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Rolling Back Third-Party Intrusions in the Practice of Medicine.

THE CONSUMER-DRIVEN health care movement--a powerfully attractive concept that is rapidly drawing support from pragmatists on both sides of the political spectrum--is gaining momentum at a time when managed care appeared to be in charge of our nation's health care delivery. The perception that managed care may be more a part of the problem than the solution is causing employers to reexamine their role and to seek relief from the financial and legal risks associated with conventional practices. This signals a movement from health insurance as a defined benefit to a defined contribution plan. Such a transition involves a transfer of health insurance ownership that is key to establishing incentives for curbing improvident spending while expanding the freedom of consumers to do what suits their needs and preferences. Some of the features of managed care most disturbing to patients and physicians may soon become a distant memory.

Purchaser resolve

That managed care enrollment has expanded to the point where only about 15 percent of insured workers retain traditional indemnity coverage is testimony to the confidence employers had in the money-saving power of managed care. But this support was conditional on the continuing ability of managed care to hold premium prices in check, something that appears increasingly doubtful.

During the three-year period beginning in 1994, a large migration of workers into managed care plans enabled employers to hold their health spending increases below 3 percent--an amount less than the overall inflation rate--after a decade of average annual increases of 20.6 percent. [1] In retrospect, however, this is viewed as nothing more than a brief respite, given that premiums have resumed rising far in excess of general inflation due to managed care plans attempting to replenish profit margins depleted by price wars for market share and stiffening provider and consumer resistance to cost-cutting strategies. [2,3]

The added pressures of an aging work force, along with a proliferation of expensive new drugs and therapies, exacerbates the situation. In these circumstances, the credibility of managed care as an effective cost fighter has suffered and employers will be severely tested to avoid concluding that managed care is more a part of the problem rather than the solution.

Presumably, employers could respond to the return of premium inflation by: (1) redoubling attempts to micromanage care, either by circumventing insurers and contracting directly with providers; or (2) using their purchasing power to pressure managed care plans into monitoring and changing medical practice styles more aggressively and to become less lenient in permitting questionable consumer utilization patterns. While an understandable response to the pressures for cost containment, the prospects of this occurring are constrained by two practical considerations, the neglect of which will add to the complications bedeviling employers.

1. Any attempt to save money by imposing more rigorous cost-effectiveness rationing measures will further alienate a labor force already exhibiting considerable unhappiness over purchaser actions that limit freedom of choice. This alienation will only escalate if employers try to counter higher premiums by further restricting the number of plans open to employees or intensifying efforts to steer them into less permissive plans. And, in this period of low unemployment, employers can hardly take any steps that make recruiting and retaining employees more difficult.

2. For self-insured employers, any reduction in ERISA-related privileges that either strips away employers' exemption from costly state mandates or diminishes their protection from medical malpractice risks, whether by court rulings or federally sponsored patients' rights legislation, will inhibit their willingness to enter the clinical arena. Accompanying frustration, together with the increased risk of litigation, will induce employers to simplify their lives by relinquishing ownership responsibility, especially if the number of plans that employees may select is winnowed down from many to a few or a single "best buy." Expediency and self-interest, therefore, predispose putting employee health insurance on a defined contribution basis.

The case for changing health insurance from a defined benefit to a defined contribution plan goes beyond risk avoidance to include: greater budgetary control over fringe benefit outlays; a scaling back of health benefits administrative staff; and better morale among employees who acquire the freedom to choose what best suits their particular situation. The obvious choices for this transformation are either vouchers or Medical Savings Accounts (MSAs). [4]

The obvious choices--vouchers and MSAs

Vouchers may hold more immediate appeal than MSAs for employers because they enable a greater degree of separation from burdensome health insurance issues. Employers simply pay a fixed annual sum to purchase a reasonable package of benefits that employees are then free to spend on any available plan they choose--pocketing any price differential if they select a less expensive plan or making up the difference if a more costly one is chosen.

The catastrophic coverage feature in MSAs, on the other hand, keeps employers more involved in the plan selection and administration. They need to purchase catastrophic policies that are typically half or less than the cost of conventional policies While not fully extricating employers from the health insurance morass, their appeal rests on the prospects for superior long-term results; notably, curtailment of medical inflation and a check against unsolicited government intervention, because MSAs are conducive to a strategic employee employer partnership in which both parties share in any cost savings.

Nothing will motivate consumers more to use health services prudently and become more aware of waste and inefficiency than the personal wealth-accumulating factor of an MSA. Briefly put, the dynamic is as follows: money unspent from the MSA is allowed to accumulate in a supervised investment account. When compounded over the course of a working lifetime (45 years), the value of a $1,500 annual employer contribution invested in equities could total $600,000 or more assuming, by today's standards, a modest 8 percent average annual return. In comparison, the historic rate of return on the stock market is between 10 and 12 percent.

Since serious illness prior to old age is an exception, the cost of uncovered services is not an obstacle to accumulating substantial savings. In the worst-case scenario, an individual would be liable for a deductible of roughly $1,500, which, after the first year, would be fully covered by the employer's contribution. Unless extremely unlucky enough to incur repeated out-of-pocket expenditures precluding any build-up, sizeable accumulations of cash reserves will be the rule rather than the exception.

While managed care has prospered by exploiting easily attainable short-term economies--substituting outpatient services for inpatient hospital care, minimizing risk through selective enrollment of healthy populations, and extracting price concessions from hapless physicians and hospitals--the outlook for future profits is clouded by the rise of stronger opposition. Pressure from physicians and hospitals for higher rates and from consumers for fewer restrictions is undercutting the controls that keep costs in check, causing employers to despair over the ability of managed care to deliver anything other than temporary relief.

Stripped of its most patent backing, managed care growth will slow and finances will be endangered when exposed to a combination of consumer and provider hostility in the health care marketplace. Once confidence is lost, employers will redirect their search for savings elsewhere. Rather than continuing to expend resources on restructuring health care financing and delivery, and endure the collateral political, financial, and legal hazards, self-interest will prompt them to disengage from a direct, activist role and instead empower employees to take charge of how to best spend fringe benefit health outlays.

As defined contribution plans proliferate, the transfer of ownership responsibilities will transform health care into a consumer-driven industry. Indeed, a shift from defined benefit to defined contribution plans may not be far off. A recent survey of the nation's biggest companies disclosed that as many as three-fifths are already contemplating such a change. [5] And one third-party administrator stated that more than 40 percent of his clients were devotees of defined contribution. [6]

Restored physician-patient relationship

Managed care has alienated physicians to the point that the majority believe it has significant negative effects on the physician-patient relationship, the ability to carry out ethical obligations, and on quality of patient care. [7] Not only do practicing physicians express displeasure with the effects of managed care, but also negative views are widespread among medical students, residents, faculty members, and medical school deans [8].

It is not just physicians who are concerned about the quality of patient care under managed care. Others allege it lowers quality of care for the elderly, those with chronic illnesses, and the poor. [9] It is commonly believed that quality suffers because of the reliance on generalists instead of specialty physicians and the use of financial incentives that may invite the withholding of medically appropriate services.

While a weakening of managed care entails considerable marginalization of insurers' power and consumers dealing more directly with physicians and hospitals, it does not signify a return to the days of Marcus Welby or Dr. Kildare. Thanks to improvements in the availability and quality of information, medicine is no longer too complex for the average person to understand.

Today's information sources not only permit individuals to select best value insurance plans, they also allow patients to get their hands on information nearly equal to that possessed by physicians. Quick access to Internet data on the cause, natural progression, and treatment of disease obtained from medical journals, databases, and consumer health sites augment the dissemination of physician desk references and other technical manuals once found exclusively in physicians offices--all of which enable patients to ask more intelligent questions and participate more knowledgeably in treatment choices. [10]

There are more websites on health care than on any other topic; [11] in fact, there are more than 25,000 Internet sites serving up health information. [12] And there is a proliferation of consumer advocacy think tanks and educational groups, such as The Foundation for Accountability, whose purpose is to develop measures of performance that are relevant to consumers and to educate them about how to use this information. [13]

Instead of viewing this trend as something that undermines their status and authority, enlightened physicians will accept consumer participation in clinical decision-making for what it can do to improve compliance and treatment outcomes while diminishing their exposure to malpractice litigation. Information technology innovation will inevitably impact the health care provider role so that the physician will become more of a coach and partner to the patient rather than the sole decision-maker.

On the other hand, irritation and tension likely will arise from time-consuming and emotionally charged encounters in which consumers, overloaded with inappropriate or misunderstood information, resist correction and education no matter how diplomatically presented. Also, some providers, particularly those practicing in oversupplied service areas, may be intimidated by greater consumer willingness to comparison shop and change sources of care.

Whatever the associated aggravations, they surely pale when assessed against insurers' and purchasers' imperatives to micromanage health care. For providers vexed by managed care impositions, relief from third-party interference accompanied by a regeneration of fee-for-service practice compensates for any stress from patient assertiveness. If managed care diminishes trust in physicians, defined contribution plans (MSAs in particular) will do much to restore it.

Additional impact of MSAs on physicians

Adopting the MSA principle has additional ramifications both for health insurers and the structure of group practice. Because there will be fewer dollars in the insurance actuarial pool, the market will shrink, squeezing numerous insurance companies out of business. Survival within a sharply curtailed market will compel consolidation through the expansion of nationwide corporations at the expense of local and regional firms.

In addition to enhancing the bargaining power of surviving insurers, the focus of cost cutting will gravitate from primary/acute care to specialty/ chronic care, since, in order for the MSA to achieve its goal of curbing the over-consumption of services, coverage for non-catastrophic expenses must be prohibited. This reorientation from primary to specialty care will have two major effects on the corporate structure of specialty care delivery.

1. It will induce providers to reassess their service lines and to concentrate on what they do best. Because of the advantage of those better positioned to compete on quality as well as price, centers of excellence that specialize in providing costly services, such as oncology, cardiology, and trauma, will dominate the marketplace. Providers acting ahead of the competition will enjoy excess profits until others enter the marketplace. Following an increase in competition, remaining managed care firms will acquire more influence over prices and excess profits will dissipate, but the infrastructure will have already been put in place for continuing improvements in treating costly conditions.

2. The proliferation of centers of excellence will free physicians from having to band specialties together to amass bargaining power in competing for managed care contracts. In addition to the superior efficiency and outcomes attainable from the greater volume and frequency with which complex procedures are conducted, single-specialty group practice diminishes the conflicts inherent in multi-specialty practices. This is perhaps why, traditionally, single-specialty physicians and allied health care providers have higher incomes (44 percent higher for physicians) than those in multi-specialty groups. [14] There will be a reversal of managed care contracts being found more frequently among multi-specialty groups.


The shift to defined contribution signals a continuance of U.S. health care reform, rather than an end. Giving individuals the latitude to make their own purchasing decisions is the best way to control the cost of health care and improve the physician-patient relationship. Just as in the example of private pension programs, movement toward a defined contribution system will become a reality not for ideological purposes but because of practical necessity. Medical inflation will be interpreted by purchasers as proof positive that savings attributable to managed care are unsustainable. Criticisms that savings are a one-time phenomenon, when exacerbated by the loss of ERISA exemptions from government mandates, will cause employers to shift insurance plan ownership to their employees who, in return for greater freedom of choice, will assume any accompanying responsibility.

Significant details remain open to deliberation--notably, the respective advantages and limitations of vouchers and Medical Savings Accounts. There is no perfect solution to the health cost issue, but, more than any alternative, MSAs comprise a protective wall against entangling regulation. They arrest political momentum for intrusive government policies by accentuating cost consciousness at the grass roots level, attenuating growth in the number of uninsured, returning the benefits of a positive physician-patient relationship, and alleviating provider charity and uncollectible billings problems.

MSAs put medical choices in the hands of physicians and patients, while co-opting the power of consumer self-interest to attain the public goals of cost containment and increased personal responsibility for disease prevention and health maintenance. Incomes for physicians conceivably could decline as individuals, benefiting from the proliferation of reliable information on the Internet and elsewhere, become more cost conscious. Whatever the risks and discomforts involved, a consumer-driven health care system is more compatible with the core values of medical practice in which freedom of choice and clinical autonomy constitute the best avenue for attaining affordable, high-quality health care for all.

Roger M. Battistella, PhD, is Professor of Health Policy and Management for the Sloan Graduate Program in Health Services Administration at Cornell University in Ithaca, New York.

David C. Burchfield, PhD, is Assistant Professor for the Graduate Program in Health Administration at The University of Memphis.


(1.) Feldstein, P.J. & Wickizer, T.M. Analysis of Private Health Insurance Premium Growth Rates: 1985-1992. Medical Care. 1995: 33 (10); 1035-50.

(2.) Cigich, S. 1998 HMO Intercompany Rate Survey. Medical Benefits. 1998; 15 (23): 1-2.

(3.) Rauber, C. Evolution or Extinction? Modern Healthcare. 1998; 28 (42): 36-40.

(4.) Battistella, R.M. & Burchfield, D.C. Employment-based Health Insurance: The Inevitable Transition from Defined Benefit to Defined Contribution. Compensation and Benefits Management. 1999; 15 (1): 1-10.

(5.) Lathrop, J.P. & Carlebach, DC. HMO's R Us: A Prescription for the Future. Strategy and Business. 1998; 13 (4).

(6.) Franczyk, A. Workers in New Millennium May Pay More for Health Care. Business First. June 7, 1999.

(7.) Feldman, D.S., Novack, D.H. & Gracely, E. Effects of Managed Care on Physician-Patient Relationships, Quality of Care, and the Ethical Practice of Medicine: A Physician Survey. Archives of Internal Medicine. 1998; 158 (15): 1626-32.

(8.) Simon, S., Pan, R., Sullivan, A., ClarkChiarelli, N., Connelly, M., Peters, A. et al. Views of Managed Care: A Survey of Students, Residents, Faculty, and Deans at Medical Schools in the United States. New England Journal of Medicine. 1999; 340 (12): 928-36.

(9.) Ware, J., Bayliss, J., Rogers, W., Kosinski, M. & Tarlov, A. Differences in 4-year Health Outcomes for Elderly and Poor, Chronically Ill Patients Treated in HMO and Fee-for-service Systems. Journal of the American Medical Association. 1996; 276: 1039-47.

(10.) Green, H. & Himelstein, L. A Cyber Revolt in Health Care: Patients are Finding New Power through the Web. Business Week. October 19, 1998: 154-6.

(11.) Levy, D. "Health Care in the New Millennium: It's about the Patient!" Keynote address presented at The Congress on Managed Medicaid and Medicare, Washington, D.C., January 18, 1999.

(12.) Menduno, M. Net Profits. Hospital and Health Networks. 1999; 73(3): 44-50.

(13.) Bodenheimer, T. The American Health Care System: The Movement for Improved Quality in Health Care. New England Journal of Medicine. 1999; 340 (6): 488-92.

(14.) Hoechst Marion Roussel. Managed Care Digest Series 1998. Kansas City, Missouri: 1998.


* Defined Benefits

* Defined Contributions

* Vouchers and Medical Savings Accounts

* Restoring the Physician-Patient Relationship

* Consumer-Driven Health Care

Formerly vaunted projections about the triumph of managed care over the provider-controlled health services industry now appear overly optimistic as consumer and provider opposition stiffens. Popular dislike of managed care and purchaser disenchantment over its failure to deliver on promises to control health insurance spending have created a strategic opening for rolling bock third-party interference in medical practice. Employer frustration over rising premiums, compounded by workers' antagonism toward benefits restrictions and worry over the loss of government protection against managed care litigation, signals a radical overhaul in the way health insurance is offered. For many employers, substituting defined contribution for defined benefit plans and transferring ownership rights and responsibilities to employees is an attractive solution. Along with the growth of consumer-friendly health plans and a relaxation of onerous managed care practices, physicians can look forward to a restored doctor-patient rel ationship. This article identifies the forces pushing health care purchasers to adopt defined contribution plans and discusses the implications of such a movement on the physician-patient relationship.
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Title Annotation:consumer advocacy
Author:Burchfield, David C.
Publication:Physician Executive
Geographic Code:1USA
Date:Nov 1, 2000
Previous Article:Defined Contribution Health Care: Future Direction or Fantasy?
Next Article:What Do You Know?

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