Frustrated With Managed Care ‘Lite,’ Radicals See Virtue of Competition


As employers try to get workers to pay more and shoulder more risk, there’s another way to control cost – one that promotes quality as well.

Marlene Piturro, PhD, MBA

Managed care’s founding fathers envisioned citadels of medical excellence competing for payers’ and patients’ hearts, minds, and pocketbooks. The guiding principle for managed care, more accurately called “managed competition,” says Paul Ellwood, MD, a prime mover in the Jackson Hole Group, is that providers would align themselves with a particular way of practicing medicine.

Perhaps it would be Minnesota’s Mayo Clinic, Houston’s Methodist Hospital, or California’s Kaiser Permanente that would attract the best and brightest. This, in turn, would lead to competing brands of evidence-based medicine whose guidelines providers would adhere to — a radical and subversive idea to the American medical establishment.

If things had unfolded as visionaries Ellwood, Alain Enthoven of Stanford University, and Tom Frist of Health Care America foresaw, today’s health plans would be built on rival provider networks, distinct entities competing on price and quality. For the most part they aren’t. Big insurers killed the concept of managed care/managed competition by signing up every provider for every plan, lest any consumer be unhappy if a doctor wasn’t included.

This led to sprawling, loosely organized networks; onerous paperwork; confusing and contradictory practice guidelines from different plans; and the need for doctors to spend precious dollars on paper-pushing personnel to keep track of it all.

So instead of having distinct networks competing on price and quality, insurers blurred the quality dimension by signing on all comers. That left consumers shopping just on price. Ellwood says that consumers will abandon even the best plans for $10 a month. John Anderson, Ellwood’s former colleague at InterStudy Publications, which tracks the HMO industry, says they’ll jump ship for a nickel a pay period. Scary stuff.

Competition lives

Despite the prevalence of managed mush, there are still radicals fighting what is now the health care establishment — managed care as we know it. Believing in managed competition, they build networks that vie for business in their markets on price and quality. The radicals design plans that offer payers and consumers incentives for making cost-effective choices.

Naturally, providers who aren’t included in preferred networks get angry, but that’s OK for the subversives. They sleep at night because they follow the Institute of Medicine’s Committee on Quality of Healthcare in America’s dictum to “seek out methods for quality assurance and cost containment.”

Nowhere is that responsibility — at least for the 91 percent of employed Americans covered by managed care — taken more seriously than in managing organ transplants. Behind each of the nearly 22,000 transplants done annually is a story. Someone with a successful transplant lives; someone whose operation was carried out by a less-than-stellar team might die, leaving behind a costly trail of complications. In other words, quality is easier to discern in transplantation than for some other conditions; a poor transplant can lead quickly to organ rejection, complications, and even death.

According to the United Network for Organ Sharing, the not-for-profit agency that tracks transplants, 72,100 Americans are on transplant waiting lists — more than three times the number of those who actually receive a transplant in a year. Each failed transplant is a devastating waste of human life and money.

That hasn’t stopped over 260 transplant teams with varying degrees of expertise and success from pursuing the prestige and big dollars that transplants generate. Because managing transplants correctly is a life-and-death matter, United Resource Network (URN) of Minneapolis uses a radical approach in pursuit of quality.

It limits the percentage of in-network providers to about 13.7 percent of transplant centers. That probably angers the majority of providers who don’t make the list and some consumers who think all health care must be delivered next door.

Evaluating costs and clinical outcomes closely allows URN to manage transplant within its relatively narrow network. Its average heart transplant costs $217,718, versus $398,821 nationally. A bone-marrow transplant costs $170,153, versus $277,633.

There are clear benefits for in-network usage, yet Robert Ziomek Jr., URN’s vice president for national sales, says that less than 5 percent of his clients require 100 percent in-network coverage. Payers, he says, don’t insist on the high-quality, cost-effective network for several reasons.

Smaller payers have never had a transplant case and don’t realize the complexity and big dollars required to manage one. Some are skittish because of perceived liability around restricting choice; some bargaining units won’t allow such restrictions; and some figure that the costs of out-of-network coverage are so high that offering a less effective choice will do. In other words, an appearance of choice — rather than its reality — is important to consumers.

“The oversupply of poor-quality centers puts a huge burden on the health care system,” Ziomek says. “We try to build strong incentives for using only centers that excel. We do all we can to get subjectivity out of decisions by giving data on cost and quality to the payers. After that, it’s up to them.”

Did his homework

Building a network for transplants, and giving payers incentives to use it is one thing. Developing networks for the masses, and for high-volume events from measles to MI, is another.

Thomas Hartnett, PhD, and CEO of HealthNow (Blue Cross/Blue Shield of Western New York and BlueShield of Northeastern New York) mastered “selective contracting” years ago as CEO of a New Jersey-based HMO. Doing his homework, Hartnett found that it was cheaper and that cardiac patients had better outcomes flying to Houston for treatment by Michael DeBakey’s team than they did at nearby Columbia Presbyterian.

From that came Hartnett’s premise for plan design: Give plan members more benefits in exchange for limiting their choice of providers to those shown to deliver high-quality care cost-effectively.

In 1996, HealthNow introduced Community Blue Advantage, a network that excluded about one third of the providers in the Buffalo market — where virtually all providers had been in all three major health plans. In short, hell broke loose.

“We shook the tree with Community Blue Advantage,” recalls Hartnett, who gave the market a taste of managed competition. For example, before selective contracting, Buffalonians filled about 20 percent of their subscriptions at each of five outlets: Eckerd, Rite Aid, CVS, independent pharmacies, and grocery/discount stores. Three years later, a narrower pharmacy network was introduced.

HealthNow left the latter two options intact but made Rite Aid the only in-network chain. It worked to bring costs down; the plan’s per-member, per-month pharmacy expense in 1999 was $16.77, vs. $20.54 for Independent Health, a competitor. He further controlled costs by capitating lab, reducing hospital days from 250 to 170 per 1000, and beefing up UR and physician profiling.

Perhaps the hardest job for a managed care visionary is to get consumers with a sense of entitlement to accept limitations that make competition work. To do that, Hartnett eliminated copayments for primary care, dental, and vision appointments, and for second opinions subsequent to a cancer diagnosis. The method works equally well for HealthNow’s Medicaid, Medicare, and CHIP programs.

Selective contracting is not without consequences — mostly stemming from provider petulance — but it keeps HealthNow growing and poised for new product offerings. “If you pulled the cover off most provider directories, you’d see that they’re all about the same,” says Hartnett. “We changed that with selective contracting, which allowed us to offer richer benefits in exchange for a narrower network.”

What makes sense

Selective contracting, with tighter networks and lower premiums, make sense when contrasted with a PPO’s looseness. Pitting the give-me-a-card-and-a-copayment-and-I’ll-do-what-I-want option against a narrow network nourishes the radical’s soul.

Eric Blumencranz, a principal of BWD Group Consultants, whose clients include the NBA, NHL, and AOL Time Warner, sees employers seeking these contrasting options from the same carrier. Going from least to most expensive might mean an HMO, a POS, and a PPO. “People seem tired of HMOs only, with gatekeepers and other restrictions,” says Blumencranz. “The smart insurers have the HMO as the chassis and add-ons, like POS, as optional equipment.”

However, plans that aren’t cleverly designed face problems with double-digit premium increases and soaring utilization, according to Blumencranz. Some experiment with band-aids on hemorrhages, such as three-tier pharmacy copayments to combat annual 24-percent prescription drug price rises. Others cap soaring MRI and CT scan costs with precertification that can cut utilization by two-thirds. Without managed competition, though, it’s hard to make the numbers work.

When insurers keep 95 percent of providers in network and there are few limits on consumer behavior, premiums rise. Blumencranz notes that the reality hasn’t sunk in that more choice ultimately costs more. “Americans with employer-sponsored health insurance feel a huge sense of entitlement,” says Blumencranz.

“Most don’t want to pay anything but don’t realize that if managed care loosens up, they will pay more.”

Designing viable options

The clamor for more choice means that managed care plan designers must hit the drawing boards to design viable options. Pittsburgh, which is a mature market for managed care, lends itself to such fine-tuning. Highmark Blue Cross Blue Shield operates in 29 counties in western Pennsylvania and has built different products on its large Keystone West network, formed in 1986.

Highmark offers two managed care networks: Keystone, the larger network, and a narrower, lower-cost network called CommunityBlue. Like Keystone, CommunityBlue offers an HMO, a point-of-service plan, and a program that looks much like a PPO, though members can choose whether to coordinate their care through a primary care physician.

The narrower network offers a price difference of from 7 to 10 percent off similar products in the Keystone network. “Our strategy of building benefit packages on separate networks and offering lower costs for a narrower provider network helps us adapt to changing market conditions,” says Cynthia Dellecker, Highmark’s vice president of product management and development.

Employers can set the smaller CommunityBlue HMO as a no-employee-contribution option, and then buy up to Keystone or within CommunityBlue for a richer benefit package.

One Highmark paperless health insurance program that is based on the Internet gives consumers the capability to choose from as many as 16 different health plans. The company touts this product line as “the most choice ever offered by an insurer to individual employers.”

Next year, Highmark hopes to present a more sophisticated set of Internet tools allowing users to make choices more efficiently. Dellecker believes that offering multiple products based on dual networks and allowing consumers to tailor their coverage online is an innovative way “of looking at networks and benefits, and allows for adaptation to shifting marketplace dynamics.”

If a patient-rights bill passes, it could be harder for managed care’s radicals to build cost-effective plans and to reward consumers for good choices. Yet they are committed to staying the course, believing, as all radicals do, that right is on their side. Maybe some day the market will prove them right.

Marlene Piturro, PhD, MBA, is a free-lance writer in Hastings-on-Hudson, N.Y. She writes frequently about managed care issues.

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