I        HISTORICAL PROSPECTIVE OF MANAGED CARE

THE ORIGINATION OF THE MANAGED CARE CONCEPT

Pre-paid medical services as a concept is credited to the Kaiser-Permanente Medical Care Program who devised a health program to provide medical care to workers who (1) were working in hazardous jobs for Henry J. Kaiser and (2) who were working in areas where medical facilities were not available, or were inadequate.  This concept grew dramatically during World War II as Kaiser was engaged in ship-building with a concentration of workers in one location.  Because of the type of construction, there were a large number of injuries, particularly job-related.  Since there was inadequate medical care available near the shipyards, Kaiser hired doctors and built clinics hospitals for the employees.  This concept was not designed to alleviate or contain medical costs, but just to furnish medical care for employees.  By keeping the employees healthy, Kaiser considered their program very cost-effective as it resulted in more employees staying on the job.

The Kaiser-Permanente HMO, arising with a need for health care for workers during World War 11, is probably the most sensible competitive model developed to date.  It has evolved and became more flexible and by 1945 it subdivided into the Kaiser Foundation Health Plan, the Kaiser Foundation's Hospitals, and the Permanente medical groups.  Presently, Kaiser Permanente has approximately 6.9 million enrollees in multiple locations and in several states.  The organization of the individual medical groups vary with individual state requirements and a three-year probationary period for physicians is required to move from salaried to partnership status.  Observers credit the team relationships between individual physicians and subscribers to Kaiser's ability to consistently deliver high quality services for competitive prices.

H.M.O.’S AS A MODEL FOR REFORMING HEALTH CARE

 

A few revolutionaries risked the ostracism of organized medicine and developed the first "prepaid" group practices.  The Ross Loos groups in Los Angeles in 1929, Kaiser Permanente in the 1930s, Group Health Association in Washington, D.C., in 1935, and the Group Health Cooperative of Puget Sound in 1945 all demonstrated that cost-effective medicine could be provided in a new way.  Organized medicine continued to oppose such "corporate" practice of medicine and only agreed to take a neutral position in 1992.  One physician bucked the tide of medical obstruction and proposed in 1970 that the nation adopt a national "health maintenance strategy by promoting a health maintenance industry that is largely self-regulatory.”  Dr. Paul Ellwood, a soft-spoken but persuasive pediatrician, influenced Nixon-administration decision-makers and the HMO Act of 1973 was adopted.

Ellwood, Enthoven, and Starr, the author of Social Transformation of American Medicine in 1982 and Logic of Health-Care Reform in 1992, are often credited with the concept of reforming health care by using the HMO’s as a model.  They, and others, promoted the idea that certain organizational changes could permit the health care purchasing market to function like other markets and be what economists call "elastic.”  That is, prices fall in response to increased volume of services in most markets because of increased efficiency and a relative reduction in overhead costs.  The health market is considered inelastic because cost does not rise with increasing volume.  It sometimes increases as more expensive methods replace earlier, less expensive approaches (the result of rapid technology in medical care).

Many came to believe that the methods used by Health Maintenance Organizations (HMOs) could be the basis of health care reform.  They felt that the organizations could accomplish the goals of the obviously necessary health care reform, as HMOs are basically networks of groups of generalist physicians who refer patients to selected specialists when necessary, specialists are frequently paid on a salary basis, so that there is little incentive to recommend expensive procedures, and physicians are given a fixed amount of money annually for each patient.

And as they say, the rest is history.

EARLY INSURANCE REFORM

 

The state of Washington was the first state to institute Managed Care for uninsured residents.  Managed care techniques, including a cap on health insurance premiums, is the principal mechanism in controlling costs.  Taxes on cigarettes and alcoholic beverages are intended to raise an additional $478 million.  This reform program was hotly contested by the insurance companies and many medical organizations, and it passed by a majority of only three votes.  It is too early to tell whether the plan has been as successful as advertised.

Traditionally, hospitals, physicians, and insurance companies were independent and frequently competitive.  Physicians sought to take good care of their patients and be fairly reimbursed, hospitals wished to have a profitable year, even if they were called not-for-profit, and insurance companies wanted to pay their stockholders handsome returns.  Employees in large companies seemed content with their health insurance but the inability of smaller firms to provide health insurance began to increase.  Data collected in 1990 showed that 97 percent of firms with 1,000 workers offered health insurance to their employees, compared to only 36 percent of those with less than 25 workers.  On average, only 42 percent of these firms offered health insurance; people working for the other 58 percent of companies either paid their own way or had no insurance.

As the nation continued to move toward an ambitious approach to health care reform, a key issue was the relationship among various health care providers.  Health Maintenance Organization (HMO) was the name given to certain group practices but inevitably, (as discussed later) variations arose.  As an example, in one form of a network of physicians, insurers pick a limited number of health care providers and preferentially direct patients to them at a pre-negotiated rate which is usually lower than prevailing prices.  Patients must accept care within the network.  Although in some plans, they may "buy-out" for a specific service by paying a higher price for the service.  These organizations are called Preferred Provider Organizations (PPOs) (described in detail later in the text).  Many physicians, in contrast, decided to develop their own network of different individual practices in which they agree to negotiate collectively with insurance plans.  This variation is now called an Independent Practice Association (IPA). 

Although both of these network arrangements are technically HMOs, the term HMO was usually reserved for a group practicing under one roof - a staff-model HMO.  In each one of these models, the source of revenue - the insurance company - was linked with the care delivery organization to form an "integrated care system." 

Different networks developed different practice incentives.  Some networks were led by hospitals and others, often lumped together as professional health organizations, were controlled by physician groups.  A conflict developed between hospitals and physicians.  Because of their substantial capital investments, many hospital networks must either close beds or keep their beds filled in some manner.  Physicians networks, in contrast, often found it more profitable to reduce hospital utilization.  These integrated networks continued to function as health maintenance organizations and will evolve and can possibly be best able to blend affordable premiums with high-quality medicine.  Indeed, as these networks increasingly own there own ambulatory surgery centers, radiographic capability, and laboratory facilities, hospitals will become increasingly less necessary.

THE EFFECTS OF PRECURSORS OF DEATH

 

There has been, there presently is, and there will continue to be, debate regarding what causes death  - the ultimate health care problem.  After all, the avoidance of death is one of the primary, if not the total primary, reason for health care.  Recently there has been a lot of publicity about how tobacco causes the death of so many Americans, and the cost to the healthcare system.  Much of this is political because a lot of money is at stake and it is a great political football, but also because a lot of it is true.  A recent study illustrates just how healthy the Americans are, and what are the primary precursor (reasons) for premature deaths and how many days were spent in the hospital because of these precursors.

These statistics shows that 63 percent of premature deaths, 71% of potential years lost, and 29.9% of days in hospital for the major precursors could have been prevented.  During a the period of 1979 and 1985, prior to the most recent technological advances in medicine, deaths from coronary heart disease was reduced by 20%, stroke by 28%, cirrhosis of the liver by 21%, and cervical cancer by 18%.  However, deaths from two smoking-related diseases, lung cancer and emphysema increased by 17% and 35% respectively. 

 

How Healthy or How Sick Are Americans?

 

  Major Precursors of Premature Death (Amier and Eddins)

 

This vividly illustrates that there were significant problems in the providing of health care, as indicated by the number of deaths and hospital days as a result of gaps in screening and prevention, plus, to a lesser degree, some inadequate access to care. 

TRANSFORMATION OF THE HEALTH PURCHASING MARKETPLACE

 

In the 1990s, physicians and the AMA abandoned their unsuccessful resistance to group practice and agreed to support the Health Maintenance Organization (HMO) concept.  While HMOs had provided coverage for less than 10 percent of individuals in various geographic areas for many years, HMO enrollments greatly expanded in the 1980’s.  In some parts of the country, like Minneapolis and Northern California, HMO coverage exceeded 50 percent.  The $300-billion insurance industry saw important opportunities for cost containment and began to transform itself, and many companies allied with a variety of physician groups so that the payment or insurance function was linked to the physicians who provided individual care.  Insurance companies like Prudential, CIGNA,

Aetna, Metropolitan Life, Travelers and the nonprofit "Blue" plans evolved into HMOs and turned away from the more traditional indemnity type of insurance.

The purpose of a health insurance company is to sell insurance policies by keeping its premiums low.  The best way it has to control expenses is to reduce its policyholder use of health care services (utilization).  Conversely, health care providers want to give their patients the best and most of everything, under conditions convenient to the providers and thereby maximizing their patients’ welfare and to their own benefit.

The health purchasing marketplace had been transforming itself from the unstructured fee-for-service system of several years ago to one with varying amounts of what is generally called Managed Care.

Under the old open-ended system of "indemnity insurance, " physicians prescribed pretty much what they wished and the insurance company paid the bill.  Open-ended opportunities, with the consumers of health care relatively insensitive to costs because their employers paid their insurance premiums in pretax dollars, led to spiraling health care costs.  Managed care is the antithesis of unmanaged care or the present system - attempts to make certain that patients receive the care they need at an affordable price.  Unfortunately, the use of discounted fees and the employment of thousands of new people to watch the doctors at work - and additional hundreds to watch the watchers - have destabilized the health care system.  Several hundred insurers write insurance in most states and the paperwork they generate is so intense that most physicians and many nurses spend up to 30 percent of their time away from their patients completing forms.  Each insurance company seems to have its variety of forms to be completed.  They frequently have different fee schedules and they often use different techniques to "manage" physicians to keep their costs to a minimum.  American physicians have become so frustrated that many have indicated that they might accept a nationalized or Canadian-type system if it were accompanied by a predictable income and a major reduction in paperwork.

Socialized medicine, a frightening phrase to many physicians and one often used to defeat any new approach to health care policy, is quite simple in concept.  In socialized medicine, the central government budgets funds needed for health care.  All physicians and hospitals are paid at the same rate.  A central board defines the services available to each citizen.  The cost is paid from tax revenues so that there is little paperwork or billing effort required.  Opponents have often orchestrated campaigns against such alternatives, warning Americans about the long waiting lines and inadequate care of the British or Canadian systems, which are based on socialized medicine.  (See Foreign Health Plans)  Most experts agree that because Americans place such high value on “free choice” and rapid response in medical care, socialized medicine (or a “single-payer” system) will never be accepted politically.  Indeed, the death of the Clinton health care plan indicates that these assumptions are probably correct.

Critics charge that the American health care system was designed to be expensive so that those in control, such as physicians, hospitals, and insurers, could maximize their financial return.  They describe the system as a guild controlled mainly by the professionals providing services.  Unlike other guilds, however, there was a readily available source of funds to meet the self - determined requirements of members of the guild.  Buttressed by laws and regulatory mandates, this fee - for-service or indemnity system guaranteed free choice of physicians by patients and free choice of treatment by physicians. 

There is direct negotiation over fees between physician and patient with the third party payer-the readily available source of funds-excluded from the table.  Solo practitioners until recently dominated the scene, further inflating prices since controls on the kinds of consultants were not allowed.  Hospitals and employers were prohibited by state insurance regulations and by Title XVIII of the Social Security Act from contracting with health maintenance organizations or group practices; anti-trust legislation emphasized competition that kept physicians' fees steadily increasing.

 

DEFINITIONS OF MANAGED CARE

 

Because the costs of medical care rose so rapidly and dramatically, practically choking employee benefit plans, it became apparent that cost must be managed and at the same time, control the rising costs of medical care.  Therefore, medical care costs must be “Managed” and at the same time, the patients must continue to receive appropriate medical care.  The techniques developed to provide these services were proclaimed as “Managed Care.”  Or to put it another way, Managed Care is the system in which quality medical care can be delivered at a reasonable cost.

The term “Managed Care” is very often used to describe a structured health care system such as a Health Maintenance Organization, or a Preferred Provider Organization.  These two types of structured organizations are better known to the general public and receive the majority of the publicity.

Other programs that contain cost-management or cost-containment features, such as a “Wellness” program by an employer, can be constructed to be Managed Care even though technically there is no actual “care” involved. 

With the variations of health insurance programs today, such as Point of Service plans, Care Manager plans, etc., they are generally all considered as part of Managed Care.  Indeed, they were created to fill a particular void in the Managed Care technique system.

WHY MANAGED CARE?

 

The magic words “ Managed Care” seem to be mentioned at least daily in some fashion and usually in uncomplimentary terms.  It would be interesting to know how many television reporters and journalists actually know what that term means. 

To most people, it simply means an HMO that is taking away one of their precious rights, that of being able to choose their own doctors and hospitals.  Politicians use it frequently and in most cases, they are “against it”, regardless of the situation.

One statistic that gives them pause, is that in 1995 the average monthly premium of an HMO for a family was $447, while the average monthly premium for a family under a traditional health insurance plan (indemnity insurance) was $493, almost 10% lower.

Also, in the United States, Health-care expenditures rose an inflation-adjusted 1.9% in 1996, the slowest rate of growth in nearly four decades.  These figures were produced by a team of government researchers, and not from the Managed Care industry.

In late 1997 and early 1998, several newspapers and other publications reported the results of various studies, both government and private.  These newspaper and news magazine articles were a result of many anecdotal reports from unhappy HMO members for the most part. 

But the report, the broadest annual accounting of the nation's health costs, appeared during a period of time when there was growing concerns - especially among the nation's employers - that a rash of troubles in the Managed Care industry jeopardizes a five-year period in which medical bills were coming under control as a result of Managed Care. 

The journal “Health Affairs” found that the “total health-care tab in the U.S. topped $1 trillion for the first time in 1996, the latest year for which figures are available, despite the low rate of growth.  That amounted to 13.6% of the gross domestic product, a percentage that has remained steady since 1993.”

 

 

 

Regardless of what many construe to be a “Pollyannish” outlook, there continues to be increased friction between the public and private sectors as to who will bear most of the cost of anticipated growing medical inflation in the future.  It is very significant that these sources report that spending on publicly financed health-care services, including Medicare and Medicaid program, “rose at an annual average rate of 9.7% between 1989 and 1996, while private-sector spending, largely through employer-sponsored benefits plans, increased an average of just 5.8% a year over the same period.”

The big difference in the growth rates may narrow significantly or even reverse itself in the near future.  The new federal budget has provisions for Medicare costs to increase just 2.5% for each enrollee in 1998.  However, Medicare in particular is an extremely delicate political problem, so many Washington insiders see many changes before cost predictions can be used with any degree of accuracy.

Of primary importance to those in the health insurance industry, the fact is that we are now seeing increases above 5% in the private sector for the first time since the early 1990s.  The federal governments own employee health-care plan is reporting an increase averaging 8.5% for 1998.  Benefits consultants believe that large employers expect health costs to rise about 4% in 1998 and even more in 1999.  One important factor in these increases is a profit crunch at major managed-care companies.  This has caused some retirements, mergers and acquisitions among health care systems heavily involved in Managed Care.

During the 1990s, higher rates of Medicare spending gave providers "something of a safety cushion" as they lost income in the face of pressure from Managed Care.  However, since Medicare spending growth is slowing, health providers are trying to find ways to raise rates again in the private sector.  It can be expected that growth in overall expenditures, both in health care and in administration, may begin to rise.  A return to the double-digit increases of the 1980s is not expected.

It was also reported that national health expenditures in 1996 rose 4.4% before inflation to $1.04 trillion, or $3,759 a person.  In 1995, the nation spent $991.4 billion, or $3,633 for every American.

 

 

Credit for the declining growth rate was attributed to the growth of Managed Care, plus the fact that expensive hospital and doctor services are playing a smaller role in the health care economy.  Even though doctors and hospitals are still the predominant players in health care, it was reported that the combined share of national health-care spending allotted to doctors and hospitals fell to 54.1% in 1996 from 57.6% in 1990.

Prescription drugs muddy the statistics to some degree.  Costs for prescription drugs rose by 9.2% in 1996.  However, experts attribute a lot of this increase to 2 factors (1) managed-care plans have succeeded in reducing hospital stays, with the results that many patients are now getting drugs from their own pharmacy instead of getting them during the hospital stay, and (2) private insurance covered 45% of prescriptions filled in 1996 compared with 34% in 1990.  Indeed, a Prescription Drug Card is often taken for granted by those covered under private insurance.

Private health insurance premiums accounted for $337.1 billion of health expenditures in 1996, of which $316.4 billion came from employer-based health benefits programs.  Many companies have passed on an increasing share of health costs to the workers.  Employers paid 83.4% of the health insurance premiums, compared to 94.5% in 1990, a 1.1 percentage-point difference.  While 1.1% doesn’t sound like much, it actually shows a shift in employee cost of $3.6 billion in 1996 alone!

FOREIGN HEALTH PLANS

 

Most of the industrial nations have some type of government sponsored health care, in most cases, some form of socialized medicine.  In discussions of Managed Care, it is almost inevitable that the health care systems of others countries will be references and used by some as examples of how Managed Care should be accomplished.

Basically, European and Canadian systems practice Managed Care taken to the extreme, and cannot be called anything other than “rationed care.”  They do not make massive investments in medical research, they do not purchase the latest in medical technology and they do not furnish medical treatment to elderly people who need this technology.  For example, in the United Kingdom, those over age 60 are not eligible for heart transplants although they continue to pay taxes that support such a system.  Therefore those that fall in this category must either pay for the transplant out of their own pocket, or simply die.

Canadian procedures are performed three times as much in the United States as in Canada.  In Canada, those over age 75 and women received proportionately fewer cardiac procedures in Canada than in the United States.  The Canadians also wait longer for treatment.  For those with left main coronary artery disease; in the United States they were operated on within 7 days, but in Canada 70% of the Canadians waited for 31 to 60 days. 

A study revealed that for breast cancer the median waiting time between diagnosis and postoperative radio therapy was 61.4 days.  Generally, according to specialists, in 81% of cases awaiting surgery, the times are longer than they consider reasonable, and they feel that 45% of all patients are waiting in pain. 

Canadians have contracted with U.S. hospitals to provide technical services such as MRIs and brain injury care.  From 1991 to 1993, 10% of those needing cancer therapy in British Columbia were served in the United States.  It appears that Canadians can afford to ration health care because they have the underused U.S. system just across the border if the shortages of specialists or treatment centers becomes too severe.

 

 

There is no doubt that Americans have the best technology, and our system, with its readily available medical technology and specialists, enables all Americans to enjoy a better quality of life.

 

CASE STUDY: Delay in Treatment in Canada

A German‑owned reinsurance company with its North American headquarters in Toronto, operated in the United States with a branch office headed by a Vice President, a U.S. citizen, who maintained an office in Toronto also.  His secretary in Toronto, a 38year old female, was an exceptionally dedicated employee who was always available when her boss would call from anywhere in North America or Europe.

After 3 years, she started taking noticeably more "sick days", and was late for work at least once a week.  Realizing that something was wrong, the Vice President had a personal discussion with her and discovered that she had some "female" problems (she was not pregnant) but she hated going to a doctor as she was afraid as to what he would diagnose.  He boss talked to her husband who was also concerned, and between the two of them they talked her into going to a doctor in November.

In Toronto the Provincial health plan is called OHIP (Ontario Health Plan), It took 3 weeks before she could see a doctor, and during that time she started experiencing pain, otherwise it would have been as long as two months.  The OHIP doctor advised her to have surgery and scheduled her for April at Toronto General Hospital.  The surgery was postponed once for a period of two months, so she had her surgery in June.  In the meantime her boss had left the company and her new boss would not accept the fact that she kept coming in late and would miss so much work.  She resigned before she was fired, and took a job at less money and with longer hours.

The surgery was successful, however because of the length of time before surgery; she will never be able to have children.  She was not too concerned as she did not want have children at her age anyway.  She does miss the loss of income, as she has never been able to find another job like the one that she had so capably handled for so long.

WHO PAYS THE BILL FOR INCREASED MEDICAL COSTS?

 

According to the latest government figures, patients pay 20% of their own medical bills.  Funds for this expense comes directly from the income and savings on those to receive the medical services.

Government programs pay for the largest part of the overall medical costs, 42%.  Of course, this includes Medicare and Medicaid, plus medical care for service personnel and their dependents, and government workers and their families.

Insurers, including some self-funded organizations and third-party administrators, pay for 33% of the medical services.  Included in this category are HMO’s and variations of Managed Care, while not technically “Insurers”, do provide insurer-like services.

Other private sources, many of which are trusts organized under Federal Law, medical personnel who receive “free” services, etc., pay approximately 5%.

 

Businesses pay a substantial portion of the nation’s medical costs through Workers Compensation (5%) and employee group health benefits, 10%.  Because businesses pay taxes that, in turn, fund government spending on medical care programs, plus business taxes, payroll taxes  - in some cases such benefits and taxes exceed the after-tax profits of the business  - it is commonly held that business actually pays for the health services and suffers the most when medical costs increase dramatically.

Although this is a widely held belief, the sad truth is that the consumer and only the consumer, ends up paying for the health services, either directly or indirectly.  The government does not “make” money (it prints “money” but does not “earn” money).  It survives on the largesse of the governed in the form of taxes from a wide variety of sources, but ultimately all taxes come from individuals.

While businesses pay taxes, in actual practice the cost of increased taxes and increased cost of benefits is passed on to the consumer, either in the form of increased cost, decreased products or benefits, and/or less earning for the owners and/or stockholders.  In 1980, the cost of employee health care was equal to 24% of the corporate profits of U.S. businesses.  In 1990 it reached 100% of the corporate profits.  That means that employers were paying as much for employee health costs as they were making in profit.  Or, to state it another way, if employers didn’t have to pay for employee health care, their profits would double.  (Actually, this would probably never happen, as employers could afford to be more competitive, so they would lower their profit in order to gain more market share, and thereby reducing their profit.  But the point of the total cost to the employers of employee benefits is well made with this illustration).

Many individuals receive benefits from their employer, sometimes with the employer paying for all of the benefits, or a portion thereof.  However, where does the employer get the money to pay for benefits?  Again, from its customers and from the individuals that support the business.

Not only is there considerable benefits savings in health insurance with large employers, but they also report considerable savings in Workers Compensation costs, after they have contracted with a Managed Care firm or established a Managed Care program.

Overall, Employee benefits costs have increased at substantially lower rates after implementing a Managed Care program.  For example, S.W. Bell went from an average increase of 36% to 12% in 1996. 

In 1993, a year that showed the largest decline in the increase in health cost, the average employer increase was 14%, while increases for employers with Managed Care plans increased only 8.4%.

WHY MEDICAL CARE CONTINUE TO RISE

TECHNOLOGY

 

New medical technology adds about $30 billion to the nation’s medical care bill each year.  (CAT scans and MRI can easily cost more than $1,000). 

Certain annual surveys rate goods and services used on a daily basis as the best value for consumers’ money.  In 1989, 1992 and 1994, contrary to what you might guess, poultry was rated number one (above cars and TV’s) as the best value for the money.  The same surveys in the same years also agreed on the worse value.  Again, contrary to popular believes, it wasn’t lawyers (next to last), but it was hospital charges.  Health insurance and doctors’ charges were also rated quite low.

The reason that poultry is rated so high and hospitals so low is because of technology.  Even though technology has made chickens and health care better and cheaper, medical technology is overbought and helps to increase the hospital costs, which registers negatively with the consumers.

Medical technology differs from other technologies in cars, chickens and computers in the impact on consumers because many new medical technologies have been purchased by health care institutions, and many of the institutions use the new technology very little. 

The health care industry does not compete primarily on the basis of price.  In 1940, if a person had a gall-bladder operation, the surgeon would charge about $1,000, and the hospital would charge anywhere between $2,000 and $4,000.  While this may not seem expensive today, $5,000 was about a fourth of the median income of Americans at that time.  Not only was surgery expensive, but the lengthy hospital stays were costly and patients were out of work in a recovery mode, with a reduced or loss of income for many.

Even though American technology obviously improves the quality of life, Americans think that hospitals spend too much money.  U.S. hospitals are too big, with too many beds, too much technology and the expenses to go along with it.  In 1995, the occupancy rate of American hospitals was only 59.7%.  A Holiday Inn with that occupancy rate could not survive for long, so one can imagine the losses that a hospital must incur if 40% of its beds are not filled on a constant basis.  And with the new technology, new drugs and procedures are continually being developed that will eliminate even more need for hospital beds.

But do not weep for the poor hospitals, as they continue to hold their own.  In 1992 while the length of stay in a hospital dropped drastically, the average number of beds in the hospitals remained fairly constant, and the number of hospital personnel actually increased from 3.1 million in 1983 to 3.6 million in 1992.  But while inflation rose by 2.3%, salaries rose by 5.5%.  In 1993, on the average, the CEOs of hospital systems made $400,000 in compensation, and CEOs of individual hospitals made $243,000.  However, they seemed to be worth it, as they maintained a profit of 5.4% for the for-profit hospitals. 

Another important factor in the low esteem of medical services is related to who pays the bills.  For example, in 1994 it is estimated that hospitals were 97.5% compensated by third parties (not the patients).  Doctors, who also rate low, were 85% compensated by third parties.  On the other hand, pharmaceuticals (34%) and vision-wear compensated only 41% by third parties were rated quite high.

The most effective new technology, according to many experts in the medical field, was developed after plastic was invented.  Previously, exploratory operations were quite common, as that was the only way that the surgeons could actually see the patient’s condition.  Now surgeons can view almost any part of the human anatomy with fiberoptic light sources that illuminate the surgical site for miniature cameras.  A surgeon can operate and watch the procedure on a screen, never actually viewing his surgery except on the screen. 

Computer technology automated the tiny camera and it also developed other instruments that diagnose and monitor the body without invasive surgery.  The most well known is the computerized axial tomography (CAT) scanners, and the magnetic image resonators (MRIs).  In addition, recent advances in anesthesia now allow various areas of the body to be anesthetized so that only the affected area will not feel pain, thereby reducing many problems than have arisen when larger amounts of the body were so deadened against pain.

New technologies allow many surgical procedures to be performed outside of the in-patient section of a hospital.  It is estimated that 65% of the estimated 29 million surgeries in 1994, were performed outside of the hospital.  These surgeries included cataract removals, inguinal hernia repair and knee arthoscopy for those on Medicare.

 

CASE STUDY:  Limitations on Managed Care Medicare Supplements

Mrs. Johnson is on Medicare and has a “Select E” Medicare Supplement plan.  The “Select” series of Medicare Supplement policies is a form of Managed Care, whereby for a lower premium, patients can receive all of the benefits of the regular Medicare Supplement, but in return for paying a lower premium, they must use the hospitals designated by their carrier.

Mrs. Johnson is age 67 and it was discover4ed that she had cataracts in both eyes and needed surgery.  Being a nurse, Mrs. Johnson knew the “best” (by reputation) opthamologist in the county, and was accepted as a patient.  However, he wanted to do the surgery in his own surgery center as he had the best laser equipment in that part of the state, better than any other local hospital.

The Medicare Supplement carrier was contacted; she refused to grant a waiver to this case.  However, Mrs. Johnson’s insurance agent changed her plan from the Select E to the standard "B” plan.  The benefits are not quite as complete, but they do cover all surgery and while the premium is higher than the Select E plan, Plan B. is the lowest price plan that would cover what she needed. 

After surgery on both eyes, the agent then switched her back to Select E plan.  His insurance carrier was aware of his actions and agreed to his actions.  Since the agent did not change carriers, there was no waiting period and her medical costs were covered.

INCREASING SALARIES OF MEDICAL PROVIDERS

 

Salaries of medical providers has risen at double-digit rates, 3 times faster than inflation of the rate of average non-medical salaries.

Three/fourth of medical school graduates go into specialized care, and 2/3 of all physicians are specialists.  Please note, however, that the impact of Managed Care has affected the incomes of physicians, not only specialists, but the independent doctors also.  In 1990 median income for family practitioners was $93,000, surgeons and radiologists averaged over $200,000.  The median net income of private practice office-based physicians went from $153,620 in 1992, to $148,890 in 1994.  Gross revenues (the amount billed to patients) of all physicians fell even more during this period of time.  Specialists and those in larger offices have compensated for this decrease in gross revenue by implementing cost-control features in their own practices. 

Managed care also affects the incomes of health providers by promoting the use of Primary Care Physicians (PCPs) who perform more medical services through gate keeping activities of referring patients to specialists only when necessary.  In most cases, the PCP has a tendency to treat the patient if he feels comfortable in doing so, instead of sending the patient (and the fee) to a specialist, even though in the past, referral was a typical procedure.  This gatekeeper feature is dominant in Managed Care, especially in HMOs, and was one of the major complaints in the early years of Managed Care.  However, the Managed Care procedures now provide for evaluation of PCP’s on a regular basis and the area of specialist referral is a key item under scrutiny.

Some doctors feel that “if you can’t beat them, join them,” and negotiate the discounts of doctor’s fees in return for bringing them into a network.  The networks are aware that most doctors have a substantial patient list, and if they join a particular network, they will bring many of their patients with them.  Therefore, in many cases, the joining of a network is to the benefit of both the physicians and the network.

While the payment of a capitation fee - paying physicians a set fee for each patient enrolled in the system, regardless of how much or little each enrollee uses the medical services - has also come under criticism by consumers, it actually increases a physician’s income.  The money that he receives for those who do not require medical services, frees him up to treat those who do require medical services.  It also helps to level the provider’s income by providing a steady flow of income, thereby allowing more effective business planning for his practice. 

IS THE TREATMENT NECESSARY?

Consumer magazines, industry publications, and actuarial studies have estimated that nearly a third of all professional medical care, including tests, surgery and drugs, is unnecessary.  While it is agreed that some of the statistics can be rather subjective, depending upon the organization doing the study and estimation, these statistics have been widely reported.

• One/fourth of hospital patients do not have to be admitted to a hospital.
• Half of the pacemakers installed every year are unnecessary.
• More than half of all hospital stays are not necessary.  In view of vacant hospital beds the situation is more desperate for hospitals than many think.  However, more and more medical procedures are conducted in clinics or on an outpatient basis.
• People still go to a doctor when they don’t have to, estimate as much as 15% of office visits are unnecessary.  Some of this can be contributed to the advent of the “co-payment” provisions in HMO and insurance contracts.  Many consumers don’t mind spending $10-$15 to go to the doctor for a minor complaint.  It can be noted that the copayment provisions has increased recently, and the average is now estimated to be approaching $25.
• Approximately half of the coronary bypass operations, of which some 130,000 are performed each year, really aren’t necessary.  While this is highly subjective and cardio-vascular surgeons may disagree with these studies, even assuming only one-fourth are unnecessary, this amounts to millions of dollars that didn’t need to be spent.
• While studies show that 60% of preoperative laboratory screening tests are not needed, it should also be stated that many doctors use some tests strictly on a precautionary basis, even if results and the present condition doesn’t seemingly warrant such tests.  Some of this overusage is thought to be caused by malpractice concerns.
• Several magazines and Television programs have discussed the amount of hysterectomies performed in this country.  More than one-fourth of these operations are considered as unnecessary.
• A recent medical problem that has developed due to the increasing use of computer keyboards, is carpal tunnel syndrome.  This requires an operation to alleviate the pain, however for a while it became almost a “fad” operation, and surveys indicate that approximately 17% were determined to be unnecessary.
• 16% of tonsillectomies are considered unnecessary.  Many parents who have had their tonsils removed when they were young, have the same procedure performed on their children, whether they really need it or not. 
• Chronic back pain is frequently due to herniated discs, and many surgeons perform operations to remove the disc, instead of prescribing lifestyle changes which in many cases can alleviate the pain.  It is estimated that 14% of laminectomies could be eliminated.
• Many people have suffered through a “GI” (gastrointestinal) X-ray studies, generally to determine if there is an ulcer or other problem with the digestive system.  In particular, the upper GI series appears to be overused, as 30% of the studies are believed to be unnecessary.
• One of the more startling discoveries was that half of all cesarean deliveries are not necessary.  Some of this can be attributed to modern parents who want their children delivered at the time most convenient to them, but it must also be recognized that a cesarean is a much more expensive procedure, with the added cost of surgery and a longer stay in the hospital. 
• Quality waste, i.e. fix what should have been done right the first time, has been estimated to consume as much as 35% of health care expenditures. 
• It must be recognized that these abuses are generally not the fault of the providers, but much of the blame can be placed on the patients who demand the very best and who seek more treatment and at a higher level than is needed.  Hospital admissions is a good case in point.  Many insurers have allowed hospital admissions without question, but in recent months, hospital admission pre-certification has become almost a standard procedure.  Managed care helps to reduce the unnecessary treatments and hospitalizations, by reviewing the reasons for the treatments, the appropriateness of the treatment, and restricting what they consider as excesses.

TOO MANY PROVIDERS

A real conundrum exists regarding how hospitals with nearly a million beds, can continue to operate with about a third of them empty.  No successful hotel or motel chain can operate with such a high vacancy rate.  In any other business, an oversupply would drive down the prices in an effort to obtain more customers.  But this does not seem to apply to hospitals.

 

 

One answer to the puzzle would appear to be that in situations where the customer pays directly, normal business rules in regards to oversupply applies.  But with hospitals and other similar medical providers, the bills are paid to the facilities by Workers Compensation companies, employee benefits providers, or similar insurance providers.  The patient (customer) seldom pays any attention to what is being charged, and in many cases, could care less.  Since the customer is insulated from the effects of pricing, the oversupply does not cause a reduction in cost.

Another aspect is that many of the empty beds occur in hospitals located in heavily populated areas.  A study by the University of California of 5,732 hospitals nationally, illustrated that hospital costs are higher by as much as 26% in areas where hospitals had more than 9 competitors within a 15 mile radius.

One of the most positive effects of Managed Care, is that it is allows the direct payers for medical care, such as insurance companies and self-insured businesses, to direct patients to the most cost effective providers.

In respect to physicians, in 1972 there were 153 doctors for every 100,000 of population in the U.S., in 1992 it was 220. 

THE AGING OF AMERICA

Presently people age 65 and over make up less than 13% of the total population, but by 2030, almost 25% of the US population will be age 65 or over.  The older people get the more medical care they generally need.  Of the approximately 12% of the population over age 65, they utilize 30% of health care resources.  One of the most rapidly growing fields of medicine is geriatric care.  Not only do the older citizens need more care; they need more specialized care, as many diseases are more prevalent in the older generation.

While the first of the baby-boomers are approaching their 50’s, already employers are reporting that their health care benefits budgets are increasing due to aging of the workforce.  This opens up the field of Managed care, which can help employers by establishing preventative programs, and by exercising preventative care. 

Managed care helps to reduce the increasing health care budgets by establishing monitoring programs to analyze medical care to make sure that it is necessary, that it is appropriate for the particular medical situation, and to audit the prices charged for the medical procedures.

UNBUNDLING COSTS THROUGH CREATING BILLING

For over a period of several years, the medical profession has developed a system that allows for proper billing of services provided, using a coding system.  Every medical procedure is provided with a code and fees are based upon the code.  With the advent of Medicare and the reporting to the federal government, a coding system was an absolute necessity, as described elsewhere in this text.  In 1991, the government reported that fraudulent health care billing amounted to overcharging $50 to $100 BILLION.

While coding is necessary, it gave rise to an overbilling practice, described as “unbundling” or “fragmentation.”  This is accomplished by fragmenting (breaking down) a medical procedure into its very basic components, and then billing for each “fragment” individually.  Almost any operation, by fragmenting, can increase the cost from double to six or eight times by adding together each little facet of the procedure, even though the overall operation may have its own code.

In the same vein, adding another (often-fictitious) element into a simple procedure can increase the bill dramatically.  As an example: carpal tunnel syndrome surgery can be accomplished by one surgeon, however by adding a bill for an assistant surgeon, the cost of the operation increases considerably.

One of the functions of Managed Care is to review the bills from the doctors and hospitals in order to avoid any of these abuses.  They can also provide an audit to avoid duplicate billings, and inappropriate billings, whether fraudulent or by mistake.  Complex billing programs by providers is required to comply with local, state and federal laws, and the complexity leads to a lot of erroneous billings.  This review function care is one of the most financially rewarding aspects of Managed Care.

PRESENT RESULTS OF MANAGED CARE

 

The purpose of Managed Care as it is practiced today, should never be forgotten: “Managed Care is the system in which quality medical care can be delivered at a reasonable cost.”  Has Managed Care performed as anticipated?  The answer to that question may not be resolved for many years, or within a few years, but the trend is that so far, so good.  There are criticisms of Managed Care, particularly in the operation of the HMOs, but these criticisms are taken seriously by the industry and many of them are solved rapidly, and some criticisms will be with us for some time.

At the time this text was being composed, data on health care spending is being released by the government and the news media.  The following information indicates that at least some of the goals have been obtained.

 

Growth In Health Care Spending Reaches 36-Year Low

 

NATIONAL HEALTH CARE spending increased 4.4 percent in 1996, the slowest growth recorded since 1960, according to the Health Care Financing Administration's Office of' the Actuary.

In a report released by Health and Human Services Secretary Donna Shalala, the actuaries said spending topped $1 trillion for the first time, increasing to $1.035 trillion compared with $991 billion in 1995.

The slowdown in growth in 1996, and over the past five years, was attributed to increased enrollment in managed care, low general and medical-specific inflation, and "the capacity of health plans to negotiate discounts from a provider system weakened by over capacity," the report said.

Spending for freestanding nursing facility care rose to $78.5 billion in 1996, compared with $75.2 billion in 1995.  An additional $9 billion was spent for nursing care in hospital-based facilities in 1996.  Growth in spending for nursing facility care at all sites slowed from 7.1 percent in 1995 to 5.3 percent in 1996.  Long term care and pharmacy services accounted for an increased share of total health spending, as the majority share held by hospital and physician services dropped to 54.1 percent in 1996 from 57.6 percent in 1990.

The report said hospitals are expanding into post-acute home health and nursing facility services in order to maximize their revenues.  About 13.4 percent of spending for nursing facility and home health services went to hospital-based facilities in 1996, compared with 7.7 percent in 1990.

Spending for freestanding home health care agencies rose to $30.2 billion in 1996, while an additional $7.8 billion was spent for hospital-based home health agencies.  Spending growth rates for home health care from all sites decelerated for the fourth year in a row, reaching 9.5 percent in 1996 compared with 23.4 percent in 1992.

Almost half (46.7 percent) of the $1.035 trillion spent for health care was financed by public health programs.  Federal and state Medicaid spending totaled $147.7 billion for 36.1 million beneficiaries in 1996.  Total Medicaid spending grew only 5.3 percent, the lowest growth rate since the inception of the program.  While many state Medicaid programs have increased their managed care enrollment, it has not had a significant impact on costs to date, the report said.

Medicare continues to be the largest government payer for health care, spending $203.1 billion in 1996 in services to 38.1 million beneficiaries.  Medicare spending growth declined from 10.6 percent in 1995 to 8.1 percent in 1996.  Spending growth rates for Medicare nursing facility and home health care declined substantially to under 14 percent in 1996 compared with rates of 50 to 6O percent in the early 1990s.  Medicare spending for managed care plans rose to 10.1 percent of total Medicare spending in 1996, from 4.8 percent in 1990.

-Markian Hawryluk  Provider March-1998

Conversely, at the same time The Associated Press reported that “Healthy increases are predicted for health-care insurance costs.”  

“Costly health-care mergers, pricey lifestyle drugs such as Viagra and an aging population are expected to generate double digit increases in insurance costs next year.”  It is expected that coasts will rise the most, from 12% to 15%, in traditional plans that let the patient choose the doctor, but health maintenance organizations will increase only 5% to 7%.  Prescription drug plans will increase 15% to 22% in 1999.

Cut-rate prices just aren’t likely next year.  Some of the giant insurers and HMO’s are coping with the expense of mergers, plus are experiencing pressure to provide Viagra to their customers at $10 a pill.  This, combined with the fact that only 49% of plans made money last year, creates a need for increased premium.

Kaiser Permanent, for instance, has told employers it will seek increases of up to 12%.  It is making up for small increases in recent years.  It is also debating whether Kaiser can afford to start paying for Viagra.

The cost of health care today and how it affects the individual consumer can be reflected in the cost of automobiles.  For every Ford vehicle sold, $600 of the cost is represented by employee benefits, principally health insurance.  For General Motors vehicles, it is $900, and for Chrysler, it is $1100. 

 

CASE STUDY – One Company’s transition of Employee Benefits

 

John Westphal is a 56 year old engineer, employed by the same sheet-metal firm for the past 30 years.  He is eligible for early retirement, but one of the major factors in his retirement decision must be health insurance, its availability and its cost.

When John joined his company in 1968, he was single and fresh out of college.  One of the things that attracted John to this company was the fact that they offered health insurance and they paid all of the premium, including his family (if he had one).  John had just gotten married “fresh out of college”, and he and his bride had plans to have a family.  The company plan had a $100 annual deductible, and then they paid 80% of the next $1,000 and the plan paid the rest.  Therefore, the most they could lose was $900.  But being an excellent engineer, John qualified for a supplemental plan that paid for the deductible, the copayment, and even for glasses and dentists for him and his family.

John and his wife had 3 children in the 1970’s, and his insurance paid for all of the maternity costs, and the company continued to pay the premiums for John and his dependents. 

In 1980, the company’s health insurance premiums on its employees started to climb rather rapidly.  In 1984 the company changed their policy so that now John’s coverage was paid by the company but he had to pay for approximately 25% of the premiums for his wife and his children.  The supplemental program was dropped but the company provided a group dental plan for its employees.

In 1987, the company instituted a Section 125 (Cafeteria) plan for the employees, thereby allowing them to choose what employee benefits they wanted.  Benefit premiums were paid with before-tax dollars.  John continued with his Dental benefits.  There was little change in the employee health benefits.

In 1988 the company changed health insurance carriers in an effort to reduce their health insurance premiums.  In 1989, the received a notice of increase in premiums, so they again changed their carrier.  They maintained the same type of program, but raised the deductible to $200 per year per person.

In 1990, they again changed carriers, but still maintained the traditional indemnity plan with a large insurance company.  However their plan now had an experience rating provision, and with a large number of employees entering their 40’s and 50’s, in 1991 they had a substantial increase.  The company had now grown to where it was necessary to offer a Health Maintenance Organization option for those that wished to pay only a small copayment for doctors visits.  The result was that the younger people who liked the copayment and prescription drug cards, changed to the HMO, those older persons, particularly those with some impairments or illnesses, stayed with their traditional carrier.  Many of them were afraid to change “horses in the middle of the stream”, or to leave the doctors that had treated them for years.

Their indemnity carrier instituted some managed care controls also, such as pre-admission authorization requirement.  However, with the indemnity policy covering the older employees, the premiums increased quarterly.  In an effort to keep the premium down, the deductible was raised to $500. 

In 1992, the company assigned a task force of employees under the direction of the Human Resources Department, to study the problem of increased insurance costs.  The committee submitted proposals to several companies, both Managed Care HMO’s and PPO’s, and traditional coverage.  Their recommendation was that a large HMO with a hospital within easy access for a majority of the employees, and with several local doctors on the staff, is the primary insurer.  The company would continue to pay the premiums for the employee, and 25% of the premium for the spouse and family coverage.  In addition, the plan did allow for a PPO option, with a $500 deductible, and a network of over 25 doctors in the local area.  In an effort to promote the less-expensive HMO, the company would pay the PPO premium for the employee, but only 50% of the premium for the family members.  The committee also recommended that the company hire a consultant to determine if the company could self-insurance and use the services of a third-party administrator to administer the program.  The self-insurance program was not accepted by company management as they felt they were not large enough and could not commit enough assets to make it workable.  Besides, they liked the idea of someone other than the company management making the tough claims decisions for its employees.

The premiums on the employee health coverage continued to rise, but at a reduced rate.  For purely financial reasons, John and his family elected to be covered by the HMO.  They did not like their Primary Care Physician, particularly since John’s wife had used the same Gynecologist for all of her married life, but her doctor was not on the PCP list.  However, they were able to change their PCP to a female doctor, making John’s wife more comfortable during her annual checkup.

John’s wife had lump discovered on her breast in 1995, but her PCP stated that the mammogram did not show it to be anything other than a fibrous growth, very common in women of her age.  The PCP refused to refer his wife to a specialist.  This was appealed, but to no avail.  Therefore, John paid for a specialist out of the network to evaluate his wife.  The specialist performed a biopsy and fortunately the cyst was not malignant.  But John had had enough.

John had risen to a position of some importance in his company, and he told the company President and Executive Vice President that unless they could get some kind of plan where they could choose a specialist if they felt like the needed it, he was going to resign to accept a position with a competitor that offered such a plan.  The result was a new contract with a large HMO that offered Point-of-Service coverage, and their network of specialists was quite large (and included his wife’s former gynecologist). 

 

STUDY QUESTIONS

1.  The concept of pre-paid medical services is credited to

     a.  Metropolitan Life Insurance Co.

     b.  Aetna Healthcare.

     c.  Kaiser - Permanente Medical Care program.

     d.  Washington State.

 

2.  The health market is inelastic because

     a.  cost does not rise with increasing volume.

     b.  it is too big and has too much money.

     c.  it is controlled by doctors.

     d.  hospitals have too many beds.

 

3.  The leading precursors of death according to published statistics are

     a.  Overnutrition, handguns, occupation and unintended pregnancy.

     b.  tobacco, alcohol, injuries, and gaps in prevention.

     c.  automobiles, smog, alcohol and global warming.

     d.  gaps in screening, high blood pressure, inadequate access to care and over nutrition.

 

4.  The purpose of a health insurance company is

     a.  to create HMOs.

     b.  to sell insurance by keeping premiums high and not paying claims.

     c.  to sell insurance by keeping its premiums low.

     d.  to make policyholders use its services more.

 

5.  Managed Care is

     a.  a fancy term given to HMOs.

     b.  where doctors treat the patients in their offices.

     c.  not working as insurance costs keep climbing regardless.

     d.  the system in which quality medical care can be delivered at a reasonable
                 cost.

 

6.  During recent surveys which was considered the WORSE value for consumers?

     A.  poultry

     B.  cars

     C.  television

     D.  hospital charges. 

 

7.  In 1995, the occupancy charge for hospitals was

     A. 100%.

     B.  59.7%

     C.  25%

     D.  95%

 

8.  Various technical publications and actuarial studies have shown that

     A.  nearly 100% of all professional medical care is necessary.

     B.  nearly a third of all professional medical care is unnecessary.

     C.  almost everyone goes to a doctor only when the absolutely have to.

     D.  95% of all the pacemakers installed each year, is necessary,

 

9.  A primary care physician

     A.  will send more patients to specialists than other private physicians.

     B.  is only used in emergency rooms.

     C.  will treat more patients instead of sending them to specialists.

     D.  is not used by Health Maintenance Organizations.

 

10.  Ajax manufacturing has a traditional indemnity group health insurance for its employees.  The premiums have jumped considerably over the past 3 years.  What is the worst thing for its employees that Ajax can do?

     A.  Charge employees for family health coverage and continue to pay for the insurance on the employees.

     B.  Institute a Section 125 for its employees.

     C.  Change to a Managed Care program with a large HMO.

     D.  Drop all other benefits, raise the deductible to $750 and change to a 50/50 coinsurance.

 

ANSWERS TO STUDY QUESTIONS

 

1C     2A     3B     4C     5D     6D     7B     8B     9C     10D