Managed Health Care


Of the approximately 257.8 million individuals currently living in
the United States of America, every one of them has a need for
effective, affordable and accessible health care coverage and
services. Within the past thirty to forty years, the scope and
cost of health care coverage and services has drastically changed,
altering the manner in which health care was previously managed.
There are several factors that have affected the cost of health
care coverage over the course of the past two to three decades.
One of these factors is the introduction and rapidly increasing
enrollment in managed health care insurance plans. Managed care
health insurance plans can, in most cases, help to alleviate the
rising costs of effective medical coverage. Another important
factor that has affected health care costs is the invention and
implementation of new medical technologies. As prominent
researchers and economic analysts have discovered, there is a
distinct and direct correlat! ion between advancing medical
technologies and rising health care costs. Medical innovation has been
proven time and again to be an important determinant of health care
cost growth. It would appear that managed care health insurance plans,
which attempt to lower health care costs, and highly expensive new
medical innovations and procedures are at cross purposes, pulling
against one another in very different directions. Market-level
comparisons have found the cost growth of health care in markets with
greater managed care penetration to be generally slower than that of
non-managed care health insurance markets. However, managed care is
unlikely to prevent the share of gross domestic product spent on health
care from rising unless the cost-increasing nature of new medical
technologies changes.
Managed care health insurance plans differ greatly from
indemnity fee-for-service, or FFS, insurance plans. Since the
early 1970's, rapidly growing enrollment in managed care health
insurance plans has transformed the health insurance market in
the United States. Virtually nonexistent in most markets three
decades ago, managed care health plans covered 63 percent of
the nation's employees by 1994. Managed care incorporates a
range of features that allow the insurer greater influence in
the process of care delivery. Managed care plans aggressively
contract for lower prices from physicians and hospitals and
attempt to constrain the use of health care services by
monitoring providers and changing provider incentives. Health
insurance providers that operate under the fee-for-service
concept grant the consumer much more freedom of choice
concerning doctors and treatment programs, thus freeing the
consumer of any feelings of discontent with "interfering"
insurance companies. ! Consumers of indemnity plans, however,
pay a price for that freedom by way of drastically higher rates and
little knowledgeable input on doctors, specialists and nearby hospitals
that will fit their particular needs. Many of today's health insurance
consumers choose to place their trust in a managed care insurance
company, relying on the expertise of the provider to support and
facilitate their various medical treatments and needs. Health
maintenance organizations, commonly known as HMOs, have emerged as the
clear leader of managed care providers. Other types of managed care
plans include preferred provider organizations, point of service plans
and managed indemnity plans. Most studies focus on HMOs and so do not
describe variation in the type of HMO or in the extent of the level of
management in non-HMO plans. HMOs have effectively reduced health care
expenditures (Miller and Luft 1994; Manning et al. 1987; Luft 1981).
A natural assumption would be that the quality of ! care would be
lowered as insurance rates go down and remain reasonable and
affordable. However, these cost savings have been achieved, according
to most evidence, without significant reductions in the quality of care
(Carlisle et al. 1992; Retchin and Brown 1991, 1990; Sloss et al.
1987; Ware et al. 1986; Greenfield et al. 1995; Miller and Luft
1997). This suggests that managed care health insurance plans -HMOs in
particular- tend to reduce inefficiencies in the health care system.
In fact, a study that examined changes in hospital expenses in
California found as much as a forty-four percent slower rate of
hospital care cost growth in markets with high HMO penetration relative
to markets with low HMO penetration (Robinson 1991, 1996).
There are two main types of services that managed care health
insurance companies use to categorize and label their
treatments and procedures. These categories are known as
complementary services and substitutive services. These two
terms apply to new innovations in medical technology and the
amount of money spent to provide the technology to the
consumer. Complementary services are those whose use increases
with the use of the new technology. Complementary services are
attractive to the consumer, who, understandably, desires the
latest, most effective medical technology to treat themselves
and their loved ones. For example, suppose an improvement were
to made in the field of diagnostic imaging. This improvement
could provide clearer, higher quality images, thus leading to
more favorable surgery outcomes. The likelihood of a better
surgical outcome may result in more individuals electing to
receive surgical treatment. The development of this new
technology in diagnost! ic imaging would, no doubt, have been
highly expensive. Also, the costs associated with an illness in which
there is an increased need for surgery are usually quite high. If an
innovation leads to greater use of complementary services, expenditures
rise more than would be predicted by simply examining the direct
expenditures on the innovation. In this case, imaging and surgery are
complementary technologies. This example suggests that the use of
complementary services may increase the costs associated with use of
new innovations by as much as fifty percent. Substitutive services, on
the other hand, differ in that they are not provided because of the use
of new technologies. The savings associated with the avoidance of
these services offset the costs of the technological innovations and
complementary services. If the innovation results in improved health
outcomes, substitution away from services that would have been consumed
later may also occur. It is also hoped that ! this type of
substitution would accompany most preventive services and many other
innovations that yield a reduction in morbidity in the long-run.
Evidence suggests that medical innovation has led to higher
expenditures on health care services. It appears that if the rising
cost of health care that results from technological advances remain
unchecked by managed care, the effect of technological progress will
tend to offset any cost savings achieved by managed care through lower
prices or lower use of established services.
Factors such as population increases, extended life
expectancies and overall inflation have contributed to rising
health care costs. However, studies have proven that important
advances in specific areas of medical technology have had the
most intense effect on health care costs. This finding still
applies when it is considered in terms of managed care health
insurance plans to a certain undeniable extent (Scitovsky
1981). Studies have been conducted during many periods over
the course of the past several decades, focusing on substantial
increases in health care costs in direct correlation to
particular medical procedures and fields. Among these
procedures and fields are child birth, radiation therapy,
coronary bypass surgery, nuclear medicine and cancer
treatments. For example, the innovation of cesarean sections
used during problematic child deliveries have increased health
care costs. The various medical personnel must all be
compensated for their time and labor: the! anesthesiologists,
the surgeon, the nurses, etc. Also raising health care costs are
fetal monitoring and ultrasound techniques. In the case of breast and
other cancers, radiation therapy, as well as combination therapies
that include chemotherapy have contributed to rising health care
costs. One field of medical practice which has become notorious for
being costs-increasing is the study and treatment of heart attacks.
In the treatment of heart attacks, the prime cost-increasing
technologies were the introduction of intracoronary streptokinase
infusion and coronary bypass surgery. A study performed by Cutler and
McCellan (1996), using Medicare claims from 1984 to 1991, report a
four percent annual increase in the average reimbursement for treating
elderly heart attack patients. They attribute the majority of this
increase to the diffusion of new technologies for performing invasive
revascularization procedures. Over the period of the study, cardiac
catheterization rates! rose from eleven percent to forty-one percent
of heart attack patients. Bypass rates rose from five percent to
thirteen percent, and angioplasty rates rose from one percent to
twelve percent. The population studied by Cutler and McCellan (1996)
was overwhelmingly enrolled in traditional FFS Medicare, therefore,
any finding must represent a spillover. Furthermore, they do not
address the likelihood of receiving a related service, coronary bypass
surgery, so we have an incomplete picture of how practice patterns
change over the period of time studied.
Different approaches are used to determine the impact of new
technologies and innovations on health care costs. One
approach, called the affirmative approach, focuses on
individual technologies or diseases. This approach suffers
from an inability to access the aggregate impact of technology
on cost growth. The body of evidence suggests that the impact
of technology varies by disease. One study notes that in
certain areas, technology clearly lowers costs, particularly
when that technology facilitates complete cure or prevention of
a disease (Weisbrod 1991). One example of this type of
innovation is the Salk-Sabin polio vaccine, which is
inexpensive to develop and manufacture and almost completely
eliminates the high costs of polio treatment. Another approach
that is used to examine the effect of technology on health care
costs is known as the residual approach. This approach views
technological advances as being the sole reason for rising
health care costs simply becaus! e the innovations are so
expensive that there must be a method of which to pay for the invention
and further development of the technology. Several studies provide
evidence linking the conclusions from the residual approach to those of
the affirmative approach. Bradley and Kominski (1992) use various
criteria based on observed changes in cost to identify
technoogy-related changes in expenditures. They do not examine
specific technologies. Their findings indicate that technical change
was the single largest cause of the increase in the cost per inpatient
case and much of the remaining increase may also be attributable to
medical innovations. Also, two other studies conducted by Katz, Welch
and Verrilli in 1997, and Holahan, Dor and Zuckerman in 1990, examine
overall growth in physician expenditures during the late 1980s and
early 1990s. They do not examine specific diseases or technologies,
but they distinguish the growth of expenditures by physician type or
service type.!
In both cases, the study concludes that cost growth was greatest in
areas where technological innovation was high, such as cardiology or
orthopedic surgery. Therefore, when one combines this evidence with
that from the residual and affirmative approaches, medical technology
appears, as a whole, to be a prime driving force of health care cost
growth. For this reason, the long-run impact of managed care on cost
growth will depend on the extent to which managed care alters the
rate of diffusion of medical technology. It is important to note
that high, and even rising, costs of health coverage may be desirable
by the American consumer, and certainly by the health insurance
companies of the nation. Consumers naturally demand the best of care
when they or their loved ones require treatment for a disease.
Health care cost growth is not is not necessarily undesirable if the
consumer is willing to pay for the costs associated with new medical
technology. Also, Pauly (1993) sugg! ests that the amount of labor
devoted to health care in the United States is not excessive by
international standards.
There is an understandable fear among government officials and
the American public that, over the course of the next several
decades, quality health insurance will become unaffordable to
many, and in some cases, completely unattainable. The concept
of managed care was developed as a method of keeping these
costs somewhat reasonable, and ensuring that health care would
be available to all American consumers with minimal financial
difficulty. Careful examination of the problem of rising
health care costs have shown that if managed care does not
constrain health care cost growth, another force will do so.
Several scenarios are possible, though not mutually exclusive.
One proposed option is for managed care companies to
increasingly ration care and services. Many consumers may be
highly dissatisfied with this option, but it may help to
curtail the rising costs of health care. Enthoven (1993)
suggests that various market characteristics, such as the
failure of employers to c! harge their employees the
incremental cost of health plans have limited the effectiveness of
managed care. Managed care may become more effective in the future if
purchasers (employers and employees) are more price sensitive.
Nevertheless, if technological progress continues to place pressure on
costs, constraining cost growth will entail greater restrictions on
access to these services. A solution such as this would require not
only economic, but political and legal support to permit stronger
rationing. This remains an issue of great controversy with states
responding to public perceptions of rationing by adopting mandatory
coverage of certain services and requiring hospitalization following
procedures such as mastectomies and child birth. It is likely that if
this scenario does not come to pass, such a system will be
characterized by wider differences in access to care, particularly to
new technologies, than we have historically accepted. It is unclear
thus far whether!
this solution represents a permanent variation in coverage policies or
simply a variation in when plans opt to cover emerging innovations.
Another proposed solution is to completely abandon the
decentralized competitive health care system for a nationalized
system. Of course, this solution would not solve the
underlying problem of tension between access to care and cost
containment. Some forms of government action, such as premium
regulation, would maintain health plan control over issues of
technology diffusion. Such an undertaking would undoubtedly
move the issue of health care and costs from the economic
sphere to the political sphere even more intensely than it
already is. Yet another approach involves technology
developing in such a way as to reverse the traditional
relationship between technological progress and cost growth.
Reasonable evidence suggests that insurance has been a major
factor contributing to the development of new medical
technologies. A study by Peden and Freeland (1995) shows that
as much as seventy percent of the impact of cost-increasing
technologies on expenditure growth can be indirectly attributed
to insurance coverage. Naturally, a system dominated by
managed care would increase the incentives to develop
cost-reducing technologies and decrease the incentives to
develop cost- increasing technological innovations. Little
evidence exists assessing and proving this phenomenon. Gelijns
and Rosenberg (1994) report that preliminary evidence indicates
that there has been a shift in the types of technologies
developed, but the extent of that shift, and its ultimate
impact on expenditures, remains to be assessed. Regardless of
which path is taken, evaluation of medical technology is likely
to become increasingly important as costs continue to rise and
the American consumer demands the most effective and up-to-date
innovations. Given all of the complex information in the
health care sector, a clearer understanding of how managed care
plans ration medical technology is imperative. We must work to
develop acceptable, mutually agreeable mechanisms to ration

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