Case Management and Managed Care in Health Cost Reduction

Introduction: The U.S. Healthcare Cost Crisis

The United States has the most expensive healthcare system in the world, with per capita health expenditures far above those of any other country. For many years, U.S. healthcare expenditures have been rising faster than the overall rate of inflation in the economy. A few experts have argued that high and rising costs are not such a serious problem; however, as Bodenheimer (2005) notes, "most observers disagree with this view, pointing to the negative impact of employee health care costs on employers, the government budgetary problems caused by rising health care expenditures, and an association between high health care costs and reduced access for individuals needing health services."

Managing healthcare cost growth is a fundamental challenge facing the healthcare system. After a brief respite, healthcare spending is again rising much more rapidly than the economy as a whole. Most health economists agree that the adoption of innovative technology has historically been the main driving force behind healthcare cost growth. This additional spending may yield valuable incremental health benefits and consequently be justified from a cost-effectiveness perspective, but concerns over growing costs have renewed policymakers' interest in cost suppression.

Managed competition has been considered a central component of cost-suppression efforts for more than two decades. Although evidence supports the idea that managed care organizations (MCOs) have lower spending compared with indemnity fee-for-service systems, debate persists over whether the rate of healthcare spending growth varies among different delivery systems. To some extent, evidence suggests that even though managed competition slows healthcare cost growth, the effects are not large enough to curtail the rising share of GDP dedicated to healthcare. This evidence is largely based on statistical analyses of the diffusion of technology in health maintenance organizations (HMOs) or in markets with varying levels of HMO penetration (Chernew et al., 2004).

Managed Care: Structure, Incentives, and Cost Control

One way of understanding managed care is to consider it applied health insurance. It combines accountability for paying for a defined set of health services with an active program to manage the expenses associated with providing those services, while simultaneously seeking to manage the quality of and access to those services. An MCO undertakes to offer a wide range of care and services in acute care; these benefits are generally specified in advance along with any payments — such as co-payments or deductibles — for which plan members will be responsible. As described in the basics of managed care literature, an MCO in this definition receives a fixed sum of money to pay for the benefits in the plan for the defined population of enrollees. Typically, this fixed sum is constructed through premiums paid by the enrollees, capitation payments made on behalf of the enrollees from a third party, or both (The Basics of Managed Care, n.d.).

MCOs use one or more methods to control their costs. However, this feature does not completely distinguish them from traditional health insurers; for example, health insurers increasingly use strategies such as preauthorization for services, consumer co-payments, and primary care gatekeeping as cost-control measures. Most managed care involves placing care providers at financial risk for all or a considerable portion of the costs of care; the incentives arising from such arrangements offer the greatest potential to transform the incentives operating within care and service systems. Financial risk-taking, however, is not the only form of managed care, nor does it always occur in pure form. There are three levels of care management with regard to financial risk:

1. Full risk — accepting all the financial risk for providing services (all possible profits as well as losses).
2. Partial risk — accepting a portion of the financial risk of service provision.
3. No direct risk — but incentives are present for controlling cost, as in various case-managed primary care arrangements (The Basics of Managed Care, n.d.).

Managed care has sought to alter the way healthcare is financed by changing the incentives within the healthcare system. What was once a source of revenue under fee-for-service has become a cost under managed care. Fee-for-service healthcare rewards provision of services, while managed care discourages use of care unless it is entirely necessary. Under managed care, doctors and other healthcare providers profit by providing only the services truly necessary in treating patients and by preserving the health of plan members. Fee-for-service providers, by contrast, benefit when people are sick and use health services, and therefore have less incentive to keep people well (The Basics of Managed Care, n.d.).

Managed care effectively merges health insurance and provision of services into one organization, taking the insurance approach one step further. For a fixed fee, the managed care company agrees to provide a package of services. Having accepted a preset amount of money for the task, its incentives are to safeguard those funds. Its range of strategies is not entirely different from those available to insurance companies, but its incentive to contain costs is much stronger because its market advantage lies in offering lower costs in exchange for restricted options. When MCOs compete in a market area, they must also structure benefits that appeal to consumers (The Basics of Managed Care, n.d.).

In theory, managed care can succeed in two ways. It can lower the cost of individual services, and it can improve efficiency of care across the full range of a person's illness. By providing more effective care early, it may avoid more costly care later; or by substituting less expensive modes of care, it may achieve the same ends more economically (The Basics of Managed Care, n.d.).

In order to control costs, HMOs developed new payment methods such as salaries, withholding agreements, payment at preferred rates, capitation contracts, and lump-sum payments. Their purpose was to spread financial and medical risk across care providers and insurers. Nevertheless, because these methods vary from one HMO to another, it is difficult to assess their cost-control efficiency. An HMO can contract with numerous hospitals and use a discounted fee-for-service payment for one provider while using a capitation agreement for another. These arrangements can also be burdensome for providers and create risks for the insured (Simonet, 2005).

These instruments have overturned the practitioner's conventional role. Before their introduction, a physician used clinical expertise to request additional medical resources — such as tests, diagnostics, and hospital services — to treat patients. Once affiliated with an HMO, a physician had to manage the HMO's resources optimally. In reality, once part of an HMO, a practitioner's salary could become variable, prompting them to assume the role of the insurer's steward. Because they manage the HMO's resources while simultaneously protecting patients' interests, they become at once a judge allocating scarce medical resources and an advocate for their patients' needs (Quaye, 2001). The physician must provide the best care accessible — which may involve considerable costs — but as a steward of the HMO's budget, must also keep costs low. Additionally, practitioners must conform to a variety of protocols such as clinical guidelines (Fang et al., 1996), substantially reducing their clinical autonomy.

Managed Care's Effects on Providers and Markets

Under managed care, financial incentives reward cost-conscious practitioners. These come in several forms: a percentage of earnings, a productivity bonus, or both simultaneously. These incentives can also include penalties — financial or otherwise — such as physician exclusion or an obligation to pay all or a fraction of an HMO deficit. A withholding contract allows the HMO to retain a share (typically 15% to 25%) of the fees paid to providers, whether solo practitioners or group physicians. At the end of the withholding period, comparisons are made against an initial cap on health expenses or medical care consumption — including hospital care, diagnostic tests, and medical prescriptions (Simonet, 2005). If expenditures fall below the cap, the withheld sum is returned to the care provider; if not, the HMO retains the difference. This is a powerful mechanism to encourage practitioners to conform to prescription targets. Regrettably, patient interests may not be well served under this system, as physicians most likely to challenge an HMO decision are often those who treat fewer managed care patients.

The presence of managed care organizations in a healthcare market may affect healthcare delivery for both managed care and non-managed care patients. Through financial incentives to providers and by more aggressively managing patient care than other types of insurers, MCOs may influence the process, price, and outcomes of care for plan patients. Perhaps equally important is the potential for managed care activity to generate market-level changes in patient care that affect non-managed care patients as well. Studies of the relationship between managed care penetration and expenditures for Medicare fee-for-service enrollees have demonstrated the existence of these types of spillover effects (Bundorf et al., 2004).

Managed care organizations generate spillover effects by increasing competition in the healthcare market, altering the structure of the healthcare delivery system, and changing physician practice patterns. Studies have found that higher levels of managed care penetration are linked with lower rates of hospital cost inflation and lower physician fees, consistent with competitive effects. Other studies demonstrate the impact of managed care on delivery system structure, including hospital capacity, hospital admission patterns, the size and composition of the physician workforce, and the adoption and use of medical equipment and technologies. More recent evidence has linked market-level managed care activity to the process — though not necessarily the outcomes — of care (Bundorf et al., 2004).

Conclusion

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