Into the eye of the storm - employers, health plans, health care market, and health reform - includes related information - Cover Story

Employers and health plans will face new and heavy demands in 1995 as the health care market continues to change and as health reform, Act II, begins.

The hurricane that swept through the political system last month added fury to the already shifting winds buffering the U.S. health care system. Even as national health reform was put on hold, an unprecedented wave of mergers, acquisitions, and alliances among health providers, insurers, managed care organizations, and purchasers took place in 1994.

Next year, say health care analysts, the new owners and managers of the realigned health care system must begin to make sense of what they have wrought. They also need to make the future health system one that is more efficient, integrated, value-driven, accountable, and equitable.

"All this financial wheeling and dealing, the mergers, and shuffling of ownership is supposedly for a reason," says Donald M. Berwick, president of the Institute for Healthcare Improvement, in Boston, and a professor of health management at Harvard University. "But it doesn't by itself produce an efficient and quality-driven system. Those efforts have really barely begun." And in many cases, Berwick adds, the rhetoric of quality and efficiency has outstripped reality.

Employers have sensed this imbalance and are expected to increase their efforts next year to seek more accountability from providers and insurers. In that effort, they'll be taking a new tack--or should be, benefits consultants say. "The focus for the past couple of years has been to solidify the gains of managed care, and to some extent to justify managed care," says Kathryn Abernathy, a principal with benefits consultants Towers Perrin. "Now we must move to the next logical step--consumerism."

The health care industry should become a full-fledged service industry, serving customers' needs and competing for customers, Abernathy says. And employers have to make that happen.

To that end, analysts predict more employers will be measuring employee satisfaction with health plans through "report cards" and paying closer attention to the managed care practices that turn people away. But they'll also be maneuvering to enhance local competition. The principal form that will take is adapting the principles of managed competition to health benefit plans. Several large companies already are moving to peg their premium contributions to the lowest cost HMO in a given area, for example. Many also are standardizing their coverage across plans. Dozens of other companies appear poised to make such moves soon.

"We have notified all 116 of our HMOs that our premium contribution will be based on the low-cost plan next year," says Bob Dankmyer, vice president for corporate benefits at Marriott Corp., in Bethesda, Md. "We want our employees to begin to choose their plans on the basis of price and quality, and the price part comes first."

About 75% of Marriott's 80,000 employees are enrolled in HMOs. Marriott has calculated that if all workers stayed in the HMOs they are currently in, employees would pay a scant 1% more in premiums under the new system, Dankmyer says. The company predicts, however, that many will shift to lower cost plans. That will cut the company's and employees' costs.

Like many large employers this year, Marriott also pressed its HMOs on price and extracted an average 7% rate rollback for 1995. Benefits consultants say companies will be looking to continue to hold premium increases down next year. Employers are increasingly aware, however, that this tactic is putting enormous pressure on doctors because insurers and HMOs are paying them less.

Most economists agree that continued low inflation and intense pressure from employers will translate into no premium increase or incremental increases in the low-single digits in 1995. But the deeper issue in cost containment is moving beyond discounted rates and health care bargain shopping to more permanent solutions--namely, capitation and other risk-sharing arrangements.

The move toward capitation and risk-sharing was widely identified as the key health financing trend several years ago. Some observers predicted it would be the dominant compensation arrangement by the turn of the century. It's probably still on track to do so, health financing experts agree. But the road to capitation isn't smooth or straight. The three major obstacles are: 1) provider resistance and confusion as they assume the insurer's role; 2) the evolving art of fixing a fair price for services; and 3) negotiating contracts that shift to providers risks that those providers--hospitals and doctors--can manage. Already, doctors are chafing at capitated rates that have stayed flat for a year or more in some areas.

The newest trend in this area is capitation of specialists, and it is certain to spread in 1995, altering forever the landscape of medicine. Huge multi-specialty groups--of cardiologists and of gastroenterologists, for example--are forming rapidly to negotiate capitated rates. A study released last month found that almost 70% of group practices with more than 100 physicians had at-risk contracts. They derived an average of about 22% of their income from capitated care.

For employers, this development demands a solid working knowledge of the capitation contracting. Reason: Bad capitation agreements can give specialists too much incentive to limit care and can even destroy a physician network if, for example, the doctors get too many costly referrals. The result can be serious disruptions in patient care.

Over the next year, employers will need to watch the dynamics of the health care market even more closely than usual. In 1994, almost one in four doctors sold or merged a practice or joined a new group practice, according to a recent survey for Medical Economics magazine. And two-thirds of doctors who hadn't yet made such moves said they expected to do so in 1995 or 1996. Hospitals, too, are reconfiguring, merging, and forging new alliances. Almost half of hospital executives in a recent survey said they were developing an integrated system, for instance.

These massive shifts have created a fluid environment--one that offers fresh opportunities to improve health care efficiency and quality. But it's also an environment that presents new risks. For all the talk of integration, for example, many providers--and patients--experience today's system as increasingly fragmented. Patients are bounced from provider to provider. And doctors are struggling to cope with the rapidly changing world of managed care. Many group practices now juggle contracts with 20 or more managed care organizations.

The effect of such changes, says Sylvester Schieber, director of research and development for the Wyatt Co., benefits consultants in Washington, is that employers must be scrupulous when determining how health plans and new integrated systems recruit, integrate, pay, and measure physician performance. The way health plans profile their doctors, for example, can mean the difference between doctors who feel threatened and doctors who feel empowered to improve efficiency.

Also, companies ought to be circumspect about the size of integrated systems under contract. One in a mid-sized city that enfolds all or most major hospitals and large medical groups may seem efficient but could reduce competition significantly over time.

Indeed, over the past several months, the federal government has taken a keen interest in this issue. The Federal Trade Commission said last month it had joined forces with state attorneys general in Florida, Tennessee, Texas, and Utah to probe the proposed merger of Columbia-HCA Healthcare and HealthTrust Inc., the nation's two largest for-profit hospital chains. The major complaint: In many communities, the company would own the majority of hospitals and control a sizable of number of physicians.

The FTC also announced last month it had reopened its examination of Merck & Co.'s $6.6 billion acquisition of Medco Containment Services Inc., and SmithKline Beecham's $2.3 billion purchase of Diversifted Pharmaceutical Services. The announcement came after an Eli Lilly & Co. agreement with the agency regarding Lilly's acquisition of PCS Health Systems Inc. Lilly agreed not to give preferential treatment to its own drugs when PCS negotiates contracts. The FTC could be angling for a similar agreement next year with Merck and SmithKline--and it may seek to discourage any future such mergers.

At the same time, the government is giving new attention to the formation of physician-hospital organizations. The IRS said last month it would take a dim view of any PHO in which a tax-exempt hospital put up more than 50% of the capital to launch a PHO--and where the hospital and physician group shared 50-50 in the proceeds of the organization. Such up-front funding is essentially paying for patient referrals, which are illegal under anti-kickback laws, IRS officials warn.

All this activity is going on even as the FTC and the Clinton administration's Justice Department have stated that they support the development of PHOs and integrated medical delivery systems. Officials in many states have voiced similar support but also are considering setting ground rules. So far, only Iowa and Minnesota regulate PHOs (and other integrated systems) but at least nine other states are poised to do so, including Washington, Oregon, and Texas. Iowa's regulations, for example, allow PHOs to become risk-bearing entities without becoming an insurer or HMO. And they allow PHOs to bypass several key state antitrust provisions.

The business community and managed care industry also will remain on any-willing-provider alert next year as more state legislatures debate this difficult subject. Employers and managed care interests have generally spoken with a single loud voice on this issue. "Don't hobble our efforts to create cost-efficient and high quality provider networks," pleads Karen Ignani, CEO of the Group Health Association of America, in Washington, the largest HMO trade group.

Thus, overall, growing federal and state involvement is clearly complicating the formation of integrated systems, widely touted as the next generation of managed care. The trend has the biggest insurers--Aetna, CIGNA, Metra Health (formerly the Travelers and Met Life), and Prudential--as well as the major HMO companies, scrambling. They are competing to buy medical practices and organize local delivery networks to gain as much market share as possible--perhaps before regulations are written.

An employer's job amid this market consolidation and transition, say benefit analysts, is to ensure that providers are developing quality-oriented networks so that their products and services meet employees' needs and give them choice in a hassle-free environment.

To that end, point-of-service products probably will continue to increase in popularity--and may well become a permanent fixture. In the late 1980s, they were widely considered to be transitional arrangements. Now, many staff-model and group-model HMOs, including Kaiser Permanente, are offering a POS option at additional cost. And most of the major health reform bills this year, including the Republican bills, required employers to offer a POS option.

Benefit managers and consultants say the wellspring of support for POS responds to the lingering public perception that managed care imposes limits on them and red-tape burdens on physicians. "Choice is definitely the buzzword," says Bob Penzkover, director of employee benefits at The Quaker Oats Co., in Chicago. "We want to move to organized systems, but our unions and employees want choice of provider in that context." About half of Quaker's 11,000 U.S. employees were in POS plans this year. The company expects to have 80% in POS plans next year.

Like many companies, Quaker has faced difficult negotiations with its managed care organizations and unions. In two instances, HMOs told the company, 'Sorry, we don't want your business,' says Penzkover. "This field has become very complex to manage," he adds.

Indeed. Benefits consultants--who of course stand to gain from this complexity--say that the life of a health benefits manager at a mid-sized or large company today is full of problems that didn't exist just a few years ago. "They are juggling dozens of contracts," says Towers Perrin's Abernathy. "And they are under a lot of pressure in a field that is moving very fast. The challenge is to minimize the noise and harmonize all these disparate efforts."

One obvious solution: simplify. Abernathy predicts that many employers will look to streamline their health benefit operations in the next year or two by contracting with fewer integrated systems and vendors in each given area. Some large firms, such as General Electric, already have turned to outsourcing their entire plan management. No doubt, pharmaceutical and mental health benefit management firms that can offer a simplified coordinated plan will continue to be popular as well.

Large and small companies alike are considering another potential way to simplify: joining employer purchasing coalitions. The strategy pioneered in the 1980s by a few progressive companies has now blossomed to encompass thousands of employers. But giant multistate companies have had little reason to join such efforts; they already wielded significant market clout.

These companies have been rethinking the potential of coalitions, however, says Sean Sullivan, president of the National Business Coalition on Health, in Washington, a trade group for coalitions. For example, a loose affiliation of large companies--among them Marriott, PepsiCo, and McDonalds--has begun talking about purchasing health care jointly in areas where, as individual companies, they have too few employees to have any clout. "It's in the beginning stages," says Marriott's Dankmyer. "But we think it makes sense."

A few big companies have made the step. Norwest Corp., a financial services company in Minneapolis with 40,000 employees in all 50 states, recently joined two purchasing coalitions. Its 6,000 employees in Minnesota choose care through the Business Health Care Action Group in Minneapolis, and 1,900 employees in Des Moines are enrolled in plans through that city's Community Health Purchasing Inc.

More small business owners are joining coalitions as well. No one is keeping track, but small businesses have joined forces in dozens of communities over the past year and that trend is sure to gain momentum in 1995. "We think purchasing cooperatives are going to be a major part of the solution for small business," says John Galles, CEO of National Small Business United, a trade group in Washington representing some 65,000 members.

Employer coalitions also continue to come together to pursue quality and report card initiatives. Among the most visible next year will be a project coordinated by the Midwest Business Group on Health to evaluate the entire managed care market in Chicago. Announced last month, the Chicago Health Plan Value Project aims to produce a buyer's guide for employers and employees by next May. Among the companies leading the project are Ameritech, Kraft General Foods, Navistar, Sears, and United Airlines. The major managed care companies in Chicago have endorsed the project.

Also due early next year are the first results from the National Committee for Quality Assurance pilot project using measures from the Health Plan Employer Data and Information Set (HEDIS 2.0) to assess health plan quality.

But many observers believe the most important health care quality advances over the next few years won't come from the report card movement. Instead, they'll emerge from the rapid diffusion of information, knowledge, and data from employer to employer about managed care and health care best practices. "The lines of communications are being opened as never before," Harvard's Berwick says. "I hear executives saying, 'So we don't have to reinvent the wheel here. Let's find out what works.'"

ERISA Reform 'Has All the Makings of a Major Battle'

The wary eye of the business community will be trained most keenly next year on efforts to alter the Employee Retirement Income Security Act of 1974 (ERISA). Health policy experts and congressional staffers agree ERISA reform will be the most contentious issue of 1995--if, that is, the new Republican leadership puts it on the agenda at all.

"It's the hot button issue," says Gall Wilensky, a consultant to Republican lawmakers and a former Bush administration health adviser. "But I think it will be very difficult to pull off major changes in ERISA in a Republican-dominated Congress."

Wilensky and other analysts concur that the degree of support for ERISA changes or waivers depends chiefly on how many Republican governors come clamoring for state flexibility. Democratic governors already have said they intend to press the issue next year, but their threats won't carry as much weight in the new Congress.

"This issue will squarely pit statE; leadership and state interests against big business," says Timothy Ray, national health care director for Coopers & Lybrand in Washington. "It has all the makings of a major battle." Indeed, feelings are running high (see "Health Reform: What to Expect From the Coming Debate," page 26). If ERISA changes or waivers do get a hearing, the most likely scenario, say health policy experts, is that large multi-state companies would retain most of the exemptions from state (or for that matter federal)

regulation of their self.-insured plans. "The most vulnerable self-insured companies are the ones with 50 to 1,000 or so workers," says Ray. "They'll get hit hardest if ERISA changes get enacted." Increasingly, small businesses will seek cover and clout in community-rated purchasing cooperatives, Ray believes.

Business groups are widely expected to support incremental changes, such as insurance market reforms, that the Republicans want to advance next year. But: employers want to see the specifics first. The new Republican leadership in both the House and Senate has pledged to submit a health reform bill early next year. But health reform does not now seem to be at the top of their agenda, despite polls showing it remains a major public concern.

The big question is whether any Republican bill will contain federal funding to subsidize coverage of the working uninsured, and if so, how much. Senate Majority Leader-in-waiting Robert Dole said last month that insurance subsidies of as much as 150% of the poverty level may be too expensive. In fact, the Dole-Packwood bill, one of the most conservative bills submitted last year, now is viewed as too far-reaching, indicating how the debate has shifted to the right.

Down but far from powerless, Democrats also will determine the fate of health reform next year. They can be expected to press for some extension of coverage to the uninsured, and may even try to block a bill that doesn't contain any step toward universal coverage.

With a tobacco tax, cuts in Medicare and Medicaid are the only way to fund subsidies. But many Republicans have vowed to rein in these entitlements and to use the savings to finance tax cuts or deficit reduction. "It is not clear whether the Republicans will commit any money to expanding coverage," says Wilensky.

For employers, potential Medicare cuts portend even more cost-shifting--not a happy thought. As the government pays doctors and hospitals even less, providers will charge even more to the private sector. Business groups could find themselves siding with the Clinton administration on this issue since Clinton wants money saved from cuts in Medicare to finance expanded coverage. And it is clearly in big businesses' interest to expand coverage to the uninsured, says Ray.

Other components of national health reform that could emerge next year include:

* Benefit nondiscrimination rules that prohibit executives from getting a richer benefit package than rank-and-file employees get.

* How--or if--a standard or minimal benefit package is fashioned.

* Whether medical savings accounts will become tax deductible. Republicans broadly favor MSAs.

* A renewed effort to pass a national any-willing-provider law.

* Whether Congress opens up the Federal Employees Health Benefit Plan to small companies and the uninsured.

Meanwhile, ERISA waivers or not, many states will be moving forward in 1995 with health reform initiatives (see State Report, page 47). Emboldened by their success in scuttling employer mandates at a national level last year, national and local business groups plan to target states with the anti-mandate message next year. And they'll try to restrain efforts to pass anti-managed care laws.

COPYRIGHT 1994 A Thomson Healthcare Company
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