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2
Origins of Utilization Management

In introducing this report, the committee has emphasized the seriousness of the health care cost problem and the challenges involved in constraining expenditures. The next step is to put the problems and strategies in a historical context. Without understanding how or why utilization management and other cost-containment strategies have developed, policymakers may oversimplify both the difficulties and opportunities they face in managing health care benefits. This chapter

• reviews the development of third-party financing of health services in the United States;

• summarizes early efforts to control costs for health benefits;

• describes the growth of government and private employer involvement in cost containment; and

• identifies some factors behind the change in societal attitudes about medical care and the acceptance of external assessments of the appropriateness of health care use.

The Growth of Third-Party Financing of Health Care

Extensive third-party financing of individual health services is relatively new, emerging in this country largely in the past 60 years. Its development reflects more than a century of scientific progress in the diagnosis and treatment of illness. This progress has stimulated substantial growth and change in health care institutions and professions, raised public expectations about



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Page 27 2 Origins of Utilization Management In introducing this report, the committee has emphasized the seriousness of the health care cost problem and the challenges involved in constraining expenditures. The next step is to put the problems and strategies in a historical context. Without understanding how or why utilization management and other cost-containment strategies have developed, policymakers may oversimplify both the difficulties and opportunities they face in managing health care benefits. This chapter • reviews the development of third-party financing of health services in the United States; • summarizes early efforts to control costs for health benefits; • describes the growth of government and private employer involvement in cost containment; and • identifies some factors behind the change in societal attitudes about medical care and the acceptance of external assessments of the appropriateness of health care use. The Growth of Third-Party Financing of Health Care Extensive third-party financing of individual health services is relatively new, emerging in this country largely in the past 60 years. Its development reflects more than a century of scientific progress in the diagnosis and treatment of illness. This progress has stimulated substantial growth and change in health care institutions and professions, raised public expectations about

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Page 28 the benefits of medical care, and increased the costs of that care. These developments, in turn, have led to broad-based demands that individuals and families be protected against medical expenses by means other than charity. Although third-party payment was and is among the causes of escalating health care costs, it is also a crucially important social invention to deal with that problem. Some key dates in the move to third-party payment are summarized in Table 2-1. Table 2.2 shows the shift in funding sources for selected medical care expenses over the last 60 years. Before the 1930s, few Americans had anything resembling modern health benefit plans (Anderson, 1968, 1972; Somers and Somers, 1961). Concerns about medical costs were defined largely in personal rather than governmental or corporate terms. For example, the Committee on the Costs of Medical Care (CCMC) reported in the early 1930s that less than 15 percent of American families bore the burden of more than half of all annual family expenditures for illness (Anderson, 1968). For individuals, medical care expenses were highly unpredictable, ranging at that time "from five dollars to one thousand dollars or more" for a single illness (Rorem, 1982, p. 62). When patients and families (first parties) could not pay these costs, health care providers (second parties) absorbed them with varying amounts of assistance from other organizations (third parties) such as local governments, religious groups, and private charities.1 Among actuaries and others involved with the commercial life and casualty insurance industry that had developed in the nineteenth century, there was considerable doubt that medical care was an insurable risk (Donabedian, 1976). A classic text on insurance (McIntyre, 1962) describes traditional conditions for insuring a hazard or risk. The insured event (1) must be susceptible to unambiguous description, (2) must not be something the insured person wants or can control, and (3) must be a relatively uncommon occurrence for individuals but have a predictable incidence for a group. Medical care presents problems in all three areas. Nevertheless, in the early 1930s, a number of individuals, influenced by the analyses of the CCMC, began a virtual social movement to organize and promote new kinds of "third-party" financing for health care—although they did not use the term explicitly (Anderson, 1968, 1975; Rorem, 1982; Somers and Somers, 1961). They believed that medical expenses—at least, hospitalization expenses—for a group of people could be projected with some accuracy so that a group could do what the individual could not: 1 In 1961, Somers and Somers wrote: "The term 'third party,' usage of which varies from a technical concept of contract law to a popular epithet, means... an organization or institution involved in the financing or provision of medical care, other than the two primary parties: the vendor— doctor or hospital—and the patient. For most practical purposes the third party is a private insurance carrier, prepayment plan, or government agency." Today, employers should be added to that list.

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Page 29 TABLE 2-1 Key Dates in the Move from First-Party to Third-Party Payment 1798 U.S. Maritime Hospital Service established; deductions from seamen's pay cover part of cost 1847 First company to issue health insurance organized in Boston 1847 American Medical Association organized 1863 Travelers Insurance Company offers accident insurance 1870s Employee benefit associations formed; offer small death and disability payments 1883 Germany passes broad social insurance laws 1898 American Hospital Association organized 1910s Physician service and industrial health plans established in Northwest and remote areas 1912 First model law developed for regulating health insurance 1915 Referenda to establish compulsory state health insurance defeated 1917 American College of Surgeons sets standards for hospitals 1927 Committee on the Costs of Medical Care established 1929 Stock market crash followed by Depression 1929 Ross-Loos group founded (first prepaid group practice) 1929 Baylor hospitalization plan founded (first Blue Cross plan) 1934 Roosevelt puts low priority on public health insurance during planning of Social Security legislation 1937 Blue Cross Commission established 1939 Federal Security Agency (predecessor of U.S. Department of Health and Human Services) established 1940 Predecessor of Group Health Association of America founded 1940s Federal wage freeze increases union interest in fringe benefits 1945 Kaiser Foundation Health Plan opens to non-Kaiser groups 1946 Hill-Burton hospital construction program established 1946 Blue Shield Commission and Health Insurance Council organized 1949 Supreme Court decisions allow employee benefits to be part of collective bargaining 1951 Joint Commission on the Accreditation of Hospitals founded 1954 San Joaquin County Foundation for Medical Care established 1965 Medicare and Medicaid legislation 1971-1974 Economic Stabilization Program (wage and price controls) 1972 Professional standards review organization legislation 1972 John Deere & Co. begins to self-fund health benefits 1973 Wennberg article on small area variations published in Science 1973 HMO legislation passed 1974 Employee Retirement Income Security Act passed 1974 Washington Business Group on Health organized (predecessor) 1978 Labor-Management Group paper on health care costs 1978 General Motors cost-containment reports initiated 1983 Medicare Prospective Hospital Payment legislation passed SOURCES: Health Insurance Assocation of America (1987); Somers and Somers (1961); Starr (1982); U.S. Department of Health, Education, and Welfare (1976); and Wilson and Neuhauser (1974).

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Page 30 TABLE 2-2 Expenditures for Personal Health Care, Hospital Care, and Physician Services, by Major Sources of Funds, in Percentages, 1929-1987 Year Type of Care Direct Patient Private Insurance Government 1929 All personal health care (PHC) 88.4 NA 9.0 1950 All PHC 65.5 9.1 22.4   Hospital care 29.9 17.7 48.9   Physician services 83.2 11.4 5.2 1960 All PHC 54.9 21.1 21.8   Hospital care 19.8 36.3 41.3   Physician services 65.4 28.0 6.4 1970 All PHC 40.0 24.1 34.4   Hospital care 10.1 36.0 52.5   Physician services 44.1 34.2 21.6 1980 All PHC 28.7 30.7 39.4   Hospital care 7.8 38.1 53.1   Physician services 30.4 42.6 26.9 1987 All PHC 27.8 31.4 39.6   Hospital care 9.5 36.9 52.5   Physician services 25.6 43.4 30.9 SOURCE: Adapted from Gibson (1980) and Letsch (1988). Government expenditures include both direct services and public insurance. Figures do not add to 100%. budget the costs of medical care and share the risk of expense among the well and the unwell. Real growth in health insurance began during the crisis of the Depression. The federal government rejected health insurance as a priority in developing Social Security legislation, but in the private sector communitywide hospital benefit plans began to be organized for employed groups. These plans collected monthly per-employee payments (premiums) that were independent of individual episodes of ill health. Early premiums ran about 50 to 75 cents per month per member. Once private health insurance had a chance to prove itself, it quickly became regarded as a necessity and enrollments grew rapidly (Figure 2-1). By the end of World War II, more than 30 million people had private hospital insurance, and employment-based insurance was becoming the norm in major companies.2 Also, as early as 1940, the movement for prepaid group practices (PGPs) had helped organize enough PGPs, such as Group Health Association of Washington, D.C., to warrant establishment of 2Although some predecessors of Blue Shield plans, the physician service bureaus in the Northwest, predate the Depression, insurance for physicians services grew more slowly than did coverage for hospital services. In part, this reflected the lesser expense of such services compared with that of institutional services. It also reflected resistance from physicians, many of whom agreed with one leader's 1939 quote from George Washington: "He who would surrender liberty for security is likely to lose both" (Fishbein cited in Rorem, 1982, p. 94).

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Page 31 Figure 2-1 Private health insurance enrollment. Percentage of civilian population  with hospital  expense, surgical expense, "regular medical," and "major medical" coverage, 1940-1959.  Data are based on end-of-year population and enrollment figures. Sources: Somers and  Somers (1961). Based on data from the Health Insurance Council and the Social Security  Administration of the U.S. Department of Health, Education, and Welfare. the trade association that eventually became the Group Health Association of America (Somers and Somers, 1961). Insurance coverage continued to expand during the next quarter century, reaching a peak of over 188 million people in 1982 (Health Insurance Association of America, 1987, 1988). Recently, after 50 years of growth, the reach of private health insurance has begun to decline. AS shown in Table 2-3, the percentage of the nonelderly population covered by employment-based plans dropped from 67.4 percent in 1979 to 64.8 percent in 1986 (Congressional Research Service, 1988). In the same period, the number of individuals with neither public nor private insurance expanded to an estimated 37 million in 1986

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Page 32 TABLE 2-3 Sources of Health Insurance Coverage for Nonelderly Population, 1979, 1983, and 1986   Percentage of Nonelderly Population Coverage Source 1979 1983 1986 Employment-based plans         Covered on own job 33.1 32.5 33.4   Covered through someone else 34.3 32.1 31.4 Total employment-based 67.4 64.6 64.8 Other planspa 17.9 18.5 17.7 Uninsured 14.6 16.9 17.5   Total 100.0 100.0 100.0 aExcludes persons covered by employment-based plans. SOURCE: Congressional Research Service (1988, p. 181). (Chollet, 1988; Congressional Research Service, 1988). Those people represent 17.5 percent of the civilian population, up from 14.6 percent in 1982. (A recent revised estimate puts the number of uninsured at 31.1 million in 1987 [Rich, 1989].) Some individuals move in and out of coverage as they take seasonal or other periodic employment, but many of the uninsured are full-time workers and their dependents. In 1986, 15 percent of workers reported no health insurance from any source (Monheit and Schur, 1988). Although a variety of economic and social conditions lie behind the decline in insurance coverage, high costs for health care certainly contribute to it. In fact, the continuing escalation of health care costs is once again prompting questions about the insurability of medical care and the viability of private health benefit plans (Abramowitz, 1989; Freudenheim, 1989; National Health Policy Forum, 1988). Early Cost-Management Efforts By Third Parties The transfer of many health care costs from individuals to third parties has been accompanied both by a shift and a recasting of the cost problem. Insurance has added new complexities to the problem, along with new resources for managing it. Table 2-4, which shows changes in the general consumer price index and selected medical care items from 1929 to 1960, reveals a sharp postwar increase in hospital rates compared to physician fees. Between 1920 and 1965, many of the basic elements of today's strategies for managing health benefit costs were identified, even if they were not persuasively articulated or successfully applied. These include

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Page 33 TABLE 2-4 Consumer Price Indexes for All Items, All Services, and Medical Care Items, Selected Years, 1929-1960 (Average Annual Index, 1947-1949 = 100.0) Item or Service 1929 1935 1940 1950 1955 June 1960 All items 73.3 58.7 59.9 102.8 114.5 126.5 Medical care 73.5 71.4 72.7 106.0 128.0 156.1 General practitioners' fees — 73.9 74.7 104.0 124.3 147.5 Surgeons' fees - 73.8 74.0 104.5 116.4 129.3 Hospital rates — 47.1 50.4 114.6 164.4 222.7 Hospitalization insurancea — — — — 115.5 174.3 NOTE: Values are annual averages, except for those in June 1960. aIndex for December 1952 is 100. SOURCE: Adapted from Somers and Somers (1961, p. 545). Data from consumer price index, Bureau of Labor Statistics. • management of the risk pool, • design of the benefit plan, • controls on payments to health care providers, • constraints on the supply of health care resources, and • review of the appropriateness of utilization. Management of the Risk Pool The founders of health insurance plans in the 1920s and 1930s had to abide by a fundamental principle of all insurance: The composition of the risk pool is critical to the cost and survival of a plan. If the people who buy health insurance are disproportionately those who expect high expenses for health care, then insurance will be, at best, a form of group budgeting for the ill minus the critical feature of risk-sharing with healthy individuals. The choice of the employment group as the foundation for private health insurance was a key element in managing the risk pool. The employee group was attractive because it existed for reasons other than the purchase of insurance. Many of the early nonprofit health insurance plans were also committed to "community rating." That is, they charged the same amount per individual based on the projected expenditures for all those covered in the community. However, "experience rating" soon emerged as a way for insurers to compete by segmenting risk. Insurers could attract business by offering lower premiums to groups with lower health cost experience or lower projected costs. This left smaller employers, groups with older and less healthy workers, and self-insuring individuals to pay higher premiums.

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Page 34 To make it feasible to sell insurance directly to individuals, most insurers have devised various controls. These include medical underwriting (that is, excluding those with conditions such as cancer or charging them higher rates) and waiting periods for coverage of preexisting medical problems. Such controls are designed to limit or compensate for the disproportionate selection of an insurance product by less healthy individuals.3 Even so, individually purchased insurance was and is more expensive than comparable group insurance. Recently, with many employers offering several health plans to their employees, the management of risk within and across these plans has become a major issue. The long-term impact of this new fragmentation of the risk pool on benefit costs and on the stability of health plans is the subject of spirited controversy (Scheffler and Rossiter, 1985). Efforts to create sound risk pools for small groups, the self-employed, the fragmented employer group, and others remain an elusive goal for those trying to extend health benefits to the nonpoor uninsured. Design of the Benefit Plan Like management of the risk pool, the centrality of benefit design was also quickly appreciated as a vehicle to control health plan costs. One way to limit expenses is to require patients to bear some of the cost of care themselves through deductibles, copayments (a flat payment per service), coinsurance (a percentage of a charge), and dollar maximums on benefits for all services or specific categories of service. Cost-sharing has two objectives—first, the simple transfer of some liability for costs to the patient and, second, the discouraging of patient demand for care. Plan administrators also concluded that premiums could be held in check by excluding coverage for experimental and ineffective treatments, for treatments whose use was highly discretionary or difficult to monitor, for extended or custodial care for chronic conditions, and for relatively low-cost services that could be scheduled and budgeted. Early benefit plans often limited coverage to selected hospital services. These coverage limitations applied uniformly to the covered group and did not require patient-by-patient judgments of medical appropriateness. Later, as insurers 3The difference between individual and group coverage risk pools is illustrated by statistics from a recent report issued by Independence Blue Cross and Pennsylvania Blue Shield (1988). The Blue Cross plan offers individual coverage without medical underwriting on an open enrollment basis throughout the calendar year for residents of its five-county service area. In 1987, individual subscribers were 6 years older on average (44 versus 38 years), had a hospital admission rate that was 46 percent higher than that for all group subscribers, and incurred costs that were 60 percent higher. Fifty-five percent of the individual subscribers were age 50 or over compared with 35 percent of the group subscribers.

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Page 35 and employers became more comfortable with sponsoring health plans, coverage began to include nonhospital services. Controls On Payments To Providers During the financially uncertain years of the 1930s, contracting and risk-sharing with providers were important economic elements of prepaid group practice arrangements and some health insurance plans. One of the earliest prepaid group practices, the Ross-Loos Medical Group, was started in 1929 and later followed by the Group Health Association of Washington, D.C., the Kaiser Foundation Health Plan (as a community-based organization), and the Health Insurance Plan of Greater New York. Also in 1929, what is considered the first Blue Cross plan was established (for a public teachers group) and ''underwritten'' by Baylor University Hospital. Later Blue Cross plans also had provisions for some sharing of risk by their contracting hospitals or physicians, and negotiated limits on fees were elements in many plans (Donabedian, 1976; Hellinger, 1976). Strong contractual relationships that included some risk-sharing or limits on payments to providers, however, were hard to establish and maintain (Werlin, 1973). The expansionary postwar decades stimulated hospital restiveness with the contractual relationship that guaranteed service to Blue Cross enrollees at a negotiated price (Anderson, 1975). Physicians continued to fight prepaid group practice plans and other forms of contracting and risk-sharing. However, some medical societies took a less negative approach, establishing Foundations for Medical Care (FMCs), beginning with the San Joaquin County (California) Foundation in 1954. Those FMCs that were based on contracts and physician acceptance of financial risk are the predecessors of today's independent practice associations (IPAs) (Egdahl, 1973).4 Constraints On Supply Another approach to cost containment was developed under the rubric of health planning. Health planning had received much of its initial nationwide impetus as a tool for guiding the expansion in community hospital resources under the Hill-Burton program established after World War II. Beginning in the late 1950s, however, the growing supply of hospital resources came to be viewed as a source of rising health care costs (Roemet 4Egdahl (1973) distinguishes two types of FMCs. The comprehensive FMCs sponsored prepaid health insurance and performed peer review of health care quality. The other type provided peer review services to insurers and other organizations and became the model for government-mandated professional standards review organizations (PSROs) and peer review organizations established in the 1970s and 1980s.

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Page 36 and Shain, 1959), and health planning was seen as a way to limit excessive capital investment (Somers and Somers, 1961). By the 1970s, a full-blown federal, state, and local health planning program was attempting to regulate resource development (IOM, 1981; Yordy, 1972). Many insurance officials and employers were active supporters of these efforts (Ennes, 1974; Herod, 1974). Using a tactic pioneered by Blue Cross of Northeast Ohio as early as 1950 (U.S. Department of Health, Education, and Welfare, 1976), some insurers warned that unless hospitals cooperated with public or voluntary health planning, "we will not pay full reimbursement or continue our contract with a hospital" (Walter McNerney, quoted in Somers, 1969, p. 138). In the 1980s, faith waned that health planning could be effectively implemented as a cost-control tool (Schwartz, W., 1981), and much of the federal and state legal framework for health planning was dismantled. Utilization Review Historically, payers have concentrated their cost-containment energies on the unit price of medical services and have directed less attention to the volume of those services provided by institutions and practitioners. Although some hospitals used committees to monitor utilization in an effort to cope with the short supply of hospital beds during World War II, the first explicit use of retrospective utilization review to control fee-for-service payments for unnecessary and inappropriate hospital services seems to have begun in the 1950s (Payne, 1987, p. 724).5 In 1954, Fred Carter, a physician, wrote in The Modem Hospital, "Why not appoint a standing hospital staff committee designated as the 'hospital utilization committee' to do in the field of hospital and medical economics what the tissue committee does . . . in the field of surgery. Abuses in the use of hospital services and facilities coming to the attention of this hospital utilization committee could be disciplined to the point of near deletion" (cited in London, 1965, 5To a considerable degree, this utilization review was built on earlier efforts to standardize medical care delivery and establish mechanisms for overseeing the quality of care (Payne, 1976; Starr, 1982). Before the turn of the century, Florence Nightingale had pioneered techniques for assessing and improving the quality of medical services and spurred advances in the training and use of nurses. In the early 1900s, the Flexner report (1910) stimulated reforms in medical education. Ernest Codman developed techniques to audit medical care and identify corrective strategies for treatment deficiencies. Studies by the American College of Surgeons (ACS) identifying problems in the quality of hospital care led in 1917 to the Hospital Standardization Program of the ACS, which was refashioned after World War II into the Joint Commission on the Accreditation of Hospitals (Roberts et al., 1987). The ACS also initiated the professional activities studies to develop abstracting techniques to help audit committees. Over time other professional societies, such as the American College of Physicians and the American Society of Anesthesiologists, have also worked to develop standards of care and guidelines for medical practice.

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Page 37 p. 77). Apparently, high optimism about the impact of utilization review was born with the idea itself. The 1950s also appear to have seen the first attempt to establish provisions in health benefit plans to encourage or require second surgical opinions (Rutgow and Sieverts, 1989). The United Mine Workers Union tried to institute second opinion requirements but failed because of resistance from organized medicine. It was not until the 1970s that such provisions were successfully introduced by the Store Workers Health and Welfare Fund working with Eugene McCarthy and his colleagues at the Cornell University Medical College in New York City (McCarthy and Widmer, 1974). The San Joaquin County Foundation for Medical Care (FMC), founded in 1954, not only served as a model for many IPAs but also helped inspire several medical societies to organize peer review of health care utilization and quality. FMCs pioneered many utilization review tools, including model treatment profiles to assess physician performance, protocols for reviewing ambulatory care, and computerized screening of claims. By 1973, there were 61 FMCs in 27 states (Egdahl, 1973). Utilization review also spread in other settings (Werlin, 1973). In the early 1960s, more than 60 Blue Cross plans reported programs to review hospital claims for the appropriateness of admissions, and more than 50 looked at the length of stay.6 Some required physicians to certify at admission that hospital care was necessary for cases such as diagnostic and dental admissions, and more than two dozen required physicians to certify the need for continued hospital care after a specified length of stay (Fitzpatrick, 1965; Young, 1965). In an observation echoed many times over the next 25 years, one speaker at a 1964 conference on cost-containment programs observed that insurer staffs had varying opinions on the effectiveness of utilization review, lamenting that "specific data are lacking" (Fitzpatrick, 1965, p. 24). In a prescient comment, Odin Anderson noted in 1968 that as payers showed increasing interest in medical practice patterns, "the central concern of the medical profession today and in the years ahead might well be 'bureaucracy'" (Anderson, 1968, p. 161). To summarize, as third-party payment for medical care services expanded from the 1930s into the 1960s, payers—primarily insurers and 6State insurance commissioners, who often have considerable power over Blue Cross plans by virtue of their power to approve rate increases, spurred some of the utilization review and other cost-containment initiatives of these plans. This was true, for example, in Michigan, Pennsylvania, and New York (Anderson, 1968; Law, 1974). However, these initiatives—at least their outward forms—seem to have spread rather quickly elsewhere without intervention by state officials (Fitzpatrick, 1965). In the late 1950s, many Blue Cross plans were in precarious financial condition (Anderson, 1975).

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Page 47 The value of linking cost and quality concerns is suggested by several developments over the past two decades. For example, the growing support for research on the effectiveness of medical services—support that cuts across purchaser, provider, and consumer interests—might not have materialized based on only cost or quality considerations. In addition, the legislative history of PROs and HMOs suggests that congressional support for these programs depends on their perception that quality of care as well as cost-containment goals are being served. When Congress banned hospitals from making incentive payments to physicians as an inducement to reduce services to Medicare beneficiaries, it also set restrictions on some financial incentives used by HMOs that were to take effect in 1989 (P.L. 99-509). The effective date has been shifted to 1990, and other changes may result from further study of these incentives, but the basic concern about the cost containment/quality link remains (Ready, 1989). The paper on utilization management in HMOs in Appendix B of this report discusses these concerns at greater length. Improving the Tools and Structures for Utilization Management Changing perceptions about the extent of unnecessary medical care and the impact of such care on both cost and quality have been intertwined with changes in information resources, analytical tools, and organizational structures. Although there is substantial need for improvement in each area, these technical and organizational developments have made it more feasible to move from problem identification to problem solving. Information Resources The past two decades have seen many advances in the quality and availability of data on the cost and use of health services. These advances include • greater, though still incomplete, standardization of cost and utilization data from different provider and payer sources; • more rationality and uniformity in the definition and coding of medical diagnoses and services; • creation of more large utilization and cost data bases covering hospital, physician, and other services; and • development of computer software to manage and analyze information. Each of these developments has increased the ability of purchasers, researchers, and others to describe utilization and cost patterns, track changes across time, and identify anomalies. This kind of descriptive

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Page 48 information has been a powerful stimulus for purchaser efforts to reduce inappropriate utilization. The committee recognizes that, despite considerable progress, many problems with the availability and quality of data remain. Studies continue to document imprecise or inaccurate diagnosis and procedure coding, lack of diagnostic codes on most claims forms, only scattered documentation about entire episodes of treatment or illness, errors and ambiguities in preparation and processing of claims data, and limited information on patient and population characteristics (Larks, 1989; PPRC, 1988). However, the momentum for solving these problems is substantial and stems from multiple public and private interests and needs. These include the demands of purchasers for better documentation on claims for payment, the specter of malpractice, the interest of policymakers in data to develop and monitor changes in methods of paying providers, and technological advances in computer hardware and software. Assessment and Education Strategies Assessment and analytic tools that have helped the move toward utilization management include (1) explicit criteria for assessing the appropriateness of medical services, (2) statistical methods for setting utilization norms, and (3) methods for assessing the health status of different patients and population groups. On this analytic base are built feedback techniques for informing physicians about how their practice patterns compare with statistical norms and criteria for appropriate care (Eisenberg, 1986; Wennberg, 1984; Wennberg et al., 1977). Explicit criteria for judging the appropriateness of medical services include methods that are diagnosis-specific and those that are not (Payne, 1987). The studies of carotid endarterectomies and cardiac pacemakers cited earlier rely on the former, whereas studies of the need for hospital admission or clays of hospital care rely on the latter. Statistical norms have been used most frequently to assess lengths of hospital stay and frequencies of diagnostic or treatment procedures. Average lengths of stay for patients in the western United States, which are lower than those for patients in other regions, are frequently used as a standard in continued-stay review. Since one reason that health care use and costs may differ across groups is because the health status of group members differs, much effort has gone into methods to assess how severely ill individual patients are, whether they need to be hospitalized, and how institutions and practitioners vary in the overall severity of their mix of cases. These methods use various approaches, including patient resource consumption, organ system involvement, disease stage, and diagnosis (Aronow, 1988; Hornbrook,

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Page 49 1982). Some rely on claims data; others require abstracted information from medical records. Two cautions should be offered about the current interest in developing medical practice guidelines to influence physician behavior. First, the quality of the relevant medical evidence and the quality of the guideline development process can have major impacts on the soundness and utility of the guidelines. A number of researchers have written persuasively about the limits of clinical research, the lack of fit between some guidelines and relevant clinical evidence, and the problems with methods for generating guidelines (Bunker, 1988; Chassin, 1989; Eddy and Billings, 1988; Schwartz, 1984; Wennberg, 1984). Moreover, empirical research itself can clarify but not fully resolve some questions, for example, whether it is an appropriate use of limited resources to perform cataract surgery to correct small visual deficits. A second caution about the influence of guidelines is that the success of education programs in changing physician behavior is mixed (Donabedian, 1982; HCFA, 1979; Myers and Gleicher, 1988; Restuccia, 1982; Schroeder, et al., 1984; Wennberg et al., 1977; White et al., 1975). One thorough review of research in this area concluded that just presenting facts is not likely to accomplish much in the absence of other facilitating conditions (Eisenberg, 1986). These conditions include a supportive professional environment, a perceived need for the information, an active involvement by respected peers and professional leaders, and careful targeting of quality, utilization, and cost problems. The growth of new contracting and payment techniques that put physicians at financial risk is increasing the perceived need for information feedback to practitioners. Analyses and comparisons of practice patterns may have a greater impact on practitioners when reenforced by the specter of future claims denials, exclusion from an HMO or PPO, or loss of a year-end bonus. Moreover, the skilled use of feedback techniques may avoid the tensions created when the more negative or punitive strategies are actually used. New Organizations . The demand on the part of large public and private purchasers of care for ways to manage, rather than only review, health care utilization has been matched by the emergence of many "suppliers" wanting to take on this role (de Lissovoy et al., 1987; Freund, 1987; Gardner and Scheffler, 1988; InterStudy, 1989; Mayo Clinic, 1988). These suppliers fall into two broad categories: first, organizations that integrate utilization and cost control with service delivery and, second, organizations that offer specialized utilization management services to both health care providers

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Page 50 and purchasers. One 1987 survey of over 700 employers found that about one-third of those covered by the employers' health plans were enrolled in "managed fee-for-service" programs and over a quarter more were enrolled in either HMOs or PPOs (Gabel et al., 1988). The 1980s have seen substantial growth in the number and types of organizations that integrate, to some degree, cost-management and service delivery functions. The number of HMOs has grown from 175 in 1976 to over 600 in 1988, and membership has risen from 6 million to over 32 million (Group Health Association of America, 1988; Interstudy, 1989). A recent survey placed the number of PPOs at over 600 (American Medical Care and Review Association, 1988). Declining hospital occupancy rates and competition for the business of large purchasers has stimulated some of the country's largest multihospital systems and insurers to develop integrated service/insurance products. By 1986, all six of the largest multihospital systems, nine of the largest ten group insurance carriers plus the Blue Cross and Blue Shield system, and six of the eight largest HMO systems had developed some kind of integrated product or products (Patricelli, 1986). These organizations differ in the weight they place on financial incentives, favorable unit prices, utilization management, and other means to control costs. Some, including many PPOs, develop and manage contractual arrangements with health care providers but do not underwrite the cost of services. Others, such as many HMOs, accept risk for the cost of services, although they typically share that risk with their participating hospitals and physicians. The financial incentives used by many of these organizations, such as capitation and bonuses, target both elements of utilization risk, that is, the number of services per episode of care and the number of episodes. Although these arrangements may reassure payers that overuse of services is not being encouraged, that reassurance may be countered by concerns that some needed care will be discouraged (AFL-CIO, 1986; Halowell, 1989).8 These worries are reflected in congressional requirements for PRO monitoring of the quality of care provided to Medicare beneficiaries in capitated HMOs and PPOs (P.L. 99-272) and in proposals that people be informed about financial arrangements for participating providers before they enroll in such health plans (Physician Payment Review Commission, 1989). 8One early critic of bonuses and withholds linked them pejoratively to such historic arrangements as "split fees, kickbacks, rebates, bribes, and so forth." However, these latter incentives have generally been regarded as unethical inducements to over- rather than underutilization (Geist, 1974, p. 1306).

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Page 51 Disappointing earnings, and perhaps increasing concern about regulatory restrictions, have led many sponsors and investors to drop their new products or move out of certain geographic markets. Still, the array of organizations offering integrated service delivery and cost management is larger and more diverse than it was a decade ago and gives employers more leverage than they had in the past. Some of the vertically integrated organizations that remain are promoting and underwriting an integrated health benefit package, the so-called triple option. Such programs, which are not yet widespread, typically allow employees to enroll in an HMO, a PPO, or a traditional benefit plan based on their own weighing of coverage, premium, and freedom of choice of provider. Ideally, since all options are purchased from only one supplier, the employer gets a less complex program to manage plus an integrated premium that helps adjust for any tendency of sicker individuals to choose more generous and expensive plans while healthy individuals choose more restrictive and less expensive alternatives. A variant on this concept is the open-ended HMO that provides limited coverage for nonemergency use of providers outside the HMO panel. A second market response to purchaser demands for cost containment has involved lower entry costs and lower risks than the product integration and triple-option strategies (McGraw-Hill, 1987). Many organizations have been established to offer freestanding utilization management services to providers, insurers, and employers. Although some purchasers, such as prepaid group practices, are well situated to undertake utilization management internally, others, such as many independent practice associations, have found it easier to obtain the services from an external agent. Also, some purchasers prefer not to buy an integrated product. The utilization management industry, although growing fast and coveting an increasing number of benefit plans and beneficiaries, has received little systematic study. This report is designed to help correct that deficiency. Conclusion Much of this century has been devoted, first, to improving the effectiveness of medical treatments, second, to increasing individual protection against the financial burdens of medical services, and, third, to trying to control the economic costs of expanding access to more sophisticated medical care. In each endeavor, various strategies or working hypotheses rise and wane in popularity as initial promising ideas or results are subjected to empirical evaluation, trials of administrative feasibility, or tests of political acceptability.

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Page 52 Most current approaches to controlling costs and improving the appropriateness of care have been tried and revised, with varying degrees of enthusiasm and sophistication, over several decades. Utilization management builds on the gradual accumulation of experience and data that suggest that externally applied assessments of the appropriateness of proposed medical services can constructively influence how care is provided and, as one consequence, help constrain health care costs. The next three chapters describe what we know about the varied ways in which utilization management works. References Abramowitz, Michael, "Governments Pinched by Health Care," The Washington Post, May 28, 1989, p. C1. American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), Department of Occupational Safety, Health and Social Security, Health Care Cost Containment Crisis: Bargaining for Improved Health Care Benefits, Washington, DC, 1986. American College of Surgeons, "Second Surgical Opinion Programs: A Review and Progress Report," Chicago, 1982. American Hospital Association, Hospital Statistics, Chicago, 1988. American Medical Cam and Review Association, Directory of Preferred Provider Organizations, Bethesda, MD, 1988. Anderson, Odin, Blue Cross Since 1929: Accountability and the Public Trust, Cambridge, MA: Ballinger, 1975. Anderson, Odin, Health Care: Can There Be Equity? New York: Wiley, 1972. Anderson, Odin, The Uneasy Equilibrium, New Haven, CT: College and University Press, 1968. Aronow, David B., "Severity of Illness Measurement," Medical Care Review, Fall 1988, pp. 339-366. Bergthold, Linda A., "Purchasing Power: Business and Health Policy Change in Massachusetts," Journal of Health Politics, Policy and Law, Fall 1988, pp. 425-451. Berman, David E., and Gertman, Paul M., "Cost Containment and Quality Assurance," in Federal Health Programs, ed. by Altman, Stuart, and Sapolsky, Harvey, Lexington, MA: Lexington Books, 1981. Blum, John D., Gertman, Paul M., and Rabinow, Jean, PSROs and the Law, Germantown, MD: Aspen Systems Corporation, 1977. Blumberg, Mark S., "Inter-area Variations in Age-Adjusted Health Status," Medical Care, April 1987, pp. 340-353. Brook, Robert H., and Lohr, Kathleen N., "Will We Need to Ration Effective Medical Care?" Issues in Science and Technology, Fall 1986, pp. 68-77. Bunker, John P., "Is Efficiency the Gold Standard for Quality Assessment?" Inquiry, Spring 1988, pp. 51-58. Bunker, John P., "Surgical Manpower: A Comparison of Operations and Surgeons in the United States and in England and Wales," New England Journal of Medicine, January 15, 1970, pp. 135-144. Caper, Philip, "Variations in Medical Practice: Implications for Health Policy," Health Policy, Summer 1984, pp. 110-119. Caper, Philip, Presentation to the Physician Payment Review Commission, Washington, DC, September 1987. Chassin, Mark, "The Containment of Health Care Costs: A Strategic Assessment," Medical Care, October 1978 (Supplement), pp. 1-55.

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Page 53 Chassin, Mark, "Developing Good Medical Standards We All Can Live With," The Internist, May-June 1989, pp. 6-9. Chassin, Mark R., Kosecoff, Jacqueline B., and Park, R. E., "Does Inappropriate Use Explain Geographic Variation in the Use of Health Services?" Journal of the American Medical Association, November 13, 1987, pp. 2533-2537. Chassin, Mark, Kosecoff, Jacqueline, Brook, Robert H., and Solomon, David H., "How Coronary Angiography Is Used," Journal of the American Medical Association, November 13, 1988, pp. 2543-2547. Chinsky, David, Employee Insurance Division, Ford Motor Company, Speech on February 19, 1986. Chollet, Deborah, Uninsured in the United States: The Nonelderly Population Without Health Insurance, 1986. Washington, DC: Employee Benefit Research Institute, October 5, 1988. Congressional Budget Office, The Effects of PSROs on Health Care Costs: Current Findings and Future Evaluations, Washington DC, 1979. Congressional Budget Office, The Impact of PSROs on Health Care Costs: Update of CBO's 1979 Evaluation, Washington, DC, 1981. Congressional Research Service, Health Insurance and the Uninsured, Report to Congress, Vol. 1, Washington, DC, June 9, 1988. Cronin, Carol, "Business Wields Its Purchase Power," Business and Health, November 1988, pp. 4-8. Council on Wage and Price Stability, Executive Office of the President, The Complex Puzzle of Rising Health Care Costs: Can the Private Sector Fit It Together? Washington, DC, December 1976. de Lissovoy, Gregory, Rice, Thomas, Gabel, Jon, and Gelzer, Heidi J., "Preferred Provider Organizations One Year Later," Inquiry, Summer 1987, pp. 127-135. Donabedian, Avedis, Explorations in Quality Assessment and Monitoring, Ann Arbor, MI: Health Administration Press, 1982. Donabedian, Avedis, Benefits in Medical Care Administration, Cambridge, MA: Harvard University Press, 1976. Eddy, David M., and Billings, John, "The Quality of Medical Evidence and Medical Practice," Paper prepared for the National Leadership Conference on Health Care, Washington, DC, 1988. Egdahl, Richard, "Foundations for Medical Care," New England Journal of Medicine, March 8, 1973, pp. 491-498. Eisenberg, John M., Doctors' Decisions and the Cost of Medical Care, Ann Arbor, MI: Health Administration Press, 1986. Eisenberg, John M., et al., "computer-Based Audit to Detect and Correct Overutilization of Laboratory Tests," Medical Care, 1977, pp. 915-921. Ennes, Howard, Testimony in hearings on national health planning and resources development held by the Subcommittee on Public Health and Environment, Committee on Interstate and Foreign Commerce, U.S. House of Representatives, May 8, 1977, in Hearing Record, Serial No. 93-91, pp. 709-718. Epstein, Arnold M., Begg, Colin B., and McNeil, Barbara J., "The Use of Ambulatory Testing in Prepaid and Fee-for-Service Group Practices," New England Journal of Medicine, April 24, 1986, pp. 1089-1094. Ermann, Danny, "Hospital Utilization Review: Past Experience, Future Directions," Journal of Health Politics, Policy and Law, Winter 1988, pp. 683-704. Fitzpatrick, Thomas B., "Utilization Review and Control Mechanisms: From the Blue Cross Perspective," Inquiry, September 1965, pp. 16-29. Flexner, Abraham, Medical Education in the United States and Canada, New York: Carnegie Foundation for the Advancement of Teaching, 1910. Freudenheim, Milt, "A Health Care Taboo Is Broken," The New York Times, May 8, 1989, p. D1. Freund, Deborah A., "Competitive Health Plans and Alternative Payment Arrangements for Physicians in the United States: Public Sector Examples," In Search of an Optimal Incentive Structure in Health Care, special issue of Health Policy, 1987, pp. 163-173.

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