Industry and HMOs: A Natural Alliance

124 Pages·1978·8.01 MB·English

by  Diana Chapman Walsh (auth.)

Industry and HMOs:
A Natural Alliance
INDUSTRY AND HEALTH CARE 5
Industry and HMOs:
A Natural Alliance
Edited by
Richard H. Egdahl and
Diana Chapman Walsh
[Sl
Springer-Vedag New York
Springer Series on Industry and Health Care
Richard H. Egdahl, M.D., PhD.
Diana Chapman Walsh, M.S.
Center for Industry and Health Care
Boston University Health Policy Institute
53 Bay State Road
Boston, Massachusetts 02215
Springer-Verlag New York Inc.
175 Fifth Avenue
New York, New York 10010
Library of Congress Cataloging in Publication Data
Main entry under title:
Industry and HMOs-a natural alliance.
(Springer series on industry and health care; no. 5)
1. Health maintenance organizations-United States. 2. Labor and laboring
classes-Medical care-United States. 3. Health maintenance organizations-United
States-Congresses. 4. Labor and laboring classes-Medical care-United
States-Congresses. 1. Walsh, Diana Chapman. II. Egdahl, Richard Harrison.
RA413.5.U515 362.1'04'25 78-10912
All rights reserved.
No part of this book may be translated or reproduced in any form without written
permission from Springer-Verlag.
© 1978 by Springer-Verlag New York Inc.
ISBN-13: 978-0-387-90366-8 e-ISBN-13: 978-1-4612-9952-3
DOl: 10.1007/978-1-4612-9952-3
Preface
This fifth issue in the Industry and Health Care series takes a quick turn
through unpredictable and only partially charted waters. The series as a whole
has set out to explore the role of industry as a potential agent of change in the
health care system, and to map the courses that may lead toward control of
costs. One that looks possible is the effort now being made to infuse some
competition into the health care industry through organized systems of care,
known as HMOs.
Health maintenance organizations, especially the fee-for-service variety
known as IPAs (individual practice associations), have been a particular inter
est of the Center for Industry and Health Care, where a national data base 'on
IP A performance is being established with the aid of the Robert Wood Johnson
Foundation. The Center's identity with HMOs, combined with its focus on
industry and health care, has afforded us unusual access to nascent corporate
thinking on the pros and cons of HMO sponsorship. We are grateful for these
opportunities, and for the insights industry people have shared with us. This
series draws heavily on that experience.
Previous volumes in the series have touched on HMOs, but none with the
comprehensiveness attempted here. The first volume, in providing an overview
and road map for the series as a whole, briefly discussed the possibility of
industry's offering the HMO option as a modification to the benefit package, or
sponsoring HMO development as an alternative delivery system. The second
volume described a range of corporate innovations, HMO sponsorship among
them. The third volume, a collection of papers on industry'S changing role in
the delivery of health care, included descriptions of two industry-sparked
HMOs, written by their corporate sponsors. The fourth discussed industry'S
vi Preface
role in communicating information about health services generally and in
transmitting to employee groups the marketing messages of HMOs seeking
enrollees.
The point of departure for the more comprehensive treatment of HMOs in
this fifth volume of the series is Secretary Califano's National HMO Conference,
convened for business and labor leaders on March 10, 1978 by the Department
of Health, Education, and Welfare. The journey comes full circle six months
later with a panel discussion of corporate HMO activities, part of the "National
Conference and Workshop on the IPA-HMO," held on September 15, 1978 in
Aspen, Colorado by the Rocky Mountain Health Maintenance Organization,
Inc. In between, the IP A-HMO concept was subject to a thorough review by the
Massachusetts Division of Insurance during hearings on the Bay State Health
Care Foundation's application for an HMO license. Summaries of these three
events appear as appendices of the monograph; the text of chapter 3 draws on
yet another conference: "Industry and HMOs in Massachusetts," a follow-up of
the March 10 HEW conference, co-sponsored in April by the Center for Industry
and Health Care of Boston University and the Massachusetts Society of Internal
Medicine.
To the organizers of the conferences we owe a debt of gratitude, in
particular to Edmond E. Charrette, M.D., immediate past president of the
Massachusetts Society of Internal Medicine and Michael J. Weber, executive
director of the Rocky Mountain Health Maintenance Organization, Inc. For a
critical review of a draft of the book we are indebted to Jacob J. Spies, vice
president, Employers Insurance of Wausau. As usual, Willis B. Goldbeck was
extremely helpful, both for his own specific suggestions on the manuscript and
on behalf of the Washington Business Group on Health, whose member corpo
rations have been a major source of information and advice.
Although an artifact, the six-month period that this volume spans was a
time of unusual ferment. Not only were there conferences and hearings, but
several important HMO studies were published in professional journals during
this period, and many corporate executives began in earnest to ask whether and
how industry should promote the growth of HMOs. Their search for answers
raises policy issues that bridge the separation between the series' two
audiences-one in industry, the other in health care.
Preserving the timeliness of the material encompassed in the six-month
cycle was an overriding objective which required making some compromises.
For example, as we write this preface, the September panel discussion for
appendix III has not yet taken place; it will be added to the book in production.
This monograph, although far from exhaustive, is designed to be an up-to-date
progress report on the state of HMO development and industry's possible role
therein.
Boston, August 1978 Richard H. Egdahl
Diana Chapman Walsh
Contents
1. What Can Industry Do for HMOs and HMOs for Industry? 1
Diana Chapman Walsh
HMOs and Health Care Costs 2
Industry and HMOs 3
Notes 5
2. Defining Corporate Strategies and Goals 6
Diana Chapman Walsh
Organizational Patterns and Beginning Steps 8
Savings Potential in an HMO: The First Cut and a Second
Look 9
Data Deficiencies: Approximations and Proxies 10
The Current Benefit Package and Management-Labor
Relations 12
The Physician-Patient Relationship and the Tightrope of
Medical Politics 14
Geography: Concentration and Clout 15
The "Bottom Line" Is the Bottom Line. 16
...O r Is It? 17
Notes 18
3. Identifying Available Options 19
Anthony J. Mahler and John Friedland
viii Contents
Salaried Group HMOs: Roots in Prepaid Group Practices 22
Fee-for-Service HMOs 31
Other Emerging HMO Models 48
Potential Partners for HMO Development 54
Notes 63
4. Assessing Legal Obstacles 65
John D. Blum
Liability Issues for the HMO 65
Corporate Liability 69
State Law 71
ERISA 73
Antitrust Law 75
Conclusion 77
Notes 77
5. Issues for the Future 80
Richard H. Egdahl, Diana Chapman Walsh, and Joanna Lion
The Issues for Industry: Setting Realistic Expectations and
Goals 82
The Issues for HMOs: Amassing Useful Data and Establishing
Credible Records 83
The Broader Policy Issue: Who Ought to Realize the Savings? 85
Notes 87
Appendix I
A National Call to Action: Secretary Califano's HMO Conference 88
Anthony J. Mahler
Appendix II
Bay State Health Care Foundation Hearings 103
Anthony J. Mahler
Appendix III 109
Panel Discussion: Should Industry Sponsor Fee-for-Service HMOs?
Anthony J. Mahler
What Can Industry Do for
HMOs and HMOs for
Industry?
Diana Chapman Walsh
Any doubts that may have lingered about the place of health care costs on
the national agenda were officially laid to rest by President Carter's cost
conscious national health insurance principles, outlined in late July 1978 by
Secretary of Health, Education, and Welfare, Joseph Califano. 1 Costs now stand
out as the most immediate problem of national health policy. Nearly all com
prehensive cost control schemes accord the health maintenance organization a
significant role, justified on both theoretical and practical grounds. And most
proponents of health maintenance organizations are now looking to private
industry as a source of leadership and support. This is a relatively new de
velopment and could bring dramatic results, should industry accept the chal
lenge. The purpose of this book, the fifth in the Springer Series on Industry and
Health Care, is to unravel that challenge to industry and examine its implica
tions, from the perspectives of both industry and the health care system.
2 Diana Chapman Walsh
HMOs and Health Care Costs
Competition is the core concept around which wind the theoretical
threads of the case for HMOS.2-4 Economists blame lack of economic competi
tion for escalating costs and theorize that rising health care costs bespeak
incentives gone awry-an insurance system that underwrites care for "con
sumers" who need not or cannot "shop" for a sound medical buy from "provid
ers" who can generate demand for services, recover costs, and "optimize"
incomes. Prepaid health plans (HMOs) emerge from this analysis as a logical
mechanism for setting the incentives right and injecting competition into the
health care system. HMOs circumscribe within a fixed budget the traditional
open-ended relationship between providers, patients, and payers. Providers
contract to deliver a specified package of services to a defined population for a
fixed premium, established on the basis of actuarial projections. The consumer,
in deciding to enroll, also locks himself in. He now has to pay out-of-pocket
should he choose to go outside of the HMO for a health care service available
through the plan. With the sky no longer the limit on health care spending in this
closed financial system, incentives can be introduced to encourage providers
and consumers to conserve finite resources.
HMO proponents contend that if several such plans operate within a
single geographical area, they will become accountable for their performance to
a d(lgree unknown in the traditional health care system. Each HMO will be
forced to compete for members (patients) on the basis of product and price. The
self-discipline that is likely to result is illustrated by the Minneapolis experi
ence, described in chapter 3, case 6. Chapter 5 posits that market-oriented
approaches stand the best chance of permanently and satisfactorily solving the
problem of rising health care costs.
The practical rationale for prepaid health plans is their developing rec
ord. A few prototypes emerged well before the turn of the century. Their first
spurt of growth occurred in the 1930s; in the 1970s they became an instrument
of national health policy,S based on persuasive evidence of their capacity under
the right circumstances to provide medical care at lower cost than the tra
ditional unstructured system. A few studies have shown that successful mature
plans, such as Kaiser Permanente in California (see chapter 3, case 1) have cut
costs by 10 to 40 percent. Many more studies indicate that various types of
prepaid plans make considerably less use of the hospital, with no evidence of
compromised quality as compared to the traditional system.6 Since hospital
costs account for a major share of health care costs, this finding explains most
of the demonstrated savings of the well established plans and suggests that
prepaid plans generally should have significant potential for controlling costs
by minimizing their dependence on expensive inpatient services.
Despite their popularity in political circles, prepaid health plans have
taken hold less rapidly than it was hoped they would when, in 1971, their
development was espoused as national policyJ About 170 plans now enroll
under seven million members-only about 3 percent of the U. S. population.s
(Figure 1) Many plans were started during the early 1970s, and that growth has
continued. Between 1976 and 1977, the number of operating HMOs increased
by almost 15 percent.9 Still, the older plans account for almost three-quarters of
Industry and HMOs 3
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Dec. June Feb. Oct. May Jan. June Aug.
1972 1973 1974 1974 1975 1976 1976 1977
Date
Figure 1
Enrollment in HMOs, 1972-1977. (--) = Number of members; (--) = Percentage of
U.S. civilian population. Sources:
HMO Enrollment:
1. U.S. Department of Health. Education. and Welfare. Office of the Assistant Secretary for Health.
Office of Health Maintenance Organizations. Program Status Reports (December 1972; June 1973;
February 1974; October 1974; May 1975; and December 1976). Rockville. Maryland.
2. Group Health Association of America. National HMO Census Survey 1977. Washington, D.C.
U.S. Civilian Population:
1. The Handbook of Basic Economic Statistics. Vol. 32. Nos. 1 and 4 [January and April 1978).
Economic Statistics Bureau. Washington, D.C.
2. Current Population Reports: Population Estimates and Projections. U.S. Department of Commerce.
Series P-25. No. 504. August 1973.
total HMO enrollment, and the rate of increase in membership has fallen short
of expectations. There are various explanations for the disappointing growth
rate. High on the list is the undeniable fact that HMOs are difficult to start
because they necessitate major changes in the behavior of physicians and
patients. An important question for industry, then, is when is the effort jus
tified, and this is a question that several large industrial firms are now inves
tigating.
Industry and HMOs
The question splits into two. First, what can HMOs do for industry, to
ease the financial burden of paying for employees' health care without taking
away benefits or compromising the quality of care? Second, what can industry
do for the HMO "movement," to realign the incentives in health care, foster
competition, and thereby build private sector solutions to the dilemma of rising