Rising costs charted in wide-ranging trend study

Report sizes up outlook for near future

Every two years, researchers from the nonprofit Center for Studying Health System Change in Washington, DC, interview health care leaders in 12 nationally representative communities to assess changes in local health care markets. The center then prepares an analysis that discusses recent developments it has identified in managed care, physician-hospital tensions, risk contracting, and health plan premiums.

Technological change and increased consumer demand are starting to drive health care costs up again, says the center’s most recent analysis. "There is emerging evidence that changes in the organization and dynamics of local health care markets also may contribute to this phenomenon — and perhaps exacerbate it in the future," it concludes.

Managed care has been losing its power to control costs as health plans attempt to respond to consumer demand for less restrictive products and to restore profitability in the current stage of the insurance underwriting cycle.

Health maintenance organization (HMO) enrollment is stagnating or making only modest gains. In turn, plans are increasingly moving away from pure HMO products in favor of less restrictive, open-ended ones and preferred provider organizations (PPOs). "In fact, over the past two years, it appears that the benefits and features of HMOs and PPOs are converging and differences in premiums are diminishing," the researchers conclude. In a number of communities, plans are introducing direct access HMOs that do not require a gatekeeper and have broad provider networks that make them virtually indistinguishable from PPO products.

A leading plan in Seattle, for example, now uses the same utilization management processes across both its HMO and PPO products. Meanwhile, costs have increased more quickly under HMOs, eroding the price gap between the two products.

At the same time, health plans have shifted their emphasis from gaining market share to restoring profitability, reflecting the turn in the underwriting cycle. As a result, plans are no longer holding prices down to increase market share and are eliminating less profitable business, which for many now means exiting Medicaid and Medicare. "These trends foreshadow premium increases that potentially will exceed already higher increases in underlying costs and threaten the viability of public sector managed care programs," says the center.

Providers gain clout

Hospitals in many communities have experienced extensive consolidation, enabling them to exert greater leverage in managed care contract negotiations. With more consolidated market power, hospitals are aggressively resisting health plans’ attempts to control costs through reduced provider payment and utilization controls, the center says.

The changing balance of power between plans and hospitals has led to instances in many communities where hospitals or physician organizations could not come to terms with health plans, and, as a result, left the plans’ networks. Network instability often has significant effects on consumers, notes the center. Indeed, in Seattle, some large employers are pressuring plans to ensure network stability; this, in turn, has given providers added leverage with health plans, it notes.

Increased bargaining power comes at a critical time for hospitals, which have endured significant cuts in Medicare revenues as a result of the 1997 Balanced Budget Act and several years of intense pressure from health plans for discounts. Hospitals have responded by reducing operating costs and have successfully held down inpatient costs in recent years. However, unintended consequences of these efforts are beginning to surface, as some hospitals are now struggling with inpatient capacity constraints, the center’s report says.

In other communities, hospitals have implemented diversion programs to accommodate overflow in the emergency room. Many attribute the current capacity problem not only to hospitals’ cost-cutting strategies, but also to growing demand for inpatient services and a severe nursing shortage that has limited hospitals’ ability to staff existing beds.

Hospitals in several communities are experiencing added conflict with physicians. For example, in Cleveland’s highly concentrated hospital market, hospitals are exerting pressure on physicians to align more closely with one or the other system, spurring concerns among physicians about loss of autonomy, says the center.

In other communities, physician-hospital organizations formed to foster managed care contracting continue to decline in importance. Instead, physicians are focusing on independent strategies that emphasize opportunities for enhancing revenue rather than building capacity to engage in risk contracting. This is seen most strikingly in Phoenix, where specialists are cutting back on affiliations with local hospitals and devoting more time to ambulatory surgery centers or specialty hospitals in which they have an equity interest, the study notes.

This trend threatens traditional hospitals with the loss of some of their most lucrative services and their ability to cross-subsidize less profitable services such as emergency care. At the same time, "there are concerns that the proliferation of physician-owned facilities will induce greater utilization, particularly at a time when health plans’ efforts to constrain utilization are weakening," notes the center. In turn, some experts feel this trend will lead to higher underlying health care costs, the study concludes.

As providers gain more clout and health plans move away from tightly managed products, there is a discernible shift away from capitation and other risk-based payment arrangements, says the center.

There is a strong trend among hospitals to revert to per-diem or diagnosis-related group payments, while physicians appear to be returning to fee-for-service payment. There is also experimentation with hybrid payment arrangements, such as withholds and utilization-adjusted fee schedules, but these developments are not widespread.

Although risk contracting was seen by some as a potential boon for providers, allowing them to share in the benefits of managing care, "most providers now view risk arrangements as automatically leading to losses," says the report.

But without some kind of risk arrangement, the center points out that some experts worry that providers will not have proper incentives to manage utilization, "setting the stage for higher costs and limited provider accountability."