Exploring Human Potential

Optum-izing Paul Ellwood’s HMOs.

Posted on | October 16, 2018 | Comments Off on Optum-izing Paul Ellwood’s HMOs.


Paul Ellwood and Richard Burke

Mike Magee

According to Paul Ellwood, often labeled “The Father of the HMO”, the seeds of the Agency for Healthcare Research and Quality (AHRQ) were buried in a report that he delivered to the 34-year-old Assistant Secretary of Health, Phil Lee, in 1969.  As Ellwood recalled in 2010, “the emphasis there was on accountability for health care along with evaluating various structural and incentive arrangements for organizing health systems.”

Paul and his Minnesota based associates referred to themselves as “medical ecologists” and realized that health reform in the U.S. would “require a huge cultural shift.” What really stroked their interest was “the notion of measuring health outcomes as a means of determining who and what was effective.”

Ellwood in those early days was both optimistic and naive. In the early 1970’s, he had triggered the formation of an HMO and associated Independent Practice Association (IPA) with the local Minneapolis and St. Paul Medical Society – “a pioneering venture where individual private physicians shared risk and responsibility for the cost and quality of care for a population.”

When the leader of the new venture couldn’t persuade a wayward doctor to address his patients’ excessive length of stay, Ellwood sent over a 32-year-old staff member with “insurance expertise” to correct the problem. The messenger, Richard Burke, was hired, and “undiplomatically kicked the offending physician out of the plan.”

All hell broke loose, but not to worry. Richard Burke went on to start a little venture called Charter Med, a physician practice managed by insurers rather than physicians. A few years later, it was renamed United HealthCare.

While both Ellwood and Burke agreed that measurement could help direct outcomes, Ellwood envisioned a physician dominated system focused on clinical performance, while Burke concentrated on a business directed enterprise where cost-effective choices and and supply chain management fees could lead rapidly to outsized profitability.

For Burke, knowledge was power, but not quite the kind of power his former boss had envisioned. As the new information technology age was just beginning to reveal itself, Burke arguably was the first to realize that mining patient and provider data could be a gold mine. By 1984, he took the company private, and four years later retired – but not before launching Diversified Pharmaceuticals Inc, the first ever pharmacy benefits management firm (PBM).

Burke has remained involved as a strategic force for the company he started. He has been a Non Executive Director of parent company UnitedHealth Group Incorporated since 1977 and has been its Lead Director since September 1, 2017. And insurer United Healthcare has a new sibling, the healthcare IT company called Optum. When it first appeared, analysts thought it would be a future spin-off, instead it is rapidly becoming the center of the United Health Group Universe.

Optum accounted for 44% of UnitedHealth Group’s profits in 2017 ($6.7 billion on $83.8 billion in revenue), and includes data analytics, a PBM, a growing doctor groups in urgent care, primary care and surgical care, chronic care management and behavioral health. Formal Labels: OptumLabs (research), OptumIQ (data analytics), Optum360 (revenue cycle management), OptumBank (health savings account) and OptumCare (care delivery services).

Data management and skimming profits has been especially effective for OptumRx, their newest PBM. In 2017, it generated $64 billion in revenue by fulfilling 1.3 billion prescriptions. Their direct care arm, OptumHealth, is also on a steep upswing, from 60 million patients in 2011 to 91 million in 2017.

Money focused analysts like Burke’s vision of American health care a lot more than Paul Ellwood’s original schemes. Ellwood still holds on to his optimistic (and some would say naive) vision. In a 2010 interview, he reflected, “IT based care should emphasize openness, collaboration with largely free apps based on solid science.”

But Optum is as proprietary as it gets, and as one analyst noted, “…many of their competitors are now mimicking their strategy by trying to buy into some of the same capabilities.” (That would be you, vertical integrators CVS/Aetna and Cigna/ExpressScripts).

The reality is quite stark, if you can believe where OptumLabs has focused its’ energy. It’s still on data and disruption, as it was for Richard Burke in 1976, but faster, smarter, and more profitable – for them, not for you. Here are their three major concentrations:

1.  Machine learning.

2. Artificial Intelligence (AI)

3. Natural Language Processing.


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