Provider Selection, Bargaining, and Utilization Management in Managed Care

I. INTRODUCTION The managed care industry is extraordinarily dynamic. One of the earliest examples of managed care is the Kaiser prepaid group health plan, which contracted exclusively with the Permanente group to supply health care to a group of beneficiaries. The types of contractual arrangements used in managed care plans have since evolved into so many other forms that it is difficult to classify relationships using traditional typologies (e.g., staff versus group or network model health maintenance organization [HMO]). The managed care organization may own the hospital and/or physician group, the hospital may own the managed care organization, or the managed care organization may contract with hospitals and physician groups. (1) The large variety of institutional arrangements known as managed care make it necessary for health economists to look inside the black box of managed care and examine not only whether managed care reduces expenditures but also how expenditures are reduced. What is relevant for this analysis is not whether a managed care organization calls itself an HMO, a preferred provider organization (PPO), independent physician association (IPA), or another acronym, but how managed care affects expenditures and quality of care. Managed care organizations generally use three of the tools to reduce expenditures: selecting low cost providers, bargaining for lower rates, and utilization management. The economic differences between managed care plans lie in which of these three tools are applied and to what degree. Thus, we can gain insight into modern managed health care by studying the way each of these three components affect cost and utilization. This study measures the relative contribution of each managed care tool to changes in aggregate expenditures. We study the effect of a managed care program in which there was a change from a fee-for-service type arrangement to a managed care environment. However, the concepts and methods in this article can be applied to any situat ion where the network, contractual terms, or utilization management rules have changed. One way that managed care organizations control expenditures and quality of care is to restrict the number of providers in a network. We define the effect of selecting certain types of providers as the provider selection effect. In other words, the provider selection effect is the change in expenditures that can be attributed to the inclusion or exclusion of different providers into the network. For example, the managed care organization may select providers with a history of less intensive treatment patterns and avoid providers with a history of highly intensive treatment patterns. The change in future expenditures that are due to selection of low (or high) intensity providers is the provider selection effect with respect to utilization. Similarly, the difference in rates at providers before the new rates are bargained is defined as the provider selection effect with respect to price. In summary, the provider selection effect measures the effect of selecting types of providers on subsequent expenditures. It does not measure how rates or utilization patterns change at a given provider over time. After providers are selected to be in the network, the managed care organization may try to achieve expenditure reductions by bargaining over prices and utilization management. Changes in reimbursement rates over time for a given provider are defined as the bargaining effect, and changes in utilization over time are defined as the utilization management effect. The bargaining effect is the change (usually reduction) in prices that is a result of bargaining with the managed care organization in order to be included in the network. Although it is possible that managed care organizations negotiate other aspects of the contract, our investigation of this industry has revealed that bargaining over prices is by far the most important in terms of changes in expenditure. …