Managed Care Payment System: A Critique

Managed Care Payment System: A Critique

Richard Schulz

HCS 521 Health Care Infrastructure

University of Phoenix

Professor Jay Littleton

December 9, 2006

Introduction

Individual payments for health care services received have undergone many changes over the past one hundred and fifty years in this country. For many years a fee for service system was in place. This was acceptable at the time because costs were low. However, as costs began to rise, changes in the system occurred as well. Private insurance companies started to form in the 1920s to help consumers afford medical care when needed. Through several evolutions over the years and due to increased costs of medical care, we saw new market oriented public policy initiatives starting to form by the 1980s. In 1970 health care spending represented 7% of the national income, but by 1993 it grew to 13.4% (White, 2004). Health care costs were starting to get out of hand and something needed to be done to address it. "In the public sector, important initiatives included the introduction of the Medicare Prospective Payment System, a range of state reform efforts, and the Clinton administration's health reform initiative. At the same time, private insurers introduced changes that set in motion a fundamental restructuring of relationships in the health care market place, ultimately giving rise to managed care" (White, 2004). This paper will discuss the rationale, effectiveness, strengths, and weaknesses behind this relatively young reimbursement payment system called managed care.

Several reasons explain problems with health care costs. Insured consumers did not have the means or incentives to effectively choose their health care providers and services and this created inflationary distortions in the purchasing system (White, 2004). There was also a lack of provider incentives, a "presence of inappropriate restrictions on payer and provider behavior, including insurance rules and bans on advertising" (White, 2004). A possible solution to these problems would be to harness the market forces, enhancing performance while preserving access and choice (White, 2004

Rationale:

Managed care is a desirable option for several reasons. "First, competition could promote more efficient production of services by squeezing out waste, by generating incentives to manage care more effectively, and by making use of preventive services to maintain the health of enrollees. Second, competition could also squeeze down high provider price margins associated with ill functioning markets. Third, competition could serve to rationalize the adoption of new technology.108 As an added attraction, financial barriers to services could be largely eliminated because cost sharing would no longer be necessary to control use" (White, 2004)

Effectiveness, Strengths and Weaknesses:

Giving insurance companies more responsibility introduced new problems: incentives to under provide care, avoidance of high risk patients, coordination problems, and the risk of inflexibility in the provision of services (White, 2004). "Advocates responded that these problems could be solved by imposing accountability on plans through competition. To facilitate their choices, consumers would be provided with appropriate price and quality information to enable them to assess cost and quality tradeoffs between plans. The net result would be not only to create incentives for consumers to seek value for money in selecting their insurance, but to provide a way for consumers, through their shopping decisions, to directly impose market discipline on plans" (White, 2004). It appeared that there were several costs saving initiatives created by establishing managed care. Consumers making poor choices, lack of consumer incentives, providers overcharging, and providing competition to control health care costs were problems to be solved by managed care.

Problems with managed care started surfacing. A study done by the New England Medical Center in Boston found "54 percent of Medicare managed care patients experienced a decline in health during the four years of the study, while only 28 percent of Medicare fee-for-service patients experienced a similar decline" (People's Medical Society, 1997). "Compared to Medicare fee-for-service, managed care plans typically cover more services and impose lower out-of-pocket costs but is limited to the providers authorized by their plan" (Scanlon, 1998). The question of quality of care and services provided started to chink away at the armor of managed care.

The Balance Budget Act also played a role in determining the amount of services to be offered. Research proved that plans were being overcompensated. Discrepancies arose from a wide difference