The High Price of Health
Where is Managed Care Now?

by Marc Roberts: Professor of Political Economy, Harvard School of Public Health

For all the complaining of many citizens about managed care, it is important to remember why this change has occurred within American health care. For years, most doctors and hospitals have been paid on a 'fee-for-service' basis. Like piecework payment in the garment industry, such arrangements have the predictable effect of encouraging people to do more work - in order to make more money. The result has been that the United States has the highest health care costs in the world. Fully 60% to 100% higher than most other industrial countries. In recent years, as those costs first approached, and then exceeded, 14% of overall economic output, increasing pressure developed to control those costs. And managed care is a response to those pressures. Both companies purchasing health insurance for their employees and governments purchasing coverage for Medicare and Medicaid recipients have been increasingly interested in limiting what they spend. And managed care has succeeded in the marketplace by offering health insurance at lower cost than the 'unmanaged care' it has begun to replace.

Having said that, it is important to recognize that not all managed care is the same and not all plans offer customers equal value for money. The largest difference is between the for-profit and the not-for-profit plans. The former often spend as little as 65% to 70% on actual medical care. The rest goes to marketing expenses, profit and administrative costs. The not-for-profits, in contrast, typically spend more than 90% of their premium income on patient care.

How have managed care plans been so successful - at least in some parts of the country? Again, the situation varies with the plan. The best plans have lowered the cost of care by organizing the care process cost effectively. The worst have simply tried to bully doctors and hospitals into offering them price discounts, and have also tried to limit cost by making it more difficult for patients to receive care.

So the challenge of managed care today is not whether we should be for it or against it. The alternative - totally unmanaged care - comes with the price tag that neither the public sector, nor the private sector can afford. Global economic competition and the impending retirement of the baby boom generation means that neither corporations nor taxpayers can go back to the old fee-for-service, use-whatever-you-want system. The task is to make sure that we get more of the good kind of managed care and less of the bad. Plans that offer value-for-money and good customer service need to be the ones that succeed in the marketplace. To help insure that result will take effective public/private cooperation. Government can play a role by requiring information and disclosure that allows customers to know what they are getting when they purchase health insurance - and by being a prudent buyer itself. And the private sector has to recognize that there is more to selecting a health care plan than just minimum price. Then we can use the force of the market constructively to help ensure that an many citizens as possible do get cost-effective, well-managed care.


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