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Research Chronicles Market Changes Sparked by Managed Care's Rise and Fall

Special Edition of Health Services Research Focuses on Local Health Market Changes

News Release
Feb. 21, 2003

Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C.— As the rise and fall of managed care reverberated throughout the U.S. health care system in recent years, a roller coaster of change in health care organization and financing occurred in local communities, according to research by HSC published in a special edition of the peer-reviewed journal Health Services Research.

In 1996-97, hospitals and physicians geared up for the rapid growth of managed care with a strong push toward building integrated delivery systems. By 1998-99, with managed care growth falling short of expectations, providers changed course, finding strategies for a world of health maintenance organizations (HMOs) with narrow provider networks were incompatible for a world of preferred provider organizations (PPOs) with broad provider networks. In 2001, with restrictive managed care practices in full retreat, providers adjusted to a world where consumers had a broad choice of providers and reduced administrative restrictions on the use of care.

"A sharp change in signals from employers and consumers away from tightly managed care caused health plans and providers to reverse direction, resulting in rapid and wrenching changes for the health care delivery system," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research group funded exclusively by The Robert Wood Johnson Foundation.

"In many ways, we’re back where we started in the early 1990s—health care costs and insurance premiums are rising at double-digit rates, the number of uninsured people is growing and state budget deficits threaten recent coverage expansions," Ginsburg said. "More and more consumers are going to be caught in the middle as they have to make trade-offs about the cost, quality and accessibility of their care."

The articles published in the special issue are based on HSC’s third round of site visits in 2000-01 to 12 nationally representative communities—Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.

As part of the Community Tracking Study, HSC sends a team of researchers every two years to each community to interview local health system leaders, including representatives of major health plans, hospitals, physician organizations, employers, benefit consultants and state and local policy makers. In-depth, one-on-one interviews provide insight into the changing dynamics of local health care markets.

The eight articles included in the special edition of Health Services Research are available by clicking on the article titles below:

The End of an Era: What Became of the ’Managed Care Revolution’ in 2001? by Cara S. Lesser, Paul B. Ginsburg and Kelly J. Devers

Since the mid-1990s, managed care developed differently than expected in local health care markets, with three key factors shaping market changes: 1) the booming economy caused tight labor markets and made employers highly responsive to worker demands for less restrictive health benefits; 2) health plans eased restrictions on care; and 3) hospitals and doctors gained negotiating leverage over health plans and reverted to competing for patients based on services and amenities. These market changes have contributed to rising costs, sparked access problems for consumers and promise to make cost-control and quality improvement more difficult.

Managing Costs, Managing Benefits: Employer Decisions in Local Health Care Markets, by Jon B. Christianson and Sally Trude

The need to attract and retain workers in a tight labor market was the driving force for employer decisions about health benefits in the late 1990s. While employers responded independently and individually to similar labor market conditions, overall employer decisions about health benefits had an important impact on local health care systems, at the same time that employers’ more highly visible and collective efforts to bring about change often met with disappointing results.

An Empty Tool Box? Changes in Health Plans’ Approaches to Managing Costs and Care, by Glen P. Mays, Robert E. Hurley and Joy M. Grossman

Health plans have scaled back the use of many managed care tools, including selective provider contracting and risk contracting. Plans increasingly have sought cost savings by shifting costs to consumers. Some plans are experimenting with new provider networks, payment systems and referral practices to lower costs and improve service. These changes promise to reduce administrative and financial burdens for physicians and hospitals, but they also threaten to increase consumers’ financial burdens.

Medicare Contracting Risk/Medicare Risk Contracting: A Life-Cycle View from Twelve Markets, by Robert E. Hurley, Joy M. Grossman and Bradley C. Strunk

Between 1996 and 2001, the Medicare managed care program suffered a dramatic and rapid reversal of fortune following passage of the 1997 Balanced Budget Act. As health plan views of Medicare managed care shifted from enthusiasm to disillusionment, national policy changes and local market forces combined to send Medicare HMOs on a downward spiral, raising doubts about whether Medicare+Choice can be turned around.

Hospitals’ Negotiating Leverage with Health Plans: How and Why Has It Changed?, by Kelly J. Devers, Lawrence P. Casalino, Liza S. Rudell, Jeffrey J. Stoddard, Linda R. Brewster and Timothy K. Lake

After years of decline, many hospitals’ negotiating leverage with health plans increased, contributing to higher payment rates and insurance plan premium increases. The combined effect of consumer demand for broad provider choice, increased hospital consolidation and elimination of some excess hospital capacity helped shift the balance of power toward hospitals and away from health plans in many markets.

Changes in Hospital Competitive Strategy: A New Medical Arms Race?, by Kelly J. Devers, Linda R. Brewster and Lawrence P. Casalino

In the mid-1990s, hospitals competed primarily on price, relying on a "wholesale" marketing approach and providing services designed to win managed care contracts. By 2001, many hospitals had reverted to "retail" marketing strategies designed to appeal directly to physicians and patients through a focus on high-tech specialty care. Renewed emphasis on nonprice competition and retail strategies suggest a new medial arms race is emerging in some markets.

Something Old, Something New: Recent Developments in Hospital-Physician Relationships, by Timothy K. Lake, Kelly J. Devers, Linda R. Brewster and Lawrence P. Casalino

As HMO enrollment and capitated contracting wane, hospital executives have shifted from developing integrated delivery systems to wooing specialists who can generate fee-for-service revenues. This new emphasis on hospital-specialist partnerships may improve hospital and specialist finances and quality of care in selected service areas, but it may also increase health care costs for employers and consumers.

The Resilience of the Health Care Safety Net, 1996-2001, by Laurie E. Felland, Cara S. Lesser, Andrea Benoit Staiti, Aaron Katz and Patricia Lichiello

The safety net was stable or improved in three-quarters of the 12 communities studied, leading to improved access to primary and preventive care for low-income uninsured people. However, the safety net deteriorated in three sites, and access to specialty services remained inadequate across the 12 communities.

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely insights on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded exclusively by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.


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