Private Utilization Review
| Publication year | 1991 |
| Citation | Vol. 14 No. 03 |
I. Introduction
To cope with rising health insurance premiums of the last decade, employers, local and national business coalitions, and private insurance carriers have undertaken serious efforts to more effectively manage the costs of providing health care coverage for their employees. A principle component of such cost management strategies is hospital utilization review (UR).
UR is a process undertaken by employers and insurers to monitor effective use of health care by requiring third-party evaluation of the need for medical treatment. The underlying belief of UR is that health care costs can be controlled, in part, by decreasing or eliminating unnecessary care.(fn1) Although a precise definition of unnecessary care is elusive,(fn2) such care generally includes those services that are in excess of the needs of the patient.
Some studies have shown that unnecessary care occurs frequently and absorbs excessive funds.(fn3) In identifying the sources of unnecessary care so as to prevent excessive spending, UR studies have targeted hospital use.(fn4) Hospital use has been the most closely studied aspect of the health care system mainly because hospitals provide the highest cost services(fn5) and hospitals are fewer in number than physicians or other health care providers.(fn6) Therefore, while there are some UR programs that focus on managing the use of outpatient services, UR has typically focused on controlling the unnecessary use of hospitals.(fn7)
Today, UR is the most widely used approach in controlling or eliminating overuse of hospital services. According to a 1990 survey of 776 of the largest employers in the United States, 74 percent use UR as part of a health care cost management strategy.(fn8) A similar survey in 1985 showed only 47 percent had implemented UR.(fn9) According to the Health Insurance Association of America, about half of all United States businesses use some form of UR.(fn10)
Employers (large and small) are the primary purchasers of private UR services. They purchase services from firms which only offer UR services or from insurers which offer either their own UR services or contract for UR services from freestanding vendors. Most national insurance carriers offer UR services in conjunction with claims administration services. UR services are integrated into a variety of health plan designs, including indemnity plans, preferred provider organizations (PPOs) and health maintenance organizations (HMOs).(fn11)
Despite the tremendous increases in health care costs and the resulting growth of UR, there is disagreement about the effectiveness of UR in controlling health care costs. There are two general views on the value and effectiveness of private UR programs. The first view is that UR is a positive factor in the health care system, but it has some problems which can be resolved to improve the process. The second view is that, while theoretically UR is positive, its implementation is an unnecessary administrative burden on the health care system and an intrusion into the practice of medicine. The view taken largely depends on the specific types of programs one has experienced, and, because programs vary widely, both views are valid.
This Article describes the history of private UR and provides illustrations of successes, problems and controversies. The Article concludes with some suggestions and prescriptive advice for those who are likely to encounter UR, either through work with particular clients or directly as part of a private benefit plan.
II. Background on Public and Private UR
Historically, in both the public and private sectors, third party payors (e.g., the government and employer-sponsored insurance plans) paid providers on a percentage of charges or fee-for-service basis. As long as services were "covered," (fn12) the third party would pay, and the third party payor required little information from the provider beyond a diagnosis and the total charges. In typical employer plans, insurance covered 80 or 90 percent of charges and the employee paid the remainder subject to deductibles and annual out-of-pocket expense limits. Providers, primarily physicians, controlled both the volume and price of services rendered. Third party payor questions were generally limited to coverage issues, deductibles, and preexisting conditions.
The earliest attempts to control escalating health care costs in the 1970s began in the public sector, and specifically in the Medicare program. With Medicare, the responsibility for performing UR was vested with hospitals and insurance carriers participating in the Medicare program.(fn13) Such efforts largely failed to control costs because the hospitals and physicians had no real incentive to provide fewer services.(fn14) Further, the insurance carriers monitored the hospital performance at infrequent intervals.
Drawing largely on the experience of medical care foundations, in 1972, the Professional Standards Review Program (PSRO) was implemented.(fn15) PSROs were federally-funded private, non-profit corporations formed by state and local groups of practicing physicians following requirements laid out by law. PSROs were charged with assuring that the services provided under the Medicaid, Medicare, and Maternal and Child Health Programs were medically necessary, met professionally recognized standards of care, and were provided in the most appropriate setting.(fn16)
PSROs were fully implemented in most states by the end of the 1970s.(fn17) Despite some successes,(fn18) variations in local PSRO performance, continued increases in public sector costs, and the development of new Medicare payment policies, led to the replacement of the PSRO program with the current Peer Review Organization (PRO) program. The PRO program is designed to monitor quality and costs under Medicare's Prospective Payment System (PPS).(fn19)
In contrast to PRO review, PSRO review programs were applied prior to or concurrently with the delivery of services. Under the Medicare PPS, PRO review is designed to be applied primarily after services are delivered and after payment has been made. With the change in the public sector focus of review (from prospective to retrospective), employers found PROs somewhat less attractive. This conflict in review approach coupled with the increasing private demand for UR led to the development of the many private review programs which exist today.
As public UR spread, and controls were tightened on public programs such as Medicare and Medicaid, providers shifted more costs to private insurance plans which were largely uncontrolled. As a result, by the late 1980s, when the national health care bill was almost 12 percent of the Gross National Product,(fn20) the private sector was financing nearly 60 percent of these enormous health care expenditures.(fn21)
This cost shifting from public to private payers intensified the pressure on employers. Although consistent national data are iiot readily available, a few employers have published reports on their specific increasing health care costs. Two companies which have published such reports are Deere and Company and Chrysler Corporation.(fn22) Between 1972 and 1977, the direct costs of providing health care benefits to Deere and Company's 200,000 employees, dependents, and retirees rose 300 percent, from $20 million to $60 million annually.(fn23) By 1983, health care expenditures accounted for 11 percent of Deere and Company's total direct labor costs for production.(fn24) Similarly, in 1988, Chrysler reported a 14 percent increase in health care costs, more than triple the consumer price index.(fn25)
Because of rapidly rising health care costs, health benefit plans have become very valuable in attracting employees and in negotiating collective bargaining agreements. As such, employers faced with rising health care costs began to look for ways to reduce costs without cutting back overall benefit levels. One way to achieve these apparently contradictory goals appeared to be by eliminating unnecessary hospital use.
Estimates of unnecessary hospital use indicate that between 10 and 20 percent of hospital admissions and between 20 to 30 percent of hospital days are not medically necessary.(fn26) Independent evaluations performed on behalf of individual employers revealed that between 10 and 47 percent of all hospital days were not medically necessary.(fn27) Thus, elimination of unnecessary hospital use has the potential of reducing overall benefit plan costs without requiring the employer to make major alterations in the overall benefit plan design or delivery system.(fn28)
Some private sector efforts have been quite successful. One comprehensive study found that private UR reduced hospital admissions by 13 percent, total days by 11 percent, and total medical expenditures by 6 percent.(fn29) Additionally, high yield comprehensive medical cost containment programs have resulted in 15 to 30 percent savings in medical costs.(fn30) Such programs have substantial promise for achieving the elusive goals of controlling health care costs without compromising the quality of care provided to patients.
III. The Structure of...
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