Managed Care in the US: Under New Management Robert E. Hurley, Ph.D. Department of Health Administration Virginia Commonwealth University

PrivatePublic 1.Aged (>65) 2. Poor 3. Disabled Employee and dependents Insurance/ Managed Care Company Direct Purchase Direct Purchase Health Care Providers Hospitals Physicians Others Government Employer

PrivatePublic 1.Aged (>65) 2. Poor 3. Disabled Employee and dependents Insurance/ Managed Care Company Direct Purchase Direct Purchase Health Care Providers Hospitals Physicians Others Government Employer 85 mil.175 mil.

PrivatePublic 1.Aged (>65) 2. Poor 3. Disabled Employee and dependents Insurance/ Managed Care Company Direct Purchase Direct Purchase Health Care Providers Hospitals Physicians Others Government Employer 85 mil.175 mil. 45 mil.--Uninsured

Medicare--Aged Federal (national) program created to cover most persons 65 years of age and older Modest benefit package; no Rx benefit till 2006 Expanded later to cover permanently disabled Government pays health services providers for directly in most cases Payment methods and payment rates are set by the Medicare program--non-negotiable

Low Income Programs Typically jointly administered and financed by national, state, and local governments Focus on persons under 65 who are unable to afford to buy private coverage Benefit packages vary by program type: some are generous, others limited Provider payment methods vary but rates usually below private insurance and Medicare

Employment Based Health Insurance Coverage Source: Center for Risk Management and Insurance Research, 1999

Coverage in the US--< age 65 (approx. 250 million) Source: Kaiser Family Foundation, 2004

Employers Sponsored Health Insurance: “The Accidental System” Reliance on employer as sponsor for health insurance evolved over time in U.S. Employers may voluntarily offer health care coverage as a form of benefit or non-cash compensation Participation among employees is voluntary Health benefits are not subject to income tax Employer selects types of health insurance available and benefits to be covered Employer pays all or part of premium on behalf of employee and dependents

Real Numbers for Health Care Coverage, 2005 Annual Cost for Single Coverage = $ 4025 Pct of Premium Paid by Worker= 16% Annual Cost for Family Coverage = $ Pct of Premium Paid by Worker = 26% Gabel et al, KFF, 2005

Employer sponsored health insurance-implications Tax incentives encouraged generous benefits with limited “out-of-pocket” expenses Presence of insurance has encouraged demand for service--some say “cost-unconscious use” But many small employers are not willing or able to offer health benefits to their workers Many low income workers are not willing or able to pay for their share of the employer-based coverage

Rising Health Care Costs Total expenditures $73 $246 $696 $987 $1309 $1880 (in billions) Percent of GDP 7% 8.8% 12.0% 13.3% 13.0% 16% Source: Levitt et al 2005

Managed Care Historically, most employers relied on insurance companies to arrange health benefits Employer concerns about rising costs led many to look for new arrangements Managed care was effort by employers to try to influence on providers to control their costs HMO (health maintenance organization) was the most well-known form of managed care

Health Maintenance Organization (HMO) Combines both insurance and provider role into a prepaid health care organization Assumes risk for specified set of services Arranges with providers (employment or contract) to delivery services to predetermined rates Believed to be a more efficient model of financing and delivery HMOs expected to compete against one another on price and quality

Managed Care Organization (MCO) Enrollment Participants in millions SOURCE: AAHP

Managed Care Methods Create provider networks through contracts and negotiate favorable payment rates Promote appropriate service provision and encourage appropriate consumption Standardize medical practice and promote use of appropriate treatments Encourage provision of preventive services and care management programs for chronically ill

Increases in Health Insurance Premiums Compared to Other Indicators, % 12.7% 8.5% 8.3% 4.8% 3.4% 1.6% Gabel et al, KFF, 2002

Increases in Health Insurance Premiums Compared to Other Indicators, % 13.9% 11.2% 8.5%9.2% 8.3% 4.8% 2.3% 2.2%.8% Gabel et al, KFF, 2004

Current Challenges for Managed Care Unable to sustain cost control HMOs became very unpopular with public given restrictions on choice of provider Providers resent controls on practice and payments Financial distress for some providers led them to refuse to contract with HMOs Politicians and policymakers have imposed many constraints on managed care

Percent of Groups with “Unfavorable” Rating (Kaiser Family Foundation, National Survey of Prescription Drugs, Sept. 2000)

Contemporary Pressures Premium increases remain in double-digits Providers demanding higher payments Continued increases in labor, technology, pharmacy, malpractice, and administrative costs Private purchasers losing faith in managed care Coverage expected to decline as costs rise Increased consumer cost participation

Managed Care—Under New Management Many employers believe employees must share more of cost of their health benefits Employers decide to reduce some of their support for health benefits Health insurance companies developing new products with much more cost sharing Patients paying for care with own money are expected to consume less and demand more information to an effective buyer

Percentage of Large Employers (>200 workers) Planning Selected Benefit Changes in Next Year Gabel et al, KFF, 2004 Likely= Very/Somewhat likely; Not=Other

Consumer Directed Health Products Growing interest in offering “consumer directed health plans” Federal tax law changes allow consumers to put money into “health savings accounts” (HSA) and avoid taxation, if they purchase a high deductible insurance policy $ in HSAs can meet routine expenses and cover cost of high deductible HSAs can build up over time and be used for any health-related expense

Consumer Directed Health Plan Design EMPLOYEE’S Health Savings Account EMPLOYER High Deductible Insurance Policy $ $ Routine/ Discretionary Care High Cost Care

Policy Concerns with Consumer Directed Products  Information to support consumer decision making remains badly underdeveloped  Deferred/forgone care could lead to higher costs  Uncompensated care could rise sharply  Healthy likely to opt out of conventional insurance  Less healthy maintain comprehensive coverage  Risk-pooling undermined; premiums could soar

Consumer Directed Health Products: Inspiration or Desperation?  Some experts predict 40% of Americans could move to the products in next 5 years  Growth in products will increase demand for more and better price and quality information  Impact on utilization and cost is largely unknown  Unclear if consumers will accept the additional financial risk of these products—especially lower income consumers  Some experts predict products will remind Americans why they wanted comprehensive health insurance in the first place

“You can always count on the Americans to do the right thing, after exhausting all other alternatives.” Winston S. Churchill