How to Set Off a Medical Arms Race

SPYROS ANDREOPOULOS

February 24, 1993|By SPYROS ANDREOPOULOS

Palo Alto, California. -- Managed competition, the last hope of controlling our health-care costs through the free market, is turning into a scam.

If President Clinton embraces this concept as it is currently evolving, and Congress fails to act, we can expect our insurance premiums and deductibles to continue to rise, with more high-risk patients excluded from insurance. The major players -- the health-care and insurance industries -- will be the only winners.

Under managed competition, insurers and health-maintenance organizations (HMOs) are now the system's integrators, striving to gain control over hospitals and primary-care doctors.

Downgraded to ''gatekeepers,'' primary-care doctors save insurers money by deciding when you and I need to see a specialist for treatment or surgery. To control prices, the integrators select hospitals and doctors, negotiate price discounts, impose prior-authorization require- ments before sick people can be hospitalized, or encourage us to seek cheaper alternatives to hospitalization.

Insurers pay hospitals and specialists a fixed amount for each procedure at discounted prices. If a hospital gets a patient out quickly, the insurers benefit and the hospital makes money.

But without sufficient regulatory constraints, managed competition has escalated into a medical arms race. In the San Francisco Bay Area, where the concept has taken hold, hospitals are being forced to add more managers and pay marketing consultants to identify new ''product lines'' and ''unmet community needs.'' This often translates into liquid diets for weight reduction, exercise programs and other trendy mousetraps of dubious value.

Moneys are being diverted to six-figure executive salaries, advertising, construction of unnecessary facilities and medical office buildings in areas already suffering from overcapacity.

While some insurers and hospitals, especially in rural and inner-city areas, face losses, nationwide on the average hospital revenues were up 23 percent in 1991 and expected to be even better in 1992, according to industry figures.

Most of the top 10 commercial insurers have reported substantial improvements in their underwriting profits. These were made possible through 20 to 50 percent rate hikes for indemnity plans and 12 to 18 percent for HMO plans in the past three years, with 70 percent of HMOs reporting hefty profits.

But no one is effectively passing on the savings to consumers. In fact, health spending rose sharply last year, to $939.9 billion, and will soon top the $1 trillion mark.

Is managed competition viable? University of California researchers James Robison and Harold Luft have documented that when it comes to medical care, economic theory works only on paper. Medical costs were 26 percent higher for hospitals in highly competitive areas than they were in hospitals with no neighbors. The more competitors a hospital had, the higher the costs. In addition, it was more likely that neighboring competitors would offer the same or similar specialized services.

In a separate study, University of Michigan economist Catherine McLaughlin found that HMOs, which were supposed to have ripple effects throughout the health-care industry, did have a significant impact on hospital costs. In fact, costs were higher in competitive HMO markets.

Even if managed competition is chosen as our national health policy, President Clinton, Congress and the states can take several steps to level the playing field and foster lower health-care costs.

First, they must stop the escalating medical arms race by reinstituting the certificate of need. Widely used in the 1970s, this required hospitals to justify the need for more beds or high-priced equipment.

This would slow down construction of unnecessary facilities, delay excess diffusion of new or unproved technologies, and encourage cost-conscious renovation of existing buildings.

The certificate of need can encourage region-wide use of expensive technologies, protect university hospitals with a proven commitment to caring for the poor from going bankrupt, and foster community involvement in the development of health services by insisting that they conform with state health-plan goals.

Second, the president and Congress should consider legislation to end shameful insurance-company discrimination against high-risk groups, such as those suffering from AIDS and chronic illness.

Third, they should create fiscal disincentives for training medical and surgical specialists. If current trends continue, by the turn of the century, the United States will have more than 800,000 physicians, according to the American Medical Association. Contrary to conventional economics, the greater the supply of specialists, the higher their costs.

For more than a decade, hospital people have told each other that ''we're in a whole new ball game.'' I disagree. Under managed competition, the game won't change. It will be business as usual, with more of our precious dollars being diverted from patient care to high-paid administrators and proliferating bureaucratic controls.

Spyros Andreopoulos, director of the Office of Communications at Stanford University Medical Center, wrote this commentary for Pacific News Service.

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