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This Congressional Budget Office (CBO) Staff Memorandum was prepared in response to a request by Representative Nancy Johnson of the Committee on Ways and Means of the U.S. House of Representatives. It presents a range of illustrative estimates of the potential effects on national health expenditures and on expenditures under Medicare, Medicaid, and private health insurance if all acute health care services that are now funded through insurance arrangements were provided through delivery systems incorporating two specific forms of managed care. One is staff-model and group-model health maintenance organizations. The other is "effective" forms of utilization review, which CBO interprets to mean utilization review that incorporates precertification and concurrent review of inpatient care. Against the background of rapidly rising health care costs and diverse forms of managed care that vary in their apparent effectiveness, the memorandum outlines the assumptions underlying the analysis, presents the illustrative estimates obtained, and discusses the caveats that should be kept in mind when interpreting them.

The analysis draws on CBO's June 1992 Staff Memorandum "The Effects of Managed Care on Use and Costs of Health Services," which assesses the evidence on the effectiveness of managed care organizations and processes and their impact on the use and cost of acute health care services. In keeping with CBO's mandate to provide objective and impartial analysis, this memorandum contains no recommendations.

The memorandum was prepared by Verdon S. Staines, of CBO's Human Resources and Community Development Division, under the direction of Nancy Gordon and Kathryn Langwell. Julia Jacobsen provided research assistance. Chuck Seagrave, Jean Hearne, and Carla Pedone offered valuable comments. Roger M. Williams edited the manuscript. Ronald Moore provided administrative assistance and arranged the final version of the manuscript.
 
 

INTRODUCTION

BACKGROUND

• Forms of Managed Care
• Effectiveness of Managed Care

METHODS

• Estimation Strategy
• Assumptions Underlying the Analysis

RESULTS

DISCUSSION

APPENDIX A. Data Sources and Technical Information
 
 

INTRODUCTION

Managed care has attracted considerable interest as a possible way to curb rapidly rising health care expenditures without encountering some of the difficulties that more radical changes in the health care system could entail. Managed care seeks to modify the delivery and financing of health care in an attempt to eliminate unnecessary and inappropriate care, thereby improving quality and reducing costs. The current health care system already uses it extensively. Among employees who in 1990 were covered by private insurance based on employment, fully 95 percent were in plans that incorporated some form of managed care.¹ These diverse forms include several kinds of health maintenance organizations (HMOs), numerous forms of utilization review (UR), and various arrangements-sometimes optional for consumers-that are based on specified networks of providers. There is evidence that some forms reduce costs, but there is no such evidence for others.²

Advocates of managed care hope that channelling a greater share of health care services through the more effective forms of managed care might significantly reduce expenditures on health care. Advocates note that various forms of managed care have been incorporated into both indemnity and prepaid insurance arrangements and that they are compatible with a predominantly private health care system. Further, strong evidence exists that some reduce the costs of care.

People who counsel against expecting too much from managed care observe that its existing forms vary widely in their apparent effectiveness at reducing costs. Moreover, to be effective, policies to expand managed care would need to include enough constraints or incentives to induce consumers and providers who would not otherwise have done so both to participate and to change their behavior in ways that reduce costs. In addition, expanding managed care would not, on its own, address other concerns--such as access to health care services--that are a focus of more radical proposals for change.

This memorandum is an illustrative exercise designed to provide a sense of the order of magnitude of the reductions in national health expenditures (NHEs) that might result from universal adoption of two specific forms of managed care. One is staff- and group-model HMOs~the forms of managed care for which demonstrated cost savings are greatest. The other is "effective" forms of UR, which the Congressional Budget Office (CBO) interprets to mean utilization review that incorporates precertification and concurrent review of inpatient care. CBO does not present similar estimates for HMOs modelled on independent practice associations (IPAs) because there is no reliable evidence about their effects.

The illustrative analysis in this memorandum suggests that, if all health care services for people who are insured were delivered through staff- or group-model HMOs, NHEs might be lower by almost 10 percent. Alternatively, if all such health care services were instead delivered through arrangements that embodied relatively effective forms of UR, the resulting reduction in NHEs might be no more than about 1 percent.

For several reasons, these illustrative estimates should be interpreted with considerable caution. The results presented are CBO's best estimates of the potential that staff- and group-model HMOs, and effective forms of UR, have to reduce NHEs; they should not be generalized to other forms of managed care for which there is no evidence. By necessity, the analysis incorporates a large number of assumptions, but the data or evidence supporting many of them have significant limitations.

Another important qualification is that managed care might have quite different effects if it were applied to all consumers, providers, and services-- rather than just to part of the health care system. One possibility is that the effects of universal managed care arrangements could be larger than those reported here. As Alain Enthoven has noted, if the change to universal managed care were part of a comprehensive restructuring of the health care system that included incentives to choose efficient arrangements, the managed care component of the package might have a larger impact than if it were adopted on its own.³ That is because, under the present structure of competition among insurers, managed care arrangements may not be delivering all of the cost savings that they could potentially yield.

Currently, managed care organizations compete with traditional insurers for enrollments. Enrollments in these managed care organizations would have declined under this system if effective managed care had resulted in consumers perceiving either that they received fewer services that they wanted--whether beneficial or not--or that they waited longer for services because of prior authorization requirements. Declining enrollments among consumers insured through their work place would have been especially likely where employees who opted for unmanaged, traditional insurance plans were not required to pay the excess of these plans' higher premiums over those of less costly plans incorporating effective managed care. Because of the nature of competition in this market, HMOs could have been less aggressive in attempting to limit unnecessary care than they would have been in a market where consumers faced strong financial incentives to choose more efficient insurance arrangements. HMOs may also have used savings they achieved by managing care to broaden the range of services that their plans cover.

It is at least as likely, however, that mandating universal adoption of managed care might have smaller effects than estimates based on past experience would suggest. That could result because, if all consumers and providers were required to adopt managed care arrangements, the new participants' levels of commitment to the processes and values implicit in managed care approaches might be less than those of the current participants, who have voluntarily chosen these arrangements. Furthermore, extending managed care arrangements could increase administrative costs, offsetting some of the savings in the costs of health care services. (Because of data limitations, any increases in administrative costs are not included in the analysis.)

An additional reason for caution when interpreting the estimates presented here is that they relate to the level of--rather than the rate of increase in~health care costs. The limited available evidence suggests that managed care does not affect the underlying rate of growth in those costs; we assume that mandating managed care would not affect the rate.⁴ It might slow that growth, however, if it were introduced as part of a comprehensive restructuring of the health care system that incorporated strong incentives to choose efficient arrangements. In such a setting, universal managed care could facilitate greater control over the adoption of new technology~for example, if it led to better ways to identify new technologies and to develop guidelines for their use. However, under the present system, with its recent high rates of costs increase, even a reduction of about 10 percent in NHEs would be offset by approximately one year's increase in health care spending. Thus, universal adoption of some forms of managed care could yield substantial one-time savings; but in the absence of substantial restructuring of the health care system, that would not address the longer-term issue of the underlying rate of growth in health care costs.

Against this background of rapidly rising costs and of diverse forms of managed care that vary widely in their apparent effectiveness, the memorandum outlines the assumptions that underlie the analysis and presents the estimates obtained. An appendix describes the data and provides additional technical information.

This document is available in its entirety in PDF.

1. See Elizabeth W. Hoy, Richard E. Curtis, and Thomas Rice, "Change and Growth in Managed Care," Health Affairs, vol. 10, no. 4 (Winter 1991), pp. 18-36.

2. See Congressional Budget Office, "The Effects of Managed Care on Use and Costs of Health Services," CBO Staff Memorandum (June 1992). The memorandum reviews available evidence about the effectiveness of managed care and contains a glossary.

3. Alain Enthoven, "Multiple Choice Health Insurance: The Lessons and Challenge to Employers," Inquiry, vol. 27, no. 4 (Winter 1990), pp. 368-375; and Alain Enthoven and Richard Kronick, "Universal Health Insurance Through Incentives Reform," Journal of the American Medical Association, vol. 265, no. 19 (May 15, 1991), pp. 2532-2536.

4. See, for example, Joseph Newhouse and others, "Are Fee-for-Service Costs Increasing Faster than HMOs' Costs?" Medical Care, vol. 23 (August 1985), pp. 960-966.