America’s Experience With Managed Health Care and Managed Competition – Summary of Presentation

The USA

Enthoven opened with a review of the model of care that emerged after World War II. The medical profession were in a powerful position and demanded:

• "Free choice of provider" which meant that insurance plans had no bargaining power and doctors had no incentive to offer better value for money.
• "Free choice of prescription" which meant that nobody could interfere with what the doctor and patient agreed on. This in turn meant no utilisation management or quality management and no incentive for the insured patient to turn down a doctor’s recommendation for more treatment.
• Doctor-patient negotiation of fees, which leaves the patient in a weak bargaining position.
• Fee-for-service (FFS) payment, which means more money for doing more things, whether or not more is beneficial or provides value for money.
• Solo practice, which is the weakest form of professional checks and balances.

These principles were accepted and reinforced by the system of employer-paid health insurance that developed post-War. Insured consumers were unconscious of cost and this was reinforced by an income tax code that excluded such employer payments from employees’ taxable incomes without limit. In addition, in 1965 Congress enacted the Medicare and Medicaid programs (for aged, disabled and poor) in accordance with the principles of the medical guild. In fact, Medicare and some private health insurance paid hospitals on the basis of retrospective cost-reimbursement, which was a powerful incentive to increase costs.

These actions created a complex of perverse incentives that led to the following behaviours that fueled inflation in health care costs:

1. Financing and delivery were not linked so providers did not have to work within a prospective budget. Providers got more money for doing more "things", whether or not they added value to the patient, and there was no incentive to seek out less costly but equally effective treatments.
2. The lack of an explicit link between providers and the populations they served meant little or no population-based medicine or resource planning and no reward for prevention. This resulted in too many beds, high tech facilities and specialists in relation to the needs of the populations served.
3. Care processes were fragmented as there was no incentive to integrate the process of inpatient and outpatient care. Hospital stays were prolonged because home health care services were undeveloped. Insurers paid more for people in hospital and often wouldn’t pay for home nursing services. People were hospitalised for things that could have been done on an outpatient basis because insurance paid best for inpatient care. The gulf between inpatient and outpatient services meant duplication of diagnostic tests.
4. Hospitals competed for doctors who brought patients and revenue, leading to the so- called "medical arms race" where hospitals used access to the latest technology to attract doctors. Doctors often practised in several different hospitals and played them off against each other. Doctors had no reason to be concerned about hospital costs. In addition, hospital administrators were very reluctant to antagonise doctors by serious quality management programmes.
5. Independent free-standing non-profit hospitals had little or no incentive to share resources or even to cut cost. Each hospital management felt it must do everything. Among other things, this led to the proliferation of high tech facilities, often functioning at volumes that were too low for quality and economy.
6. The preference for solo practice led to a lack of teamwork among doctors. Under FFS, doctors were hesitant to refer patients elsewhere and risk losing them. Too many doctors were drawn into procedure-oriented specialties where they could make more money than in primary care. Generally, insurance would not pay for the services of nurse practitioners whose services might be more appropriate and cost-effective.
7. Each doctor owned his or her own patient records and was reluctant to share them. Issues over ownership of records meant that nobody had a comprehensive record, and diagnostic tests were frequently duplicated.

These behaviours flowed from a few basic incentives and, as a result, national health expenditure in the USA grew from 5.1% of gross domestic product in 1960 to 13.6% by 1993. Premiums in California doubled from 1987 to 1992 and the percentage of non-elderly uninsured increased from 15.2% in 1988 to 17.4% in 1995.

Enthoven went on to describe competition among integrated comprehensive health care financing and delivery systems as one solution. He sees competition for the business of informed and cost-conscious customers as fundamental to getting the incentives right and describes such systems in terms of seven integrations, the integration of:

1. Financial responsibility and delivery, or capitation. Services are delivered within a fixed budget and the system prospers if it can keep patients well and satisfied, or treats them in the most effective way if they do get sick. Prompt, correct diagnosis and the appropriate procedure performed with proficiency is best for the patient’s health and the delivery system’s bank account. So far, this has left one perverse incentive: employers and other payers pay the same per capita payment regardless of the health status of the patient, creating powerful incentives to avoid the enrolment of people with medical conditions that are costly to treat. One answer is "risk adjusted" payments based on age, sex and medical history which are crucial to getting the incentives right.
2. Providers and populations. The delivery system is responsible for the medical needs of a voluntarily enrolled population. This fosters resource planning to meet the needs of the enrolled population, including numbers and types of doctors. Health maintenance organisations (HMOs) typically have more primary care doctors, to create easier access, and fewer specialists, to foster proficiency, than are found in the FFS sector.
3. Comprehensive services, so that the delivery system looks at the total care process (outpatient, inpatient, and home-based care) and seeks to optimise it including care in the least costly and restrictive setting. HMOs have an incentive to develop good home care capabilities to facilitate early discharge from hospital.
4. Doctors and hospitals. Once the total capitation payment is set in the market, the doctors have an incentive to be economical in use of hospital resources, because containing hospital costs will mean more money left over for them. There are many ways in which doctors can help to hold down hospital costs.
5. Hospital systems. Integration of hospitals into systems applies where there is an incentive to share costly equipment and to concentrate complex high-tech services in one or a few hospitals in the region.
6. Doctors among themselves and with other health professionals in multi-specialty group practices. Once a medical group is paid by the same comprehensive per capita payment, they have incentives to optimise referral practices, with generalists and specialists establishing the best division of labor, ie, when to refer to a specialist. The group also has incentives to use nurse practitioners for those things they can do as well or better and at a lower cost than doctors.
7. Information. Integrated delivery systems aim for one comprehensive shared longitudinal medical record for each patient. This was difficult and costly in the days of paper records. Kaiser Permanente and other systems are working hard now to convert to electronic records. Shared records improve quality of care and reduce duplication of diagnostic tests.

The US health care system is still a long way from the goal of competition among comprehensive integrated delivery systems. Getting there requires a lot of things that are not yet being properly done. For example, employers contract for health insurance for their employees and comparatively few offer employees a financially responsible choice among health insurance arrangements. In addition, rapidly changing market conditions have put strains on the integrated systems like Kaiser Permanente.

Enthoven noted his positive view of the innovation, change and adaptation that are continuing in an attempt to determine the best combinations and concluded by emphasising the importance of trying to align the incentives of the providers with the best interests of patients.

The UK Situation

Enthoven noted his admiration for the aspiration of the NHS: to provide universal access to high quality care. But he notes that the NHS is very short of the resources needed to achieve its objectives. This increases the importance of positive incentives for improvement. He describes the pre-reform NHS as a "gridlock of perverse incentives" where doing a good job with what one has weakens one’s case for more resources. Improvement in the quality of services attracts more patients without more resources to care for them. "No good deed goes unpunished."

In contrast, the incentives for providers in competitive markets are generally to improve the quality of the product or service and to reduce the cost of producing it.

The Internal Market (IM) was an attempt to introduce some market incentives into a centrally planned hierarchical system while maintaining universal and free access. The intention was to create a buyer-seller relationship between health authority purchasers and GP fund-holders on the purchasing side and independent trust hospitals on the supply side of acute services.

Despite the rhetoric about abolition of the IM, these main components remain in place under the new Labour government and the fund-holding idea so vehemently attacked by Labour is now being generalised to all GPs.

The IM stimulated considerable innovation in primary care commissioning and in improving GP services by bringing many services into their surgeries, reducing waiting time for specialty services.

Research showed that the reforms led to an increase in efficiency but the beneficial effects were limited because many of the essential conditions for a market to operate were not fulfilled, including: