February 2000 Bulletin

Will MCOs survive?

Profit, political pressures may force change

By Carolyn Rogers

What is the future of managed care? Will it survive the current tumult and carry on well into the 2000s? Or will managed care become a relic of the late 20th century, supplanted by yet another system?

Many people confidently answer "yes" to the last question, adding that managed care has long overstayed its welcome.

"Managed care will probably be dead in five years, " predicts James D. Heckman, MD, 1998 Academy president. "The entrepreneurs who have been driving the managed care initiative will find more fertile field to till. They’ll have rung out most of the profit from the medical field by then."

Dr. Heckman admits that managed care "kept costs down for a little bit, by decreasing physicians’ income and decreasing profit margins for hospitals and other providers. But at the same time, patient benefits weren’t increased because all the cost savings went straight to the profits of the insurance companies."

The lack of profits for managed care organizations (MCOs), along with the incremental universalization of health care, Dr. Heckman predicts, will ultimately reinvent the health care delivery system into a single-payer system.

"Managed care was never meant to be permanent," says J.D. Kleinke, author of a 1998 book, Bleeding Edge: The Business of Health Care in a New Century, and chairman of Health Strategies Network , Denver. "After prices are adjusted to reflect competitive bidding and after the most obvious excessive utilization is pruned from a population’s medical experience, what is left for the managed care organization to do?

"We tend to become far too attached to institutions, delivery models and business practices that are simply no longer relevant. Once we have accomplished what the entity was created to do, it is time to move on."

Kleinke sees managed care as just one stage–albeit a critical one–on the path to the ultimate solution to the nation’s medical delivery system crisis. He believes that price wars among mega-MCOs will drive their profit margins to zero, and they will ultimately cannibalize themselves.

Kleinke’s insights may appear prescient to some in light of the January announcement that Harvard Pilgrim Health Care, one of the nation’s oldest and most respected HMOs, was placed under Massachusetts state receivership following spiraling losses and the discovery of a $50 million accounting error. That boosted the losses for the year as high as an estimated $170 million on revenues of $2.7 billion. Massachusetts officials moved quickly, fearing the insurer’s cash reserves were insufficient to protect patients.

Harvard Pilgrim has been struggling financially as a result of heavy price competition among HMOs and insurers, and rising medical costs. Other New England insurers also are posting losses; Tufts Health Plan has decided to pull out of Rhode Island, Maine and New Hampshire, citing losses of $45 million for the year, mostly in those states.

Cutting the rates paid for services and the amount of service provided was easy in the early years of HMOs, but now "a lot of the low-hanging fruit has been pulled," says Charles Baker, Harvard Pilgrims’ chief executive.

The brave new medical world of the next century, according to Kleinke, will consist of what he calls Emerging Health Organizations (EHOs). Vertically integrated and provider-driven, EHOs will control the means of production and, by concentrating expertise and information, will replace the MCO as the prime intersection point for medical care determinations and delivery. MCOs will be reduced to a status similar to the insurer of old. They will be responsible for collecting and dispersing premiums and some other routing of information and dollars, but not much more.

Seemingly in line with Kleinke’s view, two of California’ s largest and most influential pension funds announced in December that they are considering ridding themselves of the managed care plans that provide their members with health insurance and contracting directly with doctors and hospitals instead. If enacted, such moves by the California State Teachers Retirement System and the California Public Employees Retirement System, which together represent about 1.5 million people, would change the face of health care in California and possibly across the nation.

Nationally, employers found HMO costs rising 5.4 percent in 1999 and may see 12 percent increases this year as HMOs try to improve their balance sheets. That gets a lot of employers looking for solutions, like cutting out the middleman.

In an environment that is increasingly hostile to managed care, it’s clear that HMOs are being forced to change their tactics. At least nine class-action lawsuits have been filed in the past several months alleging violations of federal law by managed health plans, including one suit filed on behalf of 32 million members of managed care plans against five of the industry’s biggest players. Several class-action suits alleging violations of state consumer protection laws also have been filed on behalf of HMO members. Add to that the growing HMO liability movement and the fact that a federal "Patients’ Bill of Rights" law is expected to pass early this year, and it’s easy to see why HMOs might be abruptly changing their tune.

In a dramatic move, the nation’s second largest insurer, UnitedHealthcare, announced in November that it will no longer require doctors to obtain authorization when choosing courses of treatment for their patients. Such a policy should quickly move UnitedHealthcare out of the path of government regulators and angry patients who have long decried the practice of allowing corporate medical directors to deny care that a doctor has recommended. UnitedHealthcare said it had been approving 99 percent of the decisions anyway, and that it was actually spending more money screening physicians’ requests and issuing authorizations than it saved by denying treatments.

Health insurers across the country scrambled to publicize that they, too, have streamlined referral processes.

Shortly on the heels of the UnitedHealthcare announcement, the American Association of Health Plans (AAHP) sent a private memo to 1,000 top health-plan executives acknowledging that health insurers have themselves to blame for the public backlash.

"Public opinion of our industry is, and always has been, driven more by our own business practices than by public relations," the letter stated.

While stopping short of saying other plans ought to follow the example set by UnitedHealthcare, the letter says the public response to the company’s move "creates an extraordinary opportunity for health plans to change the dynamics confronting managed are."

However, questions already are being raised about UnitedHealthcare’s new policy. In late December, the Medical Society of New Jersey blasted the insurer for what it calls a reversal of the company’s policy ending pre-authorizations. The society claims that UnitedHealthcare of New York/New Jersey now is demanding submission of all medical documentation with all Level 4 and Level 5 Evaluation and Management (E&M) claims, including all office and outpatient services, consultations and unlisted E&M services. Also, physicians must still obtain precertification from UnitedHealthcare for MRIs, CAT scans, physical therapy and other medical procedures.

Even if MCOs are sincerely willing to change their ways, can they change enough to silence their critics who have been clamoring for legislation to control MCOs? Managed care leaders, employers and economists worry that putting new mandates on the industry–particularly opening it up to lawsuits–would raise costs even higher. If health plans further loosen their grip, will the pendulum inevitably slide back–slowly returning to a time when health care costs were skyrocketing out of control?

No, say many California doctors, arguing that managed care has already so drastically changed the practice of medicine–including the ways in which doctors are trained and view their role–that the lavish overspending is a thing of the past. After a decade under managed care’s grip, many doctors and hospitals now instinctively consider the cost of treatment while deciding how best to treat patients. As early as medical school, doctors-in-training are learning to conserve resources, earning praise from their superiors by judiciously testing patients only for the most common conditions–or, if necessary, any life-threatening illnesses–before ordering more complex and expensive tests for rare diseases.

The future of the health care delivery system promises to be a front-burner issue during the next presidential election. New census data show the number of uninsured Americans–now 44.3 million–is climbing, in spite of an extraordinary economic boom. The cost of health insurance, after a few years of stability, is rising as well. Out on the presidential campaign trail, candidates are beginning to offer their solutions to the increasingly apparent problems of access, cost and coverage. But while some experts bemoan the shortcomings of piecemeal, incremental steps to expand health care coverage, most politicians seem committed to the approach. No one is out campaigning for single-payer, universal coverage, both Vice President Al Gore and Sen. Bill Bradley (D-N.J.) are proposing health plans designed to move the system toward universal coverage.

Sen. Bradley’s is the more ambitious and costly plan. With a price tag of $65 billion, it would guarantee health care coverage for children and eliminate Medicaid, replacing it with federal subsidies to low and moderate income adults. These subsidies could be used either for private insurance or to join the various private insurance plans currently available to federal employees through the Federal Employees Health Benefits Program.

Gore’s plan would increase coverage for children by making more of them eligible for federal child heath insurance programs, which he maintains will lead to coverage for all children by 2005. His plan also would allow adults over 55 to buy into the Medicare plan, and would offer special tax benefits and grants to small businesses that join health insurance purchasing coalitions. The Gore plan also includes a 25 percent refundable tax credit to the self-employed or others who must buy insurance on the individual market. Both Gore and Bradley support a strong, enforceable Patients’ Bill of Rights.

"Managed care, and health care in general, will be a hot issue in the upcoming presidential election," says Academy President Robert D. D’Ambrosia, MD. "A lot of restrictions are going to be put on managed care and how they can dictate. But this is happening with Democratic legislation, not Republican. Unfortunately, most orthopaedic surgeons are basically conservative and tend to vote Republican, but I think we need to take a second look at how we’re voting politically. The Republicans are so heavily indebted to the insurance companies and the money they’re putting into their campaign coffers, that they’re not thinking about what’s best for the patient."

Dr. D’Ambrosia predicts the demise of managed care. "It’s on the ropes, and I’d be happy to give it a knockout punch, if I could," he says. He believes the current system will be replaced by "something between indemnity and managed care."

But if managed care is going to survive in any form, Dr. D’Ambrosia says, "they’re going to have to stop getting in the way of the patient-physician relationship. They’ll have to agree to help coordinate and facilitate care between patients and physicians. If that doesn’t happen, I think they’re dead."

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