Health Care Costs and Managed
payment method in which a managed-care plan, group of health care
providers, or individual provider receives a fixed monthly fee in
return for delivering certain or all health services to a single
patient or family. The capitation fee is paid regardless of how
many instances of care occur.
Federal poverty level The
minimum annual income required by a family to meet food, shelter,
clothing, and other basic needs: in 2002, $15,020 for a family of
three (the amount varies by family size); set according to formula
by the federal government.
Health maintenance organization
(HMO) A type of managed-care plan; offers enrollees
comprehensive coverage for specific health services for a fixed,
Managed care A broad
term for a comprehensive approach to health care delivery that (1)
provides care to enrollees, usually on a capitated basis; (2) coordinates
care, to ensure appropriate use of services; and (3) monitors and
measures provider performance, to control costs and maintain or
Medicaid The federal-state
program that pays for health care services to many low-income people,
including elderly who qualify.
Medicare The federal
program that pays for many health care services for people who are
blind, disabled, or aged 65 and older.
Panel The group of
providersphysicians, hospitals, pharmacists, othersauthorized
by a managed-care plan to care for the plan's enrollees.
Point-of-service plan (POS)
An HMO variation that allows enrollees to seek care outside
the plan's panel of providers without having to pay the entire cost.
Preferred provider organization
(PPO) A group of providers that agrees to furnish
services, at negotiated fees, to a payer's enrollees in exchange
for the likelihood of increased patient volume; functions similarly
to POS plans, but PPOs contract with HMOs and insurers rather than
acting as insurers themselves.
Primary care provider The
physician in charge of all aspects of a patient's care, including
referral to specialists.
Qualified health plan (QHP)
An HMO that meets certain state requirements; QHPs are
used by the state to serve most of the Medicaid population.
[APRIL 1, 2002] Unless otherwise noted, all national
data presented are from 2000, and all Michigan data are from 1998;
these are the latest years for which adequate comparable data are
- National health expenditures reached $1.3 trillion
in 2000, up 6.9 percent over 1999. Preliminary estimates place
2001 growth at more than 8 percent. The rise in 1999 and 2000
health spending outpaced growth in the gross domestic product
(GDP), signaling the end of the nine-year stability of health
spending's share of the GDP. Health spending now comprises 13.2
percent of the nation's economy.
- In 1998 Michigan personal health expenditurestotal
health expenditures less medical research and facility-construction
costswere estimated at $35.6 billion.
Programs and Payers
shows that public programs account for almost half (45 percent)
of the nation's health care bill. The major public programs are
- Medicare, the federal program that provides
a wide range of health services to the elderly, blind, and disabled;
- Medicaid, the joint federal-state program
that offers comprehensive health services to some adults living
in poverty and to childrendepending on their ageliving
in households at or below 185 percent of the federal poverty level.
Together, these two programs make up 37 percent of
Michigan's health spending and 33 percent of the nation's.
- Medicare spending amounted to 22 percent of the
state's health bill and 17 percent of the nation's (national spending
was $224 billion in 2000).
- Medicaid spending amounted to 15 percent of the
state's health bill and 16 percent of the nation's (national spending
was $202 billion in 2000).
- Other government programs (public health, health
care for military personnel, and others) accounted for 12 percent
of the nation's bill in 2000.
The exhibit also shows that
private health insurance, much of it offered by employers to their
employees, paid a third$442 billionof the nation's health
bill in 2000. Most of the remainder ($195 billion)for copayments,
deductibles, and other health services and products not covered
by health insurancewas paid out-of-pocket by patients.
The private-spending share of health expenditures
grew between 1997 and 1999, offsetting public-share declines caused
primarily by slower Medicare spending growth. In 2000 public and
private spending grew at about the same rate. In the near future,
private-expenditure growth is expected to outpace public-sector
health spending because outpatient prescription drug costs, which
Medicare does not cover, are rising rapidly.
More recent data on employer-based health insurance
show that after five years of record low inflation (199498),
health insurance premiums rose dramatically in 1999, 2000, and 2001.
In fact, premiums increased 11 percent between the spring of 2000
and 2001. Smaller businessesthose with fewer than 100 employeessaw
higher increases (12.5 percent on average) than did large firms
(10.2 percent). When employer and employee shares of health insurance
premiums are combined, the average cost of individual coverage was
$221 a month ($2,652 a year) in 2001. Family coverage averaged $588
a month ($7,056 a year).
As premiums rose, employers increased the employee
share of the family premium from $122 to $150 a month, on average,
between 1996 and 2001, but the proportion of the premium paid by
employees stayed about the same (2728 percent). Employers
have been requiring employees to pay higher deductibles and copayments,
however, which means that workers are bearing a growing proportion
of their health insurance costs.
Health care expenditures also may be broken down by
provider, as shown in Exhibit 2. Nationally,
more than half of health dollars go for hospital services and physician
care (32 percent and 22 percent, respectively); these portions of
the nation's health spending have not changed much since 1960. Declining
in the last four decades have been the shares taken up by dental
care and drugs, the latter dramatically despite rising drug costs
in recent years. Nursing-home and home-health care and other professional
services have grown significantly in the same period.
In Michigan, hospitals received 41 percent of health
dollars in 1998. Physician and other professional services received
26 percent, drug and other medical supplies 14 percent, nursing
homes 7 percent, dental services 6 percent, home health care 2 percent,
eyeglasses and other durable medical equipment 2 percent, and other
personal health care 2 percent.
Although drugs' share of the national and state health
dollar has declined in recent decades, it is likely to start growingperhaps
significantlyin the years ahead. The average yearly cost of
prescription drugs per person nationally in 1993 was $195; by 2000
it was $417. Drug costs are rising primarily for three reasons.
- More people are taking prescription drugs and those
who already were taking them are taking more of them.
- Newer, more expensive drugs are entering the market,
replacing older, less expensive counterparts.
- Prices are rising on existing drugs.
Managed care is a broad term for any comprehensive
approach to health care delivery that (1) provides care to enrollees
usually on a capitation (fixed monthly fee) basis (2) coordinates
patient care so as to ensure the appropriate use of services, and
(3) routinely monitors and measures the performance of health providers
so as to control costs and maintain or improve care.
Managed-care plans almost always practice selective
contractingthat is, they ask only some physicians, hospitals,
pharmacists, and other providers in a geographic area to join their
panel (the group that the plan authorizes to care for its enrollees).
Many plans also require enrollees to choose a primary care physician,
who is in charge of all aspects of their care, including referrals
to a specialist (the plan will not pay for specialist treatment
unless the patient was referred by his/her primary care physician).
There are three common types of managed-care plan.
- Health maintenance organizations HMOs
are the best-known type of managed-care plan. They offer enrollees
comprehensive coverage for specific health services for a fixed,
prepaid premium. If enrollees obtain health care from a provider
not on their plan's panel, they must pay the full cost for the
care out of their own pocket.
- Point-of-service plan (POS) This
is an HMO variation that allows enrollees to seek care outside
the panel without having to pay the entire cost. POS plans are
becoming more popular because many view them as a way to preserve
a wider choice of providers than with a conventional HMO.
- Preferred provider organization (PPO) PPOs
are groups of providers that agree to furnish services to a payer's
enrollees at negotiated fees in exchange for the likelihood of
increased patient volume. PPOs generally function like POS planswith
enrollees required to pay more for a service if they use a non-PPO
providerbut they usually do not monitor provider costs and
performance as closely as HMOs do.
Managed care is a driving force in the evolution of
the U.S. health care system, but it no longer is viewed by most
employers and federal and state governments as the primary means
by which health care costs can be brought under control. The past
two years have shown that health care costs can rise significantly
even as managed-care enrollment rises. As the numbers below illustrate,
many more employees are in less restrictive health plans (PPOs and
POS plans, sometimes called managed care lite) than
are in HMOs, which makes it more difficult for employers to control
health care costs.
In 2001, 93 percent of the nation's workers were in
an HMO, POS plan, or PPO, up from 40 percent in 1992. Only 7 percent
of workers with employer-sponsored health insurance were in traditional
- HMO enrollment peaked in 1996 at 31 percent of
the working population; in 2001 the figure was 23 percent.
- PPO enrollment has risen from 28 percent in 1996
to 48 percent in 2001.
- POS plans covered 14 percent of workers in 1996
and 22 percent in 2001.
- In Michigan, as of September 30, 2001, 29 HMOs
served almost 2.7 million members (more than one-quarter of the
state's population). Medicare beneficiaries enrolling in HMOs
have declined in recent years, as many health plans withdrew from
the federal program because of inadequate payment for services.
In Michigan in 2001, about 79,000 beneficiaries were enrolled
in Medicare HMOs; the number is projected to be lower in 2002.
Michigan has moved most Medicaid beneficiaries into qualified
health plans (QHPs), HMOs that meet certain state requirements;
as of December 2001, 742,000 are enrolled in a QHP90 percent
of those eligible for a QHP and almost two-thirds of the total
Why Health Costs Rise
Health care costs rise for several reasons.
- Inflation and population growth These
factors are persistent and, for the most part, outside the health
care sector's control. As the huge baby boom generation (those
born between 1946 and 1964) ages, its use of health care services
will drive up costs dramatically.
- Health price inflation This
exceeds general inflation and annually contributed an average
of 3 percent to 19992001 health cost increases.
- Frequency and intensity of use of services The
higher the use, the higher the expenditures. Use of services is
increasing within certain age groups (e.g., the elderly), which
may be compounded by the increase in the size of the age group
(again, the elderly are an example). New technologies and drugs
also contribute to rising costs, especially when they do not fully
replace other diagnosis and treatment methods.
In the mid-to-late 1990s, managed care was successful
in limiting the growth in two of the factors aboveinflation
and utilizationlargely by negotiating fee discounts with providers,
limiting unnecessary care, and requiring cost-conscious decision-making
by providers. There are limits to such actions, however, and in
recent years there has been a resurgence in health cost increases.
Most experts agree on several reasons for accelerated health spending
- To gain market share, managed-care plans had accepted
lower revenue/profits, but they could not continue this practice
and stay in business.
- Managed-care plans had forced providers (mainly
hospitals and physicians) to accept reduced reimbursement for
several years, but providers no longer are willing to accept this
and are strengthening their negotiating leverage through consolidation.
- Health care is labor intensive, and significant
shortages of professionals, particularly nurses, mean that to
attract and keep sufficient numbers of these professionals, health
care employers have had to increase compensation.
- Public and provider backlash against certain cost-control
practices is leading (1) managed-care plans to alter their practices
voluntarily and (2) state and federal lawmakers to
press for legislation limiting ways that plans may cut costs.
- Advances in pharmaceutical and medical technologysuch
as new biotechnology drugs and improvements in artificial limbs,
valves, and organsprolong life, but they are expensive and
few people want any limit placed on the development and appropriate
use of such advances.
- The population continues to age, and an older population
uses more health care services.
Some experts contend that managed care can control
costs without jeopardizing the quality of care. They point out that
when working properly, managed-care plans and providers are rewarded
financially for keeping people healthy, which limits cost increases
and improves quality. They add that managed care's greater use of
preventive services and patient education helps to cut costs, as
has the development of clinical guidelines that allow physicians
to forgo costly procedures that have little likelihood of improving
a patient's health. As medical science is able to define more precisely
what works and what does not, they assert that unnecessary care
can be identified and reduced and quality enhanced.
Supporters of health plans also note that through
the National Committee for Quality Assurance (NCQA), HMOs voluntarily
may seek accreditationan indicator of a certain level of quality
and financial stability. NCQA reviews are rigorous on- and off-site
evaluations, conducted by physician teams and managed-care experts.
The reviews assess such clinical quality indicators as frequency
of regular breast-cancer screening and childhood immunization, advice
to smokers to quit, first-trimester prenatal care, and use of appropriate
medication following a heart attack. To receive accreditation, an
HMO must meet specific standards in clinical care, prevention of
illness and injury, patient satisfaction, and financial stability.
An increasing number of employers are requiring HMOs to have NCQA
accreditation before they will contract with them.
Health plans are enmeshed in a complex battle among
health care interest groups. Critics of managed-care plans, including
some consumers/employees and providers, argue that their practices
threaten quality. They contend that most health plans focus primarily
on the bottom line and that to do so means that they must deny care
that physicians and other caregivers deem necessary. Other critics,
including some employers, believe that managed-care plans have not
succeeded at controlling costs.
The call in recent years for federal and state patient
bill of rights legislation confirms that there is conflict
among health plans, employers, consumers, and providers. Many consumers
want a wide choice of providers, particularly physicians, whom they
may see without financial penalty. Many managed-care plans, however,
view restricting their provider panel as essential to controlling
costsit is the only way that they can steer patients to cost-effective
hospitals and physicians. The rapid growth of POS plans suggests
that managed care is attentive to consumers' demand for greater
choice, but it remains to be seen whether this demand will continue
as health insurance premiums rise and employers ask consumers to
pay a greater share of the premium.
Current legislative debate about health care centers
on many practices of managed-care plans and government's role in
regulating them. Congress and almost every state have proposals
or new laws to toughen HMO regulation. The most common initiatives
- expand patients' legal recourse if they believe
an HMO has denied or delayed necessary care;
- give certain patients direct access to specialists;
- prohibit gag rulesthat is, proscribe
managed-care plans from limiting what physicians may tell patients
about treatment alternatives;
- prevent HMOs from denying payment for emergency
services because the HMO determines after the fact that the patient's
symptoms did not warrant an ER visit;
- prohibit routinely discharging new mothers and/or
their newborns from the hospital in less than two days (normal
delivery) or four days (caesarean section);
- prevent outpatient surgery for mastectomies;
- require that certain information about the plan
be disclosed to plan members (e.g., certain indicators of quality,
how the HMO selects panel providers, and any financial incentives
the HMO offers to providers to keep costs down);
- require a consumer ombudsman within or outside
the plan to act as a patient advocate; and
- require that members be afforded access to a sufficient
number and mix of specialty physicians and other providers.
Proponents of many of these provisions contend that
they protect quality of care. Opponents of some measures contend
that HMOs rarely engage in the practices that the bills address
and therefore legislation is unnecessary. As to limiting access
to specialists, experimental treatment, and emergency care, however,
they argue that managed care's ability to control costs and maintain
quality depends on being permitted to take these very actions.
There have been many efforts to control health care
costs. Employers are starting to shift more costs onto their employees,
and this probably will accelerate during the economic downturn because
workers are more likely to accept the increases than to try to move
to another job.
Employers, government, and health plans also are working
to address rapidly escalating prescription drug costs. Employers
have increased prescription copayments, often by dividing brand-name
drugs into preferred and nonpreferred categories, which creates
a three-tiered drug benefit: Generic drugs have the lowest copay,
preferred brand-name drugs have a higher copay, and nonpreferred
brand-name drugs have the highest. Campaigns to get prescribers
and patients to use generic drugs more frequently when appropriate
also are underway. Large employers and government long have sought
to limit drug costs by bulk purchasing and, very recently, with
price controls. Michigan and a few other states recently notified
drug companies that their products will be excluded from Medicaid's
preferred list of drugs if they do not lower their prices. The drug
companies and others contend that Medicaid beneficiaries will be
denied the medication they need under such an action.
Most health care experts believe that the efforts
discussed above will fail to control health care costs. Others add
that such efforts could even threaten the quality of care. To make
matters worse, the cost of new technology and drugs and, especially,
the aging of the population will drive up health care costs for
the foreseeable future.
To try to confront this seemingly intractable problem,
health policy experts and practitioners increasingly are focusing
on the issue of quality. They believe that the only way to gain
control of unsustainable increases in health costs is to improve
the quality of care because, they contend, too much care is unnecessary
or unproven. Doing this means better identification and elimination
of unnecessary care and delivering only care that will benefit the
patient as efficiently as possible. They argue that more must be
- translate into medical practice the procedures
known from research to be effective in restoring patients to health
and managing chronic disease (called evidence-based medicine);
- limit the use of procedures for which there is
no solid basis in research;
- reduce errors in the health care system
that are not the fault of individual professionals but are a factor
in thousands of preventable deaths every year;
- endeavor to better coordinate patient care among
physicians and other professionals, especially for the millions
of Americans with chronic illnesses such as diabetes, high blood
pressure, and arthritis; and
- emphasize prevention of illness and injury by promoting
healthy behavior (e.g., regular exercise, good nutrition, seat
belt use, modest alcohol consumption, no tobacco consumption).
Perhaps the most prominent nationwide initiative to
put these ideas into practice is the Leapfrog Group. Comprising
many large employersincluding the big three automakers, General
Electric, and Verizonthe Leapfrog Group focuses on developing
tangible leaps in patient safety and quality, rewarding high-quality
care providers, and informing employers and consumers about these
efforts. Currently, three tangible leaps are sought.
- Computerized physician-order entry Physicians'
handwriting can be misread, leading to serious prescription errors.
Hospitals would require physicians to enter medication orders
into a computer linked to prescribing-error-prevention software.
- Intensive-care-unit physician staffing Research
shows that patients do best in an intensive care unit that is
staffed with intensive-care specialists.
- Evidence-based hospital referral Employers
should direct patients and health plans to hospitals that have
demonstrated high quality of care for certain common procedures.
In our state, the Michigan Health and Safety Coalition
(MH&SC)with active participation from automakers, labor,
providers, insurers, state government, and othersis helping
to carry out the Leapfrog initiatives and other programs to improve
the quality of care.
Everyone agrees that Americans use too much health
care and that the value of much of it is unproven, but there is
no consensus on how to eliminate rationally and humanely the services
we do not need. Leapfrog and similar efforts offer promise. What
is certain is that the battles today are only a dress rehearsal
for those that we will see in a decade, when the huge baby boom
generation begins to reach age 65, and its health care needs intensify.
See also Aging; Communicable Diseases and Public
Health; Health Care Access, Medicaid, and Medicare; Long-Term and
Related Care; Mental Health Funding and Services; Substance Abuse;
Tobacco Settlement; Youth at Risk.
FOR ADDITIONAL INFORMATION
American Association of Health Plans
1129 20th Street, N.W., Suite 600
Washington, DC 20036
(202) 331-7487 FAX
American Association of Retired Persons
309 North Washington Square, Suite 110
Lansing, MI 48933
(517) 482-2794 FAX
Blue Cross Blue Shield of Michigan
600 East Lafayette Boulevard
Detroit, MI 48226
(313) 225-6764 FAX
Center for Medicare and Medicaid Services
U.S. Department of Health and Human Services
7500 Security Boulevard
Baltimore, MD 21244
(410) 786-3252 FAX
1334 G Street, N.W.
Washington, DC 20005
(202) 347-2417 FAX
Medical Services Administration
Michigan Department of Community Health
400 South Pine Street
P.O. Box 30479
Lansing, MI 48909
(517) 335-5007 FAX
Michigan Association of Health Plans
327 Seymour Avenue
Lansing, MI 48901
(517) 482-8866 FAX
Michigan Consumer Health Care Coalition
600 West St. Joseph Highway
Lansing, MI 48933
(517) 484-6549 FAX
Michigan Health and Hospital Association
6215 West St. Joseph Highway
Lansing, MI 48917
(517) 323-0946 FAX
Michigan Health and Safety Coalition
27000 West 11 Mile Road
Mail Code B713
Southfield, MI 48034
(248) 448-0058 FAX
Michigan State Medical Society
120 West Saginaw Street
Lansing, MI 48823
National Committee on Quality Assurance
2000 L Street, N.W., Suite 500
Washington, DC 20036
CONTENT CURRENT AS OF APRIL 1,
© 2002 Public
Sector Consultants, Inc.
Sponsored by the Michigan Nonprofit Association and the Council
of Michigan Foundations