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President's Advisory Commission on Consumer Protection and Quality in the Health Care Industry

Improving Quality in a Changing Health Care Industry

Chapter Two
Improving Health Care Quality in an Industry in Transition

The American health care system is undergoing a period of rapid and unprecedented change. The growth of managed care and its associated changes in provider organization, combined with health innovation and technological change, has great potential to enhance care delivery, but it also poses challenges and increases the demand for information. Taking advantage of the opportunities and meeting the challenges of rapid reconfiguration while avoiding the associated risks is a critical goal whose achievement is contingent upon the efforts of all who have a stake in the current and future performance of the health system.

A Rapidly Changing Industry

Four characteristics define the health insurance market today, with implications both for who gets coverage and also for the kinds of coverage and protections in place for those who have insurance coverage: (1) pluralism, with a focus on employer-based coverage for the nonelderly; (2) significant and growing numbers of uninsured Americans; (3) the continuing pressure of costs on employers and consumers; and (4) the shift to managed care and the growth of self-funded plans in the group insurance market. The implications of these characteristics are profound, generating potential tradeoffs among cost control, coverage, and access.

A Pluralistic Insurance System

Private insurance coverage dominates the U.S. health care system. Most Americans under the age of 65 receive their health insurance benefits through their employer or the employer of their parent or spouse. About 65 percent of Americans under 65 have private insurance, including both group and individual coverage. Most of the remainder are either uninsured or covered by Medicaid. About 4.5 percent (10.5 million) of those under 65 are covered by individual health insurance plans (GAO, 1996), including the self-employed, those not in the labor force, those working for employers who do not offer coverage along with their dependents, early retirees, those who lose their jobs and have exhausted or are not eligible for continued benefits, and dependents of these individuals.

Medicaid covers about 36 million low-income and needy individuals nationally and serves a heterogeneous mix of individuals with diverse needs. Medicare covers 37 million elderly and disabled individuals, as well as those with permanent kidney failure.

Rising Numbers of Uninsured Americans

Because of the link between insurance coverage and employment and other sociodemographic characteristics, the United States always has had a relatively sizable number of individuals who are uninsured either all or part of a year. The most recent estimate is that 41.1 million individuals under 65 (13.9 percent of the population and 17.7 percent of those under 65) were uninsured in 1996 (EBRI, 1997).

Both the number and share of those without coverage are up from 1995, when 40.3 million were uninsured. From 1988 to 1995, the number of Americans without insurance coverage rose from 32 million to 40 million (ProPAC, 1997). In addition, the share of those experiencing a lapse in coverage during the year (12 million in 1992) was up. Most recently, the number of children who are uninsured has grown disproportionately, with a higher percent of rural children uninsured than urban children (Dunbar, 1998). The new Children's Health Insurance Program holds the promise of extending insurance to a significant proportion of the Nation's uninsured children (Rosenbaum et al., 1998). Cooper and Schone (1997) report that while the rate of private insurance coverage among the employed population is dropping, this may reflect a drop in the number of Americans who are offered insurance coverage but do not take it. Although the reasons for such decisions are not well established, the cost of insurance may be one factor. Costs clearly influence coverage levels, and these in turn influence access through their effects on the out-of-pocket costs of care. Research strongly supports the link between insurance coverage and access to health care (OTA, 1992; Schoen et al, 1997).

Continuing Concern About Costs

Continuing a trend, the United States in 1996 spent the largest percentage of its gross domestic product on health care among the 29 leading industrialized countries (Anderson, 1997). These high costs are felt by all stakeholders who pay for health care: insurers, group purchasers, and consumers.

However, after a period of rapidly accelerating increases in health care costs between 1975 and 1989, there has been a "steep and unprecedented decline in the rate of increase in health care costs" throughout the first half of the 1990's (Ginsburg and Pickreign, 1997), followed by a dramatic slowing of spending for personal health care expenses in the past 5 years as a result of low general and medical inflation, the growth of managed care enrollment, and the capacity of health plans to negotiate discounts with providers (Levit et al., 1998). In spite of this decline, because health care costs are high to begin with, and in light of the cost increases of the 1970's and 1980's, any increase in costs, however small, is cause for concern. Two areas in the health care marketplace that are particularly affected by the cost of health care are insurance premiums and the employee's share of these costs.

  • Health insurance premiums. Reflecting the decline in the increase in health care costs, the average increase in private health insurance premiums declined from 10.9 percent in 1992 to about 2 percent in 1995. In 1996, premium growth was almost flat (0.5 percent) despite a 2-percent rise in health care costs (Ginsburg and Pickreign, 1997).1 In 1997, premiums (for employers with 200 or more workers) increased by 2.1 percent, the third consecutive year that the cost of employer-based health insurance rose less than the overall rate of inflation and workers' earnings. However, it was also the first time in 8 years that the percentage increase in health plan premiums was not less than that of the previous year (KPMG, 1997). This may indicate the potential for premium cost increases in the future.
  • In the first half of the 1990's, group purchasers responded to increases in premiums by increasing employee cost sharing and by switching to managed care products in the hope that they would restrain costs. Such strategies appear to have helped to slow the growth in health care costs (Melnick and Zwanziger, 1995; Gaskin and Hadley, 1997; Wickizer and Feldstein, 1996; Robinson, 1996). It is unclear, however, whether the recent moderation in premiums will continue in the near future. Since purchasers appear committed to restraining the rise in premiums, there should continue to be pressure on health plans to become increasingly cost efficient.
  • Employee cost sharing. In 1988, employees, on average, paid about 26 percent of the premium for family coverage and 10 percent of the premium for single coverage. By 1996, these percentages had increased to 30 percent for family coverage and 22 percent for single coverage (GAO, 1997). However, 1997 marked the second consecutive year that the percentage of premiums paid for by workers (of employers with 200 or more workers) has decreased (KPMG, 1997).
  • Similarly, between 1980 and 1993, the percentage of workers with no-cost single coverage dropped from 72 percent to 37 percent (Ginsburg and Pickreign, 1997). However, in 1997, the percentage of employees who work in firms (with 200 or more workers) where the firm pays the full cost of premiums increased 4 percentage points for conventional plans and 2 percentage points for point of service (POS) plans, but declined 2 percent for HMOs and 3 percent for POS products (KPMG, 1997). The share of employees with fully employer-funded family benefits dropped from 51 percent to 21 percent over the 1980 to 1993 time period but has jumped significantly since 1995 (Ginsburg and Pickreign, 1997). Between 1995 and 1997, employees provided full family coverage by their employer (with 200 or more workers) dropped 1 percentage point for conventional indemnity and HMO products, but increased 4 percentage points for both preferred provider organization (PPO) and POS products (KPMG, 1997).
  • Over the 1992-1996 period, the dollar contribution of employee cost sharing increased at an average annual rate of 7.2 percent, compared to premium increases of 3.8 percent (Jensen et al., 1997). Although from 1995 to 1997 employees' (of employers with 200 or more workers) average monthly contribution in dollars has declined, and in some cases, 1997 figures are less than amounts paid in 1994 (KPMG, 1997). Controlling for product, cost sharing through deductibles, coinsurance, and copayments is growing (Jensen, 1997). However, the implications for out-of-pocket costs are not clear because of the shift to managed care, which generally requires more limited copayments on insured services and smaller deductibles than indemnity insurance requires (Levit et al., 1998).
  • The evolving relationship between public and private insurance. Actions taken by public and private insurance programs increasingly have implications for each other. For example, changes in employer-sponsored insurance and expansions in the Medicaid program have interacted to produce some shifting of low-wage workers from private insurance to Medicaid (Holahan, 1997). The new State Children's Health Insurance Program, created under the Balanced Budget Act of 1997, will expand the interrelatedness of public and private insurance by further promoting the use of public funds to purchase private insurance for low-income children. Public and private purchasers also have engaged in productive partnerships to exert stronger value-based purchasing, share knowledge and resources, reduce duplication and overlap, and avoid cost shifting (Midwest Business Group on Health, 1997).
  • The shift to managed care. Group purchasers in both the private and public sectors are shifting to managed care products,2 in part to gain control over costs. Managed care integrates, to different degrees, the functions of health insurance and health care delivery (Shortell and Hull, 1996; Gold et al., 1995b; Weiner and deLissovoy, 1993).
Traditional indemnity insurance now covers a minority of the individuals insured through employment-based plans, and almost all indemnity plans now include utilization review (UR). The share of individuals enrolled in managed care products of any type (HMO, PPO, or POS) rose from 29 percent in 1988 to 73 percent in 1995. However, recent analysis shows that employers moving to managed care do not necessarily provide strong incentives to encourage their employees to choose lower cost plans (Hunt et al., 1997). In 1995, only about 20 percent of workers were in firms that offered multiple health plans where the employer did not subsidize, through its contribution strategy, the cost difference for the more expensive option.

Historically, managed care products have been most prevalent in the medium- and large-employer market, with limited penetration in the small-employer (under 100 employees) market. This now is changing (Gabel et al., 1997; Morrissey and Jensen, 1997). Only 29 percent of employees in firms with fewer than 100 employees were in conventional indemnity plans in 1996, down from 50 percent in 1993 and 88 percent in 1988. After analyzing factors contributing to the increased use of managed care among small employers, Morrissey and Jensen (1997) concluded that employer choice was sensitive both to price and market experience, with the likelihood of managed care's being offered correlated with the existing managed care penetration in the market.

The Growth of Self-Funded Plans

Under the Employee Retirement Income Security Act of 1974 (ERISA), the Federal Government has oversight authority over self-funded and insured plans, which are not subject to regulation by States (Mariner, 1996). The Employee Benefits Research Institute (Copeland and Pierron, 1998) estimates that in 1995, 123 million individuals were covered by ERISA-regulated plans, of whom more than 39 percent -- 48 million individuals -- were in self-insured (i.e., self-funded) plans.

In 1995, 46 percent of insured workers were in self-funded plans, including 63 percent of all conventional plan enrollees, 60 percent of all PPO enrollees, and 53 percent of POS enrollees (Jensen et al., 1997). Self-insurance is less common for workers in HMOs; only 11 percent were self-insured in 1995. The share of workers from small- and medium-sized firms in self-funded plans increased from 15 percent in 1980 to 46 percent in 1993. Among small firms (under 100 employees), 31 percent were self- funded in 1992. The line between self-funding and insured arrangements is not entirely clear, with partly self-insured arrangements almost as likely as full self-insurance (Jensen, 1997).

Implications for Consumers

The complexity of the U.S. health care system and the rapid and, at times, involuntary change that it has presented to consumers increases the potential for transitional problems and consumer confusion and dissatisfaction. With both a pluralistic system and the trend to self-funded plans among group purchasers, authority for oversight is split between State and Federal agencies and across the public and private sectors. This increases the importance of collaboration among all those with a stake in the system to identify how best to support the current transition in our health system so that short-term problems are minimized and effective, more permanent change is encouraged.

Health Insurance Products

Five trends characterize health insurance plans today and the ways in which the products they offer are structured: (1) an increased complexity and concentration of health plans; (2) an increased diversity of health insurance products; (3) an increased focus on network-based delivery; (4) shifting financial structures and incentives between purchasers, health plans, and providers; and (5) development of clinical infrastructure for utilization management and quality improvement. These trends have tremendous implications for consumers, affecting how care is accessed, which providers are seen, and how care is delivered, as well as who is accountable for the outcomes of care and performance of the health care system.

Increased Health Plan Complexity and Concentration

Historically, health insurance primarily was provided by commercial insurers and Blue Cross-Blue Shield organizations that sold insured conventional indemnity products to purchasers. With the shift to managed care, commercial insurers, Blue Cross-Blue Shield organizations, managed care companies, provider groups, and others have increasingly become involved in sponsoring health insurance products (AAHP, 1997). The growth of self-insured employer-sponsored plans has meant that group purchasers also provide their own health insurance products, sometimes working directly with provider entities to offer managed care products.

As managed care plans have become more mainstream, they, like the conventional products they are replacing, increasingly are owned by or affiliated with national or regional organizations (Corrigan et al., 1997). National firms now own more than half of the existing HMO and PPO health plans (AAHP, 1997). The share of the HMO market held by the 10 largest national firms rose from 21 percent to 34 percent between 1990 and 1994 (Corrigan et al., 1997) and is likely to now be well above 40 percent (InterStudy, 1997b).

Enrollment tends to be concentrated in a small share of plans. More than half of HMO enrollment was in 65 HMOs with 200,000 or more members; almost three-quarters was in 143 HMOs with 100,000 or more members (InterStudy, 1997a). This means that a relatively small number of managed care entities are responsible for the care of a large share of managed care enrollees.

Increased Diversity of Products

Conventional indemnity health insurance was a financing system that paid for services but did not otherwise attempt to influence what services should be received, who should provide them, and how they should be organized. With the shift to managed care, health insurance products with features that aim to more directly influence care delivery are growing. Even conventional indemnity insurance now almost always includes utilization review.

The amount and kind of change from conventional insurance and care processes vary considerably across managed care products. Traditional PPO products, for example, differ relatively little from conventional insurance with utilization review, except that PPOs use a defined provider network that agrees to fee discounts that, when voluntarily accessed by enrollees, lower enrollee cost sharing. HMOs, in contrast, are capitated and responsible for providing or arranging health care service for a defined population, often transferring some of the risk to intermediaries and individual practitioners. HMOs also are more likely to employ features like gatekeeping and focused studies for quality improvement that depart from fee-for-service practice.

In response to consumer and group purchaser interest, health plans increasingly offer a range of health insurance products rather than a single product. In 1996, 75 percent of the HMOs offered a POS product, 59 percent a PPO product, and 59 percent an indemnity product (AAHP, 1996). Many of the firms offering multiple products offered three or more options, typically a traditional HMO, a traditional PPO, and a POS (Gold and Hurley, 1997).

Increased Focus on Networks

The growth of managed care means that more and more consumers are covered through health insurance plans in a managed care product that links coverage in some form to use of a defined provider network. In HMO products, coverage is limited to care provided through the network unless the individual is referred by a health plan provider (with exceptions for emergencies and out-of-area services). In PPO and POS products, cost sharing is less if network-based providers are used.

Complex provider networks. Provider networks used by managed care plans are complex, with individual plans typically using many different types of provider contracts (Gold et al., 1995a; InterStudy, 1997). In 1994, half of all HMOs (and two-thirds of PPOs) contracted with providers both directly through individual contracts and indirectly through various forms of intermediate entities (Gold et al., 1995b). Most often, these contracts were with groups and provider independent practice associations (IPAs), but almost half the HMOs (a smaller share of PPOs) had contracts with physician-hospital organizations (PHOs). InterStudy (1997) estimates that about 18 percent of those enrolled in HMOs in early 1997 were cared for through organized delivery systems.

In early 1997, 77 percent of HMOs contracted with large groups, 57 percent with PHOs, 30 percent with management service organizations (MSOs), and around 20 percent each with foundations (usually a hospital-affiliated entity), integrated health care organizations (with both insurance and provider arrangements), and physician practice management firms (InterStudy, 1997). This growing complexity in part explains why traditional categories of HMO models (group, staff, network, IPA) are less relevant today.3

Empirical information about the growth and form of provider-sponsored entities is relatively limited, although efforts to conceptualize this evolution are under way (Miller, 1996; Robinson and Casalino, 1996; Shortell and Hull, 1996). Provider entities mostly contract through health plans with purchasers. For the most part, States have ruled that provider entities seeking to assume direct risk from group purchasers (rather than downstream risk from managed care entities offered risk-based managed care products) must obtain an HMO license. While provider HMOs exist, they tend to be newer and smaller than other HMOs (PPRC, 1997).

Thus, direct provider contracting, to the extent it exists, tends to involve PPOs and POS products that are more likely to be self-insured under ERISA. However, this may change in the future since the Balanced Budget Act of 1997 provides expanded authority for provider-sponsored organizations in Medicare, and States also are actively working to define a legal infrastructure through which providers could offer managed care products (PPRC, 1997).

Changing roles of primary care providers. Primary care providers are responsible for an increasing scope of work in HMO products (less so in PPOs and POSs). In 1994 in about 9 of 10 HMOs, primary care providers were responsible for authorizing referrals to specialists (Gold and Hurley, 1997), and enrollees were required to choose a primary care provider. In contrast, only about 34 percent of PPOs offered a "gatekeeper" PPO product. About half the network/IPA HMOs and two-thirds of the group/staff HMOs required preauthorization of specialist services in 1994 (Gold et al., 1995b). Also at that time, over half the HMOs (21 percent of PPOs) said they had taken specific steps to expand the scope of primary care practice, though most characterized any expansion as moderate rather than great (Gold et al., 1995a). In addition, over the past 2 years 30 percent of primary care physicians report an increase in the severity and complexity of patient conditions that they care for without referring to a specialist. Fifty percent of specialists similarly report an increase in the complexity and severity of patient conditions at the time of referral to them by primary care physicians (St. Peter et al., 1997).

Shifting financial structures. Payment methods that modify traditional indemnity plan fee-for-service payments are the norm in HMOs, though less so in PPOs and other managed care products, where conventional fee-for-service payment continues to dominate.4 HMOs typically receive a capitated payment per member per month for which they are responsible for providing or arranging all health care services. In return, HMOs often transfer, in various ways, some of this risk to the intermediate entities and individual providers in their network.

These arrangements are complex, with multiple elements. The transfer of risk and financial incentives is determined by (1) the basic method of payment (fee-for-service, salary, or capitation); (2) additional financial incentives in the form of withholds or bonuses; and (3) alternative mechanisms to limit the amount of risk through stop-loss arrangements or adjust it by enrollee characteristics. The form all of these incentives take changes as it is translated through various intermediate contracting entities to individual physician practice groups, and ultimately to an individual practitioner.

In general, individual primary care practitioners in traditional group/staff HMOs are paid by capitation or salaried arrangements, either directly or through intermediate entities. Most network/IPAs used either capitation or bonuses or withholds in 1994 (Gold et al., 1995b). Common performance indicators used by half or more of HMOs using withholds or bonuses include measures of use and cost, quality of care, and patient complaints, as well as consumer surveys. About half the network/IPAs use capitation to pay their primary care practitioners (InterStudy, 1997b); the rest most often used fee-for-service payment methods.

HMOs still tend to pay individual specialists on a fee-for-service basis, but elements of risk are being introduced. HMOs also are starting to capitate or competitively bid for specific specialty services such as mental health, radiology, podiatry, and cardiology (InterStudy, 1997b).

Clinical infrastructure. Health insurance products are developing clinical infrastructures to manage utilization and improve quality of care. There is evidence that HMOs in particular are strengthening their internal quality oversight structures by carrying out targeted quality improvement initiatives, introducing practice guidelines, implementing disease management programs, improving their information infrastructure, and generating performance measures.

For example, in 1994, a high proportion of HMOs reported employing various care management techniques traditionally associated with quality improvement (Gold et al., 1994; 1995b). More than 90 percent of HMOs and 59 percent of PPOs had targeted quality improvement initiatives; virtually all HMOs and 45 percent of PPOs conducted clinically focused studies on a regular basis. Profiling is used by more than three-quarters of HMOs and half the PPOs, with common uses including quality-focused goals like systemwide improvement and practitioner feedback. Three-quarters of HMOs and about a quarter of PPOs used formal written practice guidelines. More than four-fifths of these say they monitor compliance with guidelines, and an equal proportion of those that do say they meet with practitioners to review results. HMOs also have standards for health records.

There is growing interest in disease management, with half or more of HMOs having implemented programs for asthma, diabetes, and high-risk pregnancies (InterStudy, 1997a). Use of patient satisfaction measures as evaluation tools for disease management programs increased markedly between 1996 and 1997. Measurement of patient well-being also increased.

Implications for Consumers

The growing diversity of health insurance products is challenging for consumers. Diversity expands choice and allows purchasers to better tailor offerings to particular needs. But choice among products may not be straightforward. When each of the products has different providers in their system, different rules for accessing providers, and different cost-sharing requirements, it may be difficult for consumers to readily comprehend or assess those products.

The current design of health insurance products and plans requires a greater investment in education and information to help consumers understand how insurance products differ, how best to navigate managed care systems, and what differences exist in structure or performance across plans or products. One fact that makes addressing these issues challenging is that the amount and kinds of change being introduced across health insurance products vary, so the oversight issues are not always the same, even if the goals are consistent.

Changes in Provider Practice

The characteristics of provider practice are changing in four important ways: (1) the shift of physicians away from solo, self-employed practice and effects on income and satisfaction associated with the demands of the current health care system; (2) the shift in hospitals from inpatient facilities to health systems; (3) the heightened demand for nursing home, postacute care, and long-term care services associated with demographic trends and changes in Medicare coverage interpretations; and (4) the changing roles of nurses and other health care professionals.

    Shifting Characteristics of Physician Practice

    Physician practice is shifting away from its historical roots in self-employed practices toward group and salaried arrangements. Given the magnitude of these changes and their implications both for physician income and autonomy, it is not surprising to find a decline in physician satisfaction. Whether these trends are transitional or permanent is unclear.

    Trend toward salaried and group practice. The physician employment trend is moving away from solo, self-employed practice toward both physician-owned groups and organizations owned by others (Emmons and Kletke, 1997). From 1988 to 1996, the share of salaried physicians rose from 28 percent to 48 percent nationally. It is important to note, however, that salaried physicians include providers employed by organizations (i.e., hospitals, nursing homes, staff-model health plans) as well as physicians who draw a salary from a practice in which they have an ownership interest. Solo practice has been declining, but many physicians still are in small group or individual practice (Emmons and Kletke, 1997). Only 10 percent of physicians practiced in groups of 20 or more in 1996 (up from 8 percent in 1988). As with so much of the change in the industry, changes in physician practices are occurring rapidly. Almost a fifth (19 percent) of physicians in one national survey said their practices had experienced a major change over the past 2 years, such as merger, affiliation, or acquisition (Colby, 1997).

    Growing reliance on managed care revenue. In 1996, 88 percent of physicians had at least one managed care contract, up from 85 percent in 1995 and 61 percent in 1990 (Emmons and Wozniak, 1997). Most physicians have contracts with multiple health plans. Half of the physicians in one recent national survey were members of 5 or more separate plans, and one-quarter have contracts with 10 or more plans (Collins et al., 1997).

    The AMA estimates that managed care now accounts for 39 percent of spending on physician services (Emmons and Wozniak, 1997). From 1990 to 1996, the share of revenue from managed care among participating physicians increased from 28 percent to 44 percent. In addition, capitation revenue is becoming more important for physicians, even though the entities in which physicians practice are more likely to receive capitation payments than are individual physicians (Lake and St. Peter, 1997; Remler et al., 1997; Simon and Emmons, 1997). Thirty-six percent of physician practices in 1996 received some revenue capitation, which accounted for 25 percent of their total revenue (Simon and Emmons, 1997).

    Utilization review has become a standard feature of both conventional and managed care product design. In a 1995 survey, physicians say that, on average, 59 percent of their patients are reviewed for length of stay, 45 percent for site of care, and 39 percent for the appropriateness of treatment (Remler et al., 1997).

    Implications for physician income and satisfaction. Physician incomes continue to grow, but are doing so less rapidly than in the past. However, data suggest that the 3.8 percent absolute drop in median physician income that occurred in 1994 was reversed in 1995 when incomes rose 6.7 percent (Moser, 1997). The incomes of primary care physicians -- especially general and family practitioners -- are growing more rapidly than specialists' incomes.

    Studies show that physicians are more dissatisfied now than they were in the past and that this change correlates both over time and cross-sectionally with shifts in managed care penetration. In a recent national survey, physicians report that over the past 3 years, 38 percent have experienced a decline in their ability to make decisions they think are right for their patients, and 41 percent report a decrease in the amount of time spent with patients. Overall, physicians report feeling greater pressures on their clinical autonomy (Collins et al., 1997).

    The Shift from Inpatient Hospitals

    Community hospitals now are less dominated by inpatient services and more likely to be part of broader based systems of care. Inpatient services represented just 70 percent of spending in community hospitals in 1995, compared with 87 percent in 1980 (ProPAC, 1997). From 1984 to 1994, hospital days declined by 19.3 percent while outpatient visits increased by 81 percent (AHA, 1996). Ambulatory surgery increased 168 percent between 1983 and 1993 while inpatient surgery declined 33 percent (AHA, 1995).

    The freestanding independent hospital increasingly is rare as hospitals affiliate and become part of health systems. Analyzing trends from 1990 to 1994, Corrigan et al. (1997) found consolidation both within hospitals in national systems and among other hospitals, but little change in the overall share of each. Of 248 multihospital systems, only 26 were nationally owned. Within the national sector, a significant share of activity was associated with the rapid growth of Columbia HCA, which appears about to be reversed. Hence future trends are unclear.

    Provider consolidation seeks to better position hospitals to participate in managed care. In 1996, 26 percent of hospitals had PHO arrangements, up from 6 percent in 1995; 8 percent of hospitals owned and operated their own HMO and 18 percent their own PPO (ProPAC, 1997). About a fifth (21 percent) of hospitals were in health networks in 1994, up from 11 percent the year before (AHA, 1996).

    Hospital involvement in integration activities is correlated with a higher percentage of managed care revenue. Morrissey et al. (1996) suggest that the line above and below 15 percent of revenue from managed care distinguishes both the proportion of hospitals involved in integration and the strength of those integration activities. On average, community hospitals received only 11 percent of their revenue from managed care (defined as HMOs and PPOs) in 1993. Eighty-three percent received 5 percent or less of total revenue from capitated plans, and 42 percent received 5 percent or less from managed care more generally.

    Growth of subacute care services. The share of spending for hospital-based and freestanding nursing facilities and for home health care has been growing rapidly, up from 8.1 percent of the total national health care spending in 1980 to 10.8 percent in 1995 (ProPAC, 1997). Spending on home health care is the fastest growing component, with Medicare assuming an increasing share of home health care costs -- 41 percent in 1995 compared with about 25 percent in the 1980s (ProPAC, 1997).

    In response to the reinterpretation of Medicare skilled nursing facilities and home health benefits in the late 1980s, subacute care providers are growing in number and capacity. Since 1990, the number of Medicare-certified providers has increased at an average annual rate of 6.8 percent for skilled nursing facilities; 4.3 percent for rehabilitation facilities; 12.8 percent for long-term care hospitals; 9.3 percent for home health agencies; 15.4 percent for hospices; 12.1 percent for clinic, rehabilitation agency, and public health agency services; 6.2 percent for individual independent occupational therapists; and 13.3 percent for comprehensive outpatient rehabilitation facilities (ProPAC, 1997).

    Demographic trends. The influence of U.S. demographic trends on these patterns is likely to intensify over the coming years. Older adults are increasingly comprising a larger percentage of the U.S. population. Between 1980 and 1990, the elderly population grew by 22 percent, while the total population increased by 9.3 percent. This "graying of America" will continue so that by the year 2050, an estimated one in five Americans will be age 65 or older (Schick and Schick, 1994). The number of Medicare beneficiaries will almost double in size over the next 30 years, adding 38 million beneficiaries (Board of Trustees, 1997). By the year 2000, nearly one-quarter of the U.S. population will be members of racial or ethnic "minority" groups; this will grow to 47.5 percent by the middle of the next century (Lavizzo-Mourey and Mackenzie, 1996). Roughly one-quarter of Americans live in rural communities faced with unique challenges in receiving quality health care. Rural Americans are, on average, older and frequently employed in industries (agriculture, mining, forestry) that are prone to occupational injury and often lacking in employer-sponsored health insurance.

    Changing Role of Nurses and Other Health Care Workers

    Changes in the health care industry also are bringing new demands for skills that health care workers need to do their jobs (also go to Chapter 13). For example, while the aggregate number of nurses appears sufficient to meet demand, there may be a deficiency in the educational mix of the nursing profession (Aiken and Salmon, 1994; Pew, 1995). The nursing profession will need to address such critical issues as interdisciplinary education and team approaches to care; management of care, including attention to costs, accountability, and outcomes; and new models of care delivery, including community-based care, managed care, and home care.

    Unlicensed paraprofessional health care workers also are being asked to perform additional duties, creating some concerns about their ability to deliver quality care (IOM, 1996). For example, no national standards currently exist for the training and certification of ancillary nursing personnel employed in hospitals.

    It is clear that the education and training of physicians, nurses, and other health care workers will have to change to meet the demands of the changing health care system.

    Growth in Knowledge and Health Care Technology

    Health knowledge and technology have grown explosively over the post-World War II period, and even more rapid growth is expected in the future. Surprisingly little is known about the relationship between health technology and costs and about how this relationship may be changing in today's environment.

    Both public and private sector investments in research and development are extensive (Gelijns and Rosenberg, 1994; Read and Lee, 1994). While investments have a long pipeline, knowledge of treatment has grown explosively and promises to continue to do so in the future. About 20 to 30 new drugs are approved by the Food and Drug Administration (FDA) each year, including biotechnology products and vaccines (Reed and Lee, 1994). Recently approved and widely used drugs, devices, and procedures include beta blockers, imaging devices, ultrasound, and surgical laparoscopy (Gelijns and Rosenberg, 1994). Approved biotechnology products include some broad-based products such as Interferon and TPA.

    In the pipeline and likely to emerge soon are new classes of technology that allow better targeting of drugs to cell receptors; new treatments for autoimmune diseases, such as diabetes and rheumatoid arthritis; and new approaches to genetic screening and therapy that will influence treatment for cystic fibrosis and cancer, for example (Schwartz, 1994).

    Evolving knowledge has potential to improve care, but it also places stress on providers who need to be knowledgeable about evolving technologies and able to translate disparate findings into practice. Substantial efforts have been made in recent years to develop practice guidelines and other evidence-based guidance for clinicians, both on therapy and on preventive services. In response to these needs, efforts to better develop an infrastructure for evidence-based medicine are evolving. AHCPR recently awarded 12 5-year contracts to create Evidence-based Practice Centers to produce reports and technology assessments that would be widely used and provide a scientific foundation for developing guidelines, performance measures, and clinical quality improvement tools (AHCPR, 1997b). The AMA, American Association of Health Plans (AAHP), and AHCPR are working together to develop a National Clinical Guideline Clearinghouse (AHCPR, 1997a). The AMA is also working on a related Clinical Guideline Recognition Program to provide feedback to physicians on guideline quality (AMA, 1997).

    The effects of these changes on health care expenditures are poorly understood. While studies quantifying the effects of health innovation and other technological changes on health care spending exist (Fuchs, 1986; Newhouse, 1992), these studies have been criticized because new technology is assumed to account for changes in health care spending unless the change is otherwise accounted for.


    Achieving significant improvement in health care quality will require consistent efforts on the part of all stakeholders in the health care system: government leaders, group purchasers, health care providers (including individuals, facilities, and organizations), quality oversight organizations, and consumers themselves. Responsibilities for each of these key stakeholder groups are detailed in succeeding chapters. While each participant in the health care industry should read these chapters to understand what it should do to promote improvement in quality, it is important to underscore that lone action by any one group of stakeholders will not by itself achieve the necessary changes in the quality of American health care. Action by all parties will be needed to achieve the high-quality health care that American consumers deserve.


    Agency for Health Care Policy and Research, Department of Health and Human Services, Press Release: AHCPR, AAHP and AMA to Develop National Clinical Guideline Clearinghouse (May 28, 1997a).

    Agency for Health Care Policy and Research, Department of Health and Human Services, Press Release: AHCPR Announces 12 Evidence-based Practice Centers (June 25, 1997b).

    Aiken, Linda H., and Maria E. Salmon, "Health Care Workforce Priorities: What Nursing Should Do Now," Inquiry 31(3):318-329, Fall 1994.

    American Association of Health Plans, HMO and PPO Industry Profile, 1995-1996 edition (Washington, DC: May 1996).

    American Association of Health Plans, unpublished data on plan ownership and products, 1997.

    American Hospital Association, Hospital Statistics: The AHA Profile of United States Hospitals, 1994-1995 edition (Chicago: 1995).

    American Hospital Association, Hospital Statistics, Emerging Trends in Hospitals, 1995-1996 edition (Chicago: 1996).

    American Medical Association, Press Release: AMA Launches Clinical Practice Guideline Recognition Program to Evaluate Guidelines (July 16, 1997).

    Anderson, Gerard F., "In Search of Value: An International Comparison of Cost, Access, and Outcomes," Health Affairs 16(6):163-171, November/December 1997.

    Board of Trustees of the Federal Hospital Insurance Trust Fund, 1997 Annual Report (Washington, DC: U.S. Government Printing Office, 1997).

    Colby, David C., "Perspective: Doctors and their Discontents," Health Affairs 16(6):112-114, November/December 1997.

    Collins, Karen Scott, Cathy Schoen, and David R. Sandman, The Commonwealth Fund Survey of Physician Experiences With Managed Care (New York: Commonwealth Fund, March 1997).

    Cooper, Philip F., and Barbara Steinberg Schone, "More Offers, Fewer Takers for Employment-Based Health Insurance: 1987-1996," Health Affairs 16(6):142-149, November/December 1997.

    Copeland, Craig, and Bill Pierron, Implications of ERISA for Health Benefits and the Number of Self-Funded ERISA Plans, EBRI Issue Brief (Washington, DC: Employee Benefit Research Institute, January 1998).

    Corrigan, Janet, Jill Eden, Marsha Gold, and Jeremy Pickreign, "Trends Toward a National Health Care Marketplace," Inquiry 34(1):11-28, Spring 1997.

    Dunbar, Jennifer L., Anticipating the 1997 State Children's Health Insurance Program: What's Current in Five Rural States (Bethesda, MD: Project HOPE, January 1998).

    Emmons, David W., and Phillip R. Kletke, "An Examination of Practice Size," in Socioeconomic Characteristics of Medical Practice 1997 (Chicago: American Medical Association, 1997).

    Emmons, David W., and Gregory D. Wozniak, "Physicians' Contractual Arrangements with Managed Care Organizations," in Socioeconomic Characteristics of Medical Practice 1997 (Chicago: American Medical Association, 1997).

    Employee Benefit Research Institute, Trends in Health Insurance Coverage, EBRI Issue Brief No. 185 (Washington, DC: 1997).

    Fuchs, Victor, The Health Care Economy (Cambridge, MA: Harvard University Press, 1986).

    Gabel, Jon R., Paul B. Ginsburg, and Kelly A. Hunt, "Small Employers and Their Health Benefits, 1988-1996: An Awkward Adolescence," Health Affairs 16(5):103-110, September/October 1997.

    Gaskin, Darrell, and Jack Hadley, "The Impact of HMO Penetration on the Rate of Hospital Cost Inflation, 1985-93," Inquiry 34(3):205-216, Fall 1997.

    Gelijns, Annetine, and Nathan Rosenberg, "The Dynamics of Technological Change in Medicine," Health Affairs 13(3):28-46, Summer 1994.

    General Accounting Office, Private Health Insurance: Millions Relying on Individual Market Face Cost and Coverage Trade-Offs, GAO/HEDHS/97-8 (Washington, DC: November 1996).

    General Accounting Office, Private Health Insurance: Continued Erosion of Coverage Linked to Cost Pressures, GAO/HEHS-97-122 (Washington, DC: July 1997).

    Ginsburg, Paul, and Jeremy Pickreign, "Tracking Health Care Costs: An Update," Health Affairs 16(4):151-155, July/August 1997.

    Gold, Marsha, and Robert Hurley, "The Role of Managed Care 'Products' in Managed Care Plans," Inquiry 34(1):29-37, Spring 1997.

    Gold, Marsha R., Robert Hurley, Timothy Lake, et al., "A National Survey of the Arrangements Managed Care Plans Make With Physicians," New England Journal of Medicine 333(25): 1678-1683, December 21, 1995a.

    Gold, Marsha, Lyle Nelson, Timothy Lake, et al., "Behind the Curve: A Critical Assessment of How Little Is Known About Arrangements Between Managed Care Plans and Physicians," Medical Care Research and Review 52(3):307-341, September 1995b.

    Gold, Marsha R., et al., Arrangements Managed Care Plans Make With Physicians, Selected External Research Series, No. 3 (Washington, DC: Physician Payment Review Commission, November 1994).

    Holahan, John, "Crowding Out: How Big a Problem," Health Affairs 16(1):204-206, January/February 1997.

    Hunt, Kelly, Sara J. Singer, Jon Gabel, et al., "Paying More Twice: When Employers Subsidize Higher-Cost Health Plans," Health Affairs 16(6):150-156, November/December 1997.

    Institute of Medicine, Nursing Staff in Hospitals and Nursing Homes: Is It Adequate? (Washington, DC: 1996).

    InterStudy, The InterStudy Competitive Edge: Part II, HMO Industry Report, No. 7.1 (Excelsior, MN: April 1997a).

    InterStudy, The InterStudy Competitive Edge: Part II, HMO Industry Report, No. 7.2 (Excelsior, MN: October 1997b).

    Jensen, Gail, Michael A. Morrisey, Shannon Gaffney, and Derek K. Liston, "The New Dominance of Managed Care: Insurance Trends in the 1900s," Health Affairs January/February 1997.

    KPMG Peat Marwick, Health Benefits in 1997 (Montvale, NJ: 1997).

    Lake, Timothy, and Robert St. Peter, Payment Arrangements and Financial Incentives for Physicians, Data Bulletin: Results from the Community Tracking Study, No. 8 (Washington, DC: Center for Studying Health Systems Change, Fall 1997).

    Lavizzo-Mourey, Riza, and Elizabeth R. Mackenzie, "Cultural Competence: Essential Measurements of Quality for Managed Care Organizations," Annals of Internal Medicine 124(10):919-921, 1996.

    Levit, Katharine, Helen C. Lazenby, and Bradley R. Braden, "National Health Spending Trends in 1996," Health Affairs 17(1):35-51, January/February 1998.

    Mariner, Wendy K., "Sounding Board: State Regulation of Managed Care and the Employee Retirement Income Security Act," New England Journal of Medicine 335(26):1986-1990, December 26, 1996.

    Melnick, Glenn, and Jack Zwanziger, "State Health Care Expenditures Under Competition and Regulation, 1980-1991," American Journal of Public Health 85(10):1391-1396, October 1995.

    Midwest Business Group on Health, Public-Private Healthcare Purchasing Partnerships (Chicago: 1997).

    Miller, Robert H., "Health Systems Integration: A Means to an End," Health Affairs 15(2):92-106, Summer 1996.

    Morrissey, Michael A., Jeffrey Alexander, Lawton R. Burns, and Victoria Johnson, "Managed Care and Physician/Hospital Integration," Health Affairs 15(4):62-73, Winter 1996.

    Morrissey, Michael A., and Gail A. Jensen, "Switching to Managed Care in the Small Employer Market," Inquiry 34(3):237-248, Fall 1997.

    Moser, James W., "Trends in Physician Income, 1985-1995," in Socioeconomic Characteristics of Medical Practice 1997 (Chicago: American Medical Association, 1997).

    Newhouse, Joseph P., "Medical Care Costs: How Much Welfare Loss?" Journal of Economic Perspectives 6(3):3-21, Summer 1992.

    Office of Technology Assessment, Does Health Insurance Make a Difference? OTA-BP-H-99 (Washington, DC: U.S. Government Printing Office, 1992).

    Pew Health Professions Commission, Critical Challenges: Revitalizing the Health Professions for the Twenty-First Century (San Francisco: University of California Center for the Health Professions, 1995).

    Physician Payment Review Commission, Annual Report to Congress 1997 (Washington, DC: 1997).

    Prospective Payment Assessment Commission, Medicare and the American Health Care System: Report to Congress (Washington, DC: June 1997).

    Read, J. Leighton, and Kenneth B. Lee, Jr., "Health Care Innovation: Progress Report and Focus on Biotechnology," Health Affairs 13(3):215-225, Summer 1994.

    Remler, Dahlia K., Karen Donaelan, Robert J. Blendon, et al., "What Do Managed Care Plans Do to Affect Care? Results From a Survey of Physicians," Inquiry 34(3):196-204, Fall 1997.

    Robinson, James C., "Decline in Hospital Utilization and Cost Inflation Under Managed Care in California," Journal of the American Medical Association 276(13):1060-1064, October 2, 1996.

    Robinson, James C., and Larry Casalino, "Vertical Integration and Organizational Networks in Health Care," Health Affairs 15(1):7-22, Spring 1996.

    Rosenbaum, Sara, Kay Johnson, Colleen Sononsky, et al. "The Children's Hour: The State Children's Health Insurance Program," Health Affairs 17(1):75-89, January/February 1998.

    Schick, Frank L., and Renee Schick, eds., Statistical Handbook on Aging Americans (Phoenix, AZ: Oryx Press, 1994).

    Schoen, Cathy, Barbara Lyons, Diane Rowland, et al., "Insurance Matters for Low-Income Adults: Results From a Five-State Study," Health Affairs 16(5):163-171, September/October 1997.

    Schwartz, William B., "In the Pipeline: A Wave of Valuable Medical Technology," Health Affairs 13(3):70-79, Summer 1994.

    Shortell, Stephen M., and Kathleen E. Hull, "The New Organization of the Health Care Delivery System," in S. Altman and U.E. Reinhardt, eds., Strategic Choices for a Changing Health Care System (Chicago: Health Administration Press, 1996).

    Simon, Carol J., and David W. Emmons, "Physician Earnings at Risk: An Examination of Capitated Contracts," Health Affairs 16(3):120-126, May/June 1997.

    St. Peter, Robert, Marie C. Reed, David Blumenthal, and Peter Kemper, "The Scope of Care Provided by Primary Care Physicians: Physician Assessments of Change and Appropriateness," paper presented at the Association for Health Services Research Annual Meeting, Chicago, June 1997.

    Weiner, Jonathan P., and Greg deLissovoy, "Razing the Tower of Babel: A Taxonomy for Managed Care and Health Insurance Plans," Journal of Health Politics, Policy, and Law 18(1):75-103, Spring 1993.

    Wickizer, Thomas, and Paul J. Feldstein, "Does HMO Competition Reduce Health Insurance Premiums: Recent Evidence," Medical Practice Management 21(1):14-17, August 1996.

    1. Group purchasers' costs are reflected in premiums they pay as offset by any premium contribution from those covered. Because there is a lag in accounting for costs, changes in premiums may lag cost experience by 18 months or more.

    2. By managed care, we mean network-based arrangements associated with health benefit products such as HMOs, PPOs, and POS hybrid arrangements, including the provider-sponsored organizations set up to contract or compete with entities offering such products.

    3. The group/staff model is the form traditionally associated with large prepaid group practices that typically are exclusive to the HMO; the network/IPA model includes HMOs that have more dispersed networks of independent providers in community-based practices in which the HMO accounts for only a small share of the practice. But in 1994, 55 percent of group/staff model HMOs made some use of network/IPA arrangements within their traditional HMO product (Gold et al., 1995b).

    4. Only 1 in 10 PPOs uses a payment method that transfers risk to practitioners (AAHP, 1996). Whether the PPO itself bears any financial risk through its contract with the group purchaser is not clear.

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