The new anatomy of health care.

FORGET "MANAGED" COMPETITION. ORDINARY COMPETITION DOES NICELY, THANK YOU. NOW THAT THE FEVER OF OUT-OF-CONTROL HEALTH-CARE COSTS HAS BROKEN, DOES THIS MEAN THE HEALTH-CARE CRISIS IS PAST? NOT ENTIRELY. CEOS OF BOTH PROVIDERS AND EMPLOYER-USERS DEBATE POSSIBLE PRESCRIPTIONS FOR WRINGING OUT FURTHER COSTS AND UPGRADING THE QUALITY OF CARE.

Last year for the first time ever, annual growth in corporate America's health-care costs declined to 12 percent from 6 percent the previous year, although overall spending hit 14 percent of GDP. To some degree, private-sector reform has been so widespread that government reform seems moot. Why? Health care is at last starting to be run like other businesses. The surge of HMOs and the increasing variety in managed-care vendors are due, in part, to recent moves toward standardization, outcomes measurement, and performance data collection. There's an increasing emphasis on accountability that was absent 10 years ago.

So if U.S. health care is no longer on the respirator, is the patient recovering? It depends on who you talk to. Facing acute overcapacity, hospitals are losing money. Doctors and other providers say they are unhappy with managed care and the industrialization of the care industry. HMOs are continuing to consolidate almost as fast as banks. In 1994, the industry saw 1,100 mergers and acquisitions worth $60 billion. Through an aggressive acquisition strategy, Columbia/HCA Healthcare, for example, turned itself into a $15 billion juggernaut with operating margins close to 20 percent in less than eight years. Big pharmaceuticals have moved with lightning speed to pick off rivals and merge. Consumers are frustrated and continue to worry about quality and availability of care. In short, the industry is still in turmoil.

The history of the health-care crisis is riddled with short-lived victories over escalating costs. In 1984, then-Secretary of Health and Human Services Margaret Heckler asserted that the rise in healthcare costs was at an end. Events proved otherwise (see chart). Many experts claim that recent evidence of a decline in average costs reflects one-time savings from moving out of high-cost indemnity plans. A Foster Higgins survey, for example, noted that HMO premiums increased 9.7 percent in 1994 for large employers and 6.2 percent for small employers. To counter this, employer coalitions - notably in Minneapolis and San Francisco - have sprung up in an effort to push HMOs to lower prices and let employers monitor care provided by doctors and hospitals.

Some employers are considering Medical Savings Accounts for the same reason others have turned to managed care (see sidebar). It puts the buyer-user of health care in direct contact with the seller-provider. In exchange for indemnity coverage with a high deductible, employees keep any MSA money they do not spend. They have a financial incentive to shop around to buy prudent first-dollar health care. According to Michael Tanner, director of health and welfare studies at the Cato Institute, a variety of companies that use some version of MSAs - flexible savings accounts or incentive savings plans - including Dominion Resources, Quaker Oats, Indresco, and Forbes, have found them highly effective in reducing costs, despite the fact that they face a bias in the present tax code.

In the following roundtable, held in partnership with Deloitte & Touche LLP, CE gathered CEOs of both providers and users to discuss cost and quality trends that will affect employers. Will costs continue to decline? As buyers exert more power over providers and government defers more to market competition, uncontrollable costs should be a thing of the past (the Heckler effect notwithstanding). The challenge will be to measure efficiencies and quality of care in ways that employer-buyers of health care can use. Beyond hospital utilization rates and inpatient care days, the industry is at the nascent stage of developing metrics that can help employers buy higher-quality care at lower cost.

- J.P. Donlon

AN "UNFULFILLED PROMISE"?

Robert A. Go (Deloitte & Touche LLP): Many people, including policy-makers, say managed care is the solution to the high cost of health care. Others argue it is only part of the solution. Let's look at the facts.

There has been a slowdown in healthcare inflation. As recently as 1988 or '89, increases in HMO premiums were between 15 percent and 17 percent. This year, the average is near 0 percent. Yet the inflation rate for health care since 1960 has remained fairly consistently between 50 and 100 percent higher than the overall U.S. inflation rate for GDP (see chart). This year, GDP was rising at approximately 2 percent or 3 percent, and health care was increasing at approximately 4 or 5 percent.

So what's going on? The actual promise of managed care - the creation of new ways of managing patients - is still largely unfulfilled. While managed care has created financial incentives and some cost containment, actually managing care - developing clinical protocols and so forth - is just beginning.

So managed care remains largely a promise of making a difference from a clinical perspective.

Arnold B. Pollard (CE): Could the care delivery process be rearranged without moving to managed care?

Go: Changing the financial incentive is a necessary step to changing the care delivery process. Historically, there has been little or no accountability for costs and results: Health care was a benefit financed by government or employers, and neither the users nor the care deliverers had financial incentives to manage costs. Even now, patients themselves are not widely incentivized to manage the costs of their care. That is still to be done.

Mark H. Tabak (AIG Managed Care): I agree that the promise of managed care is still largely unfulfilled. My working definition of managed care is "the provision of care with a focus on outcomes." Those outcomes pertain to cost, access, and quality. While managed care has focused on cost, the real promise will be fulfilled when we address quality and access.

Josh S. Weston (Automated Data Processing): Let's identify which components of health care we're addressing. As CEOs, presumably, we're talking about the cost to employers.

On a bigger scale, we should consider some of the following: demand - from unlimited to controlled; service efficiency; integrity of the care providers - there are some outright liars out there; the appropriate markup on services; and accessibility to knowledge, because if people don't know the wise system, they're stuck with the dumb system. If the nation could make progress in just one or two of these areas, it would be quasi-nirvana.

Frank N. Liguori (Olsten Corp.): What's driving costs? First, there are simple demographics - life expectancy changes. Tied to that is the development of expensive advanced technologies. Health-care costs in just raw expenditures will increase because of demographics.

Another factor driving cost is waste: in infrastructure, utilization, and unnecessary procedures. Managed care has heightened awareness in those areas and has served as a catalyst to wring out waste.

Bernard J. Korman (MEDIQ): That's a good point: Demand for health care has been created by providers who have no economic incentive to eliminate waste. If you could marry providers and risk, you might control demand more efficiently.

Liguori: In home care, we are seeing more capitated deals from managed-care companies, and there is more risk-sharing by providers. But those providers have an incentive to offer less service: The less service they provide, the more money they make. Ironically, in past years, they made more money if they provided more service. That was part of the waste wrung out of the system.

Korman: Yes, but is there not a professional standard? A managed-care company's margin is based on the company's squeezing the system, not on its quality of service. If we could marry the provider and the risk, and add the appropriate professional standards, we could cut costs.

Wallace Barnes (Rohr): Managed care has been useful in inducing competition, and in driving choice by users with co-payments. But what will drive us to the next stage? We are missing sufficient data for users to make intelligent choices.

We have a long way to go in developing these data. Historically, developing them has been inhibited by privacy issues. But until we develop more results-oriented data, users will have a hard time making intelligent choices.

Tabak: You're right: Don't misconstrue control as scrutiny. As scrutiny diminishes, costs will escalate.

Jack Rosen (Continental Health Affiliates): We're missing the most important ingredient: How to control Medicare and Medicaid costs. Whatever progress we're making will be overpowered by how the government handles these biggest cost sectors.

J.P. Donlon (CE): I'm going to challenge you on that. We didn't get a government health plan, and look what's happened: The market has adjusted and is undergoing consolidation.

Rosen: I'm not suggesting we continue the discussion about a national healthcare plan. But we need to tackle the Medicare and Medicaid dollars. The Republicans want to move them into managed care. The Democrats want to maintain the status quo. It's essential that we manage these huge components.

Weston: You can't tackle all components at the same time with the same solution. Medicare and Medicaid deal with people who are not in the work force, representing about 40 percent of the total number of insured lives. That will require one type of solution, because it's mandated by the government. For the other 60 percent spread out over 3 million employers and the self-insured, no single solution will work for all of them.

Rosen: I'm not so sure. Right now, there's a gold rush in New York State for who is going to sell Medicaid a managed-care program. Since the margins are narrowing on the private side of managed care, providers see a pot of gold in Medicare and Medicaid.

Go: Yes, the commercial HMO field is becoming so crowded, and there are relatively few - if any - virgin markets left. So equity-based, publicly financed HMOs are looking for growth as a way to sustain their P/E ratios. Medicare and Medicaid are new places to do that.

Joseph T. Lynaugh (NYLCare): Managed care promises to cut costs, but it will not be a painless transition. First, any cost-cutting will mean laying off some healthcare employees. Second, we are heading into an unprecedented time in this country in which there will be unemployed physicians. That presents an interesting ethical question: What kind of world is it where men and women who control life and death are unemployed? Third, how will this affect academic health centers, such as medical schools and research hospitals? Much of the cost containment will come from their hides, and they are not prepared. I'm all for managed care, but it comes at a price.

William E. Mayer (CE/University of Maryland School of Business): How will managed care move from a promise to something closer to reality?

Go: First, more of the risk will be shifted to the providers. This process has started. Second, professionals must be appropriately incentivized to do the right things and develop new ways of managing the care of patients or members.

Liguori: HMOs operate with tremendous price/growth ratios. To maintain these ratios and lower costs, many are recruiting more participants by offering more out-of-network options. But if you allow members to go out of network, aren't we full circle back to an indemnity-based plan?

Go: There is an imbalance between demand and supply, and managed-care providers do not have to truly manage care to make money. The marketplace is set up so that the average hospital is 50 percent to 60 percent occupied, and the marginal cost of taking care of a patient is 50 cents on a dollar of full cost. Why wouldn't that hospital bid 60 or 70 cents to care for that person if he or she were an incremental patient? As long as over-supply continues, there is little incentive to truly manage care, because managed-care companies can gain economic leverage through better negotiating and new payment systems.

Robert W. Lear (CE/Columbia Business School): Many people think there is an incentive. Few industries are undergoing more consolidation than the health-care industry. Local hospitals are going national in chains, as are nursing homes and doctors' clinics. Pharmaceuticals are broadening their base through distribution. Costs will be cut once these companies are centrally managed.

THE DATA GAME

Margaret E. O'Kane (National Committee for Quality Assurance): Today, we see a collision of value systems. The old value system, held by consumers, the press, and the purchasing community, maintains that fee for service is inherently better than managed care. The purchasing community only came to managed care because of cost incentives. A second set of values holds that if you industrialize health care, you will get better quality at lower cost. So your expectations are higher for a managed-care system than for a fee-for-service system.

Since these two value systems are at odds with each other, idiotic things are happening. Purchasers are buying preferred provider organizations without asking about quality, which is probably good since PPOs are discounted fee-for-service organizations. People think because PPOs offer more choice than HMOs, there's no reason to worry about quality. Right now, about 25 percent of the marketplace is in HMO products, 50 percent is in PPOs, and the rest are insured under indemnity plans. Those are my numbers. Our goal at NCQA is to release information about the quality of managed-care organizations, hoping it will raise the issues for a broader group of organizations. All health plans should have to provide results-performance data, because those will drive the market in an intelligent way.

We launched our accreditation program in 1991, largely because of demands by Fortune 100 companies. By early 1996, more than half of all HMOs will have gone through our accreditation process, which is based on defining processes, aggressive quality management and oversight, and care standardization. It's not easy to obtain our accreditation: Only 33 percent of the plans that have been through the process have been fully accredited. A number of them get a one-year accreditation or a provisional and then usually move up. Fully 13 percent of the plans flunk the process outright.

Pollard: Do you make public the list of organizations that fail?

O'Kane: Yes, we release all the good, bad, and ugly news.

Weston: How do you measure outcomes? Since, for example, the mortality rate at Bellevue Hospital in New York City can't be compared to that of Morristown General Hospital in New Jersey, how can you compare quality?

O'Kane: Accreditation alone is incomplete. Standardized performance measurements will drive the market, allowing purchasers to compare specific aspects of quality. We developed something called the Health-Care Employer Data and Information Set. In it are about 60 measures and nine quality measures. They are simple, such as rates for mammography, cholesterol screening, low birth weight, and prenatal care. This year, about 400 HMOs will be producing these HEDIS data; it has become a condition for doing business.

Managed care is not simply about cutting costs; rather, it's about changing the mix of services so there is early intervention in disease, which can prevent expensive hospitalization, emergency room use, and so on. If you take an asthma patient and you monitor his or her care aggressively, you make sure he or she is getting the right drugs, etc., you can prevent hospitalizations most of the time. This is the beginning step toward defining processes.

Our next goal is to move HEDIS to the next generation, so we've assembled a committee of 24 people who represent stakeholder interests. We want to know how well each managed-care plan handles chronic disease and acute illness.

Also part of HEDIS will be standardized satisfaction information, which tells us about access, patient satisfaction, and quality of care. Most employers will want this satisfaction survey.

So right now, we have many different ways of looking at health-care: We have the structural and functional way - the accreditation program; we have HEDIS data; and we have member satisfaction data. Ultimately, we want to integrate all this information and make it available to purchasers and consumers.

Donlon: Let's get down to specifics: Near the top of your list is Blue Cross of Rochester, with something like a 96 percent or 97 percent satisfaction rate. And near the bottom is HIP of New York, with about 72 percent. Should a purchaser go with one and not the other?

O'Kane: Absolute HEDIS numbers are probably not a good measure of performance, because different local market conditions and cultural factors affect how well HMOs do on satisfaction surveys. That's why we haven't integrated HEDIS with accreditation; we don't have enough information yet to use it intelligently.

Rosen: Physicians get licenses, providers get licenses - do we need another accreditation process?

O'Kane: We face a market just like everyone else, and if we don't add value, nobody's going to buy it.

Rosen: But doesn't New York State and every other state have standards? And if a health-care provider doesn't deliver results, wouldn't it be closed down?

O'Kane: Look at some of the hospitals that were licensed by New York State and accredited by the Joint Commission.

Rosen: But you're not going to close down a hospital, either.

O'Kane: No, I'm simply putting information out into the marketplace that says, "This organization doesn't meet our standards." It's already having an effect in the market. Companies are looking at our information and saying, "I'm not going to offer this plan."

Donlon: Let's ask an HMO.

Lynaugh: The NCQA accreditation process or its equivalent is the price of HMOs' moving into the mainstream. As long as only 10 percent of the population used them, no one cared. Now that it's taking center court, this is going to be the price of traffic in Medicare and Medicaid. We must face that fact.

As for NCQA, it's important to distinguish between what is a realistic hope, and what is almost a pursuit of the Holy Grail. For process issues - immunization records, rates of mammograms, etc. - the NCQA is right on target. But measuring results to a given patient on a given course of treatment is confounded by so many variables.

Donlon: Can we arrive at a standard that's not perfect but good enough for purchasers to say, "That's where I want to put my benefit dollars"?

Go: Properly designed, the accreditation process can give us a binary decision on whether a health plan has or has not met certain criteria. I don't think we'll ever get to a point where we can say, "This company is No. 35 on the list."

Liguori: If it's that simple - either you're on the left side or the right side - why can't consumers just see that and decide for themselves? Why do we need to accredit?

Go: How do you think people make decisions about HMOs today? It's often based on how well HMOs market themselves.

Korman: Absolutely. These plans are not bought. They're sold.

Go: A well-designed accreditation process at least can add an objective measure.

Liguori: But you know if you've bought quality goods. If the plan you purchase doesn't meet your quality standards, you don't stay with the system.

O'Kane: It's not like buying shoes. If you buy a bad health insurance plan, you're stuck with it.

Liguori: You're not stuck with it for life.

O'Kane: It might be for life if you get sick enough.

Rosen:: Are you suggesting that plans hire bad doctors or bad hospitals?

O'Kane: Yes.

Rosen: In other words, the way we monitor our professionals doesn't work?

O'Kane: Right.

Rosen: Are the poor ratings due to administrative error or larger issues such as malpractice?

O'Kane: There is some malpractice and abuse. I'm not suggesting it's that widespread.

Rosen: You sound exactly like the government. Now we have one more bureaucracy that has to govern itself.

Tabak: I'm troubled by NCQA's benchmarking process, because it might reflect only how well a managed-care company markets itself, not how well it provides medical care.

NEW OPTIONS FOR SAVINGS

Donlon: One of the flaws in our healthcare system is that the users are not the ones who pay for it. Jack's firm is a standard-bearer for medical savings accounts, which try to address that problem.

John M. Whelan (Golden Rule Insurance): Several years ago, the typical deductible in an indemnity insurance plan was $250, and the plan had a co-insurance band, which means that the insurer paid 80 percent of the cost after the deductible, and the individual paid 20 percent. Now the typical deductible is about $500.

Here's how an MSA works: We take the deductible up to $3,000. Since the cost of catastrophic coverage above $3,000 is less than the cost of coverage with a $500 deductible, you take that savings and use a piece of it to fund a savings account for the employee, who becomes responsible for the first $3,000.

You usually can fund that account with enough that the employee's out-of-pocket expenses with an MSA are equal to or less than they were with an indemnity plan. If the employee has money left in the account, he or she can pocket it or - hopefully - roll it over into the next year's savings account.

At Golden Rule, we offer MSAs to our employees as an alternative to the basic plan. Now, people have said MSAs might only appeal to the healthy and the wealthy. Wrong. At the beginning of any year, none of us know whether the next year is going to be good or bad health-wise. Even if you become sick, you're better off spending the entire savings account and using the catastrophic coverage than you are with your traditional indemnity plan. Why? You will have spent less out of pocket. And if you have a healthy year, you have money left over.

Does it work? It's worked for us. The first year, we gave back to each employee an average of $700. Last year, we gave back $1,000 per employee. Our healthcare costs have not increased during that time. We energize health-care consumers by creating an economic incentive to be careful about what they buy. We've found that employees ask the doctors questions they normally would not.

Tabak: If employees want to maximize the accumulated value in their account, do they defer diagnostic services?

Whelan: That's a fear everyone expresses. Our data do not support it, and our experience is that people, in fact, do get the care. We've conducted surveys since we began this system two years ago, and we found that, in the second year, 27 percent of our employees used medical services they never used before, because they now have the dollars available to purchase them.

Liguori: But in this system, the employer comes out cost-neutral. At the end of the day, when the employer should have saved money, he or she is still paying it out - only now it's to the employee and not to the health-care provider.

Rosen: We're missing the point. The real criticism of this plan is that although the employer might save money, there will be a lot of cost shifting, and the plan will attract the healthy who think they can save money. Once you segregate the healthy and unhealthy, the government or some other part of the system will have to pick up the tab.

Whelan: We think health-care costs will fall with widespread use of MSAs in combination with other techniques. I don't mean to suggest that MSAs alone are a panacea.

Weston: How many lives are we talking about?

Whelan: We have about 1,000 employees who use MSAs. And in the marketplace, we have about 1,000 groups in place. Forbes magazine has an incentive plan, and it reported that health-care costs fell by about 20 percent the first year, 13 percent in the second.

Liguori: Are MSAs offered as an option by these employers?

Whelan: Yes.

Go: And who selects it? What are their profiles?

Whelan: At our company, about 80 percent select it, and there is nothing that distinguishes those who take it from those who don't.

Rosen: You left out one important ingredient, and that is how this money is taxed.

Whelan: Yes, there is a basic tax problem today for the employer, not the employee: The dollars that go into an MSA do not get the same treatment as those that go into a health benefit. It's considered taxable income.

Liguori: But if you put $2,000 into an MSA, and the employee spends it on health care, is it still taxable?

Whelan: Yes, it's in a savings account; it's taxable income. Currently, the tax law doesn't allow this money to go into the account pretax. The Archer-Jacobs Medical Savings Account bill working its way through Congress seeks to change that.

THE COST/QUALITY QUOTIENT

Donlon: What does the future hold from a price/quality perspective?

Barnes: I don't think prices for health care will come down, but we'll see more physicians and hospitals organizing into competitive blocs, acting as gatekeepers. I also think we need to put more information in consumers' hands.

Donlon: A Consumer Reports for health care?

Barnes: Yes. I'm more enthusiastic about that than I am about accreditation.

John J. Sickler (TFX Equities): Costs are still headed up - although maybe the rate of increase has slowed. While I agree with everything that's been said about the user of health care, I think the user is sufficiently involved in the process with real choice other than maybe compliance to make decisions about how to purchase and use health care.

Tabak: The question is whether physicians and hospitals and the so-called provider community can organize themselves. If they do, they will put competitive pressure on HMOs and insurers, which will make them more efficient.

Lear: I'm grateful that most competitive and cost issues are being left up to private health-care businesses to sort themselves out. But I worry about the cost to America with the government taking care of Medicare and Medicaid.

Lynaugh: On the consumer side, I think there will be more freedom within the managed-care system - maybe MSAs, point-of-service plans, multi-option plans, ways in which you can opt out by paying more. The joker in the deck is Medicare and Medicaid, and as those recipients move into managed-care programs, the program costs could shift back to the insurers and HMOs.

Go: Short term, competition will keep the inflation rate on health-care costs low. That will be manifested in another year of reasonable rate increases on premiums, if any. But until the health-care industry becomes better organized to deliver and manage care, and until the imbalance between supply and demand gets sorted out, we won't see true improvements in health-care costs or delivery.

RELATED ARTICLE: A Who's Who Of Roundtable Participants

Wallace Barnes is chairman of $918 million Rohr, a Chula Vista, CA-based manufacturer of components for the commercial and military aerospace industries.

Robert A. Go is managing director of the health-care practice of Deloitte & Touche LLP, a $2.5 billion accounting, auditing, tax, and management consulting firm with headquarters in Wilton, CT.

Bernard J. Korman is president and chief executive of Pennsauken, NJ-based MEDIQ, a $168 million provider of health-care services and equipment to health-care providers.

Robert W. Lear is former CEO of F.&M. Schaefer and current executive-in-residence at Columbia University Graduate School of Business.

Frank N. Liguori is chairman and CEO of Melville, NY-based Olsten Corp., a $2.3 billion provider of home health care and temporary staffing services.

Joseph T. Lynaugh is president and chief executive of $2.5 billion NYLCare, a Fort Lee, NJ-based health-care and related employee benefits company.

William E. Mayer is dean of the College of Business and Management at the University of Maryland in College Park, MD, and chairman of CE.

Margaret E. O'Kane is president of the National Committee for Quality Assurance, a Washington, DC-based nonprofit group that studies the quality of managed care plans, and acts as an accrediting organization for health plans.

Jack Rosen is chairman of Englewood Cliffs, NJ-based Continental Health Affiliates, a health-care services company.

John J. Sickler is president of Plymouth Meeting, PA-based TFX Equities, an $813 million division of Teleflex, a $1 billion provider of automotive, aerospace, and medical products and services.

Mark H. Tabak is president of AIG Managed Care, the managed care division of AIG, a New York-based insurance company with $114 billion in assets.

Josh S. Weston is chairman and chief executive of Roseland, NJ-based Automatic Data Processing, a $2.7 billion provider of computing services.

John M. Whelan is president and chief executive of Golden Rule Insurance, a Lawrenceville, IL-based insurance company with $1.2 billion in assets.

RELATED ARTICLE: Making Sense of MEDICAL-SPEAK: A Glossary

The health-care landscape is littered with acronyms, initialisms, and jargon. Don't get dizzy. Memorize this guide, and you'll be ready to discuss health care with any doctor, lawyer, patient, or government regulator.

AWP - Any willing provider. In some states, HMOs by law must sign up any doctor who wants to contract with them and who meets their quality standards. Doctors and consumer groups have lobbied for AWP laws so doctors are not locked out of the managed-care market.

CAPITATION - The opposite of fee for service, and health-care's version of Pay One Price. A method of paying for health care per-person instead of per-procedure. An HMO pays a doctor a fixed fee each month for every HMO enrollee, regardless of how much or how little health care that enrollee receives that month. The fee varies according to the patient's age and sex.

DISEASE MANAGEMENT - A way of controlling some of the costliest health care using preventative methods. Open-heart surgery, for example, can be avoided if heart disease is monitored through diet and exercise.

FEE FOR SERVICE - How a patient gets health care under an indemnity plan: The doctor charges the patient for each procedure and test, the patient fills out forms, and the health insurer pays all or part of the doctor's fees.

FORMULARIES - A list of prescription drugs and their doses that have been selected by a health plan as the best choices in cost and effectiveness.

HEDIS - Health-care Employer Data and Information Set. HEDIS is a list of performance measures designed by the National Committee for Quality Assurance. Employers use HEDIS to rate health plans against regional or national norms to judge plan quality.

HMO - Health Maintenance Organization. A health plan that places doctors at risk for medical expenses and uses primary care doctors as gatekeepers by restricting procedures and costs.

INDEMNITY PLAN - An insurance program that reimburses the insured person for all services and expenses covered under the plan.

LIVES. Also known as "people" to anyone who is not an insurer, employee-benefits executive, or consultant.

MCO - Managed-Care Organization. Any managed-care plan. The term can apply to an HMO, PPO, or any health plan that influences the cost of services and measures physician performance.

OUTCOMES - As in "desirable patient outcomes." An employer or a health plan scrutinizes outcomes to measure providers' performance.

PAYORS - Those who actually pay for health care. That includes self-insured employers, insurance companies, HMOs, Medicaid, and Medicare.

PCP - Primary Care Physician. The old general practitioner, now replacing the medical specialist at the top of the health-care food chain. The PCP is the all-powerful gatekeeper in managed care. All HMO enrollees must pick a PCP, who is responsible for preventative and routine medical care. The PCP is trained in internal medicine, pediatrics, family practice, nursing, gynecology, or as a nurse practitioner or physician's assistant.

POS - Point of Service. A health plan in which members don't have to choose how to receive services until they need them (also referred to as a "cafeteria-style plan"). The plan provides different benefits (for example, 100 percent coverage rather than 70 percent coverage) if the member uses authorized providers. It costs the member more to go outside the plan for services. Employers often use POS plans to spoon-feed employees their first dose of managed care.

PPO - Preferred Provider Organization. Doctors who have contracts with a health plan are known as that plan's preferred providers, and the network of doctors and hospitals is a PPO. Members are encouraged to choose the preferred providers through financial incentive. These doctors will cost them less money (with low co-payments) than doctors who are not in the PPO.

RISK - Refers to financial responsibility for medical care. If a doctor or hospital agrees to care for an HMO member for a set monthly fee, it is "at risk" for the cost of the patient's care.

UR - Utilization Review. A formal review conducted by an MCO or an employer that determines how patients use health care, and the appropriateness of that use. Before an HMO member is hospitalized, for example, a UR person (usually a nurse) decides if hospitalization is necessary.

RELATED ARTICLE: The Dark Side OF Managed Care

As large companies move away from simply paying the bills to enlarging their role in controlling how employees get health care, they are leaving themselves wide open to the latest twist in rising health-care costs - the multimillion-dollar medical liability lawsuit. The risk may only apply to self-insured companies, experts say, but if it does apply, a lawsuit could mean big payouts in damages.

"It is only a matter of time before a large, self-insured employer that has taken control of a health plan will be brought into a suit," says William L. Granahan, senior consultant at Wakefield, MA-based actuaries Milliman & Robertson. "They can be accused of the whole ball and chain."

Health-care experts are waiting for corporations to be named in medical malpractice lawsuits, alongside the physicians and health maintenance organizations that already are keeping the plaintiffs' bar busy nationwide.

Managed care cuts health-care costs by exerting influence over both healthcare decisions and the manner in which services are delivered. That interference between a patient and the doctor has already prompted hundreds of lawsuits. HMOs have been sued for denying experimental or advanced treatment recommended by a doctor, and for limiting treatment duration. They've been sued for restricting access to a home health-care nurse and for discharging a patient from a hospital too early.

Because these court cases often involve emotional issues such as death or prolonged suffering, juries have voted for whopping damages. In 1993, a jury awarded $89 million in punitive damages and $12 million in compensatory damages against a California HMO that refused to pay for a bone-marrow transplant. The award was reduced on appeal to less than $4 million, but the lesson of these lawsuits is clear: The price tag can be huge - and employers are increasingly at risk for litigation.

Employers who are not self-insured are unlikely to get sued. They usually contract with an HMO, and therefore "have essentially bought a product and performed as a reasonably prudent person would," says Irwin Birnbaum, a partner at New York-based law firm Proskauer Rose Goetz & Mendelsohn.

But self-insured plans are a different case. What long has protected self-insured employers from being named in these lawsuits is ERISA, a federal law that deals with employee benefits. Courts have held that under ERISA, a company that offers a health plan is making a benefits decision rather than a medical decision.

"ERISA pre-emption is a formidable tool to ward off potential liability," says Birnbaum. But plaintiffs' lawyers are just waiting to pummel a weakness in ERISA, the question of vicarious liability, which would mean knowingly contracting with an inferior HMO.

There are two precautions that employers can take to avoid such an allegation:

First, a self-insured employer that fully administers its own plan must do everything without reproach. That means contracting with HMOs that are NCQA accredited, or making sure medical directors are consistent in denying or approving treatment.

"Employers have to do this competently, and they have to risk-manage it," says Granahan.

Second, if an employer subcontracts administration of a plan to a third party, which is what the lion's share of U.S. corporations does, it has to have an arm's-length contract with a quality HMO. The more responsibility for medical care is delegated to the HMO, and the greater the distance between the doctor and the employer, the less liability the employer will have.

- Barbara Benson

RELATED ARTICLE: A Dearth of SPECIALISTS in a Managed-Care World?

Irwin Freedberg, M.D., chairs New York University Medical Center's prestigious department of dermatology, but that doesn't mean his revered place in medicine as a specialist is sacrosanct. Within five years or so, managed care will threaten not only his practice, but the livelihood of thousands of his Park Avenue colleagues.

"My bottom line is still OK, and I can't find many specialists who have been badly hurt, "says Dr. Freedberg. "But that doesn't mean it isn't going to happen."

While CEOs may feel little financial pressure to turn to managed care for their own health-care needs, the rest of the nation is enrolling in HMOs by the tens of thousands. In five years, the majority of the U.S. population covered by health insurance will be enrolled in some sort of managed care, which cuts costs by restricting access to specialists. As a result, there is an oversupply of specialists, and many of them may not survive the onslaught of managed care. The question for patients who want to continue with indemnity insurance - and can afford the higher out-of-pocket costs associated with it - is: Will there be a dearth of high-quality specialists in five or 10 years?

"There will always be specialists," says Judith Stanton, president of the Stanton Healthcare Group, a physician recruitment firm. "The wealthy will continue to receive health care from them, because they are not willing to give them up."

But change is definitely on the way, and specialists are going to have to alter their practices, or move out of the way. "There will be a consolidation," says Karl H. Graf, a certified financial planner at New York-based Clarfeld & Co. who advises medical specialists on their practices. "But there is a disproportionate number of doctors who feel they will be among the specialists who survive." That false security may prevent specialists from planning their survival in the age of managed care.

Those specialists who are not squeezed out by market forces or their own mismanagement will have a transformed practice, relying far more on managed-care patients. Managed care's impact on a specialist's practice, however, may be transparent to patients who still have indemnity insurance or pay out of pocket. Even five years from now, there will be few restrictions by indemnity insurers on seeing that doctor, getting a battery of expensive tests, or receiving the best Park Avenue care for patients who have money to spend on fee-for-service insurance.

What will the medical practice that caters to the rich and famous - or even the merely well-to-do - look like in five years? The specialist who is a solo practitioner will be a rarity, and he or she will need to be much more aggressive about marketing.

"The successful Park Avenue specialist increasingly will be part of a network. Over the next five years, depending on the specialty, he or she will participate in capitation programs that will result in their assuming higher financial risk," says Wink Willett, a vice president and medical segment head at the Citibank Private Bank, based in New York, which advises medical specialists.

Big group practices will negotiate their rates with insurance plans. That means CEOs may then find it cheaper to switch from indemnity insurance to a plan called "managed choice." Such a plan may well include the CEO's specialist, who by then most likely would have joined a group practice that discounts its rates in exchange for contracts with large companies. Few CEOs would turn down an opportunity to pay $10 for the same medical service that now costs them $100. One top executive at a financial-services company in 1994 switched his family to such a managed-choice plan, and without changing any doctors saved $25,000 last year. Such choices will be even more common in the future, as managed-care's market penetration increases.

Yet there will always be CEOs who stick to their old indemnity insurance as an executive perk, and it is increasingly a negotiating point for CEOs. "Nationwide, probably 30 percent to 40 percent of large companies" are negotiating it for their CEOs, Graf says. "The ones that haven't yet are looking at it, because CEOs are asking for it."

- Barbara Benson

RELATED ARTICLE: MSAs: A Market-Based Remedy

When Steve Forbes, CEO of Forbes Inc., wanted to slash health-care costs at his 500-employee Manhattan company, he turned to a market-based incentive.

"Like so many other businesses, we were faced with rapidly rising costs," Forbes says. "So we asked ourselves: What positive incentive could we come up with to induce people to comparison-shop, for health care the way they do for other products and services?"

Forbes isn't alone. Medical savings accounts, flexible spending accounts, and other market-based incentive devices increasingly are being used by companies to control medical costs by encouraging the users of health care to shop around for the best prices and services among health-care providers. The incentive is financial: The possibility of a payout at the end of the year to employees who spend less in health-care costs during the year. Among the companies that offer such plans, in addition to Forbes: Dominion Resources, Quaker Oats, and Indresco.

Currently, however, there is a tax-code bias against MSAs - savings accounts earmarked for medical expenses. That will change, experts say, when Congress passes legislation now on the table, known as the Archer-Jacobs Bill. Introduced by Rep. Bill Archer (R-TX) and co-sponsored by Rep. Andy Jacobs (D-IN) and seven other Democrats, the bill would eliminate the bias.

Each MSA is constructed differently. In general, however, money is deposited annually into an MSA by an employer, and is reserved for paying the deductible of a catastrophic health insurance plan. This deductible typically ranges between $1,500 and $3,000, and is money paid out of the employee's own pocket through the MSA.

Potentially, MSAs are a windfall for employees because they get to keep any unspent dollars at the end of the year. And for employers, the payoff can be bigger still: MSAs encourage workers to look for the best price in health-care services since they are spending their own money.

For those companies currently experimenting with MSAs or market-based incentive plans, the cost-saving benefits are apparent.

In 1992, Forbes instituted its program, which is constructed somewhat differently than an MSA, "to make people aware of health-care costs," says Joel Redler, vice president and treasurer. "Basically, we are self-insuring the low-end claims and encouraging people to spend wisely and less frequently."

The program works this way: Forbes pays a bonus at the end of the year to employees who submit few or no insurance claims. The plan doesn't require any special paperwork, and all employees who work the full calendar year automatically are enrolled in the incentive plan. To any worker who didn't submit a claim in 1995, Forbes will pay $1,500 (plus all applicable taxes) in early 1996. If an employee does submit a claim, for every $1 in claims, Forbes will deduct $2 from the account.

Since 1993, Forbes has paid out $150,000 to $200,000 a year in incentives, and another $20,000 annually to cover the employees' taxes on that amount. In 1994, 42 percent of employees received bonuses. Forbes estimates that with its incentive program, dollars paid for health-care reimbursements have declined by at least 20 percent.

Still, glitches can and do happen. An employee, for example, may not want to file a claim, but because his doctor's office is computerized, the claim is sent directly to the insurer. And some employees may not have the cash flow to pay a $500 bill in February with their own money, just to wait an entire year until Forbes reimburses them.

- Barbara Benson