Instructor Guide by jolinmilioncherie


									                   Online Book Serial: 44835831

                           TABLE OF CONTENTS



      EARLY INSURANCE REFORM                               3
      THE EFFECTS OF PRECURSORS OF DEATH                   4


    DEFINITIONS OF MANAGED CARE                            8

    WHY MANAGED CARE?                                      8

    FOREIGN HEALTH PLANS                                  12


    WHY MEDICAL CARE CONTINUE TO RISE                     17
     TECHNOLOGY                                           17
     IS THE TREATMENT NECESSARY?                          21
     TOO MANY PROVIDERS                                   23
     THE AGING OF AMERICA                                 25

    PRESENT RESULTS OF MANAGED CARE                       26

II. MANAGED CARE PROVIDERS                                32

    THE CATEGORIES OF MANAGED CARE                        32


    TYPES OF HMOs                                         33
      STAFF MODEL HMO                                     34
      GROUP MODEL HMO                                     35
      NETWORK HMOS                                        37
      CARE MANAGER                                        41
      INTEGRATED DELIVERY SYSTEMS                         42

    GRADING AN HMO                                        43
      “QUALITY” OF SERVICES                               43
      CHOICE OF PHYSICIAN                                 44
      ACCESS TO PROVIDERS                                 45


   MANAGED CARE MANAGEMENT FOR PPO’S                            51

 POINT - OF SERVICE PLANS                                       51

 EXCLUSIVE PROVIDER ORGANIZATIONS (EPO)                         53


 CARVE - OUTS                                                   54
   CARD PLANS                                                   55
   CASE STUDY: Prescription Card - Frosting on the Cake         55
   MAIL - ORDER PLANS                                           56
   MENTAL HEALTH AND SUBSTANCE ABUSE                            56

 COMPARISONS OF CARE DELIVERY SYSTEMS                           57
   PROS AND CONS OF VARIOUS TYPES OF HMOs                       57

 ERISA                                                          61
   CASE STUDY: ERISA Protecting Negligence                      61
   ANSWERS TO STUDY QUESTIONS                                   65

NEWS MEDIA                                                66

 BUSINESS SPONSORED WELLNESS PROGRAMS                           70


 EMPLOYEE ASSISTANCE PROGRAMS                                   71
   ANSWERS TO STUDY QUESTIONS                                   74

IV. MANAGING UTILIZATION                                        75

 DIRECT PATIENT INTERVENTION                                    78
   MEDICAL CASE MANAGEMENT                                      78

 INPATIENT HOSPITAL REVIEW                                      81
   OUTPATIENT REVIEW                                            83
   SPECIALIZED CARE REVIEWS                                     84
   ANSWERS TO STUDY QUESTIONS                                   87

V. MANAGED CARE ,WORKERS COMPENSATION                           88

   ONGOING COMMUNICATION.                                       91
   VOCATIONAL REHABILITATION                                    92

   RECOVERIES/SUBROGATION                            93

 CENTERS OF EXCELLENCE                               94

 MANAGED LONG TERM CARE                              96
  CARE COORDINATOR CONCEPT                           97

 THE MANAGEMENT OF TECHNOLOGY                        99

  ANSWERS TO STUDY QUESTIONS                        103

VI. ETHICAL CONSIDERATIONS                          104

   LIMITING HEROIC TREATMENT                        106
   ANSWERS TO STUDY QUESTIONS                       109



   Pre-paid medical services as a concept is credited to the Kaiser-Permanente
Medical Care Program who devised a health program to provide medical care to
workers who (1) were working in hazardous jobs for Henry J. Kaiser and (2) who
were working in areas where medical facilities were not available, or were
inadequate. This concept grew dramatically during World War II as Kaiser was
engaged in ship-building with a concentration of workers in one location. Because of
the type of construction, there were a large number of injuries, particularly job-
related. Since there was inadequate medical care available near the shipyards, Kaiser
hired doctors and built clinics hospitals for the employees. This concept was not
designed to alleviate or contain medical costs, but just to furnish medical care for
employees. By keeping the employees healthy, Kaiser considered their program very
cost-effective as it resulted in more employees staying on the job.
   The Kaiser-Permanente HMO, arising with a need for health care for workers
during World War 11, is probably the most sensible competitive model developed to
date. It has evolved and became more flexible and by 1945 it subdivided into the
Kaiser Foundation Health Plan, the Kaiser Foundation's Hospitals, and the
Permanente medical groups. Presently, Kaiser Permanente has approximately 6.9
million enrollees in multiple locations and in several states. The organization of the
individual medical groups vary with individual state requirements and a three-year
probationary period for physicians is required to move from salaried to partnership
status. Observers credit the team relationships between individual physicians and
subscribers to Kaiser's ability to consistently deliver high quality services for
competitive prices.


   A few revolutionaries risked the ostracism of organized medicine and developed
the first "prepaid" group practices. The Ross Loos groups in Los Angeles in 1929,
Kaiser Permanente in the 1930s, Group Health Association in Washington, D.C., in
1935, and the Group Health Cooperative of Puget Sound in 1945 all demonstrated
that cost-effective medicine could be provided in a new way. Organized medicine
continued to oppose such "corporate" practice of medicine and only agreed to take a
neutral position in 1992. One physician bucked the tide of medical obstruction and
proposed in 1970 that the nation adopt a national "health maintenance strategy by
promoting a health maintenance industry that is largely self-regulatory.” Dr. Paul
Ellwood, a soft-spoken but persuasive pediatrician, influenced Nixon-administration
decision-makers and the HMO Act of 1973 was adopted.
   Ellwood, Enthoven, and Starr, the author of Social Transformation of American
Medicine in 1982 and Logic of Health-Care Reform in 1992, are often credited with
the concept of reforming health care by using the HMO’s as a model. They, and
others, promoted the idea that certain organizational changes could permit the health
care purchasing market to function like other markets and be what economists call
"elastic.” That is, prices fall in response to increased volume of services in most
markets because of increased efficiency and a relative reduction in overhead costs.
The health market is considered inelastic because cost does not rise with increasing
volume. It sometimes increases as more expensive methods replace earlier, less
expensive approaches (the result of rapid technology in medical care).
   Many came to believe that the methods used by Health Maintenance
Organizations (HMOs) could be the basis of health care reform. They felt that the
organizations could accomplish the goals of the obviously necessary health care
reform, as HMOs are basically networks of groups of generalist physicians who refer
patients to selected specialists when necessary, specialists are frequently paid on a
salary basis, so that there is little incentive to recommend expensive procedures, and
physicians are given a fixed amount of money annually for each patient.
   And as they say, the rest is history.

                          EARLY INSURANCE REFORM

   The state of Washington was the first state to institute Managed Care for
uninsured residents. Managed care techniques, including a cap on health insurance
premiums, is the principal mechanism in controlling costs. Taxes on cigarettes and
alcoholic beverages are intended to raise an additional $478 million. This reform
program was hotly contested by the insurance companies and many medical
organizations, and it passed by a majority of only three votes. It is too early to tell
whether the plan has been as successful as advertised.
   Traditionally, hospitals, physicians, and insurance companies were independent
and frequently competitive. Physicians sought to take good care of their patients and
be fairly reimbursed, hospitals wished to have a profitable year, even if they were
called not-for-profit, and insurance companies wanted to pay their stockholders
handsome returns. Employees in large companies seemed content with their health
insurance but the inability of smaller firms to provide health insurance began to
increase. Data collected in 1990 showed that 97 percent of firms with 1,000 workers
offered health insurance to their employees, compared to only 36 percent of those
with less than 25 workers. On average, only 42 percent of these firms offered health
insurance; people working for the other 58 percent of companies either paid their
own way or had no insurance.
   As the nation continued to move toward an ambitious approach to health care
reform, a key issue was the relationship among various health care providers. Health
Maintenance Organization (HMO) was the name given to certain group practices but
inevitably, (as discussed later) variations arose. As an example, in one form of a
network of physicians, insurers pick a limited number of health care providers and
preferentially direct patients to them at a pre-negotiated rate which is usually lower
than prevailing prices. Patients must accept care within the network. Although in
some plans, they may "buy-out" for a specific service by paying a higher price for the
service. These organizations are called Preferred Provider Organizations (PPOs)
(described in detail later in the text). Many physicians, in contrast, decided to
develop their own network of different individual practices in which they agree to

negotiate collectively with insurance plans. This variation is now called an
Independent Practice Association (IPA).
    Although both of these network arrangements are technically HMOs, the term
HMO was usually reserved for a group practicing under one roof - a staff-model
HMO. In each one of these models, the source of revenue - the insurance company -
was linked with the care delivery organization to form an "integrated care system."
    Different networks developed different practice incentives. Some networks were
led by hospitals and others, often lumped together as professional health
organizations, were controlled by physician groups. A conflict developed between
hospitals and physicians. Because of their substantial capital investments, many
hospital networks must either close beds or keep their beds filled in some manner.
Physicians networks, in contrast, often found it more profitable to reduce hospital
utilization. These integrated networks continued to function as health maintenance
organizations and will evolve and can possibly be best able to blend affordable
premiums with high-quality medicine. Indeed, as these networks increasingly own
there own ambulatory surgery centers, radiographic capability, and laboratory
facilities, hospitals will become increasingly less necessary.


    There has been, there presently is, and there will continue to be, debate regarding
what causes death - the ultimate health care problem. After all, the avoidance of
death is one of the primary, if not the total primary, reason for health care. Recently
there has been a lot of publicity about how tobacco causes the death of so many
Americans, and the cost to the healthcare system. Much of this is political because a
lot of money is at stake and it is a great political football, but also because a lot of it
is true. A recent study illustrates just how healthy the Americans are, and what are
the primary precursor (reasons) for premature deaths and how many days were spent
in the hospital because of these precursors.
    These statistics shows that 63 percent of premature deaths, 71% of potential years
lost, and 29.9% of days in hospital for the major precursors could have been
prevented. During a the period of 1979 and 1985, prior to the most recent

technological advances in medicine, deaths from coronary heart disease was reduced
by 20%, stroke by 28%, cirrhosis of the liver by 21%, and cervical cancer by 18%.
However, deaths from two smoking-related diseases, lung cancer and emphysema
increased by 17% and 35% respectively.

                     How Healthy or How Sick Are Americans?

Precursor                     Deaths                 Years Lost              Hospital Days

Tobacco                       338,022                 1,497,161                 16,098,587
High blood pressure           297,162                   340,752                  9,781,647
Overnutrition                 289,502                   292,960                 16,306,194
Alcohol                       99,247                  1,795,458                  3,348,354
Injuries, excluding alcohol   64,169                  1,755,720                 25,470,176
Gaps in screening             56,692                    172,793                  3,647,729
Gaps in prevention            54,027                  1,273,631                  4,651,730
Inadequate access to care     21,974                    324,709                  2,141,569
Occupation                    16,807                    102,065                    581,740
Handguns                      13,365                    350,683                     28,514
Unintended pregnancy          8,000                     520,000                         n/a

     Major Precursors of Premature Death (Amier and Eddins)

   This vividly illustrates that there were significant problems in the providing of
health care, as indicated by the number of deaths and hospital days as a result of gaps
in screening and prevention, plus, to a lesser degree, some inadequate access to care.


   In the 1990s, physicians and the AMA abandoned their unsuccessful resistance to
group practice and agreed to support the Health Maintenance Organization (HMO)
concept. While HMOs had provided coverage for less than 10 percent of individuals
in various geographic areas for many years, HMO enrollments greatly expanded in
the 1980’s. In some parts of the country, like Minneapolis and Northern California,
HMO coverage exceeded 50 percent. The $300-billion insurance industry saw
important opportunities for cost containment and began to transform itself, and many
companies allied with a variety of physician groups so that the payment or insurance

function was linked to the physicians who provided individual care. Insurance
companies like Prudential, CIGNA,
Aetna, Metropolitan Life, Travelers and the nonprofit "Blue" plans evolved into
HMOs and turned away from the more traditional indemnity type of insurance.
   The purpose of a health insurance company is to sell insurance policies by
keeping its premiums low. The best way it has to control expenses is to reduce its
policyholder use of health care services (utilization). Conversely, health care
providers want to give their patients the best and most of everything, under
conditions convenient to the providers and thereby maximizing their patients’ welfare
and to their own benefit.
   The health purchasing marketplace had been transforming itself from the
unstructured fee-for-service system of several years ago to one with varying amounts
of what is generally called Managed Care.
   Under the old open-ended system of "indemnity insurance, " physicians
prescribed pretty much what they wished and the insurance company paid the bill.
Open-ended opportunities, with the consumers of health care relatively insensitive to
costs because their employers paid their insurance premiums in pretax dollars, led to
spiraling health care costs. Managed care is the antithesis of unmanaged care or the
present system - attempts to make certain that patients receive the care they need at
an affordable price. Unfortunately, the use of discounted fees and the employment of
thousands of new people to watch the doctors at work - and additional hundreds to
watch the watchers - have destabilized the health care system. Several hundred
insurers write insurance in most states and the paperwork they generate is so intense
that most physicians and many nurses spend up to 30 percent of their time away from
their patients completing forms. Each insurance company seems to have its variety
of forms to be completed. They frequently have different fee schedules and they
often use different techniques to "manage" physicians to keep their costs to a
minimum. American physicians have become so frustrated that many have indicated
that they might accept a nationalized or Canadian-type system if it were accompanied
by a predictable income and a major reduction in paperwork.

   Socialized medicine, a frightening phrase to many physicians and one often used
to defeat any new approach to health care policy, is quite simple in concept. In
socialized medicine, the central government budgets funds needed for health care.
All physicians and hospitals are paid at the same rate. A central board defines the
services available to each citizen. The cost is paid from tax revenues so that there is
little paperwork or billing effort required. Opponents have often orchestrated
campaigns against such alternatives, warning Americans about the long waiting lines
and inadequate care of the British or Canadian systems, which are based on
socialized medicine. (See Foreign Health Plans) Most experts agree that because
Americans place such high value on “free choice” and rapid response in medical care,
socialized medicine (or a “single-payer” system) will never be accepted politically.
Indeed, the death of the Clinton health care plan indicates that these assumptions are
probably correct.
   Critics charge that the American health care system was designed to be expensive
so that those in control, such as physicians, hospitals, and insurers, could maximize
their financial return. They describe the system as a guild controlled mainly by the
professionals providing services. Unlike other guilds, however, there was a readily
available source of funds to meet the self - determined requirements of members of
the guild. Buttressed by laws and regulatory mandates, this fee - for-service or
indemnity system guaranteed free choice of physicians by patients and free choice of
treatment by physicians.
   There is direct negotiation over fees between physician and patient with the third
party payer-the readily available source of funds-excluded from the table. Solo
practitioners until recently dominated the scene, further inflating prices since controls
on the kinds of consultants were not allowed.          Hospitals and employers were
prohibited by state insurance regulations and by Title XVIII of the Social Security
Act from contracting with health maintenance organizations or group practices; anti-
trust legislation emphasized competition that kept physicians' fees steadily

                       DEFINITIONS OF MANAGED CARE

    Because the costs of medical care rose so rapidly and dramatically, practically
choking employee benefit plans, it became apparent that cost must be managed and at
the same time, control the rising costs of medical care. Therefore, medical care costs
must be “Managed” and at the same time, the patients must continue to receive
appropriate medical care. The techniques developed to provide these services were
proclaimed as “Managed Care.” Or to put it another way, Managed Care is the
system in which quality medical care can be delivered at a reasonable cost.
    The term “Managed Care” is very often used to describe a structured health care
system such as a Health Maintenance Organization, or a Preferred Provider
Organization. These two types of structured organizations are better known to the
general public and receive the majority of the publicity.
    Other programs that contain cost-management or cost-containment features, such
as a “Wellness” program by an employer, can be constructed to be Managed Care
even though technically there is no actual “care” involved.
    With the variations of health insurance programs today, such as Point of Service
plans, Care Manager plans, etc., they are generally all considered as part of Managed
Care.   Indeed, they were created to fill a particular void in the Managed Care
technique system.

                             WHY MANAGED CARE?

    The magic words “ Managed Care” seem to be mentioned at least daily in some
fashion and usually in uncomplimentary terms. It would be interesting to know how
many television reporters and journalists actually know what that term means.
    To most people, it simply means an HMO that is taking away one of their
precious rights, that of being able to choose their own doctors and hospitals.
Politicians use it frequently and in most cases, they are “against it”, regardless of the
    One statistic that gives them pause, is that in 1995 the average monthly premium
of an HMO for a family was $447, while the average monthly premium for a family

under a traditional health insurance plan (indemnity insurance) was $493, almost
10% lower.
    Also, in the United States, Health-care expenditures rose an inflation-adjusted
1.9% in 1996, the slowest rate of growth in nearly four decades. These figures were
produced by a team of government researchers, and not from the Managed Care
    In late 1997 and early 1998, several newspapers and other publications reported
the results of various studies, both government and private. These newspaper and
news magazine articles were a result of many anecdotal reports from unhappy HMO
members for the most part.
   But the report, the broadest annual accounting of the nation's health costs,
appeared during a period of time when there was growing concerns - especially
among the nation's employers - that a rash of troubles in the Managed Care industry
jeopardizes a five-year period in which medical bills were coming under control as a
result of Managed Care.
    The journal “Health Affairs” found that the “total health-care tab in the U.S.
topped $1 trillion for the first time in 1996, the latest year for which figures are
available, despite the low rate of growth. That amounted to 13.6% of the gross
domestic product, a percentage that has remained steady since 1993.”

                          NATIONAL HEALTH EXPENDITURES - 1993 ($882 BILLION)

                                                                      PHYSICIAN'S CARE
                   OTHER                                                    19%

                           DRUGS                                               37%

    Regardless of what many construe to be a “Pollyannish” outlook, there continues
to be increased friction between the public and private sectors as to who will bear
most of the cost of anticipated growing medical inflation in the future. It is very
significant that these sources report that spending on publicly financed health-care
services, including Medicare and Medicaid program, “rose at an annual average rate
of 9.7% between 1989 and 1996, while private-sector spending, largely through
employer-sponsored benefits plans, increased an average of just 5.8% a year over the
same period.”
    The big difference in the growth rates may narrow significantly or even reverse
itself in the near future. The new federal budget has provisions for Medicare costs to
increase just 2.5% for each enrollee in 1998. However, Medicare in particular is an
extremely delicate political problem, so many Washington insiders see many changes
before cost predictions can be used with any degree of accuracy.

    Of primary importance to those in the health insurance industry, the fact is that
we are now seeing increases above 5% in the private sector for the first time since the
early 1990s. The federal governments own employee health-care plan is reporting an
increase averaging 8.5% for 1998. Benefits consultants believe that large employers
expect health costs to rise about 4% in 1998 and even more in 1999. One important
factor in these increases is a profit crunch at major managed-care companies. This
has caused some retirements, mergers and acquisitions among health care systems
heavily involved in Managed Care.
    During the 1990s, higher rates of Medicare spending gave providers "something
of a safety cushion" as they lost income in the face of pressure from Managed Care.
However, since Medicare spending growth is slowing, health providers are trying to
find ways to raise rates again in the private sector. It can be expected that growth in
overall expenditures, both in health care and in administration, may begin to rise. A
return to the double-digit increases of the 1980s is not expected.
    It was also reported that national health expenditures in 1996 rose 4.4% before
inflation to $1.04 trillion, or $3,759 a person. In 1995, the nation spent $991.4
billion, or $3,633 for every American.


      900                                                                  3500




                                                                                  TOTAL $ BILLION
                                                                                  $ PER CAPITA




       0                                                                   0
            1960   1970    1980    1985    1990    1991     1992    1993

    Credit for the declining growth rate was attributed to the growth of Managed
Care, plus the fact that expensive hospital and doctor services are playing a smaller
role in the health care economy. Even though doctors and hospitals are still the
predominant players in health care, it was reported that the combined share of
national health-care spending allotted to doctors and hospitals fell to 54.1% in 1996
from 57.6% in 1990.
    Prescription drugs muddy the statistics to some degree. Costs for prescription
drugs rose by 9.2% in 1996. However, experts attribute a lot of this increase to 2
factors (1) managed-care plans have succeeded in reducing hospital stays, with the
results that many patients are now getting drugs from their own pharmacy instead of
getting them during the hospital stay, and (2) private insurance covered 45% of
prescriptions filled in 1996 compared with 34% in 1990. Indeed, a Prescription Drug
Card is often taken for granted by those covered under private insurance.
    Private health insurance premiums accounted for $337.1 billion of health
expenditures in 1996, of which $316.4 billion came from employer-based health
benefits programs. Many companies have passed on an increasing share of health
costs to the workers. Employers paid 83.4% of the health insurance premiums,
compared to 94.5% in 1990, a 1.1 percentage-point difference. While 1.1% doesn’t
sound like much, it actually shows a shift in employee cost of $3.6 billion in 1996

                            FOREIGN HEALTH PLANS

    Most of the industrial nations have some type of government sponsored health
care, in most cases, some form of socialized medicine. In discussions of Managed
Care, it is almost inevitable that the health care systems of others countries will be
references and used by some as examples of how Managed Care should be
    Basically, European and Canadian systems practice Managed Care taken to the
extreme, and cannot be called anything other than “rationed care.” They do not make
massive investments in medical research, they do not purchase the latest in medical

technology and they do not furnish medical treatment to elderly people who need this
technology. For example, in the United Kingdom, those over age 60 are not eligible
for heart transplants although they continue to pay taxes that support such a system.
Therefore those that fall in this category must either pay for the transplant out of their
own pocket, or simply die.
    Canadian procedures are performed three times as much in the United States as
in Canada. In Canada, those over age 75 and women received proportionately fewer
cardiac procedures in Canada than in the United States. The Canadians also wait
longer for treatment. For those with left main coronary artery disease; in the United
States they were operated on within 7 days, but in Canada 70% of the Canadians
waited for 31 to 60 days.
    A study revealed that for breast cancer the median waiting time between
diagnosis and postoperative radio therapy was 61.4 days. Generally, according to
specialists, in 81% of cases awaiting surgery, the times are longer than they consider
reasonable, and they feel that 45% of all patients are waiting in pain.
    Canadians have contracted with U.S. hospitals to provide technical services such
as MRIs and brain injury care. From 1991 to 1993, 10% of those needing cancer
therapy in British Columbia were served in the United States. It appears that
Canadians can afford to ration health care because they have the underused U.S.
system just across the border if the shortages of specialists or treatment centers
becomes too severe.

                          PER CAPITA HEALTH EXPENSES AS % OF GDP



           GERMANY                                                                     Series1



                  0.00%     2.00%   4.00%   6.00%   8.00%   10.00%   12.00%   14.00%

    There is no doubt that Americans have the best technology, and our system, with
its readily available medical technology and specialists, enables all Americans to
enjoy a better quality of life.

CASE STUDY: Delay in Treatment in Canada
    A German-owned reinsurance company with its North American headquarters in
Toronto, operated in the United States with a branch office headed by a Vice
President, a U.S. citizen, who maintained an office in Toronto also. His secretary in
Toronto, a 38year old female, was an exceptionally dedicated employee who was
always available when her boss would call from anywhere in North America or
    After 3 years, she started taking noticeably more "sick days", and was late for
work at least once a week. Realizing that something was wrong, the Vice President
had a personal discussion with her and discovered that she had some "female"
problems (she was not pregnant) but she hated going to a doctor as she was afraid as
to what he would diagnose. He boss talked to her husband who was also concerned,
and between the two of them they talked her into going to a doctor in November.
    In Toronto the Provincial health plan is called OHIP (Ontario Health Plan), It
took 3 weeks before she could see a doctor, and during that time she started
experiencing pain, otherwise it would have been as long as two months. The OHIP
doctor advised her to have surgery and scheduled her for April at Toronto General
Hospital. The surgery was postponed once for a period of two months, so she had
her surgery in June. In the meantime her boss had left the company and her new boss

would not accept the fact that she kept coming in late and would miss so much work.
She resigned before she was fired, and took a job at less money and with longer
    The surgery was successful, however because of the length of time before
surgery; she will never be able to have children. She was not too concerned as she
did not want have children at her age anyway. She does miss the loss of income, as
she has never been able to find another job like the one that she had so capably
handled for so long.


    According to the latest government figures, patients pay 20% of their own
medical bills. Funds for this expense comes directly from the income and savings on
those to receive the medical services.
    Government programs pay for the largest part of the overall medical costs, 42%.
Of course, this includes Medicare and Medicaid, plus medical care for service
personnel and their dependents, and government workers and their families.
    Insurers, including some self-funded organizations and third-party
administrators, pay for 33% of the medical services. Included in this category are
HMO’s and variations of Managed Care, while not technically “Insurers”, do provide
insurer-like services.
    Other private sources, many of which are trusts organized under Federal Law,
medical personnel who receive “free” services, etc., pay approximately 5%.

                                  SOURCES OF HEALTHCARE FUNDING


                  FEDERAL                                                  PRIVATE
                     31%                                                      57%

    Businesses pay a substantial portion of the nation’s medical costs through
Workers Compensation (5%) and employee group health benefits, 10%. Because
businesses pay taxes that, in turn, fund government spending on medical care
programs, plus business taxes, payroll taxes - in some cases such benefits and taxes
exceed the after-tax profits of the business - it is commonly held that business
actually pays for the health services and suffers the most when medical costs increase
    Although this is a widely held belief, the sad truth is that the consumer and only
the consumer, ends up paying for the health services, either directly or indirectly.
The government does not “make” money (it prints “money” but does not “earn”
money). It survives on the largesse of the governed in the form of taxes from a wide
variety of sources, but ultimately all taxes come from individuals.
    While businesses pay taxes, in actual practice the cost of increased taxes and
increased cost of benefits is passed on to the consumer, either in the form of
increased cost, decreased products or benefits, and/or less earning for the owners
and/or stockholders. In 1980, the cost of employee health care was equal to 24% of
the corporate profits of U.S. businesses. In 1990 it reached 100% of the corporate

profits. That means that employers were paying as much for employee health costs
as they were making in profit. Or, to state it another way, if employers didn’t have to
pay for employee health care, their profits would double. (Actually, this would
probably never happen, as employers could afford to be more competitive, so they
would lower their profit in order to gain more market share, and thereby reducing
their profit. But the point of the total cost to the employers of employee benefits is
well made with this illustration).
    Many individuals receive benefits from their employer, sometimes with the
employer paying for all of the benefits, or a portion thereof. However, where does
the employer get the money to pay for benefits? Again, from its customers and from
the individuals that support the business.
    Not only is there considerable benefits savings in health insurance with large
employers, but they also report considerable savings in Workers Compensation costs,
after they have contracted with a Managed Care firm or established a Managed Care
    Overall, Employee benefits costs have increased at substantially lower rates after
implementing a Managed Care program. For example, S.W. Bell went from an
average increase of 36% to 12% in 1996.
    In 1993, a year that showed the largest decline in the increase in health cost, the
average employer increase was 14%, while increases for employers with Managed
Care plans increased only 8.4%.



    New medical technology adds about $30 billion to the nation’s medical care bill
each year. (CAT scans and MRI can easily cost more than $1,000).
    Certain annual surveys rate goods and services used on a daily basis as the best
value for consumers’ money. In 1989, 1992 and 1994, contrary to what you might
guess, poultry was rated number one (above cars and TV’s) as the best value for the
money. The same surveys in the same years also agreed on the worse value. Again,

contrary to popular believes, it wasn’t lawyers (next to last), but it was hospital
charges. Health insurance and doctors’ charges were also rated quite low.
    The reason that poultry is rated so high and hospitals so low is because of
technology. Even though technology has made chickens and health care better and
cheaper, medical technology is overbought and helps to increase the hospital costs,
which registers negatively with the consumers.
    Medical technology differs from other technologies in cars, chickens and
computers in the impact on consumers because many new medical technologies have
been purchased by health care institutions, and many of the institutions use the new
technology very little.
    The health care industry does not compete primarily on the basis of price. In
1940, if a person had a gall-bladder operation, the surgeon would charge about
$1,000, and the hospital would charge anywhere between $2,000 and $4,000. While
this may not seem expensive today, $5,000 was about a fourth of the median income
of Americans at that time. Not only was surgery expensive, but the lengthy hospital
stays were costly and patients were out of work in a recovery mode, with a reduced or
loss of income for many.
    Even though American technology obviously improves the quality of life,
Americans think that hospitals spend too much money. U.S. hospitals are too big,
with too many beds, too much technology and the expenses to go along with it. In
1995, the occupancy rate of American hospitals was only 59.7%. A Holiday Inn with
that occupancy rate could not survive for long, so one can imagine the losses that a
hospital must incur if 40% of its beds are not filled on a constant basis. And with the
new technology, new drugs and procedures are continually being developed that will
eliminate even more need for hospital beds.
    But do not weep for the poor hospitals, as they continue to hold their own. In
1992 while the length of stay in a hospital dropped drastically, the average number of
beds in the hospitals remained fairly constant, and the number of hospital personnel
actually increased from 3.1 million in 1983 to 3.6 million in 1992. But while
inflation rose by 2.3%, salaries rose by 5.5%. In 1993, on the average, the CEOs of
hospital systems made $400,000 in compensation, and CEOs of individual hospitals

made $243,000. However, they seemed to be worth it, as they maintained a profit of
5.4% for the for-profit hospitals.
    Another important factor in the low esteem of medical services is related to who
pays the bills. For example, in 1994 it is estimated that hospitals were 97.5%
compensated by third parties (not the patients). Doctors, who also rate low, were
85% compensated by third parties. On the other hand, pharmaceuticals (34%) and
vision-wear compensated only 41% by third parties were rated quite high.
    The most effective new technology, according to many experts in the medical
field, was developed after plastic was invented. Previously, exploratory operations
were quite common, as that was the only way that the surgeons could actually see the
patient’s condition. Now surgeons can view almost any part of the human anatomy
with fiberoptic light sources that illuminate the surgical site for miniature cameras. A
surgeon can operate and watch the procedure on a screen, never actually viewing his
surgery except on the screen.
    Computer technology automated the tiny camera and it also developed other
instruments that diagnose and monitor the body without invasive surgery. The most
well known is the computerized axial tomography (CAT) scanners, and the magnetic
image resonators (MRIs). In addition, recent advances in anesthesia now allow
various areas of the body to be anesthetized so that only the affected area will not feel
pain, thereby reducing many problems than have arisen when larger amounts of the
body were so deadened against pain.
    New technologies allow many surgical procedures to be performed outside of the
in-patient section of a hospital. It is estimated that 65% of the estimated 29 million
surgeries in 1994, were performed outside of the hospital. These surgeries included
cataract removals, inguinal hernia repair and knee arthoscopy for those on Medicare.

    CASE STUDY: Limitations on Managed Care Medicare Supplements
    Mrs. Johnson is on Medicare and has a “Select E” Medicare Supplement plan.
The “Select” series of Medicare Supplement policies is a form of Managed Care,
whereby for a lower premium, patients can receive all of the benefits of the regular
Medicare Supplement, but in return for paying a lower premium, they must use the
hospitals designated by their carrier.

     Mrs. Johnson is age 67 and it was discover4ed that she had cataracts in both eyes
and needed surgery. Being a nurse, Mrs. Johnson knew the “best” (by reputation)
opthamologist in the county, and was accepted as a patient. However, he wanted to
do the surgery in his own surgery center as he had the best laser equipment in that
part of the state, better than any other local hospital.
     The Medicare Supplement carrier was contacted; she refused to grant a waiver to
this case. However, Mrs. Johnson’s insurance agent changed her plan from the
Select E to the standard "B” plan. The benefits are not quite as complete, but they do
cover all surgery and while the premium is higher than the Select E plan, Plan B. is
the lowest price plan that would cover what she needed.
     After surgery on both eyes, the agent then switched her back to Select E plan.
His insurance carrier was aware of his actions and agreed to his actions. Since the
agent did not change carriers, there was no waiting period and her medical costs were


    Salaries of medical providers has risen at double-digit rates, 3 times faster than
inflation of the rate of average non-medical salaries.
    Three/fourth of medical school graduates go into specialized care, and 2/3 of all
physicians are specialists. Please note, however, that the impact of Managed Care
has affected the incomes of physicians, not only specialists, but the independent
doctors also. In 1990 median income for family practitioners was $93,000, surgeons
and radiologists averaged over $200,000. The median net income of private practice
office-based physicians went from $153,620 in 1992, to $148,890 in 1994. Gross
revenues (the amount billed to patients) of all physicians fell even more during this
period of time. Specialists and those in larger offices have compensated for this
decrease in gross revenue by implementing cost-control features in their own
    Managed care also affects the incomes of health providers by promoting the use
of Primary Care Physicians (PCPs) who perform more medical services through gate
keeping activities of referring patients to specialists only when necessary. In most
cases, the PCP has a tendency to treat the patient if he feels comfortable in doing so,
instead of sending the patient (and the fee) to a specialist, even though in the past,
referral was a typical procedure. This gatekeeper feature is dominant in Managed
Care, especially in HMOs, and was one of the major complaints in the early years of
Managed Care. However, the Managed Care procedures now provide for evaluation
of PCP’s on a regular basis and the area of specialist referral is a key item under
    Some doctors feel that “if you can’t beat them, join them,” and negotiate the
discounts of doctor’s fees in return for bringing them into a network. The networks
are aware that most doctors have a substantial patient list, and if they join a particular
network, they will bring many of their patients with them. Therefore, in many cases,
the joining of a network is to the benefit of both the physicians and the network.
    While the payment of a capitation fee - paying physicians a set fee for each
patient enrolled in the system, regardless of how much or little each enrollee uses the
medical services - has also come under criticism by consumers, it actually increases a
physician’s income. The money that he receives for those who do not require
medical services, frees him up to treat those who do require medical services. It also
helps to level the provider’s income by providing a steady flow of income, thereby
allowing more effective business planning for his practice.

                         IS THE TREATMENT NECESSARY?

    Consumer magazines, industry publications, and actuarial studies have estimated
that nearly a third of all professional medical care, including tests, surgery and drugs,
is unnecessary. While it is agreed that some of the statistics can be rather subjective,
depending upon the organization doing the study and estimation, these statistics have
been widely reported.
       One/fourth of hospital patients do not have to be admitted to a hospital.
       Half of the pacemakers installed every year are unnecessary.
       More than half of all hospital stays are not necessary. In view of vacant
        hospital beds the situation is more desperate for hospitals than many think.
        However, more and more medical procedures are conducted in clinics or on
        an outpatient basis.
       People still go to a doctor when they don’t have to, estimate as much as 15%
        of office visits are unnecessary. Some of this can be contributed to the
        advent of the “co-payment” provisions in HMO and insurance contracts.
        Many consumers don’t mind spending $10-$15 to go to the doctor for a

    minor complaint. It can be noted that the copayment provisions has
    increased recently, and the average is now estimated to be approaching $25.
   Approximately half of the coronary bypass operations, of which some
    130,000 are performed each year, really aren’t necessary. While this is
    highly subjective and cardio-vascular surgeons may disagree with these
    studies, even assuming only one-fourth are unnecessary, this amounts to
    millions of dollars that didn’t need to be spent.
   While studies show that 60% of preoperative laboratory screening tests are
    not needed, it should also be stated that many doctors use some tests strictly
    on a precautionary basis, even if results and the present condition doesn’t
    seemingly warrant such tests. Some of this overusage is thought to be
    caused by malpractice concerns.
   Several magazines and Television programs have discussed the amount of
    hysterectomies performed in this country. More than one-fourth of these
    operations are considered as unnecessary.
   A recent medical problem that has developed due to the increasing use of
    computer keyboards, is carpal tunnel syndrome. This requires an operation
    to alleviate the pain, however for a while it became almost a “fad” operation,
    and surveys indicate that approximately 17% were determined to be
   16% of tonsillectomies are considered unnecessary. Many parents who have
    had their tonsils removed when they were young, have the same procedure
    performed on their children, whether they really need it or not.
   Chronic back pain is frequently due to herniated discs, and many surgeons
    perform operations to remove the disc, instead of prescribing lifestyle
    changes which in many cases can alleviate the pain. It is estimated that 14%
    of laminectomies could be eliminated.
   Many people have suffered through a “GI” (gastrointestinal) X-ray studies,
    generally to determine if there is an ulcer or other problem with the digestive
    system. In particular, the upper GI series appears to be overused, as 30% of
    the studies are believed to be unnecessary.

       One of the more startling discoveries was that half of all cesarean deliveries
        are not necessary. Some of this can be attributed to modern parents who
        want their children delivered at the time most convenient to them, but it must
        also be recognized that a cesarean is a much more expensive procedure, with
        the added cost of surgery and a longer stay in the hospital.
       Quality waste, i.e. fix what should have been done right the first time, has
        been estimated to consume as much as 35% of health care expenditures.
    It must be recognized that these abuses are generally not the fault of the
providers, but much of the blame can be placed on the patients who demand the very
best and who seek more treatment and at a higher level than is needed. Hospital
admissions is a good case in point. Many insurers have allowed hospital admissions
without question, but in recent months, hospital admission pre-certification has
become almost a standard procedure. Managed care helps to reduce the unnecessary
treatments and hospitalizations, by reviewing the reasons for the treatments, the
appropriateness of the treatment, and restricting what they consider as excesses.

                               TOO MANY PROVIDERS

    A real conundrum exists regarding how hospitals with nearly a million beds, can
continue to operate with about a third of them empty. No successful hotel or motel
chain can operate with such a high vacancy rate. In any other business, an oversupply
would drive down the prices in an effort to obtain more customers. But this does not
seem to apply to hospitals.

                                          HOSPITAL BEDS IN THE U.S. (000)



       600                                                                                                 BEDS



              1957   1960   1965   1970    1975   1980    1985   1986   1987   1988   1989   1990   1991

    One answer to the puzzle would appear to be that in situations where the
customer pays directly, normal business rules in regards to oversupply applies. But
with hospitals and other similar medical providers, the bills are paid to the facilities
by Workers Compensation companies, employee benefits providers, or similar
insurance providers. The patient (customer) seldom pays any attention to what is
being charged, and in many cases, could care less. Since the customer is insulated
from the effects of pricing, the oversupply does not cause a reduction in cost.
    Another aspect is that many of the empty beds occur in hospitals located in
heavily populated areas. A study by the University of California of 5,732 hospitals
nationally, illustrated that hospital costs are higher by as much as 26% in areas where
hospitals had more than 9 competitors within a 15 mile radius.
    One of the most positive effects of Managed Care, is that it is allows the direct
payers for medical care, such as insurance companies and self-insured businesses, to
direct patients to the most cost effective providers.
    In respect to physicians, in 1972 there were 153 doctors for every 100,000 of
population in the U.S., in 1992 it was 220.

                              THE AGING OF AMERICA

    Presently people age 65 and over make up less than 13% of the total population,
but by 2030, almost 25% of the US population will be age 65 or over. The older
people get the more medical care they generally need. Of the approximately 12% of
the population over age 65, they utilize 30% of health care resources. One of the
most rapidly growing fields of medicine is geriatric care. Not only do the older
citizens need more care; they need more specialized care, as many diseases are more
prevalent in the older generation.
    While the first of the baby-boomers are approaching their 50’s, already
employers are reporting that their health care benefits budgets are increasing due to
aging of the workforce. This opens up the field of Managed care, which can help
employers by establishing preventative programs, and by exercising preventative
    Managed care helps to reduce the increasing health care budgets by establishing
monitoring programs to analyze medical care to make sure that it is necessary, that it
is appropriate for the particular medical situation, and to audit the prices charged for
the medical procedures.


    For over a period of several years, the medical profession has developed a
system that allows for proper billing of services provided, using a coding system.
Every medical procedure is provided with a code and fees are based upon the code.
With the advent of Medicare and the reporting to the federal government, a coding
system was an absolute necessity, as described elsewhere in this text. In 1991, the
government reported that fraudulent health care billing amounted to overcharging
$50 to $100 BILLION.
    While coding is necessary, it gave rise to an overbilling practice, described as
“unbundling” or “fragmentation.” This is accomplished by fragmenting (breaking
down) a medical procedure into its very basic components, and then billing for each
“fragment” individually. Almost any operation, by fragmenting, can increase the cost
from double to six or eight times by adding together each little facet of the procedure,
even though the overall operation may have its own code.
    In the same vein, adding another (often-fictitious) element into a simple
procedure can increase the bill dramatically. As an example: carpal tunnel syndrome
surgery can be accomplished by one surgeon, however by adding a bill for an
assistant surgeon, the cost of the operation increases considerably.
    One of the functions of Managed Care is to review the bills from the doctors and
hospitals in order to avoid any of these abuses. They can also provide an audit to
avoid duplicate billings, and inappropriate billings, whether fraudulent or by mistake.
Complex billing programs by providers is required to comply with local, state and
federal laws, and the complexity leads to a lot of erroneous billings. This review
function care is one of the most financially rewarding aspects of Managed Care.


    The purpose of Managed Care as it is practiced today, should never be forgotten:
“Managed Care is the system in which quality medical care can be delivered at a
reasonable cost.” Has Managed Care performed as anticipated? The answer to that
question may not be resolved for many years, or within a few years, but the trend is
that so far, so good. There are criticisms of Managed Care, particularly in the
operation of the HMOs, but these criticisms are taken seriously by the industry and
many of them are solved rapidly, and some criticisms will be with us for some time.
    At the time this text was being composed, data on health care spending is being
released by the government and the news media. The following information
indicates that at least some of the goals have been obtained.

Growth In Health Care Spending Reaches 36-Year Low

  NATIONAL HEALTH CARE spending increased 4.4 percent in 1996, the slowest
growth recorded since 1960, according to the Health Care Financing Administration's
Office of' the Actuary.
  In a report released by Health and Human Services Secretary Donna Shalala, the
actuaries said spending topped $1 trillion for the first time, increasing to $1.035
trillion compared with $991 billion in 1995.
  The slowdown in growth in 1996, and over the past five years, was attributed to
increased enrollment in managed care, low general and medical-specific inflation,
and "the capacity of health plans to negotiate discounts from a provider system
weakened by over capacity," the report said.
  Spending for freestanding nursing facility care rose to $78.5 billion in 1996,
compared with $75.2 billion in 1995. An additional $9 billion was spent for nursing
care in hospital-based facilities in 1996. Growth in spending for nursing facility care
at all sites slowed from 7.1 percent in 1995 to 5.3 percent in 1996. Long term care
and pharmacy services accounted for an increased share of total health spending, as
the majority share held by hospital and physician services dropped to 54.1 percent in
1996 from 57.6 percent in 1990.
  The report said hospitals are expanding into post-acute home health and nursing
facility services in order to maximize their revenues. About 13.4 percent of spending
for nursing facility and home health services went to hospital-based facilities in 1996,
compared with 7.7 percent in 1990.
  Spending for freestanding home health care agencies rose to $30.2 billion in 1996,
while an additional $7.8 billion was spent for hospital-based home health agencies.
Spending growth rates for home health care from all sites decelerated for the fourth
year in a row, reaching 9.5 percent in 1996 compared with 23.4 percent in 1992.
  Almost half (46.7 percent) of the $1.035 trillion spent for health care was financed
by public health programs. Federal and state Medicaid spending totaled $147.7
billion for 36.1 million beneficiaries in 1996. Total Medicaid spending grew only 5.3
percent, the lowest growth rate since the inception of the program. While many state
Medicaid programs have increased their managed care enrollment, it has not had a
significant impact on costs to date, the report said.
  Medicare continues to be the largest government payer for health care, spending
$203.1 billion in 1996 in services to 38.1 million beneficiaries. Medicare spending
growth declined from 10.6 percent in 1995 to 8.1 percent in 1996. Spending growth
rates for Medicare nursing facility and home health care declined substantially to
under 14 percent in 1996 compared with rates of 50 to 6O percent in the early 1990s.
Medicare spending for managed care plans rose to 10.1 percent of total Medicare
spending in 1996, from 4.8 percent in 1990.
                    -Markian Hawryluk Provider March-1998
   Conversely, at the same time The Associated Press reported that “Healthy
increases are predicted for health-care insurance costs.”
   “Costly health-care mergers, pricey lifestyle drugs such as Viagra and an aging
population are expected to generate double digit increases in insurance costs next
year.” It is expected that coasts will rise the most, from 12% to 15%, in traditional
plans that let the patient choose the doctor, but health maintenance organizations will
increase only 5% to 7%. Prescription drug plans will increase 15% to 22% in 1999.
   Cut-rate prices just aren’t likely next year. Some of the giant insurers and
HMO’s are coping with the expense of mergers, plus are experiencing pressure to
provide Viagra to their customers at $10 a pill. This, combined with the fact that
only 49% of plans made money last year, creates a need for increased premium.

    Kaiser Permanent, for instance, has told employers it will seek increases of up to
12%. It is making up for small increases in recent years. It is also debating whether
Kaiser can afford to start paying for Viagra.
    The cost of health care today and how it affects the individual consumer can be
reflected in the cost of automobiles. For every Ford vehicle sold, $600 of the cost is
represented by employee benefits, principally health insurance. For General Motors
vehicles, it is $900, and for Chrysler, it is $1100.

    CASE STUDY – One Company’s transition of Employee Benefits

     John Westphal is a 56 year old engineer, employed by the same sheet-metal firm
for the past 30 years. He is eligible for early retirement, but one of the major factors
in his retirement decision must be health insurance, its availability and its cost.
     When John joined his company in 1968, he was single and fresh out of college.
One of the things that attracted John to this company was the fact that they offered
health insurance and they paid all of the premium, including his family (if he had
one). John had just gotten married “fresh out of college”, and he and his bride had
plans to have a family. The company plan had a $100 annual deductible, and then
they paid 80% of the next $1,000 and the plan paid the rest. Therefore, the most they
could lose was $900. But being an excellent engineer, John qualified for a
supplemental plan that paid for the deductible, the copayment, and even for glasses
and dentists for him and his family.
     John and his wife had 3 children in the 1970’s, and his insurance paid for all of
the maternity costs, and the company continued to pay the premiums for John and his
     In 1980, the company’s health insurance premiums on its employees started to
climb rather rapidly. In 1984 the company changed their policy so that now John’s
coverage was paid by the company but he had to pay for approximately 25% of the
premiums for his wife and his children. The supplemental program was dropped but
the company provided a group dental plan for its employees.
     In 1987, the company instituted a Section 125 (Cafeteria) plan for the employees,
thereby allowing them to choose what employee benefits they wanted. Benefit
premiums were paid with before-tax dollars. John continued with his Dental
benefits. There was little change in the employee health benefits.
     In 1988 the company changed health insurance carriers in an effort to reduce
their health insurance premiums. In 1989, the received a notice of increase in
premiums, so they again changed their carrier. They maintained the same type of
program, but raised the deductible to $200 per year per person.
     In 1990, they again changed carriers, but still maintained the traditional
indemnity plan with a large insurance company. However their plan now had an
experience rating provision, and with a large number of employees entering their 40’s
and 50’s, in 1991 they had a substantial increase. The company had now grown to
where it was necessary to offer a Health Maintenance Organization option for those
that wished to pay only a small copayment for doctors visits. The result was that the
younger people who liked the copayment and prescription drug cards, changed to the
HMO, those older persons, particularly those with some impairments or illnesses,
stayed with their traditional carrier. Many of them were afraid to change “horses in
the middle of the stream”, or to leave the doctors that had treated them for years.
     Their indemnity carrier instituted some managed care controls also, such as pre-
admission authorization requirement. However, with the indemnity policy covering
the older employees, the premiums increased quarterly. In an effort to keep the
premium down, the deductible was raised to $500.
     In 1992, the company assigned a task force of employees under the direction of
the Human Resources Department, to study the problem of increased insurance costs.
The committee submitted proposals to several companies, both Managed Care
HMO’s and PPO’s, and traditional coverage. Their recommendation was that a large
HMO with a hospital within easy access for a majority of the employees, and with
several local doctors on the staff, is the primary insurer. The company would
continue to pay the premiums for the employee, and 25% of the premium for the
spouse and family coverage. In addition, the plan did allow for a PPO option, with a
$500 deductible, and a network of over 25 doctors in the local area. In an effort to
promote the less-expensive HMO, the company would pay the PPO premium for the
employee, but only 50% of the premium for the family members. The committee
also recommended that the company hire a consultant to determine if the company
could self-insurance and use the services of a third-party administrator to administer
the program. The self-insurance program was not accepted by company management
as they felt they were not large enough and could not commit enough assets to make
it workable. Besides, they liked the idea of someone other than the company
management making the tough claims decisions for its employees.
     The premiums on the employee health coverage continued to rise, but at a
reduced rate. For purely financial reasons, John and his family elected to be covered
by the HMO. They did not like their Primary Care Physician, particularly since
John’s wife had used the same Gynecologist for all of her married life, but her doctor
was not on the PCP list. However, they were able to change their PCP to a female
doctor, making John’s wife more comfortable during her annual checkup.
     John’s wife had lump discovered on her breast in 1995, but her PCP stated that
the mammogram did not show it to be anything other than a fibrous growth, very
common in women of her age. The PCP refused to refer his wife to a specialist. This
was appealed, but to no avail. Therefore, John paid for a specialist out of the
network to evaluate his wife. The specialist performed a biopsy and fortunately the
cyst was not malignant. But John had had enough.
     John had risen to a position of some importance in his company, and he told the
company President and Executive Vice President that unless they could get some
kind of plan where they could choose a specialist if they felt like the needed it, he
was going to resign to accept a position with a competitor that offered such a plan.
The result was a new contract with a large HMO that offered Point-of-Service
coverage, and their network of specialists was quite large (and included his wife’s
former gynecologist).

    1. The concept of pre-paid medical services is credited to
       a. Metropolitan Life Insurance Co.
       b. Aetna Healthcare.
       c. Kaiser - Permanente Medical Care program.
       d. Washington State.

    2. The health market is inelastic because
       a. cost does not rise with increasing volume.
       b. it is too big and has too much money.
       c. it is controlled by doctors.
       d. hospitals have too many beds.

     3. The leading precursors of death according to published statistics are
        a. Overnutrition, handguns, occupation and unintended pregnancy.
        b. tobacco, alcohol, injuries, and gaps in prevention.
        c. automobiles, smog, alcohol and global warming.
        d. gaps in screening, high blood pressure, inadequate access to care and over

    4. The purpose of a health insurance company is
       a. to create HMOs.
       b. to sell insurance by keeping premiums high and not paying claims.
       c. to sell insurance by keeping its premiums low.
       d. to make policyholders use its services more.

    5. Managed Care is
       a. a fancy term given to HMOs.
       b. where doctors treat the patients in their offices.
       c. not working as insurance costs keep climbing regardless.
       d. the system in which quality medical care can be delivered at a reasonable

    6. During recent surveys which was considered the WORSE value for
       A. poultry
       B. cars
       C. television
       D. hospital charges.

    7. In 1995, the occupancy charge for hospitals was
       A. 100%.
       B. 59.7%
       C. 25%
       D. 95%

8. Various technical publications and actuarial studies have shown that
   A. nearly 100% of all professional medical care is necessary.
   B. nearly a third of all professional medical care is unnecessary.
   C. almost everyone goes to a doctor only when the absolutely have to.
   D. 95% of all the pacemakers installed each year, is necessary,

9. A primary care physician
   A. will send more patients to specialists than other private physicians.
   B. is only used in emergency rooms.
   C. will treat more patients instead of sending them to specialists.
   D. is not used by Health Maintenance Organizations.

10. Ajax manufacturing has a traditional indemnity group health insurance for
     its employees. The premiums have jumped considerably over the past 3
     years. What is the worst thing for its employees that Ajax can do?
   A. Charge employees for family health coverage and continue to pay for the
   insurance on the employees.
   B. Institute a Section 125 for its employees.
   C. Change to a Managed Care program with a large HMO.
   D. Drop all other benefits, raise the deductible to $750 and change to a 50/50


1C    2A    3B    4C    5D     6D    7B    8B    9C    10D

                   II.       MANAGED CARE PROVIDERS


     Managed Care Systems all fall into the following categories:
1.      The systems that are used to actually provide health care.
2.      Utilization Management
3.      Those that avoid or prevent illnesses and injuries.
4.      The interceding of the patient in their own treatment(s).


     HMO’s are often considered as synonymous with Managed Care in many
people’s mind. Even Managed Care “experts” will define Managed Care as HMOs.
However, HMOs are only one part of Managed Care, arguably the most important
part, and is actually a method of providing Managed Care. HMOs differ from other
health care organizations in several primary respects.
 1. Medical care is provided on a pre-paid basis, as opposed to the typical
     indemnity agreement offered by insurance companies, that pays for medical
     services after they have been received.
 2. Persons that belong to an HMO plan (members) pay a monthly fee, regardless
     of how much medical care or medical services they receive that month.
 3. In most situations, an HMO provides all types of medical service, including
     physicians, specialists, surgeons, hospitalization, laboratory work, clinics, and
     in many cases, even prescription drugs.
 4. A significant feature of HMOs is that preventative care is often included, such
     as routine physical examinations.
 5. HMO’s are noted (or notorious) for tight operational control. With the
     exceptions of emergencies, that occur outside of the HMO’s service area, or for
     treatment not provided by the HMO, HMO members are required to obtain any
      medical care through the HMO network. This is accomplished, in most cases,
      by first consulting a Primary Care Physician (PCP), who will then refer the
      member to a specialist if the PCP feels it is necessary.
     If one factor could be determined as the primary reason that HMO’s have been
successful in holding down medical costs, it is the extremely tight utilization rules.
     As with any other medical provider, it must be determined as to the type of care
that the network is designed to provide. If an HMO is designed as a “Medicare”
HMO, specialists in geriatrics and other age-related diseases must be on the network.
If the HMO is designed as an employee benefit plan, then family doctors,
pediatricians, Gynecologists, etc., must be available. For Workers Compensation
Managed Care, physicians specializing in trauma and those experienced in Workers
Compensation claims should be available as PCP’s, or at the very least, on the
specialist list for referrals.

                                  TYPES OF HMOs

     Because of the changes in the structure of Health Maintenance Organizations, it
has become necessary to categorize HMOs into major sections, or “Models.” As the
HMO concept matures, subtle changes in the way that Managed Care is provided will
create additional types, but at this time these types of HMOs are evident. The
variations that have occurred from these models are of such importance that the
industry has given them separate names and descriptions, as discussed later.
     The principal differences between these Models are as follows:
     1. The amount of control over the health care providers in the organization.
     2. How the providers are compensated.
     3. Do they treat only HMO members.
     The industry has categorized HMOs into four primary “Models” as follows:
     1. Staff Model
     2. Group Model
     3. Network Model
     4. Individual or Independent, Practice Association (IPA) model



    A Staff model HMO can be classified as a “classic” HMO, or the “original”
HMO, as this was the type of HMO first introduced by Kaiser Permanente. The
health care provider uses the physical facilities that are provided by the HMO.
Hospitals may be owned or leased by the HMO, and include hospital equipment and
    Physicians and other healthcare providers are paid a salary by the HMO, and the
salaries are not contingent upon how many patients are treated. Most of the
physicians are Primary Care Physicians, but also includes specialists. The number of
physicians and specialists depends upon the size of the HMO and the number of
members. Only HMO members are treated in the Staff Model HMO.
    These HMO’s exercise tight control over the healthcare providers, and therefore
are the most effective in managing costs. The providers have no incentive to over
treat patients as all providers are salaried, and their treatment programs can be closely
monitored for efficiency in cost and medical treatment results.
    Staff Model HMO’s range in size, as large as a multi-state HMO (such as Kaiser)
or they can also be located in one building, or even in a hospital.
    However, the Congressional Budget Office reports that a Staff Model HMO
reduces the use of resources by nearly 20 percent, while the less restrictive models
barely reduces the use of resources at all.


  The Group Model HMO resulted primarily from reaction by providers, who saw
the Staff Model HMO as a threat to their livelihood, and to the medical profession as
a whole. As a defensive measure, providers organized into large professional
associations (“P.A.’s”). This allowed them to negotiate their fees and services with
the HMO on a basis of strength in numbers.
  The Group Model HMO is usually a corporation that performs all of the duties of
an HMO with one important exception; it cannot actually practice medicine. The
HMO must, therefore, negotiate with these large professional groups, what medical
services will be required, and the fees that they will pay for these services. The

contract with members of its organization to provide the number and type of
physician necessary to provide the types of services needed and contracted for with
the HMO. They provide the necessary hospital services, they pay their providers, and
they provide facilities for the contract physicians. In effect, the professional groups
become the service-rendering arm of the HMO, and the HMO performs the
marketing and some of the administration.
   Whey would these groups need and HMO? The HMO provides all (or at least
most) of the patients for the providers. They can negotiate for payment amounts and
for various operational procedures necessary for the success of the HMO.
   An HMO is usually not limited to a contract with only one group practice, and
may contract with several such organizations. However, they always contract with
large multi-specialty practices so that more services can be offered to its members.
   The Staff and Group Model HMOs continue to lose market shares, and the Group
Model shares most of the patient criticisms of the Staff Model.


   Network Model HMOs contract for all of their services, both hospital and
physician groups. Similar to Group Model HMO’s, they contract with physicians to
provide healthcare services, however they will contract with physician groups of all
sizes, including one-doctor offices. The providers continue to operate out of their
own office or that of the group to which they belong, and they are allowed to
continue with their private practice. Many provider groups will contract with more
than one HMO, and still continue their fee-for-service practices.
   Hospital services for their members are handled on a contractual basis with local
hospitals. Even though the control exercised by the Staff and Group Models is not
present with the Network HMOs, in many respects the Network Model has been just
as successful. Some of the larger health insurance companies have elected to form a
Network HMO with allows them to compete with older and more established Staff or
Group HMO and to do so with a minimum of organization time.


    (An IPA is also known as an "Individual" Practice Association in some areas).
    To classify the IPA Model HMO as "loosely constructed" is an understatement.
To many, it vaguely resembles an HMO, but still maintains some vestige of Managed
    The IPA Model is an association of physicians (and other healthcare providers) in
individual practice or in practice with a small group of doctors. These providers
contract with the HMO to provide medical services to its members with medical
services as contracted with the HN40. There is little control as to procedures or costs
as the percentage of HMO members treated by the provider is small compared to
their usual private-practice patients. In most cases, the providers continue to work
out of their own offices.
    An IPA offers tremendous flexibility to providers, as an IPA provider can belong
to more than one IPA, may belong to one or more PPO network, they can still
contract with other HMO's. In addition, they continue to develop their private
practice. '
    Obviously, the HMO has relatively little control over the utilization decisions of
these providers, but since the providers are the owners of the IPA, financially it
would not be wise to over treat the HMO members.
    It would seem that there is little relationship to an HMO, however the IPA
physicians are generally paid on a "capitation" basis whereby the provider is paid a
flat fee per member each month regardless of how much medical treatment the
member receives. If the provider is unable to provide treatment and a specialist is
needed, the specialist can negotiate their own fee for their services.

CASE STUDY: Victim of an IPA/HMO

     A thirty-four-year-old mother of one and a patient of a southern California IPA
HMO apparently was a victim, of an IPA HMO contract that made her doctors
individually responsible for the cost of almost every test and referral they ordered.
Joyce’s tragic death and the subsequent medical malpractice trial against her HMO
doctors garnered nationwide news coverage, including a segment on “60 minutes.”
    Joyce Ching's two primary-care IPA HMO doctors, according to the contract they
signed-with their IPA, had to pay directly for every test or specialist referral they
ordered, up to five thousand dollars per patient per year. They were paid a flat fee of
twenty-eight dollars per month by the IPA for each patient assigned to them,
significantly-more than the usual eight to thirteen dollars per month primary care sub-
capitation that was standard at that time for IPA HMO doctors in southern California.
In exchange for receiving this increased capitation payment, Joyce’s doctors had
agreed to take on the individual risk of her medical expenses, they did not share in a
risk pool.
    On Aug. 14, 1992, Joyce visited her IPA HMO primary-care doctor with
complaints of abdominal pains, abnormal bowel movements and rectal bleeding.
During pelvic exam, her doctor noticed a “mass posterior” to Joyce’s uterus. She
asked for a referral to a specialist, but the PCP ordered a pelvic ultrasound and a pain
    The ultrasound could not find a source for her symptoms and the painkiller didn’t
work, so 5 days later, she again asked her doctor for a referral to a specialist. Her
PCP said she had to have another office visit with him before he would refer her to a
specialist. Two weeks later, she called again and stated that she was still having the
symptoms and wanted a specialist. She then made an appointment with her doctor’s
partner, as her PCP was not available. The new doctor changed her diet and ordered
a series of blood and stool tests. He also refused to authorize the referral request and

did not schedule a follow-up visit. 7 weeks later, still having the symptoms, she
pleaded with both doctors for a referral to a specialist, but to no avail.
   Joyce and her husband then went to the PCP’s office and begged for a referral.
After refusing again, the PCP then agreed to order a barium enema x-ray as her
husband refused to leave until the situation was resolved. The x-ray showed that she
had colon cancer.
  On November 2, 1992, Joyce finally got a referral to see a specialist. She was
referred to a gastroenterologist (an internist who sub specialize in the intestines and
digestive organs). After examining her, the specialist arranged to have Joyce
admitted to the hospital that day. Three days later after preoperative preparations and
tests were completed; a surgeon removed a tumor the size of a fist from her lower
colon. But it was too late; the cancer had already spread and would kill her a few
months later.
  During the trial against the HMO doctors, Dave Ching's Attorney presented medical
evidence that if Joyce had been referred to a gastroenterologist soon after her initial
August 14 visit to Dr. Gaines, such a specialist in the digestive tract, more likely than
not, would have started an investigation that quickly would have discovered and led
to the removal of her colon cancer. If her cancer had been removed by the end of
August 1992, as the expert witnesses who testified at the trial claimed was the proper
and typical amount of time- that an average gastroenterologist would have taken to
make the correct diagnosis, the odds would have favored Joyce being alive today.
  Furthermore, her attorney argued that the reason she was not referred to a
gastroenterologist was that her IPA HMO doctors didn't want to spend the money out
of their own pockets to pay the specialist for his examination and the expensive tests
such specialists often order.
  The attorney for her two PCP’s offered a different version of the events. He argued
that Joyce's initial visit was actually prompted by ovarian discomfort and symptoms
of irritable bowel syndrome. The mass Dr.Gaines felt posterior to Joyce's uterus was
actually benign uterine fibroids, which was confirmed by the pelvic ultrasound
examination. The doctors' attorney also argued that even if the cancer had been
discovered on Joyce's first visit, it would have been too late because the tumor had
already metastasized.
  The jury awarded Dave Ching and the Chings' four-year-old son almost three
million dollars in a verdict against their HMO doctors. The Chings' attorney, Mark
Hiepler, commenting on why the case was settled in their favor' said that the "jurors
told me later they couldn't believe this was how HMOs work."

                                 CARE MANAGER

     The “Care Manager” concept is relatively new, and is a compromise between an
HMO and a Point-of-Service plan. Basically, it is an IPA model HMO that allows
patients to choose either full coverage under an HMO or to pick their provider from a
list of providers, normally a smaller network that a typical PPO. Generally, if the
patient uses the HMO concept, the co-payment may be eliminated, or at least
reduced. If they want to pick their own provider from the list, they may be subject to
a deductible and a co-payment. The uniqueness of this plan allows the patient to pick
which plan they will use at the time they will need the provider services.
     The Care Manager plan is sold almost exclusively as an employee benefit and
the premiums are lower than a FFS, POS, or PPO plan.

                             MEDICARE HMO
    "Medicare HMO" is simply an HMO that accepts only persons on Medicare,
both those age 65 and older, and those under 65 receiving Medicare because of
disabilities. It may be any of the Models listed above, but it also has its own
    If a Medicare Beneficiary enrolls in an HMO, the Beneficiary is no longer on
Medicare. To be approved by Medicare, the IB40 must furnish all of the medical
services provided by Medicare, plus those services provided by a Medicare
Supplemental policy. The HMO may provide additional services, and many do; for
instance many provide routine checkups that would not be covered under Medicare.
In some states the Medicare HMO provided prescription drugs that would not be
provided under Medicare, or under most Medicare Supplement policies-.
    In most Medicare HMO's the Medicare beneficiary does not pay a premium to the
HMO, but continues to pay the Part B Medicare premium as he would have paid had
he remained on Medicare. The IM40 is paid a contracted sum for each Medicare
beneficiary that changes to the BA40. The sum paid can vary from $300 a month, to
twice that
amount or more, depending upon the geographical location and availability of
medical care.
    In today's market, the HMO is rapidly taking over the need for Medicare
Supplements, to the point that in some geographical areas, the HMO "owns" the
supplemental market. In some locations, the IB40s organize Senior Clubs, sponsor
outings, provide club houses for social functions and become heavily involved in the
social life of the Beneficiaries.
    In many retirement areas, HMOs have become popular because of the lack of
out-of-pocket expense (no need to purchase a supplement), and they provide some
prescription drug programs where there is none available otherwise. Many observers
are positive that in the not-too-distant future, Medicare will be available only in some
form of HMO.

                       INTEGRATED DELIVERY SYSTEMS

    The Integrated Delivery System refers to the merging of the methods of paying
for health care, and can be used when referring to several different organizations.
The delivery of medical services is integrated by uniting groups of doctors and a (or
several) hospital(s) into one cohesive unit, or one organization. A Staff Model HMO
which owns its own hospital and employs its own physicians, is an example of such
an integrated delivery system.
    Staff-model IB40s are considered fully integrated, both vertically and
horizontally. Vertical refers to the ownership of the hospital and (employee) the
physicians. Horizontal means all of the services that they offer and the financial risk
that they assume, i.e. vertical means the entity owns the hospitals and employers the
physicians. Full horizontal integration would mean complete range of medical and
claims services managed intensively through utilization management, gate keeping,
data management, and assumes full financial risk by providing both physician and
hospital care for a tee per person (capitation fee). Kaiser Permanente is an example
of a fully vertical and horizontal integrated delivery system. A Group Model HMO
that does not own its own hospital would not be a fully vertical delivery system.

                                 GRADING AN HMO

                               “QUALITY” OF SERVICES

    Many persons are concerned about “Quality” of the care they receive from an
HMO, although the individual’s definition of quality varies widely from person to
person. Regardless, this is the major concern of most persons contemplating joining
an HMO.
    One of the most publicized concerns of HMO members - and the press blew it
completely out of proportion - was whether the doctors had a financial incentive to
under treat the patients. Since the general public was unfamiliar with “capitation,”
this method of compensation was perceived negatively as an “evil” thing. If doctors
were paid to treat a person regardless of whether they even saw that person or not, the
doctor would be paid regardless of how much medical service was provided. If a
doctor had to share part of his capitation fee with a specialist, this would entice the
doctor to not refer patients so they could keep the entire fee. While there may have
been an incentive to under treat, in actual practice it rarely, if ever, happened.
    In the first place, Doctors are highly trained professionals, most of who take the
Hippocratic Oath very seriously, and who are genuinely concerned about their
patient’s health. Many take any health reversals or improper treatment personally,
and consider it a personal failing and they feel they have not done their job properly.
    Doctors are also pragmatic and realize that if their patients are healthy, their
patients are well satisfied and will return when more medical care is needed.
    HMO’s all have procedures to handle complaints, and if a doctor receives too
many complaints, they could stand a chance of being terminated with the HMO.
    Besides, if a patient was under treated, they would eventually return and would
require even more treatment making it economically unsound to under treat.
Logically, it is not economically sound to under treat any patient.

    CASE STUDY: A Satisfied Customer
     Brian was a newspaper columnist, well known in his community. His newspaper
came under new ownership and he was offered a traditional insurance plan, a PPO, or
an HMO plan run by PacifiCare. He elected for the HMO because “it provided 100
percent coverage.” Further, he could continue to see his same doctor, as he was an
approved Primary Care Physician with PacifiCare. Brian felt that he had made the
right choice, as he only had to pay a small fee when he went to see his doctor.
     About a year after joining the HMO, he suffered a heart attack at work. He
fainted in his office and when he awoke, he found that he was in a private room
diagnosed as having a major heart attack. When he was stable, he was transferred to
an area hospital noted for special expertise in cardiology. A well-known cardiologist
reviewed his records and told him that he needed “stents” (devices that hold arteries
open) in tow of his coronary arteries, one immediately and one in a 2 weeks.
“Meanwhile I’m hearing nothing about insurance or payment. All I know is that I’m
in a beautiful private room in a famous hospitals getting trillions of dollar of care,
with the magic figure of 100 percent stuck in my mind.”
     After the 2d stent, he was discharged, but had to return later when it was found
that his bone marrow had been poisoned by his heart medication. He stayed in the
hospital for a week, and then was discharged, well and healthy.
     Brian described his hospital care as first class, and the medical tab for his
treatments was around $250,000. Under his old insurance plan, he would have had to
pay about $50,000.
     His experience with managed care demonstrates that excellent care can be, and
is, delivered by an HMO. His doctor considered his care as relatively
straightforward, a quick easy diagnosis, followed by standard medical treatment.

                               CHOICE OF PHYSICIAN

    One of the biggest perceived negatives that new HMO enrollees have to
overcome, is that they must choose a single primary care physician (PCP) who
controls all referrals for hospital and specialist care. Under a staff or group model,
the number of PCP’s to choose from can be quite small. In network and IPA models,
there are a larger number of physicians over a larger geographic area. However,
many people hate to give up the doctors they have been seeing for some time but are
now outside of the network.
    If enrollees do not like their doctors, they can request a change. Those providers
who are paid a salary (group and staff model physicians) aren’t hurt financially, but
an IPA physician may be less inclined to make a patient unhappy if the patient is
wanting a referral for more specialized care.

    Part of the problem, conjecturally if not actually, is that the doctor has a financial
incentive to limit care, but the enrollee does not. One solution is to educate enrollees
as to the care that they actually are entitled to.
    A co-payment helps to create a partnership between the patient and the doctors,
especially since the co-payment fee for a specialist is higher than with the PCP. Care
must be exercised, however, that the co-payment is not so high as to discourage
    Originally, the co-payment for a PCP consultation averaged $5.00, but a recent
survey shows that presently a $15 co-payment is becoming the norm, and many
experts feel that it will soon reach $25. The reason for this increase is thought to be
overutilization because of the lack of financial incentive of the enrollee to avoid
unnecessary medical treatment, and the inclination to “run to the doctor for the

                                 ACCESS TO PROVIDERS

    One of the drawbacks to an HMO for those that travel outside of the immediate
HMO area, is that virtually no coverage exists outside of the geographical area of the
HMO (except for emergency care, and then notification must be given). Also, at the
present time, the definitions of “emergency” vary from plan to plan, to the point that
Federal intervention in this definition is being considered by Congress. Since most
hospitals have adequate capacity, the problem becomes that of access to providers.
This problem is two-pronged:
    Are the HMO physicians located in a reasonable geographical area, easily
available to the enrollees? A group employer should try to establish the area in
which the majority of employees reside, and the location of the doctors within that
    Are there enough physicians to service the HMO’s enrollees? One of the major
reasons for dissatisfaction with HMO’s is the waiting period that an enrollee must
suffer before being able to see their doctor. Americans are used to immediate
medical attention.

                         COMPARISON OF WAITING PERIOD
Medical Care           HMO - Staff Model              Traditional FFS with PPO

Nonurgent                       7 days                        1 to 4 days
Physical Examination            30 days                       1 - 14 days
Urgent referral to specialist   3 days                        1 - 3 days
Urgent OB/GYN                   7 days                        1 - 7 days
Non urgent OB/GYN
with referral from PCP          30 days                       NA
Routine OB/GYN exam             12 weeks                      1 - 3 weeks
Urgent Care                     Within 24 hrs with            Within 24 hours
                                referral from PCP
Emergency Care                  Nearest emergency room        Nearest Emergency


    Traditional insurers have a lower expense ratio, 6.9% compared to HMOs
average of 10%.
    HMOs earn 8.3% profit on every dollar or premiums, indemnity insurers earn
only 3.7% profit margin on their premium dollar. Managed care organizations spend
proportionately less on providing medical care per premium dollar than do indemnity
insurance payers. A 1995 CBO study concluded that Managed Care organizations
reduce use of health care services by 8% when compared with a typical indemnity
    HMO members generally experience lower hospital admission rates and lengths
of stay, than indemnity plan policyowners.
    HMOs use fewer expensive procedures, e.g. average Managed Care patient spent
2 fewer days in intensive care and 5 less days in the hospital, with financial
differences approximately $4,000 for average patient.

    National Cancer institute found that a study of breast cancer surgery results
found that survival rates were “significantly worse at HMO hospitals than at large or
small community hospitals.”
    HMOs do provide as much diagnostic and preventive care, if not more than,
indemnity programs.
    A 1996 report found that significantly higher dissatisfaction among sick
members of Managed Care plans as opposed to fee-for-service plans in the wait for
appointment and the doctors interest in the case. Many doctors feel that “Managed
care and rationed care are synonymous.” (Dr. Warren Francis, Letters to the Editor,
New York Times, Feb. 26, 1995.)
    Younger and healthier people have more interest in HMOs as they have no
particular relationship with a family doctor and they like the preventative care and the
reduced premiums. This has left the fee-for-service and indemnity companies with
those who are older and of poorer health.


    The basic similarity of HMOs and PPOs is that they both consist of healthcare
networks. However, with a PPO the providers are paid for the medical services they
actually provide, as if they were in a fee-for-service system. The principal difference
between the PPO and the fee-for-service (FFS) system is that the providers cannot
charge whatever they wish, as they have contracted with the PPO to accept a pre-
determined fee for the services rendered. In most cases, the fees are discounted from
what they would normally charge for the service. In addition, providers usually agree
to certain Managed Care procedures imposed by the PPO.
    The employee benefits plans or individual contracts utilizing PPOs have a
financial incentive to use the network. The coinsurance payment required by the plan
will be markedly reduced if non-network providers are used. As an example a
traditional plan will offer 80% coverage for medical bills (after a deductible, or
without a deductible, depending upon the plan) if network providers are used. If non-
network providers are used, then the plan will only pay a reduced amount, such as
60%. This would provide sufficient inducement to receive treatment only from the
network providers.
    An additional incentive frequently arises as the network providers have all
contracted for the amount that they will charge for the medical procedure. A non-
network provider has no such contract, and can, and frequently will, charge more
than the plan allows. The user of the plan is responsible for the amount charged by
the provider and that was not paid by the plan.
    With the pre-determined fees and the Managed Care procedures imposed on the
PPO providers, PPO medical care costs have remained lower than the FFS costs. The
HMO’s experience a lower cost for medical care than do PPOs, however the PPO
users are generally much more satisfied with their plan than those covered under
HMOs. The principal attraction appears to be the fact that the PPO member can
choose a provider from a large number of providers, and they can also choose their
own specialist, regardless of what their doctor wants. The amount of “freedom of
choice” that a PPO user loses when they leave a fee-for-service plan, appears to be
acceptable in these situations.
    PPOs can be sponsored by a wide variety of businesses and organizations. Most
of the PPOs are sponsored by insurance companies, but there is a rapidly growing
group of independent investors who own PPOs. Also, hospitals, doctor groups (or an
arrangement between both), HMO’s, or Third Party Administrators (TPAs) own
PPO’s. In some cases, smaller PPO organizations band together to form a larger PPO
that can offer more services.
    Most PPOs attempt to offer the broadest range of medical care possible,
including hospitals, laboratory and x-ray facilities, and even mental, vision and dental
care. By offering all of these services, there are fewer incentives for patients to go
outside of the network and the easier it is to control costs.
    Originally, PPO providers were paid on a contractual pre-negotiated discount
system. However, some providers would raise their rates until the actual amount they
received was equal to (or more than) the fee before the discount. Obviously this was
counterproductive, so a system of fees, pre-negotiated, was developed based on the
numeric codes used by physicians to describe the medical procedures they provide to
their patients.

    There are two code systems, the Current Procedural Terminology (CPT), which
described the procedure, such as suturing, injections, etc., and the International
Classification of Diseases, 9th Edition (ICD-9), describing the diagnosis.
    A price is assigned to each code, and this price is the amount that is paid to the
    Medicare with its ever-increasing amount of paperwork, adopted the RBRVS
(resource based relative value scale) in 1992 as a method of compensating
physicians. Because of the growing number of Medicare recipient’s providers are
familiar with the system. One advantage of the RBRVS system is that it takes into
consideration services other than treatments, such as consultation, examinations, etc.
This was appreciated by those in general or family practices as they spend more time
with their patients than do the specialists.
    Hospitals obviously use different systems, as their billing procedures are much
different. Originally they used a negotiated discount, but have now adopted one of
the following systems:
     Per Diem: A set fee is paid for each day a patient stays in the hospital,
        thereby eliminating any reason to raise fees to compensate for any discount.
     Tiered Per Diem: A set fee is paid for each day a patient stays in the
        hospital, but the fees vary according to specialty area within the hospital. It
        may also upon the number of PPO patients in the hospital.
     Per Care (Diagnosis Related Group): Medicare introduced the DRG method
        in 1983, and it has been adopted by many private hospitals. The amount of
        care that is necessary to treat each patient is determined, and the hospital is
        then paid on that diagnosis instead of being paid for the actual amount of
        care that was received. This led to the “sicker and quicker” concept of
        getting patients out of the hospital before they are completely cured. In turn,
        this produced a rash of regulations and the problem appears to have been
        mostly solved. Providers are sensitive to any adverse publicity as a result of
        being discharged too quickly while under the provider’s care.

    CASE STUDY: Buyers Beware of PPO’s
     Leo, a 58-year old semi-retired man purchased an individual Preferred Provider
Plan, principally because a PPO plan was considerably less than traditional plans, and
the network included both major hospitals in his hometown, and there were over 160
participating doctors in the county. After a $500 deductible, the plan paid 80% of all
medical costs until the out-of-pocket was $3,000, however the providers in the
directory must be used, except for emergency. If out-of-network providers were
used, the plan only paid 60% of the “approved amount.” The agent explained that the
approved amount was the amount the insurer paid the provider for the particular
medical service, and it was generally quite a bit lower than the doctor’s normal
     Within a year of issue, Leo developed cancer of the larynx. Because of the
location of the tumor, he had to have all of his teeth removed and the oncologist and
his family doctor both notified the insurer that they were removed for medical
purposes as he could not get radiation treatment unless his teeth were all removed.
The insurer refused to pay for the teeth removal as they considered it as “dental”
treatment. This was appealed, but the insurer refused to budge, and the Department
of Insurance backed up the insurer. However, the insurer did pay for the false teeth.
Leo had made sure that his doctor, surgeon, oncologist and hospital were all
approved provider.
     After Leo returned from the hospital with tubes sticking out of his throat and
with a hole in his throat, he desperately needed home health care. The hospital sent
their home health care nurses to take care of these needs; at least Leo assumed they
were from the hospital as they had the same name as the hospital.
     After receiving home health care, Leo started getting bills from the home health
care agency. He checked with is agent who made repeated telephone calls to the
home health care agency and the insurer in an attempt to determine why he was
getting these bills. Eventually, Leo got a nasty letter from a collection agency asking
for approximately $2500 for home health care.
     During this period his wife had been cashing small checks, without really
understanding what they were for. Needing cash, she felt that she should take what
she was receiving to help with the bills.
     Six months after receiving home health care, the agent discovered that the home
health agency was not an “approved” provider, so the insurer was paying only a small
amount of what the agency billed. For example, a $240 service was billed, the
insurer only approved $74, and they paid $44.40 to Leo. Leo then received a bill for
$195.60. To Leo, it would seem that if a patient went to the “Acme” hospital, an
approved provider, and Acme hospital provided home health care from the “Acme
Home Health Care” agency after he left the hospital, how was he to know that the
home health care agency was not approved. The insurer responded that (1) in the
front of the provider book, there are specific instructions for the policyholder to
check with the provider to make sure they were still “approved” and (2) many home
health agencies are privately and independently owned, even though they are allowed
to use the name of the hospital, and they either do not wish to be approved, or don’t
meet the insurer’s qualifications.

    PPO providers must contract for and agree to utilization management controls.
These controls pertain to practice patterns, outpatient procedures, hospital care, and
specialized areas such as chiropractic care, physical therapy and mental health.
These utilization procedures consist of analyzing treatment patterns, and if the pattern
falls outside of the norm for the same or similar medical situation, this information is
provided to the participating providers. This allows the providers to compare their
treatment of a specific condition, and the results thereof, with that of their
contemporaries in their geographical region or in their area of specialty.

                             POINT - OF SERVICE PLANS

    For the user, it can be difficult to differentiate between PPOs and Point-of-
Service (POS) plans, as they are actually HMOs. POS plans can provide for out-of-
network coverage with a penalizing reimbursement differential so as to direct patients
to their network. Providers may be compensated on a variety of systems, either per-
patient capita system, or under some contractual fee arrangement.
    Points-of-Service name arises because members can access medical care at a
point of service other than their PCP. Since the choice of physician restriction posed
a major barrier to acceptance of HMO’s by the members and by the general public,
POS plans have grown to be very popular and most of the recent growth in HMO
enrollment is from Point of Service plans. And importantly, they have contained
healthcare costs as well as HMO’s.
    CASE STUDY: Obtaining Referrals in an HMO
      The experience of George Baker illustrates the difficulty patients frequently
have obtaining referrals outside their HMO.
   Through a company in the Los Angeles area for which he was a broker, George
had belonged to a local staff-model HMO for many years, but he had rarely seen a
doctor. He'd occasionally gone to the walk-in clinic with a cold or a sinus infection
and seen a different doctor each time. He had never established a relationship with a
primary-care physician. At age forty-four, he began noticing that his right leg seemed
slightly numb and weak during his daily three-mile jog. In a couple of months, he
detected a slight weakness in his leg even when he was not jogging.
     He then made an appointment with the primary-care internist assigned to him by
the HMO. The doctor examined George, found no abnormalities, and told him the
weakness was caused by irritation of a nerve root in his back from excessive jogging.
He was told to give up jogging for a month, and the weakness should get better.
     George did as the doctor recommended, but at the end of the month when he
resumed jogging, his right leg seemed even weaker and cramped easily. George
asked the internist to refer him to a neurologist, but the doctor said George simply
needed some physical therapy on his back. After the four physical therapy sessions
his HMO approved, George was no better.
     George wanted to see a neurologist. He went to the HMO's patient services
department and asked, nicely at first, - for a referral. The clerk, trained to handle
such requests, told George that only a primary-care physician could make a referral to
a specialist; he would have to see another HMO internist if his primary-care internist
didn't want to send him to a neurologist.
More than three weeks later, another HMO internist examined George. He told
George that the initial diagnosis was correct and a referral to a neurologist was not
indicated at that time.
     Based on his own observations and intuition, George knew better. His leg was
slowly getting progressively weaker. His back did not hurt. How could he have
nerve irritation without any pain? Something was wrong.
   This time at the patient service department, George demanded to see a neurologist
this week. Three clerks, an administrator, and an hour later, George was reluctantly
given an appointment with an HMO neurologist, for six days later.
   The neurologist conducted a number of tests, including a MRI scan of George's
lower back, all of which were normal. An electromyography (EMG) and a nerve
conduction velocity study of both legs, however, showed problems with the nerves in
George's right leg and, unexpectedly, some mild abnormalities in the nerves going to
his left leg. When all of the test results were available, the neurologist called George
in for a conference. In his office, he told George that he believed George had a form
of amyotrophic lateral sclerosis, or Lou Gehrig's disease. Unfortunately, there was no
cure or treatment;, it would slowly completely paralyze him; and it probably would
be fatal within three or four years.
   A few weeks later, after his mind had cleared somewhat, he decided to learn more
about AILS before he planned the rest of his apparently dramatically shortened life.
He visited the library and read all he could on the disease. The more he read, the
more, he doubted this diagnosis. Many of his symptoms and their progression, were
similar to those of the usual ALS cases, but in many, they were not
   His research revealed that a world-renowned expert in ALS, Dr. Brown, worked
less than fifty miles from the University Medical Center (UMC). George: saw Dr.
Brown the following week, incurring a consultation fee of $250. In seeing Dr.
Brown, George utilized the point-of-service (POS) option that was part of his HMO
policy, which allowed him to see any physician outside of his HMO without prior
authorization. When he used the POS option, he had a. $300 yearly deductible after
which his HMO would reimburses him 70% of his medical expenses. Using the POS
option, he didn't have to wait to see if his HMO would pay for the consultation with
Dr. Brown.

    After Dr. Brown had taken a complete physical examination, and reviewed
George’s records from the HMO neurologist, he informed George that he didn’t have
ALS. That was the best news money could buy.
   The news was not all good, though. Dr. Brown's opinion was that George actually
had a rare condition called an arteriovenotis malformation (AVM): his arteries and
veins had grown together in an uncontrolled manner and formed an enlarging mass
that was pushing on the nerves of his spine and robbed it of its vital blood supply.
This condition could become quite serious, leading to paraplegia.
   Dr. Brown recommended that George undergo a specialized, somewhat risky
angiogram of the arteries surrounding his spinal cord to confirm the diagnosis. He
said that a radiologist at UMC was the only doctor in the Los Angeles area who was
experienced at performing this rare angiogram.
   George scheduled the angiogram with the radiologist for ten days later. Including
hospital charges, it would cost a little over five thousand dollars. The procedure was
completed without complications. George did have the rare AVM and knew he'd be
facing surgery.
   With his POS HMO policy, George was able to schedule his difficult spinal
surgery with one of the best spinal surgeons in the country without having to get
approval from his HMO. Tapping his savings, he paid his 30 percent share of the
nearly thirty thousand dollars the surgery cost, his HMO paid the rest. The surgery
was a success. George's recovery was complete and uneventful.


    Exclusive Provider Organizations are PPOs that provide no coverage outside of
the network. To the consumer it is difficult to differentiate between an EPO and an


    The PHOs meld a variety of providers to provide health care services for
insurance companies and employers. In 1996, 10 percent of all medical groups with
more than 50 doctors were owned by hospitals.
    Also, 69% of physician groups, 62% of home health agencies, 55% of Managed
Care organizations and 46% of skilled nursing facilities were involved in these
integrated health systems.
    Some provider groups have decided to go directly to employers and offer their
services, thereby bypassing the HMOs. This way they will be rewarded for keeping

costs down, while if they were with an HMO, the HMO would keep the savings for
    Hospitals have formed subsidiaries that are designed to bring the physicians into
a closer business relationship with the hospital without making them employees.
    The Physician-Hospital Organization (PHO) brings physicians and hospitals
together in a joint business enterprise. Frequently, a PHO consists of one hospital
and many doctors that contract with the hospital to accept their Managed Care
patients. By physicians and hospitals working together, large numbers of patients can
be channeled to certain providers. By forming a PHO, both hospitals and physicians
can create a more powerful contracting entity. A feature of the PHO that can have
powerful influence on Managed Care in the future, is their ability to advance both
vertically and horizontally, and as they evolve, they can be substantial competitors
with HMOs and PPOs in the health care market.
    Physician groups that “capitate” and act as insurers, can eliminate the
“gatekeeper” function of the Primary Care Physician. The gatekeeper function was
found during a survey to be of significant concern to 68% of American consumers.
There is little data available as this is a relatively new arrangement, but it appears that
these groups do not increase the cost of care, but may even decrease the cost because
of the elimination of the gatekeeper function.

                                    CARVE - OUTS

    “Carve-Outs” refers to a plan that is taken from a larger plan providing more
benefits, and provides services only to a special or particular area. Many such
medical services can be “carved-out”, including mental health, dental or vision
benefits, chiropractic, physical therapy, prescription drugs, etc. Usually they consist
of healthcare providers who contract with insurers or HMOs to provide certain
specialized benefits and at a fixed price. These providers are usually part of a loosely
organized provider network.
    One example is a network of cardiologists and heart surgeons, with over 500
members located all over the United States. In order to qualify each physician must
perform at least 150 heart bypasses or similar operations, and to do so in hospitals

that do at least 500 or more of such procedures each year. They are subject to strict
peer review and their mortality rate must be very low in order to participate.
    A PPO or HMO that specialized in a particular type of care may be more
successful at controlling costs for that type of care than a general purpose medical
care network.
    Prescription drugs are the most familiar “carve-out”, as prescription drugs appear
to be approaching 25% of the total medical care costs. In order to contain these
costs, certain options for prescription drugs are available.


    Card plans are the most popular plan. The customers are issued cards to be
presented to a pharmacy (that is part of the network) which has agreed to furnish
drugs at a predetermined discount. Since this is done electronically, administrative
costs are lower and paperwork is reduced dramatically. Some card plans require a
co-payment only, frequently differing from generic and standard brand drugs, and the
plan paying the remainder of the cost. Some plans provide for drug utilization
review, which reviews the drugs and its application, and uses a “formulary”. (A
formulary is list of drugs that covers all, or most of drug therapy that might be used to
cover the treatment offered by the plan. An “open” formulary allows for drugs not
listed, wherein a “closed” formulary restricts drugs to only those on the provider list.)

CASE STUDY: Prescription Card - Frosting on the Cake

    Beth Middleton owns a small business, a dress and fashion shop, and employs 5
salespersons on a full-time basis. It is difficult for her small business to provide
health insurance benefits for her employees, but after doing a lot of shopping, she
finally decided on a PPO that had a sizable list of providers the area. This PPO was
able to work with her on benefits and provided her with a plan at an attractive
premium, but with some exceptions. The principal exceptions were that maternity
benefits were not covered, and prescription drugs were covered as part of the
deductible ($500), and were treated as any other medical expense, i.e. the company
would pay 80% of the prescription drug bills after the deductible was satisfied.
    While the employees were grateful that they finally had some coverage, they
really considered it as "catastrophic" coverage as $500 was a lot of money for them to
pay out of their own pockets every year to satisfy the deductible.

    In an effort to pacify her employees without paying too much for insurance, Beth
was able to find a company that provided substantial discounts for prescription drugs,
and at a cost of about 25% of what it would cost to add a drug card to her benefit


    A mail-order plan allows customers to order drugs through the mail. These
drugs are primarily for maintenance, such as high-blood pressure, allergies, etc. as
obviously they cannot be obtained quickly for medical emergencies. This provides
considerable savings as they can usually be obtained in a larger supply than normal
and the pharmacies supplying these drugs furnish the prescriptions at substantial
Some firms offer a managed prescription drug plan wherein they contract with a large
number of employees and furnish the prescription drugs at a negotiated price.


    Another Carve-out program is for Mental Health and Substance Abuse. It is
necessary to carve-out these plans because either (a) the benefits provided by the
general healthcare plan are too limited, such as being restricted by the provisions of
an HMO; or (b) the employer wants to keep the inpatient benefit for mental health or
substance abuse from being overutilized. An employer may also wish to offer
expanded mental health and substance abuse benefits and at the same time keep
control of the costs. The carve-out allows this.



TYPE OF MANAGED CARE                           PROS                           CONS

Preferred Provider Organization       Many physicians &                Care is least
                                      locations, greatest choice       well-coordinated

                                       Discounted fees for             Unanticipated
                                      using PPO Physicians         expense can be high

                                  Short wait for appointment       Lowest percentage
                                                                   of Board Certified
Non-Network HMO                       Highest percentage of      Routine scheduling
                                      board-certified physicians    can be long

                                      Fewest physicians &              May have to see a
                                      facilities                       non physician
                                      Well-coordinated quality
                                      assurance program

                                      More physicians & facilities Lower percentage
                                      than in network HMOs         of Board
                                                                   Certified Doctors
Network HMO                            Routine appointment             Limits on certain
                                      scheduling is fast               type care such as
                                                                       mental health &
                                                                       physical rehab.
                                      Comprehensive first-             Less well
                                       dollar coverage              coordinated case
                                      High Selection of                Costs of referral
                                      Specialists                      to specialist may
                                                                    be passed on to PCP

                                      Quality Assurance program


    For those who have the choice of a Fee - for - Service (FFS) plans, the following
illustrates the differences to consumers:
* Choice of Doctors: With FFS insurance, you can see any doctor you wish,
anywhere in the country, when you want to. HMOs, on the other hand, are
geographically dependent - they severely limit your choice to a small list of doctors in
a fairly small geographical area around where you live.
* Specialist Referrals: With FFS insurance you can see any specialist you choose
without having to ask permission from your primary-care, gatekeeper physician.
* Out-of-Town Services: FFS insurance will pay for doctor visits or emergency room
visits anywhere in the country, while HMOs are, again, geographically dependent. If
you go to a doctor or an Emergency Room not contracted with your local HMO
because you're out of town, and don't get pre-approval for the visit (often there isn't
time for that), the visit will be reviewed by your HMO and, if judged not a medical
emergency," it may be denied for payment, leaving you to pay the bill.
* Medications:         Many HMOs give their doctors a financial incentive to
prescribe fewer medications or the lowest cost medications. At the end of the year,
doctors who have saved a significant amount of money for the HMO through their
prescribing patterns may get some of the savings kicked back to them as a bonus.
FFS insurance companies do not give their doctors a bonus for prescribing less
medications or less expensive medications which helps insure that you'll be
prescribed the best medication for your problem.
    Conversely, there are reasons why an HMO may be a good choice. While some
members of HMOs have received inadequate health care because of HMO policies,
they're the rare exceptions.

    Here are some reasons for joining an HMO:
* Less Expensive: Joining an HMO can make good financial sense because it means
very low fees for doctor visits and prescriptions with low deductibles.
* Less Paperwork: When you join an HMO you can avoid the frustrations and
confusion of trying to decipher the multiple bills from doctors, specialists, hospitals
and other health-care providers that many consumers experience, With an HMO you
pay a small, fixed copayment for each service and there is no billing to worry about.
    No Unnecessary Procedures: With an HMO you don't have to worry that you’ll
be persuaded to undergo marginally indicated, unnecessary, or even potentially
dangerous test or operations, as can happen when you have FFS insurance.
Remember, that under FFS insurance, the tendency is that you will get too much care.
    Quality Doctors: If you select a high-quality HMO, you won't need to worry
whether your doctors may be under investigation from medical regulatory agencies or
may be incompetent without your knowledge.
    High-quality HMOs have enough doctors to choose from, and have sufficient
liability, that they generally do a decent job of verifying credentials and investigating
the doctors they employ or contract with. The doctors may not be the best in the area,
but they usually are not the worst either. If you're seeing a doctor in private practice,
though, you need to do your own investigations. There is a small, but significant
number of private practice doctors out there who shouldn't be practicing medicine.
The regulatory agencies overseeing doctors are not as vigilant in this respect as the
    And to make it even more significant, the following statistics are interesting:


                                                           HMO/Staff Model         FFS with
Overall Satisfactory                                       70%                     54%
Ease of seeing a doctor of your choice                     50+%                    90+%
Ease of referrals to Specialist                            50%                     90+%
Time spent waiting beyond time of appointment              45%                     46%
Days between appointment and seeing a doctor               56%                     63%
Time spent doing paperwork                                 80%                     45%
Out-of-pocket costs                                        63%                     33%
No complaints or problems                                  78%                     82%
Would recommend their doctor                               85%                     90%
Medical care outcome                                       65%                     65%
Overall Quality of care                                    65%                     72%

    An interesting point that can leave one rather confused, is that while 70% of the
HMO members are satisfied overall with their HMO, compared to only 54% with the
Fee-for-Service with PPO plan, the ease of seeing a doctor and of referrals very
heavily in favor of the FFS with PPO. Waiting time was about equal - one could
surmise that waiting for a doctor has become part of the American culture. The two
big “plusses” for the HMO would seem to be the cost (always, always significant)
and the lack of paperwork. It is most interesting to note that the Medical care
outcome is equal, and the overall quality of care is only slightly lower with the HMO.

    CASE HISTORY: Who’s Responsible in the Emergency Room?

     A pregnant woman in southern California was rushed to a hospital emergency
room with sever lower abdominal pains and vaginal bleeding - almost certain signs of
a miscarriage. After a rapid exam, the ER staff urgently called her HMO to find out
how it wanted her treated. It took two and a half hours before the HMO returned the
call. In an interview with the Los Angeles Times, the ER doctors said that for the
next six hours the HMO and the ER staff argued about who was obligated to provide
care for the patient. Eventually the HMO agreed that she could be admitted to the
hospital she had been taken to. A doctor directing the ER said the HMO’s actions
“appeared tantamount to abandonment.”
                                                   Los Angeles Times, Aug. 30, 1995


    The Employee Retirement Income Security Act (ERISA) was passed in 1974 and
was originally designed to protect pension-plan funds against raids by unscrupulous
labor leaders. It promulgated regulations that safeguards retirement funds, but it also
included a clause which preempted any state laws from regulating employee benefit
programs, including health insurance. That this means is that, under ERISA, an
employee cannot sue an employer-sponsored insurance plan in a state court. This
prevents a dissatisfied or injured employee from bringing a bad-faith lawsuit against
an employer self-insured health plan, such as the type of plan offered by an HMO. It
also stops state laws aimed at protecting health-care consumers on other issues.
    ERISA limits legal remedies of consumers to recovery of “reasonable” legal fees
and restoration of benefits owed to the consumer. The consumer cannot sue for
punitive damages or emotional distress. So, if an employee was originally denied
surgery and consequently lost their house because they had to pay for medical
expenses from their own funds, a later finding by the court that the employee should
have been covered for the surgery, plus attorney’s fees, but not the loss of the house.
    Some attorneys believe that ERISA created an immunity for health insurance
companies. Normally a consumer would need an attorney where ERISA is involved,
however because of the limits ERISA puts on punitive damages, few lawyers will
touch these cases, particularly on a contingency basis.
    To appeal an HMO decision as a result of ERISA, is by arbitration. While this
doesn’t usually make a wronged patient or a malpractice attorney wealthy, it can
cause financial problems for an HMO.

CASE STUDY: ERISA Protecting Negligence
     When nine-year-old Carley Christy was diagnosed with a cancerous kidney
growth called a “Wilms’ tumor,” she was referred to her HMO’s urologist for
surgery. With some research her father discovered that the same university hospital
at which the HMO urologist worked had a multidisciplinary team that specialized in
treating Wilms tumors. He asked for Carley to be treated by them. The HMO
stubbornly insisted that its own urologist (who had never removed a Wilms’ tumor)
do Carley’s surgery, and that if the Christie refused, it would not cover another
surgeon’s bill. Because they know Carley’s surgery had to be done right away, the
Christi’s paid to have the Wilms’ tumor specialists take charge of her and Carley’s
kidney growth was successfully removed.
      The Christies were astonished when the HMO also refused to pay the $47,000
hospital bill, since Carley would have had her HMO-funded surgery there anyway.
With his daughter on the road to recovery, Harry Christie took his case to the
American Arbitration Association, which ordered the HMO to pay the entire cost of
Carley’s treatment (including arbitration costs). Still not satisfied, however, Christie
notified the State Department of Corporations, which, upon investigation, found that
the HMO had failed to provide Carley with access to an appropriate pediatric
surgeon, had retaliated against the family by refusing to pay the surgeon and hospital
bills, and that denial of these services was prompted by the HMO’s own financial
considerations. The State Department fined the HMO $500,000 for its actions.
Los Angeles Times, August 27, 1995

CASE HISTORY: Fighting for a Transplant

     Morris Gitterman lost his wife of 43 years as she died waiting for a lung
transplant in England after fighting a long and hard battle to get on the waiting list for
the transplant. Gitterman feels that his HMO treated her with a “cold-blooded
corporate indifference.”
     An arbitration decision against the HMO after his wife’s death confirms his
     In the summer of 1989, his wife’s pulmonologist told her that he suspected she
had a progressive scarring process in her lungs that would eventually kill her, and the
only treatment was a lung transplant. The family sought and paid for outside
opinions, all of whom confirmed the HMO doctor’s diagnosis and treatment plans.
The Gitterman’s elected to arrange for a pay for the treatment, and one center told
them that she was a possible candidate but she must have a lung biopsy to confirm
the diagnosis.
     The biopsy was done in an HMO approved hospital and supervised by her HMO
lung specialist. As she was discharged, she was told that needed to be on oxygen at
home, but the case manager told them that oxygen therapy was considered “durable
medical equipment” which the HMO excluded. Even though this did not make
sense, the Gittermans decided to pay the $300-$400 a month charge themselves.
     When they asked the HMO to pay for the single lung transplant recommended
by all of the specialists, they were turned down. The HMO considered a one-lung
transplant an experimental procedure, and therefore not covered under the plan.
However, they would cover a heart-lung procedure, as it was not considered
experimental. Even though her heart was in good condition, she had no choice but to
reapply for the heart and lung transplant.
     Realizing that time was getting short, Gitterman wrote to the HMO’s president
and to the state Department of Insurance. The president’s office said they would
review the matter. The Insurance Department told them to settle their differences and
then report to the Department as to the outcome. At this point, Gitterman realized
that the HMO was procrastinating and was using an effective stalling technique. He
finally found a lawyer who would handle the case for him, and who immediately

instituted arbitration. The HMO continued with their stalling tactics, refusing to
agree to an arbitrator and not being willing to expedite the appeal process.
      In the meantime, his wife was being turned down by transplant centers because
she was 61 years old, but they finally found a surgeon in London who agreed to
evaluate her. He was successful in getting his wife to London, and after she was
declared a lung-transplant candidate, she was put on a waiting list. However, there
were no appropriate lungs available in time, and one month later she died in a
London intensive care unit.
      The American Arbitration Association awarded Gitterman $234,314 after
finding that the single-lung transplant is no longer considered experimental and that
his wife was an acceptable candidate for this procedure. Gitterman feels that the
HMO still came out ahead as it did not have to pay for the procedure ($300,000 plus
lifetime care), and under ERISA, it saved money on the award, which would have
gone to $1 million if tried before a jury.
      The final straw for Mr. Gitterman: The HMO refused to pay the London
hospital’s intensive-care bill!

1. Managed Care Systems into the following category(s) except for
   A. the systems that are used to provide health care.
   B. utilization Management.
   C. those that avoid or prevent illnesses and injuries.
   D. isolating patients from their own treatments.

2. The four primary Models of HMOs are
   A. Staff, Group, Network and IPAs
   B. PPO, POS, FFS and Care Manager
   C. Professional Associations, Primary Care Physicians and Workers
   D. Providers, Hospitals, Professional Associations and Specialists.

3. The “classic” HMO with very tight controls is
   A. the Staff Model.
   B. Professional Provider Organization.
   C. the only type of HMO that is still in operation today.
   D. growing faster than any other HMO today.

4. “One of the biggest perceived negatives that new HMO enrollees have to
    overcome is that they must choose a single PCP. A “PCP” is:
    A. a type of HMO that is owned by physicians.
    B. insurance that pays after the medical service has been performed.
    C. a premium payment plan using automatic bank drafts.
    D. Primary Care Physician.

5. A co-payment is
   A. the annual deductible that must be paid before services are rendered.
   B. the amount that is split between the doctor and the hospital.
   C. the amount that is paid to the provider by the policyholder or member when
      they receive medical care.
   D. the premium that is paid every two weeks.

6. A “PPO” is
   A. the primary care physician with an HMO plan.
   B. a Point - of - Service plan.
   C. a group of doctors that incorporate to create their own HMO.
   D. a Preferred Provider Organization.

7. Which type of an HMO is where the professional groups of doctors are the service
rendering arm of the HMO, and the HMO performs marketing and some
    A. Staff Model
    B. Group Model
    C. Network Model
    D. IPA

8. Which type of an HMO will contract with hospitals and physicians, including one-
doctor offices.
    A. Staff Model
    B. Group Model
    C. Network Model
    D. IPA

9. An Association of physicians and healthcare providers in either individual or
group practice, who then contract with an HMO to perform certain services, is called
    A. a Staff Model HMO.
    B. a Group Model HMO.
    C. a Network Model HMO.
    D. an Independent Practice Association (IPA).

10. The type of plan is actually and IPA type of HMO which allows their patients to
choose either full coverage under an HMO, or to pick a provider from a list of
providers, is called
    A. the Care Manager concept.
    B. a Primary Physician Organization.
    C. a Point-of-Service plan,
    D. a Fee-For-Service plan.


1D    2A    3A    4D    5C    6D    7B    8C    9D    10A


    In 1997, several newspapers, including the Wall Street Journal, and other news
reporting media reported the effect of the “Baby-Boomer” generation on the
economy, politics, finances, and in particular, the effect on health care.
    With the Baby Boomers generation starting to turn 50, states are enacting
hundreds of new restrictions as to how HMOs limit care, and these restrictions are a
direct result of the political clout of the boomers.
    The managed-care industry is still new and is feeling its way along. The past
couple of years has not been as profitable as expected for health care providers or
plans. It is bad enough that doctors and hospitals are clamoring for higher fees, big
employers are sticking to their demands for the absolute lowest health care employee
benefit prices, states are passing restrictive laws and stock traders are punishing
health care and insurance companies whose profits do not take double-digit leaps.
    Now, adding to all those woes, baby boomers are revolting against the strictures
of Managed Care. This generation that has set the social and political agendas of the
nation for the last three decades is beginning to suffer the aches and pains of middle
age. To win them over, HMOs are loosening the rules for those willing to pay a
premium, thereby slowing a trend that just a couple of years ago seemed unstoppable.
    Executives of large HMO’s have stated that the market is telling them that the
HMO as we know it, is on the decline and that it is a product whose time has come
and gone. It has been difficult lately to recruit members to various classic, tightly
controlled, health-maintenance organizations. More and more consumers want to
have a say in their own medical treatment.
    As a result of the boomers' political clout, states are enacting hundreds of new
restrictions on the way HMOs limit care; such as requiring hospital stays after
mastectomies and forbidding rewards to physicians for denying care. Congress is
debating bipartisan proposals for a health-care bill of rights that would force
managed-care companies to be more flexible by establishing independent reviewers

to consider appeals of care denial. Opponents, including the majority of the health
insurers, insist that the new laws can only push up the cost of health care.
    But still health insurers are rethinking their positions on health care, which had
been considered to be “etched in stone”, and they are giving in the political strength
of their customers, and are yielding to marketing pressure. The results are more-or-
less what they hear their customers telling them and the news is not good for the
typical HMO.
    At last, the news organizations accurately reported that Managed Care is a
growth industry covering a broad range of health care providers, including not only
HMOs, but also other, looser forms of medical care such as preferred provider
organizations, etc. They awakened to the fact that increasingly, new customers are
gravitating to open - access or point - of - service plans where members can go
directly to a specialist, without prior approval from a primary-care doctor. They have
discovered that many patients have no reluctance in paying more of the bill - which
had almost been heresy to some of the news reporting organizations.
    It was discovered that one of the largest HMOs that showed a respectable 20
percent membership growth in the New York area in 1997 and almost as well
nationally, was "almost entirely" in plans featuring open access plans that attract
customers, primarily from more expensive, traditional fee-for-service plans and
networks of "preferred providers."
    Also, when one insurer purchased the health insurance business of two other
large insurers two years ago, it added 255,000 members in New York, of which only
15,000 joined the classic and restrictive HMOs.
    Unfortunately, they felt that the flexible plans are more likely to increase health
costs, often just shifting much of the cost burden from employers to their employees.
    A research group reported that nationally, HMO membership rose 13 percent to
66.8 million early in year (1997) while that of point-of-service health plans shot up
twice as fast to 7.8 million. Some researchers say the point of service total was even
higher, as high as 14.2 million.
    Consumers’ growing fussiness is putting added strains on the managed-care
industry just as it is experiencing numerous other growth pains.

    Several big managed-care companies struggled in 1997 with embarrassing
financial reporting adjustments that upset Wall Street and drove down stock prices.
    Some say the industry is also suffering from a glut of too many players. It is not
just consumers' growing insistence on making their own choices that is putting
upward pressure on prices. Doctors are fighting for pay increases after years of
seeing their incomes erode. An actuarial firm reported that there is so many doctors,
that the country actually needs only 300,000 of the 425,000+ doctors. Many
physicians don't feel any particular incentive to practice more conservatively as most
are paid a discounted fee for each service.
    Another huge expense to managed - care companies is the administrative cost of
controlling costs. The companies are spending hundreds of millions of dollars on
computerized information systems that monitor patients, doctors and other providers
of care. The companies report the results to the providers and try to promote cost
effective practices. Some Managed Care companies organize committees of local
radiologists, orthopedists and other specialists who weigh the results and urge their
peers to conform.
    Because of all these factors, many HMOs have lost money or made only small
profits in the last few years as premiums were lowered and they put emphasis on
recruiting new members. Revenues per member have actually declined every year
since 1995.
    Some HMOs have been willing to absorb losses to get new members, planning
to raise prices later, but many HMOs will be frustrated all over again when they try to
raise prices for 1998. Some of their biggest customers have banded together and
forced the HMOs to settle for small increases or even decreases.
    A few companies bring their own actuaries to negotiate prices based on the size,
age, sexual mix and medical history of the employee group. In some cases their costs
decreased significantly.
    Where consumers lack negotiating strength, they often face higher fees. The
Minnesota state government, for example, as well as smaller employers in the region,
will all be facing 12 percent increases in HMO premiums next year.
    Contrary to frequently - held beliefs, adding new members is no panacea.

     Experts say that enrollment is only indirectly related to profit. Indeed, adding
members can be costly. With growth it is necessary to add more personnel, and more
personnel will create a need for more capital, with the result that physician networks
are expanded in order to bring in more enrollees. This creates a Catch-22, or vicious
     New HMO members, particularly elderly people in Medicare HMOs, have a
difficult time with the restraints of Managed Care. Handling their complaints creates
an added cost that is essential to keeping them from joining another health plan.
     The more an HMO grows the more sick people they must serve. The older
HMO’s originally enrolled healthier people as those who are less healthy have a
natural hesitancy to change insurers. Therefore the young and healthy people were
insured. Now the HMO’s must start providing health benefits to those people who
are not as healthy and have more of an inclination, and in many cases - need - to seek
medical assistance.
     Changes in Managed Care are inevitable and the news organizations are united
in their belief that the onslaught of Baby Boomers will change the industry more
radically than any other event.

   CASE STUDY: A Boomers Reaction to HMO Limitations

   Rhonda and Chris are approaching 40 and they are proud to be considered as "Yuppies",
as well as Baby Boomers. Rhonda is a stay-at-home Mom for their two little girls, and Chris
has been a Vice President of a specialty manufacturing firm for 15 years. The company
provides them with a good benefit program, with health insurance being provided by a large
   Both of their parents live in a small city 500 miles south. They had both graduated from
the same high school where their parents now live and have many friends and relatives there.
While visiting their parents last Fall, both daughters apparently contacted a virus and was
running high temperatures. When one would improve, the other would worsen. The
pediatrician that Rhonda had when she was a child in this town was called, and would be
glad to see her daughters. Rhonda called their PCP who told her to give them aspirin, then
plenty of liquids and rest, and would not refer them to her former pediatrician. After 2 more
days of sniffles, headaches and sore throats, the PCP still refused the referral. Chris
canceled his planned hunting trip with relatives; they bundled the girls up and headed home.
   The girls only had a childhood virus, but their vacation was cut short, Chris did not get
his deer, and they were all upset with their PCP. This is no way to treat a "boomer" and
since Chris is on the Human Resource committee for Employee Benefits, guess what
happened the next month!


    Nearly twenty percent of the illnesses that can be related to lifestyle, it is
estimated, costs over $171 billion dollars per year. One of the most easily
identifiable lifestyle illness, heart attacks, are reported to cost employers an average
of about $80,000 in hospital costs, and over $15,000 in disability benefits. In
addition to the costs related directly to medical care and disability, lost productivity is
very expensive. There are approximately 200,000 employees - ages 45 to 65 - each
year disabled by heart problems and which cost employers more than $700 million to
replace these employees. Obviously, it is in everyone’s benefit to reduce the
financial toll that lifestyle illnesses bring to employers.
    When a business has healthier employees, the business will make more money,
be more successful, and can afford to expand a wellness program. Many businesses
work with local health clubs to promote wellness programs. The health club industry
has developed statistics that show productivity (and profit) can be increased by as
much as 20% with an active and professional wellness program.
    Absenteeism due to illnesses and injury is reduced dramatically for those
participating in such a program.
    A well-designed wellness program is an attractive recruiting tool and soon
becomes known as an employee benefit. For those employees that use the program
on a regular basis, it becomes a social as well as fitness aid. Productivity increases as
the employees are able to see the results of the program and they start to feel better
about themselves.
    Coors Brewing Company was mentioned in particular, at a recent IRSA
(Association of Health Club owners) meeting as they have had a wellness program
installed for several months. A cardiac rehabilitation program at this brewery has
shortened the length of time that an employee lost due to heart problems, from 7
months to just 5 weeks, and with excellent results with no negative effects. Medical
claims for Coors employees who regularly use (two or more times a week) its
wellness center are 13% lower than those for non-users. Coors’ wellness program
includes a program designed to help temporarily disabled employees get back to
work as soon as possible. In addition, they offer nutrition counseling and smoking
cessation classes. Coors attributes cost savings in excess of $4 million for a recent
    Typically, a corporate wellness program will return in excess of $3 for every
dollar invested, and can have a measurable value to the company.
    While typically a Wellness Program is provided or installed by a local health
club, in some situations it will include preventive screenings, and non-medical
programs designed for behavioral changes such as stress management and smoking


    Managed care is not restricted to reducing employee benefit and health insurance
premiums, but also can be used for the prevention of accidents in the workplace.
Since over 10,000 workers are killed on the job each year, and 6 million are injured,
this is of prime importance to all employers.
    The prevention of illnesses and accidents in the workplace is primarily designed
to reduce Workers Compensation costs but it also affects employee benefit costs.
Employees, who are taught to recognize workplace hazards, and how to respond to
such hazards, generally continue with these practices even while not on the job.


    Employees are human beings, and all humans have problems serious enough to
affect their job performance at some time or other. When these problems arise, many
will go away without any professional intervention. However, those that do not will
probably continue to worsen and will be reflected by a decline in work habits and
product quality. Inevitably, absenteeism, injuries on the job, and increasing medical
costs will arise.
    Originally, these types of programs were designed to help those with alcohol
problems. In the 1940’s, many returning servicemen had alcohol problems so many
employers instituted formal programs to assist those to overcome their problems and
to better assimilate into society. These programs have grown to encompass
counseling and referral services, financial and legal counseling, marital counseling,
childcare issues, chemical dependency and psychological problems. Large
companies offer plans like this today and are quite popular, with an estimated 80% of
large employers participating
    If employees will use such a program, a recent study shows that medical claims
averaged 30% less than for employees who did not use the program. Another study
found that early intervention in chemical dependency could reduce medical costs by
up to 69%, reduce the number of employee sick days by 47%, and lower accident
benefits by 48%.
    CASE STUDY: Patching a Sick Corporation
    The Cordea company opened a new manufacturing plan in South Georgia, which
was picked because of availability of employees and the business climate in that area.
The main plant was still located in New York and the top executives at the Georgia
plant were from New York, many from New York City.
    After being in operation for about 3 years, their absenteeism rate kept climbing
and they continued to see a decrease in productivity. Also, they had an increase in
their Workers Compensation rate because of increased accidents and on-the-job
injuries. The main plant sent their company Medical Director to the Georgia plant to
see if there was any reason for the illness and injury problems,
    The doctor noted that the greatest majority of the employees were used to manual
and outdoors labor prior to working at the plan. Since working at the plant, their
physical activities had greatly reduced, with the result that their overall general health
condition had severely deteriorated.
    In addition, the steady income from the plant had allowed the standard of living
of nearly all of the employees to increase. Their eating habits were still rural South
and consisted of a lot of fried foods, meat that contained a lot of fat, and desserts and
drinks that were sweetened heavily.
    Also, he discovered that many of the workers had an alcohol problem,
Fortunately there was little drug use, but excess beer drinking in particular, seemed to
be a local cultural problem.
    The doctor recommended that a wellness program be instituted immediately at
the plant, There was a Gold's Gym only 3 miles from the plant, and arrangements
were made to subsidize memberships at the Gym. The Manager of Gold's worked
with the doctor in establishing certain programs, including aerobic classes held at the
end of each shift, that would specifically benefit the workers at the plant. Classes in
martial arts and bodybuilding were created, and arrangements were made to
baby-sitters for plant workers using the Gym.
    The company established a series of sports leagues, including industrial softball,
which would compete inter-company, and also with other leagues in South Georgia.
    A counseling program was established for those who needed some help in
controlling their alcohol intake, with special help for those who cooperated fully.

   The employer even hired a nutritionist to supervise the company cafeteria, and
regularly would hold cooking seminars, food-tasting expositions, and cooking
contests in an effort to change the eating habits of the employees, from a high-fat
diet, to one that was low in fat and high in vegetables.
    After two years, the results were:
    1. The eating habits changed but they still had their annual pork barbecue with
baked beans, corn, cole slaw and Brunswick stew. By now, the New Yorkers were
the biggest fans of the barbecue.
    2. The plant won the regional industrial softball championship. They also had
Martial Arts, basketball and bowling teams competing with other businesses in the
state. A Supervisor was runner-up to Miss Georgia in bodybuilding. They ran 3
aerobic classes each day, and 45% of all of the female employees attended the
classes, as did many of the wives of male employees.
    3. Absenteeism was reduced by 45%, injuries were nearly non-existent, and the
company feels that the wellness program was a great investment.

1. The group of Americans that are causing Managed Care organizations,
   particularly HMOs, to make the greatest changes in providing health care is
   A. the Baby Boomer generation.
   B. the senior citizens.
   C. the “unions.”
   D. the teenager generation.

2. The growth of HMO’s as compared to point-of-service health plans over recent
   years, indicates
A. that HMOs are growing more rapidly than any other type of health care plan.
B. that while HMOs are growing, point-of-service plans are growing more
C. point-of-service plans will soon be obsolete.
D. indicates that no HMOs are profitable.

3. Many experts believe that
A. doctors are fighting for pay increases after years of seeing their incomes erode.
   B. there are not enough doctors.
   C. hospitals are full most of the time.
   D. the more an HMO grows, the more healthy young people it serves.

4. The Baby Boomer generation is primarily revolting against
   A. the restrictions of Managed Care.
   B. the low cost of medical technology.
   C. doctors performing abortions.
   D. not having socialized medicine.

5. As a result of the political clout of the Baby Boomers
   A. Congress is creating legislation to make HMOs more strict,
   B. new legislation will lower the cost of health care dramatically.
   C. more liberals will be elected to Congress.
   D. states are enacting hundreds of new restrictions on the way HMOs limit care.

6. Wellness programs are designed to
    A. treat sick people.
    B. sell vitamins and herbs.
    C. keep employees healthy and productive.
    D. get people to join health clubs.

7. Industrial accidents
    A. can be reduced by Managed Care.
    B. are more severe in Idaho than in California.
    C. are not covered by insurance.
    D. occur only in factories.

8. Employee assistance programs
    A. are designed to loan money to employees
    B. encompass counseling and referral services and financial and legal
    C. provide trained temporary personnel
    D. are used primarily in several companies.

9. The primary reason for preventing illness and accidents in the workplace, is
    A. to lower employee benefit costs.
    B. to keep the Federal Government out of their hair.
    C. to reduce Workers Compensation costs.
    D. reduce the service of Para-medics.

10. The Health Club industry was worked with large industrial corporations
    A. but it has been a total waste of money.
    B. but it was found that employees who use a health club are the ones who
       normally are healthy anyway.
    C. and statistics indicate that productivity can be increased by as much as 20%
       with an active and professional wellness program.
    D. by recommending certain Chiropractors to employees.


1A    2B    3A    4A    5D    6C    7A     8B    9C    10C

                      IV. MANAGING UTILIZATION

    In any type of health insurance, the determining factor regarding pricing, plan
development, forecasting and eventually, controlling costs, is utilization, i.e. how
much and how often the system is used. The more health insurance is “utilized”, the
more expensive it becomes, as benefits must be provided by health providers who
must be compensated for their services. The first real Managed Care program
developed solely for the purpose of containing medical care costs, was utilization
review, i.e. reviewing how often and how much the system was used. This system
attempted to determined whether hospitalization was proper for the particular health
situation, whether the medical care was proper. It proposed alternate medical
services on occasion, and also helped to determine the length of hospital stays.
    The first major use of a utilization panel was in 1972, when the federal
government crated panels in an attempt to provide quality medical service to
Medicare beneficiaries on a cost-effective basis.
    In 1973, the Health Maintenance Organization Act inserted the federal
government into the insurance business which was considered the domain of States’
Departments of Insurance. In effect, it “legitimized” the HMO concept by requiring
any employee groups of 25 or more employees that is provided health insurance by
the employer, must include an HMO as an alternate provider of health services. This
stimulated the growth of HMO’s but were not popular with employees because of the
limited number of health care providers available.
    Coincidentally, medical care costs were rising rapidly due to continuing
inflation, so health insurers watched the growth of the HMO concept with increasing
interest. However, with the eventual of the HMOs due to limitation of health
providers, the insurers introduced the Preferred Provider Organization (PPO) which
help to contain medical costs.
    The cost savings concept of the PPO was simply that there would be savings in
medical care because of the discounted fees of the network providers. However, it
did not take long for many of the hospitals and health providers to realize that if their

fees were cut, then an increase in utilization would put the money back in their
pocket. As an example, doctors may charge 80% of their usual fees to PPO patients,
but if it would normally take 4 visits to conclude medical treatment, it would be
extended into 5 visits. Hospitals would keep people in the hospital longer to make up
for any discounted fees, with the result that savings would be generated by
discounted fees to providers that would join the network. However, overutilization
more than offset any such savings through discounts. Example: A hospital might
give a 25% discount to PPO patients, but may keep them in the hospital longer to
make up for the discount. Therefore, medical costs continued to rise, although not as
sharply as before.
    As a result, some insurance companies would combine the cost savings and
discounts of a PPO, with the utilization review procedure. This was accomplished by
the insurers maintaining close scrutiny of all health claims, particularly in the area of
hospital costs. Again, some hospitals would then treat patients on an outpatient
basis, so while inpatient care costs decreased, they more than made up for it by
increasing the outpatient cost. Again, the total overall medical costs did not reduce
or level out as anticipated.

                               UTILIZATION MANAGEMENT
    Realizing that more action must be taken, insurers decided to review the
procedures of more than just inpatient and outpatient care, but also to include In an
effort to contain these overall medical costs, utilization review procedures were
expanded to include a much broader range of services, such as inpatient and
outpatient hospital care, drugs, mental health, substance abuse, physical therapy, and
chiropractic care. This in turn led to the technique of “Utilization Management”
    In addition to increasing the reviewing of more procedures, Utilization
Management provides for utilization reviews at three points: prior to treatment,
during treatment, and after treatment.
    In order to control medical care costs, it is necessary to manage both the fees
charged by providers and also how appropriate is the treatment. It is often quoted

that if a surgeon agrees to a charge of $2,000 for an operation for which he usually
charges $3,000, the savings might be considered as $1,000. However, if the
operation was unnecessary, there was still $2,000 spent and the patient was at risk of
complications from the procedure.
    Utilization Management uses reviewers who monitor the patient’s care as to
appropriateness by basing the procedures and results upon criteria obtained from a
variety of sources.
    If review is done on a prospective basis (i.e. before the fact), coverage for a
recommended course of treatment or hospitalization can be denied if the proposed
treatment is not considered appropriate according to standard medical guidelines.
    If review is done on a concurrent basis (during the procedure), the need for
continued treatment is evaluated.
    If review is done on a retrospective basis (after the procedure), payment for
inappropriate treatment may be denied. The severity of denial is not taken lightly and
the decision is internally reviewed and approved after very strict criteria. The
purpose of utilization management is not punitive, but is for control purposes.
    Utilization management provides certain discipline that makes providers more
careful in the treatments they recommend and the services that they render. To some,
this may seem like drastic measures and be similar to having someone “looking over
your shoulder”, but the results have been that these procedures have reduced cost and
improved treatment guidelines.
    In actual practice, Utilization Management has provided an educational function
as by reviewing the treatments and establishing treatment “norms”; they have
discovered wide variations in the treatments provided by various providers. By
comparing procedures, particularly when outcomes are known, the best course of
treatment can be more accurately determined.
    Using Utilization Management techniques widely has proven that only a
minority of providers contribute to inappropriate or substandard treatment.
Conversely this data also helps to identify the high-quality providers and their
practices can be used as a model. The low-quality providers can then be brought up
to standard or weeded out of medical care networks.

    Employers can use utilization management techniques in a self-insured system,
by third-party administrators, and by insurers. Medicare uses utilization management
by using a system whereby nurses trained in utilization techniques use a set of
treatment protocols to make an initial screening of proposed treatment by physicians.
Panels of local physicians modify the protocols to reflect community practices. If a
particular treatment does not meet the protocol standards, the situation is referred to a
consulting physician for further review. This is commonly called “peer review” and
needs a large number of physicians and specialists to participate.

                       DIRECT PATIENT INTERVENTION

                        MEDICAL CASE MANAGEMENT

    Like Utilization Management, a third party, other than the healthcare provider
and the patient, becomes involved in the treatment process and is necessary for
Medical Case Management. While Utilization Management involves only the
provider of medical care services, whether hospital, doctor or specialist, Medical
Case Management intervenes with both the provider and the patient, taking a much
more active role in the treatment process. Utilization Management is generally a
remote activity achieved by paperwork, computers and telephone, with occasional
on-site review of medical records and bills. In Medical Case Management, a lot can
also be done by telephone: gathering information, arrangement for treatment, etc. It
is necessary, in most cases, for a medical care manager to personally communicate
with all interested parties in the treatment process; the providers, the patient, and the
patient’s family.
    Medical Case Management should not be used for routine cases as it is not
considered cost effective for commonly used procedures and treatments. Statistics
indicate that 40% of medical care costs are attributed to 3% of the patients - those
very seriously ill or injured. 40% of medical costs are attributed to 17% of patients
with chronic illnesses. Applying Medical Case Management to just 20% of the
patients allows over 80% of medical care costs to be controlled. (NOTE: These
statistics illustrate the “Pareto” rule, that states that roughly 80 percent of most events
can be attributed to approximately 20% of their causes).
    Determining just how cost-effective Medical Case Management is, or can be, is
difficult to determine because catastrophic and chronic medical problems involve
longer periods of time, called “long-tail claims” in insurance parlance, than other
medical care which is usually of a short duration. Therefore, in catastrophic and
chronic cases, the cost savings can only be projected. People rarely take such
projections into serious consideration, as there can be too many events that can
completely destroy the estimation. Therefore, there is really no way to “prove” that
the medical case managers can actually effect such savings. However as a larger data
base is created with experience, it appears that such savings are actually realized.
    The Case Management Society of America has created the following definition
of Medical Case Management:
       Case management is a collaborative process which assesses, plans,
implements, coordinates, monitors, and evaluates options and services to meet an
individual’s health needs through communication and available resources to promote
quality cost-effective outcomes.

    A collaborative process means that medical case managers work as a team
member with providers, care payers, the patients, and the patient’s family.
    The general procedure for a medical case manager is as follows:
    The patient’s overall medical situation is assessed.
    The patient’s condition is ascertained through the examination of medical
       records and interviews of specific providers involved.
    From the interviews and record review, the prognosis is determined.
    The desires of the patient are considered, such as location of treatment,
       productiveness during treatment, etc.
    The patient’s family situation, including the ability and desire of the family
       members to provide support and care.
    A complete evaluation of available benefits, particularly as to the services
       provided and services excluded.
    The current treatment plan needs is assessed for effectiveness.

    A life-care plan is developed and individualized for the patient. This plan must
meet the medical and psychosocial needs and designed to allow the patient the
highest quality of lifestyle befitting the medical care needed. Then the costs of the
plan is determined, and sources of payment are determined. The plan is presented for
approval by all parties.
    After approval, the medical case manager initiates the plan and continually
audits the effect of the plan for efficiency and completeness. Communication is
important in the analyzing process and the manager is responsible to maintaining
continuing communications with the participants in the plan. As with any business
plan, it is continually reviewed, modified when necessary, and evaluated as to the
efficient operation and effect of the plan, keeping in mind that the goal is to derive
the maximum benefits in relationship to the cost of the program, and the satisfaction
of the patient, the patient’s family, physician and all other interested parties.
    Medical case managers must have the background to properly evaluate the
program and all of its components and ramifications. They must know the providers
of service in every instance where appropriate, and they must judge which services
and actions are appropriate. They must have a grasp of the availability of private and
government services, and how they all interact to provide the best plan for the
    The principal objective of the medical case manager is to communicate with all
participants, and to build a consensus among all of those involved as to the
procedures involved, and to accomplish these objectives with the available resources.
Frequently the medical case manager will represent the patient in negotiations, in
many cases without the knowledge of the patient. They can attempt to change or
modify the benefits with negotiating with the providers, and frequently, transmitting
the desires of the patient to the providers in respects to where or how the services are
to be rendered.
    The medical case managers have a number of different results that they strive
for, such as arranging for medical care that a physician will approve, with savings to
payers, and still meet the patient’s needs and desires. For the patient, the
management assures that patients receive the right amount and type of care.

Providing the appropriate amount and type of care is the most cost-effective way to
treat patients. For the medical community, which is made up of a wide variety of
providers, each provider is focused on delivering a certain type of care. The medical
case manager brings objectivity into the situation, making providers more aware of
the range of options available to service their patients.

                            INPATIENT HOSPITAL REVIEW

    Treatment review can be either Prospective, Concurrent, or Retrospectively, as
explained earlier. Review can be at any or all of these points in treatment.
    Prospective Review. Pre-certification or pre-admission certification is probably
the most recognized Managed Care technique as it is required by almost all plans,
whether Managed Care or fee-for-service. It has proven that it prevents unnecessary
inpatient hospital stays.
    When a physician makes a recommendation for hospital treatment, the utilization
reviewer is contacted, usually by the physicians. This contact is usually within 24-48
hours, except in case of emergency. The utilization reviewer is provided with the
name of patient, name of doctor and hospital, diagnosis and proposed treatment and
any other pertinent information. This information is matched against protocols
developed for similar diagnosis and which indicates whether the treatment is proper
for the diagnosis, whether it needs to be performed in a hospital or on an out-patient
basis, and whether the proposed length of stay is in line with standards. If the
treatment agrees with the protocols, the reviewer proves the plan and the patient are
admitted to the hospital.
    However, if the protocol doesn’t meet the proposed treatment, it is referred to a
consulting physician who then contacts the patient’s doctor to discuss the situation
and to see if they can agree on the treatment. Usually, they compromise on the
treatment, or if not, the treatment could be disapproved and coverage denied.
    Second Surgical Opinion. Second surgical opinion is also a very popular
provision that requires that elective surgery be reviewed by another specialist prior to
surgery. This requirement may be satisfied by simply getting the required second

opinion, but some plans require that the second opinion agree with the first opinion.
The costs of the second opinion are borne by the plan. Not all elective surgery
requires a second opinion, as it is not cost effective them in many situations. Some
surgeries are mandatory with all plans, such as hysterectomies or laminectomies.
    Pre-admission Testing. Patients are tested prior to surgery by facilities outside
of the hospital. This eliminates patients being admitted to the hospital a day or two
early just for the tests. This is a popular requirement and is present on most plans.
    Concurrent Review and Discharge Planning. As soon as the attending
physician determines that a hospitalized patient is medically ready for discharge,
discharge planning asses whether the patient needs continuing care could be
performed at a lower cost with acceptable results, in another facility, such as a skilled
nursing facility, nursing home, home health care, or rehabilitation services.
    Retrospective Review. After the treatment has been rendered, it can be
compared with established standards and guidelines. If the treatment doesn’t match
the standards, payment can be denied. However, it is very rare that the payment is
denied, but in most cases the information gathered in the review is used to educate
the physicians and for date purposes in order to improve the review process.
    Review of the Hospital Bill. The overpayment of hospital bills has received
considerable publicity recently and a hospital bill review system more than pays for
itself. Most overpayments are administrative errors, however some significant
savings have been realized over deliberate overbilling. The hospital bill review
determines, among other items, whether:
    All services listed on the bill were actually performed,
    Duplicate charges have been made,
    Charges have been made for unauthorized procedures,
    Charges are inconsistent with current medical practice,
    Charges represent reasonable and customary frees, or conform to fee
    The payers are responsible for a portion of charges, and which particular

    The bill review procedure can also determine whether the “codes” have been
used correctly (called “code gaming”).
    Upcoding - erroneously coding simple procedures as more complex and
expensive procedures.
    Explosive - breaking down a group of laboratory tests performed on the same
specimen into a number of separate tests, and billing separately for each charge.
    Unbundling or “Fragmentation” - breaking down a complex procedure into
separate and individual procedures and billing for each. Surgery, in particular, lends
itself to fragmentation, as charges can be made for cutting, for suturing, etc.
    Visit churning - refers to the physician billing for more visits than were

                              OUTPATIENT REVIEW

    Outpatient care, often referred to as “Ambulatory” is defined as medical
treatment rendered in doctor’s offices, clinics, surgery centers, mobile laboratory
facilities, emergency medical facilities, hospital emergency rooms and other
outpatient departments.
     The Outpatient Review is a direct result of the increase in the volume of care
provided on an outpatient basis. Since most of the outpatient services are for small
amounts, it is not cost-effective to review many outpatient bills. To add to the
difficulty, there are many different types of providers including all disciplines of
medical professionals, some of who are not familiar with utilization management.
    Therefore, only the more expensive items are reviewed, e.g. pre-authorization
may be required for CAT scans and MRI procedures.
    Concurrent review is cost effective only to extended treatment plans, which
include a number of visits to the provider.
    Most outpatient review is performed on a retrospective basis and the larger
amounts can be reviewed in conjunction with the hospital bills. Review of treatment
of catastrophic or chronic cases; can be accomplished on an individual basis, with
emphasis on monitoring so as to compare with established standards.

                          SPECIALIZED CARE REVIEWS

    Specialized care can be reviewed on a basis that is separate from the general
health plan that is being reviewed. There are professional reviewers who specialize
in the specific areas under management. They can be more effective in dealing with
those specialists to control costs.


    Early identification of the 20% of cases that account for 80% of the medical care
costs, is a key issue in Medical Case Management. The earlier a catastrophic or
chronic case can be identified and referred to a medical case manager, the better the
care that can be provided to the patient. Medical Case Management is generally
integrated into a Managed Care system, which is already involved in utilization
management. Cases are designated for case management consideration by diagnosis
or nature of the treatment recommended. The list usually includes potentially high-
cost indications as head or spinal cord injuries, respirator dependency, extensive
burns, loss of limbs or eyes, chronic pain, psychiatric or emotional illness, prolonged
hospitalization, high risk pregnancy, premature birth or birth with complications,
diabetes with complications, transplants, etc.
    Additional patterns of abuse may be flagged for intervention by a medical case
manager, such as persons who have multiple prescriptions for mood-altering drugs
filled at a high frequency, drug addition, alcoholism, etc.
    The potential high cost does not automatically mean that case management is
appropriate for a case. There must be potential to improve the case and to obtain
substantial cost savings. For cases involving in-hospital treatment, there is little for a
care manager to do, and in many other cases the hospital discharge department can do
an adequate job of arranging for timely release and alternative settings for care.

   CASE STUDY: The Effect of PCP Bedside Manners

    Ellen's parents were patients for many years of a large, staff model IB40. Her
father, Joe, was admitted to the hospital for diagnosis and treatment of increasing
severe chest pains. After the tests were completed, Joe's, internist for many years and
the cardiologist he had called to consult, asked Ellen and her mother to come in for a
family conference at her father's bedside.
    At the conference, the doctors told the family that Joe had severe coronary artery
disease and the best option was open-heart coronary artery bypass surgery. The
doctors discussed other options, such as balloon angioplasty - where a balloon is
inflated in the artery to open up the blockages - and further medical therapy with
cardiac medications, but they did not recommend either of those options.
    Recognizing that the treatment for Joe was going to be severe, the situation had
been referred to a Case Manager. After reviewing the information from the doctor
and cardiologist, the Case Manager concurred with their suggested course of
    However, Joe, known to be a stubborn man who generally disliked doctors,
rejected the surgery and said he would take his chances with more medication. It was
Joe's decision at this point. Ellen felt that they seemed more concerned in telling her
of their options and covering their rear ends, than in helping her father make the right
    In discussing this with her father, it was discovered that he felt that the doctors
didn't seem to feel it was necessary, as they raised no objection to his refusal of
surgery. Ellen felt that the doctors were more concerned in saving $30,000 that the
heart surgery would cost. Ellen returned to the HMO doctor and demanded more
information as to what could happen to her father if he did not have surgery. As it
turned out, the HMO physician was depending upon the expertise of the cardiologist
who, by nature, was really not a forceful individual. The situation was referred back
to the Case Manager of the HMO, and he agreed to refer Joe to another cardiologist
for a second opinion.
    The new cardiologist was closer to Joe's age, and after studying the medical
records, told Joe that there were several alternatives, but only one that would allow
him to five much longer. Joe seemed very impressed, and then agreed to the surgery.
    The Case Manager checked with Joe to make sure that it was his decision for
surgery, and he also contacted Ellen and explained the alternatives to her. Of course,
she wanted the surgery all along, so the Case Manager felt comfortable with the
    The surgery was performed within a week at a large HN40 hospital. The Case
Manager was kept abreast of the surgery and the recovery on a continual basis.
Immediately after the surgery was completed, the Case Manger contacted Ellen again
and assured her that her father would be properly cared for in the hospital, and upon
his discharge, a home health care nurse would take care of Joe as long as was
necessary, and the physical therapy that might be needed afterward.
    After Joe had been home for a week, the Case Manager again contacted Joe and
Ellen as a follow-up to the procedure. They were impressed with the fact that there
was very little paperwork, and the HMO took care of Joe so well.

1. The determining factor regarding pricing, plan development, forecasting and
   controlling costs is
   A Utilization.
   B the profit margin.
   C. the number of HMOs.
   D. the cost of hospital rooms.

2. Utilization Techniques
   A. proves that only a minority of providers contribute to inappropriate or
     substandard treatments.
   B. cannot be used by insurers.
   C. is not used by Medicare.
   D. have nothing to do with local doctors.

3. When someone other than the doctor and patient becomes involved in treatment,
   it is called:
   A. an HMO.
   B. Medical Care Management.
   C. long-term care.
   D. a Physician’s Association (PA).

4. Second surgical opinions
   A. are normally paid by the plan.
   B. are never used for elective surgery.
   C. are only used by Blue Cross.
   D. are illegal in most states.

5. Pre-admission testing
   A. is used for college entrance exams.
   B. is a popular requirement and is present in most plans.
   C. is performed in the hospital only.
   D. admits the patient to the hospital 3 days early for tests.

6. Prior to 1973, insurance regulation was primarily in the hands of the States. How
   did the Federal Government get into the insurance business at that time?
   A. It passed a law stating that the federal government now controlled insurance
      laws and regulations.
   B. It expanded Medicare to include all citizens of the U.S.
   C. It passed legislation requiring all groups of 25 or more employees that
      provided health insurance to its employees, to make available an HMO as an
      alternative provider of health insurance.
   D. Legislation was passed requiring all health insurance for groups of 25 or more
      employees, to be approved by the Federal Department of Health and Human

7. Utilization Management requires there be Utilization Reviews at 3 points. Which
is not one of these points.
    A. at autopsy
    B. prior to treatment
    C. during treatment
    D. after treatment

8. The purpose of Utilization Management is
   A. for punitive purposes.
   B. to makes doctors and hospitals more money.
   C. to eliminate as much as possible, federal intervention.
   D. for control purposes.

9. A collaborative process which assesses, plans, implements, coordinates, monitors,
   and evaluates options and services to meet an individual’s health needs through
   communication and available resources to promote quality cost-effective
   outcomes, is
   A. Utilization Management.
   B. Care Management.
   C. Case Management.
   D. Cost Management.

10. In question (9) above, “collaborative process” means
   A. an administrative procedure endorsed by the doctors and the hospital.
   B. that Medical Case Managers work as a team with providers, care payers, the
      patients and the patient’s family.
   C. the ability of the doctors and hospitals to collect their medical charges from the
      insured’s insurer.
   D. the cross-ownership of the medical and surgical facilities.


1A    2A    3B    4A     5B    6C    7A    8D     9C    10B


    While this discussion of Managed Care is of primary important to those who
market employee benefit plans, another aspect of Managed Care is quite important as
well. Work-related accidents create their own special Managed Care problems and
one such accident can affect the success of a business and the employee as much as a
serious illness or non-job-related accident.
    For those not familiar with Workers Compensation Insurance, a detailed
explanation is outside the scope of this discussion, but briefly stated, Workers
Compensation insurance provides health benefits (including rehabilitation), and
disability benefits. State laws require groups of certain size or occupations to provide
Workers Compensation insurance on all of their employees.
    When Workers Compensation insurance becomes involved because of a work-
related accident, the company may institute a Managed Care procedure which is
called a “Post-injury Response Plan.” Of course with accidents, there is no
prospective review.
    A post-injury response plan are procedures which are designed to provide the
injured employee with the proper medical attention so that the person can return to
work as soon as possible. This plan involves the cooperation and communication
with the patient, the employer, the medical providers, the Workers Compensation
carrier, and in many cases, supervisors and fellow employees. Post injury response
plans are established to help control Workers Compensation costs.


                             OTHER ANCILLARY


                                        PHYSICAL THERAPY

                              WORKERS COMPENSATION CLAIM COSTS




       TEMP. DISB.

      VOC. REHAB.                                                                                  Series1





                     0.00%    5.00%     10.00%    15.00%   20.00%    25.00%      30.00%   35.00%


    Obviously, the first step in this plan would be to verify that the employee
receives first-aid and other immediate treatment for their illness or injury. Needless
to say, the proper first-aid treatment often saves the life of the patient, and at the very
least, lessens the severity of the injury. As a precaution, the first-aid should be
administered only by qualified individuals.
    Once first-aid has been administered, a company representative should provide
whatever help and assistance is necessary for the employee to obtain prompt medical
attention. As an example, an employee should never be allowed to drive themselves
to the hospital, regardless of how minor the injury appears to be. The supervisor that
accompanies the employee to the treatment location should always stay with the
employee until the treatment is completed or the employee is confined for overnight.
If necessary, the supervisor should provide an ambulance or other transportation to
the employees home if an overnight stay is not needed.
    The employee’s supervisor should become involved in the total treatment, and
should alert the hospital and/or physician immediately after the accident. This also
accomplishes several things that can assist the Managed Care programs.

     Since the supervisor and other employees become personally and actively
        involved, the employee feels that the company has an interest in their
        condition. This helps to eliminate any antagonistic feelings that the
        employer may have and alleviates any problems that may develop with the
        Managed Care techniques.

     Because the employer is involved in the treatment process, the treatment
        program will continue to be focused on the employee returning to work.
        Communication between the employer and the providers can assist in
        determining exactly what duties the employee performed, and what duties
        will be expected in the future.

     If for nothing other than peace of mind - which can be a powerful stimulant
        in returning an employee to work - the employee is aware that he/she is
        important to the employer and the employer has their best interests at heart.
    Immediately after the accident, the area in which the accident occurred should be
isolated and not used until a complete investigation can be completed. If the
situation causing the accident could be repeated, corrective action must be taken
    Claims and claims details must be provided to the company and to the insurer
immediately. The reporting of the claim starts the post-injury response plan and is
essential to controlling the Workers Compensation costs. The claims reports
activates the professional claims examiners and benefits administrators. Therefore,
as soon as the insurer starts claims management, the quicker the injured employee’s
medical bills will be paid, disability checks commence, and Managed Care strategies
can be employed. The insurer can be a source of information and reassurance to the
employee who may be confused by the Workers Compensation system.
    Workers Compensation is considered a target for those committing fraud and
cases of workers drawing disability while performing normal physical activities are
commonplace. Prompt reporting can help to reduce the number and amount of
fraudulent claims, and the most rapid method of reporting is by telephone or fax. If
the injured worker has a history of Workers Compensation claims, an investigation
can be implemented prior to payment of any benefits.

                        ONGOING COMMUNICATION.

    The employer should make a special effort to maintain continual and positive
communication with the injured employee, and continue to do so as long as the
employee is disabled. This will facilitate treatments and at the same time contribute
to the employees attitude toward the employer and the Managed Care plan.
    Continual communication assures that medical treatment is moving as quickly
and efficiently as possible and according to the post-injury response plan. Since the
employee is probably receiving disability payments, any delay in treatment becomes
more expensive than similar treatment under an employee benefit plan. Therefore, if
the employee is not recovering as soon as expected, the employer may wish to have
the treatment plan reviewed to make sure that it is appropriate for that particular
    A similar plan can be used to control disability income insurance costs when this
type of coverage is provided as an employee benefit.


    A common practice in disability claims is not to allow an employee to return to
work until they are medically able to perform every aspect of their previous job. This
may be a more costly procedure, but indemnity benefits do not have to be paid once
the employee returns to work. This savings in benefits makes such a plan successful.
    Injured employees normally feel better physically and mentally when they are
allowed to return to work as soon, as is practical. Unfortunately, employees who are
out of work for a longer period of time because of disability, have a more difficult
time in returning to work. They can actually develop a “disability mentality” that
makes it very difficult for them to return to work at any time and which can cause the
medical and disability benefits to soar.
    Therefore, employees should be allowed to return to work when they can
perform any meaningful or useful job for any period of time. They may be placed in
“transitional” work with the understanding that the work is temporary and eventually
the employee will be allowed to return to their former position.
    Transitional employment is part of the American Disabilities Act, and any
disabled employee who is denied transitional employment according to the Act, can
initiate a lawsuit. The act states that transitional employment must be useful to the
company and not demeaning to the employee.

                       VOCATIONAL REHABILITATION

    Even though the objective of any return-to-work policy, is to return the employee
to the position that they held prior to the injury. Occasionally, this is impossible
because of the type or degree of injury, e.g. amputation of hand or limb. Therefore,
the only alternative is to rehabilitate the employee and start them on a vocational
rehabilitation program.
    Vocational rehabilitation starts with a complete assessment of the individual’s
physical and psychological condition. Then a study of the employee’s interests,
aptitudes, education, work history and particular skills is performed in order to
determine the type of work that the employee can perform with the greatest success.
    The job market is searched to determine the availability of a position for which
the employee is qualified, and for which they have an interest. A job meeting all of
the requirements may not be available, in which case the employee will be trained for
a similar position, with a specific attempt to provide skills so that the employee can
obtain a job at an income the same as, or as close as possible, to the income from the
original position.
    Again, early claim reporting allows the vocational rehabilitation to get a jump-
start on recovery so that the employee will have a job waiting as soon as they are
released from medical care.
    While transitional employment for these more seriously injured employees may
be preferred, the goal of the employee becoming a productive member of society
again is the same. However, if vocational rehabilitation is involved, the employee
may have a different job, at a different location or the same job with a different
employer or even a different job with a different employer.


    In certain circumstances, all or part of the claim payments can be recovered from
other parties. Subrogation is involved when there is a legal liability by a third party;
e.g. a manufacturing defect causing the accident can be recovered from the
    Some states have created Second Injury Funds, which alleviates the risk of an
employer that hires a physically impaired employee. If the employee is injured and if
the pre-existing impairment causes the claim to exceed the amount that would have
been paid if the employee had not been impaired, the fund will pay the excess.

   CASE STUDY: How Managed Care Techniques Help Injured Employees

     The SunTech Industries factory is located in a state that required Workers
Compensation (WC) on all employees, and WC must be purchased through a
licensed insurance carrier.
     Felix is an Assistant Supervisor for SunTech and works in the manufacturing
facility. On June 3, a chain drive on a machine that had been broken and was being
repaired under his supervision, broke while operating at high speed, and struck Felix
above the elbow on his right arm. He fell to the floor, with his arm gushing blood.
     Felix's immediate superior, the Section Supervisor, had been trained in First Aid
(all Supervisors and above had taken mandatory First Aid courses), and he
immediately shut down the machine, ordered all workers away from the machine,
snatched the First Aid kit that was next all machines and bandaged Felix's arm rather
expertly. Meantime, the alarm bell that sounded when an accident occurred
prompted the office to dial 911.
     The paramedics arrived and they took Felix to a hospital only 2 miles away. His
supervisor went with him to the hospital, completed the necessary paperwork,
notified Felix's wife, and stayed with him until Felix's wife arrived and Felix was in a
hospital room and resting.
     Meantime, the area of the machine was taped off, and the machine manufacturer
was notified and was sending expert engineers to determine the cause of the accident
so as to preclude any further accidents of this type. The office supervisor notified the
Workers Compensation carrier of the accident who immediately appointed a Case
Manager to work with Felix and his doctors.
     Felix underwent surgery the following day in an attempt to save his arm, which
was successful, however he would have very limited usage of his arm. His
supervisor visited him on a regular basis and kept his wife informed of company
benefits available to Felix. With Felix's permission, he contacted the Felix's
mortgage company and 2 creditors and assured them that Felix would be receiving
disability payments and asked for patience. The rapport between Felix and his
supervisor could not have been better.
     After 2 weeks in the hospital, Felix returned home and time with a physical
therapist was scheduled. While this helped him use what he could of his arm, Felix
was concerned about returning to his job. The Case Manager, working with his
doctor, surgeon and therapists, found ' that he would not be able to perform the exact
same job that he had previously. With the education, experience and training that
Felix had prior to the accident, a course of vocational rehabilitation was scheduled
leading to a position in management, Felix completed his rehabilitation and has
returned to the company in a higher paying position than before his injury.

                             CENTERS OF EXCELLENCE

    A facility, usually a hospital, is considered a “Center of Excellence” if it is
designated by a payer to perform certain high-cost/high-risk procedures. A common
procedure performed in Centers of Excellence is organ transplants. A transplant

patient would be admitted to this hospital for the transplant, and then returned to
another “regular” hospital to recover.
     Other Centers of Excellence are orthopedic hospitals, and hospitals specializing
exclusively (or nearly exclusively) in the treatment of cancer, etc.
     The purpose of designating a facility as a Center of Excellence is because
physicians and facilities that perform certain procedures most frequently have the
best results, with higher success and lower death rates. Obviously, practice makes
perfect. Also these facilities will have the proper equipment, including state-of-the-
art equipment and as importantly, they will have a highly trained and experienced
     These centers obtain patients from other facilities and from physician referrals,
and in return they are usually willing to discount their fees. Because of the highly
specialized treatments and services that they offer, their cost is quite high, but with
the discounts the plan’s cost would be comparable to obtaining the same services
elsewhere, perhaps at even a lower cost. It is common for the center to provide for
travel and hotel costs to help compensate for the patients having to travel some
distance to receive treatment.
     The services rendered by these centers are usually regionalized so those patients
needing, for example, cardiac care in nearby states would use this facility. A patient
needing cancer treatment would go to another center located elsewhere in the same
geographical region.
     This regionalization helps to alleviate the costs of all hospitals having to invest
heavily in new technological equipment in competition with hospitals “down the
street.” If all of the hospitals in a small area all purchase the same “high-tech”
equipment, for instance, the cost would be covered through increasing the hospital’s
rates for other services. Further, the quality of care suffers, as the same number of
patients would be spread among more hospitals.

     CASE STUDY: How Bad HMO Decisions can Affect a Family

     An unnamed HMO had arranged for a leukemia baby’s bone-marrow transplant
to be done in another state by a “Center of Excellence.” The child’s older sister (who
was having behavioral problems) was recommended as the donor, and, in this
capacity, would have to be away from home for an extended period of time. The
baby’s family felt the distant treatment site would create added social and financial
hardship for them. Both parents feared long absences would mean demotions or loss
of their jobs, and requested referral to a closer medical facility.
     Although several centers competent in the procedure existed nearby, the HMO
would make no exception in its policy, declaring that it chose only the “best” for its
clients. Prompted by the family’s dilemma, Western determined that the center
chosen by the HMO had “no particular experience” in treating the type of blood
cancer the baby had. He and Lauria were cautioned by one colleague not to offend
the HMO because their own clinic “was in the running for the next contract.” The
HMO administrator stated Weston and Lauria were “interfering with the client-carrier
     The transplant was successfully performed at the HMO - designated center and
the baby returned to Weston’s care about five months later. Unfortunately, the family
had suffered severe social and financial hardship as a result of their disruption caused
by their child’s illness and the faraway treatment site. They had already lost their
home, depleted their savings, and to make things worse, the baby relapsed and
required another transplant. This time the HMO made arrangement with a different
center - because the original one was no longer deemed to offer “quality care.” The
family would again have to develop a relationship with an entire new cadre of doctors
and staff. Complicating matters, the father had lost his job and the mother was
demoted. To keep her family together, the mother quit her job, took her family out of
the HMO, and applied for welfare.
                                                  The New York Times, March 15, 1996

                         MANAGED LONG TERM CARE

   The field of Long Term Care, i.e. the providing of care (skilled, intermediate and
custodial) for individuals who require such care, and furnished by Nursing Home,
Community Care Retirement Centers, Adult Living Facilities, Home Health Care,
and other such providers. Managed Care is usually regarded as the management of
medical care, however, with long term care, it goes beyond simply medical care.
Indeed, the majority of those requiring long term care need very little medical care.
Skilled nursing facilities, who furnish medical care and who provide
around-the-clock medical care & and medical supervision by doctors and nurses,
comprise less then 10% of those requiring long term care.
   With millions of Americans receiving institutionalized long term care and
professional home health care, the industry has developed its own Managed Care

techniques. For those needing medical care, the techniques are the same as those of
other health care providers. However, there are some distinctions, and for the
purpose of this text, two of the areas are of interest.

  Long Term Care Insurance is considered Health Insurance, and has been available
for over 30 years, originally covering nursing homes only, then adding home health
care and other types of intermittent care. Newer policies covering all types of long
term care, both in the home and outside of the home, are available in a single policy.
However, less than 5% of nursing home costs are paid by long term care insurance
policies. The largest payer of nursing home care is Medicaid, the welfare program
jointly administered by the state and the Federal Government. The need for long
term care insurance is immense, as the number of persons over age 65 will triple by
the year 2030. The annual cost of care in a nursing home averages $40,000 per
person in the U.S. This translates into approximately $90 billion a year spent on
nursing home stays.
    The care of these patients necessitates some form of Managed Care, if for no
other reason than to "keep the lid on" the escalating costs, Long Term Care insurance
has a unique Managed Care concept in a "Care Coordinator' (the name will vary by
company, but the duties are basically the same) who is a trained professional that is
available to the policyholder of his/her family when benefits are to be provided under
the policy.
    When the insured first required benefits, they contact the Care Coordinator (CC)
who works with the insured, the insured's family, the doctor and the care provider
(nursing home or home health care agency). The CC is familiar with the policy
benefits and can assist in deriving the maximum benefits from the policy, and created
specifically for the policyholder. At the time when a person requires long term care
assistance, it is quite reassuring to have a professional working with the policyholder
in helping to answer such questions as: "What is the best nursing home in this area
for my condition?” "What services can be provided in the home so I won't have to go
to a nursing home until absolutely necessary?", "How much is the insurance going to
pay and how much will have to pay?", etc.

   The CC continues to work with the policyholder, family and providers as long as
they are covered under the policy. However, the policyholder is not obligated to use
the services of the CC, but there are incentives to do so.
   Most Long Term Care Insurance (LTC) policies have a waiting period before
benefits are paid (such as 20 days, 60 days, or 100 days) with the longer the period,
the lower the premium. With several LTC plans, if the CC is used, the waiting
period is waived; i.e. benefits will be provided on the first day that the insured
qualifies. This type of policy is new on the market, however it is expected that very
few policyholders will not take advantage of this form of Managed Care.

  Realizing that the care of the Medicaid patients, mostly senior citizens in nursing
homes or receiving Home Health Care, causes a tremendous drain on the state
budget, the state of New York and 2 other states have approached the problem by
passing legislation that states in essence that if an individual has a LTC policy that
provides nursing home benefits for a minimum of 3 years or home health care for 6
years, then after this period of time, the individual can receive Medicaid without
"spending down", i.e. using all of their own assets to pay for Medicaid. (Under
Medicaid, an individual can have only a minimum of assets and income, depending
upon the state - as an example in one state the patient may have a maximum of
$2,000 of assets, if in an institution, with maximum gross income of $1400. If they
have more than that, the sate will take their assets until the minimum- is reached.
Any assets that have been transferred to any other person for a 3 year period prior to
receiving Medicaid can be seized).
   In August 1997, the state legislature of New York passed a bill that clears the way
for 24 new managed care programs (described as "demonstration" programs, meaning
that these are trial programs) that will provide primary, acute and long term care
services for up to 25,000 chronically ill New Yorkers.
   These demonstrations can be sponsored by a variety of types of organizations, but
1WOs, prepaid service plans, and integrated delivery systems may sponsor no more
than five of the 24 programs. No more than eight can involve capitation.

    Overseeing these demonstrations will be a 13 member advisory committee, five
of whose members must be either clients of participating sponsors or their
    It also allows accelerated payment of death benefits under a life insurance policy
for people who require lifelong long term care.
    There is little doubt that other states are watching this very closely, and it can be
expected that the New York experiment will spread to other states rapidly,
particularly those states with large Senior Citizen populations.

                      THE MANAGEMENT OF TECHNOLOGY

     As discussed earlier, technology costs have driven up the cost of health care, so
it was a prime candidate for Managed Care techniques. Technology can be managed
by assessing the value of the various procedures, drugs and medical devices. This
assessment is important because it helps to prevent the rapid assimilation of any new
“state-of-the-art” technology, which may or may not be appropriate. There is a
distinct tendency to overuse the technology, with the result that can subject patients
to unnecessary treatments, erroneous diagnostic procedures, or treatments that will
produce no benefit.
     If a new procedure is overpriced, it can create underutilization; i.e. patients
won’t use the new technology because it costs too much. (However, sometimes the
opposite effect occurs, as some patients will insist on receiving the highest cost
procedure available. Fortunately most insurers or other plan providers will not allow
this situation).
     Conversely, if the cost of new technology is under-priced, then it can be over-
utilized. It is obviously essential to establish the proper price for the technology.
     When new technology for the treatment of patient first appears the insurers or
benefit payers insist that the new technology have final approval from the proper
governmental agency before they even consider paying for the service. They will
further insist that there is conclusive evidence that the new technology is beneficial to
the patient. They have strict criteria regarding testing outside of the controlled

conditions of the study submitted that showed it to be effective - in other words, the
same outcome must be available in areas outside of the original study. The
technology involved must be an improvement over existing alternatives to the


    Employees and employers frequently ask why the insurer cannot combine
employment benefits and Workers Compensation, thereby providing 24-hour
coverage for accidents and illnesses.
    For regulatory purposes, this would be like mixing apples and oranges - health
insurance benefits provided as employee benefits are underwritten by companies or
organizations under the life and health insurance regulations of the state Department
of Insurance. Workers Compensation is normally under the jurisdiction of the
Property and Casualty regulations. (Workers Compensation can be provided through
a state-owned monopoly also).
    Forgetting for the moment that for Workers Compensation (WC) purposes all
employees are covered immediately after hire, whereas under an Employee Benefit
(EB) program, there is normally a waiting period before coverage can be offered, and
normally it is not available to part-time employees, there are some other determining
    State laws make WC mandatory for all employees of a firm of a certain size, or
involved in a certain occupation. EB is optional and is more common with large
employees, i.e. there is no known regulations (at this time) that require ALL
employers to provide employee benefits.
    The primary difference is that WC pays for all medically necessary care, income
replacement benefits, and vocational rehabilitation. EB pays for medical benefits
which may be limited in scope (may not pay for all medically necessary care) and
they normally do not pay for disability. If the employer does have a disability plan as
part of employee benefits, it has a waiting period and usually coordinate with WC.
    For the employee, the principal difference is that WC is provided at no cost to
the employee, whereby EB may require the employee to pay part of the premium.

Also, the health insurance plans normally have deductible and coinsurance
    At this particular time, there is a major healthcare benefit provider active only in
one state, that has just started offering WC through an affiliated company. The life
and health agents may sell WC, but only under very strict conditions and under the
license of a Property and Casualty general agent. This experiment should prove
interesting and it can be expected that other large health benefit providers may offer
this coverage.
    One note of caution: Some indemnity insurers offer individual Major Medical
plans which cover job-related accidents or illnesses if the insured is not covered by
Workers Compensation insurance. However, these plans only cover the medical
benefits, and are subject to deductible, copayment provisions, etc. Specifically, they
do NOT cover disability payments.


1. Workers Compensation insurance
   A. is only necessary in large companies.
   B. can be written by health insurance companies.
   C. provides health benefits and disability benefits.
   D. only pays for temporary disability.

2. If an employee is injured on the job
   A. a company representative should provide whatever health and assistance
       is necessary for the employee to obtain prompt medical attention.
   B. only his individual health insurance policy will pay.
   C. he should be terminated before making a claim.
   D. he should not be moved until his attorney arrives on the scene.

3. After an employee has received medical treatment for an on-job injury
   A. the employer should cut of all communications with the employee.
   B. he should never be encouraged to return to work.
   C. the employer should stop paying his salary.
   D. the employer should make a special effort to maintain continual and
      positive communication with the employee.

4. An employee should return to work
   A. only when benefits expire.
   B. as soon as practical.
   C. when he/she can perform 100% of his/her previous duties.
   D. at any time they want to, regardless of their physical condition.

5. A program to return the employees to work when they are not going to be
   able to perform the duties of their former position, is
   A. Vocational Rehabilitation.
   B. Physical Therapy.
   C. a medical maintenance program.
   D. seldom used as it takes the employee off disability too soon.

6. “Centers of Excellence” refers to
   A. any university.
   B. Ivy League schools.
   C. hospitals that perform certain high cost and high risk procedures and meet
      very strict requirements.
   D.. clinics located in the heart of large cities.

     7. There is a tendency to over use medical technology with the result that
        A. patients can be subjected to unnecessary treatments.
        B. the cost of technology is reduced as the procedures are seldom used.
        C. doctors won’t use new technology as they are uncomfortable with it.
        D. hospitals can make bigger profits as they have more modern equipment.

     8. Work-related, and non-work-related medical care
        A. can be covered under a single policy.
        B. are covered by two separate and distinct areas of insurance.
        C. are covered immediately after employment.
        D. are really the same thing.

     9. Workers Compensation is
        A. provided at no cost to the employee.
        B. covers supervisors only.
        C. a policy that only pays for temporary disability.
        D. sold by life and health insurance agents.

     10. The purpose of a Second Injury Fund is
        A. alleviate the risk of an employer that hires a physically impaired
        B. to pay medical bills if an employment hazard injures more than one
        C. to pay a fund equal to one years salary or income, whichever is more, to
            the dependents of an employee that is injured on the job more than one
        D. to fund the education of dependent children of a severely injured person,
           or an employee who dies on the job.


1C    2A    3D 4B       5A     6C    7A    8B    9A     10A

                     VI. ETHICAL CONSIDERATIONS


     With the introduction of Managed Care, a conflict heretofore not of significance
in most situations, arose. As discussed in this text, there can easily be a conflict
between the treating physician and the “gatekeepers” of the Managed Care
     Managed Care organizations that have become successful have always listened
very intently to their providers and to their customers. They have amassed huge
amounts of knowledge and statistics and case studies, etc., in order to create their
treatment guidelines. While these guidelines are used to evaluate treatment, etc., they
also service as an educational tool by providing information to their providers as to
the effectiveness of the various procedures, drugs and devices.
     Regardless of the amount of information available to the organization, nothing
can replace the judgment of the individual physician in treating any individual. The
physician may not always be entirely correct, however the input of the physician is
absolutely necessary in determining the course of treatment for a particular patient.
     Many physicians feel that the Managed Care “bureaucrat” is looking over their
shoulder all of the time, and are more interested in the cost of treatment than in the
success of the treatment. They strongly feel that there is a definite ethical problem
when the guidelines disagree with the care that they feel is necessary for the proper
treatment of their patient.
     Managed care can only be successful when they completely and totally adopt the
position that the appropriateness of care should not be judged on strict adherence to
treatment guidelines, but on patient outcomes. Only by analyzing and comparing the
outcomes of treatment with the treatment guidelines, and this ethical conundrum be
laid to rest.

CASE STUDY: The "Transition of a Doctor”

   Profit-oriented incorporation of medical care is an increasingly common
phenomenon. In an interview in Managed Care magazine in August 1994, Dan Aleut,
NM, then president of the American College of Cardiology, described the trend of
for-profit HMOs to buy up doctor's group practices and turn them into profit centers
for the HMO.
   "Increasingly ...large insurance companies (HMOs) are buying patient lives, using
vast resources to buy up primary care practices, such that the companies essentially
own the patients and the doctors own and control the patients, you can dominate the
interaction between the doctors and patients for various motives. The worry is that
you control the interaction to make profits."
   A California doctor Dr. Charles, an excellent doctor whom his patients will miss
for years to come, lost his practice of many years to a for-profit HMO. Originally he
joined a multi-specialty group of about sixty physicians in a Los Angeles suburb. He
had been a family practice physician doing traditional indemnity FFS (Fee for
Service) insurance medicine. In early 1990's, the group was struggling because the
number of patients was decreasing, a lot of it due to the group's inability to get HMO
   The group was approached by a large multi-state for-profit HMO with an offer to
buy their group and its facilities (an increasingly common occurrence). The HMO
offered to pay each of the partner physicians a handsome sum in exchange for his or
her interest in the medical group. In order to get a full share of the buyout; each
doctor had to agree to a five-year contract as an employee of the for-profit staff
model HMO that would then be created-at a generous salary. After much debate, the
partners narrowly agreed to sell the practice. Dr. Charles stayed on as the buyout
agreement stipulated and received the generous agreed-on salary. He had no idea
what the future would bring.
   Soon after the agreement was implemented, the clinic's patients were notified that
during the next year the clinic would phase out FFS patients. Patients who wanted to
continue seeing their current clinic doctors would have to purchase HMO insurance.
The HMO made enrollment very inviting through a huge advertising campaign
drawing on the medical group's excellent reputation.
   Within thirteen months, the doctors were seeing only HMO patients. Then the
cost-saving push began. Utilization review (UR) nurses hired by the HMO began
reviewing each hospital admission. An UR nurse would call a doctor and suggest
ways to decrease the length of the hospital stay for each patient. At first the
suggestions were fairly benign - arrange for home-ad ministered IV antibiotics, or
discharge a hip-surgery patient early for physical therapy at home.
   Over time, though, the UR nurses grew increasingly aggressive. They challenged
every day of continued hospitalization and questioned every admission. The doctors
felt hassled by the nurses, but when they complained to the administration, they were
told to cooperate with them as much as they could. Feeling the pressure from the UR
nurses, and knowing they were being scrutinized by management, the doctors
gradually came to admit fewer patients and discharge patients much earlier than
before. They were becoming company doctors.

   Many patients' medical problems don't meet textbook criteria for hospital
admission or discharge but require subtle, informed medical judgment. Dr. Charles'
HMO hoped to color cases in these gray areas in its favor. If any argument could be
used to contain the cost of treatment of any of the patients, this is the direction that
the HMO would go.
   Dr. Charles felt that he was being second-guessed on every diagnosis and every
treatment. Initially, he had gone along with the extremely close supervision because
he admitted he learned a lot about treatment as the HMO had "volumes" on various
treatment procedures. However, he found himself in the position of having to treat a
patient that he had known for years and had treated in the pre-HMO days, and to treat
the patient according to the HMO guidelines, instead of what he knew instinctively
and from years of experience, would be much better treatment.
   He sold his interest in the group, and moved his practice to a small town in

  Physicians are expected to do everything possible to prolong life, regardless of
how long a time. In those countries that have single payer or socialized medicine,
this is not the practice.
    The issue of cost arises when it is apparent that the patient may continue to live
for a very short time, or in a very reduced capacity if they do survive. This is
rationing at its worst, but is a way of life (or death) in many countries.
    In the United States, many people have living wills in anticipation of severe
disabling illnesses or injuries. The Patient Self-Determination Act makes it
mandatory that patients be asked if they have a living will when they are admitted to
a hospital.
    As an example, in the United Kingdom which has socialized medicine, patients
with kidney failure who are over age 65 are normally refused kidney dialysis. In the
U.S., the fastest growing segment of society using dialysis are people over age 75.
    At this time, we in the United States are horrified at the idea that we may have to
eventually ration health care. However, it must be conceded that the more resources
are stretched to provide health care, the more likely it becomes that we may have to
face the question of rationing.
    Managed care reduces pressure on medical care costs, and therefore the less likely
it is that we will have to face the questions of rationing. By reducing pressure on

medical care costs, Managed Care can help us postpone or possibly eliminate having
to make this terrible decision.


1. The input of the physician is necessary in determining the course of
    A. never
    B. absolutely
    C. seldom
    D. questionably

2. Physicians are expected to do everything to
    A. prolong life.
    B. shorten life.
    C. collect their fees.
    D. avoid forming HMOs.

3.. In the United States, patients entering a hospital are asked if they have
     A. car in the parking lot.
     B. prescription drug card.
     C. living will.
     D. relative working at the hospital.

4. When Americans are told that they might have to ration health care
    A. most of them could. careless.
    B. they are horrified!
    C. they join HMOs.
    D. they cancel their Fee - for - Service plan.

5. Many physicians feel that Managed Care
   A. is more interested in the cost of treatment than in the success of the treatment.
   B. is more interested in the success of treatment than in the cost of the treatment.
   C. is more interested in making more money for the physicians than in proper
   D. is highly flexible and always approves a doctor’s course of treatment.

6. Managed care can only be successful when they completely and totally adopt the
   position that
   A. the only true and accurate method of determining proper treatment, is the cost.
   B. the appropriateness of care should be judged only on patient outcomes.
   C. the appropriateness of care should be judged only on strict adherence to
       treatment guidelines.
   D. most physicians look upon managed care as a bureaucrat looking over the
       shoulders of the doctors.

7. The issue of health care cost arises
   A. when politicians want a football to toss around before election (this is not the
      right answer, but it is an interesting thought…).
   B. when a young, healthy persons joins a health club.
   C. when it is apparent that the patient may continue to live for a very short time,
      or in a very reduced capacity if they do survive.
   D. very infrequently in a retirement community.

8. Marie is 72 years old, in relatively good health until she had a stroke. The
   prognosis is that it will take a lot of expensive therapy and then there is not much
   hope that she will ever really be able to have a meaningful recovery. The
   difference between what doctors in a country that has socialized medicine might
   do, and what most doctors in the United States might do, would be
   A. that doctors in socialized medicine countries would probably do everything in
      their power to have Marie lead a normal as possible, and function life for as
      long as possible.
   B. that doctors in the U.S. would probably just not prescribe therapy because of
      her age and physical condition, or any other type of relatively expensive
   C. not different at all. They would all try to return her to a productive life if
      possible, with no cost consideration.
   D. doctors in the U.S. would probably prescribe therapy and any other type of
      treatment, and do everything within their power to get her recovered and active

9. By reducing pressure on medical care costs, Managed Care can help
   A. speed-up the possibility of health care rationing.
   B. postpone or possibly eliminate medical care rationing.
   C. keep more politicians in power.
   D. put a cap on physicians incomes.

10. The Patient Self-Determination Act
    A. allows HMO patients to choose their own doctors.
    B. makes it mandatory that patients be asked if they have a living will when
admitted to the hospital.
   C. makes hospitals admit uninsured patients.
   D. allows patients to go to Canada for treatment if they wish.

1B   2A   3C   4B   5A   6B   7C    8D   9B   10B


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