Toward a 21st century quality-measurement system for managed-care organizations

Health Care Financing Review, Summer, 1995 by Rodney C. Armstead, Paul Elstein, John Gorman

INTRODUCTION

As part of its Strategic Plan and as the Nation's largest managed-care purchaser, HCFA is working to promote improved quality of care, responsiveness, and outcomes for Medicare and Medicaid beneficiaries in managed-care settings. There is wide agreement that current methods of monitoring the quality of care provided by Medicare and Medicaid managed-care organizations (MCOs) are antiquated and cumbersome. New methods of assessing quality of care and outcomes in managed care will have their roots in data on how health plans are responding to the needs of beneficiaries in patient encounters. HCFA's efforts to develop these new methods of quality and performance measurement are being undertaken in partnership with other purchasers, the managed-care industry, States, and other public and private organizations.

For the last 20 years, America's health care system has been embroiled in a revolution of industrialization driven by spiraling costs. Today, the dust of the first stage of the managed-care revolution--the struggle between capitation and fee-for-service payment methods--is settling. In all likelihood, indemnity products will represent only about 10 percent of the insurance market within the next 5 years. The majority of privately insured individuals--some 65 percent--are already enrolled in some form of managed-care plan, with double-digit annual increases in managed-care enrollment. Medicare and Medicaid have lagged substantially behind the private sector during this transition and therefore represent the "last frontier" of untapped markets for the managed-care industry.

Two major factors will characterize the second stage of the managed-care revolution:

* Costs will become a constant, as managed-care markets mature and prices level off, and improved quality of care-particularly outcomes--will become the dominant objective.

* The greatest growth in managed-care enrollment in the 1990s will come from Medicare and Medicaid. Millions of poor families and frail, chronically ill seniors will descend upon managed-care plans.

Medicare

In many respects, Stage 2 has already begun. Since the inception of the Medicare managed-care program under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, enrollment of beneficiaries in Medicare managed-care contracts has increased steadily (Figure 1). In 1987, about 1.7 million beneficiaries were enrolled in managed-care plans. This figure increased to more than 2 million in 1992. As of July 1, 1995, there were more than 3.5 million Medicare beneficiaries enrolled in the 253 Medicare-contracting managed-care plans, an increase of more than 18 percent over the previous year. TEFRA established three types of Medicare contracts: risk- and cost-based contracts, authorized under section 1876 of the Social Security Act, and Health Care Prepayment Plan agreements, authorized under section 1833.

The number of Medicare risk HMOs has increased rapidly during the past few years, consistent with trends in the private sector Figure 2). In 1992, Medicare had risk contracts with 83 HMOs. As of July 1995, there were 165 HMOs with Medicare risk-based contracts, with a 20-percent increase in contractor applications in 1994. Risk-based arrangements are viewed as having greater profitmaking potential by managed-care plans and are favored by some policymakers as a vehicle through which health care budgets can be stabilized by shifting deficits onto the private sector.

Most of these Medicare-contracting HMOs are in areas of the country where there are large numbers of Medicare-eligible seniors. Enrollment in managed-care organizations with Medicare risk-based contracts is concentrated in five States: California, Florida, Arizona, New York, and Oregon. Indeed, in certain parts of Oregon and a handful of other States, the Medicare managed-care penetration rate actually outpaces the rate in the private sector.

Managed care is entirely voluntary in Medicare. All eligible seniors have the option of enrolling in a managed care plan if one is available in their area; some 74 percent of Medicare beneficiaries have access to at least one plan, and 57 percent have a choice between two or more.

Medicaid

The proliferation of managed-care in Medicaid is astounding, especially considering that, as late as 1980, managed-care was virtually unknown in Medicaid. During the 1980s, virtually uncontrolled growth in Medicaid costs compelled States to pursue managed care as the primary mechanism to restrain costs, while increasing access to care for beneficiaries who faced limited numbers of providers available to serve them.

By 1990, there were more than 1.5 million Medicaid enrollees in managed-care programs. From 1990 to 1992, this figure more than doubled to 3.6 million; between July 1992 and July 1993, it increased by another 33 percent to 4.8 million. In 1994, we witnessed growth in excess of 60 percent, taking the number of Medicaid managed-care enrollees over the 8-million mark. Today, more than 24 percent of all Medicaid recipients nationwide are enrolled in managed-care arrangements (Table 1).