Managed Care:
Present and Future
Robert (James) Walling, MRH&T
James B. Connor, Pricewaterhouse Coopers
James W Macdonald, Reliance Reinsurance Corp.
Managed Care:
A Brief Look at the Past
Robert J. Walling, Consulting Actuary
Miller, Rapp, Herbers, & Terry, Inc.
Why look at “Ancient History”
Those who cannot remember the past are
condemned to repeat it.
—George Santayana
That men do not learn very much from the
lessons of history is the most important of all
the lessons of history.
—Aldous Huxley
Ancient History 1

1910
– First prepaid group practice (50¢ /member/mo)
– First group health policy issued to Montgomery
Ward

1917
– Early medical society opposition to managed care
begins as Pierce County Service Bureau is formed
to limit competition from prepaid plans.
1929: Depression & Managed Care





Decreased philanthropic support of hospitals
Substantial medical inflation
Decreased hospital occupancy
First prepaid hospital (Dallas Schools &
Baylor University Hospital)
The Ross-Loos service clinic establishes
prepaid clinic in L.A. for Power and Water
Departments
Backlash

1931 - Ross & Loos expelled from L.A.
County Medical Society

1932 - AMA Publishes a strong statement
opposing prepaid medical.

1932 - Blue Cross developed (medical
community responded more favorably to
health insurance than prepaid medical)
Development Despite Opposition

1937 - First Urban HMO established (Group
Health Associates in D.C.)

1937 - Henry Kaiser begins Permanente
Plans as prepaid medical plan for workers on
Grand Coulee Dam construction site.
Judicial Developments



1941 - U.S. Supreme Court finds D.C.
Medical Society guilty of Restraint of Trade
against Group Health Associates
Several court successes for HMOs follow.
(Shadid v. Oklahoma Medical Society)
Over the next 10 years, 100 rural group
health plans, 20 HMOs, and prepaid group
health plans for several local unions
(Teamsters, UAW, UMW) develop.
Social/Political Changes



1965 - Social Security expanded to include
medical insurance for the elderly (Medicare)
and poor (Medicaid)
1970 - Nixon responds to $85B in US Health
expenditures by endorsing HMOs as new
national health strategy
1973 - HMO Act signed by Nixon. Provides
for “assistance and encouragement for the
establishment and expansion of HMOs”
Economic Changes

1975-84 - Hospital charges inflated at
average of 9.3%

1970-90 US Health expenditures rise from
$85B to $647B

1990 - Health Expenditures 12% of GDP.
Economic Changes (cont.)



Dramatic increase in medical malpractice
costs
Dramatic advances in medical technology
(CAT scans, MRI, Organ transplants, etc.)
revolutionize medical care but at a substantial
cost
A number of social factors (aging population,
more doctors, new techniques, relatively low
employee costs) increase utilization.
Number of HMOs






1950 - 20
1970 - 37 in 14 states
1975 - 183 in 32 states (297 more in
planning)
1980 - 236 HMOs serving 9.1 million
members
1985 - 393 HMOs
1987 - 662 HMOs
Early Cost Containment Efforts

Controlling Utilization
– Utilization Review
– Weekend Admissions
– Maternity Length of Stay
– Preadmission review
– Second Surgical Opinion
– Case Management
– Appropriate Level of Care
– Pre-admission Review
Early Cost Containment Efforts

Employee Contributions

Reducing Plan Benefits
– Deductibles
– Copayments
– Maximums (Mental Health, Private Rooms,
Chemical Dependency, DME, Physical Therapy)
– Outpatient Incentives

Provider Network Discounts
Backlash Revisited

1996 - Over 1,100 bills considered in 46
states to regulate managed care.

1997 - President Clinton appoints advisory
panel to draft bill of rights for health care
consumers.

1997 - In the first 4 months, 800 proposals to
regulate managed care are introduced in 49
states.
Managed Care:
Present & Future
Jim Conner
Pricewaterhouse Coopers
Managed Care - Overview











Current Environment
– Trend Issues
– Overview
Growth
Prices
Medical Care Costs
Margins
Mergers
Quality of Care
Member Satisfaction
Government Programs
Computer Systems
Regulatory
National Employee Health Care
Enrollment
1993
1997
1998
Change 1993
to 1998
Indemnity
48%
15%
13%
-35
PPO
27%
35%
40%
+13
POS
7%
HMO
19%
53%
20%
30%
85%
20%
27%
87%
+13
+8
Overview - HMO Results
1990
1994
1996
1997
# Members
36.5 mil 51.1 mil
64 Mil
64 mil
Growth Rate
5%
13%
19%
0%
Penetration
15%
20%
24%
24%
Margin
4.6%
4.7%
2.0%
-0.5%
HMO RATE INCREASE
9
8.3
8
7
6
4.6
5
4
Projected
Actual
3.3
2.6
3
2.1
2
1
0.8
0.5
0
1996
1997
1998
Sources: Sherlock Co. (Projected); KPMG Peat Marwick (Actural)
1999
Managed Care - Growth

Penetration/Growth Rate

Control Risk

Underwriting Risk

Provider Contracting Leverage
Managed Care - Prices

Price Changes

Market Share Driven

Employer Leveraged

Expectations of Managed Care

Purchasing Coalitions

Underwriting Cycle
Managed Care - Medical Care Costs

Utilization vs. Inflation

Aging Population

Disease Management

Capitation/Risk Sharing

Pharmacy Costs

Complementary & Alternative Medicine (CAM)
Managed Care - Margins

Digesting Acquisitions

Computer Capacity

Rising Medical Costs

Building Market Share
Managed Care - Quality of Care

Clinical vs. Administrative

Accreditation (NCQA)

HEDIS Reporting

Quality vs. Cost
Managed Care - Member Satisfaction

Choice of Provider

Point of Service/Open Access Products

Availability of Provider
Managed Care Government Programs

Medicare Risk

Medicare + Choice

Medicaid
Managed Care - Computer Systems

Information Driven Business

Capacity

Medical Management

Integrated Healthcare Systems

Dynamic Industry
Managed Care Pricing Components
Pricing Grid
Medical Service Categories
20 - 30
Diagnostic Related Groups (DRG)
495
Procedure Codes (CPT)
1,000+
Diagnostic Codes (ICD9)
1,000+
Managed Care -Regulatory

Consumer Protection Legislation
–
–
–
–
–

Emergency Care
External Appeals
Access to Specialists
Continuity of Care
Right to Sue Health Plan
Medicare Reform
– Medicare & Choice
– Outpatient Drugs

Medical Record Privacy
– Consent Issue
– Genetic Data

Uninsured (45 Million)
MANAGED CARE
MANAGED HEALTH
Future of Managed Care:
The Only Certainty is (Much) More Change
James W Macdonald, Senior Vice President
Reliance Reinsurance Corp.
Important recent developments
most likely to define the future
of Managed Care

Consumer Choice is returning rapidly
Number of Operating HMOs Dramatic Growth Since 1993
800
750
700
650
600
550
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
500
Source: Hoechst Marion Roussel Managed Care Digest 1998; SMG
Marketing Group
Total Enrollment Approached 84
Million In 1997
85
75
65
55
45
35
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
25
Decentralized Models are #1: Over 70% of
1997 HMO Enrollees were in Network or
IPA model plans
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Staff
Group
Network
IPA
1995
1996
1997
4.3
16.2
8.9
38
4.2
19.5
8.4
45.2
3
19.8
14.2
46.7
IPA Model HMOs Not Penalizing Physicians for
Certain Practices Increased From 49% in 1996 to
74.1% in 1997
75.00%
65.00%
55.00%
45.00%
35.00%
IPA HMOs
1996
49.00%
1997
73.90%
HMO Capitated contracts with Specialists
Declined in 1997
44.0%
43.0%
42.0%
41.0%
40.0%
39.0%
38.0%
Specialists with
Captiated Contracts
1996
1997
43.2%
40.3%
Primary Care Physicians also saw a reduction in
Capitated Contracts in 1997
77.0%
75.0%
73.0%
71.0%
69.0%
67.0%
65.0%
PCP's with HMO
Captiated Contracts
1996
1997
75.0%
70.7%
Triple-Option HMO plans Jump to
over 41% of all HMO plans
42.0%
40.0%
38.0%
36.0%
34.0%
32.0%
30.0%
HMO Plans Offering
Triple Options
1996
1997
33.9%
41.4%
Note: Triple Option plans give enrollees choice of HMO, PPO or
indemnity.
Important recent developments
most likely to define the future
of Managed Care


Consumer Choice is returning rapidly
The Cost of Health Care will Re-Accelerate
Health Care Expenditures as a Percent of GDP
- New Growth Expected
(Selected Years to 2007)
19
17
15
13
11
9
7
5
1970
1980
1990
1993
1996
1998e
2001e
Sources: HCFA, Office of the Actuary; US Department of
Commerce, Bureau of Economic Analysis
2007e
Private Sector Expected to assume Burden of
Increased Expenditures ($B)...
1200
1100
1000
900
800
700
600
500
400
300
200
1990
1993
1996
1998e
2001e
2007e
Pub lic Sector
284.4
389
483.1
540.4
637.4
987.4
Private Sector
415.1
505.9
552
606.4
746.6
1145.9
…with the average annual Private Funds
growth rate more than doubling from 1996 to
2001
12
11
10
9
8
7
6
5
4
3
2
1990
1993
1996
1998e
2001e
2007e
Pub lic Sector
10.5
11
7.5
5.8
5.7
7.6
Private Sector
11.3
6.8
2.9
4.8
7.2
7.4
…But widespread double-digit growth
rates are not expected to return
(Average Annual Growth Rate From Prior Year
Shown)...
30
25
20
15
10
5
0
1970-1980
1993-1996
2001-2007
National Health Expend.
12.9
5
7.5
Hospital care
13.9
4.9
6.6
Physician services
12.8
3.5
7.8
Other professional
16.3
7.8
8.1
Home health care
26.9
9.7
8
Prescription Drugs
8.2
7.6
9.8
Two assumptions critical to these
projections ...


Cost savings produced by Managed
Care are “primarily one-time” and are
not sustainable.
Only a small long term growth rate
reduction will result from the impact of
managed care on the use of higher
cost medical technology.
Important recent developments
most likely to define the future
of Managed Care



Consumer Choice is returning rapidly
The Cost of Health Care will ReAccelerate
Vertical Integration will become as
much a change driver as Horizontal
Integration
Horizontal Consolidation: The nation’s 25 largest
HMO’s enrolled 25.4 million members, or 30.3%
of the total versus 23.7 million in 1996.
Top 25 HMOs
30%
All Other
70%
Vertical Consolidation: Hospitals are forming and
taking increased equity stakes in HMOs
65
60
55
50
45
40
Hospital-Owned
HMOs
1995
1996
1997
46
58
61
Source: SMG Marketing Group
Vertical Consolidation: Hospital-Owned
Enrollment Growth Possible Key Indicator to
Future of Managed Care
4200
3700
3200
2700
2200
Hospital-Owned
HMO Emrollment
(000s)
1995
1996
1997
2,448
2959.8
4082.1
Source: SMG Marketing Group
Vertical Consolidation: Hospitals with an HMO
equity stake averaged 72% occupancy versus 46%
for hospitals with no HMO equity
70%
60%
50%
40%
30%
1997
Hospitals with HMO
equity
72%
Hospitals Without
HMO equity
46%
Vertical Consolidation:
Pharmaceutical Segment



Top Down: Merck / Medco
Bottom Up: Rite Aid / PCS
Mixed Segments: McKesson / HBOC
Important recent developments
most likely to define the future
of Managed Care




Consumer Choice is returning rapidly
The Cost of Health Care will ReAccelerate
Vertical Integration will become as
much a change driver as Horizontal
Integration
Future of Managed Care / Health Care
Free Market Ideal: Three Phases
to Market Evolution
Phase 1:
Phase 2:
National expansion &
share consolidation
Market Segmentation
HMO
Customers
Segment1 Segment 2 Segment 3
Source: Andersen Consulting
Three Phases to Market
Evolution:
Phase: 3
Outcomes Based Product & Service Differentiation
“...universally accepted quality standards and
measurement capabilities…”
Source: Andersen Consulting
Conclusion: Past Key Health Care
Issues Remain Unresolved ...






Aging Baby Boomers (should drive
medicare Managed Care Growth)
Uninsured & Underinsured Americans
Solvency of Medicare / Medicaid
Highest Health Care % of GDP
High Cost of New Technology
Need for highly informed patient /
consumer (“Demand Management”)
… while several tough issues
have emerged today...





Demonization of Managed Care
Probable loss of ERISA protection
Patient Distrust of For-Profit Providers
Failure of PPMC model: Physicians in
disarray
New and tougher regulatory
environment
… and new important
challenges appear to be on the
horizon.



End of low cost malpractice and E&O
Insurance?
Payer Dis-intermediation: Large
Employer Direct Contracting (e.g. John
Deere)?
Impact of BBA of 1997 prospective
payment system
Conclusion: Follow the Money
Two Possible Long Term Scenarios

Decentralized, regional payer and
provider system
– Can consumer bear increased cost?
– Can investors achieve adequate ROI?

If not, probable alternative: centralized,
single or limited payer system
– Strictly tiered, government controlled
– Similar to British or Canadian systems
Conclusion: Most Likely Scenario
“Tiers - R - Us”
Elite
Elite
Secure
Middle
Market
Vulnerable
Middle
Market
Safety Net
Safety Net
1980
1990
Elite
Upscale
Managed
Care
Low-End
Managed Care
Safety Net
2000+
Q&A