After a decade of tumult, what’s next

In a few weeks, the calendar will tick over and, if we’ve solved our Y2K problems, we’ll be seeing a calendar year none of whose digits will be the same as this year. It will look new (even though we know it’s really the last year of the second millennium) and may invigorate us. A little emotional support couldn’t hurt a health care system that has been buffeted by winds from all directions for years.

We could say that we’re on the cusp of dramatic new developments in health care, but people have been saying that for a decade, and there’s been no revolution yet. Evolution, however, is indisputable: The ’90s have seen significant advances in understanding many diseases, and if treatment advances haven’t kept pace, they’ve done pretty well. The health care delivery system has evolved in ways few foresaw a decade ago. The rise of HMOs to a position of overwhelming influence on the delivery of care surprised a lot of patients and physicians, and lately the increasingly successful counterattack of the “unmanagers” who brought us point-of-service plans, mandated minimum hospital stays and, now, a patients bill of rights, has become a thorn in the side of health plans that pretty much had carte blanche.

The calendar will change dramatically, but there will be no apocalyptic change in health care. Evolution, maybe even progress, will continue.

But what changes? We asked influential participants in the health care system what they saw as developments and issues that would dominate the first half of the ’00s (though we didn’t ask them to pronounce ’00s!). Each speaks from his own field of expertise, and if some show a little self-interest, well, that’s part of the equation. They represent distinct constituencies (health plans, physicians, analysts and academics, disease management purchasers, and employers, for example), and all see significant movement within their areas of expertise over the next few years.

We’d like to share their visions and expectations with you. We hope you’ll find them as provocative as we do.

For the first time, plans are in a position to work with physicians to improve outcomes, efficiency, and patient safety. Helping doctors would go a long way toward mending managed care’s image.

At some point in the future, health plans will look back at the changes in care delivery at the end of the 20th century and recognize that one of the most important — and one of the most lasting — accomplishments will have been to move the health care system toward a strong focus on evidence-based medicine and accountability. With that as a springboard for discussion, all parts of the delivery system can build on this accomplishment by using evidence-based practice and principles of accountability to ensure that consumers receive the highest-quality care.

If anything illustrates that we have gained a great deal of ground in pursuing this objective, it is how the discussion proceeded on Capitol Hill about best practice vs. customary practice. The year began with a major debate about whether the standard for medical care should be generally accepted physician practice — in other words, what the physician has always done — vs. best practice. And even those who vociferously supported anti-health plan legislation agreed that the best medicine for patients is based on scientific research and evidence. Once the choices became known, there was an about-face, and now there is nearly unanimous consent that the risks are too high to move in any other direction.

This experience demonstrates that as they go about day-to-day activities, health plans need to ensure that they work hard to connect with physicians and consumers, and to educate them about the “how and why” of coordinated care. Now that we are over the hurdle of whether the standard ought to be best practice, we have to prove that we are delivering on that promise.

In support of physicians

To that end, job one is to prove value to physicians. We have the technology, the information systems, to provide physicians real support. The first wave of managed care was about discounting. Now, we’re making the transition into true coordination of care and disease management, both of which proceed from effective information systems. For the first time, we’re poised to change health plans’ relationships with physicians — making them far less contentious, and far more collaborative, based on things that we can provide physicians to help them do their jobs better.

Health plans can help physicians orient their practice toward outcomes. We also can help them understand how they compare with their colleagues — not only in the same community, but across the country. What do the latest research studies say? What do various specialty societies say about how to handle a particular kind of case? What are the pros and cons about specific pharmaceutical therapies? Physicians are very busy trying to meet the needs of the patients in their practice, and what plans can provide is something of value to assist physicians with that process, and to improve their efficiency and effectiveness. Then they can draw upon us, as opposed to viewing us as agents that are simply setting up processes that make it hard for them to do things. We’ve never been in a position to do that until now.

Restoring industry’s image

If we can accomplish that, then we can begin to turn the tide of negativity that has arisen.

We have to bridge a major disconnect between individuals who believe that their health plan is doing a good job for them yet are assaulted every day with horror stories, and thus become concerned that the plan may not be there if something catastrophic happens to them.

The way to begin to do that is to stay focused on the benefits we deliver to patients — communicating that in a straightforward way, but not shrinking from debate. We created this revolution in health care. Some — not patients — who have been affected by this revolution have gone to the legislative arena for protectionist legislation. Health plans have to provide data that offer a compelling case about why initiatives that are put on the table in the name of patient protection are not necessarily deserving of that name.

This has become a very politicized debate. We have to continue to demonstrate that we provide affordable, high-quality care, and that by giving physicians something tangible to use to work with us to improve the care of people, we are enhancing patient safety in the process. This is the value differentiation for health plans. Empirical data suggest that we are accomplishing this objective, but we have to translate data from the realm of technical information and scientific research into what people think about, when they think about health plans.

Karen Ignagni is president and CEO of the American Association of Health Plans, a trade association representing HMOs, PPOs, and other managed care plans.

A health plan’s systematic approach to dealing with common chronic illnesses is on the edge of remarkable outcomes. Physician buy-in can be slow, but is crucial.

The challenge many health plans and integrated health systems face — transforming the delivery of care into a systematic approach that is based on the best medical evidence — is dependent on more than just laying out the rules and expecting physicians and clinicians to do it. To improve patient care, you need to work simultaneously in three areas:

  • You need to create some kind of incentive for improving care. Whether that is a philosophic incentive, a clinical incentive, or a financial incentive, it needs to be there.
  • You need the tools. Not just the knowledge tools — i.e., clinical practice guidelines — but also financial resources, experts who understand the peculiarities of a local market, and the technology to monitor and measure care and to communicate.
  • You need a framework for accountability.

All three of these things must work in concert. The absence of one results in the type of frustration most people have experienced with attempts to improve care. Knowledgeable, well-meaning people have spent a lot of time developing guidelines, but then simply expected physicians to practice by them because those guidelines were so good and so important. Alternatively, people have focused on the incentives without providing the guidelines or technology. And there have been occasions where organizations have created accountability structures and said, “You will do this or you will not have our business,” and that, too, is shortsighted.

Our job at Kaiser Permanente’s Care Management Institute is to develop systematic approaches to managing major health conditions, and to provide our physicians with the tools to help them adopt these approaches. We are dedicated to this three-pronged approach, but doing all three things well, simultaneously and quickly, is difficult. In some areas, we have shown significant progress since we began our work in 1997. We’ve certainly made more progress than if we had just focused on handing guidelines to providers. We’re poised to make significant breakthroughs as individual clinicians begin to realize that adopting evidence-based practice styles will make their day-to-day lives easier.

Yet in others — namely, the effort to change physician culture — it has been slower going than I had anticipated.

Resistance to change

Our philosophy is not to take the existing culture and just graft things onto it. New technologies and the new emphasis on accountability are creating an opportunity in health care, but also creating a threat to existing practice cultures.

For instance, one of Kaiser Permanente’s regions signed an agreement with the CMI whereby it agreed to achieve specific improvements for clinical measures in three areas. In return, the CMI supplies knowledge, financial, and information-technology tools to help it reach those goals. But a one- or two-year period for achievement of those goals has proven to be insufficient. The changes required to achieve these targeted goals are deep, rather than superficial. A number of those changes must occur at the ground level, and have to do with how new information is presented to very busy clinicians. Everyone develops routines — heuristics — because they make our day-to-day lives easier. That same thing happens with practicing clinicians, who develop habits of practice. Trying to change those habits is much deeper than saying, “Here’s the latest journal article — read it and do what it says.”

For any organization, the success of efforts to change physician culture can hinge, in part, on whether this type of information is presented with a heavy hand — as opposed to appealing to their desire to provide the best possible care. And this relates to another phenomenon that can foster resistance to change: Physicians are a very embattled group. Think about all of the changes in health care and about who the major stakeholders are. In a very short period of time — less than a decade — physicians have gone from the top of the stakeholder pecking list to someplace in the middle. That has engendered anxiety and fear about their economic livelihood. Worse, there aren’t any solutions in sight, from a physician’s perspective, that would restore what they once had.

Whatever the future holds, unless physicians take a more active role in shaping that future, it will be shaped for them. By helping to mold the new practice of medicine, physicians can reinforce the value they bring to the health care system.

Return on investment

The biggest challenge for us — or any organization that attempts major cultural changes to achieve better outcomes — is return on investment. The Care Management Institute is something of a lab; Kaiser Permanente has made a significant bet that by having an organized, systematic, nationally leveraged approach, we will achieve improvements in three key areas: patient outcomes, care processes, and satisfaction among the stakeholders in health care — patients, physicians, employers, and health plans. In the last couple of years, we have worked hard to get the infrastructure in place. We have been able to demonstrate significant outcomes — 15 to 20 percent improvement. But those are interim outcomes, and soon, the organization will look carefully at the question, “What did that actually result in?” If by then we can’t prove an appropriate return on this investment, then it may be that we as a society — as well as our health care apparatus — are just not yet ready for systematic change.

Peter I. Juhn, M.D., is vice president and executive director of Kaiser Permanente’s Care Management Institute. He earned his medical degree at Harvard University.

The young industry must clear some hurdles in the near future. Medicare stratification, disability management, and federal restrictions are worrisome. Then there’s that new law in California.

To paraphrase the immortal words of Dan Quayle, there is an irreversible trend toward more disease management — but that could change.

All the DM pieces are starting to fall into place. Health care professionals and employers are beginning to understand the economics and the quality-of-care benefits. Vendors are getting more experienced and buyers are developing better information systems, which they need. The stage is set for explosive growth and I predict DM will be the fastest growing non-Internet sector of the health care industry. That’s the irreversible trend.

Now for the “that-could-change” part. There are some legislative and regulatory movements on the horizon that pose very serious threats. In some states, identifying patients through claims is going to become impractical if not de facto illegal. I’m especially worried about Texas, Pennsylvania, and Massachusetts. Those are the three I know about, but there are probably others.

In a very small state called California, there’s a new law that says patients can only get into disease management programs if physicians enroll them.

The debilitating provision in the approximately 35-page statute is only a paragraph long. It states: “For purposes of chronic disease management programs, information may be disclosed to any entity contracting with a health care service plan to monitor or administer care of enrollees for a covered benefit, provided that the disease management services and care are authorized by a treating physician.”

As anyone in the industry knows, physicians are often part of the problem. The many who are not adhering to protocols or guidelines will resist efforts to enroll their patients in programs.

Battle plans

Jim Jacobson, J.D., of the Washington law firm of Gardner, Carton, & Douglas (and who also serves as general counsel for the DMAA), says there are several ways to fight this though none of them seems terribly promising at this point.

The industry can hope that Congress passes a less onerous patient-privacy law, but don’t hold your breath. In addition, while the DMAA has done a good job in getting Congress to credit its reasons why disease management needs to be protected from privacy legislation, the Department of Health and Human Services is another story altogether.

Jacobson says that privacy guards favored by Secretary Donna Shalala are likely to be far more stringent than legislation on Capitol Hill.

He feels that the industry’s best bet may be to lobby for legislative repeal at the state level — another long shot. Meanwhile, it will be tough to prove any bad effects the legislation may have to legislators in other states that are considering a similar move.

“It’s difficult to show factors resulting from a lack of access,” says Jacobson. “That’s like trying to prove a negative.”

At federal level

The huge issue is Medicare stratification, in which the government would pay more to health plans that have sicker populations. This sounds terrific in theory. In practice, however, they’re basing level of sickness on utilization. So if you’re a health plan doing a good job with disease management to the point where utilization goes down, your reward from the government will be less reimbursement.

Hopefully, the Health Care Financing Administration will improve those systems and stratify based on underlying medical conditions, as opposed to the amount of utilization.

I’m considerably less worried about federal confidentiality rules. Congress has been educated on the importance of carving out disease management from confidentiality legislation.

Falling into the irreversible-trend category will be a push by HCFA for a DM program that covers Medicare fee-for-service members. That would be terrific. But so far, to paraphrase Woody Allen, it’s just a notion trying to find funding to turn into an idea and, eventually, a concept.

Internet’s potential

It’s on everybody’s mind these days. I predict that the Internet, as a data-gathering tool, will become an integral part of disease management, but it — in itself — will never become disease management. DM is too high-touch. There’s too much relationship building and coordination involved to be done without some labor components.

You couldn’t operate a DM program on the Internet anymore than you could have a third-grade teacher replaced by someone on the Internet.

Disability management

Some large self-funded employers are exploring ways to combine utilization management, disease management, and disability management. They’re wasting time and resources. Disability management is basically a method for pushing people back to work sooner without trying to improve their health status.

Disease management, on the other hand, actually improves the underlying health of these workers so that they’re going to have less lost-work time, lower medical expenses, and less need to use high-cost parts of the system.

Al Lewis, one of the nation’s foremost experts on disease management, is president of the Disease Management Association of America.

Buyers of health care are looking at risk adjustment to discourage parsimonious care. They’re also hoping to transfer power and responsibility to workers.

Historically, businesses that provide health coverage have acted independently, doing their best to balance the pressure points: network size, quality of benefits, and price. This go-it-alone approach may allow a single employer to put out brush fires, but it doesn’t help that company address larger issues that influence the dynamics of its health care market. The employers we work with recognized several years ago that no matter how hard they tried, they couldn’t develop incentives that created value in the marketplace by working alone. Even some of the Fortune 50 companies we work with realized they didn’t have enough clout to fundamentally change the market on their own. They understood they needed to collaborate on a very tough long-term business problem.

The more employers can get consumers involved in the game, the more providers will become directly accountable to consumers. Under traditional managed care, employers — without realizing it — have put themselves in the middle of the relationship between physicians and their patients: Which doctors are available? Which drugs? Even the price people pay to see their physicians has been dictated by their employers. Our member employers believe they should not make value judgments — such as which doctors they should see and at what cost — for their employees.

One thing employers can do to ease out of this dilemma is to give consumers the tools and opportunity to become smart shoppers. If a group of doctors wants more money, historically what employers have done is asked the carrier to kick that group out of the network or paid a higher premium so the consumer never feels the effect of that increase. That neither serves the needs of consumers nor empowers them. Our employers realized that if there’s a group of doctors that thinks it can get away with charging more money, consumers should have the information they need to be the ones to make that value judgment.

How so? If a group really thinks it provides superior quality or access, and thinks it can charge more money for that, it should try to demonstrate that to its patients. This way, providers would compete on efficiency, outcomes, and competitive service.

We also need to address perverse incentives for insurers to compete on risk avoidance. A carrier that says, “We want the very sickest people in the community to sign with us,” will go out of business. How do you get value-based competition if everyone says, “Boy, I hope I don’t get sick people in my program”? The solution: risk-adjusted reimbursement in provider contracts and insured arrangements. That way, money goes with the sickest people.

Suits may scare away

The way the debate over a patients’ bill of rights is resolved will have an incredible impact on whether employers stay in health care at all. If employers can face lawsuits just for doing their best to try to manage a benefit, then that’s probably not going to encourage businesses to try to solve the problems of employer-sponsored coverage.

We’re in a race against time. If employers and public purchasers don’t begin listening to consumers about why they don’t trust managed care, if they don’t get creative to align the incentives of players in the health care industry, if they don’t get consumers and physicians to be accountable to each other, then we’re going to see more “solutions” from Washington that address short-term concerns, not underlying issues.

Take, for example, concern about access to specialists. Under risk adjustment, insurers would want sick people to get to specialists; they wouldn’t worry about whether easy access attracts bad risk. The issue of access to specialty care would just go away. Instead of mandating access to specialists, risk adjustment would create an incentive for providers and plans to compete on whether people get to specialists when they need them. One reason the gatekeeper system exists is because it’s a good way to avoid risk. Let’s not reach for Band-Aids; let’s talk about the issues that lead to patient-protection legislation in the first place.

Demand-side management will increasingly affect employers. We have two coverage problems in this country: people who are uninsured or underinsured, and those who are overinsured. Employers can be their own worst enemy by overinsuring; in an effort to recruit workers in a tight labor market, they can fail to deal with the very delicate issues of demand-side management.

We contract directly with a lot of good physician groups that struggle with prescription-drug costs. This year, we had a remarkable breakthrough. These groups came to our employers and encouraged them to change consumer contributions on prescription drugs to counter increased demand. Here’s a case where employers, if they listen to providers and think about demand management, could still be fair and offer competitive benefits.

In the end, consumers need a higher stake, armed with knowledge to make the best choices.

Steve Wetzell is executive director of the Buyers Health Care Action Group, a health care purchasing coalition owned and governed by 47 Minnesota employers.

Now that the hard part — forging quality-measurement systems for HMOs and point-of-service plans — has been done, the next step is to adapt these programs to the rest of the health care industry.

Twenty years ago, when fee-for-service practice was dominant, medicine was unlike any business. There was no oversight to assure customers that service was of high quality. Today, this has changed. More employers demand proof that they’re getting the biggest bang for their health care dollars, while patients want the ability to judge the quality of their care in much the same way they would consider the quality of any major product before buying it.

To its credit, the managed health care industry has, at least in part, embraced this trend; half of all HMOs have earned NCQA accreditation, and about 90 percent collect HEDIS data. We’re very proud of having succeeded at making a large segment of the HMO industry take ownership of the quality of care and service it delivers to its members.

Going forward, the biggest challenge will be to make quality-assurance measures work across the system. That means accrediting PPOs and medical groups, and bringing performance measurement to the entire industry. The health care community has to figure out how to make all types of health plans — not only HMOs — be accountable for their quality of care.

Physicians who actually deliver care should be held accountable in the same way HMOs are: with performance information. It may not be the same kind of information used to evaluate HMO quality, but nonetheless, this kind of information is the best way to hold medical groups accountable for quality.

It can be done

Many have suggested that measuring medical-group quality of care will be much more difficult than measuring health plan quality. Truth be told, I don’t see it as that complex. There are barriers, but we’re basically talking about evaluating two things: clinical systems and the functions they perform. We’ve shown that’s possible, and that it can pay huge dividends in terms of improved quality.

We already evaluate some of those functions in our health plan standards: Are credible practice guidelines in place? What patient education programs exist? What outreach and follow-up systems are there? This foundation is at the core of some very good models now in existence for physician-organization standards, though such models are clinically focused. The devil is in the details — as we have learned through the development of health plan accreditation standards and of HEDIS — but all in all, adapting this to medical groups shouldn’t be any more complex.

That’s not to say that this or anything involving quality measurement is simple. Quality measurement has turned out to be both more complex and more straightforward than I expected. Complex, because it’s critical to constantly question your assumptions as you go forward — do we really need to have plans report every HEDIS measure every year? And so on. And yet, straightforward as well, because the concept is fairly simple: Measure something, work to improve it, and it will get better.

You can quibble about the fine print, but trying to measure quality of care is like anything else: You have to start somewhere. You take your best shot at a prototype, and then change it as you go forward. Part of refining what you do as you go along is being receptive to other points of view. This fosters a dialogue that helps key stakeholders with divergent interests forge a shared vision.

Margaret E. O’Kane is president of the National Committee for Quality Assurance. NCQA accredits HMOs and manages the evolution of HEDIS.

Better-informed patients need not be a bane to other players in the health care industry. Interaction doesn’t have to be adversarial and should include the historical “have-nots.”

Four themes will continue to grow in importance as the shift to consumer and patient empowerment continues into the 21st century. Consumers will want more and better information so they can participate in decisions about their health care. Consumers need to be more directly engaged in the challenge of keeping medical costs in check. The calls for accountability will extend beyond health plans to individual doctors. And, there will be increased recognition of the necessity of addressing both the needs of the health consumer “haves” and the health consumer “have-nots.”

Informed consumers

Patients are walking into doctors’ offices with material from the Internet — this trend will grow in the years to come. Too often doctors roll their eyes when this happens and think, “Here we go again.” Other doctors say, “Great! Let’s see what you’ve got there and let’s talk about it.”

These situations should be seen as incredibly important opportunities for doctor-patient dialogue. Consumers will be more and more attentive to those they can trust.

Accountability issues

The push for accountability will go beyond the current array of legislative initiatives and consumers will increasingly ask whether they are getting quality health care. Patients will ask tough questions about the quality of their provider — not just of their health plans (they’re already moving beyond that) — but also of their individual doctors and the particular care being recommended. They will ask: “Is this the right care for me and is a person with the right qualifications recommending it?” That’s going to be an increasing source of friction.

Who pays?

Consumers are becoming more sophisticated, looking at when they pay as opposed to when their insurer pays, what’s out-of-pocket, what’s not out-of-pocket. But beyond understanding payment terms, consumers need to be better engaged in the coverage choices that may limit benefits.

Much of consumer concern about managed care has focused on the questions, “Who’s denying what, and what’s the basis of that denial?” They have wondered if a qualified physician is denying care because it truly isn’t medically necessary or an accountant is denying care as part of a health plan’s cost-cutting measure.


In the past five years, the so-called consumer-protection debate has included virtually no discussion of the issues of the health care have-nots — those who are uninsured, are underinsured, or have limited ability to understand the growing array of report cards (in the rare case where these individuals have a choice to make). The high rate of those without health insurance is a national embarrassment and represents thousands upon thousands of individual tragedies.

Hopefully we will get to some form of universal coverage through a variety of means. Beyond expanding coverage, a major challenge is how to respond, on the one hand, to the educated drivers of the health care system while not leaving behind patients who are less educated and assertive.

Peter Lee, J.D., is the executive director of the Center for Health Care Rights in Los Angeles.

Companies will want to distance themselves from insurance entanglements, giving employees little option but to become more involved. Meanwhile, stormy seas ahead for Medicare+Choice.

What’s going to happen in employer-provided health insurance in the first part of the next millennium will be a radical shift from what is now essentially a defined-benefit scheme — where the employer basically pays 80 percent of whatever an employee picks — toward a defined-contribution system.

The employer will say to employees, “Look, we are in the business of making widgets. We’re willing to make a contribution to your health insurance but, in the end, it’s your responsibility. So, we’ll give you a defined contribution and we’ll help you get information on insurance options available and you pick them yourself.”

There will be all types of insurance products with different premiums. The dividing line will be gatekeeper vs. nongatekeeper. Nongatekeeper models — PPOs, some point-of-service plans — will be more expensive. The employer is likely to pay the contribution to make a tightly managed care gatekeeper policy affordable.

Employers will say, “We’ll cover roughly 80 or 90 percent of an HMO product, but if you want all this choice, you pay for it.” Which means that, ultimately, employees who are fussy will pay a much higher percentage of their premiums as a visible deduction from their paychecks.

Health marts

The second thing employers will do is organize health marts for employees, as the largest companies already do. These will be farmers markets for health insurance in which competing health plans will bid on a standard package so that employees can compare rival health plans fairly. The employer will get information on quality with NCQA data, or other data, so that employees have some notion about patient satisfaction with the plan and with providers in the plan.

Community rating will be an issue. Employers now pretty much community rate within their own companies — that is, the contributions employees make out of pocket to the premiums paid by employers do not vary by the age or health status of the individual employee. Healthy young employees cross-subsidize sicker or older employees. This intra-company socialized medicine is something employers are likely to try to continue to offer their employees.

However, employers will not try to make, say, all employees in a state (of whatever company) pay the same premiums. Companies with young, healthy employees would never go along with that.

Of course, what’s been discussed so far applies mostly to big employers. Small businesses have the handicap of being prevented by statute from forming consortiums for the purpose of purchasing insurance. I’m astounded that such laws exist. My hunch is that they will be abolished so that small employers can also develop health marts.

Perhaps employers will also play along with another innovation that is badly needed in a competitive health insurance market. Serve enough wine to a bunch of HMO executives and they will tell you that the best strategy in the HMO business is to become third best in the treatment of particular chronic illnesses — not the best. If you are known to be the best, you are likely to attract people with those chronic illnesses, but your premiums won’t be adjusted accordingly.

This problem could be solved — and the search for truly best quality would get new life — if the premiums paid health plans by employers were to reflect better the actuarial risk of the enrolled. A badly needed innovation in employer-provided health insurance is a system that:

(A) Continues to socialize the cost of health care within the company, so that healthy employees keep cross-subsidizing sick employees, and yet

(B) Rewards health plans appropriately for trying to give the best possible care to chronically ill enrollees.

Medicare risk rating

The government is moving down this road. A new risk-rating methodology devised by the Health Care Financing Administration for Medicare+ Choice is slated to be implemented Jan. 1. From the HMO industry’s perspective, there are problems. When HCFA calculated what risk rating would do for Medicare+Choice, it found that most of the HMOs that are now in business with Medicare would wind up taking a huge hit.

That’s because, so far, HMOs have benefited by having slightly healthier Medicare members. That’s how they made money on the Medicare population; it wasn’t from managing care better. That’s why the HMOs could offer better benefits, such as pharmacy.

However, with risk rating, that favorable selection margin isn’t in there anymore and the HMOs will find that they can make money off the Medicare population only if they actually learn how to manage health care better.

They can do this. A good HMO in Florida can easily shave 20 percent of health spending off the system without in any way harming patients. Any expert will tell you that, in theory, that should be possible. However, the minute the HMOs try it, there would be uproar among patients rights groups. Gray power is going to get into action, egged on, of course, by doctors who do not like to be managed by HMOs.

Being told “no”

Let’s face it: Employed people take just about anything shoved down their throats, but even they insisted on the Patients Bill of Rights. The elderly have never experienced being told “no,” nor have their doctors.

The other thing HMOs are up against is the fact that Medicare pays out 98 cents of every dollar it collects to the provider. The administrative load is only 2 percent. There is no HMO that could ever take a million elderly and administer their care for 2 cents on the dollar. They need at least 15 percent off the top. Where would they get the 15 percent?

Well, presumably by managing care better. But when you ask an HMO executive what does managing care mean, he’ll say it means offering fewer services and paying lower fees for them.

As John E. Wennberg, M.D., vividly shows in the Dartmouth Atlas of Health Care, there is a great deal of excess use in Medicare in certain areas. However, Medicare pays very low rates. HMOs couldn’t match them. There isn’t a lot of money to be made by bargaining fees below Medicare.

The only option HMOs have is to deliver fewer services to the elderly. This approach would have to save enough money to cover the 15 percent administrative costs that Medicare doesn’t have, as well as a prescription benefit that’s the big come-on for Medicare+Choice.

Another alternative is for Congress to put more money on the table and raise the HMOs’ premiums, but that’s not going to happen either.

The final alternative is to get the elderly to pay more out-of-pocket. Let’s see someone try that.

Uwe Reinhardt, PH.D., is the James Madison Professor of Political Economics at Princeton University.

For HMOs: Administrative Retooling
For M.D.s: Managerial Competency

The two main players in the managed care industry have their work cut out for them for the next several years. While HMOs retrench, physicians need to become more constructive participants.

The biggest wild card facing the industry in the next few years is what physicians and other providers will do to be constructive players in this game of limited budgets. There haven’t been any strong statements from the physician community about this.

What we’re getting from physicians, instead, are complaints that they don’t have a blank check to do anything they want. The issue isn’t their salaries. The issue is: How do they manage the business of providing health care? How will they do it within the constraints that we all face?

We’re entering a period where the public will be more critical of providers. HMOs have been the punching bag for a long time. Now, the public’s going to look at providers.

In addition, the entire industry will probably become more honest with consumers and say, “This is what it costs. You can have this option if you’re willing to pay more for it.”

We have also gotten through our national debate on capitation. It’s not going to be seen as the solution for controlling the medical-loss ratio. And gradually we will realize that it never really was much of a movement. The HMOs that organized large-scale capitated systems five years ago are still accounting for most capitation today.

As recently as two years ago, people thought that transferring risk to providers in capitation arrangements would help HMOs control medical expenses. That’s a stalled trend. It didn’t happen. There are a lot of reasons why you don’t want to capitate some providers.

The primary reason health plans don’t capitate is that it is incompatible with their business model. Multi-product national concerns, organized across broad IPA networks, usually have information systems and management policies designed to serve claims-driven insurance businesses. Their business model is based on discounted fee schedules. To change into capitated plans requires these companies to rethink, reanalyze, reorganize, and then renegotiate each of their provider contracts — there’s just too much inertia.

For HMOs

Many of our customers who are consultants say that HMOs want operational solutions — they’re looking into how they can improve their administrative efficiency or get a handle on controlling utilization. They have to figure out how to control their medical-loss ratio. They can’t just rely on premium increases.

This is different from the last 10 years, where HMOs have sought planning guidance. In the past, many consulting engagements were to examine new markets, keep an eye on competition, and devise ways for gaining market share. That’s not so much the case anymore.

In short, HMOs are retrenching, looking for ways to restore their bottom lines. They can do some of that through premium increases, which we’ve all read about, but they also have to improve efficiencies.

HMOs have to get back to the original principle of the HMO industry, which was to take prepaid premiums and use them to provide preventive services and superior access to primary care.

Too many HMOs have just forgotten about that and have become insurance companies that pay claims. They try to stay within the limits of their prepaid premiums through a lot of administrative obstacles that enrage both physicians and consumers and which, according to our research, are actually contributing to lower profitability among the HMOs.

Our data indicate that as HMO administration gets more intense and closer to the actual processes of care, profitability suffers.

HMOs vs. PPOs

There has been some price convergence. The cost of providing a PPO-based health plan has been going up more slowly in the last two years than the cost of providing an HMO health plan. More recently, HMOs’ share of the total commercial market has dropped maybe one or two percentage points while PPOs now have one or two percentage points higher market share. These trends have encouraged some cost-sensitive employers to take a new look at PPOs.

However, while you might be able to view PPOs as the alternative to HMOs, there are many things that consumers can get from HMOs that they can’t get from PPOs. The PPO is not just a replacement product for the HMO.

For instance, a large portion of PPOs don’t do their own claims adjudication. They don’t have any data that help account for quality and efficiency. Many of them can provide utilization review, but their customers don’t buy utilization review on a regular basis.

The employer that puts together a PPO-based self-insured plan usually has to go elsewhere to find a case management, pharmacy benefits, or chronic disease management company. While many PPOs do offer those services, many do not, and many employers choose not to buy them.

So HMOs remain the primary choice for somebody who wants a comprehensive benefits package with low out-of-pocket expenses.

Medicare market

It should also be pointed out that very few PPOs have anything to do with Medicaid, and none of them has anything to do with Medicare.

HMOs serve both those markets. Our most recent work shows that the reimbursement rate in Medicare isn’t really the predictor for market exit that many thought it was. Most HMOs are maintaining their service areas and expect to grow, on average, by 2,500 Medicare enrollees a year.

I realize that this runs somewhat counter to perception. There’s a lot of publicity created when plans like Humana and Aetna U.S. Healthcare pull away from Medicare. Before the Balanced Budget Act of 1997, you rarely saw HMOs doing that. But even after the act, most HMOs stayed in the Medicare market and plan to stay in.

Until the act passed, that market grew at about 24 percent a year, topping out at 35 percent in 1996. Last year, it was an 18-percent growth rate, but there’s nothing wrong with that.

Right now, health care is a miserable business for those in the trenches. Nobody is making any money and financial instability is very common. However, managed care is not going away because no government wants to become an insurance company.

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