VMO’s Force the Paradigm Shift by  Robert W. Murphy REBC, ChFC, CLU, RHU, MBA  Copyright © 2008 Boca Benefits Consulting Group, Inc.   In 2008 Virtual Managed Care Organizations May Challenge Two Decades of Dominance by the National Managed Care Companies The health care claims cost differential between managed care ASO carriers and the best TPA’s needs to be considered over three distinct time frames: (1) short-term, (2) mid-term and (3) long-term. The 80/20 rule will remain in place. Eighty percent of the claims dollars spent on a plan will be incurred by twenty percent, or less, of the plan participants. Early Identification of risk and the avoidance of highly intense services, or their redirection to the lowest cost proper modality,  will generate the highest return on investment by a plan sponsor. The core of a comprehensive claim cost control program must be substantial prospective interaction with the 20% of plan participants with the highest potential morbidity indicators.  Clearly, minimizing the frequency of less intense services for the balance of the plan population will result in incremental claims cost savings as well.  However, even a 5% savings on the 20% of claims this group might incur only generates a 1% claims savings across the entire plan.   Movement in the Paradigm Has Already Begun        Short-term the TPA and ASO claims costs have gotten closer and closer as the larger TPA-based health care companies have in essence become VMO’s (“virtual managed care organizations”). Their degree of integration approaches that of the small group of major national ASO managed care companies. Bargaining leverage and discounts remain an issue but less so for the larger VMO’s than for the smaller independent TPA companies. However, the actual emerging mix of health care services provided will be the true determinant of claims cost for either alternative. BBCG has found that discount levels may not be substantially different between the two for certain packages of services when the larger independent provider networks are utilized by a VMO. Primary care physician (“PCP”) and specialty care physician (“SCP”) maximum allowable fees may continue to show a differential.  It is important to keep the above “80/20 rule” in mind. The majority of dollars are not spent on office visits. In addition to physician and hospital services considerations, certain ancillary services from third party vendors may be provided on virtually a par level. If the VMO’s continue to grow market share in urban areas, the discount differential will become less over time. Rural markets may remain problematic for them as certain ASO carriers maintain incrementally higher bargaining leverage in those markets, specifically the Blue Cross Blue Shield organizations. Overall, it is BBCG’s position that, short-term, the lower admin cost of the VMO’s should offset any ASO carrier claims cost advantage that might remain.        Mid-term costs will be largely influenced by three elements: (1) plan participant behavior modification, (2) promotion of healthier lifestyles and (3) early identification of risk parameters and associated medical/surgical intervention. ASO carriers once controlled the high ground on this issue, primarily due to the availability of investment capital to build long time to break-even programs. Today, larger VMO’s have made the required investment or established strategic partnerships to provide highly integrated processes for the above purposes. In some cases the VMO’s have also utilized a more personal and  proactive outreach philosophy with participants (i.e., TLC) which has generated program penetration percentages substantially higher than those of the ASO carriers which for the most part still rely on less intimate approaches to program enrollment and management. . A differentiating factor between VMO’s and ASO carriers is that the former stresses a high degree of “employee touch” in order to maximize participation. The underlying programs between the two alternatives are not substantially different. Where there is major difference (e.g., degree of emphasis and breadth of disease management protocols with at least one major VMO), BBCG believes that it will be short-lived. Momentum will take all to the middle over time as best practices become more unequivocal. Ultimately, the degree of emphasis (i.e., incentives) and the level of program utilization by plan particpants will determine the effect on mid-term claims costs.  To date, it appears VMO’s are on a par with, if not actually ahead of, the ASO carriers in this area. It is a critical component of the VMO model and it is reasonable to expect them to attempt to maintain competitive advantage via additional investment and innovation in these programs. ASO carriers have the ability to keep up but likely not surpass the VMO’s relative to the efficacy of mid-term cost control programs. Net result: VMO’s, when considered with the lower admin costs previously cited, may have significant advantage at present  .        Long-term claims costs (i.e., 10-20 years out) are also most effected by the early risk identification and intervention programs coupled with lasting lifestyle changes. Unfortunately, the population morbidity changes have a relatively long incubation period before any financial results actually emerge. ASO carriers have historically had the edge here due to one prevailing reason: employer plan sponsors do not remain with an administrator long enough for the results to be seen.  These type programs have often been considered fluffy add-ons by plan sponsors and there has been very little quantification of their long-term value. As such, in the past,  long-term incidence and mix of health care services had to be assumed to be equal for both the ASO carrier and the VMO. There was just no proof to the contrary. A corollary to that assumption has been that provider discounts must be the most important long-term consideration and that the ASO carriers had the edge.  A walk around your production floor or bullpen area might provide the best sense of the approach to take.  Do you see anybody who might still be there 10+ years into the future and who might be a huge claim due to lifestyle and lack of proper present care? What about potential claimants about whom you have no knowledge? The decision on long-term costs can be quickly skewed in favor of the VMO if it can be proven that they identify and intervene more effectively than the ASO carrier. It may be true that the ASO carriers can provide a less expensive cost for the “big one” when it comes. However, a more important question may be “How many ‘big ones’ can we avoid completely?”.   Considerations as the New Paradigm Takes Shape        The above factors notwithstanding, few employers have been willing to take the long view to date. When administrators and networks change in a normal 3-5 year bid cycle, the early risk identification and lifestyle modification programs also change. If not terminated in entirety, they change in format and management. Anticipated employee turnover also is a deterrent to the long view.  The employee with whom an employer worked so hard to lose 50 lbs., stop smoking, and take his/her cholesterol medication regularly may easily fall back on old habits if the support structure is suddenly eliminated or substantively changed.  Alternatively, that employee may work for a competitor down the street two years out and the investment could be completely lost. A ten year, or greater, planning horizon is difficult for many employers to get their arms around.        Given that the results of any of the above long-term programs, regardless of their high degree of efficacy, may be perceived to have little effect on the long-term claims cost of an employer sponsored health plan, it appears a reasonable conclusion that short-term and mid-term programs should receive the greatest comparative analysis when making the ASO carrier versus VMO choice.        The above notwithstanding, if employee turnover is relatively low in a specific industry, making incremental health care investment per employee a wise business decision, long-term programs should receive more weight.        The efficacy of the longer-term programs will always be maximized by keeping them in place for as long as possible, quantifying interim changes in emerging risk characteristics, and ultimately comparing claims cost results to what a less proactive approach might have generated.  It is reasonable to expect that certain employers may begin to conclude that short-term fixed administration savings (i.e., frequent bidding for short-term savings) may be more than offset by a longer-term emerging claims differential that could be realized from stability associated with risk identification/intervention programs.  Short-term known small savings versus long-term potential huge savings? Which management decision is most efficacious for a specific company?        If the above change in thinking were to occur, the paradigm shift would be complete. Discounts would fall to a second tier in making the administrator/network decision. As the two alternatives trend towards the “best practices” middle we mentioned above, it is more than likely that sooner or later ASO carriers and the VMO’s will get to a point where the risk identification/intervention programs are considered relatively homogeneous by plan sponsors. If there is no perceived product differentiation a short-term bidding thinking may re-emerge. Even if that were to occur, the end result will be the dominance of the entity which can maximize employee participation in the most effective risk identification/intervention programs without utilizing heavy handed tactics.  At least as of now, BBCG has to give that advantage to the VMO’s.   #  Copyright © 2008 Boca Benefits Consulting Group, Inc.