Why Managed Care Doesn't Work

It is 2 a.m. and you are frantically searching for the number to call your doctor. Your child is ill, with a fever and a rash, and you have been up for hours. The answering machine at you doctor’s office indicates that the number may be used during the hours of 9 to 5 Monday through Friday, and that in case of emergency, you should call another number. You jot it down, and can hear the telephone switches as the call is relayed to yet another number. A pleasant voice comes on the line to tell you that all the operators are busy, but that they will get to your call in the order that it was taken, please don’t hang up. You hang on, impatient with the nice voice on hold telling you how to tell whether you need a flu shot, when an operator answers. She wants to know your name, phone number, your insurance plan and contract. Before you can tell her that your child is sick, she informs you that your contract is being managed by an organization called NCU (Night Call Unlimited) and that you must call an 800 number. You call, of course, and another voice asks you to touchtone the numbers corresponding to your contract number, then wait for the next available operator. As you wait, your child falls asleep, and you decide to hang up quietly, go back to bed and hope for the best.

This scenario may sound like a nightmare, but from a managed care company’s perspective it may be the best outcome of a system designed to lower the cost of health care. After all, your child seemed to improve, using a method known as the “waiting list cure”, and almost no health care resources were utilized.

This scenario exemplifies the type of managed care that has given HMOs a bad name, undermined the success of HMOs and forced employers to look for a new savior to provide high quality health care insurance to their employees at a controlled cost. Too many employees complained about the shortcomings of managed care; they complained about restricted panels, restricted referrals to specialists, drug formularies, and most damaging, about the managers who seemed more concerned with saving money than taking care of their health problems.

If we are to understand the need for a totally new approach to controlling health care costs, we should probably understand some of these more important solutions to the problem that have been tried previously. Managed Care was a promising new approach to improving quality and care in the health care system in the 1970s. Let’s analyze how it works, and the reasons that HMOs will not be the answer to the problem of cost and quality control.

When I started to work in managed care in the late 1970s, it was HMOs that held the promise of high quality care at reduced costs. The expansion of HMOs was made possible by federal funding and legislation that, among other things, protected health plans organized as HMOs from lawsuits based on outcomes of administrative decisions. Thus funded and protected and offering more for your money, HMOs flourished and spread in many markets around the country.

There were several models of organization that allowed HMOs to operate under US and state laws. These included staff model HMOs like Group Health Cooperative of Puget Sound, group model HMOs like Kaiser Permanente and Independent Practice Associations (IPAs) and network Models like most of the plans that still exist today in most markets around the country.

In order to control quality and cost, HMOs limited their panels of physicians to doctors who would sign contracts, accept limited fees, and abide by the rules of the HMO. In the case of staff model HMOs, the doctors were employed by the HMO and naturally developed loyalty to the plan, created and followed the rules and complied with guidelines, or left. A group practice HMO would act in the same manner if HMO members made up a significant majority of the group’s patients. In an IPA, where the number of HMO members tended to be a small percentage of the doctor’s patients, there was little loyalty or compliance with HMO rules. Often, HMO attempts to use financial incentives to encourage physician compliance with organizational rules and guidelines was either too small to create sufficient incentive or too negative to allow physician buy in. Group and staff model HMOs had a definite advantage in physician cooperation, but they could only grow slowly by adding physician (or NP/PA) staff and “bricks and mortar” to house them. Non HMO physicians complained about not for profit health plans and groups that were supported by government grants and protected by regulations, but HMOs did grow and look successful for a while in the 1980s and early 90s.

A report by the Rand Institute answered a very important question in the 1980s: Do HMOs work? That is, can health care delivered by HMOs be delivered at a reduced cost, per person? The answer: yes, HMOs work. HMOs can reduce the cost of health care for their enrollees. Rand compared patients similar in age and sex and health care statistics who were in HMOs to a similar group in “traditional” care systems. The HMO patients, matched in this way, got their medical care for less. Point made.

The next question to answer was: did the HMO patients get their lower cost care by reducing quality? Quality has always been hard to measure in health care, and this question was more difficult to answer. Still, the answer came soon, and the answer from RAND and others was that patients covered by HMO insurance had health care outcomes of similar quality to those in the traditional system. Some groups of patients fared better, some fared worse. The more highly educated patients generally got better care, and those with less education and money, less sophistication, if you will, often received less care and had worse outcomes1 . Overall, quality was similar and costs were lower. It was proved. So, if HMOs can reduce health care costs without reducing quality for the majority of patients why aren’t HMOs the answer? What were some of the problems that have lead to the demise of the HMO?

First, the consumer had a basic problem. Satisfaction with the system just wasn’t sufficient. Satisfaction is one measure of quality in any consumer driven system. Patient satisfaction with care covered by HMO insurance fell short of non-HMO care too often. When physicians participated in HMOs, their decisions were second guessed by demanding patients who questioned the physician’s motivation for advocating low cost conservative treatments or failing to advocate for more advanced treatments. When administrators became involved in making decisions to deny care, people became outraged! These patients wanted every opportunity to access every possible type of care without extra cost. They felt entitled to it, no matter what their HMO contract stated. (One local HMO cynically advertised against another HMO by having actor/HMO executives laughing around a table about how “patients don’t read their contracts!” Therefore the HMO could put any restriction into the contract allowed by law and get away with it.)

Entitled patients were supported by eager lawyers who saw the large financial reserves of the HMOs as low hanging fruit ready to be harvested. Who could deny a new treatment to a woman dying of breast cancer? What jury would support the greedy HMO executive against the poor ill woman? The answer? None. Women were given access to high dose chemotherapy with bone marrow transplantation as a treatment for breast cancer after lawyers successfully convinced judges and juries that HMO executives were making arbitrary decisions about care just to save money! (As if that was a greater sin than making the decision for any other reason.) When it turned out that bone marrow transplantation didn’t prolong life for breast cancer patients, the problem all but disappeared, the patients died anyway and the lawyers kept their money, but the damage had been done. As we’ll see, restricting access to expensive and questionable care is one of the key elements in the function of an HMO. Once the lawyers had HMO executives on the run, there was no place to hide. Courts had upheld the paranoia of patients afraid that decisions were being made to save money, not to give quality care, and the HMOs were all painted by that broad brush stroke of condemnation.

This was the beginning of the end of the HMO industry as a thriving and growing industry capable of saving the American health care system. Further nails were hammered into the coffin by malpractice lawyers and, ironically, employers and the quality movement.