The Un-Managed Competition Revolution

Abstract

Health care executives' attention is focused on President Clinton's recently introduced health care reform proposal. Most are wondering whether Congress will pass it and if so, what it will mean for their health care facilities, not to mention their careers. But this highly visible public theater is obscuring the fact that the federal government has already implemented a more subtle variety of health care reform that is unleashing a competitive revolution in health care that will rapidly restructure the U.S. health care delivery system. Like most revolutions, this one will be turbulent; it will also have profoundly negative consequences for health care executives who are not prepared to manage it effectively. Furthermore, should the competitive forces it unleashes disrupt coverage and access for important segments of the American public, it could produce a counter-revolution aimed at restoring order, fairness, and simplicity to U.S. health care through the adoption of a single-payer system. The foundations of this quiet health care revolution were laid in 1982 when the federal government stopped reimbursing hospitals retrospectively for their Medicare costs and started paying them on a predetermined, fixed price basis. This change provided the federal government with a powerful budgetary device for shifting more of the economic risk of treating elderly patients to the hospitals that serve them. Since 1983, Congress and the president have used this fiscal tool to produce large annual budget savings by reducing the rate of growth in Medicare hospital payments. Hospitals initially responded to this development by cutting their costs. But once they achieved the easy savings, most resorted to cost-shifting-that is, using higher hospital prices to transfer the shortfalls in Medicare payments (along with losses from treating uninsured and Medicaid patients) to local employers. In the process of doing so, they contributed to an exponential growth in employer-paid health insurance premiums. Between 1987 and 1990, Medicare per capita expenditures rose at a 9.7 percent annual rate, while employer per capita health insurance costs accelerated at a much brisker 16.5 percent per year. In effect, the cost-shift functioned as an economic safety valve enabling most hospitals to weather large public program reductions, as well as losses from the growing uninsured population, by shifting those losses to employers. As a result of federal budgetary actions in 1990 and 1993, the cost-shift will continue to grow. During those years, the federal government reduced Medicare and Medicaid expenditures by another $43 billion and $63 billion, respectively. As long as the federal deficit remains high, additional large Medicare and Medicaid reductions are likely--with or without systemic health care reform. Since no business, however efficient, can sustain a large area of uncontrolled expense, employers are unlikely to absorb these latest cuts in the form of higher premium payments. Indeed, employers have been taking a series of ever more aggressive actions to shield their balance sheets from the full brunt of escalating health insurance costs. Their first line of defense has been to shift some of the higher hospital charges to their employees through slower wage growth, increased copayments and deductibles, premium sharing, and in some instances, reduced or eliminated health benefits. However, the need to maintain employee morale in most businesses and union-negotiated contracts in others have placed clear limits on this approach to control costs. Many employers are now attempting to build a firewall between themselves and the rising cost-shift by placing a growing number of their employees in tightly controlled managed care plans. These organizations attempt to slow premium cost increases through the use of limited panels of physicians, exacting utilization standards, and large provider discounts. As managed care plans become more effective at resisting the cost-shift and as government continues to restrain the rate of growth in public program payments to health care providers, hospitals will be forced to go out of business or become more productive through stringent cost-cutting, consolidation with other providers, and eventually the clinical and financial integration of services. …