PACEMAKER: Centennial 1998

Evolving payment system restructures nation's health care system

Defining the term "managed care" is difficult because managed care organizations continue to evolve and adopt new strategies to compete in the market. Essentially, though, managed care is a system of health care delivery designed for managing the cost and quality of health care and access to care. Common features include an approved panel of contracted providers, reduced benefit levels to subscribers who use non-contracted providers (unless authorized to do so), and some type of authorization system.

Traditionally, payment for medical services was a private matter between physician and patient, and most hospitals were charity institutions providing care at public expense for those who could not afford it.

The growth of hospitalization and medical insurance after World War II, in addition to expanding access to health care services, shifted payment for health services to other sources. Most often these third parties were insurers acting on behalf of groups of individuals or large employers who provided insurance as a benefit to their workers. In 1965 Congress enacted the federal Medicare program, a publicly financed universal insurance plan for Americans 65 and older.

While the rise of third party payment changed the relationship between doctor and patient, it left intact the health care system's traditional form of financing: direct payment for the services physicians and hospitals felt were appropriate in each individual case.

Combined with the development of expensive new technologies and of effective treatments for ever more complicated diseases, this form of financing contributed to dramatic increases in U.S. health care costs, especially after 1965. Alarmed at the rise in Medicare expenditures, the federal government began implementing cost control measures in the 1970s. They included regional organizations to review physician and hospital services for appropriateness.

In 1983 Congress enacted watershed legislation establishing a new Medicare payment system based on diagnosis-related groups, or DRGs. Under this new prospective payment system, Medicare reimbursed hospitals based on a presumed average cost of treating various diseases and injuries. Other insurers such as Blue Cross adopted similar prospective payment systems.

At the same time, large employers and some insurers began to organize even more radically different alternative systems of health care delivery. Health maintenance organizations, preferred provider organizations and other forms of managed care aim to control health costs by negotiating discounted fee arrangements and charges with health service providers, and by controlling patients' access to specialty services. Both of these cost control strategies represent a special challenge for teaching hospitals such as UIHC.

Cost-based competition among health care providers puts teaching hospitals, with their social obligations, at a disadvantage. Teaching hospitals not only support medical education, both undergraduate and graduate, they also carry a higher burden of charity and uncompensated care.

Furthermore, restricting patients' access to specialty care threatens to undercut the very strengths for which teaching hospitals are known-their comprehensive array of sophisticated high technology services.

To meet these challenges UIHC and the UI College of Medicine have launched a number of initiatives under the leadership of the Clinical Enterprise. This new strategic partnership encompasses expanded clinical outreach services; joint ventures with physicians, hospitals, and communities; agreements with provider networks to assure continued access to specialty referral; and development of a primary care network, including increased primary care services at UIHC itself.

These initiatives will permit UIHC to continue to fulfill its social contract with the people of Iowa and its tripartite mission of patient service, health care education, and clinical research within the newly evolving marketplace.