Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. B. Financial pressures for plans and providers


Among the most disturbing aspects of the health care system that led to the embrace of managed care by purchasers, was the extent to which cost shifting was extensively practiced by providers. The process of meeting financial requirements by charging those payers who would make payments in excess of costs had been a longstanding practice, but worsened in the late 1980s. This resulted in a disproportionate burden on private purchasers with indemnity coverage who paid prices or posted charges that had been set to make up for “shortfalls” from public payers and uninsured persons, ostensibly paying less than full cost. The opportunity to engage in cross-subsidization across payers to meet requirements diminishes the pressures that providers encounter in the face of financial constraints, and is generally viewed as promoting inefficient production.12

Managed care organizations that negotiate payment levels with providers that pay only for the cost of care for persons whom they are covering are engaged in a kind of systematic suppression of cost shifting. The extent of cost shifting that prevailed in hospital sector has been well-documented by first ProPAC and now MedPAC as they advise Congress on Medicare payment policy.13 Figure 4 illustrates that in 1990 private payments reached nearly 130 percent of costs of care for persons with private coverage. By 1998, private payment had fallen toonly 113.6 percent of costs. The decline is even more notable because hospital operating cost increases have slowed over this period as well, as evidenced in part by the fact that Medicare and Medicaid payments have come closer to covering the full costs of care for their own beneficiaries. MedPAC carefully chronicled improved efficiency in hospital operations as operating costs per discharge experienced real declines through the mid-1990s.

Figure 4a. Hospital Payments as Percentage of Costs-1998

Figure 4a. Hospital Payments as Percentage of Costs-1998

MedPAC, 2000

Figure 4b. Hospital Payments as Percentage of Costs, 1990

Figure 4b. Hospital Payments as Percentage of Costs, 1990

Source: PROPAC, 1992.

Another indication of the mutual financial pressures between hospitals and health plans is shown in Figure 5. This figures illustrates one of the truisms in the contemporary saga of cost containment: “one man’s revenues is another man’s expense.” The success of managed care in the cost control realm—while welcomed by purchasers in most instances—has had adverse impacts on those enterprises whose fate depends on sustaining the rise in health care costs—particularly hospitals. Note the nearly perfectly inverse pattern between the percent of HMOs making a profit when juxtaposed with the percent of hospitals doing so. The entwined fortunes of both parties reveal why much of the current policy debate is over how much of BBA refinement restorations should be awarded to hospitals and HMOs.

Figure 5a. % of HMOs Reporting a Profit 1988 to 1999

Figure 5a. % of HMOs Reporting a Profit 1988 to 1999Source: Smith Barney Inc./Salomon Brothers Inc. estimates.

Figure 5b. %  of Hospitals Reporting a Profit 1988 to 1998

Figure 5b. %  of Hospitals Reporting a Profit 1988 to 1998Source: ProPac/MedPac

The picture of suppression of cost shifting, and in fact, cost control in general on physician income is less clear-cut. It appears that physician income has continued to grow throughout most of the 1990s, though at a slower rate than in previous periods.14 In addition, there is some variation across specialties and, some evidence that the range of variation across subspecialties and primary care has been narrowing though this trend seems to be leveling off.15 However, the Kaiser Family Foundation reports that in the period from 1985 to 1996 the ratio of median physician income to all full-time wage earners actually grew from 5.3 to 6.5. This suggests that, at least through that period, physicians had fared reasonably well during the downward trend in managed care premiums.16

In light of these general trends, questions about the future of managed care organizations can reasonably be raised. They have been created for a specific purpose: to increase value for purchasers. The principal mechanism for value enhancement to date seems to be aggressive negotiation of prices, while presumably at least holding outcomes constant. To date, research on patient outcomes suggests differences in performance between managed care and conventional delivery and payment systems have been modest and inconclusive17. Even industry efforts to track and tout performance indicators suggest year-to-year improvements are limited. But price discounts have reduced revenues to providers, especially hospitals that now appear to be engaged in a vigorous pushback to forestall further concessions. Faced with rising costs, health plans have raised premiums by increasing rates in the most recent years until they are back to levels of the early 1990s. This development underscores the fact that if these MCOs cannot demonstrate increased value, they, like other expendable middlemen, will be replaced.

  1. W. CleverlyEssentials of Health Care Finance, Fourth Edition, Aspen Publications, 1997.
  2. Medicare Payment Advisory Commission. Selected Medicare Issues: Report to Congress, June 2000, Washington, DC: MedPAC, 2000.
  3. H. Luft, “Why are Physicians So Upset about Managed Care?” Journal of Health Politics, Policy, and Law, 24(5):957-966, 1999.
  4. A. Slomski, “How Much are Groups Paying the Doctors?” Medical Economics, January 10, 2000, pp. 115-124.
  5. L. Levitt, J. Lundy, and S. Srinivasan, Trends and Indicators in the Changing Health Care Marketplace: Chartbook. Menlo Park, CA: Kaiser Family Foundation, August 1998.
  6. R. Miller and H. Luft, “Does Managed Care Lead to Better or Worse Quality of Care? Health Affairs, 16(5):107-123, 1997.