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Health Care: It Is a Big Business, and Now It's Being Run Like One

"The so-called free market has had time to show us what it can do. It has shown us a corporate gold rush with greed the driving force, with corporations gobbling up their competition in the hospital industry and profits piled upon profits. Management brass has paid itself millions while the nation's social fabric has unraveled. And the skyrocketing ascent of corporate, for-profit medicine has converted frontline health care professionals into assemblyline workers. And as usual, nurses are bearing the heaviest burden." 

Gerald W. McEntee,
International President


The failure of national health care reform, the desire of state and local governments to get out of the business of directly delivering health care, and the rise of for-profit managed care — these factors drive a new system ruled by shareholders, marketers and bottom-liners. And for growing numbers of the new health care marketers, the big money is in managed care.

According to surveys of large government and private employers, by 1995 well over 60% of their employees were enrolled in some type of managed care plan. In some states, such as California and Minnesota, the proportion is even higher.

While the growth of managed care began first in the private sector as large employers sought greater control over costs, it is now making big gains among the Medicaid population. Almost half of all Medicaid recipients were estimated to be covered by managed care networks by the end of 1996. That percentage is likely to grow significantly in the future.

There have been many attempts to manage costs. At first, hospitals and doctors were paid for each day a patient stayed in the hospital, or received fees for medical services rendered. In the mid-1980s, Medicare limited the amount of reimbursement for patient stays — hospitals were paid a set amount for the duration of patients' stays. By the late 1980s, however, hospitals learned to shift costs to private insurers to subsidize care provided to those in the Medicare and Medicaid programs and those without health insurance (uncompensated care). But as health care costs outran inflation and were affecting business profits, companies that provided insurance to their employees began to look for ways to manage their insurance costs and get relief from what were perceived as runaway expenditures.
Bar Chart showing National Health Expenditures - 1970-1995

Today, the trend is no longer to control costs, but to reduce costs. Employers' costs for providing managed care plans actually fell, from an everage of $3385 per employee in 1994 to $3255 in 1995. Politicians are looking to control both federal and state costs by encouraging or mandating that Medicaid and Medicare recipients enroll in managed care, a trend that is spreading to mental health and long-term care services. While few elderly Medicare enrollees choose managed care now, that that is expected to change rapidly.

The rush to managed care brings massive changes to hospitals and other health care providers. Under the conventional fee-for-service system, the health insurance plan has virtually no influence over choice of provider or hospital, and little influence over how professional care is provided. There is incentive for physicians and hospitals to make money by doing more — providing as many services as possible — and increasing fees for those services.

The shift from unmanaged, fee-for-service medicine to managed care changes the basic nature of control of the health care system. In unmanaged care, the incentive is to provide more care. In managed care, the incentive can be to provide less care and hold down expenses, because the managed care organization receives the same fee no matter what: An extra sonogram comes out of profits.

In managed care, the insurance plan has significant influence over choice of doctor and hospital, and has much influence over how care is provided. Managed care organizations may employ their own providers, but more typically contract with doctors, hospitals, clinics, laboratories, etc. to create their own networks.

As managed care organizations capture an ever-larger share of the total health care market, hospitals and physicians enter cost-cutting wars to win places in managed care networks. Because there are excess hospital beds in most areas, hospital administrators are especially vulnerable to this pressure.

Under managed care systems, health plans receive a pre-set fee to meet all medical services. Increasingly, managed care organizations are paying doctors and hospitals "capitation" payments — a flat per-person fee, regardless of how much medical care is provided. This cuts the amount of money that the insurance plan pays for overall services.
Bar Chart showing The Growth of Managed Care


"We're not going to have decent health care in this nation until frontline workers get into the debate about what American health care ought to be. To the insurance industry, quality care became defined as being able to choose your own doctor. But that, it seems to me, isn't nearly the image that comes to mind for quality care. Quality care means making sure you've got adequate numbers of nurses, adequate numbers of other support personnel that go into making a good hospital or facility."
William Lucy,
International Secretary-Treasurer

As a result, hospitals are scrambling to reduce costs so that they can bid a lower price and win more managed care contracts. For example, in California (a bellwether in the transition to managed care as three-fourths of all covered people are in HMOs) the going rate paid by HMOs for heart bypass surgery is $15,000, including all doctor, hospital and other fees. In contrast, the cost for bypass surgery under traditional insurance in much of the country can easily be $45,000 or more.

In another drive to lower costs, hospitals also limit the length of patient stays. This can translate into a lower hospital census (number of occupied beds). UNA/AFSCME members who work in hospitals know that the patient census is the principal measure that drives most hospital budgets. Lower census means lower revenues, an incentive for hospital administrators to lower costs. And since labor costs generally range from 45-55% of all hospital expenditures, cost-cutters frequently make personnel the first target for reductions. Many hospitals have started opening administrative and medical departments on weekends in an effort to discharge people sooner. As a result, there is pressure on doctors to limit hospitalizations or discharge patients too quickly.

Another major trend stemming from managed care — combined with advances in medical technology — is the fact that more and more care is being provided in outpatient settings. Proponents of managed care say that preventive care leads to improved medical outcomes and fewer hospitalizations, reduced length of stays and charges.

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