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EXECUTIVE SUMMARY

Introduction

This paper examines a number of current and emergent challenges facing the managed care marketplace. It explicitly assesses whether managed care organizations will be able to continue to the meet the goals that private and public purchasers have had for them. Factors within and beyond the managed care industry are explored with the aim of extrapolating from contemporary trends and developments.

Turbulence in the Health Care Market

Health benefit purchasers embraced managed care initiatives to increase value. They enlisted the assistance of managed care organizations to carry this out. Enrollment in network-based managed care products grew rapidly from the mid- 1980s to the late 1990s reaching nearly 200 million lives by the year 2000. Premium increases slowed dramatically into the mid-1990s, but have since sharply reversed this trend. Current double-digit rates of increase are painfully reminiscent of those of the 1992-94 period, suggesting to many purchasers that cost savings ostensibly gained from managed care may not be sustainable.

In addition, managed care organizations have provoked considerable backlash among consumers and providers. The backlash has, in turn, led to a nearly unrelenting series of substantial regulatory impositions on the industry. Despite major investments in the quality monitoring and improvement, plans have not been able to convince most constituencies that these efforts pay off in greater value. Financial pressures for plans and for providers have also contributed to significant uncertainty and to increasing contentiousness in negotiations between these parties. Taken as a whole then, there are reasonable doubts about the continued contribution that managed care as-we-have-known-it may make in the future.

Public Sector Concerns

Though not examined extensively in this paper, it appears that public sector managed care has many of the same difficulties as private sector experience, with some added complications. Managed care in Medicare, and to a lesser extent in Medicaid, has witnessed considerable instability in terms of plan participation, raising serious doubts about its durability in these public programs. A number of risk factors seem to suggest that public buyers may not be able to adapt as effectively to market changes in managed care models and methods as private purchasers. These factors included procurement processes, regulatory requirements, payment methods and rates, and characteristics of beneficiaries. In addition, it may be that the adverse experience of many plans in these lines of business will convince them to continue to avoid participation, at least for the foreseeable future.

Trends in the Managed Care Sector

Several important trends in the managed care industry are explored and interpreted including:

In general, a number of changes are evident in each of these areas. The industry has been transformed by a dramatic shift in ownership from not-for-profit to for-profit. Markets appear to becoming more concentrated with the influence of national plans more apparent. But achieving local market leverage continues to be a critical task for plans to accomplish in order to be successful. Product diversification is moving toward looser network products and also away from fully funded ones. Networks are growing in size in response to pressures to expand choice. Risk sharing between plans and providers has become extensive, but may now be reversing course as providers pushback on this and other fronts. Innovation in care management practices is apparent, but its widespread adoption faces many obstacles.

Contemporary environmental pressures

Several pressures for managed care organizations are detailed as emanating from purchasers, consumers, providers, and public and private regulating authorities. Shifting purchaser preferences in terms of both financing and delivery arrangements are forcing plans to alter their products, strategies, and structures. Generalized consumer disenchantment with HMOs has proven nearly impossible to overcome, despite substantial investment in mechanisms to enhance the legitimacy of the industry, including accreditation, compliance with regulatory impositions, and consumer reporting and education campaigns.

Providers, feeling financial pressures from managed care contracts, rising input costs, and reduced Medicare payments, are negotiating much more aggressively with plans over rates and other terms. Regulatory and accreditation compliance is adding cost and complexity to plans, and having disproportionate impacts on traditional or pure HMO products to the point where they may no long be a viable option. Plans are finding lack of purchaser interest in performance data disappointing and disconcerting in light of the investments they have made in these areas.

Longer Term Challenges

A number of long-term challenges for the industry are identified and discussed in the paper.

Implications for Future Market Trends and Areas for Tracking and Monitoring

The paper concludes by assessing how these trends may impact several areas of interest and what issues and indicators policymakers may wish to track and monitor as these trends unfold. The areas examined include:

In general terms, the implications are not particularly promising in any of these areas. But they are especially daunting in terms of cost control and provider cooperation. Provider market consolidation could further forestall efforts of plans to negotiate rates and terms that could result in savings similar to those observed in the early and mid-1990s. Gains made on outcomes reporting and, possibly improving consumer acceptance, may not be sufficient to overcome the fact that if managed care plans cannot control costs, many purchasers—both private and public—will not see them as adding value in the health care marketplace.

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