Scott MacStravic

The allure of cost savings from proactive health care has given rise to a new way of thinking about healthcare prices and payment.

At a Glance

Now that proactive health services are increasingly being paid for by third parties, entirely new bases for and kinds of pricing are being practiced. New options becoming common include:

  • Pay-for-performance bonuses
  • Bonuses based on achieving disease-specific or risk-specific outcomes
  • Gainsharing arrangements

For decades, hospital prices have been fictions. Prices hospitals have charged have had little relationship to the hospitals' costs and too often have seemed outrageous to patients, who may find themselves being charged many times more than they would pay themselves for simple items such as aspirin or tissue. And because hospitals' charges are less than their costs for some services, and more than their costs for others, hospitals have encouraged competitors to cherry-pick those services that are consistently profitable, while general full-service hospitals struggle to maintain an adequate margin.

Another characteristic of traditional hospital pricing is that it has focused on "reactive" care-care intended to detect and treat or cure acute conditions, plus the crises, complications, and worsening of chronic conditions that were not prevented. Reactive care represents the vast majority of our health system expenditures.

Questions of how much reactive care is worth, to individuals and to society, often have been discussed in terms of the worth of human life, of "quality life years added," and similar benefits. No such calculations or estimates have been widely accepted by payers, so the current payer-dominated, "barely-squeeze-by" levels paid to providers have become dominant. A few hundred hospitals have sought alternative pricing through products and services sold directly to consumers. And a few hundred physicians have sought the same through retainer or cash-only practices, usually aimed at the affluent minority willing to pay premium prices for premium service.

Approaches to Proactive Care Payment

Unlike most reactive care, proactive care offers the possibility of not only improved health, but also cost savings for the overall health system. Therefore, proactive care has been at the heart of innovations in pricing and payment.

Proactive care includes all medical interventions intended to precede and minimize, mitigate, delay, or avoid altogether some kind of future more expensive and severe medical interventions. Examples include health promotion, health risk behavior or risk condition management, and disease management.

Like reactive care, proactive care is sometimes priced for sale directly to consumers. Hundreds of hospitals and many physicians offer proactive "executive health" or "health vacation/medical spa" programs, mainly to affluent executives whose employers often foot the bill, or to wealthy individuals willing to pay out-of-pocket. Hundreds of hospitals offer medical fitness center programs, usually at prices affordable to the average person, though add-ons for personal trainers and coaches can get expensive.

But when proactive services are aimed at and paid for by third parties-employers, commercial insurers, and government programs such as Medicaid and Medicare-entirely new bases for and kinds of pricing have become available and practiced. Traditional fee-for-service and payer-dictated examples exist, but far more common are the new options:

  • "Pay-for-performance" bonuses based on how well providers adhere to established guidelines for proactive care-for doing the "right" proactive things, such as asking patients if they smoke and advising them to quit if they do, and regularly checking blood pressure, sugar, and cholesterol levels.
  • Similar bonuses based on achieving disease-specific or risk-specific outcomes, particularly those related to payers' expenditures. These bonuses may be based on measures such as how many patients a provider has gotten to quit smoking and verified their abstinence, whether or not it has reduced the costs of treating patients below some predetermined level.
  • Gainsharing arrangements, under which payers, primarily the Centers for Medicare and Medicaid Services, have agreed to share their savings from proactive care management efforts by payers, and pay them no bonus at all if they do not achieve minimal savings.

What all these methods share is an entirely new basis for setting prices: not on how much life or cures are worth to consumers or society, but on how much payers are willing to share of how much they save from proactive interventions.

Balancing Payment and Savings

This approach has a far more severe upper pricing and payment limit than for reactive care. Consider the millions that providers have spent and insurers have paid for reactive care for individual infants in the neonatal intensive care unit, single cases of life-threatening cancer treatments, and catastrophically injured individuals. That level of expenditure does not seem to be contemplated for proactive care.

Even if proactive interventions were to reduce the incidence of NICU preemies, for example, and save millions in the process, the interventions would have to be spent on hundreds or thousands of patients to avoid one million-dollar case. Hence, the amount spent per individual would be dramatically less than the amount spent as a whole. If 1,000 patients must be proactively "treated" to prevent one million-dollar preemie case, then the payment for each patient treated cannot be more than $1,000, or else there will be no ROI.
Because proactive interventions often have to be aimed at large numbers to have the desired impact on small numbers, investments in each intervention, and in each of the four categories of proactive interventions, tend to vary greatly by risk or disease-and by the probability that the people to be addressed will repay the effort put into their proactive care by changing their behaviors appropriately and profitably for payers.

The vast majority of proactive interventions are currently being aimed at disease management patients. These include case/care management efforts aimed at acute patients already in reactive care to improve quality and minimize unnecessary or overly expensive testing and treatment. But more is being spent on proactive chronic disease management cases, aiming to prevent crises, complications, and worsening thereof. This is where the most money can be saved most quickly, and most payers are focused on short-term savings, typically those that will be enjoyed within the same year as their investments are made.

For example, CMS demonstration projects with large physician groups and integrated systems require contracting providers to treat their patients at costs at least 2 percent lower than the projected costs for such patients assuming traditional reactive care, rather than proactive disease management. If providers do not save at least 2 percent, no payment whatsoever will be made to the providers. But if providers save more than 2 percent, CMS will share 80 percent of those additional savings with the providers who made them possible, while keeping only 20 percent itself.

It is generally believed that disease management aimed at congestive heart patients can save 30 percent to 50 percent of the costs of unmanaged care, so providers using this approach for patients with congestive heart failure may be sharing in tens of thousands of dollars saved per patient per year. With diabetes, savings are more likely to be in the range of 10 percent to 20 percent; asthma patients may yield only 5 percent to 10 percent because their management involves increasing their compliance with using expensive medications, even as costs for emergency department visits decline, for example.

The percentage of savings possible, the likelihood of achieving such savings given the varying levels of cooperation expected among patients, and the costs of achieving such cooperation, along with costs of medical interventions, all will determine how much there is to share with providers, and whether the gainsharing approach or negotiated price will cover providers' costs. Hence, this combination will determine which providers will participate in which disease management programs with which patients.

Rather than upper limits being based on how much patients and society gain from reactive care, the upper limits on proactive care payments will be based on how much payers save. For this reason, providers will have to be careful of which diseases and patients they accept responsibility for, and which payers they deal with. And the unresponsiveness of individual patients to proactive provider efforts may provide a new reason for removing patients from proactive health programs if it costs more in time and effort to achieve a meaningful response than that response is worth to a payer (D. Willis & A. Zerr, "Terminating a Patient,", Sept. 20, 2005).

Payer Prospects

Which payers are most likely to pay the price for proactive care?

Employers. Employers may be the most promising prospects, because they usually have the most to save from proactive interventions. Employees' and dependents' health affects employers' short- and long-term disability and workers compensation insurance costs, as well as their health insurance costs; therefore, they can gain much more from proactive care than can insurers. And because employers also gain in reduced labor costs through results such as reductions in absenteeism, presenteeism, and turnover, as well as improved morale, they may realize cost savings that are many times the amounts they save in health insurance alone.

Medicaid. Medicaid may have significant savings potential in prenatal care for mothers and in proactive child health and development care for children, for example. However, given that the average tenure for Medicaid beneficiaries is a matter of a few months, the period in which savings must occur for Medicaid to enjoy such savings is brief. Only the highest-risk patients with the most likelihood of avoiding the highest expenditures in the nearest future may be good prospects.

Medicare. Medicare, by contrast, at least for beneficiaries in fee-for-service coverage, can afford to take a longer-term perspective of ROI. Medicare life expectancy, and hence coverage risk, is a decade or two on average. Medicare could theoretically afford to devote investments to not just disease management, but also health risk or predisease conditions, even health risk behaviors and health promotion. Medicare already covers smoking cessation programs, for example, though only for beneficiaries with smoking-related conditions. Medicare tends to focus far more on disease management, because chronic conditions are much more common and expensive among the elderly.

Commercial payers. Commercial insurance probably has the least to save overall, but may have significant savings potential for at-risk members. CHF patients covered under commercial plans can probably produce savings that are at least close to those available in Medicare. The same is likely true for diabetes and asthma, and a large proportion of asthma patients are children, where dramatic savings may be achieved.

Also, commercial insurance companies are already heavily involved in, and increasing their investments in, Medicare1Choice managed care coverage of Medicare beneficiaries, now that they are out from under their former prescription drug risks. Although there may be fewer unhealthy members in such coverage than in fee-for-service Medicare, there will certainly be plenty of patients with chronic conditions and, therefore, plenty of potential savings to be shared with providers who can perform well in disease management.

What the Future May Hold

Whether any of these payers will be willing to share enough, and providers able to save enough, to make proactive interventions feasible for providers is in the process of being discovered. Unfortunately, payers tend to deal with proactive medical care the same way they do reactive care-that is, as if there is one best practice, as if it can be studied as a standard "treatment" whose costs can be compared with its savings.

But disease management, health risk condition management, health risk behavior management, and health promotion are all highly variable concepts, rather than uniform treatments, even when they are focused on identical diseases, conditions, risks, or health status metrics. There are no proven best practices, no evidence-based-medicine guidelines and protocols that all providers should follow. We are still in the early experimental stages of proactive care and have years to go before we have the evidence.

So providers will have to make a case for proactive care when approaching payers. Providers may have to guarantee a certain savings or take a risk/reward pricing option. For proactive care offered on a retail basis to consumers, providers will continue to enjoy market options, including take-it-or-leave-it prices, negotiated prices, or tiered pricing for different levels of support or different conditions. However, with payers, they will have to cope with an upper limit on payer willingness to share, as well as on what will be shared. And providers constantly will have to adjust their intervention methods and costs to fit within both.

Scott MacStravic, PhD, is semiretired after a 42-year career as a healthcare strategy and marketing executive, professor, consultant, and writer. He lives in Port Ludlow, Wash. (

Categories of Proactive Care

  • Health/wellness/fitness promotion and preservation for people who are already normally healthy but want to be more so. This approach can:
    • Increase resistance to disease and injury
    • Reduce the time, effort, and expense when participants have to be treated for either
    • Help participants to avoid or reduce negative side effects of treatment, as with cancer therapies
    • Reduce the risks and side effects of normal life stages and events, from pregnancy to childbirth to childhood, adolescence, adulthood, menopause, aging, and end of life
  • Health risk behavior management, including preventing people from adopting such behaviors, getting them to quit, enabling them to modify the behaviors to healthier alternatives, and dealing with relapses
  • Health risk condition management, including using immunizations and other total prevention treatments, as well as medications, behavior changes, and so on to prevent, control, or reverse conditions such as overweight/obesity, lack of fitness, prediabetes, prehypertension, high cholesterol
  • Chronic disease management, intended to prevent, delay, or minimize crises, complications, and worsening of existing conditions, even "reversing" them through combinations of surgery, medical care, medications, and lifestyle changes

Publication Date: Thursday, October 01, 2009

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead