Managers May Help Cure High Medical Costs

On April 9, 1988 catastrophe struck at the Tustin home of Keith and Edwina Charde. They were preparing for bed when Keith felt faint. Two weeks later, he was in surgery to repair an aneurysm that could have killed him had the weakened artery in his brain ruptured. The surgery was a success, but 45-year-old Keith would be an invalid for months.

Among Edwina’s first calls was to Pacificare, the Cypress-based health maintenance organization that provides medical care for employees at Edwina’s company. Pacificare immediately assigned a case manager to plan Keith’s care and rehabilitation. More than a year later, Keith has made progress, but he can’t walk or talk and has very little other motor function. For Edwina, there have been periods of panic, frustration and anger, but she says she’s grateful to the Pacificare case management system. Without the program, she says, “I think I would probably be in an institution by now.”

The well-being of patients and their families is a major goal of the program, Pacificare officials say. But the company’s motives aren’t entirely altruistic. Cases such as Keith’s cost insurers many thousands of dollars in claims. Case management is designed to ensure that one person has the broad overview of an individual patient’s illness so that the care will be better managed. Through close monitoring of cases and finding the lowest-cost care alternatives, Pacificare has saved itself $2.5 million in payments during the past year for claims that might have been incurred in unsupervised cases, says Dr. James Moffat, medical director.

As health-care costs soar seemingly out of control, insurers and employers who pay most health-care bills are once again straining for measures to control costs. Aggressive management of high-cost illnesses is among the most promising strategies cited by experts for controlling costs in the 1990s.

Years of effort thus far have produced few successes, but controlling costs has taken on a new urgency as health care becomes an increasingly contentious and divisive social issue in the U.S. High costs have put the system out of the reach of many Americans and battles rage over who will pay the cost of access for others. Thousands of Communications Workers of America workers struck three regional telephone companies last Monday, with health-care benefits as a major issue.

In the ‘80s, employers have experienced double-digit increases in health-care costs almost annually. At the same time, workers are paying more as employers are trying to shift the costs.

Fed up with escalating costs, Southern California Edison over the years has taken complete control of health care for some 57,000 of its workers and their families, eliminating many of the middlemen in the health-care services system. The company health plan is self-insured and self-administered. It processes all claims in-house and pays those claims from a pool of funds that it has set aside for the purpose. It also provides workers with clinics and pharmacies and offers discounted premiums to workers who opt to lead healthier life styles.

“In internalizing, we wanted maximum accountability. I am the responsible party,” says Dr. Jaque Sokoloff, medical director. The company’s costs have increased over the years, he says. But the utility had expected to spend $187 million in 1992, and is now projecting only a $136-million cost as a result of the changes it has made.

Overall, U.S. health-care spending is expected to top $600 billion this year--or 12% of the U.S. gross national product, compared to 9.1% in 1981. Attempts to control costs have been akin to squeezing a balloon. Tightening in one area has often led to expansion in another. There have been major victories in restraining hospital costs, but higher outpatient costs have generally outstripped the savings. There is no consensus on why costs keep rising.

“There is a lot of finger pointing going on in a very complex system,” says Clark Bell, editor of Modern Healthcare magazine.

Few people have a good understanding of the economics of health care, says Carol Cronin, vice president of the Washington Business Group on Health. “I’m not sure the normal economic principles apply to health care. You have people who supply the goods also controlling the demand.”

Some blame the federal government for precipitating cost shifting. When the federal government limited reimbursements to Medicare and Medicaid patients in 1983, “immediately, hospitals began increasing costs to everyone else,” says Russell Coile Jr., a San Francisco-based health-care consultant. Private insurers bore the brunt of the cost shifting, he adds. While such cost shifting has “had the most profound effect on cost,” he says the actual cost of medicine has also gone up because of technology and labor shortages.

Jeff Goldsmith, health-care adviser for the accounting firm of Ernst & Young, believes that increased demand for medical services has been the most important factor in increasing costs. Utilization has increased because technology has made it possible to treat many more ailments with less pain and inconvenience to patients, he says. “You have lowered the perceived threat and pain, so people are more willing to seek treatment. We are dramatically expanding the capability to treat a lot of problems,” says Goldsmith.

‘Utilization Review’

Expanded coverage of substance abuse treatment and psychiatric services have also had a profound effect on health-care costs, he says. “Employers have steadily expanded the benefit package, then they wonder why costs keep going up,” he adds.

Employers and insurance companies have tried “utilization review”--a process of determining the medical necessity of hospitalizations, surgery and outpatient treatments--in attempts to control costs. They have required second opinions before certain procedures could be performed, but many employers are dropping second opinions after realizing no savings. “There are a high rate of collaborating second opinions,” Cronin says. “People probably aren’t being that objective. There’s no clinical criteria on which decisions are made.”

There is a move to take a second look at second opinions, with the idea that they will be more useful if limited to a smaller number of high-risk, high-cost procedures, Goldsmith says.

Utilization reviews, second opinions, quality assurance programs, peer review and hospital bill audit services are all under the umbrella of “managed care”--the health-care buzzword of the 1980s. Insurance companies, health maintenance organizations and several health-care consultants promise to manage services rather than simply paying claims or arranging medical care--with the implied guarantee that they will save their clients money.

But as costs continue to soar, some involved in the health-care system are seeking further refinements of managed care. Much attention is being paid to how health-care providers are paid and how to encourage price competition. Congress, for example, is considering restricting payments under Medicare to physicians and limit use of physician-owned enterprises, such as clinical laboratories, on the theory that doctors who own these facilities order more tests than those who don’t.

Since the cost of outpatient services has increased the most of any expense category in recent years, Blue Shield of California will spend the next month putting into place a system of contracting with providers of outpatient services, says spokesman Michael Odom. To gain control of costs, Blue Shield wants to set up contracts with a range of providers, from clinics that perform simple sterilizations and cataract surgery to suppliers of wheelchair ramps, he says.

“This is the next major wave in doing something about cost,” Odom said.

Goldsmith says he thinks that there will be more “exclusive provider organizations” through which employers or insurance companies will choose certain providers for exclusive contracts in exchange for significant price discounts. “Where we have had the best gains (in controlling costs) has been in selective contracting for high-risk, high-cost procedures like open heart surgery,” he said.

These organizations will work, he says, because “there is an increasing volume of evidence” that certain institutions provide a better quality of care. “And the best are actually less expensive,” he says. “Within a year or so, we will have all the information we need to make those kinds of choices.”

The Prudential Insurance Co. of America has adopted the concept, if not the term. The company offers employer groups--at reduced rates--an “Institutes of Quality Program” for procedures like organ transplants, bone marrow transplants and lithotripsy, a non-surgical treatment for kidney stones. “The Prudential IQ program can give employees access to superior service and quality care while reducing employer’s benefit cost for specialized treatments and procedures,” says Richard Roge, a Costa Mesa-based Prudential regional group manager.

Quality an Issue

The doctors and institutions under contract--including UCLA Medical Center and Stanford University--have agreed to negotiated rates because Prudential’s nationwide network offers access to a larger pool of patients. Free travel for the patient is included.

Employers say that quality--including health-care providers’ long-term performance--is becoming an increasingly important cost-control issue. The major advantage of case management is that it combines quality and cost control, says Odom of Blue Shield, which has also begun to use case management to control costs and ensure appropriate care for catastrophic illnesses, including acquired immune deficiency syndrome. The patients’ doctors have ultimate authority, but case managers are able to make decisions based on knowledge of the patients’ circumstances and the alternatives for care, says Christine Blodgett, manager of Pacificare’s case management program.

A case manager recommended that a Pacificare member with severe migraine headaches, who was in and out of hospitals several times a week and addicted to pain killing drugs, be sent to a non-traditional facility where she could be taught biofeedback to control the pain. It cost the HMO $30,000 for a facility it would not normally use, Moffat says. But it is no longer paying for the frequent hospital visits or the drugs, and the woman’s family no longer has to cope with the total disruption of the migraines, he says.

Case management also preserves the consumers’ benefits, Odom says. Insurance coverage usually includes a lifetime benefit cap that could be reached quickly in the case of severe illnesses, he says. That could have happened in the case of a 33-year-old Northern California Blue Shield subscriber who lost most of her intestines to disease, he says. Normally, a person in her condition would have had to be hospitalized for the daily feedings and special care necessary to keep her alive, he says.

A case manager found the equipment needed for her care, a place to purchase the nutritional supplements in bulk and someone to provide care at home, he says. Hospitalization would cost “$200,000 to $300,000 a year. She would have exhausted her $2-million lifetime maximum in no time. This way, we have projected that her lifetime benefit will last well into the time that she is eligible for Medicare,” he adds.

All of the Blue Shield case managers are registered nurses, as are Blodgett and all of the Pacificare case managers. Nurses are considered well suited for the job because they have the clinical knowledge necessary to make recommendations, have a history of direct contact with patients and their families, and are accustomed to performing social service type functions in the course of their jobs.

“I see it as natural extension of bedside nursing,” says Cheree Belanger, a former neonatal intensive care nurse who is assigned to Keith Charde’s case.

Case management isn’t the total solution to controlling costs, but it is a “good interim step,” says David K. Matheson, vice president of the Boston Consulting Group, which advises insurers and employers on health-care issues. Ultimately, the health-care system must learn “disease management,” which involves understanding the economic patterns of different diseases and developing appropriate protocols for treatment.

Case management as generally practiced is limited, in that case managers are brought in only when there is a serious accident, catastrophic illness or a particular patient’s claims reach a specified dollar threshold.

Pacificare’s Chief Executive Terry Hartshorn says he would like to see case management eventually applied to a much broader range of illnesses. But ultimately, he says, doctors, health maintenance organizations and others in the system must be much more assertive than they are now in leading consumers toward healthier life styles.