Towards a choice-based model of managed care. (Part 2: Global Theory and the Nature of Risk).

WHEN LAST WE LEFT PART 1, the discussion ended with an introduction of the multidimensional risk analysis of global theory, and the fact that specialized markets (i.e., the ex ante and ex post markets) must evolve to allocate speclaiized types of risk (i.e., probabiiity, technical, and choice-utility risk). I also discussed the manner in which orthodox managed care attempts to compress time by integrating health insurance with health care. This, the reader may recall, partly explains why outcomes reports and satisfaction surveys play such an intrinsically anemic role in managed care. But time isn't the only aspect of health care reality being compressed by orthodoxy. Seen in its true light, the entire foundation of orthodox managed care is to compress all three types of economic risk into one marketplace, the ex ante market for health insurance.

The orthodox compression wedge

The basic orthodox business ideology, then, is to compress as large as possible a pool of reserves and insured lives onto as small as possible a care network. Graphically, Figure 1 represents the gist of the concept as an inverted isosceles triangle. The insured-life population, the premium base, and its master policy of benefits rules form the wide base of the triangle, all being focused downward on a point that represents both the narrowed care network, as well as the restricted patient/provider choice sets.

The idea is to collapse and merge the ex ante market (i.e., the point in time where medical demand is unknown and consumers demand health insurance) with the ex post market (i.e., the point in time where medical demand is known and patients demand health care). The intent is to create a synergy of financial interests between those who manage premiums and those who manage care. While there is little doubt this structural approach can save money over indemnity fee-for-service, there is also little doubt that it has the unfortunate effect of driving a wedge between the traditional patient/doctor relationship. This "compression wedge" is the primary source of tension feeding consumer and physician discontent with managed care, and nearly all new or proposed laws and regulations are attempts to pry the wedge open.

The four cardinal "pressure points" and phenomena

Orthodox managed care seeks to "integrate" the functions of health insurance and health care through a series of top-down, command and control techniques that compress the four cardinal "pressure points" of sensitivity In the health care public square. These are:

1. Patient choice/access compression (selective contracting, gate-keeping, etc.)

2. Physician choice compression (preauthorizations, utilization review, protocols, etc.)

3. Price compression (through such leveraging methods as volume-driven discounts, the RBRVS, and capitation. Payer fee schedules are really price controls)

4. Fiduciary role compression (the fiduciary role of insurance conflated with the fiduciary role of the Hippocratic Oath)

All depend. in one way or another, on a basic power asymmetry that exists between insurer and patient, and insurer and physician. This statement is not negated by the instances where physicians have willingly adopted the ideology of capitation or have voluntarily formed their own HMOs, PS (HM) Os, and IDSs, for though these circumstances do exist, they are by far outnumbered by similar arrangements that have been induced through an element of market coercion. If some element of coercion were not the case, and the entire matrix of orthodox managed care relations were the voluntary result of knowledgeable and willful choices, four observable phenomena would be in evidence:

1. There would be little or no consumer backlash. But the evidence to the contrary, however, is overwhelming. Here's just one of many examples: a mid-1998 New York Times survey revealed that 85 percent of Americans do not believe the current system is working and that 50 percent believe managed care harms the quality of care. (1)

2. There would be little or no physician dissatisfaction. But the fact of the matter is that a great many physicians to whom we look for care are either demoralized about or furious with managed care; in fact, a recent survey conducted by the MEDSTAT Group and J.D. Powers shows that 7 out of 10 physicians considers themselves anti-managed care. (2)

3. Orthodox managed care structures would be thriving, (i.e., closed-panel, vertically integrated HMOs and global capitation). Not only are these forms not thriving, but they are increasingly--and correctly--being seen as the source of friction generating the first two contrary indicators.

4. Consumers would not be turning to the state and the courts as a means of rectifying the power asymmetry.

Since 1994, well over 2,000 bills have been introduced in state legislatures alone, most of which are hostile to managed care in one way or another. (3) It's highly likely that some kind of patient's bill of rights' will come under close consideration by the federal government this year.

An alternative foundation for managed care

Obviously, the suggestion of an orthodoxy presupposes the existence of a "heterodoxy." The global theory of managed care is a alternative attempt to not only formulate a theory of managed care that makes relatively little use of compression techniques, but comes as close as a health care market can to mirroring the manner in which human beings interact in all other legitimate marketplaces.

Instead of creating an inverted compression wedge, Figure 2 represents the same triangle, pinched at the waist, and then expanding as it approaches the provider community. Under this model, expansion of patient choice is desirable because the payers have catalyzed price competition at the point of medical service, in addition to being in competition themselves at the point of medical insurance. Moreover, the objects of integration change. Instead of integrating health insurance with health care, the new paradigm seeks to integrate and rationalize the badly fragmented processes of care through the medium of globally priced episodes of care.

Thus, the stage is set to define and price discrete product lines of health care services, independent of health insurance products. And just as the expansion of competitive goods and services redounds to the welfare of consumers by engendering continuing gains in efficiency, the more that providers compete on the basis of integrated episodes of care for populations of insured lives, the more efficiency will be engendered to attract those patients. The key is to allow patient out-of-pocket costs to proportionately fluctuate with the variable amounts of competing global fees, and to tie those global fees with outcomes reports that speak to each patient's level of understanding. In that way, it matters to patients where they go for care in terms of cost and in terms of their expectations (i.e., choiceutility risk). Instead of being inimical to managed care, patient choice becomes the dynamo of managed care. This has been the critical missing element, and the only way, as I see it, to get the value equation righ t.

Globally pricing integrated episodes

In Part 1, I spoke to the issue of Outcomes and satisfaction surveys, and how the structure of orthodox arrangements actually works against this very essential goal. To reiterate, people do not seek information about health care when they select what type of health insurance plan they want, they seek information when they know they will need care.

When a young mother finds out she is pregnant, she doesn't care if a given health care system has excellent results in oncology or orthopedics. She wants to know which physician and hospital will best suit her and her baby's needs. Managed care has singularly failed to meet this most important facet of consumer information demand. But by recognizing and appropriately structuring the ex post market, the same young mother could select from a wide menu of providers on the basis of price and outcomes. For instance, if one group of providers offers a globally priced obstetrical delivery at $4,800 but whose facilities are not quite as convenient as she would like, she may opt for another obstetrical provider closer to home, even though the global price is $5,150. If her insurer levies a 5 percent out-of-pocket cost for this type of episode, then the higher priced provider would cost her $17.50 more. But according to her values, the extra cost is worth it.

I would like to draw out a couple of important observations at this point. First, notice that globally pricing integrated episodes allows the woman to be a consumer. There are up-front and knowable prices attached to the medical service she demands, with outcomes information. This type of information is so much easier for patients to relate to when it is attached to discrete medical product lines for which they find themselves in need. What's more, it allows them a sense of sovereignty at the point of service--another stumbling block for managed care. Second, the woman is not going to receive a flurry of explanation of benefit paperwork with accompanying co-pays for all the elements of care comprising her obstetrical episode. One co-pay takes care of the entire episode.

The episode of care as the essential conduit

A recent Wall Street Journal article entitled, "One Woman Has Lengthy Battle With Health Care Bureaucracy," documents the experience of a cancer patient and her six-year battle with her insurer and providers to get the voluminous flow of co-pays right. For those of you who've had to deal with an involved episode, you know how infuriating these encounters with the health care system can be. Imagine if we had to fork out a co-pay for every wire harness, bolt assembly, lug nut, spark plug, CPU, body panel. seat belt, AC vent, chassis rivet, battery terminal, axle bearing, coolant reservoir, shock absorber, and the other hundreds of components that make up the cars we purchase. In reality, most of us pay one out-of-pocket cost and finance the rest of the sticker price. Think of a sticker price as a global fee for an episode of car. This is how health care markets should work.

But another critical observation to make is that the episode of care forms the most natural unit of analysis for arriving at a common outcomes metric. If one goes to the trouble of reading the 30-year body of literature on episode theory, one quickly discovers that this was the reason health services researchers developed the concept in the first place. Allow me the privilege of quoting Jerry Solon et al in their seminal paper on episodes of care:

"The summary statistical data used to describe the medical care received by a population usually take the form of (1) stating how many in the population have obtained medical services in a given period of time (the volume of users), and/or (2) expressing the volume of services In terms of the number of physician visits made, the days of inpatient care provided, the number of X-rays, lab tests, medications, physical therapy treatments, and so on. These culminations are valuable insofar as they represent, in an overall way, the sheer volume of service. But their very simplicity, their objectivity, and apparent precision are deceptively reassuring. They create the illusion that the essential facts of utilization are thus expressed There is much more to tell of medical care than these superficial counts reveal.

The episode of care was conceived as the essential conduit through which the natural history of any given patient's care could be comprehended. Astute readers will not only note that the traditional metrics Solon is criticizing are precisely the metrics upon which capitation rates are calculated, but also most of NCQAs measures as well. And just as the traditional metrics "create the illusion that the essential facts of utilization are understood," so capitation creates the illusion that care is being managed. The episode of care is the irreducible medicoeconomic reality of care. It is at this level that providers create clinical value; It therefore follows that the episode of care should constitute the lens through which we view value, quality, and outcomes.

What's in it for the providers?

I feel that this is exceptionally good news for physicians. Once a global fee is established for an acute episode of care, or a maintenance fee for a chronic episode of care, the providers are then at (technical) risk for the care they render. There is no reason from that point on for the payer to involve itself in care management decisions, a role to which it is poorly suited anyway. By placing physicians at technical risk through global fees, an appropriate level of financial incentive is given to spark an interest in efficiently managing the care along the episode continuum. To this, physicians are well suited, and truth be told, they are the only qualified people capable of managing care at that level.

Such a risk allocation technique avoids the capitation problem of delegating probability risk to providers. which not only puts them in the business of insurance, a logic wholly at odds with the logic of care, but also tends to bias their financial interests against the health interests of their patients. (5) Moreover, when both technical and probability risk are allocated to providers, patient choice at the point of service must of necessity be sacrificed: it's impossible to capitate an open, choice-based panel. Global fees put physicians back in the driver's seat of care management without forcing them to undergo the duress of forming huge, capital intensive IDSs or PSO/PSNs.

And the payers?

First of all, given the insuperable will for choice at the point of service, I don't see that most payers have a whole lot of options. Right now, many payers and consulting firms are pulling their hair out over the fact that, on the one hand, pressure to control costs is still intense, yet on the other hand, the orthodox compression techniques are no longer socially valid. (6) We can't go back to unmanaged fee-for-service and capitation is becoming a diminished option. What's a payer to do? I say. look to the ways of other markets.

Unlike other insurance businesses (home, auto, inland marine, etc.), health insurers have never enjoyed a time when the products for which they're on the hook were produced under conditions of price competition. For that matter, they've never known a time when health care products have even been defined. That's why the movement away from orthodox managed care is such a ground-shaking event. Instead of trying to squeeze efficiency into health care through an insurance paradigm, which capitation is, the time is finally arriving when we can introduce efficiency through a production paradigm. Letting out contracts for competitively priced episodes of care will spark that change. As this is accomplished, three benefits will follow: (1) price competition at the point of service, (2) abundant cost and outcomes information, and (3) greatly reduced administrative burdens.

Conclusion

This two-part article has been a simple overview of a very complex subject. As is always the case with such an introductory exercise, much information and subtlety is condensed from view. But if there's one point I would like to drive home, it's this: health insurance and health care are two fundamentally different economic animals. Try to mate them, and at best, you get a sterile mule. To go forward, we must ultimately abandon the idea that insurance and care can be integrated, and then sold in the same market parading as "choice." Without being managed care sophisticates, most Americans have intuitively grasped that this isn't what they want. It's now time for the industry to acknowledge the same.

Real choice, and I mean the kind of genuine empowerment it takes to feel a sense of control and dignity in the management of their own medical affairs, requires giving patients a heavy helping of options at the point of service. I may be wrong, but it's difficult for me to envision the American people tolerating anything less. They love their doctors; they hate bureaucratic paternalism, It's that simple. So far, the orthodox paradigm has totally dominated the national dialogue in a way that has left a creative pall over the process of reform. But surely there is room for a differing vision of what managed care means. The global theory of managed care is offered as an alternative interpretation and as an avenue for enlivened--and hopefully--enlightened discourse on the future of managed care innovation.

References

(1.) Kilborn, P.T. Reality of the HMO system doesn't live up to the dream, The New York Times, October 5, 1998, Sec. Al.

(2.) Hawkins. J.A. America's physicians unenthusiastic about managed care. The Physician Executive, 24(6) (November/December 1998), pp. 5.

(3.) Hellinger. F.J. Regulating the financial incentives facing physicians in managed care plans, The American Journal of Managed Care, 1998 4(5): 663-674.

(4.) Solon, J.A. et al. Delineating episodes of medical care, American Journal of Public Health, 57(3) 1967:401-408.

(5.) Robbins, D.A, and Emery D.W. Fiscal arrogance: questioning the ethics of capitation. in: Emery D.W., ed: Global fees for episodes of care: new approaches to healthcare financing, Chicago, Illinois: McGraw-Hill, 1999, pp. 187-201.

(6.) Cunningham, R. Wall street verbatim: wider networks need not drive new cost explosion, in Cunningham R, ed: Medicine and health perspectives, Washington, DC: Faulkner and Gray, 1998, pp. 1-4,

Doug Emery, MS, is a Research Fellow at the Institute of Political Economy, Utah State University. He is also President of Zoadigm Health Systems, a managed care consulting and technology firm based in Sandy Utah. His new book, Global Fees for Episodes of Care: New Approaches to Healthcare Financing, is published by McGraw-Hill, He can be reached by calling 801/495-0601, via fax at 801/495-0602, or via e-mail at [e-mail].