Issue Brief No. 35
February 2001
Cara S. Lesser, Paul B. Ginsburg
very two years, researchers at the Center for Studying Health System Change
(HSC) interview health care leaders in 12 nationally representative communities to
assess changes in local health care markets. The third round of site visits is underway,
and early findings from 2000-2001 indicate significant changes in health care
financing and delivery are taking place across the country. This Issue Brief discusses
developments in managed care, hospital consolidation, physician-hospital tensions,
risk contracting and health plan premiums. State and federal policy makers charged
with balancing cost, coverage, access and quality of health care should consider
these emerging trends in their decision making.
s technological change and
increased consumer demand are
starting to drive up health care costs
again, there is emerging evidence that
changes in the organization and
dynamics of local health care markets
also may contribute to this phenomenon-
and perhaps exacerbate it in the
future. Over the past two years, several
important developments have taken
place in local health care markets
across the United States:
For consumers, these trends have resulted in rising costs, fewer choices for coverage for many and, in some cases, considerable turmoil.
In a number of communities, plans are introducing direct access HMOs that do not require a gatekeeper and have broad provider networks that leave them virtually indistinguishable from PPO products. One of the leading plans in Seattle, for example, now uses the same utilization management processes across both its HMO and PPO products. Meanwhile, costs have increased more quickly under HMOs, eroding the price gap between the two products.
At the same time, health plans have shifted their emphasis from gaining market share to restoring profitability, reflecting the turn in the underwriting cycle. As a result, plans are no longer holding prices down to increase market share and are eliminating less profitable business, which for many now means exiting Medicaid and Medicare. These trends foreshadow premium increases that potentially will exceed already higher increases in underlying costs and threaten the viability of public sector managed care programs.
ospitals in many communities have experienced
extensive consolidation, enabling them
to exert greater leverage in managed care
contract negotiations. One of the most
extreme examples among HSCs 12 sites
is Cleveland, where two local hospital systems
now control nearly 70 percent of the
areas inpatient capacity. In Indianapolis
and Phoenix, hospitals have carved out
strongholds in key urban and suburban
areas, at times creating virtual monopolies
in geographic submarkets.
With more consolidated market power, hospitals are aggressively pushing back on health plans attempts to control costs through reduced provider payment and utilization controls. The changing balance of power between plans and hospitals has led to instances in many communities where hospitals or physician organizations could not come to terms with health plans and, as a result, left the plans networks. Network instability often has significant effects on consumers. Indeed, in Seattle, some large employers are pressuring plans to ensure network stability; this, in turn, has given providers added leverage with health plans.
Increased bargaining power comes at a critical time for hospitals, which have endured significant cuts in Medicare revenues from the 1997 Balanced Budget Act (BBA) and several years of intense pressure from health plans for discounts. Hospitals have responded by reducing operating costs and have successfully held down inpatient costs in recent years. However, unintended consequences of these efforts are beginning to surface, as hospitals in several communities are now struggling with inpatient capacity constraints.
In Seattle, for example, the three major hospital systems have had to close admissions periodically for lack of beds. In other communities, hospitals have implemented diversion programs to accommodate overflow in the emergency room. Many attribute the current capacity problem not only to hospitals cost-cutting strategies, but also to growing demand for inpatient services and a severe nursing shortage that has limited hospitals ability to staff existing beds.
eanwhile, hospitals in several communities have confronted increasing conflict
with physicians. In Clevelands highly concentrated hospital market, hospitals
are exerting pressure on physicians to align more closely with one or the other
system, spurring concerns among physicians about loss of autonomy.
In other communities, physician-hospital organizations formed to foster managed care contracting continue to decline in importance. Instead, physicians are focusing on independent strategies that emphasize opportunities for enhancing revenue rather than building capacity to engage in risk contracting. This is seen most strikingly in Phoenix, where specialists are cutting back on affiliations with local hospitals and devoting more time to ambulatory surgery centers or specialty hospitals in which they have an equity interest. This trend threatens traditional hospitals with the loss of some of their most lucrative services and their ability to cross-subsidize less profitable services such as emergency care.
At the same time, there are concerns that the proliferation of physician-owned facilities will induce greater utilization, particularly at a time when health plans efforts to constrain utilization are weakening. For this reason, some observers suggest that this trend will lead to higher underlying health care costs.
ith health plans moving away from
tightly managed products and providers
gaining more clout, there is a discernible
shift away from capitation and other risk-based
payment arrangements that health
plans and some providers had embraced
not that long ago. At the time of the 1998-
1999 site visits, risk contracting had grown
less than anticipated, but now it appears to
be in serious decline.
Early findings indicate a strong trend among hospitals to revert to per-diem or diagnosis-related group (DRG) payments, while physicians appear to be returning to fee-for-service payment. There is some experimentation with hybrid payment arrangements, such as withholds and utilization-adjusted fee schedules, but these developments are not widespread.
Although risk contracting was seen by some as a potential boon for providers- allowing them to share in the benefits of managing care-most providers now view risk arrangements as automatically leading to losses. Indeed, many observers point to risk-bearing contracts as a key contributor to the failure of independent physician organizations, a phenomenon that was observed two years ago and continues today. For example, in Seattle, the two largest independent practice associations recently folded after struggling financially under their health plan contracts and failing to achieve the administrative and clinical integration necessary to offset overhead costs.
The failure of these organizations has contributed to providers reluctance to accept risk and has left health plans with fewer opportunities to transfer risk downstream. Yet, in the absence of risk arrangements, there are concerns that providers will not have incentives to manage utilization, setting the stage for higher costs and limited provider accountability.
s underlying health care costs increase
and health plans attempt to restore profitability,
employers across the markets
visited are experiencing large premium
increases. However, because the economy
remains strong and labor markets tight,
most large employers are not changing
purchasing strategies, benefit packages or
cost-sharing arrangements significantly in
response, other than increasing pharmacy
cost sharing and adopting three-tiered
prescription copayments.
In fact, it appears that large employers are not actively seeking to switch to lower-cost plans because of the resulting disruption to employees, and because there are few opportunities to do so, as plans have largely abandoned their previous strategy of underpricing to gain market share. In some instances, however, small employers have responded to steep premium increases by switching plans, dropping dependent coverage or dropping coverage altogether.
With initial conceptions of managed care under siege, employers appear to be at a loss for a vision for the future. So far, the 2000-2001 site visits have not identified any innovative approaches to purchasing health benefits. Defined-contribution approaches are on the minds of consultants, but employers show little sign that this is something they are about to embrace. If premiums continue to rise or the labor market slackens, large employers may increase cost sharing for employees, but it is unlikely that they will lose coverage in the near term. For those employed in small firms, however, there is the potential for substantial erosion of employer-based coverage.
he reluctance of most employers to make
significant changes in their health insurance
benefits has insulated many consumers
from rising health care costs. At the same
time, health plans responsiveness to the
managed care backlash and regulatory
threats has restored greater provider choice
and flexibility to consumers health
insurance products.
However, recent changes in the health care system have a downside for consumers, too. Network instability stemming from provider and health plan contract disputes is causing considerable disruption in some markets. As provider contracts lapse, people enrolled in closed-network HMOs are threatened with the immediate need to change providers, while those enrolled in open-network products are threatened with additional out-of-pocket costs to see providers who are no longer in their plans networks.
Consumers covered under Medicare or Medicaid also are experiencing substantial turmoil. As Medicare and Medicaid products became unprofitable, health plans are exiting these markets in many communities, causing disruption for enrollees and leaving beneficiaries with fewer coverage choices.
For example, Phoenix, a once-thriving Medicare managed care market that attracted more than 40 percent of beneficiaries to enroll in HMOs, is now experiencing plan exits and increased cost sharing and reduced benefits from the plans that remain. In Cleveland, where enrollment in Medicaid managed care is mandatory, several plans participated in the program two years ago, but now there are just four, two of which have struggled with poor financial performance. Numerous exits by commercial plans, in particular, threaten to thwart the goals of providing access to mainstream providers for Medicaid beneficiaries and broader benefits packages and lower cost sharing for Medicare beneficiaries.
Despite turmoil in these programs, initial site visits indicate that the safety net is stable in most communities. In some cases, traditional providers of care for the uninsured have grown stronger in recent years. For example, the Maricopa County System, the public hospital system in Phoenix, has emerged from major financial difficulties under new management and reportedly is in good financial health. A stark exception is Cleveland, where the public hospital is reportedly in poor financial condition after having lost millions of dollars each month since December 1999, partly because of low reimbursement rates for Medicaid patients.
Overall, however, concerns noted in earlier years that safety net providers would perish under financial pressures have largely not been borne out. While many providers reported that the BBA and Medicaid managed care have been major financial pressures, safety net providers in a number of sites have been bolstered by increased disproportionate share hospital (DSH) funds, the infusion of tobacco settlement funds and expanded coverage under the State Childrens Health Insurance Program. Some speculate that the increased consolidation of hospitals may help to boost charity care because of hospitals greater ability to finance uncompensated care and increased motivation to demonstrate their value to the community.
nitial findings from recent site visits indicate
that the U.S. health system is at a critical
turning point. Managed care as we knew it
in the early and mid-1990s appears to be in
retreat in both the commercial market and
public programs. With growing provider
clout and increasing resistance to risk-based
contracting, there seems to be a move back
to the future in the financing and delivery
of health care. However, the experience of
the past decade has left its mark, as optimism
about new models for the delivery and
financing of care to both reduce costs and
improve quality has faded. At the same time,
there may be less potential for further savings
through reduced payment rates to
providers, given the degree to which they
have been squeezed in recent years.
Nevertheless, if and when the economy softens, employers likely will step up their efforts to control costs, and, with a weaker labor market, they may become less averse to dropping coverage or passing greater cost-sharing requirements on to their employees. An economic downturn is likely to have an impact on the safety net as well, as state funds for health care diminish and private providers adjust to more limited resources. Indeed, several states are already facing Medicaid budget shortfalls.
As costs continue to rise, employers and policy makers will again confront the dilemma of how to provide broad access to care and promote quality improvement under tight budgets. At a time when backlash against managed care has become so intense, and providers have strengthened their positions to resist further change, serious challenges lie ahead.
SC is conducting its 2000-2001
site visits in collaboration with
researchers from Mathematica
Policy Research, Inc. (MPR), the
University of Washington and
individuals from selected academic
institutions. The staff is organized
in four research teams, each covering
a substantive area of interest.
Health Plans
Robert E. Hurley, Virginia
Commonwealth University
Debra A. Draper, MPR
Glen P. Mays, MPR
Sue Felt Lisk, MPR
Bradley C. Strunk, HSC
Joy M. Grossman, HSC
Providers
Lawrence P. Casalino,
University of Chicago
Kelly Devers, HSC
Linda R. Brewster, HSC
Timothy K. Lake, MPR
Liza Rudell, HSC
Jeffrey Stoddard, HSC
Purchasers and Consumers
Jon B. Christianson, University
of Minnesota
Sally Trude, HSC
Leslie Jackson, HSC
Cynthia Watts, University of
Washington
Lance Heineccius, University
of Washington
Ashley Short, HSC
J. Lee Hargraves, HSC
Policy and Safety Net
Lawrence D. Brown, Columbia
University
Aaron Katz, University of
Washington
Laurie E. Felland, HSC
Patricia Lichiello, University
of Washington
Elizabeth Eagan, HSC
All of these individuals have contributed to the data collection and analysis captured in this Issue Brief. More detailed analyses on these and other trends are underway and will be released shortly after all 12 site visits are completed.
s part of HSCs mission to provide objective information about how the health system is
changing and the effects of that change on people, researchers conduct site visits every two
years in 12 nationally representative communities. Through intensive interviews with local
health care leaders, representing health plans, providers, policy makers and employers, HSC
collects information that allows researchers to describe and analyze how health care markets
are changing locally and nationally.
Shortly after each site visit, HSC issues a Community Report describing the major changes in each community since the previous site visit. HSC is now conducting the third round of site visits and has published four Community Reports, detailing the changes in the Indianapolis, Ind.; Cleveland, Ohio; Seattle, Wash.; and Phoenix, Ariz., health care markets. This Issue Brief draws on the four completed third-round Community Reports and preliminary analysis of completed site visits in Syracuse, N.Y.; Lansing, Mich.; Greenville, S.C.; and Little Rock, Ark. Site visits and analysis of the Orange County, Calif.; Boston, Mass.; Miami, Fla.; and Northern New Jersey health care markets are also underway and will be completed in late 2001. All Community Reports are available on the HSC web site at www.hschange.org.
ISSUE BRIEFS are published by Health System Change. President: Paul B. Ginsburg