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OCR for page 35
Part TI
Managing Care in the United States
OCR for page 36
OCR for page 37
~2
The Growth of Managed Care
in the Private Sector
Michael Soper and David Ferriss
The private sector is moving rapidly into managed care.) Over the past
two decades, profound changes have occurred in the way health care is
organized and provided. The American health care delivery system has
been transformed from one in which independent, fee-for-service medicine
was dominant to one that is increasingly characterized by multiple health
care delivery systems based on contractual relationships between managed
care organizations and physician and institutional providers. This paper
attempts to identify the factors responsible for this rapid movement toward
managed care and to suggest consequences of this movement for the devel-
opment and dissemination of medical technology.
EMPLOYER-PROVIDED HEALTH CARE BENEFITS
IN THE UNITED STATES
Employee group health insurance has been an accepted employer-pro-
vided benefit for some four decades in the United States (Feldman et al.,
Managed care: A term often used generically for all types of integrated delivery systems,
such as HMOs and preferred provider organizations, implying that they "manage" the care
received by consumers (in contrast to traditional fee-for-service care, which is "unmanaged").
The terms defined in footnotes are based in part on a working paper by Jonathan P.
Weiner and Gregory de Lissovoy of the Johns Hopkins University School of Hygiene and
Public Health, Baltimore, Maryland.
37
OCR for page 38
38
MICHAEL SOPER AND DAVID FERRISS
1989~. Since the end of World War II, an increasing number of employees
and their dependents have been covered by group health insurance plans; in
1988, 153.3 million individuals were covered by some type of employer-
related group health insurance (Health Insurance Association of America,
1990~. These benefits traditionally have been provided through an indemni-
ty insurance program; however, alternative systems of prepaid health care
delivery have existed for some time (Mayer and Mayer, 1985~.
Although employer-provided health care benefits have been of signifi-
cant value to employees, the cost of providing these benefits has become
increasingly burdensome to employers, particularly in an environment char-
acterized by global competition. In a global marketplace, U.S. employers
find themselves at a distinct competitive disadvantage because the high cost
of health care a cost of doing business in the United States-is not always
a factor in the pricing schemes of competitors in other countries (Office of
National Cost Estimates, 1990~.
Even more alarming is the rapid rate at which health care costs have
been increasing over the past two decades (Schieber, 19909. This rise is
evident in the increasing proportion of the gross national product that is
consumed by health care costs. A special concern of employers is that
private-sector health care costs are inflating much more rapidly than those
of the public sector, a fact that many employers and analysts attribute to
cost shifting.
Cost shifting occurs when a health care provider, for example, a hospi-
tal, attempts to meet costs that are not fully covered by one purchaser of its
services by "overcharging" other purchasers-in other words, shifting costs
from one purchaser to another. To the extent that Medicare, as part of the
Prospective Payment System, pays hospitals for services according to flat,
diagnosis-related group (DRG) rates that do not cover a hospital's full costs
for providing a service, the hospital must cover its unmet costs by increas-
ing its charges to so-called passive payers those payers who are not in a
position to negotiate specific reimbursement amounts. Many argue that the
private sector is being "taxed" (or overcharged) to support Medicare through
this type of cost shifting. In a similar fashion, managed care organizations
negotiate reimbursement contracts with hospitals and physicians, a course
of action that effectively removes these organizations from the ranks of the
passive payers. This strategy protects those employers who provide em-
ployee health care benefits through managed care organizations from fur-
ther cost shifting, but it also results in a smaller number of passive payers
onto whom providers can shift future costs. Traditionally, these passive
payers have consisted primarily of indemnity health insurance companies.
Corporate America is quite serious about getting control of medical
costs in order to stay in business; it considers itself literally in a fight for
OCR for page 39
MANAGED CARE IN THE PRIVATE SECTOR
39
survival in an increasingly competitive global marketplace. This desire to
contain medical costs is the major driving force behind the growth of man-
aged care in the private sector.
. . . . ~
the next section of this paper examines
those developments in managed care that have made this rapid growth pos-
sible. Prior to pursuing this theme, however, it is important to point out
that managed care is not the only way to control health care benefit costs.
Two other methods have been considered by employers: (1) relinquishing
employer responsibility for the provision of employee health care benefits,
and (2) sharing more of the costs of health care benefits with employees.
Relinquishing responsibility for the provision of employee health care
benefits by transferring current benefit costs to increased salary and wages
is attractive to many employers, because the inflation of salaries and wages
is much less than that of benefit costs.
The overwhelming majority of
employers, however, realize that this approach is not a realistic option.
Employer-paid health care benefits are firmly established in American soci-
ety and are viewed as more of a right than a benefit by most employees.
Given the current size of the U.S. deficit, it is unlikely that Congress will
solve the significant health care access problems that presently exist by
relieving American business of this responsibility. It is more likely that
Congress will mandate some form of employer-financed health care bene-
fits for those who are employed but who are currently without health care
coverage, and extend public financing only to those who are unemployed.
The second method, sharing more of the costs of health care benefits
with employees, has been extensively pursued by employers during the past
decade. Although first-dollar, 100 percent coverage of health care costs by
major employers was common in the past, it is rare today. This increased
employee cost sharing has taken two forms: (1) employee contributions in
the form of paycheck deductions and (2) the imposition of cost sharing at
the time of receiving benefits.
Employees now tend to shoulder, through paycheck deductions, a high-
er proportion of the total premium cost of health insurance or its equivalent.
This trend is particularly pronounced for the cost of dependent coverage. In
addition, an increasing number of employers have introduced "cafeteria"
benefit plans in which employees may choose what benefits they wish to
purchase with a given number of employer-provided benefit dollars. Such
plans are often an attempt by employers to help employees become more
value-oriented purchasers of benefits, with hoped-for results that include
increased awareness of the cost of employee benefits (in particular, health
care benefits) and a decrease in the inflation rate of this cost.
In addition to increasing employee payroll deductions for health care
benefits, employers have also sought to impose additional cost sharing at
the time health care benefits are received. This most commonly takes the
-
OCR for page 40
40
MICHAEL SOPER AND DAVID FERRISS
form of higher deductibles2 and higher levels of coinsurance.3 Deductibles
of $200, $500, or more are now more the rule than the exception. To
distribute the financial burden of higher deductibles more equitably, an
increasing number of employers now set the deductible as a percentage of
salary; thus, more highly compensated employees will pay a higher deduct-
ible before health care benefits apply than will lower paid employees.
A similar approach has been taken with coinsurance the percentage of
actual health care costs that an employee pays after the deductible has been
met. Current coinsurance levels are typically 20 percent and in some in-
stances may be higher. In addition, employers have increased the maximum
out-of-pocket expense to which an employee is subject. Increasingly, this
amount is also a percentage of the employee's salary rather than a fixed
dollar amount.
The rationale for increasing employee out-of-pocket costs for health
care services has been to give employees a significant personal incentive to
consider carefully the costs as well as the benefits of these services. In
increasing costs, employers would help their employees become more so-
phisticated, value-driven consumers of health care services. Without such
incentives, employers would continue to bear the brunt of higher costs that
anse, at least in part, from unrestricted use of the "health care credit card"
by providers; employees (and providers) would continue to be the sole
beneficiaries of the employer's largesse.
Although employers have pursued increased use of employee cost shar-
ing for health care benefits, there are limits to the extent to which cost
sharing can be imposed. High out-of-pocket costs may pose a significant
barrier to access, thus inadvertently delaying needed treatment, which may
result in poorer outcomes and higher health care costs. A second limitation
comes from the intense dislike of employees for cost sharing and other
"take-aways" from their health care benefits, a fact driven home by the
willingness of organized labor to strike over this issue above all others.
Overall, the use of employee cost sharing to contain health care costs
has not been successful. The "smart shopper" theory has proved to be
flawed with respect to health care; sick patients have neither the inclination
nor the information to shop around for the least costly health care option.
Consequently, the amount of cost sharing that employers can impose on
2Deductible: That amount of covered medical care expense that the insured individual must
pay before insurance benefits become effective (e.g., $200 per individual, $500 per family per
year a deductible may also be calculated on the basis of a percentage of an individual's
annual income.)
3Coinsurance: That portion of the total covered medical expense paid by the insured indi-
vidual after the deductible is met; coinsurance is usually expressed as a percentage of the total
(e.g., 20 percent).
OCR for page 41
MANAGED CARE IN THE PRIVATE SECTOR
41
their employees has probably reached its limit, without appreciably slowing
the health care inflation spiral.
An approach to containing health care costs by means other than in-
creased employee cost sharing is to provide health care services through an
alternative health care delivery system that attempts to give more value for
the dollar in the form of lower costs and improved quality. In addition, its
proponents hope that such an alternative system can favorably affect the
rate at which health care costs are inflating. This is where managed care
organizations enter the picture.
MANAGED CARE AND ITS GROWTH IN THE PRIVATE SECTOR
Managed care organizations do three things: (1) they establish a health
care delivery system composed of physicians, hospitals, and other health
care providers; (2) they merge the role of third-party payer with the role of
provider; and (3) they actively manage the health care delivery process. In
this way, managed care organizations both provide and manage health care,
rather than just pay for it. They are active, not passive, players.
A major advantage of managed care organizations is that they signifi-
cantly reduce the ability of providers to shift costs. Managed care organiza-
tions have contracts in place with both physician and institutional providers
that specify and establish reimbursement arrangements. These arrange-
ments are subject to negotiation and marketplace forces, but they constitute
a real constraint on provider charges. In the private sector, other con-
straints on provider charges are few in number and weak in their effects.
For example, when health care is covered by passive payers, providers
can increase their revenues by increasing the intensity (volume) of the ser-
vice provided. Extensive diagnostic testing, prolonged hospital stays, and
frequent follow-up visits are all examples of increased intensity of services
for which the demand is strongly influenced by provider recommendations.
The marginal benefit of such increased intensity is uncertain at best; fortu-
nately, any potential harm or risk, if costs are not a consideration, seems
even more remote. Given the lack of harm of such practices, little has been
done until recently to interfere with the way providers manage the delivery
of health care services. Indeed, the utilization managements practices of
managed care companies that limit the delivery of some of these services
are the only significant constraints in the private sector.
4 Utilization management: The management of health resources so as to ensure that appro-
priate care is provided. Utilization management activities may include precertification of
specific diagnostic and therapeutic procedures, authorization and concurrent review of inpa-
tient treatment, management of catastrophic illness and injury cases, and discharge planning.
OCR for page 42
42
MICHAEL SOPER AND DAVID FERRISS
The more cost shifting that takes place, the greater the impetus for
private-sector employers to move toward a managed care arrangement to
avoid being the target of unrestricted increases in provider charges and
intensity of services. This desire to avoid cost shifting is a significant
impetus for the growth of managed care in the private sector; coupled with
the desire of employers to eliminate inappropriate utilization of health care
services, it has fueled an ever-increasing demand for managed care.
Changes have occurred in the managed care industry over the past 20
years to meet the demand of employers who want to move their employees
into managed care delivery models. Such changes have been necessary to
spur the development of a sufficient number of managed care organizations
(all major health insurers now sponsor one or more) and more flexible
products that encourage employees and their dependents to give up their
historical freedom to choose their physicians and hospitals from among all
of those available.
Although the concept of prepaid health care was well established prior
to the 1970s, the Health Maintenance Organization Act of 1973 provided
significant impetus to the health maintenance organization (HMo)5 move-
ment. The act was important in three respects: (1) it provided federal
grants and loans for the development of new HMOs; (2) it superseded exist-
ing legislation in approximately 20 states, thus removing bamers to this
type of health care delivery system; and (3) it provided an additional mea-
sure of credibility for HMOs as well as mandating employers to offer HMOs
to their employees when HMOs were available (Soper et al., 1990~.
SHealth maintenance organization (HMO): A prepaid organized delivery system in which
the organization and the primary care physicians assume some financial risk for the care
provided to enrolled members. The term health maintenance organization was coined by Paul
Ellwood for the Nixon administration in 1972. It constituted a renaming of two existing
delivery models: prepaid group practices ("closed-panel" plans) and independent practice
associations (IPAs, or "open-panel" plans). Currently there are four basic HMO models:
Staff-model HMO: A type of HMO in which the majority of enrollees are cared for by
physicians who are on the "staff" of the HMO. Although these physicians may be involved in
risk-sharing arrangements, a majority of their income is usually derived from a fixed salary.
Group-model HMO: A type of HMO in which a single large multispecialty group prac-
tice is the sole (or major) source of care for HMO enrollees.
Network-model HMO: A type of HMO in which a "network" of two or more existing
group practices have contracted to care for the majority of patients enrolled in an HMO. A
network-model HMO sometimes also contracts with individual providers in a fashion similar
to the operation of an IPA-model HMO.
Independent practice association or IPA-model HMO: An "open-panel" type of HMO in
which individual physicians (or small group practices) contract to provide care to enrolled
members. The primary care physicians may be paid by capitation or by fees for service, often
with a "withhold" risk-sharing provision. Physicians who participate in IPA-model HMOs
retain their right to treat non-HMO patients on a fee-for-service basis.
OCR for page 43
MANAGED CARE IN THE PRIVATE SECTOR
43
In 1973, when the HMO Act was passed by Congress, only about 2
percent of private-sector employees were receiving their health care through
HMOs. It was hoped that the new legislation would impel rapid growth of
the HMO concept of comprehensive benefits and limited cost sharing within
a cost-effective system of health care delivery. Despite high hopes, howev-
er, HMO growth during the 1970s was slow; other changes in the managed
care model were necessary to bring about the eagerly anticipated growth of
the concept.
One of these changes was a greater opportunity for developing indepen-
dent practice association (IPA) HMOs. At the beginning of the 1970s,
virtually all HMOs were of the staff- or group-model type. As these HMOs
became successful and attracted increasing numbers of patients who were
seeking more comprehensive benefits, physicians in private practice became
concerned. The IPA-model HMO began to be viewed as a way for physi-
cians to compete with the staff- and group-model HMOs without abandon-
ing the private practice of medicine.
The development of IPA-model HMOs, which used the basic building
blocks of mainstream medicine, allowed HMO growth to accelerate. This
type of HMO avoided the problem of enormous cash outlays for building
health care facilities and hiring physicians before sufficient members were
enrolled. In the early 1980s, it became possible for for-profit companies to
raise capital and invest in the development of IPA-model HMOs; this trend
also facilitated the growth of the HMO movement.
As a result of these developments, most of the growth of HMOs in the
1980s came from IPA-model health plans rather than from staff- and group-
model plans. IPA-model HMO enrollment increased from 19 percent of
total HMO enrollment to 41 percent during 1980-1990. In 1985-1986 in
particular, IPA-model HMOs surged in popularity, increasing from 181 to
345 (InterStudy, 1991~.
The second important factor contributing to the rapid growth of man-
aged care in the private sector has been the development of point-of-service
(poS)6 products, also referred to as open HMOs or open-ended HMOs.
InterStudy, the Minneapolis-based HMO think tank founded by Paul Ell-
wood, characterizes these health care benefit products as follows: (1) peo-
ple enroll in an HMO; (2) the HMO permits them to receive services out-
side of the HMO provider network without referral authorization but requires
them to pay an additional deductible or a copayment, or both, to do so; (3)
6Point-of-service (POS) plan (also called an open-ended HMO or open HMO): A type of
HMO in which the enrollees are not "locked in." Enrollees may leave the HMO and still have
certain services covered. Such out-of-plan utilization is usually subject to a significant degree
of cost sharing (e.g., deductibles and coinsurance) unlike those services delivered within the
plan.
OCR for page 44
44
MICHAEL SOPER AND DA VID FERRISS
coverage is offered under a financing mechanism similar to traditional in-
demnity insurance and is available at any time service is desired; and (4)
benefits for services received outside the HMO network are typically less
comprehensive than the HMO benefit and usually include deductibles, co-
payments, or coinsurance (InterStudy, 1991~.
Behind the popularity of point-of-service products popularity that ex-
tends both to employees and employers-is the fact that Americans like to
have choices. Many Americans do not wish to give up entirely, in return
for better benefits and lower out-of-pocket costs, the freedom to choose
their own physicians and hospitals. The point-of-service product allows the
employee to take advantage of the. ~.omnr~hf~nci~P Unfit ^~ ~= lava Or
to ~ ~ ~<~ ~ DIVE ~ _ V~A_~4~ in ~1~ 1w W
out-of-pocket costs associated with HMO membership while retaining the
right to seek care outside the HMO system from any licensed provider in
return for higher deductibles and coinsurance. Employees can try the HMO,
but if they find it not to their liking, they are not locked in to using it.
Point-of-service health care benefit products also have advantages for
employers. Employers can offer their employees a single product that can
operate either as a traditional HMO or as a traditional indemnity health
insurance program. Employees who always use the HMO system receive
all the benefits associated with membership in a traditional HMO; employ-
ees who ignore the HMO and consistently seek care from other providers
still have indemnity benefits; and employees who use the plan in both ways
have increased flexibility in meeting their health care needs.
Point-of-service products have also allowed employers with traditional
indemnity programs to ease their employees into a more flexible managed
care program without completely mandating that employees use only the
HMO system of physician and hospital providers. The employer's hope, of
course, is that employees will be attracted to HMO providers whose use
ensures the most comprehensive benefits and least out-of-pocket cost. The
benefits to the employer are better control of costs and an environment in
which quality can be monitored and improved. As point-of-service prod-
ucts become more acceptable to employees, employers are likely to increase
significantly the cost to employees of the opt-out component of such plans.
Doing so will preserve freedom of choice but attach such a high price to it
that receiving care outside the system will not ha. ~ r~.nli~tir. tinting for Brat
emolovees in most c.
.
rat aim
~- - - ~ ~
Thus, the widespread development of IPA-model health plans and the
availability of point-of-service products are facilitating the growth of man-
aged care in the private sector, the implications of which are significant for
the U.S. health care delivery system. As managed care becomes the domi-
nant model for providing health care benefits, there will be fewer and fewer
people to whom costs can be shifted, and cost shifting will come to an end.
When no one is buying "retail" anymore, the "wholesale" price will have to
OCR for page 45
MANAGED CARE IN THE PRIVATE SECTOR
45
be sufficient to cover the costs of providers of health care services. Less
efficient providers that are unable to cover their costs will be forced to
close. The most likely result will then be a far smaller number of more
efficient, competing health care delivery systems rather than the thousands
of independent physicians and dozens of redundant hospitals found today in
most major urban areas. There will still be choices, but they will be fewer
in number.
IMPLICATIONS OF MANAGED CARE FOR
TECHNOLOGY DEVELOPMENT AND DISSEMINATION
If, indeed, managed care continues to grow in the private sector, what
are the implications of this growth for the development and dissemination
of medical technology? The remainder of this paper addresses this ques-
tion, particularly in the light of Wennberg's argument (in this volume) in
support of global limits on health care resources as opposed to managed
care.
In his paper, Wennberg argues for reform of the currently dominant
delegated decision model in which the physician, without adequate knowl-
edge of the shape of the benefit-utilization curve or the risk-benefit prefer-
ences of the patient, makes decisions regarding what patients need and want
with respect to medical care. Wennberg advocates a shared decision model
based on outcomes research and a sensitivity to the desires of the patient.
He contrasts this model with managed care, a model, he argues, that con-
centrates on micromanaging physician decision making in the face of limit-
ed knowledge and without considering the desires of the patient. Both
models, in Wennberg's assessment, are unlikely to control the continuing
escalation in health care costs. To achieve this objective, Wennberg advo-
cates a health care system that imposes global limits on the availability of
health care resources. Such limits, he claims, will eliminate excess capacity
(and therefore reduce costs) without compromising access to care that is
medically appropriate and desired by patients. Wennberg cites studies of
geographic variation in hospital utilization as evidence that physician and
hospital bed supplies are in excess of what is required to provide care that is
both effective and desired by patients.
Although it is true that managed care to a large extent has concentrated
on reducing cost shifting, unnecessary hospital days, and inappropriate sur-
gical procedures, it has also focused on improving the quality of medical
care and the service that patients receive-that is, the outcomes of care,
including patient satisfaction. This paper suggests that the managed care
model has the greatest potential for bringing about both the transformation
of the medical decision-making model and the appropriate allocation of
health care resources that Wennberg advocates.
OCR for page 66
66
H.GILBERT WELCH AND ELLIOTT S.FISHER
TABLE 5-1 Weights Assigned to Various Health States Based on
Responses from a Random Telephone Survey of 1,000 Oregonians
Health State
Functional Impairment
Unable to drive
In hospital/nursing home
Limited in recreational activity
Need help going to the bathroom or eating
In wheelchair or walker under own control
In bed or wheelchair controlled by someone else
Symptom
Wear glasses or contact lens
Loss of consciousness (fainting, seizures, coma)
Prescribed medication or diet
Trouble talking
Unable to stop worrying
Overweight or facial acne
Pain in ear/trouble hearing
Trouble falling asleep or staying asleep
Pain or discomfort in eyes
Pain or weakness in back or joints
Difficulty walking
Severe fatigue/weakness
Trouble with sexual performance
Itchy rash over large area
Pain with urination or bowel movement
Headaches or dizziness
Cough/wheezing/trouble breathing
Drainage from sexual organs
Often depressed or upset
Trouble learning or remembering
Stomach ache/vom~ting/diarrhea
Severe burn over large area with pain
Trouble with the use of alcohol or drugs
- , ,-
Weight
.,,
.954
.951
.938
.894
.627
.440
.945
.886
.877
.812
.785
.785
.783
.752
.752
.747
.747
.725
.724
.703
.701
.695
.682
.675
.674
.633
.630
.628
.545
Note: 0 = death; 1 = perfect health. The standard deviation of all weights is < .02.
ness formula produced a preliminary priority list, which was released in
May 1990. The list ranked 1,600 medical treatments, and it contained
several serious flaws. Effectiveness and cost data were, of course, limited.
But the major problem related more to the cost-effectiveness method itself,
which seemed to favor minor treatments over life-saving ones. Widely
criticized rankings included the priority of tooth capping over appendecto-
my, reconstructive breast surgery over treatment for open fracture of the
thigh, and treatment for crooked teeth over treatment for Hodgkin's disease.
OCR for page 67
PUBLIC-SECTOR COST CONTAINMENT: OREGON
67
Transplantation again was near the bottom of the list. Overall, there was
widespread unhappiness with the ranking both inside and outside Oregon.
In response, the commission adopted a new approach that modified the
foregoing quantitative method by incorporating the consensus views of the
commission. The final ranking was the result of three steps. First, to make
the ranking more manageable, the commission chose to classify the list of
condition-treatment pairs into 17 health service categories, which were then
ranked relative to one another. Second, condition-treatment pairs were
ranked within each health service category. Third, the 17 separate lists
were combined, and those condition-treatment pairs that were judged by the
commission to be out of order were reranked.
In step 1, the 17 categories were ranked by summing the weighted
category scores derived by each commission member. Before considering
individual categories, each commissioner assigned a relative weight (out of
a total of 100) to each of the three general attributes identified from the
public meetings. The mean weights of the 11 commissioners were as fol-
lows: value to society '10 (range: 20 to 60~; value to an individual-20
(range: 0 to 401; and importance to basic health care-40 (range: 20 to 50~.
An individual commissioner's weight was held constant across categories.
For each attribute, a commissioner assigned a value of from 1 to 10 to each
of the 17 categories. A value of 1 and a value of 10 each had to be assigned
to at least one category to ensure a distribution of scores. (A commissioner
who had weighted "value to an individual" as only 5, for example, must still
have assigned a value of 10 to at least one category for that attribute.)
After the initial assignment, category values that were discovered to differ
markedly from those of other commissioners could be modified. A summa-
ry score for all commissioners was then calculated, which determined the
ranking of the 17 categories (Table 5-2~.
In step 2, the commissioners worked within categories. They first cal-
culated the net benefit of treatment for each condition-treatment pair. The
probability of different outcomes (e.g., death, trouble breathing, need for
prescription medicine, return to former health state), both with and without
treatment, were incorporated in the net benefit formula:
Net Benefit = "outcomes with treatment x probabilities]
toutcomes without treatment x probabilities]
Probabilities for death, return to former health state, and intermediate out-
comes were multiplied by a value for each health state. The value for death
was 0; the value for return to a former health state was 1. Intermediate
health states were assigned values obtained from the telephone survey (see
Table 5-1~.
The ranking of condition-treatment pairs within each category (step 2)
was completed by acknowledging the cost of treatment and the number of
OCR for page 68
68
H. GILBERT WELCH AND ELLIOTT S. FISHER
TABLE 5-2 Ranking by Members of the Oregon Health Services
Commission of 17 Health Service Categories
Rank Category Description (number of condition-treatment pairs in category)
3
4
s
6
7
8
9
10
11
12
13
14
15
16
17
1 Acute fatal treatment prevents death with full recovery (64)
Maternity care (53)
Acute fatal treatment prevents death without full recovery (61)
Preventive care for children (4)
Chronic fatal- treatment improves life span and quality of life (180)
Reproductive/contraceptive services (4)
Palliative care death is imminent (2)
Preventive dental care (1)
Proven effective preventive care for adults (3)
Acute nonfatal treatment allows return to previous health state (60)
Chronic nonfatal one-time treatment improves quality of life (107)
Acute nonfatal treatment without return to previous health state (28)
Chronic nonfatal repetitive treatment improves quality of life (80)
Acute nonfatal treatment expedites recovery from self-lim~ted conditions (31)
Infertility services (4)
Less effective preventive care for adults (1)
Fatal or nonfatal treatment confers minimal or no improvement in quality of life (31)
individuals who would potentially benefit from the treatment. The commis-
sion reordered condition-treatment pairs within a category to account for
these factors. However, they also noted the difficulty of obtaining cost data
in general, the limited ability to determine which costs could reasonably be
attributed to treatment of a condition, and the virtual absence of data on the
costs associated with no treatment. The minimal impact of cost data was
demonstrated by a correlation analysis performed after the final ranking,
which showed no correlation between cost and final rank.
In step 3, the 17 separate priority lists (one for each category) were
entered as blocks into a single document based on their category rank (i.e.,
all condition-treatment pairs in category 1 were placed on top, followed by
those in category 2, etc.~. Selected condition-treatment pairs were then reor-
dered "to reflect the clinical and public policy judgement of the Commis-
sion" (Oregon Health Services Commission, 1991~.
RESULTS
The commission finalized the priority list on February 20, 1991. More
than 60 pages long, it contains 714 condition-treatment pairs. Each entry
includes diagnosis, treatment, the ICD-9 (the World Health Organization's
International Classification of Disease, 9th ea.) coders) for the listed diag
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PUBLIC-SECTOR COST CONTAINMENT: OREGON
TABLE 5-3 Condition-Treatment Pairs with Extreme Rankings
Rank Category Condition Treatment
69
1 1 Pneumococcal and other bacterial pneumonia Medical
2 5 Tuberculosis Medical
3 1 Pentonii~s Medical/surgical
4 1 Foreign body in airways or esophagus Removal
5 1 Appendicitis Appendectomy
710 17 Constitutional aplastic anemias Medical
711 11 Prolapsed urethral mucosa Surgical
712 17 Central retinal artery occlusions Paracentesis
of aqueous humor
713 17 Extremely low birthweight (< 500 grams) Life support
and < 23 weeks' gestation
714 17 Anencephaly Life support
aThose cases for which treatment confers minimal or no improvement of quality of life.
TABLE 5-4 Ranking for Common Condition-Treatment Pairs
Rank Category Condition Treatment
16
48
144
176
292
305
317
318
337
393
408 11
478
502
586
685
9
s
5
11
11
11
700
13
10
13
17
Gallstones with cholecystitis
Acute myocardial infarction
Streptococcal sore throat
Angina pectons
Non-life-threatening arrhythmias
Chronic obstructive pulmonary disease
Hyperplasia of prostate
End-stage renal disease
Cataract (adult)
Osteoarthritis
Transient cerebral ischem~a
Osteoarthritis
Transient cerebral ischeniia
Intervertebral disc disorders (back)
Gallstones without cholecystitis
14 Acute upper respiratory infections
Cholecystectomy
Medical
Medical
Medical/surgical
Pacemaker
Medical
Transurethral
resection
Dialysis
Removal
Arthroplasty
Endarterectomy
Medical
Medical
Laniinectomy
Medical/
cholecystectomy
Medical
nosis, the CPT- 4 (Current Procedural Terminology, 4th ea.) coders) for the
treatment or procedure, the category number, and the rank. The calculated
net benefit influenced the final ranking (Pearson correlation coefficient =
.47, p < 0.0001~. The rank of a condition-treatment pair was also strongly
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70
H.GILBERT WELCH AND ELLIOTT S.FISHER
TABLE 5-5 Ranking of the Various Indications for Solid Organ
Transplantation
Rank Condition Organ Transplanted
. ~..
311 End-stage renal disease Kidney
363 Biliary atresia Liver
364 Cirrhosis of liver no mention of alcohol Liver
365 Myocarditis or pulmonary hypertension Heart
366 Acute hepatic necrosis Liver
507 Diabetes and end-stage renal disease Pancreas/kidney
609 Alphal-antitrypsin deficiency Lung
612 Hepatic cancer Liver
695 Alcoholic liver disease Liver
Note: All condition-treatment pairs are in category 5, with the exception of acute hepatic
necrosis, which is in category 3.
TABLE 5-6 Ranking of the Various Indications for Bone Marrow
Transplantation and Alternative Therapies
Condition
BMT Alternative
Rank Alternative Therapy Rank
Hodgkin's disease 208 Chemotherapy/radiation 188
Acquired aphasic anemia 213 Medical 259
ALL (child) 243 Chemotherapy/radiation 235
ALL (adult) 243 Chemotherapy/radiation 307
Agranulocytosis 248 None N. a.
Constitutional 306 Medical 180
aplastic anemia
ANLL 310 Chemotherapy 517
Chronic leukemias 518 Chemotherapy/radiation 278
Non-Hodgkin's lymphoma 696 Chemotherapy/radiation 238
Note: Alternative therapies listed in boldface are ranked higher than bone marrow transplanta-
tion for the listed indication. All condition-treatment pairs are in category 5.
Abbreviations: BMT, bone marrow transplantation; ALL, acute lymphocytic leukemia; N.a.,
not applicable; ANLL, acute nonlymphocytic leukemia.
influenced by the rank of its health service category (Pearson correlation
coefficient = .83, p < 0.0001~.
Tables 5-3 through 5-7 give the reader a feeling for the final ranking as
well as an opportunity to consider its face validity. Table 5-3 shows the
condition-treatment pairs ranked at both extremes (the five highest and the
five lowest ranks). Antibiotic therapy for bacterial pneumonia tops the list;
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PUBLIC-SECTOR COST CONTAINMENT: OREGON
TABLE 5-7 Ten Randomly Selected Condition-Treatment Pairs
71
Rank Category Condition Treatment
86 3 Subarachnoid and intercerebral BUIT holes/
hemorrhage craniotomy
246 5 Pernicious anemia Medical
254 5 Opportunistic infections in Medical
immunocomprom~sed hosts
273 5 Regional enteritis Medical/surgical
383 13 Cerebral palsy Medical
490 11 Ganglion of tendon or joint Excision
494 5 Histiocytosis Medical
520 5 Anomalies of the gallbladder, bile Medical/surgical
ducts, and liver
674 14 Acute pharyngitis and laryngitis Medical
706 17 Cyst of the kidney (acquired) Medical/surgical
life support for a newborn with anencephaly is at the bottom. Table 5-4
shows the rankings for common condition-treatment pairs. For the two
conditions for which medical and surgical treatment are listed separately,
surgical therapy has the higher rank. Arthroplasty (e.g., hip replacement)
has higher priority than medical therapy for osteoarthritis; endarterectomy
has higher priority than medical therapy for cerebral ischemia.
The motivation for the priority list was, in part, the recognition that the
decision to curtail funding for organ transplantation had been arbitrary.
Tables 5-5 and 5-6 demonstrate that organ transplantation is no longer at
the bottom of the list. Table 5-5 shows the rankings of various indications
for solid organ transplantation. These ranks were, in general, lower than
those for bone marrow transplantation. Table 5-6 demonstrates the level of
detail used by the Health Services Commission for this single procedure.
Nine indications for marrow transplantation are shown, as are eight alterna-
tive treatment strategies. Five of the alternative treatments (boldface) have
a higher rank than marrow transplantation.
Finally, to offer the reader an unselected sample, Table 5-7 includes 10
condition-treatment pairs drawn at random.
DISCUSSION
The level of funding provided by the Oregon state legislature will ulti
mately determine which condition-treatment pairs are covered. The result
ing benefit package, once a federal waiver is approved, will apply to the
Medicaid program and will also serve as the minimum benefit package to be
offered under the mandated employer-based insurance. Despite the fact that
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72
H. GILBERT WELCH ANI)ELLIOTTS.FISHER
the results of the priority list may only apply to a segment of the popula-
tion, the Oregon experience deserves scrutiny for its potential relevance to a
more universal health insurance plan.
The mandate of the Oregon Legislative Assembly to develop a "list of
health services ranked from the most important to the. 1~.~t imn~rt~nt" is
particularly daunting task.
Because no prototype was available for guid-
ance, the Health Services Commission was forced to break new ground.
Thousands of volunteer hours were devoted to the process by both profes-
sionals and ordinary citizens. The community meetings and telephone sur-
veys represent a level of public input rarely solicited in health policy plan-
ning. Any health professional who reviews this process will be impressed
by the effort committed to the task.
But they will be equally impressed by the problems facing this kind of
micromanagement. Three are particularly noteworthy. The first is accura
Adapting either cost-effectiveness analysis or a consensus approach to
such a comprehensive task was bound to be fraught with problems
~_ :1 _ ^~
cy.
_ c, . . ~ ~ ~ ~ ~ _,~, ~ .
.
For
By c;ona~on-~rea~ment pairs there are few data on effectiveness, a prob-
lem compounded by the difficulty of comparing dissimilar benefits. Where-
as the extreme high and low ranks shown in Table 5-3 have legitimate face
validity, the relative priorities of more closely ranked services are, with
good reason, open to question. For example, the higher priority (rank =
;~) assigned to treatment for end-stage renal disease in comparison with
treatment for cataracts (rank = 337; see Table 5-4) may engender vigorous
debate. Furthermore, because a line must ultimately be drawn, the accuracy
of adjacent ranks is relative. For example. in T~hl~. ~ ~ ic it ~r~r~rm~riatm try
~· , . . . .. ~
- ~~ ~-~~~~~c-~~~ ~ ~~~~ ~ - ~ -~ ^~ ~$-~w V
Iuna nears transplantation tor myocarditis (rank = 365) and not fund liver
transplantation for acute hepatic necrosis (rank = 366~? Because the avail-
able data were limited and the methodologies not sufficiently mature, the
commission was forced to make decisions that in retrospect appear arbitrary
and may not be reproducible.
More important is the problem of heterogeneity. Even if perfect data
were available and a consensus about the rankings could be obtained, ex-
ceptions would exist. Priorities that make sense for the population as a
whole may fail miserably for the specific case. Although internists may be
unhappy to learn that arthroplasty (rank = 393) is more valued than ibupro-
fen (rank = 478) in the treatment of osteoarthritis, it may be defensible to
rank definitive treatment over palliation. For a patient with mild pain or
one with extreme surgical risk, however, it is farcical. In addition, the
heterogeneity of patient preferences is relevant (Barry et al., 19889. The
ranking of surgical procedures above their medical alternatives ignores those
patients who may prefer less invasive therapy. Although it is easy for
clinicians to imagine such exceptions, it is difficult for policymakers to
incorporate them into a set of priorities.
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PUBLIC-SECTOR COST CONTAINMENT: OREGON
~3
Finally, there is the problem of administration. Since the priorities are
catalogued by diagnosis, physician discretion in the choice of diagnosis
could have a dramatic impact on the rank assigned their therapy. Some
consideration must be given to the problem of "gaming" by physicians,
particularly if financial incentives to do so persist. Will cultures be re-
quired to ensure that physicians are treating strep pharyngitis (rank = 144)
and not the common cold (rank = 7009? How can cholecystectomies for
symptomatic cholelithiasis (rank = 16) be distinguished from those for
asymptomatic stones (rank = 6859? The incentives for providers to-inflate
diagnoses will be powerful when rank determines whether reimbursement
occurs. Furthermore, it is unclear how a priority list can deal with patients
whose symptoms have yet to be diagnosed or whose diagnosis does not
appear on the list.
Recognition of these problems has led Oregon's legislative leaders to
emphasize a strategy that combines the priority list with capitation. In
essence, however, it is a strategy that combines micromanagement with
global limits. The priority list will define the benefit package on which the
capitated rate will be based. Physicians will be free to prescribe treatments
outside the benefit package but with no increase in total reimbursement.
This approach will go a long way toward solving the problem of heteroge-
neity by allowing for a more flexible allocation process tailored to the
individual patient. By addressing incentives directly, capitation should lessen
the problem of gaming. How capitated health systems will actually imple-
ment the priority list, however, remains unknown. Where capitation is im-
practical (e.g., rural Oregon), the problems of heterogeneity and administra-
tion are likely to be more severe. Clearly, regardless of reimbursement strategy,
implementation of a priority list in clinical practice will be difficult.
On the other hand, there are certain aspects of a priority list that would
offer benefits to physicians. The current pressures for cost containment
force the health care system and the nation to face the problem of which
services to deliver and to whom. Societal guidance about these choices
would be appreciated, for two major reasons. The first is to mitigate the
problem of malpractice by establishing agreed-upon standards of care that
recognize the current environment of limited resources. Second, and more
importantly, a system of public priorities will provide the ethical foundation
needed to curtail services with token or undetermined benefit. A public
policy not to support extremely low birthweight infants (rank = 713) could
serve as an important example.
In addition, a priority list might benefit society as well. Such a list
forces explicit decisions about how to use limited resources and encourages
public scrutiny of the process employed to make those decisions. Current-
ly, much of this decision making is underground, and resource allocation
decisions vary considerably. Because decisions are neither standardized
_
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74
H. GILBERT WELCH AND ELLIOTT S. FISHER
nor publicized, there is little opportunity for public input. Application of a
priority list within a universal health insurance plan might mitigate such
problems.
The need to set limits in health care coverage is sufficiently acute to
warrant a consideration of priority setting, despite its problems. Admitted-
ly, many refinements are needed. A more comprehensive approach will
require evaluation of more condition-treatment pairs. The RAND Corpora-
tion, for example, defined 864 distinct indications for carotid endarterecto-
my alone (Chassin et al., 1987~. The problem of whose set of utilities are
used to define health states also needs attention. The tension between using
an unselected population (which may have minimal symptom experience)
and diseased populations (which may have a tendency to inflate those symptoms
they would experience without treatment) will have to be addressed (Mul-
ley, 1989~. More consideration should also be given to the measurement of
cost. Eventually, incremental cost must be calculated with careful consider-
ation given to what is chosen as alternative therapy (Detsky and Naglie,
1990~. And, of course, more and better data are needed.
Finally, given the objectives of this volume, the relationship between
priority setting and technological innovation requires exploration. It is
possible that the process of establishing priorities may change the rate of
technological advance; it is also possible that technological advances will
drive new priorities. The latter is certainly the case for a single state,
whose health policy can have only minimal impact on innovation in medi-
cine. On the one hand, Oregon has acknowledged the potential impact of
new technologies on the priorities it has already established and intends
periodically to reconsider its rankings. On the other hand, a widely applied
priority list could influence the rate of technological advance with re-
search on low-priority conditions and treatments Reemphasized. Although
the rate of technological innovation is largely determined by the resources
that are available, explicit priorities may govern where innovation occurs.
Explicit priority setting has an important contribution to make in deter-
mining what health care services to purchase in an era of limited budgets.
It is especially relevant to health systems working within global limits, such
as Britain's National Health Service (see Chapter 6~. The efforts being
made in Oregon ought to advance this process. The state's approach has
and will continue to foster vigorous debate (Duggan, 1989; Gore, 1990;
Relman, 1990; Schwartz and Aaron, 1990; Hollingsbaum, 1991~. The meth-
odology used to create the priority list is likely to undergo extensive peer
review. The ranks of individual condition-treatment pairs undoubtedly will
be a source of considerable dispute, encouraging further efficacy and cost-
effectiveness research. Finally, Oregon's efforts should encourage those
who say such a method is unworkable to develop some alternative.
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PUBLIC-SECTOR COST CONTAINMENT: OREGON
ACKNOWLEDGMENTS
75
The authors appreciate the efforts of W. Pete Welch, Ph.D., and Jenni-
fer Dixon, M.D., for their assistance in this work. In addition, they are
particularly indebted to the staff of the Oregon Health Services Commission
and the Oregon Senate President's Office who were exceptionally respon-
sive to requests for information.
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Representative terms from entire chapter:
health insurance
