Center for Studying Health System Change

ublic policy has broadly affected Seattle’s health care system during the past three to five years. The Health Services Act of 1993 and the movement of the AFDC population into managed care have led to significant changes in the organization of health care providers. Insurance regulation has also become an important health policy issue. In general, the Health Services Act sought to expand and protect access to insurance coverage for state residents. Since 1994, however, the legislature has reversed course and overturned several key earlier provisions. Respondents report that the impact of employers on the insurance market is felt primarily through their influence on state health policy rather than through organized or concerted purchasing efforts.

The Health Services Act of 1993 was an effort at comprehensive health reform. The Health Services Act included five major provisions:⁶

• Employer and individual mandates. By 1999, all employers would have been required to offer employees and dependents a choice of health plans, join a purchasing cooperative or offer coverage through a state-sponsored health plan. Individuals would have been required to subscribe to a plan by 1999.

• The Basic Health Plan. This subsidized insurance plan was funded through Washington’s tobacco, alcohol and hospital taxes. It was designed to insure 200,000 adults and 130,000 children statewide with low incomes and limited access to health benefits and who were not eligible for Medicaid.

• Reform of individual and small-group insurance markets. This included guaranteed issue to all employer groups; pure community rating with adjustments only for family composition and geography; guaranteed renewal; and limits on waiting periods for pre-existing conditions.

• Any willing provider and patient protection provisions. These would have required insurers and HMOs to accept all licensed health providers willing to comply with terms of participation.

• The state Health Care Policy Board. This new entity would have replaced the powerful Washington Health Services Commission.

In addition, the Health Services Act called for certain health care task forces and studies, resulting in the creation of the Public Health Improvement Plan, a program designed to track and help improve the public health infrastructure in Washington.

The legislature elected in 1994 reversed the direction of the previous legislature. Universal coverage was rescinded, and some insurance reforms have been repealed through a series of legislative actions during the past two years. The Basic Health Plan, some insurance reforms and the task forces and commissions created by the Health Services Act remain in effect, but some informants believe that the remaining insurance reforms may be repealed as well. Although the state’s medical and hospital associations and various consumer groups strongly supported the Health Services Act, powerful business lobbies (including the Association for Washington Business and the Health Care Purchasers Association) opposed it, largely because of the employer mandates.

The passage and subsequent rescission of the Health Services Act had profound effects on Seattle’s health care providers and plans, which had anticipated broad expansion of managed care. For example, many physicians consolidated into large groups, and several hospitals launched insurance products to compete with health plans. Medalia, Washington’s largest physician group, was created directly as a result of anticipated demand for large primary care group capacity under universal coverage. Group Health Cooperative and Virginia Mason Medical Center launched a joint POS product to compete with other plans, and the State Medical Association started a physician-owned health plan to compete for new contracts.

Although the demise of universal coverage undermined the viability of these strategies, many of these entities became contractors under the Basic Health Plan. The changes they made to participate in this program left them well positioned for Boeing’s managed care announcements.

Following passage of the Health Services Act, several area HMOs and individual health insurance carriers, particularly the popular Group Health Cooperative of Puget Sound and Blue Cross, reportedly experienced problems with adverse selection. This adverse selection may have resulted from insurance reforms that remained in effect even after universal coverage was repealed -- leaving sicker patients in plans without a large increase in healthy patients to counter their effect. Informants suggested that the Basic Health Plan has attracted its own adverse selection. As a result, they said, costs of care are higher than expected and resources are running out earlier than expected.

The mandate to enroll the entire AFDC population in Medicaid’s Healthy Options managed care program, which took effect on a statewide basis in 1993, created a new market opportunity for Seattle’s health plans. Washington also passed a law to move the SSI population into Healthy Options, although the time frame for this transition has been pushed back several times. Healthy Options’ initial purchasing approach included only limited qualifying requirements for plans. In July 1996, it switched to a selective strategy in which price counts for 60 percent of the selection decision. Respondents generally credited the Healthy Options program with improvements in access to primary care. But new price competition in the program may result in lower revenues for participating providers or, as in the case of Providence Health Plans, discontinuation as a contracted plan.

Regulation and legislative advocacy by the state Department of Insurance has also influenced the Seattle landscape. The department regulates insurers and licenses HMOs and Health Care Service Contractors (HCSCs, which include provider-sponsored or provider-operated health plans, as well as more traditional HMOs, such as PacifiCare). Like HMO licenses, HCSC licenses have been available in Washington for more than 10 years. However, they require fewer assets and are easier to obtain than HMO licenses. Traditional insurers and PPOs are not licensed in Washington.

The Department of Insurance also responds to consumer concerns about health benefits, a role highlighted by the department’s commissioner. Informants credit the department with supporting insurance reforms and other recently enacted mandates, including:

• minimum length of stay for deliveries,

• expanding the definition of primary care providers to include non-traditional therapists, such as naturopaths and chiropractors (this mandate was subsequently struck down in a federal court for violating ERISA laws); and

• provisions allowing access to obstetricians and gynecologists without gatekeeper control.

PURCHASING

Seattle’s two largest health care purchasers have altered their purchasing strategy in the past two years. The Boeing Company, which purchases benefits for 86,000 local employees plus dependents, has undertaken a plan to move beneficiaries into managed care. The state of Washington, which purchases coverage for public employees, recipients of subsidized insurance and Medicaid enrollees, has increased its level of contracting with managed care and instituted price-driven selective contracting in Medicaid. Brokers also have a long-standing relationship with public and private purchasers and are highly influential in purchasing.

Private Purchasing

Private sector employers reportedly are satisfied with the health care costs, quality and benefit designs available in Seattle. They have not insisted on deep cuts in premiums or changes in benefit designs, as long as prices remain "reasonable." After price, their primary concern is provider choice, which has worked against plans’ efforts to establish more exclusivity in their physician and/or hospital networks. Contracting generally has been with traditional insurance plans, or with Group Health Cooperative of Puget Sound. Prior to 1996, Seattle’s major employers (including Boeing, Microsoft, Nordstrom, SeaFirst Bank and The Bon Marché) reportedly had devoted little energy to health benefits purchasing. Instead of trying to make major changes in their health benefit options, these employers reportedly have sought to influence state policies related to health benefits. For example, employers opposed small-group insurance reforms that established mandated benefits or provided guaranteed issue.

In 1994, Boeing took the first major step by a large private employer in decades by launching plans to convert its employees, dependents and retirees to managed care in the July 1995 open enrollment period. Prior to this initiative, 85 percent of Boeing’s work force plus retirees and dependents were enrolled in traditional insurance; the remainder were enrolled in HMOs. The Machinists’ Union (Boeing’s largest union) went on strike in 1995 over pay and health benefits. The machinists were generally concerned about converting to managed care, and they were particularly disturbed by Boeing’s proposal to make employees who chose other than the cheapest health plan option available pay more out of pocket. That proposal was dropped, and Boeing proceeded with the initiative for the 1996 open enrollment.

Boeing revised its menu of plans and sought to standardize its benefit packages by requesting proposals from specific plans. After awarding contracts to five plans, Boeing began offering financial incentives to employees who converted to -- and remained with -- those plans: $600 for the first year, $400 for the second year and $200 for the third year. Although these changes were met with some concern initially, many of Boeing’s beneficiaries are now enrolled in managed care. As of July 1996, 60 percent of salaried workers, 50 percent of hourly workers and 25 percent of retirees had converted to managed care. Informants believe that Boeing’s plan faces its real test during the next open enrollment period -- July 1997.

Brokers play a prominent role in Seattle; one estimate suggests that more than 1,100 individuals act as brokers. Employers hire brokers to evaluate, recommend and help negotiate with plans. While many brokers work solo or in small firms, brokers for Seattle’s larger employers work in large consulting firms, where they have research staff available to gather and analyze data on the health plans, including information about the providers within the networks and the care management provided by the plan. One broker expressed concern that brokers increasingly will need to demonstrate the added value they bring to purchasers to retain their positions. Health plans reportedly are not happy with the influence that brokers wield, but accept them as a fact of life.

Three purchasing cooperatives were launched recently in Seattle under the direction of three major business groups:

• the Employers Health Purchasing Cooperative, created by the Health Care Purchasers Association;

• a cooperative founded by the Seattle Chamber of Commerce; and

• the Purchasers Alliance, which was launched by the Association for Washington Business.

These cooperatives were created largely by Seattle’s small and medium-size employers to increase their purchasing power and ensure stable health care costs. Their impact on the local market reportedly has been minimal. The Employers Health Purchasing Cooperative (EHPC) illustrates how a purchasing cooperative works in this market. Established two years ago with funding from the Hartford Foundation, the EHPC has more than 200 members but represents only 10,000 covered lives. It caters to small employers and does not view itself as a viable vehicle for larger employers who want benefits more tailored to their needs. Instead, the EHPC secures a rate cap from plans in exchange for three-year contracts from employers.

More changes are predicted in purchasing and health plan strategies. Several health care providers and purchasers predict more movement toward direct, capitated contracting with provider systems. Meanwhile, respondents said that purchasers would prefer direct contracting as a way to circumvent plans and pick the provider systems that they believe offer the best value.

Health plans, on the other hand, are developing regional and multistate strategies with the hope that large purchasers will prefer to contract centrally with a few plans. However, there is no evidence of success with such regional strategies.

Public Purchasing

State actors dominate public purchasing in Seattle, although different entities are responsible for Medicaid, public employees and Basic Health Plan enrollees. The Washington State Health Care Authority purchases for the Public Employee Benefits Board (state employees and teachers) and the subsidized Basic Health Plan. The Medicaid Authority purchases for Medicaid’s Healthy Options managed care program.

The Health Care Authority issues a single request for proposals to solicit separate bids from plans for the Public Employee Benefits Board and the Basic Health Plan. The process and criteria used to review bids for these separate contracts are the same. The Health Care Authority reviews proposals against minimum threshold requirements for quality and access, price and financial solvency. The Health Care Authority offers at least eight plans in the Seattle area to Basic Health Plan members and at least 11 plans in the Seattle area to Public Employee Benefits Board enrollees, who must pay higher premiums if they subscribe to one of the more expensive plans offered. The Uniform Medical Plan has been the Health Care Authority’s self-funded plan (and among the state’s most expensive options) for decades. In 1996, the authority required employees enrolled in the Uniform Medical Plan to pay a higher premium for the first time. To encourage state employees to select other offerings, the authority has been beefing up benefits in its HMO options for the last decade.

Before 1996, the Medicaid Authority contracted with health plans that met certain minimum thresholds for quality and access. In 1996, Medicaid introduced a selective contracting process in which price considerations counted for 60 percent of the purchasing decision. The designation of price as the dominant criterion sparked what some informants referred to as a competitive bidding "price frenzy." Other selection criteria include access to emergency services; availability of prenatal, family planning and medical interpreter services; and the use of quality improvement measures. The Medicaid Authority strongly encourages plans to obtain and analyze encounter-level data from physicians and hospitals. Plans receive additional consideration if they include traditional safety net providers in their networks.

Medicare managed care enrollment has grown over the past few years, driven especially by the recent entry of California-based PacifiCare into the Seattle market. Medicare managed care penetration is currently about 26 percent.⁷ PacifiCare eliminated the premium for its Medicare product, and Group Health quickly matched that strategy. Informants now wonder whether this competition will actually increase enrollment in Medicare HMOs or the plans essentially will battle each other for the same pool of enrollees. They also expressed mixed views on the attractiveness of the Medicare risk business, because of the large senior population in Seattle and low AAPCC rates.

The broad expansion of the Basic Health Plan and the introduction of price-based selective contracting in Medicaid managed care may amount to the most significant changes in public purchasing. The Basic Health Plan has expanded the market to include the previously uninsured. However, some respondents believe that some individuals who were privately insured previously have discontinued their coverage in order to be picked up under the state-subsidized plan. In addition, by introducing price into the Medicaid contracting equation, the state for the first time has placed plans on alert to keep their costs down. This new cost-consciousness may affect the composition and management of provider networks in the future.