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What’s the ROInfo in MCOs?

April 1, 1998
by Kathleen Kimball-Baker
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CAN ANYONE TELL what the return on information is in managed care organizations?

"Too soonto say," caution some observers.

"Too hardto say," declare others.

"Too busy to say," respond the media-hounded.

"No comment," retort a few.

"I wouldn’t believe an answer if I got one," snarl the skeptics.

Still, healthcare organizations are expected to plow more than $13 billion into information technology this year, and the question isn’t going away, no matter how much squirming precedes the answer. Especially on Wall Street, where investors would like to see IT in certain organizations flat out work.

Wall Street was much displeased last year with such IT woes as bungled claims processing and the snail-slow union of the disparate computer systems of newlywed organizations. A scan of stock market reports on IT-challenged managed care organizations (MCOs) turns up advice like "only for the risk-tolerant," "stay on the sidelines," "look elsewhere" and worst of all, "avoid this issue." On the flip side, publicly traded MCOs that proved their IT mettle earned such plaudits as "an attractive issue for those investors with a 3- to 5-year horizon" and "offers strong price appreciation potential."

Wall Street, of course, can only speak to the for-profit world of managed care, but in the less financier-beleagured land of nonprofits, the ROI question is just as valid. Why is that? In a word: competition. Explains Cynthia Burghard, research director in managed care service for GartnerGroup: The IT-wise managed care organization of the future, be it for- or not-for-profit, will be able to "deliver the right information to the right people at the right time."

Simple, yes. Easy, no. Getting from A to Z for many MCOs is going to require--ironically--more IT investment.

’Show me the money--first’

IT underspending is catching up with many organizations, says Burghard. "In the past, as long as you kept enrolling people, you were okay. But the rush of volume from indemnity plans to managed care has slowed down." Apparently, that’s hurting competition enough to shift outlay priorities. In a recent survey of health maintenance organizations, GartnerGroup discovered what Burghard called a "dramatic rise" in spending for information technology. Between 1996 and 1997, the per-member, per-month dollars associated with IT operations rose from $2.66 to $3.00. "That’s the biggest jump we’ve seen in the last five to six years," says Burghard.

Wall Street appears to smile on those organizations that both articulate they’ll use IT for a competitive advantage and can back it up with a little history. Case in point, Minnesota-based MCO goliath United HealthCare. "United is definitely one organization that has separated itself from the pack, in many ways based on its IT focus," notes analyst Ray Falci, managing director of Bear Stearns Healthcare Information Systems in New York.

United HealthCare became IT-literate when most of the industry was still struggling to memorize the managed care alphabet. "United was one of the earliest to identify IT as a focal point" says Falci--and one of the earliest to pump funding into infrastructure and innovation. Dogged commitment to researching needs and testing applications before rolling them out has enabled United to realize what Falci calls "incremental benefits" from IT. Incremental meaning good enough to sustain ongoing investment.

United offers many examples of thought-filled rollout, one of which was its consumer-friendly Optum Online. After two years of talking to patients, physicians and plan managers about information needs, forecasting usage, and testing applications, United in 1996 launched the Web-based nurseline and call center. Return on investment: a savings of $4.50 for each dollar invested in the digital dialogue over a two-year period.

Not that United HealthCare hasn’t had its fair share of financial trouble--and Wall Street rebuffs. After acquiring MetraHealth Companies Inc. in 1995 for $2.3 billion, United faced the same merger migraines that many other peer-gobbling MCOs suffer. Ultimately, United’s stock took a hit, making investors wonder if this MCO leader was a bellwether of the entire for-profit managed care portfolio.

It was. And it still appears to be. Today United has spun around its financial picture--reporting fourth quarter earnings in 1997 of $3.1 billion, reversing earlier disappointments, raising the price of shares, and delivering dividends of $0.03 per share in February. What changed? United HealthCare had the digital data and computing capacity to understand its costs and project its expenses, an elegantly simple formula that has eluded many of the competitors. United also hiked premiums--a trend other MCOs are tapping as well; a fact that Wall Street likes.

’Ask me later--when we get our IT act together’

At The McGraw-Hill Companies’ Standard & Poor’s ratings division, "We’ve got a cautiously optimistic point of view," reports Jeffrey Cohen, associate director of insurance ratings. "1998 looks better. The industry is rebounding. There’s a lot of cleanup following the merger and acquisition problems of the last few years. We’re looking for more profitable results in 1998."

To be sure, cleanup is under way at Oxford Health Plans in Norwick, Conn., where stock prices plummeted when a botched claims processing conversion drained cash reserves and depleted earnings. But it’s also in the works for other Wall Street-watched MCOs like PacificCare, in the throes of integrating acquiree FHP, Inc.; Aetna, Inc. following its purchase of US Healthcare and subsequent creation of the new entity Aetna US HealthCare; and Humana Inc., working to integrate its buy: Physicians Corp. of America.

But do other MCOs without United HealthCare’s legacy of systems success have a prayer of bolstering their competitive edge via IT? Yes, say industry observers--if. That is, if they make their systems simpatico, if they plug into ensuing efficiencies, if they balance innovation with discipline, if they consider their costs and if they render quality. They’ll certainly need to learn from their own mistakes as well as others’.

So then, if you buy the signs that managed care has learned some important lessons and is shifting into an era of higher IT spending, the question remains: Will the money be spent wisely? In others words, will CIOs be able to ante up the answer to the ROI question?

’No, no, I insist’

To those who demur from divulging a return on information, Anthem, Inc.’s CIO Cecilia Claudio could rightfully say "phooey." Instead, the polite Portuguese IT expert agrees that "a little bit of a cop-out" is the fitting phrase.

A staunch believer in blending IT savvy with business acumen, Claudio is about as frank and forthcoming as they come when asked the ROI question. CEOs, she says, deserve nothing less from their CIOs. "CIOs who are part of the senior management team are no longer limited to being technology gurus. They must be very good general managers with very broad skills in financial management," she explains.

Indiana-based Anthem, Inc., the merger of Blue Cross Blue Shield plans from four states (Kentucky, Ohio, Connecticut and Indiana), is not on the stock market tape. Rather, the $6 billion mutual insurance company is owned by its policy holders.

When Claudio became CIO, she faced a challenge all too familiar to many of her for-profit peers. "I took a broad-based look at how IT was positioned in the organization and recognized the operating model of decentralized IT, a model that usually contributes to higher costs." Claudio brought before the senior management team, of which she is a part, a "picture of how much was being spent on the current model versus how a centralized model presented ways of decreasing expenditures." She could back up her "picture" with numbers that demonstrated a 50 percent reduction in IT costs over the next three years, with a savings of more than $100 million. They restructured.

’Now we’re talking’

Granted, administrative savings are one thing; what about the clinical side?

At most, the administrative slice of the total healthcare spending pie amounts to 12 percent, says GartnerGroup’s Cynthia Burghard. That leaves a whopper segment in need of well-conceived IT innovation. It’s also arguably a harder place to quantify ROI, given that human transactions can’t be calculated the same way banking transactions are. But ask most any healthcare observer from Wall Street to Waikiki and you’ll hear the same thing: What needs fixing next is what happens between doctors and patients.

"The number one thing a wise MCO can do is facilitate the doctor having appropriate contact with the patient," says long-time industry watcher Sheldon I. Dorenfest, president of the Chicago-based consulting firm bearing his name. Another healthcare information longtimer, former United HealthCare CIO-turned-entrepreneur Jim Bradley, agrees. "The next innovation is connecting physicians to the people at risk and the reinvolvement of patients, patients who will become better consumers," says Bradley, president of Minneapolis-based Abaton.com, which makes Web-based software linking doctors to pharmacies, pharmacy benefit management companies and laboratories.

From the doctor’s perspective, says Bradley, real-time connectivity is the ticket to better life--literally. For doctors, it’s having the information they need when they need it and where they need it, a set-up that improves their practice and keeps patients healthier and happier. Sound familiar? For patients, it’s access to information and affordable care when and where they need it.

"Innovative medical management activities are looking at real-time information practices. The biggest need right now is at the point of care," where doctors and their patients make decisions, says Burghard. A spokesperson from PacificCare, for example, says the MCO has squeezed the wait time for referral to a specialist from two weeks to 24 hours because it had the digital data to learn it was taking too long in the first place. Harvard Pilgrim Health Plan’s VP of Information Technology and CIO Debra Speight says her Brookline, Mass.-based organization "has saved millions" by giving its nurse case managers better automated access to information.

Equally important is the ability for MCOs to stratify patient populations according to risk--keeping healthy people well and zeroing in on those who need help now or soon. The focus is changing to a "continuum of care" model, says Burghard. Standard & Poor’s Cohen says "cutting edge" innovators in managed care will be able to use the IT infrastructure to keep their members from getting sick and to spot the ones becoming or at high risk (some might say high-cost, high-maintenance) and connect them to the appropriate care provider. Pie in the sky?

A stroll through the healthcare IT industry’s "main event," the annual HIMSS conference and exposition, might convince the casual observer that the industry has already won the pie. But "peel away" the surface, says Burghard, and you’ll find many of the products hawked don’t have much substance. Some of the leading managed care organizations do have a range of innovative techno-products, she says, "but none have enough history to say they’ll work." Nurse triage and call centers, a low-tech option, may be the exception, she adds.

’It’s a secret’--or is it?

Then again, maybe some managed care organizations are working quietly, spending on solid IT rather than stellar marketing. Anthem’s Claudio says her MCO uses its data warehouse to "actively influence the health of members." Anthem looks at medical encounter information from claims, sleuthing for patients who may be headed for dangerous drug interactions or who need special intervention, like people with asthma or diabetes. Then it alerts them via mail, phone or their doctors when they need a test, visit or medication refill. "Providers may not have all the history on a patient," says Claudio, so Anthem works to fill in the blanks from its behemoth bank of data.

The better MCOs get at mastering that task--targeting IT investment on behalf of the health of their patients--the better able they’ll be to compete and survive the rigors ahead. Those, according to analysts, include the continued migration of older--often sicker, often costlier--patients (Medicare) to managed care plans and continuing merger mania.

"When you look at the future state of healthcare," says Claudio, "after all the mergers and consolidations, there are probably going to be five or six organizations left. One of them is likely to be a Blue plan. We’d like to be that one."

Says Bear Stearns’ Falci: "Ten years from now, all this is going to look like a bump in the road of normal growth for any industry."

Maybe by then the ROI question will produce real numbers, not the real nebulous.


Will Wall Street Wait?

LIKE IT OR NOT, MOST MANAGED CARE is commercial and is likely to stay that way a while. Profits matter. As does the quarterly report.

Given that IT looks to be a place where healthcare needs to spend money to make money, the inevitable worry arises: Will Wall Street be patient while managed care organizations figure out who they are, what they can do and how they can strike the delicate balance needed?

Says Ray Falci, managing director of Bear Stearns healthcare information systems in New York: "Yeah. Of course, it hasn’t been exactly patient with Oxford." But investors know that building and using an IT infrastructure takes time. You can’t realize efficiencies and economies of scale "just by a push of a button," says Cynthia Burghard, research director for managed care service at GartnerGroup. "There are expenses associated." And time.

"This is a multi-year process" says Falci. If investors are looking for a return in the first 12 to 18 months, they’re going to be disappointed.

One example of IT and financial rebound is the Louisville Ky.-based MCO giant Humana, Inc.

"When the news hit the tape in 1996 that Humana’s utilization costs were going up faster than they had forecasted, faster than their system could recognize the trend, that the lack of IT infrastructure hurt their ability to forecast, the stock got as low as 16," he said. "But then during the 18-month period that followed, the stock steadily improved." After shoring up IT, Humana has been able to raise its premiums for 1997 business, is growing enrollment, and is expected to post positive quarterly comparisons in 1998.

Will the same trend touch other publicly traded MCOs? As one Wall Street watcher put it: "Wait and see."

--K.K.B.


Kathleen Kimball-Baker is a Minneapolis-based healthcare writer.



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