Recession hits managed care

June 1, 2009
Tracey Walker

She is senior editor of Managed Healthcare Executive.

Rethink benefit options and watch for new consolidations in your local provider market

NATIONAL REPORTS - Healthcare is not immune to impacts of the current recession.

"Managed care executives will have to re-examine benefit options and continue to manage utilization in light of these trends," says Richard Sacher, an audit senior manager at Grant Thornton. "Further, managed care executives will have to actively monitor the economic health of entities with whom MCOs have entered into risking sharing or capitated arrangements."

Finally, providers, like all large employers, are looking to reduce head count and related costs, including the costs of medical insurance.

PROVIDERS HIT HARD

The healthcare landscape is feeling many of the same forces that are impacting the broader economy.

"On the provider side, hospital providers are experiencing higher volumes of uninsured and underinsured patients in their emergency departments, while at the same time, more profitable, elective procedures are being deferred," Sacher says. "In addition, the tightened credit markets have limited some hospitals' abilities to finance capital improvements or refinance existing obligations."

Bruce Pyenson, FSA, principal and consulting actuary, Milliman Inc., agrees the financial crisis is hitting providers in several ways. Most hospitals are non-profits and they depend on debt financing, which has been much more difficult lately, he says.

"Perhaps more importantly, the recession is reducing demand for elective treatment, and that reduction might be a permanent change-and a good one," Pyenson says. "Some elective surgeries are also known as 'preference-sensitive admissions' where the decision to use surgery instead of appropriate but less-invasive treatment is the 'preference' of the provider or patient."

This includes some orthopedic, cardiac and gynecological surgery. Milliman estimates that about 12% of admissions or 16% of inpatient cost, which is about $80 billion per year, falls into this category, and that perhaps 30% is avoidable.

"Some of the techniques being discussed to manage this cost are precertification and 'patient decision aides' where a patient may need to sign an informed consent form choosing surgery over other options," Pyenson says. "The economic downturn seems to be making people more cautious about elective surgery. Higher cost sharing is probably one component."

The accelerating cost controls by Medicare are also putting pressure on hospitals, and some of these techniques are being taken up by private payers.

"While these dynamics will promote hospital consolidation, some of them also will open new tools for private payers to control costs," he says. "For sure, in tough times, hospitals will find it hard to justify fee increases. In addition, insurance buyers are more interested in limited network products, more aggressive medical management or higher cost sharing."

EMPLOYER, GOVERNMENT PRESSURE

The continuation of the current recession will place additional pressure on employers and governmental purchasers of managed care services, according to Sacher.

"Managed care executives can tailor their business approach by adjusting benefit packages and copays to reduce medical expense to maintain profit margins in light of premium pressures," he says.

In addition, executives should conduct an inventory of key sub-providers, particularly those to whom the MCO has shifted risk, to identify those economically troubled.

"For troubled sub-providers, organizations should consider requiring letters of credit or increasing withholds to limit their organization's exposure in the event the sub-providers cannot honor their commitments," Sacher says. "Finally, better capitalized MCOs will have an opportunity to gain market share from weaker competitors, if the current recession continues and weaker competitors have to more drastically reduce benefits, as well as advertising and promotion budgets."

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