It seems like almost a daily event…I’m meeting with a client to discuss their renewal and they say, “Why are health care costs rising faster than the rate of inflation (CPI)?” Like me, I’m sure this question takes you many places because the answer can be complicated —but is it really?

New England is home to 4 of the top 10 health plans in the country. Our health plans are not for profit and operate their businesses with around 10 cents of every premium dollar. They deliver broad access to high quality care and earn high marks in member satisfaction. Could our health plans reduce their administrative costs? Sure, but by how much? And why aren’t we focusing on the real problem?

The real drivers of rising health care costs are provider prices (unit cost), uninformed consumer decisions and poor lifestyle choices (utilization). So how do we solve this problem?

In my first blog post, we chatted about transparency and the responsibility of the health care consumer to make informed purchasing decisions and live a healthy lifestyle. Now, I want to make you aware of a “new” trend to solve the cost problem in New England – it’s not so new – but it’s a trend. Tiered and defined network products as well as global payments are making a comeback.

I’m confused. Didn’t we try this and fail in the 80’s and 90’s? Over time, didn’t consumers push back on smaller networks and limited choice? Didn’t they resist doctor directed care and health plan provider payments that restricted access to the care they needed?

As I sit here writing, our health plans are passionately renegotiating their contracts with providers (hospitals, doctors and prescription drug managers) and both sides are lobbying for their position in the newspapers, trying to win over public support. Why are they arguing?

Providers have traditionally negotiated discounted fee for service contracts and charged health plans much higher prices (rates) to make up for the low reimbursement they get from the federal government by accepting Medicare and Medicaid patients — typically 40% lower than what they need to run their businesses. They also built in annual escalators into their contracts that are well above CPI. But there’s a shift. For the first time in quite some time, big powerful Providers are feeling the political pressure for rising healthcare costs. They are responding by reducing annual inflation to 3-4%, more closely aligned to CPI.

At the same time, health plans are entering into Global Payment risk contracts with providers. Learning from the past, health plans are not using the word “capitation” because it was wildly unpopular and ineffective in 80’s and 90’s. They are entering into these risk arrangements with Providers to “encourage quality and hold providers accountable.” What’s not said is the potential impact these contracts could have on the doctor/patient relationship or the solutions employers are implementing now that promote consumerism, health and wellness. Where is the consumer incentive to make informed choices when the cost of the service they are buying is hidden from them? Or worse, socialized with other consumers who are not engaging in healthy lifestyles or informed decision making?

Without diving too deeply into the weeds, the challenge with this “new” solution is it doesn’t work over the long-term. And the reason it doesn’t work is because it asks the doctors to assume more control and accountability for managing the patient’s choices, ultimately reducing the consumer’s responsibility. Essentially, in this payment model, the doctor is paid a flat fee every month for each patient throughout the year, regardless of the patient’s actual utilization. At the end of the year, providers settle up with the health plans and earn a “quality bonus” rewarding those doctors that are more “efficient.”

With these new contracts and public pressure remaining hot on health care costs, New England health plans are rejoicing that their “reduction” in inflation is a success because it is below 10%. From my standpoint, it’s a start but doesn’t go far enough. Annual escalators in provider contracts should be tied to CPI – and the actual cost and quality metrics should be transparent to the healthcare consumer so they can make informed choices.

Solving rising healthcare costs is a shared responsibility – reducing provider choice, increasing provider responsibility for consumer choices, implementing creative methods of provider payment and limiting consumer engagement is not the solution — it’s a page from the past and we can do better.