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Jennifer - -
Here are our notes from
last week's health care
hearings caducted by the
Senate Caber Comm fee.
momea Healy
I
OFFICE OF CONGRESSIONAL AND INTERGOVERNMENTAL AFFAIRS
Hearing Summary: March 14, 15, Senate Committee on Labor and
Human Resources, Hearing on Health Care Reform in the Changing
Marketplace
Opening Statements (March 14) Chair Kassebaum (R-KS) described
changes in health care financing and delivery that have taken
place since 1987. In 1987, 28 million individuals received
health care from HMOs. Today, 45 million persons are covered by
HMOs. Also, the cost of providing health are has fallen 1.4% for
all employers -- 1.9% for large employers. However, the Chair
stated that she receives dozens of letters from those who cannot
afford health insurance or who have been excluded due to
preexisting conditions.
Senator Wellstone (D-MN) stated that in 1994 another 1.1 million
Americans in working families lost coverage, with a
disproportionate share being children. He commented that today
we would hear from innovative employers, but noted that employer-
based coverage has been declining since 1988 and is projected to
only cover 52% of Americans by the year 2000.
Panel 1: Leonard Schaeffer, CEO, Blue Cross of Calif.; William
Custer, Custer Economic Group.
Leonard Schaeffer testified that he was the Carter
Administration's Administrator of HCFA and had experience in
managed care. His testimony traced the history of managed care
in America, beginning in the 1920's. He explained that when
Congress created Medicare and Medicaid they followed the fee for
service model which caused the cost of health care to rise.
According to Mr. Schaeffer, this was because there was no reward
for appropriate delivery of health care under those systems.
He testified that we have seen a 451% increase in health benefits
provided to workers but only a 7% increase in wages since 1965.
As a result, more and more companies have been providing less in
wages. Some companies are turning to managed care which features
utilization review, case management and coordinated design of
financing and delivery to help keep costs down. Today about 65%
of Americans receive health care through managed care 75% of
Californians. Mr. Schaeffer recommended that we slowly begin
making changes to Medicare and Medicaid to utilize more managed
care.
Dr. Custer presented data illustrating the rising cost of health
care, including the fact that since 1970 expenditures on health
care have increased at an average annual rate of 11.6 % -- 2.9%
faster than GDP. If current trends continue, by the year 2000
only 52% of Americans will have employer-provided health care and
more than 50 million will be without coverage. He also testified
that the rate of growth in expenditures has slowed in recent
years. Much of that moderation can be explained, according to
Dr. Custer, by past decreases in real personal income. The
implication is that costs will rebound in future years in
response to increasing personal income. CBO, HCFA, and private
researchers all project health care cost increases in the coming
years, according to Dr. Custer. He also testified that the
health care delivery system has changed in response to an
increase in costs, and while more American are covered by HMOs,
the evolution of health care delivery still has a long way to go.
Ouestions and Answers: Panel 1
Senator Frist (R-Tenn) asked whether the shift to managed care
represents a one-time savings. Mr. Schaeffer testified that it
was not and explained that over time large savings will result as
more and more consumers develop relationships with providers and
seek preventative care. He also stated that health care delivery
was essentially a local issue, but because local conditions vary,
the federal government must set standards.
Senator Frist also asked whether academic health centers will
suffer due to managed care. Mr. Schaeffer stated that
traditional fee-for-service arrangements have funded academic
research centers, but the system cannot afford it any more. He
testified that we need to formulate a policy on whether we want
to still lead in research and if so, how to pay for it. He
recommended that research be funded separately from health care
delivery.
Senator Wellstone (D-MN) stated that over 50 million Americans
will be without health insurance by the year 2000. He asked what
steps the government should take to address the lack of coverage.
Dr. Custer stated that the choice was to either subsidize the
system or to require an employer mandate. Senator Wellstone
asked about the impact that cuts in public health care programs
would have on the system. Dr. Custer testified that cuts in
public programs would reduce access to health care. Senate
Wellstone noted the irony that during last year's health care
debates the Clinton plan was criticized for causing rationing,
whereas, anticipated GOP cuts in public plans, would now cause
rationing. Mr. Schaeffer explained that if the public plans
moved to managed care, that would not mean less access to care.
Senator Jeffords (R-VT) asked whether all types of delivery
systems can be regulated similarly. Mr. Schaeffer testified that
since families buy health care based on need, the government
should not regulate the product, but should instead regulate the
market. For example, young families often want HMOs because of
their high utilization and need market protection.
Senate Jeffords stated that he was concerned that the old, sick
and the poor would become segmented into public plans. He asked
what impact that would have on health care. Dr. Custer testified
that the solution was to have large pools of consumers to spread
risk. Mr. Schaeffer stated that products have been designed in
California that have lowered the costs for the old and elderly.
He testified that the market can be encouraged to compete for
these risks.
Senator Dodd (D-CT) noted that of the 41 million uninsured, 11
million are children. He stated that the GAO found that for
uninsured children, 89% of their parents work, and that 61% work
full-time. He stated that Medicaid has covered a large portion
of children who would otherwise be uninsured, and that Medicaid
cuts would increase the number of uninsured children.
Senator Dodd asked the panel about continuation of academic
health centers. Dr. Custer stated that the system used hidden
subsidies to support academics and that now was the time to make
the funding explicit. Mr. Schaeffer stated that it was a policy
decision. With respect to coverage of children, he commented
that children were easy to cover because they tend to be healthy
and that California covers children for about $400 per year.
Senator Abraham (R-Mich) asked how much money will be saved by
moving to block grants with respect to Medicaid. Mr. Schaeffer
testified that Medicaid is a cumbersome program because of the
local administration and federal oversight. He commented that
bureaucratic fears of being out of compliance with the program
caused it to be inefficient, e.g., people are afraid to be
innovative. He stated that streamlining might help.
Chair Kassebaum stated that the Committee would look at the issue
of academic health centers. She asked if dividing Medicaid by
giving AFDC to the states, but keeping SSI federal, would help.
Mr. Schaeffer stated that the real problem was that authority and
accountability were spread around which creates tension and
friction. He urged that Medicaid be transformed into something
like the MediCal plan which is user friendly and provides
services to about 34,000 persons.
Panel 2: Managed Care and Barriers to Market Reform: Kathleen
Angel, Digital Corp; Cristie Upshaw, Memphis Business Group on
Health; Glenn Potter, Kansas University Medical Center; Dr. James
Kimmey, St. Louis University
Kathleen Angel, Digital Corp, testified that she represents the
Corporate Health Care Coalition, a group of 25 self-insured,
multi-state companies that purchase health care. She testified
on Digital's success in enrolling employees in managed care.
Prior to 1991, 72 of employees were in fee-for-service plans and
85% were in HMOs. Today, 81% of employees are in HMOs and only
7% in fee-for-service, with 12% in a third plan. She credits
ERISA with allowing the innovative solutions her members have
created in order to ensure high-quality health care at a
reasonable price. Changes to ERISA preemption, according to Ms.
Angel, would stop this innovation.
Glenn Potter, Kansas University Medical Center, testified with
respect to health reform measures undertaken in the private
sector, including use of managed care (HMOs, PPOs) and the
formation of provider networks. These changes, according to Mr.
Potter, have slowed the growth of health care costs. He
recommended that Congress consider: (1) modeling Medicare on the
federal employees health plan (FEHBP) ; (2) providing incentives
to Medicare beneficiaries to choose managed care options; (3)
implementing insurance market reforms, and (4) enacting antitrust
law reform to allow mergers of tax exempt hospitals.
Cristie Upshaw, Memphis Business Group on Health, testified that
her group was formed by 11 employers in 1985 to address rising
health care costs. Today, the group represents 54 companies with
approximately 59,000 local employees and 147,500 covered lives.
The group provides utilization and quality management services
for health care services; psychiatric and substance abuse case
management, and case management of worker's compensation. Member
companies have experienced a decrease in length of hospital stays
from 5.5 days in 1987 to 4.0 days in 1994 for all diagnoses and
saved about $3,112,00. Ms. Upshaw urged the Committee to support
models of health reform that will allow local, market driven
solutions to continue.
Dr. Kimmey, VP, St. Louis University, testified on medical school
training research. He explained that these institutions have
historically depended on patient income to fund research. As
providers evolve to managed care systems, hospitals have become
leaner and must look to new sources of funding for their academic
mission. He testified that we must develop a policy with respect
to academic research hospitals.
Ouestions and Answers: Panel 2
Chair Kassebaum asked whether they agree ERISA preemption is
beneficial. Ms. Angel testified that the ERISA umbrella is
necessary because it allows plans to be flexible. She explained
that Digital was restricted by the State of Massachusetts from
establishing a PPO and had to apply to the state for a waiver.
Ms. Travis explained that the Memphis group served workers in
Arkansas, Tennessee and Missouri. She noted that a point of
service option is only permitted for Tennessee residents because
it is prohibited by the other states.
Senator Wellstone (D-MN) noted that the university of Minnesota's
teaching hospital had cuts last year. Dr. Kimmey testified that
the solution was to separate medical care from the research
component.
Senator Ashcroft (R-MO) asked about promotion of healthy life
styles. Mr. Potter stated that much has been done in that area
by the life insurance industry, but that attempts to apply such
rules to health insurance would "set groups off in opposition. "
Opening Statements (Day 2): Senator Jeffords (R-VT) opened the
hearing by stating that health care reform was a key to keeping
the deficit under control. He also stated that the private and
public health plans were linked -- changes to one affect the
other. Senator Jeffords expressed concern that market
segmentation was shifting the old, sick and poor to the public
plans.
Senator Simon (D-IL) stated that by the year 2000, about one-
fifth of all Americans will be without health insurance. He
stressed the importance that health care costs play in balancing
the budget. Senator Simon noted that the GOP has Senator
Bennett, a freshman physician from Tennessee taking the lead on
health care
Panel 1: Dr. Ellwood, Jackson Hole Group; Bill Gradison, Health
Insurance Association of America; Dr. Diane Rowland, Kaiser
Family Foundation
Dr. Ellwood, Jackson Hole Group, testified that despite the
failure of the 103rd Congress, health care reform was moving
ahead in the private sector. He stated that a draft discussion
paper his group submitted to the Committee focused on those who
have not shared in this improvement: small firms, the sick, and
public plans. Four principles are outlined in the paper: (1)
competition between health plans works. The paper cites the
California public employee plan which experienced real premium
reductions of 5.2 percent for 1995-1996; (2) Medicare, Medicaid,
small businesses and individuals are not benefiting from
competition; (3) the tax code should reward cost conscious
purchasing of health plans, and (4) successful buyers of health
care rely on the same four techniques: competition based on price
and quality; purchasing as a large group; motivating consumers to
be cost conscious, and providing comparative information on
plans.
With respect to insurance reforms, he testified that proposals
should include: guaranteed issue; renewability; limiting
preexisting condition exclusions; continuity of coverage, and
limited rating restrictions. Dr. Ellwood urged the Committee to
consider allowing small groups to pool together under ERISA to
purchase health care provided that they adhere to the same
standards imposed on health insurers. He did not recommend that
ERISA be amended to permit the states to tax plans.
Dr. Rowland, Kaiser Family Foundation, testified that 11 million
children do not have health insurance, about 1 in 6. She stated
that another 9 million would be without coverage but for the
Medicaid expansion. She urged the Committee to protect the
current Medicaid coverage of poor children, stating that cuts
would increase the number of uninsured. Dr. Rowland stated that
cuts in Medicaid cannot be offset by moving to managed care. She
noted that it only costs about $1,000 to cover a child, but that
it costs about $8,000 to cover elderly beneficiaries.
Former Representative Bill Gradison, HIAA, testified that a HIAA
survey found that 89% of Americans favor anti-fraud efforts; 85%
favor allowing all workers to participate in a plan; 79% favor
streamlining claims forms; 79% favor restricting preexisting
condition exclusions; 73% favor limits on lawyers fees in
malpractice suits. He testified that HIAA supports these reforms
but commented that they could, however, increase the cost of
health insurance.
With resect to small groups, Mr. Gradison testified that HIAA
supported rating limitations for small groups. He testified that
a balance could be achieved by directing carriers to establish
rates within 25% of a community rate based on geography, family
composition, age, gender and health behaviors. A 35%
differential would apply to individual policies.
Ouestions and Answers: Panel 1
Senator Jeffords stated that with average incomes of $30,000,
working Americans cannot afford individual policies costing
$6,000/year. He asked what could be done to help the individual
market. Mr. Gradison stated that unless there was a subsidy,
insurers could not guarantee issue in the individual market. He
cites COBRA experience as evidence that the individual market is
a high cost group. Dr. Rowland responded that the answer was to
reduce the cost of this coverage or to subsidize these
individuals. Dr. Ellwood testified that tax credits might help
this market.
Senator Jeffords stated that in the 1950's, during the Eisenhower
Administration, the idea of creating a quasi-government
corporation to spread poor health risks around was developed.
Under that concept, according to Senator Jeffords, all plans
would pay a premium to the corporation and would have poor risks
covered, e.g. a system of re-insurance. Mr. Gradison noted that
he helped work on that idea when he was with the Eisenhower
Administration and recommended that the Committee pursue it. Mr.
Gradison noted that the Clinton plan called for risk adjusting by
April of 1995, but commented that it was hard to design. He
stated that the State of New York has a similar, but different,
mechanism in place. He commented that the public plans should
also participate in the program SO they stop shifting risks to
the private sector. Dr. Ellwood stated that the proposed
corporation cannot "be a dumping ground for bad risks" but stated
that risk adjusting would help competition.
Senator Simon commented that the Clinton plan should have called
for an income tax increase to pay for increased coverage, not a
cigarette tax. He pointed to the inconsistencies that are being
advanced in opposition to ERISA waivers for the states, arguing
that if we are not going to have federal health care reform, it
is unfair to stop the states from pursuing it. Noting declining
coverage rates, Senator Simon stated that he would only support
leaving ERISA preemption intact if there was universal coverage.
Senator Frist (R-Tenn) stated that plans were competing on price,
but commented that it was hard to measure quality. Dr. Ellwood
testified that consumers do not have enough information to hold
plans accountable and that purchasers of health care are calling
for such measures. Senator First and Dr. Rowland proceeded to
discuss reforms in Tennessee, a state that now insures 94% of its
population with 25% of its population under managed care plans.
Dr. Rowland stated that the real structural savings will not come
from use of managed care because SO much of the Medicare costs
are in long-term care for the elderly. She stated that the
results of the Tennessee reforms were mixed because the state
still receives the same amount of federal payments.
In response to a question from Senator Wellstone, Dr. Ellwood
stated that since the federal government purchased 38% of the
health care in America, it should have a major say in reform. He
commented that the government runs old-fashioned plans.
Senator Abraham (R-MI) and Mr. Gradison discussed portability
features that have been part of many proposals. Mr. Gradison
stated that while portability would help end job lock, it would
not help in the situation where a covered worker moves to an
employer that simply does not have a plan.
Senator Simon questioned the worth of guaranteed issue of
coverage if the cost made it prohibitive. Mr. Gradison stated
that HIAA supported limiting the premium differential for these
policies to a 35% band.
Panel 2: History of ERISA and Its effect on State Efforts for
Health Care Revisions; Frank Cummings, Lebouf, Lamb et al; Lee
Greenfield, MN House of Representatives and the Reforming States
Group
Lee Greenfield, MN House of Representatives, testified on behalf
of the Reforming States Group (RSG), a group of 26 states that
are leaders in health care reform. According to Mr. Greenfield,
47 states have enacted some form of small market reform.
However, he testified that each state comes up against ERISA. He
testified that the Minnesota 2% tax on gross health care receipts
was challenged in court, but upheld by a federal judge that
rejected the indirect economic impact argument only because the
level of taxation was low. That decision is being appealed.
According to Mr. Greenfield, small market reforms have not
worked, in part, because employers with good risks self-insure
and then jump back into the small group market when their
experience changes. Mr. Greenfield testified that the RSG
supports allowing the states to move ahead, but at the same time
allowing large interstate business to stay covered by ERISA and
not be under different rules in each state. The federal
government should establish standards for miltistate plans. The
federal government should also establish a mechanism by which
states can meet the federal standards and then be free from
further federal preemption. According to Mr. Greenfield, this
approach would allow for a federal role in health reform, but
would give states the flexibility to carry out health reform.
Frank Cummings testified that ERISA works well for health plans,
that ERISA preemption should not be modified, but that some
carefully targeted improvements may be worth considering. To
support his argument, he cited that example of pre-ERISA
litigation he was worked on involving the Packard pension plan.
In this case, because the parties were from different
jurisdictions there was no agreement on the law to be used. The
judge advised the parties to settle the matter because the
litigation would "go on forever.' Mr. Cummings summarized
ERISA's provisions applicable to health plans -- written plan
document, named fiduciaries, annual reports, SPD, fiduciary
provisions, etc. Mr. Cummings testified that Title I of ERISA
has been a success, but that Title II was a failure because of
the frequent tax law changes.
Mr. Cummings testified in support of HR 995. He stated that he
supported the bill because it blocks state mandated benefits,
anti-managed care laws, preserves the voluntary nature of the
system, imposes no new taxes, and opens the door to MEWAs. He
testified in support of the insurance market reform provisions in
the bill and the formation of employer coalitions. ERISA
waivers, according to Mr. Cummings, "are dangerous, unnecessary,
and will not work."
Ouestions and Answers: Panel 2
Chair Kassebaum asked Mr. Greenfield to respond to Mr. Cummings'
testimony. Mr. Greenfield stated that he was describing a
framework whereby the federal government would set standards and
the states would only have jurisdiction with resect to "in-state"
plans and plans that did not conform to federal guidelines. Mr.
Greenfield described the cost-shifting that occurs under current
ERISA law. when self-insured plans go bankrupt and leave workers
without coverage for their bills.
Senator Jeffords asked Mr. Greenfield about the Minnesota 2% tax
on gross receipts used to finance health reform. Mr. Greenfield
explained that the funds were used to provide care to families
that do not qualify for Medicaid, but whose income was less than
200% of poverty. He stated that although the law was upheld,
they were also awaiting the Court's ruling in the Travelers case.
Senator Simon, noting that Mr. Cummings was an AA to Senator
Javits, commented that Senator Javits would have wanted universal
coverage. He asked Mr. Cummings who he was representing at the
hearing. Mr. Cummings stated that he was representing only
himself, not a client. [The rumor circulating at the hearing
was that he was representing a MEWA. ] Senator Simon asked Mr.
Cummings what he would do about the 41 million Americans without
health insurance. Mr. Cummings stated that we need to facilitate
the market. Senator Simon, noting the expected decline in
employer coverage from 67% to 50% by the year 2000, stated that
it was inconsistent to refuse federal reforms and then prevent
the states from trying to enact reform. Senator Simon stated
that he was not urging repeal of ERISA, but instead sought
moderate change to help workers.
Senator Jeffords stated that ERISA set standards for pension
plans, but not health plans. He introduced into the record a
paper by Michael Gordon on the history of ERISA which states that
the preemption language was added "at the 11th hour during the
conference committee". He stated that the state's interest in
health care was different than pensions. He also stated that
while nothing should be done to impair multistate employers,
something could be done to help with uncompensated care. Mr.
Cummings stated that if there are going to be mandated benefits,
it should be done at the federal level.
Senator Jeffords asked if the Committee should look at ERISA
remedies under managed care arrangements. Mr. Cummings stated
that the current remedies work and that punitive damages would be
expensive. Mr. Greenfield stated that remedies under ERISA were
poor and that it was too easy for self-insured plans to dump
people. Senator Wellstone stated that he agreed with moving
authority back to the states in this area.
Chair Kassebaum asked Mr. Cummings about benefit packages. Mr.
Cummings testified that the market will dictate what the benefit
package should be.
Panel 3: State-based Insurance Revisions and Barriers; Rick
Curtis, Health Policy Solutions; Josephine Musser, NAIC,
Insurance Commissioner of Wisconsin; Rick Smith, Association of
Private Pension and Welfare Plans.
Richard Curtis, Health Policy Solutions, testified with respect
to the need for rules in the small market. He explained that
states regulate the market though insurance, but because of
ERISA, self-insured plans are exempt from regulation. His
testimony explained "cherry picking" e.g., the way individual
carriers selectively market and enroll individuals and groups.
With resect to state reforms, he testified that partially insured
entities were creative as soon as a state gets a handle on
regulating them, a new problem will come up.
Josephine Musser, NAIC and Wisconsin Insurance Commissioner,
testified that ERISA does not provide sufficient consumer
protections to employees. She noted that her office was
dedicated to consumer protection and handled 60,000 calls and
11,000 letters each year without litigation. She testified with
resect to the harm brought about by fraudulent MEWAs, citing the
example of Mr. Zimmer who testified before the House Labor-
Management Relations Committee in 1992 in support of MEWAs and
subsequently pled guilty to fraud, according to a DOL March 9
press release. With respect to HR 995, Ms. Musser testified that
the bill ties states hands in the area of small group reform and
would be a step backwards. She testified that the bill's MEWA
provisions would strip the states of their regulatory authority
over MEWAs.
Ms. Musser also testified that consumers of ERISA plans and
insured plans should be afforded the same protections. She
stated that under HR 995 there would be disparity of treatment.
According to Ms. Musser, the NAIC is also concerned that HR 995
would expand staff leasing arrangements under ERISA.
Richard Smith, APPWP, testified in opposition to state waivers
from ERISA. According to Mr. Smith, many workers would lose
health coverage if ERISA preemption were amended because
employers would not pay the increased costs attributable to state
regulation.
Ouestions and Answers; Panel 4
Chair Kassebaum asked Ms. Musser about solvency standards for
self-insured plans. Ms. Musser stated that standards were needed
because there is no guarantee fund covering these plans and when
employers go bankrupt, workers lose benefits. Ms. Musser stated
that self-insured plans should set funds aside to pay claims.
Chair Kassebaum asked whether Wisconsin had community rating. Ms
Musser stated that Wisconsin has rate banding which limits the
amount of a premium that can be based on experience.
Mr. Smith stated that required capital reserves are a bad idea
and that the current tax code would not permit it. Those funds
should be invested into the company's productivity, according to
Mr. Smith. Ms. Musser stated that the NAIC has worked with the
states to develop solvency standards for self-insured plans.
TESTIMONY
OF THE
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
BEFORE THE
COMMITTEE ON LABOR AND HUMAN RESOURCES
OF THE UNITED STATES SENATE
Josephine Musser
Recording Secretary, NAIC
Commissioner, Office of the Commissioner of Insurance
State of Wisconsin
March 15, 1995
Introduction
Good morning Madame Chairwoman and members of the Committee, my name is
Josephine Musser. I am the Recording Secretary of the National Association of Insurance
Commissioners (NAIC) and Commissioner of Insurance for the State of Wisconsin.
The NAIC is the nation's oldest association of state public officials, composed of the
chief insurance regulators of the fifty states, the District of Columbia, and four U.S.
territories. On behalf of the NAIC, I would like to thank you for providing me with the
opportunity to address you this morning at this hearing on "Effective Health Care Reform
in A Changing Marketplace." My testimony today will focus upon the experiences of
consumers and the state insurance departments with the federal Employee Retirement and
Income Security Act, also know as "ERISA."
I have recently learned that, in testifying before you, I am continuing a tradition within
my state of testifying before this Committee on the topic of ERISA and consumer
protections. In fact, just over twenty years ago, a predecessor of mine, Commissioner
DuRose, then Commissioner of Insurance for the State of Wisconsin, testified before the
U.S. Senate Committee on Labor and Public Welfare (as this Committee then was
named) regarding some concerns he had with the then-proposed ERISA bill. He observed
that it was a "grievous derogation of consumer protection" that the bill preempted state
regulatory authority with respect to employee welfare plans without providing
comparable substitute regulation at the federal level. See Hearings before the
Subcommittee on Labor of the Committee on Labor and Public Welfare, United States
Senate, 92d Congress, Second Session, on S. 3598, at 740. I am before you today to
reiterate my predecessor's concerns. Now, over twenty years after the enactment of
ERISA, and at a time when an ever-increasing number of Americans receive their health
care coverage through ERISA-governed arrangements, many important consumer
protections are still missing from the statute.
As you know, ERISA is a complex statute with broad applicability to the regulation of
employee benefit plans in both the pension and health plan areas. Indeed, ERISA has
established many needed protections for beneficiaries of employee benefit plans --
particularly pension plans. However, ERISA provides inadequate protections to
employees who receive their health benefits through health plans governed by ERISA.
Today, I will address what state regulators believe to be the shortcomings in ERISA's
2
regulation of employee health benefit plans. I also will raise issues which this committee
is likely to confront as Congress examines certain health reform proposals.
The state insurance regulators believe that health care consumers who receive their health
benefits through health plans governed by ERISA deserve heightened protection in
several areas. First, all consumers of health care coverage should have the benefits of
enhanced "portability" and a reduction in the use of exclusions and rate hikes based upon
an individual's or group's health status. Thus, insurance reforms should be made
applicable to all types of health plans, whether they are governed at the state or federal
level. Federal proposals must be careful not to grant exemptions from certain reforms or
regulations for multiple employer welfare arrangements (MEWAs). Such a proposal
could foster fraud and undercut the success of insurance reforms.
Second, employees should be provided with a low cost, accessible, and meaningful way
to address complaints they may have with either the administration or benefits provided
through their health plan. Third, employees have a right to have the terms of their health
plan disclosed to them in a clear and understandable fashion and to be assured that the
plan will abide by these terms. Fourth, all ERISA health plans should be subject to
requirements which assure that the plans solvent -- that is, that the plans are able to
provide the benefits promised to beneficiaries. Finally, all health plans should be
required to conform to quality control measures and report uniform data relating to the
services provided to their beneficiaries. Such requirements will assure that consumers are
provided with quality health care. In addition, in these days of spiraling health care costs,
data collection concerning these plans will enable policymakers to understand where
health care dollars are being spent so that they can work to control overall health care
costs.
Background: ERISA and the Governance of Employer Health Plans
Admirably, the overarching and express purpose of ERISA is the protection of
beneficiaries of employer-sponsored benefit plans. The preamble to the statute states that
the statute seeks to protect:
the interests of participants in employee benefit plans and their
beneficiaries, by requiring the disclosure and reporting to participants and
beneficiaries of financial and other information with respect thereto, by
3
establishing standards of conduct, responsibility, and obligation for
fiduciaries of employee benefit plans, and by providing for appropriate
remedies, sanctions and ready access to the federal courts.
29 U.S.C. § 1001(b) (emphasis added). Importantly, employer health plans governed by
ERISA are not excluded from this purpose. Thus, the statute seeks to protect the interests
of beneficiaries of all employee benefit plans governed by ERISA -- including health plan
beneficiaries.
However, many important consumer protections were omitted from the portion of ERISA
governing health plans. In fact, the provisions in ERISA relating to health benefit plans
only make up a small portion of the statute itself. Twenty years after the enactment of
this statute, consumers continue to experience the detrimental effects of this imbalance.
ERISA currently contains sweeping language which preempts many state laws which
would otherwise govern employer-sponsored health plans. ERISA preempts state laws
"insofar as they may now or hereafter relate to any employee benefit plan 29 U.S.C. §
1144(a). The statute exempts state laws regulating insurance from this preemption.
However, twenty years and many court decisions later, the one thing that is clear from
this statute is that this preemption language is both far-reaching and confusing. Thus, in
addition to the gaps in consumer protections under ERISA, there has been great
uncertainty regarding its interpretation. The scope of ERISA's preemption and the lack
of clarity in the statute has had a "chilling effect" on certain state-level health reform
activity.
For the purpose of this testimony, I will call all health plans governed by ERISA "ERISA
health plans." However, it is important to note that the nature of the federal requirements,
and the extent to which the plan is subject to certain state laws, depends upon the specific
structure of the plan. For example, different requirements apply to single employer-
sponsored plans, as opposed to those formed pursuant to collective bargaining
agreements. Furthermore, if an employer chooses to provide his or her employees with
"insured coverage," the substance of that coverage and the solvency of the plan is
regulated by the states. Whereas if an employer "self-funds" the coverage, the regulation
of the plan, to the extent to which such regulation takes place, is entirely at the federal
level. In either event, however, a broad array of elements of such plans are regulated by
ERISA.
4
ERISA has had a huge impact upon the delivery of health care coverage in this country.
A recent study by the General Accounting Office in 1993 estimated that only 24% of
Americans received their health coverage through insured plans governed by the states.
Health Insurance Regulation: Wide Variation in States' Authority, Oversight and
Resources, GAO/HRD-94-26, December 27, 1993. That means that the remaining
portion of the American public that has health care coverage receives this coverage
through plans governed by ERISA-or through Medicare and Medicaid and other public
programs. The growing portion of the population which is receiving its coverage through
ERISA-governed arrangements makes it all the more important that Congress ensure that
beneficiaries of ERISA health plans are accorded meaningful protections with regard to
this coverage.
I will address several areas in which existing consumer protections within ERISA are
insufficient. I also will comment upon the "ERISA Targeted Health Insurance Reform
Act of 1995," H.R. 995, recently introduced by Representative Harris W. Fawell (R-III.).
I am addressing this bill because it is one of the more significant health-related proposals
introduced during this Congress, H.R. 995 relates to ERISA, and ERISA is within this
Committee's jurisdiction. Furthermore, the bill raises issues which this committee is
certain to confront in dealing with health reform.
Insurance Reform and ERISA Health Plans
As many of you may know, the states have paved the way in the area of small group
insurance reform-and are continuing to do so. To date, forty-seven states have enacted
some type of small employer group insurance reform. Many of these state laws are based
upon the NAIC's Small Employer Health Insurance Availability Model Act, adopted by
the NAIC in 1991. The NAIC Model Act and the reforms enacted in most states are
designed to enhance market competition by creating a level playing field within the
insured marketplace regulated by the states. These reforms limit the ability of insurers to
raise rates due to the claims status or experience of a certain group. They also enhance
portability by prohibiting insurers from imposing preexisting condition limitations on
groups which previously had qualifying coverage.
In addition, just this past weekend, the NAIC, at is 1995 spring National Meeting,
adopted amendments to its small group reform model act which, among other changes,
5
now extends the protections of small group reforms to one life self-employed groups and
which includes an adjusted community rating methodology. The new rating methodology
would only allow for premiums to vary based upon age, geographic location, and family
composition. In addition, the NAIC has made it a priority over the coming year to
develop a model law to address questions relating to the individual health insurance
market. Thus, the states have paved the way in insurance reforms, and are continuing to
move forward in this area. The NAIC's recent small group model provides the states
with a means to continue to move forward in this area.
However, the states need your help in expanding the scope of these reforms. ERISA
constrains the states' ability to promote portability among all types of employer-
sponsored plans. The states are unable to apply their insurance reform statutes to ERISA
health plans. The NAIC urges that Congress, if and when it enacts health insurance
reform legislation, do so in a manner that ensures that the same reforms apply to insured
and non-insured plans. Such a level playing field requires uniformity of not only the
standards imposed, but of the stringency and level of oversight of these plans.
Insurance reforms are indeed important and can enhance the availability and affordability
of health care coverage. However, these reforms do not take place in a vacuum. To the
contrary, the potential success of insurance reforms is directly linked to the breadth and
varied health status within the marketplace. If the market incentives are such that only
healthy groups will find it beneficial to self-fund their coverage, the insured market place
will become the refuge of individuals and employer groups with poor or "high risk"
health status. Such an occurrence would make it virtually impossible to stabilize rates
within the insured marketplace in a way which would make coverage truly affordable. It
is therefore imperative that any federal insurance reforms create a truly level playing field
-- in terms of the standards imposed, the level of oversight, and the coverage demands
placed upon each segment of the marketplace.
The partnership created between the federal government and the states in the
development and enforcement of standards for Medicare supplement insurance (Medigap)
is an example of a way in which the federal government has promoted uniform standards
across the country but has availed itself of the ongoing strength of the state insurance
departments: consumer protection. In that instance, the states, through the NAIC, worked
to develop the Medigap standards and implement and enforce these standards. The NAIC
stands ready to offer the technical expertise of the states to members of Congress as you
6
consider insurance reforms. We encourage you to build upon the proven success of this
type of federal/state cooperation.
Multiple Employer Welfare Arrangements (MEWAs)
As you may know, MEWAs provide a means whereby groups of employers join together
to provide health care coverage for their employees. The states currently regulate
MEWAs -- both those MEWAs which purchase insured coverage for their members as
well as those which self-fund the coverage. Although the amendments to ERISA
clarified certain aspects of the states' jurisdiction over MEWAs, as I will explain, the
states need further federal action in order to help protect consumers from fraudulent and
incompetent MEWA operators.
Furthermore, it is critical to realize that MEWAs provide health insurance -- nothing
more and nothing less -- and such entities must be regulated using the same tools we use
to regulate health insurers if we are to protect adequately the public. In addition,
MEWAs must be subject to the same reforms as traditional insurers in order to prevent
unfair competition in the marketplace.
MEWAs are very different from the other types of health benefit plans authorized under
ERISA. Unlike traditional ERISA health plans, MEWAs market health benefits to small
employers, they use insurance agents, they provide coverage through associations with
looser affiliation and less permanence than traditional ERISA plans, and they compete
directly for business with traditional insurers. The differences between MEWAs and
ERISA plans require different methods of oversight of such plans.
While the states have the authority to regulate MEWAs, many MEWAs are
camouflaging themselves as collectively bargained or staff leasing arrangements pursuant
to ERISA and claiming to be exempt from state regulation. Because there is no federal
certification process for ERISA-governed entities to which the states can refer, states
often engage in lengthy jurisidictional battles with these entities even before states can
assert their regulatory authority. Consequently, under the current structure, many years
can and often do pass before states can oversee such fraudulent MEWAs. In the
meantime, consumers' claims can go unpaid.
7
In order to give you a sense of the potentially devastating impact of inadequate regulation
in this area, I would like to share with you a few statistics. The GAO estimated in a
survey of state regulators that between January 1988 and June 1991 almost 400,000
participants were left with over $123 million in unpaid claims by MEWAs. In 1994, the
state of North Carolina reported that there had been a total of $4,380,000 in unpaid claims
from MEWAs not paying the claims of covered persons. This is just one state's
experience. Unlike other types of insurance company insolvencies where a state guaranty
fund would absorb the losses, there is not a guaranty or similar fund to pay the claims
owed by fraudulent MEWAs.
Let me share with you a few examples of the harm brought about by fraudulent MEWAs.
On January 26, 1995, Michael R. Stiles, the United States Attorney for the Eastern
District of Pennsylvania, and Robert M. McKee, Special Agent in Charge, Office of
Labor Racketeering, Department of Labor, announced the indictment by a federal grand
jury of four men blamed for health insurance fraud that left victims in 26 states. In a 15-
count indictment, the authorities charged Edward M. Zinner of Virginia Beach, Va., the
founder of a rock band, a restauranteur, and the head of two MEWAs and related
marketing and administration firms; Jeffrey C. Neal, formerly of Virginia Beach, a plan
administrator and trustee; Mark "Waldo" Waldron of Portsmouth, Va., a plan trustee and
keyboard player for the band; and William E. Moulton, Jr., also of Virginia Beach, a plan
sponsor, with racketeering and bilking subscribers of more than $1 million. Allegedly,
Mr. Zinner marketed and administered two fraudulent employee health insurance
schemes that received $12.6 million in subscriber premiums from November 1990 to the
present.
According to the indictment, Mr. Zinner, Mr. Neal, and Mr. Waldron falsely informed
agents, brokers, employers, and state regulators that the MEWAs were qualified benefit
plans under ERISA; falsely represented that the plans were insured and had adequate
claims reserves when in fact they were uninsured and did not have adequate reserves; lied
to actuaries about the plans' finances and ignored actuarial recommendations for fully
funding the plans; used the plans' funds for personal debts, business debts unrelated to
the plans' health claims, entertainment expenses, no-interest and no-term "loans," and
increases in personal lines of credit; fraudulently diverted the services of MEWA
administration employees for work in Mr. Zinner's band, "Southern Legends," and
restaurant, the New England Lobster and Clam House in Virginia Beach; and evaded and
8
denied claims, among other things. The indictment alleges that Mr. Zinner and his
associates marketed fraudulent insurance coverage to small businesses in Arizona,
California, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky,
Louisiana, Maryland, Massachusetts, Michigan, New Jersey, Nevada, New York, North
Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia,
West Virginia, and Wisconsin. Business Insurance, February 13, 1995, p. 1, reported that
Mr. Neal has agreed to plead guilty to certain charges in the federal indictment and
cooperate with the prosecutors. According to a news release from the Department of
Labor dated March 9, 1995, Mr. Zinner has pled guilty to one count of racketeering and
one count of forfeiture and has agreed to forfeit one million dollars. Mr. Waldron pled
guilty to one count of wire fraud.
Allegedly, Mr. Zinner formed Atlantic Healthcare Benefits Trust (AHBT) in Virginia in
1991. He operated this company until October 1992 when he sold the plan and a related
administration firm. Supposedly, the plan was "sponsored" by United Healthcare
Association of America. The indictment shows that United Healthcare purported to be an
association of small employers, but was actually controlled by Mr. Zinner through
"straw" directors and officers, including Mr. Moulton. Mr. Zinner also controlled
National Insurance Consultants, Inc. and National Investment Consultants, Inc., which
functioned as third-party administrators and marketed AHBT through agents and brokers.
Two weeks after selling National Investment Consultants and AHBT, Mr. Zinner
established American Fidelity Trust (AFT), which was "sponsored" by the National
Association of America's Workers and administered by National Insurance Consultants,
Inc., a newly-formed Delaware corporation.
Most of AHBT's and AFT's policyholders were small businesses. For example, in
Pennsylvania, those purchasing health coverage through AHBT included a screw
manufacturing firm, a Ford dealership, a construction contractor, a restaurant, and others.
The following is the story of one family who had thought they were thoroughly covered
by AHBT.
In March 1989, a family in Brogue, Pennsylvania celebrated the birth of a baby daughter.
Unfortunately, the baby was born with an extremely serious birth defect. At one point,
doctors gave the baby a 1-in-5,000 chance of living. Even with such extraordinarily high
odds, she lived, and the pediatric surgeons at Johns Hopkins Hospital in Baltimore
referred to her as a "miracle baby." The baby was born with a large omphalocele-she
9
had no skin or muscle across her entire abdomen. She was in the neonatal intensive care
unit for almost three weeks with only bandages covering her internal organs. The doctors
opted to use donor skin as an improved covering. For the next three weeks, chances of an
infection were great. Two doctors even took the couple aside and suggested they think
about how to cope after the little girl's death. The doctors' biggest concern was that the
infant's body would reject the foreign skin and would require some other sort of bandage.
Because the infant had not yet developed an immune system, her body did not reject the
donor skin. At the age of five weeks, she was old enough to have her own skin grafts
taken, and the doctors were able to remove the donor skin and use her own tissues. The
infant was two-months-old before she could go home. Since then, the family has returned
to the hospital numerous times for various operations. As only skin covered the infant's
internal organs, the doctors were concerned about her falling and rupturing a vital organ.
So, the doctors implanted a mylex mesh that covered the infant's organs and lay
underneath her skin.
The Pennsylvania parents noted that they had good insurance coverage through the
husband's employer. Indeed, that company paid for the first seven operations. The
problem the couple encountered was that insurance company took so long to pay their
portion of the bills. The parents said collection agencies pursued some of these accounts
because the insurer took up to 19 months to pay their bills. Then, the husband's employer
changed to a new insurance company, Atlantic Healthcare Benefit Trust (AHBT). Before
that switch, the husband's employer made sure to inform AHBT that the child had been
born with birth defects, the number of operations she had, and the fact that she might
need many more. The parents even sent a photograph of her protruding belly (the little
girl had the appearance of being pregnant because she had no muscle under her skin).
The new insurer said they would accept the family, even with all of the little girl's pre-
existing conditions, and the AHBT representative stated that they positively understood
her treatment had not ended and she would require even more care.
The eighth operation for the little girl, now almost three, was scheduled for February 3,
1992. This would have been the first operation under the new insurance policy. The
parents followed the directions on the card from AHBT. The directions stated that the
family was to notify the insurance company at least 72 hours before a scheduled
operation. The parents called eight working days before the operation. A secretary from
AHBT called back to say that the insurer did not cover birth defects and congenital
diseases and would not pay for any of the young girl's expenses. The parents then
10
informed the secretary of a letter received from the vice president of the insurance
company that stated: " your coverage includes full takeover of all pre-existing
conditions...." According to the parents, the secretary replied, "That letter means
nothing."
The parents immediately called the hospital, which temporarily postponed the surgery for
a short time. As of the time of that procedure, March 7, 1992, the parents wrote that the
scheduled surgical procedure would cost at least $4,000 and the 10-day recovery period in
the hospital would cost up to $15,000, with more required if the young girl needed to
spend any time in intensive care. The husband's employer hired a lawyer who said the
daughter should be covered, but AHBT continued to insist that they had no obligation to
pay.
Regulators in a number of states filed cease and desist orders and temporary restraining
orders against both AHBT and AHT. The Virginia Corporation Commissioner revoked
Mr. Zinner's agent license in January 1993.
Interestingly enough, Mr. Zinner submitted a prepared statement on June 16, 1992 before
the Subcommittee on Labor-Management Relations of the House Committee on
Education and Labor. During that hearing, the Subcommittee on Labor-Management
Relations considered three bills that would amend ERISA. Mr. Zinner endorsed
"reasonable federal standards for MEWAs" and called for legislation to "preempt
redundant and unreasonable state regulations." He continued, "Most of the proposals for
reserve requirements reflect a confusion of our benefit plans with insurance. Well-run
MEWAs want to be, and my operations are, actuarially sound, and conservatively so. As
I stated earlier, sound actuarial practices, coupled with an ability to assess the
participants, provides sufficient financial security."
Incredibly, in his statement, Mr. Zinner also offered his view that access to health
insurance would not be improved by reliance on state insurance commissioners. "There
is one point I want to leave with you in my statement," Mr. Zinner noted. "This
Committee should not adopt legislation which relies on the state insurance commissions"
(emphasis in original). He added:
None of these negative experience with MEWAs, such as unpaid
claims and fraudulent practices, are of primary concern to the Insurance
11
Commissioners in the states that seek to put MEWAs out of business. In
fact, the States are engaging in unscrupulous practices which are blocking
access to benefits and often causing unpaid claim situations to occur. That
is, MEWAs can be perfectly sound but still will be run out of business by
certain States.
*
*
*
I urge you to develop legislation to cure those problems. To continue offering low-cost
healthcare benefit plans for small business, we need clear Federal pre-emption for ERISA
plans from burdensome State requirements. We are willing to consider reasonable
provisions for registration and certification by the Department of Labor, and they would
be helpful if, and only if, coupled with clarified pre-emption of State regulations.
As time has borne out, not all individuals who decry state regulation do so out of the
purest intentions -- nor would it appear that "uniformity" or the provision of health care
benefits are their prime or sole concerns. Mr. Zinner's MEWAs had many victims. Their
stories are too numerous to elaborate upon now.
The following additional story of a victim of a "sham union" plan should give you a sense
of the potentially devastating effect such plans can have upon individuals when purported
health insurers fraudulently escape proper oversight. A 42 year old man from Florida and
his family were participants in a plan called the National Council of Allied Employees
(NCAE) through which a local union (Local 444) offered "Physicians Benefit Plan"
(PBP). PBP's brochure represented that NCAE was insured by Lloyd's of London. (See
attachment 1) The man had enrolled for health coverage through this plan for his family-
owned citrus company in Central Florida. The coverage documents led this man to
believe he was well covered. Unfortunately, he was to face significant medical
difficulties. The man saw his family doctor in May of 1992 for heart problems. He was
admitted to a hospital shortly thereafter, then transferred to a hospital with superior
cardiac facilities for a heart catheter and angioplasty; an aneurysm developed. He
returned to the hospital in June to have the aneurysm repaired. In January of 1993, he
returned to the hospital for another heart catheter and angioplasty. In April of 1993, he
returned to the hospital for yet another angioplasty; he had a heart attack in the recovery
room which required two additional angioplasties. He later required emergency surgery
for a triple bypass and repair of a main artery. During surgery, he suffered an acute
12
hematoma in his stomach, groin, and legs. After this traumatic series of medical
difficulties, the couple learned that their plan was fraudulent and that they had no
coverage for the extensive medical treatment. The sham union plan left them with
$150,000 in unpaid medical bills. Due to the overwhelming financial problems, the
family was forced to relocate to North Carolina.
The state of Florida originally filed an administrative complaint against NCAE in March
of 1992 as an unauthorized insurer naming the four local unions known to be operating
under NCAE in Florida. As part of its overall efforts, Florida tried to track down the
insurance agent who sold the plan to this particular family. Once the agent was finally
tracked down in Oregon, the state of Florida hit a dead end in trying to collect money
from him. The problem was that this plan was not connected with any authorized
insurance company, even one acting as a third-party administrator. This is an example of
the problems faced by insurance departments with sham plans which try to avoid
regulation and then leave victims high and dry without any claims paid.
Several years ago, a working group of state regulators worked with representatives of the
AFL-CIO to find common ground for addressing some of the problems associated with
questionable collective bargaining arrangements. S. 2843, introduced in the 102d
Congress by Senator Sam Nunn (D-Ga.), incorporated the work product of those
discussions. The NAIC has supported such efforts to address the serious problems caused
by questionable collective bargaining and staff leasing arrangements and pledges to work
with this Committee and any interested members to enact appropriate legislative
solutions.
Finally, as you consider health insurance reforms it is important not to single out MEWAs
and exempt them from any reforms applicable to other health insurers -- such an
exemption could greatly undermine the success of the reforms. If MEWAs are able to opt
out of the rating pools applicable to other types of insured arrangements, adverse risk
selection could ensue. For example, employers with young and healthy workers would
opt to join MEWAs which either self-fund or purchase insured coverage which "pools"
their risk separately. In either event, a fundamental tenet of insurance, the spreading or
pooling of risk, would be undercut and market fragmentation could follow. The NAIC
looks forward to working with members of this Committee in order to craft legislative
solutions which foster a level playing field among entities providing health care
insurance.
13
ERISA Health Plans Should be Subject to Solvency Requirements
Unlike pension plans, ERISA health plans are exempt from any meaningful financial
standards or oversight. Self-funded ERISA health plans are specifically excepted from
ERISA's minimum participation standards, minimum vesting standards, benefit accrual
requirements, and minimum funding standards. Therefore, ERISA does not subject self-
funded health benefit plans to the same initial financing standards as it does pension
plans. ERISA also contains no requirements to regulate the continued solvency of self-
funded ERISA health plans once such plans go into operation. Even worse, ERISA
provides absolutely no financial safety net for the beneficiaries of self-funded ERISA
health plans. This omission stands in sharp contrast to state guaranty funds, which
undergird insured plans-including insured ERISA health plans, and the Pension Benefits
Guarantee Corporation, the safety net for pension plans.
ERISA's limited requirements relating to the payment of claims have no teeth. While
ERISA obligates claim fiduciaries to pay valid claims submitted-this does little to help
plan participants if a plan becomes insolvent. In such a case, participants can do little
other than join the bankrupt employer's other creditors to pursue the firm's remaining
assets.
Congress should recognize that all entities which bear risk in connection with the
provision of health care coverage, including ERISA health plans, should be subject to
financial regulation and standards. Such standards include initial capital requirements,
risk-based capital requirements (capital requirements adjusted for the level of risk
assumed by the entity), and effective protection for participants in the event of health plan
insolvency. Furthermore, all types of health plans should be subject to ongoing
regulation of their financial condition.
Consumer Complaints and ERISA
Currently, ERISA does not assure that beneficiaries of ERISA health plans have access to
either meaningful internal or external complaint procedures or remedies.
14
Internal Appeals and Review of Health Plan Decisions
ERISA does not guarantee that participants in both insured and self-funded ERISA health
plans have an unbiased and independent internal review process. The statute does require
that health plans provide a mechanism for participants to appeal a plan's denial of a
participant's claim. However, if a person is dissatisfied with the result of this appeal, the
next level of review may be conducted by the same fiduciary party whom denied the
claim initially. Thus, plan participants do not have the opportunity to seek an
independent review of a plan benefit decision.
Review of Consumer Complaints by a Public Agency
What can a beneficiary of an ERISA health plan do if he or she is dissatisfied with a
decision made by his or her health plan? Unfortunately, ERISA plan participants do not
have recourse to a public agency that has jurisdiction over these plans and the capacity to
respond to the beneficiary's concerns in a timely and aggressive manner. The beneficiary
may file a complaint with the U.S. Department of Labor (DOL). However, the
Department of Labor's employee benefit complaint review program is very limited-as
the Department itself has admitted.
The Department of Labor's Task Force on Assistance to the Public, in a 1992 report,
stated that, for complaints that appear to have merit, its Division of Technical Assistance
and Inquiries tries to seek a response from plan administrators. However, if the plan
official does not agree to approve the benefits, the staff member will not pursue the
matter further. Instead, DOL staff will either suggest that the claimant seek legal counsel
or will refer the matter to the DOL's Office of Enforcement. Thus, as the Department of
Labor's Task Force noted, the Department of Labor does not have an explicit statutory
mandate to assist individuals who wish to pursue complaints related to ERISA health
benefit plans. Further, the DOL's activity in this area is minimal.
By contrast, while participants in self-funded ERISA health plans only can appeal to an
ill-equipped Department of Labor, beneficiaries of insured ERISA health plans have
limited access to state insurance departments to obtain an independent and informal
review of some of their complaints. Many state insurance departments try to help
beneficiaries of ERISA self-funded and insured health plans, although they have no
15
jurisdiction over the self-funded plans and limited jurisdiction over the insured ERISA
health plans. For example, during 1994, the Wisconsin Office of the Commissioner of
Insurance (OCI) received 996 complaints relating to self-funded ERISA health plans out
of a total of 4,666 complaints concerning health care coverage. Thus, complaints
regarding self-funded ERISA health plans comprised over 20% of the complaints
regarding health care coverage received by my office last year, even though our
department has no enforcement authority over these plans. Despite its lack of jurisdiction
over these entities, the Wisconsin OCI was able to help beneficiaries recover $281,347
from these plans. One could only speculate as to the additional numbers of beneficiaries
of such plans who had complaints, but did not even attempt to call our state department --
perhaps because they realized that the OCI did not have jurisdiction over these plans. The
Alaska Insurance Department recently reported receiving approximately twenty-five calls
a week from consumers having problems with self-funded ERISA health plans.
Clearly, ERISA fails to provide participants with an effective external administrative
appeal mechanism.
Limited Redress Available to ERISA Plan Beneficiaries through Litigation
As noted above, if participants in ERISA health plans believe they have been aggrieved
by the decisions of their plan administrators, they may not have much success with the
limited internal and administrative remedies available under ERISA. Consequently,
despite the difficulty and expense presented by this option, a beneficiary may choose to
pursue his or her claim through litigation. Importantly, it is unlikely that someone will
choose to litigate smaller claims. Therefore, for many claims, ERISA provides
consumers with no meaningful remedy. Furthermore, even when a beneficiary pursues a
court suit, ERISA seriously restricts the avenues of redress available to ERISA
beneficiaries.
ERISA does permit a participant to bring a court action for recovery of benefits which an
ERISA health plan owes him or her. However, the plan can remove most state court
actions to federal court -- a forum in which plaintiffs often must wait for many years
before their claim comes to trial. In addition, once in federal court, ERISA preempts
many state law claims. For example, it preempts a state common law cause of action for
failure to process a benefits claim in good faith.
16
Furthermore, ERISA prevents states from implementing innovative dispute resolution
mechanisms for participants in ERISA health plans. Hence the states' hands are
completely tied; ERISA hampers state efforts to spare individuals and businesses the cost
and time of litigation.
Thus, as outlined above, ERISA seriously impairs the ability of ERISA participants to
enforce the benefits provided to them by ERISA health plans. All consumers can do is
sue in federal court. This remedy is illusory for all but truly catastrophic claims because
consumers likely will not find it cost effective or worthwhile to file a suit for smaller or
medium-sized claims -- claims which nonetheless could be difficult for most Americans
to bear in addition to their other financial responsibilities. Congress should correct this
egregious deficiency within the statute. The current scope of ERISA's preemption of
state law remedies only should remain if statutory changes are enacted which assure
meaningful governmental oversight and authority over ERISA health plans' claim and
coverage determinations. Further, participants must be provided with internal and
external appeal mechanisms in addition to the right to appeal to federal court.
Fair Disclosure of Terms of Coverage
ERISA fails to ensure that ERISA plan beneficiaries receive complete and meaningful
disclosure of plan benefits and plan changes. While the statute does require health plans
to distribute a summary of the plan, annual reports, and a summary of material
modifications to the plan to plan participants, it does not require any outside or
administrative agency review of the documents. Furthermore, if a plan has been changed,
ERISA does not require prompt notification of the changes. Instead, plan administrators
have as long as 210 days -- about seven months -- to notify beneficiaries of plan changes.
This absence of meaningful notice under federal law contrasts with the rights available to
beneficiaries under state law. If an employee is fortunate enough to have an employer
who is offering an insured plan, the plan's policy forms are subject to review by the state
insurance departments. Most states also require insured health plans, including insured
ERISA health plans, to give participants prompt notice of changes to the plans.
Beneficiaries of non-insured ERISA health plans are at the mercy of their plan. A recent
U.S. Supreme Court decision highlights the fact that employers have a fair amount of
latitude to cancel benefits with only general notice requirements. See Curtiss-Wright
Corp. V. Schoonejongen et al., 63 U.S.L.W. 4201 (1995).
17
Fair Coverage
Critics of state insurance laws often object to the benefit requirements under certain state
laws as overly onerous and restrictive. However, let us examine the shocking effect of
ERISA's absence of coverage requirements. A family, the Browns, had a child born with
severe congenital defects. Their self-funded single employer-sponsored ERISA plan
refused to provide coverage for the child because it only covered newborns thirty-one
days after birth, and, even then, only provided coverage if these newborns had no
disabilities. For years, state insurance law has banned such shocking and disgraceful
exclusions. However, when the Brown family challenged this exclusion in court, the U.S.
Court of Appeals for the Fifth Circuit was forced to acknowledge that ERISA's
preemption of state insurance laws left the Browns without coverage for their child. See
Brown V. Granatelli, 897 F.2d 1351 (5th Cir. 1990).
While we would agree that employers should have certain flexibility with respect to the
coverage they offer employees -- consumers deserve more protection than that currently
provided by ERISA. congress should revise ERISA to ban egregious exclusionary
practices.
In addition, the federal statute has permitted ERISA health plans to terminate or reduce
the maximum amount of benefits provided for a certain type of illness. This has had
particularly onerous consequences for individuals with disabilities or life-threatening
illnesses, such as AIDS. See McCann V. H & H Music, 742 F. Supp. 392 (S.D. Tex.
1990) aff'd 946 F.2d 401 (5th Cir. 1991), cert. denied 113 S.Ct. 482 (1992). The
Americans with Disabilities Act ("ADA") of 1990 has improved the situation somewhat.
The U.S. Equal Employment Opportunity Commission (EEOC) has issued enforcement
guidelines under the ADA which only allow an ERISA health plan to terminate benefits if
the plan can demonstrate that the benefit termination is not a "subterfuge" or made with
the subjective intent to discriminate against a particular disability. See "Interim
Enforcement Guidance on the Application of the ADA to Disability-Based Distinctions in
Employer Provided Health Insurance," EEOC, June 8, 1993. However, the federal courts
have not definitively interpreted the relationship between ERISA health plan discretion
and individual rights under the ADA. The application of the ADA to ERISA health
plans should be clarified by federal statute. Further, since the ADA does not apply to very
small employers, federal law should clearly prohibit all ERISA health plans from
18
discriminating against particular groups or disabilities in their provision of health care
coverage.
Quality Health Care
With the increased prevalence of managed care in the health care market, the
administration of ERISA health plans have become inextricably linked with the quality of
the health care provided through the plan. For example, plan hospital preauthorization
requirements or utilization review requirements can determine whether a beneficiary has
access to coverage for certain medical care. Many states regulate heath plan utilization
review procedures. However, in the case of ERISA health plans, federal courts have held
that such procedures relate to the administration of a health care plan and therefore are
preempted by ERISA. ERISA's preemption therefore removes an important existing
check on the quality of ERISA health plans -- and provides no meaningful federal
replacement for this void.
Federal courts have expressed concern regarding the scope of ERISA's preemption in this
area. In addressing the question of whether ERISA shielded a self-funded ERISA health
plan from claims relating to actions performed in connection with the administration of
the plan, the U.S. Court of Appeals for the Third Circuit noted that "[ERISA] removes an
important check on the thousands of medical decisions routinely made in the burgeoning
utilization review system there is no deterrence for substandard medical decision
making bad medical judgments will end up being cost free ERISA health plans will
have one less incentive to seek out the companies that can deliver both high quality
services and reasonable prices." Corcoran V. United Health Inc., 965 F.2d 1321, 1338 (3d
Cir. 1992). The NAIC shares the court's concern.
ERISA should be amended to provide plan participants with a way to seek redress if they
suffer an injury due to the negligence or malfeasance in the administration of a plan.
19
Data Reporting
When used appropriately, health data on plan participants can lead to better management
of health care costs, employee prevention and education efforts, improved quality of
service, and more effective coverage. However, at the moment, there are no federal
requirements which subject non-insured ERISA health plans to quality standards or any
data reporting requirements. Further, states are restricted from requesting such
information from these plans -- thus thwarting any efforts to monitor and improve the
overall health status of communities. Furthermore, ERISA currently does not address the
privacy concerns of participants in ERISA health plans.
ERISA should be revised to allow for the collection of health data concerning ERISA
health plan participants and to protect the privacy and confidentiality of sensitive
beneficiary information.
Comments Upon Future Congressional Action
Congress certainly will confront many challenges as it considers insurance reform and the
relationship between such efforts and ERISA. A recently introduced bill on the House
side, H.R. 995, suggests certain changes in the regulation of the small group insurance
market and seems to attempt to apply some standards equally to insured and ERISA
health plans. Unfortunately, it also ties states' hands in the area of small group reform
and would force many states to move backwards, not forward, from existing market
reforms. The bill also creates a federal exemption process which could strip the states of
their regulatory responsibilities over MEWAs. The NAIC has only had a limited
opportunity to review H.R. 995 and would like to reserve the right to provide a more
detailed analysis on its provisions at a later date. However, I would like to highlight
certain areas of the bill which raise issues this Committee is certain to grapple with if it
attempts to enact federal legislation in the area of health insurance reform.
First, as I noted earlier, it is critical that consumers of insured plans and ERISA plans are
afforded the same consumer protections. This can only occur if both the standards,
enforcement, and consumer complaint handling systems are equally rigorous for all types
of plans. The NAIC is concerned about any regulatory construct under which there is a
20
disparity, or a potential for a disparity, in the application of reforms to insured and ERISA
health plans. Such a dissimilarity would harm consumers.
For example, H.R. 995 ostensibly creates a level playing field for ERISA-governed and
insured health plans. However, as one example of the way this statute attempts to
implement such standards, the bill provides that a set of standards developed by an
unspecified private entity, would apply to all types of health plans, subject to federal
approval. If no private entity develops standards which are approved by the Secretary of
Health and Human Services, there could be no standards for ERISA health plans in this
area. (The bill provides the NAIC with the opportunity to develop standards for insured
plans). It is thus conceivable that there could be a disparity between the level of consumer
protections available to consumers of insured plans and ERISA health plans in the
important areas of provider network quality and services, and the rights of covered
individuals with respect to denial of services through utilization review. Once again,
persons covered under ERISA plans would lose out.
H.R. 995 strips the states of much of their existing regulatory authority in the areas of
small group insurance and health insurance. Unless states are granted a waiver, states
authority over insurance rating and several other important areas would be preempted.
The bill only maintains minimal authority over such plans within the states' hands. Thus,
the bill creates a confusing regulatory structure under which oversight of health insurance
plans would be awkwardly split between the states and the federal government.
Implementation of this split arrangement is certain to be confusing and may likely harm
consumers.
One problematic consequence of the bill's suggested regulatory construct lies in the area
of solvency regulation. Without a waiver, states would not have oversight responsibility
over a small group health insurer's rating structure. However, it appears that states still
would be expected to regulate plans for solvency. It is difficult to imagine how states
could regulate solvency without full oversight authority over a health insurance
company's revenue source: premiums. In the context of the federal health reform debate
in the 103rd Congress, the NAIC opposed any split in the authority over premium rates
and plan solvency. The NAIC continues to oppose any such split authority.
21
The bill also preempts many state laws in the areas of managed care, including utilization
review statutes, without providing for a clear substitute to protect consumers in many
areas relating to medical decision-making.
Federal legislation should clearly spell out the duties of any federal administrative body to
which it delegates responsibility. Also, federal legislation should clearly provide for the
resources for the agency to carry out its assigned duties. H.R. 995 gives the Department
of Labor many more responsibilities without specifying the mechanisms or resources
through which the Department is to carry out its duties. For example, nothing within
H.R. 995 gives the Department of Labor any more of a specific statutory mandate to
respond to and process consumer complaints than currently exists under ERISA. Thus,
under H.R. 995, the existing gaps within the law would continue and grow worse, since
the Department of Labor will have regulatory oversight responsibility for many more
health plans under H.R. 995.
As illustrated in the unfortunate examples I relayed to you, the NAIC is concerned with
federal law which allows for the creation of entities with only loose employer affiliation
and over whom regulatory authority is unclear. Such a system is rife with the potential
for the proliferation of sham, fly-by-night entities. Yet, H.R. 995 expands the types of
entities which can qualify as staff leasing arrangements under ERISA. It also creates a
bifurcated structure for the regulation of MEWAs by creating an exemption process by
which a MEWA can be regulated by the Department of Labor rather than by the states.
The bill is unclear as to how much time could pass before the Department of Labor grants
a MEWA an exemption and what, if any, effect a pending application would have on a
state's ability to regulate these entities. In addition, the bill's provisions spell out only
very loose criteria for the granting of an exemption. Finally, the bill contains no
substantive standards for external financial examinations of a company or for market
conduct review, nor does H.R. 995 clearly provide for how the Department of Labor
would handle complaints by consumers about the exempt arrangements.
We look forward to working with you and any other Congressional committees that are
considering the MEWA issue to try to develop standards which would best assure that the
appropriate regulatory authorities can exercise meaningful oversight over these
arrangements which promise, but do not always deliver, health care coverage to millions
of Americans. The NAIC will be examining the provisions of this bill further. It does
22
appear that a structure such as that proposed by H.R. 995 would create even further
opportunity for abuse. We would urge you, in considering any legislation before your
Committee in the area of insurance reform, to avoid some of the pitfalls the NAIC has
just enumerated.
Conclusion
Since its enactment, ERISA's provisions relating to employee health plans have had
increasing import and meaning for the millions of Americans who receive their health
care coverage under these arrangements. As I have spelled out, we urge you not to forget
these Americans when you consider enacting federal health insurance reform. Any
federal insurance reforms should be made applicable to ERISA health plans.
Furthermore, all Americans deserve to be able to understand and enforce the terms of
health care coverage offered by their employers. This requires affordable avenues of
redress and meaningful access to independent parties to help them pursue their claims.
Furthermore, there is a place for government in health care coverage. Effective
regulatory oversight can ensure plan solvency and provide quality controls to avoid
abusive denials of medical coverage when individuals most need it.
The NAIC looks forward to working with the 104th Congress as it attempts to enact
meaningful market-based reforms of the health care coverage market.
w:Adrafis\misc\sen-er5
23
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2
APPWP
Association of Private Pension and Welfare Pians
STATEMENT
OF THE
ASSOCIATION OF PRIVATE PENSION
AND WELFARE PLANS
BEFORE THE
COMMITTEE ON LABOR AND HUMAN RESOURCES
U.S. SENATE
HEARING ON
EFFECTIVE HEALTH CARE REFORM
IN A CHANGING MARKETPLACE
MARCH 15, 1995
1212 New York Avenue NW
Suite 1250
Washington DC 20005
(202) 289-6700
FAX (202) 289-4582
I. INTRODUCTION
Madam Chairman, members of the Committee, I am Richard I. Smith, Director of
Health Care Policy for the Association of Private Pension and Welfare Plans (APPWP).
APPWP is the national association of firms and individuals concerned about federal
legislation and regulation affecting employee health and pension benefits. APPWP's
members include Fortune 500 companies, managed care plans, and consulting and
actuarial firms. I appreciate the opportunity to testify today.
For twenty years, one of APPWP's principal missions has been to defend the integrity of the
Employee Retirement Income Security Act (ERISA). We have adopted this mission because
ERISA is the preeminent health care reform statute. ERISA has created a legal framework
that has allowed private employers to (1) voluntarily sponsor health plans that cover tens of
millions of American workers, and (2) lead the revolution in health care markets that is
bringing health costs under control. ERISA, unlike many other federal statutes, benefits
American workers and businesses by supporting rather than undermining effective markets.
Despite the success of employer-sponsored plans governed by ERISA, amending ERISA to
provide for "state waivers" from ERISA preemption or to impose certain new and costly
federal requirements on employers who voluntarily sponsor health benefit plans remains
under discussion. These proposals sometimes are rooted in misunderstandings about how
employers manage health benefits and the legal structure governing health plans voluntarily
sponsored by private employers.
Enactment of such ERISA amendments would produce tragic results. Many American
workers will lose their health insurance if Congress adopts state waivers or other ERISA
amendments that increase the health costs of employers and employees who voluntarily pay
for health coverage. Rather than adding to the burden on employers at a time when we need
to expand coverage rates, Congress should preempt the many anti-market state laws that raise
costs for fully insured, and usually smaller, employers. These include, but are not limited to,
state antimanaged care and mandated benefit laws.
Ironically, the proposed cost-increasing ERISA amendments come at a time when employers,
after years of intense effort, have achieved real success in controlling health costs. If
Congress adopts ERISA amendments that reverse this success, it will be telling employers
that they will not be permitted to control their health costs. Under these circumstances, many
employers will "cash out" their employees rather than continue to offer health coverage.
The remainder of this statement discusses (1) the accomplishments of health plans governed
by ERISA, (2) ERISA's place in the current political environment that emphasizes devolution
of federal activities to state governments. (3) the reasons that APPWP opposes state waivers
from ERISA preemption, (4) flaws in certain proposals for adding new federal standards to
ERISA. and (5) the double standard that some advocates of amending ERISA seem to apply
to private, employer-sponsored health plans and government-sponsored health plans that are
not governed by ERISA.
II. ERISA PLANS' ACCOMPLISHMENTS
Employer-sponsored health benefit plans governed by ERISA set the standard for health
insurance coverage provided to Americans. Firms that voluntarily offer health plans cover a
very high percentage of their workers. In firms that offer health benefits, roughly 90
percent of full-time workers are eligible for coverage. The coverage is typically
comprehensive. Notably, coverage in ERISA plans is far more comprehensive than the
coverage offered by the federal government to Medicare enrollees. The high quality of
employer-sponsored plans reflects the reasons employers choose to offer plans: to attract
and retain a healthy, high quality, and satisfied workforce.
Employers who sponsor health plans governed by ERISA have led the ongoing revolution in
the health care market that is improving health care quality and controlling health costs.
Annual cost increases for employer-sponsored health plans are continuing to decline
from their double digit rates in the 1980s, despite massive cost shifting from Medicare
and Medicaid. FosterHiggins reports that employers' health costs declined by 1.1 percent
between 1993 and 1994. (Large employers achieved better results than smaller
employers. Large employers generally have better protection under ERISA from state
laws that increase health plan costs and, to date, have made more use of managed care.)
HMO premium increases have declined for five consecutive years. In 1995, HMO
premiums are expected to decline in absolute terms. Notably, employers have been far
ahead of government programs in switching from inflationary fee for service
medicine/indemnity-style insurance to managed care.
Large employers have been well positioned to lead the health care revolution. They have
joined their market clout as purchasers of a large volume of services and their technical
expertise to demand more efficient delivery of health care and create real competition in
the market. Recent innovations led by ERISA plans, often in collaboration with managed
care plans, include:
Creation of comprehensive health plan standards, which include but are not
limited to data reporting, quality, and access. These standards are creating, for the
first time, accountability for cost and quality in the health care market. Similarly,
employers are requiring hospitals to report quality and cost data that facilitates
prudent purchasing.
Development of information that consumers need to choose among competing
plans based on their performance.
Creation of collective purchasing entities that enhance plan sponsors' ability to
negotiate cost effective, high quality health care arrangements for their employees.
Some collective purchasing entities have begun to insist on arrangements that
benefit all purchasers, not just purchasers who are members of the entity.
2
Development of new benefit designs, such as (1) flexible mental health benefits
that eliminate arbitrary limits on covered services, expand use of services, and
control costs, (2) income related cost sharing, which enhances individual
responsibility, and (3) point-of-service plans that have held costs down and been
highly popular with consumers.
According to Dr. John M. Ludden, medical director of the 550,000 member Harvard
Community Health Plan, "Employers are a powerful voice for health care consumers. They
have really become sophisticated customers. They know what to ask for and how to ask for
it. They set goals for us--clinical goals, not just cost goals."
III. ERISA's ROLE IN THE CURRENT POLITICAL ENVIRONMENT EMPHASIZING DEVOLUTION
OF FEDERAL ACTIVITIES TO THE STATES
ERISA preemption bars some state health care initiatives. Some have claimed that this
runs counter to the political tide emphasizing devolution of federal activities to the
states, and point to the widespread discussion of giving states much greater flexibility to
operate Medicaid and welfare programs as they see fit. This misses important distinctions
between private, employer-sponsored health plans and Medicaid and welfare.
First, employer-sponsored health plans operate in the private sector. Unlike Medicaid
and welfare, they are not government programs. Therefore, the view that states rather than
the federal government are better positioned to manage Medicaid and welfare has no
relevance to the management of private, employer-sponsored health plans.
Second, responsibility for how voluntary, employer-sponsored health plans operate should
remain with the private sector. ERISA recognizes this and creates a legal framework that
appropriately balances private sector responsibility and government regulation. In contrast,
the purpose of states seeking ERISA waivers is to gain unprecedented control over private
health plans voluntarily sponsored by employers.
Third, the best case for maintaining ERISA preemption is made by the National Governors
Association (NGA). In its winter 1995 report, NGA calls for freeing states from federal rules
that prevent states from operating Medicaid programs as they see fit. States are responsible
for purchasing coverage on behalf of Medicaid beneficiaries. Employers are the purchasers
for their employee groups. Both should have the flexibility needed to use effective purchasing
strategies. Yet some states seeking Medicaid flexibility also are seeking ERISA changes in
order to strip private employers of the flexibility needed to manage their employee health
plans.
IV. WIIY APPWP OPPOSES ERISA WAIVERS FOR STATE HEALTH CARE LEGISLATION
APPWP strongly opposes ERISA waivers, which would harm single state as well as
multistate employers, and small as well as large firms. Contrary to assertions by some
3
states, NGA, and the National Association of Insurance Commissioners, ERISA is not a
barrier to health reform. It permits health reform by the private sector, where it can be
done well, while preventing enforcement of ill-advised state policies that would roll back
private sector reform.
Allowing increased state interference with employer-sponsored health plans will make
our nation's health system problems worse rather than better. Unwarranted state
government intrusion into the private sector can be every bit as damaging and characteristic
of "big government" as federal government intrusion. This is clear from the list of
prohibited state policies NGA cites in its concerns about ERISA preemption. NGA's list
includes, but is not limited to, establishing "minimum guaranteed benefit packages,"
health care price controls, statewide employer mandates, and various health care taxes.
Giving states "flexibility" to force employer-sponsored health benefit plans into state health
care systems will destroy private sector flexibility. State flexibility will impede private sector
innovation and increase health costs, thereby putting expanded coverage rates
permanently out of reach.
One of the reasons that employer sponsored health plans governed by ERISA have
worked well is that ERISA has preempted state laws that increase costs. Cost control
and therefore employers' ability to maintain comprehensive coverage would be
compromised if states were given broader jurisdiction over employer sponsored health
plans. States have a long record of enacting antimanaged care laws, mandated benefit
laws, price controls that fail to contain costs but prohibit employers from negotiating
their own cost control arrangements, and claims dispute remedies that create a litigation
bonanza for plaintiffs' attorneys. Forcing ERISA plans to comply with these antimarket
laws--whether the plans are sponsored by single state or multistate firms, or by small or
large firms--would undo effective employer driven quality improvement and cost control.
Advocates of ERISA waivers also fail to consider that health care is delivered and paid
for in interstate commerce, not within state borders. Many health care delivery systems
cross state borders and patients frequently cross state borders to receive care (sometimes
to receive care arranged for by an employer or managed care plan from an out-of-state
center of excellence). Many individuals reside in one state and work and obtain their
insurance in another; labor markets and labor contracts affecting health benefits
encompass multiple states; and employers administer a single health plan for worksites in
multiple states. Allowing the laws that govern health care delivery and financing to vary
from state to state would create a very costly and difficult (if not impossible) to navigate
patchwork of conflicting rules that will not work for patients, providers, or purchasers.
The Congressional Budget Office (CBO) addressed just one small subset of the questions
about state-specific health systems in its analysis last year of Senator George Mitchell's
health plan: whether it would be feasible for some states to have an employer mandate
while other states do not. CBO concluded that "[T]he practical problems of
implementing mandates in some states and not in others could be overwhelming
4
Because of the disruptions, complications, and inequities that would result, CBO does
not believe that it would be feasible to implement the mandated system in some states
but not in others; the system would have to include either all states or none." While
employer mandates may no longer be on the table, we believe that this conclusion is
applicable to a broad range of state-specific initiatives.
States already have ample authority to address a broad range of health system issues without
interfering with health plans sponsored by private employers:
By converting Medicaid to managed care through waivers available under current
law, states can control the impact of health costs on their budgets and pay for
initiatives to cover uninsured individuals. Many states are successfully pursuing
this strategy.
States have complete freedom to manage their state employee health plans.
States can reform small group markets and establish purchasing groups for small
firms.
States can pay for initiatives to reduce the number of uninsured persons through
broad-based, visible taxes. Taxes that violate ERISA and thus require an ERISA
amendment in order to be enforced are merely an effort by states to obtain low
visibility, low accountability revenue.
Finally, all firms quired to bear new costs under state law would be left with no choice
but to cut benefits in order to recoup those costs. Multistate firms would be forced to
make the deepest cuts, since they would face the administrative cost of complying with
conflicting state laws in addition 10 the costs associated with state antimarket laws.
V. PROPOSALS FOR NEW FEDERAL STANDARDS IN ERISA ARE FLAWED
Some policymakers have advocated requiring ERISA plans to meet an array of costly,
new requirements. On most issues, this position fails to recognize the standards already
created by other federal statutes, the cost of compliance, and/or the lack of need for such
standards.
A. ANALOGIES BETWEEN ERISA'S PENSION PLAN AND HEALTH PLAN STANDARDS ARE
INACCURATE
Advocates of adding a new array of detailed standards to ERISA's health care provisions
sometimes point to the difference between ERISA's detailed pension rules and more
general health care rules. This analogy between ERISA's pension and health care standards
LS mistaken. The lion's share of ERISA's pension rules govern vesting, prefunding.
nondiscrimination, and fudiciary standards that are inapplicable to health benefits
5
The ERISA rules governing pensions are inapplicable because virtually all health
benefits, unlike pension benefits, are current year benefits rather than promises to pay
benefits many years in the future. Moreover, Congress has adopted a policy against
prefunding health benefits in a way that is similar to prefunding of pension benefits,
since it has severely restricted tax-preferred prefunding of retiree health benefits in
comparison to tax-preferred prefunding of pension benefits. Congress also has not
enacted legislation under which the government assumes liability for retiree health
benefits in the event of plan failure--a liability it has chosen to assume for pension
benefits.
Pension-type nondiscrimination rules are inapplicable to health benefits because
eligibility for employer-sponsored health plans and employer contributions to health
benefits rarely vary by income. In fact, when employer contributions do vary by income it
is usually for the purpose of increasing the premium payment required from highly
compensated employees--the opposite of the concern that has led to pension
nondiscrimination rules. Additionally, the practice among employers who sponsor health
benefits is to make those benefits widely available to their employees. Even the smallest
health plan sponsors--firms with fewer than 25 employees, offer health benefits to 84
percent of their full-time employees. Firms with at least 1,000 employees offer health
benefits to 92 percent of their full-time employees.
Other differences between health and pension benefits abound, making the rules
governing each inapplicable to the other. For instance, the fiduciary rules of ERISA are
generally aimed at ensuring the protection of assets that are being held over a period of
many years so that they are available to be paid at retirement. Again, this analogy is
inapplicable in a context in which health benefits are paid on a current year basis.
Additionally, employers can impose vesting periods for pensions of up to seven years,
and pension benefits can be made proportional to length of service. Employers can, at
their option, recover all pension contributions they make to employees who leave
employment prior to vesting. In contrast, because most health benefits are current year
benefits, employers could not recover premium contributions made to health plan
participants who leave employment prior to a predetermined period. It would be difficult
to make current year health benefits proportional to length of service. These factors
support the broad discretion employers have in determining participation standards for
their health plans.
Policymakers who advocate imposing pension-type rules on health benefits should focus
on one final point. The employer-sponsored pension system has been burdened by
extensive regulation. The cost of excessive pension regulation has dampened retirement
plan coverage, especially by leading to many terminations of defined benefit plans.
Unquestionably, the regulatory burden is a major reason that retirement plan coverage
rates are lower than health plan coverage rates. Forcing health plans to adhere to
()
pension-type rules will increase health plan costs, leading employers and employees to
drop their health benefits.
B. PROPOSALS FOR ADDING NEW STANDARDS TO ERISA's HEALTH PLAN RULES
1. Increased Litigation and Damages for Claims Disputes. APPWP strongly opposes
changing ERISA's procedures, standard of review, and remedies in claims dispute cases.
Currently, ERISA gives plan participants the right to a de novo review of a denied claim
by the plan's fiduciary and an opportunity to appeal the fiduciary's decision in federal
court. The claim will be paid if the participant shows that the fiduciary's decision was
arbitrary and capricious. Often, the court also will order payment of a successful
plaintiff's attorney fees. Additionally, a fiduciary who violates ERISA's fiduciary
standards can be barred from acting as a fiduciary. In practice, virtually all of the very
small proportion of disputed claims are resolved before they reach federal court.
Some policymakers advocate changing ERISA's grievance procedures and adding
economic and/or punitive damages to available remedies. The case for these changes
rests on anecdotal "horror stories." The anecdotes often present compelling
circumstances, but rarely provide any basis for evaluating the merits of a plaintiff's case
and may not present the facts accurately.
Equally important, the anecdotes do not move on to seriously examine the incidence or
severity of improper claims denials. In fact, only a minute portion of claims are ever
disputed. Many of the disputes are groundless and nearly all disputes are quickly
resolved. It is difficult to find any support for the notion that any appreciable number of
Americans with private insurance is improperly denied payment for covered services. The
anecdotes never evaluate the consequences--increased costs, decreased coverage, and
decreased propensity to deny authorization for harmful services--of changing ERISA's
grievance procedures, standard of review and remedies.
Changing ERISA's claims denial procedures and remedies will create a costly litigation
lottery for employers and managed care plans as plaintiffs seek large jury verdicts.
Employers and managed care plans will often be forced to settle unjustified claims to
avoid litigation costs. (Litigation to the federal court level now costs roughly $250,000.
This amount would increase dramatically if the litigation rules are changed and if cases
could be heard in 50 different state courts as well as federal court.) Avoiding exposure to
large jury verdicts in emotionally charged cases also will induce employers and managed
care plans to pay unjustified claims, despite well-documented evidence that Americans
receive much medically inappropriate care. As a result, employers will drop employer-
sponsored health care plans to avoid increased health benefit costs and increased liability
for denied claims.
Allowing state law rather than ERISA to govern these disputes would create
extraordinary enforcement problems, due to the number of parties involved, the
7
interstate nature of many claims, and differences in state law. Many individuals might be
less able to effectively appeal claims under state law than under current federal law.
2. State Taxation of Self-Insured ERISA Plans. States have a plethora of taxing options
that do not violate ERISA. Nonetheless, much of the states' interests in obtaining
ERISA amendments boils down to their desire to tax self-insured plans. States' insistence
on being allowed to enforce the few taxes that do violate ERISA merely reflects their desire to
generate large revenues with little accountability or visibility. APPWP opposes amending
ERISA to require self-insured health plans to pay state taxes.
Congress clearly decided during the 1993-1994 health care debate that employers should
not be obligated to pay for their employees' health coverage. It would make no sense for
Congress to require employers who have voluntarily chosen to pay for their employees'
health benefits to begin paying the added expense of new state taxes on their health
plans. Employers who voluntarily pay for employees' health benefits would be singled out
to pay the new state taxes, while employers who choose not to pay for health benefits
and beneficiaries of government-sponsored insurance programs remain outside of the tax
base. Moreover, because only employers who offer health benefits are subject to these
low visibility state taxes, the opportunity to control their growth over time is limited.
Employers who do not offer health benefits and beneficiaries of government programs
would have no interest in opposing these taxes.
Requiring ERISA plans to begin paying state taxes that have been preempted until now
also could expose employers and employees to taxes by multiple states. Individuals who
work in one state and obtain care in another could trigger taxes by more than one state,
since some states may tax medical services while other states tax "premium equivalents."
Finally, it is important to recognize that hospital surcharges, as in New York State,
distort health care markets. This can increase total employer costs by more than the
amount of the tax.
3. Risk Pooling Between Insured and Self-Insured Groups. Requiring self-insured firms
to pay into a pool that subsidizes insured firms is an invitation to irresponsibility and
inefficiency in the insured market. Such a pool also would be subject to major abuses by
state officials, since they could provide a low visibility, low accountability source of
revenue to defray state health care costs. Self-insured firms voluntarily bear the cost of
their own employees' health benefits. They should not be compelled to pay for other
firms' health benefits, compelled to pay for services which they have no opportunity to
control, or singled out to pay for state programs.
The justification for risk pooling between insured and self-insured firms is sometimes
based on the erroneous assumption that small firms, which are less likely to self-insure,
pay more for health benefits than large firms, which are more likely to self-insure. A
Lewin-VHI study commissioned by APPWP exposed the error of this assumption by
8
examining health insurance costs by employer size. Lewin-VHI found that the average
cost of premiums for firms with fewer than 25 employees does not exceed the average
cost of premiums for firms with more than 25 employees.
4. Participation Standards/Nondiscrimination Requirements. Advocates of adding
participation standards/nondiscrimination requirements to ERISA's health plan rules
rarely mention that self-insured health plans sponsored by private employers already are
covered by participation standards and nondiscrimination rules in other statutes. These
rules are found in Internal Revenue Code Section 105, the Americans With Disabilities
Act, the Pregnancy Discrimination Act, the Older Workers Benefit Protection Act, Title
VII of the Civil Rights Act, and Medicare secondary payer requirements. Other rules
apply to structures that often are part of ERISA plans, such as cafeteria plans and
voluntary employee beneficiary associations. In light of (a) these statutes and (b)
employer practices which typically make the same level of benefits available to a very
wide range of employees (evidenced by the 89 percent eligibility rate among full-time
employees of firms that voluntarily offer health benefits), there is no reason to add
participation standards/nondiscrimination rules to ERISA.
Under current practice, part-time employee eligibility for employer-sponsored plans is
lower than full-time employee eligibility. A recent Hewitt Associates survey of mostly
large firms that offer health benefits to their full-time employees reports that 24 percent
of such firms do not offer health benefits to employees working between 30 and 39 hours
per week. Thirty-nine percent of the firms do not offer health benefits to employees
working between 20 and 29 hours per week. A FosterHiggins survey reports that 76
percent of small firms do not provide coverage to part-time employees.
Part-time eligibility standards reflect judgements made by employers who voluntarily
sponsor health benefit plans. Legislation that would reverse these judgements by
mandating eligibility for part-time workers would be counterproductive. The increased
cost will lead employers who voluntarily sponsor health benefit plans to reduce premium
contributions across the board, yielding more uninsured workers, and/or cut-back
benefits.
In sum, any effort to enact additional participation standards/nondiscrimination rules will
be highly controversial, sapping support for health reforms that are needed. A firestorm
of criticism forced Congress to repeal the now infamous Section 89 nondiscrimination
rules shortly after they were passed. Nondiscrimination rules discussed during the 103rd
Congress also drew strong opposition from the business community.
5. Solvency Standards. Indiscriminantly imposing reserve or other solvency requirements
on self-insured firms to assure payment of claims that are incurred but not reported or
paid prior to bankruptcy makes little sense. Firms vary markedly in their exposure to
bankruptcy and in their ability to assure payment of previously incurred claims in the
event of bankruptcy. Additionally, there is much variation in the risk that incurred claims
9
will go unpaid in bankruptcy. For instance, health benefit plans that involve capitation
payments or minimum premium plans with monthly payments present no risk or a very
low level of risk. Under these circumstances, it would make little sense to establish
reserve requirements that would tie up tens of billions of dollars of private capital that
otherwise could be put to productive use and drain billions of dollars from the Treasury
in the form of increased tax expenditures.
Other aspects of the solvency issue, including alternatives to traditional solvency
requirements, deserve serious exploration. If the objective is to protect consumers from
claims generated prior to plan insolvency, then the amount of business risk that providers
should bear in the event of an insolvency should be examined.
6. Standard Benefit Package. It would be a costly mistake to eliminate all flexibility from
benefit design and cost sharing schedules. No one can credibly claim to know the one
best way to design benefits to maximize quality while minimizing costs. Only market-
driven innovation can achieve this goal. Therefore, employers and health plans should
be permitted to retain benefit design flexibility in order to promote cost control, and
consumers should have a choice of benefit designs so that they can shop for the highest
value plans.
Freezing a benefit package in place by legislation is likely to yield a package that lags far
behind the state of the art in benefit management. For instance, flexible mental health
benefits and point of service plans are new techniques that increase choices and control
costs. They were unknown just a few years ago, and would have not developed had
legislation frozen benefit design in place a few years ago. Similarly, income related cost
sharing is a new strategy that gives highly paid employees the same incentive as lower
paid employees to be cost conscious health care consumers. Today, about 10 percent of
large firms use income related cost sharing. Yet none of the standardized benefit
packages proposed in 1993-1994 would have permitted income related cost sharing.
Some advocates of amending ERISA to include a standardized benefit package base
their argument on McGunn vs. H&H Music, a case which involved providing different
levels of coverage for AIDS as opposed to other serious medical conditions. The issues
raised in McGann already have been addressed by the Americans with Disabilities Act.
7. Data Reporting. APPWP supports efforts to enhance the information available to
group purchasers and individual consumers about the performance of health plans and
providers. However, care must be taken in how this goal is achieved. Requiring
employers to report cost, quality, and member satisfaction data on a state-by-state basis
would impose enormous new administrative costs and burdens on multistate employers.
We also are concerned that a single national data set dictated by federal officials would
lag far behind the state of the art. thereby producing a mass of costly but irrelevant data.
Medicare has collected mountains of data for many years, but has been incapable of
making good use of it.
10
In contrast, private employers who voluntarily offer health benefits are leading the way in
innovative collection and use of data. For instance:
Four large Cincinnati employers used their purchasing power to persuade all 14
greater Cincinnati hospitals to use the same quality measurement system. The
resulting data led many hospitals to quickly revamp their practices, yielding
reductions in health care costs.
In October 1994, a coalition of New England employers and health plans
published a report card rating 15 health plans on more than 100 measures of
performance. Similar employer-led efforts to improve data on provider
performance and create health plan report cards are underway in national forums
and numerous other communities.
This record provides good reason for approaching with extreme caution proposals that
would take data standards out of the hands of private purchasers and place it in the
hands of government officials. The rapid evolution of health care data and the variety of
initiatives underway in different communities reinforce the need for extreme caution in
creating a single, standardized data set.
8. Preexisting Condition Exclusions. APPWP is prepared to accept a carefully designed
restriction on the use of preexisting condition exclusions in order to meet the need for
portability of coverage. However, while we retain a voluntary health insurance system,
employers and health plans must have the option to use a preexisting condition exclusion
that is adequate to encourage healthy individuals to purchase insurance and avoid other
gaming of the system. Additionally, preexisting condition exclusions should be available
when individuals switch between different levels of health coverage.
We emphasize that our support for the principle of limiting preexisting condition
exclusions will not deter us from opposing poorly designed limits that leave the health
benefits system vulnerable to various forms of adverse selection and gaming.
C. THE DOUBLE STANDARD APPLIED TO EMPLOYER-SPONSORED HEALTH BENEFITS
GOVERNED BY ERISA AND GOVERNMENT-SPONSORED HEALTH BENEFITS NOT SUBJECT TO
ERISA
Health plans sponsored by federal, state, and municipal governments are not governed by
ERISA. Nonetheless, because ERISA sets the right structure for providing quality health
benefits at an affordable cost, many government-sponsored plans operate according to
ERISA-like rules. These non-ERISA government plans cover about 35 million
Americans.
11
Policymakers who criticize ERISA rules governing health plans voluntarily sponsored by
private employers rarely, if ever, criticize government-sponsored plans or suggest that
these government plans should adhere to the costly new standards they wish to impose
on private employers. Two examples of this double standard follow:
ERISA challenges have been brought against hospital uncompensated care
markups set by state law in New York, New Jersey, and Connecticut. In 1990,
Congress appropriately passed a law barring the Federal Employee Health Benefit
Plan (FEHBP) from paying these taxes, and the Office of Personnel Management
has appropriately directed FEHBP insurers not to pay the taxes.
We are not aware that advocates of ERISA waivers or other ERISA changes that
would require private employers to pay these taxes also support repealing the
federal law and appropriating funds so that FEHBP can begin paying state taxes
on the health benefits provided to federal employees.
Policymakers who wish to expand ERISA's claims dispute remedies rarely, if
ever, mention that remedies available to individuals enrolled in Medicare,
FEHBP, and many state employee health plans are essentially identical to ERISA
remedies. Again, we are not aware that advocates of increasing private employers'
claims denial liability also advocate increasing federal and state government
liability for claims denials and appropriating federal and state funds to pay for
judgements and increased health benefit costs.
VI. CONCLUSION
ERISA has facilitated a voluntary, employer-sponsored health benefit system that
provides excellent coverage to tens of millions of Americans. ERISA also has facilitated
the employer and managed care plan-led revolution that is improving health care quality
and controlling health costs. Amending ERISA to allow state waivers or require
employers to meet costly new standards will undermine this well functioning system. As a
result, many workers will lose their health benefits or have their benefits cut.
We urge Congress to extend the full benefits of ERISA preemption to all employer-
sponsored health plans by preempting states' antimarket laws.
12
STATEMENT OF
Cristie Upshaw Travis
Chief Executive Officer
Memphis Business Group on Health
BEFORE THE COMMITTEE ON LABOR AND HUMAN RESOURCES
UNITED STATES SENATE
March 14, 1995
Good morning Chairman Kassenbaum and Members of the Committee on Labor and
Human Resources. The Memphis Business Group on Health (MBGH) is pleased to have
the opportunity to present testimony regarding our organization, its history, purpose and
efforts to support the delivery of high quality, cost-effective health care services.
A History of the Memphis Business Group on Health
In 1985, 11 Memphis-based employers formed the Memphis Business Group on Health
(MBGH), a non-profit organization, in response to uncontrolled increases in the cost of
health care coverage and to the absence of quantitative outcome measurement data. In
1986, results of a study commissioned by these employers indicated that there was a
difference in the charges among area hospitals of up to 80% for the same services. As an
initial step, the MBGH called a press conference and published the results of the study,
notifying the entire community of the significant differences between hospitals. The
member companies decided that networking to form cooperative programs was the most
viable method to achieve cost containment, quality monitoring, and development of a
competitive health care market in Memphis.
Today membership in the MBGH has grown to 54 companies, with approximately 59,000
local employees and 147,500 covered lives.
2
Madam Chairman and Members of the Committee:
I am Kathleen Angel, Worldwide Manager, Corporate Benefits for the Digital Equipment
Corporation. I am here today also representing the Corporate Health Care Coalition, a group
of 25 self-insured, multi-state companies that actively purchase health care benefits for
employees and their families. Coalition companies operate health plans covering over 5.2
million workers, retirees, and family members (2.1 percent of the U.S. population) and
provide more than $10 billion a year in health benefits.
The Coalition is distinguished by its exclusive focus on issues of significance to self-insured,
multi-state employers. We approach the health care system as active purchasers of health
benefits for employees, not as vendors of insurance or health care products. Members of the
Coalition have been in the forefront of efforts to ensure high-quality and cost-effective health
care for employees. We have extensive experience in designing, administering, and
delivering employee health benefits and are a major force in ongoing efforts to restructure
the health care delivery system.
Today I would like to talk with you about the role that large employers are playing in the
market, how this is changing the way health care services are provided -- not just for our
employees, but for the community as a whole -- and where we are headed in the future.
The Employer Role as an Active Health Care Purchaser
Twenty years ago, around the time ERISA was enacted, nearly all employers were passive
purchasers of health insurance. A typical large employer had one indemnity health care plan
that covered their workers -- unless they had separate collectively bargained benefits. They
probably contracted with a Blue Cross Blue Shield plan or commercial carrier to provide
coverage. The role the employer played was to select the carrier, design the benefit
package, and oversee the activities of the carrier. The premiums were experience-rated,
based on some average of previous years' claims.
The employer's role has changed dramatically since then. Most large employers have gone
from passive purchasers of off-the-shelf insurance products to active and, in some cases,
aggressive purchasers of health care delivery system services.
Employers took the first step in this transition by self-insuring their own populations and
contracting with insurance carriers only to provide administrative services. Because their
large groups had fairly predictable risks, self-insurance did not really increase financial
exposure. It did lower administrative and other costs imposed by the carriers and enable
them to manage their cash flow. Self-insurance also offered the opportunity and the
flexibility for plan sponsors to manage their health plan costs.
Rapidly rising plan costs from unmanaged indemnity plans motivated employers to get more
involved in health plan management. Rather than cut benefits to save costs (which would
have compromised employee health, productivity, and morale), employers became more
discriminating and skilled as active purchasers. This stepped-up involvement of self-insured
employers in the market for coverage and services and has driven fundamental changes in
health care delivery. Over the last decade, employers have transformed the health care
marketplace.
In some cases, employers have become more active as purchasers of coverage by selecting
from existing health plans and provider networks and requiring selected plans to meet
employer-set guidelines. Employers dissatisfied with indemnity coverage have contributed to
the growth of HMO enrollment and increased incentives for new managed care arrangements
to enter the market. Employers unhappy with HMO premiums that seemed to shadow
indemnity rates and with the lack of HMO accountability have helped develop quality
measurement systems and encouraged HMOs to report regularly to their purchasers.
In other cases, employers have stepped directly into the health care market, setting up their
own provider networks, contracting directly with specialized facilities, and encouraging
competition among groups of providers. Employers searching for high-quality, cost-effective
providers to perform complex medical procedures have encouraged nationwide price
-2-
competition among the best medical facilities over the provision of these expensive
treatments. Employers concerned about the lack of information on hospital and physician
performance have helped develop data resources to measure medical outcomes, and have
used this information in assembling a quality-based network of preferred providers.
This ability of self-insured employers to engage as knowledgeable purchasers in the
marketplace has opened a dialogue with providers. It also has brought change and greater
competition among suppliers in a market that had become fairly entrenched and resistant to
outside influence. The single federal architecture -- ERISA -- under which self-insured
employers can operate flexibly has played a major role in large employers' transformation
from passive to active purchasers and in the emergence of competition in the health care
marketplace.
There are four key aspects to the employer role in today's health care market:
1)
Screening and Selection of Health Plans: Armed with data, experience, and
leverage in the market, employers are operating as agents for their employees.
They are screening health plans, negotiating with providers, and holding plans
accountable for quality and cost of care. Given their capacity to deliver large
numbers of enrollees, large employers are influencing plans to improve cost-
effectiveness and quality. They are stimulating competition among providers
and affecting plan operations in ways that would not be possible for employees
buying coverage as individuals. This is done in an environment in which
companies do not contribute to the problems of cost-shifting.
2)
Partnership with employees: Employers are expanding employees' choice of
health plans -- providing a carefully selected array of indemnity, point-of-
service, and HMO plans; improving the information employees have to make
choices; and encouraging them to use their choice of plans to help drive
competition in price and quality.
-3-
3)
Risk sharing with providers: Employers no longer are purely self-insured but
are increasingly sharing financial risk with health care delivery systems and
provider groups in the hopes of encouraging providers to develop more cost-
effective approaches to treatment. This change of incentives has the advantage
of encouraging cost management through physician-patient treatment decisions
rather than through benefit restrictions and claims denials.
4)
Leadership in quality assurance: Employers are taking the lead in developing
measures of health care quality for plan-to-plan comparisons, and in
establishing standards for health care delivery systems. Employers are using
their leverage to encourage delivery systems to adopt these standards and
account to purchasers for their performance. Employers also are working with
health care delivery systems to improve data collection and analysis and are
conducting studies aimed at identifying medical treatments producing the best
patient outcomes.
By playing this role, employers have driven fundamental changes in the way health care is
delivered and paid for. The improvements health providers have made in response to large
employer demands for quality and accountability accrue to the entire community, not just to
the employers. When a plan, responding to employer concerns, alters operations to improve
quality, quality improves for all plan enrollees. For example, an HMO that changes its
procedures to eliminate unnecessary surgery changes them for all its patients. Improvements
in plan services, say, to decrease waiting time in doctors' offices or to speed communication
of lab results, apply to a plan's entire enrollee population. Nor do employers merely cause
cost-shifting to others when they help improve a managed care plan. Rather, the plan's
rivals are more likely to adopt similar changes to stay competitive.
Managed care organizations regard active employer purchasing positively. They appreciate a
sophisticated, articulate purchaser that can identify and explain its expectations. In response,
an HMO or other health plan can better prioritize goals to satisfy customer needs.
-4-
Active Purchasing at Digital
Digital Equipment Corporation is committed to the goal of ensuring that its health care
programs meet the needs of its 30,000 U.S. employees and their families, a total of 88,000
people, while being cost-effective for both employees and Digital. This includes offering
quality programs that provide flexibility and choice to its diverse workforce and to its
retirees.
Digital has responded to escalating health care costs by becoming an active and creative
purchaser of health care services. Based on its experiences, Digital believes that quality and
cost efficiency in health care can best be achieved through organized, technologically
advanced systems of care. These systems should integrate and be held accountable for the
delivery and financing of comprehensive, necessary and appropriate care to their members
and compete for membership based on comparable performance measures. Further, Digital
believes these systems of care offer the greatest potential to control costs and deliver quality
care. Digital has designed its current health care strategy around a model that encourages
partnerships with well-organized, well-managed, efficient Health Maintenance Organizations
(HMOs).
Background
In 1990, when Digital was considering implementing a managed care program, there was no
"off-the-shelf" program that could fulfill the requirements of the Company and its U.S.
employees, that is, giving its diverse workforce choice of quality, cost-effective health plans.
To achieve these objectives, in 1991 Digital developed a strategy to implement point-of-
service plans with the most efficient HMOs in those geographies which also had the highest
concentration of employees. Implementing those point-of-service plans involved extensive
negotiating arrangements with HMOs that were capable of meeting specific performance
criteria developed by Digital.
-5-
Through the Digital point-of-service program, employees retain the flexibility to choose any
doctor, hospital, or eligible health care provider. However, benefits and levels of coverage
depend on how members choose to receive their medical care. If employees choose a
provider outside the HMO, they are responsible for paying a larger portion of their medical
expenses through deductibles and co-payments as in a fee-for-service plan.
In addition to 26 point-of-service plans, during annual open enrollment, employees can
choose among 88 HMOs, two fee-for-service plans, and an Opt-out plan.
From a cost-sharing perspective, Digital's share of medical costs is based on the lowest cost
HMO in each geographic area that meets Digital's HMO Performance Standards. Employees
who choose less efficient, more costly health plans or fee-for-service plans must pay the
incremental difference in the cost of these programs. As a result, Digital's cost is the same
regardless of the plan the employees choose.
Measurable Results
Since the implementation of its managed care strategy in 1991, Digital has seen a dramatic
shift in the enrollment of its U.S. employees. Prior to 1991, 72 percent of employees were
enrolled in fee-for-service plans and 28 percent of employees were enrolled in HMOs. As of
January 1, 1995, 81 percent of employees were enrolled in managed care plans, 7 percent in
fee-for-service plans and 12 percent in the Opt-out plan. As a result of this strategy,
Digital's savings from 1991 through 1995 exceeded $100 million, or $765 per employee in
1995. In 1990 the weighted average HMO premium increase for Digital was 12 percent. By
1994, Digital's weighted average HMO premium increase was 4 percent and for 1995,
Digital will experience a 1 percent decrease in the weighted average HMO premium.
Digital's HMO Performance Standards
Digital's HMO Performance Standards are today the hallmark of the Company's quality
approach to managed care. The standards of care, which can be described as "purchasing
-6-
specifications" for health care services, have been developed by Digital for the management
of the participating HMOs. The standards provide the framework for developing new
relationships, recommending new HMO partners, and influencing the ongoing management
of the HMOs. The management process is based on the principles of Total Quality
Management (TQM) focusing on major areas of specific concern to Digital. These include
access of HMO members to services and member satisfaction; quality of clinical operations
and treatment; mental health and substance abuse; data reporting; and financial stability and
management.
Proven Leadership in Quality Health Care
In an effort to encourage continuous quality improvement in the delivery of health care to its
employees, Digital is partnering with several of its HMOs, and in some cases other
employers, in several leadership efforts:
Since 1989, Digital provided the impetus for developing a standardized data collection
instrument which has evolved into the Health Plan and Employer Data Information
Set (HEDIS). The goal of this data collection tool is to capture comparable data on
each HMO regarding utilization, quality and financial reporting. Additionally, Digital
drove the development of and provides leadership to the HEDIS Coalition, which
consists of employers and HMOs. to implement HEDIS V2.0 in the marketplace.
Under a project sponsored by the National Committee for Quality Assurance
(NCQA), a group of large employers, including Digital, and some of its larger HMOs
have been participating in a program to compare HMOs' performances in 60 key
categories. Digital also has representation on an NCQA Steering Committee to
develop "report cards" comparing HMO performance in these areas.
Digital has facilitated the collaboration arnong three major New England HMOs,
including Harvard Community Health Plan, Fallon Clinic and Matthew Thornton
Health Plan, in the design and implementation of the New England Psychiatric
-7-
Outcomes Project. This is a significant project that addressed the need for consistent
treatment approaches and outcomes measures in order to allow for the return of a
productive employee to the workplace.
Partnering with other FORTUNE 500 companies and the nation's leading HMOs,
Digital is participating in a landmark study on outcomes measures for the treatment of
angina and asthma.
Digital joined forces with GTE and Xerox to implement a standardized member
satisfaction/health risk assessment survey of employees across a broad spectrum of
health plans. The goal is to compare enrollee satisfaction levels across health plans
and model types.
Looking Ahead
Digital is implementing its strategy to provide a more viable, long-term solution to the health
care cost issues that continue to face the Company and its employees by:
focusing on the managed care delivery system;
holding plans accountable for the delivery and financing of quality, cost-effective
care;
developing long-term partnerships with HMOs; and
setting up a proactive management process utilizing TQM principles that clearly
articulate performance standards that balance quality and cost.
Digital also believes that its experience will serve as a working model for other health care
system planners. Appendix A outlines Digital's health care strategy in greater detail.
-8-
Coalition Member Activities
Digital is only one of the many Corporate Health Care Coalition members involved as active
purchasers in the health care market -- all approaching it a little differently. I would like to
take a moment to talk about some of these efforts.
General Electric Corporation (GE)
GE manages over $900 million a year in health benefits for over 450,000 employees,
retirees, and dependents associated with facilities across the country. Its strategy in
recent years has been to focus on managing local markets. In its Health Care
Preferred (HCP) plan, GE builds long-term partnerships with a selected health plan in
each area and invites the participation of other employers and public purchasers to
improve quality and lower costs. GE initiated this strategy in Cincinnati,
Cleveland/Columbus, and Louisville in 1992, and has since expanded it to 32 local
markets.
In each market, GE selects a single "best partner" health plan, based on the
capabilities and performance of that plan. GE builds enrollment by bringing in other
employers, and then actively manages each plan at the local level. By selecting one
health plan partner, GE can work cooperatively with that partner to improve quality
and costs over time. Active management means that GE has its own staff periodically
on-site at the health plan to work collaboratively with plan managers. The GE health
care team searches throughout the country for national benchmarks against which to
measure the performance of its plans in each local market. GE then provides on-
going consultation in developing strategies to bring plan performance up to these
benchmarks. The net effect is to improve quality and lower costs not only for GE
and its employees, but for all other enrollees in these health plans, and for other
members of the community who benefit from the increased local competition among
health plans.
-9-
The process of identifying best practices is a two-way street. In its relationship with
Tufts Associated Health Plan, GE has helped Tufts identify practices in other markets
that would improve Tufts performance, and has adopted practices from Tufts that it
can take to other markets. For example, GE brought in a consultant from a New
Jersey-based group with state-of-the-art case management tools and introduced Tufts
to a midwest vendor specializing in X-ray capitation and management. At the same
time, GE adopted a physician practice pattern software package from Tufts that it then
introduced to other GE partners.
Through its cooperative relationship with Tufts, GE established performance targets
for the plan. The targets for 1995 include a five percent reduction in GE premiums at
the same time that Tufts continues to meet its goals for customer service and steadily
improves the quality of its care. GE's benchmarks help Tufts to identify changes in
practices that not only will enable it to meet GE's performance targets, but also will
lower costs and improve quality for other Tuft plan enrollees as well.
GTE Corporation
GTE provides health plans for over 300,000 employees, retirees, and dependents in
association with its operations in 40 states. GTE has structured a comprehensive
approach to managing its health benefits that includes health plan selection, consumer
education, value pricing health benefit options, employee satisfaction evaluation, and
quality assurance.
HMOs that want to participate in the GTE program must comply with GTE's Health
Plan Requirements: they must be an organized delivery system and offer the standard
GTE benefit design; meet requirements for access to care; be able to provide data in
the HEDIS format; be accredited by NCQA (by 1996); agree to participate in GTE's
Quality Improvement Partnership (QIP); and have a demonstrated capacity to manage
costs.
-10-
GTE offers employees a choice of indemnity, HMO, and HMO/point-of-service
health plans. GTE contributes at a different rate for different types of health plans in
a way that creates "value pricing" of the employee premium. Employee contributions
are priced in relation to the ability of the health plan to deliver quality health care at
an affordable price. The ability to enroll the sickest beneficiaries in the highest
quality plans without an impact on employee premiums may raise costs for GTE in
the short run, but it will save money in the long run from better management of care.
Its purpose is to ensure that employees have an incentive to select health plans that
will give them the best value. Employees are provided detailed information on the
plan choices in the GTE Health Care Consumer Guide. The percentage of GTE
employees voluntarily enrolling in HMOs has increased from 32 percent to 60 percent
in the last four years, and is expected to rise to 75 percent within 2 years.
All HMOs that cover GTE employees participate in regional GTE Quality
Improvement Partnerships (QIPs). The purpose of the QIP is to manage quality
improvement activities with the plans. Regional QIP meetings focus on GTE
requirements and objectives, quality management, plan performance indicators, and
sharing of best practices. These groups identify problems in treatment rates, medical
outcomes, or patient satisfaction, and develop shared strategies for resolving these
problems.
In markets where GTE has not had a choice of managed health plans, it has
contracted directly with providers. In San Angelo, Texas, GTE had 1700 employees
and no managed care. Health care utilization rates were 50 to 100 percent above
their norms in other communities. GTE negotiated directly with the two local
hospitals to develop competition on price and access, and in the end developed the
beginnings of an organized delivery system, selecting one of the hospitals to serve its
employees.
In the Tampa Bay area of Florida, GTE created its own primary care center -- the
Family Health Center -- to meet the needs of employees, retirees, and their families
-11-
in that area. The Center provides preventative and educational services and primary
care, urgent care, laboratory services, pharmacy, and x-ray services for a $5 visit
copayment on a voluntary basis. The Center was well received by retirees and
employees -- saving them an estimated $431,000 in the first year -- at no additional
cost to GTE. Over the long term, the greater emphasis on preventative and primary
care should reduce CTE costs while improving the quality of services for its
employees.
GTE's active purchasing of plans and health care is changing not only its own health
plans, but the nature of the surrounding health care markets. The growing
accountability of plans for quality and cost and the increased competitiveness among
health care providers are measurable improvements that benefit the entire community
in locations where GTE is active.
Hershey Foods Corporation
Hershey Foods has played a direct role in developing state-wide reporting systems
that enable employers and health care networks to identify and select high-quality
providers, and in using this information to set up networks for its employees.
Hershey was a partner in the development by the Pennsylvania Health Care Cost
Containment Council of a state hospital effectiveness reporting system based on
clinical information collected and analyzed using the MedisGroups effectiveness
measures. In 1990, the state began reporting comparable data on treatment outcomes
in specific disease categories for every hospital in Pennsylvania with more than 100
beds.
Hershey combined the state hospital effectiveness data with data on hospital costs and
on other providers which it developed independently. Hershey then selected hospitals
and physicians for its own network on the basis of their cost-effectiveness and
physician practice data. Employees were offered the choice of continuing to use
-12-
their own providers with the full indemnity cost-sharing or using Hershey network
providers with little or no cost-sharing.
This network strategy coupled with viable HMO alternatives has allowed Hershey to
discontinue its indemnity plans in 1995 for all but a small portion of its employees.
Moreover, employee satisfaction with the health care program is at an all-time high.
The availability of Pennsylvania's hospital effectiveness data and Hershey's use of
cost-effectiveness data in selecting providers has helped to increase the sensitivity of
providers to price and quality differences -- creating a more competitive market for
medical care in their area. Hershey has also been able to improve the quality of
health benefits for its employees, with greater accountability from providers to
Hershey for the cost-effectiveness of the medical care provided.
The Importance of ERISA
The role that employers are playing as innovators and active purchasers is largely possible
due to their self-insured status governed under a single set of federal standards enacted in the
Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides a set of
national rules and procedures that give employers the flexibility to structure coverage and
financial incentives to meet the needs of employees and actively manage plan costs. Because
ERISA preempts any and all state laws that would apply to employee benefit plans,
employers are able to operate their plans free from the need to condition each action on state
level approval or to demonstrate compliance with state law in every state in which company
employees reside. Given this flexibility, employers have been able to act quickly to develop
innovative solutions to health care problems and negotiate new arrangements with providers
to ensure that appropriate high-quality care is provided for employees at a reasonable cost.
The protection ERISA affords employers is substantial. It is protection from state taxation,
and thus regulation, of their health plans. It is protection from state anti-managed care laws
that would prevent them from selecting specific health care providers and excluding others.
-13-
It is protection from community-rating insurance regulations that would force them to turn
over the financial returns from effective management of their plans to a state pool. It is
protection from state rate-setting and cost containment laws that would eliminate risk-sharing
arrangements with providers. It is protection from state claims reporting and data collection
specifications that would force changes in their claims and outcomes reporting activities and
interfere with efforts to hold health plans accountable.
Lack of uniformity and administrative complexity are not the most serious consequences of
relaxing ERISA's preemption of state law. Far more serious are the societal implications of
the effects of state regulation on the private health care markets that have thrived within
ERISA's zone of federal oversight. The emergence of multiple, and sometimes contradictory
state regulatory schemes, perhaps separated only by a line on a map, could well stifle the
innovation of many national employers, jeopardizing the achievement of health care
modernization over the last 20 years. We have included for the record a Corporate Health
Care Coalition publication entitled "ERISA Preemption: The Key to Market Innovation in
Health Care".
Conclusion
The Corporate Health Care Coalition believes that the long-term solution to health care cost
issues involves the active participation of employers in the health care marketplace as
advocates, brokers, and sophisticated purchasers for their employees.
Turning individuals loose to buy their own health plans from among the hundreds of
available options would be pure folly in today's market. They are unlikely to get adequate
information to make educated choices about plans, as employers can. Nor can individuals
command the attention of large, sophisticated health care plans and providers. Only
purchasers representing many individuals, such as employers, have enough market power for
that. It would be quite easy for health insurers and HMOs to sway individuals' purchasing
decisions by promising amenities, marketing name brands, differentiating products and using
-14-
a variety of other marketing techniques that only serve to obscure true distinctions in price
and quality.
The employer is an important agent for the employee today -- negotiating financial risk
sharing with providers, developing long-term relationships with health plans to build
capabilities and improve quality, and holding plans accountable for the delivery of high-
quality care. The fact that we are selecting health plans enables us to deliver large numbers
of enrollees to the plans we select and encourages the plans to work constructively with us to
make improvements. We would not be able to affect these plans if employees shopped
individually for coverage among the multitude of plans available. Without our involvement
in the market, we believe this concentrated effort to improve quality and lower the cost of
care would flag, even as its success begins to show in declining health plan premiums and in
high employee satisfaction with managed care plans.
As employers we have much more work to do before we have truly established a vibrant
competitive health care market focused on improving quality and lowering cost. ERISA and
ERISA preemption of state law are critical factors that have contributed to the role of
employers as "laboratories of change". They must remain in place if we are to reach our
goals and contribute to your own hopes for better and more affordable health care for every
American.
-15-
APPENDIX A
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Digital Equipment Corporation has responded to escalating health care costs by becoming an
active and creative purchaser of health care services. Based on its experiences, Digital
believes that quality and cost efficiency in health care can best be achieved through
organized, technologically advanced systems of care. These systems should integrate and be
held accountable for the delivery and financing of comprehensive, necessary and appropriate
care to their members and compete for membership based on comparable performance
measures. Further, Digital believes these systems of care offer the greatest potential to
control costs and deliver quality care. Digital has designed its current health care strategy
around a model that encourages partnerships with well-organized, well-managed, efficient
Health Maintenance Organizations (HMOs).
Background
In 1990, when Digital was considering implementing a managed care program, there was no
"off-the-shelf" program that could fulfill the requirements of the Company and its U.S.
employees, that is giving its diverse workforce choice of quality, cost-effective health plans.
To achieve these objectives, in 1991 Digital developed a strategy to implement point-of-
service plans with the most efficient HMOs in those geographies which also had the highest
concentration of employees. Implementing those point-of-service plans involved extensive
negotiating arrangements with HMOs that were capable of meeting specific performance
criteria developed by Digital.
Through the Digital point-of-service program, employees retain the flexibility to choose any
doctor, hospital, or eligible health care provider. However, benefits and levels of coverage
depend on how members choose to receive their medical care -- either within the HMO
system or outside the HMO. If employees choose a provider outside the HMO, they are
responsible for paying a larger portion of their medical expenses through deductibles and co-
payments like a fee-for-service plan.
Since introducing 4 point-of-service plans in 1991, Digital has expanded its point-of-service
offerings to employees who reside in 28 different geographies across the country. Based on
a January 1, 1995 population of 30,000, 91% of employees are eligible for a point-of-service
plan. In addition to these 26 point-of-service plans, during annual open enrollment,
employees can choose amoung 88 HMOs (based on residence), 2 fee-for-service plans and an
Opt-out plan.
From a cost-sharing perspective, Digital's share of medical costs is based on the lowest cost
HMO in each geographic area that meets Digital's HMO Performance Standards. Employees
who choose less efficient, more costly health plans or fee-for-service plans must pay the
incremental difference in the cost of these programs. As a result, Digital's cost is the same
regardless of the plan the employees chooses.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 2
Measurable Results
Since the implementation of its managed care strategy in 1991, Digital has seen a dramatic
shift in the enrollment of its U.S. employees. Prior to 1991, 72% of employees were
enrolled in fee-for-service plans and 28% of employees were enrolled in HMOs. As of
January 1, 1995, 81% of employees were enrolled in managed care plans, 7% in fee-for-
service plans and 12% in the Opt-out plan.
Digital has found that the managed care delivery system has already contributed significantly
to controlling health care costs, while maintaining the quality of care provided to employees
and their families. As a result of this strategy, Digital's savings from 1991 through 1995
exceeded $100 million. Per employee savings of $52 in 1991, $176 in 1992, $363 in 1991,
$572 in 1994, and $765 in 1995 account for this total.
Yearly cost increases for HMOs have risen considerably less than fee-for-service plans. For
instance, in 1990 the weighted average HMO premium increase for Digital was 12%. By
1994, the weighted average HMO premium increase was 4%. For 1995, Digital will
experience a 1% decrease in the weighted average HMO premium.
Digital's HMO Performance Standards
Digital's HMO Performance Standards are today the hallmark of the Company's quality
approach to managed care. The standards of care, which can be described as "purchasing
specifications" for health care services, have been developed by Digital for the management
of the participating HMOs.
Adherence to Digital's HMO Performance Standards is the key to the HMO management
program. The standards provide the framework for developing new relationships,
recommending new HMO partners, and influencing the ongoing management of the HMOs.
Digital has contracted with John Hancock Mutual Life Insurance company to play the role of
Network Manager to assist Digital in monitoring HMO performance against these standards.
The management process is based on the principles of Total Quality Management (TQM)
focusing on major areas of specific concern to Digital.
Access/Administration/Member Services and Satisfaction - choice of primary care
physician in defined geographic areas; established ratios of providers to patients;
availability of urgent care; telephone response time monitoring; implementation of
member satisfaction surveys.
Clinical Quality - integration of TQM principles into the HMO's clinical and
operational systems; maintenance of medical records, preferably automated;
commitment to outcomes research; maintenance of provider selection and credentials
process; monitoring and evaluation of provider practices and treatments protocols.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 3
Behavioral Health - the ability to offer a continuum of care; the willingness to flex the
limits of coverage for inpatient and ambulatory visits; the availability of alternative
treatment settings; the presence of an active triaging and case management program;
the ability to track outcomes.
Information Management and Reporting - prescribed format on patient satisfaction
survey, patient utilization, and audited financial statements. (Health Plan/Employer
Data Information Set - HEDIS).
Finance and Contracts - detailed financial reporting and a statement of liability
protection.
As of October 1993, HIV/AIDS care standards were included in Digital's HMO Performance
Standards. These standards were developed by Digital, John Hancock, and Digital's HMO
partners to nelp ensure consistency of care for Digital employees and families who are living
with or are affected by the HIV disease. This leading initiative in HIV/AIDS care attests to
Digital's commitment to provide necessary and appropriate health care to all of its employees
and their families.
Proven Leadership in Quality Health Care
In an effort to encourage continuous quality improvement in the delivery of health care to its
employees, Digital is partnering with several of its HMOs, and in some cases other
employers, in several leadership efforts:
Since 1989, Digital provided the impetus for developing a standardized data collection
instrument which has evolved into the Health Plan and Employer Data Information
Set (HEDIS). The goal of this data collection tool is to capture comparable data on
each HMO regarding utilization, quality and financial reporting. Additionally, Digital
drove the development of and provides leadership to HEDIS Coalition, which consists
of employers and HMOs, to implement HEDIS V2.0 in this marketplace.
Under a project sponsored by the National Committee for Quality Assurance
(NCQA), a group of large employers, including Digital and some of its larger HMOs
have been participating in a program to compare HMOs' performances in 60 key
categories. Digital also has representation on an NCQA Steering Committee to
develop "report cards" comparing HMO performance in these areas.
Tufts Associated Health Plan, Harvard Community Health Plan and Fallon Clinic is
called the Clinical Indicators Project. Its goal is to establish benchmarks for cross-
plan comparisons of Caesarean section, prenatal care, asthma admission, hypertension
screening, mammography and mental health.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 4
Digital has facilitated the collaboration among three major New England HMOs,
including Harvard Community Health Plan, Fallon Clinic and Matthew Thornton
Health Plan, in the design and implementation of the New England Psychiatric
Outcomes Project. The study has been designed to include all inpatient mental health
admissions at several local facilities. This is a significant project in that it addressed
the need for consistent treatment approaches and outcomes measures in order to allow
for the return of a productive employee to the workplace. In June of 1993, a "Special
Presidential Commendation" was awarded to Digital by the American Psychiatric
Association (APA) in recognition of outstanding leadership in providing high-quality
mental health services for its employees and their families, both at the work-site and
through HMOs.
In partnering with other FORTUNE 500 companies and the nation's leading HMOs,
Digital is participating in a landmark study, the Managed Health Care Association
(MHCA) Outcomes Management Study, for the treatment for Angina and Asthma.
The conclusions of Phase I were that outcomes measures can be collected and pooled
by HMOs, competing companies can cooperate for a common goal, instruments are
reliable and valid, and standardization of data collection processes across
organizations is needed.
Digital has representation on the Board of Directors of the Washington Business
Group on Health (WBGH).
Digital joined forces with a consortium of large national employers to implement a
standardized member satisfaction/health risk assessment (SF-36) survey (Employee
Health Care Value Survey) of employees across a broad spectrum of health plans.
The goal is to compare satisfaction levels across health plans and model types, as well
as to identify areas of improvement through performance monitoring and assess the
health risk of employees across these Plans.
Looking Ahead
Digital is implementing its strategy to provide a more viable, long-term solution to the health
care cost issues that continue to face the Company and its employees by:
focusing on the managed care delivery system;
holding plans accountable for the delivery and financing of quality, cost effective
care;
developing long-term partnerships with HMOs; and
setting up a proactive management process utilizing TQM principles that clearly
articulate performance standards that balance quality and cost.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 5
Digital also believes that its experience will serve as a working model for other health care
system planners.
Digital is committed to the goal of ensuring that its health care programs meet the needs of
its employees and their families, while being cost-effective for both employees and Digital.
This includes offering quality programs that provide flexibility and choice to its diverse
workforce.
Digital Equipment Corporation is the world's leader in open client/server solutions from
personal computing to integrated worldwide information systems. Digital's scaleable Alpha
platforms, storage, networking, software and services, together with industry focused
solutions from business partners, help organizations compete and win in today's global
marketplace.
January 1995
Initial Activities of the Memphis Business Group on Health
The original mission established by the MBGH was:
To exert a moderating influence on rising health care costs in the community,
without sacrificing quality or access to medical care.
In order to accomplish this mission, the MBGH adopted a two-pronged approach of
reducing costs through group purchase agreements and management of health care
resources. Only one hospital responded to the MBGH's initial competitive bidding
process for health care services. It is important to note that, among the major health care
systems in Memphis, the hospital that responded was the lower charge hospital. The
MBGH group purchase preferred provider network has been operational since 1988.
There have been four bidding cycles. Beginning with the second contract period, all area
hospitals have submitted proposals in each cycle. The current PPO contract includes per
diems for inpatient services and a 20% discount off billed charges for outpatient services.
The MBGH has recognized from the beginning that discounts alone are not the answer to
controlling health care costs. As such, in 1987, the MBGH initiated utilization and case
management services for member companies. Today, we provide:
3
Utilization and Quality Management services for basic health care services;
Carve out psychiatric and substance abuse case management, which utilizes a
provider network that is separate and distinct from the full-service PPO
network; and
Case management for workers' compensation.
Member companies have experienced significant savings due to these utilization review
and case management services. For example:
The average length of stay for all diagnoses (excluding psychiatric and
substance abuse) has decreased from 5.5 days in 1987 to 4.0 days in 1994.
In 1994, member companies saved an estimated $3,112,000 in basic health care
costs;
The average length of stay for companies using MBGH psychiatric and
substance abuse case management decreased from 26.9 days in 1987 to
approximately 10.5 days in 1994.
In 1994, member companies, on average, saved $6 for every dollar they invested in
utilization review and case management services at the MBGH.
4
The average annual increase in health care costs per employee was only 6% from 1987 to
1992 for member companies that submitted data to the MBGH. This compares favorably
to the national annual average increase of 14.7% for that same time period. The MBGH is
currently collecting data to estimate savings since 1992. These savings reflect the success
of the MBGH in controlling health care costs.
A New, Broader Mission
With the development of a successful PPO arrangement and the establishment of cost-
effective utilization review and case management services, the MBGH essentially
accomplished its original mission. Activities of the MBGH began to expand and the new
mission, adopted in 1994, more accurately reflected the purpose of the group:
The Memphis Business Group on Health is dedicated to making conscientious
business decisions by striving to facilitate the purchase of effective and efficient
healthcare for MBGH and the Memphis business community.
Activities (in addition to those described previously) designed specifically to address the
effective and efficient healthcare component of the mission include the following:
Quality Initiative. The last two PPO contracts have included a quality initiative between
the PPO network and MBGH. Specific utilization and patient outcome data are reviewed
periodically and patient satisfaction surveys are conducted. With the recent availability of
5
national and regional comparative data, benchmark data is now being used to compare the
PPO's performance. Any trends that need further investigation are identified. For
example, there is currently a special task force charged with establishing PPO network-
wide policies, procedures and critical paths designed to reduce cesarean deliveries (C-
Section). As a result of the quality initiative, we have been able to decrease MBGH's C-
Section rate by greater than 10% over the past nine (9) months. In addition, a breast
cancer task force and an education committee have been formed to address specific issues
of concern identified through the MBGH quality initiative.
The efforts of MBGH to work with providers in continuously improving the quality of
services have a community-wide impact. The policies, procedures, critical paths and
treatment programs developed as result of this initiative will benefit all PPO patients, not
just MBGH members.
Point-of-Service Program. In 1994, the MBGH determined that further cost savings
could best be accomplished through the introduction of a "gate-keeper" component and
more comprehensive management of health care resources. As a result, a group purchase
point-of-service option is now available to member companies. By offering a group
purchase POS, the MBGH is supporting the continued development and evolution of
effective and efficient delivery models.
6
This new mission also reflects the expanded role for MBGH within the Memphis
community The following points provide examples of programs and services that have
had a community-wide impact:
The Business Group Health Insurance Alliance. In 1994, the MBGH, in alliance with
an insurance company and health care providers, developed a fully-insured health care
benefit plan specifically designed for small employers with 2 to 100 employees. The
benefit plan is priced favorably and is more affordable to small employers because it is
based on the pricing negotiated by the MBGH for its self-funded PPO network. The
following statistics reflect the experience of the plan during the first 11 months of
operation
123 groups with 2,618 employees;
Average group size of 21 employees;
7% of the groups had no prior coverage;
Based on a sample of participating companies, these companies saved an estimated 24%
by accessing health insurance through the Alliance compared to their previous health care
coverage.
Policy renewal pricing will be based upon specific company experience and the combined
experience of the Alliance. It is anticipated that if there are premium increases, they will
be significantly lower than would have been experienced outside the Alliance.
7
Composition of the Memphis Business Group on Health. The profile of MBGH
member companies indicates that small, medium and large employers in the Memphis area
have accessed membership and its benefits. As presented in the following table, employers
with 100 to 299 Memphis-area employees represent the largest category of member
companies:
Company Size (Employees)
Number
Percent
Less than 100
4
7.4
100 - 299
23
42.6
300 - 499
8
14.8
500 - 999
6
11.1
1,000 and over
13
24.1
Total
54
100.0
All member companies, regardless of size, benefit through membership in MBGH. Large
companies are able to increase their purchasing power in the community by associating
with other large companies. Smaller companies have the opportunity to benefit from the
purchasing power of these large companies and realize significant savings in their
company's overall expenses.
Conclusion
All of these efforts to develop and support high quality, cost-effective health care services
in Memphis have been undertaken by local employers seeking local solutions to the
specific health care issues in Memphis. These initiatives have been undertaken based upon
8
our membership's identification of a problem and have not been mandated by third-parties
Because these have been private initiatives, the solutions have been both creative and
targeted. This competitive, market-driven approach is working We encourage you to
support models of health reform that will allow this type of local, market-driven solution
to continue.
9
Remarks Prepared for Testimony
before the
U.S. Senate Labor and Human Resources Committee
Washington, D.C.
March 14, 1995
Glenn Potter
Vice Chancellor for Hospital Administration
University of Kansas Medical Center
Madam Chairman and distinguished members of the Senate Labor and Human Resources
Committee. Thank you for the opportunity to be with you today to share our experiences in
the local health care marketplace.
I am Glenn Potter, Vice Chancellor for Hospital Administration, the University of Kansas
Medical Center. The University of Kansas Medical Center was formed 90 years ago when
three proprietary medical schools in Kansas City were reformed under the control of the
University of Kansas. We are a major health care asset for Kansas City, our region and the
State of Kansas, providing the majority of health care professionals from our schools of
medicine, nursing and allied health who practice in Kansas City and the majority of 5,000
physicians who practice in Kansas. K.U.'s Medical Center itself is the seventh largest
employer in greater Kansas City. Our biomedical research efforts are a significant economic
development factor for the region and the state. Yearly, we treat patients from each of
Kansas' 105 counties as well as patients from neighboring states of Missouri, Nebraska, Iowa
and Oklahoma. We are proud of our role in providing quality tertiary care services and
proud. too, that we are making bold steps to encourage new students in the primary care practices.
1
In Kansas City -- like many other cities across the country - hospitals, health systems,
physicians, other health care providers and practitioners, insurers, local agencies and
business leaders are working together to make our community healthier. We are forming
partnerships that bring greater focus towards keeping people healthy and creating a more
coordinated health care delivery system to better serve people's health and care needs.
Health care has historically been focused on restoring people to health. Health care today
and in the future is focused on keeping people healthy. That simple change in wording is a
major change in focus, behavior and mindsets. It's a societal, cultural shift.
Today in Kansas City, partnerships or networks are being designed to create major cultural
shifts not only in how we deliver and finance health care, but also in our individual and
collective mindsets about the importance of our health, our community's health, and how we
access and use health care services.
These emerging partnerships are taking on a variety of forms and legal structures. But they
are all striving to design a greater focus on community needs and addressing underlying
problems that contribute to poor health. They are being designed to better coordinate care,
aligning incentives to ensure that the right care is available at the right time. Through
cooperation and collaboration, these partnerships or networks are also beginning to reduce
excessive duplication of services and technology; and by increasingly aligning the incentives
of all the parties involved, they are also reducing costs. A Group Health Association of
2
America study shows nationwide that coordinated care plans, on average, reduced their
overall premiums 1.2% for 1995. In Kansas City the industry seems to be solving many of
its own problems as evidenced by:
o
Rate increases have moderated considerably over the last 18 to 24 months.
o
similarly, rate increases seem to have stabilized for all medical health
insurance products. True managed care products, such as health maintenance
organizations (HMOs), show increases of 1 to 2%, while increases for
moderately managed products such as Preferred Provider Organizations (PPOs)
have been somewhat higher in the range of 8 to 10 %.
o
observed cost trends are being pushed downward by a combination of factors,
including more people selecting more effective managed care plans and
providers. who are gaining efficiencies, being able to offer and accept better
(lower) pricing.
In the emerging partnerships in Kansas City, network partners are beginning to share the risk
with each other for bottom-line, per-person cost and performance. This strengthens the
common interests of all the partners. All partners now have an interest in delegating quality
improvement and cost management responsibilities to the most appropriate effective partner,
and in finding ways to help each other execute these responsibilities.
3
For now, it is the players' responsibilities and relationships that are changing more than the
interventions. But the more the risk/rewards and objectives are shared, the more we'll be
able to reduce wasteful or duplicate processes, procedures and capital. There's also a greater
potential for developing and implementing innovative, cost-effective processes for
maintaining people's health.
Traditionally, relationships between insurers and providers have been based on arms-length
negotiations. In these new partnerships, the parties are creating shared or consistent
objectives and financial incentives. So, rather than an arms-length negotiation, the
relationship focuses on gaining a better understanding of each others' perspectives and
concerns: and developing together, new approaches to achieve these common objectives.
As these relationships evolve, partners begin to no longer distinguish between their interests
and their partners' interests. The partnership is only successful for any partner, if all
interests -- including the community's -- are satisfied.
The emerging primary objective is keeping people healthy and happy.
As I mentioned, in the Kansas City area and Kansas, a number of such community focused
networks are emerging. For instance, a couple of efforts with which our hospital is
involved
o
Five hospitals/health systems including KU Medical Center, and two Blue
4
Cross Plans, one from Kansas City , the other from Kansas, have come
together to form a corporation called Tri-Source. Tri-Source has implemented
and operates a health maintenance organization that is marketed throughout
eastern Kansas and western Missouri to a population of nearly three million
people within a 75 mile radius of Kansas City. As important as the product
we have produced is the collaboration among the partners that seeks innovative
ways to work together for the benefit of the communities served.
o
The Jayhawk Health Alliance is another collaborative venture that involves KU
Medical Center and seven other suburban and rural hospitals all within a 75
mile radius of Kansas City. A few of the stated objectives of this Alliance are
to:
a.
integrate financing and delivery of care;
b.
focus on primary and preventive care;
C.
provide access to a full continuum of health services in a variety
of delivery settings;
d.
enhance quality through demonstrated outcomes management,
and
e.
reduce cost through collaborative patient care management.
o
At KU Medical Center, our Schools of Nursing, Allied Health and Medicine
are seeking closer working relationships with various managed care entities to
5
better prepare tomorrow's practitioners for their role in "coordinated care."
Our outreach efforts reach into virtually every corner of Kansas through
teaching affiliations, compressed video-teleconferencing, continuing education
programming and specialty clinics. Our goal of enhancement of primary care
teaching services and research includes a strategy to change residency mix so
that 50% of all residency positions are in primary care by the year 2000. To
accomplish this, we are adjusting the curricula in all schools to emphasize
primary care, evaluating and establishing sites for training affiliates throughout
the State of Kansas. reallocating faculty positions to primary care disciplines
and emphasizing selection of students with an interest in primary care.
0
The states of Kansas and Missouri are both in the process of creating new
Medicaid managed care programs. In Kansas, Wyandotte County --
University of Kansas Medical Center's home county -- is being selected as one
of the demonstration sites. The state will be requesting bids from
organizations with an HMO license. KU Medical Center is currently
exploring our partnership opportunities for this demonstration program.
o
The Greater Kansas City Chamber of Commerce's "Chamber Choice" program
also offers the areas' smaller employers the advantages of today's competitive
marketplace. Subsequent to a highly competitive bidding process, the
Chamber selected a plan which offers subscribing businesses, with 25 or fewer
6
employees, the opportunity to allow their employees to select between:
--
a health maintenance organization (HMO) which offers 100% coverage
for most services, extra benefits, and no annual deductible; and
a preferred provider organization (PPO) that offers freedom of choice
of providers, and extra cost savings when provider networks are used.
Since Chamber Choice was launched last May, over 350 employers have signed up to
cover over 1,500 people. These small businesses not only have a plan that gives their
employees options, they have a guaranteed rate increase cap for their first renewal.
While this cap is 8%, it is believed actual renewal rates will be lower consistent with
lower premiums of smaller rate increases being realized in Kansas City and
nationwide. This initiative has the potential to give greater rate stability for small
employers because of the "pooled" experience concept.
All of these initiatives and ventures are "works in progress". We will need to continue
improving them as we learn how to become more integrated, coordinated health care delivery
systems. But we know coordinated care is the right thing to do. It is a fundamental change
and fundamental change is needed to:
o
rein in compounding increases in health care costs; and
7
o
improve people's health and the health of our communities.
However, there is a right way, and a wrong way to stimulate such changes. The wrong way
is to create managed care programs that are really only managed costs. The right way is
putting the care back in managed care. Care must become more coordinated, integrated and
community-focused.
Managed or coordinated care's
o
emphasis on prevention and responsibility for the full continuum of services
can improve quality as one organization is held accountable, instead of a
variety of providers; and
o
shifting of the care emphasis from treating sickness to promoting wellness can
also reduce costs.
In Kansas City, multiple provider partnerships and insurer/provider partnerships are giving
us the opportunity to leverage and capitalize on our respective strengths to better serve and
affect our greater community's health.
There are barriers to making these changes, however. One of the greatest barriers or
complications is that public programs (i.e., Medicare and Medicaid) are not following the
8
private sector trends towards managed care.
Instead, Medicare and Medicaid often create incentives that are in conflict with our private
sector trends to coordinate care. This is particularly problematic, given these programs, on
average, represent 50% of hospitals' revenues.
We need to move toward coordinated care. Beneficiaries need to be encouraged to select
coordinated care options. Providers need to be encouraged to offer coordinated care options.
For Medicare beneficiaries, coordinated care means greater ability to meet their needs and to
receive preventive care. More and more, coordinated care is covering all Medicare services,
plus coverage for vision, dental, preventive services and even hearing aids -- benefits that
most "Medigap" policies don't provide. Many coordinated care plans eliminate the 20% co-
payment seniors must pay for doctor visits, and at the same time eliminate mountains of
claim forms. These may be key reasons why a recent survey by the consulting firm of
Frederick/Schneiders found that Medicare enrollees in coordinated care plans are as satisfied
with their overall care as those with fee-for-service insurance.
Most importantly, coordinated care networks can bring Medicare beneficiaries closer to a
better vision of health care for the future: a connected health system with everyone who
provides care -- doctors, hospitals, nurses and others -- linked together and communicating
with each other at every stage of treatment and service.
9
Moving the Medicare program toward coordinated care is an idea that makes sense, and one
that many people believe will save money for our health care system. Take a look at the
tremendous change that is going on right now in the private sector and the impact this change
has already had on health and health care costs. According to the most recent Congressional
Budget Office (CBO) projections, a shift from fee-for-service health care to coordinated care
in the Medicare and Medicaid programs would generate overall savings of about 8%.
Coordinated care works. It works better than the old-fashioned, fragmented system we must
pull away from. And it can bring better, more efficient care to older Americans who entrust
their health to Medicare. There are a number cf options Congress could consider that would
help move Medicare into coordinated care. Here are some ideas to explore:
o
Model the Medicare program after the Federal Employees Health Benefit
Program (FEHBP). Similar to FEHBP, where the government makes a fixed
contribution and federal employees choose from a wide variety of plans,
Medicare could make a fixed contribution on behalf of its beneficiaries and
allow them to choose to enroll in a coordinated care plan in the private sector.
Under this proposal, beneficiaries choosing to receive services through a
coordinated care plan would pay little or no additional costs. Beneficiaries
choosing to receive services through traditional fee-for-service providers would
pay the difference between the fixed contribution and higher costs of fee-for-
service care. This option provides Medicare beneficiaries with a financial
10
incentive to choose a coordinated care option where available.
Provide financial INCENTIVES for Medicare beneficiaries TO choose a managed
care option available in their area. For example, require beneficiaries who
select the fee-for-service benefit package to contribute a supplemental
premium. Consumers would have an economic incentive to chose more cost-
effective types of care and the government would take in additional revenue.
Explore new ways of paying managed care organizations that contract with
Medicare through a series of demonstrations. There are many problems with
the way in which Medicare currently pays managed care organizations. A new
approach would allow plans in the same market area to bid competitively for
Medicare contracts. Bidding, which could not exceed current managed care
payment rates, would have the effect of setting different market prices in loca¹
areas for Medicare managed care enrollees in a way that takes into account
local costs and health care needs. Different ways of treating winners and
losers in a given market could be explored through demonstrations to
determine the appropriate incentives for plans that would not have a disruptive
effect on beneficiaries.
o
Work to develop quality standards, including conditions of participation,
quality improvement activities, and performance measures that address issues
11
of importance to systems that coordinate care. Insure that new standards do
not duplicate, but rather coordinate with efforts already underway in the
private sector. The standard should be flexible enough to apply to a variety of
delivery mechanisms, be patient-focused, and emphasize ongoing quality
improvement.
o
Expand the types of plans from which Medicare beneficiaries can choose.
Today, Medicare beneficiaries can choose to receive care through an HMO or
through traditional fee-for-service providers. But many non-HMO provider-
sponsored networks for care are available, and can offer a full continuum of
services to seniors for a fixed premium. Medicare should expand the types of
risk-bearing plans with which it contracts to include these non-HMO networks
of care. New types of contracts could be negotiated with these non-HMO
networks in which the networks and the Medicare program would share risk.
For example, for a fixed payment, networks would be responsible for
providing services up to a certain pre-determined cost limit based on
reasonable use of services by the network's enrollees. If a network's enrollees
were unusually sick and required more than expected care, the Medicare
program could be responsible for absorbing the "outlier" costs in excess of the
predetermined limits. Payment to networks would be adjusted to reflect the
risk borne by the government and economies of direct contracting.
12
0
Medicare should provide its beneficiaries with more information on managed
care plans. The program should send a list of local managed care plans
directly to beneficiaries and give seniors an annual report that compares
managed care and fee-for-service plans on the basis of premiums, supplemental
benefits, cost sharing, and quality ratings. These efforts will make seniors
smarter consumers of health care and highlight the benefits of managed care.
o
Allow for an open enrollment period each year during which Medicare
beneficiaries can elect to receive services from a managed care plan. Also,
make seniors' choice of a managed care plan valid for one year -- longer than
the 30-day period required today. Annual open enrollment will give seniors
more opportunities to select managed care options. Making their managed
care choice valid for one year enables plans to better manage beneficiary
needs. practice preventive care, and achieve cost savings. This should
encourage more managed care plans to enter the market and reduce Medicare
costs overall.
Other barriers to coordinated care include the lack of insurance or the breaks in insurance
coverage that many people experience. Insurance market reforms need to be seriously
considered to provide greater portability of insurance coverage and greater security that a
pre-existing illness or chronic condition will not leave people without access to any health
care insurance.
13
Formation of community health networks can also be impeded by antitrust policies that
prohibit providers, practitioners and their communities from assessing local health care needs
and creating mechanisms to jointly address those needs. We are all concerned with
inconsistent, conflicting and burdensome requirements of the various fraud and abuse laws.
Adoption of "any willing provider" proposals could also hamper efforts to maintain quality
and cost effectiveness standards if networks are forced to contract with or hire any qualified
provider who agrees to the networks' terms. Requiring all plans to accept all providers
means the cost of health care goes up and the quality may go down.
How we structure the Medicaid program in terms of funding, benefits, eligibility and
administration also is a serious concern. Kansas' demonstration project for Medicaid
managed care offers some hope of better aligning the program in Kansas and the incentives
among all the stakeholders. Meantime, welfare reforms could have direct or indirect impact
on the future need for or viability of the Medicaid program. We wish to work with you as
you explore alternatives for welfare's reform and their implications for people's future health
care needs.
Yet, when all is said and done, as Wilbur Cohen once remarked, health care reform is,
"10% legislation, 90% implementation." Health care is a local, people-intensive service --
it's people serving and caring for people. And our long term health and need for health care
services is predicated on people caring about and for their own health. Finding real solutions
14
to the complex, interwoven problems in health care will require people working together on a
local level. It requires major cultural shifts. There are no quick fixes or easy, painless
answers.
Madam Chairman and Senators, we look forward to working with you to create constructive
changes -- and to protect and improve the health and health care of our nation's communities
and the people we all serve.
15
Statement of
James R. Kimmey, M.D., M.P.H.
Vice President for Health Sciences and Chief Executive Officer
Saint Louis University Health Sciences Center
before the
Commitee on Labor and Human Resources
United States Senate
March 14, 1995
MADAME CHAIRPERSON AND MEMBERS OF THE COMMITTEE-
I am Dr. James R. Kimmey, Vice President for Health Sciences of Saint Louis University and Chief Ex-
ecutive Officer of the Saint Louis University Health Sciences Center. I appreciate the committee's invita-
tion to appear today to discuss the impact of the rapid changes in organization and financing of medical
care on academic health centers in the United States. Although my testimony will draw heavily on the
changes occurring in the St. Louis (MO) medical market area, similar changes are occurring in virtually
every major metropolitan area in the nation. These changes, which I will collectively call "prudent pur-
chasing," have both anticipated and unanticipated consequences for the purchaser, the patient, and the
provider of care. They have similarly diverse effects on the institutions which our society has charged
with the dual missions of educating health professionals and expanding our knowledge of health and dis-
ease as well as of the systems in which that knowledge is applied.
An academic health center is defined as a complex of institutions involved in education of health profes-
sionals which includes a university, a medical school, at least one other health professions school, and one
or more teaching hospitals. At the present time, there are 125 centers in the United States which meet this
definition. Academic health centers are mission-driven non-profit organizations which comprise the prin-
cipal settings in this country for health professions education, medical and health services research, and
management of complex medical cases. Their programs include undergraduate and graduate medical edu-
cation, undergraduate and graduate training for other health professions, and a variety of related educa-
tional and research endeavors
Education and research are two of three mission elements which are common to these unique institutions.
The third element IS service and that element is most often expressed in provision of medical care to those
who cannot afford its cost. In part because of their largely urban locations, academic health centers have
by default become major providers of uncompensated care. Many major teaching hospital are also desig-
nated as disproportionate share hospitals under the federal Medicare program, documenting the fact that
they provide care to the indigent at a much higher rate than community hospitals.
The Saint Louis University Health Sciences Center is one of the most complete such institutions in that it
offers a full range of health professions' education programs. The Health Sciences Center comprises a
School of Medicine, a School of Nursing, a School of Allied Health Professions, a School of Public
Health, and a Center for Advanced Dental Education. In addition, the University owns and operates a
320 bed acute care hospital providing tertiary and quatemary level care, and maintains substantial teach-
ing affiliations with several other community hospitals and long term care facilities. It is also located in
the inner city, a mission-driven decision made two decades ago when other institutions were fleeing to the
suburban ring.
Academic health centers are supported financially from many different sources, including tuition, endow-
ment income and gifts, state appropriations, federal and private grants and contracts, and from revenues
received for patient care. Table 1 shows the sources of revenue for allopathic medical schools, the most
resource-intensive educational component of an academic health center, by source for three time periods.
James R. Kimmey, M.D., M.P.H.
Page 2
Table 1
U.S. Allopathic Medical School Revenues,
by Source, Three Time Periods
(Dollars in Millions)
1960-61
1980-81
1992-93
% of
% of
% of
Revenue Category.
Amount
total
Amount
total
Amount
total
Federal research
133
30.5
1,487
22.9
4,817
19.1
Other Federal (non-service)
43
9.9
529
8.2
630
2.5
State/Local (non-service)
74
17.0
1,503
23.2
2,958
11.7
Tuition & fees
28
6.4
348
5.4
1,048
4.2
Medical services
28
6.4
1,729
26.7
11,985
47.5
Other
130
29.8
885
13.7
3,812
15.1
Total
436
100.0
6,481
100.0
25,250
100.0
Source: Association of American Medical Colleges. 1994
These are totals for all schools, both public and private. Within those categories, there are substantial
variations in the sources of funds. Public medical schools receive the bulk of the $2.9 billion in state/local
non-service funds which represents 22% of their total revenue. Private medical schools receive only 1%
of their revenue from state and local sources. The public schools are less dependent on income from
medical services offered patients (40% of their total) than are private schools (48% of their total.). In the
case of Saint Louis University, the proportion of support from clinical activities to academic and research
endeavors is substantially higher, representing almost two-thirds of the School of Medicine budget. This
makes our institution and other private academic health centers particularly vulnerable to policies that re-
duce clinical income.
As complex institutions with varied funding streams, academic health centers are subject to many differ-
ent pressures in their environments. The degree of strain has never been greater than it is today, and the
changes in the financing and delivery of medical care currently under way in the private sector will on'
intensify the pressures on such institutions. Similarly, changes in Medicare and Medicaid, in foundati
and other private giving, in state tax support, and in federal research policy and funding directly affect
such centers.
Current Pressures on Academic Health Centers
Examination of the data in Table 1 emphasizes the large number of funding streams which flow to medi-
cal schools. Each of these types of funding is threatened in the current environment. The sources of diffi-
culty are several-- prudent purchasing activities on the part of business and government, pending changes
in reimbursement policy, and health reform legislation at the state or federal level are most critical. Many
of the sources are relatively minor as contributors to total revenues (e.g., endowment, parent university
transfers, gifts) and are unlikely to be affected by financing policies. The largest sources of support--
faculty practice plans and hospital transfers--summarized in the table under "medical service" are heavily
affected by reform, however, and deserve further discussion. These can be considered as the revenues
from the medical enterprise of the academic health center.
The Medical Enterprise
As the costs of medical education and of maintaining the large teaching and research establishments re-
quired to support such education has spiraled upward, tuition revenues have become less and less capable
of providing the resources required. Increasingly, the education and research process has become de-
pendent on the medical enterprise which is operated in conjunction with the educational and research en-
terprises. Two major components make up the medical enterprise--the clinical practice of faculty and the
patient care activities of affiliated hospitals. In 1992-93, revenues from these sources comprised 47.5 per-
cent of the total revenues of medical schoo!s
Linking the costs of medical education to patient care has been essential but is not without controversy.
This linkage has contributed to higher costs in most teaching hospitals than those in non-teaching hospi
tals. Among the factors cited for explaining these differences are the greater complexity of illness in pa
I
These are 1991-92 figures, accounting for their variation from the percentage figures in Table 1.
James R. Kimmey, M.D., M.P.H.
Page 3
tients seen in such institutions; the presence of multiple problems in such patients; a higher proportion of
indigent patients seen in teaching centers; the added costs of the learning process in terms of length of
stay and amount of testing done as an adjunct to teaching; and the greater capital intensity in the teaching
institution which needs the latest technology to prepare practitioners conversant with such modalities.
Academic physicians tend to be less productive in terms of patient care. This is because of demands of
teaching students and residents, both in the classroom and at the bedside. Another factor is the faculty's
activity in carrying out basic and clinical research, a major component of their responsibility. Since such
physicians are generally salaried by the educational institution, while payment for services to patients has
been based on fees charged such patients or their insurers, a mechanism was required to collect such fees
and effect their disbursement in accord with the individual physician's compensation agreement. Practice
plans were developed as a mechanism for accomplishing this business transaction. There are many differ-
ent types of such plans, but fundamentally they are organized arrangements wherein fees are assigned to
the organization by the physician. The organization in turn provides financial and administrative services
in support of the physician's activity. Usually, a portion of the revenues of the practice plan pass to the
faculty member's department and the school. These funds are used to advance educational and research
activities which would otherwise fall on the tuition dollar or the parent university. Clinical income from
practice plans has allowed growth in the size and scope of these schools despite limitations on tuition and
other academic sources of revenue.
Teaching hospitals, and particularly those owned by an academic health center or its parent, have also
been "taxed" to support the academic enterprise. In part, the funds transferred from the hospitals are re-
imbursement for services provided the hospital by the faculty. Like the practice plan revenues, these
hospital revenues have supported expansion of the medical (and often other) educational programs of the
academic health center beyond that which would have been possible without the influx of dollars gener-
ated from inpatient care.
In addition to these sources of support for the general educational mission of the academic health center,
there has been major support provided from clinical income to graduate medical education--the advanced
training of physicians in specialties. Charges for services in academic health center teaching hospitals have
incorporated the costs of maintaining residency programs, often extensive, both in types of residencies
and numbers of resident physicians. A major source of support for graduate medical education has come
through the federal Medicare program, which adjusts payments to hospitals both for the direct costs of
such training (resident stipends, costs of supervision, direct and allocated overhead) and the indirect costs
known to be associated with such training such as extra testing and procedures.
The Need for a Policy
The practice of supporting health professions education from hospital and physician practice revenues
has elements both of expediency and policy. On the expediency side, as the complexity and cost of such
education increased, volume-based revenues were a ready source of funds to substitute for inadequate
tuition dollars. Cross-subsidization was a common practice in the field, and payors were willing to pay a
premium price to academic health centers. On the policy side, the Medicare program institutionalized the
concept with the introduction explicit payments for these educational activities. These funds were seen as
essential to maintaining the resource represented by teaching hospitals, both as sites for educating pro-
fessionals and conducting research and as providers of care to underserved and indigent populations.
Linking education costs to patient care, either indirectly or directly, also avoided a fundamental policy
issue for society and government--how appropriately to pay for health professions' education, which
meets a broad need for society as a whole. With the growth of managed care and the expansion of pru-
dent purchasing practices on the part of business and government, that basic issue must come to the
agenda.
Managed Care and Academic Health Centers
Managed care is a general term which covers a wide range of arrangements under which individuals are
enrolled in organized systems which accept responsibility for providing a defined range of services at a
predetermined charge or premium. Managed care organizations have demonstrated an ability to offer high
quality care at lesser costs than the traditional fee-for-services system. Such organizations are based on a
strong network of primary care providers--providers who provide first-contact care sensitive to the indi-
vidual's social and psychological situation as well as his/her medical problem and which incorporates a
strong element of prevention. Generally, managed care organizations achieve economies by appropriate
use of referrals and decreased use of expensive diagnostic techniques and inpatient services. When the
James R. Kimmey, M.D., M.P.H.
Page 4
managed care organization pays on the basis of a capitation per enrollee, the pressure to cut all extrane-
ous cost out of the system becomes most acute.
The effects of capitation payment are particularly harsh for academic health centers. The effect of a
from fee-for-service to capitation payment is to "turn things upside down" for providers of services.
ure 1 compares the fee-for-service market forces and those in a capitated situation.
Figure 1
Relationships Among Factors in Payment Systems
Fee-for-Service Medicine
Capitated Medicine
Costs and revenue increase with volume
Revenue is fixed; costs increase with volume.
Total
Revenues
Total
on
Costs
Certs
$
LOW
Total
$
Revenue
Incentive
Incentive
Break
Service Volume
Break-
Service Volume
volume
Volume
The change in incentive from increasing volume to decreasing volume in order to make a profit is a
problem for all health care providers. It is particularly acute for teaching institutions. Clinical teaching
involves more testing, pr redures, and hospital time than does non-teaching care. Yet these are the very
things that the capitation model drives out. The academic health center finds itself torn between conflict-
ing goals--to provide value attractive to the market on one hand and to meet its academic requirements
on the other. When managed care is a small part of the total mix, this is not a problem; as managed care is
promoted as a preferred approach, it becomes a huge problem.
Although managed care organizations have existed in the United States for decades, they have only Γ
cently become widely utilized as a source of care for a significant portion of the population. Since the C
ganized system is at risk financially for the amount of care provided, it seeks out advantageous prices
from providers through negotiation. Although quality is a desired factor, the critical item for the "at risk"
organization is price
As more and more care has shifted from the traditional fee for service model to the managed care model,
high cost providers like academic health centers are less competitive, and their market share is eroded.
Even in the case of the "high-tech" care which is commonly available only in such centers, the prudent
purchasers have been able to negotiate discounts, playing such high cost providers off against one another
in a quest for the low price. Although managed care organizations do not yet dominate the market in
most places, they have achieved dominance in several locales, and in those locales academic health cen-
ters have experienced severe financial problems as their clinical income has decreased.
The Saint Louis University Experience
The St. Louis market demonstrates many of these features. The market is making the transition from a
fee-for-service market to a managed care market very rapidly. As the number of individuals served
through managed care arrangements increases, the utilization practices of managed care organizations
impact the market, increasing the surplus of hospital beds and specialist providers already present in the
community. This in turn challenges providers to change behavior in ways earlier regulatory approaches
never did. Hospitals and physicians discount charges to maintain a market share. Consolidation of hospi-
tals, closure of excess beds, sale of physician practices to hospitals and formation of Physician-Hospital
Organizations designed to package services for managed care becomes ? frenzied activity. Downsizing,
administrative consolidation, and other cost cutting measures occur. In short, the market is alive and well
and living in St. Louis. The changes in the delivery system are exactly those that proponents of private
market-based reform predict.
These changes in the financing environment locally are driving strategic development activities at th
Health Sciences Center. An organization which as recently as two years ago led a comfortable, independ
ent, traditional academic existence in the St. Louis community has begun an often wrenching process of
transition into a lean, mean competing machine. At the end of 1993, the clinical enterprise of the Health
James R. Kimmey, M.D., M.P.H.
Page 5
Sciences Center consisted of thirteen semi-autonomous clinical departments and a hospital presenting
thirteen volume driven enterprises to the market. Competition was not an major issue. All the hospitals in
the community were independent, and non-university physicians were entrepreneurs in partnership or
small group practices. Market penetration by managed care companies was small and stable.
We recognized that this situation was not going to last, and that the Health Sciences Center like the rest
of the system in the community was going to have to adapt to a new reality, one in which purchasers
were going to be unwilling to pay a premium price to support academic endeavors. For the organization,
it meant rethinking our role, our organizational structure, and our relationships in the community. I want
to stress that we are not fighting the managed care revolution. Indeed, we are undertaking substantial
changes to position the Health Sciences Center as an asset to a more cost-conscious environment. If an
institution's orientation is toward community-responsive services and a prevention oriented approach,
and ours is, it cannot but support the basic tenets of a managed care approach. However, the institution
must find new ways to support its primary educational mission in the new context. That is the challenge
all academic health centers face currently.
The strategy developed for the Health Sciences Center was designed to permit it to respond effectively to
a managed care environment. Three phases were envisioned to take the organization from its traditional
configuration to one consistent with current realities.
In the first phase, the clinical practices of the faculty were consolidated into a single organizational unit,
the University Medical Group (UMG). Under faculty leadership, the departmental business activities were
consolidated into one organization. This step promoted administrative efficiency and allowed the faculty
as a whole to develop and market products and product lines to the purchasers in the community.
In the second phase, we are consolidating the UMG and the hospital into a single economic entity with a
corporate identity separate from the University. This new company combines all the clinical activity of the
University into a single provider structure which aligns physician and hospital incentives, permits rapid
and coherent responses to changes in the market, and achieves additional administrative cost savings.
This step, approved by the University Trustees ten days ago, was a major adjustment for the University
and for the faculty of medicine. From the University perspective, it is allowing another entity to manage a
significant portion of the University assets. The faculty required assurance that the new entity would not
be so focused on its financial performance and marketing that it would lose sight of the basic educational
mission it serves.
The third phase, which is proceeding concurrently, involves merger of the new single provider with an-
other health care provider in the community which has a strong primary care physician base and broader
geographic coverage than the University alone. This third step is essential to providing the academic
health center with the base of covered lives required to support its teaching mission and with access to a
network of primary care providers who can participate in the teaching programs for both medical stu-
dents and residents.
These structural changes, difficult as they are to achieve, are only a first step. Extensive cultural change
will be required as well if the new structures are to be effective in establishing a competitive position for
the Health Sciences Center. And even though we believe we are making the right moves to position us
for a competitive market, there are no guarantees that the market will recognize or be willing to pay for
the added value we perceive in the services provided by an academic center.
Academic Health Centers and Special Populations
While these market driven changes are drawing our attention and we strive to make all available adjust-
ments, another problem looms on the immediate horizon, changes in the Medicare program. As indicated
earlier, Medicare reimbursement under the DRG system is adjusted upward for teaching hospitals to re-
flect the costs associated with teaching status. There are two such adjustments: the indirect medical edu-
cation adjustment (IME) which compensates teaching hospital for the increased costs associated with pa-
tient care in their institutions and the direct medical education payment (DME) which supports a portion
of the cost of resident salaries, supervision of residents, and other costs specifically identified with the
training activity.
Both of these allowances for teaching institutions have come under scrutiny as the federal government
seeks ways to cut expenditures in the interest of deficit reduction. If these allowances were to be reduced
substantially or eliminated without an opportunity for the recipients to adjust to the loss, the results-
James R. Kimmey, M.D., M.P.H.
Page 6
combined with the existing problems occasioned by reductions in other sources of support to the aca-
demic health centers--would be disastrous. In the case of the Health Sciences Center, a reduction of the
IME from the current 7.7% rate to a 3% rate, as some have suggested, would drop $10 million
rewenue in the first year, eroding our ability to sustain significant parts of our teaching program.
Another area which should be carefully monitored as cost constraining policies are entertained is the ef-
fect of such policies on charity care. Academic health centers in most situations are major providers of
care to those without insurance or other means of paying for care. This is particularly true of high tech
procedures, an area of care so expensive as to be beyond the reach of many who can handle costs of
routine care. As the ability of academic health centers to cross-subsidize such care decreases, access to
such services will be impaired. The contribution of academic health centers to care for those unable to
pay is substantial. In St. Louis, the two primary teaching hospitals for the two academic health centers in
the community provided $29.6 millior. in charity care in 1992. This represented 37 percent of the total
charity care provided by the 37 hospitals in the metro area. The ability of academic health centers to sus-
tain charity care at these levels and at the same time to continue the teaching and research activities soci-
ety expects will become an impossible task as sources of revenue drop. It makes little difference whether
the drop is the result of prudent purchasing, or cuts in Medicare reimbursements, or any of the other
factors which affect revenue. The result will be deterioration in the ability of academic health centers to
perform adequately the social responsibilities they bear.
Perspective on the Future
These problems will intensify markedly in the coming years. The clinical funding stream which supports a
significant portion of both undergraduate and graduate medical education, as well is non-physician edu-
cation activities in many centers, will slow to a trickle compared to the recent past and the present. Fail-
ure to recognize these unanticipated consequences of efforts to constrain health care costs both to busi-
ness and government payors, and to deal explicitly with the problems which result, surely lead to a dete-
rioration in the quality and quantity of medical education, push its costs to the individual beyond the
reach of all but a few families, and erode the nation's role as the world leader in medical research.
Changes must be made to accomodate this new reality, but they should be planned changes which take
advantage of the opportunities it offers Forced reactions in response to the market will not meet eit
the institution's needs or serve society's interest. They will force solutions--such as decreasing care
indigent patients or less research investment or less comprehensive educational efforts--which are incon-
sistent with academic health centers' missions.
These problems are soluble, but must be recognized before they can be dealt with effectively. This is a
challenge to both private and governmental payors in this managed care era.
This completes m. statement I would be happy to respond to any questions the committee might wish to
pose.
Chris Dodd
U.S. SENATOR FROM CONNECTICUT
NEWS
FOR IMMEDIATE RELEASE
CONTACT: Marvin Fast
March 14, 1995
(202) 224-0345
DODD HIGHLIGHTS KIDS AND HEALTH CARE
WASHINGTON - In an effort to focus attention on the health
care needs of children, Senator Chris Dodd, D-Conn., today
released data from the General Accounting Office (GAO) showing
that kids continue to suffer when it comes to receiving adequate
coverage.
"Children are the heart and soul of a nation, " said Dodd.
"They shouldn't be shoved to the back of the line when it comes
to getting decent health care. "
The GAO study, requested by Dodd last year, found that
children who face the biggest risk are those whose parents make
up the working poor. Even parents who work full year, full time
are unable to afford health care for their kids. Those on
welfare are covered.
Below are highlights provided by GAO:
*
The number of children receiving insurance through their
parents' employer has decreased 9 percent in 4 years.
*
Eighty-nine percent of uninsured children have at least one
working parent with sixty-one percent employed full time for the
full year.
*
Medicaid has picked up a large portion of kids who would be
uninsured. The percentage of Medicaid enrolled kids with working
parents has increased dramatically. Cuts to this program will
increase the number of uninsured children.
-30-
Testimony:
The Changing Health Care Marketplace
Senate Labor and Human Resources Committee
March 14, 1995
Packet Includes:
Statement from Senator Kassebaum
Testimony from all witnesses
1
Nancy Landon Kassebaum
United States Senator
Kansas
For Immediate Release
KASSEBAUM SAYS SENATE SHOULD BEGIN REEXAMINING HEALTH CARE
REFORM IN LIGHT OF CHANGING MARKET
WASHINGTON, D.C.--March 14, 1995-Senator Nancy Landon Kassebaum, R-Kan., issued
the following statement today during hearings before the Labor and Human Resources Committee
on the changing health care marketplace:
"While congressional action on health reform bogged down last year, the private health care
market continues to change at a rapid pace. Since 1987, the number of Americans enrolled in Health
Maintenance Organizations (HMOs) has grown from 28 million to more than 45 million. In the past
year alone, enrollment in traditional fee-for-service plans declined from 48 percent to 37 percent
while overall managed care enrollment climbed from 58 percent to 65 percent in firms with more
than 200 employees.
"Health care costs and insurance coverage patterns are also changing. According to a recent
survey, employers' 1994 health care costs were down 1.1 percent, falling for the first time in a
decade. Large employers reported decreases averaging 1.9 percent. However, overall health
expenditures are projected to reach 18 percent of gross domestic product (GDP) by the beginning
of the next century, the number of Americans who are uninsured continues to climb, and many
families and small employers are finding it more difficult to obtain health coverage.
"The politics of health care reform have also changed dramatically since last year's debate
and, in part, as a result of last year's debate. Each week, I receive dozens of letters from Kansans
who cannot afford health coverage or who cannot buy insurance because they have a preexisting
medical condition. Increasingly, however, most of those letters also encourage us to fix what is
broken in the health care system without relying on big government solutions.
"That leads to the two main questions I hope these hearings will begin to address: what we
should do now, and how we should do it. As most physicians will tell you, you cannot prescribe the
proper treatment unless you first make the correct diagnosis."
The committee will begin a second day of hearings at 9:30 a.m., in Dirksen 430 on
Wednesday to explore possible directions for market-based reform.
###
Contact: Mike Horak - Press Secretary
Joel Bacon - Deputy Press Secretary
(202) 224-4774
STATEMENT OF
LEONARD D. SCHAEFFER
CHAIRMAN AND CEO
BLUE CROSS OF CALIFORNIA
BEFORE THE
COMMITTEE ON LABOR
AND HUMAN RESOURCES
U.S. SENATE
MARCH 14, 1995
Written Testimony of Leonard D. Schaeffer
Presented to the
Committee on Labor and Human Resources
March 14, 1995
Good morning, Madame Chairman and members of the Committee. My
name is Leonard Schaeffer and I am chairman of Blue Cross of California (a non-
profit public benefit corporation) and WellPoint Health Networks, Inc. (a publicly-
traded company). Our companies serve more than 5.8 million Californians
through a variety of managed care plans, as a participant in the Medicare supple-
mental market, and as a Medicare intermediary.
I appreciate the opportunity to testify today because of my long-standing
involvement in the private and public health care sectors. I have formerly held
positions as Administrator of the Health Care Financing Administration (HCFA):
Director of the Budget for the State of Illinois; Deputy Director for Management,
Illinois Department of Mental Health and Developmental Disabilities; and Presi-
dent of Group Health, Inc., a large staff model HMO in Minnesota.
The most important lesson I have learned from this experience is that
health care is a locally delivered and locally consumed service. If you are in the
business of financing or delivering health care to diverse and rapidly changing
populations, your organization--whether public or private-- must be flexible
enough to respond continuously to local consumer demands and changing
provider practice patterns. Managed care plans today are demonstrating this
flexibility which requires providing different markets with different choices of
health plans.
My goals today are to describe the evolution of health care financing and to
show how managed care plans are creating the infrastructure for future health
care delivery based on the coordination of care in local markets. In my discus-
sion, I also hope to convey how the demands of purchasers for products with
measurable value are transforming the private marketplace.
THE RISE OF VOLUNTARY HEALTH INSURANCE
First, let's look briefly at some of the historical background because
revisiting the past can help us sharpen our rethinking about the future.
1
Prior to 1929 and the Great Depression, only a few dangerous industries—
mining. lumber. and railroad construction- provided health care to workers
through a physician employed by the company. After 1929, hospitals began an
insurance movement which adopted the symbol Blue Cross. Baylor University
Hospital in Dallas is considered the first Blue Cross plan which charged 1,500
teachers 50 cents per month for a guarantee of 21 days of hospital care a year. In
1939, the California state medical association organized similar non-profit insur-
ance plans to pay doctor bills. As the concept spread, such plans became known
as Blue Shield.
Many employers were already providing commercial pension policies and
disability benefits when wages were frozen during World War II. Adding health
insurance as partial compensation for frozen wages attracted commercial insur-
ers, expanding the health insurance market in a major way. Employers offered
health insurance as a fringe benefit to compete for workers, and insurers ben-
efited from the ease of group marketing. The non-profit Blue plans and the com-
mercial insurers both reimbursed providers or consumers directly for services, a
payment approach known as fee-for-service. This approach paid for services after
they were rendered thus creating an incentive for providers to deliver more and
more services. Fee-for-service systems reward service volume and penalize the
efficient provision of appropriate services. (A few prepaid group practice plans
such as my old plan, Group Health of Minnesota, had coexisted with the Blues
and commercials, but organized medicine had opposed them for decades.)
Because the growth in health coverage was employment-based, however,
retirees. the unemployed, and low-income workers often did not have insurance.
By 1960, the lack of health coverage for the elderly and the poor became a political
issue that led to the creation of Medicare and Medicaid. These programs filled a
critical gap. However, these federal programs also contributed greatly to the soar-
ing costs of American health care because they were based on the then-prevalent
fee-for-service model which encourages utilization of more services than needed.
In 1971, recognizing the need to slow the rate of growth in health expendi-
tures, Congress enacted the Health Maintenance Organization Act of 1973 which
provided subsidies to increase the number of HMOs.
In addition to the incentives of fee-for-service, other factors have also con-
tributed to the explosion of health care costs after World War II including the
2
building of new hospitals, advancements in medical technology, the rise in per
capita incomes, the increase in health insurance, and the growth and aging cf the
population.
THE TRANSITION FROM FEE-FOR-SERVICE TO MANAGED CARE
The Economic Context: Business Demand for Cost Containment
Describing the evolution of the health care financing market requires review
of the economic trends that underlay private sector health care reform. Health
care spending has been rising rapidly (see figure 1). In 1960, health care expendi-
tures were $27 billion or about 6% of GDP. In 1993, expeditures reached $884.2
billion; 14% of GDP. By the year 2000, at current growth rates, spending will
exceed $1.7 trillion or 18% of GDP.
Figure 1
Health Care Expenditures as a Share of GDP
20
18.0%
(est)
15
12.2%
0.2%
10
7.4%
5.3%
5
0
1960
1970
1860
1990
2000
Source: HCFA and CBO. Trands in Health Care Spending: An June 1093
Since 1960, the consumer share of medical costs has declined significantly,
while the proportion paid by business and government has steadily risen (see
figure 2). Business could offset some of its rising health care costs by shifting
some costs of total compensation from wages to benefits (see figure 3). However,
as costs continued to climb, and as domestic and international markets became
increasingly competitive, business increased the pressure on the insurance mar-
ket to offer more cost-effective managed care options.
3
Figure 2
Who's Paying for Health Care?
Share of expenditures for health services and supplies
70%
60%
50%
40%
Business
Government
30%
Consumer
20%
10%
0%
1965
1970
1975
1880
1985
1987
1968
1901
Source: MCFA. Health Care Financing Reving Spring 1893
Figure 3
Cumulative Growth in Real Compensation
per Worker
451.5%
450%
Health benefits
350%
250%
150%
Pension and
profit-sharing benefits
76.3%
50%
Wages and salaries
6.9%
$
1965
1970
1975
1980
1985
1990
Sendres: Entimated trom Health Care Phoneing Review - 1683
Health Plans Respond to Business
Health plans responded to this increasing demand for a combination of cost
control, quality, and coordinated care, with the development- and continuing
adaption-of managed care plans. Starting with traditional staff and group prac-
tice model health maintenance organizations, the market rapidly evolved to create
independent practice associations, networks, and more recently, PPOs and POS
products which allow access to out-of-network specialists in exchange for higher
cost-sharing. Today, traditional fee-for-service plans without utilization review
and case management are rare. Instead. most plans exhibit a range of managed
care techniques for providing high quality care at lower cost.
4
These techniques include selective contracting with providers based on cost,
access, and quality: subscriber incentives to use plan providers; utilization review
to assure necessary and appropriate care: case management to select the best anc
least expensive treatment plan; and coordinated design, financing, and delivery of
health care.
Enrollment and Growth Trends in Managed Care
HMO and PPO enrollment is impressive. By mid-year 1994, more than 52
million people were enrolled in HMOs, about 20.3 percent of the population (see
figure 4). This upward trend in enrollment is expected to continue, reaching more
than 64 million in the year 2000. In California, HMO enrollment was 37 percent
of the population in 1994, up nearly 3 percent from 1993. Nationwide PPO enroll-
ment exceeded 60 million in 1993 (latest available figure). In California, more
than 7 million people (23 percent of the poulation) belong to PPO plans.
Figure 4
HMO Enrollment as Percentage of U.S.
24%
Population
(est.)
25%
21%
20%
14%
15%
9%
10%
5%
0%
1985
1990
1995
2000
Source: CHAA. NIHCM
A recent Foster Higgins survey for 1994 showed that only 37 percent of U.S.
workers are covered by indemnity-style fee-for-service plans compared with 48
percent in 1993 (see figure 5). Only 3 years ago, this was the standard plan for a
majority of workers. Today, 23 percent of workers are enrolled in HMOs, 25 per-
cent in PPOs, and 15 percent in POS.
5
Figure 5
Enrollment Breakdown by Type of Plan
1993
1994
19%
23%
48%
37%
27%
6%
15%
Traditional Indemnity
HMO
PPO
Point of Service
Sever Laber Department, Faster Highns - reported in LA Faturary, 1896
As figure 6 indicates, managed care has advanced fastest in the West rela-
tive to other regions. Washington, Oregon, California, Nevada, and Arizona all
have HMO penetrations exceeding 15 percent. There are, however, a number of
regions where managed care has also taken hold. Three examples include Minne-
sota, Maryland, and Massachusetts.
Figure 6
HMO Market Penetration by State, June 1994
are
Wash
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SPA
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-
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Source: Medical - - Morell Dear). 1004
There are some key factors that account for the acceleration of managed
care in some markets, such as California. Markets experiencing rapid migration
to managed care are characterized by private sector competition, regulations fa-
vorable to network development, and a medical community characterized by larger
group practices.
6
Managed Care Impacts on Costs
According to Foster Higgins, employers' health care costs for 1994 declined
1.1 percent for the first time in a decade primarily because of workers switching to
managed care plans (see figure 7). Large employers reported decreases averaging
1.9 percent. while small employers had an average increase of 6.5 percent. Small
employers are more likely to offer one plan and that plan is likely to be fee-for-
service. Foster Higgins saw no evidence that the good news was due to massive
cost-shifting to employees or decreases in coverage. Prior to the release of this
survey, GHAA had already shown that the annual change in HMO premiums
which has been declining through the 1990s, was a negative 1.2 percent for 1995
(see figure 8).
Figure 7
Percentage Change in Total Health Care
Costs per Employee
20%
10%
17%
18%
15%
13%
10%
10%
0%
5%
-1.1%
6
-5%
1988
1989
1990
1991
1992
1993
1994
Serve: Estimated trom A. Fester Higgine in The Wall Street Journal 1005
Figure 8
Annual Change in HMO Premiums
16.0%
16.0%
14.0%
12.9%
12.0%
10.6%
10.0%
8.0%
8.1%
6.0%
5.6%
4.0%
2.0%
0.0%
-1.2%
-2.0%
1990
1991
1992
1993
1994
1995
Source: Business insurance, 1894
7
Critics of managed care continue to turn a blind eye to the evidence that
managed care does control costs. In the debate over managed care competition
versus regulation. advocates of more regulated approaches contend that competi-
tion cannot generate long-term savings but only one-time savings concentrated in
the hospital sector. The evidence in California refutes this belief.
Recently. the Bureau of Labor Statistics released data showing that San
Francisco and Los Angeles are significantly below the U.S. medical inflation rate
for 1994. And while Los Angeles medical costs are increasing at the same level as
the general inflation rate - 2.7 percent - San Francisco, at 2.2 percent, is actu-
ally below (see figure 9).
Figure 9
The California Example - Results
Medical Cost Increases (12 months ending Dec. 30, 1994)
4.9%
5.0%
4.0%
2.7%
2.7%
3.0%
2.2%
2.0%
1.0%
0.0%
U.S. Medical
Los Angeles
San Francisco
U.S. Inflation
Inflation
Area Medical
Area Medical
Costs
Costs
A RAND study compared the cumulative growth in per capita health expen-
ditures in California with four states (New York, New Jersey. Maryland, and
Massachusett) with hospital rate regulation programs from 1980 to 1991. The
study determined that California experienced the lowest rate of growth compared
to the four rate-regulated states and to the U.S as a whole (see figure 10). The
study not only looked at total spending, but analyzed the hospital, physician, and
retail drug sectors separately. In each sector, California still emerged with the
lowest growth rates (see figure 11).
8
Figure 10
The California Example - Results
Cumulative Growth in Per Capita Health Spending:
1980 . 1991
CA
30.0%
NY
85.4%
NJ
86.4%
MA
70.2%
MD
50.0%
U.S.
63.0%
0.0%
50.0%
100.0%
Figure 11
Cumulative Growth in Per Capita Health Spending in
Three Key Areas: 1980 - 1991
Physician Services
CA
--
NY
HOLPS
as
- -
-
181.0%
-
167.50
ua
- -
can
HER # -
sea on
É
Hospital Services
Drugs
CA
0.00
CA
41.0%
NY
5.9%
6
NY
an
NJ
- -
NW
08.9%
-
-- -
PM
114.7%
-
- -
-
117.00
M.S.
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-
Managed Care Impacts on Quality
Systematic studies of managed care plans, particularly HMOs, have deter-
mined that the quality of care is equal to or superior to care delivered in a fee-for-
service environment. Reviews of the literature (GHAA, CAHMO) have found that
HMOs produced more positive or no difference in outcomes from fee-for-service
despite shorter hospital stays and less surgery. HMOs also scored higher on the
prevention of disease, another measure of quality of care. Some examples of typi-
cal study findings comparing HMOs to fee-for-service include:
Elderly HMO members with cancer are more likely to be diagnosed at an
earlier stage (American Journal of Public Health 1994);
9
A study of 100,000 California adults found that HMO appendicitis pa-
tients were 20 percent less likely to suffer a ruptured appendix (New
England Journal of Medicine, Dec. 9, 1993): and
Women in HMOs are more likely to obtain mammograms (CDC/NCHS
Advance Data No. 254, Aug 3. 1994).
In addition to high quality care, study after study has demonstrated that con-
sumer satisfaction levels of managed care members across the spectrum of health
status are highly satisfied.
Market Consolidation
Much has been written about the consolidation occurring in the provider
and health plan markets. There is also growing aggregation among purchasers to
increase employer bargaining power. Nearly half of all states have enacted pur-
chasing alliance legislation that establishes a publicly or privately administered
mechanism for pooling risk. In California there are purchasing alliances that
represent not only small groups, but in the case of the Pacific Area Business
Group on Health, large groups as well.
MANAGED CARE'S POTENTIAL IN THE PUBLIC MARKET
The number of people enrolled in government health programs (Medicare
and Medicaid) has grown dramatically and explains some of the increase in health
care expenditures. Spending on public health has generally outpaced private
sector payments since 1987 (see figure 12). During the 1990s, the annual percent
increase in public sector health expenditures has been significantly higher com-
pared with the private sector. As I'll touch upon later, government has lagged far
behind employers in using managed care to lower its costs.
Figure 12
Public Sector Health Payments are Increasing
Average annual percent increase
20
15
10
Private
Public
5
0
1987
1968
1969
1990
1991
1992
1993
Saran NCFA, 1880
10
The Medicare program and many state Medicaid programs have turned to
managed care more recently in order to lower costs and increase access. Medicare
HMO Risk enrollment stands at 2.7 million, up 13 percent from 1993 (see figure
13). Medicaid managed care enrollment is 7.6 million beneficiaries, up an aston-
ishing 62 percent from 1993. States have implemented different Medicaid man-
aged care models to reflect the diversity of their counties.
Figure 13
Managed Care Enrollment in Medicare and
Medicaid
in 000's
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1967
1986
1989
1990
1991
1992
1993
1994
Source: MCFA, NHCM
Medicare
Medicaid
While managed care enrollment in both Medicare and Medicaid is growing.
the real potential to control the high rates of inflation that plague these programs
hasn't been tapped. Most Medicare beneficiaries remain in the old-fashioned fee-
for-service plan.
Managed Care and the Medicare Program
Improving the Medicare program for seniors and increasing savings for the
government necessitates a practical approach based on incremental steps. This
will be more effective than trying to change the entire program.
The first step in Medicare reform must be to make Medicare Select perma-
nent. Medicare Select is an extremely popular Medicare supplement program.
Medicare Select uses PPO networks to save seniors between 10 and 37 percent
from the premiums charged for traditional fee-for-service Medigap policies for the
same benefits. Real innovation based on consumer choice could be unleashed in
the supplemental market if managed care plans were allowed to design Medicare
Select alternatives that contain incentives to increase in-network utilization.
When beneficiaries elect to stay in network, the government saves because it
benefits from the low-cost, high quality providers that account for the lower-
more appropriate- utilization.
11
The broader issue is Medicare's role as purchaser of care. If Medicare is to
provide coverage and choice comparable to the rest of the population, substantial
changes must be phased in. These changes should be based on the standards
that include giving seniors a choice of qualified health plans: setting a Medicare
payment level based on some percentile of premiums charged in the private mar-
ket: and phasing in the capacity for beneficiaries to pay for more enhanced benefit
plans. Those seniors choosing a higher priced plan than the standard government
level would pay the difference in premium.
Managed Care and the Medicaid Program
A recent Lewin-VHI study (1995) concluded that managed care works to
increase access and reduce costs for state Medicaid programs. Although the
states are moving quickly to enroll their Medicaid populations in managed care
(nearly one fourth are in managed care), 90 percent of Medicaid dollars are still
paid on a fee-for-service basis. The reason is that long-term care and services for
the blind and disabled account for 70 percent of Medicaid expenditures, but are
generally not included in Medicaid managed care programs.
Blue Cross of California participates in the California Medi-Cal managed
care program. I believe the program will be very successful, but there are some
lessons learned in establishing the program that are worth sharing with legislators
and colleagues in other states. Prior to implementation, three key state activities
would help communities make the transition to managed care. These include
informing providers early about the change so that they can begin to assess how it
will work, ensuring that the state-produced literature is user-friendly, and work-
ing closely with community leaders, local politicians, and the media to promote
understanding of the program before it is implemented.
THE MARKET OF THE FUTURE
I believe the market is evolving as a natural response to consumer demand
for high quality care delivered at a lower cost. There is no fixed end point to this
evolution as long as competition remains the driving force. In the near-term, I
think we are heading toward a competitive marketplace in which managed care
systems that accept clinical and fiscal accountability for an enrolled population
will dominate.
12
The California Model: Where the Nation is Heading
Figure 14 graphically presents this movement towards managed competi-
tion. Compared to other major cities, Los Angeles- though still changing- repre-
sents one of the most advanced or mature markets where HMO penetration is
high, excess capacity is being reduced, and delivery systems that integrate financ-
ing and delivery are forming. Across the country, there are still numerous mar-
kets characterized by independent providers, low HMO penetration (less than 30
percent). and considerable excess bed capacity that will attract managed care
plans which will serve as the catalyst for rationalizing local health care systems.
Figure 14
The California Model: Where the Nation is Heading
Chicago
Boston
Los Angeles
Atienta
Washington
Unstructured
Loose
Consolidation
Managed
Framework
Competition
Independent
Leading
Market
Purchasers
providers,
managed care
consolidation
contract with
employers and
entities
Hospital
IDS to provide
HMOs
emerge
systems form,
comprehensive
<10% HMO
11-30% HMO
beds close
services
penetration
penetration
31-50% HMO
>50% HMO
penetration
penetration
Source: APM Inc.
The Role of State Reforms
The success of future managed care markets depends in part on an appro-
priate regulatory framework that fosters innovation, establishes rules for fair
competition, and protects consumers. Many states are striving to achieve this
balance through incremental reform. In 1994, seventeen states enacted or modi-
fied laws to reform the small group and/or individual markets. California began
this process in 1992 with the passage of A.B. 1672. This small group legislation
eliminated redlining. blacklisting, and cherry picking: guaranteed issue and re-
newability; established rate limitations, limited pre-existing conditions; and estab-
lished a small group purchasing alliance. The focus in 1995 for many states will
continue to be incremental reform to improve coverage for individuals and small
groups.
13
Models of the Future
Given the differences in markets, the managed care models of the future are
unlikely to all converge on one model, but will continue to grow and change. Al-
ready we see the emergence of four prototypes that are being tested in the market-
place today. These models are led by hospitals, physicians groups, PHOs (hospi-
tal/physician organizations), and insurance companies. As figure 15 indicates, at
the heart of these models are information management systems for decision-
making that address the demand for increased accountability.
Figure 16
Marketplace Testing of Different Models
System / Network Sponsor
Hospital / Health system-led
Hospital 1 physician group-led
Physician group-led
Insurance company-led
Primary care
Hospitals
providere
Subscute
Specialists
units
information
Systems
Ambutatory
Hursing
care conters
I
Home
Health
Hespines
Insure Shariell at of (1004)
IMPLICATIONS OF MARKET-DRIVEN REFORM
Predicting the success of the new world of managed care is a job for futur-
ists. However, it is never too early ask whether the transforming managed care
market alone can alleviate current health care financing issues.
Competition and Access for the Uninsured
As market-driven reform continues, one concern is that providers will de-
liver fewer services to the uninsured who are disproportionately lower income,
children, and members of minorities. The uninsured fall between the cracks be-
cause nearly 85 percent are workers or their dependents and do not qualify for
Medicaid. Most of the working poor are also employed in small firms which are
less likely to provide health coverage.
A related concern is that health plans will find ways to segment the market
in search of the healthiest members. Both of these concerns really speak to the
role of policymakers in ensuring that health plans compete on a level playing field.
14
In California, for instance. our small group legislation mentioned previously
banned unfair practices of the past, instituted rating reforms. and established a
small employer purchasing alliance to intensify competition. As health coverage
becomes more affordable and the costs more predictable from year to year, more
employers will provide coverage as a way to compete for the best workers. How-
ever, given the constant of economic cycles, there is no guarantee that all small
employers will eventually be able to afford coverage no matter how low the cost.
Another challenging issue is in the individual insurance market where the
potential for adverse selection under a voluntary system is the greatest. Adverse
selection occurs when people wait until they are sick to purchase health insur-
ance. Since it is unfair to ask already insured individuals and small groups to
subsidize the excess costs of high risk cases in the individual market, some
thought must be given to identifying a broad-based subsidy to cover these costs.
Given our experience as a participating plan providing care to a majority of
California's high risk pool enrollees and also covering above average risks in our
Guaranteed Coverage Program, I am convinced such cases can be managed cost-
effectively in the private sector. Doing so, however, requires not only a broad-
based subsidy but also rating flexibility within limits and, I might add, incentives
for more plans to follow our example.
Competition and Health Professions Education
Financing for key societal benefits, such as health profession education,
must also be considered. Academic Health Centers (AHCs) are concerned about
two fundamental changes they may need to make for the future. First, over time
as more systems become capitated, more primary care physicians. and fewer
specialist and beds, will be needed (see figure 16). Consequently, educational
institutions will have to change dramatically and produce more primary care
physicians to meet the demand. AHCs may also have to consider the feasibility of
downsizing if the specialists don't exist to fill the beds.
15
Figure 16
Comparison of Fee for Service and Capitated
System Requirements
FFS
Capitated
Covered lives
100,000
100,000
Primary care physicians
30 . 50
50
Specialty physicians
175
50
Hospital beds
275
150
Source: Health Care Advisory Board
The new world of managed care also means that AHC's, already faced with
the potential loss of Medicare funding, also will have limited ability to cost-shift to
the private sector. Furthermore, they will have to compete with other community
providers rendering specialty care. While AHCs must control their costs, there is
no question that as a society we will need to address the additional costs of AHCs
attributable to research, technology development, and education.
CONCLUSION
Madame Chairman, there is no doubt that the marketplace is changing in
response to consumers' demand for low-cost health care delivery. There is
probably no single best model. Rather, health care systems will continue
evolving under the influence of the communities they serve. Blue Cross will be
pleased to work with the Committee as you further explore health reform
issues. I would be happy to answer any questions that you may have today.
16
The Changing Health Care Delivery
System
Statement by
William S. Custer, Ph.D.
Committee on Labor and Human Resources
U.S. Senate
March 14, 1995
CUSTER ECONOMIC RESEARCH
1818 N Street, NW Suite 300
Washington, DC 20036
Phone (202) 833-8220 Fax (202) 833-8250
Statement of William S. Custer
Committe on Labor and Human Resources
March, 14, 1995
Highlights
Since 1970, expenditures on health care have increased at an average
annual rate of 11.6 percent in the United States, 2.9 percentage points faster
than Gross Domestic Product (GDP). Health expenditures are estimated to
be $938 billion in 1994, or 13.9 percent of GDP. Projections indicate that by
the year 2005 health expenditures will reach 18 percent of GDP.
The latest data available indicates that 18 percent of Americans (almost 41
million) under the age of 65 are without health insurance at any given
time.
If these trends continue by the year 2000 the percentage of Americans with
employment based coverage will fall to 52 percent and more than 1 out
every 5 nonelderly Americans will be without health insurance: over 50
million people.
Much of the moderation in the growth of national health expenditures
can be explained by past decreases in real personal income. The impact of
the recession in the early part of this decade is being felt presently in the
reduction of health care inflation.
There is mounting evidence that managed care, in all its forms, has lower
costs than traditional indemnity plans and lower rates of cost increases.
The evolution of the health care delivery system toward a market of
competing organized systems of care has the potential for bringing health
care cost inflation closer to the rate of general price inflation.
Although the changes the health care delivery system has undergone over
the last decade have laid a foundation for the creation of an efficient
health care services market there is a long way to go before achieving that
goal however, and many obstacles remain. Without government action it
seems likely that health insurance coverage will continue to erode and
that costs will continue to increase through the end of the decade.
The health care delivery system has evolved dramatically in the last
decade, largely in response to health care cost inflation. Since 1970,
expenditures on health care have increased at an average annual rate of 11.6
percent in the United States, 2.9 percentage points faster than Gross Domestic
Product (GDP). Health expenditures are estimated to be $938 billion in 1994,
or 13.9 percent of GDP. Projections indicate that by the year 2005 health
expenditures will reach 18 percent of GDP.
Increasing health care costs have led private and public purchasers of
health care services to change their relationships with both providers and
patients within the health care services market. This in turn has affected the
practice of medicine. Care has moved out of the hospital to a variety of sites,
referral patterns of physicians have been affected, the relationship between
hospitals and their medical staffs has been altered, and the way providers
market themselves has changed.
Rising health care costs have resulted in an increasingly segmented health
insurance market, leading fewer employers, especially small employers, to
offer health insurance as an employee benefit and also resulting in an
increase in the number of Americans without health insurance coverage.
Changes in health care financing have limited providers' ability to provide
uncompensated care, limiting the uninsured's access to care.
This statement examines the changes the health care delivery system has
undergone in the past decade and their implications for the evolution of the
health care delivery system.
Health Insurance Coverage
From the beginning of World War II until the early 1980s both the
number of people receiving employment-based health insurance coverage
and the scope of that coverage expanded. This expansion, together with the
1
introduction of the Medicare and Medicaid programs in 1965, greatly
increased the number of Americans with health insurance. It also produced
an inflationary push in the health care services market that has created an
evolutionary pull in both the health services market and the employment-
based financing system.
Health care cost inflation gradually changed the dynamics of the
employment-based health care financing system. As health care costs rose
and became a larger component of total compensation the focus of
employment-based plans moved from expanding coverage to containing
costs. Moreover, the increase in health costs began to reduce the number of
employers, especially smaller employers, who offered coverage and reduce
the number of workers who participate in their employer's health benefits.
The number of Americans without health insurance increased slowly
through the 1980s, grew sharply during the economic downturn at the
beginning of the decade, and has apparently returned to the slow but
persistent upward trend. The latest data available indicates that 18 percent of
Americans (almost 41 million) under the age of 65 are without health
insurance at any given time. (Table 1)
Table 1
Sources of Health Insurance Coverage for the Non-Elderly
1988-1993
Employment
Public
Year
Coverage
Coverage
Uninsured
Millions
Percent
Millions Percent
Millions
Percent
Total
1988
141.5
66.8%
26.3
12%
33.7
15.9%
211.8
1989
140.8
65.9%
26.1
12%
34.4
16.1%
213.7
1990
138.6
64.2%
29.1
14%
35.8
16.6%
215.9
1991
139.8
64.1%
31.6
15%
36.2
16.6%
218.1
1992*
138.8
62.0%
34.2
15%
39.8
17.8%
223.8
1993*
137.5
60.8%
36.4
16%
40.9
18.1%
226.2
Source: March supplement to Current Population Surveys, 1989-1994 as reported in Employee
Benefit Research Institute, EBRI Issue Brief 158 (February, 1995) p. 7
Uses 1990 Census as basis for estimating total population numbers from survey results.
2
The shift in the number of nonelderly individuals with employment-
based health insurance has been more dramatic in recent years. Partly as a
result of the recession beginning in 1990, 2 million fewer Americans had
employment-based health insurance in 1990 than 1989. At the same time the
number and percentage of Americans with public insurance increased by
almost 3 million due to increased eligibility and to falling incomes. In the last
3 years employment-based coverage has continued to erode and public
coverage has continued to expand.
Table 2
Wage and Salary Workers Coverage and Participation in Employer Health Plans
1988
1993
Employer
Employee
Employer Employee
Total
Sponsors
Participates
Total
Sponsors Participates
(millions)
Workers
98.5
78.1
64.1
103.2
80.9
64.6
Less than 10
13.3
5.2
4.0
13.6
4.5
3.5
10 to 49
14.4
10.0
7.7
14.8
9.8
7.2
50 to 99
5.4
4.5
3.7
6.1
5.0
3.9
100 to 249
7.3
6.5
5.2
7.6
6.5
5.2
250 or more
49.8
46.1
39.3
53.4
49.8
40.9
(Percentage of Wage and Salary Workers)
Workers
100%
79%
65%
100%
78%
63%
Less than 10
100%
39%
30%
100%
33%
26%
10 to 49
100%
69%
53%
100%
66%
49%
50 to 99
100%
83%
69%
100%
82%
64%
100 to 249
100%
89%
71%
100%
86%
68%
250 or more
100%
93%
79%
100%
93%
77%
Source: EBRI tabulations of the May, 1988 and April, 1993 supplements to Current Population
Survey, EBRI Issue Brief Number 152 (August, 1994)
Between 1988 and 1993 the number of wage and salary workers increased
by 4.7 million, but the number of workers participating in their employer's
health plan increased by only 500,000. (table 2) For small employers the
change in coverage and participation is even more pronounced. The
percentage of workers at employers with less than 10 employees whose
employer offered a health plan decreased by 6 percentage points. It also fell
for workers at firms with between 10 and 49 employees, and between 50 an 99
employees, but for workers at those sized employers the participation rate fell
3
even more. This implies that more workers at these size firms were either
ineligible or choose not to participate in their employers plans.
The reasons for the increase in the number of Americans without health
insurance is primarily the increase of health care costs relative to family
income. Just as national health care expenditures have increased as a
proportion of Gross Domestic Product so has personal health care costs
increased as a proportion of families' budgets. As these costs increase families
decrease their purchase of health care services and especially health
insurance. Insurance is a hedge against the likelihood that an individual or a
family will need health care services. The two groups most likely to reduce
their purchase of health insurance are therefore those whose family incomes
are low and those whose risks of needing health care services are low. In the
labor market those workers will seek out jobs where compensation is
weighted toward cash and not health benefits.
Low wage workers are much less likely to work for an employer who
offers a health plan, and less likely to participate in that plan when it is
offered (table 3). For those making less than $10,000 annually over half work
for employers who do not offer a health plan. For these workers only 30
percent participate in that plan when it is offered, although most are
ineligible because they are part-time or contract workers.
Just over three quarters of workers making between $10,000 and $20,000, or
just above the Federal Poverty line for most families, work for an employer
who sponsors a health plan. In turn, three quarters of those workers whose
employer sponsors a plan participate in that plan. The majority of those who
do not participate (60%) are eligible but choose not to participate, most because
they are covered through another plan, but many because the plan is too
costly or they do not want or need the coverage. Of those workers without
health insurance from any source 61 percent had annual earnings less than
4
$20,000 and just under 60 percent worked for employers with less than 100
workers.
Table 3
Workers Whose Employer Offers Health Plan and Workers Who Participate
Number of Workers
(Millions of Workers)
Employer
Employees
Offers
Who
Annual Earnings
All Workers
Coverage
Participate
(a)
(b)
(c)
Total Workers*
112.5
82.4
65.6
Less than $10,000
15.7
7.6
2.3
$10,001 to 19,999
29.3
22.3
16.88
$20,000 to $30,000
22.1
19.7
17.33
$30,000 to 49,999
19.8
18.6
16.99
Above $50,000
8.5
8.2
7.7
Percent of Workers
Percent of
Total
Employer
Offered
Percent of
All
Offers
Employees
Workers
Annual Earnings
Workers
Coverage
Participating
Participating
(b/a)
(c/b)
(c/a)
Total Workers*
100%
73%
80%
58%
Less than $10,000
100%
48%
30%
15%
$10,001 to 19,999
100%
76%
75%
57%
$20,000 to $30,000
100%
89%
88%
78%
$30,000 to 49,999
100%
94%
91%
85%
Above $50,000
100%
97%
94%
91%
Source: Custer Economic Research tabulations of the April, 1993 Supplement to the Current
Population Survey
* Includes workers whose annual earnings were unknown.
Health insurance coverage is dependent upon two factors: the ratio of
health care costs to income and the individuals self-assessment as to the risks
of needing health care services. As health care costs increase faster than
income those individuals whose incomes are low or who are better risks will
continue to drop out of the health care market. As those better risks are
removed from the health insurance market premiums, which are based on
average risk, increase driving still more from the health insurance market.
5
The erosion of the employment based health insurance coverage and the
increase in the number of Americans with no health insurance has been
pronounced over the last decade. If these trends continue by the year 2000 the
percentage of Americans with employment based coverage will fall to 52
percent and more than 1 out every 5 nonelderly Americans will be without
health insurance, or over 50 million people.
The consequences of being uninsured increase with health care cost
inflation. The uninsured face a much different process of care than those with
insurance. They much less likely to have a usual source of care, more likely
to receive care in an emergency room or a hospital outpatient department,
and less likely to be admitted to a hospital. Moreover, the uninsured are
more likely to experience avoidable admissions, or admissions that could
have been treated on an outpatient basis had they been diagnosed early
enough, and are likely to be more severely ill upon admission. Once
admitted to the hospital studies have found that the uninsured are likely to
have short lengths of stay than privately insured individuals with similar
conditions. Finally, the uninsured are more likely to have adverse results,
and higher mortality rates even after adjusting for the severity of illness.
The question is: will those health insurance coverage trends continue?
The answer depends on health care cost inflation. If health care costs, and
therefore health insurance premiums, increase faster than personal income
these trends are likely to continue. In fact, given that coverage through the
public sector is unlikely to increase in the future, as it has in the recent past,
the rate of growth in the number of uninsured Americans may in fact
increase if health care cost inflation returns to the level of the 1980s. If
however, health care cost inflation moderates and the economy remains
strong the erosion of the employment based health insurance system is likely
to moderate, and the growth of the number of Americans without health
insurance would slow.
6
Health Care Cost Inflation
National health expenditures have consistently risen faster than national
income at least since 1965. In that year national health expenditures
accounted for less than 6 percent of Gross Domestic Product (GDP). By 1993
national health expenditures accounted for just under 14 percent of GDP.
Yet the rate of growth in national health care expenditures has slowed in
recent years. Both the Congressional Budget Office and the Health Care
Financing Administration project that national health expenditures will
grow at roughly the same rate as GDP in 1995. Surveys of employers and
insurance plans have found that premiums are rising at rates less than
general price inflation, and in some cases, actually falling.
This moderation of health care cost inflation occurs after a decade of rapid
evolution in the health care delivery system. The health care delivery system
has undergone a rapid evolution during the past decade, both in terms of
technological innovation, and in the organization and financing of the
delivery of health care services. Increases in health care cost inflation, fueled
by technological innovation, have changed the way health care services are
purchased, the delivery of health care, and access to health care.
These changes have had profound effects on the health care delivery
system, and the effects of these changes are likely to become even more
important in the future, but it is unclear that the moderation in health care
cost inflation results from the changes in the health care delivery system.
In fact much of the moderation in the growth of national health
expenditures can be explained by past decreases in real personal income¹. The
impact of the recession in the early part of this decade is being felt presently in
the reduction of health care inflation. That implies that health care cost
1 Cookson, John P., and Peter Rielly, "Modeling and Forecasting Health Care Consumption"
Milliman and Robertson, August, 1994
7
inflation will rebound in future years in response to increasing personal
income. The Congressional Budget Office, the Health Care Financing
Administration, and private researchers are all projecting health care cost
inflation to increase in the coming years.
The projection that health care costs inflation is likely to rebound in the
near future does not negate the importance of the changes occurring in the
health care delivery system, nor indicate that those changes have been
ineffectual in reducing health care costs. Rather its is an indication of the
enormity of the challenge of reducing health care cost inflation while
maintaining or increasing the quality of care in an almost trillion dollar
sector of the economy that is composed of hundreds of interconnected local
markets, each with its own characteristics and idiosyncrasies.
The Changing Health Care Delivery System
Public programs and private health plans have been evolving rapidly in
the last 15 years in response to health care cost inflation. The federal
government's efforts at controlling costs in the Medicare program has differed
greatly from efforts by private payers. The Medicare program instituted the
prospective payment system (PPS) for reimbursing hospitals in 1983 and
began reimbursing physicians using a relative value fee schedule in 1992. PPS
changed hospital incentives was the bundling of the services provided a
patient during a single admission. Under PPS hospitals have an incentive to
reduce the length of stay and provide the minimum services necessary to care
for the patient. In fact, a number of studies have found that PPS reduced both
the average length of stay per admission and the number of admissions.
The reaction of employers to increases in health care costs has varied
depending on the labor market they face, the amount of competition in their
product market, and their level of market power in their specific health care
services markets. In general employers have adopted four types of cost
8
management strategies: cost sharing, utilization review, packaging provider
services, and selectively contracting with providers. These strategies have
been combined in the various managed care plans employed by many
employers.
These attempts to manage health care costs have been a major factor in the
restructuring of the health care services market. Between 1987 and 1994, total
enrollment in Health Maintenance Organizations (HMOs) increased from
28.6 million to 45.1 million, representing 17 percent of the United States
population. It is estimated that as many as 85 million more Americans are
covered by some sort of Preferred Provider Organization (PPOs), although the
evidence on the ability of PPOs to manage care is at best mixed. Providers are
coalescing into larger groups and hospital's relationships with their medical
staffs are increasingly built on explicit financial relationships that were rare 15
years ago. In many markets the health care delivery system is becoming more
concentrated. One rational for this concentration is that it makes the
exchange of information vital to managing care more efficient and therefore
less costly.
Public and private attempts to manage health care cost inflation have
focused on two issues: reducing the amount of waste in the health care
delivery system and applying cost-benefit criteria to the introduction of new
technology. Measuring the amount of waste in the system, or the benefits of
any health care procedure, requires an ability to measure the effect of health
care on a patient, or a population.
Managed care bundles services together to alter incentives for providers.
It also relies on monitoring physician treatment patterns in a variety of ways
(utilization review, physician profiling, and case management), and changing
the financial incentives faced by providers. The first approach requires an
explicit definition of the quality of health care services. Without that
definition there are no criteria for evaluating care as its being provided.
9
Changing provider incentives also relies on quality of care measures. It
would be difficult to justify a financial incentive to provide too little care if
there were no checks on the quality of care being provided under such
incentives.
The need to evaluate providers for selective contracting and to evaluate
care as it is being provided has led to the development of a health
information industry. This industry supplies providers, insurers, employers,
and consumers with information on the quality, appropriateness, and cost
effectiveness of the care they are producing or consuming. Methods are being
developed and implemented for measuring health service outcomes;
measuring patient satisfaction; and evaluating competing physicians,
hospitals, and health plans.
Unfortunately, measuring the effects of the changing delivery system on
costs and quality of health care services has been a difficult task, resulting in a
considerable amount of disagreement as to whether or not costs have been
affected. A 1992 Congressional Budget Office (CBO) report stated that "It
cannot be assumed that further growth of managed care would reduce either
the level or the rate of increase of system wide health care spending" (U.S.
Congressional Budget Office, 1992). In October 1993, the General Accounting
Office released a report on the effectiveness of managed care (U.S. General
Accounting Office, 1993). The study concluded that there is very little
empirical evidence, and the evidence that does exist does not adequately
control for key factors affecting health care costs such as a person's age and
health status. Recently, CBO released an update to its 1992 report. The 1994
CBO report recognizes two new major findings. First, managed care can
provide cost-effective health care at a level of quality that is comparable with
the care typically provided by a fee-for-service plan. Second, independent
practice associations can be as effective as group- or staff-model HMOs under
certain conditions (U.S. Congressional Budget Office, 1994). In addition,
10
Miller and Luft² find more evidence of cost savings from managed care but
suggest that generalizations of their findings need to be made with caution.
Other recent studies have also found that managed care can save costs. A
KPMG Peat Marwick study found that HMO and PPO premiums increased at
an average annual rate of 2-5 percentage points below fee-for-service plan
premiums between 1988 and 1993 (KPMG Peat Marwick, 1993). Data from A.
Foster Higgins found a 14 percent increase in the premium cost of a
traditional indemnity plan between 1991 and 1992, compared with a 9 percent
increase for all managed care plans (A. Foster Higgins, 1993). This survey
found that the cost of a traditional indemnity plan is 23 percent higher than
the cost of an HMO. The traditional indemnity plan premium costs an
average of $4,080 while the average cost of an HMO is $3,313.
There is mounting evidence that managed care, in all its forms, has lower
costs than traditional indemnity plans and lower rates of cost increases. The
evolution of the health care delivery system toward a market of competing
organized systems of care has the potential for bringing health care cost
inflation closer to the rate of general price inflation.
The Future of the Health Care Delivery System
Despite the important changes in the health care delivery system that
have taken place over the last decade it is only at the initial stages in its
evolution. It is perhaps unreasonable to expect the market to have evolved
to a point where health care cost inflation has been brought under control so
quickly.
The health care delivery system is composed of interconnected local
markets. Each or these markets has unique characteristics that determine the
2 Miller, Robert H., and Harold S. Luft, "Managed Care Plan Performance Since 1980: A
Literature Analysis," Journal of the American Medical Association, vol. 271, May 18, 1994, PP.
1512-1519.
11
providers' and purchasers' relative market power. The evolution of the
health care delivery system has not been uniform across these markets.
The increase in market penetration by managed care plans has not been
evenly distributed. HMOs have not been established in rural areas, in large
part because these areas lack the population size necessary to maintain an
independent health plan. The market penetration of HMOs also differs
considerably by region. Over a third the residents of Californian of
Massachusetts were enrolled in an HMO in 1994, but only 16 percent of
Floridians and 9 percent of Texans. (See Appendix 1) There are other
important differences in local markets that affect the evolution of the health
care delivery system, such as the number and specialty distribution of
physicians, the number and ownership of hospitals, state laws regulating
health care and health insurance, sources of health insurance coverage
within the local community, and demographic characteristics.
There are many reasons for differences in local health care markets and
their adoption of managed care. One is that each of these markets has started
with important differences. For example, hospitals on the west coast reported
lower admission rates and shorter length of stays than eastern hospitals well
before the expansion of managed care in the 1980's. The initial impact of
managed care is to lower admission rates and length of stays, so perhaps
managed care had less of an impact on physician practice patterns out west
and faced less resistance from providers and patients as a result.
These local differences also effect the way managed care entities organize
and market themselves. Research has shown that managed care entities
themselves undergo an evolution. They often begin with a strategy of
attempting to achieve market share. During this stage they may be less
interested in controlling costs and more interested in attracting physicians
and enrollees. New insurance organizations often benefit from positive
selection in that people most likely to switch plans are those who have not
12
forged a relationship with a provider, most likely because they have not
needed health care services. As these entities mature, that benefits of
selection may wear off, and these managed care entities become more active
in controlling costs, and they begin to be more aggressive utilizing the cost
management tools available.
The tools available however, are at best rudimentary. The health care
delivery system has made great strides in developing quality assessment
methods and information systems necessary to make the health care services
market function efficiently. However, there are no set standards for
measuring quality, the methods for evaluating care vary widely, information
necessary to evaluate care is only haphazardly collected, and the
infrastructure for collecting that information efficiently is not yet in place.
Reimbursement methodologies are being developed that provide
incentives to providers and patients to achieve cost effective care. There is a
great deal of experimentation in reimbursement methodologies however,
and not all experiments should be expected to work. Moreover, without
adequate information almost any reimbursement methodology can be gamed
by providers, patients, or health plans.
There is evidence that cost savings are being realized without
jeopardizing the overall quality of health care services. What is not clear is
how close we have come as a nation in constructing a health care delivery
system in which the market promotes cost effective high quality care.
Conclusion
The market for health care services is changing rapidly. It has not,
however changed rapidly enough to declare victory over health care cost
inflation. As health care costs increase faster than income it is likely that the
erosion of employment based health insurance will continue. Moreover,
those individuals mostly likely to lose coverage will be the low income and
13
the healthy. As the healthier individuals drop out of the health insurance
market premiums will rise exacerbating the problem.
The changes the health care delivery system has undergone over the last
decade have laid a foundation for the creation of an efficient health care
services market. There is a long way to go before achieving that goal
however, and many obstacles remain. Last year's debate on health care reform
illuminated most of the difficulties with enacting comprehensive reform.
Yet the problems that triggered the health care reform debate have not been
addressed and are unlikely to be resolved easily. Without government action
it seems likely that health insurance coverage will continue to erode and that
costs will continue to increase through the end of the decade.
14
Appendix 1
Selected Health Care Statistics by State
MDs
Hospital
Per Capita Expenditures
HMO
Percent
per
Deds
Hospital
Physician
State
Penetration
Uninsured
100,000
Per 100,000
Care
Care
Alabama
6.2%
21%
155
440
$1,105
$561
Alaska
0.0%
16%
136
300
$1,155
$548
Arizona
22.5%
24%
189
280
$964
$619
Arkansas
5.4%
24%
149
430
$994
$523
California
33.7%
23%
215
250
$1,025
$761
Colorado
22.2%
15%
204
280
$1,070
$628
Connecticut
21.2%
12%
283
290
$1,242
$679
Delaware
16.6%
16%
180
290
$1,177
$718
Florida
15.7%
24%
192
370
$1,146
$744
Georgia
6.7%
22%
173
380
$1,148
$589
Hawaii
21.1%
14%
222
230
$1,135
$634
Idaho
1.1%
17%
122
250
$733
$382
Illinois
16.2%
15%
201
360
$1,195
$496
Indiana
7.4%
14%
155
370
$1,074
$515
Iowa
4.6%
11%
139
430
$1,049
$463
Kansas
5.2%
15%
165
430
$1,020
$563
Kentucky
10.6%
15%
170
440
$1,052
$489
Louisiana
7.5%
27%
189
450
$1,241
$564
Maine
5.1%
13%
168
340
$1,018
$443
Maryland
24.5%
17%
295
280
$1,072
$676
Massachusetts
34.5%
14%
307
360
$1,517
$708
Michigan
18.3%
13%
180
320
$1,138
$549
Minnesota
25.4%
13%
217
330
$1,039
$806
Mississippi
0.1%
21%
124
460
$936
$356
Missouri
15.0%
14%
188
430
$1,291
$546
Montana
1.6%
18%
156
370
$944
$388
Nebraska
6.9%
14%
167
420
$1,123
$489
Nevada
11.9%
22%
141
280
$930
$736
New Hampshire
14.2%
14%
188
280
$1,022
$581
New Jersey
11.4°
16%
236
370
$1,138
$589
New Mexico
12.7%
26%
174
310
$1,014
$452
New York
23.4%
17%
298
400
$1,404
$588
North Carolina
6.7%
17%
183
340
$1,009
$475
North Dakota
0.7%
17%
175
540
$1,255
$697
Ohio
15.2%
13%
188
370
$1,154
$557
Oklahoma
7.1%
27%
141
390
$950
$463
Oregon
29.6%
17%
192
260
$877
$595
Pennsylvania
18.3%
13%
223
400
$1,390
$559
Rhode Island
26.6%
12%
250
330
$1,210
$541
South Carolina
3.6%
20%
160
330
$1,015
$409
South Dakota
2.9%
16%
141
550
$1,136
$487
Tennessee
11.0%
16%
195
470
$1,260
$579
Texas
9.1%
25%
168
350
$1,042
$562
Utah
23.4%
12%
175
240
$853
$464
Vermont
11.2%
15%
226
290
$886
$429
Virginia
7.2%
16%
197
320
$1,019
$551
Washington
21.0%
15%
200
250
$913
$665
West Virginia
4.1%
23%
167
460
$1,111
$500
Wisconsin
22.4%
10%
181
320
$1,005
$621
Wyoming
0.0%
18%
128
370
$857
$337
Source: The Interstudy Competitive Edge, Vol4, No 1, 1994
Urban Institute, State-level Databook on Health Care Access and Finanincing, Second edition,
1995 EBRI Issue Brief Nunber 158, February, 1995
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