[Congressional Record Volume 140, Number 17 (Thursday, February 24, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]
[Congressional Record: February 24, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]
MANAGED COMPETITION: MAKING THE MARKET WORK TO CONTAIN COSTS
Mr. DURENBERGER. Mr. President, the phrase managed competition has
achieved a great deal of currency in the debates on health care reform.
It is therefore regrettable that the concept of managed competition is
often misrepresented and misunderstood.
Managed competition is not about Government. It's about markets, and
making markets work. In its essence, managed competition is a simple
concept. It is based on the fact that competition among providers of
services for the business of informed consumers drives prices down, and
drives quality and innovation up. That's the definition of a market.
Under managed competition, Government is used to facilitate the
market through incentives, not replace the market with regulation.
I cannot stress enough, Mr. President, that managed competition is
not just a theory. It is up and working in communities all over
America. Minnesota happens to be one of the leaders in competitive
health care delivery systems on the managed competition model. By
reducing costs and improving quality, Minnesota's market is providing
health care at a cost 15 percent below the national average.
And the California Public Employees Retirement System--Calpers--has
shown that a large health care purchasing agent can succeed in putting
downward pressure on premium costs. After 4 months of negotiations with
California HMO's, Calpers has concluded a deal that will reduce health
care premiums for its members by an average of 1.1 percent.
This debate is going to be won on the basis of facts--and the facts
prove that markets, not mandates, are the key to health care cost
containment. I ask unanimous consent that an article from Business &
Health outlining Minnesota's experiment in managed competition be
included in the Record, along with a news story from the Wall Street
Journal describing the achievement of Calpers in reducing premium
costs, and an important American Spectator article by Fred Barnes
entitled ``Health Care Costs Are Going Down.''
There being no objection, the articles were ordered to be printed in
the Record, as follows:
How Twin Cities Employers are Reshaping Health Care
(By Marion Torchia)
Last January, nine members of the Business Health Care
Action Group, a coalition of employers in the Minneapolis-St.
Paul metropolitan area, began offering their workers a new
health plan. The coalition adopted a plan that operated as an
integrated system of care because its members believed such a
system had the greatest potential to deliver high-quality,
cost-effective care.
This year, BHCAG's founding companies have just completed
their first re-enrollment and are happy with the results. The
per-employee costs are about 10% below the average cost of
the HMO options offered previously, and costs have increased
4% to 5% in the past year, compared with average increases of
7% to 8% in the greater Minneapolis market, reports BHCAG's
Executive Director Steve Wetzell. On average, employers are
paying $2,900 per family and $1,200 per individual.
The plan, called Choice Plus, is a typical point-of-service
plan, allowing enrollees to choose care from a network of
participating providers and go outside the network for
coverage at a lower reimbursement rate. But it is also
unusual in many ways. The network is large and can therefore
offer its enrollees a considerable degree of choice among
providers. It is highly standardized--all participating
companies have agreed to use a standard benefit design.
Technically, an ISC coordinates care provided by groups of
doctors and hospitals and accepts financial risk for the
population. Choice Plus borrows features of an ISC by using a
primary gatekeeper physician as the coordinator for all care,
financial incentives to improve the delivery of care and
contain costs, and a range of continuous quality improvement
techniques.
Choice Plus is a first step in the coalition's effort to
reform health care by demonstrating that improved quality,
increased provider competition, increased consumer
responsibility, and enhanced efficiency of health care
delivery are compatible goals. These goals can best be
accomplished within an ISC, BHCAG members believe.
When Choice Plus was created, a statewide health care
reform movement was under way, and the coalition members
wanted to influence its outcome by creating their own health
care financing and delivery system. ``This is not just a
purchasing activity. It's an effort to change the basic
structure of health care through an ongoing dialogue among
payers, providers, and consumers,'' says Larry Schwanke, vice
president for human resources of The Bemis Co. Inc., a
packaging manufacturer.
Adds Dee Kemnitz, vice president of the Minneapolis-based
Carlson Cos. Inc., ``When the coalition's effort to get cost
containment features incorporated into the state's health
reform legislation was not successful, the companies decided
to demonstrate that they could contain costs themselves.''
Carlson Cos., a hospitality services company that includes
Radisson Hotels and TGI Friday's restaurants, has 5,300
covered lives in the Twin Cities area.
assessing choice plus
Benefits managers of participating companies say their
employees are happy with the new plan. Paula Roe, vice
president for compensation and benefits for Norwest, a
nationwide financial services company headquartered in
Minneapolis, says 70% of the bank's employees chose Choice
Plus over the other alternatives the company offered, and
this year's enrollment has increased to 87%. The company has
14,300 covered lives participating in Choice Plus.
Such numbers and the coalition's growth mean BHCAG now
possesses sufficient purchasing power to exert a significant
influence on the area's health care market. Now numbering 22
members, the coalition includes most of the major employers
in the Twin Cities.
Collectively, the companies are responsible for some
250,000 covered lives, about 10% of the population of greater
Minneapolis, Wetzell estimates. Enrollment in Choice Plus in
1994 is expected to be about 100,000, and it will continue to
grow as member companies adopt to the plan.
In developing the network of providers, ``The coalition's
founders wanted to find a group of providers who were
committed to conservative, cost effective medical practice
and who were willing to engage in an ongoing dialogue with
employers about health care delivery issues,'' says Schwanke.
``They were convinced that efficient delivery of health care
was achievable. They wanted to bring a greater degree of
vertical integration to the health care system.''
So the coalition considered the multispecialty group
practices in the area because ``these large groups have the
administrative sophistication to support the development of
integrated systems of care,'' says James L. Reinertsen, M.D.,
a rheumatologist with Healthsystem Minnesota, the parent
organization of Park Nicollet Medical Center and Methodist
Hospital. ``They also have a capacity for collective action
impossible among many small independent practices.''
Early in 1992, BHCAG invited bidders to develop a health
plan meeting their specifications. The winning bid came from
a consortium that consisted of HealthPartners, an entity
formed from two HMOs (Group Health and MedCenters) that had
counted many of BHCAG's employees among their members; the
Park Nicollet Medical Center; and the Mayo Clinic.
Careful to structure its arangements so members can retain
their self-insured status under the Employee Retirement
Income Security Act of 1974, BHCAG individual member
companies signed a three-year contract with HealthPartners,
which became the administrator of Choice Plus. Since they are
not technically insurance plans, self-insured plans come
under ERISA, which preempts state law. Such plans are thereby
exempt from state regulation. Minnesota failed this summer to
get an ERISA waiver, which would have allowed the state to
tax self-funded plans.
financial incentives
During 1993, the first year of operation, members companies
paid physicians a fee-for-service. Though the coalition hopes
to move away from fee-for-service, it chose this payment
method during start-up because it needed to collect baseline
information on the cost of treating patients, says Wetzell.
This information can then be used to set rates and to
quantify cost savings.
To meet its goal to change the way health care is
delivered, BHCAG has devised a complex strategy of gain and
loss sharing to influence providers' behavior. Under its
contract, HealthPartners receives bonuses for efficiently
accomplishing administrative functions such as claims
adjudication, for containing the utilization of services, and
for the quality of its guideline development and research
activities. The physician groups also share the savings when
their expenditures fall below a certain level.
This year, each clinic will be given a monthly budget for
each enrollee. The budget limits will be different for each
employer. The clinic will be liable for the part of costs it
incurs in excess of the monthly budget limit. Catastrophic
care, however, is not included in the risk-sharing
arrangement.
Ultimately, BHCAG wants to create a series of risk
adjustments--for patient characteristics and for local
economic conditions--that will eliminate cost variations
among clinics resulting from factors outside their control.
It is considering using the ambulatory patient group patient
classification system to adjust for the risk of treating
costlier cases. (The APG system was developed by 3M Health
Information Systems, Murray, Utah. It classifies patients
according to the medical or surgical outpatient treatments
they receive.) Eliminating all cost variations among medical
groups may be impossible, however, Wetzell says. ``If we
can't scientifically adjust for all cost variations that do
not reflect the efficiency of medical practice, we may
consider using variable premiums and allow the employee to
select a higher cost clinic and pay the difference.''
Roe of Norwest, who serves on BHCAG's provider payment
committee, says that much more work needs to be done to
devise proper payment incentives for physicians. ``Pure
capitation is not the answer,'' she wants. ``We need to
reward physicians for their cognitive work, for the
counseling they provide to patients, and for preventive
services.''
As far as hospitals are concerned, says Wetzell BHCAG
members pay hospitals at per diem rates based on diagnostic-
related groups. ERISA prevents self-insured companies from
capitating payments to entities such as HealthPartners, which
would, in turn, pay the hospitals.
Only for Healthsystem Minnesota, which owns a clinic (Park
Nicollet Medical Center) and a hospital (Methodist Hospital),
is BHCAG negotiating a single payment for physician and
hospital care, explains Wetzell.
implementing cqi
As envisioned by BHCAG, integrated systems use practice
guidelines as a basis for standardizing health care delivery,
and engage in continuous quality improvement efforts based on
outcomes information generated while delivering health care.
Competing integrated systems, of which Choice Plus is the
first, will be encouraged so that consumers could use
objective data to choose among them.
Therefore, following the ISC model, BHCAG's contract with
HealthPartners commits both employers and providers to an
active continuous quality improvement program based on best
practice guidelines developed by the clinical professionals,
the monitoring of provider performance based on data gathered
in the course of practice, and on outcomes research. This
effort is coordinated through a separate non-profit entity,
the Institute for Clinical Systems Integration.
ICSI Chairman Reinertsen explains that the institute, which
is funded by BHCAG at a level of approximately $225,000 a
year--10% of the institute's budget--facilitates development
of guidelines, analyzes data the providers submit on the
costs and outcomes of treatment, and reports the information
to providers and to member companies. In effect, adds Larry
Schwanke, ``The Institute is the Coalition's R&D arm.''
The practice guidelines are the key to the process, says
Reinertsen. Sixteen sets were distributed for pilot testing
in July, and all clinics received them in November.
While clinical guidelines, as expressions of the standard
of good medical practice, should be applicable universally,
the clinics are encouraged to develop their own
implementation protocols, adds Kemnitz. ``Our relationship
with the providers is built on a high level of trust,'' she
says. ``People tend to support policies they had a share in
creating.''
To maintain this climate of trust and cooperation, explains
Reinertsen, the plan's information handling policy is
designed to ``drive out fear.'' No information will be
released identifying an individual physician, practice, or
employer without explicit permission. The coalition also has
rejected as counterproductive the idea of publishing rankings
of providers' performance. Any reports with physician-
specific data remain inside the clinics. Companies will
receive information on their own enrollees' costs and
utilization patterns compared with the group. And providers
will be entrusted with the responsibility of internally
identifying outliers.
To support CQI, ICSI has a variety of projects under way,
says Wetzell. The institute is planning a survey of
enrollees' health status, so that each company can see
whether its employees' health is improving. It has developed
a prototype automated medical record. And it has research
projects planned on the cost effectiveness of several new
technologies used in the clinics.
future plans
Now the Choice Plus has completed its first year, the
coalition must decide whether to allow the network to add
more companies and accept more enrollees, or whether BHCAG
should begin developing a competing ISC, Wetzell says. Choice
Plus has already expanded geographically, accommodating
employers in Rochester, Minn., 90 miles south of Minneapolis,
via a contract with the Mayo Clinic's primary care group.
Rather than allow the network to grow indefinitely, BHCAG
may prefer to develop competing provider networks, using
essentially the same benefit structure, Wetzell says. To do
so would promote competition and allow for a greater degree
of consumer choice. Not coincidentally, it also would be more
compatible with the managed competition proposals being
considered. ``What our board decides,'' say Wetzell, ``will
depend to some extend on what decisions are made in D.C.''
Meanwhile, reports Wetzell, BHCAG's board of directors has
taken a significant step to counter criticism that
coalitions of large employers do not contain health costs
but simply shift them to smaller companies that lack
buying power. It has decided to offer an insured product
for small businesses, using community rating within the
risk pool of the businesses that choose to participate.
The small group plan's structure will be significantly
different from that of Choice Plus, since it will be subject
to state regulation and must include all of state-mandated
benefits. Wetzell also expects that the project will face
problems of adverse selection, since competitors will no
doubt market lower priced products to attract the companies'
healthier employees.
Is It Transportable?
Although the BHCAG views its project as proof that provider
competition, quality of care, and cost efficiency are
compatible, Wetzell concedes that the Twin Cities is an ideal
location for the experiment. It has several distinct
advantages: a physician community already used to
standardized practice in large multispecialty groups; managed
care penetration on the order of 70% to 80% hospital bed
capacity already reduced through mergers and consolidations
in the 1970s and 1980s; and a population healthier, more
prosperous, and more homogeneous that the national average.
Nevertheless, Wetzell believes the Choice model is
transportable, though elsewhere it may first be necessary to
lay the groundwork of integrated systems. He believes the
effort is definitely worthwhile. ``How can you argue that a
piece-rate system of health care, with dispersed providers
and primitive communication among them, does a better job
than a vertically integrated health care system?
____
Calpers Proves Insurance Costs Can Be Reduced
(By Marilyn Chase and Carrie Dolan)
After four months of negotiations with 18 health-
maintenance organizations, one of the nation's largest group
purchasers of health insurance has secured an average 1.1%
premium reduction for $920,000 public employees and family
members.
The California Public Employees Retirement System (Calpers)
won the one-year contracts yesterday. The process and its
result may be seen as a model for Clinton health-care reform:
A large public health-care purchasing agent squeezing even
low-cost providers, like HMOs, into making extra savings. But
Calpers's success may also show that an elaborate government
bureaucracy isn't needed to lower health-care costs.
The reduction ``shows managed competition can bring down
the cost of health care,'' particularly in areas like
California where HMO's are well-developed, said Alain C.
Enthove, a professor at Stanford University's Graduate School
of Business and a Calpers advisory committee member.
``Competition works, not compulsion,'' he said.
Calpers said it has kept premium increases over the past
three years to 6.4% compared to the national average of
30.1%. For the 1994-95 contract year, when the rate reduction
takes effect, Calpers said its savings will be about $321
million. While not all the contracts met its demand for a 5%
rate cut, Calpers said it hopes to achieve that goal in the
next several years.
Calpers--once known as a languid and not particularly
choosy buyer of health care--has recast itself as a tiger in
recent years. In 1991, after California's budget crises,
Calpers froze its contributions to health care, making its
HMOs responsible for cost variations.
Last October, Calpers demanded that its 18 HMOs cut health-
care premiums 5% effective Aug. 1, the start of the 1994-95
contract year. It called the demand ``modest,'' given
California's stagnant economy. But that demand followed two
years of strict cost containment. So Calpers' demand left
some HMOs a little testy.
``They're a 900-pound gorilla, and they know it,'' grumbled
one HMO negotiator who asked not to be identified. ``They
don't have to be real sophisticated. They know the volume
they represent. Bottom line is, they are holding most of the
cards.''
About a third of the HMOs doing business with Calpers
offered premium reductions, said Tom Elkin, the agency's
assistant executive officer. Others--with lower base rates or
older, sicker patient populations--asked for ``modest,
single-digit'' premium rises, while a few argued for double-
digit increases, he said. The latter group got little
sympathy.
``We're out of cash,'' Mr. Elkin said he told them. ``And
we can't entertain increases of that magnitude. We'd like
some sign that you can, in fact, manage care.''
Among the key issues, Mr. Elkin said, were the price of
prescription drugs, surgeries and administrative expenses--
including profit margins and consultants' fees.
As an example, he noted, ``There's a 30% difference between
what one plan is paying for drugs and another,'' Mr. Elkin
told the HMOs this can be corrected by buying in bulk and
changing vendors, then passing on the savings.
``If they'd succeeded in pushing us to the absolute wall,
we'd have said no. We're not in the business of charity. We'd
have gone without their business,'' said one health-care
officer. ``But the ultimatum never occurred.''
Mr. Elkin conceded that negotiations ``can get a little
lively. If the expectation is much higher than we can pay, it
gets a little tense. On average, though, we get good
cooperation.'' And in the end, Calpers relented on the 5%
rollback demand, as many had predicted.
Mr. Elkin said Calpers was impressed by the efforts of
Kaiser Permanente, the Oakland, Calif., HMO that cares for
320,000 Calpers subscribers. A year ago, Kaiser's northern
California region considered increasing its premiums 6% for
all its customers, including Calpers. Instead, it looked hard
at results of its cost-cutting programs and raised premiums
an average of 2%.
Kaiser spokesman Jerry Fleming said it wasn't simply
prodding by Calpers that led to Kaiser's change of heart.
``We're doing better with our cost targets than we'd budgeted
for,'' he said.
Kaiser's most potent cost controls are simple things:
lowering hospital inpatient rates, substituting outpatient
surgeries when possible and aggressively keeping Kaiser
members out of more expensive, non-Kaiser institutions.
``At the same time, the satisfaction of our members was
going up, so we knew [these savings] weren't because we were
skimping on care,'' he added.
Other HMOs said they cracked down on high diagnostic test
prices charged by certain hospitals trying to offset losses
on inpatient business.
HMOs said they're also trying to limit the budget havoc
wrought when hospitals buy costly new psychiatric drugs.
``They're a significant piece of the total pharmaceutical
cost, and the trend has been very steep,'' said one HMO
officer, adding that his group plans more seminars on cost-
effective alternative drugs.
____
Health Care Costs Are Going Down
(By Fred Barnes)
President Clinton has a story and he's sticking to it.
``Rampant medical inflation,'' he declared last September in
unveiling his health-care plan, ``is eating away at our
wages, our savings, our investment capital, our ability to
create new jobs in the private sector and this public
Treasury.'' A month later, he sent the plan to Congress and
said ominously: ``If we do nothing, almost one in every five
dollars spent by Americans will go to health care by the end
of the decade.'' Don't sugarcoat it, Clinton was advised just
before Christmas by William Cox, vice president of the
Catholic Health Association. It's worse than that. ``Sometime
in the next thirteen years we're going to be spending 22 to
25 percent of our income on health care,'' Cox said. At that
rate, ``if you want to go out for dinner and a movie, you're
going to have to check into a hospital.'' Clinton chuckled at
the joke. ``That's pretty good!'' he said.
It was hogwash. There's a new direction in health-care
costs--down, down, down. No, spending isn't actually
declining. That will never happen in a nation with rapid
population growth and lifesaving but costly advances in
medical science. But the rate of growth in medical spending
is dropping precipitously. Every month brings a fresh
decrease in what the U.S. Labor Department calls ``price
inflation for consumer medical goods and services.'' It was
5.8 percent for the year ending last August, 5.7 percent for
October, 5.5 percent for November. That's still nearly twice
the rate of general inflation, but a lot better than 1989
(8.5 percent) or 1990 (9.6 percent). In fact, the 5.5 percent
increase is the lowest since January 1974. Better yet, the
4.9 percent rise in the third quarter of 1993 was the lowest
quarterly hike since 1973. And it's a good bet medical
inflation will fall further.
Don't thank Bill and Hillary Clinton. The downward trend is
the product of a revolution in health-care financing caused
by market forces, not government. It started several years
before the Clintons arrived in Washington and began harping
on ``skyrocketing'' (Hillary's favorite adjective) medical
cost increases. It was triggered by businesses and consumers
confronted in the late 1980s with annual health benefit
increases of up to 20 percent or more. Corporate health plans
cover roughly 140 million Americans. Something had to give,
and it has. For the first time in years, the percentage of
payroll costs devoted to health and dental insurance dropped
from 8.4 percent in 1991 to 8.1 percent in 1992, according to
a U.S. Chamber of Commerce study of 1,100 firms.
Such signs of downward pressure on health-care costs are
largely the result of two changes. One is the willingness of
businesses--especially insurance companies and firms that
self-insure--to challenge medical bills. Dan Clark, a
benefits consultant in Seattle for Howard Johnson and Co.,
recently advised a client whose employee had been murdered to
balk at a $75,000 hospital bill (the victim had lingered near
death for five days). The mere threat of hiring a firm that
aggressively scrutinizes medical bills prompted the hospital
to slash the bill by $15,000. This process, once rare, is now
routine. ``The thing the large employer did early on, the
small employer is now doing,'' says Clark. One result: growth
of the total cost of private health insurance premiums
decreased from 18.6 percent in 1988 to 12.1 percent in 1991
and 10.1 percent in 1992, the consulting firm Foster Higgins
found.
More important, companies are steering employees away from
fee-for-service medicine (with each doctor visit billed) and
into managed care particularly health maintenance
organizations (doctor groups charging an annual fee per
patient). This lowers insurance payments. HMO membership has
doubled since 1986, from 25 million people to an expected 50
million this year. Not only are HMOs less expensive than fee-
for-service medicine, their premium hikes have fallen for
five straight years, from 16 percent in 1990 to 5.6 percent
in 1994. A 1993 study concluded that if all Americans went to
HMOs the 19 percent chunk of GDP projected for health care in
2000 would shrink to 15 percent. Then there are ``preferred
provider organizations'' (PPOs), networks of doctors who
agree to discounted fees. Clark surveyed fifteen Seattle-area
companies at random recently and found every one was part of
a PPO network with cut-rate fees. One result of the surge in
managed care: fewer patients hospitalized and a decline in
the growth of hospital expenses nationally, from 10.2 percent
in 1992 to 8.1 percent in 1993.
What's striking about the revolution in health costs is the
absence of government. ``This revolution has been driven by
frustrated employers,'' says Michael Bromberg, executive
director of the Federation of American Health Systems.
``They've forced the insurance industry to change from an
indemnity industry to a managed-care industry. It's all
happened without legislation.'' The real question, he adds,
is whether Washington ``will accelerate that trend or screw
it up.''
Don't get your hopes up. While the private sector has begun
to get a grip, the federal government allows its health-care
programs to roar out of control. ``Medicare and Medicaid have
tripled since 1982,'' Clinton correctly told an entitlements
summit in Bryn Mawr, Pennsylvania, in December, Medicare
spending jumped 12 percent in 1992. Medicaid is expected
to grow 16.6 percent in 1993. That's just at the federal
level. State outlays for Medicaid rose 30 percent from
1991 to 1992. By 1996, states will spend more on Medicaid
than on education.
If you suspect the cost revolution in the private sector
undermines health-care reform, you're right. ``There's a
torpedo heading for the great ship health-care reform,'' says
Democratic Senator Bob Kerrey of Nebraska. By mid-1994, he
says, HMO cost increases will have dropped to the rate of
inflation (about 3 percent) and non-HMO price hikes will be
well under twice the inflation rate. Numbers like those alarm
the Clinton administration, since they knock out the
overarching rationale for Clinton's sweeping plan. ``They
can't let the public think this has gone very far, because it
takes the steam out of what they want to do,'' insists Paul
Elwood, the respected health-care expert at the Jackson Hole
Group and father of the managed care movement. (Elwood's son
David, by the way, is an assistant secretary of health and
human services in the Clinton administration. As a Harvard
professor, he came up with the idea of cutting off welfare
recipients after two years on the dole.)
The administration and its allies are desperately seeking
to minimize the new trend, particularly because it's
beginning to draw press attention (from Business Week to
Fortune to Time to columnists James K. Glassman and George
Will). Clinton offered this putdown: ``A couple of times
before when an administration's made a serious effort at
health-care cost control, health-care costs have moderated
for a year or so, then they start up again.'' He cited the
Nixon administration as an example. HHS Secretary Donna
Shalala echoes Clinton. ``We clearly have had some
experience,'' she said in December. ``Every time a president
starts talking about health-care reform, there has been some
moderation, probably a mixture of politics and economics
going on.'' Buttering up Clinton at Bryn Mawr, she added,
``Certainly there has been some moderation under your
administration.'' She credited the ``Hillary factor.''
Clinton and Shalala are dead wrong. Their implication, of
course, is that insurance companies, doctors, and hospitals
hold down cost increases when Washington is threatening to
impose controls, then jack up prices wantonly once the crisis
passes. This hasn't happened. National health-care
expenditures have risen less in some years than others, but
for economic, not political, reasons. When President Nixon
put on price controls, the rise abated. When controls were
lifted, its rapid climb resumed. Chatter about reform hasn't
been a factor. Consider 1986, the year national health
expenditures rose by the lowest percentage (7.6) since 1961.
Was President Reagan jawboning the health-care industry in
1986? Get serious.
The Washington Post suggested in a December editorial that
health-care providers are purposely defusing the crisis
atmosphere as Clinton's legislation moves through Congress.
This makes superficial sense. ``Nobody wants to invite
special attention while restrictions and ceilings are being
written into the bill,'' the Post said. True, but nobody
wants an artificially low floor for health-care prices as
price controls are being enacted, either. This means health
companies have an incentive to get large price increases now,
because they won't be able to impose them later under the
Clinton plan.
Contrary to the Administration's line, the current dip in
health cost increases reflects what Paul Elwood calls ``a
fundamental and permanent change.'' It's structural, not
temporary. There are, Elwood says, ``very basic differences
in provider and purchaser behavior.'' Take HMOs, which didn't
exist on any scale before the mid-eighties. They've gained
from experience, becoming leaner and more cost-effective as
they've had to compete for customers. Many HMOs participating
in the Federal Employees Health Benefits Program, which
covers nine million federal workers and their dependents,
offered dramatically reduced fees for 1994. That's actual
cuts, not merely cuts in the growth rate. For example, U.S.
Healthcare slashed the employee payment for its ``high
family'' plan by 29 percent. Overall, the 300-plus plans
competing for the business of federal bureaucrats this year
averaged fee hikes of 3 percent.
What's been done in the private sector? The examples are
many and spectacular. But first, a question: Why hasn't all
this free-market cost-trimming been reflected in the
government's projections on national health expenditures? The
Congressional Budget Office last October predicted health
spending at 18.1 percent of GDP in 2000, down from its June
projection of 18.9 percent, but still quite high. Well,
there's a simple explanation: the government is operating off
of old numbers. The most recent year for which it has
calculated national health expenditures is 1991. So that's
its baseline for projections. But in 1991, the revolution in
private health-care financing was just getting off the
ground. Its full impact hadn't been felt.
That was the year Digital Equipment Corporation began
offering a new series of health plans. Employees can go to an
HMO that's part of the company's program or outside the HMO
network. But they pay a bigger share of their medical
expenses if they go outside. By 1993, 70 percent of Digital's
employees were enrolled in HMOs, up from 30 percent in 1990.
And the yearly increase in HMO fees paid by the company
has fallen from 12 to 14 percent in 1992 to 9 percent in
1993 and 4.5 percent this year. It paid a higher rate for
fee-for-service insurance, but fewer employees chose that
option.
It wasn't until 1992 that International Paper, whose
medical costs had been rising at better than 20 percent a
year, gave its employees an incentive to be cost-conscious in
buying health care. It boosted the level at which the company
would pay 100 percent of expenses and began informing
employees how much it would pay for each medical procedure
and how much physicians in their area charge. The idea was to
encourage employees to shop around. The firm has also shown
employees a video on how to negotiate lower fees with
recalcitrant doctors. One emboldened employ got $400 shaved
off the cost of his knee operation, according to the Wall
Street Journal. Overall, the firm's annual increases in
medical costs have fallen to 9 percent--not a breathtaking
improvement, but good for starters.
IBM has produced even more impressive savings from its
mental health program. It negotiated fees with a network of
20,000 providers nationwide and cut its spending in half,
saving $30 million annually. Four corporations in
Cincinnati--Procter & Gamble, Kroger, General Electric, and
Cincinnati Bell--banded together to prod the city's fourteen
hospitals to reduce wide disparities in treatment fees and
hospital stays. This generated a 10 percent drop in the
average hospital stay in 1992 from 1991 and a 5 percent
decrease in the cost per case (an average saving per hospital
admission of $350). After health insurance premiums soared 30
percent in 1990, Forbes magazine gave its employees an
incentive to avoid filing claims for routine medical care.
They'd be refunded twice the difference between their major-
medical and dental claims and $500. The results are eye-
popping. In 1992 claims fell by 23 percent and the magazine's
insurer, CIGNA, gave it a $200,000 rebate. Premiums were then
cut 17.6 percent for major-medical and 29.7 percent for
dental. In 1993, Forbes boosted the refund to twice the
difference between their claims and $600.
I could go on and on, citing both companies and health-care
organizations that have increased efficiency and cut costs
while maintaining quality. (The Washington Business Group on
Health has published such a list, in a booklet called ``The
Health Reform Challenge: Employers Lead the Way.'') It's not
the private sector but the federal government that has failed
to curb exploding costs.
There's an obvious solution here: extend the managed-care
revolution to Medicare and Medicaid. This, rather than
reforming the entire health-care system; should be Clinton's
first priority. Billions could be saved simply by sending
Medicaid patients to HMOs, a step implemented thus far only
in Arizona, and billions more by encouraging Medicare
beneficiaries to try managed care. The savings in Arizona
haven't been epic--6 percent less than traditional Medicaid
costs--but with its large number of retirees the state had
start-up problems other states won't face. Elwood is
convinced that, through HMOs, Medicaid costs can be
stabilized at the level of general inflation and patients can
get better care.
Medicare is trickier. The Clinton administration backed
away from steering the Medicare elderly into HMOs after a
study found the government was losing money by doing so. Only
2.5 million of the 36 million Medicare beneficiaries had
signed up for HMOs, and these tended to be the younger,
healthier ones. The government was paying HMOs too much for
their care. The answer is either to pay HMOs less or get more
Medicare patients, including the older, less healthy ones who
need more care, enrolled. Or both.
Bringing managed care to government programs is the
brainchild of David Harrington, vice president of Chicago's
Grant Hospital and former chief strategic planner for Aetna
Insurance. ``Energy and creativity are already producing
results in the private market,'' he told columnist Morton
Kondracke. They can do the same with Medicaid and Medicare.
More broadly, Harrington insists, market forces, if left
alone, will gradually push down insurance costs far enough so
that small employers can afford to cover workers. And if the
government chooses to let the uninsured join HMOs, perhaps
with subsidies, we'd have universal coverage. Of course,
there would still be medical inflation. Heavy demand for
care, the intensive brand of medicine practiced in the United
States, pharmaceutical research, technological innovation,
union contracts with lavish health benefits, a growing and
aging population--these guarantee some inflation. But it
would stay near the general rate of inflation.
One thing stands in the way: the Clinton administration.
Its health-care plan would remove the force driving the
downward trend in health costs--businesses that insure
employees--from the game. Under Clinton's scheme,
companies would pay a set amount to a ``health alliance''
and have no further involvement. They would have no
financial incentive to curb the health costs of their
employees. Their bottom line wouldn't be affected if
workers rang up heavy medical expenses.
In fact, Clinton's scheme would spur individuals to do
exactly that. And this would drive up medical inflation, not
control it. Clinton's plan, as he put it at a White House
meeting in January, would guarantee ``comprehensive benefits
that can never be taken away.'' The benefits--including
thirty psychotherapy sessions a year, treatment for drug
abuse and alcoholism, eye exams, and so on--would be much
broader than most Americans now have. My guess is folks would
take advantage, as they have in Germany and Japan (where
doctor visits occur three to six times more often than here).
This would increase national health expenditures. Or, if a
cap were put on health-care spending, inflation would take
another form, waiting lines for medical care, as it has in
Canada.
Don't count on preventive care, Hillary's favorite
solution, to hold down costs either. True, patients would get
more preventive care, because the Clinton plan includes it,
free. But there's no evidence this would lead to lower
medical costs later as a result of early detection. More
likely, it would create a large increase in costs--just to
pay for the burst of preventive care. And, sorry to say, more
preventive care will have only a marginal impact on the
serious diseases like cancer and heart trouble that generate
huge health-care costs.
In his first chat with White House staffers in 1994, the
president set the stakes very high in the fight over health-
care reform. It's a question, he said, of ``whether we are
going to be able to maintain a health-care system and still
have the money that we need to invest in a growing and highly
competitive global economy so that America will be strong.''
Clinton has the right question, but the wrong answer. Instead
of accelerating the revolution in health-care financing that
has contained costs while protecting the best medical system
in the world, he would end it. Not smart.
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