Markets at Risk— Current and Future Challenges in a Managed Care Marketplace

Publication Date

Nov 30, 2000

Robert E. Hurley, Ph.D.
Department of Health Administration
Virginia Commonwealth University

Paper prepared for the Office of the Assistant Secretary for Planning and Evaluation of DHHS.

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:

Industry composition
Market structure
Product diversification
Provider networks
Care management practices

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.

Continued movement to looser products and models
Survival of the traditional HMO largely as a niche-product
Technology challenges on both clinical and technology fronts
Major purchaser preference shifts to direct contracting with providers or defined contributions for employees/beneficiaries
On-going consequences of efforts at provider organization
A continuing legitimacy deficit for the managed care industry

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:

Cost containment
Outcome improvement
Consumer acceptance
Provider cooperation
Public sector purchasing

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.

Implications for Future Market Trends and Areas for Tracking and Monitoring

Cost containment
Outcome improvement
Consumer acceptance
Provider cooperation
Public sector purchasing

I. Introduction

A return to double digit rates of health insurance premium increases and widespread disenchantment with many of the strategies and tactics of managed care organizations have raised doubts about the capacity of managed care models to make a long term contribution to the health care sector. Public sector experience with managed care has both paralleled and contributed to some of the broader disillusionment. Many factors play a role in the declining ability of managed care models to deliver the added value they were expected to provide. Some of these developments relate to the practices and performance of managed care organizations. Other factors reflect changes in the operating environments and financial condition of health care providers. Still other indicators reveal shifting preferences among purchasers and consumers about what they want to buy and how and from whom they want to buy it. And the regulatory climate in which managed care is being carried out has seen dramatic developments.

Taken as whole then, it may be “this year the answers are different” in terms of whether managed care organizations will even meet the needs of the private and public purchasers who have relied on them in the past or expect to rely on them in the future. For public purchasers who historically have followed and attempted to conform to private sector trends, the faltering of managed care models raises many doubts about future strategies. It is not clear what types of organizations and products may be available to contract with in the future. Nor is it certain that surviving managed care enterprises will be interested in participating in public sector contracting. Furthermore, the extent to which the policies and practices of public sector purchasers can influence a market place shaped by broader secular trends remains in doubt.

This paper provides an examination of some of the evidence of widespread turbulence in the health care marketplace. It then shifts to looking at the environmental pressures that managed care organizations face that are shaping their capacity to do the jobs for which they have been created. Extrapolating from current trends and broader themes in the health care environment, the paper next examines some of the long-term challenges for managed care organizations and draws some conclusions about their ability to meet them successfully. It then concludes by identifying selected indicators of change that should be systematically tracked by purchasers and policymakers to ascertain if the markets and products they are looking for will be available in the future.

II. Turbulence in general health care market

The conversion of most private health insurance to network-based managed care arrangements has been characterized as a purchaser revolution.^1-3 Disgruntled with steeply rising prices in the 1980s and disappointed by their inability to capture the attention or concern of health care providers, buyers revolted. As with political revolutions or coups d’etat, they attempted to topple the dominant provider regime and in the process establish themselves as the ruling party. To accomplish this transformation, buyers of health insurance turned to managed care organizations to help them pursue better value for the money they were spending. Managed care organizations came from two diverse worlds. One group included what had once been counter-culture prepaid group practice that had become “health maintenance organizations (HMO)” in the 1970s.⁴ The other group came from the traditional health insurance industry, which had provided coverage through unmanaged products for these same purchasers. Many of these latter organizations entered into managed care by developing preferred provider organizations (PPO) and then later developed HMOs.⁵

The growth in enrollment in the principal forms of network-based managed care—HMOs and PPOs--was extraordinary during the 1980s and 1990s (Figure 1). HMO enrollment grew from about 12 million to 80 million from 1982-99 and PPO participation shot up from virtually nil in the early 1980s to 110 million lives by 1999. Taken together, as of the year 2000 nearly 200 million people receive their health benefits from providers participating in network-based managed care organizations (MCOs).

Figure 1. Managed Care Organization (MCO)Participation 1982-99

Sourse: AAHP

Throughout much of the 1990s there was a strong sense among buyers that their efforts to reconfigure the health care world had paid off. Premiums seemed to move inversely to managed care enrollment. By the mid-1990s the year to year changes were so low to suggest that price inflation in premiums had been stopped, at least in part, because of the efforts of managed care organizations. However, an inflection point occurred at about this time, both in terms of financial success of the managed care organizations and in premium trends for purchasers. Profits in the industry plummeted—among both for profit and not-for-profit plans-- and premiums started to rise as plans tried to return themselves to profitability. Plans made strategic withdrawals from selected markets and product lines to shore up their finances and to reduce some of the uncertainty that cast doubt on their investment appeal or even their long-term viability.⁶ By 2001, rates of premium increase were expected have returned to the double- digit levels of 1992 and 1993 (Figure 2).

Taken a whole, these developments suggest to many that managed care, or managed care-as-we-have-known-it, has run its course.⁷ What was designed to be a solution has become a source of problems in its own right. Its capacity for cost savings seems to have diminished rather than intensified over time. The promise of improved outcomes has yet to be delivered upon. Resistance to managed care models among consumers has strengthened rather than softened over time as more have experienced them. Relationships between health plans and their network providers seem to have deteriorated rather than improved, as managed care has become more widespread and pervasive. Consequently, many purchasers are no longer sure whether the gain from a managed care strategy is worth the pain it has evoked.

Figure 2. Trends in HMO Premiums 1988-2000

Source: AAHP and Mercer

R. Hurley, “The Purchaser Driven Reformation in Health Care,” Frontiers of Health Services Management, 9(4):5-35, 1993.
T. Bodenheimer and K. Sullivan, “How Large Employers are Shaping the Health Care Marketplace (2 Parts), New England Journal of Medicine, 338(14):1003-1007 and 338(15):1084-1087, 1998.
J. Thompson, D. Draper, and R. Hurley, “Revisiting Employee Benefits Managers,” Health Care Management Review, 24(4):70-79, 1999.
T. Mayer and G. Mayer, “HMOs: Origins and Developments,” New England Journal of Medicine312(9):390-394.
D. Ermann, G. deLissovoy, J. Gabel, and T. Rice. “Preferred Provider Organizations: Issues for Employers,” Health Care Management Review, 11(4):29-36.
Salomon Smith-Barney, Managed Care and Hospital Management Overview, New York: Salomon Smith-Barney, 1999.
G. Savage, K. Campbell, T. Patman, and L Nunnelley, “Beyond Managed Costs,” Health CareManagement Review,, 25(1):93-108, 2000.

A. Multi-party Set of Relationships

The managed care industry has not been static or stagnant in the face of these problems. But its pivotal position as the intermediary or middleman between buyers and sellers—employers and providers (see Figure 3)—has proven to be a difficult and delicate one to sustain to the satisfaction of both parties. In addition, consumers, whose affiliation with MCOs is orchestrated by their employer/sponsors, access providers of care through this MCO connection, because of the conditions imposed on the benefit packages offered to them. In essence, the managed care industry’s role is simply the facilitation of exchange between buyers and sellers to ensure increased value as measured by outcomes over cost. But the simplicity of the statement masks the high degree of difficulty and contentiousness that facilitation has taken on.

Figure 3. Multi-party Relationships in the Managed Care Arena

Given the challenges of satisfying disparate needs of purchasers, consumers, and providers, many of the adaptations that managed care organizations, and in particular traditional HMOs, have made have taken them further away from their origins as tightly crafted, prepaid organizations with monogamous provider relationships. The modal HMO is now structured as an independent practice association (IPA) or network model plan comprised of provider networks whose constituent providers have multiple health plan and other payer relationships.⁸ The web of contracts in which providers are situated imposes confusing and conflicting incentives and constraints on them. Many providers have banded together to try to simplify relationships or screen out some of the complexity.

The product array offered by managed care plans has also paralleled this diversification in network configurations. The typical health plan is now a multi-product health benefits firm offering a widening spectrum of products with finer gradations among these products to try to meet purchaser and consumer tastes and preferences.⁹ As Figure 3 illustrates, the health plan is effectively creating and offering a vector of products that tries to match what buyers want in terms of financing, benefit, and delivery system designs. At the same time, health plans arrange to make these products available by negotiating with various configurations or networks of providers representing differing service constellations and organizational structures by negotiating terms of participation and payment methods. Overlaying product diversity on network variation results in a vastly increased level of complexity for both consumers and providers, and not inconsequential increases in administrative expense to design, offer and manage them. The simple days of only a high and a low option product being offered by insurers, or single products with no out-of-network benefits being offered by HMOs are long gone.

Product and network diversification has been designed primarily to respond to changing preferences among both purchasers and consumers. Regulatory developments also add impetus to make changes, particularly as the managed care backlash has grown. Policy-related impositions have targeted many facets of managed care and they often have differential and, in some cases, distorting effects on products and product arrays.¹⁰ Health plans contend that HMO products are subject to a disproportionate amount of regulation and benefit mandates, while far less attention is focused on PPO products. Growth in self-funded preferences has been traced to these mandates, given the influence of the Employee Retirement Income Security Act (ERISA)¹¹ that preempts self-funded plans from state regulation. This growth in turn has led employers to opt for products in which premiums are not being paid. State variation in managed care regulation further complicates compliance and accommodation. These developments seem to be particularly challenging for conventional, limited product HMOs whose traditional products and networks are most commonly found in the regulatory line of fire.

J. Gabel, J. Whitmore, C. Bersten, and L. Grimm, “Growing Diversification in HMOs, 1988-1994,” Medical Care Research and Review,54(1):101-117.
M. Gold and R. Hurley, "The Role of Managed Care Products in Managed Care Plans," Inquiry 34(Spring):29-37.
American Association of Health Plans, The Regulation of Health Plans. Washington, DC: AAHP, 1998.
G. Jensen and M. Morrisey, “Employer-Sponsored Health Insurance and Mandated Benefit Laws,” Milbank Quarterly, 77(4):425-459, 1999.

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 1999 Source: Smith Barney Inc./Salomon Brothers Inc. estimates.

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

Source: 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.

W. Cleverly, Essentials of Health Care Finance, Fourth Edition, Aspen Publications, 1997.
Medicare Payment Advisory Commission. Selected Medicare Issues: Report to Congress, June 2000, Washington, DC: MedPAC, 2000.
H. Luft, “Why are Physicians So Upset about Managed Care?” Journal of Health Politics, Policy, and Law, 24(5):957-966, 1999.
A. Slomski, “How Much are Groups Paying the Doctors?” Medical Economics, January 10, 2000, pp. 115-124.
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.
R. Miller and H. Luft, “Does Managed Care Lead to Better or Worse Quality of Care? Health Affairs, 16(5):107-123, 1997.

III. Current Concerns in Public Sector Managed Care

The extent to which public sector forays into managed care have been affected by the reversal of fortune in the managed care industry has been well documented and is only briefly summarized.

A. Medicaid.

The departure of a number of prepaid managed care plans in Medicaid was first noted in the 1997 and 1998, following a dramatic increase in participation as illustrated in Felt-Lisk’s study of fifteen states with sizeable Medicaid managed care enrollment in Figure 6¹⁸. What is striking about

these developments is the considerable variation across states in the extent to which they have experienced withdrawals, or in some instances, refusals to participate and how this created marked diversity in state experiences with prepaid managed care. Some states continue to have strong programs with multiple competing players reporting successful performance; other states, with fewer players by design or attrition, can still maintain sufficient capacity and competition; and still other states have seen programs fail entirely because of plan withdrawals¹⁹.

Notable among the findings from studies that have examined withdrawals is that most withdrawals are occurring among predominantly commercial plans (i.e. those that have < 25 percent Medicaid membership) that have had relatively small memberships. When queried about their decisions, plans have suggested that relatively low rates, smaller than expected memberships, and administrative requirements that have been poorly conformed with commercial specifications has led to the business being a low or no margin opportunity²⁰. Moreover, the uncertain and volatile contracting relationships plans have encountered with state agencies that ostensibly “don’t understand the nature of true business partnerships” has prompted many to avoid, reduce, or terminate participation. In fairness to Medicaid programs, it also appears that the downturn in HMO profitability in the mid- to late 1990s was a potent secular trend that forced plans to reevaluate all lines of business.

K. Sullivan, “Managed Care Performance since 1980: Another Look at 2 Literature Reviews, “ American Journal of Public Health, 89:1003-1008, 1999.
S. Felt-Lisk, The Changing Medicaid Managed Care Market: Trends in Commercial Plans. Washington, DC: Kasier Commission on Medicaid and the Uninsured, 1999.
M. McCue, R. Hurley, D. Draper, and M. Jurgensen, “Reversal of Fortune: Commercial HMOs in The Medicaid Market, Health Affairs,18(1):223-230.

B. Medicare.

The Medicare program’s experience with health plan withdrawals, at least in the recent history of the Medicare HMO program, has been attributed to several factors: market competition, declining margins, smaller than expected enrollment, and consolidation among health plans²¹. Growing evidence suggests that withdrawals can be more precisely traced to changes made in Medicare due to the Balanced Budget Act of 1997. In addition to making many structural changes to the Medicare program that had significant bearing on beneficiaries and providers, HMOs encountered a number of changes that have contributed to a hostile contracting environment. Changes in premium payments, including ceilings on rate increases in markets with above average payments, have reduced revenues for many plans in the markets where enrollment was most substantial. The risk adjustment scheme being phased in for plans has introduced additional uncertainty about future revenues. In addition, added administrative and regulatory impositions increased the cost of offering this product line. Moreover, the convergence of several different changes flowing from the BBA added further uncertainty to plans that have been heavily invested in this product line²².

The result has been a substantial number of plan retreats from selected service areas and withdrawals from some markets all together that have accumulated in the years since the BBA. The number of beneficiaries affected by these changes has also snowballed. In addition, plans remaining in Medicare have raised premiums, trimmed benefits, and adapted their networks to try to restore these products to profitability or staunch their losses²³. As noted below, the ability of plans to maintain networks and to control medical loss ratios has been challenged by providers, particularly hospitals, that have been hard hit by BBA reductions and are less willing to accept health plan discounts than they might have been in the past. This pushback has been intensified by provider consolidation to the point where plans in some markets have encountered so much countervailing leverage that they cannot sustain networks, or they cannot retain the compensation terms with providers that the plans believe they need to be financially successful²⁴.

R. Hurley and M. McCue. Commercial Plans and Medicaid Managed Care: An At Risk Relationship.Princeton, NJ: Center for Health Care Strategies, 1998.
R. Hurley and M. McCue. Partnership Pays: Making Medicaid Managed Care Work in a Turbulent Environment.Princeton, NJ: Center for Health Care Strategies, 2000.
General Accounting Office. Medicare Managed Care Plans: Many Factors Contribute to Recent Withdrawals; Plan Interest Continues(GAO/HEHS-99-91, April, 1999).
General Accounting Office, Medicare+Choice Plan Withdrawals Indicated Difficulty of Providing Choice While Achieving Savings,(GAO/HEHS-00-183, September 2000).

C. The Public Sector Challenge.

Public sector purchasers of manage care share many goals with private purchasers. Public purchasers are pursuing more value through managed care models, either in terms of better outcomes at the same cost; similar outcomes at a lower cost, or some combination of improved outcomes with cost reductions. They are also interested in contracting with responsible systems of care that provide increased accountability, including the availability of performance monitoring mechanisms that are not in place when care is purchased on a fee-for-service basis.

But the responsibilities of public purchasers bring added concerns for plans because they are subject to legislative oversight and administrative procedures that impose burdens on contractors typically not found in the private sector. Public purchasers have more rigid contracting terms, conditions, and procurement policies and plans have to make substantial investments in order to comply with them. Often, as has been noted in Medicaid managed care studies²⁵, these are often additive costs because the requirements are different from private contracts, and plans may not see the payments they receive as commensurate with the additional cost they require.

The political context in which public sector contracting is being carried out also affects the attractiveness of this product line on several levels. Offering these products exposes health plans to increased public scrutiny—as those that have made recent withdrawal decisions in Medicaid and Medicare have discovered.²⁶ Changes in political sentiments and policy may promote sweeping programmatic revisions in the operating environments of health plans that fundamentally change their business environment as noted by one Medicaid managed care plan executive’s comment: “In Medicaid, we get 100 year events, every 2 years.” The political volatility is even more apparent in the “buy versus bash” ambivalence evident in many legislative forums, as health plans struggle to understand how they can be vilified by the same people who have touted them to be the solution to cost containment problems. Or they discover that their success in controlling costs at the expense of providers has provoked a provider backlash that increasingly has influenced anti-managed care legislative initiatives²⁷.

Medicare Payment Advisory Commission. Medicare Payment Policy: Report to Congress, March 2000. Washington, DC: MedPAC, 2000.
Medicare Payment Advisory Commission. Medicare Payment Policy: Report to Congress, March 2000. Washington, DC: MedPAC, 2000.
K. Hallam, “A Big Problem for Health Plans: Some Providers Won’t Play the Managed Care Game,” Modern Healthcare, June 5, 2000, pp: 48-52.

IV. General trends in the managed care sector

It is useful to examine briefly several trends in the contemporary managed care industry that are both indicative of the changes and adjustments that are occurring and also serve as a foundation for speculating about pressures that may stimulate forthcoming changes. The trends are examined in terms of industry composition, structure, products, networks, and practices.

A. Industry Composition.

The diversification in product mix and product sponsorship has made it difficult to speak either in generalities about the industry, or even about individual product lines. As noted earlier, the modal managed care company is now a mixed model, multi-product firm with traditional HMO companies offering PPOs and indemnity products, and classic indemnity insurance companies offering PPOs, HMOs, and HMO-based point of service options to members. Competitive conditions motivate firms to provide this spectrum to enable them to achieve what they call “total replacement product” status—meaning a purchaser can choose to select a single company that can offer its employees a menu of products ranging from indemnity to HMO²⁸.

One useful indicator of just how much industry composition has changed is to look just at the ownership status of products licensed as HMOs. The table below illustrates that a dramatic change has

The Changing Distribution of HMO Membership by Ownership Status

	1981	1985	1989	1993	1998
For Profit	12%	26%	46%	52%	63%
Not for Profit	88	74	54	48	37

Source: Kaiser Family Foundation, Market Facts, March 1999

occurred when looking at plans. In less than two decades enrollment in for profit plans have gone from one-eighth of all HMOs to two-thirds. The reasons for this change are beyond the scope of this paper, but the trend illustrates just how important the role of investors has become in supporting and sustaining the HMO industry, including those owning stock in the 20 or so publicly traded HMO companies. Relatively little empirical evidence has been produced to suggest that ownership is a major factor in understanding health plan performance and behavior. Some efforts to link differences in member outcomes (HEDIS) data to ownership type have been attempted²⁹, but they typically suffer from the fact that ownership and open or closed panel status are closely entwined (nearly all closed panel plans are not-for-profit today) raising doubts about their meaning.

A similar problem exists with comparing medical loss ratios because closed panel plans commonly delegate utilization management and other functions to their affiliated medical groups and record these as medical expenses³⁰. It is also not clear that concerns about for profit, and especially publicly traded, firms are more likely to make short-term decisions based on their periodic reporting to investor cycles, as is sometimes asserted. Nor does ownership status affect responses to broader market trends. During the troubled period of the mid-to late 1990s virtually all plans in the industry suffered substantial losses, with notable not-for-profits like Kaiser Permanente and Harvard Pilgrim racking up unprecedented negative margins.

Among publicly traded companies, stock prices have fluctuated throughout the 1990s, both for individual firms and the overall sector. By fall 2000, the industry was enjoying a substantial resurgence with prices for some firms at record or near record highs, as premium increases have restored many to profitability levels not seen for several years. Since stock analysts commonly focus on the medical loss ratios, it is obvious to them that price increases, rather than cost control is fueling this current boom³¹. There remains, in the views of some stock analysts, longer term concerns that the industry will still continue to face significant instability arising from both the purchaser and provider communities³². Plans simply have not found stable, long term relationships with their provider networks and the current tolerance of double digit rates of increase among employers is likely to fade when the very tight labor market weakens.

R. Hurley and M. McCue. Partnership Pays: Making Medicaid Managed Care Work in a Turbulent Environment.Princeton, NJ: Center for Health Care Strategies, 2000.
R. Hurley and M. McCue. Commercial Plans and Medicaid Managed Care: An At Risk Relationship. Princeton, NJ: Center for Health Care Strategies, 1998.
H. Luft, “Why are Physicians So Upset about Managed Care?” Journal of Health Politics, Policy, and Law, 24(5):957-966, 1999
M. Gold and R. Hurley, “The Role of Managed Care Products in Managed Care Plans, “ Inquiry34(Spring):29-37.
D. Himmelstein, S. Woolhandler, I. Hellander, and S. Wolfe, “Quality of care in investor-owned vs not- for-profit HMOs,” Journal of the American Medical Association, 282(2):159-163.

B. Market Structure.

The number of HMOs has remained relatively stable for the past decade, probably reflecting a plateau in geographic extension to virtually all large and small metropolitan areas across the country. In addition, while merger activity among large multi-market companies in the mid-1990s was substantial, in many cases the mergers were motivated to give plans more complete national network coverage³³. Acquisitions were often targeted at plans or companies that had presence or strength in markets where the acquiring plan was weak. Consequently, the net change in the number of plans has been quite small.

But there has been more consolidation in the industry as shown in Figure 7 in recent years with nearly two-thirds of all plans now owned by 10 “national” companies. The national nature of these companies remains uneven, in terms of having plans in all major markets, whether full product lines are available in each market, and in terms of how much negotiating leverage multi-market plans can muster across markets with highly uneven membership. The amount of negotiating leverage directly affects the ability of national plans to promote and attain preferred network arrangements and to achieve control over other operating conditions. Thus, they may be extraordinarily dominant in one market but a peripheral player in an adjacent one.

Figure 7. Proportion of HMO Enrollment in 10 Largest National Managed Care Firms, 1987-1997

Source: InterStudy Completitive Edge, various years

The abiding local character of health care has continued to make uniformity in plan structure, products, and practices an elusive goal. Conversely, local and regional plans have been able to maintain very strong positions in markets where they may be a dominant player with long standing providers and purchaser relationships³⁴. These plans may be able to exploit and actually trade on provider-based xenophobic tendencies to bolster resistance to the entry of national plans that might disrupt the local equilibrium. For the regional players, the challenge has been to determine if regional or even national expansion is a reasonable strategy to attract multi-market employers or leverage locally based expertise and experience to a larger and more geographically dispersed scale. Grossman has described this trend and also some of the notable shortfalls and stumbles that have ensued, most notably among some of the high profile HMOs in the Boston market that tried and failed to become New England-wide health plans.

The remaining Blue Cross and Blue Shield plans (currently 47 in numbers) represent a special, and increasingly diverse, illustration of the complex lattice work that multi-market companies are attempting to create through selective acquisition of individual plans across the country—both as for profit and not for profit companies. At the same time, the national federation of plans remains an important vehicle for enabling Blues franchise holders to offer multi-site purchasers a national, brand-named network as well as the means to negotiate and resolve cross-market issues³⁵.

M. Hasan, “Let’s End the Not-for-Profit Charade,” New England Journal of Medicine, 334(16):1055- 57.
Salomon Smith Barney, Managed Care and Hospital Management Overview, New York: Salomon Smith Barney, 1999.
G. Harris, M. Ripperger, and H. Horn, “Managed Care at a Crossroads,” Health Affairs, 19(1):157-163, 1999.

C. Product Diversification.

Several notable trends through the 1990s are evident in health insurance coverage as shown in Figure 8³⁶. The role of indemnity insurance has shrunk dramatically, and has become nearly non-existent in many markets. Secondly, managed care has grown substantially in all three of the principal products—HMO, PPO, and POS. Traditional HMO products represent only one third of managed care participation while PPOs represent almost one half. The fastest growing product is the POS product—rising from 7 percent to 25 percent in the seven-year period shown here, which allows members to have access to out of network providers without a primary care gatekeeper referral.Because the POS product (sometimes known as a “leaky HMO”) may be offered as a derivative of both HMOs and, to a lesser extent, gatekeeper PPOs, counts of enrollment that do not break out the POS product allocate membership to the other two products, as shown earlier in Figure 1.

Figure 8. National emploee enrollment by type of plan*

* Numbers do not add up to 100 due to rounding.

Source: William M. Mercer, New York - Business and Health, The State of Health Care in America 1998 and Kaiser/HRET Survey, 2000.

In general, the direction of product offerings has been toward more choice and fewer restrictions to respond to pressure from consumers that the traditional HMO was too confining with no out-of-network benefit. Typically, there are direct costs to members in the form of higher co-payments or different coinsurance levels for out of network use that are intended to promote cost conscious decisions. The POS product has become so appealing that many HMOs use it as their lead marketing product because it can compete successfully against PPOs on the access dimension. And it typically results in the bulk of care being rendered by the core HMO provider network since little out-of-network care actually ensues. As discussed below, HMO and POS products may be made even less restrictive, when plans eliminate the primary care gatekeeper function and they become “open access,” almost indistinguishable from PPOs. These products do present challenges to plans in terms of how to compensate providers and control utilization patterns, particularly if capitation-based payments for professional services are in use.

Paralleling changes on the delivery side to ease access, is a willingness among health plans, including HMOs, to accommodate purchaser preferences for more flexibility in financing. As self-funding has grown among employers and particularly become more common among smaller employers, they seek out networks and network-based products that do not require prepayment or at least full prepayment³⁷. Often this decision is motivated by a desire avoid benefit mandates or other strictures that may be imposed on traditional risk-based products³⁸. For health plans, this has meant growth in administrative services only (ASO) business and migration away from fully insured business.

When traditional product networks are rented out only for access and other administrative fees, a health plan whose principal product has been a traditional HMO loses the ability to use provider capitation contracts because it has not been prepaid. In effect, persons in self-funded accounts become free riders in the networks that are being largely financed by the fully insured lives in them. As the ASO portion of lives grows, the ability to sustain more traditionally structured networks and compensation arrangements could be undermined. For many in the HMO industry, regulatory requirements that are being disproportionately placed on fully insured HMO products are effectively driving business away from these products.

J. Robinson, “The Future of Managed Care Organizations,” Health Affairs, 18(2):7-24.
J. Grossman, “Health Plan Competition in Local Markets,” Health Services Research, 35(1):17-35, 2000.
R. Cunningham and R. Cunningham. The Blues: A History of the Blue Cross and Blue Shield System, Chicago: Northern Illinois University Press, 1997.

D. Provider Networks.

Recent research sponsored for MedPAC^³⁹ provides a detailed picture of the most common network configurations among HMOs across the country. The results illustrate that plans commonly employ multiple contracting strategies, even within the same market, to enable them to launch the diversity of products described earlier, and to adapt to distinctive local provider market configurations they are confronting. Contracting arrangements include individual physician contracts, contracts with groups or associations of physicians, and in some instances with pre-existing integrated delivery systems. Likewise, payment methods range from fee-schedules to capitation for varying scopes of services, again depending on plan preferences and provider willingness to assume risk for specified sets of services. For hospitals, plans contract primarily with individual facilities, though a sizable number contract with systems of hospitals. Plans commonly pay them on per diem, per case such as DRGs, and, in rare instances, capitation.

The MedPAC study estimates that nearly half of the lives in health plans are enrolled in plans that pay capitation to other intermediate entities for professional (commonly primary and specialty physician care), global (physician and hospital care), or only for inpatient care. Plans delegate a substantial amount of control to these capitated entities including utilization management functions, decisions about individual provider compensation, and, in some instances, quality oversight and improvement. It is also noteworthy, that the MedPAC study found that risk is more likely to be “down-streamed” or passed on to provider organizations for Medicare products than for commercial products.

The experience of providers with risk-assumption has been very mixed. There have been some notorious failures of risk-bearing provider groups—including the MedPartners/FPA bankruptcy⁴⁰ and the collapse of the Allegheny Health Care System⁴¹. In both instances, health plans had made substantial capitation payments to these organizations for the care of members enrolled in their owned physician practices. With the bankruptcy of the parent corporation and its inability to its pay providers, the care for these members was put in jeopardy. Medpartners’ problems are also reflective of the near total failure of the physician practice management industry that was, for a brief time in the 1990s, expected to be a major aggregator and corporate rationalizer of what is generally acknowledged to be a cottage industry of physicians⁴².

The problems of financial instability of provider groups has received the most notice in California. This is due in part to the large number of large physician organizations, the extensiveness of downstream financial arrangements, and what are relatively low utilization and premium rates that have left little room for further economizing in care delivery⁴³. Certainly, the experience there has heightened regulatory concerns and bolstered oversight of plan-to-provider risk arrangements. The California Medical Association has reported as many 75 to 95 percent of capitated groups and IPAs in California are in serious financial difficulty⁴⁴. The physician service marketplace remains deeply distressed, as the management organization (KPS Global) that acquired many of the practices sold off when MedPartners went into bankruptcy is itself struggling. It has been able to survive by allowing own physicians to purchase their practices back and by obtaining loans and additional payment increases from health plans. It is also possible that problems of risk bearing provider groups have been more extensive than is commonly acknowledged. This is because plans may have “bailed out” delivery systems that have not been able to manage their prepayment well or, in other instances, deeper-pocketed hospital partners may have been able to finance shortfalls for affiliated IPAs or physician hospital organizations (PHOs). All of these indications suggest that substantial premiums will be forthcoming to shore up these ailing arrangements.

Along with the practice management companies, another enterprise that has largely failed to thrive as anticipated by some during the 1990s was the hospital-sponsored or -centered integrated delivery system⁴⁵. These systems were expected to be the product of concerted efforts at vertical integration. Integrated systems for which the hospital was to be the anchor and the banker engaged in physician practice acquisition, purchase of post acute facilities, initiation of home health and other community-based services, and even development of their own health insurance plans. Vertical integration along a continuum of care was touted as a means to control one’s operating environment. But many of these systems found that diversification of business lines ended up exposing them to more uncertainty; subjected them to competition from more agile and specialized players; and, in many instances, exceeded their ability to effectively manage enterprises removed from their core businesses⁴⁶. And if they started their own HMO or were able to secure global capitation contracts with health plans, as many had been designed to do, they found that allocation of these dollars proved more challenging and disputatious than they had anticipated. So by the end of the 1990s, vertical dis- integration had become widespread and sticking to the knitting/returning to core business became the operative watchwords for much of the hospital industry.

The experiences with both practice management companies and integrated delivery systems have cast doubt on the readiness and willingness of provider organizations to assume and manage risk effectively. Notwithstanding the evidence from the recent MedPAC report on how extensively risk has been shared, it may be that risk-bearing among providers may not prove to be a viable long-term strategy as financial pressures grow and easy savings in terms of reduced utilization and inefficiency are eliminated. Providers appear to be uncomfortable with the conflicting pressures between the insurance (prepayment) function and the care delivery responsibility. Moreover, they have struggled with reengineering care delivery processes that depart from traditional roles and responsibilities, such as hospitals promoting community-based ambulatory care services. They have also been slow to develop sufficient administrative infrastructures to enable them to use more sophisticated information and decision support systems. As discussed below, this has led to a determined pushback by providers that in some instances entails using their negotiating clout to forestall, rather than accept, risk arrangements.

L. Litvan, “Switching to Self-Insurance,” Nation’s Business, March, 1996, pp: 16-21, 1996.
T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
P. Elkind, “Vulgarians at the Gate: How Ego, Greed, and Envy Turned Medpartners from a Hot Stock to a Wall Street Fiasco,” Fortune, (12(1):132-145, 1999.
L. R. Burns et al , “The Fall of the House of AHERF: The Allegheny Bankruptcy,” Health Affairs, 19(1): 7-41, 2000.
Kaiser Family Foundation, “A Risky Proposition? Risk-Bearing and Solvency in California’s Medical Groups, “ California Health Policy Roundtable Report, Menlo Park, CA: KFF, February 2000.
J. Robinson, “Consolidation of Medical Groups into Physician Practice Management Organization,” Journal of the American Medical Association, 270(2):144-149, 1998.

E. Care Management Practices.

An additional indication of plan responsiveness to concerns of purchasers, consumers, and providers has been changes in the way in which health plans are managing medical care. Some of these changes have meant abandonment or reductions in the intensity of certain techniques. A number of plans discontinued primary care gatekeeping and permitted members to have direct access to specialists⁴⁷. Others have reduced or eliminated pre-service authorization of admissions or selected medical procedures to reduce some of the intrusiveness these techniques have represented to providers, and to reduce their own administrative expenses which typically have resulted in relatively few denials⁴⁸. A third area of activity has been the actual delegation of utilization management responsibility to risk-bearing provider entities, as discussed earlier, which then may determine if they wish to maintain, modify, or discontinue the conventional pre-service and concurrent review methods.

Plans have also adopted new approaches to care management at the same time as they phased out traditional ones. Disease/disease state management programs have come into widespread use for a number of chronic diseases including asthma, diabetes, and congestive heart failure⁴⁹. These programs reflect a broad set of strategies to identify members with certain conditions, provide educational interventions with both patients and physicians, promote compliance and earlier detection of emergent problems, and systematically measure changes in outcomes. Plans are making investments in information technology to support care and disease management, and to bolster profiling and provider feedback programs that are used to monitor performance as authorization programs are discontinued.

Figure 9. Pct Increase in Rx Spending v. Total Health Care Spending

Figure 9. Pct Increase in Rx Spending v. Total Health Care Spending

Source: HCFA

One area where plans are becoming more, rather than less, restrictive is in management of pharmacy benefits. With prescription drug prices rising at 15 to 20 percent per year as shown in Figure 9, plans have turned to a variety of methods to try to slow this rate. Among the most rapidly growing techniques are those that impose additional cost sharing on members that will provoke them to use generic substitutes, rather than brand names. In some instances, plans are using three tier co-payments while in other cases they use proportional co-payment or coinsurance, that encourage members and their physicians to select the least costly clinically equivalent product⁵⁰. As noted below, the current challenges represented by rising pharmaceutical costs is emblematic of intensifying pressures on plans to contain emergent technologies.

D. Conrad, S, Koos, A. Harney, M. Haase, “Physician Practice Management Organizations: Their Prospects andPerformance, Medical Care Research and Review, 56(3):307-339.
L. McNamara, “Healthcare Market Overview: Orange County, California, January 2000,” GartnerGroup RAS Services, 2000.
T. Snail and J. Robinson, “Organization Diversification in the American Hospital,” Annual Review of Public Health , 19:417-453, 1998.
J. Magel, “Consolidation in the Health Care Sector,” Journal of Health Care Finance, 25(3):22-27.

V. Contemporary environmental pressures facing managed care organizations

The changes described reflect a continuing effort by managed care organizations to adapt to shifting preferences and specifications of purchasers and consumers and developments in the provider and regulatory arenas (see Figure 3). A number of these pressures are highlighted to suggest the direction that health plans will have to move in order to try to demonstrate that they are able and can continue to add value.

A. Purchasers.

As noted, private purchaser preferences for looser products and more flexible financing show little evidence of abating, certainly as long as labor markets remain tight. EBRI reports the number of lives now under self-funded arrangements is now over 55 million or more than one-third of all insured lives in the country⁵¹. More notably is that these employees in these arrangements are far less likely to participate in traditional HMO products as shown in Figure 10, which shows that while only 19 percent of employees in HMOs are self-funded; 67 percent of employers in PPO arrangements have self-funded coverage. This finding indicates that a continuing trend toward self-funding is almost certainly going to erode HMO enrollment further.

Figure 10. Percentage of Covered Self-Insured Employees in Product Type, 1999

Source: Kaiser/HRET Survey of Employer Sponsored Plans

The shift toward looser and self-funded products affects a health plan’s ability to contract with providers on a risk basis as a means to promote behavior change. It also makes it more difficult for plans to collect and use data on member experience and provider performance, because of a less than complete picture of utilization and cost that ensues in looser products. This has been characterized as a kind of “PPO-ifying” of the HMO industry because the potential impact of a health plan in this product is diluted and reduced larger to negotiating fee discounts with network providers that can be used simply to create benefit differentials for members/participants⁵².

Another facet of the shift to self-insurance for purchasers is that they also move themselves away from the state-level debates of benefit mandates that appear to again be on the rise and which apply only to insured products. While it might be natural to anticipate stronger alliances between health plans and employers in resistance to these mandates because of their asserted impact on premiums, the ERISA preemption diminishes the participation of self-funded employers in these kinds of debates in their statehouses.

K. Southwick, “Open Access Responds to Consumers’ Desire for Perceived “Safety Valve,” Health Care Strategy, 3(1):1-5.
R. Cunningham, “Will United Help Defuse Backlash by Scrapping Authorization Rules?,” Medicine & Health, 53(45):1-4, 1999.

B. Consumers.

The attitudes of consumers toward the industry as a whole appear to continue to be in free fall (see Figure 11), with disdain for HMOs lying between tobacco and oil companies. The reasons for and legitimacy of this unfavorable image are beyond the scope of this paper, though it merits mention that individuals hold markedly more positive impressions of their HMO than the HMO industry as a whole⁵³—a phenomenon reminiscent of the schizoid view held toward Congress and one’s own congressman or congresswoman. The dramatically higher esteem in which hospitals and doctors are held, underscores how influential they have been in fueling some of the negativism and backlash toward HMOs as noted in additional KFF survey results.

Figure 11. Percent of Groups with "Unfavorable" Rating (Kaiser Family Foundation, National Survey of Prescription Drugs, Sept. 2000)

Another interesting feature of consumer attitudes toward HMOs is that, despite extensive efforts to promote more consumer information flow in the era of managed care and the sizable investments plans have made in generating and sharing performance data (e.g. HEDIS, report cards, etc), such efforts seem not to have succeeded in improving consumer comfort levels with health plans. A variety of reasons have been suggested to explain this on technical and more general bases. The measures being used are not the most appropriate ones; the data are not timely enough; they are not formatted to be consumer friendly; or they are not sufficiently customized for individuals to relate to them personally. More general criticisms revolve around whether members will ever trust these indicators over their own intuition or personal experience; whether there is a lack of sophistication and understanding of probabilities and statistics to ever fully digest these sorts of data; and whether even the most artfully packaged materials can avoid exceeding the appetite for data among consumers⁵⁴.

Models of care with expanded choice of provider have been seen as a psychological safety valve for health plans. They allow members to at least feel less claustrophobic than in traditional managed care products, a fact borne out by evidence that out of network use in POS products remains very limited. Larger networks achieve a similar degree of increased comfort and a lessened sense of restrictiveness, as does the dropping of primary care gatekeeper requirements. Gestures directed toward reducing the intrusiveness of managed care for physicians have indirect effects on consumer attitudes, whose hostility toward plans has been influenced by the manner in which plans have treated their providers⁵⁵. There is a price for this product loosening, in terms of the potential for more out-of-pocket expense, increased use of co-payments in such areas a drug benefits, and, of course, rising premiums.

W. Todd and D. Nash, Disease Management : A Systems Approach to Improving Patient Outcomes Chicago : American Hospital Pub., 1997.
Kleinke, J. “Just What the HMO Ordered: The Paradox of Increasing Drug Costs,” Health Affairs, 19(2):78-91, 2000.
Employee Benefit Research Institute, Employment-BasedHealth Care Benefits and Self-Funded Employment-Based Plans: An Overview, Washington, DC: EBRI, April 2000.

C. Providers.

For many hospital providers, at the dawn of the new millennium, the antipathy once reserved for managed care organizations has been shifted to a new villain—the BBA of 1997. The cumulative effects of Medicare reductions are creating considerable strain on hospitals, in particular. As shown in Figure 4, Medicare payments have in fact been at or above costs for hospitals in recent years because of concerted efforts by hospitals to reign in their operating costs, a trend document by detailed MedPAC analyses⁵⁶. But their ability to continue to reduce costs in the face of dramatic upward trends in pharmaceutical and labor inputs seems to have been depleted. Hospital financial distress is further exacerbated by their inability to make up for BBA reductions through the tried and true mechanism of cost shifting to private purchasers, because these purchasers are using managed care plans to suppress the cost-shifting, as also noted in Figure 4.

The financial results for hospitals (Figure 12) reveal their own reversal of fortune that began to appear in 1998 and worsened in 1999. Not all of this is due only to hospital payment reductions. Failed vertical integration strategies, changes in post-acute payment methodologies, and declining investment income have all contributed to the recent financial downturn⁵⁷. And this has been a recent downturn, as 1996 and 1997 financial performance for hospitals was the best it has been since the introduction of the prospective payment system in 1983/84.

Figure 12. Aggregate Total Hospital Margin 1981-1999 (In Percent)

Figure 12. Aggregate Total Hospital Margin 1981-1999 (In Percent) Source: American Hospital Assotiation Annual Survey of Hospitals, 2000

In addition to a substantial amount of retrenchment to reduce operating costs, another consequence of deteriorating margins has been a pushback in managed care contracting. Many hospitals have taken the position that they will not longer enter into “bad contracts,” which typically means contracts that pay less than full costs⁵⁸. Consolidation among hospitals has increased their ability to exercise such concerted action, and continuing BBA-related pressures suggest that even more aggressive negotiating stances will be forthcoming. It appears that some of the withdrawal of HMOs from the Medicare market has been due to the inability of plans to keep existing networks in tact⁵⁹. The Medicare circumstance is particularly notable because hospitals may be able to engineer a return to full DRG payments, if they refuse to participate in Medicare+Choice HMO networks that are paying them something less than full DRG rates. On the commercial side, the need for plans to raise payments to providers has led to sharp premium increases.

The physician market place has witnessed similar efforts of consolidation to improve negotiating clout. While evidence of physician group membership suggests a steady drift toward more and larger groups, this does not adequately capture the formation of negotiating federations of both multi-specialty and, perhaps more prominently, single specialty in local markets. The failure of practice management companies to be the catalyst for aggregation, left indigenous physician leadership and alliances with hospitals via PHOs and related entities to foster more consolidation in negotiating stances⁶⁰. In some cases these involve creating federations of multiple PHOs or “super-PHOs” to negotiate with plans. In other cases, single specialty confederations have been organized to improve countervailing leverage. In some markets, single specialty group practices in areas like cardiology and orthopedics have grown rapidly to gain enormous influence in their markets. Influence manifested in both contract negotiation with plans and joint venturing with hospitals to develop new facilities and programs to expand their services.

These cartel-like organizations have benefited from a general willingness to overlook some of the anti-trust implications, except in the most egregious of cases—a fact that stands in stark contrast to the angst that health plan consolidations seems to trigger among providers and public regulators. Only anecdotal evidence exists to suggest that a physician pushback is occurring through these variously configured provider sponsored entities—but plans contend their impact is going to become more prominent as providers discover just how much negotiating leverage they have accumulated.

While recent research demonstrates that the extent of plan to intermediate entity contracting is quite high, it appears that this varies markedly around the country⁶¹. It also appears that some, if not many of these physician and physician-hospital groups may not have a goal of accepting risk, but rather trying to negotiate terms and rates to health that may explicitly preclude the use of risk based payments. This bodes ill for those health plans that depend on global and/or professional capitation arrangements as the basis for their cost and care management. The recent announcement of Pacificare to freeze growth in its Medicare product in many markets because provider resistance to risk transfer makes their products unsustainable seems to support this concern⁶².

M. Freudenheim, “HMO Costs Spur Employers to Shift Plans,” New York Times, September 6, 2000, p. 1.
R. Blendon, M. Brodie, J. Benson, D. Altman, L. Levitt, T. Hoff, and L. Hugick, “Understanding the Managed Care Backlash,” Health Affairs, 17(4):80-94, 1998.
J. Hibbard, L. Harris-Kojetin; P. Mullin, J. Lubalin, S. Garfinkel, “Increasing the Impact of Health Plan Report Cards by Addressing Consumers,” Health Affairs 19(5):138-145, 2000.
Kaiser Family Foundation/Harvard University School of Public Health, Survey of Physicians and Nurses—Chart Pack, Menlo Park, CA: KFF, July 1999.
Medicare Payment Advisory Commission. Selected Medicare Issues: Report to Congress, June 2000, Washington, DC: MedPAC, 2000.
T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
Medicare Payment Advisory Commission. Medicare Payment Policy: Report to Congress, March 2000. Washington, DC: MedPAC, 2000.

D. Regulation—public and private.

The final broad pressure facing the managed care market place comes from the regulatory environment. This environment includes both the public sector where there has been a protracted period of political scapegoating and increasing imposition on a relatively slender segment of the managed care industry: the traditional HMO product. Also included here is private regulation or accreditation, which has had a pervasive effect on the industry in terms of standards and practices, as well as a rapidly growing cost of compliance. Ironically, despite the extensive investment plans have made to comply with these public and private requirements, they have not made much of an impact on the credibility and perceived legitimacy of the industry, as shown in public opinion polls of trust and respect.

The nature of the problem is even more troubling when looking at the accreditation experience since the NCQA’s origins’ lie largely with the purchaser community. It appears that accreditation status and accompanying reporting via HEDIS and CAPHS has had a disappointingly small impact on purchasers in terms of influencing their decision making. There are indeed exceptions, and there are also organizations like the Pacific Area Business Group on Health that have taken data collection and reporting much further than even NCQA⁶³. But insofar as obtaining accreditation was designed to assure purchasers and consumers that plans with full accreditation have demonstrated laudable performance on a number of important dimensions, it has had little effect in muting or deflecting the generalized backlash against HMOs.

On the public sector front, regulation has probably had a distorting impact on product offerings and (self) funding decisions because it has loaded requirements on fully insured HMO products, and paid little or no attention to less fully formed managed care products. This is not simply a matter of inattention, but rather a recognition that looser models of managed care like PPOs are neither accepting as much responsibility nor are they capable of being held to the same standards of accountability as HMOs. It is because of this that the “PPO-ifying” of the industry noted earlier, will mean a much lower degree of care and quality management will be possible, with a corresponding inability of regulators to extract a higher degree of accountability. The implications of this trend for public purchasers, for whom loss of HMO contractors means a return to self-funded and fragmented fee-for-service medical care, will be significant.

K. Hallam, “A Big Problem for Health Plans: Some Providers Won’t Play the Managed Care Game,” Modern Healthcare, June 5, 2000, pp: 48-52.

VI. Longer term challenges for managed care organizations

Based on the changes the managed care industry has experienced, prominent contemporary developments, and rising pressures among the principal parties involved in the managed care market, it is useful to identify several longer term challenges that will impinge on the industry’s survival and the potential for the managed care industry to meet the needs of private and public sector purchasers in the future.

C. Clinical and administrative technology challenges and opportunities.

keptics of the managed care revolution questioned from its earliest days, its ability to have a long term impact on health care costs and consumption because of inability to influence adoption and exploitation of emergent clinical technology⁶⁴. The current travails with rising prescription drug costs seem to bear this concern out. Health plans have not been able to either avoid or to control the impact in ways that one might have expected prepaid organizations to be more skilled or adept at. They may have more deliberate processes in place for review and adoption of new drugs and technology, but these often only slow, rather than alter, adoption patterns. Moreover, given their relatively underdeveloped networks and delivery systems, most health plans cannot engineer the tradeoffs associated with putting more money into pharmaceuticals and off setting costs in other service areas any better than other forms of coverage, at least so far. Plans also face the added problem that their return on investment logic runs counter to the lengthy payback period in some clinical technology investments because of high levels of member turnover. Thus, they find they are often required to pay for products that will benefit other plans far in the future.

On the administrative technology side, the picture is somewhat more sanguine because many communication, data transfer, and interactive exchange technologies will lead to real improvements in production efficiency and reduced transaction costs. The challenge for plans is to acquire the scale to justify and capital to support major new investment in information technologies. There is also reason to believe, based on the experience of industry leaders, that these investments can improve member and provider satisfaction by making interaction with plans more transparent and less burdensome.

L. Kohn, “Organizing and Managing Care in a Changing Health Care System,” Health Services Research, 35 (1): 37-52, 2000.

A. Looser products and models to continue.

Purchasers, providers, and consumers all appear to be strongly in favor of less, rather than more, restrictive products. They are doing so despite the fact that these products are trading off accountability for acceptability, and typically contain weaker incentives for provider integration and behavior change. Plans have acceded to these demands, despite the loss of cost controlling properties, because of the need to respond to customer demands (and all three parties are customers), and because purchasers and/or consumers have been willing to accept higher costs. It also appears, based on contemporary trends, that the spread in premium and premium increases across these various products is not so great as it once was. Therefore, it is difficult to justify a more restrictive product when its cost to members is not enough to make them comfortable with accepting these restrictions. Plans counter that this has been brought on large by benefit mandates and other regulations loaded on traditional HMO products that have destroyed their historical price advantage.

B. HMOs will survive but more as niche-product.

Kaiser CEO David Lawrence is often quoted as noting the irony that in a twenty-five year period HMOs went from being “a communist conspiracy to a capitalist conspiracy.” Lawrence’s statement underscores that the insurgency that used to denote HMOs has disappeared, as its model of combining care and financing was commandeered and co-opted by the traditional health insurance industry which once, along with organized medicine, was among the most trenchant critics of the HMO model. A corollary of this viewpoint is that the HMO model’s reach may have exceeded its grasp when it sponsors or expropriators tried to make a mainstream, rather than alternative model of care. It appears that the survival of HMO models now depends largely on their embedded-ness in certain regional markets with a strong consumer commitment to network-based care, and/or a belief in community-rated products among a sizable number of major purchasers. In addition, there has to be the means and mechanisms to create plan-provider relationships that achieve a level of peaceful coexistence and long term partnership. In effect, then, the HMO is likely to survive as a niche product/model, a taste for and tolerance of will not be for everyone. However, it also may not even be designed for persons in pursuit of the least costly product.

D. Major changes in purchaser preferences may appear.

As purchasers encounter rising premiums, concerns about liability, a need to customize benefits to respond to a diverse work force, and a desire to promote more cost conscious consumption, they will experiment with new approaches to health benefits. There appear to be two principal directions in which purchasers may go in the future if they decide to give up on conventional managed care. One is to bypass existing managed care organizations and engage in direct provider contracting arrangements without the traditional middleman. The most notable current prototype in this realm has been the Buyers Health Care Action Group (BHCAG) in Minneapolis-St. Paul. BHCAG was established as a sophisticated model of contracting with provider- sponsored “care systems” that are liberated from having to carry out most administrative functions which remain lodged with the buyers’ group⁶⁵. This model appears to have both garnered and sustained strong employer support. But many suggest that it is a model uniquely fitted to the Twin Cities market given the extensive managed care experience found in the purchaser and provider communities as well as within health plans there.

Despite the durability and apparent success of the BHCAG model to date, direct contracting by individual employers has remained remarkably underdeveloped, as have employer group purchasing coalitions. Correspondingly, despite much talk in the provider community about the virtues of “direct sales” the supply side of the direct contract market also has not flourished. Observers suggest a variety of reasons for the failure of direct contracting to thrive⁶⁶. Most employers do not want to become engaged in the insurance business, nor accept the responsibility for extensive direct interaction with providers and the complex world of health care. Successful direct contracting arrangements would also entail building or buying a significant amount of administrative capacity. Some employers worry that these arrangements might heighten their liability for problems their employees might encounter with their health services. Providers have likewise proven to be tepid about these opportunities when they have been presented with them, for many of the same reasons they have struggled with risk-based payments from health plans and management of care across a full continuum. Thus, while neither party seems to like the prominent role of the managed care plan as middleman, the prospects of replacing them has not been enthusiastically embraced.

For some employers, the principal alternative to direct contracting on behalf of its employees is to give these workers a defined contribution, or a voucher, that would be designed to enable them to buy the equivalent health benefits that are currently being purchased on their behalf⁶⁷. Though these models also remain underdeveloped, and mostly speculative, they could soar in use if employers begin to leave the health benefits buying arena because of rising costs or expanded liability due to federal policy changes. Critics caution that there are many uncertainties associated with individual insurance markets, as well as very limited consumer information to support informed choice-making. Consequently, it is unclear just how accessible coverage might be and how much the defined contributions might buy in this market rather than in a group health insurance market. Many tax policy questions would also have to be addressed. Health plans express concern that this model is a recipe for adverse selection as persons with expected costs will migrate to comprehensive products and individuals with good health will seek to cash some out their benefits while buying only catastrophic coverage.

Proponents suggest that entrepreneurs will rise quickly to either aggregate individuals into purchasing cooperatives analogous to mutual funds for buying stocks; or to provide other modes of exchange where cost-conscious consumers might shop for health services. A novel example of the latter is the newly formed HealthMarket, Inc.⁶⁸ which attempts to link, through its website, consumers who pay membership fees with providers who are willing to have their bid prices for procedures posted on the website.

T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
K. Hallam, “A Big Problem for Health Plans: Some Providers Won’t Play the Managed Care Game,” Modern Healthcare, June 5, 2000, pp: 48-52.
Pacific Area Business Group on Health, pbgh.org website.
G. Harris, M. Ripperger, and H. Horn, “Managed Care at a Crossroads,” Health Affairs, 19(1):157-163, 1999.

E. Provider organization and sophistication remains problematic.

Despite more than a decade of concerted efforts to promote provider organization either by plans or by providers themselves, few models have emerged that have been successful and sustainable. Practice acquisition by hospitals, investor owned practice management companies, hospital-centered integrated delivery systems, etc. have all largely fallen by the wayside—apparently, in part, because physician desire for autonomy remains an elemental instinct, frustrating various strategic initiatives to rationalize this cottage industry. Goldsmith captures this evocatively when he suggests: “Culture eats strategy for breakfast, every time. . .”⁶⁹ For health plans this lack of organization has been a two-edged sword: frustrating their ability to find strategic partners with whom to build longer term relationships, while perpetuating anxiety and uncertainty among providers who have been willing to contract with plans without clear strategic purposes.

It appears that the current influence of provider alliances and federations in developing countervailing leverage with plans suggests that the era of exploitation of anxious providers by plans may be ending. However, beyond being more effective price negotiators, these entities are often neither able nor intent on becoming more fully formed organizations that could assume greater responsibility for care management, development of information technology and infrastructure, or become a stable platform to adopt and adapt emergent treatment innovations. Consequently, health plans will face stronger and less malleable provider organizations in the future, whose strength lies principally in their ability to preserve existing modes of practice at increasingly higher prices.

Christianson, J., R. Feldman, J. Weiner, and P. Drury, “Early Experience with a New Model of Employer Group Purchasing in Minnesota,” Health Affairs 18(6):100-114, 1999.

F. Managed care organizations will continue to suffer from lack of legitimacy to do the difficult tasks asked of them.

The situation for health plans can be aptly juxtaposed with the resurgence of providers through their new forms of consolidation. It is as though the revolution has moved through counter-revolution and now on to a restoration, to again borrow from the political realm. Health plans have simply not been able to establish themselves as the legitimate rationers of medical care, or rationalizers of medical care consumption. For many of them this was never their aim, as evidenced by the top level executive in one of the national commercial companies who once characterized the managed care industry as being analogous to the travel agent industry: it exists to add value by simply brokering and facilitating the link between consumers and service delivers (see Figure 3). Such perceptions may never have been shared by some of the original prepaid group practice plans, but they too have been drawn into this industry by design or association.

The current controversy over health plan liability manifests this continuing struggle to identify if and how health plans/managed care organizations add value by what do, in any way other than through their decisions about coverage and compensability. The minimalist view as embraced by the industry has been justified as necessary to avoid being drawn in the mindless lottery-like morass of tort liability. But an alternative view holds that not only would liability promote a stronger sense of accountability and commitment to quality improvement, but it would reduce the likelihood that the managed care industry will marginalize itself as it seems to have succeeded in doing⁷⁰. Consequently, if health plan liability were to become a clear reality, then it is reasonable to expect that many current managed care organizations would quickly retreat to the more modest roles of claim processing insurance companies and third party administrators. This situation would leave a relatively small number of HMOs in operation to fill what would be a narrow HMO niche.

M. Jennings, “The Perils of Direct Contracting,” Healthcare Financial Management, pp: 43-45, December 2000.

VII. Implications of trends for future managed care markets

What are the implications of these developments for the private and public purchasers that have expected to rely on managed care markets to meeting their future needs? Alternatively, to what extent is the managed care market at risk in terms of it continuing to function to provide more value? These questions are addressed across the dimensions of cost containment, outcome improvement, consumer acceptance, provider cooperation, and some additional issues pertinent specifically to the public sector.

A. Cost containment.

It appears doubtful that managed care organizations will be able to deliver an encore performance of premiums and aggressive reduction in provider payments displayed through much of the 1990s. Current indications suggest that plans are less committed to revenue growth than income growth, and this is revealed in the fact that few plans are under-pricing their products to “buy” business. Insofar as this pattern contributed to some of the sharper reduction in the mid-1990s while contributing to sizable financial losses for plans, this strategy has been discredited. In this same vein, opening networks to respond to demand for choice has relinquished leverage plans previous held vis-a-vis providers. As long as purchasers insist on these products and remain willing to pay for them in a tight labor market, choice will prevail is the most important feature of a health plan. Provider consolidation further counteracts the ability of plans to negotiate as aggressively as they previously did. Plans and their provider networks also appear overmatched by current explosive growth in pharmaceuticals. Taken together these factors suggest plans will be hard pressed to exert much control over rising cost in the near term.

B. Outcome improvement.

Delivering more value entails improving the ratio of outcomes over costs. Plans may be expected to continue to invest in systems and processes with which they can demonstrate that they do, or have the capacity to, improve quality of care being rendered by network providers. As NCQA has recently reported, plans that participate in accreditation and reporting appear to perform at higher levels than those that do not, and sustained efforts at reporting is associated with quality improvement⁷¹. However, one may expect plans to continue to pursue of accreditation and collection and reporting of HEDIS data as long as plans believe that such activities are important to purchasers. This is an important qualification because plans appear to believe that quality differentiation is both very difficult given overlapping networks, and is not currently a major factor among purchasers and/or consumers. Some of the activities that plans have pursued in the disease state management realm illustrate an additional dilemma for them. Major improvements in quality may only be detectable over a longer term horizon—a horizon that may exceed the period of enrollment in and thus field of vision of most health plans. The commitment to quality improvement will also be tested by the shift to looser products with which plans have less ability to influence provider and member behavior. As suggested earlier, an increase in legal liability for plans may mean that many companies may chose to evade liability by diminishing the degree of assertiveness with which they try to shape care seeking and care delivery. For example, when a health plan substitutes notification for pre-authorization for hospital admissions it no longer has to comply with external appeal requirements because it is not rendering a decision⁷².

Booz-Allen & Hamilton, “The Real Consumer Revolution in Healthcare: Defined-Contribution Health Plans, “ Booz-Allen website, March 3, 2000.
Healthmarket, Inc., Healthmarket.com website.

C. Consumer acceptance.

Plans know well what their marketing executives have been telling them—choice sells. The proliferation of broad network, open access, less intrusive UM all underscore this. The plaudits United Healthcare received when they announced the abandonment of pre-service authorization exceeded their own expectations in terms of a public relations coup. On another front, some of the softening of support for capitation also reflects discomfort and restiveness that consumers have felt toward the possibility of their physicians might have financial incentives to withhold care⁷³. The many, many consumer protections passed primarily by state legislatures in the past several years to ease access to certain specialists, guarantee availability of POS products, force plans to contract with any willing providers all further illustrate efforts to break down real and perceived barriers to access⁷⁴. All of these impositions, in effect, appear to be converting the HMO to a PPO type of product that has been demonstrated to garner a higher degree of consumer acceptance. Accompanying this acceptance will be additional offloading of costs to consumers which employers will try to modulate as long as the labor market remains so tight.

J. Goldsmith, Keynote Address, Academy for Health Services Research Annual Meeting, Los Angeles, June 26, 2000.
C. Havighurst, “Vicarious Liability: Relocating Responsibility for the Quality of Medical Care,” American Journal of Law & Medicine, 26:7-29, 2000.

D. Provider cooperation.

The expectation that shifting more financial risk to organizations of providers would reduce intrusiveness, respond to provider desires to maintain autonomy, and enable providers to purse their own reconfigurations seems to have met with very mixed success. The uneven track record probably reflects many factors: maturity of provider groups, relationships between physicians and hospitals, adequacy of payments, and potential for further reductions in utilization whose benefits would accrue to provider organizations. Looming over this experience has been some notable and painful failures of certain provider-sponsored risk bearing entities. Adding this to physician discomfort with the capitation-based incentives to withhold care, one might expect continuing pushback toward fee-for-service payments in PPO-type products. It is also likely that as utilization levels in general have declined and cost shifting has been reduced, savings potential from economies in care delivery have been lessened to the point where risk-bearing by providers has little opportunity for upside gain. Emerging from this resurgence of fee-for-service payment will be rising physician concern about the adequacy of the levels of payments, rather than mode or method payment. This will probably provoke more concerted efforts among physicians to create stronger vehicles for collective bargaining over rates with health plans.

E. Public sector purchasing.

The picture for public sector purchasing is a troubled one in the face of the market place developments noted throughout this paper. The circumstances and scenarios for the Medicare and Medicaid programs are so different that they are addressed separately. But there is a common overarching concern that health plan contracting in the public sector carries with it exceptional uncertainty—an uncertainty that a growing number of predominantly commercial plans are choosing to avoid. This “public sector risk factor” emanates from the essential features of doing business with public purchasers and the added requirements, processes, and compliance concerns this represents. In addition, because of volatility in public budgets and budget processes, payment methods and amounts may seem less predictable. But certainly the added burden of vilification that health plans in general have experienced, and in particular among those that participated but then withdrew from public programs, the prospects of returning to these lines of business seem remote.

Medicaid managed care experience reveals a widening gap between states that have achieved relatively strong and successful experience with prepaid health plan contracting, and those that have tried and failed in this realm, or who have chosen not to pursue this form of managed care at all. For states with full-risk programs, broader changes in the products in the managed care industry and the shift toward more cost-sharing will make it harder for them to find what they want to purchase. In addition, sharply rising commercial premiums will mean more pressure on states to provide comparable rate increases for the Medicaid product. If they cannot meet rate increase demands, Medicaid agencies may have to respond by reducing some administrative requirements or find them selves increasingly contracting with Medicaid-only plans that cannot leave the program because it is their sole line of business. The industry- wide shift toward products with more cost participation presents additional cause for concern for Medicaid because of the nature of its eligible population. For states that do not or cannot do prepaid programs, the major challenge will be to devise alternative models that afford some of the benefits of care coordination and cost management while retaining fee-for-service payment or experimenting with novel risk models.

In the Medicare realm, the failure to develop the expected menu of alternatives to traditional Medicare as envisioned under Medicare+Choice has been disappointing. It suggests that promoting innovation and sustaining alternatives is much more challenging that originally expected by policymakers. The withdrawal of plans in Medicare is likely to continue in the absence of major changes in program requirements or payment methods, including substantially increasing payments to plans. Beyond just the dislocation and disgruntlement that withdrawals have engendered among plans and beneficiaries, two other factors seem pertinent. There has been a dramatic loss of momentum among beneficiaries and providers that once seemed to indicate that Medicare HMO enrollment was inevitable for a very larger percentage of the Medicare population. The pace of growth both primed beneficiaries for such a transition, and also signaled to providers to join (or form) Medicare HMO networks, or run the risk of losing access to current Medicare patients. The stalling in program growth has reversed this psychology among providers, who now seem quite certain that Medicare HMOs are no longer a major threat to the status quo. A second, more tangible example of provider pushback, described earlier, is the refusal of providers to accept terms such as downstreaming of risk from Medicare plans. Insofar as many plans feel that this product only can work if providers accept risk-sharing (having “skin in the game” as they characterize it), resistance to risk is a major impediment to be overcome. Provider consolidation further counteracts the ability of plans to negotiate favorable terms. This situation makes it very doubtful that plans can regain enough leverage to improve their positions with providers and thus Medicare HMO products remain at considerable future risk.

VIII. Areas to Track for Policy Monitoring and Development Purposes

It will be important to monitor a variety of indicators to assess whether some of the current patterns and direction of change continue on current trajectory, intensify, or abate. The indicators are enumerated separately but it is likely that there are important interaction effects will emerge because of the interdependence among the players and their mutual impact on one another.

A. Industry Level Trends

1. Industry profitability and premium trends. Will premium increases continue and will they contribute improved profitability among health plans?

2. Industry consolidation .To what extent is consolidation evident and influential at both the national versus regional levels?

3. Variation in and implications of market level concentration. Is concentration among health plans increasing in local markets and what are its consequences?

4. Product diversification and membership shifts. Will the number of products continue to grow or will they start to shrink, and what will be membership migration trends?

5. Changes in the extent of ASO/self-funded lives. Will the numbers of self-funded members in health plans continue to increase and what are implications of this trend?

6. Trends in cost-sharing/participation across products. How will increased cost-sharing affect product preferences among consumers?

7. Provider consolidation and premium trends. Will increased rates of provider consolidation and concentration be associated with faster increases in premiums?

8. Commitment of MCOs to accreditation and HEDIS reporting. Will plans lose confidence in the value of trying to respond to private sector external oversight?

9. Purchaser interest in alternative models for financing health benefits. Will providers turn to direct contracting models with providers or opt for more dramatic strategic changes like defined contributions?

B. Public Sector Trends

1. Medicare. To what extent will plan participation shrink back to only the high AAPCC markets characteristic of risk contracting in the early 1990s? What type of plans will remain and what kind of provider network arrangements will they have? What factors are associated with more favorable benefits or premium arrangements in surviving plans?

2. Medicaid. How dependent will states become on Medicaid-dominated plans in order to sustain full risk models? How successful are non-risk or limited risk models in preserving or expanding Medicaid managed care in states that cannot or choose not to do full risk arrangements? To what extent can conventional managed care products that employ cost sharing be employed or adapted for Medicaid- eligible populations?

IX. Conclusion

The revolution that purchasers wrought in the health care market through their embrace of managed care in the late 1980s and 1990s now seems to have lost much of its momentum. In a relatively brief time, the apparent success of managed care models in curbing cost increases has completely dissipated. Provider and consumer objections and complaints about the strategies and tactics of managed care organizations have grown into a full-fledged backlash or counter-revolution. Policymakers and purchasers have responded by imposing new requirements and demands on these organizations that health plans contend curb their ability to manage both cost and care. In the near future, there is sure to be growing recrimination over who is responsible for the “loss” of cost containment. But irrespective of where responsibility ultimately is assigned, it is evident there is very uncertain support for a managed care model that is clearly at risk. As creations of the purchaser community, if these organizations fail to deliver the value for which they were created, they will be replaced.

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Topics

Health Insurance

Program

Health Insurance Marketplace

Markets at Risk— Current and Future Challenges in a Managed Care Marketplace

Executive Summary

Introduction

Turbulence in the Health Care Market

Public Sector Concerns

Trends in the Managed Care Sector

Contemporary environmental pressures

Longer Term Challenges

Implications for Future Market Trends and Areas for Tracking and Monitoring

Implications for Future Market Trends and Areas for Tracking and Monitoring

I. Introduction

II. Turbulence in general health care market

A. Multi-party Set of Relationships

B. Financial pressures for plans and providers

III. Current Concerns in Public Sector Managed Care

A. Medicaid.

B. Medicare.

C. The Public Sector Challenge.

IV. General trends in the managed care sector

A. Industry Composition.

B. Market Structure.

C. Product Diversification.

D. Provider Networks.

E. Care Management Practices.

V. Contemporary environmental pressures facing managed care organizations

A. Purchasers.

B. Consumers.

C. Providers.

D. Regulation—public and private.

VI. Longer term challenges for managed care organizations

C. Clinical and administrative technology challenges and opportunities.

A. Looser products and models to continue.

B. HMOs will survive but more as niche-product.

D. Major changes in purchaser preferences may appear.

E. Provider organization and sophistication remains problematic.

F. Managed care organizations will continue to suffer from lack of legitimacy to do the difficult tasks asked of them.

VII. Implications of trends for future managed care markets

A. Cost containment.

B. Outcome improvement.

C. Consumer acceptance.

D. Provider cooperation.

E. Public sector purchasing.

VIII. Areas to Track for Policy Monitoring and Development Purposes

A. Industry Level Trends

B. Public Sector Trends

IX. Conclusion

Sources

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