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© 1997 The Journal of Bone and Joint Surgery, Inc.
Current Concepts Review - Managed Care: Form, Function, and Evolution* , NEW YORK, N.Y.Investigation performed at the Department of Orthopaedics, Mount Sinai School of Medicine, New York City
During the last decade, health care in the United States has become a cost-conscious and, in some instances, a cost-driven industry. To a large measure, this focus on price explains the reasons behind the phenomenal growth of managed-care companies in the last ten years. These arrangements are now an integral component of the nation's health-care-delivery system, and many experienced observers believe that they have the potential to reduce or eliminate much of the inefficiency in the current system. Health-care plans such as those offered by health-maintenance organizations (HMOs) are thought to provide comprehensive coverage for enrollees at a lower cost than is associated with the episodic care that people receive under traditional indemnity policies. An HMO delivers comprehensive, coordinated medical services to voluntarily enrolled members on a prepaid basis. The risks and costs are frequently borne by the provider (the independent clinical professionals and institutions that furnish services to the consumer). As the HMO is obligated to provide all medically necessary care to its enrollees, it is thought to have a direct incentive for making sure that its members remain healthy. Managed care has been greeted by many legislators, business leaders, and health-policy experts as a promising alternative to traditional indemnity health coverage. Since 1973, employers who are self-insured—typically, large corporations—have been required by federal law to include an HMO as part of any list of options for health-care coverage that they offer to their employees. Starting in the 1970's with non-profit plans such as those offered by Kaiser-Permanente of California, the industry expanded rapidly and, by the 1980's, many for-profit programs were in operation. With the for-profit models available, the private-insurance sector that once avoided controlling services moved far in the direction of managed care, sometimes blurring the distinction between traditional insurance providers and managed-care plans. More than fifty million Americans currently belong to the predominant form of managed care, the HMO. As of 1990, conventional indemnity health-insurance plans no longer covered most Americans. By 1995, more than 83 per cent of all physicians practicing medicine in the United States had at least one managed-care contract, compared with 61 per cent in 1990 and with 43 per cent in 198617. Moreover, many states are converting their Medicaid fee-for-service coverage of individuals to managed-care plans, thus encouraging millions more people to join HMOs. This kind of rapid growth is not without merits. National data suggest that HMOs are substantially more efficient than indemnity plans in controlling costs, sometimes by as much as 25 per cent46. Sweeping changes that have taken place in the last several years, including the slowdown in health-care costs, the cutbacks at hospitals, and the mergers among hospitals and drug companies, are attributable in large measure to the spread of managed care32.
The concept of the HMO has its origins in the national health policy of the early 1970's. There was annual double-digit growth of health-care spending, and the Medicare and Medicaid programs were growing at an even faster pace. There were complaints of insufficient access to medical care and concern that care in the United States was inferior and inefficiently administered54. In 1970, in response to calls for national health insurance from Democrats and some Republicans as well as to sharply rising health-care costs, the Nixon administration began to explore ways to achieve more efficient, less costly medical care and thus to quiet critics45. The administration was alarmed by the popularity of proposals calling for nationalized health care. The Health Security Plan, an initiative introduced by Senator Edward Kennedy (Democrat, Massachusetts) and Congresswoman Martha Griffiths (Democrat, Michigan), called for a comprehensive program of free medical care, which would replace all public and private health plans with a single, federally operated health-insurance system. Although this plan would not have involved any nationalization of facilities or have required physicians to work for a salary, it would nonetheless have moved the nation far in the direction of a single-payer system. For example, it would have set a national budget, allocated funds to regions, provided incentives for prepaid group practices, and obligated private hospitals and physicians to operate within budgetary constraints25. Searching for a strategy that could compete politically with this plan, the Nixon administration began working on a presidential health message that offered an alternative national health plan, with HMOs as the centerpiece of its approach42. Originally, the idea, labeled the Health Maintenance Strategy, was to allow Medicare beneficiaries to choose between HMOs and traditional fee-for-service systems that were competing with regard to price and quality. The architects of the plan anticipated that the government's actions would catalyze similar restructuring in the private, largely employer-financed segment of the health-care economy, which, at the time, was also having difficulty coping with medical inflation13. The result was the Health Maintenance Organization Act of 1973, which authorized the federal government to lend funds to new HMOs that could not obtain private funding. To qualify for a loan, the HMO was required to offer certain specialty services, open enrollment, community ratings, and other features. The act did not pass the Democrat-controlled Congress intact, but aspects of it were incorporated into later legislation. The Nixon legislation ushered in an era during which the government took an active role in helping the HMO industry to grow. For more than a decade, until President Reagan phased out programs geared toward subsidizing HMOs, the managed-care industry enjoyed explicit support from the federal government in the form of grants and start-up money. From 1974 to 1980, the federal government contributed $190 million to the development of new HMOs54. While government policy was a pivotal component behind the rise of the managed-care industry, a growing disenchantment with traditional health insurers on the part of business leaders was also important. By the mid-1970's, a number of large employers had become restless with their arrangements with the insurance industry. They argued that they were paying commercial insurers large fees to do little more than process hospital and physician claims for their covered employees. As a result, businesses began to self-insure. Gradually, most large and medium-sized employers cut back or entirely discontinued their reliance on commercial insurers. Surprisingly, most for-profit carriers failed to protect their profitable niche in the expanding health-insurance market19. Beginning in the 1980's, the HMOs gained marketing influence and began to seek a greater role in the vast health-care market. Americans started to witness an unprecedented change in the organization and financing of their health care. At the onset of the decade, there were three major health-insurance arrangements. Approximately 90 per cent of working Americans and their dependents were covered by conventional indemnity health-insurance plans, purchased by employers as a benefit. Under a typical employment-linked plan, consumers were free to choose any available provider. Physicians were faced with few constraints and practiced more or less as they wished. The insurance company usually served as a passive intermediary between the employer and the provider. With little scrutiny, insurers typically paid bills submitted to them on a fee-for-service, retrospective basis. For the most part, insurers let providers determine the rates of reimbursement. The government-sponsored insurance programs (Medicare and Medicaid) were not much different. Although slightly less flexible, they were patterned directly on this traditional employee-health-benefit model. Moreover, private-sector insurance companies performed most of the day-to-day management of the Medicare program, further blurring any distinctions58. The second major type of health-insurance plan, the prepaid HMO, was the preferred arrangement for only about 5 per cent of Americans in 1980. However, the industry was still in its early stages. Approximately 80 per cent of HMO enrollees received care from so-called closed-staff or group-model HMOs, where physicians practiced in large, organized, multispecialty group settings. The remainder were enrolled in open-panel independent-practice associations, consisting mainly of physicians practicing in small groups or alone who wanted to compete with the larger, closed-panel plans. Toward the end of the 1980's, traditional insurance plans and established HMOs were joined by a startlingly large and varied array of new health-care-financing and delivery systems. Collectively, these new plans (along with HMOs) came to be known as managed-care plans or alternative-delivery systems. Many believe that the traditional HMO models of the 1970's and 1980's provided the paradigms for these new alternatives but that the stimulus for their explosive growth emanated from employers and, to a lesser extent, from the federal government58.
People in the United States purchase health coverage in one of essentially three ways. The first type of coverage is through service policies, which pay for specified medical and hospital services or a predetermined percentage of them. Such coverage is provided by the traditional Blue Cross-Blue Shield or indemnity carrier, and until recently it was the most common type. The second type of coverage is the cash-indemnity plan, under which the enrollee receives a specified amount of money each month during a hospital stay. These plans, generally called supplementary plans, are often advertised in newspapers and magazines and by mail, and they are designed to provide the person with some extra money during an illness. However, they pay only a small portion of the actual costs of care and are not intended to serve as a person's sole coverage. The third type of coverage is the prepaid health plan, which usually provides almost all of a person's medical care, including office visits, laboratory tests, and hospitalizations, for one fixed monthly or biweekly fee. These are the managed-care plans that people are familiar with today, and they include HMOs and the newer, hybrid arrangements that have sprung from traditional HMOs8. This review of managed care focuses on the HMO because it is the most prevalent form of managed care today. The goal of this type of delivery system is to reduce what the managed-care company deems to be unnecessary and inappropriate care54 in order to limit health-care costs. These savings are then passed on to subscribers such as large employers who buy the health coverage for their employees. Group contracts between employers and HMOs or other managed-care insurance programs typically reflect the lower costs that the plans are able to secure for themselves. The HMOs contract with payers (sometimes referred to as sponsors, these often are employers who purchase the insurance for their employees) to provide all agreed-on services to individuals or groups at one prepaid, fixed annual fee. Such arrangements are referred to as capitation. Under capitation, the provider (the doctor or hospital) is typically given a lump-sum annual fee to provide health-care services to a designated group of people. If the costs of providing care exceed the amount of money that the managed-care company allocated, then the provider is typically required to assume the extra cost in the form of an operating loss. Similarly, if the cost of providing care is less than what the managed-care company allocated, the provider is often able to keep the extra money as profit. From the payer's perspective, the managed-care plans both insure and provide services, thus eliminating the risk that the actual cost of care may exceed premium revenues. Moreover, because the HMO acts overtly to lower the cost of care, the payer can usually assume that the amount of money that must be spent will be competitive and predictable. In return for lower costs, members of a plan are usually required to select physicians solely from the HMO's authorized list. The member's primary-care physician also serves as the so-called gatekeeper of the cost of care. Typically, no non-emergency treatment or referral to a specialist can be made without a referral from this physician. There are four primary types of managed-care arrangements: the staff-model HMO; the group-model HMO; the preferred-provider organization, or network model; and the independent-practice association. It is worth noting that the categorization of many of the newer plans into different types of models is an inexact science and is becoming increasingly difficult. Well defined models are now integrating the characteristics of competing models and, increasingly, many plans are starting to look similar. Staff-model HMO: A staff-model HMO directly employs its doctors and health-care staff and usually owns its own hospitals and clinics. The HMO provides services at one clinic location or more through its own staff physicians. A well known example of this type of model is the Kaiser-Permanente Plan. Group-model HMO: A group-model HMO operates essentially as a partnership among a group of doctors, hospitals, and the membership plan. Under this arrangement, a single large multispecialty group practice is the sole (or major) source of care for an HMO's enrollees. The HMO provides services to enrollees by contracting with at least one physician-owned group practice or clinic. HMO members are seen in the medical group's office. Because of the similarity with the staff-model HMO, the term staff/group-model HMO is often used to denote these large HMOs58. Preferred-provider organization: To provide health-care services to enrollees, preferred-provider organizations contract with both large physician-medical group practices and independently practicing physicians. The preferred-provider organization enters into contracts with a broader range of health-care providers and is thought to offer enrollees more points of service (facilities and doctors from whom the enrollee is permitted to receive care and still be reimbursed by the managed-care plan), although often at the expense of higher premiums. There are variants of the preferred-provider organization, but enrollees typically receive all of their care for a flat monthly charge as long as they use the plan's so-called preferred hospital or doctors, or both. If enrollees seek care elsewhere, they typically pay at least part of the bill and, rarely, all of it. Independent-practice association: An independent-practice association makes contractual agreements with independently practicing physicians, who provide services to members in their own offices. The independent physician groups and hospitals provide services under the organization's guidelines, but they may also care for patients who are not members. The independent-practice associations and preferred-provider organizations are newer entities. They are largely a result of employer and employee dissatisfaction both with the sometimes stringent guidelines imposed by traditional HMOs regarding the care that an enrollee can receive and with the failure of HMOs, in some instances, to contain costs. In many regions where managed care has entered the health-care marketplace, these newer arrangements are the predominant form of managed care and are more prevalent than the traditional HMOs. These networks proliferated in the 1980's and, ironically, became more like traditional HMOs as they evolved. The essential element of a successful preferred-provider organization or independent-practice association is an ability to identify accurately efficient health-care providers who provide quality care at reasonable rates—in other words, physicians who practice what is deemed by the network to be cost-effective care. Under these two plans, physicians are reimbursed in a variety of ways, ranging from capitated payments to agreed-on fee schedules. These arrangements are geared toward consumers who want greater choice in the physicians whom they see as well as the option of being able to consult a physician who is not a member of their particular plan or network, usually for an additional fee. Enrollees may thus continue to see their former doctor even if that physician is not included on their new plan's roster. As in traditional HMOs, under these plans individual physicians serve as gatekeepers and provide managed-care services. While group and staff-model HMOs have grown at a slow, steady pace, the newer models have expanded rapidly. Nearly one-half of all managed-care enrollees are now either in independent-practice associations or in preferred-provider organizations9. However, with preferred-provider organizations, independent-practice associations, and other modified HMOs, the difficulty of keeping track of patient referrals has contributed to eroding profit margins and increasing losses. These plans are, in a sense, traditional indemnity insurance plans offered within the HMO concept15. All four types of arrangements have advantages and disadvantages. The primary concern with regard to the staff-model HMO is that, as individual employees, doctors may not have as much influence to promote quality care as they would in an independent practice. The group and staff models also have the limitation of offering services only in their own clinics and hospitals, which may not be convenient or desirable to all members. Also, when a group or staff-model HMO is selected, all members must change doctors, whereas this may not be necessary in an independent-practice association or a preferred-provider organization51. An advantage of the staff and group-model HMOs is that doctors always have immediate access to the patient's medical records in an emergency, as all care is handled in one system that is owned and operated by the plan. Also, some doctors in non-traditional HMO plans, such as independent-practice associations and preferred-provider organizations, have complained in recent years that they are under intense pressure to limit their number of referrals in order to reduce costs17,51. This, some maintain, may not be necessary in group and staff-model HMOs as specialists are already being paid as members of the physician group or as employees of the HMO17,51. Thus, use of an HMO's services does not necessarily translate into increased costs for the HMO, although it can be argued that, if the demand for specialists in a staff-model HMO becomes too high, additional specialists will need to be hired. A commonly cited problem with the independent-practice association is that the primary-care physician may be able to refer patients only to specialists within his or her own small medical group rather than to any group of doctors under contract to the HMO. Thus, the choice of specialists may be restricted even more than what a patient who is familiar with a traditional managed-care plan may have come to expect51. One of the more contentious issues surrounding managed care is that of provider autonomy. Many practitioners place a high value on autonomy: the freedom to independently prescribe and administer clinical services guided only by ethics, medical science, and marketplace interests37. The common feature of all managed-care plans is an extensive system of utilization controls. With such programs, many facets of the patient's use of health services and, accordingly, of the provider's practices are subject to review by an external utilization-review entity58. This may be a committee of health-care advisers or a physician who works exclusively on administration. These controls are one mechanism used to manage the patient's care and, ultimately, the sponsor's resources. Restrictions on a practitioner's clinical operations are often greatest in closed networks, or so-called fully managed delivery systems (that is, HMOs). In these settings, many if not most practices come under the scrutiny of concurrent treatment or retrospective utilization review. There are probably more restrictions in independent-practice associations than in staff or group-model HMOs. There are few restrictions on providers in traditional indemnity plans58. However, a plethora of new plans that do not fit easily into these categories are emerging. Observers say that it is important to scrutinize a plan carefully to determine the category into which it fits31. As virtually all private and public insurers now apply at least some utilization controls, the question of demarcation between managed and non-managed care arises. Most analysts have stated that a plan is deemed to be managed when physicians lose their ability to hospitalize non-emergency patients without first obtaining authorization or certification from the intermediary or its agent58.
A key factor contributing to the surge in innovation and growth in managed care is the increasing number of employers who have seized direct control of their health-benefits plans because of rising health-care costs throughout the 1980's. It has been estimated11 that more than 50 per cent of all employees are now in plans that are primarily self-insured: that is, the employer has met certain federal criteria, under the Federal Employee Retirement Income Security Act (commonly referred to as ERISA), with regard to its size, the number of employees to whom it intends to offer coverage, and the type of insurance options that it will make available. Because self-insured or self-funded companies bear more risk for health-care costs, they tend to view health-care expenditures as a direct drain on earnings. Understandably, many become quite determined to develop approaches to limit health-care outlays. Self-insured corporations were among the first to experiment with contractually negotiated health plans, such as preferred-provider organizations, under which providers agree to special terms, including fee discounts and added utilization review. To employers, the contractual approach to health-care procurement seemed only natural, as most of their day-to-day purchasing of other types of goods and services was already done on that basis58. A 1993 national survey46 conducted by a managed-care-industry trade group of almost 2000 employers found that more than half were in managed-care plans as compared with 29 per cent in 1988. In contrast, indemnity insurance policies are increasingly harder to find in the benefits packages of corporations in the United States46. HMOs and other such plans are able to bring savings to employers for only as long as they are able to manage care. The plan's success depends precisely on tighter management, not only of enrollees but also of hospitals and physicians who together provide most of the services that patients receive. There is evidence that cost-cutting on the part of managed-care plans led to the first decline in physicians' incomes, in 1994, and this trend is predicted to continue49. Managed-care plans seek to purchase the services that they need from hospitals and physicians for the lowest possible price, with an interest in maintaining an acceptable level of quality and sufficient patient satisfaction. To attract and retain physicians who are willing to practice in what the plans deem a cost-effective manner, many plans offer opportunities to physicians for stock options or bonus payments, or both18. Other factors contribute to the growth and profitability of managed-care companies. Managed-care companies have the ability to obtain substantial discounts from hospitals that are operating in markets with excess capacity. They also have relatively easy access to the capital markets19. The enthusiasm for greater reliance on managed care and market solutions is underscored by the fact that an ever-larger number of states are moving to mandate that their Medicaid enrollees join one or another approved managed-care plan. Nearly every state now encourages or requires its Medicaid beneficiaries to enroll in a managed-care plan52. Such efforts, and an evaluation of managed-care plans, suggest that these plans may be able to provide acceptable levels of care at costs of about 10 per cent less than those of alternative payment-and-delivery systems. However, there is also evidence of a disconcerting number of managed-care arrangements, especially for Medicaid enrollees, that have failed to provide quality care or to adhere to promised prices, or both18.
Managed care also has its detractors, including those who argue that reliance on it implies a continuing strong role for insurance companies and entrepreneurial, profit-driven health-care organizations. For those who oppose a major role for government in the financing of health care, managed care raises the specter of rationing, lower quality, less freedom to choose physicians, interference with physicians' clinical autonomy, reduced access to specialty care and teaching hospitals, and increased government regulation10. In theory, HMOs remain solvent by keeping people well and by detecting disease early, thereby minimizing the over-all expenses required for costly services such as hospitalization and specialty care. Moreover, there is no financial incentive for providers to deliver what the HMOs might deem unnecessary services, including referrals to expensive specialists or ordering of certain diagnostic tests. However, this is also one of the chief criticisms levied against HMOs and other forms of managed care. These criticisms will likely become more frequent primarily because HMOs seem to be involving doctors, to an increasing extent, in the financial liabilities of providing care. Moreover, some critics already detect what they believe to be signs of a rigged market34; profits in managed care increased 40 per cent from 1992 to 1994 and jumped another 20 per cent in 199534. Others have claimed that managed-care plans have spent too much money on lavish executive salaries and uncoordinated expansion at the expense of improvements in the quality of care34. The use of so-called gatekeepers also presents particular problems to patients who have illnesses that are rare or difficult to treat. People with special needs often require services that are out of the ordinary. There is some evidence to back up these concerns about costs and access. Many HMOs are slow to cover the cost of new treatments deemed experimental, even after the treatment has been approved by the Food and Drug Administration and the evidence suggests that it is effective. Many HMOs typically require a much greater burden of proof before they deem a new device or treatment beneficial and make a substantial investment in providing it to their members. Managed-care companies have countered these arguments by saying that, if a treatment appears to be overwhelmingly beneficial, they will move quickly to make it available14. Some groups of people may have worse medical outcomes under managed care than with management by fee-for-service doctors. According to a four-year study of chronically ill adults in Boston, Chicago, and Los Angeles, elderly and poor patients managed by HMOs did not fare as well as their counterparts who were treated by fee-for-service physicians56. Of 822 patients who were sixty-five years old or more, 54 per cent of the 346 enrolled in an HMO had a deterioration in health as compared with 28 per cent of the 476 in a fee-for-service arrangement56. Criticism also has been levied against the financial mechanisms that managed-care plans employ to ensure that cost-efficient care is provided. In some cases, providers are put at risk for a penalty or a reward, depending on some retrospective measure of their efficiency. Another practice is the use of so-called withholds, whereby a portion of a fee-for-service or capitation payment—for example, 15 per cent—is withheld from the provider and not returned unless a certain target is met. Capitation places the provider at risk for both the utilization of health services and the cost of that utilization. Thus, to the extent possible, the managed-care company must create incentives to ensure that services are provided in the most cost-effective manner, thereby maximizing clinical benefit while minimizing cost3. Doctors are expected to provide a wide range of services, recommend the best treatments, and improve the patient's quality of life. However, to keep costs down, they must limit the use of diagnostic services and specialty care, increase efficiency, and shorten the time spent with each patient. There is evidence that not all aspects of quality are being emphasized under the capitation arrangements that managed-care companies are forming with doctors30. Moreover, many doctors working under managed-care arrangements increasingly believe that they will be forced to choose between the best interests of their patients and their own economic survival29. The American Medical Association has long complained about the ethical implications of these types of financial arrangements. These weaknesses require that patients (consumers) and physicians (providers) pay close attention to certain details when choosing among the plans offered by HMOs. First, it is important to have a clear knowledge of the financial health of the HMO. A financially weak plan may be tempted to shortchange members on medical testing and treatment as a way of cutting costs. Such financial pressures could also lead the plan to cut payments to providers or to adopt more restrictive incentives to encourage them to hold down costs. A financially healthy HMO is more likely to have sufficient facilities and authorized physicians to provide reasonable convenience to its members. According to some indications, which are heatedly disputed within the industry, non-profit HMOs provide more money for patient care than do for-profit organizations. Whereas publicly traded HMOs must sustain annual growth rates of 20 to 30 per cent and medical-loss ratios (calculated as medical costs divided by premium revenue) that do not exceed 80 per cent, mostly in order to satisfy shareholders and to ensure that they are able to access public markets for new financing, not-for-profit HMOs can accept margins (the amount of money claimed as profits after all expenses are paid) as low as 3 or 4 per cent. This usually allows them to offer lower fees or to have more cash at the end of the year to reinvest in the medical practice.
Some of the same phenomena responsible for the growth of the managed-care industry are also exerting intense pressure on many academic medical centers. Academic medical centers stand to suffer with the growth of managed care because their special mission of teaching, research, and highly specialized clinical care makes them more expensive than non-academic hospitals and places them at a competitive disadvantage. Managed care will have a substantial impact on both undergraduate and graduate medical education by diverting or eliminating resources that have been available to support these activities in the past5. Managed care poses two types of special challenges for the educational mission of academic medical centers, according to industry observers1. The first challenge is a financial one. While the training of young physicians entails added costs for the participating academic facility, it must continue to compete financially with institutions that do not incur extra costs. The second challenge is educational in nature. A number of commentators have cogently described how managed care changes medical practice, the difficulties that academic medical centers experience in responding to these educational demands, and the problems that managed care creates for traditional, specialty-oriented training1. Pressure is placed on physicians to cut corners in the delivery of care and on academic medical centers to limit the number of specialists that they train and the financial burden that they assume in order to compete with thrifty managed-care plans1. Academic medical centers are expensive to operate because of the costs associated with the training of physicians. It has been estimated that teaching hospitals cost about 30 to 40 per cent more to run, because of their diverse mission, than do community hospitals29. The conversion to managed care thus has the potential to affect academic hospitals so severely that they will no longer be able to support research and education adequately28. Despite the fact that medical-school revenues increased last year, academic medical centers are under added stress with regard to their ability to accomplish their educational mission33. Moreover, efforts to reduce the size and scope of the federal government have brought under scrutiny the federal subsidies that academic medical centers are paid in order to compensate them for activities such as the training of medical residents and the provision of public services (for example, to poorer, inner-city populations). With pressures in the marketplace mounting and the likelihood of continued reductions in federal grants, academic medical centers are facing a so-called double squeeze. A fundamental issue is that academic medical centers do not fit naturally within managed-care systems because their missions are so different from those of largely service-oriented managed-care institutions. Managed-care plans anticipate that most health services will be for routine care in a relatively healthy population. Although managed-care health systems benefit directly from cost-effective technologies and innovations in patient care, they do not explicitly pay for them or pass on the cost of research to their customers in the form of higher premiums. In contrast, academic medical centers provide care for the sickest patients who need the costliest services, and they invest heavily in medical research and new technologies5. Another problem lies in the awkward, indirect way in which the government attempts to subsidize the nation's 125 academic medical centers for the medical training that they provide. Currently, the federal government, through its Medicare program, explicitly subsidizes the direct and indirect costs of graduate medical education by paying teaching facilities $6.1 billion annually. As these payments are calculated to cover the teaching costs associated only with publicly insured patients, some portion of the cost of medical education is passed on through the higher charges that academic medical centers typically collect from private payers1. Although the precise amount that academic medical centers contribute from their own clinical revenues remains to be measured carefully, a recent estimate placed this figure at about $1.7 billion, of which about $1 billion goes to undergraduate medical education and $700 million, to graduate medical education26. Federal payments for graduate medical education, however, have been cut in recent years and will probably decline further22. While undergraduate medical education is supported partially by tuition, a substantial portion of the funding for this activity comes from government appropriations, which have not generally kept pace with inflation33. Moreover, federal subsidies intended for medical training are sometimes diverted to other uses, including HMOs, which do not offer specific medical-education training programs12. In recent years, many leading industry observers have advanced the concept of market evolution. Typically, they describe three or four stages of development that reflect increasing competition, employer involvement, provider integration, and managed care. The message that these models convey to academic medical centers is that, in order to survive, the centers must evolve into regional, integrated delivery systems that can compete on the basis of cost and quality in a managed-care environment. However, most academic medical centers do not currently have the strategies, know-how, or cultural predisposition to meet this challenge40. A number of academic medical centers have begun to take steps, in the last several years, to try to adapt to the new marketplace. Many are seeking strategic alliances, trimming peripheral services, forming partnerships with the private sector, and reducing their size and scope. The move by the multibillion-dollar for-profit hospital chain Columbia/HCA into the academic hospital marketplace has hastened this adaptation. Columbia/HCA is seeking to forge new relationships between managed care and academic medicine, and recently it began efforts to purchase academic medical centers for the first time in its history. One widely watched example is Tulane Medical Center in New Orleans, which sold controlling interest of its hospital to Columbia/HCA this past year. Another example of the evolution taking place in academic medical centers can be seen at Duke University Medical Center in Durham, North Carolina. This institution has one of the most productive clinical-trial programs in the world and is now setting up a business unit called the Duke Clinical Research Center. The medical center plans to use its sprawling health-care network to expand its clinical trial operations and to compete with private-sector companies that run trials for the manufacturers of drugs and medical devices. The expense of maintaining the quality of research and education has prompted some academic medical centers to sell off the hospital portion of their business. With tens of millions of dollars in proceeds from such sales, a medical center is able to concentrate on its teaching mission while attempting to fulfill its obligation to the community through foundations. (In many instances, the hospital and the buyer are required by law to earmark a certain percentage of the revenues from the hospital sale to charitable foundations.) While academic medical centers and managed-care plans have intersected in a struggle for profitability in the marketplace, they are also struggling to resolve issues pertaining to medical education. In the past, managed-care plans played a very limited role in the provision or funding of medical education, leaving most of the burden to be assumed by the academic medical centers16. However, there is an emerging consensus that HMOs are ideal sites for certain types of training; they can provide experience in outpatient primary care and in working with health-care teams, increase awareness with regard to the costs of medical care, demonstrate utilization review and quality assurance in action, and offer a model for the principles of preventive and social medicine and the care of defined populations55. Moreover, there is a growing refrain within managed-care organizations that they should be playing a greater role in providing medical education22. However, few managed-care companies have thus far shown a willingness to pursue this task, as it will inevitably lead them to assume higher costs21. Both young physicians and industry leaders report that the current system of medical education is not preparing graduates for practice environments that are guided increasingly by managed-care principles. Only a few medical schools currently offer educational opportunities in HMOs and other managed-care organizations55.
Recent trends suggest that, as the health-care marketplace continues to mature, the traditional role of HMOs may change. Managed-care companies operate essentially as insurance companies. This largely explains the synergy between HMOs and insurance companies and the prevalence of mergers between the two entities, such as the one recently consummated between U.S. Health Care and Aetna. Like insurance companies, at the beginning of each year the HMO estimates how much money it will spend for the coming year. When it overestimates its medical liabilities for the year, annual profits are higher than expected. In these instances, the stock price typically increases as quarterly or yearly earnings exceed what Wall Street analysts had predicted. When the HMO underestimates how much it will spend on medical claims for a given year, it ends up with less profits than it had expected and, conversely, investors respond by driving the price of stock down. The latter scenario largely explains the phenomenon that took place recently with a number of publicly traded HMOs. The stock prices of these organizations declined, some sharply. Although a number of HMOs regained some of the losses, few returned to the levels that they experienced during the peak of their popularity in the early 1990's. These declines in stock prices are an indication of investors' growing concern that HMOs are not able to manage medical costs properly amid eroding profit margins. (The profit margin is the amount of money left over after all of the HMO's expenses are paid, including the overhead costs that it incurs in operating its plans and providing treatment to its members.) Evidence that managed-care plans cannot sustain the cost-savings achieved over the last several years lends support to this apprehension47. Wall Street typically looks at the medical-loss ratio as a principal sign of the health of an HMO and of management's ability to control costs and to make a profit. (The medical-loss ratio, calculated as medical costs divided by premiums, is a measure of how much money the HMO has left after all of its medical costs are paid and is thus an indication of the HMO's ability to contain costs.) This ratio was about 80 per cent during much of the time when the concept of HMOs was very popular on Wall Street; thus, the HMOs were able to claim about 20 per cent of all premium revenues that they generated as profit. However, the ratios of many HMOs have slipped closer to 90 per cent recently. Part of the reason for this is that premiums charged to enrollees have remained flat or have been lowered—an average of 2 to 10 per cent at some plans—because the intense market competition among competing plans has prevented HMOs from raising their rates and thus passing on the higher medical costs to their enrollees. Some HMO executives have warned that a number of health plans are charging less than they should in order to attract and keep customers, thus jeopardizing profitability. If this is so, it will lead to an additional reduction in reimbursements to doctors and will increase pressure from HMO executives to curb what they deem to be excessive care. The result will be an increasingly competitive environment in which price cuts will be the norm and premiums will be pushed as low as possible. Competition will be based more often on quality than on cost39. Even assuming that managed care will be able to contain health-care costs in the long term, other issues are at stake. Although HMOs have been successful in controlling hospital costs, eliminating unnecessary admissions, and decreasing the duration of stay, the savings from these measures are sometimes offset by rising costs for outpatient and diagnostic services. It seems unlikely that HMOs can continue to realize savings from a reduction in hospital stays, as shortening them more will be difficult. Moreover, the shifting of patients from an inpatient to an outpatient status does not always result in cost-savings, as it causes outpatient costs to rise15. In addition, as managed-care plans become large, the money needed to administer them offsets some of the savings from the use of fewer services. Utilization review and management firms add another layer of bureaucracy and thus, an added expense, to a system that many argue is already fraught with wasteful administrative spending60.
Compounding recent setbacks for some managed-care plans is evidence that some large employers are beginning to rethink their commitments to the largest HMOs. The state of Minnesota was one of the first health-care markets to be penetrated by managed-care organizations, and health-policy experts consider it to be a mature market38. Some of the nation's first HMOs flourished in the Twin Cities during the 1970's, long before the concept took hold elsewhere; this market is therefore seen as being at the cusp of change in the health-care sector7. Lately, however, employers have been removing their support for the HMOs that are dominant in the region6. In the early 1990's, more than 80 per cent of managed care in the Twin Cities marketplace was controlled by three large HMOs50. Three years ago, an influential coalition of Minnesota employers, the Business Health Care Action Group, awarded the bulk of their health-care business to a large HMO called Health Partners. In the past year, the employers changed their minds, deciding that bigger was not necessarily better. In a move that could have ominous implications for HMOs if it is duplicated in other regions, these employers plan to negotiate contracts directly with smaller organized groups of doctors and hospitals. The effort is aimed at forcing health-care providers, insurers, and HMOs to behave more frugally and efficiently. The employees, who receive monthly vouchers toward premiums, will be able to shop among competing medical groups59. The scenario unfolding in Minnesota is important because some analysts believe that it is the leading edge of a new trend in the evolution of managed care. As managed-care companies have matured, the amount of savings that they have been able to bring employers has begun to decrease because many onetime savings have evaporated. At the same time, others in the health-care marketplace have become more cost-effective and forceful, often setting up arrangements that compete with the HMOs. In January 1996, the California Health Care Association predicted that managed-care profits may drop from 3 to 5 per cent as a result of new competition, a sizable decrease compared with the profitability that plans have enjoyed in the past21. One large HMO, United Health Care, which is seen by Wall Street in some respects as a bellwether for the industry, has instituted a number of measures aimed at stemming its declining profit margins. United Health Care's rate of medical inflation—the year-to-year increases in the cost of providing medical care to each of its members—was two to three times higher than the targeted value. To address this, United Health Care increased its profiling of physicians in order to identify and improve the performance of what it deems cost outliers—physicians whom the managed-care plan believes are providing health care that is not cost-efficient, such as the ordering of too many laboratory tests. Most managed-care plans use computers to track the services prescribed by doctors. When a doctor's medical practice does not conform to predetermined models in the computer software, a note is made for the managed-care plan's management and, occasionally, the doctor is notified44. The company has also begun to use more restrictive formularies to hold down the costs of prescription drugs, and it has started to renegotiate contracts to decrease selected physician fees. The HMOs' flexibility to negotiate cuts in doctors' fees has been somewhat dampened by recent negative media coverage; it is unlikely that HMOs would be willing to endure the unfavorable pronouncements that might be made if they sought large concessions in fees from doctors48. As a consequence, HMOs may have only a limited ability to outbid the smaller, sometimes more nimble groups of doctors. The increased competition that many HMOs are confronting is demonstrated by the rise of large groups of doctors, doctor-run HMOs, and physician-practice-management companies. The doctors' groups originally appeared as a vehicle by which physicians could band together to negotiate a better deal with the HMOs. Recently, however, these groups have sidestepped the HMO intermediaries and have begun to negotiate directly with employers. This has put new pressure on the HMOs to cut prices and costs in order to offer employers a better deal. To some who grapple with HMOs over issues of quality and professional autonomy, physician-practice-management companies have emerged as an interesting new option. Such a company acts as a kind of intermediary between the doctor and the HMO, rendering services to the physicians that make their offices more efficient and banding them together into groups that can bargain with the HMOs. In effect, the practice-management company purchases the doctor's practice and then takes care of everything, from hiring nurses and paying salaries to buying new equipment. Some practice-management companies do not buy the doctors' practices outright but instead offer to represent them when they do business with HMOs and other managed-care companies. Under these arrangements, called independent-practice associations (discussed earlier), the doctors remain free to seek additional medical business elsewhere. A company well known for taking this approach is FPA Medical Management, based in San Diego. Under a traditional practice-management arrangement, the doctor's practice is run by a board composed of physicians from the practice and businesspeople from the practice-management company's business headquarters. By enrolling large groups of doctors, the practice-management company is able to sell complete medical-service packages to HMOs at a fixed fee. It can also help to negotiate volume contracts for the doctors with other health-care providers such as hospitals and specialists. The company does all of the doctors' billing, scheduling, staffing, and paperwork. The theory behind the practice-management company is that it can manage the office better than the doctor, thus saving money. One aspect of this arrangement that doctors like is that the management firm takes over the business side of the practice. The management company usually promises to provide capital for expanding the practice, an important issue because doctors typically rely on bank loans for working capital and this type of financing is becoming harder to secure23. While an independent-practice association is easier for doctors to start, its structure is not as well defined and investors are not as eager to provide capital. With practice-management companies, investors typically receive a stake in the company and are more comfortable with providing financing. From an industry that barely existed five years ago, physician-practice-management companies have undergone phenomenal growth23. Originally confined to generalists, these companies now specialize in the management of particular areas of medicine, such as occupational medicine and oncology. Three practice-management companies that specialize solely in the orthopaedic market have recently been formed. Each is in the early stages of development. The largest of the three is OrthoLink, based in Nashville, Tennessee. OrthoLink was formed through the merger of the two largest orthopaedic-physician groups in middle Tennessee. Recently, it received a $30 million venture-capital investment from Welsh, Carson, Anderson & Stowe, a prominent venture-capital firm based in New York City. OrthoLink soon plans to acquire two more orthopaedic practices, located outside of Tennessee. Longer-term plans include gradual expansion into states such as Kentucky, Indiana, Ohio, Mississippi, Oklahoma, Arkansas, North and South Carolina, Texas, Colorado, Georgia, and Missouri, according to the company's president, Dr. David Alexander, Jr., who is also an orthopaedic surgeon.
The environment for the delivery of health-care services is changing dramatically, from one of competition among individual providers such as hospitals and physicians to one of competition among well integrated, coordinated delivery systems. Integrated networks that achieve maximum savings from the efficient utilization of services while maintaining or improving the health status of their populations will have a competitive advantage compared with those that are unable to control either utilization or cost and those that lose members because of a low level of patient satisfaction or quality3. At a minimum, growth in the enrollment of HMOs and other managed-care plans is likely to continue at its current rate of about 1 or 2 per cent a year20. It is therefore likely that the real answers to the question of where the future will lead us lie not in the marketplace but with our legislators. Managed-care companies have already come under intense pressure from legislators to relax their rules, as seen in the public demand for the imposition of mandatory maternity stays and the popular criticism of practices by HMOs to limit what doctors can tell their patients. Almost daily, managed care is criticized in the popular press. Time magazine's cover story of January 22, 1996, entitled "What Your Doctor Can't Tell You," may epitomize public attitudes toward managed care. The article followed a patient who had cancer through a heartrending ordeal with her managed-care plan36. In October 1995, Newsweek ran a similar story, "Beware Your HMO."53 An August 1995 article in Business Week, "The Lethal Side Effects of Managed Care," took a similar tone35. The currently proposed laws to regulate managed-care plans can be grouped reliably into four broad categories24: (1) legislation that would limit the ability of managed-care plans to direct the flow of patients to specific providers and that would allow patients direct access to specialists without a referral (so-called direct-access laws); (2) legislation that would mandate a minimum duration of stay in the hospital for births and other procedures; (3) legislation that would prohibit contracts between managed-care plans and providers that establish exclusive relationships (contracts that do not permit providers to sign contracts with other managed-care plans); and (4) so-called any-willing-provider legislation, mandating that any provider willing to meet the price terms of the health plan must be accepted into its network41. (The latter legislation is in response to the demands of physician groups, as the spread of managed care has meant that providers who are not in a network may find it difficult to attract patients.) Soon, investor-owned HMOs will also have to compete with HMOs that are owned and organized by physicians. So-called provider-sponsored organizations contract directly with employers, eliminating the HMO intermediary between the employer and the provider. Three-fourths of the fifty state medical societies are planning to form such organizations. Although antitrust laws have slowed the formation of these networks in the past, in August 1996 the Federal Trade Commission and the Justice Department issued guidelines easing the antitrust restrictions on physician-owned HMOs2. It should also be noted that legislation is likely to bring the managed-care industry millions of new enrollees, as there is a strong possibility that recipients of Medicaid and Medicare will continue to be encouraged to join managed-care plans43. This would usher in a tremendous increase in the size and scope of managed-care plans, for which the managed-care companies say that they are prepared. However, such growth could also foretell troubling times for managed-care companies. So far, the HMOs and other plans have separated their Medicaid and Medicare populations from their commercial enrollees, offering different points of service. However, a surge in both populations, driven by political and marketplace demands, may make the demarcation between the two more apparent. If variations in service and quality are noticeable, managed care may be criticized for dividing the health-care system into different tiers, each representing a different level of care—that is, for offering public-paying patients a more limited set of options compared with those offered to private-paying enrollees. Under such a scenario, politicians could be pressured to enact changes that would make the services provided to public and private-paying patients more equal. This in turn would limit the industry's ability to market itself simultaneously to both public and private-paying patients. There may be other hurdles for the industry to surmount. Insofar as the HMO operates as an intermediary between the purchaser and the provider of health care, profit margins may continue to drop until they reach the levels experienced by other resellers of services, about 5 per cent according to Wall Street standards. Moreover, as profits decline, the industry's ability to tap the equity markets will wane as well. All of these trends could strengthen the position of physicians compared with that of recent years. Employers will continue to seek direct contracting and group purchasing of medical services for their employees, putting the physician rather than the HMO in a position to negotiate directly with the employers. As purchasers of health care, employers are finding that direct contracting offers them value in return for their investment27. Physicians will increasingly regain the control that they once had over the health-care system. Groups are experiencing success in influencing various state and federal legislation to position themselves to control the new health-care economy. Physicians are also successfully seeking relief from antitrust regulation of referral relationships27. Ultimately, the real drama is likely to take place in the legislative arena. In both state and federal legislatures, there seems to be a growing refrain that the managed-care industry has created some undesirable trends in its efforts to control costs.
*No benefits in any form have been received or will be received from a commercial party related directly or indirectly to the subject of this article. No funds were received in support of this study.
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Introduction
The History of Managed...