Estimates for Health Expenditure Growth Rate Should Reflect Marketplace Trends and Uncertainty, According to UCSF Study.

SAN FRANCISCO--(BUSINESS WIRE)--Feb. 21, 1995--When projecting the impact of health care reform proposals, researchers and policymakers should use health expenditure models that provide a range of estimates that better reflect both market trends and the profound uncertainty about the effects of health care reform, according to a new UCSF study published in this week's (Feb. 22) Journal of the American Medical Association.

"Policymakers apply relentless pressure on health expenditure modelers to produce credible estimates of the effect of legislation on health costs," says lead author Robert H. Miller, PhD, health economist and UCSF assistant professor of health. However, there currently is no hard scientific basis for estimating the impact of managed care legislation and market developments on the HEGR, or behavioral responses to these changes, which makes it especially difficult to develop usable estimates, according to the study.

Estimates of the gradual rise in health care costs--called the health expenditure growth rate (HEGR)--are especially critical, "because savings due to change in the HEGR are potentially far more important than one-time or static savings," Miller says. "Small differences in rates over time create large differences in the health care costs."

Miller and co-author Harold S. Luft, PhD, acting director of UCSF's Institute for Health Policy Studies, looked at assumptions and methods used in existing non-partisan HEGR models used in the 1994 national health care reform debate. They found that simulation model estimates of the impact of health system reform proposals on the HEGR used by the Congressional Budget Office (CBO) and Lewin-VHI Inc., of Fairfax, Va., a health policy consulting firm, contained no empirical underpinning.

Moreover, the UCSF study emphasizes that in the critical 1994 health care reform debates, the modelers focused on single estimates, rather than on a range of estimates required to reflect the profound uncertainty about the future of the health system under different reform proposals.

"According to the CBO and Lewin-VHI estimates, managed care would have little or no impact on the HEGR. This is equivalent to saying that fundamental changes that are reshaping the health system will not substantially affect the HEGR," Miller says.

To produce their estimates, the CBO and Lewin-VHI developed qualitative scenarios for future health system development under managed care and managed competition. The UCSF researchers concluded that there are alternative scenarios that are just as plausible and reasonable as those created by the CBO and Lewin-VHI, in which managed care would substantially lower the HEGR more quickly and further. These scenarios incorporate four key trends. They are:

Purchaser Power Concentration. Purchasers set in motion supply-side health system changes by moving many enrollees from indemnity insurance into managed care plans, particularly during the past 12 years, according to the study. They have concentrated their buying power by limiting enrollee choice of health plans, and some have created incentives for enrollees to purchase lower-cost plans.

"Such purchasers increasingly demand that health plans supply information on enrollee utilization, outcomes, satisfaction, and risk differences to justify premiums charged," Miller says. "These trends contrast with the old indemnity insurance 'fee-for-service' system, in which uninformed purchasers had fragmented purchasing power."

Delivery System Capitation and Risk Bearing. According to the UCSF study, provider payment methods are shifting, from linking higher use to higher provider income ("more is better") to linking lower use to increased provider income ("less is more"). Miller says this reversal of incentives reflects the shift from fee-for-service without risk bearing to capitation--a uniform per capita fee--with risk bearing.

Studies have shown that capitation and associated risk bearing lower use of hospital resources and more expensive procedures, enough to lower the health costs of HMO plans compared with those of the indemnity insurance plans. "HMO plans already predominate in a few areas and are a growing threat to indemnity insurance in other areas, while capitation of the delivery system has grown in parallel."

Delivery System Consolidation and Integration. Medical care is being reorganized through consolidation and integration. This includes the creation of large and integrated medical groups, and tighter independent practice associations, either as a result of mergers, purchases or more loosely binding alliances. Increased capitation and risk bearing is the driving force behind consolidation, according to the UCSF study.

Control is shifting to primary care physicians within larger, risk-bearing organizations as gatekeepers of more expensive services, Miller says. "In fee-for-service or indemnity systems, the control rests with physician specialists in solo practice, small medical groups, or loosely managed multispecialty medical groups that have little risk."

Information Technology. "Hospitals and physicians depend on paper medical records, leaving health system managers with less information and control over production than their counterparts in other industries," Miller says. However, recent technological advances have created much cheaper information-technology that is well-suited to the often dispersed health production process. "This allows efficient production and use of large amounts of clinical and financial transactions information," the UCSF researchers state.

"If you interact these four trends with managed competition legislation," Miller says, "the net impact is to increase the effect the trends alone are having, which tends to make the provision of health care more efficient and to lower health expenditures. A good case can be made that it is at least as difficult to argue that managed care will have a small or no impact on the HEGR as it is to argue that it will have a major impact."

Miller adds that although research on health system change is getting better, "We need to be able to measure change and its impact in an empirical way to get a deeper understanding of what is happening in the marketplace and why. The absence of reliable, scientifically-based behavioral models is a serious problem, one that needs to be solved. Good policymaking depends on it," Miller says.

CONTACT: UCSF

Rebecca Higbee, 415/476-2557