HEALTH CARE COSTS:
Managed Care, Prospective Payment, and
Reimbursement Trends
A Concern for
Costs
It's an interesting fact that,
even though cost containment is the driving force in health care, we always have
a difficult time identifying people who can write good chapters about health
care costs related to nursing. Not many nurses have developed programs of
research or careers around nursing economics. Until recently, this was not a
subject that was taught in many schools of nursing or a source of concern for
many nurses. Things have changed. The concern for costs is determining a number
of decisions that affect nurses and our patients. This section introduces some
of the issues around the costs of nursing and health care.
In their debate chapter, Seefeldt, Garg, and Grace overview the two major approaches to the control of health
care costs: regulation and competition. This is a very informative chapter and
contains a clear overview of a number of cost-control initiatives. Total
In the first viewpoint chapter
Maddox examines the evolution of managed care, the financial factors that have
created the current health care system, and the impact of the changes on
nursing. The chapter contains numerous financial facts. For example, in the
past the categories of services generating the most growth in expenditures were
hospitals and physician cost, but since 1998, the fastest rising spending
category is prescription drugs. Maddox demonstrates that the federal government
is increasing its role in the financing of
The cost of home care for a person
with a disability is the topic of the next chapter by Aronow.
This is an increasingly important topic in nursing because the number of
persons in society with a disability is growing. The increase is due to the
aging of society and the better survival rate of those with a disability. As Aronow states, the reorganization of care away from large
institutions and toward home care and homelike residences requires a clear
analysis of services and costs to the disabled community. Aronow
structures her chapter by four types of care in the home: short-term recovery,
long-term care, technology-supported care, and end of life care. For each type
of care she presents a patient example and discusses the components of cost.
She concludes her chapter with a discussion of the responsibilities of
professionals. Whereas the home has become a viable alternative for care of
persons with disabilities, the cost of home care is not well understood. She
believes that the nurse has some responsibility to help explain costs
associated with alternative choices and that the nurse should be prepared to
become a part of the family negotiations that involve the patient and the
informal caregivers. The chapter provides an excellent overview of the
financial and care burden issues related to caring for a variety of diverse
patients in the home.
As the previous chapter illustrates,
it is more important than ever that nurses understand the business aspects of
health care. A different example of this is illustrated in the next chapter by Klemczak and Dontje, who discuss
the need for sound business practices in the development and conduction of
nursing centers. A nursing center is an organization, controlled by nurses,
whose primary mission is to provide nursing services. Although nursing centers
have existed for many years, usually attached to schools of nursing, most of them
were supported by grants and did not have to be concerned about income
generation. As these grants are being reduced or eliminated, the centers are
left with commitments and few funds to deliver services. With the 1997 Balanced
Budget Act that changed the Medicare law to designate advance practice nurses
(APNs) as reimbursable Part B providers, nursing centers that employ APNs can
seek new types of funding. Klemczak and Dontje urge existing nursing centers to expand the services
they offer to include a complete set of primary health care services, including
health screening, testing, prescribing, treatment, referral, case management,
and patient teaching. They discuss reimbursement of these services under
capitation contracts. The last part of their chapter is a case study of the
development of a nurse-managed center at the
Reimbursement for nurses and other
nonphysician providers is the subject of the chapter
by Lee. The proliferation in consumer use of alternative therapies, such as
autogenic training, biofeedback, massage, acupuncture, Ayurvedic
techniques, and reflexology, to name a few, has resulted in the recognition
that there needs to be a way to document the use of such therapies and bill for
reimbursement as they become more accepted. Consumer demand for alternative
therapies has been so dramatic that they are increasingly being included in
mainstream practice and medical journals. In 1996, the Health Insurance
Portability and Accountability Act called for the setting of a national
standard to communicate with all providers (not just physicians) electronically
in a standardized way. This act combined with the widespread and growing
dissatisfaction with the Current Procedural Terminology (CPT), currently
the only coding system approved for Medicare reimbursement by the Health Care
Financing Administration (HCFA), opened the door for the development of the Complete
Complementary Alternative Medicine Billing and Coding Reference. The Reference,
published for the first time in 1999, includes Alternative Billing Codes
(ABC Codes) developed by a group known as Alternative Link in Las Cruces, New
Mexico. In this Reference, alternative is defined as any provider other
than an allopathic physician and the treatments provided by these providers.
Thus, nursing is included (although most nurses do not think of themselves as
alternative providers). The ABC Codes do include interventions from the Nursing
Interventions Classification (NIC), the Home Health Care Classification (HHCC),
and the Omaha System. Although the system has not yet been adopted by HCFA for
reimbursement, the ABC Codes have been included in the American National
Standards Implementation Guideline and the National Library of Medicine
Unified Medical Language. The system not only includes language for thousands
of alternative therapies, it provides the legal scope of practice for multiple
practitioner groups. It will be interesting to see future developments in this
area. Will HCFA approve the use of this Reference for reimbursement to
alternative providers? If not, how will the growing use of alternative
therapies be documented?
The last chapter
in the section by Schmidt overviews the financial skills needed by patient care
managers. As the role of the nurse manager
has grown and become more challenging, the need for financial skills is
essential. Schmidt discusses the prerequisite computer skills including
spreadsheet applications. She overviews the budget
measures of volume, revenue, and labor and nonlabor
expenses. She shows how to operationalize the budget with a staffing plan.
Several types of productivity measures are defined and four types of analyses
are reviewed that can be used to help evaluate cost and productivity
performance. These are staffing-to-demand analysis, productivity benchmarking,
use of labor dollars analysis, and workforce composition. Schmidt's chapter
provides an excellent overview of the financial skills a nurse manager must
have to be an effective leader and manager in the ever evolving complex health
care environment.
Nursing's ability to identify and
deal with economic issues has come a long way in the past decade. More and
more, all nurses and nursing students are gaining knowledge about costs of
health care, but nursing is still not a major player in health care
cost-containment efforts. We need to make the concern for costs a nursing
concern and voice this concern and appropriate actions whenever the
opportunities arise.
Controlling Health
Care Costs
Regulation vs. Competition
The issue of controlling health
care costs hits at the heart of a major social dilemma that grows out of the
American character and the values surrounding the practice of medicine: the
rights of the individual versus responsibility for the larger social group. The
tensions between balancing individual rights against the common social good
become compounded in the area of medical care because the physician and, more
recently, the provider organization become the arbiter between the individual
and society. Although there was a time when the physician could make decisions
largely on the basis of what was deemed best for the patient, today's concerns
over the rising costs of medical care services and the large numbers of people
without access to these services have made it increasingly difficult to
practice in this simplistic manner. With the costs of medical care rising far
more rapidly than those of other parts of the economy, the concern for
controlling these costs has become an increasing preoccupation in recent years.
Before the 1960s, most medical
care costs were covered by insurance that was provided as part of the benefits
package paid by employers for their workers. This system worked effectively for
those who were employed and provided reimbursement to physicians and hospitals
in a satisfactory manner. Over the years, however, an aging
population, increased numbers of people who are not part of the
workforce, and increasing costs of insurance to employers have resulted in a
situation open for governmental intervention. The enactment of Medicare and
Medicaid legislation in 1965 signaled the beginning of a new chapter for
medical care in this country. The intent behind Medicaid and Medicare was to
provide health care to the two most vulnerable groups: the elderly and the
indigent who were not covered by employer-provided health care insurance and
were unable to pay out of pocket. In effect, the federal government became the
insurer for these uninsured populations. Soon after the enactment of these
programs, it was realized that health care expenditures were rising much faster
than the economy, and initiatives were undertaken to address the issue. The
agreed payment system based on "reasonable" costs for hospitals and
"reasonable prevailing charges for physicians" provided little
incentive for patients or providers to control health care costs. Over the past 30 years a variety of legislative approaches have
been taken to try to control escalating costs. A systematic display of
major initiatives is presented in Figure 51-1. These approaches can be
classified either as competitive, describing a condition of the workings of the
free market in which the unfettered private sector forces of supply and demand
determine the most efficient allocation of resources, or regulatory, which
assumes that market forces function imperfectly and that government
intervention is required to control costs. This chapter reviews the approaches
taken and encourages the reader to consider the pros and cons of regulation vs.
competition in controlling medical care costs.
REGULATORY
APPROACHES
The reimbursement
system of Medicare and, to some extent, Medicaid, which was based on
"reasonable charges," created intense inflationary pressure on health
care costs. Earlier, much of the health
care for the elderly had been offered as charity and was not reimbursable. In
addition, there had been no incentives to add new expensive procedures before
Medicare. That changed dramatically. Substantial reimbursement was available
for increasing hospital revenue for providing additional procedures requiring
new staff and equipment. By creating a surplus of income over revenues, this
money went back into fur ther expansion of facilities
and staff, ultimately resulting in increased cost.
This increased cost, which was not retrievable
from public sources, was then passed on to private patients and their insurers,
creating inflationary pressures on the entire system. Total health expenditures
grew from $41.9 billion in 1965 to $425 billion in 1985. This increase occurred
despite governmental efforts to control costs. From 1971 to 1983 the major
efforts to control costs were through regulatory efforts. None appreciably
slowed the growth in total health care costs
Certificate of Need
One type of intervention used the
strategy of controlling the structure of medical care (i.e., the settings and
instruments available and used for the provision of care) by limiting the
development of hospital capacity. Built on a certificate of need (CON) law
initiated in New York State in 1964, Congress in 1972 passed amendments to the
Social Security Act to give planning agencies more authority. In 1974, Congress
passed the National Health Planning and Resources Development Act, which
required every state to pass a CON law allowing it to review plans by any
institutional provider for capital expenditures over $150,000 or a change in
the number of beds and services. The impact of CON programs was minimal. A
number of studies indicate that the review boards passed nearly everything that
was brought to them (Begley, Schoeman, & Traxler, 1982; Lewin Associates,
Inc., 1975; Salkever & Bice,
1976; Sloan & Steinwald, 1980). However, one side
effect of the CON program was that hospitals gained sophistication about market
conditions, long-range planning, and resource use-expertise easily adapted to a
competitive market.
Economic Stabilization
Program
This program, introduced during
the Nixon administration, was developed in two phases. Phase 1 (August 15,
1971, to November 13,1971) involved a 90-day freeze on all wages and prices,
and phase II (November 14,1971, to April 30,1974) limited institutional health
care providers to a 6% annual limit in price increases in aggregate revenue,
subject to cost justification. These controls applied to both hospital and
physician fees. The Economic Stabi lization Program appears to have moderated both the
increase in average cost per hospital day (Salkever,
1979) and also the growth of physician fees; but there is some evidence that
while fees were frozen, physicians classified visits into more expensive
categories, thereby holding the line on price while allowing revenues to
increase (Holahan & Scanlon, 1978).
Professional Standards Review
The quality, quantity, and cost of
hospital care provided under Medicare was to be monitored primarily through
mandatory establishment of utilization review committees in participating
hospitals Through review processes conducted under the supervision of
physicians, their function was to control medical services such as admissions,
diagnostic investigations, and therapeutic interventions provided by physicians
to their hospitalized patients. A 1970 Senate Finance Committee Report judged
the utilization reviews to be of a token nature and ineffective as a curb to
unnecessary use of institutional care and services. The criticism of the
utilization review led the American Medical Association to propose a Medicare
peer review system to be controlled by the medical societies. Legislative
action led to the establishment of professional standards review organizations
with responsibility to review hospital care under their jurisdiction, with
particular emphasis on the appropriateness of admission and the length of stay
for hospitalization. Evaluations of the program are mixed, with one study
concluding that the savings to Medicare and Medicaid exceeded the cost of the
program by 10% to 15% (Smits, 1981), whereas another study concluded that it
cost Medicare and Medicaid an estimated $1.80 for every $1 the program spent (Alpem, 1980).
Prospective Rate Setting
By 1980, most states had some form
of hospital rate-setting program, but the programs varied considerably. Most
were voluntary, with hospitals choosing whether to participate or comply. Only eight
states had programs that involved mandatory review and compliance with rates
set by a rate-setting authority. Mandatory rate-setting programs initiated by
several states resulted in slowing the rate of growth of expenditures per
patient day.
Prospective Payment Systems
In 1983, Congress established the
Medicare Prospective Payment System (PPS), which replaced retrospective
cost-based reimbursement for hospital care. The primary objective was that of
controlling escalating hospital costs. Under the PPS, inpatient hospital
services for Medicare eligibles were bundled into 468
diagnosis-related groups, each with a fixed reimbursement schedule. Adjustments
were made for important factors such as case severity; rural, urban, and
regional labor cost differentials; teaching costs; and disproportionate shares
of uncompensated care. During the first 3 years of the PPS, inflation in
hospital expense was reduced by about 5% to 7% from the pre-PPS double-digit
levels.
Despite these major regulatory
programs, health care costs continued to escalate at a higher rate than the
general economy. Expenditures for health care in 1985 totaled $420.1 billion
compared with $74.4 billion in 1970. The share of health care expenditures as a
percentage of the gross national product increased from 7.3% in 1970 to 10.5%
in 1985, with hospital expenditures accounting for 40% of all health care
spending.
COMPETITIVE
APPROACHES
As health care costs have
continued to escalate in the past two decades, attempts to contain costs by restructuring
the health care market to make cost-effective competition possible have
supplemented, and in some cases supplanted, the regulatory programs described
previously. For economists, competition in a perfectly competitive or
"free" market implies rivalry between sellers of comparable goods for
customers. Customers will then choose the goods that cost less, knowing that
they are not sacrificing quality, and thus the operation of the market
encourages suppliers to keep prices down. The model of free market competition
fully applies only when all product attributes other than prices are
standardized. Obviously, many of the products in health care are not
standardized.
A modified form of competition can
occur between suppliers of noncomparable products in
a particular market, but there is no guarantee that this kind of competition
will result in lowered prices. This modified form of (nonprice)
competition did occur among health care providers during the regulated era that
followed the enactment of Medicare in 1965. During this period, hospitals
competed for doctors and patients primarily on the basis of availability of
sophisticated diagnostic and therapeutic technology. Patient comforts such as
food quality, friendliness of staff, and cleanliness also played a major role
in attracting patients to a particular facility. Despite nonstandardized
"products" (in this case medical services),
prices may have played a role in the competition if patients paid their own
bills. However, during this period most patients had insurance, so price did
not play any role in their choices. Thus, relevant competitive variables
included service offerings and amenities but not price. Furthermore, as
third-party payers, health insurance companies did not promote price competition
because they were not able to exclude providers on the basis of price.
Hospitals and physicians were reimbursed on a "reasonable costs" and
"reasonable charges" basis, respectively, but there was no
competitive mechanism preventing "reasonable costs" from rising over
time. Several factors such as collusion within the medical profession promoted
increasing costs.
Competitive Contracting
In 1982 the State of
Managed Care and HMOs
The main feature of managed care
that distinguishes it from retrospective and fee-for-service payments is that
payment under managed care is prospective and capitated. Under such a system
the financial risk no longer resides with the patient or the third-party payer
as distinct from the provider; instead the managed care entity becomes a
financial risk bearer, as well as a patient care provider. This means that the
organizational focus of care shifts from individual illness care to concern for
the health of a defined population: the membership of the plan or HMO. The
incentives shift from performing unreviewed,
high-intensity patient care to a case management function in which primary care
providers coordinate all care and limit access to costly specialization and
hospitalization.
Preferred Provider
Organizations
Changes in state insurance laws
have permitted payers to contract selectively with providers such as hospitals
and physicians' groups, including those not run by HMOs. Under such schemes
most payers have started identifying a subset of hospitals and physicians to be
"preferred providers" on the basis of a predetermined rate of
reimbursement. Patients are steered to those hospitals and physicians through
financial incentives such as lower copayments and deductibles. The providers
sign agreements with payers to deliver services to their enrollees and are
designated as preferred providers, and the organizations are designated as
preferred provider organizations. To select these preferred providers, payers
generally demand price discounts or strict utilization review procedures from
the providers.
Cost Sharing
Cost sharing through increased
coinsurance and larger deductibles is a relatively simple plan for providing
disincentives for overuse of the system by insured individuals by requiring
them to pay more out of pocket. This approach addresses the concern that
third-party payment shields the patient from the costs of his or her care.
Medical Savings Accounts
If cost sharing means that
individual consumers have to pay more out of their own pockets, it becomes a
matter of concern how deep those pockets are. Cost sharing as a form of cost
containment will not work if consumers cannot pay their bills. The concept of
medical savings accounts (MSAs) was developed as a type of cost-sharing program
that encourages people to save to pay for their own health care costs, thus
ensuring that the money to pay health bills will be there when they need it.
This is how the MSA would work. Currently, on average, nearly $4,500 per year
per worker is paid by employers for health insurance. Of this amount the
employer would put $3,000 annually into each employee's MSA, which the employee
would use to pay the first $3,000 of his or her medical costs. For the
remaining $1,500 the employer would purchase an insurance policy that would
take care of medical expenses above $3,000. It is recommended that (1) an MSA
would be the personal property of the employee, so that it would be portable if
the individual changed jobs, (2) an MSA would be allowed to grow tax free, and
(3) the employee would draw from it to pay for medical expenses. Under this
arrangement, MSAs will provide consumers with built-in incentives to control
health care expenditures because they will benefit directly if they spend less.
Problems of Competitive
Systems
In a competitive environment, it
is the firm or organization that maximizes profits that succeeds at the highest
level. Health insurance companies wishing to maximize their profits can do so
either by operating at a higher level of efficiency and effectiveness than
their competitors or by practicing risk aversion to the highest level possible.
Finding ways to avoid insuring the few very sick people can be very rewarding.
Insurers practicing risk aversion as their main profit-making approach exclude
individuals on the basis of preexisting conditions or by having coverage
canceled midtreatment when unexpected illnesses
become too large a financial liability to the firm. HMOs are accused of taking
only young, healthy members of the workforce, whereas some firms have had their
coverage canceled if one worker or his or her dependent is too great a
financial risk.
The costs of health insurance have
escalated commensurate with increases in the cost of care. An increasing
percentage of the population has no health insurance coverage. Of those earning
less than $10,000 per year, 32% are uninsured (Wicks, Curtis, & Haugh, 1994). Many businesses that once provided health
insurance can no longer do so. Increasing numbers of individuals are employed
on a part-time basis, and thus employers avoid paying costly health insurance
benefits. A considerable proportion of the increased costs are a result of the
inefficiencies in the system and the high administrative costs for managing the
plans. It is estimated that one third of all fees paid for health insurance are
used for costs other than for the direct provision of coverage. Finally, one of
the most commonly voiced concerns of the public is the lack of choice of plan
or of provider. The rise of managed care systems, with restrictions on
self-referral to specialists by employing a given panel of generalists as
gatekeepers, increasingly diminishes individual choice, a value ingrained in
the American ethos.
MANAGED
COMPETITION
In the late 1980s the dynamics and
difficulties described earlier became increasingly problematic, and health care
costs continued to escalate despite the innovations in health care financing. A
proposal was made by Enthoven on behalf of an ad hoc
group called the Jackson Hole Group, espousing a concept called "managed
competition." Under managed competition, costs would be controlled by
reshaping the health care market through establishing health alliances
(sometimes called health insurance purchasing cooperatives), which would
represent large groups of consumers. These purchasing cooperatives would have
the clout to negotiate lower costs with providers. Furthermore these health
alliances would offer not just one health care plan but a variety of plans,
providing consumers with adequate information to choose between plans based
both on cost and on standardized benefit levels. This would foster price
competition and more inclusivity, what Enthoven
(1993) calls "value-for-money" competition at the level of
individuals making choices about plans. Value-for-money competition emphasizes
that what cost-conscious health consumers seek isn't simply the least expensive
health care services or health care package available, but the ones that give
them the most for their money. The ability of the consumer to make informed choices
is crucial. If consumers do not have adequate information, available in a form
that makes comparing alternatives easy, then competitive market processes
cannot work effectively in containing costs and promoting high-quality health
care.
Limitations of Managed
Competition
One of the major limitations of
managed competition grows out of the fact that it requires competing health
plans to work. Where this is a population insufficient to support several
health plans functioning independently without collusion, this model cannot
apply. Although information technology could be used to overcome some of the
problems of serving isolated communities, transportation technologies are also
important when it comes to getting people to tertiary care in a timely fashion
or for paying specialists to be flown to remote areas when needed. In all of
these plans there would be a mandated minimum benefit package. Those who choose
the lowcost benefit package will be those who cannot
afford a higher level of coverage or those who believe that they do not need
more. This leaves room for a new type of "adverse selection," even
within managed competition. A further concern is found in the fact that managed
competition relies on managed care to achieve much of its savings. Data on the
effectiveness of doing so is far from definitive or complete. Although it is
clear that HMOs operate at lower costs than traditional fee-for-service plans,
it is not yet clear how much of the savings they achieve are due to higher
levels of efficiency and how much is due to selection bias (enrolling healthier
members) in the markets where they exist. Low-income individuals will still be
at a relative disadvantage.