Think health cost inflation is something new? Back in 1973, encouraged by the Nixon administration, Congress passed the Health Maintenance Organization Act to bring cost-control measures to health plans. Today, managed care plans comprise the bulk of group and individual plans on the market. But healthcare costs more than ever. What happened?
Until the mid-1970s, if you had comprehensive health insurance, you had an indemnity plan. An indemnity plan reimburses the patient and/or provider as expenses are incurred. Most plans allow the insured to choose any provider without effect on reimbursement. They typically reimbursed the insured for a specified portion (often 80 percent) of the “usual, reasonable and customary” cost of services, or according to a fee schedule. The insured would pay the rest (the coinsurance).
The Health Maintenance Organization Act spurred the development of managed care by: 1) defining the term “health maintenance organization” as a legal entity that provides basic and supplemental health services to members, 2) authorizing the Secretary of Health, Education, and Welfare to make grants and guarantee loans to encourage the development of health maintenance organizations (HMOs), and 3) requiring all employers with an average of 25 or more employees that offered any health plan to their employees to also offer the option of membership in a qualified HMO.
HMOs assume the financial risks and responsibility for delivering all covered health services to members in a particular geographic area, usually in return for a fixed, prepaid fee. Some HMOs employ all providers and provide the facility or facilities. Others contract with medical groups, paying them a negotiated, per capita rate.
Problems with the HMO model soon appeared, however. Employees enrolled in HMOs began to push back against plan restrictions. In a true HMO, members must use a network provider or pay out of pocket, except when an emergency requires them to use an out-of-network provider. Second, as geography-based plans, HMOs offer a limited selection of providers. And third, because HMOs receive payment on a per-patient rather than per-service basis, they have incentives to promote wellness (at best) and to provide services only when needed (at worst). That perception led to consumer outcry that managed care plans’ cost control efforts came at the cost of providing needed health services.
In response to employee demand, many employers switched to POS or PPO plans. PPO (preferred provider organization) plans use a network of selected providers, but allow members to go outside the network. Members who opt to use non-network providers incur larger costs in the form of higher deductibles, higher coinsurance rates, or non-discounted charges from the providers. A POS (point-of-service) plan, a HMO/PPO hybrid, resembles HMOs for in-network services but usually reimburse services received outside the network in a manner similar to conventional indemnity plans (e.g., provider reimbursement based on a fee schedule or usual, customary and reasonable charges).
Today, the majority of people with group medical insurance have PPO or POS plans. Although less restrictive than HMOs, these plans include managed care provisions that allow insurers to manage the cost, use and quality of health care services received by group members. Examples of managed care provisions include:
Preadmission certification – A provision requiring group members to receive authorization from the insurer or a healthcare provider specified in the plan before non-emergency hospital admissions. Failure to obtain preadmission certification in non-emergency situations reduces or eliminates the insurer’s obligation to pay for services rendered.
Utilization review – The process of reviewing the appropriateness and quality of care provided to patients. Utilization review may take place before, during or after the services are rendered. Preadmission testing – A requirement designed to encourage patients to obtain necessary diagnostic services on an outpatient basis prior to non-emergency hospital admission. The testing is designed to reduce the length of a hospital stay.
Non-emergency weekend admission restriction – A limit on reimbursement to patients for non-emergency weekend hospital admissions, to encourage the use of primary care providers rather than emergency rooms for non-urgent care.
Second surgical opinion – A cost-management strategy that encourages or requires patients to obtain the opinion of another doctor after a physician has recommended non-emergency or elective surgery. Some plans are voluntary; others reduce or deny reimbursement if the participant does not obtain the second opinion. Plans usually require that second opinions be obtained from board-certified specialists with no personal or financial interest in the outcome.
Although managed care plans do help control costs and ensure better-quality care by providing review and oversight of those who deliver healthcare services, the U.S. still spends more per capita on healthcare and lags behind other developed nations in several quality measures. In addition to having a relatively high rate of infant mortality, the U.S. loses 2,500 people to death and spends an additional $19.5 billion per year due to “preventable adverse events” (medical errors) in hospitalized patients. The Agency for Healthcare Research and Quality, a federal agency, says, “…the true number and impact of errors may be higher…” The Institute of Medicine noted that “…many of the errors in health care result from a culture and system that is fragmented, and improving health care needs to be a team sport.”
Giving employees more control over their health spending decisions is only one step in controlling healthcare costs. The healthcare financial system still rewards hospitals and physicians for the number of services they provide, regardless of quality or need, often leading to unnecessary and sometimes detrimental treatments. Health plans must find alternative ways to incentivize hospitals and physicians to keep patients well and provide only the care needed.
Greater transparency among healthcare providers will also help—until consumers have transparent, unbiased information on the quality and effectiveness of specific providers and treatments, they cannot make truly informed decisions about their health. Insurers can play a role in enhancing healthcare quality and patient outcomes. Many are developing strategies that emphasize healthcare quality and patient safety by encouraging preventive and wellness treatments, promoting evidence-based care, requiring enhanced reporting and monitoring, and promoting a collaborative approach to care. For more information on managed care and suggestions on controlling your group medical costs, you can contact us at 212-842-3700.