We were most privileged to be able to draw upon the experience and thoughts of the following men, although none of them should be considered as necessarily endorsing this report: Cass D. Alvin, Education Coordinator, United Steelworkers of America; Wallace J. Andrews, Consultant, Merchants and Manufacturers Association; Charles Boren, Executive Vice President, Association of Motion Picture and Television Producers, Inc.; John Despol, Representative, United Steelworkers of America; Anthony M. Frank, President, State Mutual Savings and Loan Association; Caniel Johnston, Daniel Johnston and Associates; Harold Klein, Administrator, Food, Health and Welfare Fund, Retail Clerks Union; Irvin P. Mazzei, President, Los Angeles County Federation of Labor; Lawrence A. Peifer, Labor Relations Associate, Ford Employers Council, Inc.; and Harry Winston, Manager, Industrial Relations Branch, Lockheed-California Company. Particular appreciation is due Dean Robert Dockson and Professor Donald E. Yett for their constructive suggestions; to Max Fine of the Department of Health, Education and Welfare for his sage advice and help; and to Robert Sigmond for his incisive comments. The literature abounds with history, data, and proposals about the problems of health-care costs and their quality—what the problems are, their causes, and their remedies. Excellent materials are available, particularly the books Bargaining for Health by Munts,' Health Plans and Collective Bargaining, by Garbarino,' How to Get the Most out of Medical and Hospital Benefit Plans, by Brecher. Tilove's article "Pensions, Health and Welfare Plans", and the many splendid papers prepared for June's National Conference on Medical Costs." It cannot really be useful to restate these or even to add more of the same. However, there is a dearth of material regarding the roles that management and/or labor-the major group-health-care purchasers-play or can plan in these problem areas. There are some materials describing and analyzing what they are doing in health, but, except for some material in the book by Brecher and Brecher, one looks in vain for any analysis of group purchasers' interests and attitudes toward health care, their role perception, their options for action and policies, or their view of where their responsibilities begin and end. Accordingly, it is the purpose of this paper to try to conceptualize and categorize how the major group purchasers do and can influence the costs and quality of health care. This paper will then attempt to suggest deficiencies in the ability of the current institutional organization to solve the big problems and to indicate possible revision which might make it more effective. Many of the ideas that have been expressed over the years for expanding the supply of health-care providers, for reducing demand, or for introducing controls over the noncompetitive aspects of the industry have been ineffective, in my opinion, for two interrelated reasons. First, the ideas were just that-ideas. They might be considered as interesting hypotheses, based largely upon faith or judgment or prejudice. Many have plausible rationales, but, fraught as they are with implications for disruption of the accustomed ways and for acrimony with established institutions, they do not have an adequately hard, factual basis for activation. Plausibility is not enough. There is always difficulty, and rightfully so, in changing major social policies or programs without strong evidence that the changes will, in fact, have the desired results. The related reason that the ideas have had tough sledding is that, in addition to lacking a firm intellectual basis, they have lacked the support of any significant power group. The providers of medical care have generally opposed significant changes through their organized associations, the third parties have been relatively passive and divided, and the individual consumers-the actual payors of the rising health costs-are unorganized and not fully cognizant of what has been happening to them. Management and labor, working together in some instances and separately in others, have been the largest organized payors of health costs, either through payment of premiums or through direct payments to health-care providers. The 1 Raymond Munts, Bargaining for Health (Madison University of Wisconsin Press, 1967). 2 Joseph W. Garbarino, Health Plans and Collective Bargaining (Berkeley: University of California Press, 1960). Ruth Brecher and Edward Brecher, How to Get the Most Out of Medical and Hospital Benefit Plans (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1961). 4 Robert Tilove, "Pensions, Health, and Welfare Plans," in Lloyd Ulman (ed), Challenge to Collective Bargaining (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1967). 5 Washington, D.C., June 27-28, 1967 (Publication of the Conference proceedings, by the U.S. Department of Health, Education, and Welfare, forthcoming 1968). Southern Pacific Railroad Company established its still-existent medical-care prepayment system in 1868; the first national union health program was set up in 1877 by the Granite Cutters' Union. Now, there are thousands of different plans. It is estimated that two-thirds of the civilian population of the country are covered by a health plan purchased by or through a management and/or labor group. Yet the effects of these on restraining general health-care costs are probably quite negligible. When management and labor reach agreement in their negotiations about health care, then they may bargain with third parties for the best buy. But they then are bargaining with the wrong group. The bargaining, at some point, has to be with the providers of health care. The ability of our free-enterprise system to regulate economic forces through competition needs, among others, three conditions to enable it to work: there has to be a mechanism for dialogue between the buyers and the sellers for bargaining to occur, there has to be knowledge on the part of the buyers, and there must be alternatives so that each side has bargaining power. As I see it, these do not exist to any adequate extent. For this, as well as other reasons, management and labor, despite their thousands of individual plans, have failed, together or separately, to correct the conditions that have led to the soaring costs. Since management and labor, as the major purchasers of group coverages, are the natural choice to act for the consumer as a power force in opposition to the vendors' force, and since they do have economic as well as humanitarian motives for obtaining the best medical care for their people at reasonable cost, it seems appropriate to consider how they might be a more effective force in the healthcare market. This is a particularly urgent task, because what choices are there? Who else will represent the consumer-the immediate victim of the cost spiraling? Ultimately, of course, the entire economic system is the victim. If management and labor fail this challenge, if third parties do not radically revise their orientations, the Federal Government may have to step in as the consumers' representative. There is no other group existent that can exert the types of pressures that are necessary if health prices are to be restrained. Consequently, this paper will focus on the roles that major group purchasers might plan in regard to this national problem. It is based on several premises: first, that health-care prices will continue to rise inordinately unless something new happens; second, that when they rise, management and labor will become increasingly concerned and will examine the problem more deeply and become more knowledgeable and sophisticated; third, that when they do so they will move toward constraining measures such as those that follow. Analysis of their possible actions is built on two simple models of the market as it exists: Model A (a three-segment model, in which the major group purchasers buy coverage from a third party, who in turn pays the vendors): Major group purchasers: Third parties: Hospitals. Physicians. Other. Model B (a two-segment model in which the first parties deal directly with the second parties): Major group purchasers: Hospitals. Physicians. Other. In the following section, this paper considers each of these models to explore the different strategies they afford the major group purchasers. In the final portion, there are some suggestions regarding the implementation of these strategies and ideas through institutional modifications in the health industry and through experimental research. IMPACTS INVOLVING THIRD PARTIES--MODEL A One pattern of involvement of group purchasers in the task of controlling health-care costs and maintaining quality is through the third parties, who so often serve as intermediaries between the purchasers and providers of health care. Despite the fact that the third parties are themselves victims of increasing prices, and despite their occasionally serious losses due to unexpectedly high claim experience and their own frustration at their inability to contain the health-cost inflation, third parties remain the immediate point of contact of most group purchasers with the health-care system. This seems particularly curious. On the one hand, the Blue Cross and Blue Shield plans are closely affiliated historically and in terms of current board memberships with the principal vendors-physicians and hospitals; and the private insurance companies are mainly in the business of risk control. Neither group has, in the past, considered the sustained, hard-nosed pursuit of lower costs as one of its prime functions. This is not to say that they have been indifferent, but rather that they have not seen their role as one of vigorous bargaining with vendors on the consumers' behalf. On the other hand, their group-purchaser clients, which include some of the most rational, sophisticated, and economically powerful organizations in the country, have diffused their bargaining power in the health area by turning this matter over to the third parties. As the principal payors of hospital and physician bills, the private insurance companies and the Blues have frequently been criticized for not exercising more of an influence in controlling health costs. Some insurance companies and some Blue Cross and Blue Shield plans, in some ways, have tried to keep costs down. Careful review of claims for surgical fees, follow-up discussions with physicians whose charges were considerably out of line and with local medical societies, direct and indirect involvement with hospital boards of directors have all been tried by some companies. The effects are not measurable, but obviously have not been adequate. Several Blue Cross plans have tried to stimulate efficiencies in hospital operations through incentive provisions in proposed reimbursement formulas and through suasive processes. Hospitals have, by and large, successfully resisted these attempts. Blue Shield plans have been somewhat more effective in helping to establish pre-set medical fees for lower-income subscribers. However, once this is said, it is clear that still more needs to be done. More active programs of restraint on the part of individual third-party organizations would be very costly, and their success would be uncertain even in the short run. In the longer run, if a few such organizations were to initiate a program of restraint, their extra costs and possibly worsened relations with the medical profession and with hospitals would soon put them in a competitively untenable position. This is in the sense that if a few companies were to charge a price adequate to cover their costs, their customers would shift to other companies. It does not follow that if all the third parties acted together the same result would occur. But stimulation by an outside consumer force might lead to a greater willingness on their part to incur these economic and political costs. An expansion on this thought appears later. What, then, can major group purchasers do to control the costs and quality of medical care through third parties? From the viewpoint of the public, most of whom pay for their health care through these third parties, the price of care consists of two sets of costs: the internal costs (including any profits) of the financial intermediaries and the prices charged by the providers of health care. It seems to me that the major group purchasers can, in the three-segment model, influence costs in both these areas through impacts on products specifications, by consumer education, through influence on third-party administrative costs, and directly on medical and hospital prices. Product specifications It has been pointed out by many observers that socially noneconomic health services are often provided or prescribed because it is advantageous for an individual patient. One commonly mentioned example is the utilization of hospital facilities for simple procedures that can be done in an office or a convalescent home, solely because the former are covered by a hospitalization policy while the latter are not. It has also been pointed out that the huge variety of health plans that are available makes it impossible for most purchasers to evaluate plans comparatively because of differences in coverages, levels of benefits, and claim-payment policies. It seems to me that major group purchasers can do something about each of these. Comprehensiveness of products.-Group purchasers can push for plans that are more comprehensive (I differ from those who say that completely comprehensive prepaid plans are needed now. Such plans-at this time—would lead to abrupt increases in the demand for additional services and, with the well-known shortages in the supply of health resources, further price increases). More comprehensiveness is needed to avoid the common misallocations of scarce resources occasioned by today's usual restrictions. There are, admittedly, risks 24-798-69-pt. 3- -10 of abuse in any steps of this type, but how can progress be made without risk, and how can management policies be formulated to reduce these risks until actual experience is obtained? Standardization of products.--Group purchasers can take more initiative in developing specifications of what they want, in detail, in a prepaid health plan, be it of an indemnity or service type. Some large groups have been conspicuously successful in doing this, usually because of union pressures, exercised through the collective-bargaining process. The Steelworkers, Auto Workers, and Mine Workers have used this approach on a national basis for almost two decades; the Clothing Workers for even longer. Some local collective-bargaining units also have initiated similar programs. But, in general, the group purchaser still relies upon the third parties for development of package plans and for proposals. Group purchasers, in so doing, invite confusion and nonrationality because they cannot usually make knowledgeable cost-benefit analyses of the different proposals. It would be much simpler to specify what is wanted and then to obtain bids from several third parties. This would tend to force the third parties to compete on economic grounds, with all the concomitant pressures, for cost control and more efficiency. A big obstacle to this approach occurs, however, in the many cases in which the collective-bargaining procedures that lead to the group purchase result in an agreement on health-coverage expenditures rather than on types and levels of benefits, or in an agreement to give the coverage to a specified third party. (The Steelworkers' one-time preference for having Blue Cross and Blue Shield provided their health insurance is an example of the latter.) In either of these situations, the advantages of competitive bidding are lost. Accordingly, it would be well for labor and management to bargain for health benefits rather than for the amount of money to go into this fringe benefit. I realize this is a muchdebated subject and that many arguments can be made for labor-management agreements on health-premium dollars rather than benefit levels, but I suggest that in the interest of injecting the advantages of free competition into at least part of the health industry, emphasis should first be on benefits. Obviously, it would be completely unrealistic to bargain on benefits without some consideration of the price levels involved, but this is a solvable problem, since the number of consulting actuarial firms can be expected to increase to provide this service as it is needed. Consumer education It would be of little avail for sophisticated group purchasers and third parties to develop economic approaches to health care if the consumer remained naive about them. If the consumer does not recognize the value of patronizing accredited hospitals or, most important, does not realize that he is affected by the rising costs of health care even if he does not get ill, and even if his employer pays the entire health-care premium, then, in the long run, group purchasers will continue to face an uphill battle in trying to reduce costs and maintain quality. The economics and sociology of health care are quite complicated. In our democratic society, public awareness and the resultant support or protest ultimately come to be reflected in private and public policies. For these to be sound, the public' awareness must hopefully be based on fact. In our case, the development and acceptance of policies to control costs will benefit from broader consumer understanding. The group purchasers-union and management-can help accomplish this by programs to teach the consumer such things as how much health care costs, who is paying for it, why there are certain restrictions in coverages that are necessary, alternatives that may have been possible and why they were not taken, the consequences to costs of claim abuses, the pros and cons of group practice and solo practice among physicians, the proper role of paramedical personnel, and the proper role of extended-care facilities other than hospitals. Factors that are generally considered in attempts to increase the efficiency of an institutional system include the possibilities of effecting more economies of scale, of effecting economies through division of labor, of building in automatic restraints of cost escalations or inefficiences, and of shifting some fuctions to lower-cost alternatives. Persuasive cases can be made for how these suggestions will help realize these possibilities, not only as they apply to the insurance carriers but also as they apply to the providers of health care themselves. Third-party management policies As large-scale customers deciding on the expenditure of hundreds of millions of dollars for health insurance each year, the major group purchasers can have a great deal of influence on the management policies of third-party intermediaries. They have had, in many instances, but an area of potential influence in which little has been done is that of the relationship between the third parties and the providers of medical care-sphere Y as diagramed below : Major group purchasers Third parties Providers of care Applications of influence have been primarily in sphere X. In the section that follows, the X sphere will be commented upon, but it is also suggested that sphere Y offers significant opportunities for group purchasers. Third-party costs (sphere X).-Conceivably, the group purchasers could radically affect third parties' operations. Over the years, they have been instrumental in, among other things, stimulating dramatic reductions in retention rates. According to Louis S. Reed, in 1948, private health insurance organizations (including Blue Cross-Blue Shield plans, insurance companies, and independent plans such as community-consumer programs and employer-employee-union programs) retained 29.7 percent of subscription or premium income. In 1964, the comparable figure was 12.8 percent. Included in these figures are the retention rates for individual as well as group coverages, and the differences are interesting. In insurance companies, the retention rates on individual policies decreased from 62 percent to 45 percent between 1948 and 1964, or more than a fourth. During the same period, the group insurance rates dropped from 30 percent to 8 percent, or almost three-quarters." It is impossible to attribute any specific share of this dramatic reduction to the direct influence of the group purchasers, because other factors also were at play, but it seems clear that they have been responsible for a significant portion. Major group purchasers can go further in stimulating additional reductions in the operating and marketing costs of third parties. They can do this in a generalized fashion through an emphasis on more comprehensive plans and more standardized packages, as mentioned earlier. Similarly, a better-informed employee body will tend to enable third parties to operate with lower costs through fewer abuses and more individual-consumer bargaining with vendors. More specifically, and in addition, sample screening of claims by major group purchasers to nip abusers and abuses in the bud, periodic claim reports and analyses, efforts directed toward reducing the hundreds of different claim-reporting forms so that providers could routinize their completion, and other similar steps would have some, although probably relatively minor, effects on costs. A more important step would be to rationalize the commissions paid for group business. Under State laws based upon antidiscriminatory concepts, a commission has to be paid by insurance companies for group business. Accordingly, despite the fact that salaried employees frequently do all the necessary work, a commission expense must be incurred. Some individuals frequently reap handsome rewards for doing virtually nothing. Group purchasers would seem to have an opportunity to help eliminate this economically unnecessary requirement by aggressive action at the State legislative level. Furthermore, the whole question of an indemnity system of insurance is something for group purchasers to consider. There is a large body of informed opinion that believes that, in Raymond Munts' words, "indemnity insurance is part of the problem rather than part of the solution". For this reason, many purchasers have sought service-benefit coverages, and indemnity-type carriers have shifted some coverages-hospital room charges and major medical provisions, for instance-into a service basis. Consequently, if further investigation proves that an indemnity system of coverage does, in fact, tend to promote higher factor prices and does not deter inferior care, then it would seem reason Louis S. Reed, "Private Health Insurance Coverage and Financial Experience, 1965," Social Security Bulletin XXIX (November 1966), 12. 7 Munts, op. cit., p. 129. |