Question

What forces have changed US healthcare from a cottage-based, loose network to

what it is today?

Answer 1

Forces like technology ,demographics ,physician and hospital supply and physician decision making have been identified as key drivers of change. Today's dynamics involve a new set of powerful influences such as the purchasing power of buyers vis-à -vis providers, the role of price competition, the managed care industry and its practices, the drive for market share, assumption of insurance risk, the impact of investment capital, and new roles of employers and patients. This does not mean that health care today approaches any theoretically desirable market system, nor that its consequences are all desirable. Indeed, today's health care market is flawed by the inability to measure quality (value) and by inadequate social cost financing, and it is mostly driven by socially amoral economic forces.

Employers drive the health care market through a tough, price-focused competitive process to select the plans offered to workers. Most employees (48 percent) have only a single plan available or may choose among only two plans (23 percent) or three plans (12 percent). In this environment, health plans must control their health care spending; price competition is intense and effective.

Private-sector employers have become key drivers of health system change. They have achieved this influence by shifting their purchasing power from paying for open-ended, fee-for-service health insurance benefits to buying health care, on a capitated basis, from managed care plans. The percentage of workers in private firms who are enrolled in some form of managed care grew from 29 percent in 1988 to 70 percent in 1995. Employers now have a firm conviction that enormous savings are possible in health spending without reducing quality of care. They now expect (and demand) that rather than the annual double-digit premium increases of the insurance era, managed care premiums should fall, or rise only modestly. This strategy has succeeded in slowing the rise of national health care costs to its lowest rate in three decades.

Employers seek, through a number of strategies, to allay workers' concerns about plans that are too restrictive. Many employers select health plans with out-of-network options, which has made such plans the fastest-growing insurance product. Larger employers, with more geographically dispersed and diverse employees, also tend to offer a greater choice of plans; smaller employers offer fewer choices. The need for cost control has driven employers away from purchasing fee-for-service insurance, while the need to satisfy their workers is driving them away from purchasing tight, closed-panel health maintenance organization (HMO) plans. The employer health plan market is now filling in with a whole continuum of health plan options. Employers' new purchasing strategies, with their price-based selection of health plans, are driving changes throughout the health system, in both organization of care and cost cutting. By purchasing from health plans, employers accord plans great influence over health care providers. Employers also will make use of better information and watch the effectiveness of new purchasing strategies.

First, better information for employers will give them a basis for more sophisticated purchasing of health care. Employers would like to go beyond price-based comparisons to purchase health plans on the basis of value added, such as improved health and productivity of their workforce. The National Committee for Quality Assurance's (NCQA's) accreditation and the Health Plan Employer Data and Information Set (HEDIS) are widely viewed as steps in the right direction. But these indicators still leave many aspects of quality unmeasured and a large burden for consumers and purchasers to carry in trying to assess quality. Only as better measures of value are available will employers have a persuasive basis for purchasing health care other than by price comparisons.

Second, pragmatism may lead to new purchasing arrangements. Employers have evolved their purchasing strategies mostly by emulating the successes of leading companies. In many areas, excessive hospital overuse and excessive specialists' incomes remain a problem. In other areas, employers are already questioning whether there is much value added from health plans beyond their ability to aggregate purchasing power and impose unsophisticated utilization controls. Employer initiatives that will be watched include direct contracting and health care purchasing alliances. Large employers in the Twin Cities market are now aggregating their purchasing power through a business purchasing coalition and are seeking direct contracts with organized delivery systems; this purchasing strategy bypasses managed care plans, with their large overheads and profits. Providers' interest in fostering such arrangements is reflected in the “provider service network” options included in recent Medicare reform legislation. Most large employers already “carve out” mental health and pharmacy services to specialized benefit management firms. Employers also are evolving ways to make better use of purchasing alliances and multiemployer purchasing arrangements. These organizations offer greater purchasing power than individual companies offer alone; they can be particularly attractive options for small firms. Larger firms, if they judge that a more effective health plan market has been created by such mechanisms, may disengage from their own purchasing efforts and allow workers to purchase through such arrangements.

As health plans compete in the new employer market for managed care, price competition drives their business strategies. Pressures and uncertainties of the market require plans to prepare to quote future prices that are lower than those they offer today. This price discipline is driven by competitors as well as by employers. New health plans employ aggressive pricing to get started in the market; existing insurers must respond to hold on to market share. A substantial market share enhances a health plan's negotiating leverage with providers and is a telling factor in its success or failure vis-à -vis competitors. Indeed, price competition among health plans that are seeking to gain market share is getting tougher, as early gains at the expense of fee-for-service insurers are now giving way to a market fight among managed care plans for a declining number of privately insured individuals. Acquisitions and mergers among health plans also enhance market share.

The managed care industry, in today's price-competitive environment, is placing high priority on its cost control strategies. Most managed care plans now use the aggregated purchasing power of employer and worker premiums, through contracted networks, to leverage price discounts from the oversupplied hospital sector and specialists. They also use various “triage” approaches to control utilization through tighter controls over specialist referrals and hospital use. Only a few companies thus far are actively managing clinical care quality through improved disease management. In the face of tough market pressures, leading plans are quite confident that in most markets they will be able to realize economies for years to come. This confidence, in itself, is a key motivator as health plans develop their strategic plans and investment strategies. The confidence is based on a track record of realizing large economies while still having high consumer ratings, particularly through reducing hospital use. Both health plans and employers cite hospital use rates achieved by managed care (days of care per thousand population), compared with much higher levels that prevail in most markets, as the single most persuasive predictor for future savings. Other major savings opportunities are seen in reducing specialists' fees and use in oversupplied fields. Such easy savings mean that health plans could prosper without having to take on more challenging issues, such as improving health status, unless purchasers and competitors forced them to do so.

Today's health plans include many new hybrid models of varied structure, sponsorship, financial relationships, out-of-plan options, and other features. Old verities, such as that Kaiser-type organizations will be the most successful, are being challenged with views that such organizations are, for now, at a disadvantage because of their ownership of hospitals and salaried physicians, and that service capacity can be purchased less expensively in the market. In a rapidly changing marketplace, health plans recognize the need to be nimble, operate through many contractual and other relationships, and be ready to change rapidly.

A plentiful supply of venture capital for innovators and entrepreneurs is another key factor driving the managed care industry's growth. Wall Street has noted the profitability of managed care plans. Investment capital repeatedly destabilizes the status quo to capture excess profits throughout the health care system. Investment capital is also attracted to relentless growth in revenues and profits, thus creating a voracious appetite for rises in market share that are driven by mergers and acquisitions.

Today's health plan strategies also are driven by risk selection, particularly in markets for small-group and individual coverage. It is much easier for health plans to price their premiums competitively by avoiding high-risk populations than by achieving real economies. About 10 percent of the population uses 70 percent of health care. Marketing strategies are usually designed primarily to attract good risks and to avoid patients on whom a plan would lose money.

The major public fee-for-service insurance programs, Medicare and Medicaid, have lagged behind the private sector in the shift from traditional insurance to managed care. However, they control one-third of today's $1 trillion national health care economy, enroll sixty-seven million people, and are already starting to influence market developments. With Medicare enrollees switching to managed care at roughly 100,000 enrollees per month, about a half-billion dollars of new annual premium revenue flows into managed care plans each month. States also have been moving their Medicaid populations into managed care; more than one-third of the thirty-five million Medicaid enrollees, primarily women and children, are now enrolled in private health plans.

The health plan market will continue to be driven by today's major influences for the foreseeable future, but there will also be new influences. First, the Medicare market, with its enormous size and explosive growth potential, is the most important future market for managed care, now that most insured workers have already been enrolled in managed care. The insurance industry is working hard to enact new Medicare legislation to offer to private health plans, with the new point-of-service plans, broader network options, and organized “open-season” enrollment periods. The 70 percent of workers who are already enrolled in managed care are likely to continue in managed care as they reach Medicare eligibility, which will, by itself, raise the current 12 percent managed care enrollment rate. Health plans believe that the market power they will gain from new Medicare revenues will advance their ability to leverage future savings from health care providers. Competition for Medicare enrollees will be an important development over the next few years.

The health plan market is likely to become more competitive as a result of growth of multiemployer purchasing arrangements, cooperatives, and alliances, particularly among small employers. A number of the remaining small indemnity insurers are likely to leave the market over the next few years, which will enhance the purchasing clout of the larger health plans that acquire them. The next few years also will likely see the breakup of the Blue Cross and Blue Shield system, but the arrangements of the pieces and their partnerships and alliances are difficult to foresee, as are the effects.

Finally, purchasers, health plans, and providers are likely to work out better risk adjustment methods to appropriately pay providers that excel in serving chronically ill and other high-cost patients. Direct contracting between purchasers and providers seems the most promising avenue for developing such methods, given the reluctance of health plans to be market leaders.

Price competition for contracts from health plans is the primary driver for health care providers. Most providers confront the stark reality of being an oversupplied resource in a market with aggressive purchasers and with little basis for distinguishing the quality or value of their services from those of other competitors. As managed care takes hold, providers' expectations have shifted toward a future of unrelenting pressures on pricing and for downsizing. Whereas physicians were turning down offers of Medicare fees plus 10 percent a few years ago, they now are accepting Medicare fee schedules of minus 20 or 30 percent. Fear is now said to be a major driver of change among health care providers, and a particularly influential one.

The drivers of change for health care providers also include a large amount of investment capital to back new ventures. There are many business opportunities in downsizing the health care system. Such capital is largely amoral; that is, it seeks financial opportunity but not social good. A significant amount of capital from hospital surpluses and reserves has gone into deficit-financing mergers and partnerships among health care providers, but this financing source may be eroding.

Most providers are trying to control their futures by joining various partnerships. Despite these mergers, acquisitions, joint physician/ hospital ventures, and alliances, such strategies usually rearrange resources that are still in oversupply, even after significant reductions, and may not offer long-term stability.

Consumers drive health care market trends today primarily through their willingness to purchase health plans on the basis of price comparisons. The evidence shows that individuals tend to select lower-price plans from employers' multiple-choice offerings and that even small premium differences can drive enrollment shifts among health plans. Thus, consumer choice and employer purchasing both drive price-based competition in the health plan market.

Consumers report, on many surveys, that they have a high degree of overall satisfaction with health care providers and with managed care plans. At the same time, experts portray consumers as being relatively uninformed and unsophisticated purchasers in the health care market who often are confused about how to choose among plans and providers. As with employers, consumers would like to be informed about quality differences but now have little basis for making valid comparisons. Satisfaction reports need to be qualified, because the vast majority of enrollees are healthy; whether there are equally high satisfaction ratings from high-need/high-use populations has yet to be clarified.

Consumers are also driving the health care system to respond to their concern about access to care and choice of providers. Consumers' inherent distrust of health plans' quality is fueled by media “horror stories.” In response to pressure from workers, employers have been broadening networks and ou t-of-network options. Consumers' concerns, particularly those of disabled and chronically ill patients, also have been strongly felt in state legislatures. There has been an explosion of consumer protection legislation; for example, more than a thousand consumer protection bills were introduced in 1995. 7 Not much of this legislation has passed yet, but much of it reflects legitimate complaints and real problems that have not been addressed by the industry.

In recent years neither the federal government nor most state governments have had major roles in shaping the forces that drive health system change. Nevertheless, their future actions may be particularly influential. The implications of Medicare's shift toward managed care will be felt throughout the health care system. Medicare's health plan standards, market rules, quality assurance, grievance procedures, and consumer information, as well as its national consumer-choice system for thirty-seven million enrollees, may provide models for national reforms. Both federal and state governments will be considering proconsumer regulation of health plans.

A great deal of social distress lies ahead, however, if government does not recognize the adverse consequences of the socially amoral economic forces that are now driving change in the health care system. Today's elaborate cross-subsidy financing for care provided to uninsured persons will be unsustainable, and new public financing sources must be found to assist these populations and the providers that serve them. The dumping of more patients onto public hospital systems is not a feasible option; many public hospitals face steadily deteriorating finances, and their demise will be hastened by the movement of Medicaid to managed care. (Community health centers, however, may be viable elements in Medicaid managed care plans.) A majority of academic health centers, located in areas where they are not essential for health plan networks, also face grim financial futures in competitive markets, as well as reduced Medicare financing for graduate medical education.

The nature of market competition is to drive out cross-subsidies, which have been the hallmark of our health care system's way of financing such social costs. Government will need to step in with direct financing and/or regulation to pay for social costs. As a single optimistic note, however, evolution of the market likely will present government with purchasing opportunities for the nation's forty million uninsured persons that cost much less than universal coverage would have cost even a few years ago.

A rapid rise in the number of physicians who are organizing to take on clinical management and risk is one of the factors that could alter the course and speed of health system change. Physicians used to control an estimated 70-80 percent of health care decisions, but they have recently been moved “down the food chain” by well-capitalized insurance companies and hospital-backed ventures. Physician-organized systems could shift the balance in the health care system far more toward competition among providers and away from competition among health plans and could foster organizations based on treatment of various conditions (for example, cancer, diabetes, or heart ailments).

While some speculators can see physicians moving to the top of the health care system, others suggest that physicians' role might be in jeopardy as team approaches and protocol-driven treatments make greater use of other professionals to provide value to the patient. Such arrangements might become common in much of primary care, as well as for the chronically ill.

Another speculation is that a national consumer movement could become a powerful force for shaping the health care system. This movement would be generated by consumers' recognition that they can no longer trust their physicians to work solely in their best interests, along with a mistrust of their employers and health plans. A major new consumer-focused “helper” industry could emerge that includes “front-end” services, such as an Internet-based system, for patient contact, information, advice, and referrals.

The health care system also could organize to rapidly advance the scientific basis of clinical care and health care management. All major actors now recognize their enormous information deficiencies, but no one actor or professional society is now organized to address this problem. An improved capacity to measure and demonstrate value could change the basis of competition and clinical management. Similarly, expert systems (software that structures medical diagnoses and treatment decisions into computerized step-by-step processes based on best practices and clinical evidence) also could affect the content of medical care and relationships within the health care system.

Several developments might slow the pace of market-driven changes. Catastrophic financial failures of some large investment-financed enterprises or uninsured health plans could drop high-flying stock prices. A failure of health plans to deal with legitimate complaints could lead to slow growth of Medicare enrollments and to regulation that limits the industry's discretion. Chaos brought on by the coupling of rapid market change and government's unwillingness to finance social needs directly could bring on price regulation to protect vulnerable institutions, providers, and population groups.

Finally, the nation's employers could affect future developments by making major changes in their purchasing strategies. Possibly, small employers will recognize the advantages of multiemployer health care purchasing and move aggressively to support legislation for purchasing cooperatives and alliances. Another possible development is more direct purchasing, whereby self-insured employers contract with provider-organized systems, without insurers in the middle. Others think that employers—once accreditation, report cards, and other measures are in place for a well-functioning market—will disengage from active health care purchasing and move to a strategy of fixed contributions, close their health benefits staffs, and allow their employees a broad choice among qualified plans.