From: SANTA John John.Santa@ODE-EX1.ODE.STATE.OR.US

To: tublitz@uoneuro.uoregon.edu

Subject: Some comments/perspective on health and health benefit "markets"

Date: Sun, 21 Oct 2001 12:24:39 -0700

I have had a chance to reflect on some of the questions from the faculty and would like to share some additional comments/perspectives. These are mine not PEBBs but do reflect two years of trying to sort out issues at PEBB in a very turbulent market.

PEBB was created as an extraordinary period in health care came to a close. For the first time in over two decades health care costs moderated in the 90s. Many responses occurred as a result but two were particularly important.

• 1)A variety of strategies could be pursued in the 90s that could never have been considered because costs had moderated, structures were changing all about. There was room to innovate.
• 2)The reaction to the moderation in costs was a furious one--consumers rose up in waves of "patient protection," physicians and hospitals rose up in response to decreased reimbursement and limited opportunities. Coalitions broke down across the country. The ideal of "integrated delivery systems" fell far short of reality. Health care learned that market based strategies can be "messy."

I thought the faculty asked several good questions but three are particularly important.
1) Do you have models that you are able to use to design and predict what is going to happen?

We do. We have actuarial models that help us value various benefit plans. We have financial and accounting models that help us understand the flow of dollars. We have utilization models that help us understand what benefits and what subsets of people are using what. The problem is that all these models rely on assumptions about what choices poeple will make. These are the asumptions that are extremely difficult to make particularly when there are a variety of subpopulations, multiple incentives/disincentives and a changing economy underneath the health care industry and the employed population we serve. What plans state employees choose and which people choose them turned out to be very unpredictable in 2000 and since nothing changed in 2001 continued into 2001. The number of choices, the incentives and disincentives were so numerous that in retrospect prediction was impossible. PEBB was the winner since carriers, given the competitive market in 1999, were moderate in their correction for lack of predictability. That changed this year.

PEBB basically had very powerful elements of both defined contribution (cashback options) and defined benefits (subsidy of HMO plans) in 2000 and 2001. This is what led in part to the lack of predictability within the plan. Multiple sub populations moving in different and unpredictable ways. Defined benefit approaches are more consistent with the concept of insurance (larger population who is well, helps the smaller ill population). The problem is that many health services challenge our collective sense of responsibility for each other. We can probably agree that we are not collectively responsible for coverage of cosmetic issues but other issues are challenging--the consequences of behaviors for example--obesity, smoking, sedentary lifestyle. When we move to reward healthier populations through defined contributions we undermine the insurance concept. We know that higher income and higher education populations are healthier---if we lose those populations from our "pool" we could initiate a cycle of changes that results in decreased health outcomes for the rest of the population. Given the need for more predictability PEBB moved to more of a defined benefit approach though some features of defined contribution still remain.
One note on defined contribution. Often we hear the virtues of defined contribution extolled in the context of retirement plans. Retirement is a very different phenomena than health care. I don't think they are at all analogous--totally different industries, infrastructure, cultural settings.

I am attaching a brief paper that is being circulated among health policy folks. It is a good brief summary of what the immediate future may hold from a national perspective. We are working on some Oregon data that suggests the Oregon trend is similar if not more powerful than the national trend discussed. I will pass that along when I have it.