HMOs are facing rising health care costs,

March 19, 1997

HMOs facing rising health care costs

ANN ARBOR—Reductions in health care cost growth achieved by HMOs may not be sustained because many HMOs, like traditional insurers, have not met their toughest challenge—reducing the growth rate in the use of emerging medical technology, according to a study from the University of Michigan School of Public Health. The U-M researchers published their findings in the March/April issue of the journal Health Affairs.

The United States has witnessed a three-year decline in the growth of health care costs but costs have begun rising again in both HMOs and fee-for-service systems. The culprit, according to the U-M researchers, is the increasing demand for and use of new medical technologies.

In order to determine delivery systems’ ability to constrain the use of emerging medical technologies, the researchers examined the effect on utilization rates of a bellwether medical innovation—laparoscopic cholecystectomy (the removal of the gall bladder using minimally invasive endoscopic surgery). Their data, which covered 1989-94, came from six HMOs, fee-for-service systems in Maryland and Connecticut, and Pennsylvania’s Medicare system.

The laparoscopic surgical technique, introduced in 1989, is typical of a number of minimally invasive surgeries performed to repair hernias, knee injuries and even treat heartburn. Similar techniques also are being applied to heart bypass surgery. The minimally invasive procedures often can be performed on an outpatient basis and generally are less physically stressful than traditional surgery. Currently, 80 percent of all gall bladder surgeries are performed laparoscopically.

“Both before and after the introduction of laparoscopic techniques, HMOs appear to be appropriately conservative in their rates of gall bladder removal. However, we found that while there was some variation among the HMOs, there were no systematic differences in the growth of utilization rates for this procedure between the HMOs and the non-HMOs,” said Michael Chernew, assistant professor of health management and policy. “In both systems, when innovative technology substantially reduced the physical burden on the patient, utilization rose.”

The increase in utilization rates after the introduction of laparoscopic surgery was 19.6 percent for the Pennsylvania Medicare population and 24.8 percent in the general population of Maryland and Connecticut.

The increase in utilization rates for five of the six HMOs, however, was dramatic, rising 61.5 percent, 74.3 percent, 44 percent, 20.7 percent and 59.2 percent. “The initial utilization rates for the surgery in 1989—the starting points for the comparison—were lower among the HMOs than the fee-for-service groups, so their rates had more opportunity to rise. Nevertheless, the HMO growth in utilization rates were substantial,” Chernew said.

“Current reductions in health care cost growth associated with HMOs may only reflect transitional savings. Even if HMOs are less expensive than traditional health insurance, if they adopt technologies at these rates, they may not change the underlying rate of health care cost growth,” Chernew said.

One HMO in the study was an exception, holding growth in costs to 4.2 percent.

“This HMO operated in a very mature and competitive market,” Chernew explained. “Also the physicians with whom the HMO had contracted were generally conservative in their treatments. When the laparoscopic gall bladder technique was introduced in 1989, the contracting physicians spent considerable time determining the clinical threshold—the point at which surgery was warranted. Their experience suggests that HMOs can control health care cost growth if sufficient attention is paid to that goal.”

While the U-M study examined the effects of just one type of surgical innovation on rising health care costs, “the medical system is made up of many discrete procedures that must be controlled. The procedures are like hundreds of small streams that, if left unchecked, become a flood,” Chernew said. “Ultimate control over health care cost growth will require that HMOs and individuals make tough choices regarding utilization of an ever growing array of impressive medical services.” Chernew’s research colleagues were A. Mark Fendrick, assistant professor of internal medicine and of health management and policy, and Richard A. Hirth, assistant professor of economics and of health management and policy.

U-M News and Information Services University of Michigan

Health AffairsMichael Chernewhealth management and policyA. Mark Fendrickinternal medicineRichard A. Hirtheconomics