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					The attached interview of Leonard Schaeffer, Chairman of WellPoint, by McKinsey
Company substantiates MedEncentive’s business model on multiple levels. The
article has been highlighted and footnoted to underscore Mr. Schaeffer’s comments
which confirm MedEncentive’s market strategies.

16 January 2006 | Member Edition

IT remedies for US health care: An interview with WellPoint's Leonard

The chairman of the largest publicly traded US health benefits company discusses the
industry's future.

Michael W. Bender and Steven J. Van Kuiken

The United States spends billions of dollars on health care, and costs continue to rise.
What's more, employers shoulder a growing part of the burden—a sobering reality for
companies already facing a tough economic climate and ongoing margin pressures. And,
unfortunately, higher costs don't imply higher quality. A lack of established best practices
results in wide variations in care from region to region and even from hospital to hospital.

As the debate about how to "fix" the health care system continues, the problem's
complexity means that there will be no easy solutions. But one thing is clear: information
technology will play a critical role in the industry's eventual transformation.

Leonard D. Schaeffer, the chairman and former CEO of WellPoint, the largest publicly
traded US health benefits company, with more than 26 million members, is uniquely well
positioned to address the challenges facing the health care industry—and the likely
solutions. Under his leadership, WellPoint has been honored by Fortune magazine as the
"most admired health care company" in the United States for an unprecedented six
consecutive years. Earlier, as CEO of Blue Cross of California (WellPoint's predecessor),
he led the company back from the brink of bankruptcy.

Schaeffer shared his vision for the future of health care with Michael Bender, a director
in McKinsey's Chicago office, and Steve Van Kuiken, a principal in the New Jersey

The Quarterly: What are some of the key challenges facing WellPoint and other insurers
in the health care industry, and how can IT help address those challenges?

Leonard Schaeffer: Our issues at WellPoint are those of the health care industry as a
whole. Health care consumes 15 percent of the country's gross domestic product, and the
costs keep rising. But research shows that we don't know what we're getting for our
money. There are enormous variations in care and in the cost of that care. And we don't
have information on outcomes—on what works and what doesn't. The doctors, nurses,
and other people in the field have no way to track their own behavior or to compare
themselves with anyone else. Information technology can play a huge role in making

better information available to all the players so that we can begin to address these
problems. 1

Another key issue in the US health care system is the number of people with chronic
diseases, which are exceedingly expensive and complex to treat because of the multiple
problems that accompany them. Many of these problems are not a function of anything
that doctors can do but of how people lead their lives. So wellness and prevention
become very important. Information technology can help us to identify people with
emerging problems and to reach out to those people. We can communicate with them
over the Internet, monitor their lifestyle changes, and give them positive feedback when
they do the right things—or let them know when they don't. 2

The Internet makes it possible to converse with our customers and patients in new ways
and to access more and better information. So for the first time, we can have both
informed caregivers and informed consumers. That gives us an opportunity to truly
transform the health care system.


The Quarterly: How can better information help health insurers?

Leonard Schaeffer: As insurers, we want to cover things that work, that have clinical
efficacy, based on concrete evidence. In other words, we want a pay-for-performance
system. What we don't want is to pay for things that don't work. But today we have a
  Providing information for best practices and performance against these best practices is exactly what
MedEncentive provides.
  MedEncentive takes positive feedback to the patient two steps further. First, the patient receives a
financial reward, and second, the patient gains the satisfaction of knowing that their doctor is aware of their
compliance. Experts agree that these are powerful methods to encourage healthy behavior.
  Note that Mr. Schaeffer was voted as one of managed care’s deepest thinker. Based on this interview, we

reimbursement system: we pay doctors to do whatever they think they need to do for their
patients. It's the only part of the US economy where the source of supply determines
demand. We all know that some physicians are better than others at keeping up with
known best practices and delivering that care, so what we need is more and better
information about which practices lead to better outcomes.

According to a recent RAND Corporation study, when you go to the doctor, you get
evidence-based medicine only about 55percent of the time. That means you're not getting
generally accepted best practices 45 percent of the time; 11 percent of the time the care
you get actually hurts you. No other aspect of US business has that kind of defect ratio—
you couldn't get away with it.

The notion of a "standard of care" in this country is artificial. The level of variation in our
health care system is unbelievable. You could be hospitalized for nine days in New York
and for three days in California with the same diagnosis—and those differences would
have no impact on outcomes. There is no other industry in the world that uses so many
different approaches to the same thing and in which these differences don't relate to better
results. More care and higher spending don't result in better outcomes. In fact,
independent research done at Dartmouth clearly shows that higher costs equal lower

The Quarterly: What's the solution?

Leonard Schaeffer: Doctors need to know how wide the variation is and where their
practice patterns fit into the universe of behavior. Then they need to understand the
connection between practice patterns and outcomes or between practice patterns and
patient satisfaction. You can't put a pay-for-performance system in place until doctors
clearly see the link between best practices and better outcomes, and IT helps to do that.

Doctors are very data oriented. They'll change their behavior if they have information that
shows them a better way to do what they do. But it has to be information that they
consider accurate, timely, and unbiased. Unfortunately, insurance companies aren't seen
as sources of accurate, timely, and unbiased information, so most likely we'll see third-
party "infomediaries" emerging that will gather and correlate industry data 4 .

'The IT guys like EHR, but physicians and the people who run hospitals are not

As a health insurer, if you start by telling doctors, "We know what's best; we'll pay you
for it," you violate the fundamental principle that doctors want to exercise their own

  MedEncentive functions (as Mr. Schaeffer describes) as an “infomediaries.” His explanation of how
physicians view large insurers (which also applies to other industry service organizations) underscores
MedEncentive’s physician-friendly competitive advantage. This advantage precludes others from simply
replicating MedEncentive’s patent pending methods or proprietary technology. Competitors will be hard
pressed to replicate MedEncentive’s origins and special position of trust with physicians.

discretion. That's what killed HMOs—telling the doctors what to do. Doctors don't like to
follow cookbooks, but, clearly, evidence-based medicine would work better for patients. 5

The Quarterly: WellPoint invested $40 million to encourage its in-network physicians to
start using IT and to begin "e-prescribing." What results have you seen?

Leonard Schaeffer: If you believe in an IT-enabled, evidence-based health care system—
which I do—you've got to get IT into doctors' offices. So we offered our in-network
doctors, for free, either a desktop or a state-of-the-art "e-prescribing" unit for connecting
to the Internet. Our theory was that if we could get a certain number of docs online, we
could revisit them later and get rid of paper, which would benefit the physicians and us.
That was the theory. But to get doctors to trust us, we had to say "no strings attached."
We had to contact 26,000 doctors to get 19,500 to accept the free gift. Of these 19,500
doctors, 2,700 accepted the e-prescribing package. Unfortunately, only about 150
physicians are using this technology consistently. I was very disappointed that we only
moved the needle that much.

Harvey Fineberg, the president of the Institute of Medicine, explained why the doctors
were so recalcitrant: "When you're in private practice, 'free' is not cheap enough." In
other words, the doctor thinks, "You're giving me what looks like a free gift, but you're
really requiring a change in how I work, which costs more and gives me little benefit. So
I'm not changing my work process."

It was a real lesson in life. We were trying to change fundamental behavior, and the
doctors don't want to change unless they see a significant benefit for their patients or
themselves. 6

The Quarterly: Electronic health records—EHR—seem to hold a lot of promise for
improving care and cutting costs.1 What are your thoughts?

Leonard Schaeffer: What's in it for the industry players? They'll want to know how it
benefits them. Tell me why, if I'm a hospital, I should put a half billion dollars into EHR
when instead I can buy three machines that'll improve diagnosis and two machines that'll
improve treatment. The IT guys like EHR, but physicians and the people who run
hospitals are not convinced that there is a return on the investment.

Even if we cleared that hurdle, then we'd have to agree on standards. What if I'm a world-
class liver surgeon and I like red sutures? What if a world-class hand surgeon likes flesh-
colored sutures? But the standard is going to be, say, white sutures. What's in it for
doctors to agree on a standard coding, description, or whatever?
  Mr. Schaeffer accurately describes physicians’ attitudes toward health care reform initiatives and their
aversion to “cookbook” solutions. His comments clearly support one of MedEncentive’s most important
advantages which is the Program’s “anti-cookbook” feature. This feature is only accomplished through
MedEncentive’s patent pending rewards methods which involve the confirmation of the patient to a
doctor’s reason for deviating from a guideline.
  This comment is another strong endorsement for MedEncentive. Doctors and patients have indicated by
survey and enrollment that they appreciate the significant benefits MedEncentive offers them both.

The Mayo Clinic, in Minnesota, sets its own standards: you don't go home at night unless
your notes are complete. The doctors have to write up their notes using the format set up
by the Mayo brothers. That's what it takes to have standards. You need to say that
everybody in a hospital is going to maintain a medical record that looks a certain way,
and it's going to be legible, and everybody's going to put in the same data, and so forth.

EHR is a great idea, but you've got to prove to each of the players that it has benefits for
them. We also need consistent standards—and that should be done by the federal
government. Then the payoff will go not just to one hospital or one hospital system but to
the health care system as a whole.

The Quarterly: Has IT ever given you a competitive advantage—helped you to stay
ahead of the other players?

Leonard Schaeffer: For a long time, health insurance companies were measured on the
cost, timeliness, and accuracy of their claims processing. Blue Cross of California, using
its old systems, was the timeliest, the most accurate, and had the lowest costs. For those
reasons, the agents, customers, and employers liked us a lot, and that gave us a
competitive edge for a long time. WellPoint, overall, has relatively low administrative
costs and labor content for the number of members we serve, and that's because we've
automated things.

But today the most important thing for us is our actuarial data, which helps us price our
premiums. As you might guess, pricing is critical. Our analysis showed that the so-called
cycle in health insurance—three good years, three bad years—is simply a function of
pricing discipline and pricing mistakes. There isn't any doubt that the companies with the
best pricing are less cyclical. In our case, we have no cycles at all.

We found that the most critical information for good pricing wasn't how many contracts
we had but how many people we had—who they were, their age, their gender, and where
they lived. Together with regional and local differences in illness types and doctors'
behavior, these characteristics determined what the costs would be. So we gathered more
information than anybody else about those things, and this was a huge competitive
advantage. Now almost everybody does things that way.

We also make a point of processing claims quickly because we found that faster
processing gives you a better idea of your costs and early knowledge about how trends
are changing. By monitoring the landscape, we were able to raise or lower our prices
before anyone else, which is really important in this business. You never want to sell an
underpriced policy.

I told our IT guys that I'm not interested in data; I'm interested in translating data into
information for decision making. Information that doesn't help us make decisions isn't
valuable. So you take data, you turn it into information, you apply it, and you make better
decisions because you know more than anybody else. I think that's real power—and that
was our hidden advantage for years.

The Quarterly: Where has WellPoint been investing its IT dollars over the past few

Leonard Schaeffer: One important area is systems architecture in an environment of
consolidation. We had these old legacy systems that worked just fine. But as we began to
acquire other companies, we could see the complexity ahead and the need to build new
capabilities for the future. A few years ago, we rearchitected our systems so that we could
build new capabilities, like customer claims data access, for the whole enterprise—
without having to discard the legacy systems.

'We need to make processing a claim or getting health care information as easy as buying
a book on Amazon'

Security and confidentiality are other big issues, but they're enormously expensive to put
in place, and they've made the systems much more complicated than necessary. For
instance, to protect the confidentiality of our members, we went from Social Security ID
numbers to unique numbers, using middleware to change everything across the
corporation. The project is finished, and we had no problems, but it did cost a huge
amount of time, money, and effort—and for what? There is zero utility to the health
insurer, but in theory confidentiality will be maintained, which is good.

Security is another area we've invested in. We need to be prepared in the event of a
terrorist threat, an earthquake, or a power outage. These preparations are critical because
the more you rely on information technology, the more vulnerable you become.

The Quarterly: Where is health care insurance heading? What innovations do you see on
the horizon?

Leonard Schaeffer: Americans are reaching a point where they'll no longer compare
health insurance providers with other health insurance providers; they'll compare them
with the likes of Yahoo! and Amazon. And that's where we have to go. The issue is no
longer how accurate you are—we need to make processing a claim or getting health care
information as easy as buying a book on Amazon.

As an example, take Netflix, the company that lets you rent DVDs online and sends them
to you in the mail. It's a brilliant business model—high-tech front end, antique back
end—and it works perfectly. We need that kind of innovation in health care, but it's very
hard to come by because it's so complicated in our current environment. 7

The Quarterly: It sounds as though health care CEOs and CIOs should be looking to
other industries for inspiration.

 Experts familiar with MedEncentive marvel at how we made a very complicated issue (pay-for-
performance) seem relatively simple.

Leonard Schaeffer: Yes, we need to look outside, not inside. Simply building on what we
have won't get us where we need to be. But this environment is so complex that if you
don't have the technical knowledge, you're dead in the water.

I believe that smart third parties from outside the industry will take away a lot of the IT
stuff from health insurers, hospitals, and doctors—and will do a better job of it. Some
clever people will pull the pieces together and have it all make sense.8 You know,
Amazon's business model isn't brilliant, but its service is exceptional. My wife likes
Amazon because it's easy and it speaks to her. It tells her about new books and greets her
by name. Why isn't there a medical system that says, "Hello, Mr. Schaeffer"? We need
the opposite of "You've got high blood pressure; lose 30 pounds." That just isn't very
friendly or persuasive. There must be some way to say, "We understand your problem.
We want to help you. How can we do so?" The models will change; there will be new
opportunities in wellness and preventive care for us and the other players. The challenge
for current health care providers is to get there before an outside third party does.

It's the same for all of the administrative stuff: someone smart will come in with better
processes. For example, "one-write" systems—take the patient's name once and never ask
for it again. Every time I go to the doctor, I have to write down everything all over again,
even though nothing's changed. I've got my insurance card in my wallet; it's got my
name, address, and telephone number. I have to pull the card out to find the ID number
the doctor's office wants me to write down. Then, after I'm done, they ask me for the card
and they photocopy it!

If you have a health savings account, you ought to have a credit or debit card linked to it
so you can pay directly for health services. Real-time bill resolution, no accounts
receivables—the kinds of things that are already routine in many other industries—
should be routine in health care. And they'll need to be packaged in a nonthreatening,
user-friendly way.

We insurers can see the opportunities, but when we offer solutions we're at a
disadvantage relative to some third parties. For one thing, many doctors don't trust us. 9
Then there's the simple matter of expertise. If you have a health savings account with
$5,000 of your own money, do you want Blue Cross of California or Fidelity to manage

The future opportunities are huge. By combining smarter, IT-literate consumers and
doctors with new, aggregated information, we have the potential to make a real
improvement in health status and health care in the United States. I just hope that those of
us in the insurance and provider worlds can retool our systems and processes to beat
outsiders to the punch.

  Many experts view MedEncentive as an “outside of the industry mainstream” organization and credit this
for our “out-of-the-box” solutions - solutions which we are proving work.
  Another comment by Mr. Schaeffer which supports the viability of MedEncentive’s business model.


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