As Managed Care Evolves, Providers Still Follow Employers' Lead

Edition: February 2002 - Vol 10 Number 02
Article#: 1158
Author: Robert Neil

Managed care is on the run, but how fast is it moving? High costs and the dissatisfaction of providers, employers and consumers have put the payment structure on notice. However, the system is deeply embedded in health care, and replacing it could be a slow process.

In 2001, defined contribution – in which employees self-fund much of their own coverage – began receiving serious consideration as managed care's possible successor. This year could be the year various aspects of it gain wider acceptance. But a new study says the industry's conversion to a full-defined-contribution model is probably further down the line, if at all. The report, ''Defined Contribution Approaches to Health Care Benefits: The Long Awaited Answer?,'' by Hartford, CT-based Conning & Company, maintains that employers do not appear ready to embrace a complete defined-contribution system.

Conning is one of the country's largest assets management firms, specializing in insurance company investments, and although its analysis of the market is geared toward investors, we can learn a lot from what the company is telling its clients. One of the salient points is that hospitals —your customers — are not the ones in the driver's seat when it comes to deciding how health care expenses will be funded.

Employers in Charge
Although providers may have the right to complain about the payer system, the hard truth is that hospitals and physicians have difficulty shaping the industry to suit their needs. In fact, employers – by virtue of their funding a large portion of the nation's health plans – have much more control over the industry's direction. That's why defined contribution must first be accepted by employers before any significant changes are made.

The change from indemnity insurance to managed care in the 1980s proved that employers truly lead change in the industry. Providers watched passively as insurers began offering managed care options to large employers, who in turn pushed the plans onto their employees. Fearing a lose of business, hospitals and physicians rushed to sign on to HMO networks without really knowing enough about the ins and outs of the new system.

It has taken providers more than a dozen years to become sophisticated enough to negotiate HMO contracts without fear. Today, hospitals negotiate such contracts with the highest reimbursement rates ever, but still, there's an underlying urgency to usher the current system out and replace it with anything that appears less restrictive. However, the Conning report says that providers may be naïve in assuming that defined contribution will be an answer to all their prayers.

According to the report, some managed care practices, such as cost controls, will probably remain, even under full defined contribution. The free, unrestricted market that providers want is not expected to develop. ''Full [defined contribution] is not likely to give (providers) what they want – the power and prestige they have lost,'' says Conning. Although defined contribution shifts the burden of buying health insurance from employer to employee, it's a logical assumption that whoever is spending health coverage dollars will do so frugally. In fact, Conning believes that in an era of Wal-Marts, discount stores, supermarket double-coupons and low interest credit card offers, consumers will continue to squeeze providers on fees.

Full Defined-Contribution
At this point, it's probably a good idea to look closer at exactly what Conning means by ''full defined contribution.'' The term ''defined contribution'' is freely used to describe a number of alternative health insurance methods, and Conning's report offers one of the few clear definitions of the phrase. (For those still trying to get a handle on defined contribution, this is a good place to start.)

Conning list three elements that make up a defined contribution model:
•        Employees use monies contributed by their employer —and any additional funds of their own — to purchase health insurance.
•        Employers have full discretion in determining their level of contribution to an employee's health plan. Any unused contributions must revert back to the employer.
•        Contributions for employees' health benefits remain a tax-deductible business expense.

Despite the fault that employers find with the current managed care system, its problems are not severe enough to force a conversion to full defined contribution, says Conning. And, again, even though hospitals have different views on the severity of managed care's problems, employers are the ones who have more clout in shaping health care's payment system.

A more realistic transition away from managed care would be incremental steps that incorporate some aspects of defined contribution, says Conning. As Repertoire has reported in the past, a number of those initiatives are already underway. In its report, Conning lists four models already in the marketplace. Keeping up on changes in the payer system means keeping an eye on these initiatives.

The four models are ''managed competition,'' similar to the Federal Employee Health Benefits Program (FEHBP); ''electronic markets,'' which use the Internet for low-cost administrative services; ''direct contracting,'' where a third party contracts directly with hospitals and physicians to creates a provider network; and ''medical spending accounts,'' which allow employees to roll over any unused money from an employee-funded account.

Managed competition and electronic markets have the best chance of succeeding, says Conning, which sites the Sageo product from Hewitt & Associates, Lincolnshire, IL, as an example of what is transpiring in the electronics field. Other companies to watch include Vivius Inc., St. Louis Park, MN, which has established direct contracting networks in the Midwest; and Lumenos Inc., Alexandria, VA, which offers a medical spending account. Nor can traditional insurers be counted out. They are well aware of the negative climate surrounding managed care and are putting out — or plan to put out —products that incorporate aspects of defined-contribution plans.

The bottom line for providers is that they may end up following, rather than leading, whatever trend takes hold. That could spell continued struggles and tight budgets.

Robert Neil
is an Orange County Based health care analyst and business writer who specializes in supply chain and managed care issues. He may be reached through his Web site: