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With great rapidity and relatively little public awareness, a significant change has taken place in the way some decisions are made about a patient's medical care. Many decisions like those just described, once the exclusive province of the doctor and patient, now have to be examined in advance by an external reviewer, someone who is accountable to an employer, insurer, health maintenance organization (HMO), preferred provider organization (PPO), or other entity responsible for paying all or most of the cost of the care. Depending upon the circumstances, this outside party may be involved in discussions about whether a service is needed, how treatment will be provided, and where care will occur.

This preliminary Institute of Medicine (IOM) report describes the nature of this change in medical decision-making and assesses its impact on patients, providers, and purchasers of medical services. It focuses on the utilization management efforts of the private sector, which provides health benefits for most Americans under age 65.1

Prior review of proposed medical care is not entirely new in the 1980s. Review organizations for Medicare were performing some preadmission review in the 1970s, and some private payers made limited use of the technique even earlier. However, widespread application of this approach to managing health care utilization is a phenomenon of the 1980s.

A survey conducted in 1983 reported that only 14 percent of corporate benefit plans required prior approval of nonemergency admissions to hospitals (Equitable Life Assurance Society of the United States, 1983). By 1988, another survey found 95 of 100 large firms had such programs (Corporate Health Strategies, 1988). Perhaps half to three-quarters of employees nationwide are now covered by such programs, up from only 5 percent in 1984 (Foster Higgins, 1987; Gabel et al., 1988).

What accounts for this rapid spread of utilization management through external assessments of the need for proposed medical services? The most obvious factor is rapidly rising health care costs. Purchasers' search for effective ways to limit their financial liability for health benefits stems directly from their belief that costs are out of control.

The trends responsible for this view are painfully familiar to everyone concerned with health care financing. In 1987, the latest year for which statistics are available, total spending on health care reached an estimated $500 billion, up from $234 billion just 5 years earlier (Levit and Freeland, 1988). This spending has been increasing at a rate considerably above the rate of general inflation (Table 1-1), and the share of the gross national product attributed to health services went from 5.9 percent in 1965 to 11.1

1 Public programs have been the subject of several reports in recent years (for example, General Accounting Office, 1983, 1988a, 1988b; Health Care Financing Administration, 1979; Physician Payment Review Commission, 1988, 1989, and Project HOPE, 1987).