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Hospitals, Physicians Gain Clout Against Managed Care

Nancy Tarleton Landis

Managed care "as we knew it in the early and mid-1990s appears to be in retreat in both the commercial market and public programs," according to the Center for Studying Health System Change (HSC).

Every two years, researchers from HSC, which is funded by the Robert Wood Johnson Foundation, visit 12 nationally representative communities and interview health plans, providers, policymakers, and employers. A report based on early findings from the 2000–2001 visits was released in February. Key points include the following:

  • Managed care is losing power to control costs as health plans respond to consumer demand for less restrictive insurance products. To restore profitability, plans are passing on significant premium increases to purchasers and exiting lines of business that have become unprofitable, especially Medicare and Medicaid.   
  • Extensive consolidation has increased hospitals' negotiating leverage with health plans, allowing some hospitals to win substantial payment increases. Some physicians also are demanding and winning higher health plan payments.
  • Many hospitals are struggling with inpatient capacity constraints, after reducing operating costs to respond to Medicare cuts and health plan demands for discounted payments. Growing demand for inpatient services and a severe nursing shortage are also contributing to capacity problems.
  • Tensions between physicians and hospitals are escalating as competition to provide high-profit specialty services heats up. And as the number of physician-owned facilities increases, hospitals face the loss of profitable specialty services, such as cardiac care, that cross-subsidize less profitable services, such as emergency care. Additionally, the increase in physician-owned facilities threatens to increase utilization of services at the same time health plans' ability to control costs is waning.
  • Increased provider clout and the move away from tightly managed care have led to a precipitous drop in risk-based contracting, eroding a key cost-control mechanism. In some markets, providers' willingness to walk away from health plan contracts has created network instability and left consumers with fewer provider choices or higher out-of-pocket costs.
  • Health plan premium increases have for the most part gone uncontested by large employers, who have been reluctant to disrupt workers' coverage in a competitive labor market. Some small employers, however, are responding to steep premium increases by switching plans, dropping dependent coverage, or dropping coverage altogether.

For consumers, says HSC, these trends mean rising costs, fewer choices for coverage, and, in some cases, turmoil.

With the push for less restrictive coverage, says the report, the benefits and features of health maintenance organizations and preferred-provider organizations are converging, and differences in their premiums are diminishing. Also, health plans' focus has shifted to restoring profitability, and they are no longer holding down prices to increase market share.

Consolidated market power has enabled hospitals to "push back on health plans' attempts to control costs through reduced provider payment and utilization control." An extreme example of consolidation was found in Cleveland, where two local hospital systems control nearly 70% of the area's inpatient capacity. "The changing balance of power between plans and hospitals has led to instances in many communities where hospitals or physician organizations could not come to terms with health plans and, as a result, left the plans' networks," HSC reports.

Also, physician–hospital organizations that formed for the purpose of managed care contracting are declining in importance. Instead, physicians are looking independently for ways to enhance revenue. In Phoenix, for example, specialists are cutting back on affiliations with local hospitals and devoting more time to ambulatory care surgery centers or specialty hospitals in which they have an interest.

In a strong economy and tight labor markets, most large employers have not changed their benefit packages and cost-sharing arrangements substantially. With a slackening labor market, employees may see their share of the cost of coverage increase, but it is unlikely that they will lose coverage in the near term, says HSC.

For consumers covered by Medicare or Medicaid, withdrawal of health plans from these markets means disrupted coverage and fewer choices. In most communities, "the safety net is stable," and in some cases providers of care for the uninsured, such as public hospitals, have grown stronger. But a softening economy could have a negative impact on safety-net providers.

The backlash against managed care has brought the country's health care system to "a critical turning point," says the report. "As costs continue to rise, employers and policymakers will again confront the dilemma of how to provide broad access to care and promote quality improvement under tight budgets." Given the experience of the past decade, optimism about new models for achieving this has faded. With growing provider clout and increasing resistance to risk-based contracting, "serious challenges lie ahead."