What Comes After Managed Care?

During the latter half of the 1980s, employers in California restructured the health insurance market. They were no longer willing to cope with annual double-digit inflationary rates for group health indemnity insurance products. Managed care companies signed onto a Faustian agreement, promising to control health care inflation for the employer.

Milton Friedman once said, "No one spends someone else's money as carefully as he spends his own." Managed care, with its rich benefit structure and its fatal design flaw - first dollar coverage - succeeded in insulating consumers from knowing the true cost of their care. The California experience has shown that people are willing to consume as much in health care services as somebody else is willing to pay for.

Having reached the limits of discount contracting with physicians and hospitals, managed care in 2001 now presents California's employers with group health insurance costs that are accelerating at rates greater than those experienced in the late 1980s.

The results have been both predictable and tragic for the health delivery infrastructure.

The stewardship of managed care
Through most of the 1990's, for-profit managed care companies abandoned established underwriting principles and underpriced their group health insurance products to gain market share.

From 1994 to 1998, HMO premiums increased on average only 2 percent per year, well below the true inflationary rate for health care.¹ Employers, recognizing an underpriced opportunity, enabled managed care to grow and dominate most of the commercial market. By 2000, over 18 million people representing over 50 percent of the population in California had joined HMOs.

Managed care's demonstrated inability to adhere to sound underwriting and pricing guidelines generated inadequate funding to sustain and modernize the California health care delivery system. The clash of inadequate premium revenues and a provider oversupply was leveraged by the for-profit managed care companies that passed most losses down to providers. As a result, payments to fund both professional and institutional services have been static. The damage to the infrastructure of California's medical system has been significant:

• The quality of health care in California has declined. In a recent analysis of Medicare quality of care,² Jencks and colleagues ranked California as a dismal 41st out of 50 states as measured by 24 proven yardsticks of medical quality. Fifteen years ago, prior to managed care's dominance, California was ranked nationally at the top for delivering care based on these same medical quality measurements.
  
  
• Managed care has deliberately under funded the costs for physician services. Health plan insurance premiums in California are about 10 percent below the national average.³ In fact, California has the lowest capitation rates in the country. ⁴Reimbursement rates for California's primary care physicians are running between 20 percent and 40 percent lower than rates paid to PCPs in other parts of the country. Parenthetically, the costs for physicians to provide services in California are among some of the highest in the nation. After adjusting for cost-of-living increases, capitation rates in California have fallen 55 percent since 1993. ⁵
  
  
• The physician infrastructure in California has crumbled. The California Medical Association was accused of being alarmist when it predicted in September 1999 that nearly 90 percent of the state's physician groups and networks would either fail or be on the brink of doing so by year-end 2000. However, nearly 100 California groups and IPAs closed their doors or went under by the end of 2000.
  
  
• The financial viability of hospitals across California is literally now in question. California hospitals have faced low reimbursements, denials, down-coded claims and snail-like delays in payments for most of the past decade. Under managed care's dominance, median hospital operating margins in California run at 14 percent below the national norm. ⁶
  
  
• While revenue starved hospitals cut operating expenses, there is now a crisis in staffing for nurses. California now ranks dead last amongst the 50 states in its number of registered nurses, averaging 500 per 100,000 people. Conservative estimates show that we face a shortage of 25,000 nurses in California. ⁷Over 90 percent of hospitals in California face a nursing shortage with the situation worsening considerably in the last six months.
  
  

It is not difficult to make the case that managed care, having produced a public policy disaster in California, should lose its dominant role in underwriting the health care system in the future. We now have a $600 billion commercial health insurance industry that nobody likes. Employers don't like it, employees don't like it and physicians hate the heck out of it.

The employers' next move
California's employers supported the ascendancy of managed care and cannot escape their culpability for this mess. Their redemption: they will soon once again act in their own self-interest and abandon the managed care product. After a decade-long reliance on managed care as their weapon against health cost inflation, employers are now arriving at a consensus. Health care is broken and managed care, as a cost-containment mechanism, is dead.

All of this comes as employers have tired of the increasingly onerous task of choosing healthcare coverage for their workers. From an employer's perspective, offering an HMO is a heavy price to pay for trying to manage health care costs if what you get from your employees is frustration and anger.

The likely triggering event for another mass movement by employers will be the anticipated recession of the U.S. economy during the first half of 2001. Recessions arise in inverse proportion to consumer confidence, which is demonstrably plummeting. A closely watched consumer survey reported that Americans' confidence in the nation's economic health has dropped to the lowest point since 1993. In fact, the gap between people's attitudes about the current climate and their expectations for the future is now wider than it has ever been in the past 34 years. ⁸

Defined Contribution -
The next generation of group health insurance products
Defined contribution health coverage products allow employees to choose their own health benefits, expenses and providers. Employers have belatedly discovered that the paternalistic, defined benefit approach to group health purchasing does not work. They are looking for other options to control health care expenditures that permit them to retreat from their middleman-purchasing role. They are seeking a structure in which workers will make their own benefits decisions and, thus, bear more in the way of personal responsibility for the cost of services they consume.

In a recent survey, 40 percent of companies indicated they would support legislation that would enable them to provide employees with a voucher or a defined amount of money to purchase their own healthcare coverage. ⁹It should be noted that this defined contribution product has been prominently endorsed by the incoming Bush Administration. In all, 80 percent of the Fortune 1000 senior executives who participated in this survey said they would happily switch to defined contribution if their workers would go for the idea and if their tax picture didn't suffer.

The workers' response was not surprising. Nearly 75 percent of those surveyed said they would jump at the opportunity to choose or custom design their own health benefits. ¹⁰A decade ago, few would have predicted that employees would go online and trade in derivative securities with their 401(k) pension funds. A similar transition is about to occur within the financing of health care.

The repositioning of the physician
It is safe to assume that the market forces now in play and driving the defined contribution market will have a profound impact upon the practicing physician. This disruption is likely to be as dramatic as that experienced during the first half of the 1990's, with the conversion to managed care. How will these business realities alter the structure of medicine during the next decade? How can physicians best position themselves for this coming environment?

The next issue will explore the business realities that the practicing physician will likely face and explore the options that he or she must address in the very near future.

"The future," French writer Paul Valery once said, "isn't what it used to be." Despite Yogi Berra's admonition, it is safe to assume that a significant proportion of California employers will soon abandon the current prepackaged, defined benefit, managed care product as they struggle through the evolving economic downturn. They will not tolerate double-digit inflationary trends for a product that has lost the allegiance of their employees.

davidjgibson@email.msn.com

1. Center for Studying Health System Change
2. Quality of Medical Care Delivered to Medicare Beneficiaries: A Profile at State and National Levels; Stephen F. Jencks, MD, MPH; et.al. JAMA / volume:284 (page: 1670), October 4, 2000.
3. Kaiser Family Foundation
4. 1999 report by the actuarial firm PriceWaterhouseCoopers
5. Healthcare: An Industry in the ER; PriceWaterhouse/Coopers study, 2000.
6. Moody Investor Service; December 2000.
7. California Nursing Association
8. The Conference Board, a business research concern in New York
9. Hewitt Associates.
10. KPMG survey. 2000