The Changing State of Managed Care
California, maker of trends, is leading the United States--and perhaps the world--in pushing down the costs of health care, a particularly sensitive and important matter.
“Market-driven health system reform is occurring faster than federal legislators and regulators can measure, much less control,” researchers Alain Enthoven and Sara Singer of the Stanford University Graduate School of Business wrote recently in the quarterly Health Affairs.
Costs of health benefits are falling as much as 10% a year for major California employers, including an alliance of 27 large companies such as Bank of America and Pacific Telesis that have pooled their purchasing power to buy medical insurance less expensively.
Managed-care plans, which contract to provide health care at a fixed price, have had their greatest success in California. More than 50% of the state’s work force is now enrolled in health maintenance organizations or similar plans.
And charges are cheaper than elsewhere. Employers pay “$1,395 per employee per year in California health plans, compared to $1,550 in the Midwest and $1,900 in New York and the Northeast,” says analyst Kenneth Abramowitz of the Sanford C. Bernstein research firm.
What’s going on, Abramowitz says, “is a transfer of wealth from doctors to corporate America.”
“His focus is too narrow. He should include government, which is a larger payer for health care than private business,” says Leonard Schaeffer, chairman of Wellpoint Health Networks and Blue Cross of California. “Costs are coming down for all.”
And some of those cost reductions are coming out of doctors’ incomes. The American Medical Assn. reports that for the first time, physicians incomes are declining. In 1994, the latest year for which statistics have been compiled, decreases occurred for nearly every specialty, particularly for anesthesiology and obstetrics/gynecology. Family practitioners, internists and psychiatrists held their income “unchanged at best,” the AMA reports.
The average decline is highest in California, at 6.2%, although the Northeast also shows a hefty slippage in doctors’ pay. Both regions have an acute surplus of physicians and overcapacity of hospitals, which makes it easy for HMO plans to negotiate lower fees--and thus offer lower-priced contracts to their employer customers.
Wall Street is enthusiastic about HMOs, giving relatively high stock prices to such managed-care companies as Foundation Health Plans, United Healthcare, Oxford Health Plans and Columbia-HCA. Investors expect more acquisitions comparable to Aetna’s pending buyout of U.S. Healthcare.
They also expect California to spread its managed-care expertise to other parts of the country. Schaeffer, having turned Blue Cross of California into a for-profit division of Wellpoint, plans to transform other Blue Cross plans nationwide.
But the change in health care, an activity that accounts for 14% of the U.S. economy, is far more complex and interesting than the old story of HMOs squeezing costs.
What’s happening is that a fragmented “cottage industry” of physician groups, hospitals and medical suppliers is being transformed into a powerful industry, with major groups emerging to control costs and quality of care.
Doctors trying to regain leverage against HMOs have merged physician-led groups such as California’s Mullikin Medical Enterprises, Alabama’s MedPartners Inc. and Illinois’ Caremark International into a single, 3,000-doctor management company.
Employers are banding together, most prominently in the San Francisco-based Pacific Business Group on Health, which combines the purchasing power of 2.5 million employees and $3 billion of annual expenditure on medical care.
With such powerful groups bargaining for health services, HMOs may not be the attractive investments Wall Street thinks they are.
But to answer more important questions, such as the outlook for quality of care, it’s best to understand the illness being cured and the side effects of curing it.
The illness is overcapacity. For decades, Americans enjoyed an abundant taste for doctoring and medicines while large corporations and government paid the bills. Costs rose geometrically. In the last 30 years, health benefit costs have more than quadrupled. But--note well--wages and salaries paid by industry in that time have barely doubled. The cost of employer-provided health insurance wasn’t entirely “free.”
For years now, government and business have objected to paying the rising bill. So doctors’ incomes are falling and patients are paying more in insurance co-payments and in restrictions on choice of doctor and immediacy of treatment.
As a result, the rise in health care costs has slowed to 3.8% a year. Even that is pushed by growing Medicare costs. But those may cease also, as after the presidential election both parties get serious about fixing Medicare.
Yes, but, with all the cost cutting, will quality suffer? There’s really no reason why it should. Quality should not depend on inefficiency, and health-care reform really means that efficiency is being brought to an essential activity. “The result can be beneficial in many ways: Wages can grow, the economy can grow if health care is not eating up available dollars,” notes Glenn Melnick, an analyst of medical matters at Rand Corp., the Santa Monica think tank.
To be sure, the innovativeness that has characterized U.S. medical care and the luxury of overcapacity--of having doctors conveniently available and easily attentive--are other questions. The greatness of U.S. medicine rests partly on the scientific research carried out in the nation’s medical schools and teaching hospitals.
Those institutions, which still turn out more doctors every year despite the surpluses, face cutbacks in federal and state subsidies. “The tax base cannot afford the scientific establishment,” Schaeffer says.
Which means that other ways to fund research will have to be found. The transformation of medicine won’t be without challenge.
And what of medical students and the 45,000-plus annual applicants to medical schools? “If they are going into the profession to help people and to further the practice of medicine, fine,” says Dr. Schumarry H. Chao, a Los Angeles physician and consultant on medical business. “But if they’re looking for a country club lifestyle, this is no longer the place.”
She’s referring to more than California.
