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Center for Organizations and Delivery Studies
Changes in Health Care Markets
Organization and Delivery of Services
Impact on Clinical Decisionmaking, Access, and Quality
Impact on Cost
The last several years have witnessed a remarkable transformation in all facets of America's health care system, from its financing to the way health care services are organized and delivered. The driving force in this transformation is the shift from traditional fee-for-service (FFS) systems to managed care networks, which run the gamut from tightly structured staff model health maintenance organizations (HMOs) to loosely organized preferred provider organizations (PPOs). Today,
more than 60 million Americans are enrolled in some type of HMO.
Changes in our health care system are occurring in response to market forces for cost control, to regulatory initiatives on cost and quality, and to consumer demands for quality care and greater flexibility in provider choice. Other factors causing change are the increasing domination of for-profit ownership and the rapidly increasing number of public beneficiaries, particularly Medicaid recipients. Because these changes occurred so rapidly and extensively, little is known about the long-term effects of managed care on access to care, cost, and quality of care. If policymakers, purchasers, and consumers are to make thoughtful and reasonable decisions, we need to know what works and how much it costs.
The Agency for Health Care Policy and Research (AHCPR) is the lead Federal agency charged with supporting and
conducting health services research. These studies are designed to produce information that, ultimately, will improve
consumer choice, improve the quality and value of health care services, and support and improve the marketplace. The vast
majority of research on managed care has been conducted in HMOs, the prototypic managed care organization. Below are
descriptions of recent research projects supported by AHCPR and managed by staff in the Center for Organization and Delivery Studies (CODS), sometimes in conjunction with other agencies in the Department of Health and Human Services, or conducted by CODS researchers. These descriptions are excerpted from a publication titled AHCPR Research About Managed Care.
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Changes in Health Care Markets
AHCPR's research portfolio includes a number of studies designed to address market-level questions, with an emphasis on
market competition, deregulation, and privatization in health care. Questions posed include the following:
- How does increased managed care penetration affect health care delivery systems?
- What are the effects of competition among managed care organizations?
- How does managed care affect physician and hospital markets?
HMO Impact on Integrated Networks and Services. Lawton Burns, Principal Investigator. This study estimated the impact of HMO market structure on the development of integrated networks among physicians and hospitals' (both horizontal and vertical integration). The project also estimated the effects of HMO market structure and integrated networks on hospital costs and is providing evidence on whether integrated provider networks augment or moderate the impact of HMO market structure on HMO premiums charged in local markets. (Project
dates: 9/30/95-3/31/97. Project Officer: Michael Hagan.)
Effects of Horizontal Hospital Mergers on Efficiency, Profitability, and Consumer Prices. Robert Connor, Principal Investigator. This project addressed the following questions: Do hospital mergers reduce costs? Are savings passed on to consumers as lower prices, or are they retained by hospitals as higher profits? Does market concentration affect merger-related changes in cost or price inflation? Is there an optimal level of hospital market concentration for the most efficient provision of hospital services? Does HMO market penetration affect hospital costs or price inflation? Also examined was the relevance of merged hospitals' relative size, proximity, and similarity in services for the outcomes of mergers. (Project dates: 9/30/95-3/31/97. Project Officer: Michael Hagan.)
Competition and Health Plan Premium Determination. Randall P. Ellis, Principal Investigator. This project examined how competition influences the determination of health plan premiums by identifying the rate-setting
mechanisms and market structures where competition seems to work well. The rate-setting mechanisms and market
structures examined included community rating, experience rating, competitive bidding, negotiated rate setting,
government formulas, payment by the employer of a fixed amount or a fixed proportion toward the plan, number of plans
offered, exit and entry of health plans, and the market share of HMOs. (Project dates: 8/1/94-8/31/96. Project Officer: Michael Hagan.)
Efficiency in Hospitals: Do HMOs and PPOs "Buy Right"? Jose Escarce, Principal Investigator. This project is determining whether patients of HMOs and PPOs tend to use more efficient, higher quality and lower cost hospitals, respectively, than nonmanaged care patients. The study will control for important correlated factors such as distance of patients to the hospital. (Project dates: 9/30/95-9/29/97. Project Officer: Michael Hagan.)
Effects of Managed Care on Physicians' Practices. Jack Hadley, Principal Investigator. This project examines
physician involvement with managed care plans: Do they have formal contracts? Do they have formal "gatekeeper"
responsibilities? What are the methods of payment, the extent of risk-taking, and the financial incentives? The project is
examining changes in practice size and composition, in affiliation and ownership, and changes in operations (for example,
satellite offices and extended hours). Other factors being studied include hours worked, number of patients seen, patient
mix by insurance and socioeconomic status, fees charged, and physician satisfaction. (Project dates: 9/30/95-9/29/97. Project Officer: Michael Hagan.)
Effects of Health Care Market Structure on HMOs. Jack Hadley, Principal Investigator. The goal of the project is to analyze the effects of key elements of the local insurance market on the behavior of firms and final consumers of medical care. Specifically, the investigators are focusing on how the growth and concentration of HMOs in individual health care markets affect the choices made by employers in those markets, such as whether to offer an HMO, the share of employees selecting the HMO, premiums, and benefits and plan characteristics (e.g., cost-sharing) in HMO and indemnity plans offered. The project integrates several distinct sources of data, including the annual national survey of employers' health insurance benefits from KPMG Peat Marwick, HMO data from the Association of American Health Plans, Inforum, and other sources. Effects of HMO concentration will be analyzed in total and by type of HMO. (Project dates: 7/1/96-6/30/97. Project Officer: Michael Hagan.)
The Performance of Strategic Hospital Collectives. Roice D. Luke, Principal Investigator. Strategic hospital collectives (SHCs), consisting of two or more hospitals in the same metropolitan statistical area that are in the same system or network, are important examples of the integration of health services organizations. The project gathered empirical evidence on how performance is related to market structure, local environment, and the organizational characteristics (hospital or SHC). Market structure is being measured by concentration in the hospital market, HMO penetration, and the presence of large purchasers. (Project dates: 9/30/95-9/29/97. Project Officer: Michael Hagan.)
Health Care Markets, Managed Care, and Hospital Performance. Glenn A. Melnick, Principal Investigator. Three linked markets (hospitals, physicians, and insurance) are being examined. The study will describe how managed care penetration and competition among providers and insurance companies affect hospital utilization, costs, revenues, and uncompensated care. This study will broaden previous work on hospital competition and managed care—which is regional in nature—to the national scene. It will focus on interdependencies between markets and effects on hospital performance. (Project dates: 9/30/95-9/29/98. Project Officer: Michael Hagan.)
Effects of Managed Care on Hospital and Physician Integration. Michael Morrisey, Principal Investigator. To understand better how physicians and hospitals respond to managed care in local markets, the investigators are studying measures of physician-hospital integration from a 1993 national survey of 1,500 U.S. community hospitals, which was designed to learn about hospital-physician relationships. The survey contains facts on physician participation in hospital management, on organizational and financial arrangements between hospital and physician, on physician relations in teaching hospitals and in multihospital systems, and on hospital revenues. (Project dates:
9/30/95-9/30/97. Project Officer: Michael Hagan.)
Market Forces and Rural Health: System and Consumer Impact. Keith Mueller, Principal Investigator. This project
is assessing the pace of market changes in rural areas and the involvement of rural providers and community leaders in
changes that are occurring. Informants (including health care providers, insurers, State offices of rural health, consumer
representatives, community health centers, employers, and public health agencies) will be used to assess provider
participation in market-driven changes. Knowledge gained from this project will be disseminated directly to policymakers
as well as to academics and other researchers. (Project dates: 9/30/95-9/29/97. Project Officer: Michael Hagan.)
The Impact of HMOs on Hospital Quality and Cost. Kevin G. Volpp, Principal Investigator. The purpose of this
project is to assess the impact of reforms to promote competition such as increasing HMO penetration and hospital
deregulation on hospital cost and quality. Using data from two States, this research is designed to answer the following
questions: (1) Does increasing HMO penetration affect hospital outcomes? (2) Are hospital outcomes affected by
HMO-influenced cuts in hospital costs? (3) How do hospital outcomes and costs compare under systems of price
competition and rate-regulation? The relationship between outcome variables (risk-adjusted mortality rates, risk-adjusted
complication rates, failure rates, and readmission rates) and structural measures of quality (e.g., nursing staff levels) will be examined. (Project dates: 9/1/96-8/31/97. Project Officer: Claudia Steiner.)
Impact of Managed Care on Physician Markets. William D. White, Principal Investigator. To examine patterns of compensation, location, and use of primary care and specialist physicians, this project used physician-level data and
measures of managed care penetration. The study assessed the effects of managed care on the number, incomes, hours,
hourly compensation, and type of care provided by primary care physicians relative to specialty physicians. Information
from this project addressed issues useful in evaluating workforce policies designed to address imbalances between primary
care physicians and specialists. (Project dates: 9/30/95-9/29/97. Project Officer: Michael Hagan.)
The Determinants of HMO Efficiency from 1985 to 1994. Douglas R. Wholey, Principal Investigator. This project developed reliable efficiency measures of firm-level HMO efficiency by using two different methodologies and comparing the measures for consistency. Questions addressed included: Do HMOs become more efficient over time? Is increasing efficiency due to the failure of less efficient HMOs? Is increased efficiency due to enrollment growth and achieving economies of scale? Is it due to mergers leading to larger, more efficient HMOs? Is it due to HMO adaptation, holding HMO scale economies constant? Do more competitive markets lead to greater HMO efficiency increases? How do State
regulations affect the evolution of HMO efficiency? (Project dates: 9/30/95-12/31/96. Project Officer: Michael Hagan.)
Price Discrimination in the Physician Services Market: The Noncompetitive Effects of HMO and PPO Growth. Herbert Wong, AHCPR Investigator. Researchers frequently argue that the development and growth of HMOs and PPOs
will lead to price competition, lower fees, and lower profits in the physician services market. However, despite substantial growth in HMO and PPO enrollment, real physician income continues to rise. This project constructs a theoretical model in
which physicians compete in a two-sector monopolistically competitive market, with HMO/PPO and traditional
fee-for-service sectors, to evaluate how HMO and PPO development leads to market segmentation, price discrimination,
and increased profits. The price discrimination hypothesis offers a possible explanation as to why health care costs continue to rise despite substantial growth in HMOs and PPOs over the last decade. Simultaneous equations methods are employed to assess the validity of the price discrimination hypothesis. (Project dates: 1/1/93-2/28/97.)
Competitive Effects of HMO Growth Across Health Care Sectors: A State-Level Analysis. Herbert Wong, AHCPR Investigator. This study will examine the effects of HMO growth on total personal health care expenditures and compare how different components of this measure respond to HMO development. Existing empirical research of the competitive
effects of HMO growth is limited to case studies that examine cost and utilization of specific plans, localities, and
population groups. Broader studies have generally focused on the hospital services market. The objectives of this study are
to provide empirical evidence of the impact of HMO growth on total personal health care expenditures, examine the effects
of HMO growth on the various components of this measure, and determine if costs have shifted from one market to
another. (Project dates: 1/1/94-12/31/97.)
The Effect of Selective Contracting on Physician Pricing. Jack Zwanziger, Principal Investigator. This study used data from three annual surveys of physician fee schedules negotiated by PPOs and HMOs to examine (1) the relationship between the physician fees derived from charge data ("usual, customary, and reasonable" [UCR] rates) and the market share of HMO/PPO plans in the area, (2) comparisons of rates of growth of UCR rates with the growth of negotiated fees, and (3) whether Medicare's Resource-Based Value Scale appears to be influencing fee structures. Preliminary results indicate that first-round effects of competition on physician fees have intensified in recent years, and that cost shifting between public and private payers has continued even in an intensely cost-competitive era. (Project dates: 9/1/93-2/28/96. Project Officer: Michael Hagan.)
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Organization and Delivery of Services
Research in this area strives to describe new organizational behavior under managed care and construct empirical tests to explain observed changes.
- How are delivery systems structured and organized and how does this influence the care delivered?
- How are decisions made in managed care organizations?
- Which aspects of an organization are critical to its successful operation?
Innovations in a Reforming Health System. Sally Coberly, Principal Investigator. The project will identify and describe the innovative strategies being used to help reshape health care delivery systems into organized systems of health care by some of the Nation's largest, most successful corporate purchasers of health care. As leaders in organized systems of care, physicians are in a unique position to help large purchasers make sure that they are buying high-quality, cost-effective care for their employees. The project will also provide information on purchaser roles in encouraging organized systems of care, as well as insights into what it takes to make these innovations work. Researchers will identify and profile innovations associated with each of three key components that are essential aspects of all organized health care delivery systems: (1) patient care, (2) operations, and (3) performance. (Project dates:
9/1/95-8/31/97. Project Officer: Irene Fraser.)
Effects of Gatekeeping and Risk Transfer on Utilization of Selected Services in Multi-Product Offerings by a Health Plan in a Single Metropolitan Area. Bernard Friedman, AHCPR Investigator. The project will compare the experience of three product lines in one United HealthCare Corporation plan in a Midwestern city: (1) a capitated plan with gatekeeping, (2) an open-access plan with gatekeeping, and (3) an open-access PPO-type FFS plan. Preliminary work will include assembling data from encounters in the capitated plan and describing the financial incentives for primary care
providers in the two gatekeeping plans as well as the payment contracts with specialists and hospitals. A number of
measures of utilization of service will be calculated for each plan. (Project dates: 7/1/96-6/30/98.)
Specialty Contracting and Carve-Outs. Bernard Friedman, Fred Hellinger, Kelly Devers, AHCPR Investigators. The goals of this project are to clarify trends in health care contracting for specialists and to weigh both theoretical hypotheses and actual performance of new forms of contracting. The history, general prevalence, and variation in the terms of the contracts of specialty carve-outs will be described by specialty and geographic area. The theory and any supporting evidence on whether carve-outs achieve savings and if so, how these are achieved, will be reviewed. Finally, the adequacy of the research designs and evaluation methods used to study specialty carve-outs will be examined. (Project dates: 6/1/96-12/31/97.)
Supply and Rationing of ICU Services in Two States: The Role of Managed Care. Bernard Friedman and Claudia Steiner, AHCPR Investigators. This study attempts to clarify the contribution of many factors, including payer
differences, to the supply and rationing of an expensive hospital-based service—intensive care unit (ICU) care. Data are being used from two States that differ sharply in medical system characteristics, ownership, and regulation. The study
views rationing decisions for a particular patient within a cost-benefit framework, modified by: (1) special clinician
responses to uncertainty, (2) overall pressure on hospital ICU capacity, (3) financial incentives from particular payers, (4) the effects of teaching programs, and (5) hospital ownership differences. (Project dates: 9/1/95-7/31/97.)
Comparative Analysis of Medicaid Capitation Rate Methods. Ginny Hsieh, Principal Investigator. The objective of this project is to determine whether much can be gained by the use of more refined measures of risk adjustment in setting Medicaid managed care capitation rates. The specific aims are to (1) evaluate the predictive power of existing Medicaid rate-setting methods to identify the best model, and (2) compare the expenditure levels predicted by Medicaid rate methods and the expenditure levels based on alternative risk adjustment models with actual cost. (Project Officer: Fred Hellinger. Project dates: 9/1/96-8/31/97.)
Changes in the Delivery and Location of Care. Claudia Steiner, AHCPR Investigator. In response to the rapid and substantial move in the delivery of clinical interventions from primarily an inpatient setting to an ambulatory setting, this study will compare how rates for ambulatory surgery differ for HMOs and non-HMOs. The primary goals of this study are to (1) determine which procedures are most frequently performed in an ambulatory setting; (2) illustrate the shift of medical procedures from the inpatient setting to the outpatient setting over time and across several States in different regions of the United States; and (3) present descriptive differences between procedures done on an inpatient basis and those done on an ambulatory basis in terms of patient demographics, disposition at discharge, payer (including HMO and non-HMO), and charges. (Project dates: 10/1/96-9/30/97.)
Laparoscopic Cholecystectomy: How Does Payer Affect Adoption of Technology and Location of Care? Claudia
Steiner, AHCPR Investigator. The primary goals of this study are to determine (1) whether the adoption of laparoscopic
technique for gall bladder removal in a western State has been associated with an increase in gall bladder removal rates; (2) the extent to which any change in cholecystectomy rates have been associated with a move to ambulatory surgery; and (3)
whether observed changes in adoption of laparoscopic technique for gall bladder removal, changes in gall bladder removal
rates, and location of care differ between HMO and non-HMO patients. (Project dates: 7/1/95-6/30/97.)
How Do Different Types of HMOs Determine Access to New Medical Technology? Claudia Steiner, AHCPR
Investigator. Managed care plans can affect access to, cost, and quality of health care through decisions about technology coverage. This study examines several aspects of managed care plans, the decision process for coverage of new medical technology including factors that alert plans to use of new medical technology, who is involved and has responsibility for final decisions, and what sources of information are used. Data are from a national survey of all member plans of Group Health Association of America and HMO plans of Blue Cross Blue Shield Association, between October 1993 and March 1994. (Project dates: 10/1/93-6/30/97.)
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Impact on Clinical Decisionmaking, Access, and Quality
The studies in this section describe how both the process and results of the
health care system have been affected by managed care.
- To what extent do managed care arrangements influence a clinician's decisions, such as the decision to refer patients to specialists?
- How is access to services, such as preventive screenings, changed by managed care?
- What effect does managed care have on quality of services delivered?
Out-of-Plan Medical Use in a Prototypical Managed Care Plan: A Case Study. Herbert Wong, AHCPR
Investigator. This study will use claims data from a large, mature IPA-type HMO with a PPO option to examine the extent of enrollees' use of out-of-plan providers. The objectives of the study are to (1) determine the prevalence of out-of-plan medical use, (2) examine the financial impact of out-of-plan use, (3) identify characteristics of out-of-plan users, and (4) document the types of procedures and providers most often used out of plan. (Project dates: 3/1/94-4/30/97.)
Determinants of Physician Practice Styles: Does HMO Coverage Matter? Herbert Wong, AHCPR Investigator. To explore whether managed care plans' incentives for providers to limit the amount of care are strong enough to alter physician treatment patterns, this study will: (1) explore whether physicians treat HMO patients differently than their FFS counterparts, and (2) determine if physicians develop a particular practice style during the course of their training (medical school, residency training, and through associations with colleagues at patient care centers), and maintain that style regardless of their patients' insurance coverage. (Project dates: 7/1/96-12/31/97)
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Impact on Cost
These studies use expenditure data to address questions such as:
- What do managed care plans spend to treat particular conditions?
- Are managed care plans able to reduce costs, or are enrollees healthier than the FFS population?
- How can adjustments be made to compensate appropriately for adverse selection?
Cost Containment and Group Health Insurance Benefit Growth. Douglas C. Coate, Principal Investigator. In this study, investigators evaluated the effectiveness of managed care cost containment strategies in the group health benefit plans of private- and public-sector employers in the United States. Data were used from the Foster Higgins annual Health Care Benefit Surveys for 1986-92. Results suggest that group health plans in which all enrollment is in one type of plan (traditional indemnity, PPO, or HMO) are about 6 percent less costly than plans that allow employee choice between different plans. For employers who offer multiple health plan choices, increased enrollment of employees in HMOs was associated with higher overall costs. However, HMOs were the least costly option for employers offering only one choice
for health coverage. (Project dates: 9/1/92-8/31/94. Project Officer: Michael Hagan.)
HMO Cost Performance: A Simultaneous Equations Approach. Dana P. Goldman, Principal Investigator. This study examined the impact on the demand for medical services of reforms to reduce the costs of Federally insured health care. Two experiences were analyzed: the Department of Defense (DoD) effort to reduce health care costs for its civilian employees and a Robert Wood Johnson Foundation-funded demonstration of prepaid managed health care enrollment for
Medicaid eligibles. The DoD analysis revealed that the generosity of benefits and lower prices expanded managed care
participants' use of ambulatory services, suggesting that large and geographically diffuse managed care networks may not
reliably contain public-sector health costs. Analysis of the Medicaid reforms revealed that the HMO did not significantly
reduce expenditures. (Project dates: 9/1/92-8/31/94. Project Officer: Michael Hagan.)
Adverse Selection and Risk Rating in Insurance Markets. James C. Robinson, Principal Investigator. In this study, investigators used 1985-89 personnel data and medical care claims from a large employer to develop a method for measuring and compensating for adverse selection among FFS and HMO health insurance plans competing with each
other. Diagnostic information from the claims data was used to identify particularly high-risk individuals most likely to be the objects of risk selection strategies. Investigators analyzed both predicted and actual expenditures for individuals
switching from the FFS plan to an HMO or from one HMO to another and compared these with predicted and actual
expenditures for individuals continuously enrolled in particular plans. The comparison was found to overestimate the
degree of favorable selection enjoyed by HMOs, because employees who anticipate the need for maternity services were
more likely to switch to an HMO. (Project dates: 2/1/91-1/31/94. Project Officer: Michael Hagan.)
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AHCPR has awarded several grants and contracts to further the
understanding of managed care in rural areas, including five demonstration grants to promote the establishment of managed care approaches to health care delivery in rural areas, one of which is managed by the Center for Organization and Delivery Studies.
Program of Rural Health Demonstration Activities. Keith J. Mueller, Principal Investigator. The Nebraska Center for Rural Health Research has established a Program for Rural Demonstration Activities, which is responsible for designing activities to improve the practice of managed care in rural communities in Nebraska and Iowa. Primary care practitioners are targeted in each of the activities. A consortium of the Nebraska Center for Rural Health Research, the University of Iowa Graduate Program in Hospital and Health Administration/Center for Health Services Research, the Nebraska Office of Rural Health, and the Iowa Office of Rural Health have responsibility for this project. (Project dates: 9/30/94-10/31/99. Project Officer: Michael Hagan.)
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In addition to conducting and funding research, AHCPR undertakes a variety of activities that promote research on
managed care. These activities include data development activities and conferences that
encourage exchange among managed care researchers as well as dissemination of research findings.
Building Bridges: Translating Research into Action. Third Annual Conference. The American Association of Health Plans (AAHP), in collaboration with AHCPR, are sponsored a conference designed to bring health plans and health services researchers together to discuss: (1) how we use research in managed care settings, (2) what we learned from research about managed care, (3) what the challenges are in conducting research in managed care, and (4) what issues are on future research agendas. AHCPR cosponsored with AAHP the first and second annual Bridges conferences. Select for a description of Building Bridges IV. (Conference dates: 4/3/97-4/4/97. AHCPR Contact:
HMO Research Network National Conference. Andrew F. Nelson, Principal Investigator. The HMO Network is comprised of researchers working in HMO research centers at 11 sites. AHCPR co-sponsored the HMO Network's 1996
conference and collaborated on its 1997 conference. The conferences' primary aims were to (1) provide a forum for HMO
research to discuss methodology and disseminate research findings, and (2) create opportunities for HMO researchers to
collaborate on multisite research projects. Select for more information on HMO Network National Conferences (Conference dates: 6/7/96-6/8/96 and
5/29/97-5/30/97. AHCPR Contact: Irene Fraser.)
From Competition to Collaboration: Building Partnerships for Research Within Managed Care. Mary L. Durham, Principal Investigator. This paper was intended to promote research within HMOs through an analysis of successful and unsuccessful models of collaboration. It took the initial strategies produced at a conference of the HMO Research Network and consider questions such as: (1) How can managed care organizations coordinate diverse data systems? (2) What criteria should be used to determine if a project can be conducted as a multisite study? (3) How should multisite
projects be administered? (4) What population and organizational features should be considered when designing a
cross-site collaboration? (Project dates: 9/30/96-3/1/97. Project Officer: Irene Fraser.)
Assessment of the Feasibility of Creating a Managed Care Encounter-Level Database. Jim Lubalin, Principal Investigator. There is broad public and private interest in developing an encounter-level database using data from managed care organizations to support the study of health care issues. The purpose of this assessment was to examine the research capabilities of databases from the managed care industry, investigate the circumstances under which the plans would release their data, and identify the potential difficulties that may arise when using and combining data systems from several health plans. (Project dates: 10/1/96-4/30/97. Project Officer: Kelly Devers.)
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Current as of February 1999