FORGET “MANAGED” COMPETITION. ORDINARY COMPETITION DOES NICELY, THANK YOU. NOW THAT THE FEVER OF OUT-OF-CONTROL HEALTH-CARE COSTS HAS BROKEN, DOES THIS MEAN THE HEALTH-CARE CRISIS IS PAST? NOT ENTIRELY. CEOS OF BOTH PROVIDERS AND EMPLOYER-USERS DEBATE POSSIBLE PRESCRIPTIONS FOR WRINGING OUT FURTHER COSTS AND UPGRADING THE QUALITY OF CARE.

Last year for the first time ever, annual growth in corporate America’s health-care costs declined to 12 percent from 6 percent the previous year, although overall spending hit 14 percent of GDP. To some degree, private-sector reform has been so widespread that government reform seems moot. Why? Health care is at last starting to be run like other businesses. The surge of HMOs and the increasing variety in managed-care vendors are due, in part, to recent moves toward standardization, outcomes measurement, and performance data collection. There’s an increasing emphasis on accountability that was absent 10 years ago.
So if U.S. health care is no longer on the respirator, is the patient recovering? It depends on who you talk to. Facing acute overcapacity, hospitals are losing money. Doctors and other providers say they are unhappy with managed care and the industrialization of the care industry. HMOs are continuing to consolidate almost as fast as banks. In 1994, the industry saw 1,100 mergers and acquisitions worth $60 billion. Through an aggressive acquisition strategy, Columbia/HCA Healthcare, for example, turned itself into a $15 billion juggernaut with operating margins close to 20 percent in less than eight years. Big pharmaceuticals have moved with lightning speed to pick off rivals and merge. Consumers are frustrated and continue to worry about quality and availa
The history of the health-care crisis is riddled with short-lived victories over escalating costs. In 1984, then-Secretary of Health and Human Services Margaret Heckler asserted that the rise in healthcare costs was at an end. Events proved otherwise (see chart). Many experts claim that recent evidence of a decline in average costs reflects one-time savings from moving out of high-cost indemnity plans. A Foster Higgins survey, for example, noted that HMO premiums increased 9.7 percent in 1994 for large employers and 6.2 percent for small employers. To counter this, employer coalitions - notably in Minneapolis and San Francisco - have sprung up in an effort to push HMOs to lower prices and let employers monitor care provided by doctors and hospitals.

Some employers are considering Medical Savings Accounts for the same reason others have turned to managed care (see sidebar). It puts the buyer-user of health care in direct contact with the seller-provider. In exchange for indemnity coverage with a high deductible, employees keep any MSA money they do not spend. They have a financial incentive to shop around to buy prudent first-dollar health care. According to Michael Tanner, director of health and welfare studies at the Cato Institute, a variety of companies that use some version of MSAs - flexible savings accounts or incentive savings plans - including Dominion Resources, Quaker Oats, Indresco, and Forbes, have found them highly effective in reducing costs, despite the fact that they face a bias in the present tax code.

In the following roundtable, held in partnership with Deloitte & Touche LLP, CE gathered CEOs of both providers and users to discuss cost and quality trends that will affect employers. Will costs continue to decline? As buyers exert more power over providers and government defers more to market competition, uncontrollable costs should be a thing of the past (the Heckler effect notwithstanding). The challenge will be to measure efficiencies and quality of care in ways that employer-buyers of health care can use. Beyond hospital utilization rates and inpatient care days, the industry is at the nascent stage of developing metrics that can help employers buy higher-quality care at lower cost.

- J.P. Donlon

AN “UNFULFILLED PROMISE”?

Robert A. Go (Deloitte & Touche LLP): Many people, including policy-makers, say managed care is the solution to the high cost of health care. Others argue it is only part of the solution. Let’s look at the facts.

There has been a slowdown in healthcare inflation. As recently as 1988 or ‘89, increases in HMO premiums were between 15 percent and 17 percent. This year, the average is near 0 percent. Yet the inflation rate for health care since 1960 has remained fairly consistently between 50 and 100 percent higher than the overall U.S. inflation rate for GDP (see chart). This year, GDP was rising at approximately 2 percent or 3 percent, and health care was increasing at approximately 4 or 5 percent.

So what’s going on? The actual promise of managed care - the creation of new ways of managing patients - is still largely unfulfilled. While managed care has created financial incentives and some cost containment, actually managing care - developing clinical protocols and so forth - is just beginning.