Potential savings

Various studies indicate that tools to improve the efficiency of care can be applied successfully. These studies are mainly based on experiences with managed care in the United States. First the potential savings that can be achieved for all types of care within the specified benefits package will be discussed. This is followed by some evidence of savings for hospital care and

4. Efficiency

for specific groups of members.

4.2.1 Overall savings

Manning et al. (1984) investigated whether a prepaid group practice delivers less care than the fee-for-service system when both serve comparable popula-tions with comparable benefits. To answer this question they randomly assigned a group of 1,580 persons to receive care free of charge from either a fee-for-service physician of their own choice (431 persons) or the Group Health Cooperative of Puget Sound (1,149 persons). In addition, 733 prior emolees of the Cooperative were studied as a control group. The rate of hospital admis-sions in both groups at the Cooperative was about 40% less than in the fee-for-service group (p < 0.0 I), although ambulatory visit rates were similar. The calculated expenditure rate for all services was about 25 % less in the two Cooperative groups (p<O.OI for the experimental group; p<0,05 for the control group). The number of preventive visits was higher in the prepaid groups, but this difference does not explain reduced hospitalization.

The lower rate of use along with comparable reductions found in non-controlled studies by others, suggested that the style of medicine at prepaid group practices is markedly less 'hospital-intensive' and, consequently, less expensive. Accor-ding to the authors it is very unlikely that prepaid group practices have a substantial negative effect on the health status of (some of) their members.

Kirkmalll1-Liff and Van de Ven (1989) described a variety of efforts that have been launched in the Netherlands to achieve a more effective use of limited resources. Among these iImovations are improved systems for the monitoring of utilization and cost of medical care providers, demonstrations of incentives for cost-effective care, the development of community care projects, and efforts to improve the coordination of care. They mentioned that the estimated ineffic-iency in the Dutch health care system was about 15 % of total health care expenditures.

On the basis of an extensive review of the literature, Miller and Luft (1994) concluded that, compared with indemnity plans, health maintenance organiz-ations have somewhat lower hospital admission rates, 1 % to 20% shorter 78

4.2 Potential savings

hospital length of stay, the same or more physician office visits per enrolee, less use of expensive procedures and tests, greater use of preventive services, mixed results on outcomes, and somewhat lower enrolee satisfaction with services but higher satisfaction with costs. There were few or no results for key summary measures of performance, including total health plan and system-level expendi-tures, out-of-pocket costs per emolee, and the level and rate of growth of premiums.

Enthoven and Singer (1996) presented evidence from California of a broad decline in health care costs for employment groups adopting managed care and managed competition. The premium for some groups were reduced by about 10 percent in comparison with the previous year(s). Many of the employees involved are emoled in a health maintenance organization. Lower premiums may not imply reductions in total spending, because benefit changes and selection may increase overall spending. For the purchasers they examined, however, benefits have been fairly standard. Also, in general, benefits have not been manipulated to reduce premiums. In addition, the decreases in weighted average premiums probably did not reflect favourable risk selection.

4.2.2 Savings for hospital care

Siu et al. (1988) investigated whether health maintenance organizations selec-tively avoid discretionary hospitalizations. Medical records were reviewed from the same randomized trial as used by Manning et al. (1984). Physicians who were blinded to the system reviewed 244 medical records and judged the appropriateness of both the hospital setting and the medical indications for hospitalization. The rate of discretionary surgery was lower in the health maintenance organization, while the rate of nondiscretionary surgery was equivalent in the two systems. For medical admissions, rates of discretionary and nondiscretionary admissions were lower in the health maintenance organiz-ation. There were no observable adverse effects on health from the lower rates of nondiscretionary hospitalization, either because the net effect on health was small or because the health maintenance organization substituted appropriate ambulatory services. The authors concluded that the health maintenance organization's reductions in hospitalization rates do not occur 'across the

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board'. Discretionary surgery is selectively avoided.

Melmemeyer and Olinger (1989) examined the financial consequences when California implemented selective contracting for Medicaid services. They con-cluded that selective contracting halted a long history of hospital price inflation and won significant price concessions for the state (about 19%). While the state might have tried to get the cheapest possible care from the worst possible providers, their evidence showed that the state secured price concessions from mainstream hospitals that provided accessible, good-quality care. Furthermore length of stay remained virtually unchanged and growth of volume remained within expected ranges. Faced with a credible danger of loss of business, hospitals were able to make price concessions and find approaches to more economical operation.

Melnick et al. (1992) investigated prices obtained in different types of markets by the largest preferred provider organization in California. Their results indicated that prices paid to hospitals in the Blue Cross of California preferred provider organization network, after controlling for hospital product differences, are strongly influenced by the competitive structure of the hospital market.

Greater hospital competition leads to lower prices. Furthermore as the impor-tance of a hospital to the preferred provider organization in an area increases, the price rises substantially.

Khandker and Manning (1992) examined the performance of a utilization review program with data of one insurer. They compared the group of costumers involved with a representative sample of the costumers which had no utilization review during the study period. The program included precertification and concurrent review for each medical and surgical admission. The precertification covered both the necessity of the admission and the length of stay. The data suggested that utilization review reduced inpatient expenses by 8.1 % (and overall medical expenses by 4.4%) after a year of experience, largely by reducing length of stay. The savings of the program outweighed the extra administration costs of the program. Therefore the authors concluded that utilization review offers some promise as a cost control strategy. However, they 80

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also mentioned several limitations in their data and they note that their study has not looked at the possibility that the utilization review program may have impacts on the health status of the population.

4.2.3 Savings for specific groups of members

According to Enthoven and Singer (1996) clinical improvements will be the main source of continued savings in the health care system in the future. They give several examples of such improvements. For instance, one hospital introduced clinical case management for congestive heart failure. This reduced the overall costs per patient by 39 percent. Satisfaction levels for patients with congestive heart failure with clinical case management were higher than those for patients without case management. In addition, the readmission rate for congestive heart failure fell 33 percent to 7.1 percent. Another example is a hospital that reduced the inpatient stay for hip replacement surgery from 8 days to 3.4 days and cut costs by $4,500 per patient.

Armstrong (1997) gave examples of successfully applied disease management programs. By utilizing an asthma disease management program it is reported that the Harvard Community Health Plan's admission rate for paediatric asthma admissions dropped by 25 %. For adults the admission rate dropped 10 %.

Leading health maintenance organizations in the United States are targeting diabetes for disease management. It is believed by these organizations that although diabetes afflicts only 3 % of their members it accounts for about 13 % of their overall costs. It is estimated that diabetes disease management programs are already producing cost savings of 15-35 %.

Summarizing various forms of managed care may improve efficiency compared with indemnity insurance. However, introducing risk sharing 61' prior costs as an additional risk adjuster will reduce an insurer's potential benefits of improv-ing efficiency. This brimprov-ings us to the question: how can an insurer's incentives for efficiency be measured in the case of risk sharing and in the case of prior costs as an additional risk adjuster? This question is addressed in the next section.

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