The flood of defections from the ravaged managed-care business took a significant turn in late December 1998, as Prudential Insurance Co. agreed to sell its ailing health care operations to Aetna Inc. for $1 billion. The Aetna/Prudential deal will affect about 6.6 million people nationwide and Aetna will become the nation’s largest provider of managed care, with about 18.4 million members in HMOs according to a Los Angeles Times article (December 11, 1998).
The proposed sale has alarmed doctors and consumer groups, who fear the new company will force patients to accept fewer services and doctors to accept smaller fees. The significance of this merger is related to a sea of change in the health care insurance marketplace, and represents the maturation of the current ascending model of managed care; the multi-product, multi-market health plan.
Simultaneous Eclipse and Expansion
It seems we are observing the simultaneous eclipse and expansion of the managed care organization. HMOs are yielding one function after another to purchasers and providers, thereby evoking questions about their future role and share of the premium dollar. In addition, managed care plans appear to be denying little care, notwithstanding all the well-published horror stories and growing complaints as HMOs become commonplace in America. As a result, the cost savings that HMOs have achieved are in jeopardy.
In the 1990s, many markets have multiple managed care plans and multiple provider organizations, and vertical ownership relationships are disintegrating. Large employers and purchasing alliances are retaining insurance risk and specifying benefit packages, and large provider organizations are accepting global capitation. Pundits daily announce the dawn of direct contracting and the squeezing out of the insurance middleman. Yet health plans everywhere are in rapid expansion, diversifying into new networks, benefit designs, distribution channels and geographic markets.
In the March/April 1999 issue of Health Affairs James C. Robinson explains that neurosurgeons should be aware that although health care might be a local business, managing that care is a national enterprise. Many health plans are eliminating their ownership linkages with provider systems, and almost all of the national plans that plunged into vertical integration during the highmark of managed competition have since divested their staff models.
At the same time, they are expanding rapidly in both scale and scope. According to Robinson, organizational enrollments are up and revenues are pyramiding as leading health plans merge with and acquire their rivals, thereby demonstrating horizontal integration.
The Economics of Organization
Health plans must spread product development and pricing, utilization and quality management, and computer information systems over large numbers of enrollees to hold down the administrative cost per enrollee. High patient volumes also are important for obtaining discounts or attractive capitation rates from providers and suppliers.
Diversification into multiple benefit products and distribution channels is key to the pursuit of these scale economies, since they bring in new volume without adding significantly to the costs of managing care. Robinson states that true network diversification will be an increasingly important comparative advantage in coming years, given the irreducible variation in consumers’ and purchasers’ preferences.
The Fundamental Feature of Health Care
The main feature of health care is the heterogeneity of consumers’ preferences and providers’ capabilities. The continual flux in supply and demand creates an enduring role for the multi-product health plan as the nexus of contracts that links, coordinates and gives incentives to the many buyers and sellers of health ccare. Robinson states, “Health plans have little to fear from the rhetoric of cutting out the middleman. Neither the individual consumer armed with a Medical Savings Account, nor the corporate purchaser armed with a self-insured benefit program, can achieve provider rates and utilization efficiencies comparable to those offered by large health plans.”
The heterogeneity among providers also creates an enduring role for health plan networks that cover every ZIP code and are uniformly credentialized, contracted and accredited. Health plans do not need to fear that medical groups and hospital systems will integrate into insurance and marketing, once the regulatory demands for financial solvency and the marketplace demands for network access are understood.
Joint ventures between plans and provider organizations are to be expected, as are long-term relationships between specific plans and purchasers, but the diversified health plan will always participate in more networks, products and markets than even the largest provider or purchaser.
As stated, health care is a local business. But managed care — the development, pricing, and marketing of multiple provider networks and benefit designs through multiple distribution channels in multiple geographic regions — is a national business.
John A. Kusske, MD, is Chairman of the AANS Managed Care Advisory Committee.