The Abyss of Managed Care and Its 40-year Impact on Payer/provider Relations

• Publication year: 2015
• Citation: Vol. 2015 No. 2
• Author: Craig B. Garner

The Abyss of Managed Care and its 40-Year Impact on Payer/Provider Relations

Craig B. Garner¹

Craig Garner is an attorney and health care consultant, specializing in issues surrounding modern American health care in its current climate of reform. Between 2002 and 2011, Craig was the Chief Executive Officer at Coast Plaza Hospital. Craig is also a Fellow with the American College of Healthcare Executives.

"God hates violence. He has ordained that all men fairly possess their property, not seize it."²

Modern American health care affords every hospital patient the inalienable right to emergency treatment,³ although this same system has yet to create any parallel infrastructure beyond the clinical delivery of such care. While today's emergency department physicians across the nation have access to cutting-edge, integrated technology-based tools⁴ designed to improve patient outcomes by combining advances in medicine with evidence-based clinical guidelines,⁵ the science of overseeing managed care patients often appears to be light years removed from the era in which it was born.⁶ As a result, American health care has become a system of fundamental brilliance that finds itself limited by gross inefficiencies,⁷ a combination that has led to a symbolic, if not actual, nationwide revolution.⁸

At their core, the 2010 Patient Protection and Affordable Care Act⁹ and the amendments set forth in the 2010 Health Care and Education Reconciliation Act¹⁰ address the concept of patient access, one of health care's greatest challenges in recent years.¹¹ Notwithstanding the 961¹² regulatory pages known as the Affordable Care Act, or "Obamacare,"¹³ the relationship between the patient and the entity responsible for covering the cost of care has received surprisingly less attention in comparison.¹⁴

In California, the recent decision in Children's Hospital Central California v. Blue Cross of California¹⁵ has been seen by many as the culmination, and by some as the resolution, of conflict between providers and payers within the managed care system.¹⁶ This article focuses on events preceding the Children's Hospital Central California decision, how the managed care system of private payers has evolved over the past 40 years, and the challenges faced by payers and providers simply trying to coexist.

The Rise of the HMO

Henry J. Kaiser was responsible in large part for the growth and eventual success of health maintenance organizations ("HMOs") in the United States, and since the mid-1930s Kaiser and his self-named network have controlled the HMO market.¹⁷ HMOs grew slowly at first as they faced staunch opposition from the American Medical Association ("AMA"), which contended that such health plans were tantamount to the beginning of socialized medicine. As a result, many physicians who worked within the HMO infrastructure were excluded from participation within medicine's mainstream.¹⁸ Despite this resistance, HMOs endured, and began to win the support of those in favor of using standardization to reduce medical costs. By the 1960s, HMOs had begun to attract new money, new supporters, and new names. By 1970 there existed 37 HMOs in 14 states, with a total of 3 million enrollees and a tested work model that appealed to many who sought greater regulation over health providers. This change in conservative perception of HMOs opened the door for increased federal involvement.¹⁹

In 1973, Congress passed the Health Maintenance Organization Act,²⁰ creating a partnership of sorts between the Federal Government and certain health care providers. The HMO Act offered government subsidies and loans to HMOs, helping these managed care entities to attain much needed financial stability, in part so they could carry Medicare's increasing burden. More significant, however, was a new power extended to HMO administrators that authorized their ability to challenge the medical judgment of licensed physicians, regardless of the clinical acumen (or lack thereof) held by these corporate executives. In doing so, the HMO Act represents the first instance of business concerns gaining the upper hand over medical judgment within the health care system, and marked the first step toward the discrepancy of power between the two that continues to exist today.²¹

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From the perspective of the employer, managed care plans appeared to be less expensive than individual insurance packages, which often resulted in the elimination of plan choices for their employees.²² In theory, the HMO Act sought to create cheaper health coverage for working Americans by focusing almost exclusively on HMOs, which represented but a small portion of the health care sector in the early seventies. By fostering the growth of HMOs across the country, the HMO Act not only legitimized its model, but also spurred widespread corporate sponsorship from entities such as Prudential and several Blue Cross Blue Shield partners. Growth in the private sector continued, and by 1992 for-profit HMOs surpassed their non-profit counterparts.²³

Thanks to the consistency of government subsidies, the growth of this particular arm of health care has continued to be pronounced, with the HMO model expanding itself as the preeminent template for American health providers. 1978 saw 168 HMOs in operation, with 6 million enrolled. By 1990, there were 652 HMO plans, covering 34.7 million people. In 1996, the number of enrollees grew to 60 million. Last year, an estimated 154 million people were enrolled in managed care (109.7 million in preferred provider organizations, and 44.3 million in HMOs).²⁴

California's Response

Enacted in 1975, the Knox-Keene Health Care Service Plan Act ("Knox-Keene") regulates all aspects of health care service plans in California. Over the years, Knox-Keene expanded to include section 1371, which oversees the payments of claims by plans to health care providers.²⁵ Section 1371's primary function is to require health plans to promptly reimburse providers for services rendered. Under section 1371, health plans must reimburse a hospital (or other provider) within 30 working days, or within 45 working days if the plan is an HMO.²⁶ Interest starts to accrue for those plans in violation of these prompt pay requirements on the 31st or 46th day, as appropriate, at the rate of 15 percent per year.²⁷ At the same time, health plans must refrain from "practicing medicine," or face the ire of the Medical Board of California and a charge alleging the violation of California's prohibition on the corporate practice of medicine.²⁸

One limited exception to this statutory payment mandate provides that a health plan may avoid its payment obligation if it "contests or denies" the provider's claim. To contest a claim under the statute, the plan must give timely written notice that the claim is being contested. The notice must contain two important pieces of information: It "shall identify [1] the portion of the claim that is contested and [2] the specific reasons for contesting the claim." ²⁹ Regulations promulgated by the California Department of Managed Health Care, the agency responsible for overseeing health plans, clarify these requirements: "For each claim that is either denied, adjusted, or contested, the plan . . . shall provide an accurate and clear written explanation of the specific reasons for the action taken within the timeframes specified in sections (g) and (h).³⁰

California's legislature originally passed Knox-Keene in part "to...