G381

OK, so we hated managed care. The restrictions. The referrals. The hassles.

But employers loved it. They were able to pay less for a few years. And we got to see a doctor at our HMO for $10 a pop.

Now, though, the biggest jumps in health premiums in a decade are forecast for next year -- 10% to 13% for larger employers, 20% or more for smaller ones -- frustrating consumers and raising questions about the future of health insurance.

Medical inflation is back, besting managed care at the very thing it was supposed to solve.

"We are in the same mess as 10 years ago," says Kenneth Sperling of the benefits firm Hewitt Associates. "In the early '90s, we saw these kinds of cost increases, but we had the alternative of managed care as a low-cost option."

Some say managed care failed. Others say Americans rejected it without giving it enough of a chance. Either way, experts agree that no one now has a good idea how to control costs without it. And the cost problem is clearly not going to go away:

* Spending continues to rise, driven by an aging population, expensive new drugs and treatments, consumer demand and a growing ability of doctors and hospitals to resist managed care payment cuts.

* Although most health insurers are making profits this year -- because they've been able to raise premiums higher than the underlying medical inflation -- PacifiCare and Aetna have reported lower earnings. The companies blame their inability to control costs.

* Medicare spending is increasing faster than previously forecast. The cost of the $218 billion program is expected to double by 2010. An advisory panel last week said rapidly rising spending means Medicare's hospital trust fund will go broke four years earlier than expected, in 2021.

* With the strong economy, patients and employers have fled the tightest forms of managed care, HMOs, for looser, more expensive versions that allow patients to, among other things, refer themselves directly to specialists or see "out-of-network" doctors.

Americans simply don't like restrictions. But employers, concerned about double-digit inflation in health care premiums in the late 1980s and early 1990s, pushed workers into choice-limiting HMOs and other forms of managed care.

For a time, it worked. Premium increases fell. Hospital costs went down.

Patient rebellion

But some HMOs went too far, and patients rebelled. Horror stories about denied care led lawmakers to ban some of the most-hated insurance practices: short hospital stays for childbirth, refusal to pay for emergency room visits, unappealable denials of experimental treatments. Juries awarded several multimillion judgments against insurers. "The backlash was quite real," says Larry Levitt of the Kaiser Family Foundation, a non-profit research and education group.

"A small minority of people experience these problems every year," Levitt says. "The media fuels the backlash by covering these horror stories, causing people to worry about whether it might happen to them."

Much more common, Levitt says, are day-to-day annoyances: the long waits for the insurer to answer the phone, delays in getting a doctor appointment, having to see one doctor to get a referral to another, then having to make three more phone calls.

"Those things affected about half of all patients," Levitt says.

And the backlash continues. Controversy over whether patients should have an expanded ability to sue their health plans for denials of care -- as one version of the so-called patient's bill of rights would allow -- awaits the new president and Congress. Lawyers, fresh from the fight with tobacco companies over liability for smoking- caused illnesses, have turned their sights on managed care companies, filing a host of class-action suits.

"We conned HMOs into rationing for us," says author and industry consultant Ian Morrison. "Then we said, 'Oh, sorry, we're not going to support you in this.' We've defanged managed care, but we don't have another idea about how to contain costs."

Now spending is again on the rise. "We overestimated the capacity of managed care or the market to control health care spending," says Stuart Altman, professor of national health policy at Brandeis University.

Hobbled by critics

Altman and some other health policy experts say managed care didn't fail as much as it was hobbled by opposition from doctors, from patients, from the media and from politicians.

"I believed in managed care," Altman said. "We gave it a chance, but then the medical community, the press fought back. Collectively, we gave a system that had problems a gigantic black eye."

Still, managed care reduced insurance premium increases for a few years, mainly by cutting payments to doctors and hospitals and requiring strict oversight of expensive drugs and treatments.

Premiums increased on average only 2% a year from 1994 through 1998 as business-hungry insurers fought for market share, according to the Center for Studying Health System Change, a non-profit research group in Washington.

Without managed care, the total amount spent on health care -- now about 13.9% of the gross domestic product -- would surely have been higher, many say.

Princeton economist Uwe Reinhardt says Americans this year will spend $350 billion less on health care than the Congressional Budget Office forecast for the year 2000 back in 1993.

"Managed care did the temporary fix we asked it to do, to break spending inflation," Reinhardt says. Still, many of those savings were one-time costs, he says.

Some who study health care take a more controversial stance: that managed care failed to deliver on its promise to save money at all -- and may have increased costs.

"This was a poorly thought-out scheme that was foisted on the public long before there was any evidence that managed care or HMOs in particular could save money," says author Kip Sullivan, a consumer advocate in Minnesota.

In an article in the July/August issue of Health Affairs, Sullivan attributed the slowdown in health care premium increases in the mid- 1990s to a drop in the underlying level of inflation, along with health plan and hospital mergers that led to price competition. Many insurers set prices well below actual costs to gain market share, he says.

Now those same insurers are raising rates rapidly to catch up.

Sullivan says HMOs succeeded in reducing the amount of time patients spend in hospitals and lowering payments to doctors and other medical providers. However, he says, those savings were offset by rising administrative costs, caused by such factors as increased paperwork and the practice of reviewing and denying claims.

"If you want to hire people to police doctors, you have to pay their salaries," Sullivan says.

United Health Group a year ago surprised the industry when it said that it would do away with most such authorizations for tests, procedures and hospitalizations. United said its own studies showed that it cost more to process such requests than the program saved. Other insurers have also relaxed some of their cost-control restrictions.

Failing to change system

Other policy experts take issue with Sullivan's thesis. They argue that greater oversight can and has saved money. The failure of managed care is that it hasn't truly changed the fragmented health system, they argue. A more organized system would be better able to control costs by more closely managing patients with chronic diseases and standardizing how doctors treat particular illnesses.

"Most of what we've experienced is price discounts, not managing care," says economist Robert Reischauer, president of the Urban Institute.

Stanford Professor Alain Enthoven says some managed care organizations, such as Kaiser Permanente, save money because they oversee their own hospitals and doctors, rather than contracting with a wide selection of independent hospitals and doctor groups. That makes it easier for Kaiser to set and enforce standards.

"Organized delivery systems can do the job for a lot less," Enthoven says. "Unfortunately, for the most part, HMOs didn't reorganize the delivery system very much."

Shifting costs to workers

While citing many successes of managed care -- reduced hospital costs and an attention to creating standard "best practices" for the treatment of illnesses -- the system hasn't been able to stem demand, says Dr. David Cochran, senior vice president for strategic planning at Harvard Pilgrim Health Plan, an insurer that is recovering from financial difficulties.

"There are things outside of managed care's control," he says. If managed care can be faulted, problems arose because it "insulated the individual consumer from the costs of care."

The $10 co-payment for an office visit or a prescription drug disguises the true cost of medical services, he argues. Indeed, many policy experts believe the next evolution in health care is likely to focus on ways to get consumers to pay more of the cost of medical care, with employers playing a main role in shifting costs to workers.

Some economists say Americans are too worried about rising health care spending.

"Health care spending will always grow as a percentage of the economy -- that's something apostindustrial society invests in," says J.D. Kleinke, a medical economist and president of Denver-based Health Strategies Network. "It's not a bad thing at all."

Spending on health care is creeping toward 14% of the gross domestic product. By the end of the decade, some projections show that nearly $1 of every $5 could be spent on medical services.

"Instead of making cars and hula hoops, we will make hospital rooms and operations," says Reinhardt at Princeton. "It's just a choice. Right now, we spend more on admissions to entertainment events than for prescription drugs per capita. If we spend more on drugs and less on football, that doesn't trouble me."

Others say the rising spending will cause problems, cutting into employers' budgets, driving up premiums and keeping many self- employed people and low-wage workers from being able to afford insurance.

The number of Americans without health insurance is already nearly 43 million. That number is expected to grow with each percentage point increase in health premiums.

"We stopped offering insurance two years ago; it was pricing itself out of reach," says Bob Klinefelter, who owns a commercial print shop with 11 employees in Las Vegas.

He says he really wants to offer insurance. But unless there's some kind of universal pool for small businesses, he doesn't see a chance to compete.

"I would almost be in favor of a plan where businesses are forced to pay into the program," Klinefelter says. "That way we're all on the same footing."

That's not a likely option. The last time that idea was floated -- in the Clinton health plan back in 1993-94 -- it drew enormous opposition from businesses.

Yet, "at some point, the business community will revolt and say enough is enough," says Tom Robinette, co-owner of Robinette Demolition outside Chicago.

Asking workers to contribute more

Like most employers, he is facing a health premium increase this year. And, like many, his company will not ask workers to pay more. Surveys by major benefit consultants show that most employers this year are still reluctant to pass costs along to workers, but more say they will do so if premiums continue spiraling.

"We're looking at a 15% increase for next year. That's fine," Robinette says. "You have to have good benefit policies to retain good people. If you start playing with their money or their benefits, you're asking for trouble."

Major changes to health insurance, or the amounts workers pay, likely won't happen until there's a downturn in the economy and more workers are unemployed.

"You can use managed care techniques on employees only when they're running scared," Reinhardt says. From 1989-92 "employees were much more worried about losing their jobs than losing their doctors."

Eventually the economy will slow and health insurance will change. But no one really knows how it will look. It's possible employers will again ask insurers to tighten up, cut extras and limit medical care.

But if the lesson of the 1990s is that managed care didn't work, employers will cast about for new ways to reduce costs, and some might even get out of offering insurance altogether.

Americans want a simple solution to the challenge of how to limit spending on health care while ensuring that everyone gets what they need. But there isn't one.

"The fact is, we've never had the answer to this question," says Levitt of the Kaiser Family Foundation. "We just stopped looking for a few years."