IV. Protecting Patients from Cost Containment [FN]342

For the states seeking section 1115 waivers, the driving force behind the move is not quality of care. It is not access. Rather, it is a desire to control costs. States look to managed care to help them contain the rising cost of health care.

The managed care (payer-driven) system can be mistaken for the provider-driven system. In the payer-driven system, the physician is obligated to act in the patient's best interest and the third-party payer is contractually obligated to pay for services rendered by the physician. However, in the provider-driven system, the physician has an additional obligation to provide services under the *1130 guidelines and standards set by third-party payers if the physician wishes to be fully compensated for services rendered. The physician manages the patient's health care for the payer--hence, the term “managed-care products.” The physicians' new responsibility requires them to balance the needs of the patient with the cost-containment needs of the third-party payers.

A. Overview

With utilization review, third-party payers determine whether they believe the medical services ordered (or received) are appropriate and necessary. [FN]343 If they decide that the service is “unnecessary,” they will either refuse to pay the provider's charges (retrospective [FN]344) or refuse to authorize the provision of the service (concurrent and prospective [FN]345). Retrospective utilization management programs analyze data on hospital admissions, patterns of treatment, and utilization of certain procedures. Under a prospective review system, most nonemergency hospital admissions must receive prior approval and an initial approved length of stay is assigned.

When analyzing utilization review, it is essential to remember that a prospective decision has a fundamentally different impact on the patient than a retrospective decision. Theoretically, patients know what treatments will be paid for under either system plan. However, the different systems have significantly different impacts on patient behavior. In the retrospective system, a patient makes a decision about medical care and receives the medical care with a potential risk of disallowance. Thus, a person who needs a service will be more likely to receive the service even though there is a likelihood that the provider or the patient will not be reimbursed. Consequently, the potential for the person of color to be injured because of an erroneous decision by the third-party payer's utilization review process is lower than the prospective system.

In a prospective system, a patient knows in advance that the insurer will not pay for the recommended treatment. The patient's only chance of recovering the cost of the recommended treatment is in a challenge to the insurer's decision. Some argue that the *1131 patient can still obtain the care if she is willing to pay for it. What this argument fails to recognize is that many individuals lack economic ability to pay for the service outside any insurance plan. This is as true for middle-class individuals as it is for poor individuals. A person of color who needs services which are denied through prospective utilization review will, more likely than not, fail to receive the services. [FN]346 Consequently, the potential for persons of color to be injured because of an erroneous prospective review decision is higher than in a retrospective decision.

Financial risk-shifting mechanisms cause the provider (physician) to change his or her pattern of practice from overutilization to “appropriate utilization” at best and “underutilization” at worst. Historically, the risk of loss from providing unnecessary care was on the paying patient and the uncompensated doctor. Insurance removed the risk of loss from these parties and shifted the risk to third-party payers. Managed care products, through financial risk-shifting, shifts at least part of the risk of loss back to the providers.

Various arrangements produce financial risk shifting: ownership interest, joint venture, or a “bonus” arrangement. In these arrangements, the third-party payer shares the surplus from “cost-effective” care with the provider. [FN]347 The risk-shifting occurs in various forms of rewards, [FN]348 penalties, [FN]349 or both. [FN]350

  • 1132 The degree of risk assumed by the provider varies with the type of payment arrangement. Traditional fee-for-service practices are at one end (no risk-shifting) and traditional HMOs at the other end (full risk-shifting). [FN]351 Preferred provider organizations (and other managed care products) fall somewhere in the middle.

The most common means used by third-party payers to spread financial risk to physicians [FN]352 are capitation, [FN]353 withholding, [FN]354 discounted fee for service, [FN]355 per diem payments, [FN]356 and surplus (profit) sharing. The most frequently used means of shifting the risk to hospitals include case mechanisms [FN]357 and capitated payments per patient. [FN]358 Although the form may vary, the penalties *1133 and rewards have similar effects. Current cost-containment efforts shift the risk of financial loss, in whole or in part, to the providers of that care. [FN]359 Providers (physicians in particular) are offered economic incentives to act as the third-party payer's agent--the “gatekeeper” to health care services. [FN]360 The gatekeeping role is not new to physicians. They have used their position in several ways. For instance, physicians have used their authority as health care gatekeepers to resist hospitals' and insurers' efforts to influence medical treatment. Furthermore, they have generally used their role to obtain more services for the patient, not less. Now, however, they use their position to “save” money for third-party payers by ordering less services. Thus, the fundamental change in the basic ethical concern of the system has evolved from the “best interest of the patient” to “cost containment.”

As gatekeepers, physicians are concerned with limiting access to health care services so third-party payers do not find excessive utilization. If a payer determines that a physician practiced within the payer's guidelines, the payer financially rewards the physician. If a payer determines that a physician has ordered too many services, the payer financially penalizes the physician. Consequently, physicians are motivated to order services for patients within third-party payer guidelines and standards. Thus, gatekeeping shifts the focus of the health care system from the doctor-patient relationship to the doctor-payer relationship. Ultimately, the doctor and payer determine not only the quantity of services received by the patient but the quality of care as well. [FN]361 Some physicians will respond to the risk-shifting incentives by cutting not only “unnecessary” services and “marginally necessary” services, but also “medically necessary care.”

The shift of focus in financial risk-shifting has serious implications for persons of color. First, given that utilization review standards can be culturally insensitive, the physician will be under the greatest pressure to deny or modify services to the population not represented in the standards. The minority population requires the most services and is more likely to fall outside the standards. Furthermore, persons of color and the poor often find it difficult to advocate for themselves in a hierarchal, culturally different, male-dominated, European-American tailored health care system. *1134 As managed care creates a conflict of interest by increasingly influencing physicians to place their pecuniary self-interest before the patient's self-interest, it will be persons of color and the poor to whom physicians will find it easer to deny or withhold services. Physicians may believe, consciously or subconsciously, that these groups are less likely to deserve the services and/or less likely to complain. “As [managed care products] continue to grow and as more physicians continue to sign contracts with them, these concerns will intensify.” [FN]362

Second, physicians already order less services (quantity and quality) for persons of color. This difference in service is based on factors other than ability to pay. It is based, at least in part, on racism. A system focused on cost containment and financial risk-shifting will allow physicians to continue, if not increase, the practice of providing disparate treatment.

B. Critiquing State Waiver Application


  1. Does the Waiver Application Provide Adequate Standards Relating to Utilization Review?

Traditionally, the determination of what is “medically necessary” has been determined by the patient's physician. Under managed care the third-party payer defines “medically necessary.” To the extent that managed care organizations have incentives not to provide services, they could abuse their power and actually restrict patients from necessary care. It is important that the waiver application establishes guidelines to monitor managed care plans. Those guidelines should include: (1) a definition of “medically necessary” which provides limitations on the ability of a managed care plan to limit the care; (2) specific standards for setting up appropriate utilization review; and (3) utilization review by third parties independent from the managed care plans.

Only two states (Missouri and Tennessee) had some definition of “medically necessary” in the waiver application. [FN]363 According to the Bureau of TennCare, “medically necessary” means services or supplies provided by an institution, physician, or other provider that are required to identify or treat a TennCare enrollee's illness or injury which are consistent with the symptoms or diagnosis and treatment of the enrollee's condition, disease, ailment, or injury; *1135 with appropriate regard to standards of good medical practice, not solely for the convenience of an enrollee, physician, institution, or other provider; and at the most appropriate supply or level of services which can safely be provided to the enrollee. If the services are supplied to an inpatient it further means that services for the enrollee's medical symptoms or condition require that the services cannot be safely provided to the enrollee as an outpatient.

Missouri defines “medically necessary” as services furnished or proposed to be furnished which are reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the function of a malformed body part, in accordance with accepted standards of practice in the medical community of the area in which the health services are rendered; and services could not have been omitted without adversely affecting the member's condition or the quality of medical care rendered; and services are furnished in the most appropriate setting.

As to specific standards for utilization review, all the states but Hawaii addressed the issue; only New York's waiver was ambiguous. [FN]364 Furthermore, all the states but Florida and Hawaii required the utilization review to be conducted by an independent third party. [FN]365

However, another aspect of evaluating the waivers is assessing how well the waivers addressed issues relevant to communities of color. There are different forms of utilization review, but they all rely on statistical norms, practice parameters, and other population data to decide whether a service is necessary. The problem with utilization review is that standards and decisions are made (and will continued to be made) from data drawn from a largely European-American, middle-class, male subgroup. Such data is inadequate and unreliable when applied to minorities. [FN]366

First, persons of color have a backlog of illnesses that have gone untreated or inadequately treated. [FN]367 Because they have gone untreated or inadequately treated for so long, the history of the illness will fall outside the normal course, requiring more intense treatment over a longer period. Second, even for illnesses developed after enrollment in a managed care product, the course of the illness is likely to be longer and more severe. Without access to *1136 adequate housing, food, and clothing, the poor will not only have more illnesses, but the illnesses they do have will take a more severe course. But even middle-class minorities will have different “health status” than middle-class European-Americans. Besides the availability of current necessities (i.e., food and housing), health status is also related to the health status of the parents and health care received during childhood. Many middle-class minorities did not receive adequate health care during childhood and neither did their parents. This lack of health care has a generational or multi-generational effect on health status and the need for health care. [FN]368 If managed care products do not take this generational effect into consideration when developing protocols or practice guidelines, minorities will continue to receive inadequate health care.

Third, the data on which utilization review bases its protocol comes from research that has been largely European-American, middle-class, and male. It has only been in the last several years that there has been a concerted effort to include women and minorities in trial studies of drugs and other treatment protocols. [FN]369 Even so, health providers have failed to recognize that race can affect how a disease needs to be treated and how the disease responds to treatment. For instance, despite the fact that hypertension is a leading health problem for African-Americans, it was only recently that a study concluded that the hypertension medications being prescribed were not as effective in controlling hypertension for African-Americans as they were for European-Americans. Yet, it is likely that managed care products' utilization review protocols will not recognize these differences.

Finally, providers hired by third-party payers to do utilization review lack the culturally relevant background to factor the patients' status with regard to poverty, race, class, and prior health care into their recommendation regarding services. Unfortunately, many of the providers that traditionally served person of color are not being contracted with for managed care products. In fact, persons of color are finding that the traditional providers are moving out of their communities. Furthermore, persons-of-color are finding the doors to managed care products closed to them *1137 both as owners and provider-employees. Without providers who understand the need to take race, class, and poverty into consideration, even culturally relevant protocols will be misapplied.

Thus, to adequately serve communities of color waivers must require the managed care plans to: (1) factor the health status of population group into the utilization review process; (2) address cultural bias of protocols; (3) train providers and utilization review personnel with regard to culturally competent care; and (4) collect utilization review data based on race.

The plans were amazingly silent with regard to these standards. Only Illinois required the plans to factor in the health status of different population groups into their utilization review standards. [FN]370 Furthermore, only Illinois had even questionable standards which might have required the plans to train providers and utilization review personnel with regard to cultural competent care. [FN]371 All the other state waiver applications were silent or mostly silent on these issues [FN]372

Does the waiver application provide adequate standards relating to utilization review? The answer is questionable at best for three of the states (Illinois, Missouri, and Tennessee) [FN]373 and no for all others. The failure of the plans to specifically address issues related to communities of color is a major problem that cannot be overlooked. Intricate details outlining the utilization review process which do not address race essentially buries the impact of cost containment on communities of color.

Nevertheless, utilization review alone is not the major culprit. With utilization review alone, the patient knows what is not being authorized and, at least on a very theoretical level, can protest any denial of services. Thus, the utilization review process might have limited effectiveness in controlling costs where providers continue to order or prescribe “unnecessary services.”





Does the Waiver Application Provide Adequate Standards Relating to Financial Risk-Shifting?

Waivers should limit particular risk arrangements allowed including restricting plans from risk-shifting based on individual four states (Florida, Hawaii, Illinois and Tennessee) limited the particular risk arrangements allowed by managed care plans; [FN]374 however, only Florida specifically restricted plans from risk-shifting based on individual provider behavior.

A significant issue related to risk-shifting is the level of the captation rates. If the capitation rates are too low, managed care plans may shift more of the risk of loss to providers in order to maintain their own profits. Or they may increase denials of services on utilization review. Either way, the patient is placed at risk by rates that are too low. Even if the rates are adequate for the general population, they may be inadequate for physicians who serve primarily the chronically or acutely ill, disabled individual, elderly, and minority populations.

Three states (Hawaii, Illinois, and Tennessee) have standards to protect patients from insolvency of the managed care plan. [FN]375 Four states (Hawaii, Illinois, Oregon, and Tennessee) have standards to assure adequate capitation rates. [FN]376 Only three states had special capitation rates for special populations, such as chronically *1139 or acutely ill, disabled individuals. [FN]377 Aged, blind, and disabled persons were excluded from the first phase of Hawaii's waiver. [FN]378

Does the waiver application provide adequate standards relating to financial risk-shifting? None of the plans were overall positive in outlining standards regarding financial risk-shifting. However, all the plans had some positive aspects, while completely ignoring others. Florida, New York, and Oregon were generally negative. [FN]379 For instance, Florida had positive standards related to the kind of risk-shifting a managed care plan could undertake and no standards related to capitations. Oregon, on the other hand, was just the opposite.





Does the Waiver Application Provide Adequate Standards Protecting Patients from Insolvency?

The waivers should include standards to protect patients from insolvency, including providing alternative insurance for individuals who cannot be covered by managed care plans. Four states (Hawaii, Illinois, Missouri, and Tennessee) had standards in their waivers regarding solvency of the managed care plans. However, only Hawaii provided for alternative insurance for individuals who cannot be covered by managed care plans. [FN]380

Does the waiver application provide adequate standards that protects patients from insolvency? As in other areas, the state waivers were mixed in their approach. None of the plans were overall positive in outlining standards protecting patients from insolvency. In fact, Florida, New York, and Oregon were generally negative. [FN]381




  • 1140 C. Protecting Patients from Cost Containment: Conclusion

Overall, many of the plans have positive aspects which will provide some protection for patients. This is particularly true in the are of financial risk-shifting where all the states had at least one or two positive aspects to their plan. However, as the waiver applications stands, there is sparse mention of special health concerns of minority populations. The failure of the waivers to require managed care plans to collect utilization review data is an oversight that overrides all other aspects of the states' cost-containment efforts.