Several years ago I had dinner with a woman who had served in the late 1990s as the national Chief Medical Officer of a major health plan. At the time, she said, she had developed a strategic initiative that called for abandoning the plan’s utilization review and medical management efforts, which had produced heartburn and a backlash among both physicians and patients. Instead, the idea was to retrospectively analyze utilization to identify unnecessary care.

This was at the height of anti-managed care fervor. A popular movie at the time, As Good As It Gets, cast Helen Hunt as the mother of a sick kid. When someone mentioned an HMO, Ms. Hunt’s character let fly a flurry of expletives. America’s theater audiences exploded in applause.

Apparently, the health plan’s senior management team bought into cutting back on medical management but saw no need for retrospective review. After all, if the health plan abandoned actions against inappropriate services, utilization and cost would explode. Fully insured health plans make a percentage of total expenditures, so more services, appropriate or not, meant the plan’s profits would increase.

And that’s how it played out. Virtually all health plans followed suit, dismantling the aggressive medical management that had been managed care’s core mechanism in driving appropriateness. In the years following 1998, health plan premium inflation grew significantly, for a short period reaching 5.5 times general inflation, but averaging 4 times general inflation through today. Medical management became all but a lost, or at least a scarce, discipline in American health care, which is its status now.

The industry responded by making hay. Health care costs have been the most worrisome and unpredictable of all business line items. They have also become the single largest driver of our national budget woes and the bane of competitiveness in global markets. Nobel economist and commentator Paul Krugman noted this on CNBC last month: “If we could suddenly have French health care costs instead of American health care costs, our [national] budget problems would be solved forever.”

It is important to distinguish the term “medical management” as distinct from what physicians do. It refers to the development of mechanisms that ensure the right care at the right time in the right context, driving appropriateness and reducing avoidable risk. (These ideals have been largely thwarted by fee-for-service reimbursement, a lack of transparency and the subjugation of primary care over the past several decades.)

But it also is more than clinical management. Health care businesses now depend on delivering excessive services, often with egregious pricing, to maintain the revenues they have come to expect. Each industry sector has developed many ways to game care and cost.

So managing the processes requires knowing where health care waste is buried, and going after it.  It demands an interdisciplinary fluency in risk, analytics, medical/surgical and drug claims data, evidence-based guidelines, clinical decision support, appropriate cost, and purchasing and negotiation.

There are endless examples.

• Care for the sickest patients has become the fastest growing area of health care cost. A recent PwC study found that, over the past decade, the percentage of California cases that exceeded $1 million increased seven-fold. Often, this results from misdiagnosis, lack of expertise and/or misaligned incentives. Centers of Excellence consistently produce better outcomes for these patients at lower cost. So do organizations that use salaried physicians rather than paying a percentage of what the physicians have prescribed.
• Health plans typically have relied on the broadest possible network of doctors and other providers, even though there often can be a six-fold difference in episodic cost to obtain the same outcome. Turning a blind eye to performance opens choice, but it also amps up cost and removes quality and efficiency from the marketplace.
• Plans often purchase stakes in Pharmacy Benefit Management (PBMs) firms, jack up generic drug pricing by 200+% over cost. They use the margins as a revenue stream, and tell their customers that they’re managing cost.
• In the wake of the plummeting service volumes associated with the recession, hospitals charges for high frequency procedures have risen spectacularly. This primarily affects people without coverage, and is comparable to “gouging” for ice or gas after a hurricane. But it is difficult to spot, because most people have no frame of reference on unit pricing.
• Itemized charges for hospital stays are often replete with unnecessary products/services that are likely to go unchallenged. My firm regularly sees bills in excess of half a million dollars that health plans have auto-adjudicated and paid, but that should have been significantly less costly.
• Health plan case management and disease management programs are often provided as a default option (and at considerable cost). But in practice many don’t actively recruit members into the program, or produce savings. We have seen clients pay $100,000/month for disease management, with fewer than 20 patients actively enrolled.
• The prices of high value items can be highly variable within markets, but they can also be excessive. Advanced images like MRIs may be available on a volume basis, with a reading, for less than $500. But health plan clients have routinely and unwittingly paid $1,750-$3,200 for the same image. The same principal holds with dialysis, which in commercial settings can be charged and paid at 4-6 times Medicare rates. Market principles simply haven’t applied in many cases.

The tools and skills needed to identify and address these kinds of problems are complex, and the job itself is heavy lifting. That said, we now have far better data and information management tools than were available a decade and a half ago.

And the need has re-emerged. The health care marketplace is at an inflection point. While it is unclear whether we’ll transition away from fee-for-service and toward some form of risk – the full force of the health care lobby is intently focused on defeating this now in Congress – there are other signs that the old paradigm is failing.

With or without the development of Accountable Care, the industry will be forced, for the first time in decades, to compete for market share based on performance. Hospital admissions are down and Medicare’s annual allocation is on track to drop by $40 billion per year. Commercial plans will likely reduce reimbursements as well. Health plans enrollments have plummeted as individuals and groups have been priced out of the market by rampant cost growth, driving up the uninsured (self-pay) population. Employers and other purchasers, finally exhausted by the burden of what they perceive as a relentlessly rapacious industry, are moving toward more market-based approaches that go around conventional players. (The popularity of onsite clinics exemplifies this.)

As true markets finally emerge in health care, demonstrating better care at lower cost will finally develop beyond an admirable goal to become the basis for competition. Success will depend on managing all aspects of clinical and financial risk. And that will require reconstituting a discipline that has been mostly dormant for a decade and a half.

Brian Klepper is Chief Development Officer of WeCare TLC and blogs at Care and Cost.