The Power of Purchasers

October 24, 2002

The U.S. health care system is at a crossroads. Purchasers must think what lies around the bend before they abandon proven tactics in a flurry of short-term cost sharing.


The Power of Purchasers

Jump to:Choose article section...Why PPOs? And why not?Defined contribution/consumer-driven modelsIs there a better way?What we do in the short term creates the longer term

The U.S. health care system is at a crossroads. Purchasers must think what lies around the bend before they abandon proven tactics in a flurry of short-term cost sharing.

By Maggie Radany, RN, MPP

The economy is weak. Double-digit health care inflation has returned with a vengeance. HMOs continue to lose members. Between the consumer backlash, the industry's catch-up premium increases, and state coverage mandates for coverage, tightly managed care appears to have run its course.

In the short term, with no other promising financing or delivery strategies on the horizon, employers will simply shift more cost to their employees. That is not an unreasonable strategy, for there is no doubt that insurance has shielded beneficiaries from the true cost of state-of-the-art medical care and made it easier to shun difficult lifestyle changes in favor of the quick (and more expensive) fix of medication and surgery. Increased cost-sharing at every level — premiums, copays, coinsurance and deductibles — should encourage consumers to choose the best plan for their circumstances and to be circumspect about whether potential treatment is worth the price.

Before we move wholeheartedly into a new era of shared costs, however, it is important to ask how these short-term initiatives will shape our system of health care over the longer term and whether they will take us in the direction we really want to go. Are we simply retreating to an indemnity-like world, albeit with greater financial bite for consumers?

Cost-shifting will occur through two essentially "unmanaged" approaches — PPOs and defined contribution/consumer driven models. With both, we give up much of our ability to monitor the quality, efficiency and appropriateness of care. Over the past decade, HMOs have created an infrastructure for capturing the data needed to derive population-based quality and utilization rates, thereby enabling, at least in theory, the ability to hold providers accountable for quality and efficiency. Given that costs are likely to increase at ever-greater rates as we move into less managed insurance products, relinquishing the focus on measuring and potentially rewarding cost-effective health care may not be in our best interest.

Why PPOs? And why not?

The ability of HMOs to manage utilization and cost has been compromised by increasing regulation, a direct result of the managed care backlash. State mandates for coverage of certain benefits, mandatory lengths of stay and patients' rights to independent, external review of denials, for instance, have eviscerated key tools that enabled managed care to decrease utilization and cost in the 1980s and early '90s. Complying with HIPAA will require a substantial financial investment long before any efficiencies from information technology can be realized. Add to these regulatory issues the competitive need for accreditation, HEDIS reporting and quality improvement initiatives, and it is clear why HMOs might be at a competitive disadvantage versus PPOs.

Historically, HMOs have been less costly because of their stronger utilization management and financial incentives for provision of fewer services. The difference between HMO premiums and costs for care under PPOs have narrowed in the past two years, however, and HMOs comparatively higher rate trends have made it appear that they are doing a worse job of containing costs.

PPOs remain more costly than HMOs, however, and given their reimbursement strategies, there is little reason to expect them to be able to moderate costs. Most of their savings derive from the ability to demand fee discounts from providers. Without fairly strong utilization controls, low fees create financial incentives for physicians and hospitals to provide more services in order to maintain revenue.

Given these financial incentives, it is particularly troubling that PPOs do not, at present, have easy access to the data necessary to demonstrate the quality or appropriateness of care — critical components of the value equation. (Some would argue that the incentives for over-provision of services in PPOs make quality monitoring unnecessary, but research over the past two decades has demonstrated that too much or the wrong kind of health care can be as dangerous as too little.)

Certain characteristics of PPOs make quality measurements difficult. Enrollment data is captured only for subscribers, not dependents, so calculating population-based rates of illness and service use is not possible. Further, claims are often paid by third party administrators, so the PPO does not have easy access to the data needed to look at practice patterns, generate physician profiles or identify all candidates for disease and case management. Requiring the changes necessary to support such functions would increase administrative costs.

PPOs are able to perform case management and care coordination, but hospitalizations offer their only opportunity to identify candidates for these services. HMOs, on the other hand, can use claims and pharmacy data to identify high-utilizers or those with diagnoses that would benefit, both health- and cost-wise, from intensive case management. Most HMOs have not, to date, fully exploited this powerful capability, but their infrastructure makes it possible and purchasers could demand it. Moving to PPOs as they currently stand will erode the health care system's ability to coordinate care.

Defined contribution/consumer-driven models

Modeled on the shift in retirement benefits from the pension to the 401k, defined contribution health benefits aim to both limit and make predictable the cost to the employer, and also to make health care more consumer-driven.

The emerging model for defined contribution couples a medical savings account (MSA) to a relatively high-deductible insurance plan. The employer funds a personal care account for each employee that can be used for any health-related cost — contact lenses, laser eye surgery, acupuncture, copayments, etc. — and offers a high-deductible indemnity plan. The plan covers all preventive care, but for any illness-related care the deductible must be met by the employee (either out of the MSA or out-of-pocket) before insurance pays.

The obvious advantage of this approach is that it allows employees to customize health coverage to their own circumstances. Employees can use MSA funds to purchase services that are typically not covered and also decide between the options for allocating their benefit across the MSA and insurance. Healthy 25-year-olds would likely put the maximum in their MSAs and buy the lowest cost/highest deductible plans they can. Fifty-year-olds with a chronic disease would likely choose the most complete insurance coverage offered.

With enough education and decision support, the power of informed consumers may well help to moderate health costs. Research has shown that when patients have a full understanding of the benefits and risks of each treatment option, they often choose less intense, less costly approaches. Research has also shown that hospitals and surgeons who do a high volume of particular procedures have better outcomes than those who do fewer, and that health plans which are accredited score higher on measures of clinical quality. But presently, consumers have little knowledge of these facts and even less understanding of how to identify a good treatment, provider or plan.

Although the conceptual basis for consumer-driven plans (i.e., increased financial responsibility will cause consumers to purchase health care services more carefully) makes sense, medical care is complex and individualized. Choosing the best treatment — or deciding to forego treatment — is a nearly impossible decision for most individuals, and so we rely on physicians to recommend a course of action. But even among physicians there is often disagreement about the optimal course in a particular case because too little is known about the relative risks and benefits of alternative approaches. Hence, the emergence of "evidence-based medicine," clinical practice guidelines and the like. Further, the state of the art of hospital performance measurement remains controversial, and the most important measurement of all, physician performance, is embryonic.

Communicating complex medical information to consumers will require a new decision support industry, one that is already emerging. It is hard to argue with the advantages of informed consumers, especially when it comes to health care. Indeed, it is long overdue. However, to rely on consumer decision support as the sole mechanism for managing appropriateness and cost probably will not serve us well.

Why not? For several reasons. Providing decision support at a level that will truly empower the consumer to make well-informed decisions will be costly, and whether it will lead to less expensive choices often enough to pay for itself remains to be seen. Additionally, employees might revolt against both the greater responsibility and the greater expense. Finally, if and when the economy rebounds, competition for workers could force employers to provide richer contributions to employee MSAs and ever lower deductibles on indemnity plans. This would ultimately feed another health care cost spiral upward as it did in the 1960s, '70s and early '80s.

Is there a better way?

No one really wants to continue with tightly managed HMOs, and there is little reason to believe that this "hassle" level is particularly critical to managing costs. Empowering and incentivizing consumers to be substantially more involved in their medical decisions is an important strategy that, when accompanied by other cost and utilization management approaches, probably will enhance effectiveness.

At the same time, there are positive features of HMO-style managed care that should be retained. Managed care has not only advanced the level of accountability for providers, but also provided an infrastructure for identifying and managing complex cases across multiple providers. It has also enabled the examination of practice patterns and cost-effectiveness that can inform clinical practice. In the long term, these are the characteristics of a health care system that will give us the most of what we want, and we should insist that they be retained.

Society has clearly said, "Get the administrators out of medical decision making," so some other approach to the control of volume and appropriateness of services is needed. Physicians must be held accountable for providing evidence-based care to the extent possible and must be involved in advancing the knowledge base for "what works at what cost." Hospitals must decrease medical errors and increase efficiency. Medical groups and integrated systems of care need a reason to invest in case management, and if capitation is not going to be that reason, something else must substitute.

To achieve the kind of health care system we want at a tolerable cost, we need to become much smarter about how we incentivize providers to "do the right thing." Some would call this paying for performance. It will entail rewarding, in a truly meaningful way, the hospitals that can demonstrate improvements in patient safety and efficiency, and the medical groups and integrated systems of care that can demonstrate cost-effective practice patterns and patient satisfaction.

What we do in the short term creates the longer term

There will likely always be pressure for health care costs to increase at a rate greater than general inflation. Rich funding for biomedical research and an entrepreneurial spirit guarantee a steady flow of expensive innovations. Absent a societal decision that we are simply devoting too much of our gross national product to health care (not a likely scenario in the near term), someone will need to pay.

For most large purchasers at this point, there is little reason not to offer a range of plan types; contribution strategy can be used to keep the cost neutral to the employer or to encourage employees to choose the less costly plan, and offering a choice of plans will meet employee satisfaction goals. But it will be important for these influential purchasers to recognize the power they have to shape the health system and to be forward thinking about what that system should look like. HMOs have the information systems in place, but they need to be pressured to take much better advantage of those systems to see that care is cost-effective. Both PPOs and consumer-driven plans can provide us with the infrastructure necessary for monitoring and influencing these crucial aspects of value, but presently they do not.

If one believes that high-quality health care — doing the right thing at the right time in the right way — is ultimately less costly than lower quality care, then a long-term view towards creating the kind of delivery system that can be held accountable for cost and quality is in our best interest. Large purchasers play a key role in attending to that interest.

Maggie Radany is Director, Healthcare Performance, for UltraLink. UltraLink, a provider of outsourced employee benefits administration, combines its expertise, technology and customer support infrastructure to help HR personnel reduce costs and focus on core competencies. For information, contact Susan Broadway, Marketing at 714-384-0602 or or visit .

More Business & Health Articles on This Topic:

Can Purchasers Correct the Course? (State of Health Care in America 2000)

Heavy Hitters: How the Fortune 500 Pick Health Plans (June 2001)

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Maggie Radany. The Power of Purchasers.

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