Private Payers Serving Individuals with Disabilities and Chronic Conditions. B. The Four Studies


The four studies we conducted were designed to illustrate how people with potentially disabling chronic conditions fare in private sector indemnity and managed care plans. Specifically, we sought to determine how such people in these plans differed in terms of:

  • prevalence,
  • demographic characteristics,
  • the types of chronic conditions they have,
  • health care utilization and expenditures, and
  • their incentives to enroll in indemnity or managed care plans.

Finally, we analyze the usefulness of risk-adjustment systems as methods to evaluate competing health plans and to help plans estimate the costs of treating people who may be high service users.

Study No. 1: Characteristics of People WithPotentially Disabling Chronic Conditions in Indemnity and Managed Care Plans

This study (reported in Chapter 5) provides information on the demographic, employment, case mix, service use, and expenditure characteristics of people with potentially disabling chronic illness in the health plans offered by two large employers. The study does not try to assess causality and does not estimate a managed care “impact” on service use or expenditures. It simply provides a first look at the data in order to outline the characteristics of a large group of chronically ill people.

Chapter 5 provides information separately for children, adults under the age of 65, and early retirees. We find that rates of potentially disabling chronic illness vary by age group and retiree status and that the major conditions were similar across the two employers. While the results suggest that people with chronic conditions tend to favor the indemnity plans, these plans are not necessarily associated with greater service use.

As a purely descriptive study, Chapter 5 may raise more questions than it answers. This is entirely appropriate, however, since one may not know which questions are important without conducting a detailed first look at the data as illustrated in that chapter. Three of the more important questions raisedby the descriptive study are those addressed in the remaining studies.

Study No. 2: The Impact of Managed Care on Utilization and Expenditures of People with Potentially Disabling Chronic Conditions

Chapter 6 examines whether people with potentially disabling chronic conditions selectively enrolled into more generous forms of health insurance. Specifically, we examine plan switching behavior among people with potentially disabling conditions and determine whether those who switch to more generous plans have higher utilization. This chapter also assesses the impact of membership in managed care versus indemnity-type coverage on service use and payments levels. To isolate the managed care impact, the approach that we used adjusted the overall differences in use and payments across the plans for confounding factors. In particular, variation in patient characteristics that were available in the data (such as age), as well as variation in factors that were unobservable but correlated with the patient's choice of plan (such as the propensity to seek care), were removed from the overall estimates of differences in the levels of utilization and payments.

The descriptive evidence on plan switching suggests that, as a group, switchers to managed care were relatively healthier and generally used fewer services than the individuals that stayed in the indemnity plans. The full analysis shows that enrollment in managed care as opposed to indemnity-type insurance generally reduced service utilization and expenditures. Based on the distribution of patients across the plan types, we found some evidence from one employer that there may be increasing pressure on the indemnity option to raise premiums or reduce services through time. For the other employer, our results suggest that some of the patients who were inherently higher users of health care services may have viewed the indemnity plan as too expensive compared to the managed care plan.

One important finding from this study is that managed care did not have a uniform influence on utilization and expenditures. More research is warranted into why managed care influences some types of health care use and payments but not others. At the least, the findings suggest that a blanket policy of favoring managed care over indemnity coverage is not the best approach for providing health care for people with potentially disabling chronic conditions.

Study No. 3: Risk Adjustment for People with Potentially Disabling Chronic Conditions

Chapter 7 investigates the ability of leading risk-adjustment systems to predict the expenditures of those having selected chronic conditions. Better payment methods can mitigate the incentives faced by patients and health plans to engage in strategic behavior. Risk-adjustment has been proposed as a method to accomplish this objective. Risk-adjustment refers to more precise methods of payment to health plans--methods that account for the above-average cost of treating people who are expected to use unusually high levels of services. Comparisons were made to simple adjustments for age, gender and wage rates, since these are commonly used by insurance plans to predict expenses and by major employers to set payments to insurance plans.

The risk-adjustment systems that we compared were Hierarchical Coexisting Conditions (HCCs), Adjusted Diagnosis Groups (ADGs), and Adjusted Clinical Groups (ACGs). We used these systems to study ten types of potentially disabling chronic conditions: rheumatoid arthritis, asthma, cancer, chronic obstructive pulmonary disease, diabetes, heart failure, psychiatric disorders, seizure disorders, stroke, and ulcerative colitis. The results suggest that health plans and employers should use risk-adjustment methods in addition to traditional age, gender and wage adjustments, especially if they cover services used often by people with potentially disabling chronic conditions. Yet while risk-adjustment would improve payment methods for those with chronic illness, inequities would still remain.

Study No. 4: Risk-Adjustment of Capitation Payments to Behavioral Health Care Carve-Outs: How Well Do Existing Methodologies Account for Psychiatric Disability?

Chapter 8 focuses on risk adjustment for people with psychiatric conditions. It uses 1994 and 1995 data from Employer B to examine the viability of Diagnostic Cost Groups (DCGs--a precursor to HCCs) and ACGs for setting capitation payments to the behavioral health care carve-out plan used by that employer. The carve-out plan was responsible for all of the psychiatric care delivered by the indemnity and PPO plans used by Employer B.

As in Chapter 7, using variants of DCGs or ACGs to risk-adjust expenses resulted in projected payments that were much closer to actual mental health and substance abuse expenditures than were projected payments derived from simpler adjustments. In addition, the study investigated alternative rules for setting risk-adjusted payments. Three alternatives were included:

  • full capitation, in which plans receive a set payment for each enrollee, regardless of actual expenses incurred;
  • mixed systems, which combine capitation with reimbursement based on actual expenses; and
  • soft capitation, in which profits or losses from full capitation are shared by the plan and the employer.

The results showed that full capitation may still lead to substantial profits or losses, even after risk-adjustment. Mixed models and soft capitation performed much better but also diminished some of the incentives for cost containment.

These four studies show that people with potentially disabling chronic conditions use more health care services than the total population, have higher expenditures, and thus are more difficult to insure. The potential for improving their “insurability” exists with risk-adjustment systems available today and these systems have potential for further improvements. At the same time, while people with potentially disabling chronic conditions are more likely to choose indemnity health insurance, they also enroll in managed care in large numbers. When this differential enrollment is taken into account, the result is that managed care does not necessarily result in less cost and lower utilization. Sometimes it does, sometimes it does not. Purchasers of group health insurance who have substantial populations with disabling conditions would do well to investigate the incentives and results of specific plans to be sure they are getting the best value and highest quality from their health insurers.

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