Medical Technology Under Proposals To

Increase Competition in Health Care

October 1982

NTIS order #PB83-164046
Library of Congress Catalog Card Number 82-600646

For sale by the Superintendent of Documents,

U.S. Government Printing Office, Washington, D.C. 20402
Foreword

This report on Medical Technology Under Proposals To ha-ease Competition in

Health Care was prepared in response to requests by the House Committee on Energy

and Commerce and the Senate Committee on Labor and Human Resources. In the context of the OTA report Strategies for Medical Technology Assessment, the Committees

expressed interest in a separate analysis of the implications for the use of medical technology of proposals to promote competition in the financing and delivery of medical care.

This report was prepared by OTA staff. In preparing it, OTA consulted with

members of the advisory panel for the study and with other experts in health policy,

economics, health administration, and medicine. Drafts of the final report were reviewed

by the advisory panel, chaired by Dr. Lester Breslow; the Health Program Advisory

Committee, chaired by Dr. Sidney S. Lee; and other individuals and groups with expertise in the area. We are grateful for their assistance.

Director

Ill
Advisory Panel On Medical Technology Under Proposals

To Increase Competition in Health Care

Lester Breslow,

School of Public Health, University

Morris Cohen

Director of Technology Assessment

Kaiser-Permanente Medical Care Program

Oakland, Calik

Alain Enthoven

Graduate School of Business

Stanford University

Stanford CaliL

Rashi Fein

Center for Community Health and Medical

Care

Harvard Medical School

Boston, Mass.

Harvey Fineberg

School of Public Health

Harvard University

Boston, Mass.

Marie Henderson

Formerly, Division of Prepaid Group Plans

Federal Employees Health Benefits Program

Washington, D. C.

David Homer

Orthopedic Surgeon

Inglewood, Calik

Robert Krughoff

Washington Consumers’ Checkbook

Washington, D. C.

Mark Pauly

Department of Economics

Northwestern University

Evanston, 111.

Chair

of California, Los Angeles

Louise Russell

The Brookings Institution

Washington, D. C.

Lisbeth Bamberger Schorr

Maternal and Child Health Department

University of North Carolina

Chapel Hill, N. C.

Herbert Semmel

Consumer Coalition for Health

Washington, D. C.

Robert Sigmond

Advisor on Hospital Affairs

Blue Cross and Blue Shield Association

Philadelphia, Pa.

Jacob Spies

Health Policy Institute

Boston University

Boston, Mass.

Kenneth E. Warner

School of Public Health

University of Michigan

Ann Arbor, Mich.

Richard Watkins

Staff Physician

Group Health Cooperative

Seattle, Wash.

iv
OTA Staff—Medical Technology Under Proposals

To Increase Competition in Health Care

H. David Banta, Assistant Director, OTA

Health and Life Sciences Division

Clyde J. Behney, Health Program Manager

Jane E. Sisk, Project Director

John C. Langenbrunner, Analyst

Kerry Britten Kemp, Editor and Writer

Virginia Cwalina, Administrative Assistant

Mary E. Harvey, Secretary

Pamela J. Simerly, secretary

Principal Contractors

Peggy McManus, Institute for Health Policy Studies,

University of California, San Francisco, Washington, D. C. Office

Leon Wyszewianski, John R. C. Wheeler, Avedis Donabedian,

School of Public Health, University of Michigan

John R. Kimberly, Health Systems Management Group, Yale University

Judith E. Randal, Consultant, Washington, D. C.

OTA Publishing Staff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debra M. Datcher Joe Henson
Acknowledgments

This report has benefited from the advice and review of the Health Program Advisory Committee and several

other people in addition to the Advisory Panel. The staff especially wishes to thank Bryan R. Luce, who was

Project Director for the OTA report Strategies for Medical Technology Assessment and is now Director of the

Office of Research and Demonstrations, Health Care Financing Administration, for his contributions during the

early part of this study. The staff would also like to express its appreciation to the following people for their

valuable guidance.

Alvin Ankrum, Baltimore City Professional Standards

Review Organization, Inc.

George Bowers, General Accounting Office, U.S.

Congress

James Bryson, U.S. Office of Personnel Management

Mark Epstein, Health Systems Agency of Northern

Virginia

Robert Erikson, Kaiser-Permanente Medical Care

Program

Marsha Gold, Department of Health and Mental Hygiene, State of Maryland

Bradford Gray, Institute of Medicine, National Academy of Sciences

Lawrence Green, Harvard School of Public Health

Elizabeth Hilder, Federal Trade Commission

Kathryn Kelley, President’s Commission for Study of

Ethical Problems in Medicine and Biomedical and

Behavioral Research

Saul Kilstein, Health Care Financing Administration,

U.S. Department of Health and Human Services

Mark Kleiman, Consumer Coalition for Health

Daniel Koretz, Congressional Budget Office

Harold Luft, Institute for Health Policy Studies, University of California, San Francisco

Patricia Mullan, Office of Health Information and

Health Promotion, U.S. Department of Health

and Human Services

Samuel Meyers, National Center for Health Services

Research, U.S. Department of Health and Human

Services

Terri Louise Nally, American Chemical Society

Donna Potemkin, Intergovernmental Health Policy

Project, George Washington University

Lisa Potetz, Congressional Budget Office

Patrick J. Riley, National Federation of Federal

Employees

Valerie Riley, Blue Cross-Blue Shield Association

Louis F. Rossiter, National Center for Health Service

Research, U.S. Department of Health and Human

Services

Arnold J. Rossoff, University of Pennsylvania

Judith Sangl, Health Care Financing Administration,

U.S. Department of Health and Human Services

Helen Schauffler, A.D. Little, Inc.

Robert Silva, Health Care Financing Administration,

U.S. Department of Health and Human Services

Fred Wegner, American Association of Retired Persons and National Retired Teachers Association

Donald Whitehall, General Accounting Office, U.S.

Congress

vi
Contents

Chapter Page

Glossary of Terms.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Glossary of Acronymns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

1.

2 .

3 .

4 .

5 .

Introduction and Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Increased Competition: Proposals and Concepts . . . . . . . . . . . . . . . . . . . . . . . . . 17

Effects of Increased Competition on the Use and Innovation of

Medical Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Effects of Increased Competition on the Quality of Care.. . . . . . . . . . . . . . . . . 55

Consumer Information Under Increased Competition.. . . . . . . . . . . . . . . . . . . . 71

Appendixes

A. Method of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

B.

c

D

E.

F.

Health Program Advisory Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Federal Employees Health Benefits Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Selected Regional Examples of the Effects of Alternative Delivery Systems . 107

California Prepaid Medi-Cal Health Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Supplementary Medical Insurance for Medicare Beneficiaries . . . . . . . . . . . . . . 120

G. Health Systems Agency of Northern Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

H. Baltimore City Professional Standards Review Organization . . . . . . . . . . . . . . 132

I. Other Models of Information Disclosure: Truth-In-Lending Act and

Securities and Exchange Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

vii
Glossary of Terms

Alternative delivery system: An organization that delivers medical care in a manner alternative to feefor-service solo practice. The term most frequently

refers to prepaid group practices.

Ancillary technology: Medical technology used directly to support clinical services, including diagnostic

radiology, radiation therapy, clinical laboratory,

and other special services.

Cavitation: The method of paying for medical care by

means of a prospective per capita payment that is

independent of the number of services received.

Clinical technology: Medical technology used in the

provision of direct patient care, including medical

and surgical procedures.

Coinsurance: A form of cost sharing whereby the insured pays a percentage of total cost. (Also see copayment. )

Community rating: A method whereby the insurer

bases the premium rate on the average costs of all

subscribers in a specific industry or catchment area,

and all individuals pay the same rate. Community

rating spreads the cost of illness evenly over all the

subscribers and does not charge higher rates to those

currently or chronically less healthy than the average person.

Competition: In the present context of medical care,

the term refers to greater price sensitivity or cost

consciousness on the part of consumers, physicians,

hospitals, and other medical providers.

Comprehensive health care organization: Organizations that provide or arrange the delivery of comprehensive health services for enrollees. Like prepaid

group practices, these organizations integrate the

functions of insuring people against risks and delivering medical care, but they may vary in structure and payment method.

Copayment: A form of cost sharing whereby the insured pays a specific amount at the point of consumption, e.g., $10 per visit. (Also see coinsurance. )

Cost sharing: The general set of financing arrangements whereby the consumer must pay some

out-of-pocket cost to receive care, either at the time

of initiation of care, or during the time of the provision of health care services, or both.

Deductible: A form of cost sharing in which the insured incurs an initial expense of a specified amount

within a given time period (e.g., $250 per year)

before the insurer assumes liability for any additional costs of covered services.

Experience rating: A method of pricing used by the

insurance industry that bases premiums on the average projected costs of health care for different consumer subgroups. The premiums are a function of

experience of the group and subgroups and are affected by such variables as age, sex, and income,

as well as health status, use and cost.

Fee-for-service: A method of paying for medical care

on a retrospective basis by which each service received by an individual bears a related charge.

Group practice: Three or more physicians formally

organized to provide medical care through joint use

of facilities and distribution of income according to

a predetermined arrangement.

Health care alliance (HCA): An alternative health insurance model whereby insurance companies or employers would join with efficient providers into a

single plan. Unlike the health maintenance organization concept of a single organization insuring and

providing care, however, the HCA would offer a

clear separation between insurer and provider. Like

the individual practice association, the HCA would

not place the physicians at financial risk if the plan

were to fail.

Health maintenance organization (HMO): An organization that acts as both insurer and provider of

comprehensive but specified medical services by a

defined set of physicians to a voluntarily enrolled

population paying a prospective per capita amount.

Prepaid group practices and individual practice associations are types of HMOS.

Indemnity benefit plan: A type of insurance plan that

generally provides coverage of expenses through reimbursement to the patient for charges by doctors,

hospitals, and other providers of medical care.

Individual practice association (IPA): A type of HMO

whose physicians usually continue to practice in a

private office on a fee-for-service basis. Members

pay the umbrella organization cavitation payments

for covered services.

Managerial technology: Technology used to facilitate

and support the provision of health care services but

not directly associated with patient care, including

administration, transportation, and communication,

both within and among health care facilities.

Medical technology: The drugs, devices, medical surgical procedures used in medical care, and the organizational and supportive systems within which

such care is provided. Medical technology includes

ancillary, clinical, and managerial technologies.

Method of payment: The description of how and when

a provider is compensated for health care services

rendered. The main variations for physicians are feefor-service and cavitation.

Preferred provider organizations (PPO): An alternative delivery system of physicians and hospitals

who have been identified as low-cost providers.

They are alined with self-funded employers who

assume all of the risk. Claims are paid by an inix
dependent intermediary and reimbursement is on

retrospective, fee-for-service basis.

Prepaid group practice: A group practice that provides

or arranges comprehensive covered services for enrollees, who pay by cavitation. (See health maintenance organizations. )

Primary care network: A type of alternative delivery

system based on primary care physicians, who provide all primary care directly and supervise referrals and other care including hospitalization for each

enrollee. The participating primary care physician

receives a cavitation payment to cover her/his own

services and is at some risk for other use as well.

Service benefit plan: A type of insurance plan that generally pays for enrollees’ medical expenses through

direct, retrospective payment to participating physicians, hospitals, and other providers.

Vertical integration: The broadening of services within

a firm (or practice) to include those formerly provided by the firm’s buyers or suppliers.

x
Glossary of Acronyms

AB

AFDC

ALOS

AMA

APR

ATD

BC/BS

CBO

CCU

CFR

CHAMPUS

CON

Csc

CT

DHEW

DHHS

DOD

DRG

EKG

ESRD

FDA

FEHBP

FFS

FTc

GAO

GEHA

GHA

GHAA

GHC

GHCPS

GI

GNP

GVGHA

HCA

HCFA

HCP

HIP

HMO

HMOM

Aid to the Blind (DHHS)

Aid to Families With Dependent

Children (DHHS)

average length of stay

American Medical Association

annual percentage rate

Aid to the Totally Disabled (DHHS)

Blue Cross/Blue Shield

Congressional Budget Office

(U.S. Congress)

coronary care unit

Code of Federal Regulations

Civilian Health and Medical Programs

of the Uniformed Services (DOD)

certificate of need

Civil Service Commission (now Office

of Personnel Management)

computed tomography

Department of Health, Education, and

Welfare (now DHHS)

Department of Health and Human

Services (formerly DHEW)

Department of Defense

diagnostic-related grouping

electrocardiogram

end-stage renal disease

Food and Drug Administration (DHHS)

Federal Employees Health Benefits

Program (OPM)

fee-for-service

Federal Trade Commission

General Accounting Office

(U.S. Congress)

Government Employees Health

Association

Group Health Association

Group Health Association of America

Group Health Cooperative

Group Health Cooperative of Puget

Sound

gastrointestinal

gross national product

Genessee Valley Group Health

Association

health care alliance

Health Care Financing Administration

(DHHS)

health care plans

Health Insurance Plan of New York

health maintenance organization

HMOMinnesota

HMSA

HRG

HSA

HSCRC

ICU

IHPP

IOM

IPA

MARP

MCE

MOS

NAIC

NAS

NCHSR

NHI

NMC

OAS

OPM

OTA

PCN

PGP

PHP

PPI

P ro

PSRO

R&D

RAHMO

RHN

RO

SEC

SHPDA

SMSA

TA

UCR

UR

VA

Hawaii Medical Service Association

Health Research Group

Health Systems Agency

Health Services Cost Review

Commission

intensive care unit

Intergovernmental Health Policy

Project (The George Washington

University)

Institute of Medicine (National

Academy of Sciences)

individual practice association

Maryland Admissions Review

Program

Medical Care Evaluation Study

(PSRO)

Medigap Operations Staff

National Association of Insurance

Commissioners

National Academy of Sciences

National Center for Health Services

Research (DHHS)

national health insurance

National Medical Care, Inc.

Aid to Old Age Survivors (DHHS)

Office of Personnel Management

(formerly Civil Service Commission)

Office of Technology Assessment

(U.S. Congress)

primary care network

prepaid group practice

Prepaid Health Plan

patient package insert

preferred provider organization

Professional Standards Review

Organization

research and development

Rochester Area Health Maintenance

Organization

Rochester Health Network

Regional Office (HCFA)

Securities and Exchange Commission

State Health Planning and

Development Agency

Standard Metropolitan Statistical Area

technology assessment

usual, customary, and reasonable

charges

utilization review

Veterans Administration

x i
1.

Introduction and Summary

There is nothing more difficult to take in hand, more perilous to conduct,

or more uncertain in its success, than to take the lead in the introduction of

a new order of things.
Contents
1.

Introduction and Summary

Arrangements for financing medical care have

been cited as an underlying cause of rising expenditures for medical technologies and their indiscriminate diffusion and use. Most providers of medical

care, like the providers of other services, profit

from greater use. The notable difference with

medical care is that the people who buy and use

medical technology—mainly physicians, consumers, and hospitals—are largely insulated from the

direct costs associated with their decisions. Over

the past decade, a number of strategies have been

suggested to increase the cost consciousness of

people who use medical technologies. These strategies to increase competition and their implications for medical technology form the basis of this

report.

Much confusion has surrounded the use of the

term competition. The hallmark of strategies to

promote competition is the intention to increase

cost consciousness, and that is how the term is

used in this report. Competition also conveys a

sense of relying on individuals in the marketplace

to decide which technologies to use and how much

they are worth, instead of relying on the centralized decisionmaking of regulation. Indeed, the

goal of increasing cost sensitivity is to make these

individual decisions reflect more fully actual costs

and benefits.

Strategies to increase competition would not entail the elimination of regulation. The call for

greater competition is relative to the present situation as the starting point. Increased competition

would also mark a departure from the regulatory

emphasis of public policy during the past decade.

More importantly, regulation in a situation with

increased cost consciousness would have a different role. Regulation would not substitute for individual decisions about the price to pay for medical

technologies or the circumstances of their use. Instead, regulation would be used to establish and

support a context in which the buyers and users

of medical technologies were more price sensitive,

and these individuals would make the decisions

about use. In addition, many of the social problems that prompted governmental regulation in

the past would continue. Examples of such problems are the adequate use of certain technologies

to maintain public health, the quality of care delivered, the evaluation of medical technologies,

and the accessibility of medical care to poor and

elderly people.

In an analysis of proposals to increase people’s

sensitivity to costs, an important element is the

unusual nature of medical care. A strong sense

of compassion and concern for people who are

sick and suffering pervades the practice of medicine. The standards of medical professionals emphasize these human values and motivate the way

they care for patients. Perhaps related is the special way that society as a whole has viewed medical care, As expressed in governmental programs,

there is a social concern that people be able to obtain at least minimum levels of medical care, regardless of their ability to pay.

BACKGROUND AND SCOPE OF THE STUDY

This report responds to requests by the House

Committee on Energy and Commerce and the

Senate Committee on Labor and Human Resources. To aid their consideration of legislation

that had been proposed, these committees requested that OTA expand sections of its report

Strategies for Medical Technology Assessment

(208) to consider separately the implications for

medical technology of increased competition in

health care.

The indiscriminate use and rising cost of medical technology have figured prominently in

discussions of problems that characterize the

financing and delivery of medical care. But the

development and use of medical technology have

3
4 ● Medical Technology Under Proposals To Increase Competition in Health Care

also been prominent features of modern medical

care in the United States. Thus, it is important

to examine the positive and negative implications

for medical technology of proposals to restructure the financial incentives of the medical marketplace.

Proposals to increase competition in medical

care fall into three main categories: 1) increased

cost sharing by patients when they use medical

care, 2) greater competition among comprehensive care organizations that provide health insurance and deliver medical care, and 3) increased

antitrust activities by Government. This study

focuses on proposals for increased cost sharing

by patients and greater competition among plans.

It excludes the antitrust approach. However, antitrust activities to promote competition have major importance for price competition among medical providers and for governmental policies. Such

activities merit continuing and separate policy

research.

This study does not consider the problems that

might arise in the process of implementing competitive proposals. It does examine the provisions

of the competitive proposals and their likely effects, but does not explore the feasibility of putting the provisions into practice. Furthermore, this

study does not consider the possible alternatives

to competition. Although past regulatory approaches form the historical backdrop for the development of some of the competitive proposals,

they are not considered in any detail. Both of these

topics, and particularly the implementation phase,

deserve close attention.

In considering the implications of competitive

proposals, the study has used OTA’s broad definition of medical technology: the drugs, devices,

medical and surgical procedures used in medical

care, and the organizational and supportive systems within which such care is provided. This

definition includes the clinical technologies used

for direct patient care, the ancillary technologies

used directly to support clinical services, and the

managerial technologies not directly associated

with patient care but used to support the provision of medical care. In each of these areas, this

concept of medical technology covers both tangible and procedural technologies.

The study considers the financing and delivery

of medical technologies, but not their development or manufacture. Although the different incentives under increased competition may affect

research, development, manufacturing, and marketing of technologies, those stages are not

specifically addressed here. It is possible that less

growth in medical care expenditures will reduce

the profit rate of manufacturers and in turn lead

them to reduce their funding for research and

development (R&D). If this occurs, R&D activities

might be cut back and the level of innovation

could fall. On the other hand, the greater cost consciousness of buyers and users of medical technologies might channel R&D as well as innovation into different directions. Development of

cost-decreasing and managerial technologies as

well as less costly versions of existing clinical and

ancillary ones might be stimulated, with no

overall drop in the level of new technologies.

Greater cost sharing and catastrophic coverage

might even stimulate the development of expensive technologies.

This report is related to medical technology and

does not address all of the virtues, strengths, or

weaknesses of proposals to increase competition.

How greater competition would affect insurance

coverage and medical expenditures of high-risk

people warrants particular attention. With greater

patient cost sharing, chronically ill and elderly

people might face not only higher insurance premiums but also sizable expenditures that recur

every year. With more competition among comprehensive health care organizations, plans might

design their benefit packages or market their policies in ways that discourage high-risk people from

enrolling. Such social implications of increased

competition warrant additional evaluation.
Ch. l—introduction and Summary ● 5

SUMMARY

Increased Competition: Proposals

and Concepts

Proposals To Increase Competition

Proponents of greater price competition in medical care share the view that present insurance

coverage and the resulting financial and organizational arrangements are the main source of rising medical expenditures and inappropriate technology use. Furthermore, the procompetitive proposals discussed in this study share the intention

of strengthening the cost consciousness of the physicians, consumers, and hospitals that make decisions about buying and using technologies. In the

present medical marketplace, there is little of the

opposition and negotiation between buyer and

seller that is characteristic of most purchase decisions. In most marketplaces, buyers are mindful

of other purchases that they would be foregoing,

and thus usually weigh whether the benefits are

worth the costs. With greater sensitivity to price

under proposals to increase competition, buyers

and users of medical technologies are also expected to weigh alternatives and choose technologies whose costs are more commensurate with

their benefits.

Although proposals to increase competition

have many similarities with respect to their goals

and the mechanisms for achieving them, they have

a decided difference in emphasis. The strategy to

increase cost sharing when people use medical care

relies on the cost consciousness of individual patients to deter their initiation of care and to temper

their use of technologies as well as use generated

by providers. Like consumers of other services,

patients would convey their preferences and their

cost concerns by their decisions to seek or continue care or not to do so, their choice of providers,

and their choice of technologies. Medical providers, like other sellers, would continue to gain

more revenue (and incur more cost) from the

greater use of their services. But the desire of providers to promote use and expenditures would be

opposed by consumers’ reluctance to pay the cost

from their own incomes.

The alternative strategy, to increase competition among comprehensive care organizations,

would place the cost-consciousness choice of consumers only at the point when they choose insurance coverage or plans. At that time, consumers

would weigh the premium and out-of-pocket costs

with the benefits of enrolling in alternative plans.

In this strategy, there would be less cost sharing

and less emphasis on deterring the initiation of

care. Instead, the organizations that deliver medical care would have the primary role in controlling technology use. These organizations are expected to behave like present prepaid group practices, which receive revenue in advance by cavitation (per capita) payments from their enrollees and

operate within a prospective budget. Pressured

to compete for enrollees on the basis of premium

costs as well as quality of care and style of practice, these organizations would match resources

to the enrolled population and control the use of

technologies, such as hospitalization.

For both sets of proposals, a change in taxation policy is the main vehicle to bring about

greater price sensitivity. In the past, tax treatment

of health insurance premiums has encouraged coverage, because the expense has been deductible

from the income tax of employers or individuals.

These deductions have led people to have more

insurance than they would if they bore a larger

portion of the cost of it, although how much more

is not clear. Insurance coverage, in turn, has

dulled the sensitivity of patients, physicians, and

hospitals to the cost implications of buying and

using medical technologies.

Procompetitive proponents unanimously support making taxation more neutral toward medical insurance coverage. The strategy of greater

competition among comprehensive care organizations also calls for having a multiple choice of

plans.

Although the choices people would make in the

context of greater competition are unknown, certain tendencies are likely. Under the provisions

suggested for greater cost sharing—greater cost
6 ● Medical Technology Under Proposals To Increase Competition in Health Care

sharing or total direct payment by patients up to

a catastrophic limit, coverage of comprehensive

benefits, and experience rating of premiums—insurance coverage would have higher levels of cost

sharing at the time of use. The extent to which

people would purchase supplementary insurance

to cover possible expenses below the catastrophic

limit is not known: those at greater risk of having medical expenses, such as elderly people and

people who have recurrent expenses for chronic

conditions, as well as those who generally wish

to avoid risks, would be more likely to elect supplementary coverage. Overall, it is likely that the

average level of copayment would increase.

Under the strategy of greater organizational

competition—multiple choice of plans, community rating of premiums, and a governmental role

in enrollment—membership primarily in prepaid

group practices and secondarily in individual

practice associations (IPAs) would grow more

rapidly. It is uncertain whether or not the competition of these organizations would spur other

delivery systems and the overall delivery of care

to become more efficient. Also unclear are the

extent to which physicians would join organized

systems and the extent to which newly developed

organizations would resemble present ones.

Highlights of Provisions Common

to the Proposals

Besides changes in taxation policy, both strategies to increase competition in health care have

in common three provisions: 1) minimum benefits

defined to cover comprehensive care, 2) full coverage of medical expenses above a catastrophic

limit, and 3) payments for premiums or cost sharing related to income. These provisions conform

to the economic rationale behind the proposals

and are also designed to be compatible with certain accepted social principles.

Comprehensive coverage avoids artificially encouraging the use of one kind of technology over

another and permits the choice to depend on their

relative costs and benefits. Procompetitive proposals have included in the minimum benefits to

be covered by all plans a broad range of services:

physician, hospital, and ancillary. The list may

also include preventive technologies, drugs, visual

and auditory services, mental health benefits, and

long-term care. The areas to be covered have not

been defined exactly, as befits conceptual proposals that are not intended to be fully operationalized plans.

The definition of comprehensive care is a matter of great significance. Within the new context,

the delivery of medical care would be channeled

in the direction of the technologies included as

standard benefits and away from those that were

excluded. Technologies that fell outside the

boundary could be slighted, because their use

would not be paid for under the cost-sharing

strategy and would not be provided by comprehensive care organizations unless people added

supplementary coverage. The benefits to be included in comprehensive care would, in effect, set

out the scope of technologies considered an essential part of the medical profession. An example

is long-term care. Inclusion of long-term care in

standard benefits could give people greater financial protection and could reduce the cost and

length of stay in acute-care hospitals. Some of the

large prepaid group practices cover long-term care

and have added their own facilities. However,

coverage of long-term care could involve substantially increased expenditures.

The second provision, full coverage of catastrophic expenses conforms to the basic purpose

of medical insurance—to protect people from extreme financial hardship because of medical expenses connected with accident or illness. This

provision also conforms to the concept that the

entire society should help individuals in special

need. In any endeavor, however, resources tend

to be channeled into the areas that are the least

constrained. Expensive and lengthy medical care

is already such an area. Under increased cost sharing, this tendency would be further strengthened,

because the greater cost constraints on care below

the catastrophic limit would make care above the

limit a more attractive outlet for technology adoption and use. The overall effect on technology

cost, however, is unclear. With greater patient

cost sharing for expenses below the catastrophic

limit, fewer medical cases might reach the catastrophic threshold. In the case of comprehensive

care organizations, the organization would have
Ch. I—Introduction and Summary ● 7

a financial incentive to control technology use,

especially in the more expensive catastrophic

range.

Social concerns also underlie the provision that

payments be related to income and that they be

subsidized for poor people. There is general agreement throughout the society that income should

not prevent people from having access to medical

care that is considered basic. Although proposals

to increase competition seek to instill greater cost

consciousness into medical decisions, they also

recognize that this approach has limited applicability for low-income groups and cannot be

used for poor people. Provisions to subsidize

premiums or payments for poor people and to

cushion the effects of cost sharing on low-income

people would assure them financial access to basic

care.

Effects of Increased Competition on

the Use and Innovation of

Medical Technology

Greater Patient Cost Sharing

Greater patient cost sharing at the time of use

deters people from seeking care and results in a

lower annual percentage of the population’s having contact with the medical care system. Under

this strategy, hospital and physician services

would be affected more than others, which are

now subject to more exclusions and cost sharing.

Fewer people would be willing to pay the additional cost of a physician visit or a hospital admission. This reluctance would lead physicians

to use less expensive settings and technologies,

such as ambulatory centers or do-not-admit surgery. ’ In general, greater cost sharing would affect the initiation of care for children less than care

for adults.

The use of preventive technologies would not

be greatly affected by increased cost sharing because present insurance often excludes them from

coverage and because preventive use in the past

has not been very responsive to insurance coverage. An exception is the use of preventive technologies for children in low-income families; such

*Do-not-admit surgery is performed in a hospital, but patients

are not admitted as inpatients.

families have exhibited lower rates of use with

greater cost sharing.

In recent years, insurance for dental care has

become more common, and employers have increasingly included it in the health insurance

coverage provided to workers. With tax changes

and greater patient cost sharing, this trend might

be arrested and dental coverage might even fall.

At least initially with greater cost sharing, most

of the people who sought medical care would receive fewer and less expensive services. Most consumers would prefer medical professionals who

had lower charges and used less expensive technologies, if consumers considered the concomitant

lower costs worth the differences in quality of care

and style of practice. Patients might not comply

with physicians’ recommendations for additional

visits, diagnostic tests, or therapeutic procedures,

especially if the conditions were a minor inconvenience and not life threatening. Patients’ reluctance to pay additional costs could also lead

physicians to recommend less frequently tests or

procedures that have little diagnostic, therapeutic,

or preventive benefit.

Physicians, because of the effects on their own

incomes, would be more likely to limit technologies provided by outside organizations. Within

their own fee-for-service practices, they would be

more apt to limit the use of less costly technologies

than more expensive ones, particularly if the practice had a substantial investment in equipment or

facilities. As with the initiation of care, technology use for children would be less responsive to

cost considerations.

The combination of greater cost sharing and

catastrophic coverage has been alluded to above.

With increasing catastrophic coverage in private

insurance and governmental programs to fall back

on, people of all ages now have a low risk of paying the large expenses of catastrophic illness. The

notable difference from the present would be the

complete coverage for high expenses relative to

the greater restrictions on payment for less costly care. Because providers would be paid for expenses over the annual limit and patients would

have no out-of-pocket payments, technological

innovation and use might be channeled in that

direction.
8 ● Medical Technology Under Proposals To Increase Competition in Health Care

People might resist having surgery, hospital admission, or followup care for chronic conditions,

but for the cases that exceeded the limit, cost

would not be a consideration. Especially for such

lengthy or difficult cases, medical training emphasizes technology use, and patients are more

inclined to rely on their physicians’ advice and

to expect technological solutions. The use and

price of technology at the upper end of the price

spectrum would thus be largely unconstrained,

if not encouraged. The total effect of greater patient cost sharing on technology use and cost is

unclear; fewer cases would reach the catastrophic

limit, but those that did would be treated more

intensively.

In hospitals, technological innovation and use

would be subject to conflicting forces. Greater

pressure for efficiency would apply to technologies subject to more cost sharing. If there were

fewer hospital admissions, the use of technologies

associated with hospital stays would also fall.

Again, the presence of preexisting equipment and

facilities could retard that development. Pressures

to compete for patients on the basis of costs would

lead hospitals to trim their operating budgets, to

use their equipment and facilities more productively, and to scrutinize more carefully requests

to replace or add equipment-embodied technologies and facilities. Hospitals as well as other

organizations would adopt at a greater rate costdecreasing managerial technologies, such as

energy management systems. Managerial innovations in hospitals and in organizational arrangements to deliver medical care would be

adopted if they were more efficient.

A contradictory influence on hospitals and

other organizations with costly cases would come

from the lack of restraint on technologies associated with catastrophic expenses. Compared with

the present, this situation would channel development, adoption, and use more in the direction of

costly halfway technologies* for medical conditions that are lengthy or otherwise subject to expensive care. Again, the net effect on the level of

these activities would also depend on the number

*Halfway technologies alleviate the effects of certain diseases or

postpone death but do not prevent disease or reflect an understanding of it and are usually expensive.

of medical cases that reached the catastrophic

limit.

Whether the net effect on technology adoption

and use by hospitals would be greater efficiency

or less restraint is unpredictable. Perhaps the

technologies associated with low- and high-cost

cases would be affected differently. Or hospitals

and other organizations might become more specialized in the cases they treat. Some institutions

might treat the low- and moderate-cost cases, subject to market pressures to operate efficiently,

while other institutions might specialize in more

expensive cases, largely free from cost constraints.

An important caveat is that changes that apply across the entire system might produce results

much different from the results of past experiments that have increased cost sharing for only

a limited number of consumers, physicians, and

hospitals in an area. Systemwide changes might

lower cost and use to an even greater extent. Physicians, hospitals, and other organizations might

feel more pressured to be efficient when all of their

patients, instead of only a small minority, are subject to substantial cost sharing.

On the other hand, in an era when the number

of physicians will undergo a sizable increase, slowing the rate of growth in medical expenditures implies less income for physicians. Hospitals would

also be faced with a decline in revenues. Physicians might try to resist by raising their fees, emphasizing more expensive services, and charging

separately for services previously billed together

and more cheaply. Hospitals as well as physicians

might try to maintain their incomes by expanding

the use of technologies in areas that were freely

reimbursed, such as catastrophic expenses.

Competition Among Comprehensive

Care Organizations

Under this strategy, prepaid group practices

primarily and IPAs secondarily would experience

more rapid growth in their membership, numbers

of physicians, and market share. The development

of other organizational arrangements combining

the insurance and provision of medical care would

also proceed more rapidly. Because these organizations would compete for enrollees, they would

be under market pressure to produce and use
Ch. I—Introduction and Summary ● 9

technologies efficiently (lowest cost for a given

level of quality).

In the present context, prepaid group practices

have been subject to financial pressure because

they receive revenue predominantly by cavitation

payment. Although prepaid groups have delivered

medical care to their members at a lower total cost

than fee-for-service solo practices, there is insufficient evidence that IPAs or any of the other alternative delivery systems have done so. Questions

have also been raised, but not resolved, about

whether people who have enrolled in prepaid

groups are representative of the population or are

less likely to use medical care by preference or

because of health status. These caveats should be

borne in mind during the following discussion,

which describes the changes likely in the present

situation if organizations that felt similar pressures

for cost control either predominated or exerted

sufficient pressure on the others.

With the lower cost sharing for ambulatory care

that is typical of present prepaid groups, cost

would not greatly deter people from initiating

care. People in a context of greater competition

among comprehensive plans would have a greater

likelihood of having some annual contact with the

medical care system than people in a context of

greater patient cost sharing. Those covered under

Medicaid would beat least as likely to initiate care

as they are now.

With competing comprehensive care organizations, once people entered the medical care system, the organization would have predominant

control over the number and kind of technologies

used. In ambulatory care, the organization would

have a financial interest in discouraging laboratory and radiological tests that give unnecessary

or redundant results and in advising clinicians

about the appropriateness and timing of tests and

drugs. The presence of equipment would slow

these trends. There would be fewer followup visits

for many medical conditions, but greater use of

the ambulatory setting for cases previously admitted to hospitals.

Ambulatory visits with doubtful cost effectiveness, such as annual physical examinations,

might be reduced. Comprehensive care organizations would not necessarily provide more immunizations or counseling about chronic conditions, nutrition, or lifestyle. Organizations could

promote these technologies if consumers expressed

strong preferences for them or if they saved costs

for the organization over time. Overall, the per

capita rate of ambulatory visits would be the same

or lower.

Hospitalization rates, especially for surgery,

would fall for all age groups and income levels.

As equipment and facilities were not replaced, the

adoption and use of technologies associated with

hospitalization would fall correspondingly. In

both ambulatory and hospital settings, pressures

for greater efficiency would promote the adoption and use of cost-decreasing managerial technologies. Changes would be expected in the innovation and use of managerial technologies in such

areas as staffing patterns, the delivery of ambulatory care, and alternative delivery systems.

Comprehensive care organizations would control technology use for catastrophic care as

prepaid groups do now, by their acquisition of

equipment, staff, and facilities and by their arrangements with other organizations for rarely

used technologies, such as open-heart surgery.

Clinicians would continue to make decisions

about technology use for individual patients. It

is unlikely that catastrophic care would constitute

a larger share of total medical expenditures. If

market pressure pushed providers to be more efficient about their early treatment of medical

problems, and if comprehensive coverage permitted the use of the most efficient settings and

technologies, it is possible that catastrophic care

would account for a smaller portion of total medical expenses.

Effects of Increased Competition

on the Quality of Care

Greater Patient Cost Sharing

Although higher levels of cost sharing can be

expected to lead to lower use of technologies—

especially in such areas as laboratory tests and

drugs, illnesses of a potentially minor nature, and

certain kinds of surgery-it is not clear that these

changes would decrease the quality of care. For

many technologies, there is a tenuous relationship
10 ● Medical Technology Under Proposals To Increase Competition in Health Care

between use and benefit to patients’ health. Great

variations in rates of use among populations and

regions in the past support this skepticism. To the

extent that the use of these technologies conveys

little or no benefit, greater cost sharing would not

appreciably alter the outcome or the length of a

patient’s condition. Quality could even be improved to the extent that present overuse of technologies with some risk, such as hospitalization

and surgery, now harms patients’ health without

commensurate benefits.

Consumers’ use of different kinds of providers

could also result in similar levels of quality but

at a lower price. For example, less expensive professionals, such as midwives, who were equal in

technical aspects and perhaps even superior in interpersonal areas, might be substituted for physicians for some functions. Under such circumstances, levels of quality could either be maintained or improved. Coverage of comprehensive

care would be likely to raise levels of quality, as

providers and consumers chose the setting and

types of technologies for a medical condition without the constraint of limited insurance coverage.

To the extent that people did not initiate care

that could significantly alter the course of disease

and affect health outcomes, however, quality of

care would suffer. For technologies such as childhood immunizations that are cost effective, some

harm to quality can be expected with any decline

in use. Even with cost sharing related to income,

people with low incomes, including many elderly people, would be deterred from initiating care.

Another concern with increased levels of cost

sharing is that a cost-conscious consumer shopping for less expensive services might unintentionally choose and receive care of lower technical

quality, an aspect of medical care that consumers

are not able to evaluate fully.

If the coverage of catastrophic expenses for

everyone resulted in the use of additional services

after large expenditures had already been made,

the effect on quality would be indeterminate. The

extra care might improve the patient’s condition,

have little or no net benefit, or produce harm.

Under greater patient cost sharing, the quality

concern for technology use by providers would

be in the direction of overuse, as it is now. With

a continuation of present payment methods, providers would continue to have a financial interest

in using technologies. Pressure from consumers

might lead them to decrease the use of ineffective

technologies. But the relatively unrestrained use

of expensive technologies for patients with expenses above the catastrophic limit could have the

opposite effect. The concern regarding consumers

is that they would fail to initiate care in appropriate circumstances, both for cost-effective

preventive technologies and for conditions that

could be improved with early medical intervention.

Competition Among Comprehensive

Care Organizations

The financial barriers to initiation of care are

not stressed under this strategy, and comprehensive coverage in itself would facilitate the initiation of care. However, effective barriers to initiation of care have been achieved by restricted supply of facilities, longer waiting times to obtain an

appointment, and travel time to the delivery site.

To the extent that access to care is diminished,

consumer satisfaction would also be lessened.

However, arrangements such as walk-in clinics

and emergency rooms, as well as central recordkeeping, might enhance initiation and continuity of care overall, resulting in higher levels of

technical quality.

In prepaid group practices, selection of provider

is constrained to a preselected and limited staff

(closed panel). Although medical professionals

guide the selection of providers, the implications

for quality are not clear-cut. The most persistent

criticism of the prepaid group practice format is

that, because the prepaid group practice is a large

bureaucratic organization, it tends to depersonalize patients in their dealings with providers and

with the medical care system itself.

A consistent finding that relates to quality is

that enrollees of prepaid group practices have

lower hospitalization rates than people who use

fee-for-service solo practitioners. Lowering the

rates of hospitalization and of use of the technologies for routine hospital care would reduce

patients’ exposure to the associated risks, such as

infection. Although hospitalization rates among

enrollees of prepaid groups appear to be lower
Ch. I—Introduction and Summary ● 1 7

across diagnostic categories, there is no indication that patients’ well-being has been jeopardized

or that technical aspects of the quality of care have

been lower. In hospitalization as in ambulatory

care, members of prepaid group practices have

apparently received medical care of at least comparable quality to that provided by fee-for-service

solo practices.

In a restructured situation, organizations competing for enrollees on the basis of price would

have an incentive to reduce cost, even at the expense of quality. Present prepaid group practices

face loss of enrollment if their membership perceives that quality is below the level that they find

acceptable for the cost. Medical providers are also

responsive to the external standards of their profession. For both reasons, the practice of medicine

in prepaid groups has not differed in major ways

from that of other providers. However, the kinds

of new organizations that would develop and their

response to altered financial incentives could differ

from existing prepaid groups. Thus, the direction

of concern about quality with the strategy of

greater competition among comprehensive care

organizations would be toward underuse of medical care by providers.

Consumer Information Under

Increased Competition

Under increased competition, consumers would

need information about the benefits and costs of

the decisions that they would be called on to

make. To choose among competing plans that offered comprehensive care, people would require

information about total costs—both premiums

and out-of-pocket expenses-as well as any quality differences that would affect health. If benefits

varied across plans, information about the coverage of each plan would also be needed.

The information would have to be presented

in a standard way to permit comparisons across

plans. Although providers might have different

styles of practice unrelated to quality, those differences would not be so important to know in

advance. The opportunity to change plans during an open enrollment period would permit people to enroll in ones compatible with their

preferences. People could learn from their own

experience and that of others and gravitate toward

the plans they preferred. In theory, all people do

not need complete information for a market to

function well. A minority of well-informed consumers can influence other consumers and the

direction of the market.

As they do now, consumers would face problems in assessing technical standards of quality.

For insurance policies with greater cost sharing,

the direction of the concern regarding providers

would continue to be with overprovision of technologies. With a continuation of retrospective

payment methods, providers would have no apparent incentive to recommend too few services.

For the strategy of more competing comprehensive care organizations, however, the direction of

the concern with providers’ use would be with

underprovision. Providers operating within a prospective budget could achieve lower short-term

costs by recommending too few services.

If comprehensive care organizations had minimal patient cost sharing, as they do now, cost

would pose little deterrent to enrollees’ initiation

of care. And following the initiation of care, the

organization would guide the selection of providers and technologies. Under greater cost sharing,

in which cost poses more of a barrier, people

would need to be better informed about the appropriate circumstances for seeking care. Particularly valuable would be information to distinguish

self-limiting conditions from those requiring immediate care and to indicate an appropriate preventive schedule.

Society would have an interest in having people, especially children, use effective preventive

and therapeutic technologies that can obviate

long-term health problems and more costly care.

With greater cost sharing, people out of ignorance

might choose providers or technologies that were

less costly but ineffective or even harmful. The

unresolved issues are to what extent better informed consumers can assess incompetent providers or ineffective technologies and to what extent

the medical community, other parts of the private

sector, or the Government should structure the

system or guide consumers’ or providers’ decisions

so that these problems are avoided or minimized.
72 ● Medical Technology Under Proposals To Increase Competition in Health Care

Although little information is now available

and consumers are poorly informed about the

costs of their insurance coverage and their medical

care, this situation may be reasonable, since consumers are called on to make few choices. In a

different context, with greater price competition

and more choices, the private sector might generate much of the required information. The providers or plans themselves would be expected to

make cost information more generally available.

Private groups might arise to develop and publish

comparisons, although the difficulty of retaining

exclusive control of the information could inhibit

its development.

Certain methodological problems would continue to plague comparisons of plans and proIMPLICATIONS FOR POLICY

Either strategy to increase price competition in

medical care implies governmental action to establish the framework for the new system. Changing taxation policy to reduce incentives for greater

insurance coverage is one example of a provision

that would require governmental action. Universal coverage for comprehensive and catastrophic

care would require governmental action by regulation, tax incentives, or direct provision of coverage to set minimum levels of benefits to be included. Government is also the appropriate body

to establish the mechanisms for relating medical

expenditures or premiums for poor people to their

incomes.

Under the strategy of greater patient cost sharing, Government could guarantee loans for expenses below the catastrophic threshold, or it

could tax supplementary insurance policies to discourage them. Under the strategy of competition

among comprehensive care organizations, Government could mandate multiple choice of plans.

It could also play a role in the enrollment process, including setting standards and qualifying

plans as well as providing information to consumers about the plans.

In the context of increased competition in health

care, information for providers and consumers

would be intertwined with issues of quality. Qualviders. These problems, which apply to both

quality measures and cost indices, could produce

misleading results.

The experience with supplementary insurance

for Medicare beneficiaries casts doubt on the ability of the private sector to provide adequate information about insurance plans. The backdrop

to that situation was the complexity of Medicare

coverage itself. Medicare coverage and cost sharing have many variations, and policies to supplement the gaps in coverage have been correspondingly complex. Similar problems are less likely to

arise if plans are required to have certain standardized and comprehensive benefits.

ity assessment and assurance would continue to

pose problems under either strategy to increase

competition, although the direction of concern

with providers would differ under each—underprovision of medical care with comprehensive

care organizations and overprovision with greater

patient cost sharing.

Under the strategy of greater competition

among comprehensive care organizations, information requirements for consumers would center

on differences in quality (as opposed to style) that

accounted for a plan’s lower costs. One possible

model for developing and providing information

is the Federal Employees Health Benefits Program,

under which Federal employees choose their insurance plans from among several alternatives. The

Government qualifies plans, circulates information to employees about the plans, and enrolls

members, and this year also provided each employee with comparisons of the premiums, benefit

coverage, and cost-sharing provisions of each

plan.

An alternative model is the combination of voluntary Federal certification and State regulation

that has been adopted to address problems with

supplementary medical insurance for Medicare

beneficiaries. Other possible models are the procedures of the Securities and Exchange Commission
Ch. I—Introduction and Summary • 13

and the Truth-in-Lending laws. Using these procedures as models, the Government could require

that providers generate information about premiums, covered benefits, and likely out-of-pocket

expenses and present it in a standardized way to

permit comparisons. It could also require information about indicators of quality or practice

style.

These models address information needs related

to insurance plans’ costs and benefits; however,

neither addresses information needs related to

technology use under greater cost sharing. Present deficiencies in information about the effectiveness of technologies and the competence of

providers would persist under both competitive

strategies. Under these strategies, medical providers would have more interest in the cost effectiveness of medical technologies, in order to make

decisions that considered costs as well as benefits.

It is unlikely that individual delivery systems

would be able to generate this information. Possible sources are governmentally funded evaluations

conducted in the private or public sector or evaluations from a private consortium sponsored by

Government and other interested parties. Under

the strategy to increase patient cost sharing, a

notable difference from the present situation is the

importance of consumer knowledge about initiating care. Since consumers would exercise more

discretion about initiating care, they would need

to improve their ability to distinguish circumstances that justified their seeking medical care

from those that did not.

Under both competitive strategies, the regionalization of specialized facilities may continue to be

an issue. Market pressure might make providers

unwilling to acquire expensive technologies that

were efficacious but used for conditions with a

low prevalence. Even large comprehensive care

organizations would not have sufficient volume

to incorporate all the technologies that their patients would require. Enterprises might develop

to provide such technologies on referral from or

by contract with other providers. In addition,

with greater cost sharing, market pressures for efficiency would not restrain the development,

adoption, and use of expensive halfway technologies for conditions whose cost exceeded the annual catastrophic limit. Possible approaches to

these problems range from relying on areawide

planning at the State and local level to placing

certain technologies in medical schools or changing the emphasis and continuing federally supported health planning.

Some technologies, notably primary preventive

ones such as immunizations, may not be used to

the extent considered socially beneficial under

either competitive strategy. Current Federal and

State immunization programs could continue to

supplement private provision, and similar programs could supplement the use of other technologies as warranted.

Thus, alternative strategies to increase price

competition in health care differ in the effects that

they are likely to have on medical technologies.

Furthermore, the direction of any given effect

would vary according to the specific technology

being considered. The nature of the problems that

are likely to arise and the policies to address them

will depend on the strategy and the technology

under consideration.

ORGANIZATION OF THE STUDY

Chapter 2 provides background information and organizations that provide comprehensive

about the medical care market and the competitive care. The concept of competition in medical care

proposals that is needed to analyze their effects is discussed and distinguished from the textbook

on medical technology. The chapter presents the model.

similarities and differences between two kinds of

proposals to increase competition: 1) greater cost Subsequent chapters examine the effects of the

sharing by patients when they use medical care, proposals on three areas that OTA considered of

and 2) greater competition among health plans prime importance for medical technology: 1) use
74 ● Medical Technology Under Proposals To Increase Competition in Health Care

and innovation, 2) quality of care, and 3) consumer information. Each of these chapters distinguishes increased cost sharing by patients when

they use medical care from greater competition

among health plans and organizations. And each

also analyzes the likely effects on different decision points: consumers’ selection of health plan,

patients’ initiation of care, and providers’ and patients’ selection of technologies.

Chapter 3, on the effects of increased competition on the use and innovation of medical technology, considers the likely effects on different technologies: clinical and ancillary technologies,

which are used for patient care; and managerial

technologies, which determine the resources available and the style of practice. The issues raised

in this chapter relate to the efficiency (cost for a

given level of quality) of care delivered, as well

as the nature of technological advance that would

be probable. Chapter 4 examines the likely effects

of increased competition on quality of care, an

issue related to the use of medical technologies

but important enough to receive separate attention. Chapter 5 acidresses the different information that consumers would need to make the decisions expected of them under greater competition.

This chapter also considers potential sources of

information in a situation with different incentives.

Appendixes A and B respectively present the

method that OTA used to conduct the study and

acknowledge the valuable assistance of the Health

Program Advisory Committee. Appendixes C

through I contain case studies of governmental

programs or regional situations that pertain to

issues of use and innovation, quality of care, or

consumer information. The material in these case

studies is referred to throughout the body of the

study.
2 .

Increased Competition:

Proposals arid Concepts

“Would you tell me, please, which way I thought to walk from here?” “That

depends a good deal on where you want to go,” said the Cat.

-Lewis Carroll

Alice in Wonderland
/.
2

Increased Competition;

Proposals and Concepts

In recent decades, spending for health care has

been rising much faster than spending for other

goods and services in the economy. In 1965, national health expenditures of $42 billion accounted

for 6 percent of the gross national product (GNP),

but by 1980, they totaled $247 billion or 9 percent of GNP. This growth has been especially

notable in the Federal budget, largely because of

the entitlement programs for medical care that

began in the mid-1960’s. In 1965, when Medicare

and Medicaid were enacted, personal health care

expenditures in the Federal budget were less than

$8 billion; in 1980, they amounted to about $63

billion, of which $36 billion was for Medicare and

$14 billion for Medicaid (103). Not only are these

expenditures straining the Government’s budget,

but they are also crowding out spending for other

programs, such as public health, nutrition, education, and housing.

Strategies to promote competition in health care

are responses to the rapid and continuing growth

of expenditures for medical care, as well as to the

inappropriate use and rising cost of medical technologies. Proponents of greater competition agree

in their diagnosis of the problem—lack of cost

CURRENT INCENTIVES RELATED

MEDICAL TECHNOLOGY

There is widespread agreement that present financial incentives have fueled the use and cost of

medical technology (79,88,235). The nature of insurance coverage and the financial and organizational arrangements that have flowed from it have

dulled the sensitivity of physicians, consumers,

and hospitals to cost considerations. The purpose

of health insurance is to allow people to obtain

needed care without risking financial ruin. But the

use of medical technology is subject to much discretion, and insurance has reduced cost as one of

the few factors that deter use.

consciousness by consumers and providers in their

decisions about medical care. They also agree that

the incentives of present financing arrangements

are the underlying cause.

This chapter describes how current medical insurance arrangements stimulate people’s use of

medical technology without full regard for the cost

implications. The next section describes two major strategies intended to promote price competition by increasing cost consciousness. One strategy is to increase patient cost sharing when technologies are used; the other is to use consumer

selection among plans as the leverage to pressure

comprehensive medical care organizations to deliver medical care more efficiently. A review of

the economic theory of competition distinguishes

the theoretical model from the strategies proposed. The chapter concludes by examining the

competitiveness of the medical care market and

the importance of the three areas on which this

report will focus as it analyzes the implications

of increased competition—use and innovation of

medical technology, quality of care, and consumer information.

TO THE USE OF

There is also widespread agreement that taxation policy has stimulated the growth of medical

insurance (79,88,104). Employers’ contributions

for their workers’ medical insurance and other

fringe benefits are deductible as business expenses

and are not reportable as personal income to the

workers. An extra dollar taken in medical insurance premiums is therefore worth more to a

worker than an extra dollar of income that is subject to income tax. Because of these taxation policies, people do not bear the full costs of the insurance coverage they select or that is selected on

17
78 ● Medical Technology Under Proposals To Increase Competition in Health Care

their behalf by labor unions and employers. This

situation encourages people to have more medical

insurance than they would buy with after-tax dollars. The deduction from personal income for a

portion of health insurance premiums has an effect in the same direction, but is weaker because

of the limited amounts permitted.

In 1980, patients paid directly for 32 percent

of the total expenditures for their personal health

care (103). But the percentage varied greatly with

the setting and type of technology. Insurance coverage was most pervasive for hospital expenditures, of which public and private third parties

paid more than 90 percent. Third-party payment

for other services has been more limited: 63 percent of physician expenditures, 58 percent of nursing home care, 41 percent of other health professionals’ services, 25 percent of dental services, 17

percent of drugs, and 15 percent of eyeglasses and

appliances (103).

Although coverage for catastrophic expenses

grew during the 1970’s, at least 15 percent of people with private insurance did not have catastrophic protection (49). Catastrophic coverage

limits the insured’s direct expenses for covered

services to a maximum annual amount, which

may vary from $1,000 to $10,000 depending on

the policy. In 1978, an estimated 9 percent of all

families, mostly those with low incomes, had outof-pocket medical expenses that exceeded 15 percent of their income (49). The most frequent catastrophic expense has been for long-term care, a

type of care used mostly by elderly women (48).

The risk of an elderly person’s having a catastrophically expensive illness (defined as $5,000 in

1974) was eight times greater than that of a

younger person, but an elderly person had the

same low likelihood (0.04 percent) of paying outof-pocket $5,000 or more. Besides private coverage, public insurance programs such as Medicaid

and State-supported facilities have expanded to

provide financial protection (58).

Insurance not only protects people from the risk

of large unforeseen expenditures, but also affects

their decisions about using services. Because people with insurance face a lower or even zero price

at the time of use, insurance coverage weakens

the role of cost as a deterrent to people’s decisions

to seek care and as an incentive to choose less costly providers or technologies. If greater use by

some people causes insurance premiums to rise,

they do not feel the full effect, because the cost

is distributed beyond the users to all the insured.

Insurance coverage also affects the decisions of

physicians, hospitals, and other medical providers. When deciding about the use of medical

technologies, providers are less concerned about

the effect on their patients’ finances if patients are

insured. With the deterrent effect of cost muted,

the factors that promote technology use weigh

more heavily in providers’ decisions. Medical

training emphasizes reliance on sophisticated

technologies, and professional norms convey

greater prestige to physicians who use such

technologies. The society as a whole values technological solutions to problems, in medical care

as well as in other fields, and patients often

associate sophisticated technologies with quality

care (13).

The usual methods of paying providers also

contain incentives for them to use additional and

more expensive technologies. As is the case with

the providers of most services, the providers of

medical care gain more revenue the more their

services are used. The difference is that consumers

with insurance tend not to resist the cost. Most

physicians are paid fees for their services, with

the relative fees higher for procedures connected

with complex diagnostic equipment than for those

associated with caring. Hospitals are reimbursed

for the costs or charges of their operations. They

may compete for physicians by making sophisticated, prestigious technologies available to them,

and passing the cost on to third-party payers.

The overall result has been inefficiency (higher

cost for a given level of quality) in the provision

of particular technologies and in the combination

of technologies used for a given medical condition. In the absence of pressures for providers to

be efficient, fragmentation in the delivery of care

has persisted, with resulting duplication of facilities and technology use. A related phenomenon

is the choice of setting for providing certain technologies. Often the more expensive and less safe

hospital setting is used when ambulatory care

would be just as effective.
Ch. 2—increased Competition: Proposals and Concepts ● 1 9

Cavitation payment alters the incentives of feefor-service. A practice paid by cavitation receives

in advance an annual per capita payment for each

enrollee and undertakes the responsibility of providing or arranging for covered services. To increase the practice’s revenue, therefore, it is necessary to increase the number of enrollees. Providers do not have a financial incentive to use additional or expensive technologies because revenue

per enrollee remains fixed regardless of the number of services used. Since use raises expenses but

not revenue, the financial incentive is to limit use.

Health maintenance organizations (HMOS) receive payment by cavitation and combine the

functions of insuring and providing a comprehensive range of medical care. HMOS have two main

variations: prepaid group practices and individual

practice associations (IPAs). A prepaid group consists of physicians, most of whom practice full

time with the group; an administration; and supporting ancillary facilities. Since most of its revenue is fixed in advance, a prepaid group must

make decisions about the acquisition and use of

technologies within a predetermined budget.

Within this budget, physicians and administrators

weigh alternatives and choose technologies to buy

and use.

Although the umbrella organization of an IPA

is paid by cavitation, the same incentives do not

apply to technology use. In contrast to a prepaid

group, physicians in an IPA remain practicing in

separate offices and receive fees for the separate

services provided to IPA enrollees. Most also have

additional and often larger numbers of patients

who pay on the usual fee-for-service basis. Thus,

these IPA providers do not face the same preset

and limited budgets of their prepaid group counterparts. And the incentives

to limit technology use

weaker.

PROPOSALS TO INCREASE COMPETITION

Proposals to increase competition share the intention of strengthening the extent to which cost

enters into the decisions of providers and consumers. Procompetitive proponents concur in a

desire that consumer preferences guide the style

of medical care that is delivered. They also favor

relying more heavily on the marketplace for decisions, with governmental regulation assuming a

corrective and supportive role. All advocate that

Government continue its support of elderly and

poor people and, depending on the proposal, that

Government qualify plans and enroll members.

Although the strategy that would increase patient cost sharing and the one that would promote

competition among comprehensive care organizations overlap in many of their means and goals,

they have a decided difference in emphasis (see

table 1, fig. 1). The former favors increasing the

direct financial impact on individuals at the point

of using medical services. The latter places the

critical consumer choice at the time when insurance coverage or plan is selected and would have

individual consumers bear more of the cost of that

decision. Under this strategy, the organization delivering care would have financial incentives to

control technology use.

Table 1 .—Participants and

of cavitation payment

are correspondingly

Choices To Be Made

Under Increased Competition

Government

●

●

●

●

●

●

●

●

Determine tax treatment of insurance premiums by employers, employees

Determine tax treatment of medical expenditures by consumers

Whether to guarantee loans to consumers for high expenses

Whether to subsidize premiums or expenses of aged, poor,

general population

Whether to mandate or support areawide planning

Determine its role in quality assurance

Whether to provide information

Determine its role in consumer enrollment and qualification of insurance plans

Consumers

● Selection of coverage or supplementary coverage

● Decision to seek care

● Type of provider to use

● Type of technology to receive

Unions or employers representing consumers

● Develop and screen options avaiIable for consumers

Insurers

● Types of coverage to offer

● Marketing strategies

● Relationships with providers

Providers

● Decision to provide care

● Types of services and settings (technologies) to use

● Relationship with insurers

● Relationship with other providers

SOURGE: Office of Technology Assessment.
20 Ž Medical Technology Under proposals To Increase Competition in Health Care

Figure 1 .—Decision Points Under Proposals for Greater Patient Cost Sharing or Greater Competition Among

Comprehensive Health Care Organizations

SOURCE: Off Ice of Technology Assessment.

Greater Patient Cost Sharing

The proponents of increasing cost sharing when

patients use services wish to correct the distortion that now results from insurance coverage

(88,213). They characterize the present situation

as one in which, “with the exception of some of

the poor and the near poor, most people have too

much insurance of the wrong kind” (212). Insurance is considered excessive in the sense that

the costs are greater than the benefits to the consumer. Although the consumer benefits from reduced risk of facing uncertain medical expenses,

the resulting costs of insurance coverage from

stimulating use of services and altering the style

of care delivered are said to overshadow these

benefits.

People make decisions about use that are based

on the lower cost they pay out-of-pocket. Since

insured people do not bear the actual costs of use,

the theory is that they are more apt to initiate

medical care and

ly in their choice

that they weigh cost less heaviof providers and technologies.

The overall results are not considered desirable

even from the point of view of the insureds, who

may prefer that more resources be channeled into

areas other than medical care.

Proponents of greater patient cost sharing

would correct this distortion by having the nonpoor pay a substantial portion of their medical

expenditures. Feldstein, for example, has proposed

“major risk insurance” (88). Insurance would cover comprehensive care, so that coverage would

not artificially encourage one setting or type of

care. Insurance would also completely cover catastrophic expenses to protect people from financial

hardship. Nonpoor families would bear their medical costs up to the catastrophic threshold, a figure

such as 10 percent of income that would be “large

in comparison to average family spending and
Ch. Z—Increased Competition: Proposals and Concepts ● 21

health care but low relative to family income”

(88).

Feldstein’s proposal called for the Federal Government to provide such major risk insurance and

to guarantee loans for expenses below the limit.

A tax credit for catastrophic coverage (213) or for

expenses above a designated percentage of income

(242) are alternatives. Such provisions would replace the current income tax deduction for medical expenses over 3 percent of income. Feldstein

favored continuation of Medicare, perhaps with

increased deductibles. Major risk insurance would

eliminate medical indigency by limiting the deductible to 10 percent of income. Families below

the poverty line could be given an additional cash

grant to cover their expected medical expenses.

Feldstein foresaw a continuing role for areawide

planning. Although the market would guide more

decisions, planning could coordinate the location

of expensive equipment and long-term investment

in facilities.

Proponents of increased cost sharing by patients

at the time of use contend that this strategy would

lead to more efficient use of resources. As patients

became more cost conscious about whether or not

to use services and shopped on the basis of cost

and quality for the provider or the setting of the

care that they did seek, providers’ behavior would

change. Physicians would continue to guide patients, but their advice would reflect concern

about the effect on their patients’ finances. And

hospital administrators would become more conscious of costs in the management of their institutions (88).

How likely are these intended effects to occur?

Proponents of greater cost sharing agree on the

importance of reducing first-dollar coverage,

which they believe stimulates people to use more

services. An important issue is whether or not

people with insurance coverage against major

risks would purchase supplementary coverage for

expenses below the limit that are left uncovered.

Feldstein believes that people seek insurance mainly to protect against the risk of major expenses,

and expects that most people would not seek additional coverage if major risk insurance existed.

He predicted that only families expecting aboveaverage medical expenses would seek supplementary coverage, a process of self-selection that

would raise premiums and ultimately limit demand for such coverage.

Supplementary coverage induces greater use of

the services covered by the basic plan. A person

with insurance to supplement Medicare coverage,

for example, is more likely to use additional services and to reach the level at which Medicare coverage begins. Since the premium for supplementary insurance does not reflect extra costs to

Medicare, Pauly has suggested a tax on supplementary coverage. Such a tax would discourage people from purchasing supplementary coverage or reflect the added cost if the purchase was

made (213,215).

There has been no direct test of the kind of insurance coverage that people would select if they

had catastrophic coverage and taxation did not

distort their choice. Some theoretical work supports the prediction that people would not elect

supplementary coverage for ambulatory care if

they had inpatient coverage (136). Even with present tax incentives, where employees had options,

almost as many chose the least expensive option

as chose the most expensive (84). People at greater

risk of having medical expenses, such as elderly

people and those with recurrent expenses for

chronic conditions, and people who generally

wish to avoid risks would be more likely to buy

supplementary coverage. Although the extent of

supplementary coverage and the magnitude of the

changes are unclear, the direction of the effect of

more neutral taxation would be toward coverage

with more cost sharing than is now the case.

Proponents of greater cost sharing believe that

the changes they propose have the best chance of

moderating medical care use and costs in the near

future. However, a major goal of this strategy is

to improve the decisionmaking process. It would

be perfectly acceptable to them if people still

wanted to buy that amount and kind of care when

they were paying a larger part of the actual cost

at the time of making the decision. “A fundamental premise of competition is that the level of use

of a good or service that people demand at a price

that reflects cost is the best level of use for them”

(215).

,4–J
22 ● Medical Technology Under Proposals To Increase Competition in Health Care

Competition Among Comprehensive

Care Organizations

A second strategy emphasizes competition

among organizations that deliver comprehensive

care (79,170). Proponents of this approach observe that organizations such as prepaid group

practices provide medical care to their members

at lower cost than other practices. But these organizations represent a small share of the market.

Despite their growth in the recent years, in 1981

prepaid groups had fewer than 9 million members,

which represented slightly under 4 percent of the

market nationally (57,61). This strategy seeks to

create market conditions so that these and other

organizations that deliver comprehensive care can

compete on a more equal basis with other plans

for members.

Certain aspects of the present market are cited

as inhibiting the growth of these comprehensive

care organizations: the tax treatment of insurance

premiums reduces the influence of cost in consumers’ selection of plans and coverage; and

prevailing payment methods do not reward cost

consciousness, but instead give physicians and

hospitals higher revenue for greater and more

costly use of technologies. To create a more

favorable climate for the growth of comprehensive delivery systems, two main mechanisms are

suggested: expanding the number of people who

are offered an alternative delivery system and,

through tax changes, having people bear more of

the costs or savings of their coverage choices.

With all plans offering comprehensive care and

catastrophic coverage, consumers would choose

the combination of style of care, level of premium,

and extent of out-of-pocket costs that they

preferred.

This strategy would place the critical choice by

consumers at the point of insurance coverage

rather than use of services. This approach reflects

the judgment that, “the sick or worried patient

is in a poor position to make an economic analysis

of treatment alternatives” (79), and that the appropriate point for rational economic choice is annual selection of a health plan.

Proponents of competition among plans argue

that comprehensive care organizations are now

providing good quality care at lower cost. If all

plans compete for enrollees on an equal basis, they

expect that consumers would prefer these comprehensive care organizations. They expect that

competition for enrollees would both favor these

organizations and pressure other providers to improve their efficiency. Some of the arrangements

formed by providers would resemble those now

most common—fee-for-service physicians practicing separately from hospitals and other facilities

and receiving reimbursement from an insurer.

What is emphasized, however, is the superior

performance that has been or might be achieved

by comprehensive care organizations, mainly

prepaid group practices, but also IPAs, fee-forservice multispecialty groups, primary care networks, health care alliances, and preferred provider organizations (see Glossary of Terms). These

alternative delivery systems have in common that

the organization that collects the premiums also

provides or arranges for comprehensive services.

The functions of insuring and delivering comprehensive care are thus integrated in the organization (see ch. 3).

Medicare and Medicaid recipients could enroll

in the competing plans. Under Enthoven’s Consumer Choice Health Plan, Medicare beneficiaries

could have the Government apply their actuarial

cost to the premium of the qualified plan they

select (79). The Government would also provide

poor people with a voucher related to family income that could be used for the premium of a

qualified plan.

Enthoven stipulated that the Government

should qualify plans and supervise the enrollment

process through a set of rules that apply to all

plans. Both Enthoven and McClure would have

the plans provide information about premiums,

out-of-pocket costs, and benefits covered. This

provision seeks to aid consumers’ comparison and

choice of plans (79,170).

Some of Enthoven’s requirements for qualified

plans are intended to channel competition away

from nonprice aspects and into efforts to reduce

costs. Requirements include annual open enrollment, community rating, coverage of certain

minimum services, premium rating by market
Ch. Z—Increased Competition: Proposals and Concepts . 23

area, catastrophic coverage, and information

disclosure. Coverage of comprehensive care as

minimum benefits and enrollment restrictions address the problem of “free riders, ” who might buy

no insurance until they expect medical expenses.

Community rating—uniform premiums within actuarial categories—reflects a belief that the well

should help pay for the care of the sick. It also

relates to the potential problem of adverse selection, whereby high or low users of services gravitate to certain plans, as described below.

Proponents of greater plan competition emphasize the importance of creating incentives for

providers—medical professionals and organizations—to perform efficiently, They point to the

largely untapped potential to use medical technologies more judiciously and to hospitalize less

frequently. This strategy would rely on alternative

delivery systems to rationalize technology use and

to achieve lower medical expenditures.

Mechanisms To Promote Cost

Consciousness

Both strategies to promote competition advocate changes in taxation so that it has a more

neutral effect on health insurance coverage (see

table 2). The Enthoven-McClure-Ellwood approach also calls for giving workers a multiple

choice of plans (79,170). Although consumers

themselves might press for such a choice, mandating it would certainly hasten the process. The intended result of the changes is to instill more sensitivity to price in selection of plans and coverage.

Both strategies would also have insurance cover

comprehensive care. Comprehensive coverage

avoids encouraging one kind of technology, such

as hospitalization or surgery, over another, such

as ambulatory or medical therapy. It also permits

the combination and location of technologies used

to be more responsive to actual relative costs.

Both sets of proposals to increase competition

would cover catastrophic expenses and relate payments to income. These provisions are based on

social values. Both are intended to prevent financial hardship because of poor health and to prevent income level from unduly limiting the use

of medical services.

Table 2.—Comparison of Proposals

To Increase Competition

Similarities among proposals

● Taxation more neutral toward medical insurance coverage

● Corn prehensive benefits standard

● Catastrophic coverage standard

● Supplementary coverage an available option

● Government subsidies for the poor

● Income-related payments (for insurance premiums or

cost sharing)

Differences among proposals

Greater patient cost Competition among

sharing at the comprehensive health

Provision time of use care organizations

.

Amount of cost

sharing

Multiple choice of

plans

Basis of premium

rating

Areawide

planning

Government role

in enrollment

Emphasized—

applied to all services up to annual

limit

Permissible

Experience rating

Yes

Perhaps provide

minimum coverReemphasized —possibly as low rates,

perhaps for ambulatory care

Emphasized

Community rating

Not included

Qualify plans

Provide information

age to everyone about plans

Enroll members

SOURCE: Office of Technology Assessment

Other provisions of the two strategies differ.

The most notable difference is the degree to which

they emphasize patient cost sharing. The mainstay

of the one strategy is a provision for substantial

cost sharing to deter people from seeking care and

to pressure providers to practice efficiently. The

other strategy would permit cost sharing for ambulatory services up to about 25 percent coinsurance rates (79). However, proponents of this strategy consider cost sharing neither philosophically

nor practically appropriate to curb use when people are very sick and would rely instead on the

organization that delivers care to rationalize use.

Although all proposals would cover comprehensive care, they leave room for supplementary

benefits for the number or kind of services covered. Possibilities include mental health, dental,

visual, and long-term care.

Another difference is the basis of premium rating, experience or community rating. This issue

has implications for the kinds of people who will

select different plans and the likely reactions of

insurers. If the insurers can distinguish high and

low risks or high and low users of care, and if

they may charge people different premium rates,
24 ● Medical Technology Under Proposals To Increase Competition in Health Care

the insurers will charge higher rates to people likely to incur higher costs and lower rates to the better risks (risk rating). Theoretically, insurers will

sell insurance to high-risk people if the premium

can be set high enough to make it profitable to

cover the expected loss. In fact, there are people

who cannot obtain medical insurance, but little

is known about their specific circumstances and

the influence of high premiums or high risk (215).

Adverse selection concerns the behavior of consumers and occurs if consumers know more about

their risk status than insurers do (215). Although

that is the technical meaning of adverse selection,

the term has been used to describe situations in

which people likely to be high users choose plans

with more extensive benefits and low risks choose

plans with less extensive benefits (104). If premium

rates are based on the experience of the enrollees,

adverse selection and the differential use that

follows will raise the premiums of the plans with

more benefits and lower those of the plans with

fewer benefits.

THE CONCEPT OF COMPETITION

Proponents of increased competition in health

care have used the term competition to mean

greater regard for price in medical care decisions.

Their use of the term also conveys a sense of relying on individuals in the marketplace instead of

Government regulation for basic decisions. Indeed, the intention behind increasing people’s cost

consciousness is to have the market allocate resources efficiently on the basis of price.

The colloquial use of the term competition connotes a contest among rivals: the effort of two

or more parties acting independently to secure the

business of a third party by offering the most

favorable terms (274). However, since competition is an economic term and many of the proponents of the competitive proposals are economists, it is appropriate to consider the meaning

of the term in economic theory, and to distinguish

the concept of competition from the model of perfect competition in economic theory.

A model, such as pure or perfect competition,

is by nature a simplified statement that may

Community rating with uniform premiums and

open enrollment would have the well help to support (cross-subsidize) the chronically ill and would

reduce “free riders” (people who buy no insurance

until they expect medical expenses). Not being

able to charge higher premiums for higher risks

would give plans an incentive to target their marketing or supplemental benefits to lower risk people and to try to avoid the higher risks. Enthoven

has suggested administrative procedures, such as

limiting the high-risk people that a plan would

have to enroll, to deal with these potential problem areas (79).

The main controversy about premium rating

revolves around the extent and method by which

medical care for high-risk people should be subsidized. Although this report does not consider

further the issue of adverse selection or crosssubsidization, there are alternative mechanisms

within either experience or community rating that

should be considered before implementation.

depart from reality, and economists readily

acknowledge that perfect competition does not

pertain in the markets for the vast majority of

goods and services, including medical care. Why,

then, is so much attention paid to the existence

of competition? One reason is that under the

theoretical conditions of pure or perfect competition, an equilibrium position results in the most

efficient allocation of resources. There is no other

allocation that would make everyone better off

(such a situation is termed Pareto optimum). With

some monopolistic power, a seller can raise its

price without losing all its customers; it has some

control over the price it receives. Compared with

pure competition, with the presence of some

monopolistic power, price is higher, quantity produced is lower, and welfare can be improved by

producing a greater quantity at a lower price.

Competitive conditions are thus used as a standard of comparison for actual market conditions.

Another appeal of competition is the idea that

people separately pursuing their own self-interest
Ch. Z—Increased Competition: Proposals and Concepts • 25

will achieve a situation that is best for everyone,

This concept resembles the idea of the “invisible

hand” attributed to Adam Smith. Like Smith’s

ideas, this one presupposes that governmental

regulation will create a favorable context and will

remedy major problems that arise.

Economics textbooks state certain assumptions

about conditions that are necessary for pure competition. The key condition is a large number of

buyers and sellers, so that each is small relative

to the market and is unable to influence the market price. A related condition is that consumers

consider the products that are being traded to be

identical or “homogeneous. ” Under these conditions a seller would lose all its customers if it independently raised its price; no one would pay a

higher price for the same product. By contrast,

sellers with differentiated products and monopolistic power have some control over the price and

quantity of the products they sell because customers might be willing to pay a higher price for the

product they prefer to a slightly different one.

The condition that there be no barriers to producers’ entering or leaving the market ensures that

no seller or group of sellers will be able to wield

monopolistic power over time. A supporting condition is that the materials and workers needed

to make the product can move freely from one

industry to another. For perfect competition, the

additional assumption is necessary that buyers

and sellers have perfect knowledge about market

conditions. This condition enables them to reach

an equilibrium price (the price that equates the

amount buyers wish to buy with the amount sellers wish to sell) without repeated trial and error.

Other assumptions underlie general economic

theory and its theory of competition. The doctrine of consumer sovereignty asserts the central

importance of individuals’ preferences. Also

related to consumers are the assumptions that they

have limited incomes from which to make decisions about purchases and that they freely choose

what to buy. On the production side, each product is produced as cheaply as possible (technical

efficiency), and the prices of materials and

workers are not subsidized but reflect their actual

costs. It is also assumed that demand and supply

are independent.

The theory of competition just cited relates only

to the efficient allocation of resources and has not

considered the distribution of income or other

issues of equity. A position of maximum efficiency

does not necessarily entail the best level of social

welfare, and may or may not be judged acceptable by political or ethical standards. This caveat

applies particularly to medical care, since social

values have supported reducing inequality of access to medical care by the poor (97).

Moreover, if some important sectors of the

economy are monopolistic, as is the case in the

United States, establishing conditions more in conformance with competition in one sector will not

necessarily improve the overall allocation of resources, and may worsen it. According to this

“Theory of the Second Best, ” the conditions to

promote efficiency then depend on the particular

circumstances involved; there is no general set of

conditions that apply (150).

This discussion of competition has thus come

full circle to the question of whether or not the

promotion of competitive conditions is desirable.

A policy in favor of relying on competitive markets to allocate resources has been supported on

grounds other than efficiency. One reason given

is the relative superiority of markets over political

or other administrative methods to coordinate

economic activity and avoid surpluses or shortages of goods at prevailing prices (10). There is

also a philosophical argument against concentration of power either in monopoly or in Government and in favor of allocation by the atomistic

and impersonal operation of the market (237).

Several main points flow from this discussion

of the economics of competition. One point is that

the term competition has often been used to connote reliance on the market to allocate resources

rather than to signify the absence of monopolistic

influences; and the alternative to the market has

been considered the centralized direction of resources by governmental regulation. Another

point is that promoting competitive conditions

will not necessarily achieve the most efficient

allocation of resources and that efficiency is only

one of several bases by which to evaluate the performance of a sector of the economy. The following criteria have been identified to assess the social
26 ● Medical Technology Under Proposals TO Increase Competition in Health Care

desirability of market performance and to constitute

●

●

●

a concept of workable competition (12,237):

Efficiency. —Each product is produced and ●

sold as cheaply as possible (technical efficiency), and allocation of resources among different products is most efficient (allocative

●

efficiency).

Progress. —Sellers develop and introduce

new products and techniques so that con- ●

sumers have better products and so that production costs decrease.

Quality. –The quality of products, including

THE MARKET FOR MEDICAL CARE

The current market for medical care obviously does not conform to the theoretical conditions

of perfect competition or to the criteria of socially desirable performance. In some cases, the very

nature of medical care precludes those conditions.

It has been said that competition is workable if

there is no clearly indicated change possible

through public policy that would achieve greater

social gains than social losses (166). The following review of the way medical care diverges from

the model indicates that there is much room for

improving the present situation and puts into

perspective the emphasis on financing arrangements.

The most important cause of the divergence

from attainable conditions is the fact that medical

insurance has undermined the usual economic

assumptions about consumers. As described

earlier, consumers often do not bear the cost of

using medical services, especially expenditures for

hospital services. Insurers, who are uncertain of

people’s risk status and unable to identify it in any

straightforward way, cannot easily separate out

the additional and discretionary use that people

have because of insurance coverage.

Inefficiencies in the production and delivery of

medical care result from the effect of these financial incentives on providers. Individual services

are not produced or delivered in the most efficient

manner, as described earlier, and the combination of technologies used for a given medical condition is often not the least costly for the medical

kind and variety, is responsive and accessible to consumer preferences and societal

needs.

Equity. —The distribution of income is considered equitable.

Full employment. —Resources, especially

labor, are fully employed, or at least the specific market does not impede that overall goal

for the economy.

Price stability. —There is agreement about

the desirability of the concept, but its definition in a complex economy is unclear (246).

benefit gained. Nor do the prices of services reflect

their true costs. The prices of some technologies,

such as radiological services, are often set higher

than costs and the excess used to subsidize other

services, such as hospital room and board or outpatient care.

There are clearly restrictions on entering the

field of medical care delivery. They have been at

least partly motivated by the desire to protect people from incompetent providers and to maintain

minimum standards of quality. Compulsory licensure of physicians and other health professionals

is the most obvious restriction. In addition,

hospitals limit the physicians to whom they confer admitting privileges. Certificate-of-need requirements may pose barriers to entry for facilities

such as kidney dialysis centers or acute-care hospitals and to new organizations that wish to begin

operating in an area. Legal prohibitions on physicians’ practicing as employees of an organization

and on the corporate delivery of care have been

used to prevent formation of prepaid group practices in some areas. As discussed in chapter 1,

these issues are important but are not analyzed

in depth in this report.

For some kinds of medical technologies, the

benefits gained by society are greater than the

benefits gained by the individuals who use the

care. These “externalities” apply especially to the

prevention and treatment of infectious diseases.

If there are such externalities, individuals’ pursuit

of their self-interest may not lead to the most ef-
Ch. 2—increased Competition: Proposals and Concepts “ 27

ficient allocation of resources. Individuals making decisions about vaccinations, for example, will

not have vaccination rates that are as high as is

socially optimal because they take only their own

benefits into account. Governmental programs

have historically promoted such technologies

through education, subsidies, or regulation. Examples are public health programs to immunize

young children and to conduct eye examinations

in schools.

Buyers or sellers are often large enough in the

market to influence the price that they pay or

receive. Union members or employment groups

may bargain as a unit with medical care providers,

and most hospitals are in urban areas where a few

large hospitals have the vast majority of the beds

(235). Rural areas or small cities may not be large

enough to support numerous hospitals or specialized facilities and still take advantage of the efficiencies from potential economies of scale (97,

172). The equity and quality of having specialized medical technologies accessible, as well as the

cost of transporting people elsewhere, may result

in a small number of specialized facilities in such

areas.

The services of different hospitals, physicians,

or other providers are not identical. Physicians

of the same specialty differ in their style of practice, and manufacturers of medical supplies try

to draw customers by distinguishing their products from others. This situation, in which there

are many buyers and sellers of slightly different

services (monopolistic competition), may have little practical effect on the price and quantity of

services (10). In medical care, people have the advantage of many options, as well as the associated

difficulty of comparing prices and qualities to

make purchase decisions.

The desirability of consumer sovereignty in

medical care has been questioned. The issues are

both technical and philosophical: whether or not

people are capable with supplementary information of evaluating medical alternatives, and

whether or not people’s preferences should predominate (116,190). Physicians may compensate

for consumers’ lack of knowledge by acting as

their agents in making medical decisions (7). But

the possibility has also been raised that physicians

go beyond an agent’s role to generate demand for

their own services, a concept that conflicts with

the assumed independence of demand and supply. The results of research on this issue have been

contradictory (14,215,279), as one would expect

of a phenomenon that is difficult to identify and

measure.

EFFECTS OF INCREASED COMPETITION:

AREAS TO BE EMPHASIZED

The review in this chapter suggests certain areas

regarding medical technology that merit particular

attention when evaluating the changes that would

be likely under increased price competition: 1) the

effects on the use and innovation of medical technology, 2) the effects on the quality of care delivered, and 3) the needs of consumers for information. These areas relate to existing problems that

have been identified and to certain criteria that

have been suggested to evaluate the performance

of a market. The criteria of efficiency, progress,

and quality figure prominently in each of these

areas. Subsequent chapters consider issues of equity, the fair distribution of medical benefits, and

costs in each of these subject areas. Full employment and price stability as aspects of the general

economy are not examined separately in this study

of the medical care sector. Price stability in particular would be promoted by greater efficiency in

medical care delivery and moderation in rising

medical expenditures.

The inappropriate use of medical technology

has been a longstanding concern of public and

private policymakers alike. Both the underuse of

cost-effective technologies, such as certain preventive technologies, and the overuse of technologies

that confer little or no benefit relative to their

costs, such as repeated enzyme tests for cardiac

patients, have been cited as factors behind rising
28 Ž Medical Technology Under Proposals To Increase Competition in Health Care

medical expenditures. In fact, one of the motivations of proposals to increase competition is to

improve technology use by changing the financial incentives that act on consumers, physicians,

and hospitals.

The term appropriate use conveys consideration of the medical benefits as well as the costs

of a technology relative to other technologies that

might be used for a medical condition and relative

to other uses of those resources. This concept has

the same elements as that of efficiency, the attainment of a given level of quality for the least costly use of resources. Evaluating changes in the use

of medical technology that are likely to result from

greater competition thus relates to efficiency, one

of the standards proposed to assess the performance of a market.

Innovation or progress is another factor that

is highly valued by American society and is used

to evaluate market performance. The introduction of new technologies has been a hallmark of

medicine in recent decades. Proponents of greater

price competition hope to improve the medical

technologies that are developed by strengthening

the attention that is paid to cost. Whether more

price competition will hinder innovation or channel it into more productive areas is an important

subject of inquiry.

A basic purpose of the medical care system is

the delivery of care of good quality, a factor that

is used to evaluate markets generally. The most

pervasive policy concern in the present context

is the excessive use of technologies, primarily

because of rising medical expenditures. There is

also an underlying social concern that people be

given access to medical technologies that can

remedy or improve their health problems. Proponents of greater price competition expect quality to improve with changed financial incentives.

Since proposed changes are intended to alter technology use, the likely effects of the different proposals on the quality of care delivered deserve particular attention.

Consumers’ lack of information or expertise

about medical technologies has been cited as a

feature distinguishing medical care from most

other markets. Proposals to increase competition,

however, place greater reliance on consumers to

make choices that ultimately would guide the kind

and amount of medical technology that is used.

The needs of consumers for information in a more

price-competitive system and the likely availability of that information have implications for the

ability of the medical market to function smoothly

under the changes proposed.
3 .

Effects of Increased Competition

on the Use and Innovation

of Medical Technology

Most decisions involve choosing between a little more or a little less—in

other words, comparing the marginal benifit with the marginal cost.

—Victor R. Fuchs

Who Shall Live?
of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Research on Technology Use With Greater Patient Cost Sharing . . . . . . . . . .

Research on Technology Use in Comprehensive Care Organizations . . . . . . .

Hospitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

surgery .. .. .. .. .. .. .. Q.. ... .. .. .. .. . . . . . . . . . . . .

Ambulatory Physician Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ancillary Services: Laboratory and Radiology . . . . . . . . . . . . . . . . . . . . . . . .

Preventive Services .. .............................0.. . . . . . . . . . . . . . .

Managerial Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Expenditures for Medical Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Research on Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Likelv Effects of Increased Competition on Technology Use and Innovation

Greater Patient Cost Sharing~. .. .. ... . . . . . . . . .

Competition Among Comprehensive Care Organizations . . . . .

Implications for Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

List of Tables

Table No.

3. Interim Results of the Rand National Health Insurance Study:

Probability of Use With Different Coinsurance Rates . . . . . . . .

A. Estimated Price Elasticity of Demand for Medical Services . . .

. . . . . . .

. . . . . . .

. . . . . . .

Annual

. . . . . . .

. . . . . . .

. . .

. . .

. . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . ...*

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

per Person

. . . . . . . . . . . . .

. . . . . . . . . . . . .

33

36

37

3$

39

40

40

41

42

43

45

45

48

50

34

35
3.

Effects of Increased Competition on the

Use and Innovation of Medical Technology

The use of clinical and ancillary technology requires that a person must decide to seek care and

a medical care provider must decide to let that

person enter the system as a patient. Not only the

fact that use occurs but also the kind of clinical

or ancillary technology that is used depends on

the combined decisions of consumers, organizations, and individual practitioners. By contrast,

organizations and practitioners can determine the

use of managerial technology without the involvement or concurrence of consumers.

Through greater cost consciousness of consumers and providers, proponents of increased

competition hope to improve technology use.

Depending on the proposal, these changes in use

are expected to come about from effects at several

levels:

● consumers’ decisions about whether or not

to seek care, and if so, which providers and

technologies to use;

THE DIFFUSION OF TECHNOLOGY

Diffusion is the process by which a technological innovation enters and becomes part of the

medical care system. An innovation may represent the introduction of a new technology or the

refinement of an old one. The key feature is that

an individual perceives it to be new, even though

it may have existed for some time (232), The rate

of diffusion of a medical technology is usually expressed as the percentage of medical providers,

either organizations or individual professionals,

who adopt it over time (46).

An often lengthy period of research and development precedes diffusion. Basic theoretical

research from such fields as physics, chemistry,

biology, and engineering lays the conceptual foundation, and applied research and development

draws on that knowledge to solve medical prob-

●

●

●

providers’ (physicians’ and organizations’)

decisions about whether or not to let a person enter the system as a patient and, if so,

which settings and clinical and ancillary technologies to use;

insurers’ and providers’ managerial decisions

about their own interaction and their control over resources available; and

innovators’ decisions over time about kinds

of technologies to develop and introduce.

This chapter first discusses the concept of technology diffusion and the ways that procompetitive proposals wish to change the diffusion

process. After a review of empirical studies of

greater patient cost sharing and of comprehensive

care organizations, the likely effects of the proposals on technology use and innovation are

charted. The concluding section considers the implications for policy. Related issues of quality are

discussed in chapter 4.

lems. Once the feasibility of a new technology is

demonstrated, the transfer of the technology from

laboratory to marketplace is begun. A prototype

may be built and refined, followed by manufacturing and marketing efforts. The developmental phase may also involve clinical testing on

human subjects. During development, problems

may be revealed that feed back into further

research and modification or that lead to abandonment of the technology (202).

Adoption is related to but not synonymous

with use (46). The adoption of equipmentembodied technology, such as computed tomography (CT) scanning, is usually marked as the

point when the machine is acquired. But the acquisition of equipment does not ensure its use or

predict the extent of its use. A hospital may ac3 1
32 Ž Medical Technology Under Proposals To Increase Competition in Health Care

quire a CT scanner, but clinicians’ decisions determine its use for patients, and radiologists and the

radiology department determine how long during the day it is available. Sociologists have

theorized that technologies are adopted more

quickly if they have a relative advantage (including profitability) over alternatives, are compatible with the adopter’s values, are easy to

understand and use, can be tested on a limited

basis, and have results readily visible to others

(232).

Certain behavioral theories have been advanced

to explain technology adoption and use by medical providers (280). One is that hospitals are concerned with the perceived quality as well as the

quantity of their services and therefore put more

investment into expensive equipment than they

would if profits were their main motivation. Such

technology raises the prestige of the hospital and

enables it to compete with other hospitals to attract prominent physician specialists (53). Another

theory, which predicts a similar result, is that conflict among physician specialists and between

physicians and administrators is resolved by expanding capacity and adopting technological innovations (114). It has also been suggested that

physician specialists tend to adopt and use technology more than generalists, both to conform

to their medical training and to match their peers

(13).

Factors external to medical care providers, such

as financing arrangements and governmental policies, affect technology diffusion by encouraging

certain kinds of behavior and discouraging others.

Chapter 2 described the role of current insurance

and usual payment methods in stimulating inappropriate use of individual technologies and inappropriate combinations and settings of technologies. The chapter also outlined proposals to

change the financing and organization of medical

care so that those who buy or use technologies

become sensitive to costs as well as the benefits

of their decisions.

A major effect on technology use that is intended from greater patient cost sharing is that

use will decrease because price will deter people

from seeking medical care. The quantity and total

cost (per unit price times quantity used) would

fall if people exercised more care in preventing

illness and more discretion about seeking professional help for self-limiting as well as other conditions. It is also intended that consumers consider cost when they select providers and technologies to use. Effects on providers are expected

to come from providers’ reactions to changes in

consumer behavior. Providers’ sensitivity to the

effect of technology use on their patients’ finances

and to consumers’ preferences for low-cost providers and technologies would lead clinicians and

administrators to pay more attention to cost in

matters concerning adoption and use.

The competitive proposals that would use consumer choice to foster greater plan competition

do not stress people’s decision to seek care as a

point to affect technology use. Instead, competition for enrollees is expected to lead organizations

and physicians to make more judicious decisions

about the adoption and use of technology—decisions that weigh the costs and benefits involved.

Proponents of this approach point out that much

of current technology use is discretionary instead

of clearly necessary or unnecessary. This situation applies to the number (days of hospitalization for heart attack patients), the kind (surgery

or drug therapy for angina), and the setting (inpatient or ambulatory) of technologies used for

medical conditions.

With more competition among comprehensive

plans, surgical and hospitalization rates, in particular, are expected to be lower. The emphasis

on prevention would depend on whether consumers preferred that style of practice and whether

providers were responsive to them. Although the

process of change maybe lengthy, it is expected

that expansion of alternative delivery systems (alternative to fee-for-service solo practice) and competitive pressure on other providers would ultimately improve technology use and lower medical

costs.

Proponents of greater competition agree that

insurance coverage and payment methods have

affected the type and pace of inovation (79,89,

190). With innovation as with use, the potential

benefits have been emphasized and the costs

downplayed. The result has been rapid but costly technological change.
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 3 3

The ease of receiving reimbursement for mainstream medical technologies has been cited as a

spur to innovation. With the present extent of insurance coverage and the usual type of payment

methods, cost offers little deterrent to innovation,

especially for expensive technologies used in

hospitals. The incentives for innovation, as for

use, are to channel efforts into sophisticated

diagnostic and therapeutic technologies and away

from preventive and rehabilitative ones. Since cost

poses little obstacle to innovation, a new medical

technology is valued if it provides even a slight

additional benefit to diagnostic accuracy or patient management (235).

RESEARCH ON TECHNOLOGY USE

PATlENT COST SHARING

There is a consensus that the amount individuals pay for insurance premiums does not affect

their decisions about using services, because that

cost is not directly linked to use (14,215). Furthermore, any effect on consumers’ decisions about

technology use are likely to come from charges

levied at the point of use, which would raise the

patient’s price of medical care. These higher

charges potentially would influence consumers’

decisions about whether or not to seek care and,

if so, what to choose.

A prior issue is the extent to which people faced

with substantial cost sharing would purchase supplementary insurance. That possibility was raised

in chapter 2, and the conclusion was reached that

although some people, especially the elderly,

might purchase supplementary coverage, the net

effect would be a higher level of cost sharing than

now exists.

Studies have consistently reported that utilization rates are lower with greater patient cost sharing (15,192,238). These rates represented the combined effects of consumer and provider reactions

to cost sharing.

The interim results of the Rand National Health

insurance Study deserve close attention because

of the care exercised in designing and conducting

the trial (192). The scope of benefits covered is

broad, encompassing not only hospital and physiProponents of competitive strategies have not

specified in detail the changes in innovation to be

expected from restructured financing. They expect the kind of technological change to differ as

costs figure more heavily in decisions. Greater cost

consciousness by consumers and providers is predicted to increase organizational innovation, for

example. The development of alternative delivery

systems could be stimulated if they provided the

combination of costs and benefits that consumers

desire (88,170).

WITH GREATER

cian services, but also dental and mental health

services, prescription drugs, visual and auditory

services, and supplies. The extent of cost sharing

is related to family income (either 5, 10, or 15 percent) and limited to an annual maximum of

$1,000. Coinsurance rates also vary: O (free care),

25 percent, 50 percent, and 95 percent (similar to

income-related catastrophic coverage). The study

excluded people over 62 years and families with

incomes over $25,000 in 1973.

The interim results of the Rand study represent

only about 40 percent of the study’s eventual total

person years (192). With higher coinsurance rates,

it was found, the annual likelihood of having a

physician visit or hospital admission, as well as

the number of visits per person and total expenditures were lower. With coinsurance rates of 50

or 95 percent, total expenditures were 45 to 90

percent below total expenditures with no cost

sharing and almost 20 percent below those with

25 percent coinsurance. The lower total expenditures with higher coinsurance resulted because a

smaller fraction of people used any services at all

and fewer services were used per patient. The

price per visit or per hospital admission accounted

for little of the difference.

With 50 and 95 percent coinsurance, hospital

admission rates for adults were, respectively,

about 60 and 40 percent below those with no cost
.

34 • Medical Technology Under Proposals To Increase Competition in Health Care

sharing, and about 25 and 10 percent below those

with 25 percent coinsurance (see table 3). These

interim results are consistent with U.S. rates and

the fact that patients’ direct expenses for inpatient

care average 10 percent nationally. The 1977 national hospital admission rate of 0.095 for a person under 65 years falls between the experimental rates for free care and 25 percent coinsurance

(192).

With greater coinsurance, the Rand study found,

the likelihood of having a physician visit and the

number of such visits were also significantly

lower. In 1977, the national likelihood of a physician visit was 0.75 and ambulatory visit rates were

3.9 per person, rates consistent with the partial

coverage of physician services that now exists

(192). The Rand researchers speculated that less

contact with physicians led to the identification

of fewer medical problems and less hospitalization. For the interim data, children’s admission

rates did not differ significantly by coinsurance

rate.

In contrast to admission rates, annual expenditures per hospitalized patient in the Rand study

did not vary by coinsurance rate. Of the patients

admitted, 70 percent exceeded their catastrophic

limit, and the experimental plans covered the cost

of most inpatient services. The researchers concluded that unless people were exposed to more

financial risk, “cost sharing appears to be a poor

instrument for affecting costs once patients are admitted” (192).

The researchers’ conclusion implies that under

different coinsurance rates, cases of equal complexity and severity were admitted. However, in

light of the higher admission rates with lower

coinsurance, cases less difficult and presumably

less expensive to treat may have been admitted

more often than under plans with higher coinsurance. If so, the similar average costs per case

across plans may mask differences within plans.

Under lower coinsurance, were lower costs for the

higher percentage of less difficult cases offset by

higher costs for the other cases? Or did similar

cases receive less intensive care under higher coinsurance rates?

More importantly, the Rand experiment affected only a small portion of the patients of any

one hospital or physician. On the theory that providers adjust their practice to the average insurance coverage of their patients, one would not

expect hospitals or the physicians practicing in

them to change their routine services or charges

for the inpatients in the experiment.

An important caveat to the Rand interim results

is that the companion data on people’s health

status have not yet been analyzed (85). The health

effects of reduced use are especially important to

indicate how much came from fewer discretionary

services and how much came at the expense of

health benefits.

Smaller scale studies have also found less use

of services with greater coinsurance. In 1968, the

Palo Alto Medical Clinic, a multispecialty fee-forservice group, instituted a 25 percent coinsurance

rate for all physician and ambulatory ancillary

services (238). The per capita use of physicians’

services declined 24 percent and 4 years later remained stabilized at that low level: 5.2 visits in

1966, 3.9 in 1968, and 3.6 in 1972. The study

found that little change occurred in physician

visits in hospitals or, similar to the Rand interim

results, use for young children.

ap <0.05 compared with zero coinsurance,

bp s 0.01 compar~ with zero coinsurance.

SOURCE: J. P. Newhouse, W. G, Manning, C. N. Morris, et al., “Some Interim Results From a Controlled Trial of Cost Sharing

In Health Insurance,” N. Eng. J. Med. 305:1501, 1981.
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 3 5

Even if total use remains about the same,

changes in coverage and cost sharing may have

differential effects on certain subgroups. Proponents of greater cost sharing favor relating the

amount paid to one’s income. With cost sharing

related to income, the Rand interim results

showed similar changes in use for low- and highincome families. Cost sharing unrelated to income

could be expected to lower use more among the

poor than among nonpoor.

Prior instances of cost sharing have also found

greater changes in use among low-income groups.

When the Canadian province Saskatchewan levied a $1..50 to $2.00 copayment per physician visit

in 1968, use for the poor decreased more (18 percent) than use for the nonpoor (6 to 7 percent)

(15). The decline for patient-elective services, such

as general practitioner visits, was greater than for

physician-elective services, such as laboratory

services.

In a similar vein, the few data about use of

preventive services have indicated that use is fairly

unresponsive to insurance coverage or cost sharing (147). An exception is use by low-income people, who had lower use rates with greater cost

sharing, especially for preventive services for

children (35,43). For example, in 1972 and 1973

copayments of $1 per outpatient visit and $0.50

per prescription for Medi-Cal recipients did not

seem to delay their eye examinations, dental care,

or visits for “significant” conditions (24). However, for the copayment groups, immunization

rates for children under 6 years were 45 percent

lower than rates for the noncopayment group.

Over the past decade, a body of literature has

indicated that people’s responsiveness to price

(elasticity of demand) varies among types of

medical services (see table 4). As one would expect, the use of dental services and prescription

drugs has been found more responsive to price

than physician and hospital use. Under greater

competition, hospitals may compete with each

other for patients. Pauly has noted that what

would matter in that context is the responsiveness

to price of people’s demand for the services of certain hospitals (210).

Empirical studies have indicated that fee-forservice physicians’ use of technologies is sensitive

to the additional revenue that they receive (181)

and the cost-sharing provisions of their patients’

insurance coverage (279). According to 1977 data

from the National Medical Care Expenditure Survey, physicians are less likely to initiate ambulatory visits for patients with higher coinsurance rates. Although financial considerations

matter, the research also indicated that patients’

health status and medical condition have the

strongest influence on physician-initiated use.

Table 4.—Estimated Price Elasticity of Demand for Medical Services

Estimated

price elasticity

Medical service of demanda

Source

Physicians’ services –0.12 M. Feidstein

–0.20 Fuchs & Kramer

–0.05 Newhouse & Phelps

–0.08 Newhouse & Phelps

Hospital services –0.626 (admission) M. Feldstein

–0.494 (length of stay)

– 1.120 (patient days per

year)

–0.41/–0.10 (hospital days) Newhouse & Phelps

–0.062 (length of stay) Newhouse & Phelps

Dental service – 1.43 P. Feldstein

–0.29 to –0.47 Newhouse & Phelps

Prescription drugs –0.40 Newhouse & Phelps — —

aEla~tiCltY of d~~a”d = propo~lonate change in quantity demanded

proportionate change in price

SOURCE Applied Management Science, Syrrthes/s of Research on Cornpetit/on in ffre Firrarrcing and De/ivery of Health Care,

Technical Proposal in response to RFP 233.81.3031, Department of Health and Human Services, National Center

for Health Services Research, Silver Spring, Md., May 13, 1981
36 • Medical Technology Under Proposals To InCrease Competition in Health Care

RESEARCH ON TECHNOLOGY USE

CARE ORGANIZATIONS

The literature about technology use by alternative delivery systems relates primarily to

prepaid group practices and secondarily to individual practice associations (IPAs), both kinds

of health maintenance organizations (HMOS). As

described in chapter 2, HMOS both insure and

provide or arrange covered medical care for their

members in exchange for an annual cavitation (per

capita) payment. Other arrangements, such as

preferred provider organizations, have not been

studied because they developed fairly recently.

This section will examine technology used by different organizations and identify the changed incentives that would face providers.

Most physicians practice alone and receive revenue on a fee-for-service basis (100). But during

the past generation, and especially during the past

decade, a great variety of medical care organizations have developed and now account for a substantial share of the medical care market.

HMOS of all kinds account for about 20 percent of the market in California, which had 32

plans in 1980 (20,132). In California, 32 percent

of Federal and State employees who have had an

annual choice among multiple plans, have chosen

an HMO option (20)( see app. D). In 1980, HMOS

had more than 10 percent of the market in at least

eight Standard Metropolitan Statistical Areas

(SIVISAS): San Francisco, San Jose, 33 percent;

Sacramento, 30 percent; Portland, 32 percent; Los

Angeles, Riverside, Anaheim, 22 percent; Seattle, 21 percent; Honolulu, 20 percent; and Denver,

11 percent.

Fifty-two percent of the U.S. population lived

in an area with an HMO in 1980 (61). Nationally, however, only 4 percent were enrolled in an

HMO in 1980, and close to 5 percent in 1981 (61).

In 1980, 14 cities with populations over 500,000

and 13 States did not have an HMO (132).

In 1980, one-fourth of all active non-Federal

physicians practiced in a group, defined as three

or more physicians (96). About 80 percent of all

groups receive all of their revenue on a fee-forservice basis; 12 percent have some cavitation

IN COMPREHENSIVE

(prepayment), but it accounts for less than so percent of their revenue; and 5 to 8 percent derive

so percent or more of their revenue from cavitation payment (96,119). Although both fee-forservice and cavitation groups have similar methods for paying their physicians, cavitation practices are more likely to use salary and explicit productivity guidelines, and fee-for-service practices

are more likely to base income on some measure

of productivity (119). From 1975 to 1980, the

number of physicians in cavitation groups grew

so percent, much faster than the 20-percent increase in all physicians (203).

To what extent physicians would respond to

a restructured market by affiliating exclusively

with a plan is a matter of conjecture. These figures

suggest that increasing numbers of physicians are

already practicing in ways alternative to fee-forservice solo practice.

The term “alternative delivery system” has usually referred to prepaid group practice and has

connoted an alternative to fee-for-service solo

practice by physicians. Prepaid group practice differs from fee-for-service solo practice in two major

aspects: the group form of organization and the

cavitation payment method (see ch. 2).

Compared with solo practice, group practice

has a greater scope of services-i. e., it represents

a greater degree of vertical integration. Three

aspects of vertical integration are of interest in this

review. One is the combination in an organization of the dual functions of insuring and delivering medical care. This aspect is the focus of proponents of greater plan competition. All types of

HMOS fall into this category. Another is an ambulatory group practice, which has a range of

physician specialists and basic diagnostic facilities,

but uses a separate hospital. About 75 percent of

all groups own their own laboratory and about

70 percent own radiological facilities (118). At

another level, the hospital-based group has its

own hospital. Only about 4 percent of all groups

own a hospital (119), but they are some of the

oldest, largest, and most studied plans: the Mayo
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 3 7

Clinic, the Hawaii Medical Service Association,

Ross Loos, most of the Kaiser-Permanente programs, and Group Health Cooperative of Puget

Sound.

In addition to the extent of integration, practices differ according to their method of payment.

The incentives of cavitation payment and the differences between prepaid groups and IPAs have

been described in chapter 2. The IPA combines

the insurance function and cavitation payment to

the insuring organization with fee-for-service and

usually solo practice for physicians. In addition,

physicians in IPAs usually have a substantial feefor-service practice outside the IPA. Thus, providers in an IPA do not operate with the constraint of a prospective budget as prepaid groups

do (see ch. 2).

There is little patient cost sharing at the time

of use in either kind of HMOS. Copayments of

a few dollars maybe collected for each office visit

as a deterrent to patient-initiated use. However,

greater cost sharing exists in other organizations.

In the late 1960’s, the Palo Alto Medical Clinic,

an ambulatory fee-for-service group, started a 25

percent coinsurance rate for physician and ambulatory ancillary services.

A problem that plagues comparisons of technology used in alternative delivery systems is

whether or not similar people are enrolled in the

different plans. Controlling for patient age and

sex helps to standardize the rates, but does not

solve the problem. Theoretically, people might

prefer HMOS if they expect high use from illness,

if they prefer that style of care, if they are neurotic

about seeking care, or if they do not have an

ongoing relationship with another physician because of moving or good health (159). The direction of the total effect is unpredictable: people at

lower risk have been found to select a prepaid

group in one case (76) and a fee-for-service group

instead of a prepaid one in another (239). There

is evidence that HMO enrollees are more oriented

to prevention and less likely to have a regular

physician before enrolling. Any bias toward lower

(or higher) use would pertain most to recent enrollees and may decrease over time (159).

Hospitalization

Hospitalization is a technology in itself. Besides

the fact that inpatient care accounts for about 45

percent of all personal medical care expenditures

(103) and is a prerequisite for the use of many

surgical, medical, and diagnostic technologies, the

decision to hospitalize a person is often discretionary. Performing diagnosis or treatment on an

ambulatory basis may lower lengths of stay and

admission rates. Certain surgical procedures may

be performed without admission; and for low-risk

obstetrical patients, delivery without admission

may be an option (285). Hospitalization rates

could illustrate how physicians in different organizations and under different payment methods

use an expensive technology.

From the small number of comparisons that

have been made, them is insufficient evidence that

IPAs have lower hospitalization rates. Sixteen

cases involving twelve different situations have

compared rates of IPAs with those of fee-forservice plans (75,159). Most of the studies (10 out

of 16) did not adjust or control for the age or sex

of enrollees, a major determinant of hospital use.

Cases in which IPA enrollees had lower hospital

rates far outnumbered cases of greater use. However, all four cases in which IPA enrollees had

more days per 1,000 enrollees came from studies

that had controlled for age, and only 2 of the 10

reports of few days per 1,000 enrollees were controlled for age. The majority of the cases with

lower use used data unadjusted for age from the

Federal Employees Health Benefits Program (75,

220), under which benefits and enrollee contributions differ among plans (see app. C).

There is strong evidence that enrollees of prepaid group practices have lower hospitalization

rates than those in plans with fee-for-service, solo

physicians, and separate hospitals (159). Of 23

situations studied, 16 reported total inpatient days

and admissions or discharges per 1,000 enrollees

lower for prepaid groups than for comparison

plans. In addition, 12 comparisons of Medicaid

eligibles and 1 of Medicare beneficiaries found

lower rates in prepaid groups. These studies are
38 • Medical Technology Under Proposals To Increase Competition in Health Care

better designed than those about IPAs. Almost

all, for example, have controlled for the age and

sex of enrollees. Luft’s review found enrollees in

prepaid groups had about 30 percent fewer hospital days, mainly because of lower admission

rates rather than shorter lengths of stay. These

results were not explained by out-of-plan use

(159).

People who select prepaid groups may have

previously had lower hospitalization rates (159).

Eggers concluded there had been such a selection

effect among Medicare enrollees at Group Health

Cooperative (76), and an increasing number of

studies are being designed to compare use before

and after enrollment. It should also be noted that

a small number of older prepaid groups figured

in the comparisons: seven with the Health Insurance Plan of New York (HIP), an ambulatory

cavitation group that has had difficulty gaining

access to hospital beds; nine with one of the

Kaiser-Permanente plans; three with Group

Health Association in Washington, D. C.; and

three with Group Health Cooperative in Seattle,

Wash. These earlier, more established groups may

differ from others.

Other kinds of organizations have had low hospitalization rates. The hospital-based fee-forservice group in Hawaii, the Hawaii Medical Service Association, has had low hospitalization rates,

although they have been slightly higher than the

Kaiser-Permanente plan there. The two plans represent the same level of vertical integration but

differ in payment method (268). The possibility

of self-selection into these two plans has not been

explored.

In another comparison of two group practices

in Palo Alto, Calif., hospitalization rates of people opting for an ambulatory fee-for-service group

were similar to those in Kaiser-Permanente (282).

Inpatient days per enrollee were almost identical,

but the admission rate excluding deliveries exceeded Kaiser’s by 16 percent. Self-selection into

the fee-for-service group by people less likely to

be hospitalized may have been a factor (239,282).

In Minnesota, the Mayo Clinic and Olmstead

Medical and Surgical Group have reported rates

comparable to large prepaid groups and much

lower than national rates—30 percent lower for

hospital discharges and 38 percent lower for inpatient days after age-sex adjustment (193).

Two studies from the 1950’s illustrate that

management of medical care, resulting in lower

hospitalization rates, can be achieved by physicians within solo practice. In one case, solo internists on a retainer reduced by 44 percent admissions among beneficiaries with multiple admissions (143). Management practices have been used

to explain the similar hospitalization rates reported for enrollees of the Health Insurance Plan

of New York and a union plan that used solo feefor-service physicians (70).

The combination of cavitation payment and

group practice has achieved low hospitalization

rates, as would be expected from the incentives

of payment and organization. The experience of

IPAs is that cavitation payment to the plan is insufficient; some degree of risk to or management

of the physician is needed. While group practices

seem to provide this organizational control, other

arrangements, such as a physician who manages

total medical care and acts as gatekeeper for the

use of other services, can produce similar results.

Surgery

Great variation has been noted in rates of surgery within a State, among States, and among

countries. In Vermont, for example, age-adjusted

tonsillectomy rates across geographical areas have

ranged from 13 to 151 per 10,000 persons (277).

Since surgery carries the risk of mortality and

other complications, such differences raise questions about quality of care (see ch. 4). Here surgical rates are considered as a possible explanation for differences in hospitalization among medical practices.

Many studies over the past 20 years have found

lower surgical rates among enrollees in prepaid

groups compared with those insured under other

plans (280). In the early 1960’s, annual surgical

rates per 1,000 Federal employees were 39 in prepaid groups versus 70 in Blue Cross/Blue Shield,

at the same time that total hospital days per 1,000

were 455 and 826 respectively. Age did not explain these differences (219), and the benefit

coverage of the prepaid groups was usually
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 3 9

broader. In several studies from that period,

surgical rates from prepaid groups were lower

than Blue Cross/Blue Shield or traditional insurance plans (70).

A common finding is much lower rates of tonsillectomy in prepaid groups. In several studies,

including some with design problems, prepaid

groups had uniformly lower rates of hemorrhoidectomy and surgery for varicose veins and

usually lower rates for hysterectomy (280). The

rates for hernia repair, cholecystectomy, and prostatectomy were mixed (157). Of the four comparisons involving IPAs, the IPA enrollees had lower

surgical rates than comparable populations with

Blue Shield or indemnity coverage and Blue Cross

(159). Two of these concerned Medicaid enrollees

in California (101).

Both Luft and Donabedian concluded that enrollees of prepaid groups (and IPAs) had lower

surgical rates, but noted that nonsurgical rates of

admission were also lower (70,159). In prepaid

groups, obstetrical admissions were higher, presumably because of the membership’s age; admissions for diagnosis and tests were lower (159); and

rates for certain surgical procedures (hemorrhoidectomy, surgery for varicose veins, and

hysterectomy) were lower. Otherwise, prepaid

groups appeared to have lower admission rates

generally, rather than for any particular category

that has been discerned.

One of the advantages claimed for organizations that deliver comprehensive care is that they

can match their resources to the enrolled population (79). The case of surgery supports that claim.

Physicians practicing in groups consistently have

higher operative workloads than solo physicians.

In 1978, general surgeons in multispecialty groups

averaged 8.6 hernia equivalents per week (a standard measure of surgical time and complexity),

compared with national estimates of 2.2 to 4.5

weekly surgical operations per physician (118).

Physicians in prepaid groups had lower operative

workloads than those in fee-for-service groups,

although the complexity of the cases for surgeons

was about equal. Surgeons in prepaid groups were

much more likely than those in fee-for-service

groups to perform operations on an ambulatory

basis (119). Studies of specific groups confirm such

use at the group level. In a Kaiser plan, 32 percent of all hospital surgery was performed on a

nonadmission basis compared to 14 percent in a

multispecia]ty fee-for-service group (239). In

prepaid groups surgeons also make up a lower

percentage of the total physician staff (119).

Ambulatory Physician Services

The level of ambulatory visits in organizations

that provide comprehensive care reflects the lower

level of patient cost sharing as well as provider

incentives. Visit rates for people in prepaid groups

are about equally divided between those higher

and those lower than the comparisons with traditional coverage and providers.-

IPAs, whose physicians receive fees for additional services, have

almost uniformly had visit rates much higher than

the comparisons (159).

Enrollees of prepaid groups are more likely to

have at least one physician visit during the year

(159). This result is consistent with Rand’s interim

results that the likelihood rises with lower cost

sharing. The exception was a comparison of a

Kaiser-Permanente plan and a multispecialty feefor-service group, which had higher income people (241). There were only four studies of IPAs,

and the results were mixed. The extent of cost

sharing also seemed to explain different annual

visit rates (159). People in prepaid groups had

more visits than people with less complete coverage, but fewer visits compared with people with

more nearly complete coverage. Prepaid groups

appear to have a lower proportion of people with

many visits per year, but IPAs do not show this

pattern (159). If self-selection is not a factor, these

results suggest that prepaid groups control use by

means other than cost sharing once a person has

sought care. The results are especially striking

because the ambulatory rates may be inflated by

patients who received care in an ambulatory setting instead of being hospitalized.

In a study of Medicaid eligibles, who all had

fairly complete ambulatory coverage, those in

prepaid groups had about the same rate of patientinitiated visits as controls (159). Medicaid eligibles

in IPAs, however, were more likely than controls

to initiate visits. There was no apparent pattern
40 • Medical Technology Under Proposals To Increase Competition in Health Care

for followup visits. In Seattle, only 26 percent of

the poor who were enrolled in a prepaid group

had no visits, compared with 36 percent of the

poor enrolled in a Blue Cross/Blue Shield plan.

Within Kaiser-Perrnanente plans studied in California, low-income people were as likely as higher

income to use some services annually. Regarding

accessibility, the review concluded that the views

of poor people about HMOS depended on the performance of the local fee-for-service system with

which they were being compared (159).

Ancillary Services: Laboratory

and Radiology

No consistent pattern of ambulatory use of

laboratory and radiological services has been

found among different organizations.

In a comparison with a multispecialty fee-forservice group, a Kaiser-Permanente plan used 40

to so percent fewer laboratory tests for adults’

physical examinations, slightly more X-rays, and

two to three times more “other ancillaries” per examination (132). Members of an ambulatory cavitation group in Sault Ste. Marie had higher rates

for both laboratory and radiological procedures

(115). Among the poor in Seattle, enrollees of the

prepaid group had higher rates of total laboratory

procedures, hematology, urine, smears, and cultures than those in Blue Cross/Blue Shield. The

prepaid group members had lower rates of panel

battery tests (chemistry profiles), electrocardiograms, and X-rays (132).

Preventive Services

Advocates of HMOS have speculated that cavitation payment contains an incentive for providers to use preventive medicine as a less costly

alternative to treatment (231), and Federal legislation on HMOS (Public Law 93-222) mandates the

coverage of certain preventive services. HMOS

would have a greater incentive than other practices to use prevention if their members remained

with the organization long enough for it to reap

any financial benefits of better health. The mobility of American society and the turnover in plan

membership make the existence of this incentive

doubtful. Moreover, preventive services, like

other medical technologies, vary in their efficacy

and cost effectiveness. Some, such as childhood

immunizations, are clearly cost effective (281),

while others, such as annual physical examinations and diagnostic tests, are more doubtful (23).

An almost universal finding has been that enrollees in prepaid groups and, to a lesser extent,

IPAs have higher rates of visits classified as

preventive than comparison groups (159). Part of

this difference may stem from the tendency of

HMO enrollees to be more oriented to prevention. One analyst attributed the higher rate of

preventive visits to the more complete benefit

coverage of ambulatory and preventive services

rather than to the effect of HMOS themselves

(159).

This generalization did not apply to the comparison of a multispecialty fee-for-service group

in Palo Alto and a Kaiser-Permanente plan (241).

The Palo Alto Medical Clinic had significantly

higher annual rates of Pap smears (47 percent v.

34 percent of women) and general preventive

visits, with the greater use connected with having a regular physician. Although the clinic rate

is noteworthy because patients paid a 25 percent

coinsurance rate, the clinic also had more women

from higher socioeconomic groups, who are more

likely to have Pap smears.

There have been too few studies of immunization rates to draw general conclusions. In two (of

three) studies, children in prepaid groups had

higher immunization rates than controls in feefor-service solo practices (159). No pattern was

evident among Medicaid eligibles with comparable coverage. Children in a Washington, D. C.,

prepaid group had significantly lower immunization rates, although that study had design problems (16,98). A larger study of Medicaid eligibles

found little difference or slightly lower rates in

prepaid groups and IPAs compared with fee-forservice controls (101). These two studies reported

similar findings for prenatal care—lower or equal

use in prepaid groups. The poor in the Seattle

prepaid group had higher immunization rates, except for influenza vaccine (159).
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 41

Managerial Technologies

Use of many of the clinical and ancillary technologies discussed in previous sections depends

not only on clinicians and consumers but also on

management. Managers plan, coordinate, and

control the activities of their organizations and

link them to others outside. In the delivery of

medical care, managerial technologies support but

are not directly associated with the provision of

patient care. Managerial technologies may include

hardware, such as computer-based management

information systems; organizational structure;

planning processes; and staffing policies (141).

Managerial technologies are associated with

many of the differences observed among delivery

systems. In comprehensive care organizations, the

greater degree of vertical integration provides the

means to rationalize the resources available and

their use for patient care.

The medical care system consists largely of

autonomous units that make interdependent decisions without bearing the full cost implications.

Transactions among separate units do not always

involve a transfer of funds. Physicians usually use

hospital facilities and hospitals use the services of

community physicians without payment. A practice that directs patients to an independent

laboratory does not bear the costs of the tests.

This fragmentation often results in duplication of

tests and the use of more costly procedures and

settings. But this situation persists, because the

usual payment method rewards providers for additional use and present insurance coverage largely removes opposition from consumers.

In some cases, the delivery of medical care has

become more integrated. The original Kaiser plan

included a hospital because no other facilities were

available to the workers building the Grand

Coulee Dam. Prepaid group practices have sometimes sought to have their own hospitals, because

of the added control that is gained over operating

procedures and expenditures. In the cases where

they have developed, more vertically integrated

delivery systems internalize a greater range of

costs. An ambulatory group with its own laboratory bears the cost of that operation, and a

hospital-based group encompasses the costs of

both inpatient facilities and physician services.

Coordinating diagnostic tests and therapeutic procedures could be easier and less costly within one

organization. A separate hospital may refuse to

provide information about patients admitted by

an ambulatory group’s physician (18), but a hospital-based group would have such information

available for concurrent monitoring and control.

To the extent that an organization wishes to increase net revenue (revenue minus costs) and

maintain fiscal viability, internalizing a greater

range of costs would lead to attempts to lower

costs in the production of specific services and in

the mix of services provided for a medical condition. This possibility results from the discretion

that exists about the combination of medical services used for a particular person and the method

of providing them.

The cavitation payment method, which entails

fixed revenue within a time period, provides an

incentive to control technology use and acquisition because additional services add to expenses

but not to revenue. The union of the incentives

of cavitation payment and the management control of group practice underlies the lower hospitalization and surgical rates that have been

reported. Although the format of a fee-for-service

group gives it the same coordination and control,

it does not face the financial constraints of a fixed

budget. Like most medical providers, it gains

greater revenue from greater use and operates

within the relative fee structure that rewards

highly the use of sophisticated technology.

In the present medical marketplace, providers

are not pressed to adopt organizational structures

that are most efficient, or to realize the potential

of a more efficient structure. Nor can it be assumed that any lower costs realized are passed

on to consumers in lower premiums or charges.

This fact handicaps an analysis of different organizations. It is possible to state the theoretical

potential and note previous results, but what has

been observed is not necessarily what an organization is capable of achieving.

The proponents of competition who emphasize

consumer selection of comprehensive care organizations would rely on the organization to control and rationalize technology use. In the managerial area, possible methods include control-
42 ● Medical Technology Under Proposals To Increase Competition in Health Care

ling the number and kind or resources available

and establishing policies about the coordination

of services and the preferred setting for therapy.

In the clinical area, information and education

about decision analysis and technology evaluation could be directed to physicians and other

medical professionals.

In the resource area, management’s decisions

about the number and kind of physicians can influence the quantity and type of care provided.

Kaiser-Permanente, for example, develops annual

plans based on physician-membership ratios by

specialty. These targets guide the organization’s

recruitment of physicians, enrollment of members,

and personnel budgeting. Prepaid groups have

been significantly more likely than multispecialty fee-for-service groups to have pediatricians and

obstetricians/gynecologists and less likely to have

general surgeons (119), These staffing differences

reflect the characteristics of enrollees in prepaid

groups (prepaid groups are more likely to have

young families), and they both reflect and influence the style of practice (prepaid groups have

less surgery). Scitovsky and McCall have pointed

out that a multispecialty fee-for-service group also

controls the number and kind of physicians added

to the group (239).

Also in the area of managerial technology, organizations can control their equipment and facilities. There is some evidence that Kaiser’s internal plaming process achieves greater regionalization of hospital services than separate hospitals. One study found that compared with other

non-Federal short-term general hospitals, Kaiser

hospitals in the San Francisco area were less likely to have certain facilities, and, when present,

these facilities tended to be in the larger Kaiser

hospitals (161). The facilities were postoperative

recovery room, inhalation therapy, intensive care

unit, electroencephalograph, diagnostic radioisotope, and genetic counseling. Kaiser hospitals

were more likely to have social work departments

and home care. Psychiatric inpatient facilities,

psychiatric partial hospitalization, and occupational therapy departments tended to be in smaller

Kaiser hospitals. The study concluded that the

Kaiser system has some fully equipped larger hospitals and some smaller ones equipped for emergencies and chronic care (161). Because of the

lower density of Kaiser hospitals in the San Francisco area, members may have longer travel times.

Hospital-based group practices can plan the

number of hospital beds per capita available for

their members, just as they do physician-membership ratios. Kaiser-Permanente plans use that

approach. Ambulatory groups can contract with

a hospital, and perhaps negotiate a discount (112).

An ambulatory group may also be able to negotiate certain arrangements concerning its patients,

such as routine tests performed upon admission

(112). The existence of facilities can affect the use

of certain procedures. Kaiser-Permanente may

have performed more of its surgery in its hospital

on a nonadmission basis because that hospital was

a part of the organization (239). The lower rates

of diagnostic admission generally reported for

prepaid groups may reflect that greater ability to

coordinate testing within a group practice and the

incentive from cavitation payment and comprehensive benefits to constrain hospital admissions.

Medical practices can also provide clinicians

and departments with information to influence

and to control decisions about technology use.

Kaiser-Permanente in northern California has long

provided regular notifications of the full-time

equivalents and budgets as part of its planning

and control procedures (44).

Theoretically, the combination of the insurance

function and provision of medical care would entail greater monitoring and control over providers. The examples cited suggest that these activities occur in prepaid groups. Utilization review

and preadmission certification have been used in

some IPAs to limit hospitalization. Overall, however, there is insufficient evidence that IPAs have

achieved lower rates. This finding may reflect the

caveat expressed earlier, that the current medical

marketplace does not press providers to achieve

the level of efficiency of which their organization

is capable. This caveat also applies to the fee-forservice sector, particularly to fee-for-service

groups.

Total Expenditures for Medical Care

It is insufficient to consider piecemeal the use

of specific technologies. More important is the
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 4 3

overall expenditure level, which includes the mix

of technologies used and their relative costs. Consideration of expenditures needs to be coupled

with information about the benefits achieved, a

matter taken up in chapter 4. There is no evidence

that either the prepaid group practice or IPA form

of HMOS produces any of the specific services

used, including cost per inpatient day, at lower

cost than solo fee-for-service practices (159). Information about total annual expenditures relates

to the overall management of medical care for

enrollees.

Total annual expenditures for medical care by

an insured person consist of premiums paid for

coverage under a plan plus any additional outof-pocket expenses. * The few studies that have

reported both pertain almost exclusively to plans

on the west coast.

Study designs prohibited the attribution of effects observed among certain factors; the plans

compared usually differed in benefit coverage,

age-sex distributions of enrollees, payment method, and integration levels. On the basis of the

large and consistent differences, reviewers have

concluded that total annual expenditures are lower

for enrollees of prepaid group practices than for

enrollees of conventional plans that reimburse feefor-service, mostly solo providers (70,157,231,

282).

Five of the six studies of the general population included at least one of the Kaiser-Permanente plans in California, which are hospitalbased prepaid groups (15s9). The sixth included

*A portion of the taxes that people pay also goes toward public

funding of medical care programs, such as Medicare and Medicaid.

Another consideration is tax expenditures, the losses in Federal revenue that result from the tax savings allowed by the tax code for

certain groups. In the health area, Federal expenditures on medical

care for poor people are offset by tax expenditures from the deductibility of health insurance premiums and certain medical expenses,

which favors high-income groups. The low-income group benefits

the least (278).

RESEARCH ON INNOVATION

In the general literature on technological

change, there is disagreement about the relationship between competition and innovation. One

the Health Insurance Plan of New York, an ambulatory prepaid group (3). For IPAs or foundations for medical care, under which the plan receives a cavitation payment but pays independent physicians by fee-for-service, the results were

mixed and showed no clear pattern compared

with conventional plans (70,231),

A similar expenditure pattern has been reported

for people eligible for Medicaid and for those with

low income. Two prepaid groups, an ambulatory

one in the District of Columbia and a hospitalbased one in Washington State, had total annual

per capita expenditures 34 to 37 percent lower

than conventional plans over a 3-year period (99,

169). Benefits and age and sex of enrollees were

similar for the plans compared. In contrast, there

was no evidence that a medical foundation affected the total expenditures per Medicaid eligible in San Joaquin County, Calif. (123). During

the years studied, 1969 and 1970, the medical

foundation was not at risk for hospital care, and,

although the plan received revenue by cavitation,

physicians were paid on a fee-for-service basis.

In 1969 and 1970, Medicare payments for elderly beneficiaries in five of seven prepaid groups

were less than for a control group comparable in

county residence, age, and sex (51). All five

groups with lower expenditures than controls

owned or controlled their own hospitals, while

the two groups with higher expenditures were ambulatory groups with no such hospital control

(275). Although consistent with the expected effect of greater vertical integration (280), the results

are only suggestive because of other differences,

such as the plans’ sponsorship, selectivity of

enrollment, size of Medicare population, and hospital occupancy rates. The most obvious differences in the two higher cost plans were in

region (both were in New York City) and in their

use of part-time physicians. Also noteworthy is

that Medicare’s cavitation payment to a plan covered only in-plan physicians’ services.

theory is that competition provides an incentive

for firms to adopt new techniques. The view of

Schumpeter and Galbraith, however, is that firms
44 ● Medical Technology Under Proposals To Increase Competition in Health Care

under imperfect competition have more resources

for research and development and more incentive

to innovate, because their market control allows

them to keep any resulting profits (165). Researchers have found no definite relationship between

innovation and the degree of competition (138).

Intermediate levels of competition instead of extremes may be most conducive to innovation

(134).

The theory has been advanced that hospitals

now compete in nonprice ways by adopting

sophisticated technologies to attract prominent

physicians (235). The empirical evidence is far

from conclusive.

In one study, certain facilities, namely electroencephalograph, X-ray therapy, organ banks,

and outpatient renal dialysis, were concentrated

in nearby San Francisco hospitals, as one would

expect if hospitals were using them to compete

with each other (161). Both the extent and speed

of adoption have been studied. The adoption of

open-heart surgery occurred more often in less

highly concentrated hospital markets, but no relationship was found for other technologies (235).

Massachusetts hospitals were more likely to adopt

most technologies, except computers and radioisotopes, if more local ones already had them (53).

Similarly, Russell found that prior local adoption speeded the adoption of intensive care units

and electroencephalographs by the remaining hospitals (235). This pattern did not apply to diagnostic radioisotopes, and an appropriate measure

was not defined for open-heart surgery, cobalt

therapy, or renal dialysis (235). Greater but not

faster adoption of intensive care units, open-heart

surgery, cobalt therapy, and renal dialysis occurred in States with more physicians per capita

(53).

Under greater cost sharing, any market pressure

from patients’ price sensitivity would relate to

separate services. Patients might refuse to be

hospitalized, or at least question the matter. Patients’ cost concerns could also be conveyed

through their physicians to hospitals, so that

hospitals were more apt to adopt more costdecreasing or fewer cost-increasing innovations.

It is unknown whether hospitals would choose to

compete in such new ways on the basis of costs.

There has been some work on hospitals’ adoption under different regulatory approaches to cost

reimbursement. Although these situations differ

greatly from the competitive ones proposed, they

shed light on how hospitals have behaved when

attempts were made to constrain costs (271). A

recent study examined hospitals’ responses to prospective reimbursement (269). Prospective reimbursement sets rates in advance, but the unit of

payment (per diem, per service, per case) and the

mechanism for adjusting rates vary. Prospective

reimbursement significantly speeded the adoption

of cost-decreasing centralized energy management

in Maryland and delayed it in New York. In New

York and, to a lesser extent in Maryland, the

number of electronic fetal monitors, upper

gastrointestinal endoscopes, and infusion pumps

acquired was lower (269).

Although greater cost sharing might lead to

fewer admissions and a smaller number of patients

for whom hospital technologies would be used,

catastrophic coverage might have offsetting effects, and the development and adoption of new

technologies might be channeled into areas of expensive acute and chronic care, which were not

subject to cost constraints. With an income-related

catastrophic limit, greater cost sharing would affect ambulatory care, most of which would come

within the annual threshold and would be paid

by the patients. To the extent that providers felt

pressed on costs, innovations that were cost decreasing, or less cost increasing for similar purposes, would be expected in managerial, clinical,

and ancillary technologies related to ambulatory

care.

A great deal of innovation is already taking

place in managerial technologies related to hospitals (141). One line of activity is to refine techniques for measuring the performance of physicians. In New Jersey, for example, reimbursement

of hospitals is being tied to resources used for different “diagnostic-related groups, ” which are intended to represent standardized patient cases.

Another development is organizational change in

hospitals, By 1976, more than one-fourth of all

hospitals were participating in multi-institutional

arrangements.

Both greater cost sharing and greater plan competition are expected to produce innovations in
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 4 5

organizational forms of delivering medical care,

another area of managerial technology. In fact,

this development has apparently occurred in response to the establishment or growing market

share of the prepaid group practice form of HMO

(see app. D). Most common is the formation of

an IPA, but other organizations have also developed. In Denver, for example, a preferred provider organization, which includes physicians

selected for their low-cost practice patterns, began

as an apparent response to the growth of a local

Kaiser-Permanente plan (171).

There is no indication that the practice styles

of prepaid groups or other comprehensive care

organizations diverge greatly from the styles of

other medical practices. This similarity is to be

expected, since physicians, as professionals, are

guided by external standards of the profession.

The key is that these organizations do not have

to acquire a new technology to use it. They can

rely on outside facilities and even screen outside

use of the technology. The organization may wait

until its volume of use reaches a point at which

it is cheaper to own its own unit. This approach

has the cost advantage of avoiding the startup

phase, when volume is low and cost per unit is

high, and avoiding the purchase of a new technology during the early phases when improvements are being made.

Kaiser-Permanente in Northern California used

this strategy with computed tomography (CT)

scanning (206). The plan initially arranged to use

an existing machine outside the organization.

Only when volume had reached the point at

which the cost to buy the service exceeded the cost

of producing it internally was a head scanner

ordered. Kaiser similarly contracts with a nearby university hospital for its open-heart surgery

(77). Several prepaid group practices, including

those of Kaiser-Permanente and Group Health

Cooperative of Puget Sound, routinely assess the

relative costs of buying the services of expensive

technologies from outside the group or of acquiring the technology and producing the services internally (45,273).

A recent study examined whether or not prepaid groups were less likely than other local practices to use amniocentesis, a diagnostic innovation that does not require a large capital investment (41). In New York City (Health Insurance

Plan) and Southern California (Kaiser), the rates

were about equal to those for other eligible

women. In Washington State (Group Health Cooperative) and Oregon (Kaiser), the rates within

the prepaid groups were about twice the local

rates (41).

LIKELY EFFECTS OF INCREASED COMPETITION ON

TECHNOLOGY USE AND

Greater Patient Cost Sharing

Greater patient cost sharing at the

clearly deters people from seeking care.

INNOVATION

the additional cost to see a physician or enter a

hospital. In some cases, people would not seek

time of use — or obtain care for a medical condition at all. In

Compared other cases, and especially for expensive hospital

with present health insurance coverage, income- care, a person’s reluctance to pay the large sums

related cost sharing up to a maximum or catas- associated with a hospital admission could lead

trophic expense limit would reduce the percentage the physician to use alternative, less expensive set- of people who receive hospital and physician serv- tings to provide the care. In general, initiation of ices. There would be less effect on other services,

. . . . . care for children would be affected less than care which are already subject to more exclusions and for adults.

cost sharing.

The reduction in patient-initiated use of these Use of preventive technologies, which people

technologies would come about in different ways. may initiate themselves, would not be much afOne is that fewer people would be willing to pay fected by greater cost sharing, because present in-
46 . Medical Technology Under Proposals To Increase Competition in Health Care

surance often excludes such coverage and because

people’s preventive use has not been very responsive to insurance coverage. An exception is use

of preventive services for children in low-income

families, technologies whose use has been lower

with greater cost sharing (24,35,43).

Even with annual catastrophic expense limits

that were related to income, it seems likely that

low-income people would be deterred from seeking care more than others because of the initial

sums involved. Elderly people, who are more 1ikely to have low incomes, would be more affected

than people of other age groups. Cash grants to

people below the poverty line, as Feldstein suggested (88), could ease this effect.

At least initially, most of the people who did

receive medical care would each use fewer and

less expensive services. Part of this effect would

occur because patients would not return for additional visits that physicians recommended or

would not follow their physician’s advice to have

diagnostic tests or therapeutic procedures performed. Patients might be less inclined to seek second opinions, at least for procedures that were

not very expensive, if they had to pay the full cost

for the other physician’s consultation. People

might also resist undergoing medical or surgical

treatment for conditions that were not life

threatening and only a minor inconvenience.

In addition, people’s reluctance to pay for an

additional followup visit for acute or chronic conditions, for an expensive hospital stay, and for

other technologies might lead physicians to recommend and use them less frequently. The technologies most affected would be those that physicians felt would provide little additional diagnostic

information or little therapeutic or preventive

benefit.

Because of the effect on their incomes, physicians would be likely to limit the use of technologies that were provided by other medical professionals or organizations more than the use of

their own. And within their own practices, physicians would forego the use of less costly technologies more readily than the more expensive ones,

especially if the practice had a sizable investment

in a piece of equipment that was being paid for

by charges for its services. There would be less

tendency to hospitalize people for diagnostic

workups and for surgery that could be performed

on a do-not-admit basis. * If there were fewer admissions, the use of associated technologies would

correspondingly fall. The medical care provided

to children would be much less responsive to cost

considerations.

Patterns of technology use in hospitals would

respond to cost-sharing incentives more slowly

than those in physicians’ practices. Change would

occur more gradually in hospitals, because more

people are involved in the decisionmaking of a

large organization. Although a hospital could try

to streamline its operating budget in the short

term, its present plant and equipment would constrain changes that could be made in the capital

budget. An existing piece of equipment might be

used until its capacity was approached, when

more discussion about its appropriate use and

price would surround the decision to replace it

or buy an additional unit. Another factor restricting a hospital’s ability to change is the standards

of outside review bodies. Certain tests routinely

given to hospital patients and some hospital operating practices fall into this category.

That expenses above the maximum annual limit

would be paid with no patient cost sharing would

support the prediction that the use and innovation of medical technology would be channeled

in the direction of expensive care. If a person’s

annual threshold was approximately $2,000, for

example, most surgery, recurrent cases associated

with some chronic conditions, and most hospital

stays beyond a few days would exceed the limit.

People might resist having the surgery or hospital

admission because of the cost, but once the limit

was passed, cost would not be a consideration.

These cases are the ones for which physicians and

especially specialists are trained to use sophisticated and expensive diagnostic and therapeutic technologies. They are also the cases in

which patients are less likely to question medical

advice and more likely to expect that all available

technology be applied to help them. It thus appears that the use and price of technology at the

upper end of the cost spectrum would be largely

*Do-not-admit surgery is performed in a hospital, but patients

are not admitted as inpatients.
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology . 47

unrestrained. In addition, hospitals and physicians, faced with a potential loss of revenue or

income, might try to maintain their incomes by

trying to expand the use of expensive inpatient

technologies.

If everyone had catastrophic coverage, the financial protection accorded to most peep’e might

not be very different from the current situation.

Because of the increasing tendency for private insurance policies to include catastrophic coverage

and the development of public programs such as

Medicaid, people of all ages have a very low

chance of having to pay catastrophic expenses (see

ch. 2). What would be notably different is the

complete coverage for large expenses relative to

others. The use and price of low- and moderatecost technologies would be restrained by the fact

that patients would have to pay a sizable portion

of their cost. With the tighter constraints on lower

and moderate costs, technologies with high total

cost for a patient’s condition would be an attractive outlet for innovation and use. The total effect on use and cost is unclear; fewer cases would

reach the catastrophic limit, but those that did

would be treated more intensively.

How particular technologies would be affected

by greater cost sharing would depend on the

definition of minimum benefits to be included in

comprehensive coverage. The Rand results discussed previously came from an experiment with

a broad definition of comprehensive coverage that

included mental health and dental services, prescription drugs, and visual and auditory services

(192). In general, it can be said that technologies

included in coverage would have their use and

price restrained up to the threshold of the annual

limit, but not beyond it. Among the technologies

included in coverage, consumers and medical providers would select which technologies to use on

the basis of whether their costs were commensurate with their benefits, without artificial

boundaries created by insurance coverage. An important example is long-term care. This area of

medical care is most responsible for catastrophic

expenses, especially for elderly people. Access to

long-term care facilities can also reduce the cost

and length-of-stay in acute-care hospitals. Inclusion of long-term care in standard benefits could

afford people greater financial security and could

help to make hospital use more appropriate, but

it could also account for large expenses.

The effects of greater cost sharing on technology over a longer period of time are more difficult

to predict. Studies of greater cost sharing have

found that within 3 or 4 years, lower levels of use

have developed and persisted. There is the possibility that delaying care would lead to greater use

for some people in the future, if conditions that

could have been identified and treated early are

not found until they are more severe and difficult

to treat. Balancing that possible source of a longterm increase in use and cost is the fact that some

undetected conditions are self-limiting and some

can be diagnosed but not successfully treated by

medical care.

Empirical studies of greater cost sharing have

traced the effect of changes for a limited number

of consumers, physicians, and hospitals in an

area. The effects might be much different if the

changes applied to everyone. This caveat applies

particularly in an era when the number of physicians is forecast to increase by 75,000 in 5 years

(203). An overall decline or slower rate of growth

in medical expenditures implies less income for

providers. With continuation of fee-for-service

payment and charge- or cost-based reimbursement, providers might try to offset less patientinitiated use (14). Providers might raise the prices

of their services; emphasize more expensive services (such as, a complete instead of a partial

physical examination); or “unbundle” services by

charging separately for procedures previously

billed together and more cheaply.

On the other hand, if providers in an entire

community responded in the same direction as

they have in the limited changes that have been

studied, the results observed so far might underestimate the impact on cost and use. The effect

on practice style from a systemwide change might

be much larger if providers responded to the

average level of their patients’ insurance coverage.

Also supporting that prediction is the view that

medical providers, like others who wish to increase the sale of their services, would face consumers who are more careful about price and

quantity when they are paying a substantial portion of the cost.
48 ● Medical Technology Under Proposals To Increase Competition in Health Care

Even if providers responded by becoming more

cost conscious, conflicting factors would act on

hospitals and other organizations. Pressures to

restrain costs would lead them to adopt costdecreasing technologies, such as systems to

manage energy use more efficiently. It would also

lead them to scrutinize more carefully requests to

purchase expensive equipment, especially if the

hospital already had one such unit or if the technology was new and its use uncharted. A hospital

might resist acquiring expensive technologies designed for unusual conditions and hence likely to

have only low levels of use in one institution. Efforts to constrain costs might intensify the efforts

of hospitals, other providers, and insurers to

adopt different managerial technologies, such as

mechanisms to monitor costs or alternative organizational arrangements.

From the other side, a hospital in a more competitive environment might rush to purchase a

new technology considered to have great potential so that it could recoup its investment before

others had acquired it. The lack of cost constraints

on catastrophic expenses would spur the development and use of costly halfway technology* for

medical conditions that lend themselves to lengthy

or intensive care. Also encouraging technology

adoption and use would be the fact that medical

providers would continue to be motivated and

guided by the standards of their professions,

which call for helping their patients, often with

the use of expensive technologies.

The innovation of medical technology would

be subject to these conflicting influences. Increased

cost sharing would stimulate greater innovative

activity and presumably more innovation in managerial, ambulatory, and cost-decreasing technologies. The effect on clinical and ancillary

technologies and particularly expensive equipment

is less clear. Fewer hospital admissions and greater

pressure for providers to be efficient would predict

less adoption and use and hence less innovative

activity in these areas. However, unrestrained expenditures for expensive (catastrophic) care would

have the opposite effect of stimulating use and innovative activity related to sophisticated and costly technologies.

● Halfway technologies alleviate the effects of but do not prevent

or cure disease and are usually expensive (255).

Competition Among Comprehensive

Care Organizations

On the basis of previous enrollment trends

when people have had a greater choice of plans,

prepaid group practices primarily and IPAs secondarily would accelerate their growth in membership, physicians, and market share (see app.

C). The development of different organizational

arrangements that combine the insurance and provision of medical care would also continue at a

more rapid rate. Both commercial insurers and

Blue Cross/Blue Shield plans would become even

more involved in sponsoring such organizations

and in overseeing their operations.

These organizations would be competing for enrollees on the basis of total costs to consumers

(premiums plus out-of-pocket expenses) for the

coverage, quality, and style of practice provided.

There would thus be market pressure for them to

produce services efficiently and to use the most

efficient (lowest cost for a given level of quality)

combination of technologies for the conditions

and members under their care.

Even in the current context, prepaid group practices have been subject to financial pressures

because they receive revenue predominantly by

cavitation payment, but they have so far had too

small a market share to have had any discernible

effect on community use or cost (see app. D). If

organizations that felt similar pressures for efficiency predominated or exerted sufficient pressure

on the others, it would be possible to make certain predictions about the use and innovation of

medical technology. These changes would be relative to the present in which medical care is

delivered primarily by fee-for-service solo practices and in which insurance coverage is widespread.

If the cost sharing for initial physician visits and

other ambulatory care were lower, as it is in prepaid groups, cost would deter people less from

seeking care. Both low- and high-income enrollees

would have a greater likelihood of having some

contact with the medical care system during the

year. People covered under Medicaid would have

at least the same rate of patient-initiated care as

they do now.
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology ● 4 9

Once people entered the medical care system,

the comprehensive care organization would control their use of technology. If greater market

pressure from other delivery systems restricted

premium increases and made prospective budgets

more restrictive, the organization would take

measures to operate more efficiently. Since the

organization would integrate the delivery of comprehensive care, it could make decisions about

allocating personnel and other resources as well

as the use of alternative technologies across the

range of medical care. To be successfully implemented, these decisions would have to balance

the preferences of consumers, clinicians, and

administrators.

In the ambulatory area, more attention would

be paid to the use of diagnostic technologies and

drugs, which have low per unit cost but can account for a substantial portion of total costs.

Laboratory and radiological tests that give unnecessary or redundant results would be discouraged. Depending on its availability, information

related to the appropriateness and sequencing of

tests and drugs would be channeled to clinicians.

In the short term, these effects would be retarded

in practices that already had expensive diagnostic

equipment. As the equipment wore out or became

obsolete, the long-term result would be lower rates

of acquiring such equipment and of using drugs

and laboratory and radiological tests.

The per capita rate of ambulatory visits would

remain about the same or fall. The visit rate would

combine the effect of fewer followup visits for

many medical conditions and of relatively greater

use of the ambulatory setting instead of the hospital. If market pressure were greater than now

felt by prepaid groups, the organizations might

try to curtail visits. One possibile target would

be visits now classified as preventive that involve

technologies, such as annual physical examinations, that are not cost effective. Comprehensive

care organizations would not necessarily provide

more immunizations or counseling about methods

to manage chronic conditions, such as diabetes,

or about nutrition or lifestyle. If consumers had

strong preferences in these areas or if the technologies could save costs for the organization,

these activities could be undertaken.

Hospitalization rates would be lower for all age

groups and income levels. These lower rates

would apply across the range of diagnostic categories, reflecting the great degree of discretion

that exists in the practice of medicine. Surgical

rates in particular would be lower. Over time, the

adoption and use of technologies associated with

hospitalization would be correspondingly lower.

This effect would be manifested gradually as

equipment wore out and was not replaced.

In both ambulatory and hospital settings, pressures to limit costs would spur the adoption and

use of cost-decreasing technologies. Managerial

technologies would be a fertile area for innovation. Depending on legal and professional restrictions, different staffing patterns might emerge. A

lower percentage of surgeons on the physician

staff is one example. If less costly, other health

professionals might be substituted for physicians.

As more care would be shifted from an inpatient

to an ambulatory basis, one would expect more

innovative activity to surround the delivery of

ambulatory services. Deliveries of low-risk

mothers and babies and certain surgery would

shift increasingly to a do-not-admit basis, and

other procedures would follow. Also in the

managerial area, pressures to limit costs might

lead the physicians and institutions that now

operate separately to forge links.

In effect, most prepaid group practices now

cover catastrophic care by having no limits on

physician and inpatient services. The way these

practices handle catastrophic or high-cost cases

would likely continue. The organization would

exert control over expensive or lengthy cases in

advance through the equipment, staff, and facilities that are available, such as long-term care as

an alternative to more costly acute-care hospitals.

The organization might also have standing arrangements and predetermined rates with outside

providers for rarely used technologies, such as

open-heart surgery. Clinicians, who would be

aware of the organization’s budget and facilities

as well as patients’ medical needs, would continue

to make decisions about the use of technologies

for individual patients.

Although catastrophic coverage would be more

widespread in a restructured system, under the
50 Ž Medical Technology Under Proposals To Increase Competition in Health Care

proposal for greater competition among comprehensive care or organziations, catastrophic

care would be controlled by providers and would

be unlikely to take a larger share of total medical

care expenditures. In fact, the portion would

probably decline if market pressures pushed providers to greater efficiency in the way they treated

these cases early in the episode and comprehensive coverage encouraged use of less costly settings and technologies.

Like the effects of greater cost sharing, the effects of greater competition among alternative

delivery systems would depend on the definition

of benefits to be included in comprehensive care.

Again, long-term care exemplifies a technology

that would reduce expensive hospital care, but

could itself constitute a sizable expense.

IMPLICATIONS FOR POLICY

Regionalization of specialized facilities would

continue to be an issue under both competitive

strategies. Even large comprehensive health care

organizations would not have sufficient volume

to justify all the equipment and surgical facilities

that their patients would use. Regionalization of

such facilities might both lower costs and improve

quality (162,172). Different responses by providers are possible under greater competition.

Hospitals, for example, might compete for patients and physicians on bases other than price

by acquiring expensive technologies and appealing to the inclination to associate them with quality and prestige. Another possibility is that in the

face of strong market pressure to limit costs, no

hospital in an area would be willing to acquire

expensive technologies used for medical conditions with a low prevalence. Under greater cost

sharing, expensive technologies would not be restrained by market pressures.

These potential problems suggest that some

kind of areawide coordination would be needed

with regard to the number and placement of

specialized facilities that no single organization

would have sufficient volume to support with its

own patient load. Enterprises might develop to

provide such technologies on referral or by conThe above speculation has proceeded as if organizations would compete by rationalizing technology use and by operating more efficiently, but

other responses are possible. Price competition

could lead competing delivery systems to skimp

on the adoption and use of technologies for their

enrollees, a matter of quality of care that is considered in chapter 4. Instead of tackling the more

difficult problems of relating to providers and promoting efficient technology use, insurers might

use their marketing expertise to seek enrollees likely to be low users. Furthermore, Americans associate sophisticated technologies with high quality, particularly in medical care. Plans or providers

might vie for enrollees in ways different from

those intended—e.g., by acquiring and using such

technologies.

tract. Possible governmental approaches range

from relying on local and State activities and placing certain facilities in medical schools and

teaching hospitals, to changing the emphasis and

continuing the federally supported Health Systems

Agencies. With increased cost sharing, attention

to expensive technologies used for catastrophic

care would also be warranted.

If the pattern of technology use in prepaid

groups were considered desirable, certain constraints could be removed from the growth of such

groups. The Federal Health Maintenance Organization Act (Public Law 93-222) requires for

qualification that plans cover certain benefits,

have specific structures, and follow certain procedures with respect to premium rating and enrollment. About half of the organizations considered

HMOS are not federally qualified. Moreover, financing arrangements under Medicare and Medicaid discourage HMOS from seeking the beneficiaries as enrollees.

Easing the requirements for Federal qualification, perhaps in line with State laws about HMOS,

would remove disadvantages that HMOS have relative to other plans that are not so restricted.

Guaranteeing Medicaid eligibility for a certain
Ch. 3—Effects of Increased Competition on the Use and Innovation of Medical Technology . 51

period would reduce a barrier to HMO enrollment. The experience of Project Health in Portland, Oreg., indicates the feasibility of giving

publicly supported beneficiaries a choice of plans,

including a prepaid group (see app. D).

In a restructured situation, as in the present,

medical providers would need evaluations of technologies. The interest of the medical community

in information about the efficacy, safety, and cost

effectiveness of technologies has grown greatly in

recent years. If physicians, hospitals, and insurers

faced more market pressure to limit costs, they

would increasingly turn to evaluations of alternative technologies to guide their decisions about

adoption and use. Large, well-established prepaid

groups, which may be subject to such pressure,

already develop some of their own information.

Since it is difficult to retain exclusive control over

information once it is developed, no one entity

may find it financially worthwhile to undertake

the initial expense. Yet the benefits to providers,

consumers, and insurers would be widespread.

Representing the social interest, Government

could fund evaluations conducted in the public

or private sector or sponsor a private consortium

to do SO (208).
4.

Effects of Increased Competition

on the Quality of Care
List of Tables

55

55

56

57

57

5$

59

59

61

61

62

63

63

64

64

65

66

66

66

66

67
4 ■

Effects of Increased Competition

on the Quality of Care

The ultimate goal of the provision and utilization of technologies in the medical care process

is a healthier population. The road to this end

result, though, is made up of a great many other

factors that determine health status. Genetic, environmental, lifestyle, and other factors not related to medical care can exert at least as much

influence on health outcomes as medical care

itself.

The timely and appropriate use of technologies

in the medical care process, nonetheless, has important implications for the health of the Nation.

Technologies can prevent, diagnose, and cure disease. In the unnecessary or insufficient provision

of medical technologies, harmful side effects to

the individual are possible. Even if not harmful,

unnecessary utilization represents a wasteful use

of resources, which is socially undesirable.

Quality of care has traditionally been promoted

in a number of ways. For example, the oldest

method has been the education and training of

physicians, nurses, and other providers of care.

These providers, as a professional group, have

also internalized codes of values, standards, and

priorities to guide their preservation and improvement of the individual and social good alike. In

addition, professional and governmental bodies

have undertaken licensure, accreditation, and certification of individual and institutional providers

as measures to ensure minimum levels of comDIMENSIONS OF QUALITY

Perspectives

Quality is, as Luft (159) has called it, “a

devilishly elusive concept.” Quality of medical

care is a multidimensional concept, and its meaning can vary according to the state of knowledge

and the values of an individual and a society. Different people use different measures for quality

petence. Biomedical research, technology evaluation, and health services research in part seek to

improve the quality of medical care.

A more recent approach has been to alter arrangements for paying the providers. More widespread health insurance has improved the accessibility of medical care, particularly for elderly and poor people. But these financial arrangements contain incentives for inappropriate

technology use. The procompetitive proposals, as

alternatives to these current arrangements, encompass concerns about quality as well as cost.

Even if proposals to increase competition generate medical care utilization patterns that moderate rising medical costs, a key question will remain: have these costs been moderated at the expense of lowered quality of care? A number of

important issues related to quality are discussed

in other chapters of this report, including measures of utilization and costs of technologies as well

as issues of consumer information (see chs. 3 and

5). But emphasis on such issues is somewhat incomplete without an examination of their relation

to quality and the resulting implications under a

procompetitive process. The specific concern and

analysis in this chapter is with the changes in the

levels and distribution of quality that are likely

to result from shifting patterns of use under proposals to increase competition.

determination, and often the measures are difficult

to interpret. More care is not always better, nor

is it always worse (200).

The quality of care delivered refers to its effect

on health. To assess quality of care, therefore, requires that a judgment be made about effectiveness. The criteria used in arriving at that judg55
56 ● Medical Technology Under Proposals To Increase Competition in Health Care

ment will vary from one situation to another, depending on the perspective adopted and the specific objectives being pursued. Not surprisingly,

the formulation for evaluation of an operational

concept of quality that takes into account its many

aspects is difficult. As a result, quality per se usually is not defined in precise terms. Instead, the

different dimensions of quality, which depend on

one’s perspective, are described.

Providers, consumers, and society stress different aspects of quality (see table s). Although

both consumers and providers consider technical

competence to be of central importance, consumers place a greater weight than providers on ease

of access, continuity, prevention of disease, and

the humanization or interpersonal aspects of care.

The technical component of quality refers to

the application of the science and technology of

medicine, and of the other health sciences, to a

personal health problem (67). The interpersonal

component of care refers to the provider’s relationship with the consumer, including the “milieu,

manner and behavior of the provider in delivering care to and communicating with the patient”

(27). Amenities of care refer to the more frivolous

or nonessential services and are not included in

quality.

The technical and interpersonal components of

care are acknowledged not only to have approximately equal importance in evaluating care, but

Table 5.—Different Perspectives on

Dimensions of Quality of Care

Perspectives

Dimensions of quality Provider Consumer Society

also to constitute a mutually reinforcing set

(26,67,283). Indeed, it is the inspiration or

necessary confidence gained from the interpersonal aspect of care that often allows and sustains

the technical component of the therapeutic process. Nevertheless, the technical component is the

component that is more likely to be documented

in the patient’s record, and as a result, is the better studied one. The development of criteria and

measures for evaluating the interpersonal component lags far behind what has been accomplished

in that respect for technical care (284).

In contrast to consumers and providers, society

evaluates results of care as they affect standards

of health of the population and as the social and

economic efficiency of the system conforms to

society’s priorities. Society, unlike consumers and

providers, is apt to take into account the presence

of mechanisms to correct inequities related to ability to pay, and the presence of the external or

shared benefits that accrue to society when a given

person receives care.

Measures

Although quality has not been specifically defined, assessments of quality of care can be performed and classified in terms of whether judgments were based on either structure, process, or

outcomes (70):

● Assessment of structure, the settings and instrumentalities available and used for the

provision of care, focuses on the characteristics of the persons and organizations that

provide care.

● Assessment of process evaluates the activities

of physicians and other health professionals

in caring for patients.

● Assessment of outcomes evaluates the effects

on physical, emotional, and functional wellbeing.

Outcomes could be thought to provide the best

measure of quality, since they reflect the extent

to which one’s health is maintained or improved.

The provision of health technologies and services,

however, is only one of the factors that determine

outcomes, at least when the latter are measured

in terms of health status. Outcomes are thus a

meaningful reflection of quality of care only to
Ch. 4—Effects of Increased Competition on the Quality of Care ● 5 7

the extent that they can be attributed to specific

elements of the process or structure. For the same

reason, evaluations that focus on the process or

structure of care must address activities that are

believed to contribute to desired outcomes (284).

Data about outcomes are also difficult to obtain

and often capture only a small part of true outcomes (159).

Structural measures, such as physicians’ training and specialty board certification, have often

been used as criteria to evaluate quality because

the required data are relatively easy to collect. An

important weakness of such measures is that they

have usually been developed from a single model

of medical care delivery, with little regard for

changes over time.

Process measures are the criteria most often

used by the medical profession to measure quality of care. However, process measures tend to be

biased according to varying organizational approaches to recordkeeping, and because of their

focus on the technical management of illness. The

value of process in evaluating quality also depends

on knowledge about the relationship between certain activities (process) and outcomes.

Overall, the difficulties involved in undertaking quality assessment studies and the problems

related to interpreting the findings can be formidable. Although some positive relationships between structure and process have been found,

these are neither stable nor reliable.

A further difficulty is the often indeterminate

relationship between standard medical procedures

and favorable outcomes on health. There are two

aspects to this problem. First, it is unclear what

percentage of physicians do, in fact, follow currently accepted medical procedures in their practices. Studies have indicated great deviations from

optimal practice behavior, especially in ambulatory care. Second, given evidence of large

gaps of knowledge of what procedures and treatments are effective for many common conditions,

the correlation between standard medical procedures and health outcomes is dubious (25,200).

What must be kept in mind,

of quality are all far from

then, is that measures

perfect.

CONTEXT OF QUALITY CONSIDERATIONS

Current Levels of Quality

Empirical studies concerning current levels of

quality of medical care are almost all local in scope

and limited to segments of care in highly selected

population groups. Thus, most of the empirical

studies that are available provide only suggestive

evidence about the level of quality in the United

States as a whole. A few studies, although not

national in scope, do pertain either to a large population or to widely dispersed selections of physicians. Furthermore, national data on morbidity,

disability, and use of services are available from

the Health Interview Survey, and there are international data on mortality. But the closest to national studies on quality of care are analyses of

postoperative mortality conducted on national

samples of hospitals.

Both Bunker (187) and the staff of the Institutional Differences Study (129) found large differences in postoperative mortality across hospitals

in national samples. Even after detailed adjustments for differences in case type, large variations

(as much as a factor of 2.5) in mortality rates in

hospitals persisted in the Institutional Differences

Study (284).

Regardless of size, scope, or population groups,

a large number of studies conclude that there are

considerable departures from what seem to be

reasonable standards of care. Problems have been

found both at the one extreme of insufficient provision of technologies and at the other extreme

of unnecessary utilization.

Studies of the process of care almost invariably

show that the care provided is below the standards

used because not all indicated procedures or tests

were done. Performance levels in relation to criteria often do not exceed 45 or 55 percent (284).

A number of studies have also documented the

provision of unnecessary services and technologies, especially in the areas of surgical services,
58 ● Medical Technology Under Proposals To Increase Competition in Health Care

laboratory procedures, and drugs. Particularly for

laboratory tests, studies tend to show a pattern

of overuse (284). The studies of the quality of

surgery, however, have been criticized for using

post hoc criteria, when the appropriate measure

should be based on the information available to

the surgeon before the operation takes place

(189,284).

Lastly, the variation in performance among

providers has been found to be substantial. Hulka,

et al. (125), for example, in their study of internists obtained performance scores ranging from

30 to 80 percent. A similar range is reported by

Rhee (225) using data from Payne, et al. (217).

Nevertheless, within that variation, systematic

differences do appear. In particular, specialists

practicing within their own domain consistently

get higher scores than general practitioners (see

e.g., 26,126,217,218,228,284).

In view of such study results, one possible conclusion is that present levels of quality of care are

quite low. An alternate response, however, is to

question the validity of the standards used in

assessing quality. As previously discussed, there

is often an indeterminate relationship between

standard medical procedures and favorable outcomes on health. It is also true that much of

technology use in medical care is not fully established by rigorous research.

The presence of health insurance coverage

mechanisms is another important consideration.

If insurance creates a divergence between individual costs and social costs, there will be a

disparity between individual preference levels and

social levels of optimal quality. The disparity

arises because sick people and their providers consider individual benefits of technologies but are

insulated by insurance coverage from the costs of

technology use. The result, from a social perspective, is a misallocation of resources toward a more

costly distribution of technologies (see chs. 2

and 3).

These incentives toward overuse of technologies

are reflected in existing quality assurance

mechanisms. The Professional Standards Review

Organizations, Blue Cross/Blue Shield’s Medical

Necessity Program, and Medicare coverage policies toward new technologies, for example, promote quality (though not explicitly in the case of

Medicare coverage policy) through utilization

review. While studies document the existence of

insufficient provision of services in some areas of

care, concern with the current system is clearly

weighted toward the issue of unnecessary use.

Intended Levels of Quality

Proponents of greater competition agree that

quality of care is a priority issue. Procompetitive

proposals attempt to aline individual preferences

and costs more closely with social preferences and

costs. Almost by definition, such convergence is

professed to assure and improve quality. Enthoven (79) states simply that “the best quality

of care reflects society’s preferences in the use of

resources.” Feldstein (87) is even more terse in

stating that, at least in regard to hospitals, “quality

is assumed to be a function of the real resources

consumed.” Quality is to be secured through the

inherent workings of market forces that encourage

consumers to select the level and type of insurance

plan or medical technology which represents the

optimal tradeoff, from the point of view of the

consumer, between benefits and costs.

Competitive proposals emphasizing patient cost

sharing at the time of use intend to encourage the

consumer, and perhaps the provider acting in the

economic interest of the consumer, to consider the

cost effectiveness of a particular service or technology. The belief is that if patients have to pay

more of the out-of-pocket price to receive care,

they will be more reluctant to purchase services

which they perceive to be of little efficacy. Hence,

the intent is to improve care through reduced use

of unnecessary and marginally useful services, by

working through consumer incentives.

In contrast, those proposals emphasizing competition among comprehensive care organizations

leading to increased enrollment in health maintenance organizations (HIUOS) intend to encourage

the provider to consider the cost effectiveness of

a particular service. In changing the manner in

which a provider is paid from a services- to a timebased system, the direct monetary incentive to

provide more services is eliminated. Again, the

intention is improvement in quality through reduced utilization of unnecessary and marginally

useful services (see chs. 2 and 3).
Ch. 4—Effects of Increased Competition on the Quality of Care • 59

One concern that both strategies to increase

competition address directly is the issue of underinsurance. To guard against underinsurance,

mechanisms such as comprehensive care packages

and catastrophic coverage are specified. One of

their purposes is to avoid a situation where a person will not seek needed care or will suffer financial hardship as a result of not having sufficient

insurance. In that sense, these are explicit provisions designed to assure that initiation and continuation of care are not hindered too much. Given the possible effects of initiation and continuation, these provisions have important implications

for quality.

Some of the proposals contain another more

or less explicit intention that private insurance

companies will be put in a position of competing

with one another. In order to compete successfully, companies will impose stricter controls on providers to limit expenditures and keep premiums

at competitive levels. Results could include a focus

on rooting out unnecessary care, not covering certain services believed to be of no benefit to patients, or even the institution of formal monitoring of care.

Other proposals also intend a similar “secondlayer” arrangement of administrative control to

assure certain levels of quality care. Some of the

proposals indicate that a qualified plan will have

to meet specified “performance standards” including some that relate to providers (77).

McClure (170) favors imposing quality assurance

mechanisms on competing health care plans, as

long as other providers are also subject to those

mechanisms.

Although competition-promoting proposals do

not envisage doing away with the apparatus in

place now to assure and promote quality of care,

increased price competition under some of the

proposals may lead to a shift in the overriding

regulatory focus from a concern over unnecessary

utilization to a concern over underprovision and

omissions of useful services and technologies.

RESEARCH ON QUALITY OF CARE WITH

GREATER PATlENT COST SHARING

Increased cost sharing by patients clearly reduces the use of medical care (see ch. 3). The issues

for quality, more specifically, are how patterns

of use change, what mix of patients are affected,

and whether or not the resulting quality of care

is altered.

Initiation of Care

One way a reduction in use of technology may

come about is through reduced initiation of care.

It is useful to distinguish at least two different effects related to initiation: delay by consumers in

seeking care, and failure to seek care despite a recognized need—the extreme case of delaying initiation.

There is strong evidence that greater cost sharing deters people from initiating care. The most

recent evidence available on these issues comes

from interim results of the Rand Health Insurance

Study (192). This randomized experimental study

of people under 62 years found that the likelihood

of having a physician visit or hospital admission,

as well as the number of visits per person, were

lower with higher coinsurance rates. The Rand

researchers are still analyzing data on health

status. They have not yet examined whether less

contact with providers or fewer visits and admissions had any detrimental effects on health (see

ch. 3).

As one would expect, when necessary care is

delayed, or not sought at all, quality of care may

be lowered by leading to some combination of

fewer effective kinds of care, greater patient anxiety, increased likelihood of complications, chronic problems, extended discomfort and activity limitation, or even death (251). If and when a patient does seek care, the use of technologies may

be greater or less efficient because of the patient’s

worsened condition.

It is not clear, however, that cost sharing delays

“necessary” care. People who had to pay higher
60 ● Medical Technology Under Proposals To Increase Competition in Health Care

copayments under the California Medi-Cal program reported no deterrent in seeking care for

“significant conditions” (24). One investigator

questioned the extent to which more ambulatory

care discovers new disease or controls disease

already diagnosed (37). A study of people with

congestive heart failure found intensive followup

reduced subsequent hospital days for that condition, but was associated with an even larger increase in days for other cardiac and noncardiac

disease (37). Similar results were reported for

rheumatoid arthritis (37).

Procompetitive proposals advocate relating cost

sharing to family income. It is instructive to

review the results when cost sharing has been introduced without any attempt to make out-ofpocket expenses proportional to income. When

Saskatchewan, in 1968, levied a copayment on

physician office and home visits, the effect fell

disproportionately on its low-income population.

Use of physician services among poor families

decreased by 18 percent compared with a decrease

of 6 percent for all families (15).

Similar results were found following a 25 percent coinsurance charge in 1967 on all physician

services in a Stanford University fee-for-service

group in Palo Alto, Calif (240). Following the implementation of that coinsurance, per capita number of physician services fell 24 percent. While a

decline among all age, sex, and occupation groups

was experienced, physician use fell more for the

occupation group with the lowest income. There

were also greater decreases in the use of preventive services-particularly annual physical examinations—than in therapeutic care. Within therapeutic care, there was a greater reduction in visits

for “possibly minor complaints” (earache, colds,

headaches, etc. ) than in visits for other services

(240).

In a followup study, 4 years after coinsurance

had been initiated, the effect of the coinsurance

was found to have not been transitory; the drop

in physician services remained constant (238).

Four years following the introduction of coinsurance, the enrollment of the lower income

employees belonging to the plan dropped from

one-third to about one-quarter of the total enrollment. These employees chose to join Kaiser, a

prepaid group plan requiring minimal coinsurance

and lower premiums (see ch. 3).

Although neither the Stanford nor Saskatchewan study correlated reductions in physician

visits with a reduction in necessary care, another

study on cost sharing revealed a more direct effect on quality of care. In 1972-73, the state of

California conducted an experiment on copayment in the California Medi-Cal (Medicaid) program (24). People eligible for Medi-Cal whose

earnings or assets exceeded a certain amount were

required to pay $1.00 for each of their first two

visits to providers each month and $0.50 for each

of the first two prescriptions filled each month.

Among recipients of Aid to Families With Dependent Children, copayers’ utilization rates were

45 percent lower for childhood immunizations,

22 percent lower for Pap smears, and 58 percent

lower for “total obstetrical care.” This study did

not resolve the extent to which differences in Pap

smears and obstetrical care could be explained by

different rates of pregnancy or different proportions of women in the copay and noncopay

groups. Women in the copay group had higher

rates of regular care during pregnancy and about

the same rate of “preventive services” as women

in the noncopay group.

If people in a community turn to providers for

care that is not needed, and if the reductions in

care are confined to this category of “frivolous”

use of services, then the effects on quality might

actually be positive ones. Similarly, if the care

provided in a community tends to do more harm

than good, then restricting access to such care may

improve rather than harm quality.

There is substantial evidence that the present

use of certain technologies is not related to need.

Regional variations of surgery within the Rochester, N. Y., area, and between the United States

and Great Britain are examples (29,148).

More recently, the use of several common medical practices (such as tonsillectomies, hysterectomies, prostatectomies, and lens extractions)

were found to vary substantially among New England community populations, despite the absence

of any measurable difference in their need for

services (276). Watkins (272) has also documented
Ch. 4—Effects of Increased Competition on the Quality of Care . 61

the wide variation in appendectomies across communities and across national populations of

Australia, the United Kingdom, China, and the

United States, again without corresponding variation in patterns of need. Similar variations have

been found in the use of the laboratory procedures, antibiotics, and injections (151,153).

Selection of Providers

Another consideration for quality of care under

the option of greater coinsurance and deductibles

is increased shopping for a provider. The choice

of the initial provider will be a consumer decision, while that of referral to providers will likely require a joint decision by consumer and provider. In theory, it should be rewarding for consumers to shop for providers using price as a key

criterion, since variability in prices among providers is a well-documented phenomenon (223).

To the extent that shopping does take place,

consumers may find providers who are at least

as qualified as those the consumers would have

otherwise used, but whose prices are lower. However, as previously discussed, a consumer’s evaluation of a provider’s quality could possibly take

the technical quality more or less for granted and

focus on the interpersonal aspects of quality that

the consumer can more readily judge. Unless technical quality is somehow vouched for by some

third party, shopping based only on price with

technical quality largely left out may result in

lowered quality of care. On the other hand, an

argument could also be made that just as hospitals

have competed for physicians through acquisition

of the most modern and sophisticated medical

technology, a parallel dynamic could emerge between provider and consumer. This may be an

area, too, where consumer advocacy could surface,

Another possibility is that consumers could turn

to altogether different providers who were less expensive or who, like pharmacists, did not charge

for advice. If the care these providers offer is not

technically on a par with that of physicians, the

quality of care may be reduced. There is longstanding evidence that some people, especially

those with lower incomes, use pharmacists in situations where they would otherwise (if it were

not for problems of cost and access) see physicians (142). When such people are given better

coverage for physician services, as with the introduction of universal health insurance in Quebec,

they in fact decrease markedly their use of pharmacists for consultations about medical problems

(226).

Quality may also be improved if less expensive

professionals, such as midwives and nurse practitioners, are as technically proficient as physicians

in certain areas and more proficient in interpersonal aspects. Provider shopping may increase incentives for a more creative mix of personnel

substitution for physicians that would not lower

prices or necessarily sacrifice quality. Recent

studies suggest there can be substantial cost savings, at least in the short run, from personnel

substitution. Reinhardt (223), Robyn and Hadley

(229), and others find that the use of more support personnel in doctors’ offices can reduce the

cost of physicians’ services; Douglas and Cole (73)

and Feldstein (90) come to the same conclusion

for dentists (62). The use of nurse practitioners

and physician assistants in organized delivery

systems has also increased productivity and reduced cost (149).

Choice of Technologies

An intended effect of proposed greater cost

sharing that is closely related to choice of provider is to induce the consumer to choose technologies more efficiently. This decision is made

jointly by consumer and provider. Since it is

subsequent to initiation of care, the decision about

choice of services is strongly influenced by the

prior decision about choice of provider. For most

providers, especially those in fee-for-service practice, essentially the same incentives would continue. Any significant changes in incentives would

mostly come from the patient side.

The more favorable quality implication is that

patients’ greater cost sensitivity about choice of

services may force providers into increasing clinical efficiency, which would maintain or even improve levels of care. Recent studies have pointed

to the possibility for more widespread implementation of such efficiencies. Luft, et al. (162),

studied 12 surgical procedures of varying com-
62 • Medical Technology Under Proposals To Increase Competition in Health Care

plexity in 1,498 hospitals to determine the relation beween a hospital’s surgical volume and

surgical mortality. The results indicated a favorable relation between volume and mortality in

several instances, implying the value of regionalization for certain operations.

It may be, however, that volume is a natural

consequence of high performance and quality

standards originally established by individual

clinicians or hospitals, not the other way around.

Levels of quality under such circumstances would

not necessarily be affected by regionalization.

Reinforcing the value of regionalization, Farber,

et al. (83), found that hospitals performing relatively little surgery in seven procedural areas reported higher incidence of postoperative wound

infections.

Greater cost sensitivity may also lead to a different choice of services that results in greater

levels of consumer satisfaction. Patient preferences

for treatment outcomes can differ substantially

from the preferences of their physicians. It may

well be that, in many situations, the clinical outcomes valued by physicians are less important to

patients.

A negative possibility of greater choice of services is that consumers may demand more services

than before, especially services covered as catastrophic expenses. This could have negative effects in one of two ways: by lowering quality with

respect to interpersonal aspects if the consumers

demands increase tension between provider and

consumer, or by lowering technical care if the

demands for more services result in provision of

unnecessary care.

Under greater cost sharing, catastrophic coverage would remove the restraints on the provider

when large expenditures have already been made.

If the provider then used additional services, the

effect on quality would be indeterminate. The

extra care might improve the patient’s condition,

have little or no net benefit, or produce harm. The

provision of catastrophic coverage would not

change the situation regarding alternative delivery

systems such as HMOS. They already have such

coverage and rely on the organization to restrain

use.

As for coverage of comprehensive care, HMOS

also now provide such benefits. For other practices, quality could be either improved or unaffected as providers and consumers choose the setting and type of care for a medical condition

without the constraint of insurance coverage. For

example, present coverage of a procedure in a

hospital but not on an ambulatory basis might

lead to hospitalization, with the greater risks

associated, when ambulatory care would be appropriate.

Equity Considerations

The effects of greater cost-sharing provisions

on use of technologies seem strongly related to

income (66,159,240). Lower income persons are

more likely not to initiate care, to delay initiation, and to reject services-all with potentially

negative implications for quality of care. Recognizing these implications, the procompetitive proposals relate cost-sharing levels to income. Ginsburg (105) has argued, though, that in order to

relate these levels to income, private insurance

companies would have to measure a person’s income both at the time the premium is set and at

the time of claim; this task is not possible under

current statutes protecting privacy and would also

pose large administrative costs. An alternative to

such problems would be linkage with information

from the Internal Revenue Service.

If income-related cost-sharing levels can be put

in place, their effects on low-income persons who

choose such coverage are not easily predicted,

especially for Medicaid beneficiaries. Medicaid

coverage differs from one State to another, now

more than ever before. In most States there are

no cost-sharing provisions, but access to care can

still be severely restricted by the definition of the

services covered. All that can be said is that in

States with relatively comprehensive coverage,

cost-sharing provisions are likely to affect initiation and continuation in ways that are analogous

to those discussed earlier for the insured population, and with similar implications for quality of

care. In States with very restricted coverage, any

adverse effects on quality resulting from the inhibiting effects of cost sharing may be compen-
Ch. 4—Ettects of Increased Competition on the Quality of Care ● 6 3

sated for by the kind of broader coverage envisioned in procompetitive proposals.

One group for whom the potential benefits are

less ambiguous are people under age 65 who have

no public or private insurance coverage. Estimates

of the size of this group range from 23 million to

25.6 million people (33,135). For these people, any

insurance, even with cost-sharing features, would

facilitate access to care, and thus might contribute

to the quality of care they receive.

If, on the other hand, cost-sharing levels are

not or cannot be set in relation to income, then

the effects on the quality of care received by lower

income persons can be expected to be in the same

general direction as for other income groups, but

with differences in magnitude. For individuals

who are covered or could be covered by Medicaid, access and therefore quality would be more

apt to be reduced. For other individuals, there

would still be improvements in quality because

of increased access to care, but the benefit would

be lower. Most importantly, among those who

already have coverage, the effects on quality

would be distributed inequitably across income

classes, with lower income people being more apt

to forego necessary care than those in the higher

income brackets.

The effects of cost sharing on Medicare beneficiaries are likely to be similar to those described

earlier for the insured population, inasmuch as

Medicare Part A (for institutional services) and

Part B (for physician services) provisions resemble those of a standard health insurance policy

(284).

RESEARCH ON QUALITY OF CARE WITH COMPETITION AMONG

COMPREHENSIVE CARE ORGANIZATIONS

Proposals for greater competition among comprehensive care organizations envision greater

choice of health plans, and greater enrollment in

prepaid group practices is perceived as especially

desirable. Again, effects on quality of care can

be examined in terms of initiation of care, selection of provider, and choice of technologies.

Initiation of Care

In HMOS, the financial barriers to initiation of

care represented by cost sharing are not great. Furthermore, one of the traditionally distinctive features of HMOS is the comprehensiveness of the

services covered, which should further facilitate

initiation of care. Surveys of HMO enrollees indicate that the scope of benefits available, such as

complete ambulatory care, maternity care, mental

health/drug abuse services, and preventive care,

is one of the most attractive aspects of HMOS

(159,254).

However, there may be other barriers to initiation of care in HMOS. One way HMOS, and especially prepaid groups, achieve lower costs is by

limiting the supply of beds as well as physicians,

thus constraining demand (222). The restricted

supply of services is rationed not through money

prices but through waiting times to obtain an appointment and, because of centralization of services, through travel distances to clinics.

Enrollees in prepaid groups wait a shorter time

in the physician’s office, but a longer time for appointments (159). No difference has been found

between the time to obtain an appointment for

prepaid and fee-for-service group practices (119).

Other measures of access (e.g., home visits, ability

to reach a physician by telephone) have been investigated, but the findings do not distinguish between HMOS and fee-for-service solo practices on

these dimensions (58,159).

Almost all prepaid groups have provisions for

providing care without an appointment’s being required, such as walk-in clinics and emergency

rooms. Their central recordkeeping also promotes

continuity of care. Such integration could reduce

unnecessary duplication of tests and examinations, which are not only inefficient but can have

adverse effects on health. Overall, initiation and

continuation of care may be enhanced, resulting

in higher levels of technical quality.
64 ● Medical Technology Under Proposals To Increase Competition in Health Care

Selection of Providers

Another aspect of quality that might be affected

by enrolling in an HMO is the selection of the provider. In HMOS, the selection is constrained to

a finite set of providers, namely those who are

members of the prepaid group or the individual

practice association (IPA). Thus, for all practical

purposes the choice of an HMO as one’s health

insurance plan to a large extent determines—or

at least largely constrains-the choice of provider.

However, the IPA by its nature is apt to offer a

choice of physicians that can be quite broad compared with the prepaid group.

But those in favor of group practice dispute that

consumers’ free choice of physicians is good in

itself or is correlated with desirable health outcomes. In a solo setting, consumers have little

knowledge or control over the providers of care

(40,111). They rely mainly on a lay referral system

for choosing physicians on the basis of recommendations of friends and neighbors (93). Patients in

a group practice can often select physicians among

those available and change if they wish. Most important, the group can guide the patient’s choice

on knowledgeable grounds (40). Furthermore, beyond having the knowledge to help consumers

select physicians, group providers have a professional interest in selection of well-qualified

colleagues.

The most telling and persistent criticism of the

group practice framework is that it depersonalizes

patients in their dealings with a provider and with

the medical care system itself. This relates to process as it concerns the way care is delivered and

may adversely affect health outcomes. It can also

concern outcomes directly, since emotional wellbeing is a part of health.

Two studies of consumer satisfaction with quality of care produced findings that HMO enrollees

were more negative about the quality of care they

received than were patients of fee-for-service

physicians (154,159). It is uncertain which

characteristics of medical practice consumers

evaluated as indicators of quality, but such a

perception may stem from consumers’ heavier emphasis on the interpersonal component of care.

Studies of the interpersonal aspects of care report

that prepaid group patients were less satisfied with

the warmth, attention, and caring attitudes shown

by physicians than the patients of fee-for-service

physicians (159).

Choice of Technologies

One consistent finding in the literature is that

enrollees of prepaid groups use many fewer hospital days than the general population (see ch. 3).

To the extent that this represents the elimination

of unnecessary care or an appropriate substitution of outpatient care for inpatient services, it

represents an improvement in quality along with

a reduction in costs—the kind of ideal combination that some of the advocates of this strategy

wish to achieve (78).

As noted in chapter 3, this decrease in hospitalization occurred in both medical and surgical

categories, although reported rates of surgery

were generally far lower among HMO patients

than among comparable control groups. The

Federal Employees Health Benefits Program’s

(FEHBP’s) experience showed consistently lowered

hospitalization rates by members electing HMO

coverage (see app. C). Such rates were particularly

striking for “elective surgical admissions, ” estimated at 20 to 25 percent below fee-for-service

plans (37). None of the reviewers of the literature

on HMOS have concluded that reduced hospitalization rates meant the delivery of better quality

care (37,70,231).

There has always been some concern that prepaid group practices may be achieving lower

hospitalization rates by not always admitting patients to the hospital and by not performing

surgery when indicated. No evidence to that effect exists. One study, which compared a Seattle

prepaid group practice and an independent feefor-service practice, raised the possibility that the

prepaid group might have provided too little appropriate surgery (152). But the different rates

were attributable mainly to tonsillectomy and

adenoidectomy, two procedures whose efficacy

is controversial. Luft maintained that there is no

evidence that “skimping” by HMOS has occurred

anywhere “but in the unique situation of the MediCal Prepaid Health Plans in southern California

during the early 1970’s” (155) (see app. E).
Ch. 4—Effects of Increased Competition on the Quality of Care ● 6 5

HMOS v. Traditional Fee-For= Service

Practice

When choosing an HMO as one’s health insurance plan, the question that arises is whether the

quality of care provided in HMOS differs from

the quality of care provided in the fee-for-service

sector. This is a question that has been addressed

more or less directly by dozens of studies and by

the previous discussions in this chapter. It has also

been the subject of two recent major reviews of

the literature, in particular, those by Cunningham

and Williamson (54) and Luft (159).

Cunningham and Williamson reviewed 27 separate studies (17 independent research projects)

and concluded that 19 of these studies found that

the general quality of health care in the HMOS

studied was superior to that in general fee-forservice or other settings (54). In all 19 cases, the

HMOS were prepaid group practices. In eight of

the studies, either the quality of care was found

to be similar in both settings, or the total study

findings were inconclusive. Two of these concerned Medicaid recipients in IPAs, and one studied Medicaid recipients in both IPAs and prepaid

groups. The other five in this inconclusive category reported on prepaid group practices. None

of these studies reported HMO care to be inferior

overall. A total of 80 independent measurements,

reflecting the study’s criteria of valid quality indicators, that assessed specific aspects of care in

these studies generally supported these overall

findings (see table 6).

Table 6.—Comparison of Quality of Care in HMOS and

Other Settings: Scoring by Structure, Process,

and Outcome Indicators

Comparable

care or

Superior inconclusive Inferior

care in data: HMOS care in

HMOS and others HMOS

Separate indicators

Structure . . . . . . . . . . . . . 4 1 0

Process . . . . . . . . . . . . . . 41 11 6

Outcome . . . . . . . . . . . . . 8 7 2

Total . . . . . . . . . . . . . . . 53 19 8

Overall studies

Total . . . . . . . . . . . . . . . 19 8 0

NOTE: These scores were based on measures reflecting each study’s indicators

of quality of care.

SOURCE: F. C. Cunningham, and J. W. Williamson, “How Does Quality of Health

Care in HMOS Compare to That in Other Settings? An Analytic Literature Review: 1958 to 1979?” The Group Health Journal 1:4, 1980.

Of the eight instances of inferior care, two were

measures of continuity of care where use of team

care in the HMO was not fully taken into account

(17,122), and two were satisfaction measures (55,

99) where members of prepaid groups were less

satisfied than fee-for-service recipients with their

physicians but more satisfied with technical quality and other health personnel. One indicated provision of fewer preventive services in HMO settings (101), and one indicated poorer outcomes

for hypertensive patients (245). The remaining

two findings in this category related to perceived

access to care (245) and physician rating for appropriate length of hospital stay (217).

Reviewing many of the same studies and also

grouping quality assessment measures under the

headings of structure, process, and outcome, Luft

came to no definite resolution about the quality

question of HMO v. fee-for-service care (159).

The available structural data generally supported

the contention that prepaid groups are at least as

good as the conventional system. Prepaid groups

tend to have higher proportions of more educated

(board-certified) physicians and are more likely

to use accredited hospitals. However, some have

had problems gaining access to certain hospitals

and others have chosen not to emphasize specialist

and accredited nonprofit hospitals. In the only

such study of an IPA, qualified surgeons performed more of the surgery at the IPA than in

fee-for-service practice. Internal quality review

mechanisms were found in HMOS of both types,

but the effectiveness of these internal measures

was not clear.

Process measures of the review indicated that

large multispecialty group practices, both cavitation and fee-for-service, have a quality advantage

over small groups and solo practitioners. Outcome measures for HMOS were not generally

found to be different from those of conventional

practice. An exception is an early study (244) that

showed that enrollees of the Health Insurance Plan

of New York, an ambulatory cavitation group,

had lower rates of prematurity and perinatal mortality than a control population served by fee-forservice medicine. In another earlier study, the National Commission on Health Manpower concluded that the quality of care delivered by the

Kaiser-Perrnanente prepaid groups in California
66 Ž Medical Technology Under Proposals To Increase @repetition in Health Care

was equal to or better than the care in most communities (224).

Equity Considerations

This strategy to increase competition among

comprehensive organizations seeks to encourage

enrollment in organizations similar to present

prepaid group practices. The history of HMOS

serving Medicaid and Medicare populations suggests that this arrangement is not without its difficulties. Less than 2 percent of Medicare beneficiaries and a similar percentage of Medicaid

eligibles are enrolled in HMOS. HMOS usually

market to employment groups, which tend to

have fewer elderly or chronically ill people than

the general population. With cavitation payment

and community rating, HMOS have an incentive

to avoid high or otherwise expensive users of medical care. The proposal to relate premiums to actuarial categories would mitigate that effect (79), but

not eliminate it. The incompatibility of the retrospective payment methods of Medicaid and Medicare with HMOS’ cavitation and the uncertain

length of Medicaid eligibility payment have also

deterred enrollment of these groups (see ch. 3).

Some improvement might be expected in the

quality of care received by Medicaid recipients

who would enroll in HMOS because of accessibility and the comprehensive nature of the benefit

package. However, the problems that arose with

the Prepaid Health Plans in California indicate the

importance of minimum standards or qualifications for such plans (see app. E).

LIKELY EFFECTS OF INCREASED COMPETITION

ON QUALITY OF CARE

Greater Patient Cost Sharing

Higher levels of cost sharing by patients can be

expected to lead to use of fewer technologies, especially in situations involving laboratory tests and

drugs, illnesses of a potentially minor nature, and

certain groups of surgery. The use of technologies

in such situations has exhibited a great deal of

variation, often unrelated to medical condition.

To the extent that specific technologies are of little or no real benefit in these situations, changes

in coverage provisions will not appreciably alter

the outcome or the length of the condition. Barriers to initiation of care may also be offset by

increases in clinical and production efficiencies by

providers. Under such circumstances, levels of

quality of care will be maintained if not improved.

To the extent that necessary care—care for

which medical intervention can alter the course

of the disease and affect other outcomes—is eliminated, however, quality of care is bound to suffer. For technologies such as immunizations,

whose efficacy has been well established, some

harm to quality can be expected with any decline

in their use. Relating cost sharing to income would

be necessary to avoid pronounced declines in access and quality with regard to such necessary

services for low-income and Medicaid populations. The coverage of catastrophic expenses is

also designed to prevent people from foregoing

needed care because of finances. But people with

chronic conditions and recurrent annual expenses

up to the threshold might find medical expenses

of 10 percent of their income to be prohibitive

over several years.

At the same time, if catastrophic coverage promotes the use of technologies of questionable

benefit to the patient, levels of quality may be

diminished. A final concern with increased levels

of cost sharing is that cost-conscious consumers

shopping for less expensive services may unintentionally receive care of lower technical quality,

a critical aspect of care not always appreciated

by the consumer.

Competition Among Comprehensive

Care Organizations

If consumers respond as at least some of the

competition proposals intend for them to, substantial numbers will enroll in HMOS. The avail-
Ch. 4—Effecfs of Increased Competition on the Quality of Care ● 67

able evidence suggests that they will receive technical care that is of quality at least comparable

to that available in the fee-for-service sector, although they may be more dissatisfied with the interpersonal aspects of care. This result stems from

the more rigid organization that is characteristic

of HMOS, especially prepaid groups.

Present medical practice allows much room for

changes in the number and mix of technologies

used, with little effect on or improvement in quality of care. The intention of creating a more costsensitive environment is that incentives would be

changed and all providers would feel pressures to

be efficient. In this different situation, there might

be a tendency for providers to lower quality to

cut costs, The likelihood of lowered levels of quality might be especially pronounced in group practices with large concentrations of low-income and

Medicaid patients.

IMPLICATIONS FOR POLICY

Examination of the likely effects on quality of

care of competitive proposals suggests the importance of better information about quality, where

quality is used to mean both the benefits from care

and the competence of those who deliver it. For

the majority of technologies, the influence of these

proposals on quality remains speculative, in large

part because of the lack of good information on

what constitutes good and necessary care.

As previous OTA reports (200,201,208) have

testified, available information about the benefits

of care has much room for improvement. Pauly

(214) states in an article on unnecessary surgery

that medicine has not generated “either the conceptual apparatus or the complete information set

needed to arrive” at a general consensus on which

procedures are necessary and which are not. Likewise, many new and emerging technologies have

been documented to enjoy widespread use without

accompanying information regarding appropriate

use (200,208). Information about the competence

of providers is also very scarce. Even when information is available, it may not reach the provider or consumer who needs it.

The problem of the lack of information about

the benefits of specific care that exists under the

In addition, HMOS studied in the last 20 years

are not necessarily the type that would proliferate

in response to competition. The organizations that

fit under the rubric of HMO and alternative delivery systems are generally becoming more

varied. Many of the best studied prepaid groups

(Kaiser-Permanente, Health Insurance Plan of

New York, Group Health Association, Group

Health Cooperative of Puget Sound) have a history of sponsorship and organization that make

them unlikely to provide complete insight into any

of the IPAs that have multiplied in recent years.

Those IPAs often represent attempts by private

practitioners to compete with an existing prepaid

group. The strictures imposed by cavitation payment are shared by both types of organizations,

but the goals, incentives, and sponsorship, which

are likely to affect many aspects in quality of care,

are apt to be quite different, and relatively less

is known about IPAs altogether.

current system of medical care will probably continue to exist under any new procompetitive system. However, the uses and focus of information

about quality might change, depending on the

competitive proposal and the direction of the concern regarding quality.

With increased patient cost sharing, the concern about providers’ use would remain in the

direction of overprovision. With present payment

methods, providers would have no obvious incentive to underuse technologies and might overuse

them in the catastrophic area. Information could

be directed to consumers about appropriate circumstances for initiating care, provider quality,

and the benefits of some procedures.

In contrast to the present system, which is

believed to encourage unnecessary utilization, the

competitive strategy that emphasizes comprehensive care organizations would shift the focus of

concern about quality to the underprovision and

omission of useful technologies. Quality assurance

measures here could take the form of information

about the quality of the provider group, as well

as direct quality checks on providers themselves.

The experience of the California Prepaid Health

Plans provides an instructive lesson about the
68 • Medical Technology Under Proposals To Increase Competition in Health Care

levels of poor quality possible with greater plan

competition and increased enrollment into alternative delivery systems (see app. E). As a result

of that situation, legislation was passed to prevent similar abuses in the future. Certain marketing practices were prohibited. Direct quality

checks on providers were made through provisions of minimum benefit packages (as established

through Federal HMO legislation), and through

improved performance standards. Broad requirements were established for disclosure by plan

officials of ownership interests and reimbursements (see app. I).

Federal legislation has also since established that

Medicaid and Medicare beneficiaries must constitute a minority of enrollees in such plans. The intent has been to assure that these beneficiaries participate in mainstream medical care as well as to

allow non-Federal beneficiaries to help monitor

a plan. In addition, there is sufficient experience

with poor and aged people in prepaid groups to

indicate that the problems with Prepaid Health

Plans in California were not typical of that organizational form (see apps. C and D).

A number of possible mechanisms should be

considered for quality assurance activities with

the advent of greater price competition. One

possibility is a more decentralized approach

through individual providers and insurers. Physicians, other professional providers, and thirdparty payers could impose stricter quality controls both through professional standards and the

generation of information concerning quality of

care. Blue Cross/Blue Shield and the American

College of Physicians are already cooperating in

an effort to identify procedures and services

believed to be of no benefit to patients (208). A

more formal alternative would be to institute direct monitoring of care, tied into the payment

mechanism for greater effectiveness.

Another possible approach for quality assurance would be mechanisms that are part of a national network in the mold of Professional Standards Review Organizations (PSROS) and Health

Systems Agencies (HSAS). A more centralized network of PSRO- or HSA-like organizations would

have the advantage of providing some uniformity of procedure and standards, but at the same

time might introduce some rigidities.

PSROS are community-based nonprofit agencies directed by physicians that monitor the quality and appropriateness of institutional health care

provided to Medicare and Medicaid beneficiaries.

The main virtue of PSROS is that they are already

in place, are functioning, and have some involvement in quality assurance. Their main emphasis

to date, however, has been on inpatient utilization review. In a competitive environment, utilization review is unlikely to be of great concern, except in cases where catastrophic coverage is involved. Therefore, PSROS would need to shift

their focus, emphasizing much more quality assurance functions (i.e., assurance against underuse

of necessary services) than they do now and paying less attention to utilization review.

HSAS, in contrast, are charged with developing local health planning goals and implementing

plans in consonance with State and National

health care goals. Like PSROS, HSAS represent

a functioning infrastructure with established

methods of information collection, analysis, and

dissemination. HSAS could also act as a focal

point or clearinghouse for standardized (comparative) information on the technical aspects of

quality of care among providers and various services in the local health care delivery system. The

Northern Virginia HSA, for example, has demonstrated the feasibility of generating such information (see app. G). HSAS could also act as advocates and brokers for the less sophisticated

health consumer such as the poor and the elderly, in a manner analagous to the Project Health

organization in Multnomah County, Oreg. (see

app. D).

Neither HSAS or PSROS, however, have lived

up to expectations or their potential in the past.

Part of the problem has been the lack of evaluative

information about technologies that was noted

above. Despite a 1979 mandate for HSAS to foster

competition between providers and plans, few

HSAS seem to have revamped their activities in

that direction, and the certificate-of-need process

is seen as entrenching established providers (79)

(see app. G). Although a focal point for assessing and assuring quality of care is indicated under

greater price competition, its appropriate location

is not clear.
5 ■

Consumer Information Under

Increased Competition

For the general run of consumer goods, the buyer is necessarily an amateur

while the seller is a professionaL

—Joan Robinson

The Economics of Imperfect Competition
Contents

Page

Consumer Decisions in the Present Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Selection of Health Insurance Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Patient Initiation of Care and Selection of Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . 72

Information Required Under Increased Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Selection of Health Insurance Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Initiation of Care. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Selection of Providers and Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Availability of Consumer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Current Sources of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Deterrents to providing Conswner Information and Some Exceptions . . . . . . . . . . . . . . 76

Methodological Problems of Developing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Implications for Policy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Private Sector Provision of Information Under Increased Competition . . . . . . . . . . . . . 78

Role of the Public Sector Under Increased Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 79

List of Tables

Table No. Page

7. Information Needed by Consumers for Decisions Under Increased Competition . . . . . 74
5

Consumer Information Under

Increased Competition

A common desire of proponents of increased

competition is that consumer preferences guide

the delivery of medical care. In an environment

of competition among comprehensive care organizations, consumer choice could be exercised

through selection of a health plan in which to

enroll. In an environment with greater patient cost

sharing, consumers could decide whether or not

to seek medical care and then which providers and

technologies to use. For medical care as for other

services, consumers consider both cost and quality

when making such decisions. If the cost of one

health plan or technology were lower than others,

a person would weigh the benefits along with the

costs of each in choosing among them.

Evaluation of medical technologies currently

has many deficiencies. As previous OTA reports

have pointed out, information about new and existing technologies is not systematically developed

(200,201,208). Even medical experts often lack the

knowledge required to compare alternative technologies. The information that is developed may

not be disseminated in such a way that it reaches

the providers and consumers who could use it.

The quality of care now delivered is also far from

perfect. Although quality is difficult to measure

and evaluate, it is clear that deficiencies now exist

and that improvement is possible (see ch. 4).

Information about alternative medical technologies will continue to pose problems. The specific

concern of this chapter is not with the entire problem of information, but with the changes that

might occur if greater price competition were introduced. Would the information needs of consumers differ under greater cost sharing or greater

plan competition? How much of that requisite information is currently available and what would

a more competitive environment be likely to generate? Different incentives to develop information

and the methodological problems of doing so are

analyzed. The final sections of the chapter summarize the changes that are likely to take place

and discuss private and public sector approaches

to the problem areas that have been identified.

CONSUMER DECISIONS IN THE PRESENT CONTEXT

Selection of Health Insurance Plans tion (HMO) if there is one in the area. Of emAlthough the vast majority of people in the

ployees who had options, 7 million (11 percent

United States have health insurance, relatively few

of all workers) had an HMO as one of their options. The implication of these statistics is that

are presented with a choice among plans. In 1977, choice of coverage is greater because of that

almost 90 percent of U.S. workers had employ- legislation (84).

ment-based group health insurance, but only 18

percent (11 million) were offered a multiple choice Medicare beneficiaries-people aged 65 or oldof plans (84,253). The common practice is that er, disabled people, or end-stage renal disease

an employer or union develops an insurance pack- patients—have some limited options. They can

age, which is then offered to employees. The elect coverage under Part A (institutional services)

Health Maintenance Organization Act (Public and/or Part B (physician services) with the benefit

Law 93-222) requires employers with 25 or more coverage determined by Federal legislation and

employees that provide health insurance to offer regulation. About two-thirds of Medicare benea federally qualified health maintenance organiza- ficiaries also purchase supplementary private in71
72 • Medical Technology Under Proposals To Increase Competition in Health Care

surance (see app. F). Only about 2 percent are enrolled in HMOS.

l

Medicaid eligibles usually have little or no

choice among health plans. Although the Federal

Government requires certain minimum benefits

and minimal patient cost sharing, the States have

some discretion to set benefits, eligibility, and

payment for providers. Less than 2 percent of

Medicaid eligibles belong to HMOS (61). The uncertain length of Medicaid eligibility conflicts with

HMOS’ commitment to provide medical care for

a specified period, and the dispersion of people

eligible for Medicaid makes marketing difficult.

Across all age groups, an estimated 26.6 million

people representing 2.6 percent of the civilian

noninstitutionalized population, had no public or

private health insurance coverage in 1977 (135).

Lack of coverage is highest among young adults,

nonwhites, and people in rural areas. In the families of uninsured people, 43 percent of the other

family members had no insurance (135). About

8 percent of the employed lack health insurance

coverage, mostly people working in companies

with low wages, on a part-time or self-employed

basis, in seasonal employment, or in companies

with health insurance policies that have waiting

periods (49).

Consumers have limited understanding of many

aspects of their insurance, particularly health care

expenses, cost of coverage, continuance provisions, and types and scope of benefits (9).

This limited knowledge may be reasonable in

the present context, in which people have few

choices to make about health insurance coverage.

People who have no choice among plans or who

do not intend to change their coverage have little use for information about health insurance. In

the survey that found a low level of knowledge,

40 percent of the respondents said that existing

insurance information was sufficient and only 7

percent wanted more information (9). By contrast

HMO enrollees, who have a choice of plans, have

consistently been more knowledgeable about their

ID. N. Use and D. Sawyer, The Medicare and Medicaid Data

Book, 1981. Fkahh Care Financing Program Statistics (Washington, D. C.: Health Care Financing Adrninistration, Office of Research

and Demonstrations, April 1982).

coverage than patients of solo fee-for-service

physicians (159).

As one would expect, the more complicated the

benefits and cost-sharing provisions, the less accurate is people’s knowledge. A survey of consumers in several localities found about 90 percent were accurate about whether or not they had

private insurance and coverage for hospitalization and dental care (167). Approximately 80 percent of families with first-dollar coverage for outpatient medical services knew they were covered.

But only sO to 60 percent of the families were

aware that outpatient drugs and physician services

were covered if a deductible was required. It is

noteworthy that people’s reports of their share of

expenses averaged within 10 percent of the correct answer. Although the study did not correlate

consumers’ perceptions with the use of services,

this finding raises the possibility that people have

more of a working knowledge of their coverage

than is conveyed by the survey responses.

Patient Initiation of Care and

Selection of Technologies

It has long been observed that patients rely on

physicians for advice about the use of medical

technologies, and this delegation of responsibility has been attributed to the consumer’s lack of

medical expertise (7).

Although most people clearly do not have the

technical knowledge of medical professionals,

they do have some knowledge about and take a

more active role in determining the use of some

kinds of technologies. Through experience, consumers can become reasonably well informed

about technologies that they use frequently, such

as normal deliveries, most dental caries repair,

preventive care, and drugs for common and

chronic conditions (211). Pauly estimated that

such services may account for 25 percent of all

medical expenditures. There are other services,

such as appendectomy, that an individual uses

rarely but that physicians perform frequently. In

addition to their physicians’ advice, people may

gain considerable knowledge about such technologies from other patients. People are more dependent on physicians for guidance about services

that both individuals and physicians use infre-
Ch. 5—Consumer Information Under Increased Competition ● 7 3

quently, such as experimental procedures (63,

211).

Legal requirements that physicians and other

providers be licensed are at least partly intended

to compensate for consumers’ ignorance by certifying the competence of these professional advisers. Similar limits on patients’ use of technology are imposed by requirements that only physicians may prescribe certain drugs or admit patients to hospitals (63).

Despite these practical and legal constraints,

people exert substantial influence over the use of

technologies. They may delay care or not seek it

for self-limiting conditions. If they decide to initiate care, they choose the physicians or organizations to provide it. Patients decide whether or not

to comply with the physician’s recommendation,

such as drug therapy for hypertension. Patients’

discussions with physicians may influence physicians’ ordering of ancillary technologies and admissions to hospitals. Patients also evaluate the

care that they receive and, if dissatisfied, may

switch providers. The factors that people use to

evaluate their medical care include technical

standards but also encompass interpersonal aspects and accessibility (see ch. 4).

INFORMATION REQUIRED UNDER INCREASED COMPETITION

People now routinely make many decisions

about insurance coverage and medical care. The

intended effect of competitive strategies is to make

people more sensitive to costs in the decisions that

they make about health plans or medical care.

Under increased competition, people would consider the risks and benefits of alternative insurance

coverage and medical services as they do now.

What would differ is the extent to which cost

enters into their decisions.

Would different or supplementary information

be needed for the more cost-conscious decisions

that people would be expected to make? It is useful

to bear in mind that, in theory, not everyone

needs full information for a market to function

smoothly; a minority of well-informed consumers, whose exact number is left undefined, can

influence other consumers and the direction of the

market (79,211).

Selection of Health Insurance Plans

For consumers to weigh cost more heavily in

selecting coverage requires that such information

be available about each plan. This cost information falls into three categories: 1) the annual cost

of insurance premiums, 2) the annual out-ofpocket expenses likely for services not paid by the

plan, and 3) the sum of these two categories, total

expenditures. The information would have to be

presented in a standard or understandable way

across plans so that people could make comparisons.

Consumers’ other information needs would depend on the differences that would exist among

plans (see table 7). Although all of the competitive

proposals call for comprehensive benefits to be

covered, what is included in comprehensive benefits is open to interpretation (see ch. 2). Some

of the proponents of greater competition would

permit considerable variation among plans (170,

211). Others would have minimum standard benefits clearly defined and required for a plan to

qualify for participation (79). All proponents

would permit plans to offer optional coverage of

services, such as vision care or dental services,

that were not included in the comprehensive

benefits. Supplementary coverage could also be

offered for the out-of-pocket expenses under

greater cost sharing. To the extent that the basic

or optional benefits varied across plans, meaningful comparisons would require that the differences in coverage and their cost implications

be stated.

For health insurance as for other purchases,

consumers would consider the different benefits

along with the different costs of alternative plans.

Some of the different costs might stem from different styles of practice that do not have significant implications for quality of care. Such differences in practice styles might interest consumers
74 ● Medical Technology Under Proposals To Increase Competition in Health Care

Table 7.—information Needed by Consumers for Decisions Under increased Competition

Type of information needed ,

Benefit Quality Technology

Decision to be made costs coverage of care information

Se/action of health insurance plan

If comprehensive benefits standard:

If no basic benefits:

For supplementary coverage

to basic benefits:

/nit/ation of medical cars

With greater patient cost sharing:

In comprehensive care organization:

Selection of provider or technology

With greater patient cost sharing:

In comprehensive care organization:

Premiums, Benefits

out-of-pocket covered

expenses likely

Premiumsf Benefits

out-of-pocket covered

expenses likely

Premiums, Benefits

out-of-pocket covered

expenses likely

Cost-sharing provisions Benefits

of insurance, covered

charges likely

Cost-sharing provisions Benefits

of plan covered

Cost-sharing provisions Benefits

of insurance covered

Cost-sharing provisions Benefits

of plan covered

Any quality

differences

that affect health

Any quality

differences

that affect health

—

Distinction between

self-limiting and

other medical conditions,

appropriate preventive

schedule

Appropriate preventive

schedule

Competence of

provider

SOURCE: Office of Technology Assessment,

but would not be vital for them to know beforehand. If they were dissatisfied, they could switch

plans during the next open enrollment period. The

experience of satisfied enrollees could spread by

word of mouth, and enrollment might rise in plans

considered desirable. A similar situation could

pertain for some of the dimensions of quality that

consumers value, such as interpersonal aspects

and accessibility. People could learn from their

own experience and that of others and gravitate

to the plans that they preferred.

Of primary concern are any differences among

plans that would harm patients’ health by increasing morbidity or impairing their ability to function or even raising mortality rates. Consumers

today face problems in assessing providers’ technical standards of quality and minimum levels of

competence. Would these problems be changed

under increased cost consciousness?

For insurance policies with greater cost sharing, the direction of the concern about providers’

use of technologies would continue to be with

overprovision (see chs. 3 and 4). Providers would

have no apparent incentive to recommend too few

services and might reduce inappropriate use in an

attempt to deliver care at a cost competitive with

others. With the same retrospective payment

methods (fee-for-service to physicians and chargeor cost-based to hospitals), it is possible that providers collectively would generate additional use

to maintain their income levels. Concerns about

overprovision arise particularly in the area of

catastrophic expenses (see ch. 3).

For the competitive strategy that emphasizes

enrollment in comprehensive care organizations,

the direction of the concern about providers’ use

would be with underprovision. With a prospective payment per enrollee and standard comprehensive benefits, providers could achieve lower

costs by recommending fewer services than appropriate (see ch. 4).

As chapter 4 has discussed in depth, assuring

that people receive medical care of acceptable

quality will continue to pose problems under increased competition. The different direction of the

effects likely under alternative strategies suggests
Ch. 5—Consumer Information Under Increased Competition . 75

that different emphases would be advisable. The

issue that remains is the appropriate role for consumers and other groups. To what extent is it reasonable that consumers inform themselves about

the technical quality of care delivered by alternative plans and make enrollment decisions based

on that knowledge? And to what extent is it reasonable that the medical community or Government ensure that all plans offer at least acceptable levels of quality?

Initiation of Care

People will also consider the costs and benefits

of seeking medical care. To predict the cost, they

will require information about their insurance

coverage—both the kinds of services covered and

any cost-sharing provisions—and about providers’ charges for the kind of care being considered.

For enrollees of comprehensive care organizations with minimal cost sharing, cost will provide

little deterrent to their initiating care, and benefits

will cover most services including preventive ones.

Under greater cost sharing, cost would pose

more of a barrier. People in plans with greater

cost sharing would need to be better informed

about the appropriate circumstances for seeking

care so that they did not avoid or delay medical

care when to do so would harm their health. They

would have to distinguish self-limiting conditions

(such as the common cold) from conditions (such

as beta hemolytic streptococcus infections) that

can have worse consequences (rheumatic fever)

if care is delayed.

Most health insurance now excludes preventive

technologies. Under greater cost sharing, people

would continue to need information about appropriate preventive care, both the kinds of technologies that are effective and the schedule recommended. Then as now, information would be particularly valuable for pediatric and prenatal care.

These areas have many effective preventive and

therapeutic technologies, and long-term problems

for the individuals and for the society can result

from their disuse. Vaccines against infectious diseases such as poliomyelitis and measles can prevent crippling, mental retardation, and even

death. If untreated, otitis media (middle ear infection) can result in hearing loss or mastoiditis

(infection of the mastoid cavity of a skull bone),

but antibiotics can prevent those complications.

Selection of Providers and Technologies

Consideration of costs in selecting providers

and technologies would also require that consumers know the benefit coverage and cost-sharing provisions of their health insurance, as well

as the charges for the alternative providers and

technologies.

The cost of particular services would be less important to members of comprehensive care organizations with minimal cost sharing. Once a

member has made the decision to seek care, the

organization would guide the use of particular

providers and technologies.

Under greater cost sharing and more traditional

insurance arrangements, consumers would make

some of the decisions and rely on physicians to

make or guide others. Seeking care may entail the

choice of a provider or technology. People with

situational mental health problems may choose

among psychiatrists, psychologists, or mental

health clinics. Selection of a practice for maternity care may involve a choice between an obstetrician or midwife and among hospital admission, do-not-admit hospital care, or birthing

center for normal delivery. When a person is

under medical care, instances will arise when the

patient can influence the provider’s decision about

admission to hospital or ambulatory care, the use

of ancillary tests, or even therapy.

As with the selection of health plans and initiation of care, the concern is that consumers out

of ignorance would choose incompetent providers

or ineffective technologies for a given medical condition. This problem exists in the current context.

Under greater cost sharing, it is possible that more

sensitivity to cost would lead consumem to choose

care that was less expensive but ineffective or

harmful. A with the other choices, the issue is

the extent to which consumers can deal with these

problems by having more information. And to

what extent is it mom appropriate for the medical

community, other parts of the private sector, or

the Government to structure the system or guide

consumers’ and providers’ decisions so that these

problems are avoided?
76 • Medical Technology Under Proposals To Increase Competition in Health Care

AVAILABILITY OF CONSUMER INFORMATION

Current Sources of Information

Present consumer information about health insurance plans and medical technologies in large

measure reflects the kinds of decisions that people make. Most people do not know the costs of

their health insurance, as one would expect when

they do not bear the full cost and usually have

no choice among plans. The charges of individual

physicians, hospitals, and other providers are not

routinely published. In fact, court decisions have

only recently begun to remove restrictions on

physicians’ advertising (see app. G).

Similarly, there are few comparisons of the

benefit coverage and costs of alternative plans.

A private third-party payer usually produces one

pamphlet for all the coverage options within a

plan. With the exception of pamphlets for the

elderly, few private insurers target their information to population subgroups. The pamphlets present neither information about out-of-pocket expenses nor clear descriptions of conditions of

coverage and scope of benefits.

A recent Blue Cross/Blue Shield booklet for the

Federal Employees Health Benefits Program

(FEHBP) illustrates common difficulties (175).

Maternity benefits, for example, are described in

several different sections about hospitalization or

physician visits. Scope of coverage and out-ofpocket costs are confusing. Although the booklet

states that the plan would pay hospitalization in

full, there is a copayment of $25 per day for the

first 10 days of each admission. The text refers

to reimbursement of usual, customary, and reasonable charges, but provides no specifics about

fees. Also unclear are eligibility and coverage for

premature infants as well as the procedures and

costs of switching plans (175).

People considering a change in health insurance

have obtained information from a variety of

sources (9). Those under age 62 have drawn information primarily from employers or unions (49

percent), private insurance companies (20 percent), and families (16 percent). People over 62

have relied on Soaal Security offices (30 percent),

friends (25 percent), and private insurance companies (21 percent). For the total population, more

people received information through personal

contacts (23 percent) and booklets (20 percent)

than through any other media.

Deterrents to Providing Consumer

Information and Some Exceptions

The dearth of consumer information about

health insurance plans and medical technologies

reflects characteristics of the present medical care

system, the nature of information in general, and

restrictions on providing information.

With the limited choices now available, most

people would have no occasion to use more information. Few employers offer their workers a

choice of health insurance plans, and the number

of people who insure themselves individually is

small. In light of the limited market for the information and the substantial expense of compiling it, potential publishers have no incentive to

undertake comparisons of plans.

An exception is FEHBP, under which Federal

employees may choose their health insurance plan

from several alternatives (see app. C). The information that has been prepared by each plan and

distributed by the Federal Office of Personnel

Management (OPM) has not lent itself to comparisons among plans. The brochures have neither

compared alternative plans nor presented each

plan’s benefits or costs in a standardized way.

Another problem relating to information is that

some prepaid groups have complained that OPM

has not distributed adequate information about

their plans. Their concern was that OPM’S limited

distribution of individual plan booklets, coupled

with the emphasis on the Government-wide plans

such as Blue Cross/Blue Shield and Aetna in

OPM’S summaries, put the prepaid groups at a

disadvantage.

Washington Consumers’ Checkbook, a magazine published by a nonprofit organization, illustrates that information for consumers may be

generated when there is a market for it. Since

1979, Washington Consumers’ Checkbook has
Ch. 5—Consumer Information Under Increased Competition . 77

prepared an annual guide to Federal plans in the

Washington, D. C., area. Unlike OPM literature,

the guide draws conclusions about the plans. It

compares plan benefits, special features such as

dental coverage or customer service, eligibility,

premiums, and out-of-pocket costs. The publication has been widely marketed in the Washington,

D. C., area and is available in Federal personnel

offices. The results of the comparisons may have

influenced employees’ selections. During the 1980

open enrollment period, a plan that was ranked

highly in terms of benefits for costs increased its

Washington enrollment by 120 percent, compared

with less than 20 percent nationally (145). The

magazine has also conducted local surveys of

nursing homes, HMOS, and hospitals to assist

consumers in choosing plans and providers.

Stimulated by recommendations from the General Accounting Office and perhaps by the example of Washington Consumers’ Checkbook, OPM

has experimented with booklets summarizing the

plans. During the recent open enrollment period,

OPM’S materials to each employee included charts

comparing the premiums, benefit coverage, and

cost-sharing provisions of each plan. No estimates

were made of the out-of-pocket expenses under

each plan.

The nature of information may also inhibit its

provision in medical care as in other fields (205).

The entity that develops the information may not

be able to retain exclusive control over its use.

Once comparisons of plans or providers are made

and printed, the publication is easily passed

around and shared by many people. The original

source of the information may therefore have difficulty selling enough copies to make the undertaking profitable.

Governmentally funded agencies have developed information about local providers. The

Northern Virginia Health Systems Agency (HSA)

published a directory of information about local

physicians (see app. G). It lists each one’s credentials, services provided, and insurance and billing practices. No fees are included. Several HSAS

in the Washington, D. C., area also cooperated

to produce data about the volume of cardiac surgery in local hospitals. The association that was

found between low volume and high mortality

rates prompted measures to regionalize facilities,

especially for pediatric cardiac surgery (174).

Both legal and professional prohibitions have

restricted the provision of information about

medical providers and technologies. Although

these policies are changing to permit advertising,

their existence in the past helps to explain why

providers themselves have not publicized their fees

and services.

The Federal Government originally prohibited

FEHBP plans from advertising. That prohibition

was dropped in the late 1960’s, and in recent years

participating plans have notably increased their

advertising (see app. C).

In the case of optometric examinations, restrictions on price advertising have been associated

with higher prices. In States that banned price

advertising for optometrists and opticians, prices

for similar services were 17 percent higher than

in the States that permitted such advertising (86).

These results support the contention that price information helps consumers to search more effectively for lower prices. This example also pertained to vision services, an area less likely to be

covered by health insurance.

Related to legal restrictions is access to data that

have been collected. Several professional groups

now collect data about the performance and credentials of providers. The Joint Commission on

the Accreditation of Hospitals tests the accuracy

of hospital laboratory tests on blinded samples.

In the course of utilization review, Professional

Standards Review Organizations (PSROS) compile data about the use of services and outcomes

of patients. Hospitals know whether or not their

staff physicians are board certified.

The confidentiality of such data varies by State.

Information about board certification is not generally available, but California hospitals report

the board certification of their physicians to a

public commission. Maryland legislation has

made PSRO data nonconfidential. The Baltimore

City PSRO has combined its data with those from

the Maryland Cost Review Commission to develop profiles by provider on fees, length of stay,

and patient outcome. Area employers and unions

in turn have used this information to develop
78 • Medical Technology Under Proposals To Increase Competition in Health Care

health insurance packages and to advise workers

about providers (174) (see app. H).

Methodological Problems of

Developing Information

Aside from the incentives inhibiting consumer

information, methodological problems plague the

development of accurate comparisons of plans

and providers.

There are inherent problems in comparing the

cost of health plans. The use of specific benefits

and the out-of-pocket costs incurred depend on

the characteristics of the individual or family.

Statistics about average costs may therefore have

limited usefulness to a particular person. More

sophisticated estimates might be possible although

they would certainly be more expensive to calIMPLICATIONS FOR

Private Sector Provision

POLICY

of Information

Under Increased Competition

The current paucity of consumer information

does not necessarily imply that needed information would be unavailable in a more competitive

situation. The different choices that consumers

would be called on to make and their heightened

sensitivity to price in such a situation might

stimulate the development of new information.

If consumers have more interest in the cost of

health plans and more choice among alternatives,

both the plans and other private organizations

may respond by providing cost information and

plan comparisons. In the course of their operations, third-party payers currently assemble information on providers’ charges and use of technologies. If competition on the basis of price intensified among plans, insurers might be more

likely to share their information with the public

to attract customers. More private sector activities

such as Washington Consumers Checkbook

might also be stimulated by increased consumer

choice and interest in costs and supporting

information.

culate. Cost by age-sex category or a complete

assessment of risk status could give a person a better indication of the direct costs likely.

Comparisons of hospitals or physicians also

pose difficult problems. Undesirable outcomes,

such as mortality or infection rates, may be

misleading because of small sample sizes or differences in the case mix of their patients. Chapter

4 has discussed the tenuous relationship between

structural indicators of quality (such as board certification) and desirable health outcomes. Cost

comparisons face problems common to developing any such index of services. A provider may

have higher prices for some services and lower

prices for other services. The ranking of providers

depends on the services selected for the index and

the method of weighting their prices.

On the other hand, consumer information has

not appeared in some areas where one would have

expected it. It is puzzling that third parties have

not publicized providers with high claim rates to

discourage overuse (211). Information was not developed for the elderly about policies to supplement Medicare, despite the fact that elderly consumers constitute a large market and bear the full

cost of those premiums (see app. F).

If consumers become more interested in the cost

of providers and technologies and providers compete on the basis of price, medical professionals,

hospitals, or their professional associations may

themselves publicize information about charges.

In the absence of advertising restrictions, vision

care providers advertised their prices, and prices

were lower (86). The case of vision care has many

similarities with greater cost sharing, since eyeglasses and nonphysician services are less likely

to be covered by health insurance.

There is no direct information about whether

greater cost sharing leads consumers to search for

lower priced care. With greater cost sharing, people would have more incentive to search for lower
Ch. 5—Consumer Information Under Increased Competition . 79

cost providers and to become more knowledgeable about services, such as primary care, over

which they have more control (63). Consumers

would also have more financial reason to seek second opinions about potentially costly procedures,

such as surgery. But greater cost sharing might

deter consumers from seeking second opinions

(58,86), because the consumers would have to pay

the additional cost of the second consultation.

Business, labor unions, and coalitions of purchasers of health insurance have become increasingly active in efforts to contain medical costs.

Although their informational activities have mainly involved educating workers about health insurance benefits, these groups have expressed

interest in developing data bases and informing

people about medical technologies (137). The cooperation of employers and unions with the Baltimore City PSRO indicates the potential for developing and disseminating information to workers (see app. H).

Role of the Public Sector Under

Increased Competition

The role of Federal, State, or local governments

in providing consumer information would depend

on their responsibilities for administering greater

competition among plans and consumers’ selection of plans. It would also depend on the type

and quality of information that would emanate

from the private sector.

Both PSROS and HSAS could develop information about specific providers. PSROS have the

data (if confidentiality problems could be surmounted), and HSAS have the community perspective. Methodological difficulties of comparisons would remain and would need to be addressed so that information would not mislead

consumers. Because good evaluations can be expensive, it would be important to determine needs

and priorities carefully.

The problems that arose with medical insurance

to supplement Medicare call into question the

ability of the private sector to provide adequate

information about insurance plans to the public

(see app. F). physical limitations have hindered

many elderly people from gaining information because they have had difficulty reading brochures

or shopping for plans and providers. Aside from

these special limitations, however, there were

problems about the availability of information.

The complexity and variation of the supplementary insurance policies made them difficult to

compare. No private groups, such as Washington

Consumers’ Checkbook, came forward to offer

objective comparisons among plans. Although

elderly people had an incentive to consider cost

because they were paying the total premiums,

they often bought duplicate coverage and misunderstood the benefit limitations.

The backdrop to this situation is the complexity of Medicare coverage itself. Medicare benefit

coverage and cost sharing have bewildering variations, and policies to supplement the gaps have

been correspondingly complex. Therefore, the

problems and experience with supplementary insurance to Medicare may not apply to plan choice

in which a minimum level of comprehensive benefits is required and standardized, as Enthoven has

recommended (79).

The response to the problems with supplementary medical insurance has been the adoption of

voluntary Federal certification that operates in

conjunction with State regulation (see app. F). In

States that do not have an approved regulatory

program, insurers may submit policies to the

Federal Health Care Financing Administration

(HCFA) for review. Certification will be granted

if the policy meets minimum standards for benefits, loss ratio, disclosure, and administrative procedure. This approach is one of excluding policies

that do not meet the minimum criteria. In 1979,

for example, four States prohibited policies

against dread disease (207).

In regulating information about supplementary

policies, States have employed two other strategies, standardization of benefit coverage and information disclosure (see app. F). Wisconsin pioneered these approaches. In 1978, it required that

supplementary Medicare policies conform to the

standards for one of four designated categories.

Standardization is combined with the provision

to consumers of information to explain the categories. Wisconsin has periodically published representative prices to facilitate comparisons of
80 ● Medical Technology Under Proposals TO Increase Competition in Health care

plans. Other States, notably California and Massachusetts, use variants of the standardization approach. A common effect, clearly discernible in

Wisconsin, it that the number of active insurers

drops substantially after the market is controlled.

Many States have disclosure requirements for

these supplementary policies, and some have them

for all health insurance sold to the elderly (see app.

F). Some States require that the benefits and gaps

in coverage be listed. Wisconsin alone mandates

that a disclosure form be provided at the time of

sale, rather than with the delivery of the policy.

Few States require the use of consumer information booklets. About half of the States, as well

as HCFA and the National Association of Insurance Commissioners, have such brochures

available.

Congress has mandated that HCFA survey elderly insurance consumers in six States that have

taken different regulatory approaches (see app.

F). The diversity among States could serve as

natural demonstration projects and suggest desirable approaches for any future Federal involvement in administering greater competition among

plans for the entire population.

The design and operation of FEHBP also provides much relevant experience. Comparative information about plans has undergone great improvement recently. Comparing plans remains

difficult, however, because of the diversity in

benefit coverage and cost-sharing provisions.

Possible models for the Federal Government’s

administrative role in plan competition are its regulation of the disclosure of financial information

through the Securities and Exchange Commission

(SEC) and the Truth-in-Lending laws (79). Since

the 1930’s, SEC has required basic standardized,

comparative financial information of public companies. The Government does not generate the information itself, but rather requires the individual

companies to do so. Information disclosed by

companies is reviewed by SEC for completeness

and fairness under the threat of severe civil and

criminal penalties for false or misleading information (see app. I).

The Truth-in-Lending laws of the 1960’s and

1970’s have similarly attempted to enhance competition among lenders and to promote the informed use of credit by standardizing terminology

in the credit cost area. Such laws are regulated

by the Federal Reserve System (see app. I).

Using these existing models, the Federal Government could require provide= to generate basic,

minimum, and comparable information, such as

premiums, likely out-of-pocket costs, and benefits

covered. It would also be possible to require information about indicators of quality or practice

style, such as ambulatory and hospital utilization

rates, disenrollment rates, and board certification

of physicians. As with SEC, providers could have

to attest to the accuracy and completeness of submitted data or be subject to civil and criminal

penalties (see app. I).

Especially in the case of SEC, a problem encountered with regulation of information disclosure is that the costs of generating the information have sometimes become prohibitive for

the smaller providers (see app. I). A possible implication in the medical care area is that smaller

provider groups and plans may be at a comparative disadvantage if information disclosure

is mandated.

These models relate to insurance plans and do

not address information needs regarding use under

greater cost sharing. Medical experts as well as

consumers now lack knowledge about the effectiveness of many technologies and meaningful

measures of provider competence. These deficiencies would persist under greater cost sharing.

What would differ is the importance of consumer

knowledge about initiating use. With price acting

as more of a deterrent, people would exercise

more discretion about seeking care. This change

implies a need for consumers to improve their

knowledge of effective preventive technologies

and their ability to distinguish self-limiting from

other conditions.
— 

Appendixes
Appendix A.— Method of the Study

This report, Medical Technology Under Proposals

To Increase Competition in Health Care, grew out of

the OTA study Strategies for Medical Technology Assessment. In the course of that study, the House Committee on Energy and Commerce and the Senate Committee on Labor and Human Resources requested that

OTA expand its analysis of information needed under

different payment methods to provide a separate document on the implications for medical technology of

proposals to increase competition.

At the September 1981 meeting of the Health Program Advisory Committee, members commented on

a proposed outline for the study and suggested that

it focus on proposals to increase cost sharing and to

increase competition among comprehensive care organizations, but that antitrust proposals be excluded.

A review of legislation during the 96th and 97th Congresses that incorporated these two kinds of proposals,

and of relevant literature from economic theory, health

services research, and policy analysis was begun in

October.

During October and November, an advisory panel

was selected, with Lester Breslow of the School of

Public Health, University of California, Los Angeles,

as the chair. The 16 panel members had different backgrounds and perspectives related to the issues of the

study: the two different approaches to increase competition, economics, medicine, prepaid group practice,

individual practice associations, consumers, publishing, technology assessment, government, third-party

payment, and policy analysis. One member of the

Health Program Advisory Committee, Rashi Fein, also

served on the advisory panel.

During December 1981 and January 1982, the members individually suggested modifications in the revised

outline of the study and recommended experts and

publications to consult for further information. Four

contractors were selected and began work in December

and January to provide background information that

could be incorporated by OTA staff into the report.

The first panel meeting was held February 26, 1982,

at OTA. The panel discussed draft documents that had

been prepared by OTA staff outlining the proposals

to increase competition and the concept of competition, as well as several case studies that related to the

proposals. These case studies are included as appendixes to this report. In addition, several of the contractors described how they were addressing their subject areas. The panel suggested changes in the draft

documents, additional case studies, and ideas for the

contractors to explore further.

Following the panel meeting, the OTA staff prepared a draft report. The draft was distributed to the

advisory panel, the Health Program Advisory Committee, and other reviewers in Government, industry,

economics, and policy analysis. Discussion of the draft

report was the topic of the second panel meeting,

which was held at OTA on April 20, 1982. Incorporating comments from outside reviewers and other OTA

staff, the study staff prepared a final draft report during May.

83
Appendix B.— Health Program Advisory Committee

Sidney S. Lee, Chair

Michael Reese Hospital and Medical Center

Chicago, I11.

Stuart H. Altman

Florence Heller School

Brandeis University

Waltham, Mass.

Kurt Deuschle

Mount Sinai School of Medicine

New York, N.Y.

Carroll Estes*

School of Nursing

University of California

San Francisco, Calif.

Rashi Fein

Center for Community Health and Medical Care

Harvard Medical School

Boston, Mass.

Melvin A. Glasser

Committee for National Health Insurance

Washington, D.C.

Patricia King

Georgetown Law Center

Washington, D.C.

Joyce C. Lashof

School of Public Health

University of California

Berkeley, Calif.

Mark Lepper

Rush-Presbyterian-St. Luke’s Medical Center

Chicago, 111.

Margaret Mahoney

The Commonwealth Fund

New York, N.Y.

C. Frederick Mosteller

Department of Health Policy and Management

Harvard School of Public Health

Boston, Mass.

Mitchell Rabkin

Beth Israel Hospital

Boston, Mass.

Dorothy P. Rice*

Department of Social and Behavioral Sciences

School of Nursing

University of California

San Francisco, Calif.

Richard K. Riegelman*

School of Medicine

George Washington University

Washington, D.C.

Walter L. Robb*

Medical Systems Operations

General Electric

Milwaukee, Wis.

Frederick C. Robbins

Institute of Medicine

Washington, D.C.

Rosemary Stevens

Department of History and Sociology of Science

University of Pennsylvania

Philadelphia, Pa.

Kerr L. White

Rockefeller Foundation

New York, N.Y.

● Appointed summer of 1982.

8 4
Appendix C.— Federal Employees Health

Benefits Program

Introduction

Shortcomings in the medical care marketplace have

become major policy issues of the last decade. A

somewhat variegated landscape of “procompetitive”

proposals have emerged as possible solutions to the

perceived problems of the industry. But these proposals have been complicated by debate and disagreement over the likely feasibility and results to be expected from implementation of the various policy options. To some extent, the lack of consensus has

stemmed from lack of experience with competitivetype plans (106).

One plan which might elucidate current policy discussions is the Federal Employees Health Benefits Program (FEHBP), which provides one of the few operational experiences with a competitive-type approach.

For over 20 years, FEHBP has provided Federal employees and annuitants with an annual choice among

a range of health insurance alternatives and plans.

Because of its design, FEHBP experience has, somewhat ironically, generated interest among both proponents of the recent procompetitive proposals and advocates of the universal health insurance proposals of

the early and mid-1970’s, Competition advocates, such

as Enthoven and others, suggest that the 20 years of

FEHBP experience have demonstrated both effectiveness and remarkable administrative simplicity, and

that its potential as a model for procompetitive

strategies should not be overlooked (79).

Similarly, others a decade ago hailed FEHBP as “a

viable model for the implementation of universal

health insurance in the country, accommodating the

aspirations of the providers of services and the recipients of services within politically tolerable cost limits”

(2). On the other hand, the critics of procompetitive

proposals have used FEHBP experience to warn that

multiple choice of plans will not lead to enhanced competition, or that if it does, the competition will occur

at the expense of creating other problems, such as

“free-riding,” cream-skimming, or adverse selection

(19,106).

This appendix synthesizes existing research and evidence on the history, structure, and experience of

FEHBP. Information has been gathered from published

and unpublished sources, as well as from several discussions and interviews with individuals previously or

presently connected with the program. The appendix

should be read especially from the perspective of the

major impact areas of the overall study: 1) utilization

of medical technologies, 2) quality assurance, and

3) information availability and consumer choice.

History and Structure of FEHBP

FEI+3P was considered by Congress for 12 years.

First introduced in 1947, the program was established

by the Federal Employees Health Benefits Act (Public

Law 86-382) in September 1959, and went into operation on July 1, 1960. Enrollment was (and remains)

voluntary and initially covered 1.7 million enrollees

and 3.7 million dependents (198).

The initial rationale for FEHBP was the attempt by

the Federal Government to retain competent people

in its employment. By 1950, it was considered a normal part of the operation of private industry for the

employer to pay some or all of the health insurance

premiums of employees. Health insurance benefits

became a regular part of the fringe benefits package

along with disability and retirement pensions. Private

industry and organized labor became the backbone of

the financing of health insurance in this country.

Although it has been the largest single employer in the

country, the Federal Government began paying for

health insurance premiums for its employees after it

became common for private industry to do so (2,120).

The bill, then, was designed to “close the gap” which

existed and bring the Government abreast of most

private employers. *

The Civil Service Commission (CSC) was originally partial to an indemnity plan, one basic type that

could be let out for bids to private insurance companies

and simplify administration. Despite the commission’s

wariness of unlimited choice of health insurance benefit

packages and delivery methods, vested insurance interests who had thousands of Government employees

on their rolls convinced Congress of the need for different plans (2,120). As a result, FEHBP finally

authorized a wide range of choice of plans by all

employees and was, in effect, a negotiated compromise

among many divergent and highly organized interests.

It was the only approach which at any time during

the 12-year legislative process gained acceptance by

all of the principals: the American Medical Association, Blue Cross/Blue Shield, insurance companies,

employee unions, group prepayment plans, and individual practice plans. As a result, the Federal

● U.S. House of Representatives, United States Code: Congressional and

Aohinistrative News (St. Paul, Minn.: West Publishing Co, Aug. 20, 1959).

85
86 Ž Medical Technology Under Proposals To Increase Competition in Health Care

Employees Health Benefits Act has permitted all types

of health benefits plans—service, indemnity, group

practice, and individual practice—and various intermixtures of these types to continue development along

their own individual lines (234).

With the passage of the act, a “task force” approach

was taken to transfer legislation into implementation

over a brief 10-month span. Individual task force

members were drawn from a broad range of backgrounds and affiliations, and placed within the Retirement Bureau of CSC. Interestingly, the Department

of Health, Education, and Welfare (DHEW)* argued

the program would be better placed within its own organizational walls, but there was a deliberate congressional decision to define the program not as a health

care program but as an employee benefit program

(120).

Over the 10 months, regulations were written, carriers selected and approved, and FEHBP generally

operationalized (120). In the final negotiations with the

carriers, four basic types of approved plans emerged

within each of which there were “low” and “high” options (2,198):

1. Contracts with two Government-wide plans,

open to all employees. One was a service benefit

contract with Blue Cross/Blue Shield for basic

coverage plus a major medical plan for high-cost

episodes with a deductible and ceilings. The other

was an indemnity contract with Aetna, a private

insurance company, for basic and major medical

insurance with deductibles, coinsurance, and

ceilings.

2. Contracts with 13 separate employee organization plans for coverage analogous to the indemnity contract and hence of the same type.

3. Contracts with eight separate individual practice

plans, open only to those residing in the covered

area and providing direct payment to participating physicians and hospitals. These contracts

differed from the Blue Cross/Blue Shield service

contract only in that they covered all physician

services in- and out-of-hospital, with very modest

charges at times of services, as well as hospital

services.

4. Contracts with 13 separate prepaid group practice plans with salaried doctors and comprehensive physician services regardless of site of service plus hospital service. Again, these plans were

open only to those residing in the covered area.

These four basic categories of health insurance are

still provided today, and with more than 9.2 million

Federal employees, annuitants and their dependents

● NOW the Department of Health and Human Services (DHHS).

have an annual choice among a range of over 120 private health plans. Each participant has access to two

Government-wide plans: Blue Cross/Blue Shield, and

Aetna, plans which provide, respectively, service

benefits and indemnity benefits coverage, each with

a high and low option. Depending on geographical

location and affiliation, participants can also choose

from 20 employee organization plans. (Established by

various unions and employee associations, these insurance plans vary in availability. Some are available

only to members, while most are available to all

employees, either on an unrestricted basis or on the

basis of payment of annual association dues which

typically range from $25 to $35. ) As many as six group

practice plans and individual practice associations can

be found as well, depending on one’s area of residence

(106).

The authorizing provisions of the Federal Employees

Health Benefits Act established what were perceived

in 1959 as “significant” requirements and minimum

standards for participating plans (120). All plans must:

cover a range of benefits; offer conversion privileges;

enroll without regard to age, health status or hazardous employment; provide coverage without regard to

waiting periods or exclusions for most preexisting conditions; and cover care regardless of geographic location, Participating plans are required to establish

reserves and report statistics to the administering

Government agency. Plans are required to establish

a rate structure with a single individual and a single

family for each option and rate. No plan may offer

more than two options (e.g., high, low) (106).

As employer, the Federal Government’s contribution was originally fixed by law at one-half the cost

of the least expensive option offered by either one

of the two Government-wide plans. However, the

marked preference by employees in the early years for

high-option enrollments steadily reduced the percentage of total premium contributed by the Government.

Between 1961 and 1970, the Government contribution

slipped from 38 percent to 24 percent of the average

total premium (234,259).

In the 1970’s, the Federal Employees Health Benefits

Act was amended more than once to allow the Government to contribute a fixed dollar amount based on

specified cost-sharing ratios. The Government now

contributes a fixed dollar amount equal to 60 percent

of the average premium cost for the six largest plans,

subject to the restriction that the total Government

contribution cannot exceed 75 percent of the premium

of any plan. For postal workers, the Government contributes 75 percent of the average, subject to a 93.75

percent limit. In 1981, the annual maximum Government contribution for nonpostal worker participants
Appendix C—Federal Employees Health Benefits Program ● 8 7

was $366 and $796, respectively, for individual and

family plans (198).

Participants make their choices upon entering employment and are eligible to change plans whenever

their status changes (e.g., upon marriage) or certain

other changes occur (e.g., a move makes use of an

HMO plan infeasible or the enrollee is terminated by

an employee plan). Each participant may also switch

plans once a year on an unrestricted basis.

During this “open season” period, employees and

annuitants are provided with comparative information

on the coming year’s benefits and rates for each

available plan. Changes can be initiated by completion of a brief form; those who do nothing remain

enrolled in their previous plan. Participation is voluntary and no person may be covered by two plans. If

both members of a married couple are Federal employees, each may join an individual plan but they jointly

may choose only one family plan.

FEHBP is today administered by the Office of Personnel Management (OPM), the organizational descendant of CSC. In addition, OPM determines the

plans qualified to participate, handles grievances and

complaints, negotiates rates, and disseminates information on each plan (106). The program is authorized

by a mere 8 pages of legislative language and approximately 13 pages of regulations.

Enthoven (79) and others have lauded the relative

legislative simplicity and administrative efficiency of

the Federal Employees Health Benefits Act, especially

when compared with another Federal program, Medicare, with its legislation of 142 pages and accompanying 400 pages of regulations. A study by Hsiao (124)

also found that Federal administrative expenses per

unit of output (i. e., number of claims processed) were

less under FEHBP than under Medicare.

Competition Within FEHBP

A recent study (106) produced by the Department

of Health and Human Services suggests that some

amount of competition exists within FEHBP. This is

reflected most prominently in the shift by FEHBP

enrollees from Government-wide plans to employee

organization plans and, to a lesser extent, health

maintenance organizations (HMOS). In the past 5 years

in particular, enrollees appear to have selected a wider

group of plans. The choices also appear sensitive to

shifts in the relative premium prices across the plans.

The following discussion draws from this study,

FEHBP Differences From Proposals To

Increase Competition

The design of FEHBP obviously dictates the limits

on what can be learned from FEHBP experience. While

the program incorporates several features which are

included in proposals to increase competition, it does

not contain all the features of the various procompetition alternatives. For example, while FEHBP provides

for multiple choice among plans, the employer contribution varies across plans, and no rebate is provided

to encourage choice of low-cost plans.

Discrepancies between FEHBP and the various competitive models need to be considered and are discussed

below. The analysis suggests that FEHBP experience

is most relevant to competition proposals that focus

on the provider side and stress competition among

plans with similar benefit scope and least relevant to

proposals that stress use of tax and rebate incentives

to promote low-cost, low-benefit coverage.

VARIATION IN BENEFIT RANGE ACROSS PLANS

IS LIMITED

The plans offered within FEHBP tend to have comprehensive benefits. Even for those plans marketed as

low-option, the amount of cost sharing is limited. For

example, the 1981 Blue Cross/Blue Shield low-option

plan pays 100 percent of covered hospital charges for

the first 90 days of confinement and 75 percent of

charges for later hospital days, physician visits,

prescription drugs and other supplementary services;

and 60 percent of mental health outpatient care up to

a lifetime maximum benefit of $50,000. * Surgical procedures, in-hospital visits, and diagnostic tests are

reimbursed in full up to a schedule of allowances and

thereafter at 75 percent. There is a $2OO deductible for

supplementary services ($400 maximum per family)

and a $2,000 catastrophic limit on services other than

mental health services.

In 1980, 71 percent of all low-option enrollees were

in the low-option Blue Cross/Blue Shield plan, 27 percent were in Aetna, and the remaining few were in two

employee plans (Postmaster, Mailhandlers) and one

HMO (Group Health Association (GHA) of Washington, D.C. ).

While plans tend to cover a comprehensive range

of services, the structure of the benefits offered by the

● Ordy recently have these benefits been changed. See section entitled “Current Problems of FEHBP” for a discussion of these changes.
88 ● Medical Technology Under Proposals To Increase Competition in Health Care

different plans included within FEHBP varies. The

greatest variation arises as a result of differences in

coverageformental health and dental services. However, the plans also vary in the structure of the cost

sharing they impose on various covered services, the

use of a catastrophic cap or limit, and the types of

other benefit restrictions or exclusions used. For example, the employee-based Government Employees

Health Association (GEHA) plan emphasizes extensive

first-dollar coverage combined with some copayment

on hospital care and a low catastrophic limit. The

Postmaster’s high-option plan restricts reimbursement

for outpatient and ambulatory care but includes an extensive dental benefit.

All federally qualified HMOS also may participate

in FEHBP. Over 100 have elected to do so. The inclusion of a large number of HMOS within the FEHBP

system also results in a range of plan choice, including

choices involving group and individual practice organizations.

Because FEHBP does not emphasize plans with extensive cost sharing, the experience of the program

does not provide a good indication of the relative

popularity of these plans. Alternative FEHBP plans,

however, do vary in structure of their benefits. For

this reason, it is possible to use FEHBP experience to

examine enrollment choice among multiple plans with

extensive benefits. It is also possible to use the experience to consider choices between traditional insurance plans and HMOS.

FINANCIAL INCENTIVES TO BE COST CONSCIOUS

ARE CONSTRAINED

FEHBP provides an incentive for participants to consider cost in selecting plans. Except for postal workers,

each employee or annuitant who decides to enroll pays

a minimum of 25 percent of the premium cost for the

plan selected, and given the methods used to compute

the employer contribution, employees may pay as

much as 50 percent of the premium. * This situation

differs substantially from private industry, where nearly three-quarters of all workers have health plans totally financed by their employer and just over half receive

coverage for their dependents without cost (30).

Table C-1 provides a summary of the cost incentives built into FEHBP, focusing on a selected number

of high-volume plans. As can be seen, the total

premium cost varies substantially by plan.**

● Employees enrolled in Blue Cross/Blue Shield high-option plans pay 46

to sO percent premium cost because the plan has a total premium which is

greater than the average premium used in computing the Federal employee

contribution. As indicated previously, cost sharing on the premium is lower

for postal workers than for others. Postal workers pay from 6.25 to 35 percent of the premium cost for the plan.

● ● It is interesting to note that this occurs despite a generally similar scope

of benefits across many of the plans. However, premium price should not

Differences in premium rates lead to substantial variation in the required employee contribution for the

various plans. The most consistent differences are between the high- and low-option versions of the Government-wide plans in which high option enrollees pay

from $20 to $600 more per year than those enrolled

in low-option plans. Substantial differences also exist

between the high-option versions of the Govemmentwide plans and several of the other plans offered. For

example, GEHA enrollees pay from $257 (individual)

to $522 (family) less per year than those enrolled in

Blue Cross/Blue Shield high option. Given these statistics, the financial incentives to consider cost in selecting plans within FEHBP would appear substantial. *

Two provisions of FEHBP constrain the size of the

financial incentives built into the system and the impact of these incentives. The first is the cap on the

employer contribution at 75 percent. Persons enrolling in lower cost plans forego a portion of the potential Federal contribution to their premium. This raises

the cost of these plans to the individual and reduces

the difference in price between competing plans. It also

reduces the incentive for sponsoring organizations to

develop low-option or low-cost plans within FEHBP.

At present, the capon employer contribution affects

most of the Government-wide low-option plans,

whose enrollees must pay $64 to $197 that would

otherwise be paid for by the Government. The full impact of the cap on employer contribution is difficult

to evaluate because of its potential effect on the types

of plans offered.

The second constraint on the financial incentives included in FEHBP arises because the program provides

no rebate for those choosing plans where the Federal

contribution is below the maximum allowed. As with

the cap on employer contribution, this affects most

those who choose low-option plans and therefore

forego $146 to $369 of the potential maximum Federal

contribution. Thus, both the cap on employer contribution and the lack of a rebate reduce incentives

within FEHBP to choose or market low-option plans.

CROSS SUBSIDIES DISTORT CHOICE

TO SOME EXTENT

Within FEHBP, a single premium rate is established

for each option (high/low) and membership category

be used to provide a measure of relative actuarial value across plans. Aside

from HMOs (which with the exception of Group Health Association are community-rated), FEHBP plans are experience-rated. The premium reflects the

utilization experience of persons electing to enroll, as well as the scope of

benefits offered.

● It is possible that enrollees consider the per pay period cost rather than

the yearly cost in determining which plan to select. While these two costs

may be similar economically, the psychological impact may be greater when

expressed as a yearly figure. If true, the financial incentives built into FEHBP

may be less than they appear, since employees may not be consciously aware

of the magnitude of the cost differentials between plans.
Appendix C—Federal Employees Health Benefits Program • 89

Table C-1 .—Cost Incentives in the FEHBP Allocation of Premiums Between

Government and Employee by Plan, 1981

Individual plan Family plan

Employee Equal employer Amount Employee Equal employer Amount

Total contribution contribution foregone by Total contribution contribution foregone by

Plana

premium per yearb

shortfall 750/0 capdpremium per yearbshortfall 750/0 capd

Blue Cross—high option . . . .

Blue Cross—low option. . . . .

Aetna—high option . . . . . . . .

Aetna—low option . . . . . . . . .

American Federation of

Government Employees. . .

Alliance Health Benefit

Plan . . . . . . . . . . . . . . . . . . . .

American Postal Workers

Union . . . . . . . . . . . . . . . . . .

Government Employees

Benefit Association . . . . . .

Government Employees

Hospital Association . . . . .

Mail handlers—high option. .

Mail handlers—low option . .

National Association of

Letter Carriers . . . . . . . . . . .

California—lNA . . . . . . . . . . . .

California Kaiser (N) . . . . . . . .

California Kaiser (S) . . . . . . . .

D.C. GHA—high option . . . . .

GHA—Iow option . . . . . .

Kaiser Georgetown . . . . . . . . .

George Washington

University . . . . . . . . . . . . . . .

$781

256

660

333

.$366

64

264

83

$203

o

146

$203

0

63

$1,720

745

1,319

786

1,342

1,516

1,589

1,692

1,089

1,188

934

1,436

1,758

1,309

1,694

1,921

1,445

1,770

1,828

$794

186

393

197

$369

o

337

$186

o

197

614 219 0 0 415 0 0

618 222 0 0 589 0 0

657 262 0 0 662 0 0

635 239 0 0 765 0 0

517

432

332

129

108

83

7

71

146

7

71

63

272

297

233

708

832

382

690

995

518

843

901

110

36

226

110

36

226

663

701

514

660

754

288

306

128

264

359

142

306

0

0

10

0

0

0

0

0

0

10

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

538

701

707 312 0 0 0 0

aThis is a partial list of all plans within FEHBP.

bEmployee ~ontribution~ refer t. nonpostal workers only. The premiums and financial requirements for annuitants are identical to those for emPloYees in FEHBp

Cln lg@l the Federal Government paid a m=imum of $3~,~ for an individual plan and $926,W for a f~ily plan for workers other than postal workers. This figure reflects

the difference between this amount and the amount of the actual Federal contribution to the indicated plan.

dThis reflects the amount of Federal contribution for the indicated plan which Was lost because of the 75 percent cap on rrlSXimUm employer contribution. The figure

reflects the contribution necessary to eliminate any employee contribution or obtain the maximum Federal contribution, whichever is less.

SOURCE: M. Gold, “Competition Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,” unpublished draft staff paper, Office

of Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Washington, D. C., November 1981.

(individual/family) within each plan. HMOS establish

their premiums using community rating principles.

Other plans use experience rating. Under experience

rating, the premium is a function of the benefits provided, the use of those benefits given the characteristics

of those enrolled, and the reimbursement made for the

services used. This method of rate-setting may make

it more attractive for certain kinds of individuals to

join some plans than others. For example, older persons more likely to have high expenditures may favor

more generous benefit plans, as their expected value

per premium dollar is lower than younger members’.

Aside from these obvious adverse selection concerns, one possible effect is that joining HMOS

becomes less attractive for persons residing in highcost cities. Such organizations are geographically

based, with rates that reflect the costs of medical care

in those communities. In contrast, Government-wide

and similarly dispersed membership plans have rates

which reflect the average experience across both highand low-cost areas. Because of its diverse functions

(e.g., postal service, social security), the Federal work

force is dispersed throughout the Nation as well as

abroad.

In 1978, only 13 percent of the paid civilian work

force was in the D.C, area. About half of the work

force was located either in D.C. or in one of the 10

States with Federal regional offices (57). The influence

of geographic location on premium levels for various

plans cannot be examined without considerably more

analysis. HMOS appear to have kept their rates competitive with those of Blue Cross/Blue Shield (see table

C-1). Whether they have done so by reducing the actuarial value of the benefits cannot be determined,

however.

Some suggest that the low-option Government-wide

plans subsidize the high-option plans, which would

enhance the popularity of the latter by reducing premium cost relative to actuarial benefits. Data on the recent experience with the Government-wide plans within FEHBP as shown in table C-2 do not support this

argument. Since 1974, the payout ratio (i.e., benefit

costs as a percentage of subscription income) has been

lower for Blue Cross/Blue Shield high-option plans
90 Ž Medical Technology Under Proposals To /Icrease Competition in Health Care

Table C-2.—FEHBP Benefit Costs as a Percentage of Subscription income by Plan and Option:

Government=wide Plans, 1963-77 (selected years)

November 1963- Year

Plan and option October 1964 1967 1969 1970 1972 1974 1975 1976 1977 1978 1979

Blue Cress/Blue Shield

High option . . . . . . . . . . . 107.2 92.6 99.1 105.4 86.6 93.9 97,2 85.7 88.6 87.3 98.9

Low option . . . . . . . . . . . 73.1 63.1 66.4 84.4 81.6 117.8 136.2 136.8 127.4 120.0 109.5

Aetna

High option . . . . . . . . . . . 110.3 101.5 86.4 91.8 92.2 104.6 103.6 77.1 95.4 92.4 104.1

Low option . . . . . . . . . . . 84.2 108.8 97.9 99.4 91.5 96.7 98.2 78.9 97.8 101.1 111.7

SOURCE: M. Gold, “Competltlon Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,”unpublished draft staff paper, Office

of Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Washington, D. C., November 1981.

than for low-option plans. Aetna has experienced similar patterns since 1976.

USE OF LOW-OPTION PLANS BY ANNUITANTS

MAKES FEHBP LOW-OPTION EXPERIENCE ATYPICAL

Many annuitants use the low-option FEHBP plans

to supplement Medicare benefits. Although changes

have been proposed, Medicare is the first payer under

present coordination of the FEHBP benefits provisions,

as it is with private insurance. Because this arrangement reduces expected plan expenditures, the Government-wide plans and others have elected not to charge

individuals with Medicare coverage for deductibles or

copayments. Many annuitants choose the low-option

Government-wide plans as the equivalent of insurance

to supplement Medicare coverage. OPM has encouraged this practice. This circumstance makes analysis

of the low-option FEHBP plans difficult and detracts

from its utility. *

AVAILABLE INFORMATION AND CONSUMER

CHOICE HAVE BEEN LIMITED

This will be discussed in the section entitled “Information Dissemination and Consumer Choice. ”

Trends in Plan Choice

Figure C-1 presents the distribution of enrollment

by type of plan. Over the past 10 years, the share of

the FEHBP market held by the Government-wide plans

has dropped substantially, with sizable gains for employee plans and, to a lesser extent, comprehensive

plans (e.g., HMOS).

From 1970 to 1980, the Blue Cross/Blue Shield market share dropped from 60 to 51 percent. Most of the

decline occurred in the past 5 years. Aetna experienced

● The number of individuals enrolled in low-option plans is limited to

442,800 contract holders in total. For meaningful analysis, one should omit

or amlyze separately the employee from the annuitant group. This further

reduces the size of the low-option experience and makes difficult any analysis

with refined breakdowns or consideration of rare events (e.g., catastrophic

care).

a 5-percent decline in market share, from 18 to 13 percent, generally spread over the 10-year period. In contrast, employee plan enrollment has grown by 75 percent, group practice enrollment by 50 percent, and individual practice enrollment by 40 percent. By 1980,

the Government-wide plans held about two-thirds of

the market, with employee plans holding about a quarter, and the HMO plans (mainly group practice plans)

the rest. The shift away from Blue Cross/Blue Shield

occurred at the same time as Blue Cross/Blue Shield’s

rates increased.

Figure C-Z shows graphically the shift in Blue Cross/

Blue Shield enrollment in comparison with the change

in premium charges. It shows that the largest decreases

in enrollment followed a large 1976 rate increase for

Blue Cross/Blue Shield. The statistics in figures C-1

and C-2 suggest that over the past 5 years, competition among FEHBP plans for enrollees has increased,

with some competition apparently sensitive to price.

In comparison, the selection of low-option plans has

remained relatively stable over time, as shown in figure

C-3. Enrollment in low-option plans is limited to about

12 percent of the total FEHBP market. Low-option

plan penetration has remained relatively stable for the

past 5 years after a decline in the early 1970’s. An increased proportion of low-option plan enrollees hold

Blue Cross/Blue Shield low-option policies. This group

now represents 17 percent of the total Blue Cross/Blue

Shield enrollment and an increasing proportion of total

FEHBP enrollment.

The data presented also bear on the relative popularity of HMOS and their likely role in a competitive environment. In 1980, HMOS held 10 percent of the FEHBP

market. About three-quarters of the HMO enrollees

were in group plans. Whether this reflects a small or

large penetration is difficult to determine from available data, which merge effects based on consumer

choice with those responding to the available supply.

HMOS, particularly group HMOS, tend to be located

in large cities. Federal employees are geographically

dispersed, resulting in only a portion of FEHBP enroll-
Appendix C—Federal Employees Health Benefits Program ● 9 1

Figure C.l.— Percentage of FEHBP Enrollment by Type of Plan, 1970-80

100

8a

20

— — —

. . - . - - - -

● ☛☛☛✎☛✎☛✎ ✎

Service benefit plan (Blue Cross/Blue Shield)

Indemnity benefit plan (Aetna)

Employee plans

Comprehensive plans

0 1 I I I I I 1 1 I

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979

Year

o

SOURCE: FEHBP Program Statistics-OPM, as cited in M, Gold, “Competition Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,”

unpublished draft staff paper, Office of Assistant Secretary for Planning and Evacuation, Department of Health and Human Services, Washington, D.C, November

1981

ment’s having access to HMO-type plans. Because of

these considerations, the FEHBP experience provides

a better measure of the likely penetration of HMOS

in the total U.S. than in particular local markets.

Patterns in Selection and

Utilization of Services

Comparison by Types of Plans

There have been few studies comparing patterns in

selection among the general types of FEHBP plans and

the subsequent utilization of services by enrollees. The

earliest study was undertaken by Perrott (219), who

looked at the hospital experience of Federal employees

covered under the four broad types of insurance plans

for the period of 1960 through 1963. The data generally

showed a relatively low rate of hospital utilization

among individuals insured in the prepaid group practice plans. Perrott’s analysis showed that members enrolled in prepaid group practice plans, both options,

during the second contract year (1961-62) used 454

nonmaternity hospital days per 1,000 persons covered,

as compared with 826 days for Blue Cross/Blue Shield,

729 for employee organization plans, 708 for Government-wide indemnity plans, and 538 for individual

practice plans.

The two Government-wide programs combined

(Blue Cross/Blue Shield and Aetna) showed a hospital
92 ● Medical Technology Under Proposals To Increase Competition in Health Care

Figure C-2.—Percentage Change in FEHBP Enrollment and Biweekly Subscription Charge:

Blue Cross/Blue Shield High-Option Plan Individual and Family, 1973=80

●

✼

✎

●

✎

● ✎✎

✼

✎

●

●

I

●

●

●

●.●

● ☛

●

●

✼

●

●

●

●

●

● ☛

● ✎✚ ✼

● ☛

✎

●

✼

●

●

w

● *

●

\

●

●

●

● *

● ’I

1974 1975 i 1976 1977 1978 1979 1980

SOURCE: FEHBP Program Statistics-OPM, as cited in M. Gold, “Competition Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,”

unpublished draft staff paper, Off iCe of Assistant Secretary for Flaftnin!g and Evaluation, Department of Health and Human Services, Washington, D. C., November

1981.

utilization of 791 days for 1,000 persons, or nearly 75

percent higher than the group practice plans (219).

While there was some variation from year to year, the

same relation held for the other two contract periods

(1960-61 and 1962-63) examined. Adjustments for geographical region and then for age exhibited the same

patterns of use. Perrott found that the relative differences for days per admission showed no particular

trend; rather, it was the difference in admission rates

that was responsible for the lower utilization by group

practice employees.

Perrott also examined surgical procedure rates for

1961-62. For the Government-wide Blue Shield plan,

the tonsillectomy rate was over 2.5 times that of the

prepaid group practice plans; the “female surgery”

(mastectomy, hysterectomy, and dilation and curettage nonmaterial) rate was 1.5 times that of the prepaid group practices; and the appendectomy rate was

nearly double that of the prepaid group practices (219).

Anderson and May (2) examined FEHBP from 1961

to 1969 as a possible model for universal health insurance in this country. The study found a “truly staggering range of use” among the various types of plans.

The range of variation was from nearly 900 days per

1,000 employees in the service benefit and indemnity

plans to near 400 in group practice plans (see table

C-3). Hospital admission rates by plan also revealed

significant differences (see table C-4). The data were

not adjusted, however, for age, sex or any other variables.

Over the 8-year period studied by Anderson and

May, enrollment shifts toward the service benefit plan
Appendix C—Federal Employees Health Benefits Program ● 9 3

Figure C-3.–Percentage of FEHBP Enrollment in Low-Option Plans, 1970.80

100

Blue Cross/Blue Shield low-option plan

Aetna low-option plan

Total low-option plans

20

t

-- -- ---- - -- -- . -- - --- -- --- - --- -- - --- . -- - - - . . . .- - -. . . .- . . - --- -----

0 I I I I 1 1 1 1 I

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1960

Year

SOURCE: FEHBP Program Statistics-OPM, as cited in M. Gold, “Competition Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,”

unputiished draft staff p~er, Office of Assistant Secretary for Pfanning and Evaluation, Department of Health and Human Services, Washington, D C., November

1981.

Table C-3.—FEHBP Nonmaternity Hospital Days per 1,000 Enrollees by Type of Plan, 1961.68 (both options)

Service

Year Total benefit plana

1961 . . . . . . . . . . . . . . . . . . . . . 880.8 896.4

1362 . . . . . . . . . . . . . . . . . . . . . 762.5 826.2

1963 . . . . . . . . . . . . . . . . . . . . . 802.0 865.4

1964 . . . . . . . . . . . . . . . . . . . . . 831.5 880.5

1965 . . . . . . . . . . . . . . . . . . . . . 999.5 1,078.4

1966 . . . . . . . . . . . . . . . . . . . . . 840.2 876.5

1967 . . . . . . . . . . . . . . . . . . . . . 815.6 871.0

1968 . . . . . . . . . . . . . . . . . . . . . 835.1 878.6

Average all years. . . . . . . . . . 845.9 896.6

Indemnity

benefit planb

875.4

707.9

767.4

880.5

1,102.3

883.6

836.0

884.5

867.2

Employee Individual

organization plans practice plans

950.6 673.8

729.0 538.0

754.7 519.9

722.4 539.9

775.8 629.6

808.6 498.9

748.8 467.1

775.1 472.3

783.1 542.4

Prepaid

group practice plans

542.4

454.2

430.8

451.3

484.7

408.0

392.5

418.7

447.8

aBlue Cross/Blue Shield.

bAetna.

SOURCE: O. W. Anderson and J. J. May, The federal Employees Health Benefits Program, 1S61- 1s%8: A Model for National Health Insurance? (Chicago: Center for

Health Administration Studies, University of Chicago, 1971).
94 • Medical Technology Under Proposals To Increase Competition in Health Care

Table C-4.—FEHBP Nonmaternity Hospital Admission Rates per 1,000 Enrollees

by Type of Plan, 1961=68 (both options)

Service Indemnity Employee Individual Prepaid

Year Total benefit plana benefit planb organization plans practice plans group practice plans

1961 . . . . . . . . . . . . . . . . . . . . . 108.9 105.0 103,2 106.8 133.9 70.8

1962 . . . . . . . . . . . . . . . . . . . . . 92.1 98.8 77.8 98.3 97.5 57.3

1963 . . . . . . . . . . . . . . . . . . . . . 94.0 99.5 85.4 97.2 92.1 55.4

1964 . . . . . . . . . . . . . . . . . . . . . 94.9 101.9 83.8 95.5 91.4 54.2

1965 . . . . . . . . . . . . . . . . . . . . . 106.7 117.2 99.5 94.0 92.6 58.7

1966 . . . . . . . . . . . . . . . . . . . . . 91.6 97.8 84.7 92.7 70.9 46.0

1967 . . . . . . . . . . . . . . . . . . . . . 88.9 96.5 81.6 85.5 69.5 44.3

1968. . . . . . . . . . . . . . . . . . . . . 88.9 95.4 84.4 85.5 64.4 48.2

Average all years . . . . . . . . . . 95.8 101.5 87.6 94.4 89.0 54.4

aBlue Cross/Blue Shield.

bAetna.

SOURCE: O. W. Anderson and J. J. May, The Federal EmP@ees ffealth f3artefMs fkU7ram, K%l- 1%8: A Model for National Hea/f~ Insurance? (Chicago: Center for

Health Administration Studies, University of Chicago, 1971).

(Blue Cross/Blue Shield) and the cavitation payment

plans and away from the indemnity plan (Aetna) and

employee organization plans were noted. The authors

also concluded a strong and growing preference for

comprehensive insurance. Comprehensive or “highoption” plans were chosen by 78 percent of Federal

employees in 1961; by 1969, 84 percent were in highoption plans. Importantly, though, the formula for

Government premium contribution during this period

was one-half the cost of the “low option, ” making comparability with enrollment shifts under later contributory formulas more problematic.

Perhaps the most extensive and best known study

was undertaken by Riedel, et al. (227), in the early

1970’s. The research compared the characteristics and

utilization of enrollees in the Blue Cross/Blue Shield

high-option plans with enrollees in Group Health Association (GHA), a large prepaid group practice in

Washington, D.C. Annuitants were excluded, as were

employees residing outside the Washington, D. C.,

area. Results indicate that the age and sex distribution

was comparable across the two plans. Blue Cross/BIue

Shield enrollees tended to have smaller families and

to have been members of their plan longer. GHA members were more likely to be black, have incomes under

$10,000, and have a working spouse. Total expenditures were equal for those enrolled in individual plans.

For families, the GHA enrollee expenditures were

greater, reflecting higher payments for premiums but

lower out-of-pocket costs,

The study found substantial differences in rates of

hospital admission. Overall, the hospital admission

rate per 1,000 membership years for Blue Cross/Blue

Shield was 121 cases and 69 cases for GHA. These

differences held even after correction for small

demographic differences. An examination of diagnostic-specific admission rates indicated that in 39 of the

46 diagnostic categories, the Blue Cross/Blue Shield

rate was significantly higher than the GHA rate. In

only one category (wounds and burns) was the GHA

rate greater. Categories with the greatest differences,

which could not be attributed to differences in the

benefit structure, were disorders of menstruation,

acute respiratory infections, and hypertrophy of tonsils and adenoids and chronic tonsillitis.

Differences in length of stay between members of

the two plans were of a smaller magnitude than those

found for hospital admission rates. But there were

substantial differences in patient-day rate between the

two plans. Overall, for Blue Cross/Blue Shield there

were 724 patient-days per 1,000 membership years; for

GHA it was 383. The general patterns of differences

by age, sex, and type of contract found for hospital

admission rates were also found for patient-day rates.

Using the same data base, Meyers, et al. (180), examined ambulatory medical use by Blue Cross/Blue

Shield and GHA. The authors concluded that any

assumed “substitution” of ambulatory care for inpatient services, as an explanation of the generally lower

rate of hospitalization among prepaid group practice

members, could not be empirically found.

This same study also identified several interesting

and statistically significant patterns when the dominant difference between the two plans, the racial distribution of their membership, was controlled (180).

A higher proportion of the prepaid group members

made contact with the care system and used a higher

volume of services, regardless of race. And while

blacks generally used services less than whites in both

plans, blacks in the prepaid plan had a higher volume

of emergency visits and ambulance trips than did

whites. Among blacks, a higher proportion in the prepaid group made contact with the care system, but the

volume of use in terms of mean numbers of contacts

was similar to that for blacks in the fee-for-service

plan, whereas the reverse was true for whites in both

plans (54).
Appendix C—Federal Employees Health Benefits Program • 95

Another study by Blumberg (20) used data from the

1975 National Health Interview Survey for California

residents under age 65. A small part of the work examined plan selection for those covered by FEHBP or

the California employees system, which has some similarities to FEHBP. The FEHBP-California sample was

restricted to 697 individuals. Results indicate that 32

percent chose a prepaid group practice. * Compared

with the rest, prepaid group practice enrollees were

more likely to have a limitation in their usual activity

and to indicate fair or poor health status. However,

they experienced fewer restricted activity days. Prepaid

group practice enrollees in this study were found to

have a lower rate of hospital utilization as well. For

prepaid group enrollees overall, there were 364 patientdays per 1,000 person-years; for other private coverage

plans the aggregate number was 582.

The studies reviewed in this section, while varying

in methodological rigor, are consistent in asserting that

hospital utilization rates in FEHBP have been generally

less for enrollees in prepaid group practices than for

other general types of plans, especially the service benefit plan (Blue Cross/Blue Shield). The Riedel (227) and

Blumberg (20) studies, while limited to a small number of sites, also provide little support for the view that

prepaid group practice plans enroll healthier individuals.

Low- v. High-Option Plans*

The Blue Cross and Blue Shield Associations suggest that the FEHBP structure results in adverse selection (19). Citing analyses using data from their plans,

they note that the actuarial values of the high-option

plan are substantially less than double those of the lowoption plan, while claims costs and premiums of the

high-option plan are more than double. In the absence

of adverse selection, similar differentials between actuarial values and premiums would be expected in each

plan. Given the discrepancy, Blue Cross/Blue Shield

concludes that the low- and high-option enrollees are

not equivalent, with the high-option plan drawing a

population more likely to use services.

Available data tend to support the Blue Cross/Blue

Shield conclusions based on the experience for the

Government-wide carriers. Tables C-5 through C-9

present data on the age and sex distribution of enrollees

and claimants in high- and low-option Blue Cross/Blue

Shield and Aetna plans. Enrollment data profile the

‘It should be noted that Blumberg (2o) made a distinction in this study

between prepaid group practices and individual practice associ ations, choosing

to include the latter category with “other private coverage plans. ”

● The remainder of this section is drawn from Marsha Gold, “Competition

Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence, ” unpublished, November 1981 (106).

1980 age and sex distribution of contract holders only

(not dependents) and were provided by the individual

plans. The claimant data are based on those who filed

claims for services received in 1979 and include statistics on the total billed expenditures as well as age and

sex distribution of those making claims. The claimant

data were obtained from data reported to OPM and

are based on a sample of all claimants to the Blue

Cross/Blue Shield and Aetna FEHBP plans. While less

reliable than data on enrollment, the claimant data are

of interest since they allow for a comparison of the

medical care expenditures generated by high- and lowoption enrollees controlled for age and sex.

Tables C-5 and C-6 show the age and sex distribution of contract-holders in the Blue Cross/Blue Shield

FEHBP plan, distinguishing between employee (table

C-5) and annuitant (table C-6) experience. These data

indicate that the low-option plan draws individuals

with a lower expected utilization of health services.

Among employees, the proportion enrolled in highoption plans steadily increases with increasing age until

age 65, where it drops-presumably because many employees become eligible for Medicare as a result of

previous non-Federal employment. The high option

tends to draw those involved in child-bearing (e.g.,

younger males with family contracts), while the lowoption plan tends to draw single younger males. The

annuitant data (table C-6) also show that selection of

high-option coverage increases with age and health circumstances. The most striking thing about these data

is the heavy enrollment of the potentially disabled,

sick, high-utilizer annuitants under aged 65 in the highoption plans.

The Aetna enrollment data include a smaller population. Hence, estimates on enrollment differences in age

and sex mix of the low- and high-option plans may

be unstable. Also, the Aetna data, unlike the Blue

Cross/Blue Shield data, do not distinguish between individual and family contacts. Nonetheless, the Aetna

enrollment data presented in table C-7 tend to confirm the major trends in enrollment shown in the Blue

Cross/Blue Shield data. For both employees and annuitants, there is a precipitous drop in the proportion

enrolled in high-option plans at age 65. Unlike Blue

Cross/Blue Shield, however, the Aetna enrollees are

not so heavily concentrated in the high-option plans

and the Aetna low-option plan comprises a larger share

of the total Aetna market.

Claimant data tend to parallel those for enrollees.

Tables C-8 and C-9 profile the age and sex distribution of claimants in the Blue Cross/BIue ShieId and

Aetna plans, respectively. Because Blue Cross/Blue

Shield FEHBP has expressed some reservations about

the quality of the reported data which they draw from
96 ● Medical Technology Under Proposals To Increase Competition in Health Care

Table C-5.—Blue Cross/Blue Shield FEHBP Contract Holders by Plan, Option, Age, and Sex:

Active Employee Contracts, 1980

Individual plan Family plan

Male Female Male Female

Option and age Number Percent Number Percent Number Percent Number Percent

High option:

Under 20. . . . . . . . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . , . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

Low option:

Under do...... . . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

Rat/o: high to low option:

Under do....... . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

388

9,568

24,589

24.890

14,029

8,975

9,060

11,410

10,095

5,504

2,599

0.3

7.9

20.3

20.6

11.6

7.4

7.5

9.4

8.3

4.5

2.1

2,004

19,308

28,299

24,194

15,299

11,737

13,712

18,814

22,090

13,203

5,138

1.2

11.1

16.3

13.9

8.8

6.8

7.9

10.8

12.7

7.6

3.0

227

4,848

33,210

72,578

65,263

62,219

73,850

79,483

63,935

31,300

10,265

0.0

14.6

13.1

12.5

14.9

16.0

12.9

6.3

2.1

338

7,402

19,357

25,852

20,972

17,263

15,050

14,271

12,483

5,225

1,434

0.2

5,3

13.9

18.5

15,0

12.4

10.8

10.2

8.9

3.7

1.0

121,008 — 173,798 — 497,178 — 139,647 —

158

4,682

9,607

7,465

3,061

1,620

1,469

1,495

1,185

572

498

0.5

14.7

30.2

23.5

9.6

5.1

4.6

4.7

3.7

1.8

1.6

789

6,913

7,009

3,915

1,961

1,308

1,301

1,659

1,856

961

942

2.8

24.2

24.4

13.7

6.9

4.6

4.5

5.8

6.5

3.4

3.3

27

1,209

6,796

11,768

9,546

10,177

12,283

11,360

7,818

4,031

1,709

0.0

8.9

15.3

12.4

13.3

16.0

14.8

10.2

5.3

2.2

108

2,387

5,546

6,278

4,839

4,347

3,784

3,059

2,516

913

458

0.3

7.0

16.2

18.3

14.1

12.7

11.1

8.9

7.3

2.7

1.3

31,812 — 28,617 — 76,724 — 34,235 —

2.5

2.0

2.6

3.3

4.6

5.5

6.2

7.6

8.5

9.6

4.5

2.5

2.8

4.0

6.2

7.8

9.0

10.5

11.3

11.9

13.7

5.5

8.4

4.0

4.9

6.2

6.8

6.1

6.0

7.0

8.2

7.8

6.0

3.1

3.1

3.5

4.1

4.3

4.0

4.0

4.7

5.0

5.7

3.1

3.8 6.1 6.5 4.1

SOURCE: M. Gold, ’’Competition Within the Federal Employees Health Benefits Program: Analysls of the Empirical Evidence;’ unpublished draft staff paper, Office

of Assistant Secretary for Planning and Evaluation, Departmentof Health and Human Services, Washington, D.C., November 1961.

a 5-percent sample merging several data sources, the

focus will be on the Aetna experience (table C-9).

Data on expenditures are of greater interest. In general, they show that the total submitted expenditures

for high-option enrollees tend to be greater than those

for low-option enrollees. On average, the low-option

plan claimants incur fewer claims even when age and

sex are controlled. The patterns probably result from

a combination of several factors, including differences

in rates of claims submission based on coverage differentials and lowered utilization resulting from less coverage in the low-option plan. A selection preference

for high-optionplansbasedon health status, independent of age and sex, also appears likely.

Choices by Annuitants and the

Elderly in FEHBP

FEHBP includes both employees and annuitants,

some of whom may also be eligible for Medicare. Annuitants include disabled individuals, survivors of deceased Federal employees, and retired individuals of

various ages. As a group, annuitants are older and less

healthy than employees. Their high utilization should
Appendix C—Federal Employees Health Benefits Program ● 9 7

Table C-6.—Blue Cross/Blue Shield FEHBP by Plan, Option, Age, and Sex: Annuitant Contracts, 1980

Individual plan Family plan

Male Female Male Female

Option and age Number Percent Number Percent Number Percent Number Percent

High option:

Under 20 . . . . . . . . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

432

292

222

370

444

560

1,087

3,141

11,088

16,814

38,580

0.6

0.4

0.3

0.5

0.6

0.8

1.5

4.3

15.2

23.0

52.8

401

373

216

373

453

794

2,246

8,114

24,320

38,886

114,006

190,183

0.2

0.2

0.1

0.2

0.2

0.4

1.2

4.3

12.8

20.4

59.9

684

157

188

1,017

1,899

3,271

7,133

16,887

62,382

82,063

111,947

0.2

0.1

0.1

0.4

0.7

1.1

2.5

5.9

21.7

28.5

38.9

615

150

260

786

1,338

2,316

3,696

5,988

8,471

8,024

8,783

1.5

0.4

0.6

1.9

3.3

5.7

9.1

14.8

21.0

19.8

21.7

Total . . . . . . . . . . . . . . . . . . . 73,030 — — 287,628 — 40,427 —

Low option:

Under 20. . . . . . . . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

80

56

37

52

59

61

141

343

997

1,363

13,163

16,352

0.4

0.3

0.2

0.3

0.4

0.4

0.9

2.1

6.1

8.3

80.5

82

47

36

34

39

64

209

683

1,788

2,794

47,077

0.2

0.1

0.1

0.1

0.1

0.1

0.4

1.3

3.4

5.3

89.1

111

33

17

95

192

315

841

2,025

6,986

9,779

44,016

0.2

0.1

0.0

0.1

0.3

0.5

1.3

3.1

10.8

15.2

68.3

109

22

27

73

142

264

436

671

1,041

1,052

5,498

1.2

0.2

0.3

0.8

1.5

2.8

4.7

7.2

11.2

11.3

58.9

Total . . . . . . . . . . . . . . . . . . . — 52,854 — 64,410 — 9,335 —

Ratio: high to low option:

Under do.,..... . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

5.4

5.2

6.0

7.1

7.5

9.2

7.7

9.2

11.1

12.3

2.9

4.9

7.8

6.0

11.0

11.6

12.4

10.7

11.9

13.6

13.9

2.4

6.2

4.8

11.1

10.7

9.9

10.4

8.5

8.3

8.9

8.4

2.5

5.6

6.8

9.6

10.8

9.4

8.8

8.5

8.1

7.6

1.6

4.5 3.6 4.5 4.3

SOURCE: M.Gold, “CompetitionW ithin the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence;’ unpublished draft staff paper, Office

of Assistant Secreta~ for Planning and Evaluation, Departmentof Health and Human Services, Washington, DC., November 1981.

drive up the premiums of those plans in which they

are most heavily represented. Premium increases are

partially offset, to the extent that the annuitants also

have Medicare coverage which pays for a large proportion of their bills. Similar considerations apply for

the elderly, most of whom are annuitants.

Annuitants represent about one-thirdof all highoption contract holders with particular concentration

in the Government-wide plans. They represent 39 percent and 51 percent, respectively, of the high-option

Blue Cross/Blue Shield and Aetna enrollment, and

about a fifth of the enrollment in employee andHMOs

plans (198). Overall, annuitants represent about half

of the low-option plan enrollment.

Since almost three-quarters of all low-option enrollees are in the Blue Cross/Blue Shield plan, the experience of this plan provides a good indication of the

choices annuitants are making. Enrollment data from

Blue Cross/Blue Shield (see tables C-5 and C-6) indicate that annuitants represent about 45 percent of the

low-option enrollment and 39 percent of the highoption enrollment. The high-option annuitant enrolles

tend to be split about evenly between those underage

65 and those 65 and older, with the latter more likely
98 ● Medical Technology Under Proposals To increase Competition jn Health Care

Table C-7.—Aetna FEHBP Contract Holders by Option, Age, and Sex:

Active Employee and Annuitant Contracts, 1980

Employee contracts Annuitant contracts

Male Female Male Female

Option and age Number Percent Number Percent Number Percent Number Percent

High option:

Under 20. . . . . . . . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 ....., . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

Low option:

Under do....... . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

Ration:high to low option:

Under do....... . . . . . . . . . . .

20-24 . . . . . . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . . . .

65 and over . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .

112

1,920

8,651

15,860

15,228

15,811

19,456

19,785

15,671

7,681

3,210

0.1

1.6

7.0

12.9

12.3

12.8

15.8

16.0

12.7

6.2

2.6

281

3,574

6,965

7,919

6,595

5,650

5,317

6,278

6,762

3,787

1,873

0.5

6.5

12.7

14.4

12.0

10.3

9.7

11.4

12.3

6.9

3.4

192

106

61

132

237

499

1,268

3,955

16,714

25,491

55,960

0.2

0.1

0.1

0.1

0.2

0.5

1.2

3.8

16.0

24.4

53.4

99.8

269

128

144

144

255

547

1,141

2,908

8,014

13,232

46,028

0.4

0.2

0.2

0.2

0.4

0.8

1.6

4.0

11.0

18.2

63.3

123,385 100.0 55,001 100.1 104,615 72,746 100.2

46

832

2,816

4,720

4,838

4,917

5,385

4,996

3,539

1,790

879

0.1

2.4

8.1

13.6

13.9

14.2

15.5

14,4

10.2

5.1

2.5

107

1,182

2,073

2,181

1,695

1,507

1,483

1,520

1,557

758

596

0.7

8.1

14.1

14.9

11.6

10.3

10.1

10.4

10.6

5.4

4.1

73

38

17

48

94

149

341

1,069

3,877

5,973

27,493

0.2

0.1

0.0

0.1

0.2

0.4

0.9

2.7

9.9

15.2

70.2

80

30

27

42

69

129

271

602

1,405

2,108

24,493

0.3

0.1

0.1

0.1

0.2

0.4

0.9

2.1

4.8

7.2

83.7

34,758 99.9 14,659 100.3 39,172 99.9 29,256 83.7

2.43

2.31

3.07

3.36

3.15

3.22

3.61

3.96

4.43

4,29

3.65

2.63

3.02

3.36

3.63

3.89

3.75

3.59

4.34

5.00

5.00

3.14

2.63

2.79

3.59

2.75

2.52

3.35

3.72

3.70

4.31

4.27

2.03

3.36

4.27

2.96

3.42

3.70

4.24

4,21

4.83

5,70

6.28

1.88

3.55 3.75 2.67 2.49

SOURCE: M. Gold, ”Competition Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence;’ unpublished draft staff paper, Office

of Assistant Secretary for Plannlng and Evaluation, Departmentof Health and Human Services, Washington, DC., Novem~r 1981.

to be covered by Medicare. In contrast, more than ture and need for coverage, the choice of health insurthree-quarters of those in the low-option group are 65 ance plans also may reflect considerable risk aversion

or older. and fear of uncovered expense.

These data are interesting insofar as they may indicate a tendency for the elderly to choose high-option Blue Cross/Blue Shield High-Option

plans even when potentially duplicative Medicarecov- Plan Enrollees

erage may be available. Although the elderly with

Medicare coverage tend more to select low-option The Blue Cross/Blue Shield high-option plan proplans, a substantial proportion of the elderly elect to vides coverage for a substantial proportion of the

enroll in high-option plans. The extensive selection of FEHBP enrollment. While its market share has declined

high-option benefits by those with potentially dupli- in recent years, this plan still constituted almost half

cate benefits suggests that in addition to likely expendi- of the 1980 FEHBP enrollment. Because of its domi-
Appendix C—federal Employees Health Benefits Program ● 99

Table C-8.—Blue Cross/Blue Shield FEHBP Enrollees Who Received Benefits

by Plan, Option, Age, and Sex, 1979 (5 percent sample data)

Male Female

Claimants Claimants

Number Percent Expense/Claimant Number Percent Expense/Claimant

Option and age Individual Family Individual Family Individual Family Individual Family Individual Family Individual Family

High option:

Under 25 . . . . . . . . . . . 241

25-29 . . . . . . . . . . . . . . . 565

30-34 . . . . . . . . . . . . . . . 527

35-39 . . . . . . . . . . . . . . . 332

40-44. , . . . . . . . . . . . . . 227

45-49 ....., . . . . . . . . . 265

50-54 ......, . . . . . . . . 397

55-59 ...., . . . . . . . . . . 607

60-64 . . . . . . . . . . . . . . . 624

65+ Medicare. . . . . . . 651

65+ No Medicare . . . 622

Total . . . . . . . . . . . . . 5,058

Low option:

Under 25 . . . . . . . . . . . 79

25-29 ........, . . . . . . 126

30-34. . . . . . . . . . . . . . . 87

35-39. . . . . . . . . . . . . . . 50

40-44 . . . . . . . . . . . . . . . 21

45-49. . . . . . . . . . . . . . . 25

50-54 . . . . . . . . . . . . . . . 25

55-59. . . . . . . . . . . . . . . 25

60-64. . . . . . . . . . . . . . . 25

65+ Medicare . . . . . . . 314

65+ No Medicare . . . 71

Total . . . . . . . . . . . . . 848

Ratio: high to low option:

Under 25 . . . . . . . . . . . 3.05

25-29. . . . . . . . . . . . . . . 4.48

30-34. . . . . . . . . . . . . . . 6.06

35-39. . . . . . . . . . . . . . . 6.64

40-44 . . . . . . . . . . . . . . . 10.81

45-49. . . . . . . . . . . . . . . 10.60

50-54. . . . . . . . . . . . . . . 15.88

55-59. . . . . . . . . . . . . . . 24.28

60-64. . . . . . . . . . . . . . . 24.28

65+ Medicare . . . . . . . 2.07

65+ No Medicare . . . 8.76

590

938

1,811

1,778

1,722

2,343

2,957

3,944

3,362

2,051

2,364

23,860

61

105

178

185

166

208

239

311

245

1,114

299

3,111

9.68

8.93

10.17

9.61

10.37

11.26

12,37

12.68

13.72

1.84

7.91

Total . . . . . . . . . . . . . 5.96 7.67

4.8

11.2

10.4

6.6

4.5

5.2

7.8

12.0

12.3

12.9

12.3

—

9.3

14.9

10.3

5.9

2.5

2.9

2.9

2.9

2.9

37.0

8.4

—

.52

.75

1.01

1.12

1.80

1.79

2.69

4.14

4.24

.35

1.46

—

2.5

3.9

7.6

7,5

7.2

9.8

12.4

16.5

14.1

8.6

9.9

—

2.0

3.4

5.7

5.9

5.3

6.7

7.7

10.0

7.9

35.8

9.6

—

1.25

1.15

1.33

1.27

1.36

1.46

1.61

1.65

1.78

.24

1.03

—

427

987

784

1,017

1,127

1,216

1,249

1,831

1,584

2,818

1,934

1,507

56

531

328

428

1,010

644

975

1,804

473

1,774

319

1,014

7.63

1.86

2.39

2.38

1.12

1.89

1.28

1.01

3.35

1.59

6.06

215

468

518

577

683

1,015

1,002

1,267

1,487

2,521

1,327

702

909

764

441

347

502

875

1,440

1,641

2,334

1,597

487

808

870

724

597

644

691

728

462

264

214

1,146

258

401

359

456

713

605

1,244

919

1,135

1,943

533

1,169

.83

1.17

1.44

1.27

.96

1.68

.81

1.38

1.31

1.30

2.49

11,552

158

158

36

35

30

43

73

69

1,190

207

2,072

4.44

5.75

10.47

12.25

9.91

16.73

20.35

19.73

23.78

1.96

7.71

6,489

85

153

119

110

103

87

84

85

58

185

41

1,110

5.73

5.28

7.31

6.58

5.78

7.40

8.23

8.56

7.97

1.43

5.22

1.49 .98 5.58 5.85

6.1

7.9

6.6

3.8

3.0

4.3

7.6

12.5

14.2

20.2

13.8

—

7.6

7.6

3.5

1.7

1.7

1.4

2.1

3.5

3.3

57.4

10.0

—

.80

1.04

1.89

2.24

1.76

3.07

3.62

3.57

4.30

.35

1.38

—

7.5

12.5

13.4

11.2

9.2

9.9

10.6

11.2

7.1

4.1

3.3

—

7.7

13.8

10.7

9.9

9.3

7.8

7.6

7.7

5.2

16,7

3.7

—

.97

.91

1.25

1.13

.99

1.27

1.39

1.45

1.37

.25

.89

—

574

804

1,164

1,062

1.121

1,105

1,213

1,143

1,509

2,157

1,233

659

974

1,054

1,013

980

1,082

1,072

1,152

992

1,746

907

1,352

379

645

694

833

1,057

578

635

1,087

1,037

1,595

311

1,176

1.51

1.25

1.68

1.27

1.06

1.91

1.91

1.05

1.46

1.35

3.96

1,038

854

769

798

892

891

798

960

643

1,237

1,124

863

894

,77

1.27

1.32

1.14

1.10

1.36

1.12

1,79

.80

1.55

1.05

1.15 1.16

SOURCE: M.Gold, “CompetitionW ithin the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,” unpublished draft staff paper, Office

of Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Washington, DC., November 19B1.

nant role, it is important to analyze the available for high-option enrollees; expenditures for those who

evidence on issues of selection as they bear on the long- left at the end of that year were 28 to 38 percent below

range prospects for plans such as this one in a com- average. Analysts conclude that a continuation of

petitive system. these patterns overtime will lead to increasingly high

rates that will encourage lower utilizers to leave the

Blue Cross/Blue Shield staff are concerned that ad- plan.

verse selection within FEHBP has led to increasingly Congressional Budget Office (CBO) staff analyzed

high premium rates for the plan (19). They suggest that this issue in the courseof undertaking related research

competition will lead to “cream-skimming,” resulting (104). Ginsburg cites work by Koretz indicating that

in adverse selection which makes some comprehensive those leaving the Blue Cross/Blue Shield high-option

high-option plans residuals for the sick and otherwise plan at the end of 1977 had claims 39 percent below

unattractive enrollee, eventually driving these plans average, or 35 percent below average when mental

out of business. As evidence for this, they cite the utili- health claims were excluded. Ginsburg suggests that

zation experience of their high-option enrollees in 1976. better mental health benefits and higher hospital use

The 1976 expenditures for those who joined in open rates, especially for maternity, were only some of the

season that year were 29 to 44 percent above average factors involved in the selection effects.
100 • Medical Technology Under Proposals To increase Competition in Health Care

Table C-9.—Aetna FEHBP Enrollees Who Received Benefits by Option, Age, and Sex:

Total Across Individual and Family Plans, 1979 (sample data)

Male — Female

Claimants Claimants

Option and age Number Percent Expense per claimant Number Percent Expense per claimant

High option:

Under 25 . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . .

> 65 Medicare . . . . . . . . . . .

> 65 No Medicare . . . . . . . .

Total . . . . . . . . . . . . . . . . .

Low option:

Under 25. . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . .

> 65 Medicare . . . . . . . . . . .

> 65 No Medicare. . . . . . . .

Total . . . . . . . . . . . . . . . . .

Ratio: high to low option:

Under 25 . . . . . . . . . . . . . . . .

25-29 . . . . . . . . . . . . . . . . . . .

30-34 . . . . . . . . . . . . . . . . . . .

35-39 . . . . . . . . . . . . . . . . . . .

40-44 . . . . . . . . . . . . . . . . . . .

45-49 . . . . . . . . . . . . . . . . . . .

50-54 . . . . . . . . . . . . . . . . . . .

55-59 . . . . . . . . . . . . . . . . . . .

60-64 . . . . . . . . . . . . . . . . . . .

> 65 Medicare . . . . . . . . . . .

> 65 No Medicare. , . . . . . .

Total . . . . . . . . . . . . . . . . .

42

223

392

453

554

726

1,013

1,499

1,598

1,714

1,509

9,723

0.43

2.29

4.03

4.66

5.70

7.47

10.42

15.42

16.44

17.63

15.52

$ 607

821

762

707

1,024

1,170

1,599

1,744

1,963

3,472

1.902

150

290

330

247

219

281

474

764

894

1,505

983

6,137

2.44

4.73

5.38

4.02

3.57

4.58

7.72

12.45

14.57

24,52

16.02

100.00

$1,209

1,128

1,207

1,003

1,331

1,494

1,545

1,741

1,555

2,496

1,561

100.01 $1,896 $1,729

18

71

108

149

122

177

217

284

303

1,094

346

2,889

0.62

2.46

3.74

5.16

4.22

6.13

7.51

9,83

10.49

37.87

11.98

$ 769

576

681

604

699

873

1,634

1,334

1,793

2,482

940

32

92

62

61

46

67

79

130

119

993

225

1.68

4.83

3.26

3.20

2.41

3.52

4.14

6.82

6.24

52.10

11.80

100.00

$ 873

1,061

935

957

1,602

1,388

1,410

1,127

1,263

2,129

791

100.01 $1,653 1,906 $1,631

2.33

3.14

3.63

3.04

4.54

4.10

4.69

5.28

5.27

1.57

4.36

3.37

.69

.93

1.08

.90

1.35

1.22

1.40

1.57

1.57

.47

1.30

.79

1.43

1.12

1.17

1.46

1.34

.98

1.31

1.09

1.40

2.02

4.69

3.15

5.32

4.05

4.76

4.19

6.00

5.88

7.51

1.52

4.37

1.45

.98

1.65

1.26

1.48

1.30

1.86

1.83

2.33

.47

1.36

1.00

1.38

1.06

1.29

1.05

.83

1.08

1.10

1.54

1.23

1.17

1.97

1.00 1.15 3.22 1.06

SOURCE: Data submittectto the U.S. Officeof Personnel Management; as quoted in M. Gold, ’’Competition Within the Federal Employees Health Benefits Program:

Analysis of the Emplrlcal Evidence:’ unpublished draft staff paper, Office of Assistant Secretary for Planning and Evaluation, Department of Health and

Human Services, Washington, D.C., November 1981,

The Blue Cross/Blue Shield and CBO analyses agree

that expenditures are lower for those leaving the plan,

but they disagree on the expenditures for joiners. Sampling, methodology, and data source factors do not

appear sufficient to account for the differences in the

two analyses.Thediscrepancyinresuhsmaybeattributable to the different years considered in the two analysis, however. Around 1976, Aetna dropped its mental health benefit, while the Blue Cross/Blue Shield

plan retained an extensive one. Perhaps more importantly, 1976 also was the year of a majorrate increase

of 35 to 40 percent for the Blue Shield plan (see fig.

C-2). As discussed previously, this led to a substantial decline in Blue Cross/Blue Shield enrollment.

Blue Cross/Blue Shield and CBO also disagree on

the magnitude of the adverse selection problem and

its importance in a competitive environment. To consider this point, it is useful to review data on the age

and sex distribution of the Blue Cross/Blue Shield

enrollment between 1975 and 1980. Trends in these

data are summarized in table C-10.

The data show that enrollment in the Blue Cross/

Blue Shield high-option plan is growing increasingly

older. The most substantial shift occurred through a
Appendix C—Federal Employees Health Benefits Program . 101

Table C-lO.—Blue Cross/Blue Shield FEHBP Enrollment, by Age and Contract Type:

High-Option Contract Hoiders, 1975-80

December 1975 December 1980 Net changes, December 1975-80

Individual Family Individual Family Individual Family

Age Number Percent Number Percent Number Percent Number Percent Number Percent Number Percent

Under 35 . . . . . . 167,510 31.5 294,853 24.3 135,920 24.3 166,492 17.3 –31 ,590 –7.2 – 128,361 –7.0

35-44 . . . . . . . . . 43,510 31.5 244,995 20.2 52,292 9.4 174,541 18.1 +8,393 + 1.1 –70,454 –2.1

45-64 . . . . . . . . . 211,226 39.8 580,953 47.8 209,584 37.5 490,241 50.9 –7,642 –2.3 –90,712 –3.0

65 and older . . . 108,289 20.4 94,140 7.7 160,323 28.7 132,429 13.7 +52,034 +8.3 +38,289 +6.0

Total. . . . . . . . 530,924 100.0 1,214,941 100.0 558,119 99.9 964,860 99.9 –27,195 –250,061

SOURCES: Blue Gross/Blue Shield internal data; M. Gold, “Competition Within the Federal Employees Health Benefits Program: Analysis of the Empirical Evidence,”

unpublished draft staff paper, Office of Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Washington, D, C., November

1981.

large absolute drop of roughly 7 percent in the enrollment by those under 35 years at the same time as there

has occurred an equivalent increase of 6 to 8 percent

in the enrollment by the elderly. Because comparable

data are not available for the entire FEHBP enrollment,

it is not possible to determine the extent to which these

patterns reflect shifts in Federal employment and annuitant composition. However, labor force changes of

this magnitude are unlikely over a 5-year period. This

would tend to suggest that the increasing age of the

Blue Cross/Blue Shield enrollment reflects in part at

least a selection effect which poses a potential threat

to the viability of the plan.

This has certain obvious conclusions for the plan,

but the implications from the larger policy perspective are less clear. Under increased competition, more

attractive and efficient (i. e., more benefits and/or

lower premiums) plans might be expected to grow in

membership, while others should decrease. The drop

in Blue Cross/Blue Shield membership, may or may

not reflect such a phenomenon, resulting from increasing premium rates, the availability of alternative plans,

and potential dissatisfaction with the service provided

by the Blue Cross/Blue Shield plan. Such a response

would reflect competition leading to the encouragement of more efficient plans responsive to enrollee

demands.

Theoretically, such responses should occur across

all age groups, without the major shifts evidenced in

the Blue Cross/Blue Shield enrollment data. Shifts

varying by age are a concern because they imply there

may be some “cream-skimming” in the system. If so,

increased competition may not promote more efficient

plans, but rather plans with more successfully targeted

marketing efforts. This form of competition would

have little effect on the total costs of health care, since

its impact would be to shift costs around but not reduce overall expenditures.

The available information suggests that reported

trends in Blue Cross/Blue Shield enrollment may reflect more than “cream-skimming.” The drop in enrollment for the Blue Cross/Blue Shield plan has been

more acute since 1975, the year of the large premium

increase. Other data from consumer surveys indicate

that customer service ratings for the Government-wide

plans fall below that for several other plans (91).

FEHBP enrollees may be reacting to these circumstances.

Blue Cross/Blue Shield experience also may provide

a lesson on the actual method by which competition

among insurance plans may operate. It is possible that

the age shift in Blue Cross/Blue Shield enrollment may

reflect on the types of individuals likely to respond first

or faster in a competitive environment. Those whose

expected health expenditures are low face less risk in

switching plans. Because their costs are likely to be

low in any case, they have “less to lose” if their choice

turns out wrong and the coverage is poor, incomplete,

or not satisfactory.

The potential risk for older or less healthy individuals is higher, as it is for those who will need care (e.g.,

those expecting to use maternity benefits, psychiatric

care). In addition, those who are older have a potentially longer history with a single plan and maybe hesitant to switch to a less familiar one. These considerations suggest that response to a competitive environment may vary with age, health status, and other related factors. If so, competition without adverse selection is unlikely, and it becomes necessary to trade off

the two in determining both the form and the extent

of competition to be promoted.

Quality Assurance

Few studies have looked at the quality assurance

area of FEHBP. There is little evidence that OPM has

ever perceived a need or rationale for institutionalizing for FEHBP a quality assurance policy analogous

to the use of Professional Standards Review Organizations (PSROS) for the Medicare program. Instead, it

seems, OPM has relied on the market mechanism—at

least implicitly—and on existing quality assurance pro-
102 Ž Medical Technology Under Proposals To Increase Competition in Health Care

grams and regulatory agencies to monitor quality of

care across plans.

When FEHBP was originally operationalized in

1959-60, the integrity of each eligible plan was reviewed, and previous plan performance was checked

through State and local regulatory agencies, as well

as through various other quality assurance organizations. As previously discussed, a minimum set of

benefits under each plan had been set out by law.

CSC also delegated the contract management of a

plan to the same person and/or office that was responsible for day-to-day administration of the plan. Combining these two tasks allowed enrollee feedback concerning problems or needed benefit improvements to

be funneled directly into future contract negotiations

with individual plans (120). The result has been not

only a variety of basic plans, but also an evolution

and intermixture within each of the basic types.

The Riedel, et al., study (227) on FEHBP utilization

discussed earlier also touched on the quality assurance

areas. Two findings of the study were that: 1) a larger

percentage of GHA patients were admitted to teaching

hospitals, reflecting the pattern of hospital appointments of physicians in the plans, and that 2) there were

no large differences in the proportions of patients attended by physicians of various specialties in the two

plans, although a somewhat greater percentage of

GHA patients were cared for by physicians in practice a shorter length of time.

Using the Riedel, et al., data base, a followup survey

by Koepsell, et al. (139), looked at appropriateness of

hospital admission under a prepaid group plan and feefor-service plan available to Federal employees in the

Washington, D. C., area. Judgment on the medical appropriateness of admission was based on two sets of

explicit, disease-specific criteria listing the clinical circumstances under which hospitalization is usually considered justified for each disease. One set was developed by the American Medical Association (AMA) to

assist PSROS, and the second was developed by physicians in Hawaii for Payne and Lyons’ episodes of illness study. Diagnostic validity was assessed on the

basis of AMA criteria developed under the same auspices as their admission criteria.

While the authors admit to a certain inherent “grey

zone” of clinical situations, they found few medically

inappropriate admissions in either plan and few inaccurate diagnoses by the time of discharge in either plan

(139). The one statistically significant difference found

in the study was that more fee-for-service patients underwent both tonsillectomy and adenoidectomy rather than one procedure only. Thus, somewhat more extensive surgery was performed under the fee-forservice plan.

Information Dissemination and

Consumer Choice

According to macroeconomic theory, consumers act

rationally in market situations. Accordingly, when

provided with the opportunity to make a selection

among health care plans, consumers will seek information and maximize their welfare. (Some economists

assert that one need not assume that all consumers exhibit this rational behavior, and that it is sufficient if

some consumers act rationally; these more sophisticated consumers would be able to affect the market

structure and all consumers would benefit (1). )

One of the oldest if not the best example of a multiple consumer-choice health plan system is FEHBP. And

one of OPM’S responsibilities under the program is to

assure that employees receive sufficient information

about it and the various health plans for which they

are eligible.

This responsibility is stated in the Federal Employees

Health Benefits Act, as amended, as follows (U.S.

Code, Health Insurance, ch. 89, title 5, pt. 890, Federal

Employees Health Regulations):

Information to employees.

(a) The Civil Service Commission shall make available to each employee eligible to enroll in a health benefits plan under this chapter such information, in a form

acceptable to the Commission after consultation with

the carrier, as maybe necessary to enable the employee

to exercise an informed choke among the types of plans

described by section 8903 of this title.

(b) Each employee enrolled in a health benefits plan

shall be issued an appropriate document setting forth

or summarizing the—

(1) services or benefits, including maximums,

limitations, and exclusions, to which the employee

or the employee and members of his family are entitled thereunder;

(2) procedure for obtaining benefits; and

(3) principal provisions of the plan affecting the

employee or members of his family. [Emphasis

added. ]

OPM is to provide information on the various

health plans each year before the “open season.” Most

evidence, though, seems to indicate that the program

has been marked by limited availability of information and lack of consistent information on all of its

plans for most of its history.

Since inception of the program in 1960, CSC/OPM

has (until very recently) relied almost solely on individual brochures to provide information about the program and the various health plans—one brochure for

each health plan and one brochure containing instructions on how to change options during open season

(102). Typically, CSC/OPM would distribute the brochures to agency personnel centers, but distribution
Appendix C—Federal Employees Health Benefits Program ● 103

beyond that point depended on individual agency policies. Information on individual plans has been left to

employee initiative in many instances. Brochures on

employee organization plans for which all employees

are eligible have generally not been distributed each

open season, with employees having to specially request these brochures.

The brochure containing information to consider in

choosing a health plan and the brochure describing

FEHBP have generally been distributed on a one-time

basis, usually at the time of hiring by the Government.

In the mid-1970’s, a General Accounting Office (GAO)

study found that during an open season, the average

employee received only about 4 of the 11 brochures

needed to consider just the 7 plans for which all

employees were eligible (102).

Prepaid gorups plans have been particularly vocal

in stating that FEHBP dissemination policies have

tended to favor the most popular plans. Kaiser Foundation went so far for several years as to distribute

brochures on their plans themselves, directly to eligible employees, instead of through CSC/OPM (81).

Even assuming that an employee obtained all the

needed informational and health plan benefit brochures, the different format of each brochure and the

obscure and technical language in the brochures

hindered ready comparisons of the benefits of the plans

(102). As a 1970 CSC study regarding the feasibility

of summary comparisons of health benefit plans stated

(102):

The brochures, as they are presently designed, lack

reasonably uniform formats and do not adequately facilitate an ‘informed choice’ among the plans.

This was not always true. The brochures followed

a reasonably standard outline and format in 1960. At

that time, making the brochures as uniform as possible to facilitate comparison was just as important a goal

to the Commission as making the brochures precise

enough to show the employee’s rights under the contract. All brochures used the same style and size of print

to describe limitations and exclusions as well as benefits

and contained a page entitled ‘Benefits in Brief’ which

facilitated gross comparison with other available plans,

Each had a table of contents so that a specific provision could easily be located in a particular brochure

and compared with that in another brochure. This requirement of reasonable standardization benefited Federal employees in several ways:

“Sales pitches were forbidden—and so was the

‘fine print’ and ‘silent treatment’ of undesirable features typical of many plan descriptions. As the

plans were laid out in standard outline and format, under these strict (and, for many carriers,

unusual) standards, carrier after carrier went back

to reconsider its proposed benefits. Every contract,

without exception, was revised in this process.

Some contracts were actually changed after the

brochures had gone to press, usually in the direction of liberalization benefits, always in the direction of greater clarity. ” [Emphasis added. ]

Because of the variation in the philosophies and benefit structures of the health plans, it was impossible to

force each plan into precisely the same format . . . .

Although these differences made a precisely uniform

format infeasible, the formats of the brochures were

kept similar to the extent possible. This is not the case

since that time. Since 1961, the Commission has by

choice allowed the brochures to become increasingly

dissimilar so that today they contain numerous inconsistencies which cannot be explained by differences in

the plans’ benefit structures.

The 1970 report also stated that although CSC could

recommend that an employee read the brochure of

interest and compare it with other brochures, this task

was time-consuming, tedious, and often frustrating.

Brochures presented so many details that many Federal

employees shied away from, or failed in, attempts at

making careful comparisons of the plans. Employees

became confused and ended up choosing a plan merely on the basis of a few major benefit provisions or

as a friend’s recommendation. As a result of the report,

CSC moved to make the brochures more uniform

(102),

Later, the Subcommittee on Retirement and Employment Benefits, House Committee on Post Office and

Civil Service, again expressed concern about the information provided to Federal employees on available

health plans. In House Report 93-1205, dated July 18,

1974, the subcommittee recommended that CSC better inform Federal employees about such health plans.

The GAO study in 1976 recommended that CSC consolidate FEHBP health plan information brochures into

publications which would enhance comparability

among available plans, leading to increased informed

choice (102).

In the most recent years, improved information has

become available. For the 1980 open season, OPM

made several changes in the informational material

given to employees. Specifically, two new types of information were produced about health plan benefits

consisting of: 1) columnar comparison charts for the

benefits provided by each plan in the program, showing 17 major benefit categories; and 2) Health Plan

Benefit Summaries describing each plan’s major benefits in a uniform format on a single standard-size page

(196).

In addition, OPM experimented in two geographic

areas with special “summary booklets” containing

summaries of all plans an employee could join in the

area; i.e., containing summaries of local comprehensive plans as well as the summaries of the two Govern-
104 . Medical Technology Under Proposals To Increase Competition in Health Care

ment-wide plans and 18 employee organization plans.

This test was conducted to determine the feasibility

of an alternative distribution system in conjunction

with regional booklets (195).

Lastly, in a resurrection of an early 1960’s FEHBP

practice, training seminars for hundreds of other agency personnel working with health benefit matters were

conducted. These training seminars took place in numerous locations (120,195).

A followup evaluation of the 1980 open season was

conducted by OPM through a random survey in three

sites-Philadelphia, Chicago, and southern California.

Results indicated that the changes made and the new

material produced were welcomed by all interested

parties—carriers, agents, and employees—and served

to generate new interest in the open season. But while

the training seminars were successful, the single-sheet

summaries and comparison charts were not. In particular, the majority of those who tried to use the comparison charts found use of the charts difficult if not

impossible because of their large size, the number of

sheets (up to four for each area of the country), and

long narrative wording. Such analysis has allowed

OPM to revise the information format for the next

open season, which will have all Government plans

in one standard-size booklet (28).

Preliminary cost figures show OPM’S printing and

distribution budget has remained about the same for

the last 2 years, hovering near $1.3 million. Costs for

the upcoming open season are anticipated to stay at

that level as well (28,195).

In 1979, Washington Consumer's Checkbook Magazine also initiated publication of an annual guide to

Federal plans for Washington, D. C., area employees

with the advent of the open season. Unlike OPM materials, it: 1) was supported through private funds ($3.95

per pamphlet), and 2) drew conclusions about the consumer attractiveness of certain plans versus others.

Specifically, cost, special features such as dental care,

customer service, HMO comparability, and considerations for plan selection have all been categories of

FEHBP plans scrutinized by the magazine.

Marketing of the guide has taken place through

newspaper coverage, employee association stores, individual plans themselves, newsstands, bookstores,

and a drug store chain. First-year sales in the Washington, D. C., area stood at 11,000 copies; second-year

sales, with wider distribution and more active promotion, were double that number. The impact that this

private consumer guide has had on FEHBP consumer

choice is unknown. However, one plan favored by the

guide, the Government Employees Health Association

(GEHA), enjoyed a dramatic increase in enrollment in

the Washington, D. C., area of over 120 percent (compared with less than 20 percent nationally) during the

1980 open season (145).

One last element of change over the last 3 to 4 years

has been an apparent upswing in advertising of individual plans, initiated by the plans themselves. This

has been particularly true of the employee organization plans. OPM originally prohibited advertising by

the plans, but dropped the regulation in the late 1960’s

when it was felt all plans had become well enough established (120).

It is difficult to determine the impact of potentially

limited information in past years on plan choice in

FEHBP. Changes and improvements in available information over the last few years have, however, coincided with recent enrollment changes. For example,

the number of employee transfers into different plans

has increased from 107,000 in 1978 to 149,000 in 1979

and 159,000 in 1980 (198). As discussed in the section

entitled “Competition Within FEHBP, ” there have also

been relative changes in market shares by types of

plans, especially over the last 5 years.

Still, there are signs that more steps may be needed

to enhance consumer information and choice. The relative percentage of employees switching plans since

1960, for example, has changed little over the years,

from the 3 to 4 percent range in the early years to a

recent 6 to 7 percent range (28,120). And HMOS have

been critical of the information OPM provides on

plans and on the general way in which OPM conducts

the open season. In testimony before a congressional

subcommittee, Group Health Association of America

(GHAA), the trade organization for group HMOS, argued that several provisions limit the ability of HMOS

to effectively compete in the open season (113).

These include limitations on HMOS’ ability to directly market to Federal employees; incomplete distribution of materials on HMO options; and inconsistent

and uneven treatment of HMOS by OPM. In general,

GHAA feels that OPM needs improved understanding

of the structure of HMOS. GHAA also supports

strongly a yearly open season combined with a positive

enrollment procedure (i.e., all must indicate a preference even if no switch is involved) as a mechanism for

enhancing the competitive posture of new or less widely known plans (106,113).

Current Problems of FEHBP

FEHBP has set many good precedents for designing

a nationwide competitive health insurance system

based on the principles of consumer choice, market

incentives, and fair economic competition. Its main

features—multiple choice, uniform dollar employer
Appendix C—Federal Employees Health Benefits Program ● 105

contributions, and open seasons—have been demonstrated to be workable. Yet there are some important

structural flaws in FEHBP, which provided substantial difficulties by the end of 1981.

An open season, scheduled to begin on November

9, 1981, was indefinitely postponed by OPM 3 days

prior to its commencement because of a host of problems. The announcement resulted from a confluence

of four events: 1) a large escalation in health care costs

during 1980 and 1981; 2) severe Federal budgetary constraints imposed by the Reagan administration; 3) assertions of an increasing extent of adverse selection in

the Blue Cross/Blue Shield and Aetna high-option

plans; and 4) numerous and substantial changes proposed by OPM in participating health plans premium

rates, benefits, and deductible and coinsurance provisions at a late stage in the negotiations for the 1982

contract year.

During FEHBP’s first 20 years, OPM’S rules resulted

in a stable underwriting environment. In recent years,

carriers were generally prohibited from making substantial benefit reductions and were permitted to make

benefit increases only if the total value of the entire

benefit package did not materially change. Because

benefit packages remained fairly constant from year

to year, carriers were able to predict with reasonable

accuracy what their future loss experience would be.

This stability was undermined in 1981 when, for the

first time in FEHBP’s history, OPM ordered all carriers to reduce 1982 benefits. In August, OPM directed

all carriers (except for HMOS) to: 1) increase the deductible on supplemental benefits to $2OO per individual, 2) increase the enrollee’s coinsurance rate to 25

percent on supplemental benefits, and 3) apply a $2OO

deductible to outpatient hospital services, or 4) make

other changes of equal value.

When OPM determined in October of 1981 that the

August reductions were still inadequate to bring the

cost of the program within its $2.25 billion congressional appropriation, it mandated a further 6.5 percent benefit reduction for all carriers including HMOS.

Without these August and October cuts, the Government’s contributions would have amounted to $2.69

billion.

These unprecedented benefit cuts, which included

controversial drops in abortion coverage and an altering of mental health benefits, introduced a high degree

of uncertainty into FEHBP. Both benefits and premiums would be significantly altered in the 1982 contract

year. Moreover, because of the way in which the Government’s contribution formula works, increases in

enrollee contributions would be greater for high-cost

plans than for low-cost plans. Accordingly, many predicted an exceptionally large number of enrollees

would switch plans during open season. Since there

was no way any carrier could predict the extent of

enrollment changes, carriers faced substantial underwriting risks entering the 1982 contract year.

Consequently, nearly 100 carriers sued OPM to roll

back some benefit reductions. A few carriers, such as

Blue Cross/Blue Shield, fearing the large premium increase could cut enrollment and threaten their survival,

sued OPM to cancel the November 1981 open season

or to impose a “pre-existing health condition” limitation on all enrollment transfers. In addition, a number

of mental health organizations sued OPM, Blue Cross/

Blue Shield, and Aetna to prevent reductions in insurance coverage for mental health services (257). Faced

with these problems, OPM proposed to delay the open

season on an indefinite basis, on the grounds that it

could not print and distribute brochures outlining benefit and planning changes in time.

In turn, some carriers then sued to prevent such a

postponement. The lower court ruled that OPM acted

illegally when it required a reduction in benefits for

1982 plans, and the court invalidated that cutback in

benefits. The lower court also ruled that OPM acted

illegally when it “indefinitely” postponed the open season for employees to choose health plans. It ordered

that an open season be conducted, beginning no later

than December 7, 1981. The Court of Appeals later

granted a partial stay of that order. The appellate court

ruled that open season would not take place for 30

days, or until the court decided whether the benefits

cutback was legal, whichever came first.

As of the end of January 1982, the appellate court

was still considering whether to order OPM to hold

an open season. Regardless of the pending litigation,

OPM went ahead with an issuance of new rates and

benefits on December 31, 1981, that became immediately effective. The 1982 rates required nonpostal employees and annuitants to pay an average of 31 percent more for their share of the health insurance premium. Moreover, the benefit reductions generally resulted in added cost sharing for the enrollee (257).

In February 1982, the Court of Appeals upheld

OPM’S deferral, saying it had acted properly when it

scrubbed the open season. Around the same time,

OPM announced a new open season period had been

scheduled for May 1982. It was subsequently held from

May 3 to May 28.

For the future, OPM is considering a proposal that

would scrap the complicated method the Government

uses to arrive at percentage formula payments for insurance and instead give all workers and retirees the

same dollar amount. As previously discussed, the

Government’s share of health premiums is based on

60 percent of the average high-option premium
—

106 ● Medical Technology Under Proposals To Increase Competition in Hea/th Care

charged by six of the largest carriers in the Federal

health program. Because of the averaging system, the

actual dollar contribution (the maximum is slightly

over $39 per pay period) varies depending on which

plan the worker or retiree chooses. In some cases, it

covers as little as 40 percent of the premium cost, while

in others, it pays up to 75 percent.

The proposal being discussed at OPM would give

every active-duty worker the same dollar amount to

be applied to purchase of insurance. It would be

enough to cover the entire premium for employees

who chose inexpensive, low-option, minimum-benefit

plans. Workers who wanted more protection could

buy it, paying the difference out of their own pockets.

For retirees with potentially greater health needs but

less money, OPM is considering a two-tier system that

would give retired Government workers larger payments than active-duty workers.

The fixed-dollar payment plan is still under discussion. If the President approves it, Congress will have

to approve the change. It could be part of a major

package of health care cost reforms that the Reagan

administration will propose later this year.

The idea would be to create more competition in

the Nation’s health insurance field by giving fixed payments to individuals, who could then shop around for

the best insurance deal for themselves.

OPM would certify carriers for participation in the

Federal health program but would no longer dictate

rates or benefits (beyond a minimum package) the carriers offer. OPM officials say they would, however,

insist that any carrier participating in the Federal health

program offer group rates, to keep premiums as low

as possible (36).
Appendix D.—Selected Regional Examples of the

Effects of Alternative Delivery Systems

Rochester, N.Y.

The Rochester area has one of the lowest hospital

utilization rates of any major metropolitan area in the

country, around 560 days per 1,000 for the Blue Cross

population (which is 85 percent of the market) in 1977.

This rate has been steadily declining each year, a fact

attributed by Blue Cross/Blue Shield members to

health maintenance organization (HMO) competition

in the area (132).

Blue Cross/Blue Shield dominates the insurance industry in Rochester and has been affiliated with all

three HMOS that have operated in the area. The Blues

have been significantly influenced in recent years by

large corporations in Rochester (Eastman Kodak,

Xerox, General Motors, and Sybron), who have encouraged cost containment efforts. These firms perceived the HMO as a method by which costs could

be controlled; and they encouraged the Blues, which

claimed a philosophical commitment to the HMO as

an alternative, to create new HMOS (108).

Consequently, in 1973, three HMOS were started

with the support of the local Blues. The Genesee Valley

Group Health Association (GVGHA) is a multispecialty prepaid group practice modeled after the KaiserPermanente program. Enrollment in GVGHA has

lagged somewhat behind projections, and break even

was projected for 1981 with an enrollment of 41,000.

A second plan, Rochester Health Network (RHN) developed a network of contracting neighborhood facilities in 1976, many of them originally part of the Office

of Economic Opportunity’s Neighborhood Health

Center Program. Enrollment in 1979 in RHN was

about 18,000, drawn primarily from lower income

areas.

The third plan, Health Watch, an individual practice association (IPA), was sponsored by the Monroe

County Medical Society. The plan involved 650 physicians, a majority of those in the area, and grew rapidly in the first 2 years, enjoying an enrollment of 24,000

by 1975. Health Watch experienced a rapid decrease

in membership of its one large group, General Motors,

after a 60-percent premium increase. By July 1976, the

plan was out of business. A new IPA, the Rochester

Area HMO, began operation in November 1979, with

about 200 contracting physicians (163).

Figure D-1 presents the data for hospitalization by

Blue Cross members under the age of 65. Two possible interpretations of this pattern of decline emerge:

1) the direction downward has been relatively continuous; or 2) the flat utilization rate of 1969-72 was

Figure D-l .—Rochester, N.Y. Blue Cross: Annual Hospital Days per 1,000 Persons, 1967-78 (under age 65 only)

700

600

500

I I I I I I 1 1 ~ 1 I 1

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978

Year

SOURCE: H. S. Luft, S C. Maerki, and J. B. Trauner, “The Competitive Effects of Health Maintenance Organizations: Another Look at the Evidence From Hawall,

Rochester, NY., and Minneapolis-St. Paul, ” presented at the American Public Health Association Annual Meeting, Los Angeles, October 1981.

107
108 ● Medical Technology Under Proposals To increase Competition in Health Care

followed by a marked decline from 1973 to 1978, during which HMO enrollment grew to 46,000.

The Finger Lakes Health Systems Agency concluded

in 1980 that one of the factors contributing to the

overall decline in hospital use “may well be the

presence of alternative delivery systems.” Other factors listed by the agency included: 1) successful efforts

to control the number of hospital beds in the Rochester

area (3.5 per 1,000 in contrast to the national average

of 4.5), 2) more effective use and reimbursement of

alternatives to hospital use such as home health care

and ambulatory surgery, 3) indirect effects on physician hospital utilization practices from Professional

Standards Review Organization (PSRO) review of

Medicare/Medicaid hospitalization, and 4) “no-fault”

reimbursement for some auto injury-related hospitalizations.

Because Rochester Blue/Cross-Blue Shield dominates the market in the area, overall hospital utilization rates should, it seems, reflect the Blues pattern

of falling utilization rates. Instead, though, in contrast

to a 12 percent Blues decrease, there is an overall increase of more than 11 percent. Luft, et al. (163), hypothesized that falling hospital use by Blue Cross

enrollees stemmed from the fiscal crisis in New York

that led to some major revisions in the State Medicaid

program in 1976-77. In particular, Medicaid rates were

frozen and the State attempted to shift certain costs

onto the Medicare program by contesting eligibility.

Both factors made it more difficult for hospitalized patients to be transferred to long-term care settings.

The Luft hypothesis is that these Medicare and

Medicaid patients “backed-up” in acute hospitals and

took beds that would otherwise have been used by

under-age-65 Blue Cross enrollees. Coupled with an

existing bed supply of only 3.5 per 1,000, the situation may have resulted in a change in the indications

used for elective surgery or hospitalization, and so a

consequential decline in admissions.

Because the relatively low Blue Cross/Blue Shield

premium has been considered to be a major marketing

obstacle for GVGHA, it is further unlikely that utilization rates fell in response to a competitive threat. The

Blues have maintained premium rates at relatively constant levels over the past few years (163), and have

had an added advantage in that community rates practically equal its enrolled population (because of its 85

percent market share). As the Blue Cross utilization

rate drops each year, an HMO finds itself in a position of having to subsidize its premiums with other

income in order to remain competitive, To its credit,

GVGHA has lowered the amount of this subsidy almost every year. But it has yet to break even (132).

In 1977, a study by the Federal Trade Commission

(FTC) also raised the possibility that the Blue

Cross/Blue Shield had engaged in a certain amount

of anticompetitive behavior with the three area HMOS.

Though independent, Blue Cross originally provided

financial and marketing support as well as administrative services for the HMOS. The report noted,

though, that within 3 years of the startup of the

Rochester HMOS, all three of them expressed dissatisfaction with the Blues marketing performance. RHN,

for example, elected to develop a marketing staff of

its own after only 6 months because of a “lack of coordination at the lower levels” (108).

Hawaii

Proponents of procompetitive proposals have considered the State of Hawaii as a good example of direct

competition between a plan of Blue Cross/Blue Shield

type and an established HMO. Hawaii is also interesting because the two competing plans cover the majority of the population in the State, and so can influence the total delivery system there. More than 80 percent of Hawaii’s working population and about 72 percent of the total civilian population receive their medical care through one of the two competing plans.

One plan is the Kaiser-Permanence HMO program,

which entered the State in 1958 and now enrolls about

13 percent of the State’s civilian population. This program enrolls 16 percent of the population of Oahu,

where Kaiser’s main facilities are located (79). Kaiser

has experienced a gradual enrollment growth, which

has just kept pace with growth in the civilian population over the past 5 years. The enrollment of members

under the Federal Employees Health Benefits Program

(see app. C) provided impetus to Kaiser’s growth in

its early years (132).

The Hawaii Medical Service Association (HMSA)–

the larger of the two plans—is a Blue Shield plan that

uses the typical fee-for-service mode of payment.

HMSA enrolls about 54 percent of the population.

HMSA’S influence is enhanced through its role as fiscal

intermediary for Medicare and Civilian Health

and Medical Program of the Uniformed Services

(CHAMPUS) beneficiaries (163). In 1972, HMSA also

began sponsoring the Community Health Program, an

HMO composed of nine group practices, By 1977, this

program covered about 23,000 people, or about 3 percent of the population.

Competition and Utilization Patterns

Both Kaiser and HMSA believe that the market for

medical care in Hawaii is highly competitive. In a communication with FTC, Albert H. Yuen, Executive Vice

President of HMSA, stated (38):
Appendix D—Selected Regional Examples of the Effects of Alternative Delivery Systems Ž 109

The Kaiser Plan and HMSA maintain a posture of

respectful competitors which has resulted in the growth

of both programs.

Ronald Wyatt, Vice President and Regional Manager

of the Hawaii Region of the Kaiser Foundation Health

Plan, Inc., was more emphatic concerning this point

(38):

. . . since the late 1950’s when the Kaiser-Permanente

Program commenced operating here, there has been

vigorous competition between Kaiser-Permanente and

HMSA.

Enthoven has also argued that “there is little question but that the two plans compete vigorously, ” and

recounts the benefits to the area brought about by

market forces (79):

Kaiser’s entry into the market put pressure on HMSA

to improve its benefit coverage and to strengthen its

cost controls. Kaiser, in turn, found it necessary to

depart from its traditional style of delivering all of its

services in large medical centers and to set up five small

outpatient clinics on Oahu at locations convenient to

members, in order to compete effectively with HMSA’S

individual-practice style. Kaiser and HMSA both report

hospital use for employees and their families (that is,

the under-65 age group) at or below 400 days per 1,000

per year. Even after adjusting for the age of the population, Hawaii’s hospital use is about 75 percent of the

national average. Hawaii has about 3 short-term community hospital beds per 1,000 civilian population,

compared with a national average of about 4.6. Thus

the excess of hospital beds that adds so much to costs

in most areas is not a problem in Hawaii. As a result,

hospital cost per capita through the 1970’s was about

two-thirds of the national average, despite the fact that

the cost of living generally was about 20 percent above

the national average. HMSA and Kaiser premiums for

comprehensive care are among the lowest in the Federal

Employees Health Benefits Program.

Various factors besides competition contribute to this

desirable situation in Hawaii. The population is young.

Cultural factors and healthful lifestyles play a part. But

based on direct observation as well as study of the data,

I believe that vigorous and effective competition between HMSA and Kaiser has been the key factor in

achieving these lower costs. Both organizations make

strenuous efforts to hold down costs while giving good

service and comprehensive benefits to their members,

in order to remain competitive with each other. And

the fact that the two competitors dominate the market

is important, because individual providers have a hard

time escaping the cost controls of one or the other health

plan.

The health insurance market in Hawaii may additionally benefit by the existence of other factors. There

are more than 50,000 Federal, State, and local government employees, for example, all of whom are offered

a choice of plan and a fixed or formula-based employer

contribution toward the plan of their choice (79). And

while HMSA is nominally a Blue Shield plan, it exercises rather stringent controls over utilization (158).

Several large employers in Hawaii have been influential in promoting cost-containment activities in

HMSA. The physician fees HMSA will pay are not

allowed to increase faster than inflation (79). Luft (158)

has observed that HMSA acts more like an IPA or an

Ellwood-McClure-type health care plan (see ch. 3).

There exists, nonetheless, a certain amount of skepticism about the Hawaii experience. Enthoven (79) was

quick to point out atypical demographic, cultural, and

lifestyle factors. Luft (158) and Bailey (11) have observed that the history of HMSA, beginning with its

founding by local social workers, the Hawaiian heritage of plantation-provided medical care, and Hawaii’s

unique ethnic mix, suggests that the HMSA behavior

may have more to do with its special history than with

competition with Kaiser.

Luft, et al. (163), also examined hospital utilization

rates and patterns in Hawaii since 1955. They found

that indeed HMSA and Kaiser exhibited equally low

utilization rates, and, significantly, both rates had been

falling throughout the 1970’s. The study also identified

an overall divergence, however, between this utilization pattern and hospital use by the State as a whole.

As a State, Hawaii showed a precipitous decline of

nearly 250 days per 1,000 population between 1969

and 1974, followed by an increase of almost 100 days

per 1,000 by 1979 (see fig. D-2).

The Luft study attributes at least part of decreasing

utilization rates for HMSA and Kaiser to increasing

duplicate health insurance coverage with non-Kaiser

and non-HMSA carriers, and so artificially deflating

reported use rate (by increasing the denominator of

enrollees) (163). In 1978, there were 1.23 plan enrollees

per person in the State. (The Hawaii compulsory

health insurance law of 1975 extended coverage to

many employees not previously covered by employeebased insurance, possibly duplicating some secondary

workers. ) Between 1958 and 1976, too, the different

age and sex composition of Hawaii implied a 12 percent lower hospitalization rate than the national

average.

Still, by 1978, hospital use in Hawaii was 40 percent below the national average (163). Luft and his colleagues concede the sharp drop might be evidence of

a competitive impact, and that it was around 1970 that

HMSA instituted tight reimbursement policies designed to reduce hospital use. Yet their study builds a

strong argument that the decline stemmed from other,

extraneous factors, and not from competition with

Kaiser. Declines in utilization, for one thing, were

much more apparent for Medicare/Medicaid beneficiaries (hospital use for these groups fell by 23 and 37
110 ● Medical Technology Under Proposals To Increase Competition in Health Care

1,200

1,100

1,000

800

700

600

500

400

Figure D-2.—Hawaii-Annual Hospital Days per 1,000 Persons, 1955-80

“. \

“ .

“ .

● . . . ● . . ● .

’58 ’59 ’60 ’61 ’62 ’63 ’64 ’65 ’66 ’67 ’68 ’69 ’70 ’71 ’72 ’73 ’74 ’75 ’76 ’77 ’78 ’79 ’80

Year

SOURCE: H. S. Luft, S. C. Maerki, and J. B. Trauner, “The Competitive Effects of Health Maintenance Organizations: Another Look at the Evidence From Hawall<

Rochester, N. Y., and Minneapolis-St. Paul,” presented at the American Public Health Association Annual Meeting, Los Angeles, October 1981.

percent respectively between 1970 and 1974) than for

HMSA enrollees, even when adjusted for duplicate

coverage.

A substantial fraction of the decline in use also occurred on the islands of Hawaii and Kauai, where

Kaiser has no facilities or enrollees. With the demise

of the Viet Nam conflict, the 1969-74 period also saw

a shift of CHAMPUS and Veterans Administration

(VA) patients out of civilian hospitals and back to

military hospitals only, reducing utilization of community hospital beds per civilian population (the ratio

on which the data are based). The early 1970’s were.

a period of further reduction of long-term beds in

short-term hospitals in Hawaii.

Lastly, HMSA first began to experience rate in 1969.

Kaiser, on the other hand, has always been community-rated. A possible conclusion is that the competition HMSA felt was from experience-rating commercial insurers, who had in 1970, and continue to

have now, a larger share of the market than does

Kaiser.

Quality Assurance

A major project conducted in Hawaii by the University of Michigan (54) has looked at the implications

for quality of care in a plan setting with cavitation payment, compared with other practice settings. The project consisted of four primary components: 1) an

“Episode of Illness Study,” 2) an “Office Care Study,”

3) a “Hospital Organization Study,” and 4) a “Continuing Education Project” (54). (It should be noted

that there are often difficulties in undertaking and interpreting quality assessment studies. Findings can be

both unstable and unreliable. See ch. 4 for a further

discussion.)

The “Episode of Illness Study” (216,217), using

hospital and ambulatory record data for 1968, was a
Appendix D—Selected Regional Examples of the Effects of Alternative Delivery Systems . 111

study of medical care delivered by all practicing

Hawaii physicians. A series of 21 diagnoses were

chosen as the basis of a study of patients discharged

from two general short-term hospitals in Hawaii in

1968. There was also an assessment of physician performance in the ambulatory phases (both pre- and

post-hospitalization of this episode of illness) which

used process and outcome measures. The results of the

the “Episode of Illness Study” indicated that the

prepaid multispecialty group was capable of directing

its patients effectively to the appropriate specialist and

maintaining a staff of specialists who were more careful in the effective use of the hospital facility (admission and length of stay) without impairing quality in

the delivery of medical care.

Results of the “Office Care Study” showed that this

degree of effectiveness extended to the office care setting. A further implication was that the referral or consultation pattern of patient care was more effective in

the controlled prepaid group setting than in the more

informal organizational pattern of other community

hospitals. The important effect of the prepaid multispecialty group practice appeared to be almost totally that of assuring care in large hospitals by appropriate specialists.

As part of the “Continuing Education Project, ” appropriate lengths of stay were examined for selected

diagnoses in six general hospitals (one, a prepaid group

practice hospital) between 1968 and 1971. Although

the general trend was toward a greater percentage of

“appropriate length of stay, ” the Kaiser hospital experienced an increase in percentage of appropriate length

of stay between 1968 and 1971 of 7 percent; in each

of the other study hospitals there was a rise in percentage of appropriate length of stay of 16 to 25 percent

between 1968 and 1971. Initially, the Kaiser hospital

had a much better record of appropriate length of stay

than the other hospitals. During this period control

measures were introduced in the hospitalization insurance program of HMSA, and charges of the other

study hospitals were covered by this program.

Rhee (225) used the University of Michigan data

base to focus on determinants of the quality of physician performance. Additional data were collected on

the organization of office care from the American

Medical Association Group Practice Register, and data

on hospital structure and activities were obtained by

questionnaire. Organization of office care explained

less than I percent of the variance in the overall performance of all physicians. The data seem to suggest

that physicians in large multispecialty groups (both feefor-service and cavitation) provide the highest quality

of care, while physicians in the intermediate, smaller

groups provide consistently lower quality of care.

Rhee’s findings on the quality of care in ambulatory

settings imply that the forms and payment methods

of group practice will have a noticeably positive influence on the quality of care only when the group practice setting is large enough to implement the necessary

organizational controls. Overall, however, Kaiser-Permanente physicians provided better care by the study’s

measures than physicians in the large fee-for-service

groups (54).

Multnomah County, Oreg.

Multnomah County (which includes Portland) was

one of the first jurisdictions to experiment with direct

financial incentives to effect choice of health care plans

by the medically needy.

Until 1973, the county operated a County Hospital

located on the campus of the University of Oregon

Health Services Center just south of downtown Portland. While the center’s teaching staff and students

provided physician service, the location was very inconvenient to many potential users. In addition, the

care represented a separate system—a “provider of last

resort’’—for the county’s low-income residents.

In 1973, the Oregon legislature authorized a State

takeover of the facility, freeing up $4.2 million in county funds. In turn, a new county agency, Project Health,

was created to serve as a broker organization, as well

as advocate and counselor for the poor, rather than

as a provider of care (79,133).

Operating under waivers of several Medicaid regulations, the county offered a range of health plans with

comparable benefits, comprehensive in nature, to medically needy residents. These citizens had incomes marginally above the welfare payment level, but were unable to purchase adequate medical care, and had not

previously been offered publicly supported medical

care outside the county-owned hospital. The county

acted as a broker to negotiate health insurance packages with local health plans including HMOS (both

IPA and prepaid group practices) and the Oregon Physician Services plan (Blue Shield). Each enrollee paid

a monthly fee determined by the enrollee’s family size

and income and the total premium cost of the plan.

This provided a financial incentive for the selection

of lower cost plans usually lacking in Medicaid programs (8).

In 1978, an evaluation study of Project Health by

A. D. Little calculated the costs per recipient, and compared these figures to costs of similar health benefits

received by welfare recipients under the State’s fee-forservice Medicaid plan (8). Populations enrolled in Project Health were not directly comparable to welfare enrollees (because of higher incomes), but estimates based
112 ● Medical Technology Under Proposals To Increase Competition in Health Care

on per capita costs suggested that Project Health benefits were 7 percent less expensive than the fee-for-service Medicaid plan applied to the same population.

One caveat, however, was that this result was heavily dependent on Project Health’s ability to include the

disabled with the rest of the population and enroll

them in the competing health insurance plans at relatively favorable group rates covering both families

and disabled adults. It should be noted that unit

episodic costs were generally higher in the Project

Health system, yet total per capita medical expenditures were less, reflecting lower rates negotiated with

prepaid plans under community-rating structures.

There was also speculation that higher premiums

charged by open-panel (IPAs) HMOS and insurance

plans would result in the highest cost patients’ (with

greater preexisting medical needs) choosing these more

expensive plans. This “adverse selection, ” in turn,

would cause premiums to rise still further, and these

plans would become even less competitive with the

closed-panel (prepaid group practices) HMOS (8).

One of Project Health’s objectives in seeking “mainstream care” was to avoid adverse selection, and the

premiums were set with a view to distributing the clients evenly over the various health plans (79). Still,

the Oregon Physician Services Plan in fact withdrew

from Project Health because of rapidly rising expenditures and premiums. The effect of this withdrawal on

the premiums charged by other plans is unclear. (See

ch. 2 and app. C for further discussions of adverse

selection. )

Other problems encountered by the project have included the turning away of applicants toward the end

of each fiscal year beause of limited resources. The

County General Fund has not kept up with inflation

either, causing a general decrease in services (133).

Multnomah County is also a county with seven alternative delivery systems, a somewhat homogeneous

population with about 7 percent of its families below

the poverty level, and a minority population of approximatelys percent, including 4 percent black. Such

a demographic backdrop raises questions about how

this experience would fare in cities and communities

which have large minority and/or indigent populations, or do not have alternative delivery systems

already in place (256).

Despite the problems and uncertainty, the strengths

of the program should not be overlooked. It has provided nonstigmatized mainstream care to an income

class who have traditionally had “special problems”

with respect to health care (79). Consumer education

and advocacy have been promoted as part of the overall program, to help clients utilize the benefits of health

plans in wiser and more appropriate ways. Health care

has additionally been provided in a less costly way

than its Medicaid counterpart. Lastly, Project Health

might partially serve as a model for implementation

in other areas, and among other income groups, of a

multiple-choice competitive market system.

Minneapolis=St. Paul

A highly publicized example of apparent vigorous

competition and rapid HMO growth has been the

Twin Cities area of Minneapolis-St. Paul, Minn.

Unlike Hawaii and Rochester, the Twin Cities have

multiple HMO options. The detection of any competitive effects, as a result, seems more likely. Six of

the seven HMOS in Minneapolis-St. Paul have, in addition, chosen State rather than Federal qualification.

Such a situation, which may approximate more closely

an open competitive market, has been found deserving of further examination by several parties (163).

The Twin Cities has slightly more than 2 million

people in its lo-county metropolitan area at this time.

The growth rate is less than 1 percent a year. Yet HMO

participation increased from a base of 1.9 percent in

1972 to 20 percent in 1982 (8,132,188). Such an increase in market share reflects an average growth rate

of 28 percent per year.

The HMOS in the Twin Cities have been sponsored

by a variety of organizations and feature many different financial arrangements for distributing risk. The

largest and oldest HMO, Group Health Plan (121,184

members on Dec. 31, 1978), began operation in 1957

as a consumer cooperative, employs physicians on a

salary basis, and purchases hospital services by contractual arrangements with community hospitals. The

second largest HMO, MedCenter Health Plan (46,706

members), began in 1972 and was sponsored by the

St. Louis Park Medical Center, a mainly fee-for-service

multispecialty group practice. The plan has added several other physician groups and secures hospital services through negotiated contracts with a number of

local hospitals.

In contrast to Group Health and MedCenter, there

are three newer HMOS with somewhat closer ties to

hospitals, The Ramsey Health Plan (4,025 members)

contracts with St. Paul Ramsey Hospital, a public

general hospital, for staff, hospital, and ancillary services and clinic space, and the hospital is partially at

risk for the expense of hospitalizing plan members.

SHARE Health Plan (21,862 members) is located adjacent to Samaritan Hospital, which it uses for inpatient and outpatient ancillary services and hospitalization of members. However, the hospital is not financially at risk for the expense of hospitalizing SHARE

members. SHARE was sponsored initially by a mutual-
Appendix D—Selected Regional Examples of the Effects of Alternative Delivery Systems . 113

benefit association for railroad employees, but it is

now independent and community-based, and its physicians are salaried employees of the health plan. It is

the only HMO in the area that has sought Federal

qualification. The Nicollet-Eitel Health Plan (8,485

members) is a joint venture of the Nicollet Clinic (a

multispecialty group practice) and Eitel Hospital.

Nicollet Clinic absorbs two-thirds of any financial

losses associated with the plan, and Eitel Hospital is

at risk for the remaining third.

The two newest HMOS were formed partially in response to the growth of the five organizations described above. HMO Minnesota (HMOM, Twin Cities

enrollment, 12,170) consists of independent physician

groups that contract with Blue Cross/Blue Shield to

provide medical care to an enrolled population on a

prepaid, cavitation basis. One of these groups is sponsored by the Ramsey County (St. Paul) Medical Society. Hospitals throughout the Twin Cities provide institutional services on a contractual basis, and Blue

Cross/Blue Shield provides administrative and support

services. The Physicians Health Plan (26,422 members), an IPA HMO, was sponsored by the Hennepin

County Medical Society and includes over 1,200 physicians, or approximately 75 percent of those in private

practice in greater Minneapolis. Participating physicians agree to absorb any losses incurred by the plan,

and enrollees are hospitalized through contractual arrangements with most of the hospitals in the Twin

Cities.

There is considerable variation in the premiums that

the HMOS quote to different groups. In general, the

quoted premiums of the HMOS vary with the benefit

package offered, the expected premiums of competitors, the predicted use of services by the potential

enrollee group, the ability of the HMO to assimilate

additional membership, and the marketing strengths

other than price of competing HMOS. Thus, Twin

Cities HMOS (except SHARE because of its Federal

qualification) do not construct premiums based on a

community-wide rating system (39).

There are several reasons for the extensive development of HMOS in Minnesota. Minnesota has a strong

liberal, reformist tradition and has been in the forefront of the cooperative movement. In the State, there

are nearly 900 marketing cooperatives; 70 electric, telephone, and electric generating transmission co-ops;

and 130 mutual insurance companies. This context appears to have provided an atmosphere conducive to

the development of an HMO derived from the cooperative movement (Group Health Plan) and other

HMOS that require the cooperation of physicians. This

general attitude also appears to have stimulated the

group practice of medicine in Minnesota. The availability of group practices has made it much easier for

HMOS to develop, since some of the newer HMOS,

such as MedCenter and HMOM, are based on the utilization of existing fee-for-service group practices.

It is instructive to note the effect of the differences

in attitude towards cooperatives and group practice

between Minneapolis and St. Paul. St. Paul is a more

conservative city and has few group practices. Thus,

the newer HMOS, which are dependent on preexisting

group practices have concentrated in Minneapolis and

the suburbs.

The Minnesota Health Maintenance Organization

Act, passed in 1973, has established a favorable legal

environment for HMO development, and has increased the willingness of physicians to accept the

presence of HMOS. The act formally authorizes the

establishment of HMOS and provides financial assistance to certain HMOS.

In Minneapolis, the prior existence of Group Health

has also helped to make the community more receptive to new HMO development. Interstudy, a nonprofit research organization which conducted many

of the early studies of HMOS and which is headed by

Paul Elwood, one of the early advocates of HMOS and

the originator of the term “HMO,” is headquartered

in suburban Minneapolis. Another key element in promoting HMO development in Minneapolis has been

the National Association of Employers on Health

Maintenance Organizations, a group composed of employers concerned with the rising cost of health care

and interested in the development of alternative delivery systems that could restrain costs. Originally comprised only of Minnesota-based companies, this organization has been enlisting other large companies (108).

Indeed, an important characteristic of this regional

experience has been its involvement with the employed, middle-income family as a result of understanding and support by a number of the area’s large

corporate employers. More importantly, many employers have offered multiple choice and a fixed dollar

contribution to employees. Enrollments reflect such

behavior: 65 percent of General Mills’ employees in

the Twin Cities area have enrolled in an HMO, as have

65 percent of Cargill’s, 44 percent of Honeywell’s, and

36 percent of Control Data’s. On the other hand, only

about 4 percent of 3M Co. ’s employees have chosen

HMOS, reflecting in part that company’s lack of support for the idea (79).

Another reason for HMO development in Minneapolis-St. Paul has been the asserted number of excess

hospital beds in the area. This has prompted hospitals

to encourage development of HMOS in order to secure

a guaranteed population (108). HMOS have also

started placing clinics in locations convenient to

members and lengthening their hours of operation (79).
114 ● Medical Technology Under Proposals To Increase Competition in Health Care

The longer clinic hours, the opening of outreach

centers, and the increased availability and awareness

of health option plans at the least substantiate the impression of a competitive process in the Twin Cities

region. The evidence supporting the notion that this

competition is reducing or containing costs, however,

has been challenged (163).

Since 1976, admissions per 1,000 population in the

Twin Cities showed a marked decline relative to national trends. When measured in terms of patient days,

a relative decline is less dramatic however (see fig.

D-3).

The decline in utilization has been most apparent

among HMO enrollees. Nationally, people enrolled in

HMOS have about 25 percent fewer hospital days per

year than do similar people in conventional income

plans. In the Twin Cities, HMO enrollees average

about 450 days per 1,000 population, but these figures

are not adjusted for differences in age, sex, and other

Figure D-3.—Minneapolis=St. Paul Metropolitan Area

and United States: Use of Community Hospitals,

1971-79

~

1,300

1971 1972 1973 1974 1975 1976 1977 19781979

Year

SOURCE: H. S. Luft, S. C. Maerki, and J. B Trauner, “The Competitive Effects

of Health Maintenance Organizations: Another Look at the Evidence

From Hawall, Rochester, N. Y., and Minneapolis-St. Paul,” presented

at the American Publlc Health Association Annual Meeting, Los

Angeles, October 1981.

characteristics. In fact, in studies by Blue Cross of Minnesota of employees offered a multiple-choice option,

those who joined were found to have been low users

of hospitals while in Blue Cross. In other words, low

hospital use by HMO enrollees may partially be due

in the Twin Cities to a “selection effect” by healthier

groups into HMOS (163).

Utilization declines might also be attributed to effective area PSROS. Between 1974 and 1977, the Twin

Cities had the third largest decline in admission rates

by Medicare beneficiaries among all PSROS in the

country. There is later evidence of continued decline

in hospital use by this same group through 1979 (163).

There have been other findings that make the interplay between HMO development, competitive forces

in the health market, and cost containment more problematic. For one thing, downward trends in utilization

are much more noticeable in St. Paul, even though

most of the HMOS have been based in Minneapolis.

For another, there has been long-term decline in use

rates in a large number of hospitals. It suggests that

the recent decline may have had its roots in planning

efforts in the late 1960’s to reduce capacity (as has

already been mentioned, it has long been recognized

that the Twin Cities is “overbedded”), and not in the

recent growth by HMOS.

Thirdly, changes in coverage and reimbursement

procedures for Medicaid patients, and for treatment

of alcoholism and chemical dependency in the mid1970’s, created incentives to shift treatment out of the

hospital and to use outpatient facilities. The importance of such incentives, however, is unknown. Lastly,

some firms have found that after 3 or 4 years of multiple choice, the conventional insurance option is left

with a high-cost uninsurable pool and that this has increased, rather than decreased, total premium costs.

Honeywell, one of the major initial backers of HMOS,

seems to have experienced the major savings in spite

of large-scale HMO enrollment (163).

A 197’7 staff report of FT’C did conclude that, despite

their very small market share, HMOS have had a competitive effect in the Twin Cities (108). The report also

cautioned, though, that while HMOS appeared to have

a bright future in the region, the number of HMOS

may have been too large for all to remain viable, and

that some mergers and/or failures would not be surprising (108).

California

California is an oft-cited area where the introduction of alternative delivery systems such as the HMO

has been proclaimed to have had a significant impact

on competition among health insurers. Approximately
Appendix D—Selected Regional Examples of the Effects of Alternative Delivery Systems • 115

20 percent of California’s population (about 4 million

people) is currently enrolled in a prepaid plan of an

HMO or other alternative delivery system type. (Given

the number of people in the State on Medicare (15 percent) and Medicaid (14 percent), only about so percent of other Californians have chosen not to enroll

in an alternative delivery program. )

The Ross-Loos Medical Group, established in California in 1929, is the oldest and largest physicianowned prepaid health plan in the Nation. It was followed by the Kaiser-Permanente Plan, which had its

origins in the State of Washington in 1933, and was

first offered in California in 1942. Both Kaiser and

Ross-Loos, particularly in their early years, relied

heavily on organized labor for their growth. Kaiser’s

growth has been particularly remarkable and has become the largest group practice prepaid plan and the

largest nongovernmental health care delivery system

in the United States. Kaiser has a current enrollment

of about 3.2 million people, equally split between plans

in northern and southern California. Even more significant, perhaps, is the fact that in northern California

about one out of every two employees offered the option of joining the Kaiser plan does so (31).

One competitive response to Kaiser’s growth over

the last two decades has been the development of foundations for medical care by about half of the nonrural

county medical associations in California (31). Foundations preserve the fee-for-service approach, and have

typically offered the indemnity insurance companies

a mechanism which would conduct peer review, process both inpatient and outpatient claims, and guarantee

that participating physicians would not charge over

the maximum fee schedule. In return, the medical

foundations require the insurance companies to meet

certain specifications of coverage. Physicians in these

foundations are not at risk.

The foundations have attracted significant portions

of the market, between 10 and 20 percent of the total

population in the Sacramento, San Jose, and San

Diego areas, and have attempted to create a climate

of restraint on length of stay and physician overutilization. Still, the foundations have never offered the comprehensive benefits or integrated system approach

found in the Kaiser prepaid group practice (31).

From these foundations have recently evolved a

series of broad-based IPAs which utilize the foundation expertise in peer review and claims processing.

Presently, six of these organizations are federally

qualified HMOS, and two more broad-based IPAs are

in the process of qualifying, Interestingly, all HMO

plans that are expanding to any degree are federally

qualified because: 1) most major employers are requiring Federal certification before it is offered to its

employees; and 2) the deficiencies of the California

prepaid health care plans for Medicaid recipients in

the early 1970’s (see app. E) stimulated the growth of

extremely restrictive State regulations for prepaid

plans, regulations far stricter and more difficult to

qualify under than the Federal HMO laws (3 I).

A second major competitive mechanism in the State

has been the reaction by Blue Cross and Blue Shield.

Blue Cross of Northern California began to respond

to the presence of Kaiser in the mid-1960’s by broadening its benefits packages, introducing a hospitalization

peer review program, and creating a network-based

HMO and network-based clinics. Blue Cross of Southern California (an organizational entity separate from

its counterpart in northern California) began a network-based HMO, Communicate, in 1973. Importantly, Blue Cross does not receive a discount on

charges from hospitals as it does in many other areas

of the country, and so has no competitive advantage

over private insurers, nor is Blue Cross more attractive to HMOS seeking hospitalization agreements

(108).

Other competitive mechanisms have been the creation of four originally hospital-inspired or hospitalbased HMOS, an HMO developed by a county government, an HMO developed by the Safeco Insurance

Co., and 12 surviving HMOS from the prepaid health

care plan concept. There is also the recent development in the HMO field in California of the purchase

of established HMOS by large corporations. Currently, there are 32 HMOS functioning in California, of

which 21 are federally qualified (31).

Lower hospital utilization rates by selected California HMOS are seen in table D-1. A 1977 FTC study

also argued that the entry of HMOS was responsible

for lowering the hospital utilization of people in conventional plans (108).

Yet, a contrasting approach (158) examined total expenditures on health care in California, because even

Table D-1 .—Selected Data, California

Health Maintenance Organizations

Operational

HMO year

Kaiser Foundation Health Plan, Inc.

(Northern California). . . . . . . . . . . . 1945

Foundation Health Plan, . . . . . . . . . . 1972

Maxi-Care ., . . . . . . . . . . . . . . . . . . . . . 1973

Ross-Loos Health Maintenance

Organization . . . . . . . . . . . . . . . . . . 1929

Family Health Plan . . . . . . . . . . . . . . . 1965

Health Net . . . . . . . . . . . . . . . . . . . . . . 1979

Kaiser Foundation Health Plan, Inc.

(Southern California) . . . . . . . . . . . 1950

Hospital days/

1,000 members,

1980

356

351

330

474a

398

316

401

aData are for the year ending 1979.

SOURCE: Department of Health and Human Services, Office of Health

Maintenance Organizations, Nationa/ HMO Census, DHHS publication

No. 82-50177 (Rockville, Md.: Public Health Service, June 30, 1981),
116 • Medical Technology Under Proposals To Increase Competition in Health Care

if conventional providers constrained hospitalization

in the face of HMO competition, they might maintain

their incomes by increasing charges and by providing

more physician services. In fact, one of the responses

by Blue Cross of Northern California to Kaiser competition was to increase its coverage of ambulatory

services and encourage efforts to reduce hospitalization. The most recent figures on State per-capita health

expenditures do not, moreover, provide evidence that

extensive HMO enrollment has resulted in overall cost

containment, California ranked third highest among

the so States.

Despite low hospitalization rates, California ranked

second highest in the share of per-capita expenditures

for physician services, meaning that the physician

share of the medical care pie is much larger in this

State. California ranked 46th in the share of the expenditures for hospital care. By some standards, then,

the mix of medical services bought by Californians

may be different, but there is no evidence that even

massive HMO enrollment has resulted in overall cost

containment. This example suggests, too, that the competitive effect of HMOS may not be easily discerned

(158).

Denver, Colo.

Alternative delivery systems have captured almost

20 percent of the market in the metropolitan Denver,

Colo., area. * Of that 20 percent penetration, though,

less than half is due to enrollment in prepaid group

plans. Instead, preferred provider organizations

(PPOS) have attracted the greater number of individuals opting out of more traditional fee-for-service practice in recent years. According to 1980 Denver Standard Metropolitan Statistical Area population figures,

PPOS hold almost a 15 percent penetration into the

Denver market. More interestingly, of the estimated

400,000 people in the area who have access to PPOS,

approximately 250,000 are actually using them.

PPOS are generally organizations alined with selffunded employers who assume all of the risk of health

care costs, Labor-management trust funds or the TaftHartley trust funds are the most common participant

in PPOS. What PPOS do is allow management to preserve its commitment of freedom of choice of provider

to employees, while attempting to hold down costs and

utilization through peer review and the promotion of

cost-effective health care. In turn, any savings accrued

by the PPOS return directly to the trust fund, and so

to the employer.

● This section condensed from JoElyn McDonald, U.S. Congress, Washington, D. C., personal communication, March 1982 (l?l),

Employers often favor PPOS exactly because of the

possible savings, and because HMOS have been traditionally stingy in sharing utilization data of a particular

group with its employer. (The HMOS claim that since

they must community rate, this information is not relevant. ) Hospitals and physician providers are willing

to join PPOS in order to secure a patient base. Hospitals and physicians also agree to negotiated rates and

fee schedules in return for guaranteed prompt payment

and no uncollectable. PPO benefits are also structured

so that the physician has an incentive to provide services on an out-patient or office basis. Providers continue to be paid, however, on a fee-for-service basis.

Each employee, on the other hand, has a choice at

the time of decision to seek medical care. One option

is a regular indemnity plan with deductibles and coinsurance. The other choice is to use a PPO, which has

no deductibles and coinsurance, but does include a

copayment per office visit. If employees choose a PPO,

they are restricted to using certain physicians and

hospitals that are members of that PPO.

In Denver, about 40 percent of all employers are

self-funded. At present, one private firm acts as the

intermediary for all area PPOS, handling both indemnity and PPO claims. Additionally, the firm is tracking utilization, lengths-of-stay statistics, and other data

that could be used to eliminate PPO providers who

overutilize. There are currently four PPOS in Denver,

each affiliated with a separate hospital.

PPOS have largely been a response to the growth

and development of HMOS in the area, particularly

the Kaiser Health Plan of Colorado. The federally

qualified Kaiser group, with an enrollment of over

120,000 members, has four clinics spread out in the

Denver suburbs. Kaiser utilizes one central hospital,

St. Joseph’s, for 85 percent of their hospitalization.

Within the last 2 years, Kaiser has also started a per

diem arrangement with St. Joseph’s with some utilization guarantee in return. Adjustments are made if

Kaiser’s actual utilization is more or less than the

guaranteed amount; the fixed costs v. variable costs

of St. Joseph’s are also evaluated.

The success of the Kaiser Plan has additionally

prompted the recent establishment of HMO Colorado

(3,657 members), a Blue Cross/Blue Shield networksponsored HMO. This HMO, operational only in the

last 2 years, received a line of credit from Blue

Cross/Blue Shield for initial funding but was developed as a separate entity.

HMO Colorado has been organized around four

multispecialty group practices, each separate in terms

of recordkeeping and funding, Each clinic is paid a per

member, per month fee by every member associated

with that clinic. In turn, each clinic has responsibility
Appendix D—Selected Regional Examples of the Effects of Alternative Delivery Systems • 117

for its own financial stability while using the other

three clinics in the program as a basis for comparison.

HMO of Colorado currently uses several Denver hospitals with some discount agreements, and has also expressed interest in setting up a per diem with St.

Joseph’s.

There are two other HMOS in the Denver area: the

Arapahoe Health Plan, a federally qualified IPA with

about 700 members; and Comprecare, another federally qualified IPA with over 50,000 members. The fate

of Comprecare, however, is somewhat uncertain, because its growth has outpaced its ability to control

costs and utilization in the last 4 years.

The overall effects on utilization and costs in the

Denver area, with the successes of HMO and PPO

market shares, are still unknown. HMO Colorado

claims, for example, to have the lowest utilization rates

in the Denver area. How comparable the membership

population is to other plans and groups is, however,

at least questionable.

There is also the question of how effective PPOS can

and will be in containing costs or changing provider

behavior, since it is the trust funds in the case of PPOS

that assume the risk. Whether fear of Kaiser and other

HMOS, as well as the concern about a shrinking patient base, will provide enough incentive for PPO

physicians and hospitals to hold down costs is still far

from clear.

98-827 0 - 82 - 9
Appendix E.—California Prepaid Medi-Cal Health Plans*

The State of California, through the Waxman-Duffy

Prepaid Health Plan Act, enacted in 1971 an alternative form of delivering, organizing, and financing

health care services to beneficiaries of Medi-Cal, the

State’s Medicaid program. Program costs in California had risen rapidly and continuously under an existing fee-for-service system. In March 1966, Medi-Cal

program operations began spending at the rate of $6OO

million per year. By 1970, program costs had doubled.

Spiraling costs and a suspicion that at least some of

the inflation was caused by unnecessary provision of

health care services led the California legislature to

enable the State Health Department to contract with

prepaid health plans (PHPs) for the delivery of health

care to Medicaid beneficiaries.

PHPs were comparable to health maintenance organizations (HMOS). Both were private entities—

primarily corporations—which agreed to provide a

broad range of health care services to groups of individuals for a fixed monthly rate per individual or

family.

PHPs were designed to provide comprehensive

health services to enrolled Medi-Cal beneficiaries in

a specified service area. PHPs were reimbursed on a

prepaid cavitation basis dependent on the number of

enrollees in the aid categories: Aid to the Blind (AB),

Aid to Old Age Survivors (AOAS), Aid to the Totally Disabled (ATD), and Aid to Families With Dependent Children (AFDC). The vast majority (from 75 percent to over 90 percent depending on the PHP) of PHP

enrollees were AFDC beneficiaries.

The first contract for a PHP that was not a pilot

project took effect in May 1972. By July of 1973, there

were 47 operational projects with a total enrollment

of over 178,000 Medi-Cal beneficiaries. The PHP program had resulted in the development of more health

systems with cavitation payment in California than in

any other State.

From its inception, the PHP program aroused great

controversy throughout the State. Charges were made

ranging from financial manipulation and fraudulent

marketing practices to the delivery of inadequate

medical care.

In 1973, the Federal Government enacted the Health

Maintenance Organization Act to provide funds for

the development of HMOS across the Nation. Senate

hearings were held in 1975-76 not only to investigate

● This appendix is condensed from Prepaid Health Plans and Health

Maintenance Organizations, report of the Committee on Governmental Affairs, United States Senate, Report 95-749, Apr. 20, 1978; and from General

Research Corp., Evaluation of California’s Prepaid Health Plans, submitted

to the Department of Health, Education, and Welfare, contract No.

HEW-05-73-194, September 1974 (264).

allegations of fraud and abuse by PHPs, but also to

prevent the occurrence of similar errors in other States

with the new Federal HMO development program.

The Senate hearings found that almost all of 54

California PHPs were nonprofit, tax-exempt organizations that subcontracted with for-profit corporations

and partnerships owned or controlled by officers or

directors of the nonprofit organizations. The hearings

revealed that this type of corporate structure and contracting practice opened the way for the diversion of

Medicaid funds away from the program’s purposes.

Independent individuals and groups served as brokers, promoting State contracts for interested entrepreneurs in return for a percentage of Medicaid program payments made under State contracts. No funds

were avaiIable for startup or fixed costs, so it was imperative that the PHP enroll members as quickly as

possible. The money to finance the contracts subsequently came from the poor who were enrolled in

PHPs by door-to-door salesmen employed by the

plans, some of whom threatened, coerced, and forced

the signatures of Medicaid beneficiaries on their plan

enrollment forms. Other enrollees, who needed treatment, were involuntarily disenrolled from the plans

by the operators when the cost of their care became

expensive.

The quality of care provided in some PHPs was

below reasonable standards, as judged by the State’s

own medical auditors. Some of the plans contracted

with substandard and nonaccredited hospitals. Nonlicensed physicians were often recruited. Selective

enrollment practices were common. Thousands of

promised childhood immunization programs were

never provided. Other types of care were often

“skimped” on. Consulting firms exacted exorbitant fees

for providing management and computer services.

Despite awareness of these problems, the State did

little from the PHP program’s inception in 1972 to 1975

to reform the program. Investigative reports on abuses

and fraud were ignored, as were medical quality audit

findings. The State failed to scrutinize the role of consultants. Program contract managers were rotated so

frequently that none spent enough time working with

specific plans to learn enough about each to manage

them properly. The State had no method to objectively

monitor quality of patient care, nor did it develop, in

violation of its own regulations, an actuarially based

reimbursement rate.

Federal response to this situation came late in 1976

through the Health Maintenance Organization Act

amendments, which required that all PHPs receiving

Medicaid funds be federally qualified HMOS. This

forced the California PHPs to include the scope of

118
Appendix E—California Prepaid Medi-Cal Health Plans • 119

federally mandated plan benefits and to be approved

by the Department of Health, Education, and Welfare

(now the Department of Health and Human Services)

as a condition for continuing in the California Medicaid program,

Some PHPs did not seek Federal qualification and

dropped out of the program. Other plans qualified,

or sought qualification. The State concurrently implemented tougher regulations for certification, imposing standards in some areas that were even more stringent than Federal guidelines:

● new regulations, paralleling the Federal HMO legislation and strengthening the State’s existing regulations, were promulgated;

Ž a new standard contract between the State and

individual plans was developed, better improved

performance standards were adopted, and a State

staff team approach to contract management was

instituted;

● standards for the evaluation of quality of care

were established; and

● the process by which contracts were renewed was

totally revamped.

These efforts and the 1976 Health Maintenance Organization Act amendments had the effect of reducing the number of PHPs with State Medicaid contracts

from 26 to 12.

In addition, the California legislature passed and the

Governor signed in 1977a new law aimed at responding to problems identified by congressional investigators and others. For example, the new law prohibited certain types of marketing practices. Responding to the problem of complicated corporate structures,

the law required the prime PHP contractors to manage

themselves and prohibited subcontracting for management. The statute prohibited interentity conflicts of interest on the part of plan officials. In addition, broad

requirements were established for disclosure by plan

officials of ownerships’ interest and reimbursement.
Appendix F.—Supplementary Medical Insurance for

Medicare Beneficiaries

Background

Elderly people have a disproportionate share of all

personal health expenditures. Persons aged 65 and over

are only about one-fifth as numerous as those aged

19 to 64, but their total personal health care expenditures are more than half as large as the total for the

population aged 19 to 64. Although the aged represent only about 11 percent of the population, they account for over 29 percent of all personal health expenditures (131).

These figures reflect the more frequent illnesses of

the aged and the greater expenses involved in their

care, which occurs primarily in a hospital setting. Aged

persons are more than four times as likely to have their

activity limited by chronic health conditions than are

those under 65. The aged are hospitalized at 2% times

the rate for persons under age 65, and their average

length of stay is almost twice that of other persons

(261).

The response of Congress to these needs was the

enactment of the Social Security Amendments of 1965,

establishing the Medicare program and Medicaid program. As enacted, the Medicare program contained

two parts: a hospital insurance program (Part A) and

a supplementary medical insurance plan (Part B).

The hospital insurance program provided protection

against the costs of inpatient hospital services, posthospital extended care, post-hospital home health services, and outpatient hospital diagnostic services for

beneficiaries under the Social Security and Railroad

Retirement systems when they reach age 65. Each of

these benefits was accompanied by deductibles and/or

coinsurance payments by which the beneficiary shared

in the costs of health services provided. Limitations

on covered services were specified. In addition, Congress included provision for increases in deductible

amounts for inpatient hospital and outpatient hospital

diagnostic services to keep pace with increases in

hospital costs.

Medicare and “Gaps” in Coverage

By design then, Medicare does not cover all health

care expenses incurred by the elderly. As it evolved

through the legislative and policymaking process in the

1960’s, Medicare assumed many of the characteristics

of private health insurance at that time, focusing on

the payment of medical bills during periods of acute

illness. Medicare, however, was intended to serve as

a core health insurance program which the elderly poor

could augment with Medicaid; other senior citizens,

depending on their individual needs and resources,

could augment Medicare through private health insurance.

Despite increased Federal spending over the years

for both Medicare and Medicaid, for several reasons

a growing number of senior citizens have turned to

private health insurance for protection. For example,

the Medicare cost-sharing requirements have risen at

a much faster pace than cost-of-living increases provided to the elderly by Social Security. In addition,

medical services reimbursed by Medicare are geared

more toward episodic, short-term, acute illness than

toward chronic, long-term disorders prevalent in the

elderly population. Besides deductibles and coinsurance provisions, Medicare also does not pay for

catastrophic, custodial, dental, or eye care. Therefore,

there are important “gaps” in Medicare’s coverage for

the elderly.

These problems were further compounded by health

care costs that generally outpaced inflation in other

sectors of the economy, and a 15-percent decrease in

this time period in the number of physicians who accepted Medicare patients on “assignment” (i.e., the

physician agrees to accept full payment from Medicare

for their services. When the physician does not accept

assignment, the elderly patient is responsible for the

difference between what Medicare will pay and what

the doctor charges for a particular service).

By the mid-1970’s, Medicare coverage had eroded

to only 38 percent (compared with 50 percent in 1969)

of the health care costs of the elderly. Fearful of the

financial hardships of poor health, and confused by

a complex benefit structure (see table F-1) that left

“gaps” in their coverage, the elderly increasingly purchased supplemental, or “Medigap,” insurance policies. By 1977, approximately 66 percent of the elderly

population—15 million of the Nation’s 23 million

senior citizens—had at least one health insurance

policy to supplement their Medicare benefits (267).

Private Health Insurance and

Its Problems

As evidenced by the discussion in the preceding section, the elderly had a legitimate concern regarding

Medicare and its ability to adequately address their

financial needs during times of illness. The result was

a profusion of Medicare supplemental or Medigap policies that, because of the complexity of Medicare ben120
Appendix F—Supplementary Medical Insurance for Medicare Beneficiaries ● 121

Table F-l .—Medicare Benefits and Limitations, 1981

Kind of care Medicare pays Patient must pay Comment

Part A—hospitalization Days 1430

Days 60-90

Days 90-150

After 150 days-no coverage

Initial deductible ($204)

Daily deductible ($51)

Daily deductible ($102)

For all care

Adjusted annually

Adjusted annually

Adjusted annually

Reserve days (60) usable only once

Care must be under doctor’s orders and

only be available in hospital

Only 190 days of care

available in lifetime

Must be in Medicare certified skilled

nursing facility (SNF)

All five provisions must be met for

reimbursement (including prior

hospitalization)

No coverage for custodial care

No coverage for private duty nursing or

first 3 pints of blood

Patient must meet six conditions (including prior hospitalization or SNF care)

Does not cover full-time nursing care at

home, drugs, meals and homemaker

services

Must be confined to home and be under

doctor’s orders

Part A—psychiatric

hospitalization

Part A—nursing homes

skilled nursing care

Days 1-90

After 190 days-no coverage

Days 1-20 total

Days 20-100

Initial and daily deductible

For all care

Nothing

Daily deductible ($25.50)

After 100 days-no coverage For all care

Part A—home health

care

100 visits in 12-month period

Total cost of care for part-time

skilled nursing, physical therapy and several other

services

For most other home health care

Part B—home health

care 100 visits in a calendar year $60 (Part B yearly deductible)

and all noncovered services

provided

Patient must meet four conditions to

obtain reimbursement (including must

be confined to home and be under

doctor’s orders)

Does not require prior hospitalization

Can provide coverage after 100 visits

under Part A

Pays for doctors services, outpatient

hospital care, outpatient physical therapy and speech pathology services,

and other services

Reasonable charge is lowest of

customary, prevailing, or actual charge

Part B—physician and

other medical services

Cost of care: except Initial deductible ($60/yr) and

20% of all charges above $60

(determined to be reasonable

and covered by Medicare in a

calendar year)

Outpatient mental

illness

Ambulance

transportation

$250/yr All cost above $250

Most All other costs Available only when other forms of

transport would endanger patient’s

health

Drugs

Immunizations

If drugs must be administered

If required for treatment and

ordered by physician

Jaw surgery and setting

fractures only

Nothing

Nothing

Nothing

All other drugs

All other times

Dental care All other costs

Dentures

Hearing and eye exams

Eyeglasses and hearing

aids

Routine physical exams

Most routine foot care

Chiropractor’s services

Prosthetic devices

Blood

Total cost

Total cost

Total cost

Nothing

Nothing

Manual manipulation of spine

Most

Most

Total cost

Total cost

All other costs

All other costs

For first 3 pints Some coverage under both Part A and

Part B

Medical supplies Dressings, splints, and casts All other costs

SOURCE: T. Van Ellet, Medlgap:State Responses to Problems WWI Hea/th Insurance for the Elder/y (Washington, D. C.: Intergovernmental Health Policy Project, George

Washington University, Oct. 30, 1979).

efits, were infinitely varied, with many options regard- Private health insurance policies marketed to the

ing policy benefits and price. Comparison shopping elderly have concentrated on the cost sharing for

among the options, however, was confusing to many covered services, often not including open-ended or

senior citizens, with premium rate structures some- catastrophic expenses, and have generally fallen into

times “unfathomable” (140). three categories:
122 ● Medical Technology Under Proposals To Increase Competition in Health Care

●

●

●

Medicare supplemental policies, generally referred

to as “wraparound” coverage, usually pay some

or all of Medicare’s deductibles and copayments.

Some policies may also pay for some services not

covered by Medicare.

Indemnity policies usually pay a fixed amount of

money for each day of hospitalization. Some indemnity policies are attractive to the elderly

because they pay in addition to other insurance

held by the policyholder, providing extra income

in times of illness. However, benefits are not

structured to reflect the actual charges for an inpatient stay in a hospital. ,

Limited policies or “dread disease” policies are

another form of indemnity insurance. These policies provide benefits for only a single disease,

such as cancer, or a group of specified diseases,

and most benefits are keyed to hospitalization.

Many States have banned limited or dread disease

policies, which generally have a low rate of return

to elderly policyholders.

Serious problems in the private insurance marketplace surfaced in a series of congressional hearings in

1978 on Medigap issues, and also in a report by the

Federal Trade Commission (FTC) in July of that same

year. Widespread company and individual agent

abuses and problems in the sale of health insurance

to the elderly population were noted by investigators.

The

●

●

●

●

●

●

●

●

following were identified (267):

lack of policy standardization (complicating comparison shopping);

the purchase of duplicate/excessive coverage (in

most cases, worthless to the holder);

lack of policy clarity (small print, numerous exclusions, policy riders, and a plethora of medical

and legal terminology);

low loss ratios (i.e., the percentage of premiums

returned to the policyholders in the form of benefits), documented in table F-2, for preexisting

conditions;

clauses for preexisting conditions;

claims-handling disputes;

mail order insurance fraud; and

deception, fraud, and high-pressure sales techniques by insurance agents o-n a widespread and

nationwide basis.

At least 23 percent of those who purchase Medicare

supplements were thought to have some duplicative

insurance coverage.

It was further revealed that States had done little

or nothing about these problems. Inadequate laws,

regulations, and resources (i.e., money and personnel)

kept many States from aggressively disciplining companies and agents engaged in fraudulent practices

Table F-Z.—Returns on All Insurance as Compared

With Medicare Supplemental Policies,

Selected Companies, 1977

Percent return

Percent return on Medicare

Company on all insurance supplements

Mutual Protective Insurance . . 35 22

Medico Life. . . . . . . . . . . . . . . . . 28 25

Mony . . . . . . . . . . . . . . . . . . . . . . 66 28

New York Life . . . . . . . . . . . . . . 28.7

American United Life . . . . . . . . 83 28.9

National Casualty Co. . . . . . . . . 59 30

American Progressive. . . . . . . . 47 33

National Security Insurance . . 21 35

Reliable . . . . . . . . . . . . . . . . . . . . 37 36

Constitution Life . . . . . . . . . . . . 78 37

Old American . . . . . . . . . . . . . . . 45 38

Pioneer Life of Illinois . . . . . . .

Liberty National Life . . . . . . . . .

Pacific Mutual . . . . . . . . . . . . . .

Businessmen’s Insurance . . . .

American Exchange Life . . . . .

Commercial State Life . . . . . . .

Union Bankers . . . . . . . . . . . . . .

Country Life . . . . . . . . . . . . . . . .

Aid to Lutherans . . . . . . . . . . . .

All American Casualty . . . . . . .

Continental National -

America. . . . . . . . . . . . . . . . . .

Bankers Life & Casualty. . . . . .

Guarantee Reserve Life . . . . . .

American National. . . . . . . . . . .

American Variable Annuity . . .

Chesapeake Life . . . . . . . . . . . .

Guardian life Insurance. . . . . .

Mutual Benefit Life . . . . . . . . . .

Banker’s (Iowa). . . . . . . . . . . . . .

Home Life. . . . . . . . . . . . . . . . . .

Nationwide . . . . . . . . . . . . . . . . .

Durham Life . . . . . . . . . . . . . . . .

Life of Virginia. . . . . . . . . . . . . .

Metropolitan . . . . . . . . . . . . . . . .

National Life and Accident . . .

Provident Mutual . . . . . . . . . . . .

Blue Cross/Blue Shield. . . . . . .

40

46

65

99

43

51

53

71

44

87

82

67

62

81

65

90

82

72

82

76

79

67

78

59

79

—

39

40

40

43

44

17

48

49

50

52

55.4

57

57

57.5

63

65

66

70

75

77

78

79

82

63

85

88

91

aFlgure9 in this column estimated.

SOURCE: T. Van Eliet, Mad/gap: State Responses to Prob/ems W/th Health lnswance for the Elderly (WSshlngton, D. C.: Intergovernmental Health

Policy Project, George Washington University, Oct. 30, 1979).

(267). In testimony before the House Select Committee on Aging (262), only 11 States reported having

fined or disciplined companies for health insurance

abuses. In cases when fines were issued, they tended

to be minimal.

Interim State and Federal Responses

Every State had in place in 1978 an unfair trade practices act applicable to the business of insurance. Regulation of the industry has been, in fact, almost exclusively the responsibility of the States by virtue of

the McCarran-Ferguson Act of 1945 (ch. 20, 59 Stat.).

The act excluded the “business of insurance” from the

Sherman, Clayton and the FTC acts, and left regula-
Appendix F—Supplementary Medical Insurance for Medicare Beneficiaries ● 123

tion of the industry to State law. In place, then, were

laws and regulations to prohibit fraud, abuse, or misrepresentations in the marketing of Medicare supplementary insurance.

As previously discussed, though, congressional

hearings revealed the shortfall of many State laws,

regulations, and their attendant enforcement. The

hearings heightened Federal interest, and further

Federal involvement was advocated on several points.

First, the Federal Medicare program created the Medicare supplementary insurance business. Secondly, the

area merited consideration in terms of whether there

was a special need for consistency in regulatory approaches such as disclosure, standardization, and

labeling. Different systems in every State would impose added costs of compliance on insurers and might

confuse consumers, many of whom move at or after

retirement. Lastly, many plans were sold by mail, and

some States could not enforce Medicare supplementary regulations against mail order insurers not licensed

in their States (64,262).

Several bills were introduced in the 96th session of

Congress addressing some of the problems surrounding

the marketing of Medicare supplements. Generally, the

legislation proposed to increase the Federal Government’s role in monitoring and controlling the private

health insurance marketplace (267).

The States collectively took initiative in this area as

well. The National Association of Insurance Commissioners (NAIC), a voluntary association of the chief

insurance regulatory officials of the States, has traditionally played an important role in developing and

revising State insurance statutes and regulations. In

1978, NAIC established a task force to study the marketing of health insurance to the elderly (236). As a

result of the study, NAIC promulgated standards in

June 1979 as safeguards for insurance purchasers in the

“Model Regulation To Implement the Individual Accident and Sickness Insurance Minimum Standards

Act” (236). The model covered standards for policy

provisions, minimum standards for benefits, loss ratio

standards, disclosure standards, and administrative

procedure standards.

Primarily on the basis of two provisions contained

in the NAIC model law, Congress added section 1882

to title XVIII of the Social Security Act. Enacted on

June 9, 1980, the statute (the Social Security Disability Amendments of 1980, Public Law 96-265) was an

effort to create an incentive for States to upgrade their

regulation of Medicare supplement health insurance

policies. Basically, the law is fourfold. It provides for:

1) the creation of the Supplementary Health Insurance

Panel, 2) the establishment of a Voluntary Certification Program, 3) creation of criminal penalty provisions, and 4) a study of the Medigap regulations (248).

The New Federal “Medigap Law”

As originally proposed, under section 1882, the Secretary of the Department of Health and Human Services (DHHS) would have determined whether individual State programs met or exceeded the standards

contained in NAIC’S June 1979 Model Regulation.

However, recognizing the traditional role of the States

in regulating the business of insurance, Congress

amended its original proposal to give recognition to

the expertise in insurance existing at the State level.

In its final form, section 1882 established the Supplementary Health Insurance Panel, composed of four

State Insurance Commissioners appointed by the President and chaired by the Secretary of DHHS, as the

body responsible for determining whether State Medicare supplemental insurance regulatory programs

meet or exceed the minimum standards set forth by

the act. A provision was also added requiring the panel

to report to Congress by January 1, 1982, those States

unlikely to have in place by July 1, 1982, a program

that meets or exceeds the minimum standards.

On November 6, 1980, Commissioners William H.

L. Woodyard 111 of Arkansas, Joseph C, Mike of Connecticut, Roger C. Day of Utah, and Susan M. Mitchell

of Wisconsin were appointed to serve on the Supplementary Health Insurance Panel. Tera S. Younger,

Director of the Bureau of Program Operations in the

Health Care Financing Administration (HCFA), is the

designated representative of the Secretary and serves

as the panel’s chairperson.

The panel has reviewed the laws and regulations

governing Medicare supplemental insurance in each

State and the District of Columbia. These reviews were

conducted in open meetings, and each State was invited to speak on behalf of its own program. During

the review, a vote was taken to render an advisory

opinion on the program, approve the program, or approve the program subject to certain conditions. Table

F-3 summarizes the minimum Federal standards used

by the panel in making its determinations of individual

State compliance.

Advisory opinions were rendered at the request of

a State so that it could determine where its program

stood in comparison to the minimum standards, without having the panel formally act on the regulatory

program. Advisory opinions were also issued in instances where a State’s regulatory program required

an extensive overhaul to bring it into compliance and

the State wished the paneI’s guidance.

Programs approved by the panel meet or exceed the

Federal minimum standards. A program approved

conditionally by the panel was one in which there was

general compliance with the Federal minimum standards, but some deficiencies existed, or complying
124 • Medical Technology Under Proposals To Increase Competition in Health Care

Table F-3.—Federal Standards for State Regulation

of Medicare Supplementary Insurance

Minimum Federal Standads

6 months or less limitation of preexisting condition

Applies to group and individual policies

Loss-ratio requirements:

75 percent group

60 percent individual

Equivalent definitions as contained in NAIC model of:

Hospital

Medicare

Benefit period

Accident

Physician

Nurse

Skilled nursing facility

Sickness

Medicare eligible expenses

Automatically changes Medicare cost-sharing amounts

Limitations of benefits do not extend beyond

June 1979 NAIC model

Requires policy or combination of policies to cover both

Part A and Part B minimums

Requires coverage of Part A hospital coinsurance from

61 to 90 days

Requires coverage of Part A hospital coinsurance during

lifetime reserve days

Requires coverage of 90 percent of Part A expenses after

exhaustion of lifetime reserve to a lifetime minimum of

365 additional days

Requires coverage of 20 percent of eligible expenses under

Part B regardless of hospitalization subject to $200

deductible and maximum of $5,000 per calendar year

Free-look provision-refund available within 10 days of policy

delivery and 30 days for direct response

Delivery of buyer’s guide and written receipt at time of

application. Direct response by the time policy is delivered

Outline of coverage requirements

Replacement requirements

Prohibits use of terms “Medicare Supplement,” “Medigap”

and words of similar import unless the policy meets these

minimum standards

SOURCE: Department of Health and Human Services, Health Care Financing Administration, “The Supplemental Health Insurance Panel’s Report to

the Committee on Finance of the Senate and the Committees on

Energy and Commerce and Ways and Means of the U.S. House of

Representatives,” unpublished, Baltimore, Md., Feb. 2, 1982.

legislation or regulations were prepared but were not

yet in effect. States with conditionally approved programs were asked to modify them in a manner specified by the panel to achieve compliance. Once the

modification was accomplished, the condition was

removed and full approval was granted.

A State program was judged not expected to be in

compliance with the standards only after the panel had

issued an advisory opinion or a conditional approval

and the State had declined to make the changes necessary to achieve compliance.

On the basis of the results of these reviews, the panel

determined that the programs of 45 States and jurisdictions were expected to meet the Federal minimum

standards by July 1, 1982. Ten were not expected to

comply by that date. A listing of the status of each

State program is found in table F-4.

Of the 45 States that the panel expected to be in compliance by July 1, 1982, 22 require modifications to,

or finalization of, their Medigap regulatory programs

Table F-4.—State Compliance With Federal Minimum

Standards for Supplementary Health Insurance

States expected to meet the Federal mininum standards by

July 1, 1982

A,

B.

c.

States approved:

1. Alabama 13. Nebraska

2. Alaska 14. New Hampshire

3. Arizona 15. North Carolina

4. Arkansas 16. North Dakota

5. Colorado 17. Oregon

6. Florida 18. Tennessee

7. Georgia 19. Texas

8. Indiana 20. Utah

9. Iowa 21. Vermont

10. Kansas 22. Virginia

11. Mississippi 23. West Virginia

12. Montana

States conditionally approved or given advisory opinions

which are expected to be in compliance by July 1, 1982.

The panel will continue to review the progress of these

States to assure they finalize their programs or make the

required modifications:

1. Connecticut 11. Minnesota

2. District of Columbia 12. Missouri

3. Hawaii 13. New Mexico

4. Idaho 14. Nevada

5. Illinois 15. Ohio

6. Kentucky 16. Oklahoma

7. Lousiana 17. South Carolina

18. South Dakota

9. Maryland 19. Washington

10. Michigan 20. Wisconsin

States from which the panel has not received a formal submittal but which are expected to be in compliance by

July 1,1982. The panel will continue to review the progress

of these States to assure they finalize their programs:

1. Delaware

2. Puerto Rico

States not expected to meet the Federal minimum standards

by July 1, 1982

A.

B.

—

States conditionally approved or given advisory opinions

which are not expected to be in compliance by July 1, 1982:

1. California 4. Pennsylvaniaa

2. Massachusetts 5. Rhode Island

3. New Jersey 6. Wyoming

States from which the panel has not received a submittal

but which are not expected to be in compliance by July 1,

1982:

1. New York 3. Virgin Islands

2. Guam 4. American Samoa

apenn5ylvania’5 rqulation is effective Sept. 20, 19S2. The Panel recommends

that the Federal Voluntary Certification Program not be implemented In

Pennsylvania.

SOURCE: Supplemental Health Insurance Panel, “Report to the Committee on

Flnanceof the Senate and to the committees on Energy and Commerce

and Waya and Means of the House of Representatives,” Department

of Health and Human SewIces, Washington, D. C., Feb. 2, 1982.
Appendix F—Supplementary Medical Insurance for Medicare Beneficiaries • 125

before they will fully comply. The panel intends to

conduct a continuing review of these States to monitor

their progress and confirm their ultimate compliance.

A continuing review of those States which are not now

expected to have a program which meets the Federal

minimum requirements will also be conducted. This

will enable the panel to provide timely consideration

to any State which may decide to adopt the minimum

standards at some future date (59).

On July 1, 1982, the Medigap Operations Staff

(MOS) in HCFA was to implement the Voluntary Certification Program in those States and territories not

yet having a panel-approved regulatory program. This

program will allow insurers to submit Medigap policies

for review. It will then be determined whether these

policies meet or exceed certain loss-ratio requirements

set forth by law and the minimum requirements prescribed by NAIC. If certification is granted by the

Secretary of DHHS, the insurers will be given permission to place a Federal emblem on these policies. MOS

will review these policies yearly to determine whether

they should be recertified.

In regard to the criminal penalty provisions included

in the law, the HCFA Regional Offices (ROS), the Office of Inspector General, the Department of Justice,

the State Insurance Departments, and MOS are all

working together to implement and monitor these

penalties. Quarterly, ROS are required to submit a

report to MOS outlining complaints received and actions taken concerning Medigap abuses.

Section 1882(f)(2) of the law required the Secretary

of DHHS to submit a report to Congress no later than

July 1, 1982, and periodically thereafter, evaluating

the effectiveness of the Voluntary Certification Program and the criminal penalties established under this

section of the law. MOS will be responsible for preparing this report as well as developing and giving DHHS

recommendation as to whether or not the certification

program and criminal penalties should be continued

(248).

In compliance with Medigap legislation, HCFA’S Office of Research and Demonstrations in January 1982

began a study of the comparative effectiveness of State

approaches to Medigap regulation. The study, to be

conducted in six States, will be used to address whether

a mandatory Federal regulatory program is needed to

assure marketing of appropriate types of Medicare supplemental policies, whether there are ways in which

State regulations can be enhanced, and whether there

is a need for standards for other types of policies sold

to Medicare beneficiaries. The six States, representative of the regulatory spectrum, selected as survey sites

are Florida, New Jersey, Wisconsin, California, Washington, and Mississippi.

As an addition to this study, the National Center

for Health Services Research, in cooperation with

HCFA, will conduct a supplemental survey to determine the preference and willingness to pay for longterrn care insurance (117).

Types of State Regulatory Action

As of early 1979, only a few States such as Wisconsin had taken truly comprehensive action aimed at

alleviating Medigap abuses. Over the last few years,

though, States have passed meaningful new initiatives

to curb abuses. New Jersey, for example, has banned

all cancer insurance policies. Massachusetts has

established its own dread disease lists, and has set

rigorous standards for such policies. Most States have

implemented regulations focused either on the insurance provider or on affecting consumer behavior,

such as establishing a particular minimum standard

(e.g., loss ratios) or strengthening disclosure requirements. The State experience is summarized below

in broad areas of needed Medigap reform.

Standardization of Coverage

Several States have taken steps to classify and standardize the kinds of Medicare supplements that can be

sold in a State. These steps can help to establish

minimum levels of coverage provided by a policy and

make it easier for the purchaser to shop for or compare similar policies.

The rationale for the standardization approach is

that consumers are unable to choose intelligently

among policy forms if the choices available are too

numerous and varied. By allowing only a limited number of standard policies, the regulator hopes to enhance

price competition by holding other product variables

more or less fixed. The standardization approach implicitly assumes that there is a limit to the value of having free competition with regard to insurance product

design because consumers have difficulty choosing intelligently among a large number of products with differing configurations.

Each State has taken a different approach, California has established three classes of Medicare supplements: in-hospital expenses only, in- and out-ofhospital expenses, and catastrophic Medicare supplementary coverage. A policy must be appropriately labeled, but no attempt is made to “grade” the

policies within a category.

Wisconsin, generally considered a leader in its innovative approaches to the regulation of Medicare supplements, has four clearly defined categories of

Medicare supplement insurance and minimum levels
126 Ž Medical Technology Under Proposals To Increase Competition in Health Care

of coverage for each category. The policies carry a

clear designation of the category on the first page of

the policy. Each policy also contains a “caption” which

explains the four classes of coverage. All policies approved for sale in Wisconsin must adhere to the standards for one of the four classes of coverage.

In regulations filed in September 1979, Massachusetts established three separate classes of Medicare

supplement policies. Unlike Wisconsin or California,

however, Massachusetts strictly limits each class of

policy as to benefits. Each insurer must offer the exact

benefit package which defines a certain class of policy—no more and no less.

Minimum Standards

Many States have specific laws or definite portions

of their minimum standards laws that affect the sale

of Medicare supplements. These laws vary considerably in their approach, scope, and focus of their

provisions.

The thrust of the minimum standards approach is

to assure that policies offered for sale provide coverage

which is “meaningful” in relation to the purposes for

which it is to be sold. Prospective purchasers cannot

be expected to recognize all of the health risks they

face or to be able to put probability, severity, or cost

valences on each risk. A policy that appears to be very

complete and generous in its coverage may, in fact,

be quite limited when measured by reference to the

actual risks the insured faces.

Some of the States with noteworthy minimum

standards for Medicare supplements include California, Illinois, Massachusetts, Michigan, Pennsylvania,

and Wisconsin. California and Wisconsin are often

cited as having some of the most comprehensive minimum standards. Several States also enacted legislation authorizing or directing the insurance commissioner to promulgate minimum standards for Medicare

supplements.

Regulation of the Economic Value of Policies

Another approach, diametrically opposed in theory

to standardization, is to regulate the economic content of policies by controlling the price which insurers

can charge for them. This may take the form of direct

rate regulation or its indirect counterpart, regulation

of policy loss ratios (i.e., the percentage of premiums

returned to the policyholders in the form of benefits).

Many States have now imposed loss-ratio requirements on Medicare supplement policies, some higher

than the “benchmark” of 60 percent set by Public Law

96-25 for policies sold to individuals. Minimum Medicare supplement loss ratios range from a low ratio of

60 percent to a high minimum loss ratio of 70 percent

for group policies in Connecticut.

There is controversy as to whether loss-ratio information is a useful tool for consumers to employ in

comparing policies. The prevalent thinking is that the

complexities of loss ratio analysis are too great for

laymen to make intelligent use of such ratios as an index of economic value. Loss-ratio monitoring, then,

in most of the States in which it is used, has application only as between the insurers and the regulators;

it is a regulatory tool rather than a device for improving consumer choice. It might be noted, however, that

until mid-1981, Wisconsin included loss-ratio information among the data that it periodically publishes for

use by prospective purchasers of Medicare supplementary insurance.

Disclosure Requirements

A predominant approach to Medigap regulation is

the provision of information to consumers, either

directly or indirectly. Many States have improved their

disclosure requirements in an attempt to give the consumer every opportunity to make an “informed”

choice. At least nine States mandate the use of a form

that outlines benefits and gaps in coverage. Several of

these States, including California, Colorado, and

Pennsylvania, require the use of this form for all types

of health insurance sold to the elderly. Washington,

Oregon, and New Mexico require a disclosure form

only for Medicare supplements.

The States vary considerably in their disclosure requirements. For example, disclosure forms differ in

their structure, content, and use. California is unique

in that it requires the use of a separate disclosure form

for each of its three categories of Medicare supplements, as well as hospital indemnity and dread disease

policies. States such as Colorado and Connecticut, as

part of their disclosure requirements, attempt to warn

applicants if the sale of any new insurance replaces or

adds to existing coverage. Most States (e.g., Montana,

New Mexico, Oregon) require delivery of the disclosure form no later than at the time of delivery of

the policy. At least one, Wisconsin, is known to mandate the use of a disclosure form at the time of sale.

Very few States require the use of consumer information pamphlets—e.g., Wisconsin at the time of sale

and Michigan at the time of delivery. About half of

the States do have consumer information pamphlets

available for senior citizens. These brochures are normally made available upon request to those over 65

or through general distribution channels. In addition,

NAIC and HCFA have prepared a brochure on private

health insurance sold to the elderly that is available

to all Medicare beneficiaries (233,267).
Appendix F—Supplementary Medical Insurance for Medicare Beneficiaries ● 127

Through its regional offices and with State insurance

departments, HCFA also conducts a nationwide training program for volunteers to assist Medicare beneficiaries wishing help in considering the purchase of

private health insurance to supplement Medicare coverage. As of October 1981, HCFA had conducted over

275 Medigap training sessions, for over 13,000 individuals in every State. HCFA’S Office of Public Affairs is presently preparing a public service campaign

to acquaint Medicare beneficiaries and other affected

individuals of the Medigap law and State regulatory

programs concerning Medicare supplements. This

campaign will be nationwide in scope and provide all

entitled beneficiaries with information to help them

with their decision to purchase private supplemental

health insurance (131).

Strict Enforcement

Even before the Medigap “scandals” of the late

1970’s, most States had on their books general laws

prohibiting fraudulent or unethical sales practices and

unfair or deceptive advertising. They had also had

authority to revoke licenses or impose other disciplinary measures on companies or agents found

guilty of unethical or unprofessional conduct. Thus,

some States reacted to the Medigap issue by simply

stepping up their investigatory and disciplinary actions, communicating unequivocally to the insurance

industry that abuses will not be tolerated,

Several States, either spontaneously or under pressure from media publicity, have launched substantial

investigations to uncover and punish Medigap abuses.

At times, these campaigns have focused on particularly

abusive companies; in other cases, they have been

directed at individual agents. Fines, reprimands, and

revocation or suspension of licenses, have been the

regulatory weapons employed. Kansas has augmented

its strict enforcement policies in recent years with a

relatively sophisticated computer system for tracking

and analyzing complaint, investigation, prosecution,

and sanction data (233).

Conclusion

The last 5 years have been a period of extensive

change in the buying, selling, and regulating of

Medigap policies. How effective these changes have

been, though, is still largely speculative.

The Federal role—for all its hearings, reports, and

organizational structure—still represents a basically

voluntary approach to the Medigap problem. Sen.

Max Baucus (D-Mont. ) has stated that the best possible effect of Federal voluntary efforts “would be a

much better informed Medicare consumer . . . (that

would) make it easier for buyers to identify good insurance policies and make better comparisons before

buying.” The American Association of Retired Persons, however, has warned that because the program

is voluntary, there is potential for abuse (131). It urged

consideration of future mandatory certification requirements with set standards for comparison if present efforts are less than adequate.

States, the traditional regulators in the insurance

area, have passed new legislation and implemented new

regulations to curb established patterns of abuse. The

priority given to such enforcement in each State is not

known. It is clear, however, that relying on a Stateby-State approach can be expected to result in a diverse

approach to the problems, with a corresponding variation in results.

A recent study by Arthur D. Little (9) identified the

population 62 years and older and Medicare recipients

as demonstrating the lowest level of knowledge of any

demographic group in several categories of health insurance information, including cost of coverage and

continuance provisions. The study concluded that the

population 62 or over and Medicare recipients demonstrated poor knowledge of conditions of coverage

for Medicare supplementary policies, that this group

could generally not select the policy that provided

them with better financial protection, and that a

“substantial proportion” believed that more than one

supplementary policy is needed to cover the gap in

Medicare. The development of health insurance education/information materials and programs for this population remains an important need.

It should finally be noted that the heart of the

Medigap problem probably remains with the Federal

Medicare program itself. Medicare’s complex benefit

structure confuses many a consumer, while the continued increase in its deductible and coinsurance

clauses worries many a consumer. By paying only

about 38 percent of the health care costs of a largely

fixed-income group, the Medicare program has understandably continued to generate a market for multiple varieties of supplemental insurance. These supplemental polices have, at the same time, mostly concentrated on the cost sharing for covered services. Even

if new regulatory and consumer information strategies

alleviate recent Medigap problems, open-ended or catastrophic expenses may pose a substantial problem for

elderly people.

The Medigap experience, from a policy perspective,

can be used by proponents of greater plan competition as an argument for uniform, standard, simple, yet

fairly comprehensive benefit packages for health care

consumers, especially the aged. Advocates of greater
128 Ž Medical Technology Under Proposals To Increase Competition in Health Care

competition in health care—including proponents of ity and cost. Even under the most benign of intentions,

both greater patient cost-sharing measures and greater complex base plans such as Medicare may result in incompetition among plans—can also point to Medigap teracting with and ultimately subsidizing supplemenproblems as a lesson for avoiding two levels of health tal plans.

insurance that only serve to increase system complex-
Appendix G.— Health Systems Agency of

Northern Virginia

The Health Systems Agency (HSA) of Northern Virginia, now in its seventh year of operation, represents

an interesting case of the role of HSAS in encouraging

competition and the provision of information. This appendix provides a brief summary of the role of health

planning agencies in encouraging competition and consumer choice, with specific examples from the northern

Virginia agency.

HSAS primarily function as planning and regulatory

agencies and have seldom viewed promoting competition as a primary mission. Although the 1979 amendments (Public Law 96-79) to the National Health Planning and Resources Development Act (Public Law

93-641) called on State and local Planning agencies—

HSAS and State Health Planning and Development

Agencies (SHPDAs)—to make the encouragement of

competition one of their priorities in their review activities and in their community development efforts,

many agencies have viewed this charge with hesitation and question.

In a recent survey on this subject, several agencies

reported that without changing the present reimbursement system, little could be achieved in terms of increased competition (175). Other agencies argued that

the tools available to planning agencies are so limited

that little can be expected, Since the 1979 amendments,

approximately 30 percent of State and local health

planning agencies reported that they have changed

their certificate-of-need (CON) review criteria to promote competition.

In another survey conducted by the Intergovernmental Health Policy Project (131), 8 out of 45 States

responded that they had changed their CON program

to foster competition. Types of changes that have occurred include comparative reviews of applications;

exclusions for health maintenance organizations

(HMOS); dual choice for State employees; revisions

in CON review criteria, administrative procedures,

and dollar thresholds; procompetitive insurance laws;

and better public information about the market.

The HSA of Northern Virginia conducted several

activities in which price competition among health care

providers was supported. In 1980, the HSA focused

attention on end-stage renal disease services. At that

time, a proprietary corporation, run by subsidiaries

of National Medical Care, Inc. (NMC), operated all

of northern Virginia’s outpatient maintenance kidney

dialysis services. The HSA of Northern Virginia attempted to (80):

increase the number of physicians from which

kidney disease patients could choose in the existing outpatient facilities;

confront restrictive policies that limited medical

staff privileges to physicians’ owning or operating

the NMC dialysis facilities (new policies were set

to allow any qualified physician to treat a dialysis

patient);

encourage the development of new independent

dialysis services to reduce the domination of a

single proprietary corporation; and

encourage new services to base their charges on

the cost of providing services instead of the higher

Medicare fee, thereby promoting price competition.

To date, the HSA of Northern Virginia reports that

over one-half of the maintenance dialysis facilities have

changed their closed medical staff policies and that

NMC’S market share has decreased with the development of new and competing dialysis services.

An example of health planning activities aimed at

increasing consumer knowledge about health care services was the Northern Virginia HSA’S development of

the Northern Virginia Directory of Physicians, 1979

(194). According to Mark Epstein, the Assistant Director of the Northern Virginia HSA, consumers were experiencing difficulties in choosing physicians in such

a transient area. As a result, the HSA decided to compile a physician directory and contacted the Northern

Virginia Medical Society for assistance in designing the

questionnaire and in encouraging area physicians to

participate. Because of the State Medical Practices Act

restriction on physicians’ advertising, the medical

society initially did not get involved. The Northern

Virginia HSA then successfully persuaded legislators

to change the State law so that physicians were permitted to advertise. This cleared the way for the medical society’s and individual physicians’ involvement

(80).

In the directory, the following types of information

were collected:

Introductory information. —Type of practice (feefor-service or prepaid group practice, solo or

group), type of support services in office, sex of

physician.

Availability. —Appointment only, accepts new

patients, office hours, phone consultations, house

calls, waiting room time, language spoken, access

129

, -
130 ● Medical Technology Under Proposals To Increase Competition in Health Care

●

●

●

●

●

●

to transportation services and parking, handicapped accessibility.

Practice information. —Tests available in office

(complete blood count, etc.), fee and time for results, tests available in building.

Education, certification, and affiliation of physician. —Schools graduated from, specialty certification, hospital affiliation.

Fees and billing. —Standard fees; use of usual, customary and reasonable charges, credit card policies; complaints; billing policies. (Note: no specific fees were included in the directory. )

Health insurance. —Blue Cross/Blue Shield, Medicare, Medicaid, Medicare fee schedule as payment

in full, computes patients’ insurance forms at no

charge, bills insurance directly and waits for payment.

Counties covered.

Health maintenance organization information. —

practice information, availability, staff support

service.

The Northern Virginia Directory of Physicians,

while comprehensive in description, does not provide

actual physician fees, quality rankings, or comparisons

of services. Over 12,000 directories were disseminated

to the public at no cost. Owing to staffing limitations

and budget cutbacks, it is questionable whether the

directory will be updated. With the assistance of the

Fairfax County Office on Aging, the HSA has also

prepared a directory of nursing home services in northern Virginia.

In addition, the HSA of Northern Virginia collaborated with the Montgomery County (Md. ) Department

of Health Systems Planning, the District of Columbia

SHPDA, and the HSA of Southern Maryland in setting up the Metropolitan Tertiary Care Task Force to

study the regionalization of tertiary care services (80).

Cardiac surgery and cardiac catheterization were the

first technologies to be assessed. The purposes of the

study were: 1) to determine the Washington area’s capacity to perform cardiac catheterization and cardiac

surgery, 2) to assess if this capacity is sufficient to meet

the projected demand, and 3) to identify where these

services should be located.

HSAs first analyzed the heart disease mortality rates

for 1977. Wide variation was found in the heart disease

mortality rate per 10,000 population in the four planning areas: D.C. —31.7, Montgomery County—22.5,

northern Virginia— 17.2, and southern Maryland

16.3. They noted in their report that data on health

status are not adequate for predicting the need for cardiac catheterization services for the following reasons

(178):

I) sufficient data on the incidence of treatable heart

disease do not exist; 2) a single patient may require

repeated cardiac catheterizations to perform a variety

of tests (there presently are no data on the frequency

of repeat catheterizations); and 3) catheterizations to

substantiate negative findings are not reflected in heart

disease incidence or prevalence data.

Besides the difficulties with health status data, other

factors may affect future need for specialized cardiac

care services. First, the technology is constantly

undergoing change and innovation (e. g., intra-aortic

balloon assist and external cardiac assist devices.) The

use of beta blockers is another technological innovation that may influence the use of tertiary cardiac care

services. In addition, evidence regarding the effectiveness of coronary artery bypass surgery is insufficient

to warrant its consideration as a major treatment for

prolonging life for heart disease patients.

A technical advisory panel to the Tertiary Care Task

Force, made up of Washington D. C., area experts in

open-heart surgery and cardiac catheterization, estimated the number of surgical procedures that should

be performed to maintain an adequate volume for

quality care: 360 open-heart procedures by a single cardiac surgical team in a dedicated operating room and

200 in a multipurpose operating room (178). These

recommended utilization rates were then compared

with the surgical capacity and estimated number of

procedures at the seven Washington area non-Federal

hospitals in 1978: Georgetown University Hospital,

George Washington University Hospital, Howard University Hospital, Washington Hospital Center,

Washington Adventist Hospital, Fairfax Hospital, and

Children’s Hospital.

The Tertiary Care Task Force found that only three

hospitals—Washington Hospital Center, Fairfax

Hospital, and Children’s Hospital—were operating at

a sufficiently high volume to assure quality care, as

defined by the expert panel. None of the Federal

hospitals (Veterans Administration Hospital, Walter

Reed Army Medical Center, National Institutes of

Health Clinical Center, and National Naval Medical

Center) met the open-heart utilization standards. In

other words, the majority of Washington area hospitals were doing less than the recommended number

of cardiac procedures.

In addition to examining utilization as a measure of

quality (and cost), the task force also studied mortality

rates and suggested the following guidelines (178):

1. The mortality rate in the 30-day period following:

Ž adult open-heart surgery should not exceed 5

percent for coronary bypass surgery, and 10

percent for all other types of cardiac surgery

• pediatric heart surgery should not exceed 25

percent for patients under 1 year of age and

10 percent for all other pediatric patients (i.e.,

patients 1 to 14 years of age)
Appendix G—Health Systems Agency of Northern Virginia Ž 131

2. The mortality rate in the 24 hours following cardiac catheterization should not exceed 1 percent

for adult patients and 3 percent for pediatric

patients.

In 1978, the task force found the highest mortality

rates at Children’s Hospital (15 percent), Georgetown

University (10 percent), Howard University (10 percent), and Washington Adventist Hospital (8 percent)

(178). The high mortality rate at Children’s Hospital

may be due to the already high-risk infants that make

up a large proportion of the caseload. At Georgetown,

the high mortality rates may be due to the more complex valvular surgery performed there.

These findings, as reported by the Washington

press, criticized the heart surgery programs of the lowvolume, high-mortality hospitals (42). To improve this

situation, the task force recommended more cooperation and referral among area hospitals. It specifically

recommended that all pediatric cardiac surgery should

be performed at Children’s Hospital, and affiliations

among other facilities should be expanded since “the

demand does not appear sufficient to sustain six programs” (178). After this critical review of cardiac care

by health planning agencies, experts, and the press,

the press noted anecdotal reports of people who canceled surgery scheduled in low-volume hospitals (146).

This case illustrates the potential effect of information related to quality of care. Since publication of the

initial report in December 1978, several hospitals in

the metropolitan area have hired new cardiac specialists and increased their open-heart operations dramatically, bringing them within the acceptable range according to the cardiac guidelines (179). Only one hospital maintains a cardiac program below the acceptable utilization standards. Moreover, the mortality

rates at the hospitals with increased volumes have improved, while the hospital with the lowest volume

reports the highest mortality rate.
Appendix H.— Baltimore City Professional Standards

Review Organization

Background on PSROS

Professional Standards Review Organizations

(PSROS) were mandated in 1972 (Public Law 92-603)

to review the utilization and quality of Medicare,

Medicaid, and Maternal and Child Health services.

These private, nonprofit corporations were set up for

peer review and cost containment purposes. To

achieve their goals, PSROS are required to collect a

standardized set of data on each hospitalized Medicaid

and Medicare patient. These data include diagnoses,

procedures, average lengths of stay (ALOS), and mortality rates. Profiles of physician and hospital delivery

patterns can then be prepared.

PSROS are also required to conduct quality of care

reviews termed medical care evaluation (MCE) studies.

A specific diagnosis or procedure in one or more hospitals is compared with specific quality of care criteria

(recommended volume of procedures or indications for

surgery), and improvements are recommended. If, for

example, the PSRO determines that hospitalization or

surgery is unnecessary or ALOS excessively prolonged,

sanctions can be brought to bear against the hospital.

These may include not only complete reviews of admissions or lengths of stay, but also withholding of

Medicare and Medicaid payment.

While PSROS are one of the few agencies that systematically collect quality of care information on

hospitals and providers, public access to these data has

been somewhat limited, particularly access to physician-specific information. Some of the reasons for

restricting disclosure, according to PSROS, are to protect patient privacy and the physician-patient relationship and to prevent unadjusted analyses of raw data.

The issue of disclosure of PSRO information to the

public has been much debated. Ted Bogue, formerly

of Ralph Nader’s Public Citizen Health Research

Group (HRG), disputed the problems of disclosure to

the public and local and State health agencies (21):

. . . Contrary to the claims of doctors, patient privacy

and the doctor-patient relationship would not in any

way be compromised by public access to physicianspecific information, so long as patients could not be

identified.

There is some concern that PSRO data could mislead

the public because comparisons among providers would

be invalid. Provider profiles and MCES could be adjusted by the PSRO for variations in patient age and

diagnostic mix as a normal part of review activities.

In addition, both the PSRO and the doctor or hospital

under review could given an opportunity to attach explanatory material to whatever is released.

In a 1977 law suit, HRG charged that the National

Capital Medical Foundation (the Washington, D. C.,

PSRO) withheld public information on utilization and

quality of medical services. HRG requested these data

under the Freedom of Information Act since, it argued,

PSROS serve as Federal agencies. A decision in favor

of HRG was handed down by the District Court in

1978. In response, PSROS, the Department of Health

and Human Services (DHHS), provider groups, and

Congress became embroiled in plans to appeal the decision, design confidentiality regulations, and place a

moratorium on the final order.

A l-year delay was approved, followed in 1981 by

a reversal in the lower court holding that PSROS are

not Federal agencies as specified under the Freedom

of Information Act. In the meantime, the Institute of

Medicine (IOM) was commissioned by Congress and

DHHS “to study the public policy issues raised by the

controversy and recommend a course of action” (184).

IOM recommended that there be clear limits on access to physician-specific information and quality of

care studies performed by PSROS, and the court’s ruling was in line with this recommendation. On the other

hand, IOM recommended that hospital-specific information be made available to the public. The IOM committee also called for PSROS to take more initiative

in informing the public about the type and effectiveness of health care in their areas. They suggested

that this information, written in a form usable to consumers, might be disseminated as an annual report,

IOM summarized the committee’s findings (184):

The public, including the press and health planning

agencies, should be able to obtain: 1) utilization data

about identified institutions in the form of both data

tapes and profiles produced by PSROS, and consisting

of data elements that PSROS are required to collect for

patients whose care is reimbursed by the Federal Government; 2) coded practitioner data, but with some safeguards to limit the deductive identification of specific

practitioners; and 3) unidentified quality review study

information, including anonymously displayed performance data about institutions or comparisons among

them.

The issue of public disclosure of routinely collected

PSRO data is closely related to consumer information

and choice. Consumers can, with limited difficulty, obtain information on physician credentials and fees.

However, little quality of care information is presently available to consumers. Bogue describes the types

of quality information that would be useful to consumers (179):

What consumers need is objective, accurate, meaningful information on the “track record” of individual

132
Appendix H— The Baltimore City Professional Standards Review Organization • 133

doctors and hospitals. What kind of patients do they

treat, how long do they hospitalize patients, and what

is their complications or mortality rate as compared to

other providers treating comparable patients? Such information is crucial to fully informed consumer choice.

For example, one study showed that post-surgical mortality is more than twice as high in some hospitals as

in others, even after statistically adjusting for differences

in patient age, medical condition, and other characteristics. Surely, no information could be more critical to

a patient considering surgery.

Baltimore City PSRO

The Baltimore City PSRO is one PSRO that prides

itself on the fact that data about hospital and physician utilization, costs, and outcomes of care are not

confidential. Beginning in 1972, the State Medical

Society set up the Maryland Admissions Review Program (MARP) to review hospital utilization for

Medicaid patients. As a result of MARP’s efforts at

reducing unnecessary hospital utilization, it was possible to expand the scope of Medicaid benefits and eligibility criteria to cover more low-income people.

In addition, MARP found that a great deal of excessive hospitalization was the result of elderly patients’ awaiting placement in long-term care facilities.

As a result of these findings, the Baltimore PSRO investigated placement and utilization in chronic disease

hospitals and found between 7 and 50 percent inappropriate placement. “BC-PSRO’S [The Baltimore City

PSRO’S] report clarified that the backup of patients

in hospitals was caused not by a lack of chronic

hospital beds, but rather by problems in placing patients in nursing homes” (5).

Continuing their efforts to improve care for the

elderly and reduce unnecessary use of Chronic Disease

Hospitals and Skilled and Intermediate Care Facilities,

the Baltimore City PSRO received Federal authority

in 1978 to add nursing homes to its review. With the

assistance of the State, the Federal Government, the

local HSA, and the nursing home industry, the PSRO

instituted the following measures: changes in reimbursement, grants to facilities with “hard to care for”

patients, and new definitions of levels of long-term

care.

Not until 1974 was the Baltimore City PSRO actually established. Many of the functions and physicians

involved with MARP also took part in the newly

formed PSRO. The purpose of the Baltimore City

PSRO was to (5):

. . . assure that health care paid for by the Federal or

State Government is medically necessary and consistent with professionally recognized standards of care.

It also seeks to encourage the use of less costly sites and

modes of treatment where medically appropriate.

Standards for medical care are set by the American

Medical Association (AMA) and specialty societies,

and compared with patient records to determine medical necessity and appropriateness. Hospital and physician profiles are then developed retrospectively to

monitor delivery patterns and quality of care.

Beginning in 1979, the Baltimore City PSRO

developed the Maryland Hospital Utilization Reporting System. This system, with nonconfidential data

from the PSRO and the Maryland Health Services Cost

Review Commission (HSCRC), profiles patients,

physicians, and hospitals on a semiannual basis. In

1980, it became operational with data from 1978-81.

For each patient, the HSCRC report contains the

following information:

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

hospital number;

physician number;

medical record number (only when report is

confidential);

principal diagnosis;

secondary diagnosis;

principal procedure (with or without operation);

operating physician (performing the principal

procedure);

age of patient;

total charge (daily room charge + seven ancillary charges—operating room, drugs, X-ray

services, lab services, supplies, therapy services,

all other);

length of stay;

preoperation stay (difference in days between

the date of admission and date of principal procedure);

admitting type (elective, emergency, urgent);

admission day;

discharge day;

patient disposition (home/self care, short-term

general hospital, left against medical advice, to

skilled nursing facility, died); and

payment source (Medicare, Medicaid, Blue

Cross, other insurance company).

The utilization figures are then compared with the

physicians’ and State’s average, to compare hospitals

and physicians and to assess ALOS by diagnosticrelated grouping (DRG).

Unlike other peer review groups and rate-setting

commissions in other States, those in Maryland operate under State legislation that all cost and utilization

information, other than that regarding patients, be

nonconfidential. With the cooperation of the HSCRC,

the PSRO, hospitals, and medical societies, it is possible to generate a wide range of quality information.

Physician-specific data are collected on types of cases

(by DRG); number of patients, and ALOS. From these
134 ● Medical Technology Under Proposals To Increase Competition in Health Care

data, comparisons can be made with the area average

to calculate, for example, days above average. Hospitals are then in a position to review and improve on

the utilization patterns of their staffs.

In addition to data on hospital and physician utilization, charge data are collected on each patient by

DRG, by age, and by length of stay. These charge data

pertain to Medicare, Medicaid, Blue Cross, and “all

other” patients, and are broken down according to

charges for hospital days, operating room, drug,

X-ray, lab, supply, therapy, and other services. For

each cost report, the hospital and physician number

are identified.

The Baltimore City PSRO has worked closely with

the HSCRC to improve the quality, efficiency, and

competitive practices of health services in the Baltimore area. Both groups believe that by disclosing hospital and physician information they can generate public accountability and improve health services.

The Baltimore City PSRO (4) reports that physician

review based on the HSCRC data base has resulted

in major reductions in lengths of stay. Four hospitals

that previously had the highest ALOSs accounted for

the majority of the improvements. The reduction in

ALOS came not only from Medicare and Medicaid patients but also from the patients of Blue Cross and

other third-party payers. An estimated $8 million was

saved in the last 2 years as a result of these efforts (4):

Baltimore City hospitals have traditionally longer patient stays for similar illnesses than have the other hospitals within the State. Based on calculations for similar

illnesses, local hospital lengths of stay in the first half

of 1978 exceeded the State average by .70 days per admission or more than 128,000 days above average per

year. By the first half of 1980, this difference had been

reduced to. 55 days per admission or more than 105,000

days of care per year.

The remaining 105,000 days above average in

Baltimore City are partially the result of special care

units (newborn intensive care, shock trauma, psychiatric, etc. ) and back-up days in hospitals while Medicare and Medicaid recipients await admission to nursing homes. The PSRO, the Department of Health and

Mental Hygiene, and the local Health Systems Agenw (HSA) are working together to address this latter

problem as well as to determine the causes for the

remaining excessive ALOSs. According to Alvin

Ankrum, the PSRO’S Executive Director, the Baltimore

City PSRO seeks to bring about efficiencies in the

following areas: delivery of care (i.e., reduction in

ALOS); cost of care delivered (i.e., reducing fixed and

variable costs or cost per day); and appropriate setting for delivery of care (i.e., decrease in hospitalizations). To accomplish these changes, it is useful to be

able to accurately document a problem and provide

comparable data as well as to monitor changes and

sanction of reward hospitals accordingly.

Recently a Health Care Coalition has formed in

Baltimore, made up of private employers interested in

health care cost control. Employers like Bethlehem

Steel, Baltimore Gas & Electric, and Maryland National Bank are working with the PSRO to examine

hospitals’ efficiency and average charges by payment

source for a range of conditions. The PSRO has conducted data seminars for employers to better understand the use the HSCRC data set. As a result, employers and unions are in a better position to select

more effective and efficient health insurance plans and

to advise their employees about using different hospitals.

Several organizations use these nonconfidential

data, in some cases as a basis for sanctions. For example, the Baltimore City PSRO, as part of its peer

review system, regularly examines hospital performance using these data, often with involvement from

Blue Cross. The local HSA uses the data to determine

the need for construction and expansion and to judge

certificate-of-need applicants. The Maryland HSCRC

is able to set hospital rates based on patients seen and

performance guidelines. State licensure and the Joint

Commission on Hospital Accreditation provide additional impetus for improvements. The Baltimore City

PSRO suggests that hospitals improve their performance because it is “observable by the public.”
Appendix I.—Other Models of Information

Disclosure: Truth-in-Lending Act and

Securities and Exchange Commission

Truth= in= Lending Act

Background

Fifteen years ago, if an individual wanted to take

out a $1,000 loan for 3 years at the best interest rate

available, and called several different financial institutions to compare interest rates, the person might have

heard:

● $6 per $100,

● $1,000 at 7 percent interest, and

● interest amounts to a 10 percent annual percentage rate

While the first two quotes might have appeared to

be the best buy, the annual percentage rate (APR) on

these two offers could have been as high as 12 and 14

percent, respectively. Therefore, it is the last loan offer

that might have given the consumer the least amount

of interest payment.

Before the Truth-in-Lending Act (title I of Public

Law 90-321, the Consumer Credit Protection Act) was

passed in 1968, consumers who shopped for loans were

easily confused by the different methods used by

creditors and financial institutions to compute interest

rates on loans. Because there was no standard terminology to inform consumers of the real cost of a

loan, it was impossible to compare interest rates on

loans without a great deal of difficulty (258).

The Truth-in-Lending Act provides for disclosure

of the price and terms of consumer credit. 1 The act has

two primary purposes: to enhance competition between lenders and to promote the informed use of

credit.

In its original form, the Truth-in-Lending Act consisted of three chapters which provided for credit cost

disclosures and regulated the advertising of credit. The

act did not attempt to prescribe the conditions under

which credit could be made available, but rather required creditors to make accurate and complete disclosures of credit costs and terms and prohibited misleading or inaccurate advertisements for credit. Since

the time of its passage, the Truth-in-Lending Act has

also been used as a vehicle for the regulation of other

areas.

In 1974, the passage of the Fair Credit Billing Act

amended the Truth-in-Lending Act by adding a fourth

chapter, titled “Credit Billing, ” which regulated the acIThe remainder of this section is condensed from Curtiss Martin, Federal

Consumer Protection: A Summary and Overview, February 1977 (16s1.

tivities of credit card issuers. In 1976, the passage of

the Consumer Leasing Act added a fifth chapter, titled

“Consumer Leases,” which extended the coverage of

the Truth-in-Lending Act to regulate the disclosure of

terms and costs of leases of goods for personal use for

individuals.

The Truth-in-Lending Act applies to all extensions

of credit for which a finance charge is or may be imposed, except for areas such as stockbroker margin

loans and utility charges subject to State regulation,

and credit for agricultural purposes above a specified

amount. The act distinguishes two major types of consumer credit: “open-end” and “credit other than openend” or installment credit. Open-end credit, such as

bank or oil company creditor credits and store charge

accounts, allows consumers to incur debts from time

to time under an agreement which prescribes charges

in return for use of the privilege. Installment credit is

extended once in a specific amount and the credit balance outstanding reduced by one or more subsequent

payments. There are separate disclosure requirements

for open-end and installment credit.

The Truth-in-Lending Act also regulates advertising

of credit. Specifically, the act prohibits credit advertisements which indicate that credit will be available in

certain amounts or with certain down payments, unless the creditor usually makes credit available to

consumers under time terms; and prohibits advertisements which set forth certain specific credit terms,

unless other terms are also set forth. The purpose of

these provisions is to promote consumer reliance on

the full range of credit terms rather than on single items

which might be misleading.

Another provision of the Truth-in-Lending Act provides consumers with the right to rescind certain transactions in which a security interest in a residence is

taken.

The Truth-in-Lending Act provides for criminal and

civil penalties for noncompliance. In 1974, the passage

of Public Law 93-495 distinguished civil penalties to

which creditors would be subject in class actions.

The Board of Governors of the Federal Reserve System has the responsibility for issuing regulations to enforce the act, Enforcement is divided among the following agencies: the Board of Governors of the Federal

Reserve System for all State chartered member banks,

the Comptroller of the Currency for national banks,

the Board of Directors of the Federal Deposit Insurance

Corporation for all federally insured banks other than

135
136 . Medical Technology Under Proposals To Increase Competition in Health Care

members of the Federal Reserve System, the Federal

Home Loan Bank Board for all federally chartered or

insured savings and loan institutions, the Administrator of the National Credit Union Administration for

all federally chartered credit unions, the Civil Aeronautics Board for all air carriers subject to the Federal

Aviation Act of 1958, the Secretary of Agriculture for

entities subject to the Packers and Stockyards Act, the

Farm Credit Administration for any Federal Land Bank

and Federal Land Bank Association, Federal intermediate credit bank, or production credit association, and

the Federal Trade Commission for all other granters

of credit.

Discussion

The experience of operating under the Truth-inLending Act, in effect since 1969, has led to some questions about its effectiveness. The question of primary

concern has been whether the act is overly complex.

The answer to this question as a practical matter, however, is dependent on a number of narrower questions.

These include the questions of whether the emphasis

and scope of the required disclosures provide the most

important information to consumers in a manner

which best enables them to comprehend and utilize it;

whether the civil liability provisions of the act are

achieving their intended objective of compelling compliance in a cost-effective manner; and whether the

benefits of the act outweigh the administrative costs

imposed. Other areas of concern arise in connection

with certain specific provisions and trends in the types

of provisions which were added to the act.

Examinations of the effect of the Truth-in-Lending

Act in its present form have been limited primarily to

tests of consumer awareness of finance charges and

percentage rates, but have also included some examinations of consumer behavior. Collectively, the information available (see, e.g., 74,183,185) suggests the

following:

●

●

●

●

the Truth-in-Lending Act has increased consumer

awareness of credit costs, although many consumers remain unaware of credit costs;

studies based on consumer awareness of annual

percentage rates show that awareness is greater

among the more educated, higher income segments of society although lower income, less educated consumers may be equally aware of dollar

finance charges;

awareness of credit costs appears to be linked to

comparison shopping for credit on the basis of

price;

awareness of credit costs does not appear to be

associated with decisions to use or not use credit;

and

● to an extent, creditors compete on the basis of

terms such as amount of down payment and length

of repayment time as well as annual interest rate.

In the case of retailers, competition in the form

of the quality and price of the goods or services

offered largely overshadows price competition in

the credit area.

Although this information is useful to the extent that

is assesses the effect of the primary provisions of

the Truth-in-Lending Act on consumers, it does not

provide a great deal of guidance about how to improve

the act. None of the studies conducted has examined

the question of whether consumers benefit from the

disclosures other than the annual percentage rate and

the finance charge. The studies have not addressed the

question of whether the extensiveness of disclosures

impedes the understanding of individual disclosures.

This information could provide a great deal of guidance in any attempts to improve the functioning of the

act.

Like their purchases of credit, consumers’ purchases

of medical care under procompetitive proposals would

involve decisions about matters of high technical

knowledge and risk. Experience with the Truth-inLending Act provides an instructive example of the

benefits of a standard terminology for specified consumer transactions that are otherwise subject to misunderstanding and possible abuse. Standardization in

the area of credit has had the apparent effect of increased consumer information and improved comparison shopping. Federal, State, or local governmental

standardization of the format and distribution of information about insurers and providers merits further

examination in the context of proposals to increase

competition in health care.

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) was

created by section 4(a) of the Securities Exchange Act

of 1934. Establishment of SEC to police the Nation’s

capital markets was an attempt “to purge the securities

exchanges of those practices which have prevented

them from fulfilling their primary function of furnishing open markets for securities where supply and demand may freely meet at prices uninfluenced by manipulation or control” (265).

Widely regarded as one of the more prestigious and

effective of the Federal regulatory agencies, SEC has

the broad charge of protecting investors and maintaining fair and orderly markets. This charge grew out of

the stock market crash of 1929 and the perception that

fraud, security price manipulation, short selling, pooling, and other unsavory investment practices were the
Appendix I—Other Models of Information Disclosure: Truth-in-Lending Act and Securities and Exchange Commission ● 137

root of the ensuing Great Depression. SEC, which actually was not launched until nearly 5 years after “the

crash, ” was perceived by the public as the mechanism

that would offer protection against unscrupulous inside traders and security issuers and perhaps even

against future security losses.

The major responsibilities of SEC fall into two areas,

which have bases in the historical development of

capital market regulation. First, the commission is

most active in managing corporate disclosure programs, via oversight of accounting organizations and

exchanges. Secondly, the commission is concerned

with establishing and enforcing codes of conduct for

brokers and dealers, particularly with respect to fraud

and stock price manipulation (221).

SEC is directed by five commissioners, no more than

three of whom may be from the same political party.

Members of the commission are appointed by the President of the United States with the approval of the Senate. Each commissioner is appointed for a 5-year term,

with one member’s term expiring in June of each year.

The President designates one member to chair the panel. The commission is assisted by a staff of professionals including accountants, engineers, examiners, lawyers, and securities analysts that staff the five SEC

divisions—Corporation Finance, Market Regulation,

Enforcement, Corporate Regulation, and Investment

Management Regulation (249).

The SEC disclosure system requires public reporting

of standardized information through certain periodic

reports from registered corporations and certain reports registering newly issued securities. In 1975,

56,640 periodic disclosure reports were filed by approximately 10,000 corporations, and 2,813 new issue

registration documents were accepted by SEC.

Once a decision is made by a corporation to raise

capital through a public offering of securities, the corporation must register and report information to SEC

through standardized agency forms or statements.

There are more than 20 different forms for various

types of companies and special situations. Regardless

of the form used, certain information is common to

all: 1) nature and history of the issuer’s business;

2) its capital structure; 3) a description of any material

contracts including bonus and profit-sharing arrangements; 4) a description of the securities being registered; 5) salaries and securities holdings of officers and

directors; 6) details of any underwriting arrangements;

7) an estimate of the net proceeds and the uses to which

such proceeds will be put; and 8) detailed financial information, such as a summary of earnings, certified

balance sheets, profit and loss statements, and supporting schedules (249).

As securities are traded continuously over many

years, there is ongoing disclosure of company activities

through annual, quarterly, and special reports. The

annual reports are scrutinized by SEC to ensure that

a policy of satisfactory financial reporting is practiced.

Information is reviewed for compliance with specific

statutes, and for completeness and fairness of disclosure. Most of the material is available to the public

(249).

The number of companies reporting and the types

of reports required have grown substantially since the

enabling legislation was passed in the early 1930’s, and

this expansion of the corporate disclosure system appears to be accelerating. Some examples of this expansion include disclosure by bank-holding companies,

disclosure of management perquisites, overseas payment, replacement cost accounting, and segmental or

line-of-business accounting (221).

In noting the registration process and the SEC reporting requirements, it is important to keep in mind

that SEC’s intent is not to judge the merits of securities

offered for sale. Furthermore, the SEC review process

does not guarantee completeness or accuracy in the

reports filed with SEC, although severe penalties are

imposed for presenting false and misleading information and other fraudulent acts. Any deficiencies are

the responsibility of the company and the individuals

involved, and the final judgment on any investment

opportunity presented by an offering rests with the

potential investor.

A second important point to make is that SEC registration involves a significant amount of corporate time

and expense. Registration is a detailed, often lengthy

process, and can require simultaneous attention in several corporate divisions. It is estimated that the average

cost of initial registration of securities with SEC is now

over $200,000. Likewise, the continuous reporting requirements and related costs of being a “public company” may be substantial. For many small companies,

such overall information disclosure costs are prohibitive (249).

But, like most regulatory programs, SEC’s corporate

disclosure system was designed to remedy a perceived

market failure. In this case, the market failure involved

an allegedly fragile capital market where securities

prices were said not to reflect available information

and price manipulation was considered to be rife. The

main rationale for corporate disclosure was that better information about corporations would improve the

pricing mechanisms through the buying and selling activities of better informed investors. According to this

theory, if investors know more of the truth about the

corporation, they will be able to make more intelligent
138 ● Medical Technology Under Proposals To Increase Competition in Health Care

investment decisions. Through this market activity, hospital utilization rates, disenrollment rates, board

the stock would be more fairly priced, and the task certification, and so on, As with SEC, health plans

of price manipulators would be more difficult (221). would have to attest to the accuracy and truthfulness

State, local, and Federal bodies, following the SEC of presented data, subject to civil and criminal penalmodel, could require health plans to provide basic min- ties (79,156,175).

imum information such as premiums, ambulatory and
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 Index
Index

Advertising

effect on health care prices, 77, 78

by Federal Employees Health Benefits Program

(FEHBP), 77

Aetna Life & Casualty, 76, 87, 90, 91, 94, 95, 96,

100, 105

Aidto the Blind; 118

Aid to Families With Dependent Children (AFDCL

60, 118

Aid to Old Age Survivors, 118

Aid to teetotally Disabled, 118

Alternative delivery systems

regional examples of, 107-117

technology used in, 37

Altman, Stuart H., 84

Ambulatory physician services, 39-4o

American College of Physicians, 68

American Medical Association (AMA~85, 102, 133

Group Practice Register, 111

Ancillary technology, 40

Ankrum, Alvin, 134

Arapahoe Health Plan of Denver, Colorado, 117

Baltimore Gas& Electric Co., 134

Baucus, Senator Max, 127

Bethlehem Steel, 134

Blue Cross/Blue Shield, 38, 39, 40, 48, 85, 87, 89, 90,

91, 94, 95, 96, 113, 115, 134

consumer information provided by, 76

efforts to identify nonbeneficial procedures, 68

establishment of HMO Colorado by, 116

high-option plan coverage in the Federal Employees

Health Benefits Program, 98-101

Medical Necessity Program, 58

programs in California, 115

programs in the Rochester, N. Y,, area, 107-108

suit against Office of Personnel Management, 105

Blue Cross of Minnesota, 114

Blue Cross of Northern California, 115, 116

Blue Cross of Southern California , 115

Breslow, Lester, 83

California

alternative delivery systems in, 114-116

prepaid Medi-Cal health plans (also see Medicaid,

Medi-Cal), 118-119

Cavitation

effect on fee-for-service incentives, 19

payment by Medicare, 43, 66

payment by Medicaid, 66

Cargill Co., 113

Certificates of need, 129

CHAMPUS (see Civilian Health and Medical Program

of the Uniformed Services)

Children’s Hospital (Washington, D.C. ), 130

cardiac mortality rates in, 131

Civil Aeronautics Board, 136

Civil Service Commission (CSC), 85, 86, 102, 103

Civilian Health and Medical Program of the Uniformed

Services (CHAMPUS), 108, 109

Competition

comparison of proposals to increase (table), 23

among comprehensive health care organizations, 8-9,

10-11, 22-23, 32, 48-50, 63-67, 107

concept of, 24-26

Consumer Choice Health Plan, 22-23

consumer information needs under increased, 71-80,

cost consciousness and, 23-24

effects on medical technology use and innovation,

31-50

effects on quality of care, 9-11

emphasis areas, 27-28

and medical care market, 26-27

and medical care quality, 55-68

and medical technology use and innovation, 31-50

participants and choices to be made under increased

(table), 19

patient cost sharing and, 7-8, 20-21, 45-48

proposals to increase, 5-7, 19-24

strategies for increasing, 4

Comprecare of Denver, Colorado, 117

Comprehensive health care organizations, 22-23, 32,

48-50, 63-67

Comptroller of the Currency, 135

Computed tomography, 31-32

Congress

acts of (see Legislation)

commissioning of study by Institute of Medicine, 132

Congressional Budget Office (CBO), 99

House Committee on Energy and Commerce, 3, 83

House Committee on Post Office and Civil

Service, 103

House Select Committee on Aging, 122

House Subcommittee on Retirement and Employment

Benefits, 103

mandate for Health Care Financing Administration

survey of elderly insurance consumers, 80

Senate Committee on Labor and Human Resources,

3, 83

Consumers

information needed by, 11-12, 73-78

information needed by (table), 74

initiation of care by, 72-73, 75

selection of health insurance plans by, 71-72

selection of technologies by, 72-73

Control Data Corp., 113

Copayment (see Cost sharing)

Cost sharing

effect on initiation of care by patients, 75

effect on medical technology, 45-48, 61-62

effect on quality of care, 9-10, 59-63, 66

as incentive to search for lower priced care,

CT scanning (see Computed tomography)

78-79

155
156 Ž Medical Technology Under Proposals To Increase Competition in Health Care

Day, Roger C., 123

Denver, Colo., 116-117

Department of Health, Education, and Welfare (see

Department of Health and Human Services)

Department of Health and Human Services, 86, 87,

119, 123

Deuschle, Kurt, 84

Eastman Kodak Co., 107

Electroencephalograph, 44

Enthoven, A. C., 109, 22-23

Epstein, Mark, 129

Estes, Carroll, 84

Fairfax County (Virginia) Office on Aging, 130

Fairfax (Virginia) Hospital, 130

Farm Credit Administration, 136

Federal Deposit Insurance Corporation, 135

Federal Employees Health Benefits Program (FEHBP),

12, 37, 64, 76, 80, 108, 109

advertising by, 77

benefit costs as percentage of subscription income

(table), 90

benefit variation across plans, 87-88

Blue Cross/Blue Shield high-option plan enrollees in,

98-101

choices by annuitants and the elderly in, 96-98

comparison with Medicare, 87

competition within, 87-91

cost incentives in allocation of premiums (table), 89

cross subsidies in, 88-90

health insurance categories of, 86

history and structure of, 85-87

incentives for cost consciousness, 88

low-option experience of, 90-91

problems of, 106

quality assurance of, 101-102

selection and utilization of services, 91-1oI

Federal Home Loan Bank Board, 135

Federal Reserve System, 80

enforcement of the Truth in Lending Act by, 135

Federal Trade Commission, 108, 122

enforcement of the Truth in Lending Act by, 136

Fee-for-service practices, 36, 37

v. health maintenance organizations, 65-66

Fein, Rashi, 83, 84

Feldstein, M. S., 20-21

Fetal monitors, 44

Finger Lakes (New York) Health Systems Agency, 107

General Accounting Office (GAO), 103

General Mills, 113

General Motors Corp., 107

Genesee Valley Group Health Association (GVGHA),

107, 108

Georgetown University Hospital, 130

cardiac mortality rates in, 131

George Washington University Hospital, 130

cardiac mortality rates in, 131

Glasser, Melvin A., 84

Glossary

of acronyms (see p. xi)

of terms (see pp. vii-viii)

GHA (see Group Health Association of

Washington, D. C.)

GNP (see gross national product)

Government Employees Health Association (GEHA),

88, 104

Grand Coulee Dam, 41

Gross national product (GNP), 17

Group Health Association of America (GHAA), 104

Group Health Association (GHA) of Washington, D. C.,

38, 67, 87, 94

Group Health Cooperative of Puget Sound, 38, 45, 67

Group Health Plan of Minneapolis-St. Paul, 112, 113

Group practices, 48

Hawaii

alternative delivery systems in, 108-111

Community Health Program of, 108

competition and utilization patterns in, 108-110

Hawaii Medical Service Association (HMSA), 38, 108

Health care alliance (HCA) (see Health insurance)

Health Care Financing Administration (HCFA)

Bureau of Program Operations, 123

congressional mandate to survey elderly insurance

consumers, 80

consumer information provided by, 80

Medigap Operations Staff, 125

review of health insurance policies by, 79

Health care, 17

Health Insurance Plan of New York, 38, 43, 45, 67

Health insurance

for catastrophic illness, 20-21, 24

comprehensive coverage by, 23

consumer information provided by carriers, 76

cost consciousness and rates for, 23-24

effect on use of medical technology, 17-19, 33

exclusion of preventive technologies by, 75

differences among plans, 73-74

growth stimulation by taxation policy, 17-18

major risk insurance proposal, 20-21

Medigap legislation, 120-128

patient cost sharing and rates for, 20-21, 23

plan selection by consumers, 71-72, 73-75

population covered by, 72

private insurance and its problems, 120-122

public knowledge of information on, 127

risk rating for, 23-24

supplementary coverage, 21, 72, 120-128

Health Interview Survey, 57

Health Maintenance Organization Act (see Legislation)

Health maintenance organizations (HMOS)

ambulatory physician services in, 39-4o

ancillary services in, 40

barriers to initiation of care in, 63

in California, 36, 114-116

cavitation payments to, 19

competition among, in the Rochester, N. Y., area, 107

enrollment in (nationally), 36
Index ● 1 5 7

in Denver, Colo., 116-117

v. fee-for-service practices, 65-66

in Hawaii, 108-111

individual practice associations (IPAs), 19, 36, 37, 42,

48, 65

legal requirements for, 50-51

managerial technologies in, 41-42

Medicare/Medicaid and, 66

in Multnomah County, Oreg., 111-112

in Minneapolis-St. Paul, 112-114

preferred provider organizations (PPOS) as alternative

to, 116

prepaid group practices, 19, 36

preventive services in, 40, 65

provider selection in, 64

quality of care compared with other settings

(table), 65

quality of care in Hawaii HMOS, 110-111

of Rochester, N. Y., 107-108

surgery rates in, 38-39

types of, 19

Health Program Advisory Committee, 83

Health Systems Agencies (HSAS), 50, 68, 77

development of consumer information by, 79

Health Systems Agency of Northern Virginia, 77

description, 129-131

Health Watch, 107

Hemorrhoidectomy, 39

Hennepin County (Minnesota) Medical Society, 113

HMO Colorado, 116-117

HMO Minnesota, 113

HMOS (see Health maintenance organizations)

Honeywell Inc., 113

Howard University Hospital, 130

cardiac mortality rates in, 131

HSAS (see Health Systems Agencies)

Hysterectomy, 39

Infectious diseases, 26

Institute of Medicine, 132

Institutional Differences Study, 57

Insurance (see Health insurance)

Intergovernmental Health Policy Project, 129

Internal Revenue Service, 62

Joint Commission on the Accreditation of Hospitals, 134

assessment of laboratory test accuracy by, 77

Kaiser Foundation, 109

Kaiser Health Plan of Colorado, 116

Kaiser-Permanente Plan, 38, 39, 40, 41, 42, 43, 45, 67,

107, 108, 109, 111

growth in California, 115

origin of, 115

quality of care, 65-66

Kidney dialysis, 26

King, Patricia, 84

Lashof, Joyce C., 84

Lee, Sidney S., 84

Legislation

California Waxman-Duffy Prepaid Health Plan

Act, 118

Clayton Antitrust Act, 122

Consumer Credit Protection Act, 135

establishing Professional Standards Review

Organizations (PSROS), 132

Fair Credit Billing Act, 135

Federal Aviation Act, 136

Federal Employees Health Benefits Act, 85, 86,

87, 102

Federal Trade Commission Act, 122

Freedom of Information Act, 132

Health Maintenance Organization Act, 50, 71,

118, 119

Individual Accident and Sickness Insurance Minimum

Standards Act, 123

McCarran-Ferguson Act of 1945, 122

Minnesota Health Maintenance Organization Act, 113

National Health Planning and Resources Development

Act, 129

Packers and Stockyards Act, 132

Securities and Exchange Act, 136

Sherman Antitrust Act, 122

Social Security Amendments of 1965 (establishing

Medicare and Medicaid), 120

Social Security Amendments of 1980, 123

Truth in Lending Act, 80, 135-136

Lepper, Mark, 84

Litigation, 105

Littler Arthur D., 127

Mahoney, Margaret, 84

Maryland

Department of Health and Mental Hygiene, 134

Health Services Cost Review Commission, 77, 133

Hospital Utilization Reporting System, 133

State Medical Society Admissions Review Program

(MARP), 133

Maryland National Bank, 134

Maternal and Child Health Services, 132

Mayo Clinic, 38

MedCenter Health Plan of Minneapolis-St, Paul,

112, 113

Medicaid, 17, 37, 39, 43, 47, 48, 50, 107, 109, 111, 112,

114, 132, 134

coverage variations, 68

effects of cost sharing on, 62

establishment of, 120

health maintenance organizations serving

recipients, 66

Medi-Cal (California Medicaid program), 35, 60, 64,

118-119

options of beneficiaries, 72

Medical care

acute, 26

choice of technologies, 64

competition effects on quality of, 55-68

consumer sovereignty in, 27
158 • Medical Technology Under Proposals To increase Competition in Health Care

expenditures for, 42-43

initiation by consumers, 63, 75

market for, 26-27, 42

perspectives on quality of care dimensions (table), 56

price elasticity of demand for (table), 35

selection of providers, 64, 75

Medical technology

ambulatory physician services, 39-40

ancillary services, 40

behavioral theories on adoption of, 32

and competition in health care, 32, 45-50, 64

consumer selection of, 72-73

cost sharing effects on choices, 61-62

definition of, 4

diffusion of, 31-33

hospitalization, 37-38

inappropriate use of, 27-28

incentives related to use of, 17-19

managerial, 41-42

patient cost sharing and use of, 33-35

policy implications for, 50-51

preventive services, 40

research on use in comprehensive care organizations,

36-43

research on use with greater patient cost sharing,

33-35

selection by patients, 72-73

surgery, 38-39

use and innovation of, 31-5o

Medicare, 12, 17, 21, 22, 37, 38, 43, 58, 79, 98, 101,

107, 108, 109, 114, 123, 132, 134

comparison with Federal Employees Health Benefits

Act, 87

complexity of coverage by, 79

effects of cost sharing on, 63

establishment of, 12o

Federal standards for State regulation of

supplementary insurance (table), 124

gaps in coverage, 120

health maintenance organizations serving

recipients, 66

information provided by, 78

options for beneficiaries, 71-72

supplementary medical insurance for beneficiaries,

120-128

Medigap insurance (also see Health insurance,

supplementary coverage)

Federal legislation to create, 123-125

State regulatory action on, 125-127

Metropolitan (D. C.) Tertiary Care Task Force

assessment of cardiac surgery and catheterization in

the Washington, D.C. area, 130

guidelines on cardiac mortality, 130-131

Mike, Joseph C., 123

Minneapolis-St. Paul, 112-114

Mitchell, Susan M., 123

Monroe County (New York) Medical Society, 107

Montgomery County (Maryland) Department of Health

Systems Planning, 130

Mosteller, C. Frederick, 84

Multnomah County, Oreg., 111-112

Nader, Ralph, 132

National Association of Employers on Health

Maintenance Organizations, 113

National Association of Insurance Commissioners

(NAIC), 123

National Capital Medical Foundation (Washington,

D. C., PSRO), 132

National Commission on Health Manpower, 65

National Credit Union Administration, 136

National Health Interview Survey, 95

National Institutes of Health Medical Center, 130

National Medical Care Expenditure Survey, 35

National Medical Care (NMC), Inc., 129

National Naval Medical Center, 130

Nicollet-Eitel Health Plan (Minnesota), 113

Northern Virginia Directory of Physicians, 129-130

Northern Virginia Medical Society, 129

Office of Economic Opportunity, 107

Office of Personnel Management (OPM), 76, 77, 87, 90,

101, 102, 103

reduction of benefits for Federal Employees Health

Benefits Program, 105

Office of Technology Assessment (OTA), 67, 71

definition of medical technology, 4

Health Program Advisory Committee, 84

Strategies for Medical Technology Assessment

(previous report), 3

organization of this report, 13-14

study methods used for this report, 83

Olmstead Medical and Surgical Group, 38

Open-heart surgery, 44

Oregon Physician Services Plan, 111, 112

Organ banks, 44

OTA (see Office of Technology Assessment)

Palo Alto Medical Clinic, 34, 37

Patients (see Consumers)

Policy implications, 12

competition and care quality, 67-68

competition and medical technology use and

innovation, 50-51

competition and private sector provision of

information, 78-79

competition and public sector provision of

information, 79-80

Prepaid health plans (PHPs), 118

Prepaid group practices, 39

Professional Standards Review Organizations (PSROS),

58, 68, 101, 107, 114

background of, 132-133

Baltimore City PSRO, 133-134

data compiled by, 77

development of consumer information by, 79

recommendations of the Institute of Medicine on

information disclosure by, 132
Index • 159

Project Health, 51

evaluation by A. D. Little, 111-112

Prospective reimbursement, 44

PSROS (see Professional Standards Review

Organizations)

Public Citizen Health Research Group, 132

Quality

competition effects on, 55-68

current levels of, 57-58

dimensions of, 55-56

intended levels of, 58-59

research on, 59-66

Rabkin, Mitchell, 84

Radiotherapy, 44

Railroad Retirement System, 120

Ramsey Health Plan of Minneapolis-St, Paul, 112, 113

Rand Corp., 33-34, 47, 59

Renal dialysis, 44

Research

on innovation, 43-45

on care quality, 59-66

Rice, Dorothy P,, 84

Riegelman, Richard K., 84

Robb, Walter L., 84

Robbins, Frederick C., 84

Rochester, N. Y.

alternative delivery systems in, 107-108

Genesee Valley Group Health Association of, 107

Health Network, 107

Health Watch, 107

Ross-Loos Medical Group (California), 115

Safeco Insurance Co., 115

Saskatchewan, Canada, 35

SEC (see Securities and Exchange Commission)

Securities and Exchange Commission (SEC), 80

divisions of, 137

as a model of information disclosure, 12, 136-138

SHARE Health Plan of Minneapolis-St. Paul, 112, 113

Smith, Adam, 25

Social Security, 76, 120

Stanford University, 60

State Health Planning and Development Agencies

(SHPDAS), 129

Stevens, Rosemary, 84

Strategies for Medical Technology Assessment, 83

Supplementary Health Insurance Panel, 123

Surgery, 39

Sybron, 107

Tonsillectomy, 39

University of Michigan, 110

University of Oregon, 111

Varicose vein surgery, 39

Vertical integration, 43

Veterans Administration, 110

Washington, D. C., hospital, 130

Walter Reed Army Medical Center, 130

Washington (D. C.) Adventist Hospital, 130

cardiac mortality in, 131

Washington Consumers’ Checkbook, 76, 78, 79, 104

Washington (D. C.) Hospital Center, 130

White, Kerr L., 84

Woodyard, William H. L., III, 123

Wyatt, Ronald, 109

Xerox Corp., 107

X-Ray therapy (see Radiotherapy)

Younger, Tera S., 123

Yuen, Albert H., 108

0