The New England Journal of Medicine
January 14, 1999
Volume 340, Number 2
  

The Uncertain Future of Managed Care The fortunes of managed care have taken a sudden downturn. Consider this: the oldest and largest and one of the most respected health maintenance organizations (HMOs), Kaiser Permanente, posted a loss of about $270 million in 1997, its first deficit in more than a half-century of operations. Informed sources predict even higher losses for 1998. Oxford Health Plans, a Connecticut-based, for-profit managed-care company with many middle- and upper-income enrollees in the New York region, saw its stock-market price peak at close to $90 a share in early 1997, only to lose over 70 percent of that value by the year's end. The company still faces the challenge of borrowing several hundred million dollars in order to have the capital necessary to restructure itself. During the course of a recent annual ophthalmologic examination, my relatively young ophthalmologist mentioned in passing that Oxford owed him $40,000, a sum that he suspected would never be paid. It was, but at a collection cost of $20,000. Despite the robust stock market, many for-profit managed-care organizations have lost their attractiveness to speculators, both professional and amateur. The reasons are not difficult to pinpoint. The early and middle 1990s saw rapid increases in the number of privately insured employees changing from fee-for-service coverage to HMOs, a shift that is associated with a one-time savings of between 10 to 15 percent of premiums. But now, with the majority of potential managed-care enrollees having already made the transition, the earlier, large-scale gains in enrollment, with their accompanying high profits, are over. To make matters worse, groups of physicians have started to organize in order to improve their bargaining power with managed-care companies. At the same time, consumer groups are pressing their political representatives in Washington, D.C., and state capitals to pass consumer-protection legislation that will provide them with more choices, but such legislation will also reduce the profitability of managed-care plans. What about the Balanced Budget Act of 1997 and the introduction of Medicare+Choice for Medicare recipients, which were designed to encourage Medicare recipients to enroll in managed-care organizations? In passing the Balanced Budget Act of 1997, Congress set a goal of reducing federal outlays for Medicare during the period from 1998 to 2002 by $115 billion, primarily by cutting back on payments to providers, hospitals, and physicians. The Medicare+Choice program reflects Congress's determination to increase the options available to Medicare beneficiaries beyond that of enrolling in an HMO. Medicare+Choice offers beneficiaries a wide range of additional options: if the beneficiary's employer joins the federal program, the beneficiary can choose to establish a medical savings account, enter into a private payment arrangement with his or her own physician, or receive coverage from a provider-sponsored organization. Will there in fact be sizable increases in the number of Medicare beneficiaries who opt to join or remain in a managed-care organization because access to a broadened range of services will make it unnecessary for them to purchase a Medigap policy? Although the number of Medicare enrollees in managed-care plans is likely to continue to increase, until the Health Care Financing Administration issues its revised regulations and new payment schedules, we need to be cautious about such predictions. Recently, some managed-care plans have decided not to participate in the Medicare program, presumably because they do not believe it will be profitable. The situation is also problematic for managed-care companies enrolling Medicaid recipients. A number of smaller states, such as Arizona, Oregon, and Tennessee, have had reasonable success in enrolling a large proportion of their low-income populations in managed-care plans. But similar efforts by the larger states, such as California, Illinois, and New York, have been delayed. There are no major barriers to enrolling mothers and children on Medicaid in managed-care plans. But although mothers and children account for about 70 percent of the population eligible for Medicaid, they account for no more than 30 percent of total Medicaid outlays. The much more difficult question is whether for-profit managed-care plans will be able and willing to enroll persons who are elderly, chronically ill, or disabled, who together account for about 70 percent of all Medicaid outlays. A substantial number of for-profit managed-care organizations have decided not to bid, or not to continue to bid, on contracts to enroll these hard-to-serve populations, in part because several states have reduced their contract prices. Furthermore, many of these patients need a wide range of services, some of which fall outside the experience of managed-care plans. At this early stage of mandatory enrollment of the population eligible for Medicaid, one cannot predict how many severely handicapped patients will be forcibly enrolled in Medicaid managed-care plans, much less whether the plans will be able to make money while providing the quality and range of services that these patients received previously. Most people who would be easy to enroll, and for whom the cost of care would on average be below that of people in the fee-for-service system, have already enrolled in managed-care plans. It is much more difficult for managed-care plans to enroll Medicare and Medicaid beneficiaries, realize profits from providing services to them, or both. There is even more trouble ahead for managed care. Health insurance premiums are increasing again and may approach double-digit rates of increase in the near future. If that turns out to be the trend, one must anticipate that the number of employers who will continue to provide health insurance coverage for their workers will decline. Alternatively, employers will require their workers to pay a larger percentage of the premium, which will lead more workers to reject coverage. An even more worrisome problem is that a large number of managed-care organizations are heavily leveraged. Unless one believes that the stock market will continue its long-term upward climb, which seems improbable, a substantial correction will force many marginal managed-care companies into bankruptcy. This, in turn, will jeopardize the health insurance coverage of many millions of middle-class citizens. The federal and state governments may decide that they have to rescue many, if not all, of the bankrupt managed-care companies, but then again, they may not. If the stock market goes into a serious decline, greater numbers of people will lack coverage. Some 43 million Americans are currently uninsured, and over 30 million are underinsured. With many Medicaid recipients being forced into managed-care plans whose ability to provide satisfactory care must still be proved and with additional millions of people perhaps no longer eligible for Medicaid because of the 1996 welfare-reform legislation, we could soon be facing a crisis in health insurance coverage affecting between one third and two fifths of Americans. The expansion of managed care played a key part in moderating increases in health care costs during the early and middle 1990s, primarily by limiting the freedom of decision making that physicians and consumers had previously enjoyed. But these limitations led to serious backlashes in the legislatures, and the prospect that managed-care plans will continue to constrain health care costs is highly questionable. Moreover, both Congress and the President are committed to moderating, even reducing, the rate of increase in federal health care expenditures. So far, there is little evidence that the United States has taken any serious action to reduce the steep inflation in health care expenditures by effectively cutting back on the excess capacity of acute care hospitals, by reducing the numbers of physicians being trained, or by curbing the diffusion of new, expensive technology. If Congress and the President continue to hold the line on moderating future federal expenditures for health care, the nation may be forced to bite several bullets. First and foremost, we will be forced to recognize that the critical issue is not to restrict total expenditures but, rather, to restrict federal expenditures, which will soon account for 40 percent of total health care outlays. In addition, the public will be forced to recognize that the U.S. health care system has always rationed care and will continue to do so in the future. With up to one in three Americans vulnerable to the loss of high-quality health care insurance, federal and state legislators may find it easier to provide universal coverage than to pursue any alternative policy. According to the latest figures released by governmental statisticians, total government expenditures for health care amounted to $540 billion in 1998, (1) and according to a recent estimate, (2) the federal tax subsidy for private health insurance coverage amounts to an additional $100 billion. This means that there is over $600 billion potentially available in the federal and state payment pool to provide essential health care coverage for all citizens and permanent residents. This sum represents about 7 percent of our gross domestic product. In the United Kingdom, 7 percent of the gross domestic product provides total funding for the National Health Service. Of course, the United States is different from the United Kingdom, and we are used to a much more costly health care system, especially since the enactment of Medicare and Medicaid. Admittedly, a federal-state plan providing essential health care coverage for all Americans would not be easy to legislate, but considering the alternatives, it might prove to be the least difficult response to a steep rise in the number of uninsured and underinsured persons, should many of the managed-care plans go into bankruptcy. Medicare+Choice may represent a template -- an early stage in transforming Medicare from a defined benefit (specifying all authorized services) to a defined contribution approach (stipulating a monetary maximum of governmental outlays) that holds some additional promise of containing the rate of future federal spending. Since managed-care plans will not be in a position to constrain rising health care costs in the face of consumers' demands for more choices and reduced interference in the patient-physician relationship, and since future health care costs must be controlled, at least as far as government expenditures are concerned, the best alternative is for government to provide essential coverage to the entire population and then let persons who want more and better care to cover the additional costs out of their own pockets, through privately purchased insurance, or through employer benefits. The growing difficulties and uncertain future facing managed-care companies, particularly the for-profit companies, may offer an opportunity for the United States to provide basic coverage for the entire population, to control the rate of increase in future government expenditures for health care by linking it to the growth of the gross domestic product, and to allow marginal employers to free themselves in whole or in part from the burden of providing health insurance coverage for their employees. Some employers may decide to "cash out" the value of the health care benefit they have been providing by offering their employees an equivalent amount in increased wages or other benefits, and some may decide to offer a combination of increased wages and a supplementary health insurance benefit. Probably most employers and maybe most of their employees would welcome the decoupling of employment from health care. Under such circumstances, the future of managed care would become even more uncertain. Eli Ginzberg, Ph.D. Columbia University New York, NY 10027

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