Health Care Reform: It's Already Here

Brian Lewis, 36, single, and healthy, never gave medical insurance much thought--until two years ago, when he got word his traditional plan was going up from zero to $60 a month. That turned Lewis, a geologist for the State of California, into a health shopper: He interrogated friends and pored over all the data he could find on the eight health-maintenance organizations available to state workers in Sacramento. He settled on the TakeCare HMO, which uses a well-regarded hospital near his home. Although the state picks up the fee, Lewis has his eyes peeled for an even better plan: "Your HMO is probably one of the more important decisions you make," he says.

When Lewis started his search, he had never heard of "managed competition." But to some degree, he's living it. Consumers shopping for coverage, giant purchasing cooperatives such as the California employee plan, and greater use of managed care are all elements of the model President Clinton is building his health-care reform proposal around. The idea is to create a market that gives health purchasers the power to rein in the cost of medicine.

Critics deride managed competition as a complex, untested theory with few prospects for success. It's "the domestic version of Star Wars," says House Ways & Means Committee Chairman Dan Rostenkowski (D-Ill.), requiring "a series of nonexistent technologies to be developed and linked together so that they'd work flawlessly."

But like Lewis, millions of Americans are already dealing with key pieces of managed competition: managed care, quality measures, purchasing cooperatives, and consumer choice. No one has put the pieces together into one system. But some elements are working surprisingly well, both to control costs and to improve care.

Managed-competition advocates argue that their plan can produce a system that's even better than its parts. In that world, pressure from consumers and cooperatives would force health plans to work constantly on developing more efficient care.

LOOSER NETWORKS. Clinton buys this argument--up to a point. His plan will put the accent on "managed," not "competition": He relies on regulation enforced by purchasing cooperatives and a budget set by government to limit spending. But a look at managed competition shows private employers are already driving changes that he could build on.

Of all the pieces, managed care offers the greatest promise as well as the greatest uncertainty. HMOs were born in the 1930s, when employers began contracting with groups of doctors and hospitals to provide care for a flat annual fee. But managed care took off in the 1980s, driven by soaring medical bills and a new twist on the HMO idea: preferred provider organizations (PPOs), looser networks of providers that offer discounted fees in exchange for a steady stream of patients.

AlliedSignal Inc. was a leader in developing PPOs. Beginning in 1988, it worked with CIGNA Corp. to recruit physicians and hospitals for its Health Care Connection PPO networks in 24 cities where it had its largest operations. Now, the figure is up to 29 cities. Employees in those areas--more than two-thirds of AlliedSignal's 70,000 workers--are required to sign up for the managed-care plan but can go to a doctor outside the network if they're willing to pay more, typically an extra 20% of their bills. An independent survey found that more than 85% of users liked their care, only slightly less than the satisfaction reported by those using traditional insurance. For AlliedSignal, the network cut the rate of medical inflation in half: less than 9% a year, vs. 18% price hikes for traditional insurance.

AlliedSignal may be lucky. Preliminary results of a University of Michigan study of 14 similar plans--large PPOs with some freedom of doctor choice for members--show that one PPO cost customers more than traditional insurance, while 10 plans yielded savings of about 3%. Only 3 of the 14 plans are clear winners--those with carefully selected doctors who don't order unnecessary tests. "PPOs are a temporary phenomenon, a way to get people used to narrowing their choice of providers," says Michigan health economist Dean G. Smith. "Big savings will come only when you change the way care is delivered."

PROFIT MOTIVE. That's the strength of HMOs--the likely big winners under managed competition. Good HMOs save money by rewarding doctors for keeping patients healthy--not for doing more procedures. "Our clinical staff don't say: 'I'm going to get paid more if I do two procedures instead of one,'" says Patrick H. Mattingly, a doctor who heads a division of Harvard Community Health Plan, a New England HMO covering 525,000 members. Instead, HMOs emphasize prevention and early detection.

This approach has helped HMOs slow the rise in their premiums. That's why employers are pushing workers into these plans. Digital Equipment Corp., for one, repriced its health benefit plans in 1990 so that employees would pay less for managed-care plans--lifting HMO enrollment from 30% in 1990 to 70% this year. Today, 26% of privately insured Americans are enrolled in HMOs.

But HMO premiums, while lower, are still climbing, and skeptics wonder how much more savings managed care can reap. With almost half the U.S. in managed care, William B. Schwartz, a professor at Tufts University's medical school, says a five-year campaign to enroll all Americans would trim only 1.5 percentage points off the rate of medical inflation. "Once the potential savings in hospital days are exhausted," Schwartz says, "there will be no further offset against the upward trend in costs."

Managed-care advocates say such computations sell their plans short. As more procedures are done in one-day surgery centers or doctors' offices, "HMOs are showing cost savings in outpatient settings as well as inpatient," says Alan L. Hillman, a health economist at the University of Pennsylvania's Wharton School. And tightly managed care can continue to chip away at the vast amount of unnecessary treatment Americans receive, he adds.

Most Americans equate quantity of treatment with quality. But 25 years of research at RAND Corp., a Santa Monica (Calif.) think tank, shows that overtreatment is common. Studies show that thousands of surgical operations are performed with little certainty that they are needed or even helpful.

The tools to ensure the right amount of care will come from the rapidly growing field of quality assessment. Under Clinton's reform package, health plans will be required to publish indicators showing how well their members fare. The Administration will propose investing millions of dollars in systems to gather and assess standardized data on everything from members' blood pressure to the cost of heart surgery. The data will help design norms for when treatments are best used. Besides rooting out unneeded procedures, such standards will help doctors fend off malpractice claims, reducing the need to practice defensive medicine.

CRUDE MEASURES. A cottage industry has already risen around companies' hunger for some sign of how well their health-insurance dollars are spent. "We like to buy everything, whether it's cocoa beans or typewriters, based on information," says Richard C. Dreyfuss, benefits director at Hershey Foods Corp., a major user of hospital mortality and cost figures published by the Pennsylvania Health Care Cost Containment Council.

Business groups in Cincinnati, Cleveland, Memphis, and Orlando have launched ambitious "outcomes-measurement" projects to figure eut which hospitals give the best care at the lowest price. The groups compare the outcomes of care--death rates, readmissions, and complications--with treatments used, length of stay, and cost. The calculations are technically difficult and politically charged, since hospitals that score poorly are likely to lose business.

Yet even these crude measures of care can have a startling impact on costs. In 1992, the first year of a quality-measurement project run by four big Cincinnati employers, the area's 14 hospitals cut their average length of stay by 10%, or 0.6 days per patient. Hospital charges rose only 6.8% in 1992, down from the 11% annual trend over three years. Most of the changes originated with doctors, who could see for the first time how their patients' hospital stays compared with those of other physicians.

For consumers who can't interpret complex statistics, the HMO industry is producing "report cards" that compare such procedures as a health plan's rate of surgery with national averages. These "process measures" highlight the preventive-care strengths of HMOs rather than whether their patients are healthy or sick. But "we know that when outcomes are bad, it's usually because processes are bad," says Sheila Leatherman, vice-president of Minneapolis-based United HealthCare Corp., author of the first such report chart (table). "We don't need more proof that breast cancer is bad--we need to make sure more women get mammograms."

I.D. CARDS. Good measures of quality require good data. But the tons of paper gathered in today's health system track payments, not patients' well-being. In an early attempt to collect better clinical data, Seattle's Health Care Purchasers Assn. (HCPA) is testing an ATM-style insurance card for employees of its member companies. One swipe of a patient's card through a magnetic reader in the doctor's office can call up a medical history, alert the billing office to insurance limits, and let the nurse send lab results straight to the hospital. The HCPA estimates the system will cut billing costs by as much as 20%--but its main benefit may be a treasure trove of data for researchers trying to measure the results of various treatments. The Clinton reform team hopes that its proposed "health-security cards" can produce similar results--provided that designers can iron out the grave privacy risks posed by such automated systems.

Who are the health-care buyers that will use all these data? Managed competition calls for two sets of buyers. At the wholesale level, a statewide or regional "health-purchasing alliance," which represents consumers, government, and employers, will negotiate for the best rates from HMOs, PPOs, and insurers. The nonprofit alliance will then act as a retail broker to sell benefits to consumers, who will select the health plan they want from the alliance's list.

The regional alliances that the Clinton blueprint envisions do not exist yet, but their precursors do. Business coalitions from Orlando to Seattle have formed purchasing cooperatives to get big-group insurance rates for small businesses. The 170 member companies of the Colorado Health Care Purchasing Alliance--from Adolph Coors Co. to the 37-employee Lodge at Cordillera near Vail--formed their own provider networks in 1988, negotiating discounted fees with doctors and hospitals. After watching premiums rise by 25% to 100% for several years, Denver's Royal Crest Dairy Inc. joined the alliance in 1989. Since then, Royal Crest's health costs for its 280 employees have risen by 10% to 15% a year, in line with national averages for much larger employers.

More buying power can produce even more savings. In 1990, California froze its contribution to state employees' health benefits, forcing the California Public Employees' Retirement System to take a tough line toward the 27 health plans that cover its 887,000 members. When California's biggest HMO, Kaiser Permanente, wouldn't rein in its premiums, CalPERS slapped it with a one-year freeze on signing up new members. The result: CalPERS' average premiums will rise only 1.4% for the fiscal year starting July 1--and Kaiser's premiums not at all.

FOOTING THE BILL. White House reformers plan to give their new alliances similar leverage in bargaining with health plans. Clinton may let alliances limit the number of plans they will deal with in an area, or set prices and force the plans to meet them. Managed-competition advocates worry that such powerful alliances could eliminate another competitive force that has been proven to hold down prices: consumer choice.

The best example of consumer choice in managed health care is right under the President's nose. Federal employees buy their health coverage through a system that gives each worker as many as three dozen health plans to choose from each year while holding down health-care costs (box, page 116).

As the President fine-tunes his reform proposal, he's seeking to do more than embrace the elements of managed competition. A key goal--and selling point--for the Clinton plan is health security, reassuring all Americans that they will have coverage even if they change jobs, have a chronic medical problem, or can't afford to pay the full premium. Clinton's plan will also seek to overhaul the insurance market, reform medical malpractice laws, and make medical services available in the inner cities and rural areas. And he'll have to appease critics who deride managed competition as a life preserver for insurance companies. Toughest of all: The President must figure out how to pay what could be an extra $100 billion a year for the expanded coverage.

Those are daunting challenges that can be overcome only with perseverance and political will. But in the debate, no one should overlook that the foundations of reform through managed competition--thanks to pioneering employers and health providers across the country--are already firmly rooted.

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