Question

There have been shifts in policy regarding the regulation of managed care organizations intended to protect the consumer from rationed care. Are current regulations working or are they adding to already too much regulation and associated cost of providing healthcare in the U.S.? Explain.

Answer 1

This shift of market power from the supply to the demand side enabled the managed-care industry to accomplish two tasks that previously had been unthinkable. First, insurance carriers could extract steep price discounts from the providers of health care, sometimes driving the fees they paid doctors and hospitals below the levels paid by Medicare. Second, the insurance carriers could impose upon doctors and hospitals externally administered practice guidelines that were enforced through pre-authorization of expensive procedures, concurrent review, and ex-post physician profiles that were used by insurers in decisions whether to renew contracts with physicians. Medicine began to be practiced in a statistical fishbowl.

Poor people on Medicaid also should thank the managed care industry for a new-found dignity accorded these patients. In the 1980s, the fees private insurers paid doctors and hospitals for health care were so enormously high that many providers simply refused to treat Medicaid patients at that program's low fees. In the economist's verbiage, the physicians' and hospitals' economic opportunity costs of treating Medicaid patients were too high. In the meantime, the fees paid under managed care have been depressed to the point at which Medicaid patients look downright attractive by comparison. By depressing the fees paid for private patients, the managed-care industry has vested Medicaid patients with a new dignity in the eyes of doctors and hospitals

Now, the managed-care industry seems to be losing the tight grip it had gained over health care providers in the early 1990s. Since 1997, premiums for private health insurance have started to creep up. Current forecasts put premium increases for 1998-99 in the 5% to 10% range (depending on the size of the employer writing the contracts), although premium increases of 25% or more for small employers are not unheard of. Indeed, the Connecticut-based Oxford Health Plan recently announced that it would like to raise premiums for individually sold health-insurance policies by between 60 to 70%.

In short, boom times in the economy have eroded the power of selective contracting and, thereby, clipped the wings of managed care. That industry finds it difficult now to control its outlays on medical care--especially on prescription drugs--because the industry is slouching once again towards something resembling nothing so much as warmed-over, fee-for-service indemnity insurance.

The managed-care industry has never really understood the theory of "managed competition" or, if it did, it has sabotaged the implementation of the idea deliberately. Although much touching lip service is paid on the conference circuit to the "new, customer-driven" American health system, in truth most managed-care carriers consider their job done when they have pleased the employee-benefit manager.

Many health plans do not even have a flourishing website through which to distribute credible information on the satisfaction of enrollees already in the plan, on the background of its physicians, and so on. Most health plans still ask households to choose them without much relevant information. Taking too lightly the ultimate consumer of insurance coverage appears to have been borne by an untoward hubris the industry developed after the demise of the Clinton plan.

Related to the preceding factor, the leaders of the managed-care industry have allocated insufficient time and money to the information systems that are the sine qua non of a well-functioning managed-care industry. The current plight of Oxford Health Plan, Inc. is a highly visible manifestation of this failure; but I believe the problem to be pervasive. Saving on information systems is penny wise and pound foolish. One would hope that the industry has learned from that failure. As a rule, any health plan that pays its Chief Financial Officer more than its Chief Information Officer pays insufficient respect to the crucial role of information in managed care and managed competition.

Finally, some of the shortcomings in the managed-care industry must be laid at the doorstep of employers. Except for a few large companies, most private employers are simply not up to the task of implementing the theoretically elegant design of "managed competition," under which individual households would be well informed about the quality and cost of insurance protection of a whole host of competing for health plans. About half of the nation's employees are offered but one plan by their employers and another 23 percent only two plans. Many employers do not offer their employees any health insurance at all.

In thinking about the future of the American health care system, we should make a distinction between "managed care" and "managed competition." "Managed care" is a set of techniques designed to make the providers of health care more accountable for the quality of the health care they deliver, for the real resources they burn in the process and for the claims on the GDP they make to reward themselves for whatever health care they deliver to people. "Managed competition," on the other hand, is a carefully designed and regulated market structure in which health plans can be made to compete fairly for prospective enrollees. The two concepts are not at all the same thing, although "managed competition" usually does go hand in hand with "managed care

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