The following is intended to outline the general concept and underlying rationale for what I have chosen to call a "Mutual-Risk Point-of-Service," or MR-POS, system. The outline is intended as a beginning, not an end. As the reader will see, many important questions/issues must be resolved before this concept can be converted into a practical policy proposal. Given the political and economic realities of modern life, it remains to be seen whether these matters can be handled in a way that will allow the concept to live up to its promise. However, I believe the approach has a sound basis and could help resolve some of the most important health-care problems facing people with disabilities and serious chronic health conditions today.

The Problem: Adverse selection

Given equal economic resources and freedom of choice, those with the greatest need for health services are most likely to select fee-for- service plans over restrictive HMOs.

Since economic resources are not equal, and since medical underwriting severely limits the choices of those with pre-existing health problems, some lower-income people who need the flexibility of higher-cost, fee-for- service plans will be unable to get them.

To the extent that some managed-care plans provide particularly good service for high- risk individuals, they are likely to attract those individuals as members. In effect, they will become a magnet for higher risk, higher cost policy holders. Unless there is some effective way to level the playing field so that the cost of caring for high-risk individuals is spread broadly among plans, this adverse selection process will bring about "Mitchell's Corollary." In the absence of a level playing field, the bad plans will drive the good plans out of business (or force them to become bad plans, which amounts to the same thing).

In order to avoid being victims of Mitchell's Corollary, many plans are liable to reduce access to the services and/or providers most needed by enrollees with special needs, either openly or indirectly through contract- provider selection and "gatekeeping." In either case, the result will be reduced quality of health care in those managed-care plans--not only for those with special health needs, but ultimately, for everyone, since any enrollee may, at any time, develop a health condition that requires services that the system no longer provides.

All HMOs must be required (not just permitted) to include a mutual-risk POS option as part of all their plans. (If HMOs are merely encouraged to offer POS options, those that do so are likely to attract high-risk/high-cost individuals and, again, trigger Mitchell's Corollary, leading to their own demise.) [NOTE: levels playing field between competing plans]
 
 

Allowing insurers to offer just a few higher priced plans with POS options would continue to discriminate on the basis of financial resources and health needs. Given equal financial resources and access to these plans, Mitchell's Corollary again comes into play.)

Insurers still could offer a range of plans-- with different deductibles and copayments when an enrollee goes outside the plan's network of providers, for example.

Requiring all HMO plans to include a POS option can help level the playing field among plans without complicated risk adjustment mechanisms. A level playing field is necessary for the existence of a competitive market--the kind of market that Adam Smith (of The Wealth of Nations) said always results in the lowest possible price. (On the other hand, Smith said that monopoly results in the highest prices, with oligopolostic markets presumably somewhere in between.).

Mutual risk: Both plan and enrollee must be at greater financial risk if an enrollee goes to a non-network provider. [NOTE: levels playing field between plan and enrollee]

The POS option must be structured so that a health plan is at greater risk (at least somewhat) when an enrollee goes out of network than when the enrollee receives services from network providers. This will provide an economic incentive to health plans to maintain a network of high-quality providers and will provide a counterbalance to typical HMO incentives that encourage barriers to accessing high-cost services even when those services are warranted. (On the other hand, a POS option that doesn't put the plan at greater risk could create an incentive for plans to reduce network services and simply encourage enrollees to use their POS option for services no longer offered by their HMO. This would shift additional costs onto enrollees while further eroding the range and quality of providers/services available within HMO networks.)

If a health plan is at greater financial risk when an enrollee goes out of network, it will have an economic incentive to hire, contract with and/or retain high-quality providers, even if those providers might attract a higher-risk population: Having an enrollee see such a provider within the network still would be less costly for the plan than if the enrollee went out of network.

Since enrollees will have to pay more if they go out of network, they will have a financial incentive to stay with network providers as much as possible. Yet the POS option will provide important flexibility and give enrollees the security of knowing that they won't have to pay the entire cost of going out of network should that become necessary. This seems very consistent with the comments of those who say they want to make consumers more cost conscious, and it also gives consumers more control over their own health- care expenditures.

It may be necessary at some point to make provisions for people with costly health conditions who find they must go out of network but can't afford their plan's deductible and copayment. However, because the kind of POS system described here would encourage plans to maintain a good range of high-quality providers, most people--even those with special health needs--may find that they can get the services they need within the network.

By using this shared financial incentive, a mutual-risk POS option requirement for all HMOs could improve quality and choice in the health- care system while containing costs, all through market mechanisms.

Premiums may rise somewhat if a mutual-risk POS is required of all plans, thereby making HMO membership unaffordable to some at the economic margin. However, claims of terrible losses from the HMO industry should be viewed with some degree of skepticism unless backed by hard data and/or actuarial studies. For example, in discussing point-of-service plans, the 1994 Annual Report of United Health Care states that "our experience shows that even though consumers like having the choice of 'opting out' of the HMO's provider networks, fewer than 5% of our members ever do so." If health plans provide a broad range of high-quality services within network, it seems likely that this percentage could even go down.

Although even modest price increases may put health coverage out of the financial reach of some, it is important to remember that in the absence of a mutual-risk POS requirement (or something else to level the playing field both between plans and between any given plan and its members/enrollees), enrollees may find themselves paying for care they never receive.

Competition between plans also should help to keep premium increases, if any, modest. As noted above, requiring all HMOs to include a point-of-service option as part of every plan will level the playing field while providing financial incentives both to maintain high quality and to contain costs. Thus, in order to compete based on cost--not only with other HMOs but also potentially with traditional fee-for-service plans and perhaps medical savings account/high-deductible indemnity plans--HMOs will be forced to find creative new ways to contain costs without reducing quality or access to necessary and appropriate services. For those who truly believe in what the private market can accomplish, a mandatory mutual-risk point-of-service option system would seem to be an ideal testing ground/opportunity to demonstrate the market's ability to resolve a significant and growing problem in our health-care system.

Ultimately, resolving the affordability issue will require some kind of universal coverage strategy.

For further information, contact: Laura Remson Mitchell
Health-Care and Disability Policy Consultant
af752@lafn.org

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Copyright 1996, 1997 by Laura Remson Mitchell

February 19, 1996; rev March 5, 1996; March 28, 1996; April 16, 1996; April 29, 1996; December 30, 1996; February 3, 1997. HTML version December 23, 1997.

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