Special Article

The House of Managed Care

Jay M. Pomerantz, MD
Lecturer on Psychiatry
Harvard Medical School
Cambridge, Massachusetts
jayp@mail.map.com

[MedGenMed, September 14, 1999. © Medscape, Inc.]

Introduction

Would you like to live in a house bought for you by your employer at the lowest competitive bid? What if the builder were exempt by law from liability for any damages due to design flaws, inadequate materials, or unskilled labor? In addition, you would likely have to move your residence each year (at your cost) as your employer searches out contractors able to offer cheaper and smaller houses for you and your family. Do you have any doubt that you would end up in a leaky tent?

Although this analogy may sound far-fetched, it strikingly parallels the current situation with employer-provided managed healthcare packages. Let us examine the analogy point by point:

   1.Employers buy the health insurance package for their
     employees by asking for competitive bids from various
     managed care organizations (MCOs). These include
     health maintenance organizations (HMOs), preferred
     provider organizations (PPOs), and traditional medical
     insurance companies (who have themselves moved
     toward provider networks and approval in advance for
     most procedures). The low bidder almost always gets the
     contract.

   2.These employer-bought packages fall under the federal
     Employee Retirement Income Security Act of 1974
     (ERISA) which makes them exempt from challenge in
     state courts where malpractice claims are adjudicated.
     For example, if there is an untoward result from
     discharging a postoperative patient from the hospital too
     soon, only the attending surgeon may be sued. The HMO
     may have pressured the doctor with dismissal from its
     panel, but would claim (successfully) an ERISA
     exemption from liability.

   3.Every year, each employer solicits a new set of bids for its
     medical insurance business. Again, the lowest bidder gets
     the contract and all employees have to shift their insurance
     to the new MCO. The employee pays the personal and
     health cost of interrupted care as physicians and hospitals
     from the old network may not be in the new network.

   4.Under employer-purchaser pressure, services are being
     curtailed. These reductions in care are not achieved by
     openly changing the advertised benefit limits, but by more
     strictly interpreting what is "medically necessary." The
     changes are invisible to patients until they fall ill and have
     to access care, especially expensive tests or inpatient
     stays. Even then, patients may not know what cost-saving
     devices are built into MCO-enforced protocols. For
     example, physicians may have to prescribe cheaper
     tricyclic antidepressants despite a high risk of side effects
     before being allowed to use newer, less problematic, but
     more expensive medicines such as Prozac. Physician
     compliance with MCO protocol is monitored by
     databases which cover all patients, treatment visits, and
     prescribed medication.

All of the above is not to say that managed care is intrinsically evil or unworkable. Passive, indemnity insurance plans allowed healthcare costs to increase past 14% of the total domestic economy. President Clinton's failure to reform healthcare financing and delivery in the United States in 1994 left few alternatives. Employers rebelled against indemnity insurance plans and embraced managed care. In the past few years, the number of patients insured by managed care plans has grown by about one third. Nearly 60 million Americans are now enrolled in some form of prepaid health plan, and three in four doctors participate in at least one managed care program. Of significance, healthcare inflation abated for a few years; the average premium rose only 2.1% in 1995, reported in the New York Times magazine (December 8, 1996:68-71, 101). Unfortunately, that encouraging trend has recently reversed itself, with many insurers announcing premium increases of 10% or more for the year 2000.

Furthermore, disturbing articles continue to appear in the general press. Hospitals are losing money and laying off nurses and other direct care workers. There are case reports of withheld, delayed, and inadequate care: cancer patients denied life-saving -- but expensive -- bone marrow transplants; mothers discharged from the hospital 24 hours after delivering a baby; radical mastectomy patients sent home with open, still bloody drain tubes; chronic mental patients unable to access
psychotherapy beyond a few minutes of "medication management"; and actively suicidal patients discharged prematurely.

Other warnings are appearing in the medical press. Recently, The New England Journal of Medicine carried an editorial cautioning that: "We have embraced a financing and delivery method that rewards doctors, sometimes quite directly, for doing less for their patients. Most doctors are now double agents -- working for their patients but also for their companies."[1] In addition, the problem of the uninsured continues, with some 40 million Americans unable to afford or obtain even the constricted
and often inadequate medical insurance that managed care now provides.

This chronicle of problems with managed care, as currently practiced, is not new and may understate rather than exaggerate the situation. Legislation currently before Congress in the form of the patients' bill of rights seems hopelessly deadlocked and caught up in partisan politics. Its most powerful reform, the ability to undo the ERISA blockage of law suits, is under major attack from employers, insurers, and MCOs. Is there any answer other than a complete governmental takeover, usually
termed the "single-payer system"?

My own advice would be to restructure the current system rather than completely abandon it. Managed care is not intrinsically a bad idea. It puts power for determining how scarce resources
should be deployed into expert rather than lay hands. The miserable clinical results we are already seeing are not necessarily from managed care per se, but from the unstable and misaligned marketplace underneath the managed care structure. No medical care system can withstand a lack of legal accountability, employers entrusted to purchase on behalf of employees, and information and performance data which are not policed for honesty and completeness.

I, therefore, propose three corrections of the marketplace upon which managed care was erected. Whether these "fixes" are enough would have to be judged at some future point, after the system has had a chance to re-equilibrate.

Fix #1: System Accountability

The MCOs must stand up to the bar of justice, just as physicians already do. The MCOs' lack of clinical accountability explains their present aggressive stance in limiting treatment. Low cost
and profit drive decisions. When advertising to employers and the public, MCOs emphasize the clinical selectiveness of their network, a comprehensive clinical approach to medical care, and
supportive case managers. If a bad clinical outcome ensues, these same companies testify that they only manage the medical benefit, not the actual clinical care. That subtle distinction between managing the benefit versus managing the care becomes crucial in the courtroom of a malpractice trial because of the ERISA exemption.[2] ERISA was passed in 1974 to allow large companies to have company-wide benefits for pensions and healthcare; ERISA exempted employer benefit packages from differing and conflicting state laws. Thus, if an MCO claims the issue is one of benefits and not medical care, then most judges will accept the argument that state court is not a proper venue for such a dispute. There is consequently no place to hear a malpractice tort involving the claim of MCO culpability.

ERISA was not passed by Congress to allow such an exemption from medical malpractice claims. Indeed, in 1974, there was no managed care. Insurance companies really had no role in actual
medical care decisions. All of the changes wrought by managed care have occurred subsequent to the passage of ERISA. Unfortunately, this is no small loophole. More than half of the American public, about 150 million individuals, receive their healthcare through plans sponsored by their employer and therefore covered by ERISA.[3] These people are at increased risk because their medical care plans are immune from liability suit. Such legal immunity, when added to competitive pressures for low cost and de facto clinical control of medical care, is a recipe for disaster.

Wendy K. Mariner, in an article in The New England Journal of Medicine, provides a full discussion of the history of ERISA's adoption into law and subsequent court decisions expanding ERISA's umbrella over managed care: "The result is an anomalous law that precludes state regulation of ERISA health plans without substituting federal standards, leaving the plans in a regulatory vacuum." In addition to the problem of legal immunity for MCOs, she points out that ERISA limits states' ability to enforce mandated benefits laws, enact meaningful any-willing-provider legislation, or require the disclosure of information about plans. "The failure of national health reform has
left the states with the primary responsibility for achieving fairness in health insurance coverage, but ERISA prevents them from setting uniform standards for managed care."[4]

Although the general public and consumer groups have been slow to appreciate the problem, there has been some recent attention. While in office, Secretary Robert B. Reich of the Labor Department (which oversees ERISA) stated that the Administration was considering legislative proposals to clarify the rights of workers and dependents who receive care through HMOs. In a New York Times article (November 17, 1996:24), Mr. Reich said, "The situation has to be corrected. If the courts won't do it, Congress must."

Fix #2: Employee Medical Vouchers

If one truly believes that competition brings the best product at the best price, one needs a balanced marketplace. The user and the buyer must be the same person. Employees, who are, in reality, the patients, should have the power to choose their health plan. Unfortunately, that choice is severely restricted for many employees. Overall data from the 1995 KPMG Peat Marwick/Wayne State University survey of 2037 employers show that only 62% of insured workers nationwide were offered two or more health plans from which to choose. Even among those employees with choice, only a minority (32.8%) enjoyed a level dollar rule (that is, their employer contributed the same
dollar amount, regardless of the plan chosen).[5] Otherwise, employers commonly select the cheapest healthcare companies for their workers with little regard to quality or extent of care.

Why not put employees back in the equation? Companies might provide vouchers for healthcare which employees could use to sign up with the MCO of their choice. The voucher might be for
a given amount of money or for a fixed percentage of the cost of a managed health plan. If employees chose to add their own money to the voucher they could pick a more comprehensive
plan. Such a change would put quality and patient satisfaction back into the medical care equation.

Employer-purchased healthcare vouchers are currently being tried in the Minneapolis-St. Paul area. Four hundred thousand employees of the largest corporations will be able to use employer-supplied vouchers to purchase comprehensive medical care from any one of 15 groups of doctors, hospitals, and clinics. Employees will themselves choose which medical group best suits their needs. The 15 groups (which together comprise more than 90% of the primary care doctors and specialists in the
Minneapolis-St. Paul area) will supply a basic benefits package and information about cost, medical quality, and customer service (Los Angeles Times. October 27, 1996:A-1).

This idea of consortium negotiation for best price, yet consumer choice of particular plan, would allow even small employers and government entities to participate. In some ways it is a re-invention of one of the better ideas of the failed Clinton health initiative, ie, the purchasing cooperative.

Although such a system corrects a major imbalance, it by no means would assure that healthy employees would choose adequately for themselves. Denial of the potential for illness is not
an unknown problem, especially in the young adult population. Still, for those who wish a better care arrangement and are willing to pay for it, such freedom to choose is important. Such variation will tend to move the entire system away from the idea that cheaper is necessarily better. We intrinsically understand the need to have Lexuses as well as Chevrolets available. It just will not happen that way in healthcare if employers continue to pay the bill and make the choices.

Fix #3: Full Disclosure

Efficient markets require timely, accurate, and complete information for buyers to assess the value of what they are purchasing. For example, to protect potential shareholders from abuse and fraud, the federal Securities and Exchange Commission requires all publicly traded corporations to provide
annual, detailed information about the company. Information about the company's products and services, remuneration of officers and directors, financial dealings, profitability, subsidiaries, joint ventures, pending legal cases, and potential business problems are all part of the filing and available to the investing public. Any lack of candor on the part of the company and its officers may result in a lawsuit for withholding relevant information. The system works well and has remained in effect
for years without complaints of governmental intrusion into the domain of free enterprise.

No such system exists for making complete and detailed information available for purchasers of managed healthcare. The average investment of thousands of dollars per year for a family's care is no less than the average purchase price for a quantity of corporate shares, without even considering the difference in importance between the potential of losing money versus the potential harm from poor medical treatment. Instead, we have a system of unchecked advertisements (newspaper, radio,
television, and billboard) attesting to the purported virtues of one MCO versus the others. Even benefit brochures are no longer helpful. It is not the outside limits of coverage that are important
in the world of managed care (since those limits are rarely used), but what the "medical necessity" criteria are and how they are applied. The situation is also complicated by the variety of
inducements for physicians to apply cost-control measures. These "medical necessity" criteria and arrangements with physicians for cost control need to be openly described in yearly filings so that the purchasing public can assess which system makes sense for them. Do they want their primary care physician to have all the money for their family's care under his/her domain and keep what remains if there are low costs for hospital care, specialist care, laboratory, x-rays, and medication?[6] Would
they rather have a more expensive system which has their doctor on salary without any relationship to the cost of medical care ordered and provided?

The federal government is not unaware of the potential problem of powerful provider incentives skewing patient care decisions. The Health Care Financing Administration which oversees
Medicare and Medicaid recently put into effect a series of guidelines outlawing certain kinds of bonuses paid by MCOs to physicians and limiting financial penalties to physicians which exceed 25% of their annual income (Los Angeles Times. December 26, 1996:A-1). Unfortunately, such a piecemeal approach to provider incentives will fail; there are too many ways to get around specific regulations. I believe that opening MCOs to public scrutiny makes better sense.

All that is required is a single federal agency to delineate and receive the relevant data. At first, such data might describe utilization, patient satisfaction, and financial data; later on, actual outcome data on selective patient cohorts would be required. A prospective consumer with an already known disease (eg, diabetes or hypertension) could find out how each plan scored in outcome data for its population with the same condition. In this day of electronic communication, the Internet would be a
wonderful repository for such public information. Anyone interested in the details of a managed care plan could look it up on a home or library computer. Individuals without such detailed interest in MCO plans could rely on ratings from impartial reviewers such as Consumer Reports. That organization recently attempted a review of HMOs, but was hampered by the lack of available, reliable data (Consumer Reports 1996;61n8:28-42).

Even now some data do exist, especially in the files of the National Committee for Quality Assurance (NCQA). Unfortunately, such a voluntary organization (heavily dependent on MCOs for funding) is unable to demand that the data provided be complete, verifiable, standardized, mandatory, and
open to the public. How ironic that the public can obtain voluminous information about possible financial investments, but little information about who controls (under what constraints and for whose financial benefit) access to managed medical care and how patients actually fare in such systems of care.

Discussion

The current managed care marketplace focuses exclusively on cost reduction and bottom-line financial results. In addition to the worrisome reports about inadequate patient care and physician
constraints, newspapers continue to report the downsizing, merging, and closing of America's best medical facilities. What is to replace the vanishing teaching hospitals, research institutions, and facilities serving the poor? Indeed, is the evidence of drastic cuts in medical services being obscured by another problem, ie, the profits being taken out of the system by the managed care industry? If so, then patient care may be diminishing more rapidly than global economic markers indicate. Policy-makers and the public may have a false sense of security because insurance premiums have only stabilized rather than fallen dramatically. Savings may be more extreme than publicly acknowledged and represent inadequate care just as easily as curtailment of unnecessary care.

The three "fixes" outlined in this paper would go a long way toward correcting the current misaligned medical care marketplace. An accountable managed care industry, employee choice of plan, and reliable information for the public are all attainable goals which would bring quality back into the managed care equation. Such marketplace remedies are more powerful than well-meaning attempts by Congress and state legislatures to impose specific requirements on health plans such as minimum
hospital stay requirements for postpartum mothers and mastectomy patients. Legislative micro-management of medical care is unworkable, inappropriate, and soon out of date. Even
legislation barring contractual "gag clauses" about what doctors can tell patients is insufficient in an unbalanced marketplace. Any effective remedy must go to the heart of what is wrong; the
extraordinary new powers of MCOs and employers to demand ever lower medical costs must be understood and balanced out.

Eventually, the reduction in the quality of American healthcare will cease, but "when" and "how" are vital, as yet unanswered, questions. The specter of an overregulated system already is apparent. This is a time for all the stakeholders in healthcare (patients, providers, employers, managers of care, insurers, investors, governmental regulators, and public office holders) to come together to fix the marketplace in managed healthcare. A competitive and balanced marketplace should produce both
quality and affordable products, not just one or the other. The debate is overdue: if not the "fixes" suggested here, some other marketplace solutions may come forth. Managed care dampened
medical inflation (at least for awhile) and for that reason is here to stay. Can such a vital and powerful force ensure quality as well as cost control?

This paper specifically avoids directly addressing the problem of the growing uninsured population and those covered by Medicaid. Can we ask middle- and upper-class Americans to fund medical care coverage for the uninsured and poor if they doubt that their own health plan is adequate?