Of the approximately 257.8 million individuals currently living in
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 . 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 care.