The meltdown of the Clinton health reform plan suggests a return to competition-that managed care, capitated payment, and regional alliances will assume leading roles in the delivery of health service. But that conclusion may prove premature. Missing from the debate is a discussion of the true costs and implications of these emerging health alliances and health management organizations (HMOs).
Managed care may not offer the expected panacea for containing health costs. The nation's health alliances are already segmenting the marketplace. Hospitals and physicians are forming powerful oligopolies in almost every metropolitan area. Huge managed care plans create monopolies that force out weaker firms and stifle competition. Most of the remaining competitors must be satisfied as small niche players. These factors point eventually to a more regulated environment-obviously inconsistent with the political shift to the right. The surprise is that these forces may persist despite the Republican takeover.
Will the health field fall prey to tightening governmental controls, even as long-regulated industries like electric and gas distribution move away from traditional, cost-plus, franchise-based regulation?Managed Care: No Panacea
Compared historically with traditional fee-for-service insurance, HMOs and other managed care plans have achieved only modest results: HMO patients experience somewhat lower inpatient admission rates with slightly shorter average hospital stays. But those enrolled in managed care plans make as many or more physician office visits. Capitated payment plans encourage HMO members to use fewer expensive procedures and examinations. We find a somewhat lower satisfaction level with HMO services, counterbalanced by the perception that managed care costs less than fee-for-service plans.
By micromanaging services, managed care plans have achieved over several years a 7- to 10-percent overall cost reduction. Though sizable, this amount roughly equals one year's inflationary factor of our nation's health expenditures. In comparison, based on the most recent projections, Medicare, Medicaid, and Social Security are expected to consume all federal revenues by 2012, unless we raise taxes or reduce benefits or achieve some of both.
As HMO enrollment proliferates, hospitals and physicians will encounter more un- or underinsured patients. Smaller employer groups will witness cost shifting first hand, when Congress makes further cuts in Medicare and Medicaid reimbursement. Concurrently, the managed care plans and the regional networks will continue to face difficulty in providing health services to inner-cities and poor rural areas, where most poorly insured patients reside. To pick up that slack, we can expect to see more for-profit managed care plans formed specifically to collect premiums and deliver limited care to inner-city patients eligible for Medicaid and Medicare. Managed care plans and regional networks claim they are forced to establish panels of physicians and hospitals to ensure quality care and lower costs. What is so worrisome is that too many managed care plans and alliances will select low-quality, low-cost providers. And the professional loyalties of such providers may be dominated more by the fiscal imperatives of the third-party payers, who assure them of a steady revenue stream, than by the desire to protect their patient's best interests. Furthermore, physician-patient ratios at HMOs hover around 1 per 800, as compared with 1 doctor per 415 U.S. citizens-foreshadowing a surplus of 166,000 physicians by 2000. This excess capacity will encourage regional networks to squeeze out many of the area's weakest providers.Regional Monopolies Evolve
Over the next three to five years, expanded enrollment in managed care plans will force almost all doctors and acute care facilities to associate themselves with dominant, geographically linked, vertically and horizontally diversified health alliances. This trend will accelerate as fiscal constraints force health care providers to cut costs. By the turn of the century, almost every hospital in the United States could be affiliated with any one of a maximum of 850 regional networks. That figure assumes certain concentration rates for health networks: 1) an average of two networks for each metropolitan area under 450,000, 2) three and one-half networks for areas between 450,000 and 1.5 million, and 3) five networks for each metro area greater than 1.5 million. The strongest regional alliances will be geographically linked, compatible with existing physician referral patterns, and able to develop common culture and goals among trustees, doctors, and various levels of health executives.
In this climate, and without any utility-style state public service commission for health care, we could see one or several alliances dominating each region as an oligopoly or virtual monopoly, inviting a public utility model to regulate the health field.State PUCs for Doctors?
Federal antitrust law, though created to fight monopoly power, may not prevent these massive health networks from forming. A recent (August 1994) U.S. General Accounting Office study of the 397 acute hospital mergers reviewed by the Department of Justice and the Federal Trade Commission (FTC) during the fiscal years 1981 through 1993 reveals that less than 4 percent were challenged. Neither the Department of Justice nor the FTC has ever questioned a hospital joint venture. If this state of affairs continues, one or, at most, a few networks will eventually dominate almost all regions nationally.
In 1959, the late Ray Brown (often considered the dean of American hospital administrators) proposed that state health services commissions allocate resources. Later (1970), the American Hospital Association's Ameriplan recommended forming a National Health Commission to oversee the organization and financing of the U.S. health system. Each state would create a health services commission to control the range of services and the reimbursement rates for providers. The idea of state health commissions also served as a model in the formation (1971) of the Maryland Health Services Cost Review Commission. But the health industry rejected the "commission" approach-primarily on the advice of public utility executives, who warned the nation's medical and hospital leadership to avoid such regulation at all costs.
A key concern for health providers is whether a state health commission could maintain the various competitive elements of managed care and regional networks while making health delivery more efficient and fair. Can regulators balance the rights and needs of consumers, providers, and government? Ultimately, even if regulation could be made more effective, the performance of these hypothetical state health commissions would still fall short, in my opinion, because the difficulties with regulation arise largely from the nature of the undertaking itself.The Pendulum Swings
Why should the health field encounter these regulatory pressures just as electric utilities move away from traditional regulation? Here's a possible explanation: During the 1960s and 1970s, regulation in the nontransport industries contributed to the nation's economic prosperity, while health expenditures increased annually at twice our consumer price index. Productivity for utilities increased in the postwar period faster than any other industrial sector, as utility rates rose far less than prices generally. By contrast, the health field added 800,000 more workers to its payroll in the 1980s. It now employs one out of 13 in our labor force.
Presidents Nixon and Carter placed temporary price controls on the health industry; for a year or so this delayed increases in its expenditures. During the Reagan, Bush, and Clinton administrations, competition also flourished in the health field. As I see it, the pendulum will swing the other way for hospitals, physicians, and other providers in the late 1990s, in just the opposite direction from the electric utility industry.Thomas P. Weil, PhD, is president of Bedford Health Associates Inc., Mnagement Consultants for Health and Hospital Services, Asheville, NC, a firm founded in 1975, whose practice focuses on the managed care plans, health alliances, and the possible impact of future health reform legislation.
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