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This Congressional Budget Office (CBO) memorandum updates and revises two earlier CBO reports--a June 1992 CBO staff memorandum, "The Effects of Managed Care on Use and Costs of Health Services," and an August 1992 CBO staff memorandum, "The Potential Impact of Certain Forms of Managed Care on Health Care Expenditures." This memorandum surveys the latest research on the effects of various kinds of managed care and summarizes CBO's assessment of that evidence.

The memorandum was written by Sandra Christensen of CBO's Health and Human Resources Division, under the direction of Nancy Gordon and Linda Bilheimer. Marsha Gold, Jay Noell, and Carla Pedone offered helpful suggestions. Sherry Snyder edited the manuscript and Christian Spoor provided editorial assistance. Sharon Corbin-Jallow arranged the final version of the manuscript. Questions about the analysis may be addressed to the author.
 
 

SUMMARY

INTRODUCTION

SAVINGS FROM UTILIZATION REVIEW

SAVINGS UNDER PREFERRED PROVIDER ORGANIZATIONS

SAVINGS UNDER HEALTH MAINTENANCE ORGANIZATIONS

IMPACT OF MANAGED CARE ON THE LEVEL OF SPENDING

IMPACT OF MANAGED CARE ON THE RATE OF GROWTH IN SPENDING

APPENDIX - DEFINITION OF TERMS RELATED TO MANAGED CARE
 

TABLES
1.	Percentage Change in Costs from Utilization Review Compared with Unmanaged Care
2.	Percentage Change in Costs Under Fee-for-Service Plans After a Preferred Provider Option Is Put in Place
3.	Percentage Change in Use of Services Under Health Maintenance Organizations Compared with Fee-for-Service Plans
4.	Average Percentage Reductions in Use Assumed for People in Managed Care Plans Compared with Those in Unmanaged Fee-for-Service Plans
5.	Estimated Savings in 1990 Expenditures as a Proportion of Potentially Manageable Expenditures
6.	Estimated Savings in 1990 Expenditures as a Proportion of Alternative Health Expenditure Totals

SUMMARY

This memorandum updates previous assessments by the Congressional Budget Office of the effects of various kinds of managed care on health care costs. The latest research in this area supports two major findings.

First, managed care programs, especially health maintenance organizations (HMOs), provide lower-cost health care that appears to be generally as good as the care typically provided in the fee-for-service (FFS) sector. However, the amount by which HMOs reduce per-patient costs compared with FFS care is often overstated. Some studies do not adequately control for the typically healthier people who enroll in HMOs compared with people in the FFS sector, and so the lower costs of care observed for HMOs reflect the favorable characteristics of the enrolled population in addition to the cost-reducing effects of the HMO form of managed care. Further, some studies rely on results from selected HMOs that are more effective than is typical for HMOs nationwide, so that reported savings are higher than would be obtained on average for all HMOs in operation. Finally, some studies compare costs for HMOs with costs in a fee-for-service sector that lacks any managed care; because nearly all FFS plans now have some elements of managed care, the relative advantage of HMOs compared with the current FFS sector is decreasing.

Recent nationally representative evidence (for 1989) indicates that the most effective HMOs can reduce use of services by about 12 percent compared with unmanaged care, or by about 9 percent compared with the FFS sector, which is a mix of managed and unmanaged care. When the performance of current HMOs (plans with varying levels of effectiveness) is considered, evidence indicates that they reduce use of services by an average of about 7 percent compared with unmanaged care, and by an average of about 4 percent compared with the FFS sector.

The second major finding is that under certain conditions, the independent practice association (IPA) form of HMO can be as effective as group- or staff-model HMOs in providing low-cost care, but the necessary conditions are not often met. The IP As that are most likely to approach the effectiveness of the best group/staff HMOs are selective about using cost-conscious providers, maintain an effective network for information and control, place providers at financial risk, and generate a substantial portion of each provider's patient load.

Many IP As in the current mix do not have the above characteristics, however, and do not match group/staff HMOs in effectiveness. Recent nationally representative evidence indicates that IP As reduce use of services by an average of about 3 percent compared with unmanaged care, or by less than 1 percent compared with the FFS sector.

Although HMOs appear to reduce the level of health care costs, there is no credible evidence that they also reduce the rate at which costs subsequently increase. The claim that the rate of growth is lower for HMOs than for FFS plans is based on a comparison of growth in premiums over the past few years. That evidence, however, is too weak to support any conclusion about the relative growth of costs for different types of plans. A valid comparison of costs among plans must look at total costs, including patients' out-of-pocket costs for services that are typically covered. Because slower growth of premiums for HMOs in recent years has been at least partly offset by higher growth in HMO enrollees' out-of-pocket costs for services, one cannot conclude that total costs per HMO enrollee have grown less rapidly than costs per enrollee in FFS plans. In fact, total costs per enrollee may have grown as rapidly or more rapidly in HMOs than in FFS plans. In the absence of reliable data on changes in total costs for HMOs compared with those for FFS plans, the prudent assumption to make is that the rate of growth in costs is about the same. In any case, a focus on whether or not managed care reduces the rate at which health care costs grow subsequent to its initial effect on the level of costs is probably misplaced, because the two effects are impossible to distinguish empirically when insurers are continually adopting new elements of managed care.

Nonetheless, effective forms of managed care might slow the rate of growth in costs if they were part of a comprehensive restructuring of the health care system that incorporated strong incentives to compete on the basis of price and quality. Under such circumstances, managed care might more consistently eliminate unnecessary or ineffective care. Further, it might facilitate greater control over the adoption of new cost-increasing technology and might encourage the development of cost-reducing alternatives.

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