1999 CAS SEMINAR ON HEALTH AND
MANAGED CARE
Managed Care - What Is It and What Might It
Be?
Prepared By:
Milliman & Robertson, Inc.
Arthur L. Wilmes, FSA, MAAA
Prospective Trends in Healthcare
• Healthcare Providers Need to Consider Strategies
That Increase Efficiency
• Forces in the Healthcare Market Will Make It Very
Difficult for Status Quo Providers to Compete
Effectively
• Healthcare Providers Will Need to Develop Their
Patient Management Processes as if They Are
Being Paid Under Capitation
Extrapolations/Observations of the
Healthcare Marketplace
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Consolidation of Third Party Payers (TPPs)
Medicare and Medicaid Risk Contracting
Expectations by Hospital Executives
Growth of Employer Coalitions
Emerging Healthcare Cost Trends
Medicaid Expansion Programs
Ability to Measure Healthcare Provider
Performance
Price Squeeze
• Consumer Squeeze Healthcare Prices
• General Refusal to Accept Significant Price Increases
• Capitation or Fee-for-Service Will Not Be Immune
• Continuing Decline in Fee-for-Service
Reimbursements
• Use of Benchmark Analysis and Quality Initiatives
(QI)
• Beginning to Spill-Over into Reimbursement
Contracts
Price Squeeze
• Minimum Performance Standards
• Quality of Care and Efficiency Can Be Correlative
• Net Reimbursement Will be Based Upon a
Benchmark Level of Efficiency
• Not Going to Pay a Premium for a Provider’s
Inefficiency
• Net Paid Fee Service Resulting in Fee-for-Service
Contract - Effectively Capitation Contract
Increased Information Technology
• Healthcare Providers and Purchasers Will Use Information
Technology
• Providers Will Use the Technology to Manage Care
• Purchasers Will Use the Technology to Assess Provider
Performance and Make Purchasing Decisions
• QI Engagements for Large Employers
• Development of Operational Changes to Promote Greater
Efficiency at Employer’s Healthcare Providers
• Quality and Efficiency Measures were Introduced and
Reported
• Data Reports Used for Contract Purposes and
Reimbursement
MSO Infrastructure
• Market Changes Will Encourage Healthcare Providers to
Vertically Integrate
• Not Only Motivated by Financial Purposes
• Also for Better Patient Management
• Gain-Sharing Directive by Health and Human Services
tends to Discredit the Feasibility of Loose Integration
• Need for Central Unit Which Providers Non-Medical
Services to Providers
• Ensure That Medical Treatment is Delivered as Medically
Necessary in Appropriate Setting by Provider with
Appropriate Level of Training
• Conventional Systems Do Not Adequately Facilitate the
Successful Completion of This Goal
Need to Improve Efficiency of
Patient Care
• Influences Beyond Financial Issues
• Improved-to-Optimal Health Status and Improved
Functional Independence
• More Efficient Use of Resources
• Patients in Any Health System who Require Fewest
Resources for Physical Disposition are Those Who do as
Well as Can Be Expected
• Professional Obligation to Know What Those Resources
Are, So That Limited Supply of Total Resources not
Wasted on Routine Uncomplicated Patients
Healthcare Providers Need to Transition
Their Delivery Systems
• Expectation That Limitations Will be Placed Upon Total
Healthcare Spending
• Inefficiency Will Not Be Tolerated (or Compensated) Either Fee-for-Service or Capitated Contract Arrangement
• Today’s Markets Are A Combination of Fee-for-Service
and Capitation
• Plan That Does Not Currently Lay Groundwork For
Transition Seems to Be Preparing a System for the Past
and Not the Future
General Trends
Provider and MCO Capitation
• Consumer is Multi-Component Entity
• Government Sector, Consumer is the Government
• Government Pays All or Most of the Revenue
Supporting Services
• Government Has More Authority Than Patient
When Dealing with TPPs and Providers
General Trends
Provider and MCO Capitation
• Private Sector, Consumer is Primarily the
Employer
• Ultimate Recipient of Services in Patient
• Employer Generally Pays Large Portion of
Revenue Supporting Services
• Individuals Generally Cannot Generate Sufficient
Integration
• Generally Only View Government and Employers
as Consumers
Triangular Model of
Healthcare Market
Provider
CONSUMER
(Government/Employ
er)
TPP
Interaction Among Parties in the
Triangular Model
• TPP Industry is Consolidating
• Medicaid and Medicare Risk Enrollment Continues to
Increase
• Hospital Executives Indicate an Expectation of Growth in
Capitation
• Development of Employer Coalitions and Changes in
Large Employer Purchasing Methods
• Emerging Trends in Healthcare Costs
• Medicaid Programs are Continuing Their Expansion by
Means of HCFA Waivers
• Employers and Coalitions Combining Cost and Quality
Under the Umbrella of Quality Improvement
Recent Large Multiline Companies Leaving
Health Insurance Market
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Jefferson-Pilot
Lincoln National
Massachusetts Mutual
Metropolitan
• Prudential
• The Travelers
• NYL Care
Emerging Regional/National MCOs
• Anthem (Indiana, Kentucky, Ohio, Connecticut,
Maine? Colorado? New Hampshire?)
• Carefirst (Maryland, DC, Northern Virginia,
Delaware)
• PREMERA (Washington, Alaska)
• Wellpoint (California, Georgia)
• Trigon/Cerulean
• Highmark (Western Pennsylvania, Pennsylvania)
Consolidation Trends Are
Continuing
• December 1998, Aetna Announced They Will
Purchase Healthcare Business of Prudential
• Estimated at 11.7 Million Aetna Members
• CIGA is Currently in Discussions to Sell Its
Property/Casualty Business
TPP Industry Consolidation Will
Have Implications for Healthcare
Providers
• Consolidation is Intended to Develop Critical
Mass, Capital, Purchasing Power, and Information
Technology
• Continue to Control a Significant Number of
Insured Lives
• Continued Interest and Emphasis on Disease
Management Programs
TPP Industry Consolidation Will
Have Implications for Healthcare
Providers
• Upturns in Medical Trends May be a
Serendipitous Event for Consolidating Companies
• Increased Interest in HMO and POS Plans
Physician Trends
• Physicians Continue to Consolidate
• Survey of Physicians by SMG Marketing Group, Inc.
• Number of Medical Groups Has Increased 17.3%
Between 1995 and 1997
Consolidation is Driven By
“the increasing influence of managed care,
especially HMOs, on the physicians. Doctors are
finding it necessary to form groups to contract more
effectively with managed care companies.”
Recent Support by the AMA of
Physician Unions
• Time Frame Required to Organize Physicians
• Learning Curve Associated with a Physician
Union
• Scope is Limited to Employed Physicians
• Poorly Defined Regulatory Environment
Continued Use of External
Companies for Management
• Physician Practice Management Companies
(PPMCs) were Darling of Wall Street
• Last Two Years Have Not Been Kind to PPMCs
• Continue to Be a Force in Healthcare Market
• Approximately 27 Publicly Traded PPMCs
• Combined Equity Value Declined 49.3% During
1998
• Several High Profile Collapses
PPMCs Have Experienced Some
Recent Equity Improvement
• At the End of 1998, the Aggregate Stock Value of
PPMCs is Up 12.8% Over the Last Six Months of
1998.
• S&P Rose 7.5% During the Same Period.
• Total Capitalization of PPMCs was Estimated at
Approximately $4.8 Billion.
• Some of the Largest PPMCs Continue to Have
Difficulties.
– Medpartners
– FPA Medical Management
Hospital Trends
• Evergreen Rd Released Survey of Hospitals and
Doctors in March 1999
• Provider Expectation That Capitation Will
Increase
• Surveyed 322 Provider Organizations Nationwide
Survey Indicated Hospital Groups
• Percent of Revenue Attributable to Capitation Contracts
was 30% or More.
• Expected Capitation to Increase 33% in the Next Two
Years and 41% in the Next Five Years.
• 65% of Surveyed Capitated Hospitals Planned to Sign New
Capitation Contracts in 1999 with an Average 2.6 New
Contracts per Hospital.
• 27% of Surveyed Non-Capitated Hospitals Planned to Sign
Capitation Contracts in 1999 with an Average of 1.9
Contracts per Hospital.
Continued Reduction in
Hospital Occupancy
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Hospital Revenues May Continue to Decline
Re-Engineering Efforts May Not Be Sufficient
Expense Reductions May Not Be Sufficient
Need to Address Revenues, Expenses, Access to
Marketshare, and Operational Changes
• Empty Beds Are Bad News
• Competition May Complicate Strategies That
Focus on FFS Contracting
Hospitals as Commodities
• Nascent Nature of Newer Quality Measures
• Little Differentiation Among Competitor Hospitals
• Oversupply Shifts the Negotiating Advantage to
Consumers
• Need to Develop Strategic Alliances
Gain-Sharing is Illegal
• Consultants Promoting and Implementing Gain-Sharing
Arrangements
• Estimate That Approximately 12 - 15 Such Gain-Sharing
Programs
• HHS’s Inspector General (IG) Office and HCFA Posted
Bulletin on July 8, 1999
• Effectively Eliminated Broad Gain-Sharing Arrangements
• Gain-Sharing Programs Confined to Managed Care
Programs or Medicare/Medicaid Risk Programs are Still
Allowable.
Highlights of the IG Bulletin
• Civil Monetary Penalty Section of the Social Security Act
is Interpreted to Strictly Prohibit Gain-Sharing
Arrangements
• Existing Gain-Sharing Arrangements Should Be
Terminated Immediately.
• Alignment of Incentives by Hospitals with Physicians for
Purposes of Cost Savings May Not Violate the Social
Security Act.
• Clinical Joint Ventures May Violate Anti-Kickback
Provisions of the Social Security Act.
Medical Trends
and Employer Coalitions
• Recent Surveys of Medical Trends Indicate a Return to
Double Digit Increases
• Recent Losses Within the Managed Care Industry
• 1999 Renewal of 10.75% Negotiated Between the
California Public Employers Retirement Systems
(CalPERS) and KaiserPermanente
• Kaiser, the Nation’s Largest and Oldest HMO,
Experienced Its First Loss ($270 Million) in 1998
• Experts Have Speculated that Kaiser Will Need at Least a
25% Increase in Aggregate Premiums Over the Next Three
Years
CalPERS and Buyers Health Care
Action Group (BHCAG) of Minnesota
• Two of the Largest and Oldest Employer Coalitions
• Coalitions are Continuing to Form and Increase in Size
• Coalitions are Seeking
– To Improve Patient Access
– To Increase the Scope of Benefit Coverage
– To Reduce Overhead
– To Improve Population Management
Changes in Medicare
• Aetna/US Healthcare Withdrew from Connecticut
• BC/BS Withdrew from Arizona, Massachusetts,
and North Carolina
• Oxford Withdrew from Connecticut and New
Jersey
• PacifiCare Withdrew from California
• UHC Withdrew from Florida, Ohio, and Missouri
HCFA Statistics Indicate
A Different Situation
• Fifty-two (52) Plans Dropped Contracts at the End
of the Fourth Quarter of 1998
• Dumped Approximately 299,000 Medicare Risk
Beneficiaries
• All but Approximately 50,000 of the Beneficiaries
Have Re-Enrolled
HCFA Statistics Indicate
A Different Situation
• Average Size of the Remaining Plans Have Increased
(Over 4,000 per Plan or 5% Between October 1998 and
April 1999)
• Number of New Medicare Risk Beneficiaries Added
per Month has Increased Three Months in a Row
• 53,673 Beneficiaries were Added in April 1999
• 148,467 Have Been Added Since February 1, 1999
• 398,588 Have Been Added Since August 1, 1998
HCFA Statistics Indicate
A Different Situation
• HCFA Estimates that Medicare Risk Program will Increase
at Approximately 50,000 New Beneficiaries per Month and
to Reach 600,000 by the End of 1999
• 103 of the Medicare Risk Plans are Growing at a Rate of
10% or More per Month
• Approximately 301 Plans Enrolled in Medicare+CHOICE
• 40 Plans (55% of Total Enrolled Beneficiaries) Which
HCFA Characterizes as Super Meds Growing at More
Than 10% per Month
HCFA Statistics
Have Implications
• Growth in Beneficiaries is Occurring in Urban Areas
• FFS Medicare Beneficiaries are Shrinking
• May be Difficult to Retreat from Medicare Managed
Care Contracts
• Large Plan Disenrollment at the End of 1998 May
Have Been a Strategic Reengineering
• Need to Increase Investment in Medicare
Management Systems
Changes in Medicaid
• Three Medicaid MCOs Exited Arizona Last Fall
• Two Medicaid MCOs Left Georgia
• Two Cook County, Illinois Medicaid MCOs
Refused to Accept Medicaid Capitation Rates
• Maine Medicaid MCOs Have Refused Medicaid
Capitation Recently and Maine is Developing a
Direct Contract Strategy with Healthcare
Providers
State Governments Pursuing
Medicaid Risk Programs
• States Appear to be Intolerant of the Inability of
MCOs and Healthcare Providers to Manage Risk
Contracts
• Programs are Expanding into Disabled, Elderly,
and Long Term Care Beneficiaries
• Programs are Expanding into Children’s Health
Initiative Programs (CHIP) and Other Programs
Implication for
Healthcare Providers
• Government Risk Programs May Increase in Size
• Become a Larger Percentage of Marketshare
• Management of These Populations Will Need to
be Different
• Healthcare Providers Will Need to Adapt to the
Growth and Develop Changes