Managed Care in the US:
Under New Management
Robert E. Hurley, Ph.D.
Department of Health Administration
Virginia Commonwealth University
Public
Private
Employer
Government
Employee and
dependents
1.Aged (>65)
2. Poor
3. Disabled
Direct
Purchase
Insurance/
Managed Care
Company
Direct
Purchase
Health Care Providers
Hospitals
Physicians
Others
Public
Private
85 mil.
175 mil.
Employer
Government
1.Aged (>65)
2. Poor
3. Disabled
Employee and
dependents
Insurance/
Managed Care
Company
Direct
Purchase
Direct
Purchase
Health Care Providers
Hospitals
Physicians
Others
Public
Private
85 mil.
175 mil.
Employer
Government
1.Aged (>65)
2. Poor
3. Disabled
Employee and
dependents
Insurance/
Managed Care
Company
Direct
Purchase
Direct
Purchase
Health Care Providers
Hospitals
Physicians
Others
45 mil.--Uninsured
Medicare--Aged
• 1965--Federal (national) program created to cover
most persons 65 years of age and older
• Modest benefit package; no Rx benefit till 2006
• Expanded later to cover permanently disabled
• Government pays health services providers for
directly in most cases
• Payment methods and payment rates are set by the
Medicare program--non-negotiable
Low Income Programs
• Typically jointly administered and financed by
national, state, and local governments
• Focus on persons under 65 who are unable to
afford to buy private coverage
• Benefit packages vary by program type: some are
generous, others limited
• Provider payment methods vary but rates usually
below private insurance and Medicare
Employment Based
Health Insurance Coverage
180
160
145
140
120
160
150
170
120
100
80
80
60
40
20
21
0
1945
1955
1965
1975
1985
1997
Source: Center for Risk Management and Insurance Research, 1999
1999
Coverage in the US--< age 65
(approx. 250 million)
Employer-Based
Individual
Medicaid/other public
Uninsured
17%
5%
14%
Source: Kaiser Family Foundation, 2004
63%
Employers Sponsored Health
Insurance: “The Accidental System”
• Reliance on employer as sponsor for health insurance
evolved over time in U.S.
• Employers may voluntarily offer health care coverage as
a form of benefit or non-cash compensation
• Participation among employees is voluntary
• Health benefits are not subject to income tax
• Employer selects types of health insurance available
and benefits to be covered
• Employer pays all or part of premium on behalf of
employee and dependents
Real Numbers for Health Care Coverage, 2005
• Annual Cost for Single Coverage = $ 4025
• Pct of Premium Paid by Worker=
16%
• Annual Cost for Family Coverage = $ 10880
• Pct of Premium Paid by Worker =
26%
Gabel et al, KFF, 2005
Employer sponsored health
insurance-implications
• Tax incentives encouraged generous benefits with
limited “out-of-pocket” expenses
• Presence of insurance has encouraged demand for
service--some say “cost-unconscious use”
• But many small employers are not willing or able to
offer health benefits to their workers
• Many low income workers are not willing or able to
pay for their share of the employer-based coverage
Rising Health Care Costs
1970 1980
Total expenditures $73
(in billions)
Percent of GDP
7%
Source: Levitt et al 2005
$246
8.8%
1990
1995
2000
2004
$696
$987
$1309
$1880
12.0%
13.3%
13.0%
16%
Managed Care
• Historically, most employers relied on insurance
companies to arrange health benefits
• Employer concerns about rising costs led many
to look for new arrangements
• Managed care was effort by employers to try
to influence on providers to control their costs
• HMO (health maintenance organization) was
the most well-known form of managed care
Health Maintenance
Organization (HMO)
• Combines both insurance and provider role into a
prepaid health care organization
• Assumes risk for specified set of services
• Arranges with providers (employment or contract)
to delivery services to predetermined rates
• Believed to be a more efficient model of financing
and delivery
• HMOs expected to compete against one another
on price and quality
Managed Care Organization (MCO)
Enrollment 1982-2005
Participants in millions
250
PPO
HMO
200
150
100
50
96
19
98
20
00
20
02
20
04
SOURCE: AAHP
94
92
90
88
86
84
19
82
0
Managed Care Methods
• Create provider networks through contracts and
negotiate favorable payment rates
• Promote appropriate service provision and
encourage appropriate consumption
• Standardize medical practice and promote use of
appropriate treatments
• Encourage provision of preventive services and
care management programs for chronically ill
Increases in Health Insurance Premiums
Compared to Other Indicators, 1988-1996
HI Premiums
Overall Inflation
18%
12.7%
8.5%
8.3%
4.8%
3.4%
02
20
1
0
99
98
97
96
94
94
93
92
91
90
89
1.6%
19
88
20
18
16
14
12
10
8
6
4
2
0
Workers Earnings
Gabel et al, KFF, 2002
Increases in Health Insurance Premiums Compared to
Other Indicators, 1988-2005
HI Premiums
19
Overall Inflation
18%
13.9%
11.2%
9.2%
8.5%
8.3%
4.8%
2.3%
2.2%
Gabel et al, KFF, 2004
4
2
0
98
96
94
92
.8%
90
88
20
18
16
14
12
10
8
6
4
2
0
Workers Earnings
Current Challenges for
Managed Care
• Unable to sustain cost control
• HMOs became very unpopular with public
given restrictions on choice of provider
• Providers resent controls on practice and
payments
• Financial distress for some providers led them
to refuse to contract with HMOs
• Politicians and policymakers have imposed
many constraints on managed care
Percent of Groups with “Unfavorable”
Rating
(Kaiser Family Foundation, National Survey of Prescription
Drugs, Sept. 2000)
71%
Tobacco Cos
HMOs
57%
Oil Cos
57%
44%
Pharm Cos
28%
Airlines
Banks
26%
Hospitals
25%
17%
Doctors
0%
10%
20%
30%
40%
50%
60%
70%
80%
Contemporary Pressures
• Premium increases remain in double-digits
• Providers demanding higher payments
• Continued increases in labor, technology,
pharmacy, malpractice, and administrative costs
• Private purchasers losing faith in managed care
• Coverage expected to decline as costs rise
• Increased consumer cost participation
Managed Care—Under New Management
• Many employers believe employees must
share more of cost of their health benefits
• Employers decide to reduce some of their
support for health benefits
• Health insurance companies developing new
products with much more cost sharing
• Patients paying for care with own money are
expected to consume less and demand more
information to an effective buyer
Percentage of Large Employers (>200 workers) Planning
Selected Benefit Changes in Next Year
Likely
Raise employee
premium
Not likely
83
17
55
Increaser Rx Costs
45
Increase
Deductibles
52
48
Increase office
copays
52
48
Reduce dependent
subsidy
Restrict eligibility
41
9
59
91
Gabel et al, KFF, 2004 Likely= Very/Somewhat likely; Not=Other
Consumer Directed Health Products
• Growing interest in offering “consumer
directed health plans”
• Federal tax law changes allow consumers to
put money into “health savings accounts”
(HSA) and avoid taxation, if they purchase a
high deductible insurance policy
• $ in HSAs can meet routine expenses and
cover cost of high deductible
• HSAs can build up over time and be used for
any health-related expense
Consumer Directed Health Plan Design
EMPLOYEE’S
Health Savings
Account
Routine/
Discretionary
Care
$
EMPLOYER
$
High
Deductible
Insurance
Policy
High
Cost
Care
Policy Concerns with Consumer
Directed Products
 Information to support consumer decision making
remains badly underdeveloped
 Deferred/forgone care could lead to higher costs
 Uncompensated care could rise sharply
 Healthy likely to opt out of conventional insurance
 Less healthy maintain comprehensive coverage
 Risk-pooling undermined; premiums could soar
Consumer Directed Health Products:
Inspiration or Desperation?
 Some experts predict 40% of Americans could move
to the products in next 5 years
 Growth in products will increase demand for more
and better price and quality information
 Impact on utilization and cost is largely unknown
 Unclear if consumers will accept the additional
financial risk of these products—especially lower
income consumers
 Some experts predict products will remind
Americans why they wanted comprehensive health
insurance in the first place
“You can always count on the Americans to
do the right thing, after exhausting all other
alternatives.”
Winston S. Churchill