Health Careers and Issues -- JT 01

The evolution of health care in the United States

I. Overview of Health Care in the U.S.

A. Traditional indemnity insurance and fee for service.

1. Mid 1800's average physician.

-- received training via informal apprenticeship.

-- a small group physicians held positions in few medical schools and attended in nation's few hospitals.

-- competed with each other to attract apprentices from rich families which paid high apprenticeship fees.

-- most care of sick provided by friends, neighbors (domestic practitioners);physicians only called in extreme circumstances.

--care on fee for service basis, although most income depended on ability to attract and hold fee paying apprentices.

2. Physician's bills.

-- kept under name of head of family (entries included patients wife, children, extended family, servants).

-- one charge for each visit, theoretically bills were settled annually; however, bills often ignored until estate settled, and even then only paid in part.

-- often physician received payment or partial payment "in-kind" (wheat, firewood, pigs) for service rendered.

3. Home visits: the primary method for providing health care through the 1800's.

-- in 1873 only 178 hospitals in U.S.

-- during early 1900's the number of hospitals boomed such that by 1923 there were 6830 hospitals in U.S.

-- development of group practice (three or more physicians who deliver patient care, make joint use of equipment and personnel, and divide income by prearranged formula) boomed.

-- these two factors changed economics of medicine; there was a move to office practice, resulting in economy of time and resources; office visits were less costly, but physicians could also see more patients (6-8 patients in time for one house call).

--fee for service.

4. Increase in number of hospitals and group practices leads to increase in the number of specialists.

-- these physicians had hospital admissions privileges unlike the general practitioners (GPs).

-- consequently old GPs shut out, and responding to pressures of less patient volume some ventured into experiences in pre-paid medical care -- contract with an employer or union to accept responsibility for care of members for a given fee.

-- AMA brands this "socialized medicine" and vehemently opposes any such initiatives.

-- medical societies also adopt fee tables to prevent such pre-paid care initiatives.

-- after WW II, as a result of the GI bill, many GPs receive training as specialists; at the beginning of W.W.II 25% of physicians are specialists, while by 1960's 70% of physicians are specialists.

-- fee for service continues as basic type of physician charge (50's and 60's), and health care costs climb due to lack of integration of care and control of costs.

5. Introduction of Medicare (ensure access to health care of elderly) and Medicaid (ensure access to health care of poor) exacerbated problem in the mid 1960's.

-- to soothe resistance from AMA, government allows physicians to set their own fees (price-setting).

-- hospitals and physicians charged fees for costs they incurred in treating patients and Medicare paid the bill (based on prevailing rate formula).

-- since costs further climbed with this system of price-setting, reforms occurred in 1983 and 1992:

--diagnosis related groups (DRGs) for hospitals:
a. hospital paid a fee for patient care depending on diagnosis, regardless of what costs incurred in patient care.
b. places pressure on physicians to keep hospitalization costs low.
--some changes related to control of physician reimbursement:
a. assignments in 1980's -- fees established for various services.
b. resource based relative value system (RBRVS) in 1990's -- reforms way in which Medicare pays physicians for their work: physicians' efforts broken down into units of effort, whether procedural or cognitive.

6. Price-setting practices by physicians and hospitals extends itself to the U.S. medical insurance system and becomes practically universal; patients of present fee for service physicians are usually members of traditional indemnity insurance plan.

-- patient incurs medical expenses, pays bills, submits claim for reimbursement; or physician submits claim on patient's behalf, receives payment from insurance company, bills patient for balance.

7. Private insurance companies.

-- control costs by setting fixed limits of reimbursement for specific services, stipulating payment of deductible and ongoing share of cost (copayments).

-- therefore, control costs by constraining consumer and provider, to some degree, while providing free choice of physician or hospital.

-- definition of indemnity - protect from loss or damage; most of these plans provided service only for inpatient care and emergency services.

-- traditionally did not cover office visits, prescription drugs, preventive health care, routine physicals, well baby visits, most outpatient services (more recently they are covering some of these, to compete with managed care plans).

8. Summary.

- a system of payment in effect by early 70's where physicians treat patients, submit bills to health insurance companies that pay them in full without regard to price or usefulness of care.

-- thus, patient and physician shielded from understanding true cost of care.

-- the system creates incentives for physicians to perform more services and consumers to seek them -- no emphasis on prevention.

-- consequently cost of health care increases (even regulation of Medicare and Medicaid results in rising fees for private insurance patients).

-- the government cannot help but address the crisis, and a number of major changes occur in the early 70's that create the present-day beginnings of managed care.

II. Origins of Pre-Paid Medical Care (definition - paying for medical care before services are rendered).

--providers receive a set amount of money on prospective basis to deliver prescribed health care services to certain individuals.

A. Mid 1800's.

-- plantation owners in Hawaii, lumber companies in WI, MI, WA mining companies in MN, PA, railroad companies of West.

-- to attract and retain workers, companies agreed to provide medical care for workers and families.

-- contracted with local physicians.

--build clinics, hospitals.

--contracted with hospitals for set number of beds.

B. Western Clinic, Tacoma WA, 1916.

-- James Yocum, M.D.; Thomas Curran, M.D.

-- interested in setting up arrangement to care for workers of local mining / timber companies.

-- provided care to local mill owners and employees for a fixed monthly fee per worker.

--also set up a clinic in Seattle.

--local medical society banned their hospital admitting privileges.

C. Los Angeles, CA 1929.

-- Donald E. Ross, M.D. (railroad surgeon) and H. Clifford Loos, M.D. (Mayo physician).

-- cared for municipal workers (water and power departments) for a set monthly price per worker.

-- banned from Los Angeles County Medical Society.

-- AMA issued statement soundly opposing pre-paid medical care.

D. Elk City, OK 1929

-- Michael Shadid, M.D., Syrian-born immigrant.

-- shook up by experiences practicing in rural America -- deaths from unnecessary surgical procedures and overall mediocre care; a believer in prevention.

-- embarked in bold experiment of managed care (full risk capitated contract).

-- sold $50 personal shares for financing of a community hospital.

--in exchange for each share all medical care would be provided by hospital and local physicians.

--assumed full financial risk -- only necessary procedures were carried out; focus on prevention.

-- when in 1931 Elk City Community Hospital was founded, Shadid's memberships in medical societies revoked, his license was in jeopardy.

-- however, he traveled across country championing his concept, and a number of other communities followed.

E. Home Owner's Loan Corporation, Washington D.C., 1937.

-- organized non-profit corporation, Group Health, to provide pre-paid care for mortgagees (large medical expenses main reason for mortgage default).

-- banned by insurance commissioner - court battles followed; final decision that pre-paid group practice not medical insurance; practice of medical societies are restraint of trade.

F. Sidney Garfield, M.D., Southern California, 1930's

-- practiced medicine near construction site of aqueduct; however, never saw construction workers for health care (sent to L.A. by insurance company).

-- approached owner Henry J. Kaiser to pay him directly for medical care he would provide on site to workers.

-- Henry J. Kaiser later approaches Garfield to start a similar program for shipbuilders in San Francisco Bay Area

G. Group Health Association of Washington

-- in 1945, 400 families each contribute $100 to form a medical clinic for their care.

-- bought a clinic and arranged for physicians to deliver care.

--sued by medical society: however, prepaid practice victorious, consumers had right to form prepaid medical practices.

H. Foundations of medical care.

-- to compete with success of prepaid practices (that they had tried to stop by court battles) fee for service physicians began forming foundations for medical care.

-- example: in 1954 when workers in San Joaquim Valley in California attempted to establish a branch of Kaiser Permanente, local physicians responded forming a San Joaquim Foundation for medical care, first independent practice association (IPA) model of health care in country (IPA-model HMO).

I. Summary.

--even at this point fee for service physicians had stronghold coupled with power of traditional indemnity insurance.

--in 1960's Medicare and Medicaid exacerbate fee for service by introducing government-endorsed price setting.

--price setting extends itself to U.S. insurance business.

--physicians and patients shielded from understanding true cost of care.

--system creates incentives for physician to perform more services and patients to seek them.

--no emphasis on prevention, costs escalate.

--physicians practicing without adequate information on clinical ethics of treatment

--reform was due -- again driven by private sector.

III. The Birth of Health Maintenance Organizations (HMO's).

A. Concept of modern managed care: owed to Paul Elwood, M.D., pediatric neurologist and physiatrist, San Francisco, director American Rehabilitation Institute.

-- his premises were:

-- consequently felt that federal government should embrace concept of pre-paid practice.

B. Health maintenance organization (HMO).

-- definition: an entity that provides and manages the coverage of health services provided to plan members in return for a fixed pre-paid premium (HMO models: group, IPA, network, staff).

--congress in early 1970's was struggling with health care crisis and reform:

--Elwood's message captures attention Nixon administration which leads to HMO act of 1973.

C. HMO Act of 1973 and subsequent changes.

-- fostered development of HMO's across country by:

  1. awarding two- and three-year grants and loans for creations of HMOs.
  2. superseding state laws restricting formation of HMOs.
  3. requiring employers to offer federally qualified HMOs -- employers that had at least 25 employees and were already offering indemnity coverage.
  4. establishing voluntary qualification for HMOs.

-- important considerations:

  1. HMO's assumed responsibility for providing a comprehensive range of health services to enrolled populations at a fixed annual premium.
  2. combined inpatient / outpatient care in a single premium -- reduce hospitalization costs.
  3. willingness of physicians to accept financial risk in providing health care services to groups of subscribers; that is, if HMO physicians incur expenses above budgeted costs, part or all of shortfall needs to be absorbed.

-- HMO Act of 1973 (up to 1980): $145 million spent on HMO creation, $194 million in direct loans given to HMOs; encouraged private sector investment in HMOs.

-- in 1975: 183 HMO's, 6.85 million people enrolled (300 more HMO's in development); most initially in California; national networks emerge: Kaiser, Prudential, CIGNA, United Health Care, Family Health Plan; these enrolled well over half nation's HMO members.

-- in 1980's deficiencies of fee for service model more evident, results in spiraling health costs.

-- initial experiments with managed care demonstrated cost savings as compared to traditional plans.

-- network model HMO, IPA model HMO flourish; from 1981 - 1985 IPA model HMOs double, network model HMO quadruple.

--during mid 1980s HMO membership grows by 25% per year.

-- in 1983: 323 HMO's, 15 million people enrolled.

-- in 1987: 662 HMO's, 29 million people enrolled.

D. Results of competition.

--managed care market evolves during mid-to-late 80's due to consumers' discontent with traditional HMOs: dissatisfaction with limited provider choices of staff and group model HMOs.

--open ended HMOs or Point of Service (POS) plan:

-- a managed care plan that provides flexibility for an enrollee to receive a service from a participating or non-participating provider with corresponding benefit or "penalty" of co-pay depending upon the level of benefit selected; goal of encouraging use of participating providers.
 
-- insurance companies need to start complying with HMOs as traditional indemnity insurance on decline; thus develop preferred provider organizations (PPOs) which offered workers greater freedom to choose physicians for a slightly higher premium.

--PPOs:

-- a scenario begins to arise where we see many types of managed care organizations each delivering many types of managed care products, depending on regional market demands.

-- furthermore to gain market share in highly competitive markets, MCOs have underpriced their products, setting prices below their costs.

-- this results in reduced profit margins, weakened financial stability -- more stable MCOs take over smaller ones, constant mergers occurring.

E. Current state and future.

-- 153 million people enrolled in some type of managed care plan.

-- 80 percent of employees with employer based coverage are enrolled in some type of managed care plan (29 % in 1988).

-- why continued proliferation of managed care?

  1. its own success at controlling costs: recall that it is a business.
  2. aversion to alternative of government run, taxpayer financed national health care system:
    1. republicans and conservative democrats: "private sector solutions supported as best ways to contain costs without stifling innovation or hurting quality"; "there is no health care crisis", Bob Dole 1993.
    2. liberal and centrist democrats: increase government control and responsibility to guarantee universal coverage; the foiled Clinton initiative of 1993; the Kennedy-Kassebaum Bill of 1996 (Health Insurance Portability and Accountability Act of 1996).
  3. cost of health benefits down compared to late 80's, early 90's.

-- however, many problems: