In 'Remission' No More

Dec. 21, 2004
After several years of quiet on the health insurance front, soaring costs and legislative initiatives are back.

It's been the standard business line: Health-care reforms will raise costs and increase the number of working Americans without employer-paid health insurance. Now problems in the managed-care industry are putting pressure on federal legislators in this election year to enact changes that parallel scattered reforms at the state level. Indeed, in the last two years, 22 states have enacted comprehensive laws--in more than 300 separate bills--that protect consumer rights with regard to health care. Among other provisions, these laws:

    Require independent appeals procedures for denied medical treatment.
  • Prohibit gag clauses that restrict what physicians can tell patients.
  • Ban financial rewards for doctors to deny medical treatment (24 states).
  • Require direct access to certain specialists without the referral of a primary-care physician (14 states).
  • Force networks to pay for emergency-room visits (20 states).
Forty-two states have enacted at least one of those provisions. Those state reforms are nearly identical to the patient's bill of rights recommended by a Presidential commission last fall and proposed in a bill introduced in Congress by conservative Republican Rep. Charles Norwood of Georgia and Sen. Alfonse D'Amato (R, N.Y.). "All of the anecdotes about situations where managed care hasn't provided quality of care because of financial restrictions and treatment restrictions placed on physicians are causing legislators to see this as a key issue," says William J. Falk, a principal in the Chicago office of Towers Perrin and director of its actuarial practice-health and welfare. How strong is that anti-managed-care sentiment? One need only look, says Falk, at how the audiences in movie theaters nationwide burst into cheers when actress Helen Hunt's character blasts an HMO for its poor care of her son in the current movie "As Good as It Gets" to comprehend just how intense the criticism of managed care has become. Other factors are putting pressure on federal legislators:
  • A recent study by Consumers Union found that nearly 9 million families with health insurance still spent at least 10% of their income on health care in 1996 and that 2.5 million families spent 30% or more of their earnings in 1996 on health care.
  • A study by the University of California-Berkeley and the University of California at Los Angeles found that nearly half of Californians with health insurance have problems when trying to use their health-care plans and that many experience serious health consequences as a result.
  • Another study by the Agency for Health Care Policy & Research in Washington found that more than 74% of the 12.8 million American families who faced barriers to health care had health care insurance. The two largest obstacles were getting referrals from managed care and high co-payments. And the cost of health care was a problem even for one-third of the families with health insurance.
  • National health-care expenditures surpassed $1 trillion for the first time ever in 1996, with consumer out-of-pocket spending comprising one-third of the nongovernment spending of $552 million, says the U.S. Dept. of Health & Human Services' National Health Statistics Group. The average spent on health care per person in 1996: $3,759.
Additionally, health-care costs, which had been virtually flat since 1993, began an upward climb in late 1996 that's expected to continue until the end of the decade. Seattle-based actuarial firm Milliman & Robertson Inc.'s Health Care Index rose at a 2.9% rate in the year ended June 1997 and is projected to rise another 5.9% in the year ending June 1998. Causes include greater utilization of health-care services and higher outpatient, physician, and prescription-drug prices. Those rising prices, combined with slumping financial performance at many managed-care networks, are reflected in higher health-care premiums. The 12th annual Mercer/Foster Higgins national survey of employer-sponsored health plans found that two-thirds of companies surveyed are budgeting for an average health-care cost increase of 7% in 1998. "HMOs and managed-care organizations paid dearly for competitive pricing in 1997," says Miami-based Mercer Inc. health-care specialist and principal John C. Erb. "Many lost money, and margins were slim for most of the rest. So now they need to hike prices to recoup losses and increase reserves in anticipation of higher medical costs." Whether 1998 cost increases represent "merely a short-term adjustment . . . or the beginning of a new inflationary cycle in health-care costs remains to be seen," says Towers Perrin's Falk. "But our survey responses indicate that employers expect an even faster rate of cost growth in 1999 followed by a period of more gradual, but steadily rising cost increases." Indeed, the 150 large employers with more than 2 million employees surveyed by Towers Perrin anticipate 7% higher premium costs for managed-care plans and 9% higher premium costs for traditional indemnity health-care plans in 1999. That's on top of the 5% and 7% increases, respectively, that they anticipate this year. And, unfortunately for business, these high-single-digit increases "just throw more gasoline on the fire [for reform]," adds Erb. Indeed, the AFL-CIO is proposing that all businesses with 50 or more employees be required to provide health-care insurance for their workers and to pay for 75% of the cost of premiums. On the other hand, business plans to combat reform efforts with a $1 million ad campaign that contends the Norwood-D'Amato bill will increase health-care costs 23% and leave an additional 9 million Americans without health care. Falk suggests that business do more than just focus on how proposed reforms might impact costs. "Business certainly needs to make legislators aware of the implications of taking away the ability of managed-care organizations to manage costs and to make legislators aware that it is a business issue, not just a medical issue," he says. "That is, if managed-care organizations can't do what they are designed to do, employers will have to cut benefits or charge employees more." Falk also advises companies to look at "the need to manage health care to reduce the probability of double-digit cost increases [like those in the early 1990s]. The level of cost increases underscores the need for continuing employer vigilance in managing health-care vendors and costs. "Companies should be more careful in selecting HMOs and choose those based on financial efficiency and quality of care," says Falk, "and they should monitor HMO performance more closely." Also, they should review the design of their plans to make sure deductibles, co-pays, out-of-pocket deductibles, and the percentage of cost-sharing by employees are in line with the current norms. "Employers can also band together as a coalition to drive the direction of health care and HMO networks" in their area as employers have done in the Minneapolis-St. Paul region, says Falk. At the same time, managed-care organizations should look at the criticisms of their systems and make adjustments, where they can, in how they administer care. "Some of the provisions in the so-called patient's bill of rights have merit," says Falk. "What's wrong with the patient knowing the financial arrangements that the network has with the providers, or with patients having the right to an appeal when care is denied?" In addition, managed-care organizations, says Falk, need to be "more careful about the way they design protocols and to have better-detailed processes for reviewing cases where coverage is denied . . . . "Managed care organizations have to pay a lot more attention to decisions that they make and the possible adverse publicity and impact that denied coverage can have. And they have to make sure that whatever method they use to compensate providers doesn't provide them too much incentive not to provide care that is needed or good quality care." As managed-care organizations assess how to address criticisms that have led to reform, they must be careful not to jeopardize the reason for their existence--the ability to control costs. "The managed-care industry has some interesting choices," says Erb. "They can shrink their networks, which would help them get more favorable financial terms from providers. But that is a negative for users. [Or] they can change from fee-for-service to capitation rates for specialists. But that, too, is difficult to do." Another choice: loosen restrictions on access. "Many HMOs are loosening restrictions on referrals and diagnostic testing in an attempt to become more user-friendly," says Erb. But those changes may make it difficult to manage costs. And that worries him, because "if there are double-digit increases again in health-care costs, we [business] don't have a plan B. If managed care doesn't work and we can't keep costs low, the government is going to have to interfere, because we have put all our eggs in one basket."

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