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February 2005, Vol 95, No. 2 | American Journal of Public Health 286-291
© 2005 American Public Health Association
DOI: 10.2105/AJPH.2002.013466


RESEARCH AND PRACTICE

Health Expenditures for Privately Insured Adults Enrolled in Managed Care Gatekeeping vs Indemnity Plans

Susmita Pati, MD, Steven Shea, MD, MS, Daniel Rabinowitz, PhD and Olveen Carrasquillo, MD, MPH

At the time of the study, Susmita Pati was with the Departments of Pediatrics and Internal Medicine, Daniel Rabinowitz was with the Department of Statistics, and Steven Shea and Olveen Carrasquillo were with the Division of General Internal Medicine, Department of Medicine, Columbia University College of Physicians & Surgeons, New York, NY. Steven Shea was also with the Division of Epidemiology, and Olveen Carrasquillo was also with the Division of Health Policy and Management, Mailman School of Public Health, Columbia University.

Correspondence: Requests for reprints should be sent to Olveen Carrasquillo, MD, MPH, Division of General Medicine, Columbia University College of Physicians and Surgeons, PH 9 East, Room 105, 622 West 168th St, New York, NY 10032 (e-mail: oc6{at}columbia.edu; pati{at}email.chop.edu).


    ABSTRACT
 TOP
 ABSTRACT
 INTRODUCTION
 METHODS
 RESULTS
 DISCUSSION
 References
 

Objectives. We assessed the ability of managed care gatekeeping strategies (i.e., requiring a designated primary care provider to authorize referrals) to control health care costs in the mid-1990s.

Methods. We analyzed expenditure data from 8195 privately insured adults sampled in the nationally representative 1996 Medical Expenditure Panel Survey. Managed care gatekeeping plan enrollees included those in health maintenance organizations and other plans requiring a primary care gatekeeper. All others were considered indemnity plan enrollees.

Results. In 1996, total per capita annual health expenditures for adult gatekeeping enrollees were about $50 less than those of indemnity enrollees, primarily owing to lower out-of-pocket expenditures. After multivariate adjustment, mean per capita expenditures were approximately 6% lower for gatekeeping enrollees than for indemnity enrollees.

Conclusions. In the private sector, gatekeeping strategies resulted in modest cost savings over indemnity plans.


    INTRODUCTION
 TOP
 ABSTRACT
 INTRODUCTION
 METHODS
 RESULTS
 DISCUSSION
 References
 
Gatekeeping arrangements have been used for decades by some health maintenance organizations (HMOs) to facilitate the provision of integrated health care.1–3 This system requires a designated primary care provider to authorize subspecialist referrals. In the 1980s, managed care organizations (MCOs) began instituting gatekeeping in an effort to control costs and reduce inappropriate utilization of subspe-cialists.1–4 On the basis of preliminary evidence that gatekeeping was cost-effective,5–7 this model became the dominant mode of health care delivery in the United States in the 1990s. At the same time, MCOs greatly expanded market share8,9 by offering highly attractive premiums to health insurance purchasers. These lower premium levels led to the widely held belief that gatekeeping was an effective cost-containment strategy.2–4,10–13 However, recent upward trends in private health insurance premiums have raised doubts about the ability of managed care strategies to control health expenditures.10,14,15

Evidence that managed care gatekeeping arrangements controlled health expenditures in the mid-1990s is scarce. The lull in health care inflation from 1994 to 1997, which coincided with peak enrollment in gatekeeping plans, is often cited as evidence that MCO strategies to control costs were effective.2–4,10–13 Prior studies that examined this issue are now outdated5,6,16 or have limited generalizability.17–19 Difficulties in estimating the cost of services in MCOs that use gatekeeping arrangements, including the proprietary nature of this information, have hampered direct comparisons with expenditures in non-gatekeeping plans.20 A recent study of privately insured adults from a Midwestern metropolitan area showed no difference in expenditures between gatekeeping and point-of-service (nongatekeeping) arrangements for 1994–1995.17,18

In this study, we analyzed data from the 1996 Medical Expenditure Panel Survey21 (MEPS) of the Agency for Healthcare Research and Quality (AHRQ) to determine whether total health expenditures in the mid-1990s were lower for privately insured adults enrolled in managed care gatekeeping plans than for those in indemnity (non-gatekeeping) plans. In contrast to previous studies, this data source supports a more comprehensive approach by providing nationally representative data on total costs to all purchasers for all types of services. We also examined costs from an insurer’s perspective to determine whether third-party payments for managed care gatekeeping beneficiaries were lower than payments for indemnity beneficiaries.


    METHODS
 TOP
 ABSTRACT
 INTRODUCTION
 METHODS
 RESULTS
 DISCUSSION
 References
 
The MEPS 1996 expenditure data that were released in the spring of 2001 are the third in a series of national probability surveys conducted by AHRQ on the financing and use of medical care in the United States. The MEPS is designed to provide nationally representative estimates of health care use, expenditures, sources of payment, and insurance coverage for the US civilian noninstitutionalized population.22,23 AHRQ compiled these expenditure data from information obtained from the Household Component (HC), the Medical Provider Component (MPC), and the Insurance Component (IC) of the MEPS. In the MEPS-HC, approximately 23 000 individuals were interviewed in person using a computer-assisted personal instrument24 to collect detailed self-reported information on sociodemographic characteristics, health and functional status, utilization of medical care services, health insurance coverage, income, and employment.

The MEPS-MPC supplements and validates information on medical care events reported in the MEPS-HC with information from medical providers and pharmacies identified by household respondents. The MEPS-MPC includes expenditure data provided by hospitals, medical providers, home health agencies, and pharmacies reported in the MEPS-HC. Expenditures in MEPS are defined as payments made or received (including out-of-pocket and third-party payments) rather than the amounts charged by providers.24 MEPS estimates of health expenditures do not include administrative costs.25 Data from office-based physicians in a 75% sample of HC households receiving care through an MCO and a 25% sample of the remaining households are also included in the MPC.21 Weighted sequential hot-deck imputation was used for the remainder of the sample and any missing values.24 This method imputes missing data from the nearest respondent preceding that person in the sequence who has similar characteristics and complete information. The third source of data, the MEPS-IC, collects data from copies of health insurance policies obtained through employers, unions, and other sources of private health insurance and links these data back to individual MEPS-HC respondents.

Study Population
We analyzed data from the 8195 adults (aged 18–65 years) with private insurance. People with publicly funded insurance including Medicaid, Medicare, veterans’ benefits, or other government-subsidized benefits were excluded. Consistent with prior studies,3,17–19,26 managed care gatekeeping enrollees were defined as those in classic staff-model HMOs or plans requiring a primary care gatekeeper according to responses from the MEPS-HC.24 Indemnity enrollees were defined as those in traditional fee-for-service plans as well as some preferred provider organizations that reimbursed providers on a fee-for-service basis.5,24 Approximately 10% of hospital cases and 20% of office-based cases included reimbursement through capitation, and thus individual-level expenditure data for this group were not available.24 In these instances, AHRQ used imputation methodologies to estimate expenditures based on discounted fee-for-service payments.24

We compared total per capita expenditures between managed care gatekeeping and indemnity plan enrollees. We also examined expenditures by type of service including inpatient, ambulatory, dental, prescription medication, and home health services. Expenditures included all sources of payment (i.e., out-of-pocket, private third-party payers, and other sources) but excluded administrative costs. We performed additional analyses restricted to payments made only by private third-party payers on behalf of their beneficiaries.

Statistical Analyses
To obtain nationally representative estimates, we used 1996 person-level weights, which reflect population distributions and account for the household probability of selection, ratio-adjustment to national population estimates at the household level, and adjustment for nonresponse. To obtain estimates of variability, we used a Taylor series estimation approach.27 Variance estimation strata and primary sampling unit variables were provided with the MEPS-HC data.23

We used {chi}2 tests to compare distributions of categorical covariates (gender, education, ethnicity, and self-reported health and functional status) between both groups. We used t tests to compare differences in mean per capita expenditures between these 2 groups.

We used a multivariate regression model to examine predicted expenditures among managed care gatekeeping and indemnity plan enrollees as if both groups had similar distributions of baseline characteristics. Because a significant percentage of the sample had zero expenditures, predictions were done using the 2-part model and smearing retransformation methods as described by Duan et al.28,29 The first part of the model used a logit regression to estimate the probability of having any expenditures. The second part of the model used ordinary least squares regression to predict the natural logarithm of expenditures conditional on nonzero expenditures. Methods to estimate standard errors from 2-part models in multistage stratified survey data are not well developed; we calculated standard errors for predicted expenditures using bootstrapping with 2000 iterations.30

The key independent variable in the model was plan type (i.e., managed care gatekeeping plan vs indemnity plan). Covariates in the 2-part model included age, ethnicity, gender, poverty status (percentage of federal poverty level), educational background, functional status, and self-perceived health status. Self-reported health status was dichotomized into excellent/very good versus good/fair/poor. Adults with limitations in vision, hearing, certain specific physical actions (i.e., walking or climbing stairs), activities of daily living (help with bathing, dressing, getting around the house), instrumental activities of daily living (help with cooking, paying bills, laundry, shopping, taking medications, or paying bills), or other activities at home, work, or school were considered functionally impaired. Because expenditures are increased for pregnant women,31 we used a term for the interaction of gender with childbearing age (18–45 years). We also examined whether geographic region (Northeast, Midwest, South, or West) was a significant predictor of expenditures.

Statistical tests were 2-tailed and performed on the weighted nationally representative population using SAS-callable SUDAAN (Research Triangle Institute, Research Triangle Park, NC).


    RESULTS
 TOP
 ABSTRACT
 INTRODUCTION
 METHODS
 RESULTS
 DISCUSSION
 References
 
The 8195 adults sampled in the MEPS were representative of nearly 105 million privately insured Americans in 1996. Of these, 57.2 million (55%) were enrolled in managed care gatekeeping plans and 47.6 million (45%) in indemnity plans. Members of racial/ethnic minorities were more likely than non-Hispanic Whites to belong to managed care gatekeeping plans (P < .05). Adults in managed care gatekeeping plans were also more likely to reside in the West or Northeast than those in indemnity plans (P < .05). Otherwise, demographic characteristics were similar for both groups (Table 1Go). Functional status and self-reported health status did not differ significantly between the 2 groups.


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TABLE 1— Sociodemographic and Health Status Characteristics of Privately Insured Adults Enrolled in Managed Care Gatekeeping Plans and Indemnity Plans in the United States: 1996
 
In 1996, these 105 million privately insured individuals accounted for $190 billion in health expenditures. For managed care gatekeeping enrollees (Table 2Go), mean annual total expenditures were $1791 (SE = 140) compared with $1834 (SE = 90) for those in indemnity plans, P = .81. However, median per capita expenditures were higher for managed care gatekeeping enrollees at $561 (SE = 21) versus $492 (SE = 22) for indemnity enrollees (data not shown); this was not statistically significant (NS). This discrepancy reflects the highly skewed distribution of expenditure data and the smaller proportion of managed care gatekeeping enrollees who had no health expenditures (10.2% for managed care gatekeeping vs 14.0% for indemnity, P < .05).


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TABLE 2— Mean Per Capita Expenditures for Privately Insured Adults (Aged 18–65 Years) by Type of Service: 1996
 
To examine expenditure differences among managed care gatekeeping and indemnity plan enrollees in the inpatient and outpatient settings, in Table 2Go we show expenditure data by type of service. The proportions of adults with any inpatient expense were similar in managed care gatekeeping and indemnity plans, at 6.3% and 5.4%, respectively (NS). Among enrollees with any inpatient expense, we found a difference of 15% in inpatient expenditures with managed care gatekeeping enrollees averaging about $7575 (median $2936) in annual inpatient expenditures versus $8975 (median $4427) for those in indemnity plans (NS). The small number of adults in the sample with any inpatient expenditure limited the statistical power of this comparison. For outpatient expenditures, the proportion of adults with any ambulatory care expenditures was higher among managed care gatekeeping enrollees than among indemnity enrollees (76% vs 70%, P < .05). Yet among those with any outpatient expenditures, both groups had similar amounts of ambulatory expenditures ($617 [SE = 32] for managed care gatekeeping vs $660 [SE = 24] for indemnity [NS]).

We next examined expenditures by source of payment. As shown in Table 3Go, enrollment in managed care gatekeeping plans was associated with lower out-of-pocket payments. Adults enrolled in managed care gatekeeping plans on average paid about $110 less out of pocket than indemnity enrollees (P < .05). Lower out-of pocket-payments for managed care gatekeeping enrollees were primarily attributable to lower out-of-pocket payments for ambulatory care and prescription drugs.


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TABLE 3— Mean Per Capita Expenditures Among Privately Insured Adults, by Source of Payment: 1996
 
In contrast, third-party payments by managed care gatekeeping plans on behalf of their beneficiaries averaged $1375 (median $317) versus $1285 (median $175) for indemnity plans (NS). Third-party payments for ambulatory services were about $65 greater for managed care gatekeeping enrollees than for indemnity enrollees (P < .05). This difference was primarily because managed care gatekeeping enrollees were more likely to have ambulatory care expenditures. Analysis limited to those with any ambulatory expenditures found third-party payments for outpatient services averaged $460 (SE = 18) for managed care gatekeeping plans versus $416 (SE = 27) for indemnity plans (NS).

We then used a 2-part multivariate model to predict differences in mean annual total expenditures if both groups had a similar distribution of sociodemographic and health status characteristics. We found that older age, female gender, non-Hispanic White ethnicity, higher educational attainment, functional dependencies, poor self-perceived health status, and the interaction term for women of child-bearing age were significant predictors of having any health expenditure (P < .05 for each of these variables). After we accounted for all these covariates, geographic region was not a significant predictor of having any health expenditure. Using 5 categories of self-perceived health status rather than dichotomization of this variable did not improve the model. After accounting for the probability of having any health expenditure, we found that if both groups had similar characteristics, total mean per capita expenditures would have been $1835 (SE = 18) for managed care gatekeeping enrollees versus $1959 (SE = 19) for indemnity enrollees (Table 2Go).


    DISCUSSION
 TOP
 ABSTRACT
 INTRODUCTION
 METHODS
 RESULTS
 DISCUSSION
 References
 
In 1996, annual total per capita health expenditures were about 3% lower for privately insured adults enrolled in managed care gatekeeping plans than for those in indemnity plans. With nearly 105 million adults enrolled in managed care gatekeeping plans, this would imply a savings of about $2 billion in national health expenditures for this group in 1996. On average, this is about $50 less per adult enrolled in a managed care gatekeeping plan than expenditures for those enrolled in an indemnity plan. After multivariate adjustment for differences in sociodemographic and health characteristics, predicted expenditures varied by about 6% between managed care gatekeeping and indemnity plan enrollees.

From the insurer’s perspective, our subgroup analysis showed that third-party payments for health care services provided through managed care gatekeeping plans were statistically indistinguishable from third-party payments in indemnity arrangements. In contrast, out-of-pocket health expenditures for individual consumers were on average $110 less for those enrolled in managed care gatekeeping plans than for those in indemnity plans. This is not surprising as adults in managed care gatekeeping plans generally have lower copayments for ambulatory visits and medications than indemnity plan enrollees.

Our finding of reduced inpatient expenditures for adults in managed care gatekeeping plans is consistent with studies reporting that these enrollees have reduced lengths of hospital stays and receive fewer high-cost tests and procedures than indemnity plan enrollees.32,33 Yet the association of decreased utilization of these infrequent but expensive items with decreased total per capita expenditures has not been convincingly demonstrated.20,34 In fact, a recent analysis using the MEPS data found that managed care strategies have had little impact on expenditures for high-cost illnesses.3 In the ambulatory setting, we found that managed care gatekeeping plan enrollees were slightly more likely to have any outpatient expenditure than indemnity plan enrollees, but overall outpatient expenditures were similar for both groups. These findings are consistent with prior studies showing similar patterns of outpatient utilization within both types of arrangements.17–19,26,34

Our analysis also found that managed care gatekeeping plans in the private sector did not use selective enrollment of healthy beneficiaries as a mechanism to limit expenditures, which is also consistent with a recent review of this issue.9 These results are in sharp contrast to Medicaid and Medicare MCOs, where there is clear evidence of favorable risk selection by enrolling healthy beneficiaries.9,35–37 Medicaid and Medicare MCOs may actually provide care that, after adjusting for baseline health differences, is more expensive than traditional fee-for-service government insurance programs.38,39

Our findings raise an important question: if third-party payments for health care were not lower for patients in managed care plans, how were MCOs able to charge employers lower premiums in the mid-1990s? We and others14,40 believe these lower MCO premiums were part of an underwriting cycle. Premiums were set low to expand market share and enter new markets. Initially, MCOs absorbed costs not covered by premiums as losses and implemented procedures designed to reduce inpatient utilization and use of costly tests.3,31 Further cost reductions were achieved by negotiating discounted rates from hospitals, physicians, diagnostic facilities, and pharmaceutical companies.26,41 However, as premiums continued to lag behind expenditures, and further discounts could not be negotiated with providers, MCO profit margins fell. By 1998, poor financial performance and falling stock values led many MCOs to raise premiums.40

Several caveats apply to our study. First, the Centers for Medicare and Medicaid Services’ 1996 estimate of total expenditures is $606 billion, whereas the MEPS estimate is $548 billion after excluding costs for items not captured in the MEPS (nursing home care, construction, program administration, over-the-counter drugs, government activities, and nonpatient care revenues). The discrepancies are attributed to irreconcilable differences in definitions and measurement as well as statistical uncertainty associated with sampling error in both surveys.25 Although the most widely used source of national health expenditure data are the Centers for Medicare and Medicaid Services’ annual estimate,42 these are aggregate estimates,43 and detailed per capita expenditure data cannot be generated from the centers’ data at this time. Therefore, these data cannot be used to compare expenditures for managed care gatekeeping versus indemnity plan enrollees. A strength of the MEPS design is that it allows analysis at this level.24

Second, MEPS estimates do not include most administrative costs. These costs account for about 20% of operating expenses in some HMOs and gatekeeping plans.44,45 In contrast, administrative costs are only 2% in the predominantly fee-for-service Medicare program.46,47 Had these administrative costs been included in the data, total annual per capita expenditures in managed care gatekeeping plans might have been higher than those in indemnity plans. Third, our study addressed the impact of managed care gatekeeping only on expenditures. We did not explore other potential benefits of managed care gatekeeping such as improvements in coordination and quality of care. Fourth, we included enrollees from all types of managed care gatekeeping plans in 1 category although there is substantial heterogeneity in managed care plan provider networks, methods of payment to providers, and stringency of gatekeeping requirements.1 Our analysis cannot address whether any specific managed care gatekeeping arrangement may be superior to indemnity plans in controlling expenditures. One recent review suggests that some plans with dispersed networks are as effective in controlling costs as more tightly integrated ones.20 Finally, MEPS does not include data on local market characteristics, and our analysis cannot assess the impact of managed care gatekeeping within regional markets. Despite these limitations, our analysis is one of the first to attempt to quantify the impact of managed care gatekeeping on health expenditures at the national level.

MCOs were widely credited with controlling health expenditures during the mid-1990s and enjoyed broad-based support from health insurance purchasers and policy-makers. Our analysis of 1996 data showed a modest difference in overall annual per capita expenditures between privately insured adults in managed care gatekeeping and indemnity plans with lower out-of-pocket payments for managed care gatekeeping enrollees but not for third-party payers. In the last few years, employers and insurance companies have begun abandoning stringent gatekeeping in favor of looser preferred provider organization arrangements and plans without gatekeeper requirements. Factors contributing to this trend may have included "managed care backlash" from patients and providers and threats of tighter governmental regulation of MCOs. However, as health care costs continue to rise, some are calling for a return of the cost-containment strategies of the early 1990s.12 Our findings suggest that managed care gatekeeping arrangements are unlikely to produce enduring substantial cost savings to health insurance purchasers in the private sector or to the country as a whole.


    Acknowledgments
 
This work was supported by the National Institutes of Health (General Medicine Research Fellowship Training grant T32 PE10012–07 to S. Pati) and by the Robert Wood Johnson Foundation (Generalist Physician Faculty Scholar RWJF grant 036830 to O. Carrasquillo).

Human Participant Protection
This study was approved by the institutional review board of Columbia University College of Physicians and Surgeons.


    Footnotes
 
Peer Reviewed

Contributors
S. Pati planned the study, analyzed the data, and wrote the article. D. Rabinowitz performed critical data analysis. S. Shea assisted in data interpretation and critical revision of the article. O. Carrasquillo assisted in data analysis, data interpretation, and critical revision of the article.

Accepted for publication July 18, 2003.


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