Challenges for physician executives in the Millennium marketplace. (Beyond Managed Care).

FOUR AND A HALF YEARS ago, the country was at a watershed and didn't know It. One option was a highly government-regulated system. That was the Clinton plan, and the country abhorred it. They took the other option, to throw health care to the marketplace. and four years later, people don't like what the/re getting. (1)

--Leo M. Henlkoff, MD, CEO, Rush-Presbyterian-St. Lukes Health System

A new surge of public opinion in favor of health reform is propelling a national 'patients' bill of rights" towards Congressional passage in early 1999. This time health reformers are targeting managed care, not a universal government-sponsored health program. At the height of the health reform debate in 1992-1994, a New York Times poll found that 90 percent of surveyed American's said the nation's health care system needed fundamental change. When asked in mid1998, some 85 percent of the Times' survey panel felt exactly the same way, that America's enterprise-based and voluntary model was not working. (1) In fact, 50 percent of those surveyed felt that managed care would harm the quality of care, not improve it, a reversal of results in an earlier 1995 poll on HMOs and quality.

There will be fundamental change in the Millennium, but not enacted in Washington, D.C. American health care is entering the "post-Managed Care" era in which payers, providers, plans, and patients reconstruct a new, more efficient, and, ultimately. more satisfying health care deli very system.

At the heart of Millennium health care is "lite" managed care, which is more patient-friendly and cost-effective than traditional models. The shift by managed care organizations is driven by their current market dilemma--how to simultaneously reward Wall Street shareholders, hold employer health benefit costs down, and satisfy patients. "Pure" HMOs. which grew rapidly during the 1980s and 1990s by promising lower costs, are now struggling to deliver affordable health benefits.

The rise of point-of-service and open-access plans has pleased consumers, but relaxed the controls by which the plans had contained costs. Raising HMO premiums will not work for long. The only sustainable solution for managed care organizations is to develop multi-year strategic business relationships with large integrated health systems. If the plans fail to cooperate, provider-sponsored organizations will replace the intermediaries and contract directly with employers and government agencies in the Millennium.

Here are the characteristics of a "post-Managed Care" market:

* Employers align with providers to eliminate the "middleman"

* Consumers switch from traditional HMOs to open-access, point-of-service products, and PPOs, even if they have to pay more out-of-pocket

* Heavy government regulation of managed care plans

* Consolidation of HMOs to a few major national brands

* Regional health plans enjoy higher customer loyalty

* Providers assume capitation and manage risk

* Managed Medicare and Medicaid PM/PMs are increased to keep plans from dropping out

* Competition shifts from price to clinical outcomes and customer service

The new Millennium landscape

This is the Millennium landscape of the "post-Managed Care" marketplace:

1. "Age wave" boosts demand

Millions of Americans are joining the age wave." (2) Every nine seconds, another Baby Boomer born in the years 1946 to 1964 will turn age 50. But this next generation of seniors is younger, healthier, more active and fit than any previous group of older Americans. As America ages, demand for health services will rise. Americans used 6 percent more prescription drugs in 1998, boosting retail pharmacy sales up 15 percent (3) The "age wave" will be the most far-reaching influence on the future of American health care and society. According to a profile on the senior market from the Census Bureau and National Institute on Aging: (4)

* At each stage in their life-cycle, the 76 million Baby Boomers will be the dominant force driving the age wave In American economics, politics, and health care

* Over-65 population in the year 2000-Seniors number 34 million, some 13 percent of the U.S. population; that will double when the Baby Boom reaches age 65 in the year 2011:

* Baby Boom generation--More than one million Baby Boomers will turn age 50 annually until the year 2011; one-third of the U.S. population was born during the Baby Boom:

* Frail elderly--The nation's 3.5 million seniors over age 85 have increased by 274 percent since 1960, and will expand to 7 million in the year 2020:

* By the year 2030--The population of seniors over age 65 will grow by 120 percent from the year 2000, to 20 percent of the total population in the year 2030:

* Regional distribution--Eastern and Midwestern states have most seniors (Massachusetts with 13 percent Pennsylvania with 15.3 percent. Florida with 18.2 percent. Iowa with 15.3 percent. and South Dakota with 14.7 percent);

* Multicultural society--Of the 80 million seniors projected for the year 2050. 84 million will be black. 12.5 million Hispanic. and 6.7 million will not be white or black.

2. A push from technology

New technology could be a major inflationary factor in Millennium medicine. America is on the threshold of a new wave of medical innovation in genetics devices, and processes. Development of "immortal" human embryonic stem cells that could form the bases of hundreds of cell types or advanced therapies was recently announced by scientists at the University of Washington and johns Hopkins. (1)

As the human genome project moves forward, international teams of scientists hope to complete sequencing the entire genetic map by the year 2005. Hundreds of genetic therapies and genetically-engineered pharmaceuticals are in clinical trials today Consumers will flock to the new cures. which will be predictably expensive. Implantable devices, like heart pumps and defibrillators, could cost $25 000 to $40,000 per case. But demand will be strong for these life-enhancing devices from the growing wave of Baby Boomers used to active lifestyles.

3. Public/private health reform

Can anything slow the medical cost-push of this double whammy of demographics and technology? The answer had better be "Yes." A combination of governmental privatization and private-sector competition will reconstruct managed care to improve its customer service without losing its cost controls. (6) The result should be a level of health inflation over the next five years within 2 to 3 percentage points of the overall Consumer Price Index (CPI).

This scenario assumes that Medicare and Medicaid will continue to expand their use of managed care arrangements. currently growing at annual rates of 25 percent. and that managed care organizations are incentivized to control medical and pharmacy costs. Congress should enact a "patients bill of rights" before the year 2000 election. Consumers will get more protection at the state level. where more than 20 states have already legislated their own managed care reforms.

4. Employers use clout

Employers who switched to managed care to save money are now grumbling about rising health benefit costs Health plans boosted their 1999 premium rates by 5 to 8 percent for major employers. and small businesses received price increases of 8 to 15 percent and even higher. Many large employers who had become accustomed to 2 to 3 percent inflation in health plan premiums were shocked by this years price increases of 8 to 10 percent. The largest firms may be able to negotiate 1999 rates between 5 to 6 percent, but smaller companies are frantically shopping for lower-cost alternatives. Many small businesses are raising employee cost-sharing, and some firms are making health coverage an option which employees can purchase from a fixed-contribution "cafeteria" benefits plan.

5. Direct provider contracting

If HMO and health insurance premiums continue to rise beyond the year 2000. employers are likely to become more aggressive In managing their health benefit costs. This could infuse new resolve in the more than 100 regional employer health coalitions to use their buyers' clout collectively. Joint purchasing, group discounts, and direct provider contracting will become more frequent.

In Minneapolis-St. Paul, a strategic alignment is taking place between large employers with providers, in a move that could largely eliminate the health plans' role as intermediary. Two dozen local provider-sponsored networks are taking risk for 125,000 managed care enrollees, some 30 percent of the covered lives sponsored by the Buyers Health Care Action Group (BCHAG). Consumers are given extensive information about the local provider networks, including access, patient satisfaction, and clinical outcomes. A few health plans are participating in the experiment, but only as network organizers, who are limited to 10 percent of the premium for administrative expenses. Direct provider contracting Is gaining momentum in Minnesota. and cutting into HMO enrollment, which fell to a 1.6 percent increase in 1997. (8) The State of Minnesota has joined BHCAG, and will be offering the provider network option to another 100,000 lives in 1999.

6. Government regulates managed care organizations

Momentum is building for federal enactment of a "patients' bill of rights," which would increase regulatory controls over managed care organizations (MCOs). Complaints about HMOs have been rising as HMO enrollment expands into Medicare and Medicaid. State regulators report a surge in HMO-related complaints from consumers and providers in 1998, with an estimated 35.000 complaints filed by the 77 million enrollees whose plans are state-regulated. (9)

Both Democrats and Republicans had competing versions in 1998, and Congressional action on the measures looks likely in early 1999. The most contentious issue has been whether patients should have the right to sue their health plan for damages resulting from a denial of treatment by the plan. Physicians' cheers for more government regulation of managed care organizations may turn to groans when doctors discover that many of the new regulations in a national "patient bill of rights" actually apply to providers as well as plans.

7. Restructuring managed Medicare/Medicaid

As public pressure mounts to regulate managed care organizations, some health plans are exiting managed Medicare and Medicaid capitation markets where they cannot make money. Anthem, Oxford, United, and several Blue Cross/Blue Shield plans are among top-25 health insurers who have announced they are pulling out of managed Medicare and Medicaid-risk in small and rural markets. Across the nation, an estimated 250,000 to 400,000 Medicare and Medicaid enrollees in more than a dozen states may lose their managed care plans, and at least 50,000 Medicare HMO members will have no HMO option. (10)

Health plan pullouts could trigger public protests leading to higher premiums for Medicare and Medicaid HMOs. Angry seniors who like the lower costs and pharmacy benefits of their Medicare HMOs are complaining to Congress, which could lead to increases in the inflation factor to adjust Medicare HMO premiums yearly.

The Health Care Financing Administration is proceeding to implement all five health coverage options--"Medicare+ Choice"--adopted by Congress in 1997 as part of the Balanced Budget Act. Within the next three years, Medicare eligibles will be offered new alternatives, including Medicare PPOs, provider-sponsored organizations (PSOs), and medical savings plans, in addition to traditional fee-for-service and Medicare HMO plans.

8. Health plan shakeout

Continuing losses and slumping stock prices could drive some 50 to 100 HMOs out of business in the next three to five years. Today's 650 HMOs are in for a wave of consolidation, and possibly bankruptcies, as they struggle to cope with out-of-control medical and pharmacy costs. As of September 1997, some 49 percent of HMOs were losing money, according to St. Paul-based InterStudy, which tracks the HMO industry. (8)

Industry losses continue, with California-based Foundation Health joining Oxford and Kaiser as the latest HMO to announce big losses, including a $175 million write-down. (11) Last year, Kaiser and Group Health of Puget Sound combined to form one of the nation's largest non-profit HMOs. Merger arrangements for the biggest for-profit combination between United Healthcare and Humana were derailed in mid-1998 when United announced a $600 million loss. Several provider-sponsored plans have been sold or are in merger talks, including Advocate in Chicago. and Harris Methodist's HMO in Fort Worth, Texas.

9. Providers "push back"

Dominant provider organizations are swinging their consolidated market clout, and refusing to accept bad contracts from some health plans and HMOs. The risk, of course, is that the plans will switch to competitors, triggering volume losses and staff cutbacks. In Sacramento, California, both of the leading hospital systems, Sutter Health and Catholic Healthcare West, fought Blue Cross to a standstill. (12) The Blue plan was forced to improve its fee schedules and payment terms to both health systems, or be left with virtually no major hospital providers in the key capital-area market. On the East Coast, the Lancaster Health Alliance, a three-hospital system based in Lancaster, Pennsylvania turned down a contract from the powerful Aetna U.S. Healthcare. The Health Alliance remains profitable, while a competing hospital that took the contract is now losing money.

10. Doctors get organized

The growth of large, well-organized physician group practices and IPA networks will be a major factor in Millennium medicine. Some 38.8 percent of U.S. physicians are now salaried, according to recent data from the American Medical Association, and employed physicians' incomes rose 4 percent, while self-employed doctors' net income remained flat at $198,000. (13) Jumbo-sized medical groups and networks with hundreds of physicians are developing the scale and market power to assume risk and confront bullying health plans. By refusing to accept unfavorable contracts or payment schedules, the doctors risk losing both revenues and patients when HMOs find other doctors.

Phycor's Lexington Clinic in Kentucky stood up to the largest health plan in their market last year and came away with a better contract when the insurer calculated what It would cost to replace the 200-doctor group. In Dallas, the 450-doctor Genesis medical group refused to renew their contract with Aetna. forcing a confrontation with the Metroplex's second-largest health plan which could impact 25.000 Aetna enrollees. The Dallas physicians were strongly critical of the plan's slow payments, bureaucratic delays in authorizing treatments, and refusal to provide data to the group that would assist in better managing enrollee risk.

11. Providers assume risk

Ultimately, the only way for providers to move up the managed care "food chain" Is to assume more risk, taking 80 to 85 percent of the premium. (14) This scenario assumes that hospitals and physicians will shoulder more risk' in partial or global capitation arrangements in the future. But the assumption of risk will not be easy. A major battle is looming between providers and plans over the premium. As HMOs boost rates, they are simultaneously seeking increased discounts from providers. The result will be major confrontations, "Sumo wrestling"-style, between provider-sponsored networks and health plans over the premium split.

Beyond health plan confrontations, there are more dangers in pursuing this strategy. Managed care guru Peter Kongstevdt, MD, of Ernst & Young in Washington, D.C., cautions that "provider-sponsored organizations assuming risk are embarking on a long, dangerous, and fantastic voyage into the unknown." (15) Risk means risk, as in the potential for big losses, where providers may lack the infrastructure, discipline, or capital to be successful. San Diego-based Nate Kaufman of Superior Consultant predicts a new "stage 5 for managed care-litigation." (16) The result may be provider squabbling about the premium split, with doctors and hospitals at each other's throats.

12. Report cards

"Report cards" on health plans and providers will be widespread within five years. Clinical outcomes and patient satisfaction will be important benchmarks for monitoring clinical performance. (17) Already, providers are being rated and ranked by the media, under headlines which promise to identify the "best hospitals (or physicians, or HMOs) in America."

The Health Care Financing Administration is developing a "Medicare report card" in collaboration with the National Committee for Quality Assurance in Washington, D.C. NCQA has credentialled about half of the nation's 650 HMOs, requiring that each plan establish and report HEDIS (Health Plan Employer Data and Information System) data on an annual basis. (18) Data for comparisons is fragmentary today, and politics will slow, but not prevent, the emergence of national databases of comparative information on patient satisfaction and clinical outcomes.

13. Managing clinical performance

The core business of health care providers in the new Millennium is managing clinical care. Successfully controlling medical care and clinical costs will require standards, information systems, medical management, and provider discipline. Medical organizations will adopt clinical standards and protocols, which will become regional standards over time. But the standards will not be imposed by Washington-based government bureaucrats. This time, medical practice guidelines and standards will be developed by local physicians, based on their experience and the "best science" of evaluated clinical practice. In this scenario, physicians resume control of the health delivery system.

At the University of Pennsylvania, developing practice standards is the fulltime assignment of a disease management business unit, which has churned out (13) protocols in the past three years, and has 30 more in the planning stages. (20) Medical management is the core business process of Millennium health care. Doctors will assume economic as well as professional and legal responsibility for the care of their patients. A 1998 cross-comparison between a recently established integrated delivery system (IDS) with fewer than 100,000 capitated enrollees, evaluated against a mature IDS with 220,000 covered lives under capitation, showed remarkable differences in the sophistication, tools, and outcomes achieved by the mature IDS. (21)

14. Self-health, the Internet, and informed consumers

The patient is the last frontier of health reform in the Millennium. Self-health and health promotion could significantly Influence medical need--and medical costs--by modifying the morbidity risks of defined populations, argues James Fries, MD, a leading researcher in aging and health. (22)

The era of informed health consumers is rapidly arriving. Already, some 40 percent of seniors constitute a new consumer movement in health care, the "wired retired." Tomorrow's health care consumers will have online access to Websites like www.drkoop.com, Emedicinecom, and competing sites operated by Johns Hopkins and the Mayo Clinic. (23) "Alternative medicine" will become mainstream in the Millennium, predicts the Alexandria, Virginia-based Institute for Alternative Futures. (24) Today, one-third of Americans routinely use complementary and alternative medicine each year, which is predicted to double, to two in three, by the year 2010.

Looking forward

A new era is arriving in American health care, but not all problems will have been resolved by the Millennium. The rising number of uninsured, now estimated at 43 million, are a continuing political and moral issue. Excess capacity in the health system exceeds 40 percent of licensed hospital beds, but few health systems have demonstrated the gumption to tackle the surplus capacity issue. America's health care infrastructure. like its roads and bridges, is aging. Replacing obsolete hospitals and equipment will cost billions, adding to the burden of health costs in the new Millennium.

National health spending could double to $2 trillion in the year 2010, according to a recent forecast by the Department of Commerce, as the cumulative result of these cost pressures. That prediction assumes that managed care loses its cost-effectiveness, and age-driven demand for medical technology runs away unchecked. Don't count on it. There will be inflationary pressures aplenty, but if managed care fails, America can still swing a regulatory hammer on medicine, pharmaceutical manufacturers, and health insurers. That would not be the preferred Millennium scenario for most of America's health care providers.

References

(1.) Kilborn, P.T. Reality of the HMO System Doesn't Live Up to the Dream. The New York Times. Oct. 5. Pp. A1. A16, 1998.

(2.) Coile, Jr., R.C. Seniors' Demographic Revolution Will Redefine Healthcare Marketing, Financing and Delivery. Health Trends. 10(9):1-8. July, 1998.

(3.) Pogue, J. Prescription Drug Use Rising. Integrated Healthcare Report. 5(9):24. Sept., 1998.

(4.) National Institute on Aging 1996. "65+ in the United States." NIA. Washington, D.C., Pp. 1-200.

(5.) Wade. N. Scientists Cultivate Cells at Root of Human Life. The New York Times. Nov. 6, Pp. A1, A21, 1998.

(6.) Coile. Jr., R.C. Managed Care in the Millennium. Health Trends. 10(1):1-8. Oct., 1998.

(7.) McGinley, L. Democrats Make Patients' Rights a Top Priority. The Wall Street Journal. Nov. 6, P. A16, 1998.

(8.) Hamer, M. "HMO Industry Report." InterStudy Competitive Edge. Part II. 8(1):1-117. Apr., 1998.

(9.) Kilborn, P.T. Complaints about HMOs Rise as Awareness Grows. The New York Times. Oct. 20. P. A20, 1998.

(10.) Allen. M. Fear Greets Decision to Cut Many Elderly from HMO. The New York Times. Oct. 5. P. A19. 1998.

(11.) Rundle. R.L. California HMO Sets Big Charge in Third Quarter. The Wall Street Journal. Nov. 2. P. B10, 1998.

(12.) Cochrane, J.D. The Dynamics of Power in the Marketplace. Integrated Healthcare Report. 5(7):1-5. July, 1998.

(13.) Jaklevic, M.C. Doe Income Stilt Rising--AMA Data. Modern Healthcare. 28(13):3, March 30, 1998.

(14.) Colic, Jr., R.C. The Five Stages of Managed Care. Health Administration Press. Chicago, IL. Pp. 1-207, 1997.

(15.) Kongstevdt. P. R. "The Future of Managed Care: Coping with Chaos." Integrated Health Health Care Congress. New York. N.Y. Presentation materials. Pp. 1-64, Sept., 1998.

(16.) Kaufman, N. "Physicians. Hospitals, and the Managed Care Premium Split." The Governance Institute, White Sulpher Springs, WVA, Presentation materials. Pp. 1.20, Oct., 1998.

(17.) Malone, M. P. What Do Patients Want to Know and When Do They Want to Know It? The Satisfaction Monitor. 15(3):11. May/Jun. 1998.

(18.) Edgman-Levitan, S. and Gertels, M. Measures of Quality: What Can Public Reporting Accomplish? The Healthcare Forum Journal. 41(27):36-37. Jan./Feb. 1998.

(19.) Starr, P. Smart Technology. Stunted Policy: Developing Health Information Networks. Health Affairs. 16(3):91-105. May/June, 1998.

(20.) University of Pennsylvania. Disease Management Programs Getting Off the Ground at Warp Speed. Healthcare Demand & Disease Management. 4(3):42-44. Mar., 1998.

(21.) Byrnes, J.J. Do Integrated Healthcare Strategies Enhance Quality? Integrated Healthcare Report. 5(7):6-10. July, 1998.

(22.) Fries, J.F. Beyond Health Promotion: Reducing Need and Demand for Medical Care. Health Affairs. 17(2):70-84. Mar/Apr., 1998.

(23.) Quick. R. Click Here. The Wall Street Journal. P. R10., Oct. 19. 1998.

(24.) Bezold. C. "The Future of Complementary and Alternative Approaches in U.S. Health Care." Institute for Alternative Futures. Alexandria, VA. Pp. 1-218.. Jul., 1998.

Russell C. Coile, Jr., is Senior Vice President for Superior Consultant, a national integrated health care information systems and management consulting firm based in Southfield, Michigan. His sixth book on the future of the health field, Millennium Management "Better, Faster, Cheaper" Strategies for 21st Century Health Organizations, has just been published by Health Administration Press. He can be reached by calling 972/403-1945 or via email at Russell_ [e-mail].