As physicians, we share the credo that the best, least-expensive, and most-effective response to illness is prevention. At the same time, we find ourselves trapped in a health care financing system driven primarily by the imperative of cutting expenditures today with little concern for the cuts' impact on tomorrow. Virtually every private sector and governmental health program has contributed to this dilemma.
But the dominance of for-profit managed care (HMOs and PPOs) in the health insurance marketplace has generated major changes in medical practices. The primary drivers have been a steadily shrinking list of covered benefits and strict utilization controls. On the demand side, the aging of the population and expensive new technologies are geometrically increasing the costs of care - and will do so into the foreseeable future.
This deadly combination is rapidly driving up both the cost of medical coverage and the number of Americans without insurance. In 2000, 69 percent of all U.S. employers offered health coverage; in 2005, only 60 percent offered it. In 2005, the cost of employer-based health insurance for a family of four averaged $10,880, more than the entire earnings of a full-time minimum wage worker ($10,712). 
For physicians, managed care has resulted in increased administrative expenses, administrative requirements that distract and detract from patient care, and decreased revenue.
The administrative costs of running a practice have increased dramatically. On average, practices have twice the number of nonclinical staff members as they had in 1982. The primary reason for this growth is the increased difficulty of obtaining payment from managed care plans. While the rapid growth in nonclinical office staff has slowed since 2000, the Medical Group Management Association reports that physicians' overall operating expenses have continued to increase at almost twice the general inflation rate.
Physician reimbursement is deteriorating. Both public and private sector payers are reducing fees in inflation-adjusted dollars. In 2004, Medicare's 1.5-percent increase was less than the rate of inflation. Absent congressional action, physicians' Medicare fees are scheduled to fall by 4.4 percent in 2006 and a cumulative 26 percent over the next six years. In 2003, Texas reduced the size of its Children's Health Insurance Program (CHIP) and cut Medicaid fees. Medicaid and CHIP payments for Texas physicians now cover less than half the average cost of care. The average Texas family practice physician loses about $50,000 per year in uncompensated care for Medicaid patients. For many other specialties, in rural Texas, and along the Texas-Mexico border, this figure is even higher. Workers' compensation fees were slashed by 17 to 41 percent for surgeons, radiologists, pathologists, internists, and physical medicine specialists who treat injured workers. The impact of Texas' 2005 workers' compensation system reconfiguration has yet to be determined. Practice viability is in crisis. Managed care plans do not publicly announce their fee schedules, but all indications suggest that a downward trajectory continues in that arena.
Despite the passage of prompt payment laws in 1999, 2001, and 2003, Texas physicians continue to struggle to get paid even deeply discounted fees for patient care. More than two-thirds of Texas physicians report slow payment and related cash-flow problems due to third-party payer policies. Nearly half of those doctors have had to draw on personal funds, or secure loans or lines of credit to cover practice expenses.
Primary care practices have been particularly hard hit. Pediatricians, for example, have seen practice operating costs increase 74 percent since 1995, driving higher prices for patients, but revenues during that time period have increased by less than 50 percent.
The percentage of the insurance premium dollar devoted to health care continues to decline. While the rate of growth in per-capita health care spending has slowed in the past few years, bills for health insurance premiums continue to grow dramatically. The cost of employer-sponsored health insurance is forecast to increase by 9.9 percent in 2006, more than triple the general inflation rate. Employees' share of premiums and their out-of-pocket expenses will jump by about 11 percent. 
As Americans spend more and more on health insurance, the percentage of each dollar devoted to care decreases while the percentage of each dollar that goes into managed care's pocket increases.
Private health insurance administrative costs have increased from $85 per person covered in 1986 to $421 in 2003 . ( See Figure 1 .) From 1998 to 2003, health plans' administrative costs per enrollee nearly doubled. 
The six largest health plans covering Americans have been steadily chipping away at the percentage of premiums the plans actually spend on medical care: their commercial medical loss ratios. These plans reduced their medical loss ratios an average of more than 4 percentage points between 2001 and 2002.
In total, 84.8 cents of every premium dollar paid for actual care in 2000. That declined to 81.5 cents in 2003. 
Even these figures underestimate the true share of the premium dollar that is actually paying for patient care. The Texas Department of Insurance found that health plans frequently do not count as administrative costs such expense items as utilization review, internal and external appeals processes, records maintenance, supervisory and executive duties, and supplies and postage.
The decline of the medical loss ratio raises questions about the rapid escalation of insurance premiums. Clearly, health plans have the power to raise their customers' premiums and reduce payments to those who actually provide medical services. The consolidation of the health insurance industry has increased the surviving plans' market power. By 2004, 26 health insurance groups covered 1 million enrollees; they accounted for two-thirds of the total national health insurance rolls. 
Health insurance companies, meanwhile, are coming up with new and better ways to profit at physicians' and patients' expense.
Many health plans do not create adequate provider networks, especially among hospital-based physicians such as emergency physicians, radiologists, anesthesiologists, and pathologists. This leaves enrollees stuck with both expensive insurance premiums and unexpected medical expenses for out-of-network services. At the same time, the insurance companies reap a profit from creating inadequate networks of care. They shift the financial risk of an inadequate network to patients. And they try to shift the "moral risk" to physicians, who are ethically and legally required to provide emergency care regardless of insurance coverage. The plans defend their inadequate networks by trying to prevent out-of-network physicians from billing their patients. They also try to pass laws establishing government-imposed price controls based on arbitrary reimbursement rates set solely by the plans.
Several of the largest health plans in Texas are implementing tiered physician networks. Physicians are placed in a network tier based on how they rank against the insurers' evaluation scheme. Those who score high enough are placed in a preferred network tier that offers enrollees a lower copay. Those physicians scoring lower get shunted into a tier with higher copays. Most health plans claim that they create tiered networks by analyzing billing data and that they adjust that data to ensure cost-effective and efficient patient care. However, none of the adjustments in use capture quality of care; they are based solely on the cost of care. Low cost care is not necessarily effective care. Tiered networks may encourage underutilization and undertreatment. They often interfere with patients' ability to choose their physician and disrupt the patient-physician relationship. Patients and employers are left with the mistaken impression that tiers are created to regulate quality of care, but in actuality, they only lower the insurance plan's expense.
Physicians' long-time health care allies, the hospitals, also are caught in the financial vise between declining reimbursements and rising costs. Physicians, hospitals, and other entities have invested extensively in new lifesaving technologies and treatments, and in new settings in which patients receive health care. Studies demonstrate positive outcomes from and strong patient satisfaction with health care provided by physician-owned facilities. But rather than encourage what little remains of competition in the health care sector, many hospitals now actively oppose physicians' ability to refer patients to facilities where they have an ownership interest - regardless of medical necessity or patient convenience. Referrals to physician-owned entities or services must be based on the patient's medical needs, as determined by accepted utilization and quality-of-care standards. Physicians must disclose to patients any relevant ownership interest and adhere to applicable ethical guidelines.
Over the years, government regulatory programs have steadily added to the cost of care. Physicians must submit electronically all Medicare claims on behalf of their patients. They must meet complex government standards to continue to provide many simple lab tests in their offices. They must appoint a fraud compliance officer and a privacy officer. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) has required physicians to make expensive upgrades to their billing systems to continue transmitting their claims and insurance inquiries electronically.
In short, Texas physicians are caught between relentlessly increasing costs and steadily decreasing revenues. Unfortunately, this scenario discourages physicians and patients from taking the long view of their health. As employers shift from one insurance company to another every few years, patients tend to shift from one physician to another to stay within a network. This is a further impediment to developing strong patient-physician relationships.
Next: What is Happening in the Health Care Financing Systems
 Kaiser Family Foundation. 2005 Employer Health Benefits Survey. Accessed October 2005 at http://www.kff.org/insurance/7315/ sections/upload/7316.pdf .
 Hewitt Associates. News Release; Oct. 10, 2005.
 Dor A, Sudano J, Baker DW. The Effects of Private Insurance on Measures of Health: Evidence From the Health and Retirement Study. NBER Working Paper, No. 9774; 2003.
 Britt R. Insurers Get Bigger Health Dollar Cut, Profits Up, Premiums Up, But Medical Spending Lags. CBS.MarketWatch.com; Oct. 15, 2004.
 Weiss Ratings, Inc. Nation's HMO Profits Increase 10.7% in 2004; Aug. 8, 2005.