National Center for Policy Analysis

MONTH IN REVIEW

Health Care
July, 1996

MANAGED CARE SAVINGS

Managed care attempts to control health care expenditures by reducing the use of services on the assumption that some health services provided to consumers are unnecessary or inappropriate.

It is a matter of contention whether or not switching to managed care has reduced overall spending; if so, by how much; and whether managed care can reduce the rate of growth of expenditures nationwide.

A review of nine major studies on the impact of managed care on health spending by the Center for Health Policy Research of the American Medical Association found estimates of annual savings from managed care ranging from 2.3 percent to 9.6 percent. Reasons for the wide range of estimates include the varying assumptions on which the studies were based -- some of which were guesses.

For example, between 1994 and 1995 the Congressional Budget Office doubled its estimate of how much national health expenditures might be reduced if all health care were delivered by Health Maintenance Organizations (HMOs) from 3.9 percent to 7.8 percent . According to the AMA, the reason for the doubling was that in correcting for various biases and flaws in the data, the CBO introduced new biases into its calculations. Among the conclusions of the AMA study:

The success of HMOs in reducing health expenditures relative to traditional fee-for-service is due to reductions in hospital admissions and lengths of stay, but the effect on national health care spending is unclear.
There is no evidence that any form of managed care has the ability to reduce the growth rate of health expenditures.
Year-to-year comparisons of premium increases, which are cited as evidence of slower spending under managed care, are meaningless when it comes to determining the effect of managed care on spending growth.
Data need to be collected over a period long enough for researchers to account for all the variables that affect spending.
Assuming everyone was enrolled in managed care organizations, the best estimate of the additional one-time reduction in national health care spending that might be achieved is 3.9 percent.

Overall, the study concludes that the literature on managed care savings is "replete with poor analyses."

Source: David W. Emmons, "The Impact of Managed Care on National Health Spending: A Critical Review of the Literature," Discussion Paper 95-2, June 1995, Center for Health Policy Research, American Medical Association, 515 North State Street, Chicago, IL 60610.

SOCIALIZED MEDICINE CANADA-STYLE: NOBODY LIKES IT

To hold down skyrocketing costs and still comply with mandates of the Canadian Health Care Act -- which requires universal health coverage from the government -- the province of Ontario passed a so-called Savings and Restructuring Act earlier this year. It attempts to attack the problem of out-of-control costs by rationing and price controls.

Over the past five years, increases in Ontario's mandated physicians' fees have been restricted to less than 1 percent a year.
Doctors have been required to return to the government one-third of their gross income over $251,000 Canadian (US$183,700) , two-thirds of their gross income over C$276,000, and three-fourths of their gross income over C$30l,000.
Their net income after expenses, but before taxes, is 40 percent to 50 percent less than their gross income.
In spite of these measures, physicians' total billings are increasing by 13 percent a year.

In June 1995, after four years of socialist rule -- during which the provincial government's debt load doubled -- Ontarians elected a conservative government which drastically reduced spending. In January, Ontario passed the Savings and Restructuring Act.

Although aimed at cutting costs it has had these results:

Ontario physicians have become civil servants -- although without pensions or unemployment insurance.
The minister of health can now unilaterally close hospitals, set physicians' fees, tell them where they can work, what services they can provide -- and remove at will their right to practice in the province.
Government inspectors can seize medical records without reason, warrant or patient consent as well as review doctors' billing patterns and rescind payment after the fact for services deemed to have been "unnecessary."

Physicians in the province are reported to be outraged by the new law.

In 1994, even before the act was passed, 350 physicians left Ontario -- with two-thirds of them coming to the U. S.
In 1995, 30 of the 95 graduates in family medicine of the University of Toronto moved to the U. S.
A survey of the 1996 graduates showed that 80 of the class of 95 would emigrate if the Savings and Restructuring Act were passed.

Among the other results of Canada's system of socialized medicine: the government has been "delisting" previously covered services and rationing of care to the elderly is widely practiced.

Experts say that of all current reform proposals, only medical insurance accounts will return decision-making to patients and their doctors.

Source: Dr. Jerafle C. Arnett Jr. (West Virginia practicing physician), "Ontario's Health Care: A Pox on Doctors and Patients," Wall Street Journal, July 12, 1996.

DOES PREVENTIVE CARE HELP?

Intuitively, it would seem that diagnosing illnesses before patients notice symptoms would benefit their health, and more follow-up care would reduce the need for expensive medical interventions later on. But recent research shows that these assumptions may not hold true.

Medical researchers studied 1,396 patients in nine veterans' hospitals with chronic illnesses that require frequent rehospitalization and emergency care -- diabetes mellitus, obstructive pulmonary disease and congestive heart failure. Some patients were given six months of intensive follow-up care by primary physicians and nurses, while others received normal follow-up care.

The intensive care included a visit by the primary care physician two days before discharge, a follow-up telephone call from a nurse within two days after discharge, an examination in a clinic within one week after discharge and an updated treatment plan.

The study found that, compared to patients with the same conditions and severity of illness who received normal follow-up care:

The group given more intensive follow-up care had significantly higher rates of readmission to the hospital and more days of rehospitalization.
After six months their quality of life was no better than those given normal follow-up care.
Mortality rates were actually higher in the group of patients given intensive follow-up care.

However, patients given more intensive care did express greater satisfaction with the quality of care they were given.

Physicians suggest that the intervention was ineffective because doctors who saw patients more frequently performed more diagnostic tests and found more conditions to treat. These patients were also more exposed to the risks associated with treatment and hospitalization.

Other studies have found little or no benefit in such preventive measures as detecting and treating early-stage prostate cancer and such follow-up interventions as surveillance to detect recurrence in patients with breast cancer.

Sources: Morris Weinberger et al., "Does Increased Access to Primary Care Reduce Hospital Readmissions?" and H. Gilbert Welch, "Questions About the Value of Early Intervention," New England Journal of Medicine, Vol. 334, No. 22, May 30, 1996.

EMPLOYERS SEEK ALTERNATIVES TO MANAGED CARE

Many employers have switched to health maintenance organizations (HMOs) as a less costly alternative to traditional indemnity insurance. However, there is evidence that HMOs aren't always the least expensive way to go.

In Seattle, for instance, HMO plans cost as much as traditional indemnity plans, some $120 to $150 per employee per month.
The premiums for HMOs in Seattle are rising just as fast as indemnity plans, according to a Seattle insurance broker and consultant.
In New Jersey, HMOs actually cost more than indemnity insurance.

Catastrophic coverage for big medical bills -- accidents and serious diseases -- is the cheapest coverage an employer can buy, and the kind that 82 percent of employees say they need most. But some state legislatures have put a cap on the deductible insurers can offer.

Some companies combine Medical Savings Accounts (MSAs) with catastrophic coverage. The employer sets aside an amount for each employee's MSA that covers some or all of the deductible. The employee can use the MSA to cover routine medical expenses or receive some or all of the unused portion at the end of the year. Researchers at Cleveland State University recently found that 27 small and midsize Ohio firms using MSAs saved 12 percent, and employees averaged spending $317 less for individuals and $1,355 for families.

Employers are also switching to self-insurance to avoid state mandates on what insurance policies cover, and to avoid community rating and guaranteed issue that force healthy employees to subsidize others. Self-insurers are exempt from most state regulations because they are set up under the federal Employee Retirement Income Security Act (ERISA).

To self-insure, employers buy a stop-loss policy that kicks in only if claims exceed a certain level; below that level, the employer pays employees' claims.
For groups of fewer than 100, stop-loss policies cost only about half of regular indemnity coverage.
Some 6 percent of firms with 10 to 49 employees are self insured, as are 37 percent of firms with 50 to 19 employees and 60 percent of firms with 200 to 499 employees, according to the Employee Benefit Research Institute.

In response to self-insured firms, some states are outlawing stop-loss coverage that has a low-deductible in order to force small employers into the state-regulated insurance market. The U.S. House of Representatives passed legislation to stop this state practice as part of its health reform bill, but Sen. Nancy Kassebaum (R-KS) wants this provision dropped.

Source: Brigid McMenamin, "Don't Let Them Rush You Into An HMO," and "Banning Self-Insurance?" Forbes, July 15, 1996.

MENTAL HEALTH PARITY WON'T MAKE US FEEL BETTER

The Senate passed an amendment to the Kennedy-Kassebaum health care bill that would require insurance companies and employers who provide health care coverage to pay for treatment of mental illness on the same basis as for physical ailments.

Critics point out that "mental illness" is a vague concept and so is "therapy," and neither is defined in the Senate amendment.

Currently, almost all companies with employee health benefits offer some coverage for mental illness, but 89 percent set lower limits than for treatment of physical ailments, according to the Congressional Budget Office.
The Senate amendment would impose direct costs of $11.6 billion on employer-insured workers, averaging $110 each.
Workers would likely pay the increased cost in the form of lower wages and other benefits, according to CBO Director June E. O'Neill.

Today, relatively inexpensive and effective drug treatment is available for serious psychiatric disorders -- such as obsessive-compulsive disorder, schizophrenia, clinical depression or bipolar manic depression. Typically, employers and insurers set yearly limits of 20 outpatient visits and 30 days' hospitalization for mental illness. Patients pay 50 percent of the cost, and the lifetime payment limit is typically $50,000.

In the 1980s, mental health special interest groups pressured several state legislatures and Congress into requiring or providing coverage for mental illness, resulting in a building boom for psychiatric hospitals, particularly for "problem" adolescents and children. This led to unnecessary commitment of patients -- freed only when their benefits ran out -- and fraudulent "therapy."

A Georgia psychiatrist billed the state $6.6 million for Medicaid patients, on average billing for 488 hours of therapy per week, although a week has only 168 hours.
A New Jersey doctor submitted hundreds of claims to private insurers for therapy programs that never took place, kicking back as much as 25 percent of the loot to alleged patients and billing as many as 50 hours in a single day.
A 1990 federal review of 500 psychiatric in-patient cases, most involving adolescents and children, found two-thirds were unnecessary hospitalizations.

Opponents of the Senate amendment suggest it would unnecessarily raise health care costs without benefiting patients and should be dropped by the House-Senate conference committee that will iron out differences in the legislation.

Source: Eugene H. Methvin, "Cuckoo's Nest," National Review, July 15, 1996.

To access more information on the Kennedy/Kassebaum health care bill go to http://www.public-policy.org/~ncpa/healthhl.html on the Internet.

HOW RESEARCH CAN SAVE MORE LIVES

Almost all federal spending on medical research is funneled through the National Institutes of Health (NIH), which have an annual budget of about $12 billion. However, according to economist Gary S. Becker, the distribution of research funds among diseases isn't the allocation that would give the greatest overall benefit.

While diseases that cause a greater number of deaths generally get more research dollars, he points out that the amounts spent per death caused by each disease are very different. For example,

NIH research funding amounts to more than $4,000 per death from cancer, but only a little above $2,000 per death from heart disease -- which causes about 50 percent more deaths than cancer does.
NIH spends five times as much on breast cancer as on prostate cancer, even though they cause about the same number of deaths per year.
Per death caused, AIDS research receives four times the funding of breast cancer, more than 20 times prostate cancer, and almost 50 times heart-disease research.

Some illnesses may receive proportionally more funding because they cause more pain and suffering, there are better prospects for important research advances or the victims are younger. However, Becker suggests that to some extent funding decisions are politically influenced by how well organized are the people concerned with a particular disease.

There is a case for spending more money on medical research since potential benefits from basic medical advances are so large. Even current spending levels would be much more effective in promoting medical progress and saving lives if research funds were allocated to provide the greatest overall benefits to society.

Source: Gary S. Becker (Hoover Institution), "The Painful Political Truth About Medical Research," Business Week, July 29, 1996.

MYSTERIOUS DISABILITY -- OR HOAX?

A trendy disorder originating in California that can be caused by anything and apparently have any symptoms afflicts an unknown number of Americans: multiple chemical sensitivities (MCS).

More than 100 symptoms are identified with MCS, including sneezing, itching, twitching, numbness, difficulty swallowing, hoarseness, chest pain, high or low blood pressure, sore muscles, cramps, nausea, constipation, hunger, headaches, insomnia, hair loss and falling intelligence.

Despite a lack of medical evidence, and the belief by many mental health professionals that it is a purely psychological syndrome, the federal government recognizes MCS as a disease and disability.

In 1992, the Department of Housing and Urban Development began allowing people with MCS to seek protection under federal housing discrimination laws.
HUD even provided $1.2 million to build an "Ecology House" for MCS sufferers in Marin County, Calif., part of a program to support housing for people with disabilities.
The Social Security Administration will now make disability payments to people who can demonstrate that they have been incapacitated by MCS.

No major medical association accepts MCS as a legitimate medical syndrome, including allergists, immunologists and toxicologists. However, self-styled "clinical ecologists" are making money diagnosing and treating MCS sufferers.

In February 1996, a World Health Organization workshop concluded that MCS is an allergy of unknown origin that "cannot be recognized as a clinically defined disease."
Patients diagnosed with MCS are far more likely than other people to have psychological problems such as depression, anxiety disorder and panic attacks -- predating any chemical exposure blamed for their problems -- according to a 1990 study.

The study's author, University of Iowa psychiatrist Donald Black, suggests that if MCS patients "were offered standard anti-depression treatments, their symptoms would probably go away very promptly."

Source: Michael Fumento, "Sick of It All," Reason, June 1996, Reason Foundation, 3415 S. Sepulveda Blvd., Suite 400, Los Angeles, CA 90034, (310) 391-2245.