Managed Care: Present and Future

Managed Care: Present and Future Robert (James) Walling, MRH&T James B. Connor, Pricewaterhouse Coopers James W Macdonald, Reliance Reinsurance Corp.

Managed Care: A Brief Look at the Past Robert J. Walling, Consulting Actuary Miller, Rapp, Herbers, & Terry, Inc.

Why look at “Ancient History” Those who cannot remember the past are condemned to repeat it. —George Santayana That men do not learn very much from the lessons of history is the most important of all the lessons of history. —Aldous Huxley

Ancient History 1 • 1910 • First prepaid group practice (50¢ /member/mo) • First group health policy issued to Montgomery Ward • 1917 • Early medical society opposition to managed care begins as Pierce County Service Bureau is formed to limit competition from prepaid plans.

1929: Depression & Managed Care • Decreased philanthropic support of hospitals • Substantial medical inflation • Decreased hospital occupancy • First prepaid hospital (Dallas Schools & Baylor University Hospital) • The Ross-Loos service clinic establishes prepaid clinic in L.A. for Power and Water Departments

Backlash • 1931 - Ross & Loos expelled from L.A. County Medical Society • 1932 - AMA Publishes a strong statement opposing prepaid medical. • 1932 - Blue Cross developed (medical community responded more favorably to health insurance than prepaid medical)

Development Despite Opposition • 1937 - First Urban HMO established (Group Health Associates in D.C.) • 1937 - Henry Kaiser begins Permanente Plans as prepaid medical plan for workers on Grand Coulee Dam construction site.

Judicial Developments • 1941 - U.S. Supreme Court finds D.C. Medical Society guilty of Restraint of Trade against Group Health Associates • Several court successes for HMOs follow. (Shadid v. Oklahoma Medical Society) • Over the next 10 years, 100 rural group health plans, 20 HMOs, and prepaid group health plans for several local unions (Teamsters, UAW, UMW) develop.

Social/Political Changes • 1965 - Social Security expanded to include medical insurance for the elderly (Medicare) and poor (Medicaid) • 1970 - Nixon responds to $85B in US Health expenditures by endorsing HMOs as new national health strategy • 1973 - HMO Act signed by Nixon. Provides for “assistance and encouragement for the establishment and expansion of HMOs”

Economic Changes • 1975-84 - Hospital charges inflated at average of 9.3% • 1970-90 US Health expenditures rise from $85B to $647B • 1990 - Health Expenditures 12% of GDP.

Economic Changes (cont.) • Dramatic increase in medical malpractice costs • Dramatic advances in medical technology (CAT scans, MRI, Organ transplants, etc.) revolutionize medical care but at a substantial cost • A number of social factors (aging population, more doctors, new techniques, relatively low employee costs) increase utilization.

Number of HMOs • 1950 - 20 • 1970 - 37 in 14 states • 1975 - 183 in 32 states (297 more in planning) • 1980 - 236 HMOs serving 9.1 million members • 1985 - 393 HMOs • 1987 - 662 HMOs

Early Cost Containment Efforts • Controlling Utilization • Utilization Review • Weekend Admissions • Maternity Length of Stay • Preadmission review • Second Surgical Opinion • Case Management • Appropriate Level of Care • Pre-admission Review

Early Cost Containment Efforts • Employee Contributions • Reducing Plan Benefits • Deductibles • Copayments • Maximums (Mental Health, Private Rooms, Chemical Dependency, DME, Physical Therapy) • Outpatient Incentives • Provider Network Discounts

Backlash Revisited • 1996 - Over 1,100 bills considered in 46 states to regulate managed care. • 1997 - President Clinton appoints advisory panel to draft bill of rights for health care consumers. • 1997 - In the first 4 months, 800 proposals to regulate managed care are introduced in 49 states.

Managed Care: Present & Future Jim Conner Pricewaterhouse Coopers

Managed Care - Overview • Current Environment • Trend Issues • Overview • Growth • Prices • Medical Care Costs • Margins • Mergers • Quality of Care • Member Satisfaction • Government Programs • Computer Systems • Regulatory

National Employee Health Care Enrollment

Overview - HMO Results

HMO RATE INCREASE Sources: Sherlock Co. (Projected); KPMG Peat Marwick (Actural)

Managed Care - Growth • Penetration/Growth Rate • Control Risk • Underwriting Risk • Provider Contracting Leverage

Managed Care - Prices • Price Changes • Market Share Driven • Employer Leveraged • Expectations of Managed Care • Purchasing Coalitions • Underwriting Cycle

Managed Care - Medical Care Costs • Utilization vs. Inflation • Aging Population • Disease Management • Capitation/Risk Sharing • Pharmacy Costs • Complementary & Alternative Medicine (CAM)

Managed Care - Margins • Digesting Acquisitions • Computer Capacity • Rising Medical Costs • Building Market Share

Managed Care - Quality of Care • Clinical vs. Administrative • Accreditation (NCQA) • HEDIS Reporting • Quality vs. Cost

Managed Care - Member Satisfaction • Choice of Provider • Point of Service/Open Access Products • Availability of Provider

Managed Care - Government Programs • Medicare Risk • Medicare + Choice • Medicaid

Managed Care - Computer Systems • Information Driven Business • Capacity • Medical Management • Integrated Healthcare Systems • Dynamic Industry

Managed Care -Pricing Components

Managed Care -Regulatory • Consumer Protection Legislation • Emergency Care • External Appeals • Access to Specialists • Continuity of Care • Right to Sue Health Plan • Medicare Reform • Medicare & Choice • Outpatient Drugs • Medical Record Privacy • Consent Issue • Genetic Data • Uninsured (45 Million)

MANAGED CARE MANAGED HEALTH

Future of Managed Care: The Only Certainty is (Much) More Change James W Macdonald, Senior Vice President Reliance Reinsurance Corp.

Important recent developments most likely to define the future of Managed Care • Consumer Choice is returning rapidly

Source: Hoechst Marion Roussel Managed Care Digest 1998; SMG Marketing Group

Decentralized Models are #1: Over 70% of 1997 HMO Enrollees were in Network or IPA model plans

IPA Model HMOs Not Penalizing Physicians for Certain Practices Increased From 49% in 1996 to 74.1% in 1997

HMO Capitated contracts with Specialists Declined in 1997

Primary Care Physicians also saw a reduction in Capitated Contracts in 1997

Triple-Option HMO plans Jump to over 41% of all HMO plans Note: Triple Option plans give enrollees choice of HMO, PPO or indemnity.

Important recent developments most likely to define the future of Managed Care • Consumer Choice is returning rapidly • The Cost of Health Care will Re-Accelerate

Health Care Expenditures as a Percent of GDP - New Growth Expected(Selected Years to 2007) Sources: HCFA, Office of the Actuary; US Department of Commerce, Bureau of Economic Analysis

Private Sector Expected to assume Burden of Increased Expenditures ($B)...

…with the average annual Private Funds growth rate more than doubling from 1996 to 2001

…But widespread double-digit growth rates are not expected to return (Average Annual Growth Rate From Prior Year Shown)...

Two assumptions critical to these projections ... • Cost savings produced by Managed Care are “primarily one-time” and are not sustainable. • Only a small long term growth rate reduction will result from the impact of managed care on the use of higher cost medical technology.

Important recent developments most likely to define the future of Managed Care • Consumer Choice is returning rapidly • The Cost of Health Care will Re-Accelerate • Vertical Integration will become as much a change driver as Horizontal Integration

Horizontal Consolidation: The nation’s 25 largest HMO’s enrolled 25.4 million members, or 30.3% of the total versus 23.7 million in 1996.

Vertical Consolidation: Hospitals are forming and taking increased equity stakes in HMOs Source: SMG Marketing Group

Vertical Consolidation: Hospital-Owned Enrollment Growth Possible Key Indicator to Future of Managed Care Source: SMG Marketing Group

Managed Care: Present and Future