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Health reform for small population areas.

Since his election in November 1992, President Clinton has continued to advocate the need for significant reform of the American health care system. His commitment to health reform is evident in the naming of Hillary Rodham Clinton as Chair of the Health Care Reform Task Force, a group of Cabinet Secretaries and other high government officials overseeing the development of health reform options for the Administration.

Much of the debate has centered on managed competition, a concept first proposed by Alain Enthoven, PhD, of Stanford University and subsequently endorsed by the Jackson Hole Group. Paul Ellwood, MD, of the Jackson Hole Group, has become an ardent proponent of the concept, which structures competition among organized health plans. The concept has received considerable support in Congress and seems to be the major policy option under consideration by members of the Health Care Task Force.

Managed Competition in Small and Rural Areas The purpose of this column is not to discuss elements of managed competition that have been explored in numerous other journals in recent months. Rather, a major question that continues to be debated is whether or not managed competition can work in all areas of the United States. In the January 14, 1993, issue of the New England Journal of Medicine, Kronick et al.* highlighted these concerns by postulating that managed competition is not feasible for small metropolitan and rural areas, which contain approximately 30 percent of the U.S. population.

Those critics who believe that managed competition will not work in rural and small areas believe that a different model is needed for these areas. Specifically, Kronick calls for "alternative forms of organization and regulation of health care providers to improve quality and economy" in rural and small geographic areas.

The history lesson derived from the past decade of experiences with the Medicare prospective payment system reveals that the definition of special geographic areas for the purposes of reimbursement results in a gerrymandered, patchwork approach in the health care payment system. Over the past decade, many rural hospitals adjacent to urban areas or with other unique characteristics attempted through special legislation to obtain reimbursement at urban rates. Such efforts were required because of a seemingly unfair policy that reimbursed rural hospitals less than urban hospitals despite similar cost patterns. If health policymakers propose a health package that calls for "special geographic considerations," we can anticipate that the difficulties of defining rural and small geographic areas will be exacerbated rather than ameliorated.

Kronick, R., and others. "The Marketplace in Health Care Reform--the Demographic Limitations of Managed Competition." New England Journal of Medicine 328(2):14852, Jan. 14, 1993.

Policy Options

Rather than considering alternative structures for certain geographic areas or special populations, it seems advisable to examine ways of modifying the current managed competition model to address the needs of all areas. If one accepts such a basic premise, the call for continuing "fee for service" will not be heeded. Over the past decade, federal policymakers often gerrymandered the system to get rural providers into urban designations. A policy to continue a fee-for-service system will no doubt result in efforts to designate Central Park as a rural area. Although the example is a bit of hyperbole, it stands as a example of the type of debate that might evolve under a geographically defined health finance system.

Two proposals seem worth considering. The first proposal ties the needs of rural and small geographic areas to global budget targets, instead of caps, as part of any managed competition model. Under such an approach, a two-tiered system of regulation could be incorporated into the managed competition model. For Health Insurance Purchasing Corporations (HIPCs) that succeed in keeping costs below the annual target, a first tier set of general guidelines that embraces the uncontaminated managed competition model would be in effect. If an HIPC exceeded the target, regardless of geographic location, a second tier of more stringent regulations would become operational. The second tier would include less flexibility, dictated fees, and cost controls. HIPCs that meet certain defined parameters within the context of annual budget targets would return to the first tier after a specific period. Such an approach incorporates the notion of "incentives" into the health care payment equation. The use of incentives for the system would control rising health care costs without creating separate systems. It is conceivable that rural areas could be more cost conscious than their urban counterparts. Finally, such a proposal does not penalize rural areas with regulation simply for being rural.

A second approach that has received much attention in recent months is to define a "franchise" for those HIPCs that cover rural or small population areas. Under such an approach, the HIPC would be given a franchise to supervise the availability of health plans for a given geographic area. Franchises, by definition, confer certain privileges for providing a service within a specific geographic area and meeting certain standards or requirements. At the recent conference sponsored by the Robert Wood Johnson Foundation in Little Rock, Ark., the franchise concept seemed to be a model that appealed to many policymakers.


Regardless of the outcome of the debate, any health reform package needs to consider the needs of rural and small geographic areas. Although the population base of this group is small, its political base is exceptionally strong. The Senate Rural Health Caucus is cochaired by Senators Dole (R-Kan.) and Harkin (D-Iowa). The Caucus over the past several years has been an important force in the Senate on any health legislation. Meeting the needs of rural Americans, it seems, is not only a social justice issue but, equally important, a politically pragmatic issue.
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Author:Fickenscher, Kevin M.
Publication:Physician Executive
Date:May 1, 1993
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