|There is no question that the managed-care industry was able to use this
new-found market power to the overall economic advantage of the insured. The
annual increase in premiums private employers had to pay for their employees'
insurance coverage began to plummet, reaching a reported national average of
-1% in 1994-95 (although there was a wide variance about this average).
Although now there is talk of premium increases for 1998-99 in the range of 5%
to 10%, even these increases are considerable below the norm of the late 1980s.
As late as June 1993 the Congressional Budget Office (CBO) had predicted that
the US would be spending between 15% and 16% of its gross domestic produce
(GDP) on health care by the mid 1990s and close to 20% by the year 2000. In
fact, ever since 1992 that ratio has stabilized at slightly below 14 percent.
The ratio is unlikely to reach 16% by the year 2000 and probably will not even
In terms of dollars, in 1996 American spent somewhere between $100 to $140
billion less on health care than the CBO had predicted only several
years earlier. By the year 2000, that saving will amount to $300 billion a
year. Surely a fair-minded person must call that an achievement for which some
gratitude seems due.
Did anyone thank the leaders of the managed-care industry for this
achievement? No one did, for at least two reasons.
First, these cost savings were, after all, purchased at the expense of less
freedom of choice among providers and of considerable hassle visited upon
doctors, hospitals, pharmacists and other providers of health care. In effect,
the managed-care industry represents nothing other than the private regulation
of health care. And no one likes to have their health care regulated by public
or private regulators.
As part of the managed-care revolution, relatively gentle public regulators,
who were forever scared of the political consequences of their actions (and
whose bosses could be bought off with PAC money) were being replaced by tough,
capitalistic and sometimes ruthless private regulators who took no prisoners
and whose bosses (shareholders) could not be bought off with PAC money at all.
To their chagrin, the providers of health care discovered that the shiny
wing-tipped boot of a private regulator weighs much more heavily on the
shoulder of the regulatee than do the hush-puppies of public regulators. For
that very reason, physicians in particular have run in droves to politicians,
there to seek succor from the heavy hand of the private health-care regulators.
In the meantime, physicians have also sung a sad chorus into the ears of their
patients, fueling the patient's anxiety over the strictures of managed care.
Second, while patients certainly are aware of the freedom they have lost--and
are reminded of that loss daily in the media--they are not aware that the cost
savings purchased with that limitation of choice ultimately benefits patients.
The reason is that the typical employee is woefully ignorant of the ultimate
incidence of "employer-paid" fringe benefits. For decades, private employers
have nourished the myth that it is the "company," rather than the employees
themselves, which pays for the employees' health insurance and other fringe
benefits. Employer provided health insurance literally is being viewed by
employees as an almost free lunch. Lulled into this myth, employees now believe
that every penny of cost savings achieved through managed care has accrued
fully to the firm's owners, not to the employees.
Economists believe to know better. Both economic theory and a considerable
body of empirical research suggests that the bulk, if not all, of the fringe
benefits bestowed by employers on their employees are paid for through
reduction in the employees' own take-home pay. Thus, most economists would
argue that whatever cost savings the managed care industry wrought from the
providers of health care flowed through to employees in the form of added
take-home pay or added jobs.
Economists are willing to thank the managed-care industry for this achievement
. And they think that employees, too, should thank the industry. Alas, the
ignorant masses--carefully left in the dark on this point by their
employers--won't. And, thus, the managed-care industry ends up with a black
eye as the only "thanks" for a major achievement.
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 jargon, 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 actually has vested
Medicaid patients with a new dignity in the eyes of doctors and hospitals. It
is a major achievement that has gone almost unnoticed.
For more information on this topic, I'd be happy to share hard-copies of a
recent speech entitled: "Would Jesus have Liked Managed Care?" The answer is:
Probably yes, for Mary herself would be likely to have been a Medicaid mom in
our age (while Joseph would have been uninsured).
At this time, 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
In addition, the managed care industry is now met with a pervasive backlash,
certainly in the media and in the political arena, and apparently among the
general public as well. Bashing and regulating the industry has become a
favorite, even among Republican politicians, as is illustrated by the highly
regulatory "consumer protection" bill recently introduced by the Republican
Congressman Norwood and Senator D'Amato.
In part these developments are beyond the industry's control. In part, they
are self-inflicted wounds whose infliction was triggered by a mental illness
that the ancient Greeks called hubris.
As noted earlier, selective contracting is the central pillar upon which the
power of the managed-care industry rests. That pillar, in turn, is anchored in
the willingness of the insured to put up with limited choice of providers of
health care at the time illness strikes. In its most concrete form, that
limited choice model is the gate-keeper model, under which a primary-care
physician effectively regulates the health care patients receive at the time of
illness. As noted earlier as well, it took a recession and cowered employees to
foist the principle of limited choice upon employees. In the meantime, however,
the economy has been booming and labor markets have become tight. In such a
market, generous fringe benefits are a come-on from which limited choice
detracts. Thus, not surprisingly, the gate-keeper model in managed care has
given way to point-of-service contracts (which allow procurement of care from
outside the managed-care network of providers), direct access to specialists,
and so on.
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
In addition to this factor, which is truly beyond the industry's control, the
industry itself has triggered a backlash through its clumsy techniques, some of
which seem to be rooted in outright arrogance.
In principle, the idea of "managing care" had been to hold the providers of
health care to high standards of clinical performance through well-researched
practice guidelines. In practice, "managed care" has meant for the most part a
fanatic and ill-considered search for the lowest average length of stay (ALOS)
in hospitals. The effort is ill conceived, because the later days in a hospital
stay actually cost much less in controllable costs than the flat per diems
insurers pay for those days. Thus, insurers believe to be saving $ 1,000 to $
1,500 when they kick mothers out of the hospital one day after a normal
delivery, when in fact that second days could have added at most $200 or so in
avoidable costs. After all, how much Jello can a mother really eat on that
The thoughtless, indiscriminate hunt for ever more reductions in the ALOS of
hospitalized patients is, in my view, one of the bullets the industry aimed at
its own foot. The fact that earlier discharges are medically safe is really
besides the point in what is supposed to be a "consumer-driven" health system.
If consumers resent being discharged early, the proper policy would be to
reeducate them, rather than to treat them as mere biological structures without
a psyche. It is a safe bet that the industry will be able to turn off the
current backlash against it only once it appreciates more fully the difference
between mere biological structures in for repair and "consumers" who want a
health-care experience that suits their own preferences.
Second, 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
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. The industry is now reaping what that hubris begot.
Third, 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 general 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
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 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.
History may well record one day that, after being the catalysts for managed
care and managed competition in the early 1990s, America's private employers
ultimately become the major obstacle to these innovative ideas. I have set
forth my arguments on this proposition more fully in a recent paper entitled:
"Employer-Provided Health Insurance: Rest in Peace." Perhaps the idea of
employment-based health insurance has outlived its usefulness, and we should
start thinking of its replacement in the decade ahead.
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."
While there has been some progress in introducing "managed care" into hitherto
completely unmanaged and uncontrolled American health care system, the actual
practice of "managed competition" is the rare exception, rather than the rule.
To be sure, "managed competition" is being attempted by the Buyers Health Care
Group in Minnesota, by the Pacific Health Care Group in San Francisco and by
the California Personnel Retirement System (CalPERS) for employees of the
California State government. It seems doubtful, however, that private employers
elsewhere will ever succeed in practicing anything even resembling "managed
It is more likely that the Medicare program will embark upon the full-fledged
and proper implementation of "managed competition," as a result of the
Medicare Choice plan passed into legislation as part of the Balance Budget Act
of 1997 (BBA '97). While employees in the private sector seem willing to accept
the haphazard market for health insurance being foisted upon them by their
employers, it can be doubted that the elderly will be anywhere near as
undemanding and passive. Medicare cannot afford to be anywhere near as cavalier
toward the elderly as employers are toward their charges. It can be expected
that, within a few years, Medicare will have develop a reasonably well
functioning information infrastructure for its Medicare Choice program and
that, in the end, it will be once again Medicare that will teach the private
sector how to practice "managed competition," just as Medicare led the way in
the development of the Resource Based Relative Value Scale (RBRVS) that is now
being adopted everywhere by the private sector, and just as Medicare led in the
development of the prospective DRG payment system for hospitals that is being
copied around the world.
Medicare is likely soon to be a leader also in what is now called "direct
contracting," that is, the assumption of full risk by integrated networks of
health care providers who will take capitation directly from Medicare, without
the traditional insurance intermediary. While that is being attempted now by a
small group of private employers in Minnesota, it is likely to be the Medicare
program that will give that development a major impetus. Within the next decade
then, we should expect to see integrated provider networks compete head on with
insurance-centered health plans, although in many areas the two may well
cooperate, with insurance companies acting as patient brokers who, for 8 to 10
cents of the premium dollar, will channel insured lives to integrated providers
systems that will take full risk for roughly 90 cents of the premium dollar.
That model is already developing in some parts of the country--e.g. in
California and in Massachusetts.