Cost Containment Measures

MANAGED CARE, UTILIZATION REVIEW, AND FINANCIAL RISK SHIFTING: 
COMPENSATING PATIENTSFOR HEALTH CARE COST CONTAINMENT INJURIES[FNa]

Cost containment effectiveness depends on implementing a strict utilization review process enforced by appropriate risk-shifting techniques.⁽¹⁰⁸⁾ Section A of this Part defines utilization review and outlines utilization review structure. Section B describes the way managed care products employ strict enforcement of utilization review, through financial risk shifting, to control cost. Section C outlines the effects of cost containment measures on health care, including problems of assuring quality of care in the managed care product and maintaining the ethical basis of health care. Together, these sections provide an overview of the structure, operation, and effects of managed care products that is necessary to appreciate the need for a compensation system that encompasses managed care injuries. 

A. Utilization Review 

1. Utilization Review Defined 

Utilization review (UR) is the process by which an organization determines if medical services are appropriate and necessary. Managed care products perform UR by examining providers' authorization and furnishing of services to detect variations from the norm that may indicate unnecessary or inappropriate care.⁽¹⁰⁹⁾ When the third-party payer detects variation, it either does not pay the provider's charges (retrospective UR⁽¹¹⁰⁾ ) or refuses to authorize the provision of the service (concurrent UR⁽¹¹¹⁾ and prospective UR⁽¹¹²⁾ ). 

Utilization review takes several forms:  (1) preadmission review for scheduled hospitalization,⁽¹¹³⁾
(2) admission review for unscheduled hospitalization,⁽¹¹⁴⁾
(3) second opinions for elective surgery,⁽¹¹⁵⁾
(4) concurrent review,⁽¹¹⁶⁾
(5) gatekeeping by primary physician,⁽¹¹⁷⁾ and 
(6) retrospective claims review.⁽¹¹⁸⁾Despite all the current interest, utilization review is not new. In the 1970s, Congress established Professional Standards Review Organizations (PSROs).⁽¹¹⁹⁾ These PSROs were composed of physicians and were responsible for monitoring Medicare quality of care and conducting utilization review of Medicare services.⁽¹²⁰⁾ Medicare's PSROs, however, had limited effectiveness. In 1982, Congress reorganized the PSRO program, replacing PSROs with utilization and quality control Peer Review Organizations (PROs).⁽¹²¹⁾

2. Utilization Review Structure 

Utilization review may be conducted by providers, third-party payers, or independent agencies. The provider who conducts utilization review has a legal or a moral obligation to prevent overutilization, but a financial desire to fill the beds.⁽¹²²⁾ From the third-party payer's point of view, the physician often appears to be the least concerned with cost effectiveness because the physician is likely to authorize more services than appear necessary to the third-party payer. On the other hand, with a strong incentive to cut costs, the third-party payer may err on the side of denying needed services.⁽¹²³⁾ Not even independent agencies are truly independent when third-party payers are paying the bills for the agencies' services. The agencies' incentive is to maintain their contractual relationships with the third-party payers. Thus, with the possible exception of the provider, all entities who conduct utilization reviews focus on a desire to decrease the use of medical services, not on a desire to increase the quality of care.⁽¹²⁴⁾

It is empty and unrealistic to declare that the physician must act and be accountable for the patient's best interest while society allows, even encourages, the physician to act in the best interest of third-party payers. If "a man cannot serve two masters,"⁽¹²⁵⁾ neither can the physician. One need not be a clairvoyant to know which master will dominate. 

The transaction between physician and patient becomes a commodity transaction. The physician becomes an independent entrepreneur or the hired agent of entrepreneurs and investors who themselves have no connection with the traditions of medical ethics. The physician begins to practice the ethics of the marketplace, to think of his relationship with the patient, not as a covenant or trust, but as a business and a contract relationship.... Medical knowledge becomes proprietary; the doctor's private property to be sold to whom he chooses at whatever price and conditions he chooses.⁽¹²⁶⁾

Yet, the utilization review process is not the real culprit. Risk-shifting mechanisms cause the physician to change her pattern of practice from overutilization to appropriate utilization at best and underutilization at worst. Without financial risk shifting, utilization review would be nothing more than a guard dog without teeth. 

Third-party payers seek to manipulate provider behavior by shifting the risk of financial loss from the third-party payers to providers. Financial risk shifting can arise in a variety of arrangements: ownership interest, joint venture, or a bonus arrangement.⁽¹²⁷⁾ The risk shifting can also be in the form of rewards,⁽¹²⁸⁾

penalties,⁽¹²⁹⁾ or both.⁽¹³⁰⁾ The degree of risk assumed by the provider varies with the type of payment arrangement. Traditional fee-for-service practices are at one end of the spectrum (no risk shifted), and traditional HMOs are at the other (full shifting of the risk).⁽¹³¹⁾ PPOs fall in the middle. 

The most common means used by third-party payers to spread financial risk to providers ⁽¹³²⁾ are capitation (set fee per enrollee),⁽¹³³⁾ withholding (retaining a percentage of payment  due to reward or punish use trends at year-end),⁽¹³⁴⁾ discounted fees for services (provider required to give a discount to the third-party payer on amounts due),⁽¹³⁵⁾ per diem payments (flat fee per day per patient),⁽¹³⁶⁾ and profit sharing.⁽¹³⁷⁾ To shift the risk to hospitals, third-party payers also use per case mechanisms⁽¹³⁸⁾ and capitated payments per patient.⁽¹³⁹⁾

While the form may vary, the penalties have similar effects. For instance, third-party payers indirectly penalize physicians by giving them less profit or directly penalize them by reducing capitation payments each time they make inappropriate referrals. Not all risk-shifting mechanisms, however, have the same impact. Some have a greater potential than others to cause the physician to act inconsistently with the patient's best interests.⁽¹⁴⁰⁾ For instance, mechanisms like physician diagnosis-related groups and capitation require the physician to bear individual  loss.⁽¹⁴¹⁾ Consequently, these methods produce the greatest risk of undertreatment. 

Because many diseases and health conditions have wide variation in treatment, the loss to the physician can be significant.⁽¹⁴²⁾ On the other hand, if the financial risk shifting places the risk on the organization employing the physician, that risk shifting is less likely to interfere with the physician's attempts to act in the patient's best interest.⁽¹⁴³⁾ Finally, cost containment efforts that place explicit restrictions on the physician's decision making are less likely to result in injury than cost containment efforts whose effects may be hidden from the patient, from the physician, and from society.⁽¹⁴⁴⁾

Most plans do not place providers at individual risk. Nevertheless, third- party payers encourage competition among providers by basing the provider's financial rewards or penalties on the utilization experience of the individual provider in relation to the group. 

At what point does a financial incentive create a conflict of interest, in which physicians' behavior may be motivated substantially by pecuniary self- interest rather than by the patient's best interest? .... As [managed care products] continue to grow and as more physicians continue to sign contracts with them, these concerns will intensify.⁽¹⁴⁵⁾

C. Effects of Cost Containment Measures on Health Care 

Cost containment activities affect health care systems in several ways. First, cost containment can affect the quality of care received by patients. Second, financial risk shifting changes the fundamental ethical basis of the health care system. Finally, cost containment potentially restricts access not only to types of services but to minorities, underserved populations, and others who already have limited access. 

 1. Assuring Quality Care in the Managed Care Product

Quality health care requires a high level of health care services that assist an individual in remaining free from physical and mental incapacity while maximizing social capacity. In a third-party payer-driven market, the main challenge is structuring quality assurance activities to protect quality care in the face of counterproductive financial incentives.⁽¹⁴⁶⁾ The Council on Medical Service for the AMA (the Council) defines high quality care as that which "consistently contributes to improvement or maintenance of the quality and/or duration of life."⁽¹⁴⁷⁾ Another definition of quality care is the "component of the difference between efficacy and effectiveness that can be attributed to care providers, taking into account the environment in which they work." ⁽¹⁴⁸⁾ Both definitions are strikingly nonspecific and create, rather than solve, problems of definition. In an effort to help clarify its definition, the Council established eight factors that it believes are necessary for quality care delivery:  (1) the production of optimum improvement in the patient's physical condition and comfort; 
(2) the promotion of prevention and early detection of disease; 
(3) the timely discontinuation of unnecessary care; 
(4) the cooperation and participation of the patient in the care process; 
(5) the skilled use of necessary professional and technological resources; 
(6) concern for the patient's welfare; 
(7) efficient use of resources; and 
(8) sufficient documentation of medical records to ensure continued care and for evaluation of the care by peer review.⁽¹⁴⁹⁾Physicians have long had a concern for quality care.⁽¹⁵⁰⁾ Many believe that the quality of care must suffer to achieve cost  control.⁽¹⁵¹⁾ Unfortunately, there is very little information available about quality assurance in managed care products.⁽¹⁵²⁾ The absence of well-defined standards in an industry bent on cutting costs poses serious problems for patients.⁽¹⁵³⁾ Historically, we have seen how the profit motive worked to increase utilization.⁽¹⁵⁴⁾ There is no reason to think that similar dysfunctions will not occur in a system designed to enhance profits by decreasing utilization. Cost containment is the raison d'etre for third-party payers. Without comprehensive utilization review and financial risk shifting, third-party payers cannot contain costs.⁽¹⁵⁵⁾ But if cost containment becomes simply an excuse for sacrificing quality care, those whose benefit should be the focus of the entire system-the patients-will suffer. 

To argue that patients have a choice and can seek care outside the plan is unrealistic and even irrational. In reality, many individuals must forego uncovered treatment because of financial constraints.⁽¹⁵⁶⁾ Furthermore, providers influenced by financial concerns may not even offer uncovered treatment to particular patients.⁽¹⁵⁷⁾

Some argue that if society intends to influence provider behavior and thus create a risk to the individual patient, reasonable behavior based on that influence should be a defense to a medical malpractice claim.⁽¹⁵⁸⁾ If reasonable cost containment  was a valid defense to malpractice, however, what would happen to the patient injured by cost containment efforts? It is unfair to both encourage and entice providers to practice cost control and then to hold them individually responsible for consequent injuries. But it is no more fair to allow the injuries of innocent patients to go uncompensated. Current legal theories are neither adequate to encourage third-party payers to act cautiously, nor are they adequate to shift the burden of proof.⁽¹⁵⁹⁾ Thus, if legal theories remain unchanged, it appears inevitable that the quality of care will change, resulting in significant burdens on patients and providers. These burdens will appear unless third-party payers are held responsible for structuring systems that maintain quality care while containing costs. 

Yet, these quality care systems do not appear to be developing.⁽¹⁶⁰⁾ An overwhelming obsession with cost containment has caused developers of managed care products to essentially ignore quality assurance. The products, specific and detailed in their utilization requirements, generally address the issue of quality care in a vague and nonspecific manner. For instance, typical contract language states that "the provider is solely responsible for the quality of services rendered to a member."⁽¹⁶¹⁾ This shifting of total responsibility for quality to providers is unacceptable. Third-party payers are using financial incentives to deliberately influence providers' behavior to emphasize cost containment, possibly at the expense of quality care, while at the same time contractually passing the buck for the consequences of that emphasis. The government has made only minimal efforts to regulate managed care products. Instead, because managed care products focus on cost containment, the  government has encouraged their growth and is reluctant to regulate.⁽¹⁶²⁾

If society desires to reduce costs by changing providers' behavior, it must also establish legal safeguards to deal with predictable adverse consequences of that altered behavior. Several consequences are predictable: (1) Third- party payers will place increasingly effective utilization review and risk- shifting requirements on providers to cut costs and to increase profits; (2) Some third-party payers will attempt to increase profits by placing increasingly severe penalties and incentives on providers;⁽¹⁶³⁾ (3) Some providers will respond to the risk-shifting incentives by cutting out not only unnecessary services but also by eliminating some marginally necessary services and even some medically necessary care; and (4) Some determinations by utilization review agencies will be made arbitrarily or solely on the basis of cost. It is also predictable that some individuals will be injured because they do not receive necessary care. Given these predictable problems, we should not allow a system to develop that places the risk of injuries from cost containment on the individual rather than on society. 

2. Maintaining the Ethical Basis of Health Care 

There is a danger that financial risk shifting will undermine the fundamental ethical basis of the health care system. Historically, the health care system has been based on a belief in the sanctity of the physician-patient relationship. Physicians have had an ethical and legal responsibility to act in the patient's best interest. In addition, although access has not been actually assured, Americans have often articulated a belief that access to health care is a fundamental right.⁽¹⁶⁴⁾ Any risk shifting by third-party payers to physicians and hospitals will necessarily impact these beliefs.⁽¹⁶⁵⁾ Yet, the third-party payers'  inducements to physicians are, as one author has stated, "blatantly unethical."⁽¹⁶⁶⁾

Without a mechanism for quality control, it [is] blatantly unethical to entice physicians to alter their approach to patient care through either the prospect of personal financial gain or peer-group pressure. A patient comes to a physician to receive an expert opinion-an objective assessment of a particular problem or the best therapy. To have that opinion colored by external incentives ... creates an unethical conflict of interest that is potentially dangerous to the patient. In addition, [it] further [deteriorates] the medical profession in the public opinion.... [The] patient's welfare must be the physician's main concern.⁽¹⁶⁷⁾

The ethical basis of the health care system is necessarily founded on a certain amount of trust.⁽¹⁶⁸⁾ When a patient seeks care from a physician, the patient must believe that the physician will act in the patient's best interest and will not put other interests before that of the patient. The patient usually does not have the training to judge the reasonableness of the physician's decisions about her health care needs and alternative means of meeting those needs.⁽¹⁶⁹⁾ Thus, the physician, not the  patient, combines the components of care into treatment. It is essential that the patient trust that the physician will primum non nocere-first do no harm.⁽¹⁷⁰⁾

This trust will clearly be undermined by cost containment efforts.⁽¹⁷¹⁾ Even the suspicion that physicians no longer act in patients' best interest will cause anxiety and increase distrust. When there are actual injuries, the distrust will be reaffirmed and intensified. As the distrust becomes more and more significant, distrust may further exacerbate any unfavorable health outcomes. 

3. Maintaining Access to Health Care 

Changing the payment structure and the underlying system motivations not only affects quality and the physician-patient relationship, it also negatively affects access to health care. This is no small issue because access to health care is already a significant problem for many Americans.⁽¹⁷²⁾

Access problems caused by cost containment efforts occur in several ways. The first occurs when plans have systemic variations in the level of financial protection for the individual against health care costs.⁽¹⁷³⁾ Under those circumstances, access will be affected as patients' ability to afford health care changes. Furthermore, as plans further shift financial risk to providers, patient access will be affected as providers who are intent on avoiding cost containment penalties or obtaining cost containment rewards do not order services for patients.⁽¹⁷⁴⁾  Thus, the effectiveness of a plan's cost containment efforts will affect the patients' ability to obtain certain health care services. In addition, third-party payers can control costs by severely limiting the availability of certain resources.⁽¹⁷⁵⁾ Finally, access will be limited by differences in the quality of services. If patients perceive a managed care product to provide poor services, they are likely to forego the services, even though no other services may be available.⁽¹⁷⁶⁾

A utilization review's prospective decision is fundamentally different in its impact on the beneficiary than a retrospective decision.⁽¹⁷⁷⁾ While in both instances, patients theoretically know what treatments their plan will pay for, the plans' effects on patient behavior are significantly different. In the retrospective system,⁽¹⁷⁸⁾ a patient makes a decision about medical care and receives the medical care with only a potential risk of disallowance.⁽¹⁷⁹⁾ On the other hand, in a prospective system,⁽¹⁸⁰⁾ a patient knows in advance of treatment that the third-party payer will not pay for the recommended treatment. The patient's only chance of recovering the cost of that recommended treatment, if she can now even obtain it, is in a challenge to the third-party payer's decision.⁽¹⁸¹⁾ Thus, a patient in the prospective system is less likely to pursue treatment options not authorized by the plan.⁽¹⁸²⁾

By shifting incentives and creating the disincentive that results from having one's own finances at risk, the new methods of provider reimbursement turn providers into gatekeepers for the health care system. Their decisions would no longer be based on medical criteria alone (i.e., "does this medicine have something to offer this patient?") but would now take into account their own financial risk if they admit patients into the system whose care costs more than insurance will pay.⁽¹⁸³⁾

These considerations may undermine both the patients' trust in the system and the patients' access to care. 

D. Summary 

No matter how risk shifting reimbursement schemes are viewed, they will eventually alter the perceptions and expectations of society, physicians, patients, and third-party payers about what is owed to whom, what treatments are appropriate in what circumstances, and even what qualifies as a disease.⁽¹⁸⁴⁾ These altered perceptions may create a denial of access on the ground that a patient's condition is not meaningful in cost containment  terms, without regard to an assessment of whether the patient's condition is individually meaningful. If a denial of appropriate medical care results in injury because of cost containment efforts, who shall bear the burden? If cost containment is an important social goal, then the cost of injuries created by it should be spread throughout society.⁽¹⁸⁵⁾ Unfortunately, traditional tort theories of liability are inadequate to spread the cost throughout society, promote safety, or compensate patients. 
 

Go to: Traditional Theories of Liability

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Copyright ©1998. Vernellia R. Randall
All Rights Reserved.

 

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Endnote

107. FN107. One recent study of 222 employers noted that utilization review efforts can reduce total medical expenditures an average of 8.3%. Bishoff, supra note 57, at 9 (citing Glenn Ruffenbach, Employers Can Cut Health-Care Costs With "Utilization Review," Study Finds, WALL ST. J., May 19, 1988, at A38). In 1988, another study concluded that nearly 10% of the 800,000 hospital Medicare admissions were not "medically justified." Id. However, it may be that utilization review can provide only temporary relief and not a cure for increased costs. Id. at 10. That position would seem to be supported by employers' perceptions of the major obstacles to health care cost management: 76%-physician and hospital charges; 70%-costs of sophisticated medical technologies; 59%-an aging population; 49%-an inability to enforce medical performance standards; 42%-a failure of managed care to achieve projected savings. Only 37% and 30% respectively believed that utilization of outpatient care and utilization of inpatient care were major obstacles to health care cost management. Id. at 10. These perceptions would indicate that utilization review is a minor player in health care cost containment. Despite what may be a limited effectiveness of utilization review, the lack of a utilization management program or an inefficient system without supporting data probably disqualifies an entity from being a managed care system. Hinden & Elden, supra note 97, at 50-51 

108. FN108. Boland, supra note 90, at 503. 

109. FN109. Pamela S. Bouey, Peer Review in the Managed Care Setting, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL ISSUES (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in WESTLAW, TP-All File. 

110. FN110. Retrospective utilization management programs analyze data on hospital admissions, patterns of treatment, and utilization of certain procedures. See Bischoff, supra note 57, at 14-15 (providing examples of retrospective review). 

111. FN111. Concurrent review (or length of stay certification) determines the medical necessity of a continued hospital stay. Hinden & Elden, supra note 97, at 52. A concurrent review is conducted by a nurse reviewing the patient's treatment plan. The nurse conducts the review at the hospital using established medical criteria. If the nurse judges the treatment plan to be appropriate, she approves the stay until the next review cycle or the patient is discharged. If she does not approve the treatment plan, the nurse refers the case to a physician advisor who either confirms the need for continued treatment or suggests alternate treatment. Bischoff, supra note 57, at 14. 

112. FN112. Under a prospective review system, most nonemergency hospital admissions must receive prior approval and an initial approved length of stay is assigned. Hinden & Elden, supra note 97, at 52. 

113. FN113. Preadmission review is a form of prospective review. Preadmission review determines the medical necessity of a scheduled inpatient admission, expensive procedures, or outpatient procedures. The initial determination is made by a nurse review coordinator using established criteria. A registered nurse usually conducts offsite preadmission certification. If there is a scheduled admission prior to hospitalization, the patient's physician completes a review form. She describes the patient's medical condition and the treatment plan, and forwards the form to the nurse review coordinator. The nurse notifies the physician, patient, and hospital of her decision regarding the appropriateness of admission and length of stay. Bischoff, supra note 57, at 13-14. 

114. FN114. Admission review is a form of concurrent review. Admission review determines the medical necessity of unscheduled inpatient admissions or other admissions not covered by preadmission review. Most managed care products use admission review. The primary exception is hospitals that are paid based on diagnosis related groups. 

115. FN115. Except by commercial insurers, second-opinion surgery is used much less often. In 1985, commercial insurers required second opinions in nearly twice as many programs as any other sponsor. De Lissovoy et al., supra note 89, at 11. 

116. FN116. See supra note 111. 

117. FN117. See supra notes 64-67 and accompanying text.

118. FN118. Retrospective review disallows payments of claims for utilization. Because retrospective review disallows payment after the service has been received, it is not as effective as prospective or concurrent review. Consequently, the use of retrospective claims review is declining. However, it is useful as a tool to research provider claims. For example, it would be useful in determining whether the objective laboratory data (e.g., biopsy) and subjective data (e.g., surgeon notes) are consistent with the length of stay or the length of surgery. See Bischoff, supra note 57, at 15. Consequently, retrospective review can be a very important tool in a managed care product such as an HMO. 

119. FN119. See ANNAS et al., supra note 44, at 193. 

120. FN120. Id. 

121. FN121. 42 U.S.C. ss 1320c to 1320c-12 (1988); ANNAS et al., supra note 44, at 193. 

122. FN122. Interestingly, some commentators believe that allowing the provider to do the utilization review is letting the "foxes guard the hen house." Burgess, supra note 94, at 283-84. In reality, no review organization is independent. All review organizations are directly or indirectly concerned about encouraging overutilization or underutilization. Hospitals enter PPOs primarily to remedy a decline in patient volume, so they may not be inclined to conduct stringent utilization review, which might further reduce patient volume. De Lissovoy, supra note 89, at 9. 

123. FN123. But see Linda L. Kloss, Quality Review and Utilization Management, in THE NEW HEALTHCARE MARKET 680, 684-85 (Peter Boland ed., 1988) (identifying potential advantages for a PPO that contracts with a hospital for utilization review). 

124. FN124. While it is possible to have effective utilization review and high quality health care, without a focus on quality it is more likely that utilization review will work to the detriment of quality care. See infra part III.C.2. 

125. FN125. Matthew 6:24. 

126. FN126. Edmund D. Pellegrino, Rationing Health Care: The Ethics of Medical Gatekeeping, 2 J. CONTEMP. HEALTH L. & POL'Y 23, 32-33 (1986). 

127. FN127. See generally Capron, supra note 47, at 725; Paul M. Elwood, Jr., When MDs Meet DRGs, HOSPITALS, Dec. 16, 1983, at 62-63; E. Haavi Morreim, The MD and the DRG, HASTINGS CENTER REP., June 1985, at 30, 34-35. 

128. FN128. Rewards can be a predetermined fixed dollar amount, a fixed percentage of the surplus distributed among the risk pool, a bonus based on a physician's productivity, or a combination of methods. Alan L. Hillman, Financial Incentives for Physicians in HMOs: Is There a Conflict of Interest?, 317 NEW ENG. J. MED. 1743, 1746 (1987). The methods also include increasing fee schedules and allowing practitioners to become investors 

129. FN129. Third-party payers often provide for a portion of payments to providers to be withheld. Other mechanisms used to place the provider at risk include (1) increasing the percentage of payment withheld the following year, (2) placing liens on future earnings, (3) decreasing the amount of the capitation payment the following year, (4) excluding the provider from the program, (5) reducing the distributions from surplus, and (6) requiring providers to pay either the entire amount of any deficit or some set percentage of the deficit. Id. at 1745. 

130. FN130. For example, approximately 40% of managed care products require primary care physicians to pay for outpatient laboratory tests directly out of their capitation payments. Id. at 1746. HMOs also use peer pressure as a significant motivator. They develop a reporting system that informs providers of their performance compared with that of their peers. The reporting identifies areas of excessive costs and service intensity. Bischoff, supra note 57, at 12-13. 

131. FN131. Powers, supra note 64, at 289-90. 

132. FN132. See Alan M. Gnessin, Liability in the Managed Care Setting, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL ISSUES, at 405, 414 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in WESTLAW, TP-All File. 

133. FN133. A provider, or provider group, is paid a capitation fee per enrollee. The provider group then provides all necessary physician services. Primary care physicians are the gatekeepers to specialists and hospital services and are financially responsible for utilization. Because the amount of payment to the provider group is independent of the actual services rendered, the group takes on the risks of an insurer. Powers, supra note 64, at 298-99; Capron, supra note 47, at 726. 

134. FN134. Managed care products can shift the risk by withholding part of the provider's periodic fee-for-service payments for a claim period. The managed care products usually withhold from 5% to 20%. At the end of a claim period, a medical claim trend is determined and compared to a target medical claim trend. If the actual medical claim trend is lower than the target, the withheld funds are paid to the providers. If the actual medical claim trend exceeds the target, the withheld funds are paid to the third-party payer. Powers, supra note 64, at 283-84, 300-301. 

135. FN135. The managed care product assumes the risk that the third-party payer's premium will be sufficient to cover hospital charges. However, there is no participation by hospitals in profits of the managed care products. Third- party payers that contract with hospitals without a discount may pressure those hospitals for a discount, but discounted charges may be insufficient to cover the hospital's actual costs. Id. at 294. 

136. FN136. Hospitals are paid a flat rate per patient per day, which must cover all necessary services. The advantage of per diem payments is that the hospital is not at risk for the length of stay. However, if the managed care product also has an emphasis on early discharge, the hospital's total income may be reduced. This reduction can occur when the predetermined per diem payments are too low for the hospital to cover its costs and the managed care product requires discharge of the patient before the hospital can break even by averaging cheaper end-of-stay days with the more expensive beginning-of-stay days. Id. at 294-95. 

137. FN137. Barry S. Scheur & John H. Hoskins, New Concepts in Physician Reimbursement, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL ISSUES, at 167, 177-78 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in WESTLAW, TP-ALL File. 

138. FN138. Case mechanisms are similar to diagnosis-related groups. See supra note 60. Based on the diagnosis, a predetermined amount is paid to the hospital for each admission. The hospital is then at risk for the treatment and the length of stay. Powers, supra note 64, at 295-96. 

139. FN139. A hospital is paid a lump sum per enrollee in the hospital's service area to provide all covered hospital services required by those enrollees. Because the hospital's payments are independent of the actual services rendered by the hospital, the hospital assumes the role of an insurer. Id. at 296-97. 

140. FN140. All methods of payment implicitly involve financial incentives. The fee for service method provides as much incentive to overutilize as withholding can provide to underutilize. Alan L. Hillman et al., How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations, 321 NEW ENG. J. MED. 86, 86 (1990). 

141. FN141. See supra note 60 and accompanying text. 

142. FN142. See Capron, supra note 47, at 735-36 (noting the wide variations in treatment). 

143. FN143. Id. at 749-50. 

144. FN144. Id. at 750. 

145. FN145. Hillman, supra note 128, at 1744. 

146. FN146. Ossario, supra note 3, at 199-200. 

147. FN147. Burgess, supra note 94, at 289 (quoting AMA Council on Medical Service, Quality of Care, 256 JAMA 1032 (1986) [hereinafter Quality of Care]). 

148. FN148. Id. at 289 n.120 (quoting Quality Medical Care: Empiricism v. The Gestalt, in NATIONAL HEALTH LAWYERS ASSOCIATION 1987 HEALTH LAW UPDATE 1.3 (1987)). 

149. FN149. Id. at 289 (citing Quality of Care, supra note 147, at 1032). 

150. FN150. For instance, physicians reviewed the competence of their peers through state agencies and local medical societies. Similarly, hospitals monitored medical staff performance to maintain accreditation and minimize liability. Betsy A. Rosen, Comment, The 1985 Medical Malpractice Reform Act: The New York State Legislature Responds to the Medical Malpractice Crisis with a Prescription for Comprehensive Reform, 52 BROOK L. REV. 135, 144-45 n.49 (1986); see Quality of Care, supra note 147, at 1032. 

151. FN151. See Wendy Parmet, The Impact of Health Insurance Reform on the Law Governing the Physician Patient Relationship, 268 JAMA 3468, 3468 (1992); Virendra Sayena, Putting Out the Flames that Threaten Medicine, AM. MED. NEWS, Mar. 22, 1993, at 31, available in WESTLAW, Hpd File. 

152. FN152. See Burgess, supra note 94, at 288-91. This is in part due to the difficulty of defining and measuring quality. As a result, managed care products have had substantial flexibility in setting quality assurance standards. Id. at 292. 

153. FN153. Id. 

154. FN154. For instance, a California study found that for-profit hospitals had the highest rate of repeat Cesarean sections. HEALTH LAW. NEWS REP., supra note 3, at 5. 

155. FN155. Burgess, supra note 94, at 292. In fact, insufficient financial incentives have been connected with the breakdown of several managed care products including SAFECO's United Health Care Experiment. See generally Steven S. Sharfstein, Financial Incentives for Alternatives to Hospital Care, 8 PSYCHIATRIC CLINICS OF N. AM. 449-60 (1985). 

156. FN156. Maureen E. Corcoran, Liability for Care in the Managed Care Setting, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL ISSUES, at 425, 427 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in WESTLAW, TP-All File. 

157. FN157. Id. 

158. FN158. E.g., Morreim, supra note 3, at 1719 (arguing that the presumption of a unitary standard of care be refutable by appropriate evidence of economic constraints). 

159. FN159. See infra part IV. 

160. FN160. HMOs are required to administer comprehensive quality assurance to meet statutory and regulatory requirements. Burgess, supra note 94, at 289. Consequently, the National Committee for Quality Assurance (NCQA), incorporated in 1979, has established standards to measure HMOs. Id. at 289-90. However, those standards tend to be targeted on organizational issues and administrative and clinical problems. Id. at 289-91. Another method suggested for monitoring and assessing quality of care is the use of audit reports. Independent physicians examine the managed care products' medical records after the patient is discharged. Id. at 290; see Arnold Milstein et al., Auditing Quality of Care: An Employer Based Approach, BUS. & HEALTH, July-Aug. 1986, at 10. While audits may provide performance snapshots of quality of care, they do not necessarily identify what the quality of care should be. The AMA has proposed that the Joint Commission on Accreditation of Hospitals be given the sole authority to develop standards of care for the health care industry. Burgess, supra note 94, at 290-91. 

161. FN161. Stevens, supra note 98, at 9 (emphasis omitted). 

162. FN162. Burgess, supra note 94, at 291-92. Twenty-two states actually have enacted enabling statutes for PPOs, but only fourteen have included provisions to protect consumers. Of those fourteen, only two states, Utah and Michigan, have quality assurance provisions that require PPOs to establish programs to review care or services. Id. 

163. FN163. Managed care products are increasingly important to providers as more and more of their patients are affiliated with one plan or another. Hillman, supra note 128, at 1747. 

164. FN164. See generally Kenneth R. Wing, The Right to Health Care, 2 ANNALS HEALTH L. 161 (1993). 

165. FN165. Capron, supra note 47, at 739-40. 

166. FN166. Geoffrey Modest, Financial Incentives and Performance of Health Maintenance Organizations, 322 NEW ENG. J. MED. 62, 63 (1990) (letter to editor). 

167. FN167. Id. 

168. FN168. Capron, supra note 47, at 737-39. Some authors view trust as a basis for a contractual relationship. E.g., CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 16 (1981). 

Implicit in such a contract is that the physician can be trusted to treat the patient's health needs and interest as central, thus minimizing the need for the patient to be defensive or to withhold information. Both the status of the physician and the ethical bases of his practice facilitate the patient's willingness to put his health in the hands of the physician with little demand for detailed explanations or monitoring of the physician's decisions. This is not to imply that physicians have always conformed to these ethical mandates or that patients have generally been docile, but only that the physician's authority has been assumed to be part of the ordinary understanding of relationships between physicians and patients and their respective responsibilities. 

David Mechanic, Therapeutic Relationship; Contemporary Sociological Analysis, in ENCYCLOPEDIA OF BIOETHICS 1688 (Warren T. Reich ed., 1978), quoted in Capron, supra note 47, at 737 n.113. The courts have also recognized this trust relationship: "The patient's reliance upon the physician is a trust of the kind which traditionally has exacted obligations beyond those associated with arms-length transactions. His dependence upon the physician for information affecting his well-being, in terms of contemplated treatment, is well-nigh abject." Canterbury v. Spence, 464 F.2d 772, 782 (D.C. Cir. 1972). 

169. FN169. Capron, supra note 47, at 738. 

170. FN170. See id. at 737-38. 

171. FN171. See id. at 738. 

172. FN172. At any one time, up to 25 million Americans lack health insurance. That amounts to about 11% to 12% of the noninstitutionalized population. Because of loss of coverage or change of employment status, in any given year over 16% of Americans will not have insurance. Id. at 740-41 n.119. 

173. FN173. Individuals and agencies engaged in utilization review traditionally maintain that they make their decisions for the limited purpose of determining payment, not for the purposes of determining the course of treatment or access to care. Hinden & Elden, supra note 97, at 54. "Just because we refuse to pay for the service," the argument goes, "does not mean the patient cannot get whatever treatment she desires." Even if that argument had any validity, the reality is that for many people a denial of payment is a denial of treatment. Id. Thus, a health care system based on third-party payers that ration health care resources on the basis of ability to pay will exacerbate the problem of access. Morreim argues that these changes in the health care delivery system will more heavily burden the indigent. She argues that the problem is not so much one of "pervasive resource shortage" but of "stratified scarcity." Morreim, supra note 3, at 1722. 

174. FN174. If different cost containment programs produce markedly different financial rewards for physicians, then physicians are likely to refuse to participate in programs or to serve the subscribers of those programs that pay them less. Capron, supra note 47, at 751-52; Rand E. Rosenblatt, Dual Track Health Care-The Decline of the Medicaid Cure, 44 U. CIN. L. REV. 643, 644- 45 (1975). Thus, financial risk shifting will widen the gaps between tiers of a multi-tier health care system. At the top tier will be those individuals and companies who can afford to pay top premium for their care. Third-party payers will translate the high premium into better financial payments to the physicians. Better payments to physicians will mean more physicians willing to serve the particular population and, consequently, access to a broader range of health care services. At the bottom tier will be tax-based systems like Medicare and Medicaid that severely restrict payments to physicians. These lower payments will translate into fewer providers and fewer services. Thus, the quality of care that the patient receives is likely to be influenced by the payment source. A study of the hospital records of almost 600,000 patients found a marked difference in outcomes for those who had health insurance and those who lacked it. The uninsured were 1.2 to 3.2 times more likely to die than the insured. HEALTH LAW. NEWS REP., supra note 3, at 4. As health care costs rise, third-party payers will tend to make annual changes to reflect the previous year's experience. Products with the most effective utilization review process are likely to make fewer changes. Still, some programs are likely to make changes frequently. Annual program changes are disruptive, and physicians are likely to avoid serving the patients of a plan that changes often or to leave the system entirely. Capron, supra note 47, at 751-52. For example, the annual program changes that have occurred in Medicare in recent years as a part of congressional budget-balancing efforts have seen an exodus of physicians. Id. Programs that serve the poor are more likely to make annual changes because of smaller profit margins in the care of that population. 

175. FN175. Alternative sources of care cannot be expected to fill the gaps of access created by the withdrawal of physicians who do not believe that a particular program rewards them sufficiently. As noted by one author, "patients with 'substandard' third-party reimbursement rates have difficulty commanding the attention, much less the loyalty of many physicians." Id. at 747; see also Peter H. Elias, Physicians Who Limit Their Office Practice to Insured and Paying Patients, 314 NEW ENG. J. MED. 391 (1986) (letter to editor). Cost containment measures that shift financial risks of treating patients from the third-party payer to the provider may have an effect on access to care that other types of cost containment efforts will not have. Capron, supra note 47, at 751-53. Providers might overcome price-lowering efforts by increasing the number of service units. However, they can only beat risk shifting by excluding high risk patients from their practice. See id. at 728. But see Harold S. Luft, Health Maintenance Organizations and the Rationing of Medical Care, 60 MILBANK MEMORIAL FUND Q. 268, 299 (1982) (arguing that providers' disinclination to serve certain populations might be overcome if a higher premium is charged for those enrolled). For example, some cost containment efforts have disincentives that penalize the physician for accepting the sickest and poorest patient, "the very ones who have the hardest time obtaining health care." Capron, supra note 47, at 752. 

176. FN176. See Capron, supra note 47, at 742. 

177. FN177. Corcoran v. United Healthcare, Inc., 965 F.2d 1321, 1331 (5th Cir. 1992). 

178. FN178. See supra note 110 and accompanying text. 

179. FN179. Corcoran, 965 F.2d at 1332. 

180. FN180. See supra notes 111-112 and accompanying text. 

181. FN181. Corcoran, 965 F.2d at 1332. 

182. FN182. Id. 

183. FN183. Capron, supra note 47, at 753. 

184. FN184. Id. at 749. 

185. FN185. Soon third-party payers will routinely withhold (or decline to pay for) interventions that might benefit certain patients but that simply cost too much because society collectively may choose not to "check on physicians temptation to place their own interest ahead of their patients' interests. Instead society [attempts] to use physicians' selfish motivation to restrain full pursuit of patients' interest." Id. at 749.