Managed Care Woes:

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Industry Trends and Conflicts

Issue Brief No. 13, May 1998

Managed care plans had achieved real success in cost control but faced challenges on every front by 1998: shrinking profit margins, pressure to broaden provider networks, growing hospital and physician group clout, and mounting consumer protection demands. A deeper tension ran between plans and consumers pushing for greater control over their health care decisions. This Issue Brief covers an HSC roundtable examining these dynamics.

Industry Challenges

Despite enrollment growth, profitability had fallen from 3 percent margins in 1995 to 0.3 percent in 1996. Kaiser Permanente reported a $270 million loss for fiscal 1997 despite 19 percent membership growth. Price-sensitive employers were the primary force holding revenues down, willing to switch plans for lower premiums. Consumer demand had pushed plans to broaden networks and offer out-of-network options, with Kaiser citing $180 million in out-of-network costs as a factor in its losses.

Provider consolidation was intensifying pressure on plans, giving hospitals and physician groups greater bargaining power. State and federal legislative proposals ranged from minimum length-of-stay mandates to broader consumer protection measures. Meanwhile, some plans were trying to advance care through disease management and care coordination, but broader networks made it harder to enlist provider participation.

The Information Systems Gap

Nearly 60 percent of health care companies spent less than 4 percent of operating budgets on IT, compared with 5 percent in banking and 7.5 percent in financial services. Large plans had the capital to invest, but loosening provider relationships diminished motivation for electronic integration. Technology vendors had a potentially important role in modernizing health care's information infrastructure.

Public Attitudes and the Control Question

HSC survey findings showed 40 percent of insured Americans in gatekeeping arrangements, with 16 percent concerned their doctor might not refer them. Twenty-five percent of physicians saw potential conflicts between clinical decisions and income. About 60 percent of Americans would accept limited provider choice for cost savings. Overall satisfaction was high at 89 percent. But the fundamental issue was control -- consumers wanted to feel they and their physicians were making health care decisions, and managed care had wrested that control away.

Looking Forward

HCFA was emerging as a more assertive purchaser, mandating HEDIS reporting and developing the CAHPS survey. A consumer backlash was fueled by restrictions on provider choice, with consumers finding allies among providers, advocacy groups, and lawmakers. Panelists were cautiously optimistic that managed care could retool, with provider capitation potentially spurring care management innovation and consumers becoming more adept at using quality information over 10-15 years. But plans needed to build bridges with frustrated providers and engage them in redesigning care.

Sources and Further Reading

AHRQ — Federal health care quality research.

CMS — Quality Initiatives — Federal quality programs.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research.

Commonwealth Fund — Research on managed care.