the u.s. health-care marketplace: future tense

CHAPTER 24

The U.S. Health-Care Marketplace:Future Tense

DAVID J. DRUM AND ANDREW C. SEKEL

STAKEHOLDERS AND THEIR STRATEGIES 559EVOLUTION OF HEALTH CARE IN THE UNITED

STATES 560

IMPLICATIONS FOR THE FUTURE 579CONCLUSION 583REFERENCES 583

Currently there is a high degree of uncertainty and tensionregarding the future economic viability of the U.S. health-care marketplace. A number of forces have the potentialto contribute to market failure. At the time this chapterwas written, the legality of the 2010 Patient Protection andAffordable Care Act (PPACA) was being challenged in thefederal judicial system and attempts were being made inthe U.S. Congress to repeal either part or all of the Act.However, even if the PPACA stays in full effect, additionalactions will be needed in order to ensure that the needsand interests of the various stakeholders in the health-careenterprise are in dynamic and stable alignment in the mar-ketplace. Additionally, the costs of health care will con-tinue to rise unless controls are put in place to managekey escalating cost areas, such as pharmaceutical productsand new technologies. Furthermore, competition amongstakeholders has led to rapid consolidation of hospital sys-tems, provider organizations, and health insurers. Whilesuch consolidation reduces fragmentation, it also createsturmoil in an already-unstable marketplace.

The U.S. health-care system has endured a turbulent,unremitting change cycle for more than three decades. Itis truly a system in motion, configuring and reconfiguringitself on a regular basis. This turmoil is the result ofattempts at economic reform, on the part of both businessand government, motivated by the desire to reduce health-care costs. Consequently, the health-care system is beingrestructured around microeconomic principles, therebycausing a dramatic shift in the way that health-care servicesare organized, delivered, and financed. In the past, healthcare was seen as a profession in which professional

authority held sway. Today, it has been transformed intoa marketplace, where it is frequently treated like othercommodities. Behavioral health care has also experiencedsignificant change, notably in the way that it is financedand in its unfortunate segmentation from medical andsurgical care. Today’s psychologists must function in avery different health-care environment from that whichexisted until the mid-1980s.

In many other developed countries in the world, healthcare is centralized, with the government both financingand paying for the care. This is not the case in the UnitedStates. The way that health care is financed in this coun-try lies at the heart of the problems that the system facestoday. The consumer (i.e., the patient) does not pay formost of the expenses associated with an episode of care.Rather, either the patient’s employer or a governmentalagency bears the costs. The arrangement is called a third-party payer system , and the financing of health-care costsin the United States is completely dependent on it. Fourout of every five dollars flowing into and supporting thehealth-care enterprise come not from consumers, but ratherfrom the government or from employers, who subsidizehealth plan subscription costs for their employees. Medi-care, Medicaid, and other local- and state-government-sponsored programs pay 45% of the nation’s health-carebills. Group health plans funded by employers as part ofbenefit packages pay 35% of the total cost and individu-als or philanthropy pay 20% (Bardes, Shelley, & Schmidt,2010).

Beginning in the 1970s, health-care costs began toincrease dramatically, a trend that would continue into

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The U.S. Health-Care Marketplace: Future Tense 559

the mid-1980s. As costs increased, businesses started tofeel the strain on their profits and began to exert pressureon health plan administrators to contain costs. They weresubsequently joined in this effort by state and federal gov-ernments that were eager to avoid imposing tax increasesto pay for the escalating cost of health care. The con-certed efforts of government and industry to contain costshave provided the impetus for economic reform in healthcare. However, cost containment has remained unattain-able, due to a number of factors.

First, medical practitioners have been reluctant tochange from a system of finance in which they domi-nated. From the late 1930s to the 1980s, the standardmethod of reimbursing providers and service facilities wasthe fee-for-service/third-party payer system (FFS/TPP).This system was built on provider-oriented principles thatconsidered medical practitioners to be members of a pro-tected class. It virtually eliminated price competition asa cost-containment mechanism and prevented microeco-nomic marketplace forces from operating naturally in thehealth-care system. An additional impediment to cost con-tainment is the fact that the primary purchaser who pro-vides health coverage (i.e., the employer or government)is not the recipient of the care. Patients who do not pay forcare directly are largely unaware of the true costs of thecare. Sometimes, physicians themselves are even unin-formed about the true cost of care. Finally, it must beobserved that it is not easy to change an industry that isgrounded on the ethical principle that both life and qualityof life are precious.

Although legislative reforms have not been as success-ful in containing costs as contemplated, they have led todramatic changes. An entirely new health-care environ-ment has been created, one with serious implications forall health-care stakeholders. Purchasers no longer blindlyaccept the cost increases of the FFS system; rather, theyhave become active promoters of price competition andrestrictions on benefits. They no longer favor purchasingtraditional indemnity or service insurance coverage; wherepermissible, they frequently self-insure, either passing onfinancial risk or engaging in shared financial risk arrange-ments with health plans. Health plans now find themselvesin a difficult situation. Traditionally, they promised pur-chasers that they could reduce expenditures while retain-ing and even improving quality of care. However, thishas proved daunting, because purchasers have continuedto apply pressure to contain costs, while still expectinghealth plans to deliver the same level of quality. Increas-ingly, purchasers are asking their employees to participatein the cost-containment effort. Employers no longer just

advocate for employees. They now support efforts byhealth plans to reduce expenditures. They attempt toincrease employee cost sensitivity by forcing higher con-tributions to premiums and establishing higher copays,coinsurance, and deductibles.

The health-care environment is changing rapidly, andstakeholder roles and relationships are also changing. Thischapter seeks to explain the forces driving that changewithin the context of marketplace dynamics. The chapterbegins with a discussion of the primary stakeholders inhealth care and follows with a brief explanation of how twocategories of forces—sustaining and disruptive—are ableto shape a marketplace. Next described are the four distincteras in health care from the late 1880s to the present: (a)the self-regulatory era, (b) the FFS/TPP era, (c) the cost-containment era, and (d) the newly emerging sponsored-competition era. During the first and second periods,stakeholder revolts against the prevailing system ulti-mately ushered in the next era, establishing the principlesby which it would function. The market and service deliv-ery features of the FFS/TPP era are described in detail,because they became the health-care standard againstwhich a particular class of stakeholders (purchasers)revolted, thus initiating the cost-containment era. Thatrevolt sought to replace the cost-increasing, noncompeti-tive features of the FFS/TPP system with market-based,price-competition approaches. Just prior to and during thecost-containment era, a number of disruptive innovationsaltered, and in some cases neutralized, important featuresof the FFS/TPP system, and these are examined. While thecost-containment era initially succeeded in containingcosts during its early years, purchasers later began to expe-rience significant increases in health coverage premiums,as did consumers who faced higher out-of-pocket expen-ditures. The growing need to develop new approaches tocontain costs and the implicit recognition that action onthe part of the federal government would be necessary topromote and guide the health-care change process played alarge role in the initiation of the fourth era, the sponsored-competition era. The two major health-care pieces offederal legislation that provide the basis for the new eraare discussed, and their implications for stakeholders, howservices are delivered, and the role of psychologists areprovided.

STAKEHOLDERS AND THEIR STRATEGIES

Marketplace dynamics operate continuously in the health-care arena. All free markets have stakeholder groups, which

560 Professional Issues

are either part of the supply or part of the demand side ofthe market. The various stakeholders vie for supremacy,attempting to promote their own interests by modifyingthe market to achieve their particular economic goals. Thestakeholders are often the instigators of two categoriesof change forces: sustaining forces and disruptive forces .Both types of change forces are capable of altering the mar-ketplace dynamics, and the various stakeholders can and doemploy them to further their own goals. The interplay andcompetition among stakeholders in the health-care market-place has driven change for over a century.

The Four Stakeholders

The four key health-care stakeholder constituencies inthe United States are (1) purchasers, (2) health plans,(3) providers, and (4) consumers. The purchasers (alsoknown as payers) are largely the employers who pay asignificant portion of health plan premiums for employ-ees; governmental entities that pay for health-care costsfor beneficiaries enrolled in their programs; and, to amuch lesser extent, individual consumers who purchasean unsubsidized health plan directly. Numerous state andfederal governmental entities also serve as the regulatorsof health care. Through antitrust enforcement, national andstate rule-making authority, and legislative actions, gov-ernmental influence takes a large role in shaping and defin-ing the health-care system in the United States. Healthplans typically define and administer the benefit systemused by the consumer, and contract with providers andtheir service facilities (particularly hospitals, care manage-ment organizations, pharmaceutical benefit managementcompanies, and other groups) to provide health-care ser-vices for enrollees. Using a variety of insurance or finan-cial arrangements, health plans contract with purchaserswho pay premiums on behalf of employees or, in the caseof governmental entities, on behalf of beneficiaries. Theprovider stakeholder constituency consists of the clini-cians who provide care (physicians, psychologists, physi-cal therapists, social workers, nurses, etc.), and the servicefacilities (hospitals, rehabilitation facilities, etc.) in whichcare is provided as well as the suppliers of pharmaceuti-cals and durable medical devices. Consumers , the largeststakeholder constituency, include the patients who receivecare and the families affected by the nature and quality ofthe care provided.

Forces for Change: Sustaining and DisruptiveInnovations

Even given the imperative for reduced health benefitexpenditures stimulated by health-care purchasers, change

of the magnitude being experienced in the health-caremarketplace could not occur without additional power-ful forces disrupting the status quo. Christensen, Bohmer,& Kenagy (2000) described two categories of changeforces that have altered the way free markets operate andevolve. Sustaining innovations represent advancementsthat move technology forward, extend or expand capabil-ity, or improve diagnostic or surgical precision. Health-care examples include: developing improved antibacterialand antiviral agents, improving and digitizing imagingof internal body systems, converting the patient healthrecord from paper to electronic form, and enhancedtelehealth capabilities. Sustaining innovations typicallyextend or enhance the prevailing technological or businessparadigm, thus improving the effectiveness of services, orexpanding the market and contributing to the escalationof health-care costs.

The second category of change forces is disruptiveinnovations . Because they significantly transform theprevailing business or technical paradigm, disruptive inno-vations create more turbulence than do sustaining innova-tions, and are therefore more difficult for some categoriesof stakeholders in the marketplace to incorporate to theiradvantage. Disruptive innovations are usually adoptedwhen they decrease the cost of a product or service for themajority of the market by introducing new, more effec-tive technology, service, or business models. Disruptiveinnovations typically make it possible for services to beprovided with at least equal effectiveness for less cost.About 35 years ago, the health-care system began to bebombarded by disruptive innovations aimed at changingthe prevailing paradigms for finance systems and servicedelivery. These innovations are linked to a specific cate-gory of stakeholders: the purchasers. Normally, disruptiveinnovations in economic markets have direct, apparentbenefits or appeal to the true consumer of the productor service. However, in health care, many of the recentdisruptive innovations have benefited the purchaser, notthe consumer. The two exceptions to this are the recentlyenacted Mental Health Parity and Addiction Equity Act(2008) and the Patient Protection and Affordable Care Act(2010), both of which are discussed later in this chapter.

EVOLUTION OF HEALTH CAREIN THE UNITED STATES

Current health care in the United States, including its ser-vice delivery and finance systems, stems from an evolu-tionary process that began in the late 19th century. Over


the past 120 years, certain key historical actions havedefined how health-care coverage is obtained, how ser-vices are financed, and how competition and choice oper-ate in the health-care marketplace. It is possible to dividehealth care in the United States into four eras, employ-ing a framework similar to Weller. (For a more detaileddescription of the social, political, and economic factorsthat transformed the health-care system prior to 1980, seeStarr, 1982, and Weller, 1984.) The late 19th century canbe characterized as the self-regulatory era of health care: Afree-market environment for health care was operating andevolving, in response to the economic and social condi-tions of the time. This era ended as a result of actions takenby a particular stakeholder constituency: the provider, rep-resenting the interests of physicians and hospitals.

In the 1930s, a second era was launched, guided byprovider-based principles and interests. It is known as theFFS/TPP era, and it would be the dominant health-caremodel until the mid-1980s. At that time another stake-holder group, the purchaser, revolted against the FFS/TPPsystem and initiated changes that resulted in the third era:the cost-containment era. This era lasted for about 25years. During this period, the needs of the purchaser weredominant in the marketplace. With the advent of three dis-ruptive innovations—the Health Insurance Portability andAccountability Act of 1996 (HIPAA), the Mental HealthParity and Addiction Equity Act of 2008 (MHPAEA),and the Patient Protection and Affordable Care Act of2010 (PPACA)—a fourth era is currently unfolding: thesponsored-competition era. This era, stimulated by legisla-tion passed by the U.S. Congress, enhances the role of thefederal government beyond that of a purchaser to a moreprominent one as the managing sponsor of the change pro-cess across all stakeholder groups.

The Self-Regulatory Era

The self-regulatory era in health care began in the late1800s and lasted into the 1930s. During this period, healthcare in the marketplace evolved naturally in responseto existing conditions and without much governmentalinvolvement or interference from professional associationsof providers. In the beginning of this health-care era, stake-holders consisted primarily of consumers and providers(physicians and hospitals). Consumers were the purchasersof health-care services. They paid for care directly, usuallyby a per-visit charge. The physicians and hospitals werethe sellers of health care. In addition to the predominantself-pay system, however, a new form of arranging andpaying for health-care services emerged during this period.By the late 1800s, the leading manufacturing, mining,

and transportation industries in the United States beganto arrange and subsidize health-care services for theiremployees’ job-related illnesses and injuries, particularlyin rural areas where health care was virtually nonexistent.The industries found that they required a mechanism toensure that care would be available when needed and thatthere would be a way to compensate the provider. Theybegan to hire physicians as employees or, as became morecommon, went directly to health-care entities, usually hos-pitals, to develop contractual arrangements for the care ofworkers. These industries became a third stakeholder: thepurchaser. The typical service delivery arrangement was acontract for care with a specific hospital and its associatedphysicians. The mechanism created to pay for that care wasa prepayment system (now known as capitation) in whichthe employer agreed to pay a fixed amount to cover theanticipated health-care needs of its employees. Health-carecosts would be covered by the contractual arrangementonly if the employee received care from the contractedhospital or physician. Because these prepayment planstypically were linked to a single hospital and its core ofaffiliated physicians in a community, not all physicians orhospitals in a given community were eligible to participate.

Over time, and with the increasing economic uncer-tainty of the 1920s and 1930s, prepayment health plansproliferated. They diversified their plan structures; ex-panded benefits to include general medical care; andincluded arrangements with trade unions, fraternal organi-zations, employee associations, and other entities. As theGreat Depression approached, consumers became anxiousabout access to health care. Hospitals began searching forfinancial vehicles to ensure a steady income stream. Arobust market for prepaid health plans emerged, creatinga price-competitive, self-regulatory market environment.Physicians and hospitals, however, began to resist this free-market system on the grounds that it divided physiciansinto economic entities competing for business on the basisof price. It also limited the ability of consumers to choosefreely among all legally qualified physicians and did notinclude all hospitals and physicians in a given community.Physicians, through county and state medical societiesand the American Medical Association (AMA), began tooppose the prepayment health plan arrangements and theresulting selective contracting and price competition. Theirefforts were successful. The provider stakeholder commu-nity would eventually dismantle the self-regulatory eraof health care. During this first era, however, several keyelements of the nation’s health-care finance and deliverysystem emerged. First, employer participation in thepayment of employee health care was initiated. Although


the actual percentage of people receiving employer-financed health care remained small, the precedent ofemployer involvement would prove to be increasinglyimportant throughout all future eras of health care. Second,group health plans were financed on a preservice paymentsystem . This innovation introduced financial risk to thehospital-physician provider system. If the prepaid pre-mium negotiated was insufficient to cover costs of care,the provider system still was obligated to provide the care.Third, the notion of selective contracting with hospitalsand physicians was introduced. Without selective con-tracting it would not be possible for hospital-physiciansystems to divide into competing economic units vying forenrollees. Of course, without competing health-care sys-tems, price competition , the fourth key element from thisperiod, would have been severely curtailed. In short, aclassic free-enterprise marketplace was unfolding in healthcare. It is significant that no stakeholder constituency wasin a dominant market position relative to the other stake-holders. Providers, consumers, purchasers, and the healthplans that increasingly emerged toward the end of the self-regulatory era were aligning and realigning themselves asmarketplace conditions changed.

This period was notable for other reasons. It would dem-onstrate that a stakeholder constituency could, throughconcerted effort and under favorable conditions, dismantlea particular market system. This fact would not be loston those promoting price competition during the cost-containment era. It also established a precedent for today’sprice competition. Additionally, it established that providerorganizations and hospitals were capable of contractingdirectly with employers and other organizations withoutusing a third-party, managed-care organization or an insur-ance intermediary. However, a crucial concept was lostwhen the free-market system was destroyed: the ability tounderstand the relationship between price competition andquality of care. For all practical purposes, price competi-tion was eliminated before its full and true effects couldbe discerned. The success of the provider community ofphysicians and hospitals working through their profes-sional associations to defeat and eventually eliminate theself-regulatory era of price competition would be the firstof two stakeholder revolts against a prevailing health-carefinance and delivery system. Each revolt would lead tofundamental changes in health-care finance, delivery, andmanagement, and would decidedly slant the marketplacein favor of the desires of the dominant stakeholders.

The Fee-for-Service/Third-Party Payer Era

The beginning of the FFS/TPP era of health care in theUnited States can be traced to the mid-1930s. At that

point in time, provider advocacy organizations represent-ing physicians and hospitals began to alter the existingfree-market economic system for health care in a way thatwould be favorable to their membership. Weller (1984)described this as the guild free choice era because theprovider organizations operated in a manner similar toguilds. At heart, the economic environment that was tobe created would be anticompetitive: Each physician andeach hospital would become a self-contained market freeof competitive pressures. The manner in which the physi-cians and hospitals set about defeating the growing free-market health-care system of the 1930s would determineto a great degree the elements of the second era. Theysuccessfully shifted the health-care focus from the goalof the consumer and purchaser for a low-cost system tothe needs of providers and facility operators. Because thisprovider revolt took place during the Great Depression, theadvocacy organizations were able to operate without beingas deeply concerned about antitrust actions as would betrue today. Led primarily by the AMA, these organizationsemployed a three-part approach to assure that the interestsof the medical community were met. First, they began acampaign to discredit prepayment plans. They drew theattention of both the consumer and the physician to thedrawbacks of these plans—namely, restrictions on freechoice of physicians—intimating that prepayment plansmight fail financially and that “contract medicine” dimin-ishes quality of care.

In the second and most effective part of the strategy,the AMA and the American Hospital Association (AHA)established policy positions that enumerated the princi-ples and standards of their respective associations andwere incorporated into the related medical ethics codesthat practitioners were expected to follow. Through theseactions, the AMA and AHA were able to blunt—andalmost eliminate—hospital and physician participation inprepayment plans. Two key policy statements set the rules.In 1933, the AHA issued its policy on hospital participa-tion in The Periodic Payment Plan for the Purchase ofHospital Care (Weller, 1984). Basically, this policy stip-ulated that group hospitalization plans should include allhospitals in each community in which a plan operates; thatmember benefits should apply at any hospital in whichthe person’s physician practices; and that all plans mustbe controlled and administered by nonprofit organizationslargely composed of representatives of hospitals in goodstanding in the community.

Application of these principles in the marketplacewould severely curtail price competition in the hospital sec-tor. In 1934, the AMA House of Delegates adopted a policystipulating 10 principles that it required private health


insurance plans to meet if they were to avoid resistancefrom the provider community (Starr, 1982). This policyin effect stated that all aspects of medical care should becontrolled by the medical profession; that there should beno third-party intermediary in the medical care process;that there should be participation by any willing, legallyqualified physician; that there should be no restrictions onpatients’ choice of physicians; and, finally, that all aspectsof medical care, regardless of setting, should remain underthe control of a medical professional. Through applicationof these principles, “the AMA insisted that all healthinsurance plans accept the private physicians’ monopolycontrol of the medical market and complete authority overall aspects of medical institutions” (Starr, 1982, p. 300).These principles for private health plans were enforcedthrough accreditation standards, and some were incorpo-rated into state insurance codes and related associationethics codes. Physicians and hospitals faced significantconsequences if they did not comply. In the third prong ofthe approach to changing the health-care system, the AMAdid not oppose the development of health plans that werein keeping with its principles. Indeed, in the mid- to late-1930s, hospital systems and medical societies participatedin establishing medical insurance plans that adhered to thepolicies and standards set forth by the AMA and AHA.Designed to compete against the existing commercialforms of health coverage, the first Blue Cross plans forhospital care reimbursement and Blue Shield health plansfor physician services were established. They rapidlybecame the dominant forms of health insurance coverage.Fundamental to these plans was the elimination of pricecompetition by including all hospitals of standing in acommunity in Blue Cross and community-wide eligibilityfor physician participation in Blue Shield. By achievingcommunity-wide participation, the division of hospitalsand physicians into competing economic units, in whichclosed panels of providers aligned with a specific hospitaland competed for business with other similar systems, waseffectively curtailed. Acceptance and enforcement of theseprinciples in the marketplace and, in particular, in howhealth insurance was structured, brought to a close the self-regulatory era of health care. The variety of prepaymenthealth plans and various health insurance arrangementsof the self-regulatory era were replaced by two types ofhealth insurance arrangements: indemnity and serviceplans. Indemnity plans reimbursed patients directly formost of the costs associated with health care. Patients paidthe physicians directly, except for those too poor to pay atthe time of service. Service plans , usually developed andmanaged under the watchful eyes of medical personnel,

paid providers directly and usually for the full cost ofcare. Both types of plans were deemed acceptable becausethey respected physician sovereignty, kept intermediariesout of the care process, and minimized price competition.Having achieved a favorable structure for health insurance,professional associations more consistently embraced itas a financing mechanism for health care. Over time, theprofessionally derived and promulgated principles servedas a blueprint for the structure of a new health-care marketin which the finance and service delivery systems con-formed to these principles. The emergence and refinementof this new marketplace structure coincided also witha several-decade upsurge in employer and governmentfinancing of health care. Sustaining innovations within thefield of medicine during this same time were extendingthe range and effectiveness of medical care. Because inthe new system physicians were paid a defined amountfor each specific service provided and hospitals werereimbursed for their costs in providing care, it becameknown as the fee-for-service (FFS) system. The indemnityand service insurance entities created to pay providersand hospitals for services became known as third-partypayers (TPPs), further highlighting the restriction of theirrole to that of financial intermediaries. The new systemeventually became known as the FFS/TPP system. Thissystem would increasingly dominate health-care financeand service delivery systems in the United States, fuelinga 50-year period of prosperity for providers and servicefacilities. As the FFS/TPP system developed, certain of itsmarketplace and service delivery features became integralparts of almost every aspect of health care, from stateinsurance regulations to Medicare and Medicaid rules. Inaddition, the system set the guidelines for competitionamong providers and for relationships among health insur-ance intermediaries and physicians and patients. A closelook at the system’s structure reveals that by nullifyingprice competition, it encouraged inflation of prices. Thiseventually would cause the FFS/TPP system to become thetarget of a number of purchaser-initiated disruptive inno-vations aimed at containing health-care costs by modifyingor eliminating its key principles.

The FFS/TPP system also had a lasting effect onpsychology. During this era, psychology matured as ahealth service profession and entered the marketplace as aprovider group eligible for third-party reimbursement. Assuch, it had to abide by the principles of the marketplace.Being part of the health service provider profession, psy-chology structured its educational and training programsas well as its service delivery system to fit harmoniouslywithin features of the system.


As the FFS/TPP system evolved and the principles onwhich it was based became entrenched in the marketplace,the following key features emerged:

1. The person who receives health care is typically notthe true purchaser of that care. Rather, that person’semployer or a governmental entity usually finances asubstantial portion of the costs associated with eachepisode of care. This is the central feature of the FFS/TPP system. A fundamental disconnect exists betweenthe patient and the true cost and payment for medicalcare. Except for deductibles, copays, and coinsuranceobligations, the patient is virtually unaware of theactual costs of an episode of care.

2. Care may be accessed without preauthorization. In theFFS/TPP indemnity insurance system, consumers havethe right to access primary, specialty, and emergencycare without obtaining preauthorization from healthplan personnel. Medical necessity is determined largelyby the provider, not by the insurer or the health plan.

3. The care reimbursement system must be open to alllegally qualified providers. A central tenet of the FFS/TPP system is known as community-wide eligibilityof providers. FFS/TPP principles stipulate that healthinsurance plans operating in a given community shouldallow all legally qualified providers to participate.Health plans operated by insurers are not to contractselectively with providers by creating closed or limitedpanels of providers. This prohibition against horizontalmarket division ensures that each provider is a separateeconomic entity in the marketplace and significantlyreduces price competition among providers.

4. Care management is the exclusive right of the provider.Fundamental to the FFS/TPP system is the principlethat third parties, such as health plan personnel, shouldnot be allowed to participate in utilization managementof patients. Such decisions are to be made within thecontext of the provider–patient relationship without theinvolvement of an intermediary.

5. The FFS/TPP system is cost generating because ofits capability to stimulate price-inelastic demand. TheFFS/TPP system promotes price-inelastic as opposedto price-elastic demand. In a typical economic market,the price of a product or service is considered to beelastic if it is lowered to increase revenue. If a providercan raise revenue by increasing fees or by increasingutilization rates at the same or higher fees, demand isconsidered to be price inelastic (Enthoven, 1993).

The FFS/TPP era created a price-inelastic health-care system. Providers are reimbursed for each

procedure performed and at a rate that equals theusual, customary, and reasonable (UCR) rate for thatprocedure in that provider community. Hospitals arereimbursed for the costs associated with providingcare in their settings. Rather than having to reduce feesto increase revenue, as is typical in a competitive freemarket, providers and hospitals are able to stimulatedemand for more procedures and then also raise rev-enue by increasing fees or charges. By engaging in aform of shadow pricing (i.e., raising charges for proce-dures, which then become reflected over time byincreases in the UCR and cost of care reimbursementrates), providers and hospitals are able to increase theamount of revenue received from third-party payers.

6. Financial risk for health care is borne by purchasersand their contracted insurance carriers. The FFS/TPPsystem discourages providers and the facilities withwhich they are associated from joining forces to createa prepayment health plan and then marketing that plandirectly to purchasers. In this way the system minimizesthe amount of financial risk that providers and servicefacilities might incur in open-market arrangements. Inthe FFS/TPP indemnity insurance and service models,health insurers are largely financial intermediaries whopay providers and facility operators for the proceduresand services provided to patients.

7. The FFS/TPP system delimits stakeholder roles in themarketplace. The principles on which the FFS/TPP sys-tem is constructed discourage cross-market competi-tion. There is rigid segmentation or partitioning of thefinance, service delivery, and management of healthcare according to stakeholder function. The system isdesigned to dissuade one type of stakeholder from tak-ing on another’s role or function: for example, healthplans combining an insurance function with a servicedelivery function or a purchaser contracting directlywith a hospital and its medical staff. Keeping the health-care market segmented into distinct stakeholder rolesprevents the division of providers and treatment facil-ities into economic units that compete with each otheron price.

The FFS/TPP era is historically important not onlybecause of the key features described above, but alsobecause it demonstrated that a stakeholder constituency—the provider—could dramatically change the dynamicsof the marketplace. Moreover, it could do so in a waythat was favorable to its interests. While during the self-regulatory era no single stakeholder held a dominant posi-tion relative to the others, in the FFS/TPP era the provider


clearly dominated. Provider advocacy organizations at-tempted to confine all other stakeholders to a specificfunction in the marketplace. However, the conditions thatspawned the proliferation of prepaid health plans dur-ing the self-regulatory era still prevailed in some indus-trial segments of the U.S. economy. This resulted in theneed among some employers for the continuation of pre-paid health coverage for employees. While the FFS/TPPprinciples minimized the presence of prepaid plans inthe marketplace, prepaid plans were not entirely elimi-nated. Two examples of prepaid plans that emerged in the1940s, evolved with changing marketplace forces and arein operation today are Kaiser Permanente and the HealthInsurance Plan of New York (HIP). The impetus for theformation of what is now known as Kaiser Permanentewas the need to provide health care to sick and injuredworkers involved in the construction of the Los AngelesAqueduct (Kaiser Permanente History, n.d.). The HealthInsurance Plan of New York, now part of a larger orga-nization known as EmblemHealth Inc., was founded toprovide limited low-cost medical care to middle-classworkers in the New York City area (About HIP, n.d.). Inaddition, during this period, the health-care system in theUnited States became dependent on the third-party pur-chaser to provide the financial resources to fund healthcare. The elimination of price competition, the fact thatconsumers were increasingly cost unconscious, and thedramatic rise during the period in medicine’s capacityto intervene effectively in illnesses combined to createan expensive, heavily utilized health-care system with anenormous appetite for more funding. The stage was nowset for a second revolution.

The Cost-Containment Era

The third era of health care in the United States began inearnest in the early 1980s when the purchasers, increas-ingly and with steadfastness, began to resist paying morefor health plan coverage for their employees. Purchasersforced health plans—and eventually providers and facilityoperators as well—to reduce costs. Much like the previousstakeholder revolt led by providers, this one was aimed ateliminating those features of the prevailing health-care sys-tem that the stakeholder in revolt deemed objectionable.This time the focus was on eliminating the cost-increasingprovisions and incentives of the FFS/TPP system.

Whereas the change effort of the previous rebellion wasguided from the start by principles articulated by profes-sional associations and enforced through their codes ofethics, the cost-containment era began without a guiding

blueprint or mechanism for enforcement of changes in thehealth-care marketplace. Purchasers had a common goal ofreducing the financial burden on employers and the gov-ernment; however, they lacked a unified and clear strategyfor reducing health-care expenditures. For this reason, thecost-containment era unfolded not as a concerted, well-orchestrated effort, but rather in reaction to a string of dis-crete disruptive innovations. These innovations have hadthe cumulative effect of changing the health-care financeand service delivery systems in profound ways, movinghealth care in the United States toward a price-competitive,market-based enterprise.

During the cost-containment era, five key disruptiveinnovations were either introduced into the health-caremarketplace by the federal government, employers, orinsurance intermediaries, or embraced by them as effec-tive cost-saving measures. The first two innovations, theEmployee Retirement Income Security Act (ERISA, 1974)and the Federal Tax Equity and Fiscal Responsibility Act(TEFRA, 1982), in effect paved the way for the emer-gence of the next two: managed competition and managedcare. Managed competition would eventually provide amarket-based framework for containing health-care costs;managed care would provide procedures for managingproviders and consumers. Simultaneously introduced intothe marketplace was the concept of carve-outs, in whichsegments of the health-care enterprise were selected forspecialized management. Behavioral health care was onearea selected to be carved out from the rest of the health-care system, along with the management of consumers’pharmaceutical benefits and the management of chronicdiseases. The importance of these disruptive innovationscannot be underestimated, as they continue to have aprofound influence on the health-care marketplace. Thefollowing section describes these disruptive innovations,demonstrating how each changed an important featureof the finance or service delivery system of the previousFFS/TPP era or affected behavioral health care.

Employee Retirement Income Security Act

In 1974 ERISA became law. Prior to its passage, employ-ers had to purchase health-care coverage through astate-regulated insurance carrier. After ERISA, businesseswith 50 or more employees could self-insure their healthbenefits programs. ERISA would prove to be a vitallyimportant disruptive innovation for several reasons. First,if employers chose to self-insure, they would not haveto comply with state insurance regulations, includingrequirements to pay health insurance premium taxes and


to provide state-mandated health benefits. This preemptionfrom state regulation has meant considerable savings foremployers.

Second, because ERISA preempts employer-based self-insurance plans from state regulation, providers desiringto blunt or counter the effect of managed care on theirpractice would find the state legislative pathway to be ofonly marginal benefit. For example, after the introduc-tion of managed care, providers wishing to eliminate themanaged-care strategy of using limited provider panels byworking toward the passage of “any willing legally qual-ified provider” statutes would discover that self-insuranceplans are exempt from compliance with such laws. Thus,ERISA makes it more difficult for the provider stake-holders to counter managed-care arrangements, somethingthey were able to do successfully in the 1930s.

Third, ERISA gave purchasers financial incentive tocontrol costs, because any reduction in expenditures wasretained by employers rather than becoming profit for aninsurance carrier. The ability to retain savings from cost-containment activities provided ERISA’s greatest impact:changing the flow of the revenue stream in health care andproviding a fertile environment for the growth of managedcare, itself a disruptive innovation. Under the FFS/TPPsystem, the original revenue flow progressed from thepurchaser to the indemnity insurance carrier. Revenuethen passed through the carrier to the patient, who hadalready paid the provider directly. Over time, the insuranceindustry would develop service plans that would allow fordirect reimbursement of the provider. Regardless of whichway the provider was reimbursed, the insurance carrier inthe FFS/TPP model was essentially a financial intermedi-ary that did not meaningfully engage in cost-containmentactivities. Rather, the carrier simply provided reimburse-ment on an FFS basis, based on usual, customary, andreasonable (UCR) rates.

As employers availed themselves of the option toself-insure, they became more sophisticated health-carepurchasers, able to intensify price competition in themarketplace. As a result, two new patterns of revenue flowemerged. In the first, revenue progressed from the purchaserto a cost-containment entity, usually a managed-care orga-nization (MCO), before reaching the provider. The MCObecame an intermediary working on behalf of the pur-chaser to contain costs by actively managing both providersand patients. MCOs limited access to the new revenueflow to those providers who accepted participation incost-containment activities. MCOs thus became agents ofchange for the provider reimbursement and service deliverysystems.

As MCOs evolved, they used more aggressive mecha-nisms to manage costs. They encouraged the formation ofmultispecialty provider organizations, channeling patientsto those organizations via contracts. This accelerated thedevelopment of what became known as organized deliv-ery systems (ODS) (Zelman, 1996). ODSs are groups ofproviders linked through various administrative and con-tractual arrangements to each other and to service facili-ties for the purpose of providing health care. As a resultof their work with MCOs in cost-containment activities,ODSs have the capability of managing utilization, con-ducting quality improvement procedures, and even accept-ing financial risk for providing health care.

With the maturation of the ODSs, a second new patternof revenue flow emerged, one that eliminated the MCOintermediary altogether. The success of managed care ingetting these ODSs to assume financial risk via capitationor prepayment systems provided incentives for ODSs toimprove their ability to reduce unnecessary utilization,manage quality of care, and carry out other care manage-ment functions. Many ODSs in essence were becomingprovider-initiated and administered care management sys-tems capable of controlling costs. Hence, a new, viablehealth-care avenue was available to purchasers. It createda fresh revenue stream that began with the purchaserswho directly contracted with an ODS, eliminating bothtraditional insurance carriers and MCOs from the revenuestream. The increased viability of ODSs to engage in directcontracting with purchasers—combined with greaterpurchaser knowledge and competence in self-insuringhealth-care benefits—added a new dimension to pricecompetition. The resulting tension created further instabil-ity in an already-unstable marketplace, as MCOs soughtto limit the potential threat represented by independentODSs.

ERISA has proven to be a particularly powerful dis-ruptive innovation. By giving employers the right to self-insure, it enabled them to have more options in contractingwith health plans, including bypassing the health plansand contracting directly with provider organizations. Inessence, it simultaneously undermined another principle ofthe FFS system and elevated the purchaser to a positionof greater authority over health plans in the marketplace.ERISA also gave rise to an intermediary in the caregiv-ing process, one that identified with the needs of healthplans and purchasers to contain costs. This had the effectof defeating another FFS principle: the prohibition of anintermediary from involvement in the physician–patientrelationship. It also elevated health plan authority abovethe providers in a newly emerging stakeholder hierarchy.


Tax Equity and Fiscal Responsibility Actand the Prospective Payment System

The 1982 Federal Tax Equity and Fiscal ResponsibilityAct (TEFRA) was targeted at controlling Medicare costs,but it had an unexpected effect on all health-care costsand on behavioral health in particular. The most salientand well-known cost-containment mechanism proposed byTEFRA was diagnostic related groups (DRGs). DRGscontain costs by establishing the reimbursement rate thatproviders receive for treatment of a specific condition inadvance. By setting fixed payment rates for inpatient treat-ment of certain medical procedures, DRGs create what hasbecome known as the prospective payment system (PPS),yet another important modification of the existing FFS sys-tem. TEFRA moved reimbursement for inpatient hospi-tal services from a fee per unit of service to a fee perepisode of treatment. This was a radical change. BeforeDRGs, hospitals were reimbursed for all charges relatedto inpatient treatment. Through the use of DRGs, TEFRAset a specific number of patient days for which a hospitalwould be compensated for each specific illness or proce-dure. Whether a patient stayed more or fewer days thanthe prescribed number, hospitals received the same reim-bursement rate. Strong incentives were thus created forhospitals to control treatment costs as a way to maximizeprofits, versus increasing utilization to maximize profits, ashad been the case in the FFS/TPP era. The DRGs estab-lished as a result of TEFRA did not apply to behavioralhealth conditions, however. TEFRA codified what manyhealth-care payers already knew: In behavioral health care,diagnosis of conditions did not lead to predictable treat-ment courses or reliable estimates for the time of treatment.Most providers of behavioral health care greeted the pas-sage of TEFRA with great relief, not realizing that it wouldeventually lead to a greater separation of behavioral healthcare from the rest of medicine and cause it to be viewedas the chief spur to high inflation in health-care costs. Inthe absence of any other cost-containment mechanismsfor behavioral health, mental health care emerged as theonly sector of the inpatient market still operating under theunmodified FFS reimbursement method.

The health-care marketplace proved quick to adjust toregulatory changes. Some hospital corporations, whichsaw their revenues drop as a result of TEFRA, found reliefby shifting their focus onto psychiatric inpatient care.Venture capitalists and entrepreneurs rushed in to takeadvantage of one of the last unregulated areas of the FFSsystem. Psychiatric inpatient facilities grew at a prolificrate, outstripping any reasonable projection for the need for

inpatient care. Four large hospital corporations (CharterHospitals, Community Psychiatric Center [CPC] Hospi-tals, Psychiatric Institutes of America, and the psychiatricdivision of HCA, Inc. [formerly Hospital Corporation ofAmerica]) saw double- and triple-digit growth in theirfacilities between 1980 and 1990 (Bassuk & Holland,1987). A significant cause of the rapid rise in all health-carecosts during that decade was the exploitation by hospitalsand providers of the rich benefits for psychiatric inpatientcare unregulated by DRG prospective payment methods.The standard of care for chemical dependency rapidlybecame 28 days, regardless of the severity or duration ofthe problem. Hospital stays became lengthy for behavioralhealth disorders. By the beginning of the 21st century,these same disorders would most commonly be treatedon an outpatient basis. The excesses of the psychiatrichospitals came to a halt in the early 1990s due to high-profile investigations of their operations and subsequentsignificant fines (Lodge, 1994). For purchasers, therewas perhaps no better marketing campaign for the emer-gence of managed behavioral-health-care organizations(MBHOs).

As a disruptive innovation, TEFRA made two impor-tant contributions to restructuring the health-care market-place along cost-containment lines. First, by reintroducinga PPS, it overrode one of the basic principles of theFFS system. Second, it eventually resulted in a separatemethod for managing rising behavioral-health-care costs.Although no DRGs applicable to behavioral health inpa-tient care developed as a result of TEFRA, purchasersbegan seriously to seek other solutions to contain thesteadily rising costs of behavioral health care. Eventuallythey would embrace carve-out MBHOs , the final disrup-tive innovation of the cost-containment era.

Managed Competition

In the early 1980s another disruptive innovation appeared.Enthoven and others began to propose ways to reintroduceprice competition into the health-care marketplace (e.g.,Ellwood & Enthoven, 1995; Enthoven, 1993; Enthoven& Kronick, 1989a, 1989b; Enthoven & Singer, 1997,1998). The price competition movement that these authorsstimulated eventually would become known as managedcompetition . Managed competition proposes to change thenature of the health-care marketplace in fundamental waysby introducing competitive pressures for cost containmentand then managing how the marketplace responds to thosepressures in order to prevent market failure. It intends tocreate conditions and forces that will compel health plansand their associated providers to manage carefully the


care provided. The theory and strategies of managed com-petition guided the development of President Clinton’sproposed Health Security Act (1993).

Although Clinton’s efforts to secure passage of theHealth Security Act ultimately failed to result in legisla-tion, selected managed-competition principles, embeddedin that Act, were adopted by purchasers during the cost-containment era.

Managed competition can be defined as the pro-cess of structuring the health-care marketplace so thatrational microeconomic market forces produce a morecost-conscious, publicly accountable, quality-focusedhealth-care system. In essence, managed competition isa blueprint for increasing competition in health care bystructuring and managing a fluid market environment insuch a way as to contain costs, while at the same timeattempting to maintain quality of care and preventing mar-ket failure. Its fundamental goal is to change the health-care paradigm from exclusive reliance on the traditionalFFS model to a managed-competition model that is capa-ble of containing costs.

Table 24.1 compares specific elements of the FFShealth-care system with the managed competition alterna-tives. An entire chain of change—a linked series of eventsamong stakeholders—results from this alteration of thehealth-care paradigm. First, managed competition advo-cates the need to convert purchasers, especially employers,into sponsors of the change process. Then they must pro-vide those sponsors with strategies designed to change thestructure of the marketplace so that health plans operateequitably, and so that the more generally accepted microe-conomic forces (e.g., supply and demand, price elasticity,etc.) operate to contain costs without sacrificing quality.If microeconomic forces fail to produce the desired com-petitive market, sponsors must adjust the strategies usedto protect against market failure. Because the sponsors

are really purchasers implementing managed competitionstrategies, they will most likely try to prevent market fail-ure by having an effect on the stakeholders they influencethe most: the health plans. In turn, health plans, in order tosurvive and gain market share, will need to influence thebehavior of providers, service facilities, consumers, andthe pharmaceutical industry through various managed-carearrangements.

Managed competition employs numerous strategies toaccomplish its various goals. It aims to make the con-sumer more cost conscious and thus to change consumerbehavior; it seeks to stimulate competition among healthplans and to eliminate the noncompetitive features in thehealth-care system; and it has identified a particular stake-holder group, the purchaser, as a managing sponsor of thechange process who would implement the key provisionsof managed-competition strategies.

Making health plans compete for the business of pur-chasers on the basis of cost and quality through a com-petitive bidding process is a key strategy of managedcompetition. By standardizing plan benefits and requiringperformance data, the bidding process enables purchasersto compare price and quality among various plans.

Managed competition also seeks to make the consumermore cost conscious by changing the manner in whichpremiums charged by health plans are subsidized by em-ployers and the federal government. Managed-competitionprovisions would index an employer’s contributions tohealth plan premiums to the lowest-cost plan availableto the employees. Those employees opting to enroll in ahigher-cost health plan would have to pay the differencein premium charges between the lowest-cost plan and theplan chosen. The goal is to encourage consumers to be sen-sitive to cost when selecting among health plans offeredduring enrollment, thereby forcing health plans to con-tain costs in order to be attractive to potential enrollees.

TABLE 24.1 Comparison of Fee-for-Service and Managed-Competition Paradigms

Traditional Fee for Service Managed Competition

Separate finance and delivery of health care Integrated finance, delivery, and health-care managementCompetition for patients at individual provider level Competition for patients at health plan levelAll licensed providers eligible to participate Selective and exclusive contracting with providersUnfettered choice of provider by consumer Restricted choice of providerSolo practice or single-specialty practice groups Integrated multispecialty practice associationsInelastic price demand Elastic price demandMedical necessity determined by medical provider and consumer Medical necessity determined by health planNonstandardized insurance benefits packages with risk-based selection of enrollees Standardized benefit and no risk selectionNo financial risk for provider and facility operators Financial risk to health plans and provider care organizationsLevel of care continuum not managed Level of care managed across entire continuumLow cost attunement of consumer Cost-sensitive consumer


Managed-competition proponents also call for changinggovernment-based tax subsidies to ensure that competitionis supported and promoted, as well as to encourage busi-nesses to continue to provide health care for their em-ployees. Managed competition has also set into motioncertain initiatives focused on changing consumer behav-ior. It applies financial incentives to persuade consumersto accept reduced autonomy to initiate care and to accepta limited choice of providers. It attempts to intensify costconsciousness when the consumer contemplates using ben-efits by imposing higher copayments and coinsurance andby establishing financial penalties for not using the autho-rized provider system.

To stimulate competition among health plans, managedcompetition encourages the establishment of certain rulesof equity. These are designed to structure the businessenvironment in which health plans operate for the purposeof eliminating the noncompetitive features of the tradi-tional FFS health insurance system. To accomplish thisgoal, health plans would be required to bid on standardizedbenefit packages so that purchasers can more easily com-pare premium rates. When benefits are standardized, it ismore difficult for health plans to avoid enrolling potentialhigh-cost consumers by not offering benefits that wouldadequately cover their care. Under managed-competitionrules, payments to health plans would be risk-adjustedto ensure that the plans are adequately compensated forcosts associated with the treatment of high-need patients.Furthermore, health plans are prevented from denyingenrollment or limiting coverage for preexisting medicalconditions. Once a person is enrolled, the health plan isguaranteed to be renewable, regardless of medical condi-tions, thus making coverage continuous. Health plans mustaccept all eligible participants who choose them. Finally,the premium level is set on a community-rating basis; thatis, the premium charge is the same regardless of the healthstatus of people eligible to enroll. Managed competitionalso seeks to promote direct competition among healthplans in order to control costs without adversely affectingquality. To do so, it encourages the division of providersinto competing economic units at the health plan level.It then encourages health plans to contract with distinctpanels of providers in order to reduce the anticompeti-tive effects of competing health-care systems that havevirtually identical or highly overlapping providers. Anadditional approach to deepening competition at the healthplan and multispecialty level is to require these entitiesto provide performance data on patient satisfaction,access, and quality of care. By implementing these strate-gies, managed-competition advocates hope to make the

provision of health care more price elastic, as comparedwith the inelastic price of the FFS system.

A final key strategy is to transform purchasers intosponsors of managed competition and then to develop asponsor system. Sponsors contract with health plans forlarge groups of beneficiaries and manage the health-caremarket environment in a way that maintains price com-petition. A well-orchestrated, viable system of sponsors iscentral to the success of managed competition. Sponsorshave several important roles. They must contain cost andmaintain quality; take corrective action to protect againsttendencies toward market failure in a fluid, evolving mar-ket; and guide the system in the direction of greater effi-ciency. In order for sponsors to gain the leverage necessaryto structure and adjust the market, they must represent andpurchase care for a substantial portion of the market.

The various strategies, collectively known as managedcompetition , were developed to be implemented as aninterlocking package in an integrated and balanced way.If this does not occur, it is unlikely that the twin goals ofproducing a cost-conscious, price-competitive health-careenvironment and maintaining or improving the quality ofcare from that offered under the traditional FFS systemcould be achieved. There are obvious critical challengesto the full implementation of the managed-competitionmodel. First, it must have the ability to decrease thefragmentation present in the purchaser segment of themarketplace and to create a sponsor system capable ofmanaging change of the magnitude demanded. Second,health plans in managed-care systems must have theability to develop sustainable partnerships with providerorganizations. These provider organizations must be ableto engender loyalty and develop allegiance among con-sumers, while simultaneously managing the care that theyprovide. Managed-competition strategies and challengesapply equally to the medical, surgical, and behavioral-health components of the health-care system. Their stateof implementation and impact to date are described laterin this chapter.

Managed competition is the third purchaser-linkeddisruptive innovation that occurred during the cost-containment era. Much like ERISA, it strengthened theauthority of purchasers relative to the health plans withwhich they contract. It increased the number and effec-tiveness of strategies that purchasers had at their disposalto pressure health plans to contain costs, and it shifted agreater burden of the cost-containment mission to healthplans. Once managed competition began, the stage was setfor health plans to introduce two disruptive innovations oftheir own: managed care and carve-outs.


Managed Care

Unlike managed competition, which is aimed at restructur-ing the economic principles of health care, managed careattempts to influence the health-care behavior of providersand consumers. In the world of health-care finance, healthplans and purchasers view providers and consumers ascost centers. MCOs were formed to enable health plansto satisfy the demands from purchasers that they con-tain or reduce expenditures. Following passage of ERISA,purchasers understood that if they self-insured their com-pany’s health benefits and contracted with a health planto manage costs, they could reduce premium increases foremployees’ health-care benefits. Managed care consistsof an evolving set of interventions focused on contain-ing or reducing health-care expenditures, while attempt-ing to maintain or enhance the quality of care provided.Although the cost reduction benefits accrue to the health-care purchaser, it falls to the health plans to implementmanaged-care strategies. In fact, as the health plan marketconsolidated, the term managed became virtually syn-onymous with health plans. During the cost-containmentperiod, only a small fraction of health plans did not man-age the care that patients received.

The beginning of attempts by purchasers to containhealth-care costs can be traced back to passage of the1973 Health Maintenance Organization (HMO) Act. Untilrecently, the standard HMO service delivery system was amultidisciplinary staff model clinic that integrated finance,management, and service delivery systems.

The proponents of HMOs hoped that these new staffmodel ODSs would stimulate price competition in the mar-ketplace and eventually replace FFS systems, or at leastforce them to be more cost conscious. The competitiveadvantage that HMOs were supposed to have was basedon their incentives to contain costs. Despite financial sup-port for their development, the anticipated competition andreduction in costs never materialized, despite the fact thatHMOs managed utilization more carefully than did theFFS systems.

Within the managed-care movement, preferred pro-vider organizations (PPOs) appeared as the next cost-containment approach. PPOs divide providers into twogroups: those in their network who were eligible for higherlevels of reimbursement and those out of network whowere reimbursed at lower rates. PPOs developed networksof providers who were willing to accept discounted FFSrates and abide by the PPOs’ utilization review guidelinesin return for preferred access to treat their enrollees. Thisform of managed care immediately began to express its

disruptive effects on the prevailing health-care system.Reluctant as it was, provider acceptance for participatingin PPOs resulted in further erosion of the FFS principlesas a bedrock structure for health care. PPOs began to useselective contracting with providers, dealing a seriousblow to the community-wide provider concept of the FFSsystem. PPOs had a second major impact: The right toset prices no longer rested with the provider. Now it wasthe PPO that set a reimbursement rate for services. How-ever, PPOs continued to use the concept of reimbursingproviders on an FFS basis.

As networks became more sophisticated in terms ofutilization management, the next generation of managed-care systems would attack another key element of theFFS system. These newer forms of managed care wouldbegin to erode provider authority by becoming involved inmore aggressive utilization management via imposition oftreatment limitations. Case managers would become activein helping to determine the level, duration, and intensity ofcare that providers offered. The rise of an intermediary’sinvolvement in the care process would become one of themost problematic aspects of managed care for providers.Along with the rise of case managers came a new methodof payment that directly attacked the heart of the FFS sys-tem. Managed care began to operate under a prepaymentarrangement. This form of health-care finance becameknown as capitation , in which a specific amount of moneyis transferred from a health plan or managed-care entity toa provider organization to have that organization provideall the medical services a group of enrollees require fora specified time period. This prepayment method greatlyincreased the pressure on provider systems to containcosts by reducing expenditures. Capitation arrangementsled to more aggressive utilization management, fearsabout denial of care, and concerns that quality of carewould be sacrificed to maximize profits. As MCOs gainedexperience in controlling health-care expenditures, pur-chasers increasingly sought to contract with health plansthat had strong managed-care systems. Despite the switchfrom unmanaged indemnity plans to managed-care plans,above-average inflation returned to health care by thedawn of the 21st century. This fact calls into question theactual effectiveness of the managed-care strategies thatwere intended to contain health-care expenditures. Perhapsthe enduring contribution of this phase of the managed-care movement will be its disruption and nullificationof key FFS principles in the marketplace. Specifically,it reintroduced the concept of financial risk to providerorganizations, brought an intermediary deeper into thecaregiving process, intensified selective contracting with


providers and their facilities, and contributed to dividingproviders into competing economic entities.

Carve-Outs and Behavioral Health Care

For behavioral health care, carve-outs represented themost important disruptive innovation developed to containcosts. They were introduced into the marketplace almostsimultaneously with the larger managed-care movement.Carve-outs segment one health-care benefit from the rest,providing specialized administration and cost-containmentcontrols to that segment. Pharmaceutical benefits, labora-tory services, occupational medicine, and other benefitswere subject to carve-outs. However, behavioral healthcare would experience the greatest impact from this dis-ruptive innovation. Carve-outs were increasingly appliedwhen costs rose significantly in a segment of the mar-ket, when it was difficult to determine medical necessitybecause of the level of provider discretion in determiningthe amounts or types of care given, or when the dynamicsin that segment of the market were different from thosethat mainstream MCOs could handle effectively. Healthplans and the purchasers with whom they interacted cameto view behavioral health care as meeting all three of thesecriteria.

There is an inherent problem with carve-outs, how-ever: They create an artificial division in the health-carecontinuum, in effect separating a part from the mainbody. Carve-out companies emerged that were separatelyfinanced, and they developed independent service deliverysystems. These service delivery systems were often incon-venient. For example, when laboratory services are carvedout, there can be a lack of integration of that functionwithin the medical practitioner’s office. The patient mustgo to a separate facility for laboratory work, frequentlyhaving to fill out additional paperwork and then wait forservice. There sometimes can be difficulty in reintegrat-ing the information into the physician’s setting in a timelyfashion. Behavioral-health-care carve-outs posed a moreserious problem. Because functions overlap between pri-mary care and behavioral health care, consumers may notknow where to access care for behavioral health concerns.In fact, a significant portion of behavioral health care isstill provided by primary care physicians. Even more seri-ous, behavioral health carve-outs made it more difficult tocoordinate care for a broad range of chronic medical con-ditions that have high comorbidity rates for behavioralhealth problems. In addition, they impeded the abilityof the rest of the health-care system to utilize fully theskills of the behavioral health specialist. Such specialists

have the capability to help patients change health practicesor make lifestyle adjustments that would prevent chronichealth conditions from developing or prevent exacerbatingalready-existing conditions. Behavioral-health carve-outshave come to have broader implications than being sim-ply a different company managing mental health benefits;they have also come to represent a separation of the skillsof the behavioral health specialist from the broader needsof medical- and surgical-care patients.

Behavioral health care was among the first areas singledout by health plans for management via carve-outs. Theuse of carve-outs as cost-containment strategies in behav-ioral health care gave rise to a new form of MCO, themanaged behavioral-health-care organization (MBHO).Two distinct types of MBHOs quickly emerged: the mul-tidisciplinary staff model clinic (the clinic model ) and theexternal intermediary utilization review organization (thenetwork model ). The clinic-model MBHOs were staffedby salaried providers and were often funded by capitation,a new form of financial risk taking that was similar to theolder prepayment system of the self-regulatory era. Capi-tation funding arrangements pay a fixed dollar amount perenrollee per month or year to a clinic; the clinic in turnis expected to provide all medically necessary behavioralhealth care. Capitation funding is viewed by purchasers asa method to predetermine their costs for behavioral healthcare and as a way to create incentives for providers andtheir clinics to contain costs.

The early clinic-model carve-out MBHOs frequentlyhad contracts with one or more local employers to providebehavioral-health-care services. Direct contracting withpurchasers gave these companies a connection to employ-ers similar to the ones that had developed during theself-regulatory era. Seeing a business opportunity, entre-preneurs quickly began to develop clinic-model carve-outcompanies in behavioral health care. Soon a variety ofclinic-model MHBOs became active in the marketplace.Despite their variety, they continued to manage utilizationand coordinate care internally. No external intermediarywas involved in utilization management. The networkmodel represents the second type of MBHO to develop. Itgrew out of utilization review organizations that had beenactive for several years in general medical and rehabili-tation care sectors of the health-care market. These orga-nizations saw the opportunity to expand into behavioralhealth care. They extended and modified their care man-agement and utilization control procedures and then beganmarketing themselves to purchasers as MBHOs. Initially,the utilization review organizations did not have contrac-tual relationships with providers; their only contact was


with purchasers to contain costs. Unlike the clinic model,these companies did not directly employ behavioral-health-care providers. They contracted with providers ona discounted, FFS basis. One key element of the contractwas the provider’s agreement to abide by the company’sutilization management standards.

Impact of the Cost-Containment Era of Health Care:An Analysis

The disruptive innovations associated with the cost-containment era had a profound effect on reshaping thestructure and dynamics of the health-care system. Unlikethe FFS/TTP era, where stakeholder functions were care-fully defined and stakeholders were confined to theirassigned role in the health-care system, during the cost-containment era, stakeholders were free to perform mul-tiple functions, including those of other stakeholders.Purchasers could directly contract with provider health-care organizations; health plans could form their ownprovider organizations and be involved in service delivery;and purchasers could assume insurance functions throughself-insurance arrangements. The cost-containment erarearranged the players in the stakeholder hierarchy. Theprovider stakeholder community no longer occupied thedominant position, and in fact, providers slipped belowboth the purchasers and the health plan stakeholders onthe hierarchy. During this era, purchasers exerted theirdominant position by emphasizing cost containment asa necessity. They influenced the behavior of the twostakeholder constituencies with which they had direct con-tact: health plans and employees. They applied pressureto health plans to contain costs and shifted a greatercost-sharing burden to employees and beneficiaries whoutilized their health-care benefits. As initiators of the cost-containment era, purchasers have been its main beneficia-ries. Ever since purchasers gained the right to self-insuretheir health-care programs as a result of ERISA, theirpower relative to health plan stakeholders has increased.Therefore, health plans and their care management sys-tems occupy the pressure-filled environment where thedemands of the purchaser and consumer must be bal-anced with the dissatisfaction and demands of the providercommunity.

The provider stakeholder community experienced thebrunt of the cost-containment changes. No longer dom-inant in the stakeholder hierarchy, providers were nowsituated below both purchasers and health plans. The hard-est blow was the defeat of the protections offered by the

FFS principles. Providers have had to cope with an inter-mediary becoming involved in the provider–patient rela-tionship, selective contracting by MCOs, increased admin-istrative costs, decreased rates of reimbursement, and, insome cases, assumption of financial risk. The providerprotections that were built into the FFS-era market struc-ture have been largely nullified, and to date, providershave been ineffective in establishing a new path to market-place supremacy. The consumer stakeholder communityhas experienced much of the discomfort resident in thecost-containment era. The right to access care that is unim-peded by precertification procedures has been diminished,and purchasers have required employees or beneficiariesto pay a larger share of their health-care premiums andservice costs.

The cost-containment era lived up to its label in thatthe concern for containing costs by purchasers and thecompetition of health plans for market share resulted inhealth plans’ efforts to contain costs exceeding initiativesto improve quality. Despite this reality, some importantquality improvement efforts succeeded during this era.First, health plans transitioned from operating basicallypassive-reactive health-care systems to embracing provi-sion of proactive assistance to help avert medical crises,decrease avoidable service utilization, and improve thehealth status of their consumers, and in so doing gainedimportant insights into population health dynamics thatwill be beneficial during the subsequent era of healthcare. Second, they contributed to reducing fragmentationin the provider stakeholder community by stimulating thedevelopment and growth of organized delivery systemsof provider groups and facilities owners and operatorscapable of providing a full continuum of care, acceptingfinancial risk, managing utilization, and attending toquality of care issues. Third, as the cost-containment eraunfolded significant gains were made in utilizing infor-mation technology and other technological advancementsto assist in helping consumers maintain or improve healthstatus. Fourth, experiencing increasing pressure to containcosts to stay competitive and retain market share, healthplans sought and succeeded in closing gaps in the contin-uum of services available to consumers. Behavioral healthcare profited substantially from the addition of servicesto its continuum of care, with the addition of partial hos-pitalization programs, intensive outpatient programs, andchemical dependency programs. Fifth, viable care man-agement programs emerged during this era for consumerswith diseases that were persistent and required both treat-ment from a health-care professional and patient self-management initiatives, such as establishing positive


health supporting behaviors and eliminating health-destroying activities. Finally, improvement in informationtechnology made it possible to more easily and accuratelyidentify, communicate, and deliver targeted interventionsand advice to those coping with unremitting healthconditions.

Notwithstanding the achievements of this era, clearindicators of market failure were emerging with the returnof high inflation rates during the last decade of the cost-containment era. Paramount among the reasons contribut-ing to market failure was that the complete constellationof managed-competition principles, which to be effectiveshould be implemented as a complete and integrated pack-age, were implemented selectively and almost exclusivelyby one class of stakeholders: the health plans. Managedcompetition calls for the purchasers to consolidate theirbuying power to the degree necessary to serve as sponsorsand managers of the change process who then balance theinterests of all stakeholders. This did not happen, becausenongovernmental purchasers failed to reduce their mar-ket fragmentation and no meaningful plan emerged as tohow they would fulfill this role. Thus, no change man-agement entity existed to guide implementation of costcontrol procedures, resulting in each class of stakeholdersmore narrowly pursuing their own interests.

In retrospect, the success of the cost-containment erawas compromised from the start due to several key fac-tors: the lack of an effective change sponsor, selectiveapplication of managed competition principles, insufficientstandards or rules of equity in the health insurance indus-try, and provider and consumer resistance to the changinghealth-care landscape. These as well as other issues, wouldlead to a new era in health-care reform: the era of spon-sored competition.

The Sponsored-Competition Era

As previously mentioned, the cost-containment era lackedan effective change sponsor. Since 1996, however, the fed-eral government has been increasingly taking on this role.Much as the dynamics of the cost-containment era werehighly influenced by the provisions contained in ERISAand TEFRA, the sponsored-competition era was initiatedby the passage of three health-care-focused pieces of legis-lation: the Health Insurance Portability and AccountabilityAct of 1996, the Mental Health Parity and AddictionsEquity Act, enacted in 2008, and the Patient Protectionand Affordable Care Act of 2010. All three of these actsdemonstrate the growing role of the federal government infinancing the health-care system, establishing the market-place rules that govern the way the system performs, and

monitoring and adjusting marketplace forces to reducethe possibility of market failure. The Health InsurancePortability and Accountability Act (HIPAA) mandatesthat anyone belonging to a group health insurance planmust be allowed to continue their health insurance upontermination of their employment by purchasing healthinsurance coverage through their previous employer. Inaddition, the law also creates strict standards concerningprivacy of health information in order to prevent improperuse of one’s medical record. The Mental Health Parityand Addictions Equity Act (MHPAEA) is fundamentallya managed-care reform act designed to remedy unequaltreatment limitations and consumer financial obligationsimposed for mental health and substance use disorders thatwere not similarly applied to medical and surgical care.The Patient Protection and Affordable Care Act of 2010(PPACA) is intended to change substantially the U.S.health-care system. At its core, the PPACA is a govern-mentally derived strategy to structure the U.S. health-caremarketplace around principles consistent with managed-competition theory, so that rational, microeconomic forcesoperate more in concert to produce functional price com-petition at the health plan and provider stakeholder level,and to promote price sensitivity among the purchaserand consumer stakeholder communities. The followingsections of this chapter present a more complete reviewof the major provisions of these acts, as well as how theyare designed to transform the U.S. health-care system, andtheir impact on behavioral health care and psychologistsin particular.

Health Insurance Portability and AccountabilityAct (1996)

The Health Insurance Portability and Accountability Act(HIPAA) was enacted by Congress in 1996. Title I ofHIPAA protects health insurance coverage for employeesand their families when they change or lose their jobs.Title II of HIPAA, known as the Administrative Simpli-fication (AS) rules, required the establishment of nationalstandards for electronic health-care transactions. HIPAAset the stage for improvements in coverage as well as thebasis for electronic transactions that lead to the modern-ization of the health-care system.

Title I of HIPAA regulates the availability of grouphealth plans and certain individual health insurance poli-cies. The law mandated that anyone belonging to a grouphealth insurance plan must be allowed to purchase healthinsurance when previously provided coverage is lost. TitleI also limited restrictions that a group health plan can place


on benefits for preexisting conditions. Under HIPAA regu-lations group health plans could refuse to provide benefitsrelating to preexisting conditions for a period of up to 12months. However, individuals could reduce this exclusionperiod if they had group health plan coverage or healthinsurance prior to enrolling in the plan.

Title II of HIPAA created strict standards dealing withthe privacy of health information, which helps preventimproper use and disclosure of an individual’s medicalrecord. However, the most significant provisions of Title IIare its Administrative Simplification rules. Title II requiredthe Department of Health and Human Services (HHS) todraft rules aimed at increasing the efficiency of the health-care system by creating standards for the use and distribu-tion of health-care information. The rules established byHHS applied to health plans, health-care clearinghouses,billing services, community health information systems,and health-care providers that transmit health-care data.

Mental Health Parity and Addictions EquityAct (2008)

The Paul Wellstone and Pete Domenici Mental Health Par-ity and Addiction Equity Act (MHPAEA) prohibits grouphealth plans that have elected to provide either mentalhealth or substance use disorder benefits from imposingmore restrictive financial requirements or treatment limita-tions on the use of those benefits than those applied to med-ical and surgical benefits. The MHPAEA covers all healthplans except for Medicaid Managed Care Plans, which willbe subject to regulations issued by the Center for MedicalServices, and Medicare Advantage plans that are not groupplans sponsored by an employer. The federal Departmentsof Labor, Treasury, and Health and Human Services werestipulated as being responsible for producing implement-ing rules and regulations, which were subsequently pub-lished as an “Interim Final Rule” (Rule) in the FederalRegister on February 2, 2010. The Rule updates the 1996federal mental health parity law that applied to annual andlifetime dollar maximums for mental health benefits only,to be extended to benefits for substance use disorders (U.S.Department of Labor, 2008).

The Rule establishes six classifications of benefits andspecifies that parity must be achieved on a classification-by-classification basis, which means that if a plan providesmedical or surgical benefits in one classification and it alsoprovides mental health and substance use disorder bene-fits, it must also provide those benefits in that classificationas well. The six classifications are: inpatient in-network,inpatient out-of-network, outpatient in-network, outpatient

out-of-network, prescription medications, and emergencyservices.

The Rule also specifies that each type of financialrequirement (copayments, coinsurance, annual dollarlimits), quantitative treatment limitation (limits onnumber-of-days, visits, treatment episodes, etc.), and non-quantitative limitations (formulary design for prescriptiondrugs, methods for determining usual, customary, andreasonable charges, etc.) applied to mental health and sub-stance use disorders be the same or less restrictive thanthose applied to medical and surgical benefits under theterms of the plan in each classification of benefits. Inaddition to requiring parity across classifications, the Rulealso specifies that parity must be achieved for each “level”(magnitude) for each requirement or limitation and across“coverage units” such as individual, family, or individualplus spouse.

Limitations, Prohibitions, and Exemptions

The MHPAEA and its Rule define cumulative financialrequirements and cumulative treatment limitations as onesthat apply across covered expenses associated with mul-tiple episodes of care and that determine whether, andto what extent, benefits are provided. The most commontypes of these examples are deductibles and yearly out-of-pocket maximum limits. Health plans that apply cumu-lative requirements or limitations, such as deductibles orlimits on number of days coverage is provided for inpa-tient stays, must do so in a combined fashion. For example,it is no longer permissible to have a separate deductiblefor mental health benefits and for medical/surgical cover-age; they must now be applied as a single deductible forall health plan benefits. The only exceptions to this require-ment are for the annual and lifetime dollar limits on ben-efits. As stated in the earlier 1996 federal mental healthparity law, these two limitations may be maintained sepa-rately for both mental health and substance use disorders.

The Rule also distinguishes between quantitative andnonquantitative treatment limitations, and to date has iden-tified six nonquantitative treatment limitations used formedical management and/or cost-containment purposesthat must comply with parity requirements. They are:medical management standards; formulary design for pre-scription drugs; standards for providers’ admission to par-ticipate in networks, including reimbursement rates; planmethods for determination of usual, customary, and rea-sonable amounts; exclusions or limitations on particulartherapies or treatments (unless another alternative treat-ment is attempted as a precondition—known as first fail


or step therapy protocols); and conditioning payment ofbenefits on completion of a course of treatment.

Implications of the MHPAEA for Psychologists

There are five important practice implications for psychol-ogists and other behavioral health providers as a result ofthe passage of the MHPAEA. First, it eliminates a sub-stantial portion of the disparity that occurred in the use oftreatment limitations and financial requirements applied bymanaged-care entities to behavioral health care that werenot similarly applied to medical and surgical care. At itscore, the MHPAEA is a consumer-oriented managed-carereform act that fundamentally equalizes financial require-ments and treatment limitations that are applied to the useof a health plan’s medical benefits across all domains ofhealth care (medical, surgical, mental health, and sub-stance use disorders). During the cost-containment eraconsumers of behavioral-health-care services were subjectto more stringent financial requirements, except for a lowerdeductible threshold, and consumers and providers werealso subject to more restrictive quantitative and non-quantitative treatment limitations than were applied tomedical and surgical care. The MHPAEA is intended toeliminate such discrepancies. By prohibiting the use ofmore stringent care management provisions and tactics inthe behavioral-health-care domain, this Act will furtherreduce the contentiousness that at times characterized therelationship between consumers/providers, and the behav-ioral health managed-care intermediary involved in thecare process. While that relationship had already evolvedfrom one of contention to a more cooperative enterprisetoward the end of the cost-containment era, this Act shouldhave the potential to change that relationship further fromcooperation to partnership. However, since the MHPAEAdoes not apply to the individual and small group insurancemarkets (companies with less than 50 employees), andissues of parity for Medicare and Medicaid patients willbe directly handled by policies crafted by the Centerfor Medical Services, it still leaves the possibility thata segment of the market will impose different financialrequirements and use more restrictive treatment limitationsfor behavioral health care.

Second, the MHPAEA does not require that employer-sponsored and -subsidized health plans provide benefits forbehavioral health care or substance use disorders as partof the benefits of a health plan. A survey conducted by theSociety of Human Resource Management in 2009 revealedthat 80% of employers in the United States include behav-ioral health benefits as part of their overall health plans

(Research Works, 2009). However, some of those employ-ers have already decided to cease providing behavioralhealth benefits to mitigate their concerns about the poten-tial increase in costs associated with achieving parity andbehavioral-health-care costs in general. Behavioral-health-care providers will need to remain vigilant to the anniver-sary dates when a new benefit year begins to be surebehavioral health services are still covered by a client’shealth plan.

Third, the MHPAEA also does not define the disor-ders or conditions for which mental health benefits willbe provided, leaving such determinations to health plans inconsultation with group health insurance purchasers. This,of course, means that providers on multiple health planservice panels will have to deal with the greater adminis-trative complexity involved in tracking which health plansprovide reimbursement for treatment of a given condition.

Fourth, consumers who primarily utilize behavioral-health-care services will find that in many cases whenaccessing behavioral health care in a new plan bene-fit year, uncompensated care will initially require moreout-of-pocket payments because parity regulations requirethat all health plans have a single, coinsurance/deductible(known in the health insurance industry as an accumula-tor). The MHPAEA expressly prohibits the use of sep-arate, and therefore multiple, deductibles that have beencommon in employer-subsidized health plans. Prior to theMHPAEA, health plans often had separate deductibles formedical/surgical care and for behavioral health and sub-stance use disorder services; the latter two usually had aconsiderably lower deductible limit before a health plansubsidized the cost of care. During the cost-containmentera $1,000 and higher deductibles had become com-mon for medical care; however, most behavioral healthdeductibles were set lower in order to encourage utiliza-tion. As a result of parity, the coinsurance/deductible willbecome a shared accumulator between medical and behav-ioral. For many individuals who do not have general medi-cal problems, their entire episode of behavioral health carecould become an out-of-pocket expense, deterring someconsumers from seeking needed behavioral health carebased on financial considerations.

Finally, psychologists will need to understand the treat-ment limitations, financial requirements, and progresstoward fulfillment of a single deductible applied to all sub-scribers of a given health plan, as well as the appropriateway to engage with each health plan or Accountable CareOrganization (ACO) in order to understand their obliga-tions in relation to utilization management, quality initia-tives, and administrative issues such as coding, billing,


electronic health records, and requirements for care coor-dination. This in turn will lead to the need for providersinterested in participating in the third-party reimburse-ment system to develop effective electronic informationsystems for billing and eligibility determinations and toestablish an electronic health record system capable ofproviding information necessary to coordination of careacross multiple providers and essential to quality improve-ment activities.

Patient Protection and Accountable Care Act (2010)

The PPACA is the most far-reaching federal health-carelegislation to date. Its major elements and provisions havethe potential to so fundamentally restructure the market-place that by itself, when fully implemented in 2018, itwould be sufficient to serve as the foundation of a newera in health care in the United States. The comprehensivescope of the PPACA will require an 8-year period for com-plete implementation. Through collective impact, the var-ious elements of the PPACA are intended to accomplishthe following: (a) Lead the U.S. health-care marketplaceto operate more within the framework of establishedmicroeconomic marketplace principles, compatible withthe theory of managed competition; (b) accomplish amore functional balance of health-care stakeholder inter-ests and needs than existed in previous eras; (c) establishnew health insurance market rules that “qualified” healthplans must abide by; (d) create a new marketplace entityknown as “health insurance exchanges” through whichhealth insurance plans are bought and sold, consumers’health plan choices are expanded, and other key provisionsof health-care reform act are administered; (e) achieveuniversal coverage for U.S. citizens and legal residents;and (f) compel health insurance plans, as well as providerorganizations, to compete on both cost containment andquality of care.

It is also important to note what the act did not do: ThePPACA did not rescind the marketplace restructuring pro-visions of either ERISA (which allowed employers with50 or more employees to self-insure their health plans,stimulated the use of managed care and the involvement ofan intermediary in the treatment process, and introducedselective contracting with providers), or TEFRA (whichintroduced the prospective payment system and stimu-lated carve-outs), nor did it eliminate or limit the use ofmanaged care.

For the purpose of brevity, this chapter discusses onlythose features of the PPACA that are permanent (i.e., notscheduled to phase out before 2018), and that contribute

to restructuring some facet of the health-care marketplace.The following section examines the PPACA’s role inimplementing the principles of managed competition inthe marketplace, as well as how the PPACA attempts toaddress stakeholders’ interests, new marketplace rules andstructures, and other changes that it creates.

Managed Competition

The reason that the PPACA is so potentially transformativeis because it encompasses almost all of the principles con-sistent with Enthoven’s system of managed competition,and injects those principles into the U.S. health-care mar-ketplace. Enthoven’s principles of managed competitionare designed to reduce the likelihood of future market fail-ure; guide the health-care system toward greater efficiency;maintain and improve quality of care; and achieve a betterbalance of stakeholder interests and dynamics. Managedcompetition is not a free-market approach to health care.Rather, it relies on the active presence of a “sponsor” capa-ble of structuring and adjusting, as necessary, marketplaceforces in order to promote and maintain price competitionboth at the health insurance plan level and at the organizeddelivery systems level. Managed competition also relieson increasing consumers’ cost-consciousness by imposingcost-sharing requirements (e.g., copays, coinsurance, anddeductibles) associated with episodes of treatment, as amethod of discouraging unnecessary utilization of health-care services.

Managed competition seeks to reward health plans thatsimultaneously improve quality while decreasing costsand satisfying consumers.

The PPACA more fully places the federal governmentin the sponsor role, with some assistance from state-basedgovernmental entities. Through this legislation, the federalgovernment has assumed the role of the preeminent spon-sor of managed competition, and appears to be the onlyexisting entity capable of executing the responsibilities ofa sponsor, as required by managed-competition theory.

Balancing Stakeholder Interests

The PPACA also strives to achieve a more functional bal-ance of the needs and interests of the four major categoriesof stakeholders involved in the health-care enterprise:consumers, providers, health plans, and purchasers. Forconsumers, it offers more secure and affordable healthinsurance coverage; promotes quality-of-care initiatives;and enables access to quality and member satisfaction datarelated to the performance of health plans and providercare organizations. The provider community benefits from


(a) the addition of millions more patients who are enrolledin health benefit plans, and (b) the administrative simplifi-cation that occurs when there is greater standardization ofthe benefits covered by health plans and fewer variationsin cost-sharing requirements among qualified health plans.Financial incentives are also available to providers andprovider organizations in order to promote the conversionto electronic health records and to improve consumers’health status and quality of care. The health plan commu-nity also profits from an expanded market of consumerswho can potentially enroll in their plans; standardizationof the essential health benefits that must be included in aqualifying health plan; and the establishment of the rulesfor issuance and continuance of health insurance coveragefor enrollees. The purchaser group benefits from a greaterfocus on maintaining and improving the health status ofemployees and beneficiaries, as well as the likely reduc-tion in absenteeism from work. The establishment of state-based health insurance exchanges offers a mechanism forimproving the buying power of purchasers, while simulta-neously providing their employees or beneficiaries with agreater choice of plans. Also, it is theorized that competi-tion among the health plans participating in the exchangeswill force those plans to compete based on quality ofcare and integrated service delivery.

New Health Insurance Market Rules

The PPACA makes significant changes and adjustments toprivate health insurance coverage rules. These changes areintended to create a more price-competitive marketplaceand designed to make coverage more accessible, afford-able, and secure. These new marketplace rules, which areto be phased in between 2010 and 2014 for both individualand group health insurance plans, will do the following:establish the essential health benefits package that all qual-ified health plans must offer (as determined or revised bythe Secretary of the Department of Health and HumanServices of the federal government); guarantee issue andrenewability of a health insurance plan to any U.S. citizenor legal resident who applies, regardless of the presenceof a preexisting health condition, current health status, orpast medical history; prohibit rescinding an individual’senrollment in a health plan (unless coverage was obtainedfraudulently); limit the conditions under which healthinsurance premium ratings may vary to age, family struc-ture, geography, tobacco use, and the actuarial value ofthe coverage; extend dependent coverage to age 26; limitthe length of waiting periods for health insurance cover-age to no longer than 90 days; and prohibit establishing

unreasonable annual or lifetime limits on the dollar valueof benefits.

Create a System of Health Insurance Exchanges

The health-care marketplace for the purchase of either indi-vidual or group health insurance coverage in the UnitedStates is highly fragmented, which in turn contributes tohigher annual premium costs, a bewildering array of healthplan options (some of which offer inadequate coverage),insufficient information on which to make an informedchoice of insurance plan, and other systemic problems thatmake it difficult to contain costs and prevent market fail-ure. The PPACA attempts to remedy this situation by cre-ating a system of state-based health insurance exchangesthrough which health insurance can be bought and sold.If a given state establishes more than a single exchangefor their citizens, each exchange must serve a distinct geo-graphic area. States can choose to create exchanges thatsimply perform a connector function of linking eligiblepersons to their stated health plan preference via an Inter-net Web site that also provides comparative informationabout qualified health plans’ performance on a numberof dimensions. Alternatively, exchanges could function aspurchasing alliances in which they, on behalf of groups ofpotential enrollees, enroll people in their designated healthplan, and negotiate premium rates with health insuranceproviders.

The PPACA provides funding for states to develop andestablish health insurance exchanges in their state, in lieuof the federal government doing so, and assigns importantmarketplace functions to the exchanges. One of the mostimportant functions of the exchanges is to perform certifi-cation and qualification determinations of health insuranceplans seeking to be offered through that exchange. In orderfor a health insurance plan to be included among the eligi-ble plans offered by an exchange, it must meet a number offederal requirements established by the PPACA concern-ing insurance coverage of all the “essential health bene-fits” in the uniform benefits package, marketing features,and use of established formats for providing informationto consumers of health plans, as established by the Sec-retary of the Department of Health and Human Services.Health insurance plans must also demonstrate that theirprovider associations, networks, and quality improvementprograms meet the standards set forth in the PPACA. Asecond important function of exchanges is to increaseconsumers’ choices for health insurance coverage andto make it easier for consumers to compare the bene-fit structure, cost-sharing requirements, and performance


on quality indicators of available health plans. To do so,each certified health plan must offer multiple coverageplans, each of which offer the same essential health ben-efits coverage, but differ by the percentage of health-carecosts paid by the plan. (For example, bronze plans cover60% of the health-care costs; silver, 70%; gold, 80%; andplatinum, 90%.) Plans must also offer a catastrophic cov-erage plan for those who are exempt from the mandate topurchase health insurance or who are under 31 years old.To help consumers make an informed choice among themany health insurance plans offered through an exchange,comparative information on a plan’s administrative per-formance and measures of quality performance is to bemade available. A third important activity of exchangesis to conduct determinations of an individual’s eligibilityfor an exemption from the individual mandate to purchasehealth insurance, entitlement to health plan subsidies, andeligibility to participate in a public health-care program.

Universal Coverage

While the PPACA is focused on changing the dynamicsand structure of the health-care marketplace (as opposedto changing the way health services are delivered), it isstill likely to have an impact on the services that healthplans offer to consumers, as the system moves closer andcloser to universal coverage. When completely in force,the PPACA will have extended health insurance cover-age, or access to participation in government-based health-care programs, to an estimated 32 million people (Doherty,2010). All U.S. citizens and legal residents are required toobtain health-care coverage, except for those who exerciseone of the limited exemptions from the mandate to havecoverage. With the addition of these new enrollees to thosealready with health-care coverage, the U.S. health-caresystem will have virtually achieved universal coveragefor its citizens and legal residents. Universal coveragewill decrease the number of people who rely exclusivelyon hospital-based emergency medical facilities to providetheir health-care services, thereby reducing the usage ofthe most costly form of care. With universal coverage,everyone contributes to the cost of the health-care ser-vices they receive; therefore, there is less shifting of costsfrom one sector of the population to another. People with-out health-care coverage often, out of financial exigency,delay seeking health-care services or filling prescriptionsfor needed medication, thereby contributing to deteriora-tion in health status, development of medical complica-tions, flare-ups of chronic health conditions, and even thespread of communicable diseases—all of which add tothe total expenditures on health care in the United States.

Health-care systems that have achieved universal coveragealso typically have a greater focus on the maintenance andimprovement of overall health status, resulting in a bet-ter balance between providing preventive services versusmore exclusive reliance on treatment of episodes of illness.To prepare the U.S. health-care system to engage morefully in the provision of prevention services, the PPACAprovides a system of grants and eliminates cost-sharingrequirements for consumers who use evidence-based pre-vention services.

Systemic Implications of the PPACA

At this time it remains difficult to determine what partsof the PPACA will be implemented; however, it is clearthe health-care system is changing rapidly and will con-tinue to evolve. In particular, three trends will continue tohave an important impact on the health-care system: First,there will be a continued growth of the public sector por-tion of the health-care system and a subsequent declinein the employer-sponsored part of the system. Medicareand Medicaid will serve the majority of the populationby 2015. Medicare will continue to grow as the BabyBoomer generation (i.e., those born between 1946 and1964) becomes eligible for coverage. The initial migra-tion of this population into Medicare began on January 1,2011. There are approximately 76 million Baby Boomers,and the vast majority of them will survive to become eli-gible for Medicare coverage. The life expectancy of theseindividuals is also expected to be longer than previous gen-erations. Such a large number of beneficiaries will strainthe Medicare system, from both a financial perspective aswell as a delivery system perspective.

An additional 14 million individuals will become eligi-ble for Medicaid by 2014. The majority of individuals whodo not currently have health insurance will receive theircoverage from Medicaid. Similar dynamics will play outin Medicaid as in Medicare. There is not enough capacityin the Medicaid system to provide treatment for the largenumber of new beneficiaries. Both the Medicare and Med-icaid systems will need more providers to deliver servicesto their increased membership. The significant growth inthe population of people who have health-care benefits willrequire changes in service delivery systems for all markets.

Second, accountability for patient outcomes will be-come a major theme and force for change. As a result ofboth the PPACA and market forces, there will be a pushfor greater vertical integration of the health-care system.Integration will take the form of partnerships or organi-zations that span multiple disciplines as well as different


levels of care. The marketplace fragmentation representedby small health-care practices creates waste and con-tributes to substandard care coordination for patients. Theprimary service models being implemented to addressquality, efficiency, and improvement in care coordina-tion are patient-centered medical homes (PCMHs) andAccountable Care Organizations (ACOs). Both of thesemodels for providing patient care represent a movementtoward multidisciplinary integration of providers into sys-tems that provide improved care and reduce waste. Thisvertical integration links outpatient providers with hospitalsystems, as well as other health service organizations(rehabilitation clinics, etc.). The move toward verticalintegration is driven by the need for cost reduction andincreased effectiveness. New capabilities are being devel-oped to facilitate the effectiveness of vertically integratedsystems. Several companies are working on informationtechnology systems that improve their ability to identifyand stratify enrollees in their health plans who have identi-fiable gaps in their care. Such technological advancementswill help providers focus efforts on the highest-risk andhighest-cost individuals, to improve health-care outcomesand to reduce costs. Application of these technolog-ical capabilities will allow for greater integrating ofelectronic health records (EHRs) created by providersutilizing different EHR formats to form a single view ofa consumer.

Third, the PPACA addresses a number of issues thatcould contribute to system failure, yet leaves some impor-tant sources of health-care inflation unconstrained. As ofSeptember 2010, an estimated 16.7% of Americans—almost 50 million people—were uninsured and often uti-lized more expensive forms of care such as receiving treat-ment in an emergency department of a hospital (Schmidt,Shelley, & Bardes, 2010). The PPACA creates a mecha-nism for providing health care to the vast majority of thosecurrently uninsured. In addition, it provides regulations tomanage health plans by setting rules for the proportion ofrevenue that they must dedicate to paying medical claims.In doing so, it in essence sets limits on administrativefees and profits for health plans. In return, health plansreceive a larger population to manage, with the potentialto increase their gross revenue. As a result of a number ofpolitical pressures, several key problems that cause infla-tion in health-care premiums were not addressed by thePPACA. The Act does not propose to limit hospital feesor prescription medication costs, and it does not put limitson the cost of new technologies that are introduced in thehealth-care system. The lack of limits in these areas willproduce vulnerability in the federal government’s ability

to provide adequate sponsorship to prevent system failurewithout additional legislation that constrains marketplacebehavior of the above.

The federal government has done a more adequate jobin managing Medicare by setting pricing standards forprescription medications, hospital fees, and limits on theintroduction of new technologies. The federal mandatedregulations for Medicare are an example of more aggres-sive management for a critical part of the health-care sys-tem. In the future, many of the management techniques inMedicare may be considered for managing Medicaid andultimately commercial health care.

IMPLICATIONS FOR THE FUTURE

It is important to understand the dynamics in place todayamong the various stakeholders as they struggle for posi-tion in the sponsored-competition era.

Inter-stakeholder Boundaries and Functions Are Fluid

In the FFS era, stakeholder functions were carefullydefined and stakeholders were confined to their assignedrole in the health-care system. However, both the cost-containment era and the current sponsored-competitionera allow stakeholders to perform multiple functions,including those of other stakeholders. Purchasers candirectly contract with provider health-care organizations;health plans can form their own provider organizationsand can be involved in service delivery; and purchaserscan assume insurance functions through self-insurancearrangements. The health-care marketplace has been grad-ually adjusting to these shifting stakeholder roles; how-ever, until stable and predictable patterns emerge, allstakeholders will be caught in a cycle of perpetual changeand adjustment. Stakeholders will continue to vie for posi-tion in the health-care marketplace by attempting to reduceintra-stakeholder fragmentation, thereby increasing theirleverage.

Provider Functions Are Capable of Migrating AmongLevels and Types of Providers, if Unimpeded byArtificial Marketplace Barriers

The health-care marketplace stands to benefit considerablyfrom the natural migration of function that occurs in self-regulatory markets. However, powerful restrictions existin the health-care marketplace that prevent or severelylimit migration of function among health-care providers.The FFS era, with its guild-like protection of physicianprerogatives, resulted in a health-care system built on


elevated physician authority and backed up by scope-of-practice laws resistant to function migration to non-physician providers. Migration of function in this instancemeans that the function shifts primarily to another levelof provider or expands to include a broader community ofproviders. Battles will necessarily occur as other types ofproviders (e.g., nurse practitioners, physician assistants,psychologists, etc.) seek to remove barriers to assumingsome of the functions of physicians. Nowhere will there begreater conflict than in the behavioral-health-care arena,as psychologists press for prescription drug privilegesand access to a broader range of Current ProceduralTerminology (CPT) codes.

Cost-Containment Strategies Change in Responseto Perceived Effectiveness, Consumer Response,and Stakeholder Reactions

During the first 20 years of the cost-containment era,strategies employed by health plans to reduce expendituresunderwent changes in response to their perceived effec-tiveness and feedback from consumers and providers. Forexample, as health plan personnel gathered data about thecost effectiveness of various types of quantitative and non-quantitative treatment limitations, they adjusted their useof those limitations based on outcomes. When consumersclamored for more choice of providers, health plans even-tually accommodated by broadening their health planoptions and networks. In general, as the cost-containmentera unfolded, the use of restrictive treatment limitationswas gradually replaced by more flexible engagement withproviders. It can be anticipated that during the sponsored-competition era, the relationship of health plan personneland providers will further evolve to one of cooperationand even partnership. Given that cost-containment mech-anisms will be continuously evolving, it will be importantfor providers to keep abreast of the changes to positionthemselves to be viable in the marketplace.

Future Trends and Practice Implicationsfor Psychologists

It is difficult to forecast the future directions of the health-care marketplace when the managing entity, in this casethe U.S. Congress, is not of one mind about how thehealth-care enterprise should be structured and managed;health-care expenditures in key segments of the market-place are not constrained (for example, pharmaceuticalcosts); and the effects of rapid consolidation among keystakeholder groups, particularly the provider and healthplan communities, is underway and its impact on mar-ketplace performance is uncertain. Notwithstanding these

cautions, there are several future trends that can be fore-cast and implications for psychologists that can be madewith a reasonable degree of certainty. The three key futuretrends are: greater integration of behavioral health carewith the rest of the health-care system, growing impor-tance of efforts to help patients manage chronic diseases,and increasing use of telehealth for service delivery.

Greater Integration of Behavioral Health Care Withthe Rest of the Health-Care System (Co-Locationof Behavioral Health)

Although for the past two decades voices have beenraised in favor of greater integration, including the co-location of behavioral health care within the medical- andsurgical-care system, only modest movement in that direc-tion has occurred to date. The comorbidity of medicaland psychiatric disorders is well documented, and thereis ample scientific support for the usefulness of behav-ioral medicine practices in medical clinics and hospitals(Chiles, Lambert, & Hatch, 1999). Co-location in health-care systems in which behavioral health care is verticallyand horizontally integrated into the larger medical, sur-gical and rehabilitative care systems offers the promiseof improving treatment quality and efficiency for com-plex and chronic health conditions, many of which arecomorbid with mental health disorders. Integrated systemsof care provide opportunities for better care coordina-tion, simplify patients’ ability to navigate among varioushealth-care providers involved in their care, and increasethe likelihood that behavioral health conditions associatedwith medical illnesses will be alleviated, enabling patientsto make greater progress toward diminishing the impact ofpersistent medical disorders. A co-location model offersmany potential benefits to patients and could also createsavings in overall medical costs. The most appropriateplacement for mental health practice in a care deliverysystem is with primary care (Haley et al., 1998). It is welldocumented that medical patients often are influenced bypsychological problems, and there is significant scientificsupport for the usefulness of behavioral medicine prac-tices in medical clinics and hospitals (Chiles, Lambert,& Hatch, 1999). The placement of behavioral health carewithin medical clinics has the potential to increase qualityand contain costs.

Growing Importance of Efforts to Help PatientsManage Chronic Diseases Through CareManagement Programs

Care management programs are comprehensive strategiesthat connect a range of interventions to a larger change


model designed to treat and improve the health status ofhigh-need patients and those with unremitting health con-ditions. Typically, these programs contain elements thathelp reduce or eliminate barriers to coordination of careacross providers; employ evidence-based clinical treat-ments where established, stay involved with participantsthroughout their illness (not just when flare-ups occur),and represent collaborative care efforts requiring activeand willing participants.

There are several reasons why care management pro-grams have become increasingly important. In the yearsto come, the aging population of Baby Boomers and theobesity epidemic means that more people will be battlingwith chronic health conditions. Because the cost of carefor these groups will be substantially higher than for otherhealth plan enrollees, either disease-specific managementprograms or disease management programs that focus onsymptoms and self-management dilemmas common topeople with persistent health conditions will be developedas a way of improving quality of life and reducing health-care expenditures. Provisions of the PPACA that relateto insurance reform, establishment of a benefit structurethat covers all essential health needs, and the way healthexchanges function means that health plans and ACOs willnot be able to avoid enrolling people with chronic con-ditions through risk-avoidance practices, benefit design,or network coverage gap strategies. Thus, they willhave a greater incentive to learn how to care effectivelyfor people with chronic health conditions. During thecost-containment era, health plans and provider-operatedorganized service delivery systems learned a significantamount about what is necessary to build and implementcare and disease management programs, even thoughmuch remains to be done in enlisting and then successfullyengaging beneficiaries in those programs. Substantialprogress has been made with regard to the following ele-ments essential to care management efforts. First, infor-mation technology systems fundamental to gathering dataabout potential participants’ health needs are more sophis-ticated and enable health plans and ACOs to identifysubscribers who could benefit from such programs and tostratify and target interventions according to the level andtype of involvement necessary. Second, the greater preva-lence of electronic health records enables better communi-cation across multiple providers involved in managementof complex health conditions. Finally, progress has beenmade in establishing evidence-based treatments for moremedical and behavioral health conditions.

Psychologists should be well positioned to help develop,administer, and provide care management services—and

not only in the behavioral-health-care sector. The skillsof the psychologist in program design and evaluationare essential elements of all care management programs.Sophisticated change models, which will be at the heart ofeach program, require knowledge about how to match theprogram design to people’s readiness to change, motivatepeople to participate, change their relationship with theirdisease, sequence and pace the elements of a changeprocess, and use peer and group reinforcement for change.Also, because care management programs are broad inscale, involving multiple providers in multiple settings, itis necessary to develop the proper organizational structureand climate for their implementation. The skills that somepsychologists have in program evaluation, organizationalintervention, and executive coaching could prove invalu-able for successful implementation of care managementprograms.

Increasing Use of Telehealth for Service Delivery

The Internet has the possibility of revolutionizing vari-ous parts of the health-care marketplace. Consumers haveeasy access to a broad range of information, from infor-mation about symptoms to descriptions of evidence-basedtreatments. Thus, informed consumers can evaluate theirtreatment against established benchmarks. As audiovisualtransmission improves and becomes increasingly availableto more U.S. citizens, it will have a significant impact onbehavioral health care. Because most of the functions thatare needed to conduct an assessment and treatment of abehavioral health patient are available through the use ofinteractive video, access to treatment will change signif-icantly. The physical location of the provider or patientwill no longer be the determining factoring in the abil-ity to deliver health-care services. Consumers living inremote or lightly populated areas will access care via thetelehealth capacities of health plans and ACOs, thus pro-viding them with better access to previously unavailablespecialists.

Implications for Psychologists

There are several implications for the type of involvement,scope of practice, and nature of the way that psycholo-gists deliver health care in this ever-changing health-caremarketplace that can be forecast with a high degree of cer-tainty. The implications stem from an understanding thathealth plans are the entities that administer and managebenefits that purchasers have agreed to provide for theirbeneficiaries, and do so by contracting with providers oroperating provider organizations that deliver or coordinate


health-care services. Since the advent of the PPACA,health plans are now the segment of the health-care mar-ketplace where health-care expenses are most controlled(i.e., at least 80 to 85% of their premium dollars mustbe allocated to pay for medical care and quality man-agement). Thus, the financial success of health plans willbe inextricably linked to their ability to either develop oralign themselves with providers or ACOs that are capableof helping them provide quality care, enable easy patientaccess, reduce administrative overhead, and use othermethods to deliver effective patient care. During the spon-sored competition era, providers and provider organiza-tions (such as ACOs, PCMHs and independent providerswho are part of a health plan’s care reimbursement sys-tem) will need to contribute value to that system of care.The following implications for psychologists flow fromunderstanding ways they can provide value to the caresystems in which they participate.

Participate in Public Health-Care Systems

A 2005 U.S. Census Bureau report indicated there were46.6 million people in the United States without healthinsurance coverage (U.S. Census Bureau, 2006). ThePPACA relaxes participation standards and opens accessto Medicaid programs for a significant number of thosewho have been uninsured.

With the aging Baby Boomer population, Medicare willalso grow substantially during this decade. This meansthat the greatest growth in health plans will occur in theseprograms. Unfortunately, psychologists have been largelyabsent from participation in Medicare relative to othertypes of behavioral health-care providers. Participation inMedicare and Medicaid will become an important factorin joining ACOs and other provider groups, which willhave contracts to provide care to beneficiaries of thoseprograms, and will want to make sure that their providersare willing to treat patients enrolled in them.

Increase Knowledge Regarding WorkingWithin Medically Dominated Systems

As the behavioral health-care enterprise becomes moreand more integrated with medical and surgical care sys-tems, understanding how they function with regard to peerreview, quality assurance, and care coordination and con-sultation becomes important to a psychologist’s success.

Developing an awareness of the medical specialists thatare commonly involved in treating conditions with highindices of comorbidity with behavioral health disorderswill aid in care coordination and in identifying gaps in thecare patients are receiving.

Focus on Creating Value

Health plans, ACOs, and other organized care systemswill be focused on how each provider contributes to theirsuccess by adding value to the overall organization. Inorder to demonstrate that they are delivering value, psy-chologists will need to gather performance data regardingaccess, patient satisfaction, and treatment outcomes. Suchdata will enable health plans to help guide the psycholo-gist’s practice development and, if performance is belowstandards, to sever the relationship between the healthplan and the psychologist. Given the oversupply of behav-ioral health-care providers, it behooves the psychologistto demonstrate his or her value relative to other types ofbehavioral health providers. Additionally, it is likely thathealth plans will reward high-performing providers via asystem of performance incentives.

Become Members of Multidisciplinary CollaborativeCare Teams Focused on Primary Care

In the United States, the majority of behavioral healthcare is provided by primary care physicians. Because ofthat, it is critical that psychologists have a working rela-tionship or an on-site presence at the locations wheremembers access their primary care, and that psycholo-gists participate in collaborative care planning sessions, sothat patients accessing care in a primary care setting havebehavioral treatment options considered as part of theirtreatment plan (Haley et al., 1998; Strosahl & Robinson,2008). Psychologists should become familiar with mod-els of collaborative care, such as Doherty, McDaniel, andBaird’s (1996) model that elucidates five levels of collab-oration and integration with primary care systems in orderto determine the level of collaborative care appropriate totheir client’s needs.

Contribute to the Effective Care Management ofPatients With High-Need, Complex, and ChronicHealth-Care Conditions

Health plans understand that about 20% of the membersof their plans account for around 80% of the medical costsincurred in treating patients in a given benefit year, andthat fragmented, poorly coordinated, and unnecessary gapsin care result in high cost and poor medical outcomes.Providers who coordinate well with other providers andwho can help patients navigate through the health-care sys-tem to get the care they need in a timely fashion will addvalue to their organizations. Also, there will be a substan-tial need for psychologists who are competent in applyingbehavioral treatments for individuals with high needs andcomplex cases.


Automate the Practice Setting

Electronic health records (EHRs) are vital to the effortsto contain costs and improve patients’ health outcomes.EHRs reduce the costs associated with record manage-ment, such as filing, signing, and retrieving charts, chartreviews, and the need for multiple providers to view ahealth record simultaneously. EHRs aid in the quality ofcare by having built-in features, such as treatment proto-cols and pop-up care reminders. Also, they are essentialfor facilitating care management across multiple providersinvolved in an episode of care, and to help health plansand ACOs identify deficiencies in care that could diminishchances for recovery or contribute to relapse.

Psychologists will need to develop Web sites that gobeyond simply describing their practices. A Web siteshould be able to serve as a patient portal in which inter-active forms of patient education and communication cantake place. It should be able to help deal with accessand scheduling issues, as well as other ways to facilitatepatient treatment. In addition, it should have a secure fea-ture that allows providers to share information regardingcoordination of care and that enables the psychologist togather data regarding patient satisfaction.

Finally, electronic automation should have a patientbilling and claims management component that makes iteasy for the psychologist to coordinate the patient’s carewith other providers and to determine what additionaltreatment is desirable.

CONCLUSION

The United States is entering a new era in which the fed-eral government is taking a more active role as a sponsorof a managed-competition process. However, given thatthe federal government is not of a single mind about howand what should be carefully managed, and that it utilizeslegislative powers to inject change into the marketplace,instability, uncertainty, and tension will be everyday com-panions of the health-care marketplace. For example, thereis speculation that some or all of the provisions of the2010 Patient Protection and Affordable Care Act couldbe declared unconstitutional or repealed. Also, there issignificant risk in the implementation of the new law andthe related political controversy that could arise should itbe upheld.

The proposed increase in enrollment to Medicaid hascaused many states to raise objections to the increasedcosts that they will have to assume. The assumption ofnew enrollees will also have a cascading impact on the

traditional Medicaid delivery system, which has no addi-tional capacity. In addition, the establishment of healthinsurance exchanges will also add a level of complexityand cost, which states will find difficult to absorb duringbudget years. The combination of these issues has led tosignificant objections from many state leaders, as well asa new round of negotiations to alter the current PPACAlegislation.

The PPACA has been characterized as an insurancereform bill that extends coverage to many Americans, butdoes not do an adequate job of containing costs. Moreactions will need to be taken by sponsors in order tocontain pharmaceutical, hospital, and medical technologycosts and to achieve a sustainable system. Sustainabilitywill be achieved when coverage is available for all, andwhen the delivery system produces high-quality outcomesat a reasonable price. Significant restructuring of the cur-rent system and new provider payment methodologies willhave to be implemented in order to achieve sustainability.

Technological advancements have and will continue toaccelerate change and to restructure how care is delivered.The rapid adoption of electronic health records (more than50% of physicians already use them) and the capability ofcurrent information technology to connect providers usingdifferent information platforms or systems will achievea level of integration and collaboration that was notpossible a few years ago. Improved methods to identifypatients at risk and gaps in care of patients with identifiedchronic conditions will lead to more timely interventions,increased quality, and reduced cost.

Innovations such as ACOs, patient-centered medicalhomes, and technological advancements are already cre-ating change in the marketplace. Such innovations willincrease competition among health plans and providercare organizations, and in the long run will contributeto improved sustainability of marketplace reforms and thequality of care that patients receive.

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