What is “Managed Care”? A “type” (with many varieties) of health insurance – combines both the financing of care (insurance) with the provision of care – variations in MC plans stem from the multiple choices of financing and provision Best understood by comparing to indemnity or “FFS” insurance

Fee-for-Service vs. MC Insurance Traditional Insurance in U.S. (1930s) “One ill, one pill, one bill” Historically focussed on financing of medical care, NOT care delivery and management Provider choice NOT restricted Has existed for a long time but growth has been recent (since 1985) Restricts provider choice (hospitals and physicians) “Manages Care” Expanded benefit coverage (e.g. preventive care)

Key Components of Managed Care Oversight of the medical care given Contractual relationships and organization of providers giving care Covered benefits tied to managed care rules

Why Buy Health Insurance? Provides no direct “utility” to consumer – unlike a car, stereo, vacation or restaurant meal Utility of Health Insurance is “indirect” – consumers prefer to spend money on goods/services – medical care provides “utility when used” · preventive and wellness care (desired) · medical or surgical care (undesired) – insurance pays for medical care

Why Buy Insurance Instead of “Self Insuring” (Pay Direct)? Expenditures can be significant – rebuilding a home – making up for lost income – having knee surgery to repair a torn ACL Uncertainty – can’t predict the future – insurance is only possible when uncertainty exists

Uncertainty Uncertainty means there is some positive probability or experiencing an event – torn ACL – pregnancy – cancer – auto accident – home fire – airline crash

Buying Insurance vs. Self Insuring Taking the Gamble Taking the Risk – Income = $30,000 – Injury costs $10,000 – Income if injury occurs = $20,000 – Income if injury does not occur = $30,000 Buying Insurance Give up $ (premium) to reduce or avoid uncertainty – Income = $30,000 – Injury costs = $10,000 – Insurance costs $2,000 – Income after buying insurance = $28,000

The Advantages FFS enables physicians freedom to follow their own best judgement and to use whatever means necessary to provide for the patient’s best interest MC supports population-based diagnostic tests and preventive care that could stop illness from developing, or catch them in an early, more treatable stage  aim of public health initiatives

The Incentives With FFS, no incentive for price reduction – Providers (physicians, hospitals, labs, clinics) receive more income with higher usage With MC, incentive is to control costs by effective use of resources while still providing quality care – encourages price competition

Physicians as “Sellers” Patients as “Buyers” View of medicine as a business is skewed – buyer and seller can ignore costs – not like buying aspirin – when seeking health services, desire is to seek to the best care possible without concern about cost

Evolution of Managed Care The first managed care plans in the US developed in the 1920s and ‘30s as a way to provide comprehensive, pre-paid health care to employees who need access to affordable medical services In 1929 farmers’ cooperative in Elk City, OK and employee group for the LA Department of Water and Power were formed

Evolution of Managed Care In 1930, Henry J. Kaiser organized a prepaid medical care arrangement for his construction and shipbuilding employees As shipbuilding boomed during WWII, Kaiser’s system eventually cared for 200,000 workers and their families When shipyards closed at the end of the war, Kaiser opened its doors to the general public, marking the beginning Kaiser-Permanente, today the country’s largest Group Model Health Maintenance Organization

Evolution of Managed Care During the war, the War Labor Board, which set limits on wage increases, ruled that fringe benefits up to five percent of wages were not inflationary. In 1948 the National Labor Relations Board ruled that health benefits were subject to collective bargaining. These two rulings contributed to the development of the modern US employer-based insurance system. Group Health Cooperative of Puget Sound and the Health Insurance Plan (HIP) of New York formed (1947)

Evolution of Managed Care All of these developments received fierce opposition from local hospitals, participating physicians were refused membership in local medical societies and the AMA By 1970, as many as 38 states had restricted or outlawed HMOs Employers and unions were the major force challenging this opposition

Evolution of Managed Care During the 1960s health care costs increased rapidly stirring ideas and debate over proposals to improve the health care system In 1971, President Nixon’s State of the Union message called for “new programs to encourage preventive medicine by attacking the causes of disease and injury, and by providing incentives for doctors to keep people well, rather than just to treat them when they are sick”

Evolution of Managed Care In 1973, Congress passed the Health Maintenance Organization Assistance Act, designed to encourage the growth or organized health care delivery systems under private sponsorship – provided grants and loans for HMO development, and required most employers to offer HMO coverage When the HMO Assistance Act became law there were about 50 MCOs in 20 states  after just 5 years this became 200 in 37 states!

Evolution of Managed Care HMO Act of Awarded two- and three-year grants and loans for the creation of HMOs 2. Superceded state laws restricting formation of HMOs 3. Required employers to offer federally-funded HMOs 4. Established a voluntary qualification process for HMOs

Evolution of Managed Care In 1980, only 5% of Americans were enrolled in prepaid arrangements while 80% received care from salaried physicians practicing in large, well-organized staff or group model HMOs However, health care costs continued to increase throughout the 1980’s, with annual premium increases for traditional indemnity insurance averaging more than 20% per year by mid-decade. Employers began to cut expenses by requiring employees to pay a larger share of health care premiums

Evolution of Managed Care By the end of the 1980s, enrollment in HMOs increased 400%, from 9 million (1980) to 36 million (1990) In 1994, enrollment reached 51 million Today in 2000, there are now over 160 million individuals enrolled in some form of MCO, approximately 59% of the US population.

The Crisis: Increasing Costs During the 1950s national health care spending accounted for about 5 percent of total national expenditures Health care cost explosion with traditional care after Medicare/Medicaid introduced in = 8% 1980 = 10.3% 1990 = 13.7% In 2000, health care cost expectations exceed 18% of the national budget

Factors Driving Increased Costs Aging population The development and use of new technologies Limited emphasis on preventive care Excess hospital capacity Fragmented health care system Insufficient data on the efficacy of treatments

Factors Driving Increased Costs Aging population – consumption of health care services rises sharply with age – increasing life expectancy – demographic “bulge” of the baby boom Increasingly new and sophisticated technology – Bypass surgery and balloon angioplasty – Renal dialysis – Joint replacements – Transplants – CT and magnetic resonance imaging

Managed Care CW Today Managed care backlash: continued negative attitudes from the media to the movies Public distaste for health care on wall street HMO pull-outs from Medicare HMO markets - “cherry picking” Civil action suits - Humana

Managed Care Reality Today HMO losses: majority of plans losing money PPM losses: physician practice management company stocks drop - many bankruptcies In the midst of a “downswing” - the premium pricing cycle Mergers and Acquisitions Provider sponsored organizations

Managed Care Shortfalls Today Lack of capitalizing on administrative technology Lack of member-tailored health behavior management Trade associations focus on lobbying, not PR Lack of large plan advertising to address backlash Everything is just too complicated Customer service problems