Diagnosis for Democracy
Insights into the State of Our Union
A Blog by Rob Tenery, MD


How Managed Care Threatens the Doctor/Patient Relationship

By Rob Tenery, MD on January 16, 2017

It was just a matter of time before nonmedical personnel would take over the practice of medicine. The demand for change was not brought on by legislative fiat. It came because the large employers could no longer afford to compete in the market due to the increasing costs of health care coverage for their employees. Unwilling to continue to pay the higher insurance premiums, they began by seeking private arrangements with local physician groups and hospitals to care for their employees on a discounted fee-for-service basis. The era of managed care was born.

It was designed to remove the excesses from the health care system with capitation and commodity pricing to restrain costs. At first, physicians continued to act as independent contractors, agreeing to a reduced reimbursement level. With increasing demand came more competition that forced physicians into more binding arrangements.

With their large capital reserves, the hospital corporations and insurance companies began to assume increasing control over the private health care sector by forming Health Medical Organizations (HMOs). Initially, physicians could continue their individual office practices Independent Physicians Associations (IPAs), and their patients could either become HMO members or continue to pay as they go. In either case, their reimbursement was on a fee-for-service basis.  

Then followed Preferred Provider Organizations (PPOs). Feeling threatened, physicians in increasing numbers were forced into becoming part of “their own” organizations that would “speak for them” when negotiating managed care contracts with HMOs and independent insurance companies.

The initial thrust was to reduce the length of hospital stays. Hospital costs accounted for almost half of costs for medical care. There was a preponderance of supporting evidence that hospital admission rates by group practice HMOs were lower than among IPAs. In trying to explain why HMOs have fewer hospitalizations, three reasons were cited: more comprehensive outpatient medical benefits, a more cohesive group of physicians and providers to cover diverse concerns, and a prepayment method of financing. The contention was that physicians spent the company’s resources more prudently when they were held partially responsible.

That was quickly followed by a decrease in the number of hospital beds. As an example, the number of acute care hospitals in the state of Massachusetts fell from 140 in 1960 to 90 by 1995. Later came the drug formularies. In reality, they were just phantom pharmacies created by the managed care plans and were often no more than lists of medications that were covered by the particular plan.

Far too often the quality of service was subjugated to the profit motive of the investors. “They earned their profits by taking advantage of the excess capacity in hospitals and medical services and by gouging physicians and hospitals to make contractual arrangements at prices that barely met, and sometimes far below, actual costs," Michael E. DeBakey, MD, said, while speaking about many HMO organizations. “Cost containment,  by doing as little as possible for the patient, was the primary motive.”

The methods incorporated through managed care practices did work to decrease costs. Information released from the Kaiser Family Foundation/Health Research and Education Trust showed a drop in annual growth rate for health insurance premiums from 18 percent in 1989 to less than 1 percent by 1996.

While the costs of direct care for services by the HMOs were being curtailed, the same could not be said for the HMOs’ profits. In 1994 the nine largest publically traded HMOs showed a profit of $9.5 billion. The executives of these corporations fared even better. The average annual compensation for the top executives of twenty-eight for-profit HMOs was $1.05 million, with some reaching $10 million.

Although their costs for health care were less, patients had become pawns, governed by the whims of the “gatekeepers.” Physicians within these systems were also unhappy. Not only were their patients essentially selected for them, the financial risk through capitation arrangements had shifted from the insurer onto their shoulders.

One of the qualities most admired about physicians has been their autonomy, that self-directed freedom and moral independence to do whatever they felt best for every patient, with the only constraints being the availability of local resources. These individuals answered only to themselves and their patients. Unfortunately with the advent of managed care, those days are gone.*

*Article excerpted from In Search of Medicine’s Moral Compass, Tenery, R., Goodman, L., The Small Press at Brown Books Publishing, 2011. 





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