Controlling Costs and Changing Patient Care?

The Role of Utilization Management

Committee on Utilization Management
by Third Parties
Division of Health Care Services

Bradford H. Gray and Marilyn J. Field, editors

Washington, D.C.    1989

The National Academies of Sciences, Engineering, and Medicine
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Controlling Costs and Changing Patient Care? The Role of Utilization Management Committee on Utilization Management by Third Parties Division of Health Care Services INSTITUTE OF MEDICINE Bradford H. Gray and Marilyn J. Field, editors NATIONAL ACADEMY PRESS Washington, D.C.    1989

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Page ii National Academy Press • 2101 Constitution Avenue, N.W. • Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The Institute of Medicine was chartered in 1970 by the National Academy of Sciences to enlist distinguished members of the appropriate professions in the examination of policy matters pertaining to the health of the public. In this, the Institute acts under both the Academy's 1863 congressional charter responsibility to be an adviser to the federal government and its own initiative in identifying issues of medical care, research, and education. This project was supported by the John A. Hartford Foundation of New York City, Grant No. 87343-H, and the Pension and Welfare Benefits Adminstration, U.S. Department of Labor, Contract No. J-9-P-8-0067. The Honeywell Corporation provided funds for a roundtable meeting with corporate benefits managers. The views presented are those of the Institute of Medicine Committee on Utilization Management by Third Parties and are not necessarily those of the funding organizations. The Andrew W. Mellon Foundation contribution to independent Institute of Medicine funds was also used to support the project. Library of Congress Cataloging-in-Publication Data Institute of Medicine (U.s.). Committee on Utilization Management by Third Parties. Controlling costs and changing patient care? : the role of utilization management / Institute of Medicine, Division of Health Care Services, Committee on Utilization Management by Third Parties ; Marilyn J. Field and Bradford H. Gray, editors. p. cm. Includes bibliographical references. ISBN 0-309-04048-5.—ISBN 0-309-04045-0 (pbk.) 1. Medical care—United States—Cost control. I. Field, Marilyn Jane. II. Gray, Bradford H., 1942-. III. Title. RA410.53.158 1989 338.4t 3362/10973—dc20                    89-39638                                    CIP No part of this book may be reproduced by any mechanical, photographic, or electronic process, or in the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted, or otherwise copied for public or private use, without written permission from the publisher, except for the purpose of official use by the U.S. government. Printed in the United States of America

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Page iii COMMITTEE ON UTILIZATION MANAGEMENT BY THIRD PARTIES JEROME H. GROSSMAN,* Chairman, President, New England Medical Center Hospitals, Boston, Massachusetts HOWARD L. BAILIT,* Vice President for Health Research and Policy, Aetna Life and Casualty, Hartford, Connecticut ROBERT A. BERENSON, Washington, D.C. JOHN M. BURNS, Vice President, Health Management, Honeywell, Inc., Minneapolis, Minnesota RICHARD H. EGDAHL,* Director, Boston University Medical Center, Boston, Massachusetts JOHN M. EISENBERG,* Chief, General Internal Medicine, University of Pennsylvania, Philadelphia, Pennsylvania DEBORAH ANNE FREUND, Professor and Chair of the Health Care Faculty, and Director, The Center for Health Services Research, School of Public and Environmental Affairs, Indiana University, Indianapolis, Indiana PAUL M. GERTMAN, President, ClinMan, Inc., Waltham, Massachusetts ALICE G. GOSFIELD, Attorney, Alice G. Gosfield & Associates, P.C., Philadelphia, Pennsylvania MICHAEL E. HERBERT, President, Physicians Health Services, Trumbull, Connecticut NATHAN HERSHEY,* Professor of Health Law, Graduate School of Public Health, University of Pittsburgh, Pittsburgh, Pennsylvania NEIL HOLLANDER, Vice President, Corporate Health Strategies, Blue Cross of Western Pennsylvania, Pittsburgh, Pennsylvania KAREN IGNANI, Associate Director, Department of Occupational Safety, Health, and Social Security, AFL-CIO, Washington, D.C. CAROL ANN LOCKHART, Executive Director, Greater Phoenix Affordable Health Care, Phoenix, Arizona ARNOLD MILSTEIN, President, National Medical Audit, San Francisco, California ALAN R. NELSON,* Associate, Memorial Medical Center, Salt Lake City, Utah ROBERT PATRICELLI, President & Chief Executive Officer, Value Health, Inc., Avon, Connecticut CYNTHIA L. POLICH, President, InterStudy, Excelsior, Minnesota * Institute of Medicine member

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Page iv DONALD M. STEINWACHS, Director, Health Services Research and Development Center, School of Hygiene and Public Health, The Johns Hopkins Medical Institutions, Baltimore, Maryland BRUCE S. WOLFF, Partner, Proskauer Rose Goetz & Mendensohn, New York, New York STUDY STAFF KARL D. YORDY, Director, Division of Health Care Services BRADFORD H. GRAY, Study Director (through December 1988) MARILYN J. FIELD, Study Director (through January 1989) SUSAN E. SHERMAN, Research Associate MARGARET WALKOVER, Research Associate DON TILLER, Administrative Assistant WALLACE K. WATERFALL, Editor, Institute of Medicine EILEEN CONNOR, Consultant SHARON ROSEN, Consultant

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Page v Contents Preface vii Executive Summary 1 1 Utilization Management: Introduction and Definitions 13 2 Origins of Utilization Management 28 3 The Utilization Management Industry: Structure and Process 58 4 Impact of Prior Review Programs 91 5 High-Cost Case Management 119 6 Conclusions and Recommendations 143 Acknowledgments 163 Appendixes   A Legal Implications of Utilization Review William A. Helvestine 169 B Utilization Management and Quality Assurance in Health Maintenance Organizations: An Operational Assessment Joan B. Trauner and Sibyl Tilson 205 C Utilization Management in Peer Review Organizations 246

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Page vi D Summary of Public Hearings 250 E Summaries of Committee Site Visits to Utilization Management Organizations 253 F Analysis of Agreements Between Utilization Management Organizations and Their Clients 282 G Glossary and Acronyms 288 H Biographies of Committee Members 293 Index 301

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Page vii Preface The past decade has seen great growth in efforts by purchasers of health care to understand and influence the treatment of patients. In large measure, these efforts reflect purchasers' concerns that their increasing expenditures are not matched by increasing value and even that a significant amount of care is inappropriate and wasteful. Clinicians and researchers, too, are acutely concerned about unexplained variations in practice patterns and lack of evidence of treatment effectiveness. To respond to these concerns, we must focus on how the health care system works as well as how individual patients are served. Utilization management brings patient-level and system-level concerns together and represents a new nexus of relations among payers, practitioners, hospitals, and patients. Because it is new, at least as broadly applied, and because it is changing rapidly, utilization management needs to be watched. This report is a preliminary effort in that direction, and the committee hopes that it will inform private and public policymakers alike. Whether the current organizational forms of utilization management remain or subside, the function of managing utilization will remain a central challenge. Therefore, this committee's conclusions and recommendations bear both on generic issues of knowledge and values and on issues specific to current organizations and procedures for influencing patient care decisions. The first step in this study of utilization management by third parties was a workshop held in the summer of 1987 to identify policy issues and research questions, consider roles for the Institute of Medicine, and

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Page viii discuss the organization and methods of utilization management. This workshop provided initial direction and encouragement for the committee and staff, who held seven meetings between December 1987 and February 1989. In addition to soliciting presentations from knowledgeable persons at committee meetings, the project sought views, data, and ideas through • 12 site visits to organizations that provide utilization management services (including freestanding firms, insurer subsidiaries, health maintenance organizations, and peer review organizations); • a June 1988 hearing in which written and oral testimony was presented by over 30 consumer, provider, industry, employer, and other organizations; • four papers commissioned by the committee from experts in different aspects of utilization management (two of these papers appear in Appendixes A and B of this report); and • review of published and, in some cases, unpublished literature on the goals, processes, effects, and operating contexts of utilization management. Additional information was obtained from ongoing discussions with people involved in utilization management as purchasers of utilization management services, suppliers of these services, and subjects of utilization management review, that is, physicians, hospitals, and patients. Reflecting the competitive nature of the utilization management industry, all of the site visits and some other discussions required commitments that the committee would keep confidential any information that would identify the source. The committee on utilization management plans further work to evaluate the continued course of utilization management and related means of improving the appropriateness and cost-effectiveness of medical services. Other committees and councils of the Institute of Medicine are studying strategies for quality review and assurance, methods for monitoring and improving access for the uninsured, priorities and processes for technology assessment, and problems facing employer-sponsored health benefit plans. This and related work grows out of a continuing commitment by the Institute of Medicine to an agenda of evaluation that encompasses the cost, quality, and availability of health services. JEROME H. GROSSMAN CHAIRMAN, COMMITTE ON UTILIZATION MANAGEMENT BY THIRD PARTIES