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Session One - Managed Care and Costs: Perspectives from Plans and Employers

PAUL GINSBURG: This session is called Managed Care and Markets: Perspectives from Plans and Employers, and I’d like to introduce the first speaker, who is Glen Mays, who is a health researcher at Mathematic Policy Research, where he studies the economic and policy issues of managed care, health insurance, and public health programs.

Mays has published more than 40 journal articles, books, and chapters on issues involving managed care, public health programs, and econometric methods for health services research. He received his doctorate in health policy and administration from the University of North Carolina-Chapel Hill and completed a post-doctoral fellowship in health economics at Harvard Medical School.

Glen’s going to speak for about 10 or 15 minutes.

GLEN MAYS: Thank you, Paul. It’s an honor to be the first in line today so I don’t have to follow the many distinguished speakers we have throughout the day today.

Let me see if I can get the slides going here.

Over the past couple of years, we’ve really begun to see the effects of the backlash against managed care take shape, and so this most recent round of the Community Tracking Study site visits really provided us with an opportunity to examine how plans have changed their tools and approaches for managing costs and care in the wake of this backlash.

I want to just quickly acknowledge my co-authors in this analysis: Bob Hurley, who is here in the audience and you’ll be hearing from later today, and Joy Grossman.

Just to give you a preview of major findings across the 12 markets, we did see a clear trend among health plans in decreasing their reliance on the most restrictive managed care tools. And plans were replacing this with a growing reliance on using consumer cost sharing as a mechanism to control costs and manage utilization.

Along with that, we saw a number of plans beginning to experiment with new tools, emerging tools for managing costs and care, such as new ways of developing provider networks, some new and refurbished payment mechanisms, as well as some new ways of managing referral practices.

By way of background, clearly we’ve seen the managed care backlash come into full bloom over the past couple of years, with consumers demanding more choice and fewer restrictions on their health care decisionmaking; employers being pragmatic about this demand and, in turn, setting up--or demanding larger and more inclusive networks from health plans in order to attract and retain their workers; providers beginning to push back against the restraints of managed care, pushing for higher rates, payment rates, refusing risk contracting, and pushing for lower risk, and also pushing for less administrative hassle in their interactions with health plans; and policymakers, particularly at the state level, beginning to respond to the backlash in enacting curbs on the most restrictive tools that managed care plans have used.

Over the last year, though, we’ve begun to see some disturbing economic trends emerge with rapid growth in underlying medical costs, steady upward trends in health care utilization, and a return to double-digit rates of premium growth over the past year. These trends are particularly disturbing in light of the slowing economy, and they really raise the question of whether we can afford to be abandoning the cost containment tools of managed care at this point.

There have really been four conventional tools that managed care plans have used to manage costs and care: the first being selective contracting as a way to steer volume to a limited number of providers in order to negotiate discounts, as well as avoid the most inefficient providers; second being capitation and risk sharing as a way to transfer risk to providers in order to encourage efficient clinical practices and limit their exposure to medical losses; third being gatekeeping and utilization management processes as a way to reduce inappropriate and unnecessary health care utilization, and also ensure that care is delivered in the most cost-effective setting; and, then, fourth, managed care plans have relied on a fairly comprehensive benefit package as a way to encourage--to provide first-dollar coverage for routine health care and preventive health care, with the idea that you can then forestall the need for more intensive health care services.

So in this recent round of the site visits, we looked at trends in health plans using all four of these types of traditional managed care tools, and we saw a pulling back, a pulling away from all four of these tools to varying degrees in the markets.

First, looking at selective contracting, we saw a clear trend, health plans moving away from selective contracting over the past two years, with plans developing larger physician and hospital networks to respond to growing demand for more choices, plans also adopting less restrictive provider selection processes, and a clear example of this we saw in Seattle with one of the largest insurers there, Regents Blue Shield. They had back in ’92 developed a fairly innovative point-of-service managed care product by essentially profiling utilization and cost rates of all the physicians in the state, and then selecting the most efficient 60 percent of those physicians into their point-of-service network.

What we saw over the past two years was that health plan really abandoned this selective contracting strategy altogether in the face of growing demand from employers and consumers for larger networks.

The clear implication here is that health plans are finding a diminished ability to negotiate discounts and steer volume to the most efficient providers as selective contracting fades.

Secondly, we’ve seen an erosion in risk contracting among health plans across the markets, and that’s occurred either by a reduction in either the prevalence of risk contracting or in the scope of risk contracting. So, in some cases’ managed care plans, we’re seeing fewer members covered under these contracts, and in other cases’ plans, we’re seeing fewer types of services covered under these contracts with a particular reduction in hospital risk contracting.

Some of the drivers of this trend were lagging HMO enrollment in a number of markets that really prevented these mechanisms from working and prevented physicians from operating effectively under these contracts. We saw physicians really experiencing mounting losses under these contracts and, therefore, pushing back against these types of arrangements and refusing to continue into risk arrangements. And also along with that, we saw an implosion of a number of the physician contracting entities that had been created to manage these contracts as these entities became insolvent.

So the clear implication here is that health plans really saw their most effective incentive for encouraging efficient clinical practice eroding over the past two years.

Third, we saw a clear trend away from gatekeeping and strong utilization management techniques, really a weakening of these approaches that health plans have used to contain costs. Plans were relaxing their prior approval restrictions for hospital care and for referrals to specialists in their existing products, and in many markets plans were also introducing new products without these types of restrictions. A good example is United Healthcare, which operates products in many of our markets, coming out with their new direct-access HMO product, which allows patients to self-refer to specialists and eliminates the precertification requirement for hospitalization.

The drivers here, again, are the consumer and physician dissatisfaction with the more stringent forms of managed care and with these burdensome administrative requirements. A number of plans also indicated that the administrative costs associated with maintaining these utilization management techniques had grown burdensome and they weren’t seeing the return in terms of cost savings from some of these techniques. Also in a couple of states, we heard plans reference the direct-access mandates and HMO liability laws that were under consideration or being passed as being a motivation for moving away from these types of managed care tools.

The implication here, consumers are getting more choice and more autonomy in their health care decisionmaking, but there was also a number of plans pointing to less coordination of care and health plans being less able to manage care and to avoid unnecessary utilization.

Fourth, we saw a movement away from the comprehensive benefit packages that had become common under many types of managed care plans and growing reliance on consumer cost sharing as a strategy to control costs and control utilization. So we saw health plans adding new copayments and deductibles to HMO products that historically had offered first-dollar coverage. We also saw many health plans increasing the existing copays and out-of-pocket limits that they had in their plans. In Miami, for example, we saw copayments for emergency room utilization go up to $75 to $100, you know, substantial increases over two years prior.

We also saw a number of plans moving towards replacing their fixed-dollar copayment arrangements with coinsurance arrangements which link consumer cost sharing to the price of the health care service being utilized. And this was particularly prevalent in the pharmacy benefits that health plans were introducing as part of three-tiered pharmacy arrangements. In several markets, including Orange County, we saw health plans introducing coinsurance in the third tier of their pharmacy benefit, that tier for the non-preferred branded drugs being as high as 50 percent, so consumers having to bear 50 percent of the cost of those third-tier drugs.

The drivers here, of course, the growing pressures to constrain costs and constrain premiums while still preserving broad choice for consumers. The implications here are that perhaps this higher cost exposure to consumers may induce more cost-conscious health care decisionmaking, but it also runs the risk of exacerbating financial barriers to care, particularly for low-income populations and populations with chronic diseases that have high health care needs.

It’s important to recognize that we didn’t see--while we saw these trends occur to varying degrees across the 12 markets that we study, these trends were not uniform in the movement away from traditional managed care tools. Basically our markets tended to sort out into one of three categories, and as you see up there on the upper-left-hand quadrant, there are a number of markets that were fairly early on in their experience with these types of managed care tools. They had really just begun to experiment with some of the most restrictive forms of managed care. In those markets we just saw an abandonment of those fairly limited experimentations, and so consumers and providers really didn’t see a lot of change associated with this because these types of tools had not been very prevalent in the market.

A second group of markets that you can see down there in the lower-right-hand quadrant were markets that had gone further in implementing the managed care tools that we’ve talked about. And in these markets, we saw the most dramatic change in terms of the practice of managed care, with health plans pulling back on these most restrictive forms of managed care.

Then, finally, a third group of markets, really the two outliers, Boston and Orange County, these were the most advanced markets in terms of managed care in the 12 sites that we study, and these markets’ health plans had invested really very heavily in these cost containment tools. And as a consequence, we saw less movement away from those tools. A number of plans reported more success with those tools in managing costs and were more reluctant to move away from them.

Switching gears a little bit, we also saw some interesting emerging tools that health plans were beginning to experiment with as ways to manage costs and manage care as the traditional managed care tools began to fade, the first of these being tiered provider networks, which we saw health plans developing in about five of the 12 markets that we study. And here the analogy is to a three-tiered pharmacy benefit, but instead of dealing with pharmacy, we’re talking about providers and health plans grouping their providers into tiers based on the prices that they charge health plans for services. And then consumers and employers then have the choice. They can choose a lower-cost tier with a limited selection of providers in order to save costs, or if they want the broad choice and the high-quality--or high-perceived-quality and more expensive providers, they can choose the more expensive tier and, therefore, incur higher premiums and higher out-of-pocket costs. And the plans experimenting with this method saw it as a good balance, as a way to manage the need for broad choice, but also the need to preserve some cost containment options.

Secondly, we saw plans in a couple of markets beginning to experiment with ways to steer patient volume within their provider networks, so steer patients to the most cost-effective providers within their larger networks. And this occurred either by providing information to physicians about the most cost-effective hospitals, hospitals with lower complication rates and trying to encourage physicians to admit to those hospitals. We also saw in another market a health plan using case managers to try to encourage patients and physicians to select the most cost-effective providers within their networks for care, such as ambulatory surgery.

Third, we saw plans across all 12 of the markets beginning to expand their case management and disease management programs, introducing these programs for larger numbers of diseases or expanding these programs from HMO products into PPO products and other attractive products. But there really was not a lot of consensus about whether these approaches would allow health plans to realize cost savings. These programs were being expanded more as quality improvement initiatives and ways to improve patient satisfaction, and there was less confidence about the cost containment ability of these types of approaches.

Fourth, we saw plans in a couple of markets beginning to adopt ways of offering consumers more choice among different types of plans and different types of benefit packages, allowing employers to pay a single premium and then their employees would be able to choose between a more restrictive HMO product with a more comprehensive benefit package or a less restrictive PPO product with higher cost sharing.

So what do these trends mean for health care? Clearly, we’re seeing consumers benefiting from broader choice in their health care decisionmaking and more self-determination. On the provider side, providers are facing fewer administrative hassles as health plans become less dependent on these conventional, most restrictive managed care tools.

The problem is that we’re also seeing health plans reporting fewer restraints on utilization and fewer ways to contain premium growth without resorting to higher consumer cost sharing.

Will these trends prove to be permanent or passing phenomena? That’s the big question here as the economy continues to slow. Clearly, there are limits on the extent to which health plans can rely on cost sharing with consumers as a tool for constraining utilization and costs. At some point if the cost sharing becomes too high, consumers will just begin to refuse coverage.

It’s also important to realize that not all the health plans we studied in our communities were abandoning these traditional managed care tools, particularly the staff and group model HMOs were hanging on to these tools. They were reporting more success with these tools as strategies for managing costs, and they were sticking with them. And these arrangements were in most cases remaining viable in our markets.

So there’s a possibility that demand for tighter management products may begin to grow and we’ll see a resurgence in the demand for these types of products as the economy softens.

Some of the policy implications and concerns, clearly, as we’re seeing an erosion, a small number of tools in the managed care toolbox for containing costs, there are concerns that there will be renewed pressure for employers and employees to drop coverage as premiums continue to grow. Additionally, there are serious concerns about the financial burdens that are imposed for low-income populations as well as the chronically ill and other high users of health care. Will they be able to manage with the growth in consumer cost sharing?

And, finally, there are concerns about the ability to ensure accountability and coordination of care as we see the traditional gatekeeper model of managed care beginning to fade in many of our markets. So these are important concerns to continue to watch as the markets unfold.

Thank you very much.



Our next speaker is Jon Christianson, who is the James A. Hamilton Chair in Health Policy and Management at the University of Minnesota, and he directs the Center for the Study of Health Care Management at the Carlson School of Management.

Jon has played a key role in all three rounds of our site visits, and we’re delighted that he can be here to make this presentation.

JON CHRISTIANSON: Thank you, Paul.

This presentation is about the employer side of the market, so in a sense, we are--you know, Glen, gave an unbalanced presentation because he just looked at the health plans side, so now we’re going to balance it by looking at the employer side.


JON CHRISTIANSON: The purpose of the talk today is to try to explain or talk about some of the methods that employers have used to manage their health care benefits, how they’ve changed over time, and what impact they’ve had on local health care markets.

I should say that we’re focusing on large employers here. As most of you know, there’s a huge difference in the way that small employers versus large employers view their health care benefits, and there’s just not enough time to cover both of those topics here. So we’re focusing on large employers.

A couple of general context comments before we get going here. One is that--well, first, let me just summarize where we’re heading. There has been relatively limited success in large-employer efforts to collectively, either in collaboration with providers in the community or on their own, influence community health care systems. And that’s an important finding, but I think if we stop there that you would get a very incorrect picture of the influence of employer decisionmaking on local markets, because our conclusion is that the collection of individual employer decisionmaking related to the management of health care benefits has had a profound effect on local health care markets.

Part of the reason that we see this, I think, is because of the fact that when we were doing our site visits over the six-year period, this was an unprecedented time in America in terms of the tightness of the labor market. There’s no other comparable time except World War II when we’ve had unemployment rates like we had during this ’96 through 2000 period, and this has had a major effect on the way that employers, large employers, think about their health care benefits. So we’ll expand on both of those points as we go along.

Now, a couple of context comments before we get started. We all know, we’ve all been told that employers view health care benefits in the context of compensation strategies as a whole. But I think it’s easy to forget that. Especially those of us who work in the health care arena, we tend to look at what employers are doing in managing their health care benefits, and we say, gee, why did they do that? Why didn’t they do this? Or, you know, it seems like they should have been doing this to control their health care costs?

Well, the whole picture is not controlling your health care costs for employers. The whole picture here is: How do you best structure your compensation for your employees to serve your goals as an employer? And this became really obvious to us over the six-year time period in the context of a tight labor market, which just magnified the importance of viewing employer decisions in a broader context than just health care.

Then, second, we also were struck, I think, as an overall context comment, that even among large employers there can be a considerable amount of difference in the way they approach health care benefits, depending on the way that their employees are concentrated in local markets. Particularly for large employers that have national labor forces, the health care benefit strategy is often determined at the corporate level. So when you look at the decisionmaking at the local level and you visit health benefits consultants and human resource managers at the local level, sometimes they will essentially be telling you, well, here’s what corporate decided to do and here’s how it plays out at the local level.

Now, that’s a very different role for a human resource manager than an employer that’s really focused at the local level, has most of its employees at the local level, its headquarters there.

Who are these employers that tend to be really focused locally? They tend to be two different kinds of employers. One is a large public employer, and about half of our sites had state capitals, and so the state insurance plan tended to be a big local presence in those sites. And then, second, you know, besides these large public employers, health care systems tended to be the largest local employers. So when we were talking to health care benefits folks who had a real stake in benefits decisionmaking at the local level, they had a double stake. They had a managing the benefits side, but then also they were providers of health care as well.

So thinking about large employers in terms of whether they’re headquartered locally or they have most of their labor force locally or whether they have a labor force spread out over the country is important in understanding that there are different dynamics going on here in employer decisionmaking.

Now to some specific findings. Of course, if you ask health plan managers what do employers care about, they say price. In choosing a health plan, what employers care about is price. If you ask employers, they’re not quite so clear on that, but clearly price is a very important feature.

Now, that’s a very different question to ask, though, than asking employers how would you respond to price increases or how have you responded to price increases once you’ve chosen a health plan. And here there’s quite a bit of consistency across our markets, and it depends on several factors. One is what are the alternative health plans available in your market. If you’re offering a couple of health plans and there are substantial price increases, what options do you have?

Most employers reported to us that the number of viable health plan options in their markets decreased over the time period of our study. So switching health plans to sort of deal with the problem of increasing premiums was increasingly regarded as not a very productive option, particularly because many of the health plans were beginning to look a lot alike in terms of their provider networks. Employers are sophisticated enough to know if you’ve got all the same providers in the network, you’ve got two health plans, the same geographic distribution, and all the problems that Glen just talked about in terms of managing care in a large geographically diverse network, switching health plans is not necessarily going to be the answer for you.

Secondly, if you’re contributing a fixed-dollar amount to whatever health plan option is chosen by your employees, an easier way to deal with price increases of a particularly health plan, in other words, relatively large price increases compared to the market, keep the health plan and let your employees make the choice for you. Let your employees essentially deselect that health plan by choosing the cheaper health plan over time.

That was particularly important in a tight labor market where pulling a health plan out of the benefit package would be regarded by at least some of your employees as a benefit take-away, even if that was a more expensive health plan for them.

Then, finally, concern over employee responses in general to price increases limited the amount that employers could increase the contribution of employees towards premiums. So in our markets, most of our employers were saying and health benefits consultants were saying employers are generally eating a substantial amount of the premium increases. They’re not trying to pass them on to employees. And in some cases, our health plan respondents were quite amazed by that.

So what were employers doing in terms of benefit design? Obviously, as Glen said, the main push here by employers was early on in our site visits, ’96, ’97, tight labor markets, they had just moved their employees into managed care, they were getting complaints from employees because they no longer had a choice of an indemnity plan versus a managed care plan. Their only choices were managed care plans. So the response of employers in a tight labor market was to say, okay, we’re going to increase the panel in our managed care plans to allow our employees to have more choice. And this was possible and facilitated during that time period by the fact that we were moving into the bottom of the premium cycle so that you were able to do that as an employer without really experiencing big premium increases.

There was a focus by employers on customer service quality rather than clinical quality. Does this mean that employers didn’t care about clinical quality? No. They cared about clinical quality. But almost universally, when we asked our employers, well, what about the quality of the health care that your employees are getting, they all said, well, fortunately, we’re located in a community that has world-class health care. And so, you know, if we have large networks and we give our employees access to the providers in that community, we can assume that they’re getting good health care.

Now, how does this correspond to all the talk that you’ve heard about medical errors and patient safety? You’ve got to remember, when we went out into the communities here, it was just very shortly after the release of the IOM’s report on medical errors. I remember an interview I had with a human resource manager in Cleveland. We had a question in our protocol that asked about what they knew, what they were doing, what they planned to do about improving patient safety, reducing medical errors, and this guy said: Well, that’s an interesting question. Do you think there’s much of that going on? And where could I read more about that?

So you’re getting--you’re really hitting it very early in the process. One of the last sites we went to was Boston, which was one of the--you know, where a lot of the literature on patient safety and medical errors was produced, and there was a lot more, obviously, awareness in Boston and thought about what we were going to do--what an employer’s role should be there. But, by and large, the notion was that if you gave employees more choice, then quality became more like their decision. In other words, it was like the good old days when you offered Blue Cross, all the providers in town, you know, signed up, and if your employee had a bad experience with the provider, it wasn’t the employer’s fault. It was something that the employee needed to deal with.

This is the--you’ve heard of the trickle-down theory of economics. This is the trickle-down theory of health system reform and impact. Basically the story here--and these arrows are more tenuous in some communities than in others, but the story here is that as employers responded to employees concerned about managed care in a tight labor market, they demanded broader geographically diverse provider networks, more PPOs, more point-of-service products. Plans which were facing intense premium competition at the bottom of the premium cycle responded by changing their products, expanding their networks, like Glen described. Employers then began to see fewer differences among health plans, started to reduce the number of plans offered. Providers then saw a potential here to enhance their bargaining position given that there were fewer plans, and employers demanded broad networks, and they started to consolidate to create what we call geographic sub-market monopolies, which is to say, if you can be the only provider group in the northwest quadrant of the city and all the health plans have to cover the entire city in their network, you’re in a pretty good bargaining position. And that’s true whether you’re a physician or a hospital.

So providers then began to exercise their new market power, and we saw, as Glen commented on, the rejection of risk contracts, walking away from some contract negotiations and so forth.

So what we’re seeing here, in our view, is, again, the connection is stronger in some markets than in others, but in general, what we’re arguing is that employers, all facing a tight labor market, all responding to employee concerns about managed care in a similar way, have acted as though they were in a coalition. They’ve acted together by taking the same sort of steps in their contracting of managed care plans, with a lot of trickle-down effects in terms of long-term organization of the health care system.

What about coalitions? What about employers in their public role where they participated in coalitions with community providers or purchasing coalitions just involving employers? We found in our communities very mixed effectiveness for these coalitions. They were all there to one degree or another in different communities, but the market conditions during this time period really weren’t conducive to collective action on the part of employers.

There was relative premium stability during this period of time, so the issue here became for employers, well, what do I have to gain by participating in a purchaser coalition? I have something to potentially lose because if I want to be in a purchaser coalition, that means I have to have a standardized benefit package or agree to a standardized benefit package. My employees may regard that as a take-away, and that’s not something good in a tight labor market.

And then at the end of our study period, employers were more and more beginning to observe provider consolidation in their communities and were saying, well, you know, whether I’m in a coalition or not in a coalition, that’s not going to change this fundamental fact that providers are becoming consolidated and better bargaining positions and we’re going to have a tougher time with cost increases.

Very briefly, talking about the Cleveland Health Quality Choice experience, this was sort of the granddaddy of purchasing coalitions, started in 1988 by the Health Action Council, immediately involved the local providers. The initial round of thinking here was to get information about quality of care in hospitals that you’d be able to compare across hospitals, and this could be used by consumers but also employers in purchasing.

When we went to Cleveland the first time, there was a lot of public debate about this information, the profiles that had been produced, and it was unclear whether employers were using this information in terms of selecting hospitals, but there was some expectation that some time very soon the Health Action Council would begin to try to direct employees to choose some of these systems that were rated high quality.

Also, this was a period in time in which there was a lot of negotiation going on between the employers and the hospitals over producing price information to go with the quality information. So the notion would be there would be this grid, and the column headings would be price and the row headings would be quality, and you could see whether a hospital system was in the high-price, low-quality cell or the low-price, high-quality cell in the future.

When we came back in 1988, in fact, the Health Action Council had negotiated global fees of 22 procedures in five hospitals, selected some as centers of excellence. A lot of concern, as you could imagine, among the providers about that process and why they were not included as a center of excellence.

Only a handful of employers had said that at that time they were going to purchase services through this program. By the time we came back in 2000, the Cleveland Clinic controlled more than half the beds in the city of Cleveland. They withdrew from this process saying that it was too expensive, that there was inadequate risk adjustment, and the purchasers weren’t using the data. Purchasers said, well, wait a second, you’ve never given us the price data, we’ve never put that together with the quality data, and the plan was always to put those two things together before we made a move.

But Cleveland Clinic withdrawing from the coalition essentially destroyed it, and the Health Action Council was left with developing programs for joint purchasing for pharmacy and dental benefits.

One of the leaders of that effort said, you know, Jon, he said, I’d like you to come back and do a case study of us because we think this demonstrates why it is not reasonable to think that employers are going to drive, collectively drive health systems change at the local level.

So the bottom line was that I think employers’ collective action was not as effective as they had hoped in local markets, but their individual actions, because they were taken in the face of similar pressures related to the labor market, have had an effect.

And the current landscape, you know, as you talk to employers, employers would say, well, we think provider consolidation is here to stay, our employee expectations are very high with respect to the kinds of health benefits they’re going to get because of this period of time in which we’ve been actually maintaining, in some cases enhancing benefits. Premiums are increasing at the same time our negotiating leverage with health plans and providers is decreasing.

You know, in a sense, you talk about what the options were with these employers, and it was like after I had shoveled the walk for three hours or the driveway for three hours and it was ten below--and this happens often when you live in Minnesota--and I’d come in and, you know, I’d sort of have this worn-out body language and sort of a glazed-over look in my eyes, and then I’d listen to the radio and they’d say six more inches coming tomorrow.

That was sort of, in a lot of ways, the feeling on the part of a lot of employers: What next? What’s left in our toolbox? We talked about the managed care toolbox. What’s left in the employer toolbox? What can we do about this?

Well, we’re looking at a softening labor market for the first time in many, many years. Maybe one of the things we can do about this is to cut our benefits, increase employee cost sharing, and so forth. Most employers realize that--didn’t see that as a long-term solution or as long-term effective strategy. So they’re saying, well, what is it that we can do?

We didn’t find many employers that were ready to say let’s give it up, let’s just get out of the health benefits business, in part because they didn’t feel they could in terms of attracting and retaining employees. But what we did hear from some employers--not a large number but some employers--is that we need to really rethink our role here in the whole health care system. You know, our employees--no matter what we do, our employees are not happy in terms of managing health benefits. It was kind of the philosophy, you know, if they don’t like what we’re doing, let’s see if they can do better. Let’s see if we can ship more of the decisionmaking power to our employees. And they were beginning to think about defined contribution models where they would essentially create health savings accounts for their employees, have a major medical plan at the end, and let their employees make more decisions where they would actually see the cost of the services that they were buying.

But most of these employers were very hesitant to take that step. They didn’t want to be the first employer to get out there and do that in a tight labor market.

So the question is: With the loosening of the labor market now and the fact that we’re seeing major premium increases, how much latitude does that create for employers to really pursue some different strategies here? And that’s what we’re going to be looking for in the next round.

Thank you.


PAUL GINSBURG: Thank you very much.

Now we’re going to switch from our presentation to a panel discussion format. I want to introduce two people from the sites that will be active in this discussion. On my right is Brian Ancell, who is the Executive Vice President of Health Care Services and Strategic Development at Premera Blue Cross in Seattle, Washington. Brian there oversees the network development, provider contracting, pharmacy operations, and many other areas. Previously he was a senior manager with Deloitte & Touche Consulting Group, and he specialized in advising health care clients on operations, organizational changes, and strategic issues.

On my left is Joseph B. Reilly, who is a Senior Vice President of Aon Consulting and a manager of the Parsippany, New Jersey, office. He has expertise in managed care, disability management, flexible benefits, and a whole bunch of other things as well. And he has 20 years of experience in employee benefits.

I want to make a comment that when you think of Glen Mays’ table when he had the two-by-two matrix of the sites, both of these sites, Seattle and northern New Jersey, are in one of the boxes that said high use of tools in 1998 and high degree of change from around two to around three, and we chose them because that would be the richest discussion.

I’m going to begin by asking questions of Brian Ancell and encourage the speakers and the other panelists to chime in as we discuss this.

The first question is: Seattle is one of the markets that Glen identified--well, this is what I said before. Can you tell us from your perspective how Seattle plans’ strategies for managing costs and care have changed over the past two years and where do you see them headed?

BRIAN ANCELL: Thank you, Paul. I think actually Glen did a very good job in his summary, and Seattle, I think, is a very representative market to the types of change Glen talked about.

Specifically, we’ve seen capitation go from about 30 to 40 percent of market share to it’s now virtually non-existent. We have, I think, four contracts left with any sort of capitation, and it’s for a very small population set. And it was a very dramatic, fast, pullback. Providers just decided that they’d had enough, they couldn’t handle the financial losses, and they said we won’t do it anymore.

The second concern that came with that is you had a lot of integrated clinics or delivery systems that had formed up in Seattle and, in fact, was one of the areas leading the country in that model. And that has pulled back significantly as well. We’ve had a number of clinics that have gone under. The integrated delivery systems have come apart, and so that really puts a question as to where do you have the delivery systems then that will come and effectively manage the care, and does it get pushed back on the health plans.

And we do still have a number of large, well-established clinics, and the ones who have survived are the stronger ones, and so there is an opportunity for us to partner with them. But that has caused concern.

And then, finally, employers are moving away from managed care. The managed care backlash has caused employer groups to say they’re not interested in that.

And so I think those are the major changes we’ve seen over the last couple of years.


One thing that we noted in Seattle, probably from an interview with you or your colleagues, has been the tiered provider networks. When we were in the field, I think Premera was the only plan that had actually announced a product, even though we heard from insurers in other sites about the plans for one. Could you tell us about how that’s progressing?

BRIAN ANCELL: Sure. Premera has come out with a new tiered network concept, and we are the only plan in that market that has it, though there’s other plans across the country that have a modification on it. And the idea is that we would group providers based on cost efficiency, which is not necessarily lowest fee schedule that they accept but are they able to be indicated as a cost-efficient provider and match them into networks that then allow you to give employers or consumers choice about where they go seek their care and the costs of that care.

One of the important things that I think it’s important to understand about tiering. More cost efficient does not mean lower quality, and I think that’s--a lot of times people associate that, and, in fact, some of the larger clinics I mentioned that are very well known in our market and have a good reputation are also we’ve seen to be the most efficient. And so they actually are in our preferred tier within our network.

PAUL GINSBURG: And what kind of a response have you had from employers? Are they signing up for this product, or are they more hesitant?

BRIAN ANCELL: We’ve had a very positive response from employers so far. It’s not--we haven’t opened for business yet with a product. Our first set of pilot groups will go up June 1, 2002, though we’ve got a number of providers that have expressed interest for January ’03, which is when we’ll have our first real effective date for the product.

PAUL GINSBURG: That’s actually something that I should point out for some of these innovations that--and I guess this was announced a long time ago, but when things are new, it takes a long time before consumers will actually experience these choices in their plan.

JON CHRISTIANSON: Another point on that is that innovation in general in the health care industry and benefit design is sort of--is obviously driven by this every-year cycle, once-a-year cycle. So it just takes longer for things to progress from the discussion stage to the actual design through the implementation, because the change only happens once a year.

MR. ANCELL: And I think there’s also a lot of education. When you have a new product like this, you’ve got to educate the providers, you’ve got to educate the members and the employers about what it means. And so we’re spending a lot of time making sure people understand what it is that they’d be buying before we’re out in the market selling it.


JOE REILLY:: Brian, excuse me. What kind of cost differential to incent employers will this new kind of product be offering?

BRIAN ANCELL: We originally targeted between a 5 to 10 percent cost differential. We’re actually seeing now in our market the providers are much more willing to move and select different options for a 1 to 2 percent cost differential. They’ve become incredibly price sensitive, and so I don’t think in the future it will take as big a cost differential, at least in the next couple of years, to get them to try new products.

PAUL GINSBURG: Brian, you said providers. Did you mean employers?

BRIAN ANCELL: Oh, I’m sorry. Yes, I meant employers.

PAUL GINSBURG: Okay. I have a question for Joe Reilly. Northern New Jersey, as I mentioned, had a high degree of change. What’s your perspective on what’s been going on in northern New Jersey?

JOE REILLY:: First, I’d like to reiterate Jon’s point. It is like the snow-shoveling example that you gave.

In northern New Jersey, this year’s renewal season, if you will, as referred to this once a year, was absolutely the worst I’ve seen since the late ’80s, mid-’80s. Very difficult, heart-wrenching decisions were made by employers all along as to how these cost increases were going to be passed along.

We saw increases, some--you know, not--on our larger employer base, we saw minimum, even in the HMOs, of 17 to 18 percent, which if you have 10,000 employees that’s a $7 million increase. So you figure that’s about 150 jobs, is the way sometimes to look at it. But in the mid-market, 1,000 to 1,500, we saw 50, 60, 70 percent where employers seriously had to consider whether to go on.

We’re coming out of a marketplace where the carriers were vying for market share. It’s now all profit driven, primarily. Even the nonprofits are looking to raise their reserves. And a lot of that, I think--and maybe I’m curious as to how other people feel. A lot of that is being driven by the stock market, both from the employer side and the provider side. The three largest national carriers are all stock companies, and they’re vying for the same capital that high technology, utilities are, and things like that. And I think it’s driving a lot of behaviors that they just weren’t willing to do five or ten years ago.

We saw a loss of market share, and I found it absolutely fascinating in one of the comments. In New Jersey, Aetna U.S. Healthcare had the largest percentage of market share in northern New Jersey, and they had what I would say the most focus on clinical quality, but the worst service. And we’ve seen--and the highest cost as well in terms of administration and fees, and we’ve seen a shift away because of the poor service, not the quality measures, the clinical quality, but more towards just the basic blocking and tackling of paying claims properly to United Healthcare and Horizon picked up a lot of their market, and they would say United Healthcare went into the marketplace reluctantly even wanting to get their NCQA accreditation. They didn’t basically think it was that important. They’re doing it now, but it was not a focus of their organization. But their blocking and tackling paying claims was very strong, and their cost has been the lowest. So they had the least capitation and the lowest cost versus the carrier that had the highest focus on clinical quality with the highest cost. And the market really adjusted to that very quickly.

Like everybody else, we’ve seen the move from the point-of-service to PPOs and people are just as much as possible getting away from these high administrative costs. Nobody is seeing the value-added there. More employee cost shifting. And, really, Jon brought up an interesting point, as did Glen. We’re seeing it more in plan design and not employee contributions. Although the labor market has changed and it’s changed in northern New Jersey as well, people are still reluctant to pass this cost on to employees in terms of employee contribution. So they’re trying to do it in a more subtle way in terms of plan design.

And the issue of the changing labor market, I think the more sophisticated employers are saying, yes, it is changing but it’s not the number of people, it’s the quality of people that we want, and the people we have we don’t want to lose. So we see a lot of that.

We see our employers looking more for fixed cost, and I think, again, that’s a function of the stock market. So much of how you survive in the market is risk management, and to the extent an employer can cap their costs, we’re not seeing a huge shift to self-insurance that we expected during this renewal season, which I was a little surprised at.

We’re seeing a move of disease management down into the mid-market, which finally people are starting to pay attention. They want to put their own programs in. Yes, it’s great that Blue Cross or United does a diabetic program, or whatever it might be, but people are actually saying: Are these the problems my employee population is having? Let’s take a look at some real data for the first time and see what we can do there. So we see that moving down from the larger employers into the mid-market.

And I think--and Jon mentioned it--for 18 months we’ve been talking in the marketplace about more of a defined contribution for employers to provide health insurance, and I will tell you that categorically we got blank stares for 18 months. People were not paying attention.

This year, they are starting to pay attention already, and people are beginning to plan for some sort of a move with these more high deductibles with these spending account types of arrangements. I’d just mention Luminus (ph) or Definity, those types of models. We really think people are going to start implementing them this year, but I guess just in summary, it has been a very difficult renewal season, and a lot of heart-wrenching decisions for a lot of employers when they looked at how do you pay people, keeping that mix in between all of their benefit programs.


JON CHRISTIANSON: Just one quick comment on something Joe said, and I did, too. One employer explained to me the hesitance or the sort of decisionmaking around do you pass these costs immediately in terms of greater sharing on the premium side or do you fool with the plan design. And the way she explained it was, well, if we do it on the premium side, it affects everybody. Everybody sees it. It’s very obvious. They get the brochure, but it affects everyone. Everyone has to pay a greater share of premiums.

If we do it on the increased copay, increased deductible side, it doesn’t affect everyone, and it doesn’t happen all at once. The effect isn’t all at once. You don’t see it in your paycheck every month.

So there was sort of a strategic issue of, you know, we feel the need to begin to pass some of these costs or share more of these costs with our employees, but we want to do it in a way that it’s going to be sort of the easiest for us to pull off.


I noted your comment about how disease management was moving forward into the mid-level of the market, and this is interesting that, despite all we’re saying about the backlash of managed care and the loosening of managed care, this is a slowly developing aspect of managed care that seems to be popular at this moment.


PAUL GINSBURG: Because I guess it’s all positive.

JOE REILLY:: Absolutely.

PAUL GINSBURG: Good. The next question for either of you is: From the perspective of your markets, how receptive in general are employers--I guess you both said something about the receptivity of employers to the product changes that plans are developing. But where are employers most interested or most receptive to changes? Brian?

BRIAN ANCELL: We actually may be seeing a little bit more aggressive move by the employers in our markets, the kinds of changes you said, but we’ve seen them much more willing to start asking employees to share portions of the costs.

I think what employers are looking for, though, is they’re looking for a new type of plan design that they can offer their employees that is not just pushing all the costs down on the employees. There’s got to be something else out there that we can develop, and I think employers are looking for health plans to come forward with those products. And I don’t think there’s a clear winner out in the market yet as to what those products are.

JOE REILLY:: Brian, I would agree. I think people are willing--are actually quite anxious to respond to new products and offer them to their employees. Again, that tight labor market, you wanted to be competitive with your offering.

I would characterize New Jersey--I cannot see people in the northern New Jersey market upsetting provider relationships for a three-tier product where savings are not significant. If the savings were significant, I could see them pushing it into their employees. But in the 2 to 3 percent range in northern New Jersey--and I think maybe it’s a function of the labor market, you know, all the large pharmaceuticals are out there, unemployment was below 2 percent two years ago. I don’t think they will move for--it’s going to have to be a big number to get them to move to those kind of products.

And all the hospitals in northern New Jersey have had these three-tier products now for, I think, about the last 14 years. So they’ve been around, and they do work for the hospitals for obvious reasons, I think.

BRIAN ANCELL: An interesting thing in the Seattle market, it went within the last six months from one of the lowest unemployment rates in the country to the highest unemployment rate in the country, and I think that’s why we see such a dramatic--and these changes, this receptiveness has really shifted in that last six months. It’s directly attributed to the labor market.

PAUL GINSBURG: That’s interesting because I think when we started these site visits back in 1996, we saw great variations across the communities and how tight their labor markets were. Then, in a sense, in this round, you know, which was just before the decline, we saw this uniformity that people were attuned to tight labor markets all over, and now we’re going back to something more traditional where it’s going to vary.

Speaking of some of the things Glen was talking about, about the various managed care tools that have declined in their use, such as selective contracting or narrow networks, capitation, tight utilization management, which, if any of those, do you see having the potential for a comeback with a softer economy and with the reaction to very rapid premium increases?

BRIAN ANCELL: I think the types of things you’re going to see come back or maybe continue to develop are things like the clinical quality programs, disease management programs. The difference is in the past health plans pretty much would capitate the providers and leave it up to them to resolve it. And I think that’s not going to work in the future. Health plans need to be involved in that, and they need to provide incentives in terms of financial reimbursement for providers who develop those programs and use them effectively and can demonstrate outcomes.

I think you’re going to see narrow network options or the tiered network-type options where you have a narrower network choice, but that consumers can choose more expensive, but they understand what those costs are.

I still think, however, that narrow choice has to be a high-quality option so that a consumer is not forced to receive a lower-quality health care because they happen to be in a narrower network.

And then I think there will be a role for a primary care physician, but not in a gatekeeper model, but more as a consultant/facilitator model, helping consumers understand their way through the health care system, because as they need to make more of the choices, they’re going to have to become educated, they’re going to need an adviser to help them with that.

PAUL GINSBURG: So it sounds like a key thing in rolling out this narrow network approach is going to be convincing people that the low-cost network is not the lowest quality but, in fact, if anything, it’s a higher quality.

BRIAN ANCELL: Yes. That’s actually very important. In fact, even with the providers getting them to understand that being in this tighter network or smaller network isn’t an indication that they somehow are a lower-quality provider. They’re concerned consumers will associate them with lower cost, and that’s very important that we get people to understand that those two don’t go together. In fact, some of the most efficient providers are more efficient because they provide better-quality care and have better outcomes.

PAUL GINSBURG: Yes, it probably is not going to make your job easier at Premera Blue Cross when people hear about what the Boston health plans are doing, which simply is having an extra surcharge to go to an academic medical center.

BRIAN ANCELL: Right. It’s a very different model of tiering approach, and I think a lot of--similar to defined contribution, it’s been kind of--everyone’s definition is different of defined contribution. I think it’s true--it’s the same when you look at the different tiering models. Each model is different, and I think how you approach it is going to make the real difference in how successful the products are.



JOE REILLY:: I think in northern New Jersey, I think people will live ultimately with smaller networks. I think once again there’s going to have to be some significant economic incentives to make that happen. I think utilization management will become more retrospective in nature than it has been up to now, and I mean, ultimately I think that equates to more of a clinical focus which will--in the end higher quality does clearly indicate lower cost.

I think the disease management programs, which are ultimately going to be driven by employers, I think--and the focus is going to be just not on health care. It’s going to be on disability management as well as health care, and more of a focus on overall productivity as opposed to I have a $700 raid on my HMO. I really think that there’s opportunities out there to blend, and there are some employers that are beginning to see it, but to take the disability management as well as the medical management and put them together and look at it more as productivity than the cost of health care, which is a little bit, I think, of where Jon was going on that.

We tend as practitioners to focus in our silos, but from an employer’s perspective, they’re being pushed because of some of the technology that they’re being given now to do their job to look beyond their silos, to look to become more of a business partner with the people that are running the businesses, and that’s more than just coming up with a cost-effective health care plan.

PAUL GINSBURG: Thank you. I think of the way that managed care is changing and the employer’s role as a benefits manager is changing. What are the implications for quality initiatives in a sense? Are the things that--where there was hope that they were going to improve quality, have they been made more difficult by these changes in the last two years in managed care?

BRIAN ANCELL: I think Joe has addressed that a little bit and we’re saying the same thing, that employers have not given up on quality. And, in fact, there’s a number of initiatives going on now in the country. Leapfrog, most of you, I’m sure, have heard about, which is an employer-sponsored group that is targeting trying to find improved quality.

There was another joint-sponsored plan, I think with the Empire Blue Cross/Blue Shield plan, where a group of employers stepped up and funded a quality incentive pool.

And so I think the health care industry and employers haven’t given up on quality. I think what we need, though, is to develop better measures of real quality is, because 15 years into this quality question we still don’t have a really good set of measures that everyone can look at and say, okay, this is how we’re defining quality. And I think that’s comes through developing disease management programs and other things where you have clear outcomes that you can tie back to and measure.

JON CHRISTIANSON: I think, in fact, the whole notion of giving employees more responsibility in decisionmaking, whether it’s through defined contribution or some other way, is consistent with continued involvement in the quality side, particularly at the provider level. Because if you’re not going to--what you’re trying to do, I think, essentially what Leapfrog says they’re trying to do, in fact, is put a floor on quality, make sure if we’re going to turn our employees loose to make a lot of decisions that we might have made in the past, then we need to turn our attention to the notion of ensuring at least some minimal level of patient safety and quality.

JOE REILLY:: I think that’s a good point. I think employers will focus more on the clinical quality aspects of our business, our collective business, when a lot of the blocking and tackling is done in a very efficient way for their employees. There’s nothing from the largest employer to the smallest employer, there’s nothing that gives an employer more angst and heartburn, if you will, as when the infrastructure of a given carrier just kind of falls apart and employees are calling just to get their claims paid.

Once, I think, the carriers can get that right, I think employers will then listen seriously about the more esoteric quality initiatives that are underway.

PAUL GINSBURG: I have one more question, and then I’m going to turn to the audience for questions, so if you can, think about what you’d like to ask. And this concerns the provider consolidation. You know, you’re all aware of the degree to which provider--hospital markets in particular have become more consolidated, and one of the implications of this greater consolidation for the ability of employers or health plans to in a sense pursue the agendas that you’ve been sketching out.

BRIAN ANCELL: Just the impact on that consolidation?

PAUL GINSBURG: In a sense, to what extent is consolidation a positive thing or a barrier for you to, say, do the tiering or--

BRIAN ANCELL: Okay. Well, it’s clear if there’s not at least two provider groups in a market--and I think that was mentioned earlier--there’s not a lot of tiering that’s going to go on in that market. You have to have choices. So if there’s no choices, your tier is a tier of one.

Whether our choices--our finding that it allows us to present the true value proposition to consumers, they’re not going to a provider group then just because it’s got a great name. They can go there if they want, but if it’s more expensive just because of the name, then they pay for that.

And so I think it really comes down to if there’s at least two competing systems in a market, you’ve got the opportunity for tiering. If you don’t have that, then what you’ve got is a single-tier market and you have to present it that way.

JOE REILLY:: I think the provider consolidation in the northern New Jersey market has really driven significant change. At least in northern New Jersey, it has taken one carrier, it has pushed them to the forefront of the newspapers, and to essentially change their attitudes towards the providers.

From the employees’ perspective, it’s been extremely positive. From the employers’ perspective, it’s been extremely expensive. But on balance, I think it’s a positive. It’s a positive force. There had to be a pushback in the marketplace, and this was an effective one, that it will ultimately work in the employees’ best interest, I think.

PAUL GINSBURG: We have time for questions from the audience to either the speakers or the panelists. Jim? And could you identify yourself? MR. VERDIER: Yes, Jim Verdier of Mathematica. General Motors for several years has had a system for their salaried employees in which General Motors ranks the managed care organizations on quality measures, HEDIS, CAPs, and things of that sort. There’s a cost dimension in there as well. And then the employee premium is lower for the higher-quality plans, and, not surprisingly, there’s been a lot of migration of employees to the higher-quality and lower-cost plans.

Have you seen any other employers or purchasers doing anything like that?

JOE REILLY:: I’ve seen many of our clients move in that direction, absolutely. It does get a little--in today’s liability issue in terms of pushing people into certain plans, as the plan fiduciary you want to stay as far away as you reasonably can. But, yes, managed competition is something I would say that probably in 94, 95, in northern New Jersey, most of our large employers, we encourage them to offer two or three competing HMOs, and then based on some parameter, quality or cost, drive employees’ participation.

JON CHRISTIANSON: But I think across our 12 markets, highly unusual. That would be an extreme outlier. That’s what you would expect. I mean, General Motors is--what?--the largest employer in the United States. You’d expect them to try to do something like that.

BRIAN ANCELL: In Seattle, we have some--Boeing may provide some information, but not a system like that. And so most large employers are not that advanced.

I think if we had more employers that were that advanced, you’d have a lot better system out there.

JOE REILLY:: We have one client, a public utility, who would publish every year the results of an employee survey. So every employee got to see how all the other carriers--you know, the level of satisfaction and certain other parameters--responded. MR. VERDIER: GM tried that, and it didn’t have any impact until they charged a lower premium for the higher-quality plan.


JOE REILLY:: People vote with their feet, unfortunately.

JON CHRISTIANSON: Just one more comment. The employers that seem to pay the most attention to quality measures across plans we found in our sites were the state employee groups, large public employers. And the explanation we got from that was that they had much less flexibility on the wage side, and so they were much more concerned about sort of offering--convincing their employees that they were doing better on the benefit side. I mean, they very explicitly said, well, how we attract and keep employees is we’re able to offer outstanding benefits. And this is one way of sort of proving that you are working hard in that area.

And so thinking about the large employers, I think those were the groups that were actually the most active in this area for our sites.

PAUL GINSBURG: Yes, Steve? MR. LIEBERMAN: Steve Lieberman, Congressional Budget Office. I’d like to ask if people would speculate on the implications of what I would characterize as an apparent inconsistency between Glen’s and Jon’s presentations. The inconsistency was, Glen, you had an observation about the implosion of physician groups, and I think Brian mentioned that. Jon, you and others--I think Joe had mentioned the importance of consolidation. Does that imply--Paul, as your question I think implied--that the consolidation has been on the hospital side?

So the first question is: Is the consolidation that you’re referring to consolidation on the hospital system side? Second, if it’s the hospitals that are consolidating, not physician groups--that may be incorrect, but if it’s hospitals that are driving it, what does that say about the role of hospitals in the competitive choices that are available to employer groups?

PAUL GINSBURG: I think before they all speak, I think we saw consolidation in some single-specialty physician groups as well as in hospitals. But the physician group consolidation was not uniform. There’s some sites where it’s still fragmented.

JON CHRISTIANSON: I was just going to say there is in that book that you got a chapter that talks about specialty market and how there has been consolidation that occurs there. But I think the issue is measuring the consolidation on the physician side is a lot tougher, because you don’t need to have consolidation of all physicians in a market. You don’t need to have all the specialists in a market in one or two groups to get some really effective negotiating leverage. If you can merge a couple of single-specialty groups in a particular geographic area within a market, you have a lot of negotiating leverage because all the health plans have to deal with you because they need to serve that whole geographic area.

So I think that’s part of what you’re seeing there.

JOE REILLY:: I think in the northern New Jersey marketplace, what I’m characterizing as consolidation is more on the hospital side. And even with that, I think there’s 78 hospitals in northern New Jersey; only three or four are showing a profit of any kind. So, obviously, from a societal point of view, something has to change there, and time will tell what it is.

We see constant change in these--in their behaviors in terms of how these hospitals are treating their employees and just trying to get profitable for the first time.


GLEN MAYS: I would just add, I agree, I think the organizations we’ve seen implode in many of the markets were the vertically integrated hospitals, physician organizations, as well as the physician contracting organizations that really came together primarily or even exclusively to manage the risk contracting. The consolidation that we’ve seen that has continued to occur has been in the hospital and the single-specialty area, I think. So I would concur.

BRIAN ANCELL: Glen has described exactly what’s going on in Seattle. The large integrated groups have come apart, a lot of specialty consolidation, some hospital consolidation, not a significant amount yet.

PAUL GINSBURG: Jason? MR. LEE: Jason Lee, Academy for Health Services Research and Health Policy. There seems to be consensus, not just here but more generally, that employers are moving away from managed care to increased cost sharing because of the managed care backlash. I’m wondering whether there’s an alternative cause that you might speak to, and that is, there had been some debate for--there had been debate for some time whether managed care was a sort of one-time phenomenon or whether it would continue annually achieving its cost savings.

Perhaps employers, I would suggest, were finding that the increases in premium were due to the reduced effect of cost savings by HMOs, and that’s the reason for this current movement.

Would you please speak to that as a possible alternative?


BRIAN ANCELL: Well, I think that there is some truth to that, but I actually don’t think you can tie the shift to any one factor. In fact, our HMO that we’ve offered has very high customer satisfaction ratings. Members love it. And so they’re not pushing away from it because of that. But as a financing vehicle, it’s become too expensive. I think a lot of it is because the benefits are so rich. In managed care, products have typically had very rich benefits. That’s driven the costs up, and you’re right that the cost savings were extracted early on and they’re not there.

I do think, though, that what you’re--people are referring to it as pullback from managed care. I think that terminology has a problem in the market. But I do think you’re going to see health plans taking the best elements of that and trying to incorporate those into new products.

JOE REILLY:: I think that--I guess it’s a chicken-and-the-egg situation. I think employers are backing away from it primarily at this point because of the lack of ability for some of the carriers, some of the plans to administer the programs effectively, plus the very high administrative costs. Some of these plans are costing--the administration alone can be upwards of close to $1,200 per employee, and they’re just not seeing the value for that kind of administrative cost, particularly when a lot of the infrastructure designed to save costs is going away.


JON CHRISTIANSON: I guess I agree with you, Jason, in the sense that when we first went out in our first round of site visits, I thought employers were very happy with themselves. I mean, I thought they were really patting themselves on the back saying, you know, we figured it out, we got managed care in here, and premiums aren’t going up anymore.

But I think in part what happened was the one-time savings, in part what happened was it’s coincidental to the bottoming out of the premium cycle. And when the premium cycle started going up, there really was a feeling on the part of the employers interviewed in ’98, but particularly this last round, that, you know, God, what happened here, you know, managed care didn’t deliver. But I think what happened was that the underlying forces that drive premium cycles kicked in, and, you know, so the next is: Well, what’s next? What are we going to do now that managed care didn’t deliver on what we thought it was doing back in 1996? So there’s a lot of that kind of feeling.


MR. MILLER: Tom Miller, Cato Institute. A question for Jon. Since, like politics, all health care is local, I’d like to take advantage of your understanding of what your employer is doing. The University of Minnesota in its next round of health plan options is going to add the Definity package, which is basically a defined contribution context, a higher deductible insurance wrapper with individual health accounts.

Given that the Minneapolis area has been noted for being among the early pioneers of managed care, direct contracting, does this provide a broader signal in terms of the trends within the marketplace?

JON CHRISTIANSON: Well, first of all, I have to ask everybody to read my article in the forthcoming issue of Health Affairs on defined contribution plans.

What he’s talking about has actually already happened. We’ve had the enrollment period. We’ve had--the university has had four options: a classic HMO, a staff model plan; a very expensive PPO which probably will attract almost nobody; a patient choice health care plan, which is a competing care system plan; and then Definity, which is one of these defined contribution plans.

You know, I’ve been checking almost every day to see whether the university is releasing the numbers in terms of who enrolled in which option. But these defined contribution plans are beginning to get a toehold in the market, and not just in the Twin Cities. The question, I think, is: Over a period of time, are these going to be sort of subsumed within larger managed care plans, or will larger managed care plans start offering sort of product options that kind of look like that? Will it take employers far enough down that direction so that they’re happy? In other words, will it become just another benefit option within a large managed care organization?

Or will they, in fact, develop into competing organizations? Which I think has a whole different sort of implication for the impact on the market. And we don’t know. I mean, these are really, really small venture capital start-ups right now.

They’ve gotten publicity that’s way out of proportion to where they are in the market right now. So the question is: What’s going to happen? Will they actually make these advances?

I mean, who knows? It’s really at a stage where they’re being tried out. And the diffusion--they could take off on the diffusion curve, or it could go nowhere. We don’t know at this point.

JOE REILLY:: Just to add anecdotally, Aon rolled it out into 20,000 U.S. employees, and of those employees that attended meetings, 35 percent enrolled. We did not have mandatory meetings, but still it’s a pretty high percentage of enrollment when Aon did it, and that was last year in Chicago, where there are 6,000 eligible.

The other point I had head anecdotally was that Textron is rolling out a definitive-type model over the next 3 years in a full replacement environment, which was the--that is the most dramatic story that I’ve heard about it, but they’re rolling it out a little bit each, at certain sites, not just like that, and they’re telling people about it now.

JON CHRISTIANSON: That’s the typical rollout. I should say that Joe’s company, Aon, was also one of the venture capital funders of that plan, and that’s one of the reasons why--


JOE REILLY:: That’s a good point.

PAUL GINSBURG: We’ve got time for one last question.

DR. ROSENBERG: I’m Amy Rosenberg. I’m a physician for an IPA that’s alive and well in Northern New Jersey.

My question is that these thoughts and ideas are really very wonderful, but the actual people who are going to be providing the care are also physicians. So, if we’re an IPA, and we think we look pretty good with our outcomes and our quality and so forth, how do we access employers? How do we let them know who we are and that we’d like to be involved at the beginning in these kinds of ventures?

JOE REILLY:: I think it’s very difficult in the Northern New Jersey market, I really do, because it’s so crowded is what I would say. So, if somebody might be, say, in Morristown, they might have an office in Morristown, but their employees could live anywhere from 50 to 60 miles away, and typically do, in many fashions.

I think the geography, the amount of competition, employers have a hard time listening on an individual basis, unless there is one location in the midmarket, and then they don’t have the funding behind them, the ability to take on that risk themselves. I think it would be very difficult in our marketplace for, one-on-one, to get people’s attention, to be honest with you.

PAUL GINSBURG: Do you think it would work differently in Seattle?

BRIAN ANCELL: I don’t think the employers it would work differently. I think the best way is you’ve got a health plan that actually is interested in working with physicians.

Part of what Premera did at the beginning of 2000 is we decided we needed to change the way we worked with physicians and worked with them collaboratively. That’s part of the reason why we started so early with a tiered network concept, so we could get their input and feedback. I spent a lot of time out in the physician community giving presentations, asking questions and getting input from them.

And so if you’ve got a health plan in your market that would be interested in doing that, I think that’s a pretty good route because then they can bring that together and deliver to the employers a solution.

JOE REILLY:: And in Northern New Jersey, there’s no shortage of health plans.


PAUL GINSBURG: Good. Well, I want to thank the panel for a really great discussion.

We’ll be taking a break of about, if you could be back in 10 minutes, say, at 10:48, then we can start our next panel.

Thank you.



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