AHM Healthcare Management - An Introduction: The Evolution of Healthcare Delivery & Financing in the U.S.

Objectives: After completing this lesson, you should be able to: Define health plan. Identify the major factors that influenced the evolution of healthcare delivery and financing in the United States. Describe the role of the government in the development of healthcare delivery and financing. List and describe some factors that limit accessibility to healthcare. Discuss how the meaning of quality (as it relates to healthcare) has changed. In todays healthcare environment, the term managed care" has many meanings. Depending on the context in which it is used, the term may refer to a system of healthcare financing and delivery, to the various techniques of managing the financing and delivery of healthcare, or to the different types of organizations that practice health plan techniques. To provide us with a framework for the rest of our discussion in this course, however, we will define managed care as the integration of both the financing and delivery of healthcare within a system, or specifically within a health plan (managed care organization) that seeks to manage the accessibility, cost, and quality of that care. What exactly does it mean to integrate the financing and delivery of healthcare? And how does a health plan manage the accessibility and cost of healthcare or assure its members of quality healthcare? We answer these and many other questions in this course. Because understanding how the concept of health plans grew and developed provides important background for a study of todays health plan industry, we begin our discussion with a description of the historical factors that influenced healthcare in the United States. Then we explore some of the economic, technological, and social issues that have influenced the development of health plans. Please note that the sections of the text that tell the story of the managed care movement introduce many health plan terms and concepts. If necessary, you may consult the glossary in this course manual for definitions of unfamiliar terms. Note, too, that your primary purpose in reading these lessons is to become familiar with the historical factors that have shaped health plans. We will define and discuss important terms and concepts in later lessons. Historical Factors You might be surprised to learn that variations of what we now know as managed healthcare have been around since the early 1900s. The earliest examples of health plans appeared in 1910 in the form of prepaid group practices. A prepaid group practice was a healthcare system that offered plan members a wide range of medical services through an exclusive group of providers in return for a monthly premium payment. Blue Cross plans, which provide prepaid hospital care, were established as early as 1929, and Blue Shield plans, which provide reimbursement for physicians services, began in 1939. Individual practice associations (IPAs), which contracted with physicians in independent fee-for-service practices, emerged in 1954 as a competitive response to group practice-based health maintenance organizations (HMOs).

During the early 1900s, managed care organizations (MCOs) represented only a small fraction of the healthcare market. Since then, however, managed healthcare has grown dramatically. By January 1, 2006, more than 200 million individuals received care from today's "health plans", formerly knows as MCOs. HMO Act of 1973 One of the most important factors behind the growth of health plans was the enactment of the federal HMO Act of 1973. The HMO Act was designed to reduce healthcare costs by increasing competition in the healthcare market and to increase access to healthcare coverage for individuals without insurance or with only limited benefits. The following four features formed the foundation of the HMO Act: Federal qualification requirements -Federal qualification requirements The HMO Act established a process by which HMOs could obtain federal qualification. Unlike state licensure, which was mandatory for all HMOs, federal qualification was optional. Plans that elected this option were required to meet a series of standards related to minimum benefit packages, enrollment and premiums, financial stability, and quality assurance. Dual choice provisions - Dual choice provisions required employers that offered healthcare coverage to more than 25 employees to offer a choice of indemnity coverage or managed healthcare coverage under either a closed-panel HMO or an open-panel HMO. Federally qualified HMOs that wished to be considered by an employer as a healthcare coverage option under the dual choice provisions were required to submit a formal request to the employer. Federal development grants and loans-Federal development grants and loans In order to encourage the development of HMOs, the HMO Act offered funding to support planning and start-up for new HMOs and service area expansion for existing HMOs. These funds were available only to federally qualified HMOs. Exemption from state laws- In some states, existing laws restricted the development of HMOs. The HMO Act exempted federally qualified HMOs from these state laws. To a certain extent, the HMO Act accomplished its goals of reducing costs and expanding access to healthcare services. Federal qualification, in particular, offered competitive advantages to HMOs entering the healthcare market. For example, the dual choice provisions included in the Act gave federally qualified HMOs access to the employer segment of the market. The federal grants and loans available to federally qualified HMOs allowed health plans to market their products and compete effectively against indemnity-based insurance programs. Federal qualification even gave HMOs a somewhat official stamp of approval. In addition, federal qualification allowed HMOs to participate in Medicare without providing additional documentation of qualification. While some health plans still maintain their federal qualification status, it is no longer carries the same weight in today's market. In other respects, the provisions of the HMO Act hampered the competitive position of HMOs. As we mentioned earlier, in order to gain the benefits of federal qualification, HMOs had to satisfy a wide range of requirements related to healthcare quality and financial stability. These requirements did not apply to traditional indemnity-based insurance programs or to nonqualified health plans. In addition, the federal government was slow in taking the steps necessary to implement the provisions of the HMO Act. Even employers who supported the goals of the Act

tended to delay introduction of health plan options to their employees until the government announced which plans were qualified and established dual choice procedures. Between 1976 and 1996, the HMO Act underwent a series of amendments. These amendments eliminated or reduced some of the strict requirements imposed on federally qualified HMOs. For example, the dual choice mandate was repealed in 1995. HMO Act amendments also granted health plans greater flexibility in designing and marketing their products and strengthened the emphasis on quality. These changes will be discussed in more detail in lesson "Legislative and Regulatory Issues in Health Plans." Introduction of New Products and Programs In the early 1990s employers and consumers embraced HMOs as a lower cost, high-quality solution to rising health care costs. As annual premium increases flattened, employers and consumers became less satisfied with HMOs more restrictive provider networks, and looked to the market for plans offering access to broader choices of providers. This demand for choice and access led to the accelerated growth of additional health plans products including: Preferred provider organizations (PPOs)- Which cover services provided by a network of designated providers, but which also provide limited coverage for services delivered by non-network providers. Members can typically visit specialists without a referral. Point-of-service (POS) products- Which combine elements of traditional indemnity insurance and health plans. Members are free to obtain care from network or non-network providers, but non-network services typically involve more limited benefits and require higher out-of-pocket costs. Visits to network specialists require a referral from a primary care provider (PCP). Consumer-directed health plans (CDHPs)- CDHPs generally combine a core contribution of funding by employers with increased choice and financial responsibility for employees and increased accountability for health plans and providers. They typically combine a high-deductible health plan with a tax-advantaged personal savings account, also referred to as a consumer healthcare spending account. Carve-outs- Which are organizations that contract with health plans to provide specific types of services, such as mental health, chiropractic, dental, vision, or pharmacy services, through specialty-based provider networks. These programs and products will be discussed in more detail in later lessons. Government Influence In addition to enacting legislation to regulate healthcare, the federal and state governments also play an important role in financing healthcare for millions of Americans through programs such as Medicare, Medicaid, the Federal Employee Health Benefits Program (FEHBP), and the State Childrens Health Insurance Program (SCHIP). These programs have increasingly turned to health plans as an alternative to traditional fee-for-service programs. For example, enrollment in Medicare Advantage plans increased to 6 million in 2005. In that same year, 27 million Medicaid recipients were enrolled in some form of health plan program.(1) We will discuss the roles of the federal and state governments as they relate to health plans as well as Medicare, Medicaid, and

other government-sponsored health-care programs in lesson "Legislative and Regulatory Issues in Health Plans." Economic Factors (2) Now that we have looked at managed healthcare from a historical perspective, we turn our attention to the economic factors that have driven the evolution of health plans. In the remainder of the lesson, we explain how these factors and the changes they produced led to the development of early managed care strategies and, eventually, to the health plan industry as we know it today. Increases in Healthcare Costs What are some of the reasons for the increases in the cost of medical care? Inflation, which is a general rise in prices, is one factor that caused increases in the cost of doing business, not only for insurers, but for providers of medical services as well. A 2006 report by PriceWaterhouseCoopers (PwC) identified a number of other factors fueling rising healthcare costs and increased health insurance premiums. They include: Increased utilization According to the PwC report, increased utilization was the most important factor contributing to health insurance premium increases, accounting for 3.8 percentage points of the estimated 8.8% rise in premiums in 2005. The major drivers of increased utilization include the following: Aging: It is widely recognized that the population is aging as Baby Boomers approach retirement. PwC estimated that the aging of the population enrolled in health plans contributed to the rise in premiums in 2005. The effect of the aging population is discussed in greater detail later in this lesson. Lifestyle: Lifestyle challenges, including obesity, smoking, drug abuse, and physical inactivity also have contributed to an increase in the utilization of health services and, consequently, to rising insurance premiums. New treatments: New treatments come in the form of new imaging technologies, biologics, injectables for existing serious illnesses, and lifestyle drugs for conditions that were once not considered illnesses, or at least were not commonly and effectively treated using prescription drugs. More intensive diagnostic testing/defensive medicine: PwC cited more intensive diagnostic testing as a driver of premium increases in 2005. The practice of defensive medicine is one factor contributing to these increases in diagnostic testing. Increased consumer demand: The increase in consumer demand is fueled by factors including the proliferation of information on medical treatments and demand pull strategies such as direct-to-consumer advertising. Cost shifting The PwC report estimated that cost shifting from public providers and the uninsured to private payers increased health insurance premiums in 2006. The effect of cost shifting is discussed in greater detail later in this lesson.

Higher-priced technologies New healthcare technologies, including prescription pharmaceutical products, increase prices because they are frequently more expensive than existing technologies. Newer prescription drugs, in particular, tend to replace older drugs and generic drugs. New imaging technologies are being introduced into the market at a higher cost. Broader-access networks/provider consolidation Market forces (and, in some cases, state laws) have prompted a movement toward health plans with broader provider networks. Additionally, many plans have introduced open-access products that minimize the role of the primary care physician in facilitating consumer access to specialists. While many consumers have expressed a preference for broader provider networks, such networks tend to reduce the amount of competition in the system. In addition, there have been instances of provider consolidation that have similarly reduced levels of provider competition in some markets. Lack of incentives to control medical costs Traditionally, the US health care system has had few incentives for providers and consumers to control spiraling medical costs. In most cases, patients are completely unaware of the actual cost of the care they receive and do not factor cost into their purchasing decisions. The recent move toward consumer-directed health plans is due in part to this historic lack of cost information and incentives. Cost Shifting Many healthcare providers deliver medical care to people who either have no healthcare coverage and cannot afford to pay for the care by themselves or who pay reduced rates, such as rates for services covered under certain government-sponsored healthcare programs. The payments hospitals and physicians receive for such services are lower than the prevailing charges for those services. Many uninsured patients seek medical care in facilities such as hospital emergency rooms, and such treatments are often for ailments that could have been prevented or treated earlier in a more appropriate and cost-effective facility. To subsidize the treatment of these patients, such providers spread the unreimbursed costs to their other paying patients. This practice of charging more for services provided to paying patients or third-party payors to compensate for lost revenue resulting from services provided free or at a significantly reduced cost to other patients is known as cost shifting. Cost shifting results in higher healthcare costs for people with private healthcare coverage and the companies that provide that coverage. Technological Factors Advances in computer technology have revolutionized not only the way health plans manage information, but also the way they manage their operations. This is most evident in the use of technology to support core business functions such as claims processing, enrollment, and premium billing. By performing these functions electronically rather than manually, health plans have been able to improve both the quantity and quality of information they receive and report. Technology is also an important element in medical management. For example, health plans can generate statistical profiles of providers treatment patterns and can use these profiles to evaluate the quality and cost-effectiveness of the services delivered through their provider networks.

Pharmacists using point-of-service information systems can, at the time a prescription is filled, determine: Patient eligibility for prescription drug coverage Potential adverse drug interactions and drug therapy restrictions Formulary compliance Preauthorization requirements Copayment, deductible, and coinsurance requirements

They can also conduct prospective drug utilization review and submit and process prescription drug claim information. Technology has also helped lower administrative costs. For example, prior to computerization, the cost of processing a claim and submitting reimbursement was often greater than the claim itself. Using automated systems, that cost has been reduced to little more than the cost of postage. Automation also reduces administrative and operating costs by: Reducing staffing requirements Increasing the accuracy of data entry Shortening the internal processes needed for functions such as releasing payments, generating member identification cards, and maintaining enrollment information Turning health plan data into actionable information Health plans are now beginning to expand their use of information systems beyond core functions. Electronic medical records (EMRs) allow providers immediate access to necessary patient care data. Personal health records (PHRs) allow consumers to access and coordinate their own health care information from a variety of sources and make it available to the appropriate caregivers. With these applications, health plans will be able to add value to their services, provide consumers with needed, timely information about their own health care, and give providers the information they need to deliver effective care and avoid unnecessary and costly duplication of services. We will read more about these and other technologies in the lesson Information Technology. Social Factors Public demand for cost-effective healthcare services has also increased, driven primarily by changes in population characteristics, limited access to healthcare services, and an increasing emphasis on quality. Maturing Population The population of the United States is aging. In 1970, the median age of the U.S. population was 28 years old. In 2000, the median age was 35.8 years old. Between 2000 and 2010, the 45- to 54year-old age group is expected to increase by 19%, while the number of people aged 55 to 64 is expected to increase by 48%.8 This current demographic shift in the age of the population is often attributed primarily to the baby boom that occurred in the years following World War II. As the population ages, the general incidence of illnesses associated with aging will continue to increase. The higher rates of illness will result in a greater need for chronic care services, longterm care, rehabilitative care, and medication use. In the past, many people would have died when

their health deteriorated to a certain point. Now, because human life can be prolonged through various drug treatments and medical procedures, the need for chronic care, rehabilitative care, and long-term care has grown. The costs of providing all of these services will continue to be a factor in healthcare coverage costs as the U.S. population continues to age. Access to Services In the healthcare context, access can be defined as a persons ability to obtain affordable medical care on a timely basis. For most people, healthcare coverage is the key to accessing medical care, yet more than 45.8 million people in the United States (over 16% of the nonelderly population) lacked healthcare coverage in 2004.6,7 Why is it so difficult for some Americans to access the healthcare they need? The rising costs of medical care and its effects on the cost of healthcare coverage have made the cost of obtaining individual healthcare coverage too expensive for some people to afford. Most people who have healthcare coverage receive it through an employer-sponsored group plan, either as an employee or as a dependent of an employee. However, a persons employment status (or status as a dependent of an employed person) does not necessarily guarantee access to healthcare coverage. In 2004, nearly 27% of uninsured people lived in families in which the head of the household was a full-time worker. Further, in 2004, 24.5% of all self-employed workers were uninsured and 30.9% of workers private-sector firms with fewer than 10 employees were uninsured.8 This fact reflects the high cost of individual coverage (which self-employed persons have to buy), as well as the generally inverse relationship between employer size and group health premiumsthat is, the smaller the group, the more expensive the premium. Although the prohibitive cost of healthcare coverage is one factor that limits access to medical care, there are other reasons why accessibility has been a problem. Uneven Distribution of Medical Services Even though there is currently an oversupply of hospital beds and specialty physicians nationwide, many areas of the countryprimarily rural areashave traditionally had poor access to healthcare services. Cost concerns have forced hospital closings in many areas. These closings have occurred disproportionately in rural areas and inner cities and have reduced access to healthcare in these areas. Physicians have traditionally congregated in more highly populated areas where they have easy access to facilities and to colleagues, and where demand for their servicesand therefore potential incomeis greater. The uneven distribution of medical services is reflected in the distribution of healthcare coverage. In 2006, the percentage of the total nonelderly U.S. population without healthcare coverage was more than 17%. However, In 11 states, more than 20% of the population was uninsured. 9 These states were largely concentrated in the south central and southwestern portions of the United States, areas which have large rural populations. Other factors contributing to the higher-thanaverage proportion of uninsured individuals in these states may be the lower average income, higher unemployment rates, and higher concentration of racial and ethnic groups. Accessibility will continue to be an important factor in future developments in healthcare coverage. The Quest for Quality In the past, employers purchased group healthcare coverage for their employees and paid a large portion, or perhaps all, of the premiums. Quality determinations were really left up to their

employees, because the employees were free to choose any medical service provider they pleased. As the premiums for healthcare coverage began to increase dramatically, the cost of that coverage began to represent a larger and larger portion of employers expenditures. In response to increasing costs, employers became more discriminating purchasers of healthcare coverage and began to evaluate what each health plan had to offer in terms of cost. Employers now evaluate the quality as well as the cost of care provided by the health plan. Some employers form purchasing coalitions to bargain more effectively for the lowest-cost and highest-quality healthcare. Consumers also demand quality. In a study of 2,000 adults conducted in 2000 by the Kaiser Family Foundation, 90% said that high-quality care was very important. Nearly 50% of those surveyed said that quality care was the most important factor in choosing a health plan.9 The meaning of quality in healthcare, however, has changed. Rather than measuring healthcare quality in terms of how expensive the care is or how much service is provided, participants in the healthcare systemconsumers, employers, providers, and payorsnow more commonly evaluate healthcare quality in terms of patient safety, preventive care, access to primary care and specialty care physicians, complaints and grievances, and care for chronic illness. They also measure quality according to desired outcomes. The industry has supported the demand for quality by providing extensive quality oversight programs. The National Committee for Quality Assurance (NCQA) began to accredit HMOs in 1991 and since then has developed a variety of quality measurement tools, including the Health Plan Employer Data and Information Set (HEDIS).10 The American Accreditation HealthCare Commission/URAC (URAC) also offers accreditation programs. Accreditation and the programs available from these agencies are described in Medical Management II. In addition, various consumer-oriented magazines, state and local government groups, and health plans publish annual report cards of health plan performance. Conclusion In this lesson, we have introduced many of the factors that led to the growth and development of managed care over the last 30 years. These same factors are likely to play an important role in determining the direction of health plans in the future. The outcome will depend on how employers, employees, insurance companies, health plans, hospitals, physicians, and other types of healthcare providers respond to the challenges of operating in an era of skyrocketing costs and constant change. In the next lesson, we will discuss some of the early efforts of health plans to control costs and manage healthcare. We will also review some fundamental concepts of indemnity health insurance to give you a background for understanding many of the early strategies used to control costs and maintain quality care. Endnotes 1. Atlantic Information Services, Inc. AISs Directory of Health Plans, 2005. 2. Adapted from Jena K. Mullen, Intro to Health Plan: Fundamentals of Health Plan Coverage and Providers (Atlanta: LOMA, 1995), 46. Used with permission; all rights reserved. 3. U.S. Department of Health and Human Services & the Office of Inspector General, February 21, 2002. http://www.oig.hhs.gov/oas/reports/cms/a0102002.pdf

4. Centers for Medicare and Medicaid Services, Office of the Actuary, 2004. http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.79v1 5. Centers for Medicare and Medicaid Services, National Health Care Expenditures Projections: 20002010, Table 3, http://www.cms.gov (20 May 2004). 6. Paul Fronstin, EBRI Issue Brief, (Washington, DC: Employee Benefit Research Institute, October, 2006), 5. http://www.ebri.org/pdf/EBRI_Notes_10-2006.pdf 7. Ibid., 12. 8. Ibid., 20. 9. Newswire: Quality Does Count, But Formal Ratings Dont, Managed Healthcare Executive (January 2001):9. 10. HEDIS is a registered trademark of the National Committee for Quality Assurance (NCQA).