The Managed Care Roller Coaster

At a health care forum held last year in Las Vegas, then-presidential candidate Hillary Clinton declared that she was intent on “taking money away from people who make out really well right now” in order to fund health care reform. When asked exactly which fat cats she was referring to, Clinton responded, “Well, let’s start with the insurance companies.”

Clinton’s sentiment — that private insurers are making out like bandits while our health care system crumbles — is part of the received wisdom these days, especially among progressives who believe that for-profit health insurance doesn’t add much value to our health care system. But the reality is that in recent years, private insurers haven’t been doing so well financially.

Consider United Health Care (UHC), the nation’s biggest private insurer. Joe Paduda of Managed Care Matters reports that UHC will be cutting 4,000 jobs as part of a restructuring plan that includes eliminating Uniprise, one of its major brands. Since last fall, UHC stock has plummeted from $53 to $22 a share. WellPoint, another huge private insurer, has watched its stock drop from $82 a share in 2007 to $49 a share in June.

As Robert Laszewski wrote on the Health Care Policy and Marketplace Review in April, “Wall Street finally seems to be figuring out that the health insurance business is, and has been for years, on a long walk off a short pier. What’s sustainable about a business whose costs have continually exploded at 2-3 times the growth rate of the rest of the economy or the wage rate? Just where did Wall Street think this business was headed all those years the sector has been the darling of Wall Street?”

While the insurers’ premiums have been skyrocketing, so have health care costs: the prices of everything, from a pill to the screw that holds your artificial knee in place, have been rising. Most physician’s fees haven’t been increasing, but the volume of  services that doctors provide has—and so have hospital bills. Insurers, like the rest of us, have been running hard to keep up.

Worst of all, as employers bow out of the health benefits business, insurers are losing customers. “Perhaps most telling was the recent comment by one analyst in the Wall Street Journal,” Laszewski noted. ” ‘What we’re seeing is a market that’s gotten so mature and beyond its customer[s] that people can literally no longer afford to buy the product,’ said Sheryl Skolnick, an analyst with CRT Capital Group. ‘The number of uninsured is growing faster than any player in the game, and it’s getting bigger.’”

Part of the problem is that Wall Street investors have unrealistic expectations: They continue to expect double-digit growth from insurers. Another issue is that insurers can no longer keep ahead of rising medical costs by raising premiums 1 percent more than rising prices. Premiums are just too high already.

Finally, insurers know that next year they’re almost certain to lose the bonus that Medicare has been paying those who offer Medicare Advantage (MA). As Maggie explained last week, customers are beginning to realize that MA isn’t quite the bargain they thought it was. Complaints are mounting — and last week’s vote on the Medicare bill made it clear that legislators are tired of paying insurers 13 percent to 17 percent more than Medicare would spend if it was providing the coverage directly.

But don’t pity the insurers. The financial woes of the for-profit insurance industry  are actually an indication that, as many of us suspect, many insurers haven’t been delivering high-quality health care. Writing about UHC’s prospects, Paduda observes: “This is not a company that invests in medical management — despite its trove of data, analytical expertise, participation in NCQA accreditation and in-house capabilities, UHC has always been about managing reimbursement, not care. Their latest move to increase premiums is the way United has always reacted to bad financial results. And it may work for a while, but over the long term the winners in the health plan business will be those who actually understand how to manage care.”

And United doesn’t.

Less is More

“Managed care” is, to many, a nasty phrase.

But the truth is that the insurer who understands that “managing care” means making sure that customers get the high-quality care they need, when they need it, will save money. When it comes to health care, low cost and high quality go hand-in-hand.

At the same time, “managing care” means avoiding ineffective care. As we’ve noted on HealthBeat in the past, wasteful spending on unnecessary procedures and over-treatment produces unhealthy patients — it increases the time they spend in hospitals where they can pick up antibiotic-resistant infections; it exposes them to the risks and side-effects that come with all treatments; and it subjects them to multiple physicians, a situation that invites miscommunication and costly medical confusion.

Enlightened self-interest would suggest that insurance companies should be turning to cutting-edge medical research to decide how to better structure their coverage. They should be pushing for best practice guidelines to develop more consistent care. They should combat waste. They should be loudly speaking up in favor of greater comparative-effectiveness and cost-effectiveness research so they can choose to cover treatments that work best. In short, insurance companies should be fighting for the same principles of quality in health care that the rest of us want. And they should think like the best doctors do, using medical science as their guide to making smart treatment decisions.

But as Joe Paduda so nicely put it, most of today’s for-profit insurance companies don’t manage care, they just manage reimbursement. They don’t think like doctors — but like accountants. Instead of assessing their business from the perspective of medical research — looking at which treatments work best, for whom, and under what conditions — they work backwards from their balance sheets. And it’s this mindset that is undermining the industry.

A Cautionary Tale

To understand what is going on, it’s helpful to consider the history of HMOs in the U.S. As originally conceived by pediatric neurologist Paul Ellwood and the “Jackson Hole Group” in the 1960s, HMOs were all about managing care in the truest sense: actively regulating and coordinating medical services to ensure the best marriage of health outcomes and cost.

Here’s how Ellwood’s HMOs worked: patients enrolled in a plan that provided access to doctors and hospitals in a specific network of providers.  Providers receive a fixed payment, per patient served, per month, for a particular set of services (this is called capitation). Their goal: to keep these patients well. (This is why they were called “Health Maintenance Organizations,” or HMOs.)

In return, doctors have the security of knowing that they will always have customers. These referrals will come from the primary care physicians in the network, who serves as “gatekeepers,” recommending a visit to a specialist when a patient needs it.

The idea here is to build the high-quality/low-cost truism into the very machinery of health care plans.

First, because patients need referrals to see a specialist, and provider payments are fixed, much unnecessary spending can be curtailed. We know that “fee-for-service” payment provides perverse incentives to “do more.” By contrast, fixed payments encourage more efficient medicine because doctors are getting one lump sum, regardless of what they do, they are not encouraged to undertake unnecessary, labor-intensive, high-cost procedures. Instead, they are motivated to stop sickness before it starts. The emphasis is on preventive care — which in the long run, is less costly for everyone and less time-consuming for the health care provider.

Finally, while many patients object to going through a “gatekeeping” primary care doctor to get a referral to a specialist, this is all part of making sure that “the right patient gets the right care at the right time.” More than two decades of work by Dartmouth’s medical researchers have shown us that when patients see more specialists, outcomes are not better; often they are worse.

Last, but certainly not least, Ellwood envisioned HMOs as non-profit organizations subjected to strict quality reviews (with these reviews based on medical research). In Ellwood’s mind, plans would compete with each other on quality, not price. The cost-consciousness of managed care is balanced with an emphasis on outcomes.

Ellwood’s original model for HMOs is “managed care” in the sense that Paduda talks about. It tries to encourage smart, efficient, and financially sustainable medicine, all in the interest of patients.

Yet today, the phrase “managed care” has been besmirched. Conventional wisdom has it that HMOs are among the most heinous villains in the health care field. Yet in theory, HMOs are a perfect marriage of cost-consciousness and quality. So what went wrong? One word: profit

Enter the Profit-Motive

As Ellwood lamented in an interview with Time magazine in 2001, ultimately HMO’s have focused on “competition on price alone,” instead of quality. The management of care has become a game of accounting, rather than an exercise in strategic medicine.

It wasn’t always this way. The first HMOs adhered closely to Ellwood’s vision. As George Anders notes in his 1996 book, Health Against Wealth: HMOs and the Breakdown of Medical Trust, almost all of the HMOs through the 1960s and 1970s were non-profit, and “they approached their goals of providing affordable medical care and promoting wellness with an almost missionary-like zeal.” The welfare of the patients came first, as “ninety percent of the premiums they collected — and often more — went for patient care.”

By the 1980s, Ellwood’s managed care model had gained a lot of momentum. One 1986 Health Affairs article noted that between 1980 and 1984, the percent of insured households enrolled in an HMO increased by one-third. The percentage of corporate employers offering health plans where at least 10 percent of their employees had joined HMOs almost doubled over this period, from 26 percent and 45 percent.

Yet as the HMO industry grew, Ellwood’s vision of patient-centered, cost-effective care receded into the background. Quality in health care is hard to measure (so hard, in fact, that a frustrated Ellwood eventually founded a non-profit to push for more clarity and accountability in health outcomes). Sadly, as the market expanded, size — not quality — became the major metric for success. Bigger HMOs could offer a wider network of providers — and consumers like having a broad choice of doctors and hospitals.

Meanwhile, nonprofit HMOs were hitting a ceiling in terms of expansion. They couldn’t amass the capital necessary to become huge, because, as Anders notes, the plans “couldn’t issue stock and sometimes had trouble arranging bank loans.” Their solution? Become for-profit corporations and make stock available to the public to create and expandable base of shareholders.

President Reagan also had a hand in the shift to for-profit HMOs in the early 1980s. The HMO Act of 1973 had made federal grants and loans widely available to non-profit operations. This is one reason why, in 1981, 88 percent of all HMOs were non-profits. But in the early 1980s, Washington cut off the stream of federal funding — and eliminated a major incentive for nonprofit status.

Thus, for-profit insurers took over the HMO industry. In the 1970s, notes Anders, there were “30-odd HMOs, almost all not-for-profit.” By 1997, there were “well over 600, more than three-quarters of them investor-owned.” HMOs became big business.

With the advent of share-holder HMOs came a change in priorities. As Anders puts it, “once managed-care companies started entering the for-profit arena, the financial world’s values started seeping in.” Securities analysts and big investors refused to support plans that spent “too much” on members, leaving “too little” for shareholders. “Before long,” says Anders, “HMO bosses regarded boosting stock prices as a major priority.” And that meant maximizing financial gains to ensure a sound investment.

Unfortunately, Wall Street isn’t savvy when it comes to medicine. The delivery of care that Ellwood labored so intensively to coordinate was reduced to a line item in a budget and a sunk cost. Increasingly, patient care was viewed as the least desirable of expenses, because it never found its way back to the company. HMOs shifted expenditures away from patients and toward business operations like marketing, administrative overhead, and salaries—expenses that are understood by Wall Street as a cost of doing business.

In an indication of how the profit-driven mindset took over managed care, the percent of premiums that insurers actually paid out for patient care was re-christened the “medical-loss ratio.” Reimbursements for medical care were regarded as an undesirable financial loss, regardless of whether the care was necessary or unnecessary, life-saving or totally ineffective. Insurers were not getting smart about health care delivery.

According to Anders, in the late 1970s leading nonprofit HMOs spent about 94 percent of premiums on members’ medical treatments; by the late 1990s, leading HMO companies were spending less than 70 percent of their earnings on patients. Plans began rolling back coverage based solely on cost — as opposed to cost-effectiveness — and refused to cover expensive procedures like certain cancer treatments.

Preserving the bottom line became a mission divorced from any interest in medical necessity: in one blog post, Paduda notes that insurance giant WellPoint actively canceled coverage for seriously ill people if they actually sought care, and the company HealthNet “paid bonuses based on executive’s success in canceling individual policies” for people with high claims.

The clumsy stinginess of private insurers has not escaped the public eye—and it’s helped to fuel the belief that “managing care” equals refusing people treatments they need. As recently as 2004, 61 percent of Americans were worried that their health plan was more concerned with saving money than providing the best treatment.

As a result of the backlash, HMOs have moved away from Ellwood’s capitated model. Too many people worried that when doctors were paid a lump sum to keep a patient well, they might skimp on care.

And in fact, some for-profit HMOs did encourage doctors to “do less.” But at the same time, many doctors realized that it was in their long-term interest to do everything necessary to keep the patient well, both because they wanted the best for their patients, and because they realized that, if the patient became sick, this would mean more work without additional pay.

Nevertheless, patients suspected that if a doctor wasn’t paid fee-for-service, they would be short-changed. “Capitated care” began to disappear. People said it “just didn’t work.” Here the last of Ellwood’s bulwarks against high-cost, low-quality care crumbled. Now too many  HMOs offer the worst of both worlds, focused on reducing care even as they adhere to a payment system that encourages high-volume, wasteful treatments.

Getting it Wrong

“It didn’t have to be this way,” lamented Ellwood in the 2001 interview with Time Magazine. HMOs could have kept their non-profit status. They could have looked to medicine and science as a guide in refining their coverage policies. But they didn’t—and now they’re paying the price.

With no effort to truly regulate and audit the value and coordination of care delivery, pay-outs on benefits have spiraled. A 2006 analysis by Price Waterhouse Coopers found that between 1993 and 2003, expenditures on health benefits grew at an annual rate of 7.2 percent. Premiums grew at essentially the same exact rate, 7.3 percent, meaning that insurers are barely able to keep up with the rising cost of providing health care.

The race to become giant for-profit, publicly-held corporations has also brought on new expenses. The bigger the business, the bigger the operational costs. According to the Kaiser Family Foundation, private insurer administrative costs per person covered rose from $85 in 1986 to $421 in 2003—a five-fold increase, and the fastest-rising component of health expenditures. When insurers became mega-corporations they took on a new set of financial burdens investing more and more in marketing, advertising and lobbying. And to lure Big Name CEOs to their Big Name Corporations, they began paying multi-million dollar salaries

With so much money sloshing around, HMO insiders faced a new temptation to cook the books. UHC, for example, currently has to pay a fine of $895 million to settle a lawsuit stemming from the company’s stock option manipulation. This sort of funny business—and the huge costs, both financially and in terms of wasted time and inefficiency—wasn’t part of Ellwood’s vision of a non-profit HMO industry.

Another unforeseen by-product of the corporate takeover of HMOS has been that, as insurers got bigger, they gobbled up their competitors. Today the private insurance market is highly consolidated. Paduda reports that, according to a 2006 American Medical Association study, “one health insurer has at least 30% market share in virtually all of the nation’s major markets…[and] in 56% of the markets studie[d by the AMA], one health plan has over 50% market share.” Further, “in one of five markets, a single health plan controls over 70% of the market.

In this context, there’s little incentive for insurers to compete in any real, meaningful sense—especially on quality. The market is mature; they can only tweak the margins, adjusting their costs. For folks who judge health care at the end of Excel spreadsheets, this means hacking away at spending on patient care, that most undesirable of expenses. Yet as we’ve established, the haphazard reduction of care is no way to manage costs in health care.

As a result, today insurance companies seem stuck in an enormous hamster wheel: unable to make the profits investors expect, without incentives to truly innovate, and unwilling to think beyond Wall Street’s very short-term view of success.

Little wonder then, that the resulting expensive, inefficient health insurance is becoming too much for employers to bear. According to the Economic Policy Institute, “6.4 million fewer workers had employer-provided health insurance in 2006 than in 2000.” Because insurers have failed to rein in costs (by not thinking about how they can truly “manage care”) employers are not getting a bang for their buck—and they know it.  So they’re opting out of the whole thing. That’s bad news for workers, yes; but also for insurance companies. Their skewed priorities and inefficiencies are scaring away business.

But it’s important to note that the screw-ups of private insurers aren’t a condemnation of Ellwood’s original HMO model. As Ellwood said in 2001, it doesn’t have to be this way. In fact, “managed care”—as Ellwood presented it, and not as HMOs perverted it—is a great idea.

Indeed, Ellwood’s managed care is, in all likelihood, the future of health care in America. It’s what most of us realize we need: effective, evidence-based medicine. But after the debacle of HMOs, we’ll no doubt have to find a new name for it.

Niko Karvounis tracks the health care system for the Century Foundation. Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.

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19 replies »

  1. Years before Barack Obama came to power I witnessed near-panic in the scenic car of the Washington to Chicago overnight train. We had crossed some points at around 40 mph and swayed a little. Folks were clasping their children and looking sick. “Is this normal?” they asked me, as if I were William Huskisson reincarnated and possessing hindsight.

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  4. wow, quite a bit of energy here by some of my favorite commentators: Maggie and Brian. I appreciated Maggie’s article when I first read it here last week and circulated it to some folks who, like me, have been at this for last 25 years. I also appreciated Brian’s piece about prospects for health care reform: can I dare say the word “hope”?. Maggie summed up in a short article what could easily have been a long novel and I thank her for it and for starting this dialogue as we work on Managed Care 2.0.

  5. As I said, they may have changed their spots. The waiting list of doctors is no doubt because things have gotten so bad outside the salaried world that Kaiser now looks attractive in comparison. That was not always the case.
    And I’ll stop the anecdotes if you will.

  6. Anecdotes are one thing, but the numbers show very low turn-over among Kaiser doctors and Kaiser patients–especially in N. California.
    There is a waiting list of doctors who would like to sign on with Kaiser.

  7. I don’t know why everyone idolizes Kaiser, unless they have changed their spots recently. I vividly remember a medical executive committee meeting at my hospital one evening in the 90’s to which a Kaiser administrative representative had been summoned, to explain why Kaiser refused to provide specialists at night for emergency care of their patients. The staff physicians on call for the ER those nights were required by law to come in and see the patient – only for the patient to go right back to Kaiser the next day. Understandably, they were incensed at having to do the “scut” work while the Kaiser physicians and staff slept peacefully.
    The representative was very combative and ended the discussion by saying that the physicians were required by law to come in, Kaiser was not required by law to provide a specialist, and that was the way things would stay. Deliberate manipulation of the system to increase “profits.”
    I also knew many, many physicians who left Kaiser due to pressure to see too many patients in a day.
    One of our hospital secretaries was a Kaiser member and complained she could never get past a nurse whenever one of her kids was sick, even if she was very worried.
    Perhaps by now they have seen the light and revised their practices, but, at least then, they were by no means a gold standard.

  8. tcoyote writes:
    “..well managed investor owned companies (PacifiCare and US Healthcare, for example)…”
    Au contraire mon frere! Neither rise to such consideration. Once upon a time when Pacificare operated from it’s LHS hospital roots, it could claim some alignment with provider culture (as with its one time brethren HealthNet). That status is long gone. The culture is solely corporate, and there is nothing but an EPS mindset in the company today.
    A little history lesson….US Healthcare singularly took down Aetna post acquisition when it de-facto replaced the Aetna’s carrier culture and substituted the giant with heavy handed US Healthcare operatives.
    As we all know, history witnessed massive write-downs and and eventual expulsion of US Healthcare aggressive tactics and a re-engineering of Aetna back to its once claimed “provider friendly” orientation.

  9. Matthew-
    I agree completely. This is why I like Emanuel’s plan so much (IF anyone is interested in reading what I’ve written about it see http://www.alternet.org. It’s on the front page under Wed. July 16 (http://www.alternet.org/healthwellness/91609/?ses=34bf535ff3d01263e5dd4f7a5f123c86)
    Emanuel’s plan uses a 10% VAT tax to finance health care. It’s dedicated to health care- i.e. can’t be used for anything else. And health care spending cannot exceed what the VAT brings in (which would track general inflation.) This creates a global budget for health care spending. (The tax isn’t regressive becuase it’s dedicated to healthcare. A median income family earning and spending $50,000 pays $5,000 in taxes and, in return, gets health coverage worth $13,000—at no charge.
    Most for-profits in the health care industry do not like the idea of a global budget: they want healthcare to be a growth industry. But we cannot afford to let healthcare inflation outpace GDP growth and workers’ wages year after year.
    Moreover, as both you and I have written many times, the Dartmouth reserach shows that about 1 out of 3 of our health care dollars is wasted on unncessary tests, unneeded, ineffective procedures, and bleeding edge, very expensive drugs and devices that are no better than the older products that they are trying to replace.
    Emanuel’s plan would tightly regulate insurers: telling them what they have to cover (based on medical reserach done by a comparative effectiveness institute)
    paying them the same amount for each patient (plus a risk adjustment if they wind up with a particuarly sick or elderly pool) requiring that they take anyone who wants to enroll, regardless of pre-existing conditions.
    He assumes that under those conditions, many insurers would drop out since so many make their money by shifting risk to customers, cherry-picking, etc.
    Kaiser would stay in.
    The Medicare Payment Advisory Commission (MedPac) is very aware of the need to curb health care spending, and their most recent reports (March 2008 and June 2008) are excellent. For more than eight years, this administration and most of Congress have ignored MedPac.
    CBO budget director Peter Ortzsag has not.
    But as last week’s vote indicates, Medicare is approaching a crisis. Congress will not slash physicians’ fees across the board–some docs are seriously underpaid; some are overpaid. Medicare needs to redistribute dollars paid to doctors and it needs to use a scalpel not an axe.
    I am also quite hopeful that Congress will authorize an
    Institute of Comparative Reserach that will insist on unbiased head-to-head comparisons of drugs, devices and procedures to determine which are most effective. (Obama also favors this.) Then, Medicare’s coverage decisions would be based on this reserach. (We already have a lot of low-hanging fruit- drugs, procedures, etc. that we know are not effective for many of the people receiving the treatment.)
    I suspect that, under a new administration, Medicare will get serious about treatment decisons.
    I’m also quite hopeful that Congress will follow MedPac’s recommendation and repeal the entire bonus that it is now paying Medicare Advantage insurers. MedPac says insurers should be paid no more than it would cost Medicare to cover seniors directly.
    And it is very likely that Congress will authorize Medicare to negotiate for discounts on drugs and devices.
    Bundled payments to doctors and hospitals will also probably begin.
    I don’t see all of this happening in the first year of the next administration. But I think it will begin to happen that first year (assuming Obama is elected.)
    Congressional Democrats finally showed some spine last week when they stood up to the insurance industry. The vote wasn’t about docs–it was about the insurers. And when Congress saw seniors and the AARP lined up on one side and lobbyists representing for-profit insurers lined up on the other side, they knew who to be afraid of.
    I think that this will continue to be the case when they vote on Medicare reform.
    pcb– I’m assuming you are a urologist or a gynecologist, and probably more up-to-date on urinary tract infections than I am. When I called my doctor, he would just tell me to drink water and cranberry juice and get back to him if it didn’t get better.
    Today I googled urinary tract infections, and see that today, most reliable sources do say go to a doctor though http://www.womenshealth.org/a/urinary_tract_infection_facts.htm
    says go to a doctor only if the infections continues for more than 24 hours. In the meantime, drink water and cranberry juice.
    In general, I do think that Americans tend to go to doctors too often for minor complaints, but obviously, there are UTIs and UTIs. Mine just went away on their own and were not that troublesome. I have had friends who had serious, ongoing problems . .. I really just meant to suggest that the advice Brian’s wife got wasn’t outlandish–at least not back then, in the heyday of managed care.
    If you look at what I wrote at Barron’s you will find out that I, and Barron’s, took a very skeptical view of
    “free market competiton” as the means to reforming health care. My editor was Alan Abelson. He was happy to have me write anything that was true. We took on the tobacco industry (writing about David Kessler’s campaign), the S&L’s (and the first Bush administratio’s inadequate attempt to sweep it under the rug); and drugmakers that gouged the public and knowingly put unsafe drugs and devices on the market (Pfizer had a heart device that was defective. It killed people. They knew it but asked the Swedish physician who had developed it not to publish his research on the defect. I had the telegram they sent him. WE published the story Saturday morning. Sunday, Pfizer stopped trading in London. Monday, it never opened in New York. My editor was pleased. He fully understood just how corrupt much of corporate America is, and believed that health care is too important to be left unregulated.
    My politics have never changed. See my book “Bull: A History of the Boom: 1982-1999” narrating how CEOs, Wall Street analysts, brokerages, government, the media and investors conspired to create the bubble.
    Brian– You write: “Regular readers of this blog will remember the egregious behaviors by Blue Shield of California when they dropped the coverage of individual plan holders with claims. Or the videos of Kaiser dumping hospital patients. I do a lot of work in the health plan sector, and while I can point to a few general differences, in the main the characteristics of health plans are NOT defined or differentiated by their organization’s legal status.”
    Everyone knows that many of the Blues were corrupt. They are not who I was talking about when I talk about excellent non-profits. As for Kaiser it is an enormous organization and within that organization individuals sometimes do dumb things. Nevertheless, overall it is viewed as the “gold standard” for general care by peole like Dr. Jack Wennberg (Dartmouth reserach) and Dr. Don Berwick (IHI.)
    On the difference between non-profits and for-profits see the many excellent pieces in Health Affairs on for-profit hospitals–more expensive, poorer quality care.
    See also Brad Gray’s book The Profit Motive and Patient Care. This book also shows how, when non-profits are forced to compete with for-profits, the non-profits begin behaving like for-profits-just in order to stay alive. So Kaiser felt forced to begin selling “high deductible plans”–even though they knew that in terms of social policy, this was a terribly idea.
    Many of the really good, small not-for-profit HMOs
    simply disappered.
    tcoyote– as to why the government stopped the funding for non-profit HMOS–this was all about Reganomics, and Reagan’s desire to privative those things that govt does. Nixon was the president who pushed for the HMO act and who approved the funding. Another example of how Nixon, sometimes, was an excellent president. (As many have said in recent years, “I never thought I’d miss Nixon.”)
    Gregg Masters– Thanks. It sounds as if you also were there, and know what happened.
    Peter– Thanks–and yes, what insurers have done with Medicare Advantage (shift risk to their sickest customers, bait and switch, etc) show us what happens when you decide to let free-market competition among for-profits try to solve our health care problems.
    Baron– Yes, what we need is collaboration, not competition to solve the health care problem. And rather than turning to businessmen for advice, I would like to see the nation’s doctors, medical ethicists and public health experts on the forefront of reform. In other words, we need professionals–who put patients first–designing a system that is not about money, but about health.

  10. maggie,
    “On urinary tract infections–
    BRIAN– I imagine you’ve never had one. I have. Drinking water is an excellent idea. What you don’t wan to do is take anti-biotics. Overkill. ”
    not sure even what to say.
    While I agree that in young otherwise healthy people, a typical bladder infection may well indeed clear with time and water, this is just plain poor advice in general, your experiences aside.
    It makes us doctor types weary to hear stuff like this from those often commenting on appropriate vs. inappropriate care, costs, doctor incentives, etc.

  11. A lot of us were actually out in the field working with hospitals and doctors trying to cope with all this managed care chaos while Maggie was behind her desk at Barrons. It looked a lot different on the ground than from 35,000 feet. The non-profits she romanticized (all those Blue Cross plans, for example) were hardly paragons of virtues. Many of them were just as thuggish as the investor owned companies in how they treated doctors and their own subscribers. Plus they still had stinky conflict of interest relationships with the hospital industry, on whose Boards hospital CEO’s sat until the late 1980’s.
    Maggie also knows, because she wrote about them, that there were really innovative, well managed investor owned companies (PacifiCare and US Healthcare, for example). And today, at least two of the big firms, CIGNA and Humana, seem to realize that unless they can actually add value to the lives of their subscribers and help them manage their own health risks, they won’t be in business in ten years. The other firms, like United and Wellpoint, are, as Maggie suggests, in real trouble, and have succumbed to bureaucratic and mediocre management. They deserve to be taken apart, which is what investors and markets do to companies who take their eye off the ball and cease to innovate.
    Though the pressure to produce quarter to quarter earnings growth has distorted the mission and management processes in these firms, there is still more discipline here than Maggie makes it appear. Her recent screeds against markets would never have cleared her Barrons editor’s desk. Perhaps she has experienced a religious conversion and is now doing some type of sad penance. . .

  12. Nice barney between some of my favorite THCB contributors–I like it. (But then again I watch auto races for the crashes)
    However, the underlying point that barely got mentioned by anyone is that no one in America equates the cost of health care with the raising of the finance to pay that cost. Employees get it cost unseen from employers. Medicare payments have barely any relationship to taxes (ditto that for government spending to all taxation). Most uninsured people suffer but don’t pay cash.
    So when the health care system can consistently attract more money from the rest of the economy, because there’s no financial brake on demand, all players in the system are going to do what promotes their own profit. And even if you’re a well behaved non-profit HMO (read Kaiser/GHCofPS) you’re going to shadow price the competition.
    And of course imposing new experiments in financing on organizational forms that aren’t structurally ready for it (e.g capitation on IPAs of independent doctors) doesn’t help.
    In the end, if we had a visible cost transparent population based system (e.g. Fuchs/Emmanuel or Holland) then cooperative based population based HMOs would probably be the most effective way of delivering care.
    But until we get the structural political change that is required for that, good luck. We’ll get more of the mess we have today.
    (Meanwhile all you lot–start being nice!!)

  13. Thanks for all of your comments.
    I’m on deadline right now and so can’t respond individiually (though I will come up.) But for now, let me just make a few general comments:
    For those who suggest that we’re engaging in armchair analysis, let me assure you that I followed the evolution of HMO’s while writing for Barron’s (a financial weekly published by Dow Jones) from 1986 through most of the 1990s.
    I knew Ellwood quite well back then, heard Enthoven speak at conferences and talked to the few very good WAll Street analysts covering the health plans back then. I also was in touch with the employer organizations and doctors that became increasingly concerned about the quality of for-profit health plans.
    There was quite a bit of research back then (late 1980s very beginning of the 1990s) showing that non-profits provided better quality care. I spent days going through the files of one entrepreneur who had done extensive reserach on health plans’s quality (using AHRQ and other measures) and side it to employers. (Back then, all of this research was on paper. Stacks and stacks of files–you can imagine . .) Of course measures of quality were still quite crude (as they are now) But patient satisfaction was definitely higher at the non-profits and docs were happier.
    I wrote numerous cover stories for Barron’s on the health plans and managed care. Our readers were quite sophisticated about stocks, and quite conservative. So I tried hard to get the facts right. (That’s why they let me write the cover stories.)Many physician-investors read Barron’s and they would have been upset if I didn’t know what I was talking about.
    So I was there; I saw it from Wall Street’s perspective as well as the doctors’ employers’ and patients’ perspective, and I looked into it in depth. The Jackson Hole Group (of doctors who worked on managed care) were great.
    This doesn’t mean I am right. But it does mean that I’m not an amateur. Nor am I a “media type.” Most of my sources and a great many of my readers are doctors.
    Let me add, for those of you interested in delving into the subject, that you might want to see the Medicare Payment Advisory Commission’s June 2008 report. It’s very long, but very good.
    One thing MedPAC points out is that: “Areas with higher rates of specialty care per person are associated with higher spending but not improved access, quality, health outcomes, or patient satisfaction (Fisher et al. 2003a, Fisher et al. 2003b, Kravet et al. 2008, Wennberg 2006). Moreover, states with more primary care physicians per capita have better health outcomes and higher scores on performance measures (Baicker and Chandra 2004, Starfield et al. 2005).”
    This is why using primary care doctors as gate-keepers is a good idea. Patients who see primary care doctors more often–and fewer specialists–fare better. (This is based on more than two decades of reseearch which adjust for age, race, overall health of the population, etc.)
    Also, if you see your primary care physician first, and he refers you to a specialist, then he can follow up, have the specailist send his report to the primary adn collaborate your care. Otherwise, people wind up seeing seven specialits, who each prescribe medications, and specialists rarely talk to each other.
    In an emergency, a good primary care doc will see you immediately, refer you to a specialist he knows, make a phone call and get you in that day. (Alternatively, he’ll send you to the hospital.) This has been my experience, going through primary care docs on my insurance.
    On Capitation– patients are often suspicious that doctors who are paid a lump sum (or who are on salary) are “skimping” on care. But reserach on quality show that some of the best care can be found in multi-specialty organizations where docs are on salary, not paid fee for service.
    Capitation was Not a disaster. It worked very well in some places, particularly in the West where doctors were accustomed to pre-paid care ( The doctor is paid ahead of time to keep a group of people well rather than being paid “fee-for-service” once they get sick.)
    Capitation is still working well in Minnesota.
    But some for-profit insurers “managed care” by simply refusing to pay for the most costly care–whether or not it was the most effective care. In some cases the insuers actually looked at effectiveness and they were right. But the “media types” who knew little on medicine would do a television news story about “care denied” and patients became worried that they were being denied care they needed. Sometimes they were. Sometimes they were not.
    Some docs didn’t like capitation because it put a cap on the unlimited profits that they could make delivering care fee for service.
    On urinary tract infections–
    BRIAN– I imagine you’ve never had one. I have. Drinking water is an excellent idea. What you don’t wan to do is take anti-biotics. Overkill.
    Finally, Brian, I’m afraid you are naive about Wall Street and the pressure it puts on companies to deliver earnings growth, quarter after quarter. Wall Street is not patient–and it is very short-sighted.
    Doing managed care right is a long-term project which takes patiece, research and experimentation. Wall Street simply doesn’t allow for the long view. Ask Warren Buffett–he will tell you.
    And, unfortunately, the vast majority of Wall Street analysts (who rate the stocks) don’t know much about medicine, or health care.
    This simply know how to do what they are paid to do:
    promote stocks.
    There are, of course, always a few sterling exceptions, but they tend to turn out high-priced reserach that most people don’t see.

  14. A superb recap of relevant history. In complete agreement with key evolutionary milestones. Ellwood’s correct vision was corrupted by Wall Street’s insatiable greed, tunnel vision and “MLR” mindset.
    Once upon a time downloading a full or global risk contract, based on 85% of net premiums collected (with a guaranteed floor) was considered the minimal amount actuarially required to fund the assumption of global risk by an integrated physician network or delivery system, including hospital, physician and pharmaceutical benefits. Two examples with which I am familiar include: Sanus/Nylcare in Dallas, and Health Plan of America/HPA (formerly the non-profit HMO of the Sisters Saint Joseph, Orange).
    Just how can quality be delivered and sustained with medical loss ratios budgeted in the 70-75% range?
    I might add, the “Window Project” was Maxicare’s push in the mid 80s to move HMOs out of niche staff and tightly woven group models and introduce “managed care” to mainstream medicine, marks the beginning of this misguided push to Wall Street.
    Witness the growth spurt of IPAs, management companies and a literal industry supporting physician assumption of risk and PHO hospital collaboration that followed. Only to crash and burn due to the fundamental mis-fit between a non-profit service motivated, community based HMO culture and the vast riches envisioned if only those entities could be rolled-up on Wall Street with the then prevailing P/E’s that would be applied to any surplus generated. Maxicare went down in flames. The foundation was never properly laid. Group culture was no where to be found.
    Yes, t’was an important walk down HMO memory lane.

  15. I second Brian Klepper. Capitation, in its implemented form, was a disaster for the doctor AND the patient. More over-simplification and sensationalism from the media types.

  16. I strongly agree with tcoyote. This is an amateurish armchair analysis that doesn’t begin to understand or describe many of the larger issues that transpired in managed care’s early days or more recently. Worse, it contains as much dreamy ideology as fact. Some parts are accurate, but others are utter misrepresentations of what occurred.
    For example, it is a dramatic oversimplification to explain capitation as “fixed payments [that] encourage more efficient medicine.” Just as fee-for-service constitutes a perverse incentive to provide unnecessary care, cap constitutes a perverse incentive to deny necessary care. Neither can work without data that constitutes a feedback loop, and that can arbitrate whether the care provided was appropriate.
    Patients whose physicians were capitated often reported that they were discouraged from coming into the office for tests that would cost the practice money. Women suffering from urinary tract infections would receive advice from “clinical assistants” to just “drink more water.” (This happened to my wife.)
    Talk to docs in the California practices circa 1994 who were pushed into capitated arrangements, but who lacked the data, the tools and the practice patterns to understand or manage the risk they had taken on. Hundreds of practices closed.
    On the other side, doctors chafed at being watched and monitored by the plans, and the mechanisms set up by the plans were typically clumsy, with physicians often forced to check in (after long hold-times) with a high-school educated clerk to gain approval to do obviously necessary procedures. In addition, as (retrospective) utilization review (UR) turned into (concurrent) utilization management (UM), physician income from procedures dropped, another reason they waged war on the plans.
    As tcoyote points out, doctors’ frustration with this new system kept rising in intensity, and was abetted by employers and employees who yearned for open networks, which gave rise to more difficult-to-manage PPOs.
    Nor did most of the early or mid-year managed care plans do what they promised: invest in and focus on data to identify and steer to the best docs, and avoid the low performers. Instead, they cut contracts based on who would accept low payments rather than based on quality.
    And they were instrumental in undermining primary care by initiating the “gatekeeper” model, a hare-brained arrangement that effectively moved the point of coordination to the plan and cut off collaborative communication between the PCP and the specialist. The result was that, if a patient got referred, the primary care doctor didn’t see the patient again until the specialist was done with him/her. There was no exchange of charted information, and no one really advocating independently for the patient.
    When United announced several years ago that they were getting rid of their utilization management functions because they cost more than the care they offset, providers rejoiced. Other payers followed, and providers suddenly had much more latitude in the care they provided. The sentiment had turned against managed care companies – reflected in the movies through scenes depicting open hatred by little people in compromised situations – and the employers didn’t put up a fuss.
    It was a strategic move by United. Health plans make a percentage of total cost and, by moving away from medical management, they had set the stage for much faster cost growth. This became the strategy that launched the real acceleration of their stock price, and it was imitated by all the not-for-profits as well as the for-profits.
    The silliest part of Maggie and Niko’s description of the industry is their characterization of for-profit and not-for-profit health plans, as though their motivations and, therefore, their approaches to management, are somehow different.
    Regular readers of this blog will remember the egregious behaviors by Blue Shield of California when they dropped the coverage of individual plan holders with claims. Or the videos of Kaiser dumping hospital patients. I do a lot of work in the health plan sector, and while I can point to a few general differences, in the main the characteristics of health plans are NOT defined or differentiated by their organization’s legal status.
    The problems we have in health care are not rooted in such simplistic distinctions as for-profit and not-for-profit, but by a fee for service reimbursement system, by a lack of transparency, by the lack of pervasive but compatible IT tools, and by a regulatory system that is highly susceptible to perverse influence.
    I was and remain a devotee of managed care, but the smarter models use combinations of incentives, tools, health management programs to achieve high performance. These work in both for-profit and not-for-profit settings, and they’re focused, first and foremost, on facilitating better care for the patient and serving as a fiduciary for the purchaser.
    Maggie and Niko appear to be convinced that the answers to health care’s problems will be determined by the good or poor intentions of the people driving the process. In fact, they lie in the capability of the management structure, and of the ability of the regulatory process to provide a framework that serves both the public interest and the interests of managers.
    I agree with Maggie and Nike, or more particularly with Bob Laszewski, that the plans now are reaping what they’ve sown. They need to change their business models right now, but most can’t figure out how to change.
    And Maggie, Niko and tcoyote are also right that the Medicare Advantage plans SHOULD have been whacked. There’s no good reason why they should be a premium. By definition, managed systems should outperforming unmanaged ones, and they should be able to reap the difference. If not, then they shouldn’t be in business at all, at least not at our expense.

  17. You learn something new every day! I had no idea how/why HMO’s were started, this was news to me. To fix the problem in the health care world today, it would take a multipronged change from all sides. Hospitals, doctors, providers and patients would all need to alter their perception of what good, managed, care needs to be.

  18. I guess one of the perogatives of analysts is both to romanticize the past and view the present through smeary ideological lenses. A lot of THCB posts on this subject seem to be infused with a reflexive and doctrinaire Michael Moore sensibility that is getting a little tiresome.
    The reason why the federal government’s HMO promoters encouraged equity ownership of the plans was actually much more pragmatic than ideological . They did so because it did not want the federal government to be saddled with the responsibility for providing the industry its growth capital. A lot of them believed that what they were really doing was fostering the growth and development of Kaiser and Kaiser like prepaid groups, and that they would generate such overwhelming evidence of better value and service that employers and the government would voluntarily choose them. You could look at Ellwood and Enthoven’s ideas as a gigantic social engineering project to grow Kaiser enrollment.
    Instead, these plans succumbed to bureaucratic management and substandard service, and lost control of their expenses (many were heavily unionized). As a result, they squandered their cost advantage over fee for service based insurance plans, and left the door open for managed indemnity plans and Blue Cross. Employers and patients, not corporate greed, were responsible for the shift away from the plans Ellwood favored.
    I agree w/ Mahar and Peter about the Medicare Advantage issue, incidentally. There was no valid defense for the subsidies MA plans were receiving; if quality care costs less, they ought to be able to make money at parity w/ the average Medicare payment levels in their markets.

  19. What a great history lesson, thanks Maggie & Niko.
    After reading this and thinking about the push for the “consumer driven healthcare solution”, brought to us by the same Conservatives and market capitalists that destroyed the true HMO concept described above, I am more convinced that we are being led down the same path that got us into the present mortgage/housing/financial mess. Wall Street’s insatible greed for profit helped by the Republican, “deregulation solves everything” rhetoric, will give us a healthcare system that mirrors what deregulation has done for our financial system(s) since Reagan and the conservative movement started their dismantling of, “government by the people, for the people” to, “government by corporations for corporations”.
    Since 1981 there have been 12 massive government “bailouts” to rescue private financial investors (Bad Money, by Kevin Phillips) and present conditions show us Wall Street is still able and willing to belly up to the taxpayer trough when their investment schemes go bad.
    If “competition” by insurance companies is the savior for escalating health costs where will the savings come from? If there is NO meat on the insurance books and the industry is still expected to “perform” by Wall Street standards, who will do the suffering? If you believe Mitt Romney that the MA Health Plan is outperforming expectations because of competition, then I have to ask that either there IS a lot of meat on the insurers books or that government subsidies/mandates in the plan are the real money behind the “lower” premiums – I think a little of the first and a LOT of the second. As with Med. Advantage and Med. PartD the taxpayer is again socializing risk and profits, not care and health. If we fall for this “competition” solution then when will the taxpayer be asked to shore up investor losses and management bonuses? Will we be lining up for healthcare like we’re lining up now to remove our money from another deregutated/de-oversighted failed bank, all in the name of “free enterprise”?

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