The Health Care Delivery System and Managed Care


Organizing the U.S. Health care Delivery System for High Performance


Health care delivery in the United States has long been described as a “cottage industry,” characterized by fragmentation at the national, state, community, and practice levels. Despite the federal government’s role as the single largest payer for health care, there is no national entity or set of policies guiding the health care system. States divide their responsibilities among multiple agencies, while providers practicing in the same community and caring for the same patients often work independently from one another. Furthermore, the fragile primary care system is on the verge of collapse. This report focuses on the organization of health care delivery at the local level, considering the relationships among physicians, hospitals, and other providers in a community.

These three cases illustrate some of the shortfalls in our health care delivery system, reflecting its fragmentation and disorganization. If this is not how we want health care to be delivered, what do we want and how will we get it?






Each of these attributes is discussed in more detail below.

Attribute 1: Patients’ clinically relevant information is available to all providers at the point of care and to patients through electronic health record systems.

It is critical that providers have access to a patient’s full medical history at the point of care in order to deliver the most clinically effective and efficient care. To have this information available in real time, the most feasible approach is to implement interoperable electronic health record systems. Patients also should have access to their medical records, either through a portal to their provider’s EHR system or through a direct transfer of information to patients’ personal and portable health records. In addition to providing timely and relevant clinical information, EHRs have tools to support providers, including clinical decision support systems, reminders for preventive and other routine services, disease registries for population management, and e-prescribing.

Systematic reviews of the literature have demonstrated the potential for health information technology to transform the delivery of health care, making it safer, more effective, and more efficient. EHRs, when successfully implemented, improve the quality of care by increasing adherence to clinical guidelines, enhancing providers’ capacity for disease surveillance and monitoring, and reducing medication errors. In terms of controlling costs, in addition to efficiencies gained from better care management and reduction of duplicative tests, EHRs can improve administrative efficiency. Practices that have implemented EHRs report savings from reduced transcription services, decreased labor and supply costs for chart maintenance and creation, and decreased physical space requirements for medical records.



Attribute 2: Patient care is coordinated among multiple providers and transitions across care settings are actively managed.

As patients navigate through our health system, they see multiple providers (e.g., primary care providers and specialists, psychologists, social workers, and physical therapists) across different settings (e.g., hospitals and physician offices). It is therefore critical that their care is coordinated, and that transitions among care settings are actively managed. Without such management, patients are likely to be frustrated, medical errors are more likely to occur, and unnecessary or avoidable utilization of health care services will increase.

There is strong evidence that, if properly implemented, systems of care coordination could improve health outcomes and reduce costs, especially for patients with complex care needs. In North Dakota, MeritCare Health System and Blue Cross Blue Shield of North Dakota collaborated to conduct a chronic disease management (CDM) pilot program that linked diabetes patients to a CDM nurse in their primary care clinic. This team-oriented approach to coordinating diabetes care resulted in a significant increase in the receipt of recommended care and improved clinical outcomes, including better control of blood sugar and cholesterol, lower tobacco use, and decreased hospital admissions and emergency department visits. Total costs per member per year were $530 lower than expected in the intervention group, based on historical trends, saving an estimated $102,000 for 192 patients in the pilot.

Geisinger Health System has used coordination within a primary care setting through its Advanced Medical Home program. There is great interest now in the “medical home” concept, which is an approach to providing primary care that is accessible, continuous, comprehensive, patient-centered, and coordinated. At Geisinger, patients at high risk for disease complications are assigned a nurse case manager, who is employed by the health plan but embedded as a member of the primary care team in local Geisinger clinics as well as non-Geisinger medical groups. The nurse care manager coordinates with patients’ primary care physicians to develop and carry out customized care plans, including instituting evidence-based protocols and conducting outreach and follow-up when appropriate. The nurse also ensures that all patients admitted to the hospital receive timely follow-up care after discharge and analyzes what happened if a patient has to be readmitted. The system has documented improvements in care processes and cost control, such as savings of about $100 per member per month from reductions in avoidable hospital use among diabetes patients.

As with care coordination programs, there is evidence that care transition programs can result in better outcomes and lower costs. In the Advanced Practice Nurse (APN) Transitional Care Model developed by Mary Naylor of the University of Pennsylvania, APNs follow up with hospitalized heart failure patients after discharge to provide customized care in their homes. A randomized clinical trial of this protocol revealed increased mean time to first readmission for the intervention group, compared with the control group, and significantly fewer total rehospitalizations and lower mean total costs at 52 weeks after discharge. Together, these changes resulted in a one-third reduction in total Medicare outlays. Similarly, Eric Coleman of the University of Colorado Health Sciences Center determined that patients and their caregivers who received tools and support from a nurse “transition coach” upon hospital discharge were significantly less likely to be rehospitalized. Using his Care Transitions Measure, Coleman demonstrated that hospitals that provide adequate information to patients on how to manage their conditions following discharge are significantly less likely to have patients return to the hospital or the emergency room for the same condition.



Attribute 3: Providers (including nurses and other members of the care team) within and across settings have accountability to one another, review each other’s work, and collaborate to reliably deliver high-quality, high-value care.

In an ideal delivery system, providers both within and across settings would work together to reliably deliver high-quality, high-value care. In order for this to be effective, providers must develop accountability to one another. At a system level, accountability would be based on the notion of group responsibility and shared commitment to quality care. This would be evidenced in the performance improvement infrastructure, including peer review procedures, processes for sharing best practices, routine monitoring and feedback of provider performance, and monitoring of overall system performance. Collaborative efforts, supported by effective leadership and shared goals, result in better performance than that of providers working in isolation. For example, large physician groups generally perform better on measures of clinical quality than small physician groups (see Section IVfor additional discussion).

In addition to having a performance improvement infrastructure, it is also important that providers offer team-based care. The Institute of Medicine identified the development of effective teams as one of the key challenges for the redesign of health care organizations, and 88 percent of Americans view doctors and nurses working as a team as an effective way to improve health care quality. For example, the IMPACT program, disseminated by the University of Washington, improves the quality and efficiency of care for patients with late-life depression through collaborative teamwork. Under this model, a depressed patient’s primary care physician works in collaboration with a care manager (a nurse, psychologist, or social worker who may be supported by a medical assistant or other paraprofessional) to develop and implement a treatment plan. A consulting psychiatrist provides weekly caseload supervision to the care manager. If the patient’s condition does not improve (by at least 50 percent after 10 weeks), the consulting psychiatrist suggests treatment changes. In multiple studies, the IMPACT program has been shown to be significantly more effective than usual care for depression in a wide range of primary care settings. A randomized controlled trial found that 45 percent of IMPACT patients had a 50 percent or greater reduction in symptoms of depression after 12 months, compared with 19 percent of patients in the usual care group. IMPACT patients had lower-than-average costs over four years for all of their medical care, a total of approximately $3,300 less than patients receiving usual care, even taking into account the cost of the IMPACT program.



Attribute 4: Patients have easy access to appropriate care and information, including after hours; there are multiple points of entry to the system; and providers are culturally competent and responsive to patients’ needs.

In a patient-centered health system, appropriate care should be easily accessible to patients. Beyond having health insurance coverage, patients should be able to access appropriate health care when it is convenient for them; that means offering same-day appointments for urgent care and office hours that extend beyond regular work hours. Providers should be culturally competent, too—that is, they should show respect for and demonstrate understanding of patients’ preferences and their cultural, social, and economic backgrounds. There should also be multiple ways for a patient to enter the health system, such as through convenient retail clinics or e-health visits, as well as through traditional primary care clinics. Finally, patients should have 24-hour access to clinicians to help them navigate the health system for urgent care needs.

There is evidence that patients who receive care in a setting that is well organized and offers enhanced access to providers (e.g., in a medical home) are more likely to get the care they need, receive reminders for preventive screenings, and report better management of chronic conditions than patients who do not receive regular care in such settings.



Attribute 5: There is clear accountability for the total care of the patient.

In our health care system, it is easy to imagine that no single physician, or entity, feels accountable for the total care of a patient, but only for the portion of care they directly deliver. Without accountability for total care, it is easy to ignore care coordination and care transitions (and risk having patients “fall through the cracks”), and to focus on high-cost, intensive medical interventions rather than higher-value preventive medicine and the management of chronic illness.

In an ideal delivery system, some entity would be accountable for the total care of patients, across providers and care settings. The locus of accountability may be with an individual physician, a medical home, or the entire delivery system.



Attribute 6: The system is continuously innovating and learning in order to improve the quality, value, and patients’ experiences of health care delivery.

In an ideal delivery system, providers and health system leaders would be continuously learning and applying their knowledge to improve the quality, value, and patients’ experiences of health care. Not only would innovation drive performance improvement for existing processes, but also new structures and models of care would be tested to deliver greater quality and value to patients (e.g., the disease management and care coordination models described above).





Despite the overall fragmentation of the health care delivery system, there are pockets of innovation and high performance in the United States. The Commonwealth Fund, in partnership with Issues Research, conducted case studies of 15 diverse types of delivery systems that have been widely recognized as examples of high performance . The case studies examine the achievements of the delivery systems on the attributes we have identified for ideal health care delivery. The subjects range from fully integrated delivery systems such as Kaiser Permanente to large multi-specialty group practices such as the Marshfield Clinic to looser forms of organization such as Community Care of North Carolina. Even among the integrated systems, there was diversity with regard to public versus private systems, whether the system also included a health plan, and the contractual relationships among the partners.



From the case analyses, four important lessons emerge:

·              Existing delivery systems have achieved many of the attributes of ideal health care delivery.

·              There is more than one approach to organizing providers to achieve these attributes (see box).

·              Although there are diverse approaches to organization, some form of organization (i.e.,relationship among providers with established mechanisms for working across providers and settings) is required to achieve these attributes.

·              Leadership is a critical factor in the success of delivery systems.

The following sections illustrate how the 15 delivery systems examined in our case studies achieved the attributes of ideal health care delivery.

Patients’ clinically relevant information is available to all providers at the point of care and to patients through electronic health record systems.



In nearly all the delivery systems, providers use a shared electronic medical record. Lab results and other tests are available to all providers, regardless of who actually ordered the test. In some systems, such as the Group Health Cooperative, Henry Ford, Geisinger, and Kaiser, electronic medical records have portals to enable patients to access their medical information and make appointments online. The investment in these systems was substantial, both in terms of hardware and software costs as well as training and ongoing support of provider utilization. The resources were either a direct investment by the delivery system or, as in the case of Partners HealthCare, funded in part by a payer’s pay-for-performance program negotiated by the delivery system. In either case, organization was critical not only in getting providers to adopt electronic medical records, but also in creating infrastructure to enable information exchange.

Regional Health Information Organizations or Health Information Exchange Networks may be able to facilitate information exchanges among providers. However—given the demise of high-profile health information exchange efforts such as the Santa Barbara County Care Exchange and the slow adoption of EHRs by physicians not in large organizations—widespread use of EHRs with sharing of information among providers is most likely to occur in organized delivery systems.



Patient care is coordinated among multiple providers and transitions across care settings are actively managed.

Organized delivery systems are working to ensure that patient care is coordinated and care transitions are managed. Several delivery systems, including Geisinger, Group Health Cooperative, and Henry Ford, are developing their primary care sites to be “medical homes,” or centers of care coordination for ambulatory patients. Intermountain Healthcare (IHC) emphasizes the central role of primary care physicians in managing patients’ care, enabling them to treat chronic illnesses in the context of broader health issues. For example, IHC instituted a mental health integration program in which behavioral health professionals support primary care teams in recognizing and treating patients with both physical and mental illnesses. At the Mayo Clinic, every patient is assigned a coordinating physician, whose job it is to ensure that patients have an appropriate care plan, all ancillary services and consultations are scheduled in a timely fashion to meet patients’ needs, and patients receive clear communication throughout and at the conclusion of an episode of care.

In the New York City Health and Hospital Corporation’s Queens Health Network, care managers dedicated to several different clinical areas or settings (e.g., the emergency department, diabetes, heart failure, or HIV) are responsible for identifying high-risk patients and coordinating their care across inpatient, outpatient, and community clinics, with the goal of preventing emergency hospital visits. These care managers operate under a cross-functional care management department.

Even in less-integrated systems, such as Community Care of North Carolina (CCNC), care management is critical. CCNC is a system of 14 regional networks, each of which is a nonprofit organization consisting of essential local providers, county health departments, and social services. CCNC networks rely on case managers, whose core processes are the same across all networks, to help identify high-risk patients, assist in disease management education and follow-up, help patients coordinate their care and access services, and collect data on process and outcome measures.

A systematic approach to coordinating patient care and managing transitions requires some organizing entity. The mechanism is apparent in a single organization such as an integrated delivery system, since a single organization housing multiple providers and care settings is responsible for all aspects of that patient’s care. Individual providers or small practices that seek to offer well-coordinated care must establish multiple linkages with other providers and settings. These linkages are, in fact, the beginning of “organization.”

Delivery systems that include health plans have financial incentives to provide care coordination and care transition services. To the extent that overall costs are reduced from fewer emergency room visits or hospitalizations, these programs offer a positive return on investment. However, the case studies revealed that even in cases where no direct incentives existed, exemplary organizations made significant investments in care coordination, presumably because they saw the need for such services for providing excellent patient care.



Providers (including nurses and other members of the care team) within and across settings have accountability to one another, review one another’s work, and work together to reliably deliver high-quality, high-value, care.

Across the case studies, the delivery systems created a culture of quality in which providers had a sense of group responsibility and accountability to one another. At Kaiser Permanente, this fostered transparency, the sharing of performance data among peers, and the use of feedback as a driver of performance improvement. Kaiser Permanente physicians believe they are collectively and individually responsible for the quality and cost of care; they are stewards of both member resources and member health; and they are accountable to the health plan as full and equal partners. At Kaiser and other systems, shared accountability is reflected in robust performance measurement infrastructure as well as the aligning of incentives with performance goals. For example, HealthPartners has implemented a pay-for-performance program with their medical groups, Henry Ford has rewards and recognition programs for all staff, and Geisinger and Kaiser have a robust physician incentive program.



Patients have easy access to appropriate care and information, including after hours. There are multiple points of entry to the system, and providers are culturally competent and responsive to the needs of the patient.

For example, Intermountain Healthcare extends access to underserved populations through community and school-based clinics, in addition to traditional primary care practices. HealthPartners reaches out to workers through their Well@Work workplace clinics. It is difficult to imagine how unrelated practices—those that are not part of a larger organized delivery system or active participants in an information exchange—could offer easy access to appropriate medical care, with multiple points of entry to the system.

Many of the delivery systems examined, including Group Health Cooperative, the Marshfield Clinic, and Denver Health, have reengineered their work processes to improve same-day access for their members, and most have 24/7 alternatives (e.g., call lines and urgent care centers) to emergency department care. Health information technology plays a key role in improving access to care. Electronic systems facilitate easier scheduling of appointments. In addition, systems such as the Henry Ford Health System’s interactive Web site, “MyHealth,” enable virtual medicine consults or “e-visits.”

On its own, organization does not necessarily foster cultural competency among individual providers. Still, large delivery systems or smaller systems linked through virtual networks or shared services agreements have the resources needed to develop culturally sensitive programs for diverse patient populations. With organizational commitment, such programs can be transformative. Kaiser has developed clinics for specific patient populations. At these clinics, patients communicate with their providers in their native language and staff members are aware of and sensitive to patients’ cultural backgrounds. New York City Health and Hospitals Corporation (HHC) meets the needs of patients speaking over 100 languages through central dispatch offices for interpretation services, supported by standardized medical interpretation training for 200 bilingual and multilingual staff and volunteers, as well as multilingual publications and signs. HHC’s Bellevue and Kings County Hospitals, as well as two large community-based ambulatory care centers, are piloting the use of remote simultaneous medical interpreting, in which a remotely located interpreter uses wireless technology to interpret between providers and patients. Initial results indicate the technology improves the privacy, speed, reliability, and efficiency of interpretation, compared with traditional interpretation methods, thereby reducing linguistic and medical errors and the length of visits.

There is clear accountability for the total care of the patient.

Although there are cases in which one of the delivery systems assigned an accountable physician (e.g., Mayo Clinic) or an accountable practice (e.g., Geisinger’s “Medical Homes”) for a patient, it may be more appropriate to say that each of the health systems assumed accountability for the patient. Even though patients move among different providers and across care settings, they generally remain within the health system. This arrangement is most explicit in the prepaid practices, such as Kaiser Permanente, as there is clear financial accountability for patients’ total care. However, the other delivery systems also assumed responsibility for patients, reflected in their efforts to coordinate care and manage care transitions.



The system is continuously innovating and learning in order to improve the quality, value, and patients’ experiences of health care delivery.

The case studies found widespread evidence of innovation and continuous improvement. Not surprisingly, across many of the systems, electronic medical records play a critical role as enablers of performance improvement activities. For example, the Health and Hospitals Corporation uses health information technology to implement evidence-based practices through standing orders and routine screening protocols, while HealthPartners uses EHRs for clinical reminders and safety alerts.

In addition to using health information technology, organized delivery systems take advantage of their scale and infrastructure to improve health care quality and value. For example, Intermountain Healthcare has adopted an overarching strategic plan called Clinical Integration that focuses on improving value in key work processes. The program is built on three pillars: integrated management information systems, an integrated clinical and operations management structure, and integrated incentives. Early on, they realized $20 million in cost savings from 11 clinical improvement projects. Likewise, Denver Health seeks to continually streamline operations and eliminate waste for strategic “value streams”—such as access to care, inpatient flow, outpatient flow, operating room flow, and billing—with rapid-cycle improvement projects targeted at individual processes. Health Partners has a comprehensive model for improvement that includes: setting ambitious targets; measuring optimal care; reaching agreement on best care practices and support for improvement; aligning incentives; and ensuring transparency of results. At Scott & White in Temple, Texas, every major facility and clinic has a director of quality and a Quality and Patient Safety Council who report monthly to a system-wide Quality and Patient Safety Council led by the system CEO. The system-wide Council, on which four board members (including a layperson) serve, monitors quality across the organization. Any core quality measure not achieving 90 percent becomes an organization-wide quality improvement initiative with a formally chartered team led by a physician and an operational leader.

Without an organizing entity, providers could certainly engage in performance improvement projects and take advantage of external resources (e.g., the Medicare Quality Improvement Organization program, Institute for Healthcare Improvement campaigns, or national quality improvement collaboratives), but they would lack the expertise and economies of scale that come from a larger organization. In addition, they would face enormous difficulties in working across provider settings, and would not be able to implement novel innovations such as the chronic disease management program in North Dakota or the Advanced Medical Home program at Geisinger, both described above.

In short, the cases illustrate that the care that we want—care that meets the six attributes of an ideal health care delivery system—requires organization.



For the purposes of this report, we define “organization” as relationships among providers, with established mechanisms for communication or working across providers and settings. Although the case studies demonstrate that there are various effective approaches to organization, ranging from fully integrated delivery systems like Kaiser Permanente to looser networks of providers like Community Care of North Carolina, it is clear that some form of organization is required to achieve the attributes of an ideal health system we have identified.

The argument linking greater organization with higher performance is straightforward. Information should flow more easily among providers in an organized system than among unrelated providers. More organized systems are likely to have more resources and expertise to invest in infrastructure, ranging from health information technology to staff and processes for quality measurement and improvement activities, and be able to take advantage of economies of scale. Large organizations can create financial incentives for physicians to improve the quality of care. In organized systems, physicians and other health care providers should have easy access to colleagues for formal and informal consultation and sharing knowledge. As part of an organization, providers could hold one another accountable for delivering high-quality care. An organized system also has the potential to efficiently allocate resources for the optimal care of the patient. Finally, a more organized system should offer multiple points of access to care across the continuum of health services.

We reviewed the literature examining the relationship between various types of organization and performance on measures of clinical quality, efficiency, and patient experiences. Overall, the literature demonstrates that more organized systems generally perform better than less organized systems on measures of clinical quality, show promise for reducing health care costs, and have a mixed record in terms of patients’ experiences. It is also clear, however, that organization by itself does not necessarily lead to high performance.


Organization and Quality

There is a growing body of evidence published in the peer-reviewed literature that more organization is associated with higher quality. Beginning with the most basic level of organization—the formation of groups of physicians—large group practices perform better than solo practices. For example, large practices are twice as likely as small groups or solo practitioners to engage in quality improvement and utilize electronic medical records. They are also more likely to practice in teams, use performance and outcome measurement for quality improvement purposes, and provide preventive services than solo practitioners or small groups. Group practices have achieved better health outcomes as well: they have been shown to achieve lower mortality in their heart attack care than solo practices. Further, physicians in group practices perform better on recertification tests than those in solo practice. Maintenance of board certification is voluntary, but there is evidence that certification correlates with better quality and outcomes and more reliable care, higher rates of preventive services, lower mortality in myocardial infarction and colon resection, and fewer low birth weight babies.

There is also evidence that relationships among groups are important. For example, physician group affiliation with networks is associated with higher quality, with the impact greatest among small physician groups. Independent practice associations (IPAs) are twice as likely to use effective care management processes as small groups with no IPA affiliation.

Finally, there is evidence that full integration may lead to even higher performance. For example, integrated medical groups in California achieve a higher level of clinical quality than IPAs. Leaders of integrated medical groups are more likely than IPAs to report using electronic medical records, following quality improvement strategies, and collecting patient satisfaction data. Medical groups are also four times more likely than IPAs to offer health promotion programs. Health maintenance organizations (HMOs) with group or staff model physician networks (i.e., large networks in which the physicians are employees or members of a partnership) tend to have higher performance on clinical measures than HMOs with independent physician networks.



Organization and Efficiency

There are few studies focusing on the relationship between organization and efficiency. Older studies have demonstrated that costs are about 25 percent lower in prepaid group practices than in other types of health plans, and a study of eight large, prepaid group practices found a physician-to-population ratio of 22 to 37 percent below the national rate. A more recent study revealed that chronically ill Medicare patients in integrated delivery systems use significantly fewer patient resources in the last 24 months of life, compared with the national average, including fewer hospital days and ICU days. Total physician and hospital spending for patients in organized systems were 24 percent and 2 percent less, respectively, than other practices.

There has been more research showing that health care systems that emphasize primary care provide better outcomes at lower cost. In such systems, including prepaid group practices and integrated delivery systems with fee-for-service payer environments, Medicare beneficiaries have more visits with primary care physicians and fewer visits with specialists for each episode of care, spend fewer days in intensive care, and incur lower health care costs. A study comparing Kaiser Permanente to the British National Health Service illustrates this connection between primary care and efficiency. The study found that Kaiser achieved better performance outcomes in several areas for approximately the same cost per person. The authors attributed Kaiser’s superior efficiency to “integration throughout the system.”



Organization and Patient Experiences



Most studies show that, on average, prepaid group practices perform worse on measures of patient satisfaction than fee-for-service health plans. It is difficult to tease out whether this is related to the insurance function of prepaid group practices, or to characteristics inherent to organized delivery systems. In more recent cases, large group practices (e.g., Harvard Vanguard Medical Associates in Massachusetts) have achieved high performance on measures of patient satisfaction, demonstrating that it is possible for organized systems to excel in this area. Integrated systems are more likely than solo practitioners to collect data on patient experiences and to base physician bonuses on patient satisfaction.

A recent study by the Pacific Business Group on Health found that an intervention focused on improving doctor–patient communication, coordination of care, and access to care led to improvements in patient experience scores for communication and coordination of care items. This suggests that organized care settings can improve patients’ satisfaction by focusing on provision of patient-centered care.

Finally, there is evidence that patients desire more organized care, at least in theory. According to The Commonwealth Fund Survey of Public Views of The U.S. Health Care System, 68 percent of Americans believe that patient care would improve if physicians practiced in groups, rather than on their own.




Despite evidence that greater organization is associated with better quality and, to a lesser extent, greater efficiency, physicians have not been migrating toward more organized systems. For their part, patients generally have not been seeking out or demanding care from organized delivery systems. The proportion of physicians in small practices (with one to five physicians) is dropping. Yet, doctors are migrating toward mid-sized, single-specialty groups in which they can negotiate higher payments, concentrate capital, and selectively provide services that garner higher profit margins, rather than toward large, multi-specialty group practices or integrated delivery systems.

During the height of managed care in the mid-1990s, physicians began to aggregate into larger multi-specialty groups, independent physician associations, or physician-hospital organizations to achieve economies of scale and take advantage of The referral benefits of having primary care physicians within the organization. At the time, large multi-specialty group practices experienced a number of advantages over other, smaller practices, including leverage with health plans and hospitals, economies of scale, improved physician lifestyle, and improved quality of care.

While the general population reported fairly high levels of satisfaction under managed care, those with chronic illnesses (with greater exposure to utilization management) were much less satisfied with their care, compared with the prior fee-for-service environment. However, satisfaction varied with factors such as ownership status (i.e., nonprofit versus for-profit) and plan type (i.e., staff model versus discounted fee-for-service). By the late 1990s, initial consumer support for managed care, particularly the more restrictive forms, had declined as consumers worried that needed care might be withheld and wanted greater control over the health care options available to them. Researchers found that patients in managed care plans valued their primary care provider’s role as care coordinators, but wanted them to refrain from acting as gatekeepers to specialty care. Employers began to demand broad, almost universal choice among providers. The backlash resulted in marketplace, legislative, and legal reactions that altered the operations of most managed care organizations and HMOs.

As managed care organizations and health plans reduced cost containment restrictions, large multi-specialty groups, IPAs, and physician-hospital organizations lost many of The advantages that had brought them together in the mid-1990s. Physicians became more distant from hospitals and many stopped providing services they had provided traditionally, including emergency department call and service on hospital committees.

On its own, the consumer backlash against managed care does not account for the increase of mid-sized single-specialty practices rather than larger, multi-specialty groups. Practice costs increased over this time but payment rates did not follow, creating incentives for physicians with fee-for-service payments to provide additional services and emphasize technology-dependent procedures rather than cognitive services. Other barriers to the success of integrated systems include failure to manage costs, conflicts between primary care providers and specialists, and uneven regulatory environments that place a greater burden on HMOs than on fee-for-service plans. Purchasers are also partially responsible for the limited presence of large multi-specialty group practices and integrated systems. Few employers provide incentives that would lead employees to choose more integrated systems.

Despite the trend of physicians moving away from organized delivery systems, some high-performing organized systems have created an attractive work environment for physicians. For example, Kaiser Permanente reports having many more physician applicants than open positions, and is now considered a desirable place to work among physicians completing residency training.

Similarly, although patients have not been demanding care from organized delivery systems, it is clear that attributes of high-performing organized delivery systems, such as care coordination and widespread adoption of electronic medical records, are desired by patients. In addition, as noted above, some large group practices, such as Harvard Vanguard Medical Associates, have excelled in measures of patient experience. As we seek to create an environment that stimulates organization for high performance, it is important to derive lessons from these experiences to build support for organized delivery systems among providers and patients.





In order to get the care we want, our fragmented health care system needs to be fixed. We have identified the key attributes of an ideal health care delivery system and demonstrated that more organization, while it may take diverse forms, is required to achieve them. At the same time, organization alone is inadequate to ensure high performance, especially in terms of efficiency and patients’ experiences. Therefore, policy interventions should focus on stimulating organization as an explicit path toward high performance. The policies fall into the following categories:



Provider payment reform• : Financial incentives are a powerful lever for changing provider behavior. For example, the introduction of the diagnosis-related group prospective payment system for hospitals resulted in a marked decrease in severity-adjusted length of stay overall. The predominant fee-for-service payment system facilitates our fragmented delivery system; financial incentives do not reward care coordination, efficiency, or high-value care (see box). As a result, it often acts as a barrier to greater organization and more coordinated and efficient care delivery.

Patient incentives:• Financial incentives are also a powerful lever for changing patients’ behavior. For example, payer interventions such as provider-tiering (in which insurers offer lower copayments to encourage patients to choose providers deemed to be of higher value) and network narrowing (removing lower-quality or lower-value providers from a network) have been effective at getting enrollees to change providers. Currently, there are limited incentives to encourage patients to choose high-performing organized delivery systems.



Regulatory changes: • The regulatory environment can either facilitate or act as a barrier to certain types of delivery system organization. The current regulatory environment does not encourage hospital–physician integration.

Accreditation:• Accreditation programs may stimulate the growth of organized delivery systems as well as improve their performance, particularly if payers take these programs into account when making purchasing decisions.

Government infrastructure support: • Even with appropriate incentives in place, there will be areas, particularly rural areas and other regions where small independent practices predominate, or for specific populations, in which formal organized delivery systems may not emerge. In such areas, government could facilitate the creation of shared organized delivery system infrastructure such as health information technology, performance improvement activities, care coordination networks, care management services, and 24/7 access to services.

Provider training:• Educational programs, including physician and other health professional training and continuing education, develop or enhance provider competencies. Currently, most programs do not teach providers how to successfully practice as part of an organized system. Rather, they tend to focus on silos in care (e.g., inpatient care). They do not emphasize competencies in skills such as coordinating care or working as part of a comprehensive care team.

Promoting health information technology:  Because the use of interoperable electronic health records is an important aspect of an organized delivery system, it may be reasonable to consider policy strategies that specifically encourage the adoption of EHRs as part of an overall strategy to promote organized delivery systems.

 Evaluating the Policy Options

We discuss why each policy option would promote greater organization, highlight the pros and cons of each approach, and identify important issues that must be addressed. In Exhibit 4, we estimate the potential impact of each policy option on the six key attributes of an ideal delivery system

Overall, it is apparent from our analysis that there are several potentially effective policy approaches to stimulate organization for high performance, yet all entail significant challenges. In addition, it is clear that no single policy lever or approach will stimulate all six desired attributes. Further, we find that the different policy levers would have differential impacts in terms of stimulating the various models of organization.





The Commission on a High Performance Health System believes that addressing the fragmentation of the U.S. health care delivery system is a critical element of health reform, one that is necessary to achieve transformational gains in the quality and value of care. The goal of our policy recommendations is to stimulate greater organization of the delivery system to achieve high performance. In making the recommendations, we are guided by two overarching principles:

1.            the policies should move the system toward achievement of the attributes of the ideal delivery system we have identified; and

2.            the policies should allow for diverse models of organizational structure that might achieve those attributes, explicitly recognizing that different regions of the country may require different models of organization.

No single policy lever or option will fix the fragmentation of our health care system. Rather, a comprehensive approach is required—one that might lead progressively over time to greater organization of the health care system and better performance. We recommend the following strategies:

Payment Reform. Provider payment reform offers the opportunity to stimulate greater organization, as well as higher performance. The predominant fee-for-service payment system supports the fragmentation of our delivery system. We recommend that payers move away from fee-for-service toward more bundled payment systems that reward coordinated, high-value care. In addition, we call for expanded pay-for-performance programs to reward high-quality, patient-centered care. Specifically, we believe that:

·                   Full population prepayment to organized delivery systems should be encouraged; that o is, a single payment should cover the full continuum of services of a given patient population for a period of time. This payment should be adequately risk-adjusted to avoid adverse patient selection. If full population prepayment is not feasible, payers should encourage:

o      Global case payments for acute hospitalizations. Ideally, these payments should bundle all related medical services from the initial hospitalization to a defined period post-hospitalization (including preventable rehospitalizations). These payments should be risk-adjusted to avoid adverse patient selection.

o      Alternative payment structures for primary care. Primary care practices that provide comprehensive, coordinated, patient-centered care (e.g., certified medical homes) should be offered an alternative to fee-for-service payments. Two promising alternatives include comprehensive prepayment for primary care services, or fee-for-service plus a per-patient care management fee.

·                   Pay-for-performance should be expanded. The more bundled the payment mechanism, of the higher proportion of the payment should be tied to performance. These programs should migrate away from measures that focus on individual processes in a single provider setting (e.g., hemoglobin A1C testing rates for patients with diabetes) toward broader measures of quality, such as patient clinical outcomes (e.g., blood pressure control or hospital readmission rates), care coordination, and patient experience.

·                   Medicare should support demonstration projects that test innovations in payment o design and care delivery.

Patient Incentives. Patients should be given incentives to choose to receive care from high-quality, high-value delivery systems. This would require performance measurement systems that adequately distinguish differences among delivery systems.

Regulatory Changes. The current regulatory environment should be modified to better facilitate clinical integration between providers.

Accreditation. There should be accreditation programs that focus on the six attributes of an ideal delivery system we have identified. Payers and consumers should be encouraged to base payment and participating provider network decisions on such information, in tandem with performance measurement data.

Provider Training. Current provider training programs for physicians and other health professionals do not adequately prepare providers to practice in an organized delivery system or team-based environment. Provider training programs should be required to teach systems-based skills and competencies, including population health, and be encouraged to include clinical training in organized delivery system environments.

Government Infrastructure Support. We recognize that, in certain regions or for specific populations, formal organized delivery systems may not develop. In such instances, we support an increased government role in facilitating or establishing the infrastructure for an organized delivery system, such as assistance with establishing care coordination networks, care management services, after-hours coverage, health information technology, and performance improvement activities.

Health Information Technology. Health information technology provides critical infrastructure for an organized delivery system. Providers should be required to implement and utilize certified electronic health records that meet functionality, interoperability, and security standards, and to participate in health information exchange within five years.


Our fragmented health care system delivers poor-quality, high-cost care. We cannot achieve a higher-performing health system without reorganization at the practice, community, and national levels. This report focuses on the community level, where we need delivery systems with the following attributes:

1.            Patients’ clinically relevant information is available to all providers at the point of care and to patients through electronic health record systems.

2.            Patient care is coordinated among multiple providers and care transitions across settings are  actively managed.

3.            Providers (including nurses and other members of the care team) both within and across  settings have accountability to one another, review one another’s work, and work together to reliably deliver high-quality, high-value care.

4.            Patients have easy access to appropriate care and information, including after hours; there  are multiple points of entry to the system; and providers are culturally competent and responsive to the needs of patients.

5.            There is clear accountability for the total care of the patient.

6.            The system is continuously innovating in order to improve the quality, value, and patients’ experiences of health care delivery.

This vision of health care delivery is not out-of-reach. We have demonstrated that some delivery systems have achieved these attributes, and they have done so in a variety of ways, ranging from fully integrated delivery systems to looser networks of providers created by private entities (e.g., Hill Physicians Independent Practice Association) or public–private partnerships (e.g., Community Care of North Carolina). The Commission’s policy recommendations are intended to promote the spread of organized delivery systems as a path toward high performance, while acknowledging the different forms such systems can take.

It is important to recognize that, beyond the Commission’s policy recommendations, other actions should be taken. If adopted, the policies would create an environment that would foster and promote organization for high performance. However, the policies would not teach delivery systems how to get there. Research is needed to learn about the organizational leadership and culture required to assist providers as they move toward greater organization. Research is also needed to explore the types of organized delivery systems that are most appropriate for different regions of the country. We also need to learn more about how these systems can interact optimally with public health systems and communities at large; this is critical, given the importance of preventive medicine and public health in determining overall population health. Such activities are beyond the scope of the policy recommendations included here, but should be addressed by strong and coordinated leadership.

We can no longer afford, nor should we tolerate, the outcomes of our fragmented U.S. health care system. We need to move away from our cottage industry, where providers have no relationship with, or accountability to, one another. Though we acknowledge that moving toward a more organized delivery system will be complex and difficult, the recommendations of the Commission put forth in this report offer a concrete approach to stimulate organization for high performance.



What is Managed Care Plan?

Managed care plan is a variety of techniques that is designed to help reduce the cost of providing improved quality of care and health benefits to organizations. The techniques that may be used are as follow: providing economic incentives for physicians; increase in the cost of beneficiary sharing; establishing cost-sharing incentives for outpatient surgery, intensifying management of high-cost health care cases and controlling inpatient admissions and their length of stay.



Health Maintenance Organization Act of 1973

This is more popularly known as the HMO Act of 1973 which was passed as a result of the discussions conducted in the Congress of the United States with Paul Ellwood. This Act provided loans and grants to help begin, provide and expand the Health Maintenance Organizations of the country. The number of employees that can take advantage of this service was reduced to 25 and certain state restrictions were also removed. This further solidified the offers of HMO and provided HMO a greater access to different employers of the market.

Typical Managed Care Techniques

The most significant characteristic of managed care is the use of network or panel of health care providers which can assist the listed and approved enrollees. It shares the following integrated delivery systems:

1.     It has explicit standards for the selected health care providers.

2.     It emphasizes on preventive care.

3.     It provides financial incentives to further encourage the efficiently use the services offered by the managed care organization.

4.     It has a selected list of health care providers that provides a comprehensive array of health care services to its enrollees.

5.     It has a regular set of formal utilization review that aims to help improve the quality of its programs.



Different types of Organization which Offers Managed Care Plan Health Maintenance Organization (HMO)

This is the most inexpensive and basic type of health maintenance organization which provides basic healthcare coverage to its members. It has attracted many small businesses because of its relative affordability without compromising the services of its enrollees. In this type of managed care plan, the enrollees are given the liberty to choose a primary care physician (PCP) who is tasked to take care of all the basic needs of the enrollees. The task of the PCP is to coordinate the member’s care and for him to provide referrals to other specialists who can assist the health care needs of the enrollees.

Point of Service Plan (POS)

This is more comprehensive in comparison to an HMO plan. This is offered by companies and business owners to cater to the needs of its employees who seek aid of physicians who are outside of the health plan’s network. Through this managed care plan, the enrollee is still expected to choose a PCP who will handle and coordinate the health care services needed by the enrollee but it is not limited to health care providers of the managed care plan organization.

Preferred Provider Organization (PPO)

This is the most comprehensive type of managed care plan which gives utmost liberty to its enrollees in selecting health care providers. Enrollees are given freedom to choose services either from inside or outside health plan networks but of course the payment for out-of-network services is still higher.

Managed care is a method of delivering health care through a system of network providers. There are differences in the premiums and co-payment amounts among the managed care health plans offered; however, these plans provide comprehensive medical benefits at lower out-of-pocket cost by utilizing network providers. Managed care health plans coordinate all aspects of a Plan Participant’s health care including medical, prescription drugs and behavioral health services. An annual $50 prescription deductible is applied for each individual covered on the plan each plan year.

Members who enroll in a managed care health plan must select a Primary Care Physician or Provider (PCP) from the managed care health plan provider directory or website. Always contact the physician’s office or managed care health plan administrator to find out if the PCP is accepting new patients. Special attention should be given to these participating physicians and hospitals, which Members are required to use for maximum benefits.

If the designated PCP leaves the HMO network, there are three options:

·                     Choose another PCP with that plan,

·                     Change managed care health plans, or

·                     Enroll in the QCHP indemnity plan.

This opportunity to change health plans applies only to the PCP leaving the network. It does not apply to hospitals, specialists or women’s healthcare providers who are not the designated PCP.

Members are notified in writing by the managed care health plan administrator when a PCP network change occurs. Members have 60 days to select a new PCP or make a health plan change.

There may be managed care health plans that are self insured and administered by the State of Illinois, meaning all claims are paid by the State of Illinois even though managed care health plan benefits apply. The plans are not regulated by the Illinois Department of Insurance and are not governed by the Employees Retirement Income Security Act (ERISA).

In order to have the most detailed information regarding a particular managed care health plan, you may ask to receive a plan’s Summary Plan Description (SPD) which describes the covered services, benefits levels and exclusions and limitations of the plan’s coverage. The SPD may also be referred to as the Certificate of Coverage or the Summary Plan Document.

Pay particular attention to the health plan’s exclusions and limitations. It is important that you understand what services are not covered under the plan. If you decide to enroll in a managed care health plan, it is essential that you read your SPD before you need medical attention. It is your responsibility to become familiar with all of the specific requirements of your health plan.

In most cases a referral for specialty care will be restricted to those services and providers authorized by the designated PCP. In some cases, referrals may also require pre-approval from the managed care health plan. To receive the maximum hospital benefit, your PCP or specialist must have admitting privileges to a network hospital.

For complete information on specific plan coverage or provider network, contact the managed care health plan and review the SPD.

NOTE: Managed care health plan provider networks are subject to change. Always call the respective plan administrator for the most up-to-date information.­


Health Maintenance Organization (HMO)



HMO Members must choose a Primary Care Physician or Provider (PCP) who coordinates the medical care, hospitalizations and referrals for specialty care.

HMOs are restricted to operating only in certain counties and zip codes called service areas. There is no coverage outside these service areas unless pre-approved by the HMO. When traveling outside of the health plan’s service area, coverage is limited to life-threatening emergency services. For specific information regarding out-of-area services or emergencies, call the HMO.

Like any health plan, HMOs have plan limitations including geographic availability and limited provider networks. Most managed care health plans impose benefit limitations on a plan year basis (July 1 through June 30); however, some managed care health plans impose benefit limitations on a calendar year basis (January 1 through December 31). Contact the managed care health plan for additional information.



NOTE: When a managed care health plan is the secondary plan and the Plan Participant does not utilize the managed care health plan network of providers or does not obtain the required referral, the managed care health plan is not required to pay for services. Refer to the plan’s SPD for additional information.


Open Access Plan (OAP)

The Open Access Plan combines similar benefits of HMOs and traditional health coverage. The Plan offers two managed care networks, Tier I and Tier II. Enhanced benefits are available by utilizing providers in Tier I and II. In addition, Tier III benefits (out-of-network) are available, so Plan Participants can have flexibility in selecting health care providers. The provider and tier selected for each service determine the level of benefits available.

The OAP allows Plan Participants to mix and match providers. For example, the Plan Participant can utilize a Tier II physician and receive care at a Tier I hospital. The OAP Plan Administrator can provide a directory that contains listings of the Tier I and Tier II networks. The benefit level for services rendered will be the highest if selecting Tier I providers.

·                     Tier I is often a 100% benefit after a co-payment.

·                     Tier II is generally a 90% benefit with a 10% coinsurance after the annual plan deductible is met.

·                     Tier III (out-of-network) is generally paid at 80% of the Usual and Customary (U&C) charges after the annual plan deductible is met.



Health Care Costs:

Managed Care, Prospective Payment, and Reimbursement Trends

A Concern for Costs

It's an interesting fact that, even though cost containment is the driving force in health care, we always have a difficult time identifying people who can write good chapters about health care costs related to nursing. Not many nurses have developed programs of research or careers around nursing economics. Until recently, this was not a subject that was taught in many schools of nursing or a source of concern for many nurses. Things have changed. The concern for costs is determining a number of decisions that affect nurses and our patients. This section introduces some of the issues around the costs of nursing and health care.

In their debate chapter, Seefeldt, Garg, and Grace overview the two major approaches to the control of health care costs: regulation and competition. This is a very informative chapter and contains a clear overview of a number of cost-control initiatives. Total U.S. health expenditures grew from $41.9 billion in 1965 to $425 billion in 1985. The authors review the various regulatory (government intervention) initiatives of the past 30 years: certificate of need, economic stabilization program, professional standards review organization, prospective rate setting, and prospective payment systems. In the past two decades competitive approaches, such as competitive contracting, managed care and health maintenance organizations, preferred provider organizations, cost sharing, medical savings accounts, and managed competition, have been used to supplement or supplant regulatory approaches. Each of the regulatory and competitive approaches is described with some information about its advantages and disadvantages. Despite all of the approaches, the major problems remain: escalating costs, increasing numbers of individuals without any insurance, and uneven access and quality of care. The Medicare population is using resources at a much higher rate than their contributions; the Medicaid program is now funding more elderly care than care of children. The solutions to the problems, according to the authors, do not lie with government or insurers or providers or employers, but with the consumers of health services. Yet, they point out, the consumer is not part of the debate. Seefeldt, Garg, and Grace want to end the outdated model of health care in which "professionals are the all-knowing" and empower the people. They believe that until the consumer becomes an active partner in the system, the problems are insoluble. The chapter provides an excellent overview of past measures to control costs and raises many important issues that should be carefully digested and debated.

In the first viewpoint chapter Maddox examines the evolution of managed care, the financial factors that have created the current health care system, and the impact of the changes on nursing. The chapter contains numerous financial facts. For example, in the past the categories of services generating the most growth in expenditures were hospitals and physician cost, but since 1998, the fastest rising spending category is prescription drugs. Maddox demonstrates that the federal government is increasing its role in the financing of U.S. health services. She covers the evolution of the third-party pay system and clearly explains the functions of Medicare and Medicaid and prospective payment systems. She overviews the different models of managed care and discusses in some detail the preferred provider organization (PPO) and the health maintenance organization (HMO). She spends the last half of her chapter discussing the impact of managed care and current reimbursement methods on hospitals, ambulatory and outpatient services, long-term care, nurse staffing, and selected nursing roles such as the advance practice nurse and the nurse manager. Three utilization management strategies are discussed: prospective, concurrent, and retrospective. The Balanced Budget Act of 1997 brought several changes, including the recognition of nurse practitioners, clinical specialists, and physician assistants as authorized Medicare providers, eligible for direct reimbursement. But with this new role comes increased responsibility for the provider. This is an informative chapter about the history and current issues related to reimbursement trends in the United States and the impact on health care and nursing.

The cost of home care for a person with a disability is the topic of the next chapter by Aronow. This is an increasingly important topic in nursing because the number of persons in society with a disability is growing. The increase is due to the aging of society and the better survival rate of those with a disability. As Aronow states, the reorganization of care away from large institutions and toward home care and homelike residences requires a clear analysis of services and costs to the disabled community. Aronow structures her chapter by four types of care in the home: short-term recovery, long-term care, technology-supported care, and end of life care. For each type of care she presents a patient example and discusses the components of cost. She concludes her chapter with a discussion of the responsibilities of professionals. Whereas the home has become a viable alternative for care of persons with disabilities, the cost of home care is not well understood. She believes that the nurse has some responsibility to help explain costs associated with alternative choices and that the nurse should be prepared to become a part of the family negotiations that involve the patient and the informal caregivers. The chapter provides an excellent overview of the financial and care burden issues related to caring for a variety of diverse patients in the home.

As the previous chapter illustrates, it is more important than ever that nurses understand the business aspects of health care. A different example of this is illustrated in the next chapter by Klemczak and Dontje, who discuss the need for sound business practices in the development and conduction of nursing centers. A nursing center is an organization, controlled by nurses, whose primary mission is to provide nursing services. Although nursing centers have existed for many years, usually attached to schools of nursing, most of them were supported by grants and did not have to be concerned about income generation. As these grants are being reduced or eliminated, the centers are left with commitments and few funds to deliver services. With the 1997 Balanced Budget Act that changed the Medicare law to designate advance practice nurses (APNs) as reimbursable Part B providers, nursing centers that employ APNs can seek new types of funding. Klemczak and Dontje urge existing nursing centers to expand the services they offer to include a complete set of primary health care services, including health screening, testing, prescribing, treatment, referral, case management, and patient teaching. They discuss reimbursement of these services under capitation contracts. The last part of their chapter is a case study of the development of a nurse-managed center at the College of Nursing at Michigan State University. The college has a contract with the Office of Veterans Affairs in Battle Creek to provide primary care services to veterans living in the surrounding community. The authors discuss this experience and conclude with related issues and challenges.

Reimbursement for nurses and other nonphysician providers is the subject of the chapter by Lee. The proliferation in consumer use of alternative therapies, such as autogenic training, biofeedback, massage, acupuncture, Ayurvedic techniques, and reflexology, to name a few, has resulted in the recognition that there needs to be a way to document the use of such therapies and bill for reimbursement as they become more accepted. Consumer demand for alternative therapies has been so dramatic that they are increasingly being included in mainstream practice and medical journals. In 1996, the Health Insurance Portability and Accountability Act called for the setting of a national standard to communicate with all providers (not just physicians) electronically in a standardized way. This act combined with the widespread and growing dissatisfaction with the Current Procedural Terminology (CPT), currently the only coding system approved for Medicare reimbursement by the Health Care Financing Administration (HCFA), opened the door for the development of the Complete Complementary Alternative Medicine Billing and Coding Reference. The Reference, published for the first time in 1999, includes Alternative Billing Codes (ABC Codes) developed by a group known as Alternative Link in Las Cruces, New Mexico. In this Reference, alternative is defined as any provider other than an allopathic physician and the treatments provided by these providers. Thus, nursing is included (although most nurses do not think of themselves as alternative providers). The ABC Codes do include interventions from the Nursing Interventions Classification (NIC), the Home Health Care Classification (HHCC), and the Omaha System. Although the system has not yet been adopted by HCFA for reimbursement, the ABC Codes have been included in the American National Standards Implementation Guideline and the National Library of Medicine Unified Medical Language. The system not only includes language for thousands of alternative therapies, it provides the legal scope of practice for multiple practitioner groups. It will be interesting to see future developments in this area. Will HCFA approve the use of this Reference for reimbursement to alternative providers? If not, how will the growing use of alternative therapies be documented?

The last chapter in the section by Schmidt overviews the financial skills needed by patient care managers. As the role of the nurse manager has grown and become more challenging, the need for financial skills is essential. Schmidt discusses the prerequisite computer skills including spreadsheet applications. She overviews the budget measures of volume, revenue, and labor and nonlabor expenses. She shows how to operationalize the budget with a staffing plan. Several types of productivity measures are defined and four types of analyses are reviewed that can be used to help evaluate cost and productivity performance. These are staffing-to-demand analysis, productivity benchmarking, use of labor dollars analysis, and workforce composition. Schmidt's chapter provides an excellent overview of the financial skills a nurse manager must have to be an effective leader and manager in the ever evolving complex health care environment.

Nursing's ability to identify and deal with economic issues has come a long way in the past decade. More and more, all nurses and nursing students are gaining knowledge about costs of health care, but nursing is still not a major player in health care cost-containment efforts. We need to make the concern for costs a nursing concern and voice this concern and appropriate actions whenever the opportunities arise.

Controlling Health Care Costs

Regulation vs. Competition

The issue of controlling health care costs hits at the heart of a major social dilemma that grows out of the American character and the values surrounding the practice of medicine: the rights of the individual versus responsibility for the larger social group. The tensions between balancing individual rights against the common social good become compounded in the area of medical care because the physician and, more recently, the provider organization become the arbiter between the individual and society. Although there was a time when the physician could make decisions largely on the basis of what was deemed best for the patient, today's concerns over the rising costs of medical care services and the large numbers of people without access to these services have made it increasingly difficult to practice in this simplistic manner. With the costs of medical care rising far more rapidly than those of other parts of the economy, the concern for controlling these costs has become an increasing preoccupation in recent years.

Before the 1960s, most medical care costs were covered by insurance that was provided as part of the benefits package paid by employers for their workers. This system worked effectively for those who were employed and provided reimbursement to physicians and hospitals in a satisfactory manner. Over the years, however, an aging population, increased numbers of people who are not part of the workforce, and increasing costs of insurance to employers have resulted in a situation open for governmental intervention. The enactment of Medicare and Medicaid legislation in 1965 signaled the beginning of a new chapter for medical care in this country. The intent behind Medicaid and Medicare was to provide health care to the two most vulnerable groups: the elderly and the indigent who were not covered by employer-provided health care insurance and were unable to pay out of pocket. In effect, the federal government became the insurer for these uninsured populations. Soon after the enactment of these programs, it was realized that health care expenditures were rising much faster than the economy, and initiatives were undertaken to address the issue. The agreed payment system based on "reasonable" costs for hospitals and "reasonable prevailing charges for physicians" provided little incentive for patients or providers to control health care costs. Over the past 30 years a variety of legislative approaches have been taken to try to control escalating costs. A systematic display of major initiatives is presented in Figure 51-1. These approaches can be classified either as competitive, describing a condition of the workings of the free market in which the unfettered private sector forces of supply and demand determine the most efficient allocation of resources, or regulatory, which assumes that market forces function imperfectly and that government intervention is required to control costs. This chapter reviews the approaches taken and encourages the reader to consider the pros and cons of regulation vs. competition in controlling medical care costs.


The reimbursement system of Medicare and, to some extent, Medicaid, which was based on "reasonable charges," created intense inflationary pressure on health care costs. Earlier, much of the health care for the elderly had been offered as charity and was not reimbursable. In addition, there had been no incentives to add new expensive procedures before Medicare. That changed dramatically. Substantial reimbursement was available for increasing hospital revenue for providing additional procedures requiring new staff and equipment. By creating a surplus of income over revenues, this money went back into fur ther expansion of facilities and staff, ultimately resulting in increased cost.

 This increased cost, which was not retrievable from public sources, was then passed on to private patients and their insurers, creating inflationary pressures on the entire system. Total health expenditures grew from $41.9 billion in 1965 to $425 billion in 1985. This increase occurred despite governmental efforts to control costs. From 1971 to 1983 the major efforts to control costs were through regulatory efforts. None appreciably slowed the growth in total health care costs

Certificate of Need

One type of intervention used the strategy of controlling the structure of medical care (i.e., the settings and instruments available and used for the provision of care) by limiting the development of hospital capacity. Built on a certificate of need (CON) law initiated in New York State in 1964, Congress in 1972 passed amendments to the Social Security Act to give planning agencies more authority. In 1974, Congress passed the National Health Planning and Resources Development Act, which required every state to pass a CON law allowing it to review plans by any institutional provider for capital expenditures over $150,000 or a change in the number of beds and services. The impact of CON programs was minimal. A number of studies indicate that the review boards passed nearly everything that was brought to them (Begley, Schoeman, & Traxler, 1982; Lewin Associates, Inc., 1975; Salkever & Bice, 1976; Sloan & Steinwald, 1980). However, one side effect of the CON program was that hospitals gained sophistication about market conditions, long-range planning, and resource use-expertise easily adapted to a competitive market.

Economic Stabilization Program

This program, introduced during the Nixon administration, was developed in two phases. Phase 1 (August 15, 1971, to November 13,1971) involved a 90-day freeze on all wages and prices, and phase II (November 14,1971, to April 30,1974) limited institutional health care providers to a 6% annual limit in price increases in aggregate revenue, subject to cost justification. These controls applied to both hospital and physician fees. The Economic Stabi lization Program appears to have moderated both the increase in average cost per hospital day (Salkever, 1979) and also the growth of physician fees; but there is some evidence that while fees were frozen, physicians classified visits into more expensive categories, thereby holding the line on price while allowing revenues to increase (Holahan & Scanlon, 1978).

Professional Standards Review

The quality, quantity, and cost of hospital care provided under Medicare was to be monitored primarily through mandatory establishment of utilization review committees in participating hospitals Through review processes conducted under the supervision of physicians, their function was to control medical services such as admissions, diagnostic investigations, and therapeutic interventions provided by physicians to their hospitalized patients. A 1970 Senate Finance Committee Report judged the utilization reviews to be of a token nature and ineffective as a curb to unnecessary use of institutional care and services. The criticism of the utilization review led the American Medical Association to propose a Medicare peer review system to be controlled by the medical societies. Legislative action led to the establishment of professional standards review organizations with responsibility to review hospital care under their jurisdiction, with particular emphasis on the appropriateness of admission and the length of stay for hospitalization. Evaluations of the program are mixed, with one study concluding that the savings to Medicare and Medicaid exceeded the cost of the program by 10% to 15% (Smits, 1981), whereas another study concluded that it cost Medicare and Medicaid an estimated $1.80 for every $1 the program spent (Alpem, 1980).

 Prospective Rate Setting

By 1980, most states had some form of hospital rate-setting program, but the programs varied considerably. Most were voluntary, with hospitals choosing whether to participate or comply. Only eight states had programs that involved mandatory review and compliance with rates set by a rate-setting authority. Mandatory rate-setting programs initiated by several states resulted in slowing the rate of growth of expenditures per patient day.

Prospective Payment Systems

In 1983, Congress established the Medicare Prospective Payment System (PPS), which replaced retrospective cost-based reimbursement for hospital care. The primary objective was that of controlling escalating hospital costs. Under the PPS, inpatient hospital services for Medicare eligibles were bundled into 468 diagnosis-related groups, each with a fixed reimbursement schedule. Adjustments were made for important factors such as case severity; rural, urban, and regional labor cost differentials; teaching costs; and disproportionate shares of uncompensated care. During the first 3 years of the PPS, inflation in hospital expense was reduced by about 5% to 7% from the pre-PPS double-digit levels.

Despite these major regulatory programs, health care costs continued to escalate at a higher rate than the general economy. Expenditures for health care in 1985 totaled $420.1 billion compared with $74.4 billion in 1970. The share of health care expenditures as a percentage of the gross national product increased from 7.3% in 1970 to 10.5% in 1985, with hospital expenditures accounting for 40% of all health care spending.


As health care costs have continued to escalate in the past two decades, attempts to contain costs by restructuring the health care market to make cost-effective competition possible have supplemented, and in some cases supplanted, the regulatory programs described previously. For economists, competition in a perfectly competitive or "free" market implies rivalry between sellers of comparable goods for customers. Customers will then choose the goods that cost less, knowing that they are not sacrificing quality, and thus the operation of the market encourages suppliers to keep prices down. The model of free market competition fully applies only when all product attributes other than prices are standardized. Obviously, many of the products in health care are not standardized.

A modified form of competition can occur between suppliers of noncomparable products in a particular market, but there is no guarantee that this kind of competition will result in lowered prices. This modified form of (nonprice) competition did occur among health care providers during the regulated era that followed the enactment of Medicare in 1965. During this period, hospitals competed for doctors and patients primarily on the basis of availability of sophisticated diagnostic and therapeutic technology. Patient comforts such as food quality, friendliness of staff, and cleanliness also played a major role in attracting patients to a particular facility. Despite nonstandardized "products" (in this case medical services), prices may have played a role in the competition if patients paid their own bills. However, during this period most patients had insurance, so price did not play any role in their choices. Thus, relevant competitive variables included service offerings and amenities but not price. Furthermore, as third-party payers, health insurance companies did not promote price competition because they were not able to exclude providers on the basis of price. Hospitals and physicians were reimbursed on a "reasonable costs" and "reasonable charges" basis, respectively, but there was no competitive mechanism preventing "reasonable costs" from rising over time. Several factors such as collusion within the medical profession promoted increasing costs.

Competitive Contracting

In 1982 the State of California enacted legislation providing a mandate for "selective contracting." This approach was designed to reshape the health-care market by enabling third-party payers to legally exclude providers from their list of participants without significant risk of antitrust prosecution. Under this legislation, both private and public payers, including health maintenance organizations (HMOs) and preferred provider organizations (PPOs), could negotiate terms and conditions with specific providers such as physicians or physician groups and hospitals, who they would reimburse for services to their subscribers. Two hundred fifty hospitals negotiated agreements with the state to provide services to Medi-Cal eligibles (Medicaid) and accepted reductions in their normal payments ranging from 5% to 20%. As a consequence of the selective contracting, California saved an estimated $470 million in fiscal year 1983-1984 (Iglehart, 1984). Following the trend set by California, other states began to follow various forms of competitive contracting.

Managed Care and HMOs

The main feature of managed care that distinguishes it from retrospective and fee-for-service payments is that payment under managed care is prospective and capitated. Under such a system the financial risk no longer resides with the patient or the third-party payer as distinct from the provider; instead the managed care entity becomes a financial risk bearer, as well as a patient care provider. This means that the organizational focus of care shifts from individual illness care to concern for the health of a defined population: the membership of the plan or HMO. The incentives shift from performing unreviewed, high-intensity patient care to a case management function in which primary care providers coordinate all care and limit access to costly specialization and hospitalization.

Preferred Provider Organizations

Changes in state insurance laws have permitted payers to contract selectively with providers such as hospitals and physicians' groups, including those not run by HMOs. Under such schemes most payers have started identifying a subset of hospitals and physicians to be "preferred providers" on the basis of a predetermined rate of reimbursement. Patients are steered to those hospitals and physicians through financial incentives such as lower copayments and deductibles. The providers sign agreements with payers to deliver services to their enrollees and are designated as preferred providers, and the organizations are designated as preferred provider organizations. To select these preferred providers, payers generally demand price discounts or strict utilization review procedures from the providers.

Cost Sharing

Cost sharing through increased coinsurance and larger deductibles is a relatively simple plan for providing disincentives for overuse of the system by insured individuals by requiring them to pay more out of pocket. This approach addresses the concern that third-party payment shields the patient from the costs of his or her care.

Medical Savings Accounts

If cost sharing means that individual consumers have to pay more out of their own pockets, it becomes a matter of concern how deep those pockets are. Cost sharing as a form of cost containment will not work if consumers cannot pay their bills. The concept of medical savings accounts (MSAs) was developed as a type of cost-sharing program that encourages people to save to pay for their own health care costs, thus ensuring that the money to pay health bills will be there when they need it. This is how the MSA would work. Currently, on average, nearly $4,500 per year per worker is paid by employers for health insurance. Of this amount the employer would put $3,000 annually into each employee's MSA, which the employee would use to pay the first $3,000 of his or her medical costs. For the remaining $1,500 the employer would purchase an insurance policy that would take care of medical expenses above $3,000. It is recommended that (1) an MSA would be the personal property of the employee, so that it would be portable if the individual changed jobs, (2) an MSA would be allowed to grow tax free, and (3) the employee would draw from it to pay for medical expenses. Under this arrangement, MSAs will provide consumers with built-in incentives to control health care expenditures because they will benefit directly if they spend less.

Problems of Competitive Systems

In a competitive environment, it is the firm or organization that maximizes profits that succeeds at the highest level. Health insurance companies wishing to maximize their profits can do so either by operating at a higher level of efficiency and effectiveness than their competitors or by practicing risk aversion to the highest level possible. Finding ways to avoid insuring the few very sick people can be very rewarding. Insurers practicing risk aversion as their main profit-making approach exclude individuals on the basis of preexisting conditions or by having coverage canceled midtreatment when unexpected illnesses become too large a financial liability to the firm. HMOs are accused of taking only young, healthy members of the workforce, whereas some firms have had their coverage canceled if one worker or his or her dependent is too great a financial risk.

The costs of health insurance have escalated commensurate with increases in the cost of care. An increasing percentage of the population has no health insurance coverage. Of those earning less than $10,000 per year, 32% are uninsured (Wicks, Curtis, & Haugh, 1994). Many businesses that once provided health insurance can no longer do so. Increasing numbers of individuals are employed on a part-time basis, and thus employers avoid paying costly health insurance benefits. A considerable proportion of the increased costs are a result of the inefficiencies in the system and the high administrative costs for managing the plans. It is estimated that one third of all fees paid for health insurance are used for costs other than for the direct provision of coverage. Finally, one of the most commonly voiced concerns of the public is the lack of choice of plan or of provider. The rise of managed care systems, with restrictions on self-referral to specialists by employing a given panel of generalists as gatekeepers, increasingly diminishes individual choice, a value ingrained in the American ethos.


In the late 1980s the dynamics and difficulties described earlier became increasingly problematic, and health care costs continued to escalate despite the innovations in health care financing. A proposal was made by Enthoven on behalf of an ad hoc group called the Jackson Hole Group, espousing a concept called "managed competition." Under managed competition, costs would be controlled by reshaping the health care market through establishing health alliances (sometimes called health insurance purchasing cooperatives), which would represent large groups of consumers. These purchasing cooperatives would have the clout to negotiate lower costs with providers. Furthermore these health alliances would offer not just one health care plan but a variety of plans, providing consumers with adequate information to choose between plans based both on cost and on standardized benefit levels. This would foster price competition and more inclusivity, what Enthoven (1993) calls "value-for-money" competition at the level of individuals making choices about plans. Value-for-money competition emphasizes that what cost-conscious health consumers seek isn't simply the least expensive health care services or health care package available, but the ones that give them the most for their money. The ability of the consumer to make informed choices is crucial. If consumers do not have adequate information, available in a form that makes comparing alternatives easy, then competitive market processes cannot work effectively in containing costs and promoting high-quality health care.

Limitations of Managed Competition

One of the major limitations of managed competition grows out of the fact that it requires competing health plans to work. Where this is a population insufficient to support several health plans functioning independently without collusion, this model cannot apply. Although information technology could be used to overcome some of the problems of serving isolated communities, transportation technologies are also important when it comes to getting people to tertiary care in a timely fashion or for paying specialists to be flown to remote areas when needed. In all of these plans there would be a mandated minimum benefit package. Those who choose the lowcost benefit package will be those who cannot afford a higher level of coverage or those who believe that they do not need more. This leaves room for a new type of "adverse selection," even within managed competition. A further concern is found in the fact that managed competition relies on managed care to achieve much of its savings. Data on the effectiveness of doing so is far from definitive or complete. Although it is clear that HMOs operate at lower costs than traditional fee-for-service plans, it is not yet clear how much of the savings they achieve are due to higher levels of efficiency and how much is due to selection bias (enrolling healthier members) in the markets where they exist. Low-income individuals will still be at a relative disadvantage.


Oddsei - What are the odds of anything.