Beyond the Water's Edge: Charting the Course of Managed Care for People with Disabilities - Conference Resource Book. Surviving Managed Care and Preparing for the Next Revolution in American Health Care


Gerben DeJong, Ph.D.
February 24, 1996

INTRODUCTION (Rehab 2000=heads up)

  1. Purpose of presentation
    1. Outline what is happening in the larger health care system;
    2. Tease out some of the implications for people with disabilities, the allied health professions, and the medical rehabilitation industry; and
    3. Identify some of the steps that both consumers and providers can/must take to reposition themselves in a manner that will
      1. Make health care and rehabilitation more responsive to the consumer,
      2. Address the economic concerns of providers, and
      3. Respond to the financial constraints of the payer community and the public at large..
  2. Thesis
    • As we move toward managed health care, there is much doom and gloom, but there are also enormous opportunities for both the consumer and the provider alike.
    • As we move toward managed care, health care providers across the board are scrambling to reposition themselves in a drastically altered marketplace. In the short term, providers need to do what they have to do to survive.
    • In the long-run, provider interests are best served by working with the consumer community. In a health care system that, historically, has been provider-driven, providers have not looked to the consumer as vital to their economic interests.
    • Moreover, consumers, especially those with disabilities and chronic health conditions, have interests that are not particularly well-served by the financial incentives inherent in managed care.
    • I believe we are entering a special period in which the interests of consumers and the interests of providers are beginning to converge on several key points. If we fail to seize this moment, I believe we will loose an historic opportunity to unlock the promises of a truly market-based health care economy.
  3. Note:
    • Where I am coming from. Originally trained as an economist. A strong believer in a market-based health care system. Also believe that managed care is a necessary corrective to the excesses of the past. The problem with managed care today is that it is being hoisted on a health care system that violates all the precepts of a competitive market system. As such, managed care is likely to intensify the risk-based competition that is so detrimental to the well-being of people with disabilities and chronic health conditions.
  4. Objectives
    1. Outline the extent to which managed care is rapidly becoming the dominant method of health care financing
      1. Geographically
      2. By payer
        1. Private sector
        2. Public sector
          1. Medicare
          2. Medicaid
    2. Outline how managed care is reshaping health care system and the rehabilitation industry
      1. Health care in general
      2. Medical rehabilitation
      3. The buzz words of the 1990s
      4. Mergers, acquisitions, alliances
    3. Discuss the emergence of the consumer/ demand side of the market and identify some of the steps needed to strengthen it
    4. Identify some additional steps that need to be taken in order to secure a consumer-driven, risk-neutral, market-based system
    5. Provide a brief summary of action steps
    6. Close by noting how collaboration between consumers and providers is essential to achieving a health care system that we can live with



  1. Geographically
    1. Highest penetration in West and Northern states (Minnesota and eastward); penetration varies greatly within states. See outdated map in Appendix.
  2. By payer
    1. Private sector (Slide 5)
      1. 1993--26% of private health insurance market=managed care
      2. 1994--38%
      3. 1995--50%?
        • 65% of employees in mid to large firms were enrolled in managed care in 1995 up from 29% in 1988.
      4. 2000--85-95%
    2. Public sector (Medicare and Medicaid)
      1. Growth in Medicare and Medicaid programs
        • Medicare
        • Medicaid
      2. Threat to federal and state budgets
        1. Federal budget (see pie chard in Appendix)
          1. Medicare, Medicaid, and interest on the federal debt are the 3 big drivers of the current deficit
          2. This is why the Clinton Administration made health care reform its #1 priority

            Without bringing health care under control, one cannot bring the federal budget and deficit under control-unless one is willing to make deep/ painful cuts in other parts of the budget. That is what is happening now.

          3. The arithmetic of the federal budget and the growth of the Medicare and Medicaid programs make these programs an obvious and inevitable target.
      3. Managed care provides politicians a great deal of political cover.
        1. By cutting costs and services through managed care, politicians can let "market forces" make the hard decisions for them.
        2. No politician is willing to go out front to propose specific program cuts in health care for fearing of stirring up one constituency or another.
        3. Clinton's health care reform program looked to managed care to make some of the hard decisions.
        4. The Republicans are doing the same. Not willing to face the wrath of the voters, particularly older voters, when it comes to cutting the Medicare program.
        5. Bottom line: Managed care, regardless of its excesses or shortcomings, will have the support of the political process as well as the momentum of the economic market place.

          The politics of the federal deficit and the economics of health care converge on managed care. Managed care= harmonic convergence of deficit politics and health economics.

      4. Managed care penetration in Medicare and Medicaid
        1. Medicare
          1. End of 1994, 9% of Medicare beneficiaries enrolled in managed care
            +32% increase in 1995
            +45% increase in 1996 (projected)
          2. By 2000, 25-85% of Medicare will be managed care (estimates)1
          3. Managed care penetration within selected markets
        2. Medicaid
          1. States are moving rapidly to convert their Medicaid programs from traditional FFS to managed care programs (Lewin-VHI, 1995)
          2. All but 8 states have Medicaid managed care programs of some type
          3. One-third are now in FFS primary care case management (PCCM)
          4. By 1998, 85% of Medicaid participants (exclusive of those in nursing homes) will be in some form of managed care.
          5. §1115 and §1915 waivers. TennCare, Michigan, Rhode Island, New York
          6. TennCare
            • Currently 7 HMOs and 5 PPOs
            • 400,000 Medicaid subscribers and 800,000 new eligibles



  • Bear with me here. Trying to make a point which will become more obvious later.
  1. Health care in general
    1. Economic drivers
      1. Economics of MC is forcing individual health care providers to become part of a network of providers that can provide the full continuum of care. The drive toward "vertical integration" and "integrated service networks" (ISNs).
        • Minneapolis-St. Paul market
          90% MC pentration
          3 main networks
      2. To remain price competitive, provider networks must keep their costs down (and their risks low).
      3. Cost- and profit-sharing mechanisms are encouraging individual providers to eliminate unnecessary services; reduce hospitalizations in particular.
      4. The primary care physician (PCP) gate-keeper has become a central figure in determining who gets access to what and how much.
      5. The PCP shares much of the financial risk. His/her compensation/bonus will depend in large part upon the savings achieved by the network of which he/she is a part.
    2. Shifting the competition
      1. Shifting away from prestige competition
        • Historically, providers competed on the basis of the latest technology, their academic affiliations, the credentials and size of their medical staffs, their level of specialization, and the bed-size of their institutions.
        • This prestige competition has helped to make American health care the most sophisticated and technologically advanced in the world, but it has also led to tremendous excess capacity that has made American health care frightfully expensive.
      2. Shifting to price competition
        1. In the new health care system, price has replaced prestige as the defining element in competition
        2. "... the hospital industry still has a long way to go before excess capacity, costs and waste are fully wrung out of the system."
      3. Risk competition still remains
        1. Marketing to groups that are, on average, younger and healthier
        2. Tweaking benefit plans to attract lower-risk populations
        3. Discouraging high users from joining or continuing with their plans once large claims are made
        4. Passing on high-cost users to other health plans
          • As a result of risk-based competition, certain groups will be underserved, excluded, or simply priced out of the market.
        5. Especially true in individual and small-group health markets. (Scism, 1994)2
    3. Shifting ownership status: Not-for-profit --> for-profit
      1. Physician groups
        Physician groups tend to be undercapitalized; take too much money out of the group; forced to go to Wall Street to acquire capital needed to:
        1. Finance network expansion
        2. Finance new capital equipment needed to keep services in-house and to reduce the need to refer patients to hospital-based facilities
      2. Hospitals
        1. Debt financing (used by not-for-profits) becomes part of the hospital cost structure that must be recovered by billing and revenues.
        2. Debt financing cannot as compete well with equity financing.
        3. Hospitals need major infusions of capital in order to retool or upgrade their facilities and to acquire nonhospital partners.
        4. Hospitals are prone to look to Wall Street for the financing they need.
        5. Once publicly traded, facilities are subject to buy-outs and mergers and all the other things that can happen on Wall Street.
  2. Impact on health care providers in general
    • The "bleeding edge" of managed care
    1. Hospitals
      1. Some cutting costs by 25% or more in order to retain market share
      2. Elimination of excess capacity
        • Example: hospital beds in Minneapolis-St. Paul market
          1981   9,188
          1984   7,436
          1992   5,348   -42%
    2. Physicians
      1. Reduced need/demand for specialty medical care
        1. Year 2000 surplus of 115,000 specialists (CGME)
        2. Year 2000 surplus of 165,000 specialists (Weiner, 1994). See table in Appendix.
        3. Lewin-VHI study on demand for PM&R physicians
      2. MCOs deselecting physicians on short (30-90 days) notice.
        1. "Termination-without-cause" clauses.
        2. For-cause reasons being expanded.
      3. Physician income
        1. Income decline
        2. Modeling income decline
        3. Shifting from fixed pay to variable pay
      4. Formation of for-profit, publicly traded national physician corporations
      5. Physicians selling practices to hospitals to avoid overhead, personnel, and paperwork costs
    • California health systems and networks
      • Even largest medical groups and networks appear to have little market leverage with respect to price.
      • Even the best, most highly acclaimed, systems are having difficulty
  3. Impact on medical rehabilitation in particular
    1. Providers being forced to reduce costs in order to remain a recognized provider within a health plan (including the referral of patients)
    2. LOS is shortening dramatically in inpatient medical rehabilitation facilities
    3. Therapy teams reorganized. The interdisciplinary team model under attack.
    4. Growth of nonhospital alternatives (see table in Appendix).
      1. Outpatient programs incl. day treatment
      2. Subacute, SNF-based rehabilitation
      3. Home-based rehab
    5. Vertical integration: Medical rehabilitation being forced to become part of larger health care networks with a continuum of rehabilitation settings.
    6. Horizontal integration: Medical rehabilitation providers joining forces with like providers in order to acquire market share and strengthen position for managed care contracts
    7. More for-profit providers
    • See article from Managed Care Reporter in Appendix: "Medical Rehabilitation Undergoing Major Shakeup in Advanced Managed Care Markets."
  4. Buzz words
    1. Capitation, contact capitation
    2. Incentive compensation
    3. Pod-level risk pools
    4. Market share
    5. Vertical integration
    6. Horizontal integration
    7. Integrated service networks
    8. Partnering, joint ventures
    9. Mergers/acquisitions/consolidations
    10. Reegineering, downsizing, restructuring
  5. Impact on consumers
    1. Consumers feel they have lost choice and access
    2. Employers offering fewer or no choices of health plans
    3. Health plans limiting the choice of providers
    • Both consumers and providers are concerned that managed care may undermine traditional bioethical principles such as those that relate to (a) patient autonomy and (b) the physician's fiduciary responsibility to the patient (Biblo, 1995; Council on Ethical and Judicial Affairs, 1995).
  6. Mergers, acquisitions, alliances
    1. Acute hospital industry (Skolnick and Prime, 1994)
      Columbia-HCA Healthcare Corp (COL) (see drawing in Appendix)
      1. Grown from 20 hospitals to 340 hospitals & 100+ freestanding surgery centers in just 4 years; $22 billion in annual revenues.
      2. In late April, completed its $3.3 billion takeover of HealthTrust, a 116-hospital system and is moving its headquarters from Louisville to Nashville (Hilzenrath, 1995)
      3. Seeks to operate as many as 500 hospitals in a few years.
      4. Going international. Joint venture with (a) Britain's largest independent health care provider, General Healthcare Group PLC and (b) a health unit of the French conglomerate Groupe Generale des Eaux (Tomsho, 1995).
        Columbia/HCA has "an appetite that is seemingly insatiable."
      5. Columbia/HCA's cardinal rule of acquisitions:
        "Never pay for an empty bed unless you are buying the facility to close it."
        Why buy a facility you intend to close: eliminate competition; "it pays only for the ability to fill up beds in existing facilities by closing the hospitals that it buys."
    2. Home care industry
      1. Size
        1. $22-billion industry, 1995
        2. $40-billion industry, 2000
      2. Names
        1. Coram (CRH)
        2. RoTech Medical (ROTC)
        3. Lincare Holdings (LNCR)
        4. American HomePatient (AHOM)
      3. Mergers and acquisitions in home health services
        • From 1992-94 there were $3.7 billion of mergers and acquisitions in the home care industry.
        • In summer 1995, Manor Care, a leading nursing home chain, headquartered in silver Spring, MD, purchases a controlling interest in Home Health Inc. for $42 million.
        • The recent Homedco/Abbey merger makes it the largest home care company with revenue of more than $1.1 billion.
    3. Medical rehabilitation industry
      1. Horizon/CMS, formerly Horizon Healthcare
        1. In February 1994, Horizon Healthcare buys Greenery Rehabilitation Group (20 facilities and 2,800 beds)
        2. In August 1994, Horizon Healthcare acquires 13 peopleCare Heritage nursing facilities with 2,200 beds in the Dallas area
        3. In 1995, Horizon Healthcare buys Hillhaven (nation's second largest nursing home chain, ($1.5 billion in annual revenue)
        4. In March 1995, Horizon Healthcare acquires Total Rehabilitation, Inc. and Rehabilitation Network, Inc. in Michigan for $6.5 million of Horizon common stock
        5. In June 1995, Horizon Healthcare acquires buying Continental Medical Systems for $502 million
        6. Later Horizon/CMS (new name) purchased Pacific Rehabilitation & Sports Medicine, Inc. for $62 million
      2. HealthSouth = the Columbia/HCA of the rehabilitation industry
        1. Started in 1984; went public in 1986 with 7 facilities and $12 million in annual revenues
        2. In September 1994, HealthSouth buys 30 NME hospitals for $300 million cash
        3. In spring 1995, HealthSouth buys Nova Care hospitals
        4. In December 1995, HealthSouth buys AdvantageHealth for $325 million3
        5. In 1995 HealthSouth acquired 130 independent rehabilitation centers
        6. As of the end of 1995, HealthSouth operates 850 outpatient and rehab facilities in 44 states with projected revenues of $2.5 billion in 1996.
        7. It now controls about 40% of the nation's rehabilitation hospitals, twice the share of its nearest competitor, Horizon/CMS.
      3. Growth of subacute providers such as Nova Care and Theratx
    4. Reading (tongue in cheek)
      • If you really want to know what is going on in health care, don't read the New England Journal of Medicine or any of the medical literature, read the Wall Street Journal.
      • Perhaps time for the Archives of PM&R and the Journal of Head Trauma Rehabilitation to develop investment reports that includes
        1. Annual and quarterly sales
        2. Quarterly earnings
        3. Earnings per share
        4. High and low stock prices over the last 12 months
        5. Etc
    5. Consider following statement from a stock analyst report (name of company has been changed):

      "In our opinion our opinion, the ABC Rehabilitation Inc. has maintained impressive rates of internal growth. It is noteworthy for its efficient operations, high margins, excellent receivables management and tremendous cash flow, which have in turned enabled it to make acquisitions without leveraging its balance sheet. While ABC has not actively pursed partnerships to broaden its services horizontally or vertically to reposition itself for managed care, its well-run operations could make it attractive to an acquirer ... We recommend ABC as a buy."

      1. What's missing from this statement?
      2. There is no sense of the product, the people who produce it, the people who use it, and its future viability. No sense of the quality of the product.
      3. There is no sense of the consumer, the drivers of the demand for the services
      4. There is no sense of the producer of the services, i.e., the professionals in terms of their training, commitment, philosophy, competence, productivity. Human capital not considered.
      5. It assumes that the driver is quarterly earnings, potential for being a take-over target.
      6. The statement above seems almost vacuous.
        1. Yes, efficient operations, decent margins, good receivables management, and excellent cash flow are essential to the well-being of any organization but they cannot replace the fundamentals related to consumer demand, quality of services, and price.
        2. Nor does it give you a clear picture of the market fundamentals, i.e., the need/demand for the product nor the supply within a given market area.
        3. You cannot get an adequate read of an organization and its services merely by looking at the brochures and videos produced by the marketing department nor by merely reading the financial statements produced by the accounting department.
          In capital markets, these departments are in the business of perception management - they want to create an image of an organization as dynamic and fiscally healthy. They do not necessarily give you a true picture of what is actually happening.
    • Restructuring of the health care system = the privatization of health care reform
    • Today's shake-out is akin to:
      • The shake-out in the banking and financial services industry during the late 1980s and into the 1990s on the heels of the S&L crisis
      • The restructuring of the communications industry starting with the break up of AT&T a decade ago and continuing with the convergence of computer, cable, and telephone technologies in the 1990s



  1. Historically, consumer side has been weak but the role of the consumer is becoming stronger (as we will see later)
  2. An informed consumer is essential to a well-functioning market-based system.
    1. Perfect knowledge = key assumption in the economic theory of perfect competition.
    2. A market without informed consumers is not a "free market" in the real sense of the term.
    3. We cannot have market-based solutions to the problems of our health care system without an informed consumer.
      • The champions of market-based solutions are being disingenuous when they do not at the same time champion the consumer and his/her right to make informed decisions about health plans and health providers.
      • What the champions of market forces really mean is the forces of capital markets, i.e., Wall Street. In my humble opinion, Wall Street is often ill-informed about the fundamentals of health economics. Too much of what happens in health stocks is fueled by the perceptions created by high-flying hospital company CEOs, by marketeers, and by the expectations created by stock analysts' reports. Stock prices often move on the most flimsy information.
  3. Consumer choice is important at two different stages/levels
    1. When choosing a health plan
      1. The more important choice
      2. Consumers have most clout when choosing a health plan
    2. When choosing a provider
      1. Presumes that there is a choice of provider within a health plan or health network
      2. Consumer choice also constrained by gate-keeper referral
  4. Consumer knowledge being strengthened
    1. Consumer satisfaction
      1. Ratings of individual health plans
      2. Ratings of individual providers
    2. Health outcomes ("report cards")
      1. For health plans
      2. For health providers
      3. Examples:
        1. Washington, DC area's Consumer Checkbook.
        2. National Committee for Quality Insurance (NCQA) HEDIS 2.5 (Health Plan Employer Data and Information Set). HEDIS 3.0 to be released in early 1997.
          Information on 200 NCQA-rated health plans available on the Internet at
        3. Health Pages which currently rates health plans and health providers in 5 markets (Atlanta, Boston, Columbus-Cincinnati, Pittsburgh, St Louis) and was scheduled to start in 4 other markets starting this fall (Phoenix, Denver, S Florida, Los Angeles)
        4. Cleveland Health Quality Choice Program - outcomes and pt. satisfaction among 29 Cleveland area hospitals. Includes severity adjustments.
        5. North Central Texas HEDIS Coalition developed a report card on 7 HMOs on HEDIS performance measures and member satisfaction data from independent surveys.
        6. Denver - NCQA and Health Pages released an HMO report card comparing HEDIS performance of Denver-based Cigna, FHP International, Kaiser, MetraHealth, Pru and Sloan Lake.
        7. Pittsburgh Business Group on Health spearheaded a similar cross-HMO comparison involving HealthAmerica HMO, Keystone Health Plan West, and US Healthcare.
  5. Leading role of the large employer
    1. Demanding that health plans, particularly managed care plans, provide standardized outcome and consumer satisfaction data
      • Large businesses more likely to demand this information than small businesses. Smaller employers are mainly concerned about price.
    2. Have market power akin to purchasing cooperative or health alliance
      • National HMO Purchasing Coalition involving 10 employers, e.g., Sears. All HMOs must meet Sears' quality specs
    3. Information interests of large purchasers and small consumers are, in many ways, similar
    4. Jackson Hole II, June 1995:
      • "Monitoring quality = the next battlefield."



  1. The price imperative (short-term)
  2. The quality imperative (long-term)
    1. Providers will be bargained down by payers if the competition remains largely on the basis of costs and price.
    2. It is in the provider's interest to see that the competition shifts from one largely based on price to one that is based on price and quality (i.e., consumer satisfaction and outcomes)
      • Price and quality competition is in the interest of both the consumer and the provider. Here is where the interests of consumers and providers converge.
  3. The challenge for rehabilitation: How consumers choose a health plan
    • One of the great challenges facing medical rehabilitation in a consumer-driven health care system is how to reach out to, and communicate with, the consumer who is making a health plan choice.
    • Most consumers, especially younger ones, never envision a need for medical rehabilitation services and many will not even know what these services are. The need for medical rehabilitation services is often considered by the average consumer to be a remote possibility and, as such, will not be carefully scrutinized by the consumer when making a health plan decision.
    • Thus, consumers are not likely to make much of an investment in learning about rehabilitation and the quality of various providers within plans when making a health-plan choice.
  4. Four actions

    This state of affairs will require four actions on the part of the medical rehabilitation industry:

    1. The industry will need to develop, in collaboration with a more neutral entity (e.g., NCQA), as well as the business community and the consumer community, a single standardized rehabilitation score (with possible subscores) by which health plans will be rated based on the capabilities and performance of the plan's entire network of rehabilitation providers. Such a score would be largely outcome based (and risk adjusted). Such a score would also create enormous peer pressure to exclude subpar providers and encourage collaboration in helping to improve the plan's overall rehabilitation score.
    2. The industry will have to convince various health system governing boards, large employers, and health insurance purchasing cooperatives that a rehabilitation rating system is needed to help consumers make their annual side-by-side comparison of competing health plans. Without such a rating, consumers will overlook the rehabilitation component of a health plan and health plans may not be adequately motivated to include the best possible network of rehabilitation providers.
    3. The industry will have to adopt the single-score concept (with possible subscores) as the basis for rating individual providers. Such ratings would guide consumers, physician gate-keepers, and health plan case managers in selecting a within-plan or out-of-plan provider when a rehabilitation need arises.
    4. The medical rehabilitation industry will have to undertake an education strategy to inform consumers, physician gate-keepers, and case managers what rehabilitation scores or ratings mean for the choices they need to make when choosing a plan or selecting a provider.4, 5
  5. Another way to frame the challenge: The spark-plug and sound-system analogy
    1. Will consumers choose a health plan based on the quality score of a rehabilitation provider network associated with the plan?
      1. Consumers probably will not choose a health plan based solely on who is the rehabilitation provider
      2. Consumers do not buy an automobile based on the brand or quality of the spark plug in the automobile; they might choose an automobile based on the brand-name sound system in the automobile (Pioneer, Bose).
      3. Consumers do choose a health plan based on quality and reputations of key providers. Examples:
        1. The primary care physician or gate-keeper (e.g., a pediatrician)
        2. The OB-GYN
        3. A specialist with whom the consumer has had a long-standing relationship (e.g., a neurologist)
        4. Other providers (e.g., oncologists) if the consumer perceives that he/she is a risk of acquiring a particular health condition (e.g., oncology practice).
      4. Rehabilitation providers will have to convince would-be consumers that they are the moral equivalent of a Bose sound system; that they are at risk of acquiring a condition that will require rehabilitation (stroke = "brain attack")
    2. The situation is different for those who already have an impairment that has required, or may, in the future, require rehabilitation
      1. These consumers already understand their risk
      2. The rehabilitation provider's franchise with the consumer would be even stronger if it saw itself not only as a provider of rehabilitation services but also as the gate keeper or PCP that will meet the ongoing needs of the disabled population.
  6. Rehabilitation providers as PCP/gate keeper for people with disabilities
    1. Rehab needs to position itself at the front end of the health care "food chain," not at the back end; need to become an "up-stream" provider instead of a "down-stream" provider.
    2. Rehabilitation providers understand the ongoing health care needs of the disabled population better than most primary care physicians. Rehab physicians understand how various up-front interventions can avert the "down-stream" (specialist and hospital) costs that person with disability is otherwise likely to incur.
    3. Many primary care physicians consider people with disabilities as a "drag" on their practice - can't turn patients around fast enough.
    4. In many instances, rehab providers already serve as the de facto primary care provider.
    5. In the near term, there are remarkable opportunities to cut win-win-win deals with managed care organizations:
      1. The consumer
        • Needs a reliable source of primary care currently not available
        • Needs an informed gate-keeper who understands his/her particular constellation of health care needs
      2. The provider
        1. Needs to capture a population such that he/she is not left at the vulnerable end of the "food chain"
        2. Capitating a high-cost population can be financially profitable
          CMA in Boston capitated at approx. $27,000 per enrollee per year

        Rehab providers need to negotiate capitated carve-outs with health plans (including Medicare & Medicaid).
        In California, a 14-physician oncology group practice negotiated a carve-out with a MCO and found that their income increased 40% at a time when national average income for oncologists decreased.
        Rehab providers may, in the short term, want to team up with PCPs in order to shore up their network's primary care capabilities.

      3. The payer
        • Wants some certainty about costs managing a higher-cost population
    6. Are rehabilitation providers in the business of rehabilitation or in the business of health care for people with disabilities?
    7. Significant implications for training of rehab physicians and allied rehab professionals



  1. Develop risk adjusters
    1. Essential to developing a more risk-neutral health care system
    2. Need to risk adjust outcomes
      1. Outcomes adjusted on basis of risk, severity of impairment, severity of illness, functional limitation upon admission
      2. Without risk adjustment for outcomes, one program cannot be compared fairly with another
    3. Need to risk adjust health plans
      • Health plans will continue to discriminate against high-end users of health care such as people with disabilities and chronic health conditions without some form of risk adjustment
    4. Difficulty
      1. Development of an appropriate risk adjustment methodology for health plans and providers is probably the single greatest analytic challenge for the remainder of the 1990s
      2. Need to start with simple risk adjusters and learn how to refine them over time.
  2. Develop a standard benefits package
    1. Essential to minimizing risk competition
    2. Essential in helping consumers make informed choices among health plans when making side-by-side comparisons
      • Addresses the "homogeneous product" assumption in the theory of perfect competition
  3. Get people to understand the important role of government
    • Even for those who would like to see a reduced role for government in the provision of health care, need to understand the importance of government in creating a more level-playing field in health care.
      • Government essential to the development of rules that will result in a more consumer-driven, risk-neutral, market-based system
  4. Initiate antitrust action, where necessary, to preserve effective competition in local and regional markets
    1. The present trend of mergers, acquisitions, and consolidations reflects market-share competition. Everybody wants to be part of a larger system so they will not lose out in obtaining managed care contracts.
    2. Some within-market consolidation is needed to help achieve some economies of scale that will make health care cheaper.
    3. Excessive within-market consolidation represents the single greatest threat to the development of genuinely competitive consumer-driven market.
    4. Health care reform would have helped put the brakes on excessive consolidation.
    5. We still have a window of opportunity to structure Medicare and Medicaid managed care to insure effective competition. In the absence of comprehensive reform, we can do a lot to make sure that Medicare and Medicaid managed care adheres to principles of market competition.
      • This is another area in which consumers and providers can collaborate for the remainder of the 1990s.



  1. Near-term (next 2 years)
    Rehabilitation providers (individually or collectively)
    1. Reposition. Redefine your business. Get into the business of providing health care for people with disabilities and chronic health conditions, not just the rehabilitation business.
    2. Research what health plans are currently spending annually on the health care needs of disabled populations that rehabilitation providers are qualified to manage.
    3. Consult with consumers to determine what they need/want, what they seek in a health plan, and how they want to have their care managed.
    4. Reorient. Become the PCP/gate-keeper for selected groups of people with disabilities. Retrain.
    5. Work with other provider groups to develop a provider network than can deliver a continuum of care for people with disabilities (including primary care, outpatient care, acute inpatient, inpatient rehabilitation, subacute rehabilitation).
    6. Negotiate capitated carve-outs with MCOs. Offer MCOs the possibility of risk-sharing in managing the health care needs of a high-user population. Offer going full-risk after 3 years.
    7. Convince large employers, health purchasing cooperatives, and others representing the consumer side of the market that a rehabilitation rating system is needed to help consumers make their annual side-by-side comparison of health plans

    Providers and consumers

    1. Begin working together to develop a composite quality/outcome score and subscores that will be meaningful to consumers and referral choices when choosing a health plan or a rehabilitation provider. Seek government funding for the development of such composite scores.
    2. Read the Wall Street Journal, not JAMA or NEJM to know what is really happening in health care.


    1. As Medicare moves toward managed care, insist that Medicare subscribers have a choice of at least 3 viable health plans in each market areas.
    2. As state Medicaid programs move toward managed care, insist that Medicaid participants have a choice of at least 3 viable health plans in each market area.
    3. Petition to initiate antitrust action if Steps 10 and 11 are not implemented and if there is excessive concentration in local markets.
  2. Longer term (2-5 years)
    1. Work to make rehabilitation the sound system, not the spark plug, of health plans.
    2. Expand the current MREF education strategy to inform consumers, physician gate-keepers, and case managers what rehabilitation scores or ratings mean for the choices they need to make when choosing a health plan or selecting a provider.
    3. Provide full disclosure of outcome data across all rehabilitation providers; eliminate selective self-serving disclosure; abolish secrecy.


    1. Join forces with large employers in getting health plans to adopt disability ratings and rehabilitation scores.
    2. Insist that each health plan include a report care in its marketing material that includes a disability service and rehabilitation score as certified by an independent organization.
    3. Demand full outcome disclosure (risk adjusted to the extent possible) from rehabilitation providers.
    4. Make quality/outcome scores and subscores available on the Internet in a manner that will enable consumers and referrals sources to probe more deeply when attempting to make informed choices.
    5. Keep a watchful eye for excessive within-market concentration and anticompetitive practices that limit consumer choice and raise prices artificially.

    Providers and consumers

    1. Update methods for quality/outcome scores and subscores.
    2. Work with NCQA, health plans, and other organizations in developing risk adjusters that will minimize risk competition and can be used to risk adjust quality and outcome measures.

Remember: An informed consumer is the single most important element in truly consumer-driven health care system



  1. Strong believer in market-based approaches
    1. More creative, more dynamic, and ultimately more responsive
    2. However, we need to make sure that the conditions for a market-based health care system are effectively in place. We mentioned a few of them:
      1. Standard benefit package
      2. Consumer knowledge
      3. Competition on price and quality/outcomes, not price, risk, and market share
    3. Organized consumer groups are essential in making sure that we develop a genuinely competitive market system.
  2. Also believe in the principles of managed care provided managed care is organized on a level-playing field
  3. Moving from a provider-driven payer-driven consumer driven health care system
    1. Differences between these systems are outlined in table in Appendix.
    2. In a payer-driven system, both the consumer and provider are disadvantaged; a consumer-driven system is the provider's best hope for a more level playing field
    3. A consumer-driven system will empower the consumer to make choices and enable the provider to compete on a level playing field.
    4. I believe that the movement toward a consumer-driven system is inexorable and unstoppable. There are threats to the development of such a system. However, effective collaboration between consumers and providers is our best hope for achieving the outcomes we all want.


Gerben DeJong, Ph.D. is Director of the National Rehabilitation Hospital (NRH) Research Center; Director of the Research and Training Center in Medical Rehabilitation Services and Health Policy; and Professor in the Department of Family Medicine, Georgetown University, Washington, DC.

National Rehabilitation Hospital Research Center Mailing Address: 102 Irving Street, N.W., Washington, DC 20010-2949. Street Address: 1016 16th Street, N.W., Fourth Floor, Washington, DC 20036, (202)466-1900; FAX (202)466-1911



A presentation made to the Forum on Managed Care in Missouri sponsored by the Tri-Alliance for Rehabilitation and the School of Health Related Professions, University of Missouri-Columbia. Columbia, MO.

The preparation of this outline was supported in part by the NRH Research Center's Research and Training Center on Medical Rehabilitation Services and Health Policy (RTC-MRS&HP) which is funded with a grant from the National Institute on Disability and Rehabilitation Research (NIDRR). Grant #H133B40025.

  1. By covering increasing out-of-pocket costs for prescription drugs, managed care companies are luring Medicare subscribers into Medicare managed care plans. This was the same enticement that the Clinton health care reform plan had: It tried to secure the endorsement of the retirement-age population by including Medicare coverage for prescription drugs.

  2. A Wall Street Journal article (Scism, 1994) on the Golden Rule Insurance Company illustrates this problem well:

    Screening insurance applicants carefully, Golden rule tries to sell policies only to the healthy or to those whose existing medical problems can be exempted from coverage. And when cherry picking fails and the company gets stuck with someone with a big medical problem that isn't exempt from coverage, it still does well ... because its hardball legal tactics often carry the day.

  3. Just before being acquired by HealthSouth, AdvantageHealth purchased the 202-bed Harmarville Rehabilitation Center in Pittsburgh and its 7 affiliated outpatient centers.

  4. A rating system such as the one outlined have will require collaboration between organizations such as the Uniform Data System for Medical Rehabilitation (UDSMR) and the Commission on Accreditation of Rehabilitation Facilities (CARF). UDSMR for example, might well become the principal provider of standardized performance data and CARF will likely become the principal evaluator of provider capabilities. I believe that, in a consumer-driven health care system, the role of CARF, for example, will shift from its conventional accreditation function to also becoming producer of standardized data on which provider capabilities will be evaluated and translated for consumer consumption.

  5. The consumer-driven medical rehabilitation assessment system envisioned here will also come to replace the physician-based assessment used by organizations such as the US News and World Report in conducting its annual survey of the 10 best rehabilitation hospitals. Such surveys are based largely on physician-peer perceptions that are shaped less by the provider's quality of patient care and more by the provider's academic and research prowess and by the provider's marketing and public relations capabilities.



Boodman, Sandra G. 1995 "Doctors Learn to Generalize: Primary, Not Specialty, Care is HMOs' Focus." Washington Post (April 25), A-1 and A-4)

Batavia, Andrew I. 1993 "Health Care Reform and People with Disabilities." Health Affairs (Spring).

Biblo, Joan D., Myra J. Christopher, Linda Johnson, Robert Lyman Potter 1995 Ethical Issues in Managed Care: Guidelines for Clinicians and Recommendations to Accrediting Organizations. Kansas City, MO: Midwest Bioethics Center.

Consortium for Citizens with Disabilities Health Task Force 1994 "Testimony on Behalf of the Consortium for Citizens with Disabilities Health Task Force." Testimony before the Committee on Labor and Human Resources, US Senate. Washington, DC. February 22.

Council on Ethical and Judicial Affairs, American Medical Association 1995 "Ethical Issues in Managed Care." JAMA Vol. 273, No.4:330-35.

Council on Ethical and Judicial Affairs, American Medical Association 1995 "Managed Care Jekyll or Hyde?" JAMA Vol. 273, No.4:338-39.

DeJong, Gerben 1993 "Health Care Reform and Disability: Reaffirming the Commitment to Community." Archives of Physical Medicine and Rehabilitation, 74 (October), 1017-1024. Based on the John Stanley Coulter Lecture presented at the annual meetings of the American Congress of Rehabilitation Medicine. Denver, CO. June 27, 1993.

DeJong, Gerben and Janet P. Sutton 1995 "Rehab 2000: The Evolution of Medical Rehabilitation in American Health Care." Lead chapter in Outcome Oriented Rehabilitation: Principles, Strategies, and Tools for Effective Program Management, Pat Kitchell Landrum, et al., eds. Gaithersburg, MD: Aspen Publishers, Inc. (in press).

Ezekiel, J. Emanuel, Nancy Neveloff Dubler 1995 "Preserving the Physician-Patient Relationship in the Era of Managed Care." JAMA Vol. 273, No.4:323-29.

Foster Higgins, (1994). National Survey of Employer Sponsored Health Plans. New York.

Governance Committee, The 1995 To the Greater Good: Recovering the American Physician Enterprise. Washington, DC: The Advisory Board Company, 1995.

Health Pages-Wisconsin (1993) 1(1).

Health Pages-St. Louis (1993) 1(1).

Hilzenrath, David S. 1995 "National Orthopaedic Turns to Managed Care: Columbia/HCA Healthcare to Run Hospital." Washington Post (Washington Business), (May), 14.

Hilzenrath, David S. 1995 "Manor Care to Enter Home Nursing Field: $42 Million Deal Reflects Shift in Industry," Washington Post (May 4), B-11

Hodapp, Thomas E. and Michael Samols 1995 Mounting Momentum for New York Medicaid Managed Care Mandate Spells Massive Membership Gains. San Francisco, CA: Robertson Sephens & Company.

Hurley, Robert E., Deborah A. Freund, John E. Paul 1993 Managed Care in Medicaid: Lessons for Policy and Program Design. Ann Arbor, Michigan: The Association for Health Services Research, Health Administration Press.

Iezzoni, Lisa I. 1994 Risk Adjustment for Measuring Health Care Outcomes. Ann Arbor, MI: Health Administration Press.

Kertesz, L. 1994 A Blue Streak for Managed Care. Modern Healthcare. 24(37):63-66,68,70.

Lewin-VHI 1995 States as Payers: Managed care for Medicaid Populations. Washington, DC: National Institute for Health Care Management.

Marion Merrell Dow 1994 Managed Care Digest, HMO Edition. Kansas City: Marion Merrell Dow Inc.

Marion Merrell Dow 1994 Managed Care Digest, Long Term Care Edition. Kansas City: Marion Merrell Dow Inc.

Mathews, Jessica 1995 "Before Medicare Goes Belly-Up." Washington Post. (May 2), A19.

Newhouse, Joseph P. 1994 "Patients at Risk: Health Care Reform and Risk Adjustment." Health Affairs 13(Spring) 133-146.

Rich, Spencer 1994 "New York State's Stumble in Health Reform Raises Warning Signals on Hill." Washington Post (September 22), A-8.

Scism, Leslie 1994 "Picking Cherries: Health Insurer Profits by Being Very Choosy in Selling its Policies." Wall Street Journal (Eastern edition), 224 (September 20), A-1.

Sofaer, Shoshanna 1993 "Informing and Protecting Consumers under Managed Competition." Health Affairs (Supplement) No. 12, 76-86.

Skolnick, Sheryl R., Gianna C. Prime 1994 Acute Care Hospitals: Building Earnings through Market Share. San Francisco: Robertson Stephens & Company. November 22.

Tomsho, Robert 1995 "Columbia/HCA Finalizes Venture Plan in London, Providing Toehold in Europe." The Wall Street Journal (May 24), B-8.

Weiner, Jonathan P. 1994 "Forecasting the Effects of Health Reform on US Physician Workforce Requirement." JAMA (July 20)

Wohl, Vivian R., Scott R. Davidson 1995 Home Care '95: Parterning for Performance. San Francisco: Robertson Stephens & Company. March 21.

Wolk, S., Blair, T. 1994 Trends in Medical Rehabilitation. Reston, VA: American Rehabilitation Association.



Projected Surplus by Specialty1
Specialty Projected Supply in Year 20002 Projected Demand in Year 2000 Percentage Range of Surplus
Neurosurgery 4,285 1,449-2,736 57-196%
Plastic Surgery 5,204 1,882-2,311 125-177%
Cardiology 14,999 7,002-9,792 53-114%
Anestesiology 28,161 14,426-16,143 74-95%
Ophthalmology 17,141 9,014-10,946 57-90%
Neurology 8,265 4,542-5,400 53-82%
Radiology 26,324 15,706-18,496 42-68%
General Surgery 33,058 20,313-21,815 52-64%
Gastroenterology 7,346 4,752-4,967 48-55%
Orthopedics 19,896 13,103-16,537 20-52%
  1. Governance Committee analysis.
  2. Data represent 83% of all known active, nonfederal physicians in the U.S. and exclude residents and fellows.

Source: Weiner, Jonathan P., "Forecasting the Effects of Health Reform on US Physician Workforce Requirement," JAMA, July 20, 1994. ©The Advisory Board Company 1995


How Markets Evolve
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
  • Little managed care
  • Little hospital consolidation
  • Few insurers active as providers
  • Few physician groups
  • Overuse of hospital care fuels oversupply of beds
Loose framework
  • Most managed care is discounted fee-for-service; by late Stage 2, some capitation
  • Hospital consolidation begins
  • Insurers begin to acquire or partner with providers
  • Physicians organize in groups; primary care doctors move toward large groups
  • Oversupply of beds supports deep price discounts
  • Heavy managed care penetration, including government programs
  • Managed care dominates payment scene
  • Some capitation, especially of primary care MDs
  • Hospital mergers accelerate
  • Primary care doctors accelerate movement to groups; specialty doctors begin to form groups
  • Plans begin dropping doctors, hospitals: shift in physician supply begins
  • Managed care consolididation; providers, insurers begin to align
  • Overcapacity begins to shrink
  • Providers develop continuums of care
Managed competition
  • Employer coalitions buy health care
  • Managed care payment dominates
  • Little fee-for-service
  • A few large health care "players" dominate
  • Providers, insurers strongly align
  • Doctors not in groups pushed out
  • More pressure to eliminate beds
  • Shift in physician supply
  • Use of specialists and their fees driven down dramatically
  • Networks develop full continuums of care, especially subacute
  • Providers, insurers organize to serve "covered lives"
  • More than 50 percent HMO penetration
  • Networks with market share form true partnerships with insurers
  • Providers focus on their unique strengths
  • Integrated systems manage patient populations
  • Nassau, Long Island, N.Y.
  • Omaha, Neb.
  • Syracuse, N.Y.
  • Little Rock, Ark.
  • Birmingham, Ala.
  • Research Triangle, N.C.
  • New ark, N.J.
  • Shreveport, La.
  • Louisville, Ky.
  • Miami
  • Dallas/Fort Wroth
  • Cincinnati
  • Tampa/St. Petersburg, Fla.
  • Atlanta
  • Orlando, Fla.
  • Cleveland
  • St. Louis
  • New York City
  • New Orleans
  • Indianapolis
  • Nashville, Tenn.
  • Philadelphia
  • Orange, Calif.
  • Milwaukee
  • Portland, Ore.
  • San Francisco/Oakland
  • Detroit
  • Sacramento, Calif.
  • Denver
  • Boston
  • Salt Lake City
  • Phoenix
  • Seattle
  • Washington, D.C.
  • Houston
  • Chicago
  • San Diego
  • Minneapolis/St. Paul
  • Los Angeles
  • Worcester, Mass.
  • No markets-yet
SOURCE: Hospitals & Health Networks, 1995; APM Inc. and University Hospital Consortium, 1995
Editor's note: This chart presents a view from APM Inc. and the University Hospital Consortium of stages of health care markets evolving as a result of reform and identifies markets in the various stages.


Yearly Estimates of the Number of Rehabilitation Facilities, SNFs, and Long-Term Care Hospitals in the U.S.: 1985-1994
Type of Facility 1985 1987 1989 1991 1993 19946 Percent Change 1985-1994
Rehabilitation Hospitals1 68 88 125 152 180 187 +175
Rehabilitation Units2 386 539 642 672 783 804 +118
Long-term Care Hospitals3 86 87 89 91 109 113 +31
Skilled Nursing Facilities (SNFs)4 6,725 7,379 8,688 10,061 11,309 11,436 +70
Comprehensive Outpatient Rehabilitation Facilities (CORFs)5 86 141 184 201 229 237 +176
  1. Number of hospitals excluded from coverage under the Medicare PPS.
  2. Number of units excluded from coverage under the Medicare PPS.
  3. Number of long-term care hospitals excluded from coverage under the Medicare PPS.
  4. Number of SNFs participating in Medicare Health Insurance Program.
  5. Number of CORFs participating in Medicare Health Insurance Program.
  6. As of August 1994.

SOURCE: Wolk and Blair (1994).


Comparing Provider-, Payer-, and Consumer-driven Health Care Systems
Dimension Provider-driven
(supply side)
(demand side)
Key value Provider autonomy Cost minimization Consumer sovereignty
Basis of competition Prestige & risk Price & risk Price & quality
Economic goals Revenue maximization Market share/profit maximization Cost-effectiveness (efficiency)
Pricing "Usual & customary" Discounting Value-based
Method of payment Fee-for-service Case-mix (eg, DRGs, FRGs), RBRVS capitation Risk-adjusted capitation, carve-outs
Quality Accreditation Credentialing Perception of quality, CQI, TQM Outcomes, consumer satisfaction
Access Provider-controlled Payer-controlled Consumer choice
Capacity Excess capacity Reduced capacity Balanced capacity
Utilization Overutilization Underservice Balanced
Utilization review Retrospective Prospective Not needed
Costs Not important Very important Relative to outcome
Outcomes Elimination of pathology, "satisficing" Reduced utilization, reduced costs Health status, functional status, quality of life, consumer satisfaction
Outcome disclosure Confidential/secret Selective disclosure Full disclosure
Providers as price takers No Yes Yes
Homogeneous product No No Yes, standard benefit package
Knowledge & expertise Rests with provider Second-guessed by payer Made accessible to consumer
Rating Experience rating Experience rating Community rating
Risk adjustment No Some case-mix adjustment Yes
Governance Provider dominated Payer dominated Consumer dominated
SOURCE: DeJong & Sutton (1995)







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