here for PDF format
for participants' responses to this interview.
Steve Dahl & Patrick Pechacek,
Directors, Deloitte Consulting
Civic Caucus, 8301
Creekside Circle #920, Bloomington, MN 55437
October 1, 2010
Verne Johnson (Chair); Janis Clay, Marianne Curry, Paul Gilje, Jim
Hetland, Sallie Kemper, Dan Loritz, Tim McDonald, Wayne Popham, Clarence
Shallbetter, Bob White
of Dahl and Pechacek's comments:
In 2002 the
state government began using Minnesota Advantage, a cost-tiered strategy
put together by Deloitte Consulting to manage the health care providers in
the state employee health benefits network. Providers are rated based upon
their average cost for services, and then assigned to one of four cost
tiers. Different levels of co-payments and other benefit features
encourage insured employees to choose providers that cost less-though the
other higher-cost providers continue to be available to them.
While they have not measured for quality outcomes directly, Dahl and
Pechacek have observed a relationship between lower cost and higher
quality-a trend found by others in the field.
new plan reduced state health premiums by 10 percent in the first year,
and has held the rate of cost inflation to 5-6 percent below health-plan
trend projections. The tiered structure of Minnesota Advantage could be
applied to other public and private health insurance plans, in an effort
to hold down the overall growth of health care costs.
Context of the meeting-Through
its focus on ideas for redesign of public services the Civic Caucus has
sought ways to make
a leading state-both in the quality of its functions, and through
innovative cost-savings. The area of medical and hospital services
promises to be a major opportunity for improvement. During his visit with
the Caucus in July (see:
http://tinyurl.com/26fezsu), Bill Blazar of the Minnesota Chamber of
Commerce introduced the Caucus to this innovative program devised by
Deloitte for state employee health plans in 2002.
Welcome and introductions-
Patrick Pechacek is a director at Deloitte Consulting, and has been with
the company since 1986 specializing in human resources and partnerships.
He is a graduate of the University of Minnesota.
Steve Dahl is the
Midwest region leader for Deloitte Consulting LLP's Public Sector
practice. He has extensive experience in process, organizational and
system assessments, as well as business and technical strategy. A
certified public accountant, he graduated summa cum laude from the
of Texas at San Antonio.
Comments and discussion-During
Dahl and Pechacek's visit with the Civic Caucus, the following points were
Deloitte has a strong working relationship with state government.
Describing Deloitte, the pair told the group that, "What we do is define
and implement transformational ideas to bring about more efficient and
effective services. We work extensively with the legislature and executive
branch, forming coalitions to move good government ideas forward."
Minnesota Advantage was developed as a health plan for state employees.
Deloitte developed the program called Minnesota Advantage that has been
effective at lowering the cost of health care for state employees. The
program organizes provider groups into categories based on the cost for
certain services, and provides incentives for employees to choose the
lower-priced plans. Dahl and Pechacek worked with the state's Office of
Management and Budget to develop and implement this tiered framework.
Prior to 2002,
Minnesota had been working with a "managed-competition" plan: The state
would determine which competing plan had the lowest cost, apply their
established benefits plan to it, and then employees would pay the
difference between that lowest-cost plan and other plans. This process
saved money for the state, but did nothing to lower the cost of the plans.
the managed-competition model had a serious flaw: Healthier members would
switch to the lower-cost plans, driving costs of other plans higher and
prompting more members to switch plans. Seeing premiums continue to
increase, and anticipating practical difficulties in cost sharing with
employees, the state decided that a change needed to be made.
Deloitte examined all health care provider groups in the state and applied
risk adjustments (to account for severity of illness) to determine the
average cost for a particular service, by provider. They listed the 52
providers from lowest to highest cost. The difference between the
lowest-cost and highest-cost provider-for the same base service-came out
to be almost 160 percent. This difference was for the same service, for
the same type of patient. (Note: this data was for provider groups, not
is a remarkable variance. In tables shown to participants in the
discussion, Dahl and Pechacek described how a provider in level one (the
lowest-cost tier) may provide a service for $394, another in tier two may
charge $445; another in tier three, $485; or the most costly provider in
tier four, $694, all for the same service to patients with identical
Minnesota Advantage in practice works to change consumer and provider
program covers 116,000 members through state employee health insurance
Providers are tiered according to costs as outlined above, and then
deductibles and co-pays are devised for each tier as incentives for
employees to choose the lower-cost providers. "We knew from the
managed-competition days," Pechacek said, "that when you go from a zero
co-pay to even as little as a $10 co-pay, the healthy patients will move
to a lower-cost plan." Public employees pay a smaller share of the cost of
health plans than in the private sector, but even so they are very price
sensitive. This begins to shift behavior in the marketplace, because
providers actively seek to figure out how to increase (or prevent the
decline of) patient traffic into their clinics. This may result in
efforts to get higher productivity at lower cost.
rural areas, there may sometimes be no tier-one or tier-two clinics
available. In those cases the plan artificially drops a tier-three clinic
into the second tier to assure access in those underserved areas.
the plan drives costs down, it appears that quality also improves.
program does not account for quality of care, Dahl and Pechacek said,
though they do observe evidence of a relationship between the lower cost
of providers and superior quality of outcomes. This would be consistent
with work done by Ellwood and McClure in the 1980's that found that the
highest-quality providers of medical services consistently cost 20 percent
below the mean. Deloitte has drawn from their work.
Ellwood and McClure developed a matrix comparing providers on scales of
quality and cost. At the time there was risk-adjusted data available on
morbidity and complications. A participant asked if either of the speakers
knew of people doing that kind of data collection now. Pechacek said that
Minnesota Community Measurement is doing some of that, but without quite
the same statewide scope.
"We're the only ones that are rating these provider groups independently
on cost," Pechacek said. Providers are all working to improve quality, but
that is not being driven directly by this model.
result has been lower cost to the state.
the state first introduced the model most people had been visiting what
were determined to be tier-two and -three providers. After introducing
pricing incentives, change happened quickly: "Once all the dust settled we
had most employees in tier-one plans," Dahl said. "If people know how much
they have to pay, they respond." In the first months of the program's
life, clinics in tiers three and four lost as much as half their state
employee patient traffic.
numbers are significant. Minnesota Advantage reduced premiums by 10
percent in the first year-5 percent related to cost sharing, and 5 percent
through efficiency. While that substantial initial decline in premiums
will not be repeated in subsequent years, growth in the cost of claims has
been controlled: From 2004-08 claim costs have averaged 5-6 percent lower
than projected trend estimates for the plan ($120 million lower in actual
speakers recounted that since the program has been in effect some
providers have called to express concern that they found themselves in
tier-three or -four and might begin losing patients. This can be an
effective incentive for them to change behavior. The providers receive a
preliminary letter that says at present they are in a certain
tier-sometimes they are able to change their pricing structure quickly
enough to move into a new tier before the plan year begins.
participant questioned the macroeconomics of the program, and its effect
on changing the patterns of cost and quality in an entire market. "It's
one thing for the public employees portion of these providers to decline
in cost," he said, "but they may be only a small portion of the provider's
portfolio and thus the provider will shift the cost to other patients or
not pay much attention if their bottom line is only slightly affected."
cost-tier strategy could be applicable elsewhere in business and local
participant asked whether the plan might be applied elsewhere, with
similar results. Could businesses use this approach for their employee
Dahl and Pechacek believe this approach can be applied in other arenas and
would be happy to have conversations with business leaders. But there is a
challenge with "critical mass." Remarkably, the large companies like
General Mills have only about 10,000 employees in the metro area. With
this number of workers spread out across the state visiting a large number
of different clinics, there has not been a strong impetus for pursuing
this plan. "What this really points out," a participant observed, "is the
failure of business leaders to unite together to form a larger cooperative
speakers suggested that one option would be to have all public employees
in the entire state-local government employees and teachers included-take
this approach. Local governments tend to prefer their own plans, Pechacek
said, but some are looking more seriously at joining the state plan as
budgets become more strained. The state teachers' union has expressed a
clear preference for a tiered plan.
Another option would be to look at areas where services are provided
without much competition, and to apply a "managed competition" model in
that case. "When you can put some form of managed competition in place
there is a measurable effect on results."
more the state can move to aligning incentives to the desired outcome, the
more change there will be. This has got to be voluntary, the speakers
emphasized. Without real incentives for people to shift to lower-cost
providers, such a change is very hard to bring about.
is the scope of implementable change? "It could apply to every public
employee." The primary question has been what would constitute a
meaningful demonstration of this program? But interest in the program does
continue to grow. At the local level some public employee groups have
been asking for the state to assume more control over health care, while
others want to maintain local control. It may be possible to build this
into Local Government Aid. Teacher union locals are expressing interest in
the state's taking over their plan so they can take health care out of the
contract bargaining process.
Department of Human Services has explored applying this tiered network
concept to the Medicaid population, recognizing that it had not been done
anywhere else. So far it has not taken action. "These are really two very
different programs," Dahl said of the state and Medicaid reimbursement
models. "We're taking baby steps."
the conversation drew to a close there was discussion about the great
potential for impact on other state and private plans, and for adding a
factor of quality assessment. In government, the speakers said, the
leadership on this issue has been-and will likely need to be from-the
Thank you, to Mr. Dahl and Mr. Pechacek, for a good visit.