THE CHANGING WORLD OF GROUP HEALTH INSURANCE

Transcription

1 THE CHANGING WORLD OF GROUP HEALTH INSURANCE by Jon Gabel, Cindy Jajich-Toth, Gregory de Lissovoy, Thomas Rice, and Howard Cohen Prologue: The decade of the 1980s has been a period when many of the nation s employers have begun to view medical care as something other than the almost exclusive province of hospitals and physicians. Wielding their influence as payers, many employers began to experiment with employee cost sharing, self-insurance, and alternative delivery systems. In this article, five researchers show how an increasing number of employers have mwed in these directions in recent years. Conducted under the auspices of the Health Insurance Association of America (HIAA), the survey depicts group health insurance as a rapidly changing world. Given the recent round of sharp increases in health insurance premiums that employers have faced, the results of the survey raise an interesting question: Has managed care demonstrated that it can impose the necessary discipline on medical care providers and consumers, or must far more bitter pills be prescribed in the future? Jon Gabel, who formerly worked as a senior economist at the National Center for Health Services Research and Health Care Technology Assessment, is associate director of the Department of Research and Statistics at HIAA. Cindy Jajich-Toth and Howard Cohen are affiliated with the HIAA research department. Gregory de Lissvoy is an assistant professor of economics at The Johns Hopkins University s School of Hygiene and Public Health. Thomas Rice is an assistant professor of health economics at the University of North Carolina s School of Public Health. The article reports the results of the first HIAA national survey of employers and the directions they are moving in the group health insurance market. The association plans to conduct the survey annually, and the results will be reported in Health Affairs every year. The HIAA s survey of employers is one reflection of a broader effort on which the association has embarked under its new president, Carl J. Schrumm, to provide the public and policyrmakers with reliable information on changing health care trends.

2 GROUPHEALTHINSURANCE 49 One decade ago, a school of thought competition emerged as the dominant ideology for financing health care in the United States. By sheer force of their intellectual energy, competition advocates such as Alain Enthoven and Walter McClure first seized the attention of the nation s think tanks and universities. Then, with the election of Ronald Reagan in 1980 and the appointment of David Stockman as budget Czar, the competitive strategy became the guiding theory for the executive branch of government. The fundamental belief of this strategy was that market forces rather than government command and control regulatory programs must lead the fight against health care inflation. By inducing greater costconsciousness on the part of consumers with a fuller menu of health plans to choose from, competition advocates believed consumers would reorganize the nation s health care delivery system. Americans would vote with their feet for more efficient organized systems of care, such as health maintenance organizations (HMOs). This in turn would compel traditional health insurers to-adopt cost-containment initiatives such as utilization review. 1 Critics of the competition strategy foresaw a different scenario. More consumer choice and cost-consciousness would translate into separatebut-unequal health plans some for the young and healthy and others for the old and sick. A world of competing organized systems was a flight from reality. Despite public subsidies, fewer than 5 percent of Americans were enrolled in HMOs. For three decades, conventional insurers had demonstrated their capacity to be little more than passive payers, failing to challenge overuse through prospective utilization review while reimbursing providers on the basis of their declared costs or charges. The 1980s did indeed bring unprecedented change to the health care market, particularly to employer-sponsored group health insurance the source of protection against the cost of illness for over 160 million Americans. But have the changes led us to a more efficient marketplace as envisioned by the advocates of competition? To provide a snapshot of this changing market for group health insurance, researchers at the Health Insurance Association of America (HIAA), The Johns Hopkins University, and the University of North Carolina surveyed 771 employers in the spring of The survey permits us to take a retrospective look at group health insurance at the three-quarters mark of the decade of competition. Specifically, this article examines: (1) comparative enrollments in conventional insurance, HMO, and preferred provider organization (PPO) plans; (2) choices that employees face in their menu of plans; (3) market shares for commercial insurers, Blue Cross-Blue Shield plans, and

3 50 HEALTH AFFAIRS Summer 1988 independent plans; (4) utilization review among different health plans; (5) the importance of self-insurance in today s marketplace; (6) the cost of family and individual coverage for alternative plans; (7) increases in premium costs among plans during ; and (8) employers satisfaction with current health plans. We conclude by assessing private health plans ability to control the reemerging outbreak of inflation in the health care sector. The HIAA Survey Of Employer-Sponsored Health Plans The benchmark study of group health insurance plans is the National Medical Care and Expenditures Study (NMCES) conducted by the National Center for Health Services Research in In today s post- NMCES world, the principal sources of information about trends in group benefits are surveys conducted by consulting firms, special surveys by employer coalitions, and the U.S. Bureau of Labor Statistics (BLS) annual survey of mid-sized and large employers. 2 We designed the HIAA survey to yield information not found in these surveys. For example, most post-nmces surveys fail to include small or public-sector employers in their samples. Methodology. During the spring of 1987, National Research Inc. (NRI), a Maryland survey firm, conducted telephone interviews with employee benefits managers from 771 employers. The full questionnaire included ninety-five questions (if the firm offered a conventional insurance, HMO, and PPO plan). The interviews lasted from five to forty minutes and averaged eighteen minutes. We randomly selected the employers from a sample frame designed by the Health Care Financing Administration (HCFA) in their Health Insurance Benchmark Study. HCFA undertook this survey to adjust the accuracy of their estimates of national health care expenditures and private health insurance coverage. 3 The sample frame provided by HCFA included 16,000 employers, all of whom had offered group health insurance to their employees in They included large, medium, and small employers from both the private and public sectors. 4 We designed our sample to represent the U.S. population that is covered under employer-sponsored health insurance. Thus, small employers were undersampled and large employers were disproportionately selected to reflect the fact that many small employers do not provide health insurance to their employees and that large employers offer the lion s share of employees group health coverage. We stratified the sample according to region, number of employees, and public-private status.

4 GROUP HEALTH INSURANCE 51 Our sample frame includes an estimated 84 percent of Americans who receive their health insurance through their employers. Two groups are missing from our sample frame: federal employees and workers who receive their health insurance directly through their union. We were able to complete 45 percent of the original interviews. With the exception of the BIS survey, this response rate exceeds those achieved in other surveys of employer-sponsored health plans. It is more than double the rate that the Small Business Administration completed in its recent national survey. 5 Using the information from the sample frame collected by HCFA in their 1984 survey, we compared characteristics of employers we successfully interviewed with those not interviewed. We found no differences between the two groups on all variables, including industry, self-insurance status in 1984, and whether the firm offered an HMO in We present survey findings in two formats: one with the employer and the other the employee as the unit of analysis. When the employer is the unit of analysis, we report results by the size of the employer but do not extrapolate results from our entire sample to all employers. We do not extrapolate because more than 95 percent of the nation s five million employers have fewer than twenty-five employees. Therefore, it is not meaningful to give national estimates about the typical employer. 6 The second format, reporting employees responses, extrapolates national estimates about the U.S. population covered by group health benefits. In making these estimates, we have adjusted for the nonproportional nature of our stratified national sample. Growth Of Managed Health Care One can partition the history of group health insurance in the 1980s into three periods. The first period saw a continuation of traditional group insurance. Employees held first-dollar coverage, and payers essentially reimbursed providers on the basis of usual charges while relying on retrospective claims review to monitor the appropriateness of services. Battered by the onslaughts of runaway inflation followed by the nation s deepest postwar recession in , many employers imposed increased cost sharing on their employees and moved to self-insurance during , the second period. Medicare s adoption of diagnosisrelated groups (DRGs) in 1983 accelerated the decline in hospital occupancy, leaving hospitals vulnerable to private payers demands for discounts and utilization review. HMO growth reached the takeoff phase in 1983, as did PPOs and prospective utilization review programs for conventional fee-for-service the following year. Thus, 1984 began the third

5 5 2 HEALTH AFFAIRS Summer 1988 period managed care, which we define as either HMOs, PPOs, or a conventional plan with preadmission certification review. Employee enrollment. Our survey indicates that enrollment in managed health care plans grew at a feverish pace between 1986 and Over 27 percent of the nation s employees with group health insurance were enrolled in either an HMO or a PPO plan in 1987 (Exhibit 1). This compares dramatically to the 1981 BLS survey of large and mid-sized employers, which found approximately 4 percent of the surveyed enrollees in these plans. 7 Moreover, HMOs and PPOs show surprising strength among employers of all sizes including small (less than 100 employees) and mid-sized employers ( employees in the firm). More than 20 percent of employees enrolled in either an HMO or PPO plan among all designated employer groups. Exhibit 1 Employees Enrolled In HMOs And PPOs, By Employer Size, 1987 Source: HIAA Survey of 771 Employers. Regional distribution. HMOs and PPOs are most popular in the region of their birthplace, the West, where over 22 percent of employees who receive their insurance through their employer are enrolled in an HMO plan, and 31 percent in a PPO plan (Exhibit 2). However, a substantial number of employees now have chosen HMOs and PPOs in all regions of the country. The Midwest is another region of substantial market share, with 20 percent of the employees enrolled in HMO plans, and around 8 percent in PPO plans. HMOs are weakest in the South, with only around 8 percent of employees. There, HMOs historically have encountered strong resistance from organized medicine. PPOs are weakest in the East, where they have attracted less than 1 percent of employees.

6 GROUP HEALTH INSURANCE 53 Exhibit 2 Employees Enrolled In HMO or PPO Plans, BY Region, 1987 Source: HIAA Survey of 771 Employers. Many PPOs find it difficult to overcome the barriers posed by legalized discounts from provider charges, which many traditional Blue Cross- Blue Shield plans receive in the Northeast. If enrollments in managed fee-for-service plans are added to HMO and PPO enrollments, approximately 60 percent of Americans with group health insurance were enrolled in a managed health care plan in 1987 (Exhibit 3). Managed fee-for-service insurance is the leading managedcare product with approximately 32 percent of the U.S. population covered by group health insurance. No component of managed care grew more in absolute numbers during than managed fee-forservice. PPO and HMO enrollments grow for two reasons. First, more employ ers are offering their employees a choice of an HMO or PPO plan. Second, when employees have the option of choosing one of these plans, an increasing and substantial proportion of employees select these plans. Exhibit 4 shows the percentage of employers in our sample by size of firm (number of full-time employees) that offered a PPO or HMO plan. Nearly 17 percent of the employers in our sample offered a PPO plan, a figure that greatly exceeded those reported in previous surveys of employers. Large employers and public employers are more likely to offer a PPO. Perhaps more significant is the surprising presence of PPO plans

7 54 HEALTH AFFAIRS I Summer 1988 Exhibit 3 Enrollment In Manaeed And Unmanaged Grow Health Care Plans, 1987 Source: HIAA Survey of 771 Employers. among small and mid-sized employers, where 10 and 14 percent, respectively, offered a PPO. Of the firms in our sample, 44 percent offered an HMO plan; 38 percent of these same employers reported offering an Exhibit 4 Employers Offering An HMO And A PPO Plan In 1987 Source: HIAA Survey of 771 Employers.

8 GROUP HEALTH INSURANCE 55 HMO plan to their employees in 1984, when they were surveyed by HCFA. The major growth in the availability of HMO plans was among mid-sized and public employers, About one of every seven small employ ers in our sample offered an HMO plan to their employees, whereas one of every three mid-sized firms, and five of every eight large firms, offered an HMO plan. When employees have the option of choosing an HMO or PPO plan, substantial numbers enroll. If a PPO plan is offered, typically 70 percent of the eligible employees will enroll in the PPO plan. The reason for PPOs commanding share of the firm s enrollment is simple: most PPO plans replaced the conventional plan. In only one of every four cases in our sample did the PPO plan compete with a conventional plan. Therefore, the remaining 30 percent of enrollment often reflects the HMO market share. Substantial percentages of employees now select the HMO plan when it is available, a far cry from a decade ago when it was said, Everyone loves HMOs except doctors and patients. Small and mid-sized employ ers are less likely to offer an HMO plan than public and large employers; however, if an HMO plan is offered, 46 percent of employees of small employers select the HMO plan, as do 41 percent of employees for midsized employers. Among large employers, one of every four employees chose the HMO plan when it was offered. Once an employer agrees to offer an HMO plan, that plan must compete not only with conventional and/ or PPO plans, but, in two-thirds of the cases in our sample, with at least one other HMO plan. To understand more fully the reasons why HMOs appeal to substantial numbers of Americans, we turn to a 1987 HIAA-funded national survey of 1,500 households. In this survey, we asked a series of questions to each respondent about their satisfaction with the quality and cost of health care that they receive. 8 Exhibit 5 shows that most respondents were highly satisfied with the care that they received from their physician. Differences in satisfaction were modest among conventional insurance, PPO, and HMO plans. Those surveyed rated HMOs slightly lower on getting an appointment with their physician, and rated conventional plans slightly worse on receiving twenty-four-hour doctor coverage. HMOs received slightly higher ratings for the amount of time patients have to wait in the doctor s office before seeing their physician. But all respondents consistently indicated high levels of satisfaction (usually hovering around 80 percent of respondents) with their care from their physicians. Americans may be happy with their doctors, but when they evaluate the cost and benefits of their health plan, they tell a different story

9 56 HEALTH AFFAIRS Summer 1988 Exhibit 5 Americans Satisfaction With Their Medical Care From Their Physicians, Conventional, HMO, And PPO Plans, 1987 Source: HIAA-ACLI Household Survey. (Exhibit 6). HMO enrollees express strikingly higher levels of satisfaction with the cost and benefits of their health plans than do conventional and PPO enrollees. Roughly three-fourths of HMO enrollees say they are highly satisfied with the cost and the benefits of their HMO plan. In contrast, less than one-half of conventional and PPO enrollees were highly satisfied with the cost and benefits of their plans. It would not be wise to interpret the higher ratings of HMOs as Exhibit 6 Americans Satisfaction With The Cost And Benefits Of Their Health Plans, Conventional. HMO, And PPO Plans, 1987 Source: HIAA-ACLI Household Survey.

10 GROUP HEALTH INSURANCE 57 evidence that all Americans would be more satisfied with their health care plans if they switched to an HMO. The HIAA survey of 1,500 employees indicates that HMOs appeal to a set of Americans with distinctly different tastes than conventional subscribers, While there are few differences in the number of chronic health conditions of the typical enrollee from the two groups, HMO enrollees are more concerned about the cost of health care, whereas conventional subscribers place a higher value on their relationship with their physician. In the HIAA survey of 771 employers, we asked employee benefits managers whether they perceived that their PPO or HMO enrollees were healthier, sicker, or the same health status as enrollees in their conventional plans (Exhibit 7). For HMO enrollees, we have grouped the employer s response into HMOs that were independent practice associations (IPAs) or traditional group/ staff models. Very few employee benefits managers perceived their PPO enrollees as healthier than their conventional subscribers; most saw them in a similar state of health. In contrast, nearly 40 percent of employee benefits managers viewed their IPA enrollees as healthier than their conventional enrollees, and over 25 percent viewed their group/ staff HMO enrollees as healthier. A slight plurality of employers saw IPA enrollees in the same state of health as their conventional enrollees, and a slight majority perceived their group/ staff enrollees in similar health as their conventional enrollees. Exhibit 7 Employers Perceptions Whether PPO, IPA, And Group/Staff Enrollees Are Sicker Than Conventional Enrollees Source: HIAA Survey of 771 Employers.

11 58 HEALTH AFFAIRS Summer 1988 The Conventional Health Plan In Transition Nearly three-fourths of Americans with employer-sponsored insurance continue to receive their coverage through a conventional health plan. However, these plans sharply contrast with the coverage provided by insurers at the turn of the decade. 9 This section focuses on three dramatic changes in the market: the growth of self-insurance, the decline of traditional insurers, and the rise of prospective utilization review. The majority of employers in our sample now self-insure their conventional health plan (Exhibit 8). HCFA interviewed these employers in 1984, and we interviewed the same set of employers in We consider firms that purchase stop-loss coverage (minimum premium plans) as well as administrative services only (ASO) coverage as self-insured plans. Overall, 52 percent of the employers in our sample self-insured in 1987, up from 46 percent in For the approximately 117 million Americans with conventional employer-provided coverage, we estimate that over 60 percent are enrolled in a plan with some aspect of self-insurance. In 1975, an estimated 5 percent of employees were enrolled in self-insured plans. Between 1984 and 1987, the major growth in self-insurance was among mid-sized firms and public employers. Nearly 85 percent of the large firms in our sample had some form of self-insurance. Why should so many employers assume the financial risk for paying the health bills of their employees? One incentive may be the Employ Exhibit 8 Growth Of Self-Insurance For Conventional Plans, By Size Of Employer, 1984 And 1987 Sources: HIAA Survey of 77 1 Employers, HCFA Baseline Survey.

12 GROUP HEALTH INSURANCE 59 ment Retirement Income and Security Act (ERISA) of 1974, which exempts self-insured plans from state regulation of health insurance. Thus, employers that choose to self-insure are exempt from state taxes on health insurance premiums; state laws requiring that insurers provide coverage for specific services, categories of providers, diseases, or persons who might have difficulty in obtaining coverage; state laws regarding capital and financial reserve requirements for insurers; and state laws requiring insurers to share in the expenses for people in poor health (socalled risk pools). In addition, employers can earn interest on reserves, prior to payment of claims. 10 The growth of self-insurance has created new competitors to traditional commercial insurers and Blue Cross-Blue Shield plans- thirdparty administrators (TPAs) and employers that administer their own health plans. Commercial insurers held the largest share (40 percent) of the market in However, other plans (TPAs and self-administered, self-insured plans) now retain nearly 37 percent of the market. Blue Cross-Blue Shield plans market share has dwindled to less than onequarter of the group insurance market. Nearly half the plans that the commercials managed were self-insured plans; about one-fourth of the Blues plans were self-insured. TPAs and self-administered plans have increased their share of the marketplace substantially in the past few years. 11 At the turn of the decade, commercials and Blue Cross-Blue Shield plans had near equal market shares, whereas TPA and selfadministered plans retained a very small share of the market. Responding to increased competition from HMOs and PPOs, conventional health plans adopted prospective utilization review programs such as preadmission certification and mandatory second opinions for surgery at a record pace in Approximately 44 percent of enrollees in conventional plans were covered under a plan with preadmission certification, and a majority of conventional enrollees were covered by a mandatory second-opinion program. While no exact figures are available for all sponsors, previous HIAA surveys report that in 1986 approximately 20 percent of enrollees in conventional plans sponsored by commercial insurers were covered by preadmission certification programs. In 1984, less than 5 percent had this coverage. 12 Mandatory surgical secondopinion programs followed the same growth patterns. Both of these prospective utilization review programs attempt to keep patients out of the hospital by eliminating inappropriate admissions. Today, the popularity of these measures is linked to their pricing. The current folklore is that a conventional plan with prospective utilization review is priced percent below plans with comparable elements but no utilization review.

13 60 HEALTH AFFAIRS Summer 1988 The Cost Of Grout, Health Coverage If the rising cost of health insurance has stimulated the managed care revolution, the future of managed care products rests on their ability to control costs without sacrificing quality of care. In our survey, we asked each firm to provide the total premium cost (employer and employee contribution) per month for their largest conventional insurance, HMO, and PPO plan for individual and family coverage. We also asked how much the cost of their plan had changed from the previous year. Exhibit 9 shows the average cost of these three types of plans by firm size. The average monthly cost of a family plan was approximately $210 for family coverage and $95 for individual coverage. Overall, conventional coverage tends to cost slightly less than PPO coverage, which in turn costs slightly less than HMO coverage. However, the most compelling statement of Exhibit 9 is that differences in the cost of family coverage varied little by size of employer or type of plan in In making these comparisons, however, it is important to note that we have not adjusted the cost figures for differences in patient cost sharing, covered services, the health status of the insured population, and the geographic location of the employer among plans. This will be the subject of future work. Our survey provided an opportunity to examine changes in the cost of coverage for a national sample of conventional insurance, HMO, and PPO plans. Conventional wisdom holds that HMO plans provide one- Exhibit 9 Monthly Premium Cost For Family Coverage For Conventional, HMO, And PPO Plans, By Firm Size, 1987 Source: HIAA Survey of 771 Employers.

14 GROUP HEALTH INSURANCE 61 time savings over conventional plans because of reduced hospitalization rates, but that annual changes in costs for the two groups are similar. Some argue that costs for HMO and conventional plans increase at the same rate because the same underlying forces drive up costs the aging of the population and advances in technology. 13 No published studies document the ability of PPO plans to control health care costs, but presumably they would be subject to these same forces. One further note of caution is in order. Because insurers appear to price their products in three-to-five-year cycles, comparing rate increases over one year only may be misleading. Health insurance premiums increased at a modest rate of less than 4 percent between 1986 and Rates of increase ranged from 3.0 percent for IPA plans to 4.5 percent for PPO plans, with conventional insurance and group/ staff plans falling in between, at 3.4 percent and 4.3 percent, respectively. Differences in the rate of increase within groups were significantly greater than differences between groups. Thus, in a year of modest increases in health insurance premiums, all plans increased their premiums at approximately the same rate. Employers Satisfaction With Their Health Plans Employers satisfaction with their current plan is an important predictor of future trends in the marketplace. We asked employee benefits managers about their satisfaction with various aspects of their plan, such as the quality of claims administration, usefulness of data, and quality of preferred hospitals and doctors. We also asked about the overall level of satisfaction. Exhibit 10 shows the overall level of satisfaction for conventional insurance, IPA, HMO group/ staff, and PPO plans. In a year of modest increases in health insurance premiums, most employers expressed satisfaction with their plans. For all plans, positive ratings outnumbered negative ratings by more than three to one. PPOs received the fewest negative ratings and IPAs the most negative ratings. Conventional plans had both a relatively large number of negative ratings and the highest percentage of highly satisfied ratings. Employee benefits managers sometimes rated plans higher overall than for any individual component. Employers greatest dissatisfaction with their health plans is the quality and usefulness of the information that insurers and HMOs are providing about their plan s experience. This is particularly true for HMOs. On the other hand, employee benefits managers rated HMOs very highly for their quality of care.

15 62 HEALTH AFFAIRS Summer 1988 Exhibit 10 Employers Satisfaction With Their Conventional, PPO, And HMO Health Plans Source: HIAA Survey of 771 Employers. Managed Health Care And The Reemergence Of Inflation The good news for competition advocates in 1987 was that managed health care became the mainstream of group health insurance, with over 60 percent of Americans enrolled in either an HMO, PPO, or managed fee-for-service plan. The bad news was that health care costs grew at an accelerated rate, prompting many public and private payers to raise their premiums by more than 20 percent for While these two facts are disturbing, it is premature to pronounce managed care, and hence the competitive strategy, a failure in the fight against higher health care costs until we understand how and why health care costs increased, and what types of health plans were most successful in controlling costs. Some increased inflation in the health care sector is attributable to the acceleration in inflation in the overall economy, which rose from 1.1 percent in 1986 to over 4.5 percent in Exhibit 11 illustrates that when the overall inflation rate rises, the price of inputs in the health care sector also increases, thereby leading to increased prices for hospital, physician, and other health care services. Part of the estimated 20 percent increase in health insurance premiums reflects a catching-up for the previous three years, when insurers failed to increase premiums adequately. Between 1984 and 1987, premiums rose by less than 4 percent per year, while the medical care component of the consumer price index advanced at nearly double that amount; in addi-

16 GROUP HEALTH INSURANCE 63 Exhibit 11 Rates Of Inflation, Medical Care Versus All Items, Source: Bureau of Labor Statistics. tion, increases in private insurance benefits always outpaced increases in the price of medical care services (Exhibit 12). It is useful to examine aggregate data from the consumer price index and the American Hospital Association (AHA) to understand why Exhibit 12 Annual Growth In Health Insurance Benefits Compared To Annual Increase In Health Insurance Premiums, Source: Hay-Huggins, HCFA. a 1987 figures are preliminary estimates.

17 6 4 HEALTH AFFAIRS Summer 1988 health insurance premiums rose an estimated 20 percent between 1987 and The price of hospital services has increased only slightly, to 7.1 percent per year. Physician charges remain essentially unchanged, at 6.6 percent per year. 15 So if premiums, reflecting increased prices and utilization, are advancing at double-digit rates, then the culprit must be utilization. Yet, the AHA reports that the number of inpatient hospital days for private patients actually declined by 1 percent during 1987! 16 There has been, however, an increase in the quantity and intensity of ambulatory services, which drives inflation in the health care sector. Moreover, the same forces are affecting both public and private payers. Recently, HCFA announced a 38 percent increase in Part B premiums. The major source of this increase was a 22 percent rise in expenditures for physicians services, which occurred during a period when reasonable charges per service were frozen; hence, the increase in the quantity and intensity of services is driving up costs in Medicare Part B. 17 It is logical that increases in the quantity and intensity of ambulatory services should be the major source of inflation. Most cost-containment initiatives by public and private payers have been directed at reducing inappropriate inpatient use. On the public side, the major initiatives DRGs and peer review organizations have focused on incentives to discharge patients from hospitals as quickly as possible. For private payers, both PPOs and managed fee-for-service plans have emphasized prospective utilization review programs, the focus of which has been reducing the use of inpatient services. Moreover, PPOs have made far greater efforts at selecting cost-effective hospitals than in selecting costeffective physicians and have made little effort to change physician reimbursement from traditional fee-for-service, with its financial rewards of more payment for more service. 18 Turning to HMOs, researchers stress that their savings are achieved largely through reductions in the number of hospital days. 19 Thus, the principal challenge for private and public payers is to develop mechanisms to control the increasing number and complexity of outpatient services. Unless these efforts succeed, employers and the public ultimately will judge the unprecedented changes of the 1980s in private insurance and public payment as a failure. If managed care is a failure, then the competitive paradigm will be regarded no differently than the extreme supply-siders who said the way to balance the budget was to cut taxes. The authors thank Tony Wang for his excellent support as a research assistant, and Dianne Washington for her outstanding secretarial support.

18 GROUP HEALTH INSURANCE 65 NOTES 1 A. Enthoven, Consumer-Choice Health Plan, The New England Journal of Medicine (30 March 1978): For an excellent critique of these surveys, see G. Jensen, M. Morrisey, and J. Marcus, Cost-Sharing and the Changing Pattern of Employer-Sponsored Health Benefits, The Milbank Quarterly, in press. 3. For a description of the HCFA survey, see P. McConnell et al., Self-Insured Health Plans, Health Care Financing Review (Winter 1986): Mandex Inc., Independent Health Plan Survey: Methodological Report, Health Care Financing Administration contract no (Vienna, Va., October 1985). 5. ICF Inc., Health Care Coverage and Costs in Small and Large Business, prepared for the Small Business Administration, 15 April U.S. Bureau of Labor Statistics, Wages, Employment, and Contributions, unpublished, Jensen et al., Cost-Sharing and the Changing Pattern of Health Benefits. 8. Health Insurance Association of America, Factors Relating to Employee Choice of HMO, PPO, and Indemnity Plans (Washington, DC., 1988). 9. National Center for Health Services Research, National Health Care Expenditures Study: Private Health Insurance in the United States, Data Preview no. 23, DHHS Pub. no. (PHS) For a fuller discussion of the advantages of self-insurance, see McConnell et al., Self- Insured Health Plans, and G. Jensen and J. Gabel, The Erosion of Purchased Health Insurance, Health Insurance Association of America, Research and Statistics Note 88-1, Mandex, Independent Health Plan Survey. Our intuitive feeling is that some selfinsured plans administered by the commercials, and to a lesser extent administered by the Blues, identified their sponsor as other rather than commercial or Blue Cross- Blue Shield. Hence, we believe the reader should regard these estimates for the commercials and Blues as minimum estimates, and the estimates for the other group as maximum estimates. However, the central point remains traditional insurers are losing market share to self-administered and third-party administered plans. 12. J. Gabel et al., The Commercial Health Insurance Industry in Transition, Health Affairs (Fall 1987): J. Newhouse et al., Are Fee-for-Service Costs Increasing Faster than HMO Costs? Medical Care (August 1985): ; H. Luft, Trends in Medical Care Costs: Do HMOs Lower the Rate of Growth, Medical Care 13, no. l(1980); and H. Aaron and W. Schwartz, The Painful Prescription: Rationing Hospital Care (Washington, D.C.: The Brookings Institute, 1984). 14. G. Kramon, Insurance Rates for Health Care Increase Sharply: January 1 Jump Stuns Many, The New York Times, 12 January 1988, A-l. 15. Health Care Competion Week (21 December 1987): American Hospital Association, personal communication. 17. T. Rice, Medicare: A Fixed Fee for Doctors? The Washington Post, 15 December 1987, A-23; and U.S. House of Representatives, Committee on Ways and Means, Background Retort on the Increase in the SMI Enrolle Premium for 1988 (U.S. Government Printing Office, 28 September 1987). 18. G. de Lissovoyet al., PPOs: One Year Later, Inquiry (Summer 1987): H. Luft, How Do Health Maintenance Organizations Achieve Their Savings? Rhetoric and Evidence, The New England Journal of Medicine 298 (1978): 1336.