AHM Healthcare Management - An Introduction: The Evolution of Healthcare Delivery &

Financing in the U.S.

Objectives:

After completing this lesson, you should be able to:

 Define health plan.

 Identify the major factors that influenced the evolution of healthcare delivery and
financing in the United States.
 Describe the role of the government in the development of healthcare delivery and
financing.
 List and describe some factors that limit accessibility to healthcare.
 Discuss how the meaning of quality (as it relates to healthcare) has changed.

In today’s healthcare environment, the term “managed care" has many meanings. Depending on
the context in which it is used, the term may refer to a system of healthcare financing and
delivery, to the various techniques of “managing” the financing and delivery of healthcare, or to
the different types of organizations that practice health plan techniques. To provide us with a
framework for the rest of our discussion in this course, however, we will define managed care as
the integration of both the financing and delivery of healthcare within a system, or specifically
within a health plan (managed care organization) that seeks to manage the accessibility, cost, and
quality of that care.

What exactly does it mean to “integrate the financing and delivery” of healthcare? And how does
a health plan manage the accessibility and cost of healthcare or assure its members of quality
healthcare? We answer these and many other questions in this course. Because understanding
how the concept of health plans grew and developed provides important background for a study
of today’s health plan industry, we begin our discussion with a description of the historical factors
that influenced healthcare in the United States. Then we explore some of the economic,
technological, and social issues that have influenced the development of health plans.

Please note that the sections of the text that tell the story of the managed care movement
introduce many health plan terms and concepts. If necessary, you may consult the glossary in this
course manual for definitions of unfamiliar terms. Note, too, that your primary purpose in reading
these lessons is to become familiar with the historical factors that have shaped health plans. We
will define and discuss important terms and concepts in later lessons.

Historical Factors

You might be surprised to learn that variations of what we now know as “managed healthcare”
have been around since the early 1900s. The earliest examples of health plans appeared in 1910 in
the form of prepaid group practices. A prepaid group practice was a healthcare system that
offered plan members a wide range of medical services through an exclusive group of providers
in return for a monthly premium payment. Blue Cross plans, which provide prepaid hospital care,
were established as early as 1929, and Blue Shield plans, which provide reimbursement for
physicians’ services, began in 1939. Individual practice associations (IPAs), which contracted
with physicians in independent fee-for-service practices, emerged in 1954 as a competitive
response to group practice-based health maintenance organizations (HMOs).
During the early 1900s, managed care organizations (MCOs) represented only a small fraction of
the healthcare market. Since then, however, managed healthcare has grown dramatically. By
January 1, 2006, more than 200 million individuals received care from today's "health plans",
formerly knows as MCOs.

HMO Act of 1973

One of the most important factors behind the growth of health plans was the enactment of the
federal HMO Act of 1973. The HMO Act was designed to reduce healthcare costs by increasing
competition in the healthcare market and to increase access to healthcare coverage for individuals
without insurance or with only limited benefits. The following four features formed the
foundation of the HMO Act:

 Federal qualification requirements -Federal qualification requirements

The HMO Act established a process by which HMOs could obtain federal qualification.
Unlike state licensure, which was mandatory for all HMOs, federal qualification was
optional. Plans that elected this option were required to meet a series of standards related
to minimum benefit packages, enrollment and premiums, financial stability, and quality
assurance.
 Dual choice” provisions - “Dual choice” provisions required employers that offered
healthcare coverage to more than 25 employees to offer a choice of indemnity coverage
or managed healthcare coverage under either a closed-panel HMO or an open-panel
HMO. Federally qualified HMOs that wished to be considered by an employer as a
healthcare coverage option under the “dual choice” provisions were required to submit a
formal request to the employer.
 Federal development grants and loans-Federal development grants and loans
In order to encourage the development of HMOs, the HMO Act offered funding to
support planning and start-up for new HMOs and service area expansion for existing
HMOs. These funds were available only to federally qualified HMOs.
 Exemption from state laws- In some states, existing laws restricted the development of
HMOs. The HMO Act exempted federally qualified HMOs from these state laws.

To a certain extent, the HMO Act accomplished its goals of reducing costs and expanding access
to healthcare services. Federal qualification, in particular, offered competitive advantages to
HMOs entering the healthcare market. For example, the “dual choice” provisions included in the
Act gave federally qualified HMOs access to the employer segment of the market. The federal
grants and loans available to federally qualified HMOs allowed health plans to market their
products and compete effectively against indemnity-based insurance programs. Federal
qualification even gave HMOs a somewhat official “stamp of approval.” In addition, federal
qualification allowed HMOs to participate in Medicare without providing additional
documentation of qualification. While some health plans still maintain their federal qualification
status, it is no longer carries the same weight in today's market.

In other respects, the provisions of the HMO Act hampered the competitive position of HMOs.
As we mentioned earlier, in order to gain the benefits of federal qualification, HMOs had to
satisfy a wide range of requirements related to healthcare quality and financial stability. These
requirements did not apply to traditional indemnity-based insurance programs or to nonqualified
health plans. In addition, the federal government was slow in taking the steps necessary to
implement the provisions of the HMO Act. Even employers who supported the goals of the Act
tended to delay introduction of health plan options to their employees until the government
announced which plans were qualified and established “dual choice” procedures.

Between 1976 and 1996, the HMO Act underwent a series of amendments. These amendments
eliminated or reduced some of the strict requirements imposed on federally qualified HMOs. For
example, the dual choice mandate was repealed in 1995. HMO Act amendments also granted
health plans greater flexibility in designing and marketing their products and strengthened the
emphasis on quality. These changes will be discussed in more detail in lesson "Legislative and
Regulatory Issues in Health Plans."

Introduction of New Products and Programs

In the early 1990s employers and consumers embraced HMOs as a lower cost, high-quality
solution to rising health care costs. As annual premium increases flattened, employers and
consumers became less satisfied with HMOs’ more restrictive provider networks, and looked to
the market for plans offering access to broader choices of providers. This demand for choice and
access led to the accelerated growth of additional health plans products including:

 Preferred provider organizations (PPOs)- Which cover services provided by a network of

designated providers, but which also provide limited coverage for services delivered by
non-network providers. Members can typically visit specialists without a referral.

 Point-of-service (POS) products- Which combine elements of traditional indemnity

insurance and health plans. Members are free to obtain care from network or non-network
providers, but non-network services typically involve more limited benefits and require
higher out-of-pocket costs. Visits to network specialists require a referral from a primary
care provider (PCP).

 Consumer-directed health plans (CDHPs)- CDHPs generally combine a core

contribution of funding by employers with increased choice and financial responsibility
for employees and increased accountability for health plans and providers. They typically
combine a high-deductible health plan with a tax-advantaged personal savings account,
also referred to as a consumer healthcare spending account.

 Carve-outs- Which are organizations that contract with health plans to provide specific
types of services, such as mental health, chiropractic, dental, vision, or pharmacy
services, through specialty-based provider networks.

These programs and products will be discussed in more detail in later lessons.

Government Influence

In addition to enacting legislation to regulate healthcare, the federal and state governments also
play an important role in financing healthcare for millions of Americans through programs such
as Medicare, Medicaid, the Federal Employee Health Benefits Program (FEHBP), and the State
Children’s Health Insurance Program (SCHIP). These programs have increasingly turned to
health plans as an alternative to traditional fee-for-service programs. For example, enrollment in
Medicare Advantage plans increased to 6 million in 2005. In that same year, 27 million Medicaid
recipients were enrolled in some form of health plan program.(1) We will discuss the roles of the
federal and state governments as they relate to health plans as well as Medicare, Medicaid, and
other government-sponsored health-care programs in lesson "Legislative and Regulatory Issues in
Health Plans."

Economic Factors (2)

Now that we have looked at managed healthcare from a historical perspective, we turn our
attention to the economic factors that have driven the evolution of health plans. In the remainder
of the lesson, we explain how these factors and the changes they produced led to the development
of early managed care strategies and, eventually, to the health plan industry as we know it today.

Increases in Healthcare Costs

What are some of the reasons for the increases in the cost of medical care? Inflation, which is a
general rise in prices, is one factor that caused increases in the cost of doing business, not only for
insurers, but for providers of medical services as well. A 2006 report by PriceWaterhouseCoopers
(PwC) identified a number of other factors fueling rising healthcare costs and increased health
insurance premiums. They include:

Increased utilization

According to the PwC report, increased utilization was the most important factor contributing to
health insurance premium increases, accounting for 3.8 percentage points of the estimated 8.8%
rise in premiums in 2005. The major drivers of increased utilization include the following:

 Aging: It is widely recognized that the population is aging as Baby Boomers approach
retirement. PwC estimated that the aging of the population enrolled in health plans
contributed to the rise in premiums in 2005. The effect of the aging population is
discussed in greater detail later in this lesson.
 Lifestyle: Lifestyle challenges, including obesity, smoking, drug abuse, and physical
inactivity also have contributed to an increase in the utilization of health services — and,
consequently, to rising insurance premiums.
 New treatments: New treatments come in the form of new imaging technologies,
biologics, injectables for existing serious illnesses, and “lifestyle” drugs for conditions
that were once not considered illnesses, or at least were not commonly and effectively
treated using prescription drugs.
 More intensive diagnostic testing/defensive medicine: PwC cited more intensive
diagnostic testing as a driver of premium increases in 2005. The practice of defensive
medicine is one factor contributing to these increases in diagnostic testing.
 Increased consumer demand: The increase in consumer demand is fueled by factors
including the proliferation of information on medical treatments and “demand pull”
strategies such as direct-to-consumer advertising.

Cost shifting

The PwC report estimated that cost shifting from public providers and the uninsured to private
payers increased health insurance premiums in 2006. The effect of cost shifting is discussed in
greater detail later in this lesson.
Higher-priced technologies

New healthcare technologies, including prescription pharmaceutical products, increase prices

because they are frequently more expensive than existing technologies. Newer prescription drugs,
in particular, tend to replace older drugs and generic drugs. New imaging technologies are being
introduced into the market at a higher cost.

Broader-access networks/provider consolidation

Market forces (and, in some cases, state laws) have prompted a movement toward health plans
with broader provider networks. Additionally, many plans have introduced open-access products
that minimize the role of the primary care physician in facilitating consumer access to specialists.
While many consumers have expressed a preference for broader provider networks, such
networks tend to reduce the amount of competition in the system. In addition, there have been
instances of provider consolidation that have similarly reduced levels of provider competition in
some markets.

Lack of incentives to control medical costs

Traditionally, the US health care system has had few incentives for providers and consumers to
control spiraling medical costs. In most cases, patients are completely unaware of the actual cost
of the care they receive and do not factor cost into their purchasing decisions. The recent move
toward consumer-directed health plans is due in part to this historic lack of cost information and
incentives.

Cost Shifting

Many healthcare providers deliver medical care to people who either have no healthcare coverage
and cannot afford to pay for the care by themselves or who pay reduced rates, such as rates for
services covered under certain government-sponsored healthcare programs. The payments
hospitals and physicians receive for such services are lower than the prevailing charges for those
services. Many uninsured patients seek medical care in facilities such as hospital emergency
rooms, and such treatments are often for ailments that could have been prevented or treated
earlier in a more appropriate and cost-effective facility. To subsidize the treatment of these
patients, such providers spread the unreimbursed costs to their other paying patients. This practice
of charging more for services provided to paying patients or third-party payors to compensate for
lost revenue resulting from services provided free or at a significantly reduced cost to other
patients is known as cost shifting. Cost shifting results in higher healthcare costs for people with
private healthcare coverage and the companies that provide that coverage.

Technological Factors

Advances in computer technology have revolutionized not only the way health plans manage
information, but also the way they manage their operations. This is most evident in the use of
technology to support core business functions such as claims processing, enrollment, and
premium billing. By performing these functions electronically rather than manually, health plans
have been able to improve both the quantity and quality of information they receive and report.
Technology is also an important element in medical management. For example, health plans can
generate statistical profiles of providers’ treatment patterns and can use these profiles to evaluate
the quality and cost-effectiveness of the services delivered through their provider networks.
Pharmacists using point-of-service information systems can, at the time a prescription is filled,
determine:

 Patient eligibility for prescription drug coverage

 Potential adverse drug interactions and drug therapy restrictions
 Formulary compliance
 Preauthorization requirements
 Copayment, deductible, and coinsurance requirements

They can also conduct prospective drug utilization review and submit and process prescription
drug claim information.

Technology has also helped lower administrative costs. For example, prior to computerization,
the cost of processing a claim and submitting reimbursement was often greater than the claim
itself. Using automated systems, that cost has been reduced to little more than the cost of postage.
Automation also reduces administrative and operating costs by:

 Reducing staffing requirements

 Increasing the accuracy of data entry
 Shortening the internal processes needed for functions such as releasing payments,
generating member identification cards, and maintaining enrollment information
 Turning health plan data into actionable information

Health plans are now beginning to expand their use of information systems beyond core
functions. Electronic medical records (EMRs) allow providers immediate access to necessary
patient care data. Personal health records (PHRs) allow consumers to access and coordinate their
own health care information from a variety of sources and make it available to the appropriate
caregivers. With these applications, health plans will be able to add value to their services,
provide consumers with needed, timely information about their own health care, and give
providers the information they need to deliver effective care and avoid unnecessary and costly
duplication of services. We will read more about these and other technologies in the lesson
Information Technology.

Social Factors

Public demand for cost-effective healthcare services has also increased, driven primarily by
changes in population characteristics, limited access to healthcare services, and an increasing
emphasis on quality.

Maturing Population

The population of the United States is aging. In 1970, the median age of the U.S. population was
28 years old. In 2000, the median age was 35.8 years old. Between 2000 and 2010, the 45- to 54-
year-old age group is expected to increase by 19%, while the number of people aged 55 to 64 is
expected to increase by 48%.8 This current demographic shift in the age of the population is often
attributed primarily to the “baby boom” that occurred in the years following World War II.

As the population ages, the general incidence of illnesses associated with aging will continue to
increase. The higher rates of illness will result in a greater need for chronic care services, long-
term care, rehabilitative care, and medication use. In the past, many people would have died when
their health deteriorated to a certain point. Now, because human life can be prolonged through
various drug treatments and medical procedures, the need for chronic care, rehabilitative care, and
long-term care has grown. The costs of providing all of these services will continue to be a factor
in healthcare coverage costs as the U.S. population continues to age.

Access to Services

In the healthcare context, access can be defined as a person’s ability to obtain affordable medical
care on a timely basis. For most people, healthcare coverage is the key to accessing medical care,
yet more than 45.8 million people in the United States (over 16% of the nonelderly population)
lacked healthcare coverage in 2004.6,7 Why is it so difficult for some Americans to access the
healthcare they need? The rising costs of medical care and its effects on the cost of healthcare
coverage have made the cost of obtaining individual healthcare coverage too expensive for some
people to afford.

Most people who have healthcare coverage receive it through an employer-sponsored group plan,
either as an employee or as a dependent of an employee. However, a person’s employment status
(or status as a dependent of an employed person) does not necessarily guarantee access to
healthcare coverage. In 2004, nearly 27% of uninsured people lived in families in which the head
of the household was a full-time worker. Further, in 2004, 24.5% of all self-employed workers
were uninsured and 30.9% of workers private-sector firms with fewer than 10 employees were
uninsured.8 This fact reflects the high cost of individual coverage (which self-employed persons
have to buy), as well as the generally inverse relationship between employer size and group
health premiums—that is, the smaller the group, the more expensive the premium. Although the
prohibitive cost of healthcare coverage is one factor that limits access to medical care, there are
other reasons why accessibility has been a problem.

Uneven Distribution of Medical Services

Even though there is currently an oversupply of hospital beds and specialty physicians
nationwide, many areas of the country—primarily rural areas—have traditionally had poor access
to healthcare services. Cost concerns have forced hospital closings in many areas. These closings
have occurred disproportionately in rural areas and inner cities and have reduced access to
healthcare in these areas. Physicians have traditionally congregated in more highly populated
areas where they have easy access to facilities and to colleagues, and where demand for their
services—and therefore potential income—is greater.

The uneven distribution of medical services is reflected in the distribution of healthcare coverage.
In 2006, the percentage of the total nonelderly U.S. population without healthcare coverage was
more than 17%. However, In 11 states, more than 20% of the population was uninsured. 9 These
states were largely concentrated in the south central and southwestern portions of the United
States, areas which have large rural populations. Other factors contributing to the higher-than-
average proportion of uninsured individuals in these states may be the lower average income,
higher unemployment rates, and higher concentration of racial and ethnic groups.
Accessibility will continue to be an important factor in future developments in healthcare
coverage.

The Quest for Quality

In the past, employers purchased group healthcare coverage for their employees and paid a large
portion, or perhaps all, of the premiums. Quality determinations were really left up to their
employees, because the employees were free to choose any medical service provider they
pleased. As the premiums for healthcare coverage began to increase dramatically, the cost of that
coverage began to represent a larger and larger portion of employers’ expenditures. In response to
increasing costs, employers became more discriminating purchasers of healthcare coverage and
began to evaluate what each health plan had to offer in terms of cost. Employers now evaluate the
quality as well as the cost of care provided by the health plan. Some employers form purchasing
coalitions to bargain more effectively for the lowest-cost and highest-quality healthcare.

Consumers also demand quality. In a study of 2,000 adults conducted in 2000 by the Kaiser
Family Foundation, 90% said that high-quality care was very important. Nearly 50% of those
surveyed said that quality care was the most important factor in choosing a health plan.9

The meaning of quality in healthcare, however, has changed. Rather than measuring healthcare
quality in terms of how expensive the care is or how much service is provided, participants in the
healthcare system—consumers, employers, providers, and payors—now more commonly
evaluate healthcare quality in terms of patient safety, preventive care, access to primary care and
specialty care physicians, complaints and grievances, and care for chronic illness. They also
measure quality according to desired outcomes.

The industry has supported the demand for quality by providing extensive quality oversight
programs. The National Committee for Quality Assurance (NCQA) began to accredit HMOs in
1991 and since then has developed a variety of quality measurement tools, including the Health
Plan Employer Data and Information Set (HEDIS®).10 The American Accreditation HealthCare
Commission/URAC (URAC) also offers accreditation programs. Accreditation and the programs
available from these agencies are described in Medical Management II. In addition, various
consumer-oriented magazines, state and local government groups, and health plans publish
annual “report cards” of health plan performance.

Conclusion

In this lesson, we have introduced many of the factors that led to the growth and development of
managed care over the last 30 years. These same factors are likely to play an important role in
determining the direction of health plans in the future. The outcome will depend on how
employers, employees, insurance companies, health plans, hospitals, physicians, and other types
of healthcare providers respond to the challenges of operating in an era of skyrocketing costs and
constant change.

In the next lesson, we will discuss some of the early efforts of health plans to control costs and
manage healthcare. We will also review some fundamental concepts of indemnity health
insurance to give you a background for understanding many of the early strategies used to control
costs and maintain quality care.

Endnotes

1. Atlantic Information Services, Inc. AIS’s Directory of Health Plans, 2005.

2. Adapted from Jena K. Mullen, Intro to Health Plan: Fundamentals of Health Plan
Coverage and Providers (Atlanta: LOMA, © 1995), 4–6. Used with permission; all rights
reserved.
3. U.S. Department of Health and Human Services & the Office of Inspector General,
February 21, 2002. http://www.oig.hhs.gov/oas/reports/cms/a0102002.pdf
4. Centers for Medicare and Medicaid Services, Office of the Actuary, 2004.
http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.79v1
5. Centers for Medicare and Medicaid Services, “National Health Care Expenditures
Projections: 2000–2010,” Table 3, http://www.cms.gov (20 May 2004).
6. Paul Fronstin, EBRI Issue Brief, (Washington, DC: Employee Benefit Research Institute,
October, 2006), 5. http://www.ebri.org/pdf/EBRI_Notes_10-2006.pdf
7. Ibid., 12.
8. Ibid., 20.
9. “Newswire: Quality Does Count, But Formal Ratings Don’t,” Managed Healthcare
Executive (January 2001):9.
10. HEDIS is a registered trademark of the National Committee for Quality Assurance
(NCQA).