Question

True Master Plan (TMP) is a managed care company that provides and finances health care services for employees of DigiTech Media, Inc. Approximately 5,000 employees at DigiTech Media are currently enrolled in TMP’s health insurance plan. The number of enrollees has increased over the past year as DigiTech Media continued to expand its workforce, and more and more DigiTech Media employees have elected to receive this benefit. DigiTech Media currently pays TMP the full cost of health insurance for its employees. This insurance provides comprehensive coverage for inpatient and outpatient hospital care, surgical services, physician office visits, and other services (e.g., x-rays). The only cost to employees is a $15 copayment for each physician office visit. Frank Glen is the Director of Strategic Planning and Forecasting at True Master Plan. His key function is to direct the overall development and analysis of all strategic financial planning initiatives relating to TMP’s managed care programs. His staff is involved in many activities, including preparing periodic reports of the costs incurred under the DigiTech Media account. Every time a DigiTech Media employee uses health care services, information about the type of service and the relevant costs are recorded in a database. Mr. Glen recently directed his staff to perform a financial analysis of the current utilization and costs incurred under the DigiTech Media account. Bad News Jane Paul personally delivered her summary of utilization on the DigiTech Media account to Mr. Glen (See Exhibit 1). The data, he noted, indicated a sharp increase in number of physician office visits over the past month. He remarked, “The DigiTech Media employees’ use of outpatient physician services has been going up for the past six months. What’s going on?” He asked Ms. Paul to provide him with the enrollment numbers to see if the increase in utilization of physician services was primarily due to the change in the number of employees enrolled in the health plan. “No problem,” she replied. “I have already put the last six months’ weekly statistics into a spreadsheet.” Mr. Glen was concerned about TMP’s profitability. Last year, TMP negotiated with DigiTech Media to charge a fixed premium of $250 per employee per month. The total premium revenue is allocated as follows: 55% to hospital and surgical services, 30% to physician visits, and 15% for other services, administration, and profit. These allocations are used to establish budgets in the different departments at TMP. The DigiTech Media contract would expire next month, at which time TMP would need to renegotiate the terms of its contract with DigiTech Media. Mr. Glen feared that TMP would have to request a sharp rate increase to remain profitable. TMP’s monthly cost of administering the health plan was fixed, but the increases in the use of health care services were eroding TMP’s profits. He suspected that other health plans were planning to increase premiums by 5-10 percent, which was reasonable given the recent statistics on national health expenditures. A report from 2004, the most recent he could find, indicated that total national health expenditures rose 7.9 percent from 2003 to 2004 -- over three times the rate of inflation. Mr. Glen called in the rest of his staff to assist him in devising a strategy for renegotiating the DigiTech Media account. “If possible, I would like to figure out how we can continue providing this service for the rate we established last year. I’m afraid if we attempt to increase the per member premium, DigiTech Media will contract with another health insurer. What other options do we have?” Neil Gordon, who works in Membership Marketing, reported that he recently conducted a survey of cost control mechanisms used by other health plans. His analysis revealed that TMP’s competitors are increasing their use of these mechanisms, which include copayments, waiting periods, preauthorization requirements, and exclusions on certain health care services. 2 “One of the problems, in my opinion, is that the DigiTech Media employees have nearly full coverage for all their health care services,” remarked Gordon. “The DigiTech Media employees should pay some part of their health care services out-of-pocket, so that they share an incentive to stay healthy. TMP only charges a $15 copayment, but many other health insurance plans require that enrollees pay $20 – 25 for each physician office visit. A higher copayment will help us reduce the use of physician services.” He showed them the results from a national study that showed a significant relationship between the amount of a copayment and the number of visits to a physician (See Exhibit 3), and recommended that Mr. Glen consider implementing a larger copayment for each physician visit when the contract with DigiTech Media is renegotiated. Rose Garcia, who works in Provider Relations, disagreed. “I don’t think a higher copayment is going to reduce the level of physician visits. The demand for health care services is a derived demand because it depends on the demand for good health. People don’t necessarily want to visit their physician, but they often have to in order to stay healthy. If we want to cut our costs, we will have to figure out how to pay the health care providers less.” TMP currently pays for health care services on a fee-for-service basis. Most of the area hospitals and physicians “participate” in TMP’s health insurance plan. When DigiTech Media employees obtain health care services from participating health care providers, the providers are reimbursed for their costs directly by TMP. Several factors have increased health care costs over time, including the growing availability of medical technology, such as magnetic resonance imaging (MRI), and increased medical malpractice litigation. Ms. Garcia suggested that Mr. Glen consider negotiating with physicians to lower the costs of the services provided. “I’ve heard that some managed care plans have cut deals with physicians to lower their charges by 10-25 percent,” she said. “Physicians have accepted these deals because if they don’t, they could be cut out of the health insurance plan and they could lose all their patients.” Mr. Gordon conceded that this might be possible, but expressed his concern that if participating physicians accepted a lower amount per visit, they might reduce the quality of care they provide to TMP’s members. Mr. Glen dismissed his staff. Eager to resolve this issue, he phoned your consulting company for assistance. TMP’s executives would need a full report of the current situation and evaluation of his staff’s suggestions to either (a) increase the copayment, or (b) implement a reduction in charges for physician office visits.

question:

In addition to the options suggested by his staff, Mr. Glen recently read an article about

rationing health care services as a method of controlling costs. The general idea of rationing is that

more expensive treatments are excluded so that basic health benefits can be provided to a wider

population. Health plans can implement rationing by limiting the types of services they will cover.

While they commonly exclude coverage for experimental treatments and cosmetic surgery, many

are now considering adding physical therapy, mental health services, and therapies that treat fatal

conditions to the list of excluded services. Would you recommend that Mr. Glen consider this

approach? Discuss the ethical considerations.

Answer 1

Yes, Mr. Glen should consider the idea of rationing health care service as a method of controlling costs. I think if Mr. Glen exclude coverage for experimental treatments and cosmetic surgery then it will not put a large impact on the DigiTech Media because these treatments are rarely wanted by the employees. They need these type of services when they face serious accidents or suffer from any serious disease. So investing on such treatments for a long period is just a waste of money for the DigiTech Media employees. So it is better to exclude such treatments and include something which is essential for them, like adding physical therapy, mental health services and therapies that treat fatal conditions. Physical and mental therapy can avoid many serious diseases by keeping your body fit both physically and mentally. From the ethical point of view this method of cost control is good to implement as there is no cheating in anybody's service involved in the TMP's health insurance plan. There is transparency in excluding and including certain services in the coverage list. So this method of cost control can be considered as an ideal method of controlling costs.

According to one staff of the TMP increase in the co-payment will control costs but this is not true. A slight increase in co-payment may discourage employees to take the insurance plan, they may want to stop the service. DigiTech Media can switch to other health insurance company who can provide them good benefits at a reasonable price.

Again in the opinion of another staff, a reduction in charges for physician office visits will control costs but this is not right from ethical point of view. If Mr. Glen consider negotiating with physicians to lower the costs of services provided, then physicians may agree with it in order to retain all their patients but they might reduce the quality of care. They may reduce the time that they pay to check a patient and may not be so friendly with the patient what they were previously doing. Here Mr. Glen's apprehension of reduction in quality care by the physicians is right. Reduction in quality care will not be accepted by the DigiTech Media, they may cancel the contract.

So the two suggestions made by the staffs of TMP are not appropriate to implement.