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The Impact of Cost Containment Efforts
on Racial and Ethnic Disparities in
Healthcare: A Conceptualization
Thomas Rice, Ph.D.
Department of Health Services
UCLA School of Public Health
INTRODUCTION
Like all developed countries, the United States continues to battle high
and rising health care costs. In the mid to late 1990s, U.S. health expendi-
tures as a percentage of gross domestic product had temporarily stabi-
lized for the first time in decades, albeit at a level almost 30% higher than
in any other country (Anderson and Hussey, 2001). More recently, how-
ever, there has been a resurgence in health care cost inflation, with some
indications (unproven, as yet) that we are entering another era of double-
digit annual increases.1 This resurgence appears to have been caused by a
number of factors, including a spike in demand for pharmaceuticals, in-
creasing consumer dissatisfaction with heavy-handed cost containment
techniques used by managed care organizations, and the inability of pay-
ers to squeeze additional savings from provider payments.
This paper argues that the prevailing cost containment methods have
the tendency to cause more harm to racial and ethnic minorities than to
others. It might be argued, then, that one way to avoid problems result-
ing from cost containment would be to eschew it as a policy goal. The
point is not a trivial one. If individuals or their third-party payers wish to
1 One indication is the rate of growth in costs of two prominent purchasing cooperatives. In
2001, premiums for the Federal Employees Health Benefits Plan (FEHBP) increased by 10.5%, and
costs for the California Public Employees Retirement System (CalPERS) rose by 13% (which was
divided between premium increases and higher levels of patient cost sharing). These figures were
obtained from http://www.opm.gov/pressrel/2000/fehb%20open%20season%202000.htm
(FEHBP) and http://webmd-practice.medcast.com/Z/Channels/39/article60467 (CalPERS).
699
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700 UNEQUAL TREATMENT
spend more on health care and consequently, less on other things, why
should they be stopped—particularly when it seems increasingly clear
that certain new medical devices, products, and procedures can improve
the quality and length of life?
There are several reasons why. First, additional health care spending
has significant opportunity costs. A dollar spent on health cannot be spent
on other things like education, housing, or consumer goods. Second, there
are various ways in which the health care market is imperfect that may
lead to more spending than is desirable. Unlike other goods and services,
health care services are often well insured, which insulates consumers
from facing their true cost. In addition, because consumer information is
often poor, people may demand medical goods and services in part be-
cause of strong advertising, or because they are “induced” to do so by
providers who have a pecuniary incentive to increase demand. Third,
government now pays for almost half of U.S. health care spending. Even
though the United States is now going through a period of unprecedented
budget surpluses the future of social programs is nevertheless worrisome,
particularly for Medicare, which faces more recipients and fewer contribu-
tors when the “baby boom” generation retires. Finally, one of the major
reasons that the number of uninsured persons continues to rise in the
United States is because of health care costs. The ability of employers to
offer insurance coverage, as well as workers’ ability to enroll when it is
offered, is dependent on how much each has to pay for coverage. Rising
costs have been shown not only to reduce employers’ ability to offer cov-
erage, but also to dampen demand by employees to enroll in such cover-
age when it is offered (Cooper and Schone, 1997).
Thus, there are strong reasons to believe that we as a society should
attempt to control health care costs. One of the major challenges is to
design ways of doing so that not only preserve quality care, but also do
not aggravate—and perhaps can even reduce—existing racial and ethnic
disparities in care.
The purpose of this paper is to analyze how existing cost containment
mechanisms may have a differential negative impact on racial and ethnic
minorities. The next section provides a simple framework for categorizing
cost containment strategies. The following section examines how various
cost containment efforts may negatively affect racial and ethnic minorities
as compared with other groups. The conclusion section discusses ways in
which some of the problems raised here can perhaps be ameliorated.
COST CONTAINMENT STRATEGIES
There are numerous ways in which one can classify strategies aimed
at controlling a nation’s health care expenses. The one adopted here is
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IMPACT OF COST CONTAINMENT EFFORTS
from Ellis and McGuire (1993), who distinguish between “supply-side”
and “demand-side” cost sharing. According to these authors, the major
feature of demand-side approaches is that “patients must pay more in co-
payments and deductibles,” whereas supply-side methods “seek to alter
the incentives of health care workers to provide certain services” (Ellis
and McGuire, 1993, p. 135). A third—managed competition—is also dis-
cussed. Managed competition, more so than the other strategies, empha-
sizes both demand- and supply-side measures for containing costs.
Demand-Side Approaches
In the traditional economic model, demand is paramount. Of course,
to obtain a market equilibrium of price and quantity, it is necessary to
consider both demand and supply. Beyond that, however, the role of
supply is rather passive. If, for example, demand increases, resulting in a
higher market clearing prices and higher profits, firms will increase sup-
ply to meet this demand and reap these profits. In contrast, changes in
supply are not supposed to influence people’s demand.
The passive role of demand stems in large part from the economic
model’s reliance on consumer sovereignty—the assumption that people
make better choices for themselves than others, such as government, can
make for them. But many observers doubt that health care meets the
necessary requirements for the proper functioning of a market. If this is
the case, then relying on consumer sovereignty may not result in the best
outcomes for society. Especially noteworthy are strong externalities,2 poor
consumer information, the influence and market power of physicians, and
the belief by many that people deserve health care irrespective of their
ability to pay.3 As a result, more policy tools in health care have focused
on the supply side, as described below.
There are two major tools available for containing costs through de-
mand. One mentioned by Ellis and McGuire (1993) is patient cost shar-
ing. If people have to pay more, it is generally assumed that they use
2 Externalities exist when one person or organization’s production or consumption has
effects on others. Positive externalities imply that these activities help others; negative ex-
ternalities lead to harm. Immunizations are a classic example of a positive externality. They
help not only the recipient, but also others who are less likely to get a disease if more people
are immunized. Free markets under-provide positive externalities because the recipient
must bear the full cost even though others are benefiting. Industrial pollution is an example
of a negative externality because pollution reduces the quality of life for others. Free mar-
kets over-provide pollution because the producers of it do not bear its associated costs.
3 For a discussion of 15 assumptions necessary for a free market to result in the best health
care system, see Rice (1998).
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fewer services, a finding almost always supported in the health care lit-
erature. There are, in turn, two ways in which cost sharing is traditionally
applied to consumers: by paying for insurance premiums, and by paying
coinsurance, co-payments, and/or deductibles when they receive services.
During the 1990s, the consumer expenditure towards cost sharing in job-
based coverage was fairly steady in real dollars, although there was a
shifting in these expenses to higher premiums and lower co-payments
(Gabel et al., 2001).
An instance where there is less support for the hypothesis that cost
sharing reduces utilization is in the case of services provided by physi-
cians after a patient has commenced a new episode of care. One of the
more overlooked but intriguing findings of the RAND Health Insurance
Experiment, the pre-eminent study of consumer demand for health care
services, is that co-payments had a substantial impact on whether or not
patients sought care for an illness, but little discernible effect on how much
care they received once they sought medical attention (Manning et al.,
1987; Newhouse, 1993). Apparently, it is the physician who controls re-
source usage once an episode of care commences. This means that in con-
sidering the role of patient cost sharing, it is important to realize that its
major impact is on reducing the number of episodes of care for which
medical care is sought rather than the cost of care per episode.
The other tool available for containing costs through demand is giv-
ing people better information. This information can pertain to particular
services (e.g., informing people what services are medically appropriate)
or to insurance itself (e.g., letting them know the price and quality of al-
ternative insurance choices that may reflect different benefits, provider
networks, etc.). The idea is to facilitate consumer sovereignty so that
peoples’ demand is informed, and therefore, most optimal for meeting
their intended purposes.
Providing consumers with more information has been one of the ma-
jor developments in the health care services market in recent years. The
main avenue has been by supplying consumers with information about
the quality of alternative health plan choices, although there has also been
some movement towards reporting on the quality of hospital and physi-
cian groups as well. Parallel to that, there has been a vast expansion of
medical information available to the lay public through the Internet, even
though the accuracy of this information is, by its nature, often suspect.
Whether the availability of such information does in fact lead to better
consumer choices is a hotly debated topic, and the resolution is still up in
the air. Some published studies have found little impact of quality infor-
mation on bettering consumer choice (Chernew and Scanlon, 1998), al-
though others have found a positive impact (Mukamel and Mushlin,
1998).
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IMPACT OF COST CONTAINMENT EFFORTS
Supply-Side Approaches
Most tools that have been used to control health care costs focus on
the supply side. These approaches, in general, are aimed at getting pro-
viders such as hospitals and physicians to change their behavior, rather
than focusing on the patient’s behavior. To give a few examples:
• Public programs, notably Medicaid, traditionally have paid physi-
cians very low fees to treat patients. The result—and in some instances,
perhaps the intent—is to dissuade physicians from providing more ser-
vices to program beneficiaries.
• Utilization review and practice guidelines are aimed at ensuring
that physicians provide services that are seen as medically appropriate.
• Diagnosis-related groups (DRGs) and capitation try to instill in
hospitals and physicians, respectively, an incentive not to over-provide
services. They do this by paying a fixed sum of money for care regardless
of how many services are actually performed.
• Supply and technology controls attempt to limit the number of hos-
pitals, doctors, or capital equipment in the system as a means of control-
ling overall usage.
Space does not permit a detailed description of the prevalence of each
of these, although it should be noted all except the last (supply and tech-
nology controls) are commonly employed in the United States. To illus-
trate a single example, we focus here on one of the more controversial
ones: the use of capitation to pay physicians. Under capitation, the physi-
cian receives a fixed amount of money per patient over a period of time
such as a year, irrespective of how many services are provided. These
capitation payments often include not only the services provided by pri-
mary care physicians, but their referrals to hospitals and specialists as
well. A positive way to view the consequences of capitation is that there
is an incentive for physicians to provide preventive care but not to over-
utilize marginally useful services. On the negative side, capitation may
lead physicians to stint on providing useful services.
Recent data on its prevalence is provided by a 1999 national survey
conducted by Mathematica Policy Research, Inc. for the Medicare Payment
Advisory Commission (2000). Table 1 shows how primary care physicians
are paid by health plans, and Table 2 shows the same information for spe-
cialists. Within the table, “withholds” refers to the situation whereby some
of the physician’s remuneration is held back and paid only if certain cost
containment goals are met, such as keeping down hospitalization and re-
ferrals. “Bonuses” are extra payments that can be based on the meeting of
individual or group utilization goals, high patient satisfaction, etc.
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TABLE 1. How Health Plans Pay Primary Care Physicians
Northeast/ Southeast/
Mid- South
All California Midwest Atlantic Central
Plans Markets Markets Markets Markets
Predominant payment method
for primary care physicians
Fee-for-service 24.7% 1.2% 23.2% 29.6% 50.9%
Without witholds or bonuses 15.1% 1.2% 2.3% 10.5% 50.9%
With witholds or bonuses 9.7 0.0 20.9 19.1 0.0
Capitation 61.2% 59.5% 74.3% 69.2% 41.0%
Without witholds or bonuses 29.2% 30.7% 36.5% 31.6% 17.8%
With witholds or bonuses 32.0 28.8 37.8 37.6 23.2
Salary 14.1% 39.4% 2.5% 1.2% 8.0%
Without witholds or bonuses 13.3% 39.4% 0.0% 0.0% 8.0%
With witholds or bonuses 0.8 0.0 2.5 1.2 0.0
Capitation is by far the most common method used in paying pri-
mary care physicians (Table 1), with an estimated share of 61% of HMOs
relying primarily on it. Fee-for-service is second with 25%, and salary is
third with 14%. Withholds and bonuses are used about half of the time in
capitation and about one-third of the time in fee-for-service, but are rarely
used in salary arrangements. The results differ a great deal by geographic
TABLE 2. How Health Plans Pay Specialists
Northeast/ Southeast/
Mid- South
All California Midwest Atlantic Central
Plans Markets Markets Markets Markets
Predominant payment
method for specialists
Fee-for-service (total) 75.3% 35.9% 100.0% 94.7% 80.2%
Without withholding or bonuses 52.2% 23.8% 57.2% 73.0% 56.6%
With witholding or bonuses 23.1 12.1 42.8 21.6 23.6
Capitation (total) 13.3% 25.1% 0.0% 5.3% 19.8%
Without withholding or bonuses 7.1% 12.0% 0.0% 4.1% 10.7%
With witholding or bonuses 6.2 13.1 0.0% 1.2 9.0
Salary (total) 11.4% 39.0% 0.0% 0.0% 0.0%
Without withholding or bonuses 11.4% 39.0% 0.0% 0.0% 0.0%
With witholding or bonuses 0.0 0.0 0.0 0.0 0.0
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IMPACT OF COST CONTAINMENT EFFORTS
area. California, for example, is far more likely to use salary to pay pri-
mary care physicians, mainly due to the presence of Kaiser Permanente, a
large group model HMO. Fee-for-service arrangements are almost un-
heard of in California, but make up half of the arrangements in southern
markets and about one-fourth in the other regions.
In contrast, except in California, fee-for-service is the most common
method of paying specialists (Table 2). This method accounts for 75% of
the market nationally, and over 90% in much of the country. Capitation of
specialists accounts for 13%, and salary, 11%. As before, salary is far more
common in California than elsewhere. The presence of withholds and bo-
nuses is comparable to those reported for primary care physicians.
Strong financial methods for controlling costs in managed care are far
more prevalent in the payment of primary care physicians. Only 15% of
primary care physicians were paid on a fee-for-service without any bo-
nuses or withholds, compared with 52% of specialists.
The study also examined the types of performance measures used by
health plans to adjust payments to primary care physicians. It found that
quality measures were used most often (68%), followed by consumer sur-
veys (48%), utilization and cost measures (46%), patient complaints (42%),
and enrollee turnover rates (23%). On average, between 6%-10% of com-
pensation was affected by physician’s performance on these measures
(Medicare Payment Advisory Commission, 2000).
Managed Competition
Managed competition combines both demand and supply-side incen-
tives to control costs (Enthoven, 1978; Enthoven and Kronick, 1989). Un-
der managed competition, health plans compete with each other for en-
rollees. Payers such as employers or government provide a fixed amount
of money to the enrollees to purchase insurance. The payers also provide
information on alternative plan costs and measures of quality and en-
rollee satisfaction. If enrollees choose a more expensive plan, they have to
pay additional premiums out of pocket. These are the parts of managed
competition aimed at the demand side. Health plans, in turn, need to keep
their costs down to remain competitive, and one way they can do so is to
pay providers in a manner that induces them to control costs. They may
also use techniques such as utilization review. These are the aspects of
managed competition aimed at controlling costs through the supply side.
Managed competition was part of the failed Health Security Act pro-
posed by the Clinton Administration, but many aspects of it have been
adopted by some private payers. Most notable is the practice of offering
employees a fixed contribution towards a menu of health plans. Re-
search has shown that this can save payers considerable amounts of
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money. One problem, however, is that health plans that rely on fee-for-
service medicine may obtain a sicker group of enrollees, which eventu-
ally may lead to these types of plans being priced out of the market
(Buchmueller, 1998).
COST CONTAINMENT AND RACIAL
AND ETHNIC DISPARITIES
This section is divided into two parts: demand-side approaches for
containing costs and supply-side approaches. Within each, I will indicate
how the use of these techniques is likely to affect racial and ethnic dispari-
ties in health care.
Before proceeding, it is important to discuss a potential limitation of
this analysis. Although I make an effort, when possible, to isolate (both
conceptually and empirically) the impact of race and ethnicity from other
sociodemographic characteristics, sometimes this is not possible or even
desirable. Race and ethnicity are often correlated with socioeconomic sta-
tus, and both of these “variables” are related to various measures of health
care outcomes.
To anticipate an example discussed in more detail below, higher cost-
sharing requirements are more of a financial burden on those with low
incomes. They either result in more income being spent on services, or
fewer services being purchased. Racial and ethnic minorities have, on
average, lower incomes than whites, so they tend to be more adversely
affected by cost sharing. Thus, race/ethnicity is not the cause of the prob-
lem—low income is— but those in these subgroups of the population nev-
ertheless bear a disproportionate burden. In other instances described
below, however, race appears to be the true cause of disparities. One
obvious example is the discussion of racial stereotyping on the part of
some physicians.
DEMAND-SIDE APPROACHES
The two main demand-side approaches to containing costs—patient
cost sharing and consumer information—are discussed in turn.
Patient Cost Sharing
Patient cost sharing, in the form of coinsurance, deductibles, and co-
payments applied at the time of service usage, is more common in the
United States than in the rest of the world. It also seems to be the cost-
containment method of choice among a disproportionate number of
health economists in the United States. The genesis of this belief may lie,
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IMPACT OF COST CONTAINMENT EFFORTS
in part, in the RAND Health Insurance Study, a vast social science experi-
ment conducted between 1974 to 1982, and described in Newhouse (1993).
One of the main findings of the study was that consumer demand was
indeed sensitive to out-of-pocket costs in that people who had to pay more
for services at point-of-service were considerably less likely to seek medi-
cal care. Furthermore, in general, the researchers found little evidence
that lower cost sharing resulted in better health outcomes (although there
were some positive effects, particularly for some procedures undergone
primarily by blacks, as discussed below).
These results have been used in conjunction with traditional economic
theory to demonstrate that higher cost sharing improves a countries’ so-
cial welfare (Feldman and Dowd, 1991). The point was made forcefully
by Manning and colleagues (1987), who asked whether the cost of the
RAND Health Insurance Study (over $200 million in today’s dollars) was
worth it.
[W]e believe that the benefits of this particular experiment greatly exceeded the
costs. . . . Between 1982 and 1984, there was a remarkable increase in initial cost
sharing in the United States, at least for hospital services. For example, the
number of major companies with first-dollar charges for hospital care rose from
30 to 63 percent in those two years, and the number of such firms with an
annual deductible of $200 per person or more rose from 4 to 21 percent. Al-
though it is impossible to know how much of this change can be attributed to the
experimental results, the initial findings of the experiment were published . . .
and given wide publicity in both the general and trade press. In certain instances
a direct link between changes in cost sharing and the experimental results can be
made (Manning et al., 1987, p. 272).
Because the experiment showed that increased patient cost-sharing
reduced medical expenditures, the researchers estimated that under the
most optimistic scenario, the eight-year experiment could have paid for
itself in a week.
But why is the lower utilization that results from cost sharing sup-
posed to make society better off? It is because the extra services that
people use when they have full insurance are assumed to bring about less
in the way of benefits. Economic theory posits that people will buy some-
thing up until the point that the benefit of the last unit purchased equals
the cost. With full insurance, the money price of services is zero; it is
therefore assumed that the last service consumed has almost zero value.
When this low benefit is compared with the cost of production, there is a
“welfare loss” associated with the production and consumption of the
service—it costs more to produce than the person (and therefore, society)
gains.
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This theory has two key implications: society will be better off if
people pay higher cost sharing amounts4 and cost sharing requirements
should be highest for services that are more price sensitive. The latter
argument is a bit more complicated. If the possession of insurance leads
to a large increase in utilization, then welfare loss will be larger because
more services will be purchased where the additional costs exceed extra
benefits. Thus, one would improve social welfare by assessing higher
patient coinsurance rates for such services, thereby reducing usage. In
contrast, if utilization rates are not very sensitive to the possession of in-
surance, then there is little welfare loss, and less need to charge high co-
insurance rates.
These are strong policy recommendations, and it is important to un-
derstand their basis. The traditional economic model assumes that people
make well-informed choices that maximize their own utility. Thus, in
making the decision to buy or not buy a service, they are implicitly evalu-
ating the utility or gain they would receive from the service against its
cost or co-payment.
It should be stressed that not all economists “buy into” the applica-
tion of this theory to health care. For example, Ellis and McGuire (1993)
write, “[We] are skeptical that the observed demand can be interpreted as
reflecting ‘socially efficient’ consumption, [so] we interpret the demand
curve in a more limited way, as an empirical relationship between the
degree of cost sharing and quantity of use demanded by the patient” (p.
142). Evans (1984) notes: “The welfare burden is minimized when there is
no insurance at all” (p. 49). And if one takes this reasoning very far,
Reinhardt (1992) points out that this logic will always find that the coun-
try with higher patient cost-sharing requirements will have the more effi-
cient health system. Thus, the U.S. system would be deemed more effi-
cient than the Canadian system or any of a number of European systems,
not because of a comparison of outcomes to costs, but rather simply from
the fact that the U.S. imposes higher patient cost sharing, which in turn
reduces utilization.
The implications of relying on patient cost sharing on racial and eth-
nic minorities are extremely important. Simply put, cost sharing results
in de facto discrimination, for several reasons. First, in cases where racial
and ethnic minorities are not deterred by the requirements, cost sharing
4 It is actually a bit more complicated. Excess insurance is assumed to lower social wel-
fare, but the existence of insurance also raises welfare because “risk averse” individuals
want protection against having to face catastrophically high medical expenses. The Feld-
man/Dowd study concludes, however, that the welfare loss from excess insurance far ex-
ceeds the additional utility conveyed by owning insurance.
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IMPACT OF COST CONTAINMENT EFFORTS
constitutes a much higher average burden. In 1998, median household
income for whites was a about $41,000, compared with $25,000 for blacks
and $28,000 for Hispanics (U.S. Census Bureau, 2000, p. 466).
Second, certain racial and ethnic minority groups are in poorer health.
As a result, they have a greater need for services. If they use them, then
the problems associated with high cost sharing and low incomes are mag-
nified for minorities compared with whites, who are both healthier and
wealthier. To give some examples among the total population, 8% of
whites rate their health as fair or poor, compared with 16% of blacks and
13% of Hispanics. Age-adjusted hypertension rates are about 50% higher
among blacks than whites. Both blacks and Hispanics have about twice
the rate of untreated dental caries as whites (U.S. National Center for
Health Statistics, 2000, pp. 232, 234, 270). Among Medicare beneficiaries,
42% of black beneficiaries, and 44% of Hispanics rate their health as fair or
poor, compared with 25% of whites. Similarly, members of both minority
groups are twice as likely to have diabetes. Two-thirds of black Medicare
beneficiaries have hypertension, compared with half of whites (Gornick,
2000).
Third, in many cases cost sharing is a deterrent to necessary service
usage. Thus, racial and ethnic minorities do not receive the care they
need, in part because they simply can’t afford the costs. The RAND Health
Insurance Experiment did find some instances in which lower cost shar-
ing improved health status. Some of these included:
• Low-income families at elevated risk benefited the most from free
care. The reduction in diastolic blood pressure among lower-income per-
sons who were judged to be at an elevated risk for hypertension was 3.3
mm Hg, compared with only 0.4 mm Hg for similar people with higher
incomes (Brook et al., 1983).
• Low-income persons in poor health who were given free care had
the largest reduction in serious symptoms (Shapiro et al., 1986).
• Among children of poor families who were at the highest risk, those
with free care were less likely to have anemia than those in the cost-shar-
ing plans (Valdez, 1986).
Gornick (2000) has also shown the large disparities in service usage
between whites and racial/ethnic Medicare beneficiaries, which are dou-
bly of concern because these numbers do not adjust for the poorer health
status of the latter. Blacks use 82% as many office visits and 77% as many
specialist services as whites, and are only half as likely to get flu shots. In
contrast, they are far more likely to get services that tend to result from
seeking care too late. For example, amputations of lower limbs are more
than triple among blacks compared with whites.
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IMPACT OF COST CONTAINMENT EFFORTS
health insurance policies offered by their employers (Cooper and Schone,
1997; Kronick and Gilmer, 1999). Second, there is much research to indi-
cate that choice of health plan is extremely responsive to premiums (Cut-
ler and Reber, 1998; Buchmueller, 1998). Because racial and ethnic mi-
norities have, on average, lower incomes than whites, we would expect
that their enrollment in insurance plans would also be lower. In 1999,
75% of whites had job-based health insurance coverage, while this was
true of only 58% of blacks and 47% of Latinos (Brown et al., 2001).
The second issue is whether higher premiums may force a dispropor-
tionate number of racial and ethnic minorities to choose health plans that
are of lower quality. This is an intriguing issue and will be discussed
next.
Consumer Information
The second demand-side approach to cost containment is relying on
consumer information. As noted earlier, this is manifested mainly by com-
parisons of the benefits, costs, and quality of health plans, as well as con-
sumer satisfaction. Indeed, the major assumption of most “pro-competi-
tive” health initiatives in both the private and public sectors is that
consumers are capable of using this information to make good plan
choices.
Whether this strategy works well is a subject of much debate. The fed-
eral government has invested considerable funding and research firms have
invested considerable energy in formulating ways of presenting and dis-
seminating such information through such initiatives as the Consumer As-
sessment of Health Plans (CAHPS, see http://www.ahcpr.gov/qual/
cahpfact.htm) sponsored by the Agency for Healthcare Research and Qual-
ity). Furthermore, there have been major private initiatives such as the
Health Plan Employer Data and Information Set (HEDIS) developed by the
National Committee for Quality Assurance (see http://www. ncqa.org/
Programs/HEDIS). In addition, organizations such as the Pacific Business
Group on Health have published extensive data on HEDIS and other mea-
sures of quality and satisfaction (see http://www.pbgh. org).
Although these efforts are admirable, the reliance on consumer infor-
mation to make health plan choices disproportionately harms certain ra-
cial and ethnic minorities in relation to whites. The groups that are disad-
vantaged are those who have lower levels of education, and especially
individuals whose primary language is not English. In 1999, 26% of whites
age 25 had a four-year college degree, compared with 16% of blacks and
11% of Hispanics (U.S. Census Bureau, 2000, pp. 43, 46). Although it is
difficult to find comparable data for those whose primary language is not
English, the rates are undoubtedly lower. Research by Hibbard and col-
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leagues (2001) shows a strong relationship between more education and
understanding comparative information about health plans up until age
80.
One might argue that even though racial and ethnic minorities are
disadvantaged by strategies that rely on good consumer information,
there is little to be done except to improve education (both in general as
well as education targeted to understanding things like report cards). This
is too narrow a viewpoint. Few other countries rely on consumers to make
choices among competing health plans. It is quite possible to organize a
health care system whereby everyone has the same health plans and cost
containment efforts are focused on things other than demand-side strate-
gies. We evaluate some of these in the next section.
SUPPLY-SIDE APPROACHES
This section is divided into four parts, each reflecting a different set of
supply-side approaches for containing costs: low physician fees; capita-
tion and DRGs; utilization review and practice guidelines; and supply,
technology, and expenditures controls.
Low Physician Fees
Traditionally, states have paid physicians very poorly for treating
Medicaid patients. Economists have constructed conceptual models to
help explain how physicians would be expected to respond. One such
model is that of a “price discriminating monopolist,” in which physicians
can receive different amounts of revenue from different groups of patients
(Sloan et al., 1978). One implication of the model is that physicians will
treat the most lucrative patients first, and once that market is exhausted,
treat others, as well. They will not tend to treat patients whose costs ex-
ceed revenues. Thus, we would expect that Medicaid patients might have
trouble finding a doctor willing to treat them. In addition, different phy-
sicians have different costs and face different levels of demand. Those
physicians who are better trained, more specialized, etc. tend to have
higher costs, especially when including the value of their time. The model
would predict that these more costly physicians would also tend to avoid
low-revenue patients such as those covered by Medicaid.
Most studies have shown just such effects. Medicaid patients are less
likely to have access to physicians in their outpatient practices, as well as
to specialists and others who may be perceived as more qualified
(Mitchell, 1991). This, in turn, results in differential access problems for
minorities. Whereas 6% of whites have Medicaid coverage, 19% of blacks
and 14% of Hispanics do. Blacks are more than 30% more likely to use an
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IMPACT OF COST CONTAINMENT EFFORTS
emergency room than whites because it is less likely that their regular
place of care is a physician office (U.S. National Center for Health Statis-
tics, 2000, pp. 340, 267).
A way to avoid this problem is to have all insurers pay the same
amount to physicians, which is known as an “all-payer system.” Such a
system exists in several European countries, as well as in Japan. When
each patient has equal value to a physician, the latter no longer has a
financial incentive to choose one type of patient over another. However,
he or she may still prefer certain patients based on non-financial criteria,
an issue explored next.
Capitation and DRGs
These strategies are combined because the incentives are similar.
Under DRGs, hospitals are paid an amount of money for an in-patient
stay that is, in most cases, completely unrelated to how many resources
are used to treat the patient. Under capitation, physicians receive a fixed
amount of money per patient per year, again largely unrelated to subse-
quent resource usage. It might be argued that DRGs do not affect physi-
cian decision making because they apply to how the hospital—rather than
how the doctor—is paid. This ignores the fact that hospitals use a number
of strategies to make physicians cognizant of the hospital’s financial in-
centive. These range from informing the doctor how long the patient has
stayed in relation to the average for that DRGs, all the way to withdraw-
ing privileges to practice in the hospital.
In and of themselves, capitation and DRGs should not favor one ra-
cial or ethnic group over another. Hospitals receive the same DRG pay-
ment for a white and a Latino patient; doctors get the same capitation fee
for whites and blacks (although different insurers may pay differing
amounts, and have different racial/ethnic mixes of enrollees). Rather, the
issue is more subtle. It is possible that the financial pressure exerted by
these payment methods will result in physicians cutting back their ser-
vices differentially—and that this differentiation is related to race and
ethnicity.
Consider the case of capitation. A physician who is capitated has an
incentive to enroll more patients in his or her practice, and under certain
schemes, may also have an incentive to control the number of hospital
and specialist referrals. One scarce resource is the physician’s time. Thus,
there is a potential incentive to do less for the patient.
It is important to recognize that research on this topic has yet to reach
any consensus. Reviews of the literature by Miller and Luft (1997, 2001),
one of which includes literature up to the year 2000, lists just as many
studies finding that HMOs provide better quality care and worse quality
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714 UNEQUAL TREATMENT
care. However, this does not provide direct evidence, because here we
are specifically considering the impact of capitating the physician. Unfor-
tunately, to my knowledge there have been no studies that have directly
assessed the impact of physician financial incentives on the actual quality
of care delivered.
Let us suppose, though, that a physician does feel the need to control
how much time he or she spends with the patient and/or number of refer-
rals. How could this manifest itself into racial and ethnic disparities?
There are at least three possibilities. First, there could be overt discrimi-
nation, with the physician willfully favoring his or her racial/ethnic group
over others. Although certainly possible, this has not been considered the
major driving factor by most researchers.
A second and somewhat related explanation is that physicians stereo-
type minority patients. One particularly interesting study of this possibil-
ity was conducted by van Ryn and Burke (2000), who surveyed physi-
cians’ attitudes after patients received an angiogram in 10 New York state
hospitals. They were asked questions about perceptions on such things as
the patient’s intelligence and education, pleasantness, self-control, and
rationality. They also were asked to rate patients on likely compliance
with medical care, drug and alcohol use and lifestyle, as well as the likeli-
hood that they would sue.
In general, physicians rated whites higher than blacks on most di-
mensions—even after the researchers controlled for the appropriate vari-
ables. Overall, they found that black patients:
“were more likely to be seen as at risk for noncompliance with cardiac rehabili-
tation, substance abuse, and having inadequate social support. In additional,
physicians rated Black patients as less intelligent than white patients, even
when patient sex, age, income, and education were controlled. Physicians also
report less affiliative feelings towards black patients” (van Ryn and Burke,
2000, p. 821).
The authors posit an explanation for these results. It may be that
physicians have stereotypes about racial and ethnic minorities, and apply
these generalizations to individuals in the group. They write:
“Physicians may fail to correctly incorporate individual diagnostic data, in-
stead being swayed by their beliefs regarding the probabilities of individuals in
a socio-demographic category having a given characteristic. In this way, physi-
cians’ understanding of epidemiological evidence regarding population-based
likelihoods may function as stereotypes, and be applied to assessments and
perceptions of individuals regardless of actual individual characteristics. It is
possible that this is especially likely when population-based statistics are con-
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IMPACT OF COST CONTAINMENT EFFORTS
sistent with dominant biases. . . . This suggests that physicians are applying
general race differences to their impressions of individuals patients and failing
to incorporate disconfirming individual information” (van Ryn and Burke,
2000, pp. 822-823).
Interestingly, this could result in a circle. Because physicians are
pressed for time under capitation, stereotyping leads to less care to racial
and ethnic minorities. In this regard, the study found physicians spent
more time with white than black patients. These patients, in turn, may not
be receiving as good advice on care, and furthermore, may feel alienated
from the physician. As a result, they may reveal less information to the
physician or seek care less often.
A third and related reason that racial and ethnic minorities might
fare worse in a DRG or capitated environment is through “statistical
discrimination.” This concept has been applied to health care by Balsa
and McGuire (2001). In essence, the authors argue that physicians’ deci-
sions result from the inability to interpret information about the patient.
If they feel they know less about a patient’s symptoms or needs, they
will be less certain that a particular course of treatment is appropriate.
Under strong financial pressures such as those generated by DRGs and
capitation, physicians may therefore favor the patients for whom infor-
mation is less ambiguous. To illustrate, they note that “a white male
doctor might have an easier time interpreting the signal, ‘doc, it really
hurts’ from a white male patient than from a black woman patient, or
from a Latino woman patient” (Balsa and McGuire, 2001, p. 1). Indeed
one would expect particularly large effects among patients whose na-
tive tongue is not English.
I have argued that there are several reasons to believe that the incen-
tives of managed care could differentially harm the care provided to ra-
cial and ethnic minorities. An interesting test of this hypothesis was con-
ducted by Tai-Seale and colleagues (2001), who focused on a group of
Medicaid beneficiaries who were forced into HMOs. From this natural
experiment, they found that compared with whites who were forced into
HMOs, blacks “experienced declines in relative use of physician services
(among both adults and children) and an increase in relative use of the ER
among children” (Tai-Seale et al., 2001, p. 56). They further note that,
“while the reduction in service use in itself is not necessarily a sign of
poor access or discrimination, it is the difference in the decline of relative
service use between African-American and white beneficiaries that war-
rants further investigation” (p. 57). The findings therefore are consistent
with the belief that financial incentives that encourage physicians to re-
duce resource usage under managed care differentially harm racial and
ethnic minorities.
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Utilization Review and Practice Guidelines
Utilization review is a practice engaged in, usually but not always by
health care payers, to monitor whether a particular service is appropriate
for a patient in a specific instance. It can be done prospectively (requiring
that a hospital admission be approved in advance), concurrently (during
a hospital stay), or retrospectively (reviewing services already rendered
by a physician as part of a “practice profile”). Traditionally, utilization
review has been thought of as a cost containment method because it was
originally applied to fee-for-service medicine, in which there often is a
financial incentive to over-provide. But it can also be used in a capitated
environment to ensure that enough services are being delivered.
In contrast, practice guidelines are designed to reduce inappropriate
variation in the provision of medical services (Wennberg and Gittelsohn,
1982; Rutledge, 1998). Their implementation can lead to the provision or
more or fewer services, depending on how prevailing practice patterns
compare to the norms recommended in the guidelines.
Practice guidelines should result in a reduction of racial and ethnic
disparities. Since the guidelines are agnostic with regard to race and
ethnicity, following those guidelines should result in standard care across
these groups. A potential problem arises when guidelines are used not as
a way of enhancing quality, but as a way to reduce costs. In such in-
stances, they begin to resemble utilization review. Many of the problems
described in the previous section also apply here.
Suppose that a multispecialty group practice has contracts with a
number of network-model HMOs and wishes to monitor the resource us-
age of its physicians. Further suppose that, as a way of controlling costs,
it uses practice guidelines but alerts physicians that they are deviating
from the guidelines only when they are performing more services than
recommended in those guidelines. It does not let them know when their
utilization is lower than the specified levels (unless they are so deviant
that there is a risk of malpractice).
Under this scenario, physicians are likely to feel pressured to control
their provision of and/or recommendations for additional services. If
this is the case, then for the reasons discussed under the capitation/DRG
section, they are likely on average to provide relatively fewer services or
recommendations for services to racial and ethnic minorities.
It is worth noting a particular study on physicians’ recommendations
for managing chest pain conducted by Schulman and colleagues (1999).
Physicians at national meetings were recruited to participate in a study in
which they viewed videos of patients and were then asked to assess
whether they would recommend cardiac catheterization. The patients on
the videos were actually actors, all of whom were directed to follow scripts
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IMPACT OF COST CONTAINMENT EFFORTS
in identical manners. In addition, each of these “patients” was identified
as having the same occupation and health history. Each physician partici-
pant was randomly assigned to see and hear one such video. The study
found that both women and blacks were much less likely to be recom-
mended for cardiac catheterization than men and whites. The odds ratios
for both were 0.6, and the odds ratio for black women (compared with
white men) was 0.4.
This study seems especially relevant because it shows how physicians
are likely to ration when they are under pressure—as a result of utiliza-
tion review or the inappropriate application of practice guidelines—to
keep costs and referrals down. These supply-side techniques therefore
also have the potential to aggravate racial and ethnic disparities.
Supply, Technology, and Expenditure Controls
It is difficult to generalize about other countries, all of which have
different health care systems and have relied on different methods of
controlling costs. Nevertheless, if one were to risk doing so, it might be
concluded that they rely much more heavily than the United States on
“macro-level” supply-side strategies. Rather than looking at the particu-
lar services delivered,6 they tend to stress (in varying degrees) system-
wide policies such as regulating the supply of hospital beds, physicians,
specialists, and medical technologies.
One of the most common methods of cost containment, especially for
hospital and physician services, is the use of some kind of global budgets.
These “tend to be prospectively set caps on spending for some portion of
the health care industry” (Wolfe and Moran, 1993, p. 55). The exact mean-
ing, however, varies from country to country. In some countries, such as
Canada, hospitals receive an annual global budget to cover their entire
operating budget. In Germany, there are regional budgets for different
types of physician services. A survey of nine European countries found
that all used some form of global budgeting. Most studies of global bud-
geting have found that global budgets do help control spending (Wolfe
and Moran, 1993; U.S. General Accounting Office, 1991; Abel-Smith, 1992).
It would seem that the potential for racial and ethnic disparities could
still exist under these macro-level policies, just as they did under the more
micro-level supply-side strategies employed in the United States. Indeed,
even countries with universal coverage and low patient cost sharing re-
6 This is not the case everywhere. Germany, for example, historically has compared indi-
vidual physician utilization profiles to those of other physicians and, when there is a large
deviation, informed the physician and sometimes even withheld reimbursement.
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718 UNEQUAL TREATMENT
quirements have been unable to equalize access to care. To give some
hypothetical examples consistent with the literature cited earlier:
• If the number of specialists are controlled, as is the case in many
countries, then those that are in practice will experience excess demand
for their services and may ration according to race and ethnicity.
• If the number of hospital beds or medical technologies are con-
trolled, then these scarce resources may be rationed similarly.
• If there is a global budget on various sectors of the health system,
each of these sectors will have to make its own allocation decisions.
Again, there is little assurance that racial and ethnic disparities will be
avoided.
Thus, whatever the merits or demerits of the cost-containment sys-
tems used in other countries, there is no assurance that importing them to
the United States would be any less discriminatory than other supply-
side strategies currently being used in this country. Perhaps the major
lesson from other countries is that most do not rely on demand-side poli-
cies, which were earlier shown to have the potential to create large dis-
parities. This theme is further examined below.
Conclusions
Unfortunately, there are no easy answers to questions concerning how
we can reduce racial and ethnic disparities in health care. This paper has
shown that both demand- and supply-side cost containment methods
have strong potential for aggravating existing inequities.
In some ways, the demand-side problem is more vexing. The core
notion is that goods should be allotted according to ability to pay. Those
who lack that ability therefore, will either use fewer services or spend
much more of their income using them. Since racial and ethnic minorities
have lower average incomes and, for most indicators, worse health status,
demand-side cost containment policies tend to hit particularly hard.
There are no easy answers on the supply side either. Most papers on
racial and ethnic disparities that show some form of discrimination on the
part of physicians—however unintentional—suggest that they be told of
current disparities in treatment as part of a broader effort to make them
more “culturally competent” [see, for example, Brach and Fraser (2000)
and van Ryn and Burke (2000)]. Needless to say, changes in deep-seated
behavior of this kind will not take place overnight.
I would posit that the reliance on both demand- and supply-side cost
containment strategies, particularly through the application of managed
competition, makes the problems more acute in the United States than in
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IMPACT OF COST CONTAINMENT EFFORTS
other countries. Managed competition relies on nearly all of the problem-
atic cost-containment strategies outlined in this paper:
• Allocating services on the basis of ability to pay.
• Relying on consumer’s understanding of complicated comparative
information when choosing health plans.
• Pressuring providers through payment mechanisms such as DRGs
and capitation.
• Monitoring the provision of services through a variety of utiliza-
tion review mechanisms.
As noted, cost-containment methods used in others countries, which
focus almost entirely on the supply side, do not offer a panacea for ending
racial and ethnic disparities in health care. But they do shun the demand-
side policies that have been embraced in the United States. Moving away
from such policies is one tangible thing that the United States could do.
It really comes down to an issue of fairness. To ensure that individu-
als who are at a disadvantage have an equal probability of attaining good
health, it is necessary to redistribute resources from those who have been
more fortunate. Relying on ability-to-pay to allocate health care services,
as noted earlier by Evans and colleagues (1993), does the opposite. Thus,
while striving to increase the sensitivity of health care providers to exist-
ing inequities, we must not put further barriers in the way of racial and
ethnic minorities receiving needed health care services.
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Representative terms from entire chapter:
cost containment
