Center for Studying Health System Change

A Perspective On Health System Change In 1997

At Health System Change (HSC), energies over the last three years have been directed to tracking change. In preparing this essay, I also conducted a series of interviews with individuals who have in-depth experience with one or more components of the health care system and are highly regarded for their insights.

The year 1997 was a particularly important one in the evolution of the financing and delivery of health care. Some previous trends continued, but some new directions became apparent for the first time, and some uniquely important events took place.¹

Two broad developments appear to be most important. The first is the rise of the consumer. Consumers have triggered important changes through their demands for broader provider choice, and the market has responded. In addition, consumer concerns about managed care have led to extensive legislative activity. The second is the reemergence of public policy. In 1995, after the demise of the Clinton health reform proposal, the prevailing view was that public policy would play a much more limited role in health care, with markets having taken over. But in 1997, legislators took important steps with regard to expansion of health insurance coverage and regulation of health care markets.

CONSUMER CHOICE

As consumers have exchanged their traditional insurance coverage for managed care plans at a rapid rate—often at the behest of their employers—they have demanded that managed care provide a broader choice of providers. In HSC site visits conducted back in 1995, managed care executives described their out-of-network options, if they offered any, as a mechanism to help the less venturesome make the transition to “real managed care.” But by the time of site visits in late 1996 and early 1997, preferred provider organizations and point of service plans were seen as a permanent part of the landscape. Indeed, both employers and health plans described efforts to broaden networks of providers. In some communities, all of the hospitals and a large proportion of physicians are now included in the networks of many health plans. Budding exclusive relationships between health plans and providers are giving way to a tremendous overlap of networks.

This demand for choice has profound implications for the organization of health care delivery. It reverses a drive on the part of health plans to develop closer relationships with a limited network of providers, a development found extensively in other industries. For example, in the auto industry, manufacturers have long-term contracts with selected suppliers, which participate in the design of new models. The notion of health plans supporting providers with clinical information systems and other cutting-edge care management tools seems unlikely in an environment in which each provider must deal with all of the health plans in a given community. Indeed, broad and overlapping networks will push health plans and providers farther apart rather than closer together.

Another implication of broad and overlapping networks is that the effectiveness of health plan care management activities that support physicians rather than second-guess them will likely be diminished because the importance of any single plan in a physician’s practice will be less. In situations where provider organizations are capable of assuming and managing risk, this will make global capitation more attractive, shifting the locus of care management from the health plans to provider organizations. But this is dependent on developing mechanisms through which the capitated organization reimburses other providers in the plan’s network whom patients are entitled to access.

Broader choice will also have implications for market dynamics. Health plans will be less differentiated to employers. Since a change in health plan will mean less disruption for enrollees’ relationships with physicians than in the past, employers will find it easier to change health plans. This, in turn, will increase employers’ bargaining power. Similarly, hospitals and organizations with a significant proportion of physicians in a specialty will have more bargaining power with health plans when consumers are demanding broad choice.

MANAGED CARE BACKLASH

Consumers and physicians have been pressing their federal and state elected representatives to restrict some managed care practices. Physicians probably have stronger feelings about these issues and are better organized than consumers, so they are playing a more prominent role. The interests of consumers and physicians are not always the same, especially on issues with significant economic components.

From the consumer perspective, the rapid and often forced shift to managed care is undoubtedly a factor that is driving the backlash. In contrast to the 1980s, when those who enrolled in managed care chose it over a traditional plan, many employees today are offered only a managed care plan.

From the provider perspective, loss of clinical autonomy and threats to income have fueled a strong backlash. In private actions, providers have sought to consolidate to increase their bargaining power with managed care plans and to form organizations capable of assuming the care management functions usually implemented by health plans. Through public policy, providers are seeking to limit managed care plans’ scope of authority over care delivery and to regulate their contractual relationships with providers.

At the federal level, the Advisory Commission on Consumer Protection and Quality in the Health Care Industry has moved the discussion forward in an orderly manner by developing a “consumer bill of rights” that reflects a consensus among its members. I believe that adoption of these rights by the federal government in its role as a purchaser, and by a number of leading employers, is likely to lead to rapid implementation, whether or not these protections are mandated through legislation. Congress will now deal with the more contentious issues, such as the ability of patients to sue ERISA- protected health plans for damages and whether to require outside experts to review appeals. Concerns about the cost implications of specific provisions have been more prominent than objections to government’s playing more of a role. States have jumped into consumer protection faster, with 17 states having enacted such legislation in 1997.

PROVIDER CONSOLIDATION

The pace of hospital consolidation declined in 1997 after years of increases. Modern Healthcare data show an 18 percent decline in the number of hospitals involved in merger and acquisition activity;² the investigation of Columbia/HCA is a key factor behind this. Not only did Columbia sharply curtail its acquisitions in the second half of the year, but this likely affected acquisitions where Columbia was not directly involved. HSC researchers were frequently told of acquisitions of hospitals thought to be targets of Columbia that were pursued primarily to keep the for-profit giant out of the market, and of hospitals entering into mergers to prepare to compete more effectively with Columbia.

In contrast, physician consolidation is continuing. HSC’s survey of 12,000 physicians showed that in 1997, only 41 percent of physicians were practicing in one- or two-physician practices. Group practices continue to be formed, and physicians continue to sell practices to hospital systems or to physician practice management companies.

In contrast to a few years ago, when most attention was paid to organizing primary care delivery, great attention is also being paid now to specialty care. I see this as reflecting an evolution of managed care to approach the portion of the care spectrum that is the most expensive and that requires more sophistication to manage effectively. Physician practice management companies (PPMCs) are being formed that work with only a single specialty. Some health plans are deemphasizing capitation of primary care physicians and instead paying specialists on a capitated or per episode basis.

Hospitals and physicians pushed very hard for legislation favorable to provider service organizations (PSOs) and had some success in 1997. Their most substantial accomplishments were in public purchasing. Opportunities in both the Medicare and Medicaid programs to contract on a risk basis have expanded. The period of implementing business strategies is now at hand, and many PSOs face enormous skepticism about their ability to assume and manage risk successfully. Consumer advocates are concerned about the effects of potential PSO insolvencies on patients.

THE UNINSURED

In 1997, Congress enacted the Child Health Insurance Program (CHIP), the largest expansion of health insurance for children since Medicaid was enacted in 1965. CHIP provides states with matching funds to offer health insurance to uninsured children from low-income families; the Congressional Budget Office estimates that 2.3 million uninsured children will be covered. Many governors developed programs in 1997 for legislative action in early 1998; these proposals addressed setting income criteria for eligibility and whether to serve these children through Medicaid programs or through contracts with private insurers. In either case, managed care is the standard vehicle used to deliver CHIP benefits. The higher the income limit that states are contemplating (up to 200 percent of the poverty line or greater in some cases), the more state officials must grapple with issues of equity with those in employment-based plans and the crowd-out problem.

CHIP is by far the most important incremental accomplishment to expand health insurance coverage. Previously, the focus had been on Medicaid eligibility expansions and reforming health insurance markets to improve access to insurance for those in poor health. President Clinton proposed that the next incremental step be an opportunity for the near elderly to buy into Medicare. If enacted, this proposal may have greater importance for future policy direction than for reducing uninsurance among the near elderly because so few of those eligible who are uninsured can afford such a premium.

Policies to reduce the number of uninsured seem to be moving away from an employment-based insurance solution. Initiatives for low-income persons have involved government purchase or provision of insurance rather than subsidies or mandates to employers. Increasingly, children are covered through a government program, while their parents, if covered at all, obtain that coverage through their employment. Recent proposals for the middle class have emphasized breaking the link between tax subsidies to purchase health insurance and obtaining it through employment.

Turning from public policy to private actions, the news on the nation’s goal of reducing the number of persons without health insurance is not good. Research emerged from HSC and others pointing out that although the proportion of employers offering insurance has been increasing, this has been more than offset by a decline in the proportion of employees enrolling. The substantial increase over the early '90s in the proportion of premiums that employees must pay is undoubtedly a factor, as is the long-term trend of premiums increasing more rapidly than earnings, especially for low-wage employees.

QUALITY

Although confused with consumer protection issues at times, quality problems are also getting increased attention. Evidence of uneven quality of care has been growing, with problems afflicting fee-for-service and managed care to degrees that are roughly comparable. Health care leaders appear to have an increased sense of urgency about addressing problems of inadequate quality.

Although a small number of large employers have led the move to hold health plans and provider organizations more accountable for quality, I believe that future opportunities for progress on this front will come from Medicare and Medicaid. These programs have begun to use their clout as purchasers to promote quality. Given their size, they have the wherewithal to force health plans and providers to collect and report data in a standardized format. These activities, in turn, will benefit private purchasers, many of which care about these issues but have been limited by their ability to get data. Thus, when Medicare and Medicaid require plans to report NCQA’s Health Plan Employer Data and Information Set (HEDIS) measures, these measures are reported to employers as well.

MEDICAID MANAGED CARE

States have proceeded very rapidly to enroll Medicaid beneficiaries in risk-based managed care plans; at mid-year, almost half of beneficiaries were enrolled. The Balanced Budget Act of 1997 is expected to accelerate the process by making it easier for states to mandate enrollment and contract with health plans that serve predominantly Medicaid beneficiaries. While Medicaid programs initially concentrated on enrolling mothers and children in health plans, some states began to enroll disabled beneficiaries as well. This is more challenging because few models address issues such as tailoring payment rates to the health care needs of those enrolled (risk adjustment).

The implementation of Medicaid managed care in a community is a signal event, especially for providers who serve predominantly low-income populations, because of the rapidity of movement of large numbers of beneficiaries to a managed care environment. As such, its announcement, even when the start-up is years away, is a stimulus for substantial organizational change in communities.

To date, the Medicaid population has been served both by mainstream health plans that serve the general population and by plans serving predominantly Medicaid beneficiaries. Many of the latter have been sponsored by safety net providers. But some prominent national health plans have become disenchanted with payment rates from the program and have withdrawn. It is not clear yet whether Medicaid will continue to have ample mainstream plans or whether it will attract only those plans with the lowest costs and plans sponsored by safety net providers—and what the implications for access and quality will be should this happen.

HEALTH CARE COSTS

In 1997, health care cost increases continued to be very low, although not as low as in the previous year. Milliman & Robertson data on provider revenues for the non-Medicare population showed an increase of 3.3 percent per capita, up from 2.1 percent in 1996. Still, the 1997 rate is extremely low by the standards of the last 30 years. Medicare payments per beneficiary increased 5.4 percent in 1997. The KPMG Peat Marwick survey of employers shows that premiums for a private insurance policy obtained by employers increased by 2.1 percent in 1997, compared with 0.5 percent in 1996.

The phenomenon of premium trends continuing to run below trends in underlying costs in 1997 was at odds with earlier predictions in the media. The unexpectedly low rates of premium increase were due to the continuing erosion of health plan market power, plan aggressiveness in attempting to enter new markets and continued low growth in underlying costs.

Pharmaceuticals now comprise the largest component of cost increases. Some of this reflects disease management efforts that generate offsetting savings in hospital and physician costs. But some of it reflects treatment options and long-term prevention strategies not available before. And patients are more knowledgeable about new applications, due in part to direct marketing to consumers. Advances in molecular biology and information technology hold the promise of more rapid development of important new drugs, implying that the pharmaceutical sector could become the dominant source of cost increases in the future.

The media are again predicting sharp increases in premiums. Factors likely to lead to these increases include:

• health plans’ difficulty in gaining further provider discounts due to broader networks and provider consolidation;
  
  
• limitations of broad networks and out-of-network options with respect to efforts to manage care;
  
  
• less aggressiveness on the part of insurers in increasing market share due to low profitability; and
  
  
• tight labor markets limiting employer willingness to pursue tight cost controls that may anger employees.

LOOKING AHEAD

It is difficult to forecast developments in health care. Change has not proceeded in an even fashion. Some developments have proved to be short-lived fads while others have had staying power. Most difficult to predict has been public policy, which responds to private developments and, in turn, influences them.

One persistent trend is the incorporation of evidence on effectiveness into medical practice. Over time, care delivery appears to be increasingly influenced by research on outcomes. But the mechanisms through which further strides will be made are very uncertain. The model of close partnerships between provider organizations and health plans is not surviving consumers’ demands for broader choice of provider. Risk and responsibility for the delivery of care may shift to provider organizations of varying designs. They, in turn, will be looking to hospital systems, physician practice management companies, information technology vendors and health plans for infrastructure support.

Whether these developments have staying power will depend on how consumers react to the changes. We saw clearly in 1997 that consumers feel strongly about developments in health care financing and delivery and are prepared to act in the marketplace and through public policy. Will consumers be more comfortable signing on with a delivery system than they are with a health plan?

But even greater uncertainty about the future of health care comes from technological change. There is real potential that advances in science and information technology will dramatically change the nature of care and how that care is delivered. Not only will there be additional cures and preventive strategies for disease, but opportunities for life enhancement will become an increasingly important part of medical care. Increasingly, consumers—who have access to the latest innovations across the globe—will accelerate the pace at which medical innovation is incorporated into medical practice.

I am grateful to Janet Corrigan, Geraldine Dallek, Helen Darling, Joseph Davis, Robert Go, Jeff Goldsmith, Uwe Reinhardt, Patricia Riley and William Roper for insightful discussions. Ann Greiner provided valuable comments. None of these individuals is responsible for opinions stated (except those directly attributed to them).

¹ The date when new trends begin or are recognized cannot be precise.
² "An Off Year for Consolidation: '97 Tally Shows Sharp Cutback in Big Corporate Deals," Modern Healthcare (January 12, 1998): 40-48.

"Barriers to moving the quality agenda forward are significant but by no means insurmountable. They include an inadequate scientific evidence base, low-level investment in information systems, absence of risk adjustment payment strategies and many other issues"

-Janet Corrigan, Institute of Medicine

"Consumer protection is getting lumped in with quality-and this is confusing the policy debate. There is a legitimate function for government to assure basic consumer protections. We should legislate in this area-and then move on to address the separate and important, but devilishly difficult quality issues."

-William Roper, University of North Carolina, Chapel Hill

"As the margins of health care organizations shrink, there is less tolerance for system failures and less latitude for mistakes. This may have the unintended consequence of stifling innovation."


–Helen Darling, Watson Wyatt Worldwide