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Managed Despair

Health Care and Demand

August 1, 1999

Health insurance beyond reach of many Coloradans as managed care stumbles

By Michele Conklin
Denver Rocky Mountain News Staff Writer

Colorado's health care system is ailing.

If you have doubts, consider the numbers:

More than 550,000 Colorado residents, or 15 percent of the state's population, do not have
any form of health insurance, including public assistance.

Some of those people can afford insurance but choose not to buy it and others are temporarily
uninsured between jobs. But still, experts estimate that as many as 300,000 Coloradans do not
have access to medical insurance. That's the highest number ever and it comes during a time of
unprecedented economic boom.

The percentage of uninsured here is on par with the rest of the nation, where 43.4 million, or
16 percent of the population, lack coverage.

Two of Denver's three hospital systems lost money last year, while the third made money
only after closing unprofitable services. The state hospital association predicts further
hemorrhaging as Medicare cuts more than $900 million in reimbursements over the next five
years.

Three large Denver-area physician groups recently disbanded, while at least two others are
on the ropes. All have had problems balancing escalating consumer demands and costs with
stagnant reimbursement rates from managed-care plans and government programs.

Half of Colorado's 20 managed-care companies lost money the last three years in a row.
Three have pulled their Medicare HMOs out of the state in the past two years.

Businesses are being socked with an average 9 percent increase in health insurance rates for
next year. That's two years of increases after three years of flat or even dropping prices.

Consumers are shouldering a greater share of increasing health insurance costs. Employees
now pay a quarter to a third of their monthly premium, up from about 12 percent in the late
1980s. Their average co-payment for a doctor's visit has crept up to $6.84 from $4.36 a
decade ago, while the average prescription co-payment has jumped 25 percent since 1992.

After five years of relative calm, why now does the state's health care industry seem to be
imploding?

In a word, money. Or rather, lack of it.

Prior to the widespread adoption of managed care in Colorado in the early 1990s, employers
saw the cost of health insurance skyrocket by as much as 20 percent a year.

That was if you could get insurance. Some small businesses that employed workers with
costly health problems couldn't find insurance at any price. Most businesses at the time bought
traditional, or indemnity, insurance that covered most costs after the worker had paid a
deductible of $200 to $500.

At first, managed care worked

Employers turned to managed care for help. Managed care is often referred to as prepaid health
care because employers pay a set fee each month to provide their workers with all the health
services they need. Rather than simply paying bills like traditional insurance, managed care
attempts to control costs by getting patients exactly the care they need -- not too much or costs
will go up unnecessarily and not too little or patients will get sicker and costlier with time.

In the beginning, managed care kept health costs in check by cutting back on the amount paid
to doctors, hospitals and other providers. Techniques such as pre-authorizations and referrals
were also used to avoid the use of high-cost services that were unnecessary. At the same time,
many of the 20 or so health plans competing in Colorado were offering prices lower than their
costs in hopes of building market share.

"There was a definite view that we had tamed the beast," said Steve O'Dell, a health care
consultant with Denver-based First Consulting. "Now we know we haven't."

Indeed, managed care has hit a wall:

Health care costs, which historically have increased at double the rate of normal inflation,
continue to go up. Last year, health costs in the Denver area went up 3.5 percent, compared to
2.4 percent for overall inflation, according to U.S. Labor Department data. In 1997, the
increase in health costs was nearly double overall inflation.

Doctors, who say they've been cut to the bone, are demanding more money. Last year,
many threatened to quit health plans if they didn't get a 10 percent hike in reimbursements.
Most settled for 3 percent or less. Hospitals now are renegotiating their contracts with
managed-care plans, asking the insurer to take back part of the financial risk that the demand
for services will outpace reimbursements.

Consumers are demanding more access to specialists, new treatments and costly drugs.

Legislators are pushing for mandates and patient-protection bills that will guarantee more
coverage.

Stockholders are demanding that managed-care plans make a profit.

As a result, health plans are raising rates, cutting benefits or both.

"The bottom line is health care economics," said Larry Wall, president of the Colorado Health
and Hospital Association. "We're quickly approaching a time when there is not adequate
revenue to support everything the public wants."

The basic problem that managed care did not solve was this: The people who use health care
services still are not the people who pay for those services.

Private employers and the government, through programs such as Medicare and Medicaid, pay
80 percent of all health expenditures in the country, while consumers pay just 17 percent,
according to data from the Health Care Financing Administration.

Getting more, wanting more

This disconnect between the consumer and the payer is a problem because, unlike any other
market-driven system, there is no deterrent to consumer demand. Think of it this way: If you
could get a new car every year without paying for it, would you pick a Hyundai or a
Mercedes? And if you could get as many as you wanted, would you settle for one when you
could line your driveway with an SUV, a sedan and a sports car?

Managed care may even have exacerbated this situation by offering services that consumers
previously had to pay for themselves -- services such as well-baby care, annual physicals,
preventive screenings and, in some cases, prescription drugs. The thinking behind this was
that people were winding up sicker (and costlier) over time because they were neglecting
preventive care they couldn't afford.

While that strategy dramatically improved the rates of services such as immunizations, prenatal
care and cancer screenings, it also has increased consumer demand for yet more services.

"We've increased the level of services we expect our health plans to provide rather than
recognize the most cost-effective solution would be to continue having us be responsible for
some portion of the costs ourselves," said Jim Hertel, publisher of Colorado Managed
Care newsletter. "We've created a spiral of demand pushing up health care costs for
everyone."

Nowhere is consumer demand seen more than with prescription drugs. A newly released study
found that spending on prescription drugs has soared 84 percent, or $42.7 billion to $93.4
billion, in the past five years. The 10 most heavily advertised drugs alone accounted for 22
percent of that growth, according to the study by the National Institute for Health Care
Management Research and Education Foundation. Those drugs were Claritin, Propecia,
Zyrtec, Zyban, Pravachol, Allegra, Prilosec, Zocor, Evista and Prozac.

Prescription costs escalate

Drug companies have increased the amount they spend on consumer advertising by 59 percent
in one year, a fact that is easy to understand after learning that in eight out of 10 cases, doctors
will prescribe the drug the patient has requested.

As consumers have begun demanding drugs by brand names, spending on prescriptions has
shot through the roof.

When health care costs go up, there are two options. Health plans can try to negotiate better
rates or they can pass the costs on to the purchasers.

In the case of prescriptions, health plans often will negotiate contracts with pharmaceutical
makers, saying, "We'll only allow doctors to prescribe your drugs if you give us a discount."

But consumers balk when their choices are limited, often turning to their elected officials for
intervention. Last year, for instance, the Legislature briefly considered a mandate that would
have required health plans to pay for a specific type of Hepatitis C drug.

Or health plans can try to raise their prices. But as the payers -- businesses and government --
become unwilling or unable to shoulder higher costs, they have to either pass on the additional
costs to consumers or cut the benefit. In some cases, particularly with small businesses, even a
small increase in premiums can make insurance unaffordable. It's estimated that for every 1
percent increase in premiums, 14,000 people in Colorado will lose their health insurance
because their employer will stop offering it.

Medicare cutbacks hurt

At the same time this crunch has developed on the private side, federal and state governments
have been seeking to control the amount they spend on health care for the poor, elderly and
disabled. Medicare, the second-largest purchaser of health care after employers, has
implemented a number of programs that limit reimbursement.

Over the past two years, Medicare capped its increases in HMO reimbursements to 2 percent
annually. As a result, health plans nationwide have pulled out of certain markets. In Colorado,
CIGNA HealthCare and QualMed Plans for Health announced just a month ago that they were
pulling their Medicare HMOs out, following the lead of United HealthCare, which left at the
beginning of the year. Some 31,000 elderly and disabled members in Colorado were forced to
find coverage elsewhere or return to traditional Medicare, which is more limited in its
coverage.

Medicare also is cutting back on what it pays doctors, hospitals and other health care
providers. This is causing hardship to providers who had come to rely on Medicare since the
mid-1960s as a lucrative reimburser, sometimes providing for up to 14 percent profit margins
on Medicare business. In recent years, many providers have even used Medicare
reimbursements to help offset managed-care cuts.

In the Balanced Budget Act of 1997, Congress severely cut reimbursement levels through the
year 2002. The cuts are so onerous that some physicians, hospitals and other health care
providers are warning that they may have to stop taking Medicare patients. The Colorado
Health and Hospital Association estimates that hospitals statewide will lose $900 million over
the five years, a 12 percent reduction in payments.

"Over the past five years, hospitals made changes to eliminate excess costs in order to function
with the payment levels being provided by managed care," Wall said. "The difficulty is that
those were one-time savings. Now that those have been achieved, the question is, where do
you go from here?

"We're at a point where we've now gotten rid of the fat and we're reducing into the muscle.
We may be cutting into the skeleton of the health care system if we continue to see the kinds of
reductions we're seeing."

As an example, Columbia/HealthOne, the metro area's largest hospital system with six
facilities, had to close its home health services and consolidate its mental health services to
stanch losses. Exempla Healthcare and Centura Healthcare are considering closing their home
health services and cutting some of their seniors programs due to losses. Statewide, officials
estimate that half the home health services have closed their doors.

Health care is now back in a seemingly no-win situation. Consumers want more services and
providers want more money. But payers don't want to pay more and they're tired of being
beaten up by their employees for the choices they're making.

"Simultaneously, managed care has decided it has to get out of the hole; Medicare has stopped
overpaying; consumers are demanding a higher level of service; the population is aging; and
health care technology is increasing," said Keith Moore, chief operating officer for the national
health care consulting firm McManis Associates. "And we have a confined budget. There's no
easy place to go."

Beyond managed care

Many experts believe managed care was simply a stage the system had to pass through to
move on. And in many respects, it was successful. It added preventive care to the system and
made people start thinking about quality rather than just quantity of care. It reduced
unnecessary care and began to implement practices that sought out the most effective ways of
caring for patients.

"Managed care did a lot of things that were one-time savings," said Ralph Pollock, a Denver
health care consultant with the AP Group. "Now what are you going to do for an encore? I
don't see it in the existing system."

While not all experts agree on what the next phase in the health care evolution will look like,
most agree it must include two things. First, it must better connect consumers to the
purchasing mechanism. And second, it must use information technology to better manage
people and costs.

Minneapolis is in the midst of experimenting with a quasi-consumerism model. Under that
approach, now in its second year, employees are provided with vouchers to choose a health
plan offered directly by a group of providers, cutting out the managed-care plans. If an
employee wants the Hyundai version, the voucher covers the cost. The Mercedes plan costs
the employee extra.

Employers seeking a way out

A growing number of employers are looking for ways to turn health care over to their
workers, O'Dell said. They view it in much the same way as the move from traditional pension
plans to 401(k) plans that allowed employees the opportunity to decide how much to save and
how to invest their money, O'Dell said.

"Employers can't keep taking the heat for a system they don't control and they don't want to
manage," he said. "Employers have been benevolent purchasers, but they've gone about as far
as they could go."

The second component will be creating a system that can truly manage people's health,
keeping them as healthy as possible and then treating them in the most effective manner once
they are sick. That system depends on information.

It's generally believed that the sickest 10 percent of the population accounts for about 80
percent of health care expenditures. With an effective data system in place, health care systems
could identify those people and manage their care to keep them healthy and costing less
money. This technique is commonly known as disease management.

"It's not going to get better until we get better with disease management," Moore said. "We
need a new round of productivity gains."