Managed choice: health insurers are responding to consumer demand for more options with tiered pricing for doctors and hospitals patterned after pharmaceutical pricing plans. (Life/Health: Managed Care).

Managed care companies, finding themselves trapped between consumers demanding freedom to choose their providers and the ever-escalating cost of providing health care, are adopting programs that allow consumers to decide which hospitals or doctors they want to go to as long as they pay a greater percentage of the provider's bill if they opt for more expensive care.

Both health-maintenance and preferred-provider organizations are testing the waters by placing hospitals or doctors into different classes, and charging members more for visiting the more expensive options. It's a growing trend that may not be sustainable unless insurers are ultimately able to link quality of care to cost, some experts said.

Drug Tiers

Prescription-drug expenses were once the leading driver in raising health-care costs, but many experts credit health insurers with slowing prescription cost spending by implementing a system of tiers for prescription plans. For instance, instead of charging consumers the same out-of-pocket cost no matter what prescription they choose, under a three-tiered plan, a generic drug may cost members a $5 copayment, while the same brand-name drug would cost $10 and another newer, more expensive drug, may cost them $15. Under the old system, there was no financial incentive for the consumer to pick a generic drug over a name-brand drug.

One study by the California HealthCare Foundation found that when copayments were raised from $5 to $10, workers spent 22% less on prescription drugs by switching to generics or over-the-counter substitutes.

Insurers want to apply that same philosophy to hospitals or doctors, and make consumers pay a greater portion of costs for "top-shelf" care.

Ironically, HMOs, which got their start by controlling cost by limiting consumer choice, are giving in to pressure to provide more choice. As this happens, the lines between HMOs and their more popular cousin, PPOs, blur.

PPOs operate by allowing consumers to go outside the main network, but charge them more when they do. HMOs, which traditionally have had a strict network and a doctor "gatekeeper" to give referrals for patients to see specialists, are beginning to apply the same thinking to hospitals, and in some cases, doctors.

"People gave up choice for cost with HMOs. Now people are demanding choice, but it will cost money. It's HMOs looking at PPOs and going to the next level," said Christian Miles, a health-care analyst at the A.M. Best Co.

Multiple Copayments

Instead of a flat copayment no matter which hospital consumers go to, some insurers have put hospitals into "tiers," and are charging consumers a higher copayment if they choose a hospital from a more expensive tier.

PacifiCare launched the first hospital tiered network in January 2002 in California, the birthplace of managed care. PacifiCare has divided hospitals into two tiers, standard and select. The specific costs to consumers vary from employer to employer, but for instance, a copayment for a standard hospital might be $100 to $400 per admission, while a select hospital--the more expensive option--might have a coinsurance rate of $200 to $400 a day. Copayment is usually a fixed dollar amount; coinsurance is usually a fixed percentage of costs.

"It provides more skin in the game to consumers," said Dr. Sam Ho, chief medical officer of PacifiCare. It also provides a fairer way to distribute costs by making those who demand more expensive care pay more than other plan members who choose less expensive care, Ho said.

"We are struck with substantial health-care premium increases, which basically reflect underlying medical cost inflation," said Ho. "Health-care premiums are always priced according to the average mean cost of a provider network, but within that network, you can have 250% to 300% variation in costs. If you have a higher cost network, you'll have higher premiums."

Traditionally, HMOs have contained costs by limiting the network of providers, and dropping the more expensive hospitals. If insurers allowed the more expensive hospitals in the network, they were forced to charge higher premiums. By placing hospitals in tiers, premiums can still be kept low, because the higher costs stemming from consumers using more expensive treatment options are passed along to that specific consumer instead of spread to the entire risk pool.

"You can still have a wide network, but we will expose the variation in costs within that network and reflect those variations through proportionate out-of-pocket expenses to consumers, based on the provider they selected," Ho said. "What is significant about this product is we are offering a discount for some hospitals. The cost differential to consumers will change behavior and drive more traffic to lower cost providers, thereby lowering the average mean cost and lowering premiums."

Ho estimated the program, which has about 100 employer accounts currently, has resulted in a 5% to 15% savings from the standard premium.

Blue Cross and Blue Shield of Florida has implemented a similar plan with three hospital tiers for consumers, and, while it's not available in all areas, the health insurer hopes to one day include every hospital in the state, said Lisa York, a spokeswoman.

"Each hospital charges us a very different rate. The hospitals that demand a higher rate would have a higher copayment from the members," York said. Instead of limiting consumer choice to the less expensive hospitals in the Blues network, "we'd rather contract with every hospital, and let the members make the choice," York said.

She said member surveys showed patients wanted to choose the hospital where they would be treated. "Our members demanded more choices and we wanted to bring every hospital into the network, but to do that and keep our health plans affordable, we had to charge various rates for hospitals that charge us more," York said.

Consumers could choose among hospitals with copayments ranging from $500 to $1,750 for the entire hospital stay, York said. "One thing we like about this process is that the costs are predictable for the member, versus a PPO, where you pay 20% but you don't know what those charges are going to be when you go in."

For instance, a Caesarean section is $20,000, and a 20% copayment of that is $4,000--well above the highest copayment in the Florida Blues' tiered plan, which is called Blue Option Health Plan, York said.

For Blue Shield of California, placing hospitals in tiers by cost allowed the plan to charge HMO members an additional $150 if they visited an "affiliated" hospital instead of a "choice" hospital. PPO members may face a 30% coinsurance payment instead of a 20% payment, depending on which hospital they select.

While the model was introduced based solely on price, Blue Shield of California hopes to include quality of care as a factor this year, said David Joyner, senior vice president of network management.

"A lot of people have hypothesized that the more expensive hospitals have the highest quality care, and we haven't found that's the case," Joyner said. "But the reverse isn't true either. Instead of going to the cheapest hospital, we'd rather our members go to a high quality hospital that is more efficient."

Classifying Hospitals

Some health plans are classifying hospitals solely on cost, while others are including additional information, such as geographic location and quality of care.

Cigna has a pilot program that divides providers into two tiers, based on price alone, said Tom Richards, vice president of new products for Cigna.

"With this product, we see achieving some goals of choice for consumers, giving them access and helping them to be better informed in health care," Richards said. While the company has based the structure on price alone, it works with outside vendors to provide quality data on providers, so that consumers can make informed decisions about their care.

Right now, the Florida Blues network bases each tier solely on rates and members' geographic access to hospitals. The hospitals themselves pick which tier they will belong to based on what rates they've agreed to within the Blues plan, York said.

PacifiCare has begun to include quality of care as a component in placing hospitals in tiers, but that information is hard to obtain. The company has developed a quality index which uses 56 different measures for medical groups, and plans to release a similar index for hospitals. "We haven't had enough information, but we have to start somewhere," Ho said.

In Cincinnati, Humana Inc. also is offering a tiered product for hospitals and doctors, which it calls a "concentric network." The product is structured like a bull's-eye, with a fairly small panel of doctors in the inner circle, where the copayments are lower. In the middle ring, it's every other provider in the region, with a slightly higher copayment, and the outer ring contains out-of-network providers, where consumers pay through coinsurance rather than copayments, said Renee Buckingham, vice president of provider contracting and network operations for Humana of Ohio.

Humana does use quality of service when developing its networks, Buckingham said. It considers criteria such as whether the provider uses electronic billing and meets federal privacy requirements, as well as factors such as the frequency of patient visits, the auxiliary services used and the number of referrals.

"We have no way of knowing if the patients felt they had a good outcome. We don't have a way to look at ultimate outcome. But what it does say is these physicians tend to perform better than other physicians when you look at measurements like office visits, pharmaceutical uses and physical therapy," Buckingham said.

Lack of Information

Still a relatively new concept, tiered provider benefits have been introduced by only 5% of HMOs and PPOs and 9% of point-of-service plans, according to Kaiser Family Foundation's annual survey of employer-sponsored health benefits in 2002. Among companies not offering a tiered provider benefit, however, 15% of HMOs, 10% of PPOs and 12% of POS plans have considered introducing such an option.

"The trick in making tiering work is having both sides of the equation available--both the price difference and the quality difference," said Gary Ahlquist, senior vice president of Booz Allen Hamilton, a consulting firm. "There is a lot of work going on around the industry and health plans and hospitals to move the information richness forward, but we are still a long way away. That makes tiering based on pure costs, which is an unstable and not sustainable long-term solution."

Many experts credit managed care with improving the quality of health care delivered to patients, due in part to managed care's support of preventive care. One downside to managed care, however, is consumers became out of touch with how much that care actually costs.

Through the 1980s and 1990s, members of HMOs didn't have to fill out claim forms, but just used their insurance card and paid a flat copayment to get as many preventive services as they wanted, Buckingham said. "It did a lot to encourage the use of the medical system, which prevented disease, but did a disservice by not sharing with patients what the actual costs of those services were. Now there's a huge learning curve that needs to occur."

After all, a doctor visit really isn't cheaper than going to the barber.

Consumers "have been totally price insensitive; they've been shielded from cost altogether' Ho said. "They can get an open heart surgery for a $10 copayment, and don't realize it actually costs $70,000. It does them a disservice because it destroys the market dynamics that are necessary in a competitive environment. If you believe in the market and the power of the market, you need to develop more market dynamics, which include cost and care."

Consumers need to learn the actual cost of a visit to a doctor or hospital to be better able to choose providers. And they need to be better informed about the quality of care those doctors and hospitals provide. But that information has been elusive. While guides that rank restaurants and hotels by quality are widely available, only a few companies collect information to differentiate between the five-star and one-star hospitals and doctors, and there's no national standard for what the criteria should be.

Blue Cross and Blue Shield of Minnesota offers a tiered provider network to Minnesota state employees. It collects its own data to grade quality, and also hires vendors to gather the information.

"We're working on developing what we'd call the 'nutritional label,' facts that consumers could find helpful about providers," said Jan Lysen, vice president of network management for the Minnesota Blues.

The key to the whole process is education, said the Florida Blues' York. "We want to provide hospital quality data so if a member is planning a surgery, they can look at the cost of the hospital and pull up information about various hospitals."

Ten years ago, if you wanted information on quality of care, you might have been able to turn to a book, but it would have been outdated in a month, said Miles of A.M. Best. "Now you have the Internet. But the quality indices of hospitals and providers are still relatively new."

Jan Emerson, vice president of external affairs for the California Healthcare Association, a trade group that represents hospitals, said health plans that base the decision solely on cost don't include a description of why a hospital with a trauma center and burn unit may cost more than a community hospital.

"Hospitals in California don't have any problem on being rated on quality and cost effectiveness, if the measures are standard, and understandable, and you can really prove why it costs more," Emerson said. "Nationally, there's no standard set of indicators to measure a hospital's quality. It's consumers beware."

As the information on quality of care becomes available, then tiering the way companies are now becomes unnecessary, Ahlquist said. "Imagine if you had fairly complete information on quality and cost in a way which could be communicated to employees. You don't need to have contracts with [hospitals] the way you do now. You'd put the hospital on a shelf, and the consumer could come along and pick the provider off the shelf for what they need. So the health plan is no longer in a combative position. They'd tier themselves, sort themselves into tiers. This might be 10 years away," he said.

Not for Everyone

Experts said tiered provider networks won't fly everywhere. Markets must have a high penetration of managed care, and an adequate number of hospitals and providers for tiering to work.

"Cincinnati continues to be dominated by HMO product selections. In some communities, providers won't participate in products like this. It makes it difficult to create a tiered network," Buckingham said.

Dick Brown, spokesman for Humana, said the Cincinnati network is a pilot program, and there are no firm plans to roll out similar plans elsewhere in the country.

"It's not clear that you could pull this off in every market," said Gary Claxton, vice president and director of the health-care marketplace project for the Kaiser Family Foundation. Also, unlike a prescription drug plan which substitutes a name-brand drug for a generic drug, all providers may not be identical.

Emerson also doubts insurers' claims that tiered networks will help consumers become better informed about health-care choices.

"What has happened is it's divided hospitals who caved into the health plan and accepted low-ball rates versus those that held their ground;' Emerson said. She says it's evidence of the struggle between hospitals and health plans for the upper hand in contract negotiations. Both industries have seen drastic consolidation in recent years. The number of HMOs in California has fallen to six in 2000, down from 23 in 1990. Plus many hospitals have merged into systems.

That consolidation is a factor, said Mohit Ghose, public affairs director of the American Association of Health Plans.

"Hospital consolidation turned the tide in terms of managed care's capability at the negotiating table," Ghose said. "When dealing with these realities, health plans have continued to create options for employers and employees--these are the ones paying for health-care cost increases."

Experts said it is likely to become more common for health plans to place hospitals or doctors into tiers.

It's "going to become a prevailing model, or an important part of the health-care industry in the next few years. Everyone is going to give it a try," Ahlquist said. "But it's not a sustainable trend, because we don't have the whole equation."

Tiered Cost-Sharing

Percentage of covered workers in HMO, PPO, and POS Plans whose plan has
introduced or has considered introducing a tiered cost-sharing
arrangement for doctor or hospital visits, 2002.

Introduced tiered provider benefits

     Yes  No   Don't know

HMO   1%   1%      1%
PPO  94%  94%     90%
POS   5%   5%      9%

Note: Table made from bar graph

Among firms not offering a tiered provider benefit, those who have
considered introducing tiered benefits.

     Yes  No   Don't know

HMO   2%   4%      2%
PPO  83%  86%     86%
POS  15%  10%     12%

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2002

Note: Table made from bar graph.

Shares of Overall Health-Care Spending Growth 1999-2001

In 2001, spending on outpatient care outpaced prescription drug costs as
the fastest growing part of overall health-care spending. Spending for
prescription drugs dropped for the second year in a row.

       Hospital   Hospital   Prescription  Physician
      Outpatient  Inpatient     Drugs      Services

1999     30%         34%          5%          31%
2000     34%         27%          7%          32%
2001     28%         21%         14%          37%

Note: Data reflect the August 2002 revision by Milliman USA. As a result
of this revision by Milliman USA, some estimates for 1999-2000 changed

Source: Milliman USA Health Cost Index ($0 deductible)

Note: Table made from bar graph.

RELATED ARTICLE: Cost, Demand for Choice Drive Innovation

Rising health-care costs and consumer demand for choice are the forces managed-care companies say are pushing them to place hospitals and doctors into pricing tiers.

"When we look at our costs, one of the biggest drivers is hospitals. It's the largest driver of increases in premium in both dollars and percentages," said David Joyner, senior vice president of network management for Blue Shield of California, which has implemented a tiered provider network.

Health-care costs for privately insured Americans rose 10% in 2001, the first double-digit increase in more than a decade. Spending on hospital services, both inpatient and outpatient, grew by 12% in 2001, reflecting increases in both hospital payment rates and use of hospital services. Hospital spending is the key driver of overall cost growth, accounting for more than half of the total increase, according to the Center for Studying Health System Change in Washington, D.C.

Between the spring of 2001 and spring 2002, monthly premiums for employer-sponsored health insurance rose 12.7%, the second consecutive year of double-digit premium increases and the largest jump since 1990, according to the Kaiser Family Foundation. Average annual premiums rose to $3,060 for single coverage, up from $2,650 in 2001, and grew to $7,954 for family coverage, up from $7,053 in 2001. Also, costs grew by an additional 2% to 3% due to increased cost sharing--higher deductibles, coinsurance and copayments.

In fact, outpatient care surpassed prescription drugs as the fastest-growing component of overall health spending, according to the Center for Studying Health System Change. For the second consecutive year, the rate of growth in prescription-drug spending slowed.

"Health plans have continued to innovate in various areas, including payment options, to develop product lines that are affordable to millions of Americans," said Mohit Ghose, public affairs director of the American Association of Health Plans. "The responsibility is back on the consumer. How much would you like to spend? We can't strong arm anyone any more."

In the Driver's Seat

Humana launched its tiered provider plan as a transition to consumer-driven plans, such as defined-contribution plans.

"Employers don't have to go from a traditional HMO and leap all the way into a defined-contribution project where there's automatically higher cost sharing as an employee. This bridges those two concepts;' said Renee Buckingham, vice president of provider contracting and network operations for Humana of Ohio. "We are going to see health-care consumers more involved in decisions of health care and understanding the economic decision that they make regarding health care."

Defined-contribution plans are similar in many ways to the medical savings accounts that Congress authorized in 1996, a pilot program that was limited to companies with 50 or fewer employees and the self-employed. The plans provide high-deductible health insurance policies to cover catastrophic costs and a savings account funded by the employer, employee or some combination. The savings account is available for first-dollar coverage, but plan members are encouraged to spend that money wisely, because they are allowed to carry over unspent amounts to the next year. If members spend all of the money, they have to pay medical expenses on their own until the high-deductible insurance kicks in. This further encourages them to use their savings accounts with discretion.

Employers are spearheading interest in consumer-driven plans because most health insurance is employer-sponsored, and the cost increases of mainstream plans are unacceptable for most businesses, according to Towers Perrin.

Dr. Sam Ho, chief medical officer of PacifiCare, said that health plans must adapt to the growing need for consumer choice. "Our belief is consumers will make rational choices and consumerism will be a major driver for improvement in health care, both in cost management and quality improvement. Traditional managed-care solutions aren't acceptable in the face of growing consumerism."

Ironically, one unexpected outcome of giving consumers more choice and more knowledge about what they are paying for is they may want to give up choice in favor of a cheaper, more restrictive health-maintenance organization network.

"Once you introduce choice and tiering, it's more acceptable to consider a narrow network, which is almost back to the future in terms of managed care," Ho said. PacifiCare has launched a "value network," a more restrictive network that comes with a lower premium and appeals to consumers, and found it is gaining in popularity.