Leonard Schaeffer - The 2nd Most Important Person in Healthcare

This video provides an in-depth exploration of the profound impact of specific individuals on the structure and evolution of the American healthcare system, focusing on Leonard Schaeffer, dubbed "the second most important person in healthcare." Dr. Eric Bricker, the speaker, traces Schaeffer's career from his early government roles to his pivotal leadership in the private sector, demonstrating how his actions directly shaped major healthcare institutions and policies that persist today. The core argument is that the current state of healthcare, particularly the prevalence of managed care, prior authorizations, and service denials, is not accidental but rather the result of deliberate decisions made by influential figures like Schaeffer.

The video details Schaeffer's transformative role at Blue Cross of California, which in 1986 was a struggling non-profit. Schaeffer ingeniously created a for-profit subsidiary that eventually acquired the parent company, took it public as WellPoint, and grew its value from $10 million to $60 billion before merging with Anthem to form the second-largest health insurance company in America. Prior to this, Schaeffer had a significant career in government, notably under President Jimmy Carter, where he was responsible for merging Medicare and Medicaid into a single agency called the Health Care Financing Administration (HCFA), which later became the Centers for Medicare and Medicaid Services (CMS). This highlights his influence on both the private payer and public regulatory sides of healthcare.

Furthermore, the narrative connects Schaeffer to the origins of the largest health insurance company, United Health Group. After his government tenure, Schaeffer became CEO of Group Health, one of America's first HMOs, where he worked with Dr. Paul Ellwood, who coined the term "Health Maintenance Organization." Ellwood also collaborated with Richard T. Burke, the founder of United Health Group, at another HMO called Physicians Health Plan (PHP). This shared "HMO lineage" underscores the interconnectedness of key figures who laid the groundwork for modern managed care. Dr. Bricker emphasizes that understanding these historical developments and the specific actions of individuals is crucial for comprehending why the healthcare system operates as it does today, particularly concerning the widespread implementation of managed care practices.

Key Takeaways:

• Individual Impact on Healthcare Architecture: The video powerfully illustrates how specific, highly capable individuals like Leonard Schaeffer have profoundly shaped the fundamental structure of the US healthcare system, from major insurance companies to government regulatory bodies. The current state of healthcare is a direct consequence of their strategic decisions and organizational efforts.
• Evolution of Major Health Insurance Payers: Leonard Schaeffer's leadership was instrumental in transforming a struggling non-profit, Blue Cross of California, into a multi-billion-dollar for-profit entity, WellPoint, which subsequently merged to form Anthem, the second-largest health insurance company in the US. This demonstrates a critical shift in the payer landscape.
• Creation of CMS: Schaeffer is credited with merging Medicare and Medicaid in the late 1970s to form the Health Care Financing Administration (HCFA), which later evolved into the Centers for Medicare and Medicaid Services (CMS). This highlights his foundational role in establishing a key government agency that significantly impacts healthcare policy, reimbursement, and regulation.
• Historical Roots of Managed Care: The video traces the origins of managed care, prior authorizations, and service denials back to the early days of Health Maintenance Organizations (HMOs) in the 1950s and 1980s. Understanding this history is vital for comprehending the operational mechanisms and challenges within today's healthcare system.
• Interconnectedness of Healthcare Leaders: A significant "coincidence" is highlighted: Schaeffer's work with Dr. Paul Ellwood (who coined "HMO") at Group Health, and Ellwood's simultaneous collaboration with Richard T. Burke (founder of United Health Group) at Physicians Health Plan. This reveals a shared intellectual and operational lineage among the architects of the largest health insurance companies.
• Strategic Transformation of Non-Profits: Schaeffer's method of creating a for-profit subsidiary within a non-profit to raise capital and eventually acquire the parent company offers a historical case study in strategic financial restructuring within the healthcare sector.
• The "Why" Behind Current Healthcare Practices: The speaker argues that understanding the historical context and the specific actions of individuals is essential to grasp "why" healthcare is structured the way it is today, rather than perceiving its complexities as random occurrences. This perspective is crucial for any entity operating within or seeking to innovate in the healthcare space.
• Influence on Commercial Operations: The historical development of managed care and prior authorizations, directly linked to figures like Schaeffer, profoundly impacts commercial operations for pharmaceutical and life sciences companies, influencing market access, reimbursement strategies, and patient engagement.
• Regulatory Landscape Context: Knowledge of CMS's origins and its foundational figures provides invaluable context for companies navigating regulatory compliance, especially those dealing with Medicare and Medicaid programs.

Key Concepts:

• Health Maintenance Organization (HMO): A type of managed care health insurance plan that provides health care services through a network of providers, often emphasizing preventative care and requiring referrals for specialists.
• Managed Care: A system of healthcare delivery that aims to control costs by managing the access to and quality of healthcare services, often involving pre-approvals, network restrictions, and utilization reviews.
• Prior Authorization: A requirement from a health insurance company that a healthcare provider obtain approval before performing a service or prescribing a medication for it to be covered.
• Denial of Services: When a health insurance company refuses to cover a medical service or prescription, often due to lack of prior authorization or deeming it not medically necessary.
• HCFA (Health Care Financing Administration): The predecessor agency to CMS, responsible for administering Medicare and Medicaid programs.
• CMS (Centers for Medicare and Medicaid Services): A federal agency within the United States Department of Health and Human Services that administers the Medicare program and works with state governments to administer Medicaid, the Children's Health Insurance Program (CHIP), and health insurance portability standards.
• IPO (Initial Public Offering): The process of offering shares of a private corporation to the public in a new stock issuance.

Examples/Case Studies:

• Blue Cross of California / WellPoint / Anthem: Leonard Schaeffer transformed the struggling non-profit Blue Cross of California into a for-profit entity, WellPoint, through a strategic subsidiary acquisition and IPO, eventually merging with Anthem to become the second-largest health insurer.
• Medicare and Medicaid Merger: Schaeffer was responsible for merging these two separate government programs into the Health Care Financing Administration (HCFA), which later became CMS.
• Group Health (Minneapolis): One of the first HMOs in America, where Schaeffer served as CEO and worked with Dr. Paul Ellwood.
• Physicians Health Plan (PHP): Another early HMO in Minneapolis, where Dr. Paul Ellwood worked with Richard T. Burke, the founder of United Health Group.