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Power and new economic relationships.

Today's managed care transformation is still generating high profits for HMOs, and money is being spent to increase market share through acquisition, mergers, and new entries. As the market matures, price competition should begin to force HMOs to go deeper into change models that require talent from physician ranks molded by high-quality, patient-centered medical practice and further shaped by mastery of management disciplines needed to run the vast systems required to tie everything together and finance it.

Power and control of America's vast medical care infrastructure is being shifted away from traditional providers, especially hospitals and physicians.[1] Power is going to business firms whose guiding principles are ill understood by America's health policy elite, hospital boards, and physicians. The benefits (profit, growth, power) are being captured not for patients and buyers but for managed care firms and insurers who seek control over patients and use that control to pressure providers to lower resource use and lower prices. A lead story in the Wall Street Journal chronicles this shift--an earnings surge, HMOs seeking to grow, cash reserves in the millions, and an industry segment that has pushed down its costs by getting provider discounts and more closely managing care given to consumers while at the same time keeping prices to buyers as high as possible.[2]

The story of managed care today is about power; it is about ownership of the infrastructure and soul of health care; it is not yet about consumer benefits. Those who see ultimate consumer benefits on the slippery slope we are on today must be assuming that, once the new regime is in power and has monopoly control (market share in the 50-100 percent range) over entire markets, it will operate as benevolent dictators and not as normal profit-oriented businesses. Too many of these seers still believe in the tooth fairy. Business first serves its shareholders' interests by growing wealth. To do this, it must master market demand. But, in mastering market demand, it may only incidentally lower costs or confer major new benefits on consumers.

If consumer benefit is to be derived from the transformation to business ownership and control of medicine, it will be necessary to understand how business operates so that effective strategies can be developed to ensure patient safety and sophistication and clout for buyers.

Eckholm describes the transformation going on in managed care, the merging of insurers, and the expansion of market share by nontraditional organizations.[3] According to Relman, quoted in the article, "There never has been a time in the history of American medicine when the independence and autonomy of medical practitioners was as uncertain as it is now." The transformation is about power and control, and both translate into money. Money is the game of Wall Street, entrepreneurs, and business, but it is now, perhaps, the foremost game of health care. It is also little understood, often blindly maligned, and therefore grossly underestimated for its force in the field.

Weil[4] makes a strong case that capitation, managed care, and regionalization are old concepts put forward, at times successfully, by medical and social reformers over the past 50 years. Mergers, managed care, regional systems, and the like follow models that were developed by social engineers (medical care organization practitioners and teachers, royal commissions, and others). Now the concepts of organization are found appealing by capitalist conservatives.

Organizational concepts conceived by socialists and run along the lines of a modern state enterprise have little or nothing in common with modern, capitalistic business enterprises. Control is often in the hands of a few (with management usually part of that group) who use the power of the corporation to further their goals, which are generally wealth for the private enterprise and life-long control for the state enterprise executive and for power groups.

Capitation of providers represents a quantum leap from tradition.

Traditional health insurance was grafted onto a wartime wage and price control policy that banned wage increases. Employers bought Blue Cross and Blue Shield coverage; the Blues paid providers their charges or cost plus; and, when costs rose, the Blues passed along the increases to an undemanding customer. Private insurers followed in the '60s with similar packages but also with a marketing strategy of "cherry-picking" low-risk customers but paying providers along the same lines. This form of insurance guaranteed price escalation, so that, by the '70s, we were experiencing inflation twice the CPI, a condition only mildly moderating now.

Indemnity coverage encourages resource use, multiple referrals, and higher costs. Providers are paid only after encounters and the performance of services. Managed care and capitation are designed to correct this fundamental flaw. Managed care seeks to limit the use of resources by consumers by prohibiting and controlling the use of physicians.

Capitation and various forms of fixed prices to providers are used to give a financial incentive to providers to lower resource use, or lose money. Simply put, capitation is an amount of money offered to a vendor for a particular type of service or good that may be needed for a defined population. The amount of money likely to be needed by any provider, specialist, or vendor can be calculated from existing, massive insurance files on millions of cases. One starts with this type of information, which is defined in terms of likely use by such variables as age, sex, preexisting conditions, medical practice styles in the region, and other known determinants of need, and then projects usage forward for a given population. If the databases are large enough, those who can be capitated include all medical specialties.[5]

In one respect, insurers have always been capitated. When they quote a rate for a year, they must operate within that rate. When price increases to consumers were easier, that merely meant that, when costs exceeded premiums, the premium was immediately raised to recoup the loss and get ahead of the usual increases of the next year. Anyone who watched such increases will remember business complaints of 30-40 percent increases in one year. Fixed-price capitation has many implications for who will dominate, control, and ultimately dictate the values of health care providers and institutions.

Public policy endorses the movement to managed care.

The managed care reforms are seen by conservatives as market capitalism, and it rewards business according to who can offer the best price. "Socialist-type reform is dead, but capitalism is harder to fight," says Bob Burnett, MD, of California.[6] If, by fighting, American medicine seeks to roll back the clock, the battle will indeed be difficult, perhaps impossible, before the structural revolution is beyond reversal. In America, policy shifts in disjointed, incremental ways, a lesson learned in the Clinton health care debate. Thus, it is unlikely that any significant policy shifts will occur before our predictions on likely shifts in ownership, power, and control take hold.

Those who fear that the business ethic and profit motive might, indeed will likely, destroy the social mission of hospitals and undermine the tradition of medicine will want to try and stop this trend. Those who lead the change are equally convinced that there is much more fat in the system and profits to be made before any such ill overtakes their efforts. Those in search of profits can also use this pitch as the reason they cannot lower prices to consumers without jeopardizing patient care!

Public and not-for-profit hospitals also operate under a Wall Street discipline.

The forces undergirding the change are too embedded in our social and health care fabric to change before we go through a major transformation of the system. Since Medicare and Medicaid were enacted, with their promise that health care was or would soon become a right, Wall Street dollars have fueled a revolution in financing not-for-profit, public, and investor-owned hospitals, and, in more recent years, major HMOs. The discipline of watching hospital balance sheets through the eyes of philanthropist and community giving has now been completely replaced with a green eye shade approach that looks first and foremost at financial indicators used by financial rating agencies. Decisions about pricing and programs are screened carefully for their impact on financial ratios. This is justified by even the most conservative socially oriented institutions. The slogan used is, "We must do well to do good." Financially weak institutions simply do not survive.

Just new names for old concepts?

One might reasonably ask whether the revolution in ownership and control of hospitals that emerged during the past 20 years is the result of traditional thinking or of new market-oriented forces. Regionalization, health systems, and alliances have been, Weil argues, part and parcel of how to effectively organize and rationalize delivery of health services.[7] While it is easy to agree, it is profoundly incorrect to assume that these terms mean the same thing to profit-oriented, equity, and debt market financiers that they mean to medical care organization theorists, governmental commissions, and bureaucrats.

When entrepreneurial capitalists look at the Kaiser Foundation Plan and similar prepaid group practices, they see opportunities to produce medical services at lower cost, but they do not think first of turning those lower costs into refunds or lower prices for the community. They see the difference between lower costs and the costs and prices of competitors and from this calculus arrive at a price to the consumer that maximizes profits to the firm. When researchers look at profit-seeking organizations and find that they can thrive merely by raising prices and not becoming more efficient, they are aghast and think that profit seeking cannot lower costs. The world I see isn't so simple. An example of how things might actually work is instructive.

A government-owned provider that actually lowers costs would need to lower taxes or find new ways to spend the "dividend" arising from the difference between costs and prices. My experience with governments is that they spend surpluses and rarely, if ever, return unused funds or call for lower taxes. A for-profit firm has no such problem on the ethical level about returning surpluses. The for-profit firm will price a service to beat the competition but will never lower prices just to cover costs. One only has to watch drug pricing to see how this works. New drugs are priced in relation to the value delivered to customers, not costs. Governments tend to price on cost-based reasoning, while business prices on what the market will pay, which is related to the price of acceptable substitutes for the product or service.

There is a profound difference between public agencies and those organized to produce private profits. Many of our public health and social policy scholars tend to evaluate on the basis of whether access is extended, costs are limited, or quality is greatly enhanced. While large drops in costs may be technically feasible, not-for-profit firms, government units, and for-profit concerns are not likely to declare a public benefit dividend. All have their reasons and to some extent they are the same. Those who deliver generally want to keep the reward and do more of what they like or want to do.

Many regionalization concepts were developed for public policy purposes that assumed a public benefit would accrue from lowered costs, improved access, and/or higher quality. When such models are used by profit-seeking institutions, they generally will produce these results for consumers if and only if there is greater profit to the producer for such effort and the profit precedes the benefits to consumers. Worse, it isn't clear that any benefit will be passed on to consumers without a greatly empowered consumer or buyer federation or a greatly expanded and empowered government watchdog even stronger than considered by the Clintons in 1993-4.

How do such bald assertions about profit-seeking behavior fit with the data? Some data suggest that managed care plans produce a very small additional cost advantage.[8] The Wall Street Journal notes the large cash reserves and growth in HMOs.[2] Profit-making firms will price their products at levels designed to be sufficiently attractive to consumers. That means they will go lower than indemnity coverage, but it also means that they need only go low enough to get buyers to move to their products. If competitors stay higher, they need never go much lower to get or keep business. This type of behavior leads to the only modest lowering of prices and the big cash buildups, mergers, and acquisitions that characterize the health industry today.

There is a public benefit to be derived from lower cost delivery models, but how fast and how far prices to consumers will actually be reduced depends very much on how fast competitors adapt to lower cost methods of doing business. It is only with competitive choices available at even lower cost that innovators will go back to the well for more cost savings to consumers. The thesis presented here argues that those who can produce at lower costs can gain market share and increased profits with nominal cuts and, barring increased competition, have very little incentive to push prices down further.

Managed care behavior fits business model.

The behavior of managed care firms, including not-for-profit ones, fits the profit-seeking business model behavior. Most new HMOs seek price discounts from providers in return for favorable referral policies. As long as they can get such discounts, they have little reason to push hard for more efficiency from providers. When the discounts no longer give the HMOs a competitive price edge, they seek further concessions on utilization and other cost features. In markets where traditional providers resist the change, it is possible to see years of no change, with managed care options growing slowly but showing only modest price leadership. In fact, HMOs do not need to push to become substantially more cost efficient when the market offers little competition for even the most modest reforms. This could easily account for the fact that HMOs never seem to get around to much price cutting below their entry-level differences from indemnity and PPO products.

It is not inconsistent for political conservatives or financial investors to argue that prepaid group practices and all the modern forms of managed care can bring costs down. What they fail to add is the parallel fact that this will only result in lower costs to consumers if and when providers are forced to actually cut costs (using least-cost methods) in order to meet competitive prices in the marketplace. Some variation on this behavior occurs in not-for-profit firms and government agencies, so it is not unique to investor-owned institutions. The major change in reimbursement we find in managed care is much more of a profit-maximizing behavior.

Will business and government buyers continue to buy at prices that could be brought down if more pressure were placed on HMOs?

Given the knowledge that businesses have about how profit maximization behavior occurs and the major news reports on profitability and cash reserves of managed care organizations, it seems likely that business will seek better deals. HMOs will provide them if and when buyers can find alternatives to what they offer at lower cost. For some businesses, this will mean renting networks, building their own managed care products, or finding ways to contract around the HMOs. However, as the networks vertically integrate with providers and settle into market shares that limit competition, the ability of buyers to find such options will decline.

It is no secret that insurers, including the Blue Cross plans, are trying to shift all of their business into managed care. Price discounts are given, and providers raise prices to other consumers, thus adding to the burdens of cost shifting. Some truly weird things have happened as a result of such practices. In Virginia, Blue Cross was charged with getting kickbacks when its negotiated price was less than the deductible paid by the patient, thus creating a hospital windfall that was then rebated to Blue Cross. In New York, a Blue Cross plan was charged with having individual contract holders subsidize large employers who got discounts. All of this activity comes under the rubric of managed care. All is consistent with profit-maximizing behavior by firms (for-profit and not-for-profit alike), and none of it matches the dreams and aspirations of any expert on medical care organizations who advocates such organizational arrangements to improve access and lower costs for medical care.

New wine in old skeins?

So, the old concepts of prepaid group practice and regionalization and some newer managed care techniques are being used today, but the underlying paradigm is one of profit making, not community benefit maximizing. Only the boldest providers claim they can actually cut overall expenditures on medical care while broadening access to the uninsured. But they most often do so off the record, and none of the organized interest groups dares let this story catch hold.

Will HMOs of the modern variety ever pay off in lower costs?

The answer must be that it depends on the competition. HMOs already beat traditional group and fee-for-service arrangements and do very well against provider-dominated PPOs. It might be better asked whether the status quo or some major regulatory scheme might be better. Clearly, HMOs and modern managed care in general do a bit better than the unfettered, noncompetitive, indemnity approaches to cost containment. The nation benefits from vastly improved technology and world-class levels of specialized professional sophistication based in large part on the free-flowing cash from indemnity payments from ever-growing health insurance accounts.

Governments tend to enrich the status quo when switching to governmental controls. Thus, they might be expected to moderate growth in costs but never to make any fundamental changes.[9] Governments do not voluntarily lower taxes when costs are cut. Bureaucrats and vendors alike have an interest in growing their shares of the GDP pie, to the disadvantage of taxpayers and patients alike.

Do options exist to get prices moving downward?

If governments tend to keep taxes, rents, and costs inflating; if investors price to the market and keep efficiency gains for profit; and if hospitals and physicians of all stripes prefer to enjoy their current modes of doing business and will only yield change under special circumstances, one might reasonably ask where in this gloomy picture (from a consumer perspective, not for HMOs or most providers) there might be some hope. I can quickly elaborate on three possible approaches.

The first method of getting solid community benefit and consumer cost savings is an enlightened governing body that insists on community benefit, not institutional aggrandizement. Physicians and executives who are rewarded for growth will not easily yield to such ideas. The second mode of change would require government action with bite,[10] but the country is going in precisely the opposite direction today. The third option is for buyers to keep pressing managed care companies for discounts and lower prices. This requires encouraging competition among modes of care and choices among providers and HMOs, something that will not exist if more markets are merged.

Of all the forces that might push down costs and prices to consumers, an informed buyer is the one most likely to opt for the changes needed to make this happen. That informed buyer will have to go beyond price discounts that allow for cost shifting. It will require business and government to embrace lower cost methods of taking care of people and lower prices to reflect the lower costs. Business and government must seek better value and use all their market power to achieve it.

At this point in history, the best method for lowering costs with some quality controls is prepaid group practice and HMOs. The best way to lower prices is more aggressive and informed buying. Buying right should reward high-quality, low-cost producers with volume. Our teachers would, I suspect, be aghast at the market-oriented perversion of their concepts. On the other hand, they would see that, in many markets, the promise of profits has achieved changes not otherwise readily available.

Pros and Cons of Current Course

In a system that stresses costs, there is great risk that quality will eventually suffer. Cost-driven behavior may not be in patients' best interests. Of course, a case can be made for varying quality to allow patients to chose varying price levels for their care. Under a capitation payment or any other tightly managed care system, quality and ultimate consumer benefits are at greater risk because financial incentives stress low cost and improved profits, not maximization of efforts on consumers' behalf, no matter the level of cost-benefit expectations.

Weak providers will be pushed out of business. Perhaps worse, some of these providers will be those who provide the most services to the poor. This happens now and is a fact used by many interest groups, administrators, and boards throughout the nation to justify their business-like approach to pricing and profit making.

Another casualty of today's managed care may be specialists. Not only will specialists be in less demand, but specialists who opt early for managed care roles and its cost-consciousness may not be the best. We could also see the demise of subspecialty medicine. If my informants from England are correct, some specialties, such as dermatology, have never thrived in a primary care-oriented environment. The loss of specialists might be one of the greatest costs of changing to a system that promotes profit and low cost over maximization of knowledge applied to patient needs.

Closely related to the loss of specialists is the still small segment of the medical profession tied into the controlling and managing elements of the managed care movement. Many financially oriented managers and owners think that they can buy a bit of expertise from physicians, codify their methods, and turn the work over to nurses, clerks, and computers. We will never get fundamental and meaningful managed care without the unqualified support of and leadership from the best professionals in every major discipline.[11]

The prime responsibility of health service governance and management is to balance the health needs of the community with the economic realities of generating sufficient revenues to effectively and efficiently deliver the services required by its residents. A major reason we have reform needs is the failure of providers to move toward modes of care that recognize affordability as an important criterion for sustained support of any social service, including medicine. But this change in thinking about the field occurred before we had an affordability crisis. After Medicare was passed, the need for capital to expand and modernize in order to meet the expected growth in demand for medical care was great. Voluntary and public institutions began to rely on bond market financing. Even the most venerable institutions began to be managed with a sharp eye on financial performance.

This reliance on public financing forever changed the industry. The requirement for managing more by the numbers to get financing in the future brought more and more financially oriented administrators into the field and more businessmen on boards. More and more boards judge performance with a sharp eye to meeting financial ratios. No one should doubt the power of such a cultural change to affect values and operations. Business schools continue to grow in importance in the production of professionals for the field. Investment bankers swoop down to push financing interest, public accounting firms add their flavor, while the public health and charitable goals of earlier generations fade. And more and more business schools and health administration programs are training physicians to manage in the field.

All of this consolidation will lead to greater oligopoly and monopoly behavior, which, unchecked, could leave us with the worst of all worlds--namely, a loss of community interest and monopolistic pricing. There are two major counters to this trend. One is aggressive antitrust enforcement. The second is aggressive buyer behavior that adds counterweights to large sellers. Because government is a big buyer, we are not without a potential public interest advocate with a stake in policing the industry. I have often suggested that we would go through a long period of consolidation that leads to much more concentrated markets. When this happens, it will be necessary for government to develop some form of utility regulation and control for the industry.

On the positive side, there are many efforts under way today to try and find more efficient ways to delivery high-quality care. It is hard to imagine this happening without the kind of price pressures brought by managed care companies' demanding discounts and more efficient delivery. The old models of prepaid group practice and regionalization, while good ideas, never got off the ground. The possibility of realizing some good old-fashioned profits made managed care attractive for investors, and it is having some payoff. Without the profit motive, change wasn't likely.

Assuming that we manage to avoid the monopoly trap of consolidation, whoever owns the industry in the future will own an integrated set of organizations. It is unlikely that there will be a counter trend toward the fragmentation that characterized the vertical integration movement of the pre-1990s. Now that managed care is a firmly established trend, there is a high probability that more and more talent will enter the leadership ranks from leading members of medical disciplines. This infusion of talent can be expected to take managed care from its current price orientation to a more fundamental orientation of getting much greater value for resources used.

Some Concluding Thoughts

Even with the sometimes large risk and the substantial dislocation that will result from managed care and the transformation of the field to an investors' world, I think the current course will eventually move us to a higher plateau. Physicians will move more into the direction and design of advanced managed care systems. But this physician involvement will not presage a return to the old ways of fee-for-service, solo practice medicine. I simply do not think the field will move in the direction of government regulation, which our more socially oriented predecessors would like us to take, or back to the more idealistic posture they and many of us lament losing.

Competition is now a driving force, and equity market financing is a major factor in such a contest of power. But it will become increasingly necessary for health care organizations to come up with greater value in care systems to keep the business. This will require a marriage between medicine, marketing, and general management, a marriage consummated by management savvy and by trained leaders from the ranks of specialty and generalist medicine.

Health care reform will come again. We will have insurance reform. And we will have more cost and access problems. The crush of costs will demand even better methods, a shift that will favor the new leadership of a revived managed care movement. We are going to have problems with this change. The iron law of unanticipated consequences will apply here. Every change has impacts, many unforeseen. We hypothesize, prognosticate, and proclaim today in order that, by incessant probing and debate, tomorrow might be better than today. Examined assumptions and arguments are our best protection against untoward effects from the kind of unrehearsed experiments that changing systems presents.

References

[1.] This transition has been discussed in depth in a series of articles by the author and Richard Johnson in Health Care Management Review in 1994 and 1995. This paper builds on that work. [2.] Wall Street Journal, Dec. 21, 1994, p. 1. [3.] Eckholm, E. "While Congress Remains Silent, Health Care Transforms Itself." New York Times, Dec. 18, 1994, p. 1. [4.] Weil, T. "Close to a Bull's Eye: A Concurring Opinion." Health Care Management Review 20(2):35-44, Spring 1995. [5.] Many specialists have not yet been asked to capitate, and some who have say it does not work. There is some doubt in my own mind that HMOs or employers feel that they have sufficiently benefited from the gross waste in the system to make it necessary to capitate. That, of course, is another story outside the scope of this article. [6.] "AMA Shifts Focus to Incremental Reform." American Medical News, Dec. 19, 1994, p.1,24. [7.] The first major book devoted to this trend was Brown, M., and Lewis, H., Hospital Management Systems: Multi-Unit Organization and Delivery of Health Care, Germantown, Md.: Aspen Systems, 1976. [8.] Miller, R., and Luft, H. "Managed Care Plan Performance Since 1980: A Literature Analysis." JAMA 271(19):1512-9, May 18, 1994. [9.] "Never" is not too strong a word for what happens. Medicare promised to never interfere with fee-for-ser-vice medical relations between patients and physicians. So much has changed in 25 years that one has a hard time discerning just when the promise fell and new forces took over. On the other hand, while pricing certainly changed, there is still ample evidence of government reluctance to explicitly abandon the promise. [10.] "Bite" in this scenario would mean tough regulations; bureaucrats lose their jobs if costs don't come down and politicians do not get elected if good things don't happen for the consumer. I am not optimistic that this can be accomplished without major structural reforms, such as congressional term limits, passage of balanced budget amendments, and easing of civil service rules to make firing easier. [11.] For an in-depth treatment of opportunities for physicians in management, see, Brown, M., "Physician Opportunities in Management: Signs and Portents," Physician Executive 20(12):3-8, Dec. 1994.

Montague Brown, MBA, DrPH, JD, is Editor, Health Care Management Review, and Chair, Strategic Management Services, Inc., Tucson, Ariz.
COPYRIGHT 1995 American College of Physician Executives
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Title Annotation:in managed care
Author:Brown, Montague
Publication:Physician Executive
Date:Dec 1, 1995
Words:4917
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