Historical Background

The rapid change from a largely "fee for service" mechanism for paying for health care to a largely capitated and/or rigidly controlled pricing structure happened only within the last 10 years. In 1987 the Allied Signal Corporation driven by escalating corporate health care expenditures of 39% in one calendar year switched its entire work force of 76,000 people into what has become known as a managed care system.

Managed care as we have come to know it in the 1990's is simply a euphemism for managed cost. Modern managed care organizations have reduced the increase in health care costs largely by reducing expenditures for services. This was not always the manner in which such systems were envisioned. The earliest such organization was developed in 1929 as the Community Hospital Association of Elk City Oklahoma. It was a prepaid group practice in which for $12 a year a worker was entitled to complete medical care. The creators of this plan were socially conscious physicians who were looking for a better way to assist their patients during the difficult period of the Depression. They met with fierce opposition from their peers. Of course the cost of complete medical care in 1929 was very different than that of today.

Up until the 1920's personal health insurance was rare in part because medical costs were low. There were no antibiotics and little in the way of pharmacological therapy. Surgeries were generally limited to removal of masses and repair of fractures. Advances in medical therapy and systems to pay for it really became more prominent during and after W.W.II.

During the war the federal government froze wages to reduce inflationary pressures on the economy. Workers were scarce because so many men were in the military. In order to attract workers employers had to use other means than wages and offering health insurance became a benefit linked to employment. This became a greater portion of employer's cost of labor as time went on. For not only did the labor force expand so did medical costs. In the 1940's only 4% of the GNP (gross national product) was spent on health care. By 1989 this had increased to 12%.

The link of health care insurance with employment has long been problematic. While a social good for those with steady employment it was generally unavailable to those without full time jobs, particularly ethnic minorities, the poor, the self employed, and seasonal workers. In fact in 1945 just after W.W.II ended President Truman proposed a government run health insurance plan to expand medial insurance to most of the population. This was vigorously opposed by the American Medical Association (AMA), and died in Congress.

Modern managed care started in the 1940's with the advent of the staff model health maintenance organization (HMO) developed by Kaiser Permanent to serve their shipyard workers. This effort was soon followed by plans in other large metropolitan areas: the Health Insurance Plan of New York, Group Health Cooperative of Puget Sound, and Group Health Association of Washington, DC The overall impact was modest. Up until 1960 only 2% of the population was enrolled in an HMO, and by 1985 this had only increased to 10%.

As the cost of health care continued to rise and the majority of health insurance continued to be linked to employment further efforts to develop a national health insurance plan covering all Americans were made. Medicare and Medicaid were developed in the mid 1960's to provide health insurance for the disabled, poor, and elderly. This still left a large number of people uninsured. In an effort to head off calls for national health insurance in the 1970's President Nixon proposed the HMO act of 1973. This not only required that employers of more than 25 persons who offered health insurance also offer at least one HMO plan to employees, it provided start up funds to develop new HMOs.

Initially HMOs were seen as poor cousins to traditional health plans. A stated emphasis on preventive care such as immunizations and screening programs was not off set by the limitations on services provided. While most American physicians were being trained to provide the best possible care regardless of cost and to push back the frontiers against disease, HMOs were seen as a haven for less talented physicians, those less driven to succeed and less attuned to the latest developments in medical care. Primarily staffed by generalists they seldom utilized specialists and often failed to provide advanced or rehabilitative services.

As the cost of health insurance increased in the 1980s employers sought ways to reduce their labor costs. The Chairman of Allied Signal Corporation sought to utilized managed care organizations (MCOs which are essentially the same as a modern HMO) to reduce his escalating health insurance costs. He required increases in premiums of less than 10% over 3 years and offered to insure his entire work force with the company which could do so. CIGNA fulfilled these requirements and successfully held costs by: restricting enrollees to certain primary care physicians, restricting referrals to specialists, restricting use of emergency rooms, and restricting expensive medical procedures. They were followed rapidly by Southwestern Bell in 1987, Wells Fargo Bank in 1989, Sears Roebuck in 1990 thus the modern era of managed care was born.


Ethical Dilemma

The creation of managed care has reduced the rate of increase of health insurance. In that regard it has saved money primarily for large employers. This system has however created an unusual set of problems which make it inherently unethical and in the long term unworkable.

Unlike all other industries be they manufacturing or service MCOs are only successful if they do less. In other service industries profitability is based upon providing an ever better quality of service, giving good value for the cost. In MCOs the issue of quality is of secondary importance. Over 50% of MCOs are for profit organizations whose primary interest is creating profits for their stock holders. Compared to not for profits, for profit MCOs averaged 76.6% of their premiums paid for health care. The not for profits over 90%.

U.S. Health Care a large for profit MCO announced a decision to increase physician pay in order to upgrade its networks of providers. When this announcement was made in 1995 U.S. Health Care's investors responded by dumping the stock. The share price fell by $8.00 reducing overall value by $1 billion in just 2 days. A business decision which in any other industry would be seen as an investment improving its products or services was seen by MCOs as a loss of profitability. This is even more shocking when at the time of this loss of stock value U.S. Health Care had $1 billion in c ash reserves.

A litany of abuses and failures to provide adequate and timely care has by now become standard fare in describing MCOs. I will not mention these here, not because they are unimportant but because they are simply the necessary end of an enterprise based on maintaining strong balance sheets as opposed to providing medical care. Physicians participating in MCOs were in the past prohibited from discussing alternative treatments not within the purview the plan's services. These "gag" rule were so patently offensive that they have largely been removed. The control over physician behavior persists however in that if the number of referrals, diagnostic teats or hospital days per patient are found to be above some level determined not by practicing physicians but by MCO administrators, the contract with the physician will not be renewed. This is as effective as nay "gag" rule.

MCOs have developed a structure in which the primary care physician is no longer the patient's but rather the health plan's advocate. The primary goal is the reduction of expenditures, reductions which financially benefit the primary care physician. In most systems the primary care physician is given a fixed sum of money per patient per year or "capitation". Any services provided for that patient come out of these "capitated" dollars. The physician makes more money the less service is provided. For example Southern California Independent Practice Association pays pediatricians $266.40 per year for each child under the age of 2. Vaccinations a major part of preventive care for young children, cost $222.00 a year in the first year leaving $44.40 to cover all other treatment plus the physician's income, overhead and supplies and equipment for the year. In such a system even a well meaning person is likely to be driven to reduce care in order to survive. The unwritten contract that patients and physicians used to have one in which patients expected their physician to do the most and very best that could be done on their behalf has been broken by managed care.

Primary care physicians have been promoted as the gatekeepers, but not given incentives to utilize the array of services available. In fact one could argue that they do not have the knowledge base to do so. In American medical schools only 75% have specific neuroscience courses in the first 2 years, and only 65% have specific clinical neurology clerkships in the 3rd and 4th years. Of the 3 primary care disciplines: family practice, pediatrics and general internal medicine only internal medicine has a specific requirement of clinical neurology training during the residency. One can see that it is therefore quite easy for a graduate of an American medical schools and residency to have little or no clinical exposure to neurological patients or disease. It is quite possible then for serious neurological difficulties to be unrecognized particularly early in their course. Without the freedom to utilize specialists patients are left with a system that only really works well if you are not very ill.

In fact most people are not very ill most of the time. It is this fact which has "saved" MCOs to date. If one is not very sick MCOs can do rather well. In addition there is little in the way to measure the quality of services provided in MCOs. The National Committee for Quality Assurance (NCQA), was an MCO creation set up in 1973 to oversee quality in MCOs. In the first 12 years of its existence it passed every plan it reviewed. In fact there is a large potential for conflict of interest in that NCQA review is not only voluntary, 78% of its operating budget comes from accreditation fees from MCOs. Six of its 17 directors work directly for HMOs and a further 3 of 17 have other connections.

The accreditation standards focus on procedural issues not on medical quality admittedly a difficult thing to measure. The Foundation for Accountability (Facct) is developing more precise measures of medical quality using a series of measures called HEDIS. These measures focus on immunization rates, mammograms, and other preventive services.

There is still no effective or generally agreed upon method of measuring the quality of medical care, and MCOs are resisting any means to develop one or provide safeguards for the patients in their care. Due to the increasing number of complaints from patients about MCOs (in California an 800 number set up by the state to monitor complaints recorded over 4000 per month), over 25 states began to develop legislation to regulate MCOs.

The American Association of Health Plans had previously lead the charge against the Clinton Health Care Reform Plan giving $2 million to national candidates who supported their position. Managed Care has now become the largest corporate financier of political campaigns outspending Wall Street and the telecommunications industry.

As examples of the MCO industry's successful efforts to control the political agenda: they were able to have Congress provide an 8% increase in payments to MCO Medicare at the time when $270 billion were being cut from the program; they successfully removed the State of Pennsylvania's HMO regulator who had developed provisions to safeguard patients; they gave $500,000 in consulting fees to a Florida legislator who was able to prevent an increase in state spending for more HMO regulators.

The most chilling example of their prowess was the defeat of Texas House Bill 2766 (HB 2766). This legislation crafted by the Texas Medical Association (TMA) addressed many of the abuses of MCOs. It provided for due process before a physician could be dropped from a plan. This has been the method by which MCOs control physician behavior in treating patients. It allowed freer access to specialists and centers of medical excellence. It required approval of emergency room coverage within 60 minutes of a request. It required disclosure of physician payment methods and quality of care measures. Many plans paid physician bonuses for cutting costs by restricting care below set corporate goals. It also required a "point of service option", so that patients willing to pay a greater proportion of the costs could seek care out of their plan.

The TMA attempted to seek MCO participation in writing the bill, but were rebuffed. The MCOs used polling data to determine that a response on the merits would fail. Instead they attacked the bill as driving up the cost of care by 18%, a number vastly higher than the 1 1/2% of actual cost increase. They portrayed the physicians as "fat cats" Their attorney a Mr. Tom Bond was quoted as saying "You need to demonize the enemy... You can't make it in rational, analytic arguments." They went so far as the call HBO 2766 a $1 billion tax bill even though it had no tax provisions at all. In an attempt to influence the legislature they hired a firm to call citizens and ask them if they would lie to be connected toll free to their representative so that they could protest the tax bill. Such persons were then patched into the representatives office resulting in a large number of calls against the legislation. The bill was passed in a much weaker form by the Texas Senate and vetoed by then Governor Bush.


Potential for Rectification

The MCO industry is largely a creation of large corporate entities. It is a mechanism to reduce the costs of health insurance to business on the one hand, and has become a for profit business on the other. Its primary reason for being is flawed in that counting a 12% or even 14% portion of the GNP for health spending as too much actually makes no sense. In the 1960's over 25% of the GNP was spend on automobiles and their associated suppliers and repair. No one ever stated that automobiles accounted for too much of the GNP. It would have been a ridiculous statement just as stating that 14% is too much to spend on health care. Health care is an industry in itself, providing a relief of human suffering and employing a large labor force. Its reduction to permit greater profits in other segments of the economy is appropriate.

The major flaw in MCOs is the inherent conflict of interest created when a physician's financial benefit is coupled with withholding rather than providing services. Particularly when the withholding is predicated not on what is best for the patient but on what is best for the financial health of the plan.

Addressing these problems will require a careful and focused approach which works primarily not with legislators but with regulators, physicians and consumers. By consumers we must include employers as purchasers of health insurance as well as patients.

Regulatory reform is often easier and more rapid than legislative remedies. Working on a state and national level one can more easily develop regulatory mechanisms to deal with some abuses of MCOs such as access to emergency and specialist services and early discharge from hospital of nursing care.

The Los Angeles Center for Health Care Rights tracks legislation and had identified 50 bills which it feels can become models for future legislation in other venues. We must evaluate these and see where they can be implemented in other states.

Managed Care Organizations have frequently used surrogates to argue their case. Physicians need to develop alliances which can serve the same purpose. California physicians have provided financial support for Citizens for the right to Know an organization which seeks disclosure of MCO financial arrangements. The Ohio State Medical Association has developed a health advocacy network to support changes in managed care. Pfizer the pharmaceutical corporation has developed alliances with Black ministers in Tennessee to lobby for better health care for the poor.

The following are steps which if taken by physicians, patients and government can go a long way toward improving the abuses of MCOs.

1- Patients and Physicians need to learn how to make MCOs work for their interests. Since MCOs are driven to undertreat one needs to ask not if a service is necessary, but if it is sufficient. Appeal denials whenever possible. For those with chronic disease seek allies within MCOs who can help push for services.

2- Guidelines for the diagnosis and management of disease which are evidence based need to be developed and agreed upon by the appropriate medical societies. The American Academy of Neurology has begun to develop guidelines for the appropriate use of genetic testing, and the management of epilepsy during pregnancy. This system needs to be expanded for all neurological disease.

3- Physicians need to recognize that there are appropriate situations in which costs can be and need to be controlled. They must also challenge inappropriate decisions on restricting care and should not be penalized for doing so. Gag rules and dismissal from a plan without due process hinder physician ability to advocate for patients.

4- Systems of capitated payments and bonuses for physicians based on withholding treatment need to be eliminated. They create an inherent conflict of interest between patients and physicians.

5- Systems to assist physicians and families in deciding what to do in difficult cases such as terminal care and high risk low yield situations would be of benefit. Compassion, ethics and economics all need to be part of medical decision making.

6- Patients need to feel free to consult emergency rooms when they have situations in which there is a reasonable concern for their health, the "prudent layperson" rule. People should not be penalized for seeking treatment when they are afraid. We need to develop better systems to more conveniently serve outpatients so that they don't feel that the emergency room is the only avenue available for them.

7- MCOs need to be accountable for their errors. The Employee Retirement and Income Security Act of 1974 exempts corporate employee benefit plans from state law. Patients suing MCOs have their litigation transferred to federal courts where corporate employers are exempt from suits for negligence. This and the fact the many MCOs blame poor outcomes on the individual physician (even though the plan's own restrictions create the environment for withholding care), insulates them from litigation.

8- We need better measures of quality and outcome for health plans so that they can not only be compared but weaknesses better identified and corrected.

Reading List:

Andes, G. Health against Wealth. Houghton Mifflin Company, Boston 1996.

Source Book of Health Insurance Data. Health Insurance Association of America, Washington, 1994.

Simmons K.L. Managed Health Care: Right Idea - Wrong Rules. University of Texas Press, Austin, 1992

Falkson J.L. HMOs and the politics of health system reform. American Hospital Association, 1980.

Smillie J.G. Can physicians manage the quality and costs of health care? McGraw Hill, New York, 1991.

Kassirer J. Managed care and the morality of the marketplace. NEJM, 6 July 1995.

Consumers Union Survey. Are HMOs the answer? Consumer reports, 1 August 1992.

Baker LC, Baker LS. Excess costs of emergency department visits for nonurgent care. Health Affairs. Winter 1994.

General Accounting Office. Medicare: Increased HMO oversight could improve quality and access to care, .August 1995.

Barlett D, Steele J. America: What went wrong? Andrews and McMeel, Kansas City, 1992

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Mark S. Yerby M.D., M.P.H.
North Pacific Epilepsy Research
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