Economic Grand Rounds: Trends in Managed Care, 2000 Edition

In January 2000 the Managed Care Information Center's Executive Report on Managed Care identified important emerging trends in the health care marketplace (1). This column elaborates on some of these trends to provide clinicians and system designers a window to their future.

Trends for the 21st century

Technology will reshape every facet of health care. Medical care is being delivered, supported, and evaluated in ways never imagined even ten years ago. Telemedicine makes it possible to deliver care to geographically remote sites, with clinical, cultural, and linguistic competence. Clinicians are using the Internet to publicize their services and to communicate with patients, other providers, insurers, and pharmacies. Managed care organizations are using the Internet to educate patients on how to access services, understand benefits, and pursue self-help approaches.

Using the World Wide Web, patients can acquire an understanding of their illness and a grasp of its current treatment that sometimes exceed those of their clinician. Interactive voice response is being used to identify undiagnosed disorders in the general population and to facilitate the utilization review process. Optical character recognition is making possible the oversight of care, the collection of data, and the payment of claims electronically or by fax with minimal human involvement.

Encoded chip technology will allow critical patient data to be available to clinical decision makers whenever it is needed. Perhaps most important, data warehousing creates the opportunity to collect and analyze data for outcomes assessments and evidenced-based health care (2,3).

Health care and pharmaceutical costs will continue to rise. The Wall Street Journal predicted that health care and pharmaceutical costs will double between 1996 and 2007, to exceed $2 trillion annually (4).

Pharmaceutical costs are the fastest-rising health care expenditure, at 12 percent per year. Drug treatment costs in the United States increased from $50.6 billion in 1993 to $93.4 billion in 1998 (5). Pharmacy costs consume as much as 20 percent of health care expenditures in some plans, exceeding the cost of inpatient care (6). If the Medicare benefit is expanded to include coverage for pharmaceuticals, costs will increase (7).

Industry consolidation will continue. The four largest managed care organizations manage behavioral health for nearly 120 million Americans, or 70 percent of the insured.

As these companies grow, they amass a larger population base to cover the cost of infrastructure, including information and operating systems, case management and utilization review services, marketing, product development, and accreditation. Fees paid to behavioral health vendors are at an all-time low, with full-risk contracts as low as $2.15 to $2.50 per member per month in some markets, making it harder for small and mid-sized managed care organizations to compete on price and service.

The focus on customer service will intensify. As managed care has evolved, the most powerful players—the payer and the managed care organization—were given incentives to decrease costs as well as care. The employer benefited because savings translated into higher corporate profits. Similarly, the managed care organization was given incentives to save on care costs because the carve-out arrangement routinely placed them at financial risk for the cost of care.

An emerging trend threatens to realign these incentives. Prompted by threats from courts, legislatures, and employees, some large employers are considering abandoning their role as middleman in health insurance purchasing. Instead, there has been discussion of offering each employee a fixed sum, currently ranging from $3,200 to $4,200 per year, to be spent exclusively on health insurance. If this plan is implemented, the managed care organization's customer will not be the employer but rather the employee-customer-patient, who brings a different set of demands.

With this change, the managed care organization will be unable to compete exclusively on price but will have to offer service and value to customers who are free to seek services elsewhere if they are dissatisfied. Customers value freedom of choice, continuity, confidentiality, unencumbered access to care and to specialists, limited out-of-pocket expenses, and a hassle-free relationship with their fiscal intermediary (8).

Consumers will have a greater role. The notion that the doctor is always right is giving way to patients' demand for a prominent role in their treatment decisions (9). Consumers now enter the doctor's office with a list of questions about his or her credentials, treatment biases, and success rates. They can examine information on state medical society Web sites and health care report cards from local and state governments. U.S. News and World Report publishes a list of the nation's best hospitals. Local magazines often list the "top 100 docs." Consumers Reports routinely publishes data on patient satisfaction with health maintenance organizations and specific treatments.

Physicians will regain some control over clinical decisions and pricing. Consumers and physicians are venting their discontent with managed care practices in the courts, legislatures, and other political arenas across the United States. Early successes included legislatively mandated coverage for emergency care, parity for mental health care, and mandated independent appeals processes. National attention has been drawn to a patients' bill of rights and responsibilities (10). In April 2000, Aetna/U.S. Healthcare settled a case brought by the State of Texas that claimed that Aetna engaged in false and misleading marketing and entered contracts with physicians that contained illegal financial incentives to limit care (11). Although Aetna admitted to no guilt, it agreed to establish an ombudsman office and to change several policies and practices.

A more significant event for managed care may occur if the courts reconsider the so-called ERISA preemption—the preemption of state law in certain areas by the federal Employee Retirement Income Security Act of 1974. The ERISA preemption has made it possible for managed care organizations to claim that a denial of care based on failure to meet medical necessity criteria is not tantamount to a denial of the care itself, cannot be seen as a medical practice decision, and therefore cannot be cause for a malpractice claim. With class action suits on this issue and pertinent cases rising through the lower courts of many states, there is reason to believe that the ERISA preemption is vulnerable. The absence of this protection will make it harder to deny the treating physicians' recommendations for care.

Physicians also will likely regain some control over pricing. The courts have granted salaried physicians the right to join unions to negotiate with managed care organizations. The consolidation of managed care organizations into industrial giants is making the playing field so uneven that some predict that the courts will extend the right to unionize to an even wider group of physicians. In Texas this right has been extended to self-employed physicians and to residents.

The Campbell Bill, recently approved by the House Judiciary Committee, applies antitrust laws to negotiations between groups of health care professionals and insurers (12). Even without unionizing, physicians across the country are uniting into groups to enhance their ability to negotiate more favorable fees with large payers (13,14).

Pharmaceutical expenditures will be the next target for cost containment. Payers and health plans attempt to control pharmacy costs through their business arrangements, restrictions on patient access to expensive drugs, and influence on physician prescribing practices (15). Business arrangements include employing a pharmacy benefits manager, which most plans have done; placing managed care organizations, managed behavioral health organizations, and providers at financial risk; and acquiring or beneficially contracting with other corporate entities.

Patient access can be restricted by closing formularies, requiring substitution of one drug for another, creating fail-first policies, using clinical pathways, and creating tiered copayments to create incentives to use the least costly alternatives. Physician prescribing practices can be influenced by generating data to create provider profiles that can be followed up with informational, educational, or other interventions; creating time-consuming preauthorization requirements for nonfavored drugs; and placing clinicians at financial risk.

Concern about privacy and confidentiality will increase. The advances of the information age and the corporatization of health care threaten patient privacy. Many new technologies—fax, e-mail, cellular phones, the Internet, and data warehousing—offer no assurances of confidentiality.

The computerized medical record can follow patients across all settings, eliminate the need for repeated initial evaluations, and reduce the risk of mismanagement. Outcome studies to permit the development of best practices and evidence-based health care require that personal data be collected and aggregated. But whenever third parties, including insurers, intrude into the doctor-patient relationship, confidentiality is breached. The challenge is to balance the need to know, collect, and share against the risks of violation of confidentiality and misuse of information. No consensus has emerged on how it might be done.

Preventive and disease management services will become more important. Few believe that further reductions in unnecessary hospitalizations and fees paid for services will generate much additional savings. Attention is therefore shifting from treating disease to preventing it. Because contracts run for only two or three years, managed care organizations have been reluctant to invest in preventive interventions, which take years to affect incidence and prevalence of illness. Large payers are responsible for their employees and citizens for much longer periods, and these payers will demand that vendors make a genuine investment in the health of the covered population.

Health care economists have recognized that 20 percent of patients consume 80 percent of health care expenditures (16). One response has been to create disease management programs to treat these individuals, most of whom have dual diagnoses and chronic illnesses.

Patient safety will receive more attention. It is estimated that between 44,000 and 98,000 Americans die annually from medical mistakes (17). Efforts to improve patient safety are likely to take many forms, including instituting mandatory reporting of errors, developing new systems to evaluate clinical outcomes and complications, identifying best practices, and educating patients and providers. Greater attention to patient safety will lead to demands for greater practitioner control over clinical decision making, greater integration of clinical and administrative systems, and greater accountability and liability for bad outcomes.

Alternative medicine will become more mainstream. Alternative treatments include acupuncture, chiropractic, hypnosis, meditation, massage therapy, herbal preparations, spiritual healing, guided imagery, and other, lesser-known practices. The National Institutes of Health has allocated $68 million for rigorous scientific investigation of the efficacy and safety of alternative treatments.

In a recent Consumer Reports poll, 35 percent of respondents said they had used alternative treatments, most in combination with traditional treatment (18). Worldwide sales of St. John's wort for the treatment of depression exceed expenditures on any prescription medication (19). Blue Cross-Blue Shield of California expects to monitor 5,000 to 7,000 patients who will receive surgical counseling tapes to see if they show better postoperative healing and recuperation (20).

The shift from monitoring quality indicators to measuring outcome will be slow but steady. Early efforts at quality assurance in health care involved auditing policies and procedures that were designed to enhance quality (21). The National Committee for Quality Assurance is taking this process a step further with the development of its Health Employer Data Information Set measures, which are numerical calculations of compliance with quality indicators (22,23). The essential next step in quality improvement is to show that these interventions have a positive impact on the incidence and prevalence of disease (24).

Discussion and conclusions

Most managed care organizations were created to produce profit for their investors, but few are generating any profit (25,26). The merger, acquisition, and consolidation strategy that has characterized the most recent stage of managed care has permitted several organizations to gain dominant market share and eliminate many of their competitors. However, the result has not often been economies of scale, increased customer satisfaction, or administrative efficiency.

Many believe that the next steps in managing care must involve fundamental systemic changes. Fragmented clinical services must be reorganized within an integrated system of care supported by an infrastructure of operations and information systems. These systems must be driven by treatment guidelines and outcomes to ensure standardized care of an acceptable quality (27). Clinical experience and outcomes data from this care must be collected and analyzed to ensure continuous quality improvement and evidence of superior outcome (28).

Because these systems will operate within global budgets, they must be able to manage demand, which will require in-depth knowledge of the target population's clinical and cultural needs, a commitment to developing programs to address these needs, and investment in prevention and wellness programs.

Integrating fragmented administrative services will be necessary to support care, ensure an acceptable level of customer service, and reduce administrative costs as a proportion of health care expenditures.

The marketplace will reward convenience, consumer control, quality, and lower cost. For psychiatrists, a sustained commitment to patient needs and patient care will guarantee that they remain allied with these market forces.

Dr. Schreter is medical director of Sheppard Pratt Health Plan, 6501 North Charles Street, Baltimore, Maryland 21204 (e-mail, [email protected]). He is also assistant professor of psychiatry at Johns Hopkins University School of Medicine. Steven S. Sharfstein, M.D., is editor of this column.