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has been reported by some State Medicaid programs, which have established "primary care case management" programs for segments of their covered populations. Gatekeeping reduced such inappropriate behaviors as the use of emergency rooms for primary care. However, the utilization patterns addressed by these programs may be characteristic of Medicaid beneficiaries in the inner city and not of other groups; it is not clear that equivalent savings could be achieved with a general population. There is some evidence that most patients' care is already "managed" by their primary care physicians, at least to the extent that it is managed under formal gatekeeping arrangements. 42

Aside from the uncertain effects of gatekeeping, managed care depends on the same kinds of interventions in medical care practice, supply, and financing that might otherwise be attempted on a regulatory basis. The difference is that, instead of relying on the political process to make decisions about the allocation of health care resources, managed care privatizes these decisions. The choice among alternative cost control methods-and the stringency with which these methods will be applied-will be made by the free market. The fundamental contention of proponents of the competitive approach is that the market can impose discipline on the health care system that cannot be imposed through external regulation.

This contention rests on two key assumptions: first, that buyers will, all other things being equal, select the most cost-effective plan; second, that managed care offers greater cost-saving potential than the various regulatory controls described earlier.

One critical factor has made it difficult to generalize about the efficacy of HMOs as a cost-saving approach: the problem of "biased selection" in systems that allow a choice between a conventional health insurance plan and an HMO. Numerous studies of such "dual choice" employer group plans have shown that the members of the group choosing the HMO option used fewer health services before their enrollment than persons who chose a conventional plan. Similar patterns have been observed in Medicare HMO enrollment.43 This does not necessarily mean that HMO enrollees were healthier. Studies using self-reported condition and similar limited measures of health status have found no difference between HMO and indemnity enrollees. It may be, then, that HMO enrollees

42 A.J. Dietrich, et al., "Do Primary Physicians Actually Manage Their Patients' Fee-for-Service Care?" Journal of the American Medical Association 259 (21) (June 3, 1988): 3145-3149.

43 For a review of the evidence, see General Accounting Office, Medicare: Increase in HMO Reimbursement Would Eliminate Potential Savings. Report to the Chairman, Subcommittee on Health, House Committee on Ways and Means (Washington, D.C.: November 1989). [GAO/HRD-90-38]

are simply less prone to seek health services, regardless of their condition.44

In groups that have no HMO option but do offer a choice between high- and low-option plans the common selection pattern is for the higher users of services to choose the more comprehensive plan.45 In most group health programs offering a choice between HMOs and conventional plans, the HMO options offer more comprehensive coverage, with less enrollee cost-sharing, than even a high-option conventional plan. That higher users of services still prefer the conventional plan suggests that non-financial aspects of HMOs affect the decision, such as limited choice of providers, bureaucratic constraints on treatment, or waiting time for non-urgent care. There is stronger evidence of biased selection for staff and group model HMOs, the most restrictive, than for IPAs, which are less likely to disrupt enrollees' traditional ways of obtaining medical care.

Possible solutions to the problem of selection bias will be discussed further below. One immediate consequence, however, is that the differences between the populations in HMOs and conventional plans have made it difficult to determine whether HMOs are actually more efficient than other insurers. Only one major study has corrected adequately for this problem. In a second component of the RAND Health Insurance Experiment (HIE) cited earlier, enrollees were randomly assigned to the Group Health Cooperative of Puget Sound and an equally comprehensive conventional plan; neither plan required cost-sharing. This arrangement allowed comparisons of efficiency with identical benefits and populations with comparable health needs. The results strongly confirmed the cost-saving potential of the HMO. The HMO enrollees had 40 percent fewer hospital admissions; their use of ambulatory services was about the same as that of the conventional enrollees. Overall, costs for the HMO group were estimated to be 28 percent lower than for the control group." 46 There were no perceived effects on quality; measures of health outcomes were generally the same for both groups.

47

44 Fred J. Hellinger, "Selection Bias in Health Maintenance Organizations: Analysis of Recent Evidence," Health Care Financing Review 9 (2) (Winter 1987): 55-63.

45 Robert W. Broyles and Michael D. Rosko, "The Demand for Health Insurance and Health Care: A Review of the Empirical Literature," Medical Care Review 45 (2) (Fall 1988): 291-338.

46 Willard G. Manning, et al., “A Controlled Trial of the Effect of a Prepaid Group Practice on Use of Services," New England Journal of Medicine 310 (23) (June 7, 1984): 1505-1510.

47 John E. Ware, Jr., et al., “Comparison of Health Outcomes at a Health Maintenance Organisation With Those of Fee-for-Service Care," Lancet (May 3, 1986): 1017-1022. One group, low-income HMO enrollees with existing health problems, had poorer outcomes, possibly because of difficulty dealing with the HMO's internal bureaucracy.

While the HIE findings are persuasive, two factors may limit the general applicability of the results. First, the study was conducted in the late 1970s; the comparison plan was the passive bill-payer prevalent in the insurance industry in that period, with no utilization control mechanisms. The more recent adoption by conventional plans of some of the cost-control measures once associated only with HMOs may mean that the difference in efficiency between the two types of plan has narrowed.

Second, the HMO used in the Health Insurance Experiment was a highly structured group-practice plan with many years of operating experience. Much of the growth in the industry in recent years has involved a different type of HMO, the individual practice association (IPA), which contracts with independent physicians who see a mix of HMO enrollees and other kinds of patients. There is evidence that these more loosely structured HMOs have not achieved savings comparable to those observed in the HIE.48 Physicians may not modify their styles of practice in treating HMO enrollees if those enrollees constitute only a small share of their practice. In addition, some people believe that HMOs cannot impose cost-consciousness on practitioners who have not "signed on" to the concept of more efficient and less resource-intensive practice. Because so little is still known about the relative efficacy of different medical practices, external utilization controls may not be able to override individual physicians' judgment in many cases. The greater success of the "closed panel" plan, whose physicians treat HMO enrollees exclusively, has been attributed by some observers to the possibility that these plans attract physicians who are temperamentally more prone to conservative medical practice.

Because closed panel plans maintain their own medical facilities, they require greater start-up funding than IPAs. Federal funds were available to develop such plans in the 1970s, but new plans must now rely on private investment. Investors have favored IPAs, not only because they require less capital, but also because the wider selection of physicians makes them more attractive to consumers. This attraction may, however, be purchased at the price of reduced efficiency.

Finally, while some types of HMOS or similar organizations may be able to reduce costs relative to conventional plans, it is not clear that they have so far reduced growth in health care costs. Data from 1961 through 1981 suggest that HMOs may instead achieve

48 For the most recent findings, see Alan Hillman, Mark Pauly, and Joseph Kerstein, "How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations?" New England Journal of Medicine 321 (2) (July 13, 1989): 86-92.

a one-time saving, after which costs rise at the same rate as those for other insurance programs. One explanation that has been offered is that providers in HMOs are as likely as other providers to use new medical technologies.49 More recent data suggest that HMO premium increases have continued to resemble those of conventional insurance plans. The average HMO premium increase during 1988 was 17.2 percent, very close to the 19 percent increase for all employer coverage cited at the beginning of this report. 50

That HMO cost increases have paralleled those of other insurers does not necessarily mean that HMOs have reached the limit of their cost-saving potential. Because competition among health insurers was relatively limited until recent years, many HMOs may not have faced the market pressures that could induce them to achieve greater savings. The next section reviews proposals to strengthen competition.

Competition and Consumer Choice-The competitive strategy depends on the willingness of consumers to choose the most cost-effective plans. As was suggested earlier, the consumers most likely to incur high costs may be least likely to choose the most efficient option. The problem of biased selection might persist even if conventional insurance plans were to disappear and consumers were able to choose only among managed care options. (Some industry analysts believe this will occur in the near future, chiefly because employers will refuse to offer conventional plans.) It is possible that the most costly patients, given a choice among competing managed care plans, would choose the plan that was least restrictive and potentially least able to achieve cost savings. The most efficient plans might continue to enroll the healthiest patients, for whom only limited savings are possible.

Some people believe that biased selection is largely attributable to the fact that consumers are economically sheltered from the cost of their choice of plan, because most of the premium is paid by the employer. Various schemes have been advanced to make the employee more cost-conscious. For example, the employer's contribution might be tied to the cost of the least expensive offering, with the employee bearing the full cost of the difference between that plan and other more expensive options.

49 Joseph P. Newhouse, et al., "Are Fee-for-Service Costs Increasing Faster Than HMO Costs?" Medical Care 23 (8) (August 1985): 960–966.

50 InterStudy, The Bottom Line: HMO Premiums and Profitability, 19881989 (Excelsior, Minn.: 1989). Staff and group model HMOs generally had lower increases, possibly confirming their greater efficiency. However, these HMOs also tend to be older than IPAs; age of the HMO was also a determinant of the rate of increase.

However, selection bias can occur even when the choice of the more expensive plan has real financial consequences for the enrollee. Under the Federal Employees Health Benefits Program (FEHBP), the monthly employee share of premium costs in 1990 ranges from $20.54 in the least expensive high-option HMO to $234.07 in the most costly high-option conventional plan, a difference of $213.53 per month.51 Under one possible fixed contribution scheme, the Federal share of both plans would be set equal to the full cost of the HMO ($82.16); the employee share would then be zero for the HMO and $265.29 for the conventional plan. If some Federal employees or annuitants are already willing to pay 11 times as much as others in order to obtain the conventional plan, it is not clear that even this change would cause all of them to shift to the HMO. For at least some subset of enrollees, the preference for unrestricted coverage is apparently sufficient to override even strong financial incentives.

One possible solution to the problem of enrollee self-selection is to abandon multiple choices and oblige all members of a covered group to enter a single plan, one selected by the employer or other buyer from among competing plans. Assuming that employers disregarded their own personal plan preferences and chose the least costly option, this approach would theoretically lead to competition among plans on the basis of efficiency. However, both employers and HMOs have been hesitant to enter into arrangements under which enrollees are unwillingly locked into a highly restrictive plan. For this reason, there have evolved arrangements even less restrictive than IPAs, known as open-ended or point-of-service plans.

The predecessor of these plans is the preferred provider organization (PPO). PPOs negotiate discounted rates with certain providers. Enrollees are given a financial incentive, in the form of reduced deductible or coinsurance requirements, to obtain care from providers participating in the PPO network. However, payment will be made under the plan for services furnished by any provider. PPOs thus differ from HMOs, which deny payment altogether for unauthorized non-emergent care provided by providers outside the HMO network. While some PPOs have adopted managed care techniques, such as the use of gatekeepers, most of the savings from a PPO are expected to result from encouraging enrollees to use the participating providers.

The newer, open-ended plans are hybrids, combining some features of HMOs and PPOs. Typically, the

$1 The conventional plan is national, while HMOs are offered only in specific locations. The comparison presented here applies only in one area (Tampa, Fla.) and represents the extreme of variation in the FEHBP system.

plan operates a structured health care system comparable to that of an IPA-model HMO. Enrollees are expected to access the system through a primary care gatekeeper and obtain services from other network providers upon referral by the gatekeeper. Like an HMO, the plan also imposes external utilization controls and negotiates price discounts with providers. As in a PPO, enrollees are free to use non-network providers for covered services, but must pay higher cost-sharing amounts if they choose to do so. Enrollees are also subject to higher cost-sharing if they use specialists within the network without the authorization of the gatekeeper.

Open-ended plans have been adopted by some employers as the single plan available to their workers, replacing systems in which the workers had a choice between conventional and HMO options. Their attraction has been that they overcome the possible selection bias in dual choice systems by enrolling all employees in an HMO-like program. At the same time, they can reduce the employee resistance that would probably greet a proposal for universal HMO enrollment, because they offer employees the safety valve of being able to choose non-plan providers.

Officials of some major insurers that have experimented with open-ended plans in multiple markets report that the plans appear to be reducing the rate of health care cost increases, relative to the increases for their conventional offerings in the same markets. 52 Because these plans began operations only very recently, the data required for an objective evaluation are not yet available. Even PPOs, which have existed for a decade, have never been the subject of a controlled study. Some preliminary findings, however, suggest that the safety valve that makes PPOs attractive is potentially a serious weakness, one which may carry over to the newer hybrid plans.

One recent study of a PPO found that enrollees used the PPO's providers for preventive care and minor illnesses, but went outside the network about half the time for specialty care, major surgery, and hospitalization without surgery. 53 One study found a similar pattern among PPO enrollees who were actually employees of one of the providers in the PPO network.54 While these findings are not definitive, they suggest a dilemma that may be common to both PPOS and the newer types of managed care plans. If the price for going out of plan is not punitive, en

52 Personal communication with officials of Prudential and CIGNA. 53 Annemarie Wouters and James Hester, "Patient Choice of Providers in a Preferred Provider Organization," Medical Care 26 (3) (March 1988): 240255. The results may not be fully representative, because the PPO studied was somewhat skewed towards primary care providers.

54 Paula Diehr, et al., "Use of a Preferred Provider by Employees of the Preferred Provider," Health Services Research 23 (4) (October 1988): 537-554.

rollees may obtain much of their care outside the network; if the price is set high enough to deter outside utilization, the plan may lose its relative attractiveness.

Both solutions to the biased selection problem, higher premiums for the non-HMO plan or higher cost-sharing for using non-HMO providers, may then face the same potential barrier: the highest-risk enrollees, those for whom the greatest potential savings presumably exist, may be willing to pay much more out-of-pocket to retain free choice of providers and avoid bureaucratic restrictions. While the problem might be overcome by making the cost of unrestricted health care prohibitive, this solution may be foreclosed by the potential strain on labor relations (or, in the case of public programs, political resistance).

One other solution that has been proposed is to go to the roots of consumer resistance to managed care, the concern about quality. Some analysts argue that, because consumers have little information about the relative quality of different medical care providers, they must rely on "signals" of quality sent out by various providers, such as the use of elaborate technology or aggressive medical treatment styles. 55 If the persons with the highest expectation of requiring medical services will accept financial sacrifices to avoid managed care programs, this may be because they cannot evaluate the care offered by such programs and wish to remain free to seek out the providers who more actively signal quality. This preference might be overcome if consumers had reliable data on the actual quality of the care furnished by different providers or provider systems such as HMOs.

This view has led to such proposals as the "buy right" plan advanced by Walter McClure of the Center for Policy Studies in Minnesota. Under this plan, a community would collect and make available to consumers uniform data on patient outcomes from

55 For an elaboration of this theory, see James C. Robinson, “Hospital Quality Competition and the Economics of Imperfect Information," Milbank Quarterly 66 (3) (1988): 465–481.

all providers. Consumers would then be in a position to determine whether the higher cost providers were actually furnishing superior care and could thus make rational purchasing decisions. The proposal assumes that the community can agree on objective measures of quality. Past efforts to develop uniform bases of comparison have been controversial. For example, the annual release by the Health Care Financing Administration of mortality data for Medicare beneficiaries in hospitals has been criticized on the grounds that numerous factors other than relative proficiency can affect the death rates of hospital patients. Highly specialized facilities may be treating the most seriously ill patients; facilities serving a low-income population may find that more of their patients have delayed medical treatment beyond the point at which they could be helped. Full implementation of the "buy right" strategy might have to wait until research can provide acceptable standardized outcome measures.

Assuming that those measures can be developed, how would competition then work? Consumers would be fully informed about the relative price and quality of competing health plans, and would thus be equipped to make medical care purchasing decisions in the same way that they decide about other purchases. Proponents of competition argue that the power of the market would then compel all providers to make steady improvements in both quality and efficiency. However, if the health care market could be induced to evolve in the same way as other markets, it is not necessarily the case that the end product would be a single class of providers uniformly striving to achieve the same goals. The health care market could instead be segmented in the way that the markets for other goods and services are; there might be economy and luxury health plans just as there are economy and luxury automobiles. Improving the information available to health care consumers might mean only that buyers would be better able to distinguish between the two, not that the distinction would cease to exist. Whether Americans are prepared to accept the same price/quality tradeoffs in buying medical care that they do in buying other products is an open question.

MEDICAL MALPRACTICE

Paul Weiler and Troyen A. Brennan *

INTRODUCTION

Medical malpractice is the branch of the law that deals with injuries suffered by patients in the course of their treatment by doctors or other health care providers. The legal doctrines in this area remain firmly rooted in the traditional tort-fault principle-a doctor is liable for a patient's injuries if and only if these injuries were caused by the doctor's negligence. Lawyers and judges have long debated the question of whether this legal regime secures adequate compensation and corrective justice for already injured patients, and safer and better quality care for future patients. In the past two decades this debate has emerged into the popular and political arena, as doctors and hospitals have confronted steep and sudden increases in malpractice litigation and premiums.

In the last year, the country has emerged from its second outburst of malpractice premium increases. Insurers maintained that premiums were driven upwards by increasing rates of claims and increasing average payments on successful claims. Premium hikes from 1983 through 1986 culminated in a total premium bill for malpractice liability insurance of $6 billion in 1987, up from $60 million in 1960 (while medical costs were rising to over $500 billion, up from $25 billion in 1960). Over the last two years, premiums have moderated, and in some high-risk states have even fallen.1 However, for reasons we will sketch in this

• A background paper prepared for the Pepper Commission by Paul Weiler, Professor of Law, Harvard Law School; Chief Reporter, American Law Institute Project on Compensation and Liability for Product and Process Injury and Member, Harvard Medical Practice Study and Troyen A. Brennan, Assistant Professor, Harvard Medical School; Lecturer on Law, Harvard Law School; Consultant, American Law Institute Project on Compensation and Liability for Product and Process Injury and Member, Harvard Medical Practice Study, February 21, 1990.

1 See "Medical Malpractice Insurance Rates Fall," Wall Street Journal, April 28, 1989, B-1 and "Costs of Medical Malpractice Drop After an 11 Year Climb," New York Times, June 11, 1989, A1, col. 2.

In 1986 and 1987, during the height of the increase in premiums, predictions regarding the costs of premiums in 1988 ranged between 8.5 and 10.2 billion dollars. See Department of Health and Human Services, Report of the Task Force on Medical Liability and Malpractice (August 1987) 4.

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2 Throughout this discussion, we rely on several empirical studies of premiums. Among these are: National Association of Insurance Commissioners, Medical Malpractice Closed Claims, 1975-1978 (1980); General Accounting Office, Medical Malpractice Insurance Costs (Washington, D.C.: 1986); General Accounting Office, Medical Malpractice: Characteristics of Claims Closed in 1984 (Washington, D.C.: 1987); New York State Department of Health, Physicians Malpractice Claims Closed 1980-1983 (1986) (NY Closed-Claims Study); Florida Academic Task Force for the Review of the Insurance and Tort System, Preliminary Fact Finding Report on Medical Malpractice (1987) (Florida Academic Task Force). More recent data includes: Danzon, "Medical Malpractice Liability," in Liability: Perspectives and Policy, eds. Litan and Winston (1988), 101-127; Sloan and Bovbjerg, Medical Malpractice: Crisis Response and Effects (Health Insurance Association of America, 1989); and Physicians and Surgeons Update: The Saint Paul's 1989 Annual Report to Policy Holders (1989). This latter document has the most recent data available regarding the premiums of St. Paul's, the major national malpractice carrier, which announced there will be a 14.1 percent decrease effective July 1, 1989. 3 See Danzon, The Frequency and Severity of Malpractice Claims. (Santa Monica, Calif.: The Rand Corporation) (R-2870–ICJ/HCFA), 1982.

* The General Accounting Office had estimated that insurance costs for physicians in hospitals increased from 2.5 billion dollars in 1983 to 4.7 billion dollars in 1985. General Accounting Office, Medical Malpractice: Framework for Action (Washington, D.C.: 1987) 2. The American Medical Association estimated that professional liability premiums were 5.7 billion dollars in 1985. American Medical Association, Trends in Health Care (Chicago: AMA),

1987.

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