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Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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).

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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).

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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image

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

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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).

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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health maintenance organizations (HMOs)—tried various tools to control these costs. These tools may have had some impact, but they often were neither rigorously applied nor rigorously evaluated. In general, concerns about controlling costs were still overshadowed by society's desire to expand access and improve health outcomes through the development and implementation of advances in medical care.

Government and Employer Involvement

Two major developments differentiate third-party involvement in containing health care costs during the periods before and after 1965. The first is the entry of the federal government as a powerful force for both cost escalation and cost control. Second, and somewhat later, private employers began serious efforts to control their expenditures for employee health benefits.

Federal Government Initiatives

The federal government's interest in health care cost containment was prompted primarily by its creation in the 1960s of two major health benefit programs: the federal Medicare program for the elderly and the federal and state Medicaid program for some of the poor. (The latter program also gave states an increased stake in containing health care costs.) Both programs responded to inadequacies in private group insurance as a means for covering high-risk or low-income individuals. Government's stake in health costs consequently increased. State and federal spending for personal health care services rose from 22 percent of total spending on these services in 1960 to 40 percent by 1980 (Table 2-2).

When Congress established the Medicare and Medicaid programs in 1965 to increase access to health services, it also recognized the need for constraints against overuse of services. The initial strategy was to expand and strengthen provider-based utilization review. Hospitals and extended-care facilities were required, as a condition of participation in Medicare, to have operational utilization review committees to assure the medical necessity and quality of care "without involving government in day-to-day hospital operations" (Mills, 1967). This was consistent with the preamble to the Medicare legislation, with its famous prohibition against federal "supervision or control over the practice of medicine or the manner in which medical services are provided" (P.L. 89-97).

The costs of the Medicare program soon climbed at rates far above what was predicted when the program began. As one result, policymakers came to view the strategy of delegating utilization review as ineffective, "more form than substance" (U.S. Congress, Senate, 1970). In addition, the

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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medical profession and some consumer groups were complaining about the claims reviews and payment denials instituted by the private contractors that processed Medicare claims. The U.S. Department of Health, Education, and Welfare had required these activities—which some contractors already used in their private business—when they saw that expenditures were quickly exceeding projections (Blum, et al., 1977; Law, 1974).

In the Social Security Amendments of 1972 (P.L. 92-603), Congress provided for the establishment of PSROs to control costs and improve the quality of care through independent peer review. Building on many of the concepts developed by the Foundations for Medical Care and the Experimental Medical Care Review Organizations (federal demonstration projects beginning in 1971), PSROs were to be physician-controlled community organizations that would develop and apply professional standards to the review of institutional health services (Blum et al., 1977; Ermann, 1988; Gosfield, 1975; Nelson, 1984). The law required PSROs to perform concurrent review, but preadmission and retrospective review were optional. In their decade or so of existence, the PSROs designed and refined many of the data collection and analysis techniques used by successor organizations to serve both public and private purchasers.

Congress also got interested in the mid-1970s in second surgical opinion programs as a means of reducing unnecessary surgery. A congressional subcommittee stated that there were more than 2 million unnecessary operations each year, a figure it reached by extrapolating from rates of nonconfirming second opinions found in early research (American College of Surgeons, 1982). Although researchers disavowed this kind of projection, the figures got a lot of attention and helped persuade Congress to authorize demonstration projects to test second-opinion programs for Medicare and Medicaid beneficiaries.

Despite some positive accomplishments, the PSROs—like hospital-based utilization review—disappointed policymakers (Berman and Gertman, 1981; Chassin, 1978; Congressional Budget Office, HCFA, 1979, 1981; Institute of Medicine, 1976; Nelson, 1984). Most PSROs delegated review to hospitals (Ermann, 1988), and the PSROs had little power to penalize physicians for inappropriate practices. Also, general problems in the economy of the United States—the combination of high inflation and low economic growth—complicated efforts to contain costs.

In 1982, Congress replaced PSROs with statewide "utilization and quality control peer review organizations," PROs for short (P.L 97-248) (Gosfield, 1989). Three years later, Congress added a requirement for PROs to manage a focused second-opinion program, a provision not actually implemented until 1989. Appendix C of this report describes some ways in which PROs tend to differ from private review organizations. Many PROs also have review contracts with private employers.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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Utilization review by PROs was intended to supplement and monitor another reform that most viewed as much more important—the introduction of the prospective payment system (PPS) for hospital services provided to Medicare beneficiaries. PPS itself was another response by government policymakers to the frustration with earlier cost-containment efforts, for example, the Economic Stabilization Program with its wage and price controls and the health planning program, which tried to limit major capital investments. The end result of the former, in one evaluator's assessment, was considerable effectiveness in "reducing rates of increase in hospital employees' wages but [little impact] . . . on hospital costs" (Ginsburg, 1978).

Private Purchasers Become an Force

In the private sector, purchasers more gradually came to understand that they too had to be aggressive and prudent buyers of health benefits for their employees. Indicative of employers' low profile in the 1960s was a National Conference on Medical Costs, convened at the request of President Johnson to consider the general problem of rising costs. This 1967 conference had no corporate members (outside the health industry) on its advisory committee, listed no business associations among the groups that were consulted, and included only one corporate representative on its agenda (U.S. Department of Health, Education, and Welfare, 1968). As one employee benefits manager put it later:

In the past, many of us in the business community routinely paid bills for medical care with no questions asked. Unknowingly, we contributed to the continuation of many abuses in the medical care system by simply signing the cheek and looking the other way (Chinsky, 1986).

The oil embargo in 1973 and subsequent jumps in oil prices, rising interest rates, stiffer foreign competition, and other economic shocks combined with even sharper increases in health benefit costs finally overcame the employer passivity. By 1976 the Council on Wage and Price Stability was holding hearings, later published, on private sector concerns and initiatives to control costs (Council on Wage and Price Stability, 1976). The share of national spending for health services and supplies accounted for by business grew from 17 percent in 1965 to around 30 percent in 1987 (Levit et al., 1989).

One event that helped influence the thinking of the business community was the publication in 1978 of a 37-page report entitled, simply, "Labor-Management Group Position Paper on Health Care Costs" (Labor-Management Group, 1978). This labor-management group included former Secretary of Labor John Dunlop, the chairmen of eight major corporations, and presidents of seven influential labor unions. Their report, issued after 9

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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months of meetings and staff work, supported such utilization management precursors as retroactive utilization review (supported by explicit provisions in collectively bargained benefit plans) and coverage of alternatives to inpatient hospital treatment. It also promoted a variety of other initiatives, including prospective reimbursement, HMOs, health planning, technology assessment, medical malpractice reform, and health education.

In 1987, a new task force of the Labor-Management Group issued a statement that emphasized preadmission review, (high-cost) case management, and review of nonhospital care as key strategies for cost containment (Labor-Management Group, 1987). A related group, the so-called Dunlop Group of Six, has met on an ongoing basis to investigate and develop cost-containment proposals. The group consists of the American Hospital Association, American Medical Association, Health Insurance Association of America, Blue Cross and Blue Shield Association, Business Roundtable, and the AFL-CIO (Cronin, 1988).

Another early manifestation of greater business interest in health benefit costs was the move to self-insurance by employers large enough to bear the risk. In 1975, perhaps 3 percent of companies were self-insured (Gabel et al., 1986). Among companies surveyed in 1986, the proportion of those that were self-funded had jumped from 19 to 59 percent between 1980 and 1986 (The Wyatt Company, 1986). Many of the advantages of self-insurance lie not in reduced costs for health care but in reduced underwriting, tax, and other expenses associated with the insurance mechanism. Moreover, the Employment Retirement and Income Security Act allows self-insured employers to avoid paying benefits under state-mandated coverage for a variety of services and providers. These mandates raise both health care and administrative costs, particularly for multistate employers. Despite the apparent advantages of self-insurance, a recent study of Bureau of Labor Statistics data found that monthly costs for family coverage were higher for self-insured groups than for those with Blue Cross and Blue Shield or commercial insurance (Jensen and Gabel, 1988). It also reported that groups converting from insured to self-insured status showed higher cost increases (19 percent over 4 years) than did those remaining insured (10 percent) or those already self-insured (16 percent).

Once larger employers began to assume more active roles in managing their health benefit plans, their initiatives multiplied (Sullivan, 1984). These initiatives have included both individual and collective efforts and have often involved participation by other groups, such as labor representatives. A few examples can illustrate the wide variety of these activities.

• Beginning in 1979, General Motors started joint labor-management efforts to monitor the cost-containment activities of participating Blue Cross plans, implement pilot cost-containment projects, and undertake special

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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studies. In 1984, management and labor agreed to a target 10 percent reduction in health benefit costs (in constant dollars) over 3 years (Labor-Management Group, 1987).

• The state of Pennsylvania and Council 14 of the American Federation of State, County, and Municipal Employees agreed in 1984 to institute a statewide plan for prior review of the medical necessity (not just site of care) of certain elective procedures. Other activities involve employee education, HMOs, preferred provider organizations, and program evaluation (Labor-Management Group, 1987).

• The Massachusetts Business Roundtable helped forge revisions in the state's regulation of hospital rates (Bergthold, 1988).

• The Greater Phoenix Affordable Health Care Foundation developed a software package for local physician offices (with monthly updates) that lists features of hundreds of employer-based benefit plans (Lockhart, 1988).

• Business coalitions, such as the Washington Business Group on Health and the Midwest Group on Health, have been formed to pursue a broad range of educational, data collection, and other activities.

More and more corporate benefits managers now talk about health benefits as a complicated instance of a familiar problem: the procurement of the supplies and services needed to produce the companies' products. A vivid illustration of this shift was described in 1986 by Patricia M. Nazemetz, Xerox's benefits development manager,

We realize that the purchase of poorly defined products and services at undefined prices is not consistent with good business practice. It does not meet the standards of the quality improvement process that is applied to every other aspect of our business. While we have taken steps toward cost containment through plan redesign and expansion of alternative delivery options, we have continued to purchase off-the-shelf [health care] products that do not necessarily meet our customer requirements. A logical next step will be to define our customer requirements [and then] request proposals from providers and select those who can conform best to our specifications ....

We realize the importance of developing measurement systems . . . that allow all the parties involved to determine if... service and quality standards are being met and if benefits are being delivered at the right level for the negotiated price. Conformance to service standards will be determined through employees' input .... Measuring quality will be much more difficult. The key will be to identify and agree upon those things that are appropriate quality indicators. For example, we may need to consider time lost from work, hospital readmissions, relapses, infections, etc. (Nazemetz, 1986).

Although many larger businesses can take advantage of these approaches, it should be noted that small businesses often lack the financial and managerial resources and the economic leverage necessary to implement many cost-management strategies. Many small employers see cutting or eliminating health benefits as their major option.

The ability of large purchasers to secure better terms for their purchase

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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of medical care is attributable, in part, to shifts in the relative supply of providers versus users of care. The perceived shortage of health care resources following World War II enhanced the position of hospitals and physicians. More recently, the greatly increased ratios of hospital beds and physicians to population have turned the resource shortage into a surplus in most areas. What is in relatively shorter supply today is patients. Occupancy levels in community hospitals, for example, have dropped from a national average of 76 percent in 1980 to 65 percent in 1987 (American Hospital Association, 1988). Since ability to pay now depends largely on public or private insurance, one result is enhanced power for government and employers, at least large employers.

Many approaches now being used by payers to bring about modifications in patterns of care have been initiated by Medicare, the largest single payer. On the private side, the first use of utilization review requirements also appears to have occurred where certain purchasers were in a particularly powerful position vis-à-vis health care providers, for example, among manufacturers with large facilities in small or mid-sized cities (such as Caterpillar, Inc.) or among insurance plans with large local market shares (such as the Blue Cross and Blue Shield plans in Pennsylvania) (Richards, 1984). Although many individual employers in large cities lack leverage on their own, business coalitions in a number of communities are attempting to combine employer purchasing power. An estimated 200 to 250 business coalitions now operate; at least 72 have paid staff (Cronin, 1988).

Other Factors Giving Rise to Utilization Management

The intensified involvement of government and private purchasers in efforts to contain health care costs has been a key element in the rise of more direct and assertive programs to influence patient care decisions. Purchasers have acted as both a stimulus and a lever for the development and application of new approaches to modifying medical practice patterns and limiting the unnecessary use of services (Webber and Goldbeck, 1984).

In addition, at least three other factors have played a role in the transition from the provider-based utilization review of the 1960s and 1970s to utilization management by third parties in the 1980s. These factors include

• a growing body of research suggesting that many medical services are unnecessary or inappropriate and could safely be eliminated;

• an increasing emphasis by purchasers on linking cost containment anti quality assurance; anti

• a proliferation of information resources, assessment tools, and organizations that make case-by-case review of proposed services feasible on a large scale.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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More generally, the 1960s and 1970s saw the growth of doubts that greater expenditures on medical care were improving health status. As one sociologist has put it, this idea "hit with the force of a thunderclap" and added to pressure to constrain medical care expenditures (Starr, 1982).

Inappropriate Utilization as an Cost-Containment Target

The move by third-party payers to become more aggressive about detecting and eliminating the inappropriate use of medical services has been strongly influenced by research suggesting that some costly patient care is unnecessary or inappropriate and that less costly and more appropriate ways of providing care are possible. Support for these views comes from two directions: studies that document substantial variations in the use of medical services across different settings and studies that assess medical services by using explicit criteria of appropriateness.

Variations in Utilization

Some of the most influential research on medical care utilization has examined how the variations in the volume of medical services relate to variations in ways of organizing and financing medical care. For example, several studies suggest that the volume of physician services tends to increase when fee-for-service payment rates are frozen but levels off or decreases when prices are allowed to rise (Gabel and Rice, 1985; Mitchell, 1988; Rice, 1983; Rossiter and Wilensky, 1983; Schwartz, M., et al., 1981). Most widely known are the array of studies reporting that hospital use tends to be 5 to 35 percent lower in HMOs than in fee-for-service systems. Lower use rates in HMOs have been linked to (1) the financial incentives of capitated or salaried payment for services; (2) the advantages of group practice in providing peer pressure, feedback, and practice protocols; (3) the combination of organizational selection and self-selection that leads practitioners with different styles of practice into different practice settings; and (4) the tendency of healthier individuals to be more accepting of health benefit plans that limit their choice of physician (Epstein et al., 1986; Luft, 1987; Luft and Miller, 1988; Manning et al., 1984; Norbrega, 1982; Siu et al., 1986; Ware et al., 1986). The latter explanation is the only one in which differences in the clinical status of patients might play a significant role in explaining differences in utilization.

The view that medical practice patterns are not a precise and unvarying function of medical science is also supported by studies showing substantial and largely unexpected variations in patient care patterns across geographic areas. The studies date back to the late 1960s and early 1970s (Bunker, 1970; Lewis, 1969; Vayda, 1973). John Wennberg's 1973 article in Science on variations in small geographic areas attracted much attention, both

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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for its findings and for its methodological innovations (Wennberg, 1973). Small-area studies frequently show two- to fourfold differences in the use of various procedures (Eisenberg, 1986; Lohr et al., 1985; Sandrick, 1984; Wennberg, 1984). They have led purchasers to ask increasingly pointed questions about the rationale for such variations.7

Small-area studies tend not to label any particular level of utilization as appropriate or inappropriate (Wennberg, 1986). Certainly, some variation in use is thought to be due to different population needs for care (Blumberg, 1987; Wennberg, 1987). For example, a small-area study sponsored by Blue Cross and Blue Shield of Minnesota found one rural county with unusually high rates of hospitalization for acute myocardial infarction (80 percent higher than the statewide average) and several other heart conditions or symptoms that are not thought to involve much discretion in hospital admission decisions (Thomas, 1989). The insurer asked academic epidemiologists to investigate, and they came up with evidence to suggest disproportionate rates of coronary heart disease in the county. (In response, the insurer joined with others to fund a $300,000 wellness program for the county.)

Inappropriate Utilization

Studies of variations in utilization levels have been complemented by research that attempts to distinguish clinically between appropriate and inappropriate care and to compare actual with correct use of services. These studies have examined hospital admissions, days of inpatient care, ancillary services, and surgical and other medical procedures.

This research has used a number of methods for identifying inappropriate use, including review of pathology specimens after surgery, second opinions on the need for recommended surgery, and audits of medical records. Some studies, for example, those employing second surgical opinions and early audits of medical records, have relied on clinical judgment without explicit written criteria. For other methods, such as certain kinds of medical record audits, explicit written criteria are central to the assessment process (Payne, 1987).

Taken together, research on appropriateness suggests that perhaps one-quarter to one-third of medical services may be of little or no benefit to patients (Brook and Lohr, 1986). For example, several studies have suggested that between 20 and 40 percent of ancillary services in hospitals

7To help PROs understand area utilization patterns and target potential problems, the federal government is funding a 12-state demonstration project to make small-area analyses available for use by PROs (Tokarski, 1989). In addition, small-area studies have been initiated by public and private organizations in such states as Maine, Minnesota, North Carolina, Iowa, California, and New York (Caper, 1987, Tokarski, 1989, Wennberg, 1984).

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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were unnecessary or inappropriate (Eisenberg, 1977; Hughes et al., 1984; Schroeder et al., 1984). Other studies have found similar rates of inappropriate hospital admissions and days of care (Restuccia, 1984). Recent work by the Rand Corporation suggests that one-third or more of coronary angiographies and coronary artery bypass surgeries may be performed for patients whose risk from the procedure equals or exceeds the expected benefit (Winslow et al., 1988b). Carotid endarterectomies (which remove clots in the arteries leading to the brain) were judged appropriate in only 35 percent of cases (Chassin et al., 1988; Winslow et al., 1988a).

Some inappropriate use of medical services is probably an inescapable consequence of the inexactitude of medical science, and geographic variations are not necessarily correlated with variations in appropriate use (Chassin et al., 1987). Nevertheless, the great variability in the use of medical services and the studies suggesting that many services are unnecessary have led purchasers to target such services for cost containment.

Linking Cost and Quality

Purchasers have also recognized that a single-minded concern with the costs of inappropriate utilization can be counterproductive. It can create suspicion, antagonism, and resistance rather than cooperation among payers, practitioners, and patients. By tying utilization management to quality of care as well as cost, purchasers do two things:

• they underscore the responsibilities of health care institutions and physicians for providing patients with safe, effective care, and

• they emphasize to policymakers and health plan beneficiaries that payment for poor-quality care and unneeded services is a bad use of limited resources.

Researchers have noted that where there is strong professional consensus on the appropriate use of particular services, such as surgery for cancer of the bowel or hospitalization for hip fracture, there tends to be less variation in levels of utilization. Where consensus is low, for example, on the need for hysterectomy and prostatectomy, utilization is more variable (Caper, 1984). Although differences among populations in the use of particular services can reflect differences in the incidence of the relevant medical problems, many variations appear to be due to differences in what Wennberg (1984) calls physician ''practice styles.'' To strengthen consensus and reduce inappropriate care, the federal government, many medical societies, and other organizations are encouraging the development of practice guidelines or protocols for the appropriate and cost-effective use of specific medical services.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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,

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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).

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

Suggested Citation:"Origins of Utilization Management." Institute of Medicine. 1989. Controlling Costs and Changing Patient Care?: The Role of Utilization Management. Washington, DC: The National Academies Press. doi: 10.17226/1359.
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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.

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Utilization management (UM) has become a strong trend in health care cost containment. Under UM, some decisions are not strictly made by the doctor and patient alone. Instead, they are now checked by a reviewer reporting to an employer or other paying party who asks whether or not the proposed type or location of care is medically necessary or appropriate.

This book presents current findings about how UM is faring in practice and how it compares with other cost containment approaches, with recommendations for improving UM program administration and clinical protocols and for conducting further research.

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