Center for Studying Health System Change

President's Essay

Rough Seas Ahead for Purchasers and Consumers
by Paul B. Ginsburg

 year ago,the health care system appeared rudderless and adrift as integrated delivery and tightly managed care unraveled in the wake of a consumer and provider backlash, stoked by a booming economy that reduced concerns about costs. Now, a new course is being charted to improve the health care system as employers and other purchasers begin to navigate the rocky shoals of rapidly rising costs. Steered by financial incentives, informed consumers will be asked to take more responsibility for their care. Under this approach, consumers will make trade-offs between costs and choice and possibly stimulate improvements in quality by gravitating to providers that offer higher quality and value.

• A New Wave of Costs
• Troubling Undercurrents
• The Next Wave?
• Sailing in Uncharted Waters?

A New Wave of Costs

he passage from the unraveling of the earlier vision to charting a new course was stimulated by the coincidence of two developments—the re-emergence of cost pressures and the end of the economic boom of the late 1990s. Premium increases for employment—based health insurance reached 11 percent in 2001, in contrast to an increase of less than 5 percent two years earlier. In 2002, many knowledgeable observers expect premiums to rise by approximately 13 percent.

Initially, the underlying cost increases in these premium raises were spurred by greater use of prescription drugs, driven largely by new technology and direct marketing to consumers, but recent increases have been more widespread. Hospital spending is again the major driver of spending, reflecting both higher use of services and higher prices paid by insurers. For the under-65 population, National Hospital Indicators Survey data show adjusted patient days—an aggregation of inpatient days and outpatient visits-in community hospitals increased by 8.1 percent in 2000, compared with only 1.6 percent in 1999. At the same time, HSC's Community Tracking Study (CTS) site visits in late 2000 and early 2001 found substantial hospital price increases, driven by both higher hospital labor costs, due in large part to nursing and other personnel shortages, and hospitals' greater success in negotiating rate increases with managed care plans. Interestingly, it was the slow growth in hospital spending in the mid- to late-1990s that had been the major factor earlier behind historically low health cost trends.

The retreat from tightly managed care undoubtedly has played a role in the rising wave of costs, influencing both use of services and prices paid to providers. Over the last two years, health plans have reduced required authorizations for hospital admissions, specialist referrals and expensive diagnostic procedures, such as magnetic resonance imaging (MRI). Although many plans made these changes based on assessments that the administrative costs of authorizations had exceeded savings from denials, the rapid and widespread end of the requirements may have led to changes in physician behavior in prescribing these services through a sentinel effect. For example, with fewer authorizations needed, anecdotal evidence points to sharply higher MRI use. The cumulative effect of individual managed care plans' responses to consumer and employer demands for broader provider choice through expanded networks led to market-level effects on prices. Combined with extensive provider consolidation since the mid-1990s, much of it spurred by the threat providers felt from managed care, purchaser demands for broader networks led hospitals and some specialty physician practices to recognize their enhanced leverage with health plans to obtain higher fees.

The U.S. economic boom worked against a vigorous purchaser response to cost increases. In 1999 and 2000, businesses were highly profitable and struggling to recruit and retain employees in a tight labor market. After enjoying several years of low premium increases, employers had little interest in doing anything that would make their benefits less attractive. A key exception was prescription drugs, where the very large spending increases led many employers to adopt tiered copayments, which provide consumers with financial incentives to use generic drugs and a preferred list of brand-name drugs. Public purchasers like Medicare and Medicaid also exhibited less concern with cost trends than usual, since federal and state budgets had surpluses. Congress, for example, approved billions of dollars in so-called provider givebacks, and governors talked enthusiastically of expanding coverage to the uninsured.

The recession that began in 2001, however, brought about a sea change. Employers found profits down, costs up and labor markets looser. State governments saw budgets swing from surplus to deficit, and the federal government wasn't too far behind. Public and private purchasers began to dust off options to contain costs—an activity that had lain dormant during the period of low cost trends and a booming economy.

The experience of the 1990s sheds light on how general economic trends affect health care costs. A weak economy tends to lead to vigorous efforts by purchasers to contain costs, while a strong economy diminishes such activities. In fact, this pattern has been modeled by actuaries at the Centers for Medicare and Medicaid Services, who use changes in per capita disposable personal income—with a substantial lag—to forecast trends in private personal health care spending over the next decade.

Helen Darling    President Washington Business Group on Health

“HSC is the only organization that provides timely, useful information about major health market trends as well as what's happening in a number of key markets. Such detailed information helps employers validate what they often see and understand the context of what's happening.”

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Troubling Undercurrents

ver the past two years, capacity shortages have surfaced in many segments of the health care system. Most visible has been crowding in hospital emergency departments. But tight capacity is showing up now in physician practices as well. CTS Household Survey data show that waiting times to get a physician appointment—especially with a specialist—has increased substantially. In 2001, 28 percent of consumers reported waiting more than seven days to see a physician when they were sick, compared with 22 percent in 1997. The percentage of physicians accepting all new privately insured patients into their practices declined—a trend mirrored in such public programs as Medicare. While the media have focused on physicians who have stopped accepting new Medicare patients entirely, so far, these problems appear to be centered in practices that served few Medicare patients in the past. Although beneficiaries' choice of physicians is very good now, the continued large decreases in payment rates projected under current law do pose risks for beneficiary choice in the future.

The rising demand for services associated with the loosening of managed care likely is playing a role in this capacity crunch, hitting hospitals particularly hard because of the reversal from trends during the mid-1990s when demand declined. Then, under pressure to control costs, many hospitals closed surplus facilities or reduced the number of inpatient beds.

While some predict the need for substantial growth in hospital capacity, current capacity shortages could turn out to be transitory. If the adjustment to less restrictive managed care is, in fact, a significant factor, it may be mostly complete by now. This would lead to a slowing of the trend; the impact of new tools to control costs, such as increased consumer cost sharing, would augment this slowing.

Although the need for a sharp increase in investment in general capacity is uncertain, hospitals and physician groups have been building extensive specialized facilities, especially for cardiovascular, oncology and orthopedic services. The competition to develop additional specialized facilities is reminiscent of the medical arms race of the 1970s. Concerned about the possibility of too much specialty capacity that might encourage unnecessary care and decrease quality, some policy makers are thinking about reinstating regulation of inpatient and outpatient capacity. Another issue is whether Medicare and private insurers' reimbursement practices have inadvertently made some services highly profitable and others unprofitable and, as a result, are sending the wrong signals to the marketplace.

Jack Ebeler    President Alliance of Community Health Plans

“This is a time of tremendous change in health care, and all of us are struggling to understand what is going on and how we can best improve on it. By translating its always rigorous research into relevant, nonpartisan information, HSC helps foster that understanding.”

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The Next Wave?

e may not truly know what the next phase of health care change will look like until 2003. By the time the nation became aware of the sharp decline in economic activity in 2001, most employers had already made decisions about their health plans for the 2002 benefit year. So major changes in health benefits are unlikely to be implemented until the beginning of the 2003 benefit year. Benefits managers have indicated already that they plan to increase the amount of cost sharing required of employees and their dependents through larger deductibles, copayments and coinsurance rates. Employers are hopeful that these moves will result in changes in consumer behavior rather than simply in a shift in costs to employees. In many cases, the degree of cost sharing will revert to where it was before managed care, which replaced financial incentives with administrative controls.

Employers are likely to take this cost-sharing approach an important step further in 2003. Having tasted some success with the tiered approach to pricing pharmaceuticals, benefits managers are looking to apply it to hospital and physician services as well. In its simplest form, patients will pay a larger copayment for hospitals or physicians that charge higher prices. Some health plans also are aiming to incorporate quality and efficiency measures into the construction of tiers. Their success in doing so will be important if consumers are to base their choices not just on cost but on quality as well.

The tiered approach to cost sharing responds to a number of crosscurrents in today's health care system. It restores some health plan leverage over providers, which was lost through broader provider networks. It also accommodates many consumers' desire for a broad choice of providers, while giving those willing to narrow their choices a way to save money. The CTS Household Survey provides evidence that a substantial number of consumers are willing to make these trade-offs. When presented with the statement: "I would be willing to accept a limited choice of physicians and hospitals if I could save money on my out-of-pocket costs for health care," 57 percent of adults said they are willing to make that trade, including 22 percent who are strongly willing. Still, 42 percent of Americans said they are unwilling to sacrifice choice for savings, and 25 percent are strongly unwilling. This pattern has changed little over the three CTS survey rounds. But the plan choices available to most consumers do not provide the opportunity to make that trade-off.

With consumers facing greater financial incentives related to their choice of provider and treatment decisions, a critical question emerges: Will they be able to make these choices with confidence? A key issue will be the amount and quality of the information available to them. For example, will consumers have solid, easy-to-understand information about the effectiveness and risks of alternative courses of treatment and the quality of different hospitals and physicians? The wide geographic variation in the practice of medicine suggests having patients better informed about their options and about the evidence behind certain approaches to care may lead to better results.

Employers and health plans will provide some of the information—in many cases via the Internet—needed to help consumers navigate these unexplored waters. We also know that increasing numbers of price- and quality-conscious consumers seek information from magazines, newspapers and Web sites that provide discussion forums to aid consumer decision making. But there is precious little quality control over these sources.

Our skill in finding ways to transmit information may be ahead of our ability to obtain the needed content because of the ongoing difficulty of developing reliable quality data on providers. Information vendors will likely press the government to provide raw data needed to rate providers, such as data from the Medicare program. At this point, the degree to which patients are better able to make these choices—and feel more comfortable making them—is highly uncertain, despite many years of effort.

The notion of consumers relatively free from administrative controls but subject to significant financial incentives and an information infrastructure to support them is embodied in what today is called a consumer-driven health plan. Pioneered by such Internet companies as Definity Health and Lumenos, these products typically offer consumers high-deductible catastrophic coverage and an annual allowance to cover both insured and uninsured health services. If this allowance is not used, it can be carried over to future years—but not to future employers. Sponsors of these plans also give enrollees information about providers through restricted-access Internet sites. If consumer-driven plans catch on, they are likely to increase the speed with which mainstream plans shift to higher cost sharing and provide information to enrollees, a key step toward greater use of consumer financial incentives.

But consumer-driven plans also raise a series of public policy concerns. For example, most are offered as an option alongside health maintenance organizations (HMOs) and preferred provider organizations and raise questions about risk selection. When health plans with extensive cost sharing are offered alongside plans with more comprehensive benefits, consumers who expect to use relatively few services choose the former. This tends to shift costs to those expecting to use more services, such as people with chronic conditions, and can even threaten the viability of the comprehensive plan through a death spiral of adverse selection. Employers can limit risk selection if they choose a single carrier to offer all of the plan choices and set employee contributions for the plans on the basis of relative actuarial value of the benefit structure rather than the relative claims experience of the options. But the single-carrier restriction may come at the cost of eliminating some valuable plan options, such as an integrated staff-model HMO.

A significant shift toward greater cost sharing probably would have profound implications for care delivery. Cost sharing will definitely get the attention of patients and affect their decisions about when to seek care and what treatments to pursue. The burden of paying for care will shift somewhat, from those who are healthy to those who are sick. Choice of provider will be linked more closely with one's ability and willingness to pay more for care, with low-income people having to limit themselves more often to the less expensive provider.

Ron Pollack    Executive Director Families USA

“Policy makers need to know the likely impact of their decisions on consumers. HSC provides valuable informa-tion— both national and community-based—that gives us ‘real-time’ data on how the system is changing. The big question going forward is how will rising costs and higher cost sharing affect insurance coverage and access to care, especially for those with low incomes.”

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Sailing in Uncharted Waters?

hese are not entirely uncharted waters. Before the managed care era, more cost sharing was the norm. The RAND Health Insurance Experiment of the 1970s showed that consumers facing cost sharing did not reduce unnecessary care to a greater extent than necessary care, so much will be riding on consumers being better informed. One also wonders, with most health care dollars spent on a small proportion of people who are very sick, just how large is the potential of cost-sharing tools that still provide financial protection against major expenses.

The financial burdens on those living with chronic disease and increasing inequality of access to care from substantial cost sharing would likely concern policy makers. In contrast to debates over managed care restrictions, a parallel response—prohibiting various cost-sharing arrangements—is unlikely. Instead, these issues could lead to more serious discussions about existing tax subsidies for health coverage and whether they should be refocused on those with lower incomes. Replacing the tax exclusion for employer-sponsored health insurance with a tax credit has long had intellectual adherents from both the left and the right but few supporters with political clout.

Ironically, the move toward more cost sharing probably will rekindle interest in tightly managed care. Unhappy consumers will prefer less provider choice and more administrative controls over large cost-sharing obligations. A system that allows people to choose among alternative tools to constrain the costs of their care would be attractive in light of society's split on these issues. People with lower incomes, in particular, might welcome administrative controls in place of cost sharing that would pose a more formidable barrier to care.

If our experience charting the course of health system change over the past few years has taught us anything—and it has—it is that we must pay attention to the critical interactions among the economy, the political system and the financing and delivery of health care. A combination of these factors has taken us from integrated delivery systems and tightly managed care to broad and loosely structured systems and, now, a renewed reliance on cost sharing to curb utilization. Whether the system remains on course or runs aground is uncertain and will depend on the performance of the economy and the experience of both the general public and key stakeholders.