*26 III. THIRD-PARTY COST CONTAINMENT MEASURES

As discussed, many entities and individuals are designing and implementing managed care products. The identity of the organizers of a particular managed care product may have profound effects on the quality of care under the product and on the techniques used to shift the risk to the physician, hospital, or other provider. Yet, there is a common focus for all managed care products: To succeed in reducing health care costs and generating profits, the managed care product must consistently maintain effective cost containment efforts. [FN107] Cost containment effectiveness depends on implementing a strict utilization review process enforced by appropriate risk-shifting techniques. [FN108] Section A of this Part defines utilization review and outlines utilization review structure. Section B describes the way managed care products employ strict enforcement of utilization review, through financial risk shifting, to control cost. Section C outlines the effects of cost containment measures on health care, including problems of assuring quality of care in the managed care product and maintaining the ethical basis of health care. Together, these sections provide an overview of the structure, operation, and effects of managed care products that is necessary to appreciate the need for a compensation system that encompasses managed care injuries.

*27 A. Utilization Review

1. Utilization Review Defined

Utilization review (UR) is the process by which an organization determines if medical services are appropriate and necessary. Managed care products perform UR by examining providers' authorization and furnishing of services to detect variations from the norm that may indicate unnecessary or inappropriate care. [FN109] When the third-party payer detects variation, it either does not pay the provider's charges (retrospective UR [FN110]) or refuses to authorize the provision of the service (concurrent UR [FN111] and prospective UR [FN112]).

Utilization review takes several forms:

(1) preadmission review for scheduled hospitalization, [FN113]

(2) admission review for unscheduled hospitalization, [FN114]

*28 (3) second opinions for elective surgery, [FN115]

(4) concurrent review, [FN116]

(5) gatekeeping by primary physician, [FN117] and

(6) retrospective claims review. [FN118]

Despite all the current interest, utilization review is not new. In the 1970s, Congress established Professional Standards Review Organizations (PSROs). [FN119] These PSROs were composed of physicians and were responsible for monitoring Medicare quality of care and conducting utilization review of Medicare services. [FN120] Medicare's PSROs, however, had limited effectiveness. In 1982, Congress reorganized the PSRO program, replacing PSROs with utilization and quality control Peer Review Organizations (PROs). [FN121]

2. Utilization Review Structure

Utilization review may be conducted by providers, third-party payers, or independent agencies. The provider who conducts utilization review has a legal or a moral obligation to prevent overutilization, but a financial desire to fill the beds. [FN122] From the third-party payer's point of view, the physician often appears to be the least concerned with cost effectiveness because the physician is likely to authorize more services than appear necessary to the third-party payer. On the other hand, *29 with a strong incentive to cut costs, the third-party payer may err on the side of denying needed services. [FN123] Not even independent agencies are truly independent when third-party payers are paying the bills for the agencies' services. The agencies' incentive is to maintain their contractual relationships with the third-party payers. Thus, with the possible exception of the provider, all entities who conduct utilization reviews focus on a desire to decrease the use of medical services, not on a desire to increase the quality of care. [FN124]

It is empty and unrealistic to declare that the physician must act and be accountable for the patient's best interest while society allows, even encourages, the physician to act in the best interest of third-party payers. If “a man cannot serve two masters,” [FN125] neither can the physician. One need not be a clairvoyant to know which master will dominate.

The transaction between physician and patient becomes a commodity transaction. The physician becomes an independent entrepreneur or the hired agent of entrepreneurs and investors who themselves have no connection with the traditions of medical ethics. The physician begins to practice the ethics of the marketplace, to think of his relationship with the patient, not as a covenant or trust, but as a business and a contract relationship.... Medical knowledge becomes proprietary; the doctor's private property to be sold to whom he chooses at whatever price and conditions he chooses. [FN126]

Yet, the utilization review process is not the real culprit. Risk-shifting mechanisms cause the physician to change her pattern of practice from overutilization to appropriate utilization at best and underutilization at worst. Without financial risk shifting, utilization review would be nothing more than a guard dog without teeth.

*30 B. Strict Enforcement Through Financial Risk Shifting

Third-party payers seek to manipulate provider behavior by shifting the risk of financial loss from the third-party payers to providers. Financial risk shifting can arise in a variety of arrangements: ownership interest, joint venture, or a bonus arrangement. [FN127] The risk shifting can also be in the form of rewards, [FN128] penalties, [FN129] or both. [FN130] The degree of risk assumed by the provider varies with the type of payment arrangement. Traditional fee-for-service practices are at one end of the spectrum (no risk shifted), and traditional HMOs are at the other (full shifting of the risk). [FN131] PPOs fall in the middle.

The most common means used by third-party payers to spread financial risk to providers [FN132] are capitation (set fee per enrollee), [FN133] withholding (retaining a percentage of payment *31 due to reward or punish use trends at year-end), [FN134] discounted fees for services (provider required to give a discount to the third-party payer on amounts due), [FN135] per diem payments (flat fee per day per patient), [FN136] and profit sharing. [FN137] To shift the risk to hospitals, third-party payers also use per case mechanisms [FN138] and capitated payments per patient. [FN139]

While the form may vary, the penalties have similar effects. For instance, third-party payers indirectly penalize physicians by giving them less profit or directly penalize them by reducing capitation payments each time they make inappropriate referrals. Not all risk-shifting mechanisms, however, have the same impact. Some have a greater potential than others to cause the physician to act inconsistently with the patient's best interests. [FN140] For instance, mechanisms like physician diagnosis-related groups and capitation require the physician to bear individual*32 loss. [FN141] Consequently, these methods produce the greatest risk of undertreatment.

Because many diseases and health conditions have wide variation in treatment, the loss to the physician can be significant. [FN142] On the other hand, if the financial risk shifting places the risk on the organization employing the physician, that risk shifting is less likely to interfere with the physician's attempts to act in the patient's best interest. [FN143] Finally, cost containment efforts that place explicit restrictions on the physician's decision making are less likely to result in injury than cost containment efforts whose effects may be hidden from the patient, from the physician, and from society. [FN144]

Most plans do not place providers at individual risk. Nevertheless, third-party payers encourage competition among providers by basing the provider's financial rewards or penalties on the utilization experience of the individual provider in relation to the group.

At what point does a financial incentive create a conflict of interest, in which physicians' behavior may be motivated substantially by pecuniary self-interest rather than by the patient's best interest? .... As [managed care products] continue to grow and as more physicians continue to sign contracts with them, these concerns will intensify. [FN145]

C. Effects of Cost Containment Measures on Health Care

Cost containment activities affect health care systems in several ways. First, cost containment can affect the quality of care received by patients. Second, financial risk shifting changes the fundamental ethical basis of the health care system. Finally, cost containment potentially restricts access not only to types of services but to minorities, underserved populations, and others who already have limited access.

*33 1. Assuring Quality Care in the Managed Care Product

Quality health care requires a high level of health care services that assist an individual in remaining free from physical and mental incapacity while maximizing social capacity. In a third-party payer-driven market, the main challenge is structuring quality assurance activities to protect quality care in the face of counterproductive financial incentives. [FN146] The Council on Medical Service for the AMA (the Council) defines high quality care as that which “consistently contributes to improvement or maintenance of the quality and/or duration of life.” [FN147] Another definition of quality care is the “component of the difference between efficacy and effectiveness that can be attributed to care providers, taking into account the environment in which they work.” [FN148] Both definitions are strikingly nonspecific and create, rather than solve, problems of definition. In an effort to help clarify its definition, the Council established eight factors that it believes are necessary for quality care delivery:

(1) the production of optimum improvement in the patient's physical condition and comfort;

(2) the promotion of prevention and early detection of disease;

(3) the timely discontinuation of unnecessary care;

(4) the cooperation and participation of the patient in the care process;

(5) the skilled use of necessary professional and technological resources;

(6) concern for the patient's welfare;

(7) efficient use of resources; and

(8) sufficient documentation of medical records to ensure continued care and for evaluation of the care by peer review. [FN149]

Physicians have long had a concern for quality care. [FN150] Many believe that the quality of care must suffer to achieve cost *34 control. [FN151] Unfortunately, there is very little information available about quality assurance in managed care products. [FN152] The absence of well-defined standards in an industry bent on cutting costs poses serious problems for patients. [FN153] Historically, we have seen how the profit motive worked to increase utilization. [FN154] There is no reason to think that similar dysfunctions will not occur in a system designed to enhance profits by decreasing utilization. Cost containment is the raison d'être for third-party payers. Without comprehensive utilization review and financial risk shifting, third-party payers cannot contain costs. [FN155] But if cost containment becomes simply an excuse for sacrificing quality care, those whose benefit should be the focus of the entire system-the patients-will suffer.

To argue that patients have a choice and can seek care outside the plan is unrealistic and even irrational. In reality, many individuals must forego uncovered treatment because of financial constraints. [FN156] Furthermore, providers influenced by financial concerns may not even offer uncovered treatment to particular patients. [FN157]

Some argue that if society intends to influence provider behavior and thus create a risk to the individual patient, reasonable behavior based on that influence should be a defense to a medical malpractice claim. [FN158] If reasonable cost containment *35 was a valid defense to malpractice, however, what would happen to the patient injured by cost containment efforts? It is unfair to both encourage and entice providers to practice cost control and then to hold them individually responsible for consequent injuries. But it is no more fair to allow the injuries of innocent patients to go uncompensated. Current legal theories are neither adequate to encourage third-party payers to act cautiously, nor are they adequate to shift the burden of proof. [FN159] Thus, if legal theories remain unchanged, it appears inevitable that the quality of care will change, resulting in significant burdens on patients and providers. These burdens will appear unless third-party payers are held responsible for structuring systems that maintain quality care while containing costs.

Yet, these quality care systems do not appear to be developing. [FN160] An overwhelming obsession with cost containment has caused developers of managed care products to essentially ignore quality assurance. The products, specific and detailed in their utilization requirements, generally address the issue of quality care in a vague and nonspecific manner. For instance, typical contract language states that “the provider is solely responsible for the quality of services rendered to a member.” [FN161] This shifting of total responsibility for quality to providers is unacceptable. Third-party payers are using financial incentives to deliberately influence providers' behavior to emphasize cost containment, possibly at the expense of quality care, while at the same time contractually passing the buck for the consequences of that emphasis. The government has made only minimal efforts to regulate managed care products. Instead, because managed care products focus on cost containment, the *36 government has encouraged their growth and is reluctant to regulate. [FN162]

If society desires to reduce costs by changing providers' behavior, it must also establish legal safeguards to deal with predictable adverse consequences of that altered behavior. Several consequences are predictable: (1) Third-party payers will place increasingly effective utilization review and risk-shifting requirements on providers to cut costs and to increase profits; (2) Some third-party payers will attempt to increase profits by placing increasingly severe penalties and incentives on providers; [FN163] (3) Some providers will respond to the risk-shifting incentives by cutting out not only unnecessary services but also by eliminating some marginally necessary services and even some medically necessary care; and (4) Some determinations by utilization review agencies will be made arbitrarily or solely on the basis of cost. It is also predictable that some individuals will be injured because they do not receive necessary care. Given these predictable problems, we should not allow a system to develop that places the risk of injuries from cost containment on the individual rather than on society.

2. Maintaining the Ethical Basis of Health Care

There is a danger that financial risk shifting will undermine the fundamental ethical basis of the health care system. Historically, the health care system has been based on a belief in the sanctity of the physician-patient relationship. Physicians have had an ethical and legal responsibility to act in the patient's best interest. In addition, although access has not been actually assured, Americans have often articulated a belief that access to health care is a fundamental right. [FN164] Any risk shifting by third-party payers to physicians and hospitals will necessarily impact these beliefs. [FN165] Yet, the third-party payers' *37 inducements to physicians are, as one author has stated, “blatantly unethical.” [FN166]

Without a mechanism for quality control, it [is] blatantly unethical to entice physicians to alter their approach to patient care through either the prospect of personal financial gain or peer-group pressure. A patient comes to a physician to receive an expert opinion-an objective assessment of a particular problem or the best therapy. To have that opinion colored by external incentives ... creates an unethical conflict of interest that is potentially dangerous to the patient. In addition, [it] further [deteriorates] the medical profession in the public opinion.... [The] patient's welfare must be the physician's main concern. [FN167]

The ethical basis of the health care system is necessarily founded on a certain amount of trust. [FN168] When a patient seeks care from a physician, the patient must believe that the physician will act in the patient's best interest and will not put other interests before that of the patient. The patient usually does not have the training to judge the reasonableness of the physician's decisions about her health care needs and alternative means of meeting those needs. [FN169] Thus, the physician, not the *38 patient, combines the components of care into treatment. It is essential that the patient trust that the physician will primum non nocere-first do no harm. [FN170]

This trust will clearly be undermined by cost containment efforts. [FN171] Even the suspicion that physicians no longer act in patients' best interest will cause anxiety and increase distrust. When there are actual injuries, the distrust will be reaffirmed and intensified. As the distrust becomes more and more significant, distrust may further exacerbate any unfavorable health outcomes.

3. Maintaining Access to Health Care

Changing the payment structure and the underlying system motivations not only affects quality and the physician-patient relationship, it also negatively affects access to health care. This is no small issue because access to health care is already a significant problem for many Americans. [FN172]

Access problems caused by cost containment efforts occur in several ways. The first occurs when plans have systemic variations in the level of financial protection for the individual against health care costs. [FN173] Under those circumstances, access will be affected as patients' ability to afford health care changes. Furthermore, as plans further shift financial risk to providers, patient access will be affected as providers who are intent on avoiding cost containment penalties or obtaining cost containment rewards do not order services for patients. [FN174] *39 Thus, the effectiveness of a plan's cost containment efforts will affect the patients' ability to obtain certain health care services. In addition, third-party payers can control costs by severely limiting the availability of certain resources. [FN175] Finally, access will be limited by differences in the quality of services. If patients perceive a managed care product to provide poor services, they are likely to forego the services, even though no other services may be available. [FN176]

*40 A utilization review's prospective decision is fundamentally different in its impact on the beneficiary than a retrospective decision. [FN177] While in both instances, patients theoretically know what treatments their plan will pay for, the plans' effects on patient behavior are significantly different. In the retrospective system, [FN178] a patient makes a decision about medical care and receives the medical care with only a potential risk of disallowance. [FN179] On the other hand, in a prospective system, [FN180] a patient knows in advance of treatment that the third-party payer will not pay for the recommended treatment. The patient's only chance of recovering the cost of that recommended treatment, if she can now even obtain it, is in a challenge to the third-party payer's decision. [FN181] Thus, a patient in the prospective system is less likely to pursue treatment options not authorized by the plan. [FN182]

By shifting incentives and creating the disincentive that results from having one's own finances at risk, the new methods of provider reimbursement turn providers into gatekeepers for the health care system. Their decisions would no longer be based on medical criteria alone (i.e., “does this medicine have something to offer this patient?”) but would now take into account their own financial risk if they admit patients into the system whose care costs more than insurance will pay. [FN183]

These considerations may undermine both the patients' trust in the system and the patients' access to care.

D. Summary

No matter how risk shifting reimbursement schemes are viewed, they will eventually alter the perceptions and expectations of society, physicians, patients, and third-party payers about what is owed to whom, what treatments are appropriate in what circumstances, and even what qualifies as a disease. [FN184] These altered perceptions may create a denial of access on the ground that a patient's condition is not meaningful in cost containment*41 terms, without regard to an assessment of whether the patient's condition is individually meaningful. If a denial of appropriate medical care results in injury because of cost containment efforts, who shall bear the burden? If cost containment is an important social goal, then the cost of injuries created by it should be spread throughout society. [FN185] Unfortunately, traditional tort theories of liability are inadequate to spread the cost throughout society, promote safety, or compensate patients.