition, consumerism, to name a few).  Bryce’s company Extend Health demonstrates these benefits to its customers today, every day, and has been doing so for several years now, even before the enactment of healthcare reform, first in Massachusetts’ and now nationally, where in both cases the role of the Exchange takes prominence as a tool for expanding health insurance coverage.

So how does an Exchange work?

In the case of Extend Health, the users of its private Exchange are Medicare beneficiaries (aged at least 65 years) that receive supplemental health insurance from their former employers as a negotiated retiree benefit.   The Exchange enables these retirees to purchase an individual Medicare Advantage Plan (MA for short, which is similar to a HMO or PPO for Medicare) or Medicare Supplemental Insurance (Med Sup or MediGap for short, and it is what it sounds like, supplemental insurance that covers many of the coverage gaps in the standard Medicare package).  Today, both MA and Med Sup products are sold to individuals by most major national and regional health insurance carriers (United Healthcare, Blue Cross / Blue Shield, Aetna, et al).  Extend Health works with the former employers to establish individual accounts on behalf of each retiree, usually a Health Reimbursement Arrangement (HRA) or something similar.  The former employer funds the individual HRA(s) in lieu of purchasing a group health policy from one insurance carrier that covers all of the retirees (typically referred to as a Group Plan).  The retiree then uses the money funded into the HRA to purchase any MA or Med Sup policy offered on Extend Health’s Exchange (as of this writing Extend Health offers over 1900 policies from over 60 insurance carriers).

Operationally, and from a consumer’s perspective, Extend Health’s Exchange works the way most non-healthcare related consumer purchases work, which, oddly, makes it very unique in the healthcare world.   Retirees can access information about all available plans online at Extend Health’s website.  While the website is enabled for transactions, almost all of Extend Health’s customers make telephonic appointments with a licensed benefit advisor.  During these appointments, which usually last about 30-45 minutes, retirees review their budget and healthcare needs with the advisor and ultimately select and purchase health insurance coverage.

Today Extend Health has over 45 corporate customers (a/k/a the former employers) and has helped more than 250,000 retirees compare and choose a MA or Med Sup plan that meets their needs.  After this much experience the evidence is clear that the aggregate cost of individual insurance purchases is significantly less than the cost of a Group Plan, in some cases up to a 35% reduction in cost to the former employer and $500 per year for the individual retiree.

In his article Bryce sites the following as among the reasons for the savings:

  1. Consumerism and Personalization:  Retirees purchase the precise insurance benefit that they want.  The money in the HRA is theirs to spend on healthcare and as such they naturally spend it wisely and avoid waste.
  2. Geographical Efficiencies and Competition:  As an example, individuals living in Florida do not require primary provider networks in other states, and as such it is cheaper to buy local health insurance individually than through a national or multi-regional Group Plan.  Further, local competition for the individual business drives pricing rather than Group Plan underwriting by a national carrier.
  3. Guaranteed-Issue:  With few exceptions, MA and Med Sup plans are “guaranteed-issue” coverage, which means that no one who is eligible for Medicare can be denied coverage, eliminating an economic advantage of the Group Plan, namely the underwriting of large groups to enable expansion of coverage to high-risk individuals.

Psilos’ investment in Extend Health demonstrates our belief in the economics of Exchanges and the power of a true consumer, and I expect that over time Exchanges will evolve into one of the primary ways people access health insurance in the US.  In the market for employer funded retiree health, the Group Plan no longer makes economic sense, and today the Exchange model is facilitated by the Guaranteed-Issue structure of the Medicare market.  As 2014 approaches and the insurance market for people under the age of 65 begins to trend toward a Guaranteed-Issue structure because of the deployment of risk-pools and the prohibition on denying coverage for “pre-existing conditions” (as outlined in PPACA), I expect Exchange models to offer a viable option for corporations to provide insurance to their active employees.

We know that the Exchange model empowers the consumer and drives greater competition.  As such, I expect it to serve as a force to inspire the innovation in healthcare delivery necessary to reduce healthcare inflation and promote greater service quality.  Over time, I believe its practical and effective economics will become irresistible to a society desperate to reduce the total cost of healthcare.

March 4, 2010

Investing in Patient Safety

Query:  provide an example of a venture investment with a product that addresses patient safety.

One of our (Psilos‘) more interesting investments is a company called PatientSafe Solutions, f/k/a IntelliDot (for those interested in investing, unfortunately we just completed a round of venture financing with TPG  and Camden Partners).  PatientSafe’s medication bar-coding technology is installed in well over 80 hospitals.  To date, estimates have the technology avoiding over 11 million hospital-based medication errors.  There are 5800+ US-based hospitals, which creates a huge market for us, but the company clearly has a long way to go.

This investment demonstrates that uncovering sound investment opportunities requires digging deeply into the economics of the healthcare system.  Sometimes at first blush investments seem so obvious, until, upon a deeper dive, perverse economic incentives in the HC system thwart success.

First some background on the company’s initial go-to-market product.  

Essentially, PatientSafe’s technology uses bar coding and confirmation software to verify what the company calls the “5 rights” at the moment of drug administration, namely: right drug, right patient, right time, right mode of administration and right dose.  It does this by having the nurse use a handheld bar code scanner, slightly larger than an android-type cell phone, to scan the patient (through an ID wristband), the nurse’s name tag, and the drug prior to administration.  If any of these data points are off, e.g., the drug is an adult dose of Heparin instead of an infant dose, as was the case in the now famous hospital-based medication error involving the the near death of actor Dennis Quaid’s new-born twins, the nurse receives an alarm at the handheld device beginning the process of correcting the error.  If no alarm occurs, then it’s clear that the technology has safely confirmed the “5 rights”.

So what is the value of this system?  Well, here’s some interesting data:

  • 19% of all medications administered to hospitalized patients are given in error
  • 1.3% of all doses given in error are potentially harmful which results, on average, in a length of stay increase of 1.88 hospital days
  • A typical 200 bed hospital will have approximately 29,000 Medicare patient days per year, with each Medicare patient receiving on average 20 medicines per day, or for the hospital, 580,000 meds per year. 
  • Of the 580,000 meds per year, 110,200 will be in error and 1,465 will be in critical error resulting in 2,755 unnecessary hospital stays (1,465 error x 1.88 days).
  • The average cost of a hospital day under Medicare is about $600, so medication errors in this sample 200 bed hospital cost the healthcare system $1.65 million per year, or $8,265 per bed per year.
  • One last calculation:  taking $8,265 per bed per year across all of the 950,000 hospital beds in the US results in a cost of $7.8 billion per year.  Note that these numbers only include Medicare costs (the reason why will be apparent in a minute).  An estimate of total cost of medication error including all patients would exceed $10-12 billion per year.

Just as a reality check:  let me assure you that the annual cost of the PatientSafe system is much, much lower than the $8,265 per bed per year computed above.

So if you were the CEO of a hospital it would be a no-brainer right?  Install a system that improves my quality and saves Medicare a ton of money.  True, provided that you (the hospital) were paying for the extra hospital stays as a result of medication error.  If you were not (paying for the errors, that is), the economics of such an investment would be shaky (oh, comments and questions, please!).

In truth, up until very recently, additional hospital stays that resulted from in-patient medication administration error were reimbursed by both Medicare and private insurance.  And as a result, were these conditions to have held, PatientSafe would have had a tough environment to sell into.  Sure a few executives would purchase the system for its quality prospects, but that alone would not have created a large enough market for PatientSafe’s product to justify the investment necessary to build it.

It was not until September of 2008 when Medicare began to enforce broadly the concept of  “never events” (contained in a 2006 law),  that PatientSafe could begin to anticipate growth in its market and eventual traction with its hospital customers over the long run.  A “never event” is something that, as the term implies, should never happen in a hospital, and if it does, under Medicare, the hospital has to fit the bill for the resulting cost.  In-patient medication administration errors are considered never events.

So what is the medication administration error rate with the PatientSafe system?  Studies indicate that it’s zero.  That’s right, the system seems to completely eliminate drug administration errors, and as such, has the potential to eliminate billions of dollars of waste in the HC system.

Today, PatientSafe’s CEO, Jim Sweeny is leading a project to expand the purview of the PatientSafe system.  Using RF technology throughout a hospital, Jim believes the system can create a “cone of safety” around each patient that will significantly reduce most of the common and avoidable treatment mistakes.  More to come on Jim and his team’s work in the future.

One final point.

The implementation of the “never events” rule demonstrates one of the many ways in which simple, logical government regulation can lower cost and improve quality in the HC system.  Lots of incredible technology exists (and we’re going to talk about much of it here) that will reduce healthcare cost and vastly improve quality.  Alignment of incentives among the payers (mainly the government and corporations), providers and patients are necessary for such technology to be adopted in an economically rational manner.  The government can stimulate the adoption of that technology by modifying reimbursement mechanisms, as they have in the area of never events.  This is one very simple example of such a program and I expect private insurance will follow suit.

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