The Managed Care Blues and How to Cure Them - Review

Business Economics, April, 1999 by John C. Goodman

By Walter A. Zelman and Robert A. Bereson, Washington, DC: Georgetown University Press, 1998, pp. 224, hard cover $45.00, paper back, $17.95.

Hillary Rodham Clinton's health care task force had two goals: (1) require everyone to join a managed care plan; (2) require health plans to compete in a system called managed competition. The two authors of this book were part of that effort. Although the plan failed, the ideas flourished. There has been a managed care revolution, which is directly affecting the health care of 85 percent of American workers. Choice among competing managed care plans is also a reality for all federal workers, many state and local employees and an increasing number of employees of large companies.

Although the authors appear to present a balanced view, their book is largely a defense of managed care, including a critique of attempts to curtail it with patient-bill-of-rights legislation. If managed care "is not as good as we think it can be, neither is it as bad as many people believe it to be," they write. The remedy for its defects, they believe, is more widespread adoption of managed competition, by which they mean an artificial market in which health plans compete but are required to charge the same premium to all enrollees (community rating) or at least the same premium to everyone of the same age (modified community rating). In any event, plans are prohibited from discriminating in any way based on an applicant's health status.

Given their backgrounds, the authors are unlikely exponents of their views. Walter Zelman, who teaches at the School of Public Health at Harvard University, is a political scientist and former consumer advocate who once promoted Canadian-style national health insurance. Ironically, most advocates of national health insurance view a health care system managed by for-profit companies, as many HMOs are, as anathema. Robert Berenson is a former practicing physician who now directs the Center for Health Plans and Providers in the Health Care Financing Administration (the agency that runs Medicare). The irony here is that physicians as a group have been the most vocal in condemning managed care.

So why do Zelman and Bereson want managed care? They say third-party intervention is the only way to control health care costs. Under the old, fee-for-service insurance system, there was too much inappropriate care and too much inefficiency. The incentives for physicians were, "When in doubt, do it." Managed care has reversed these incentives. Or has it only modified them? The economics here are straightforward. HMOs get a fixed fee in return for providing health care. The less care they provide, the higher their profits. The incentives are, "When in doubt, don't do it." Yet the authors have difficulty confronting that reality and its implications.

Part of the authors' problem is today largely a nonproblem: inappropriate care. Studies of hospital records show that heart procedures that are "clearly inappropriate" (promise to cause the patient more harm than good) are performed no more than 4 percent of the time. But much of the time even the best-trained doctors, including specialists, disagree. The reason is that many medical procedures promise some benefits, but opinions differ as to whether they will be worth the cost, given a patient's specific condition. Thus HMOs are constantly making cost-benefit decisions that in effect ration health care. How do they make these decisions? The HMOs won't say. Zelman and Bereson recognize that when the economic incentives are to withhold care there is likely to be a quality problem.

Can managed competition solve the problem? The authors believe it can. But unlike real competition in free insurance markets, the "managed" competition model tries to ignore the financial implications of the fact that we are not all equally healthy. Under community rating, health plans will seek to avoid the sick and attract the healthy - a condition Zelman and Bereson acknowledge, and bemoan. On balance, has managed care led to lower quality medicine than fee-for-service insurance? The authors say the evidence is mixed. However, economic theory predicts that the evidence will be mixed but in a systematic way. HMOs under managed competition have incentives to provide too much care for the healthy (from whom they make a profit) and too little care for the sick (from whom they incur losses). Although the evidence is skimpy, I believe it is broadly consistent with this prediction.

Is the only alternative to managed care runaway health care inflation? For other types of insurance, markets have found a better way. Under the casualty model, common in automobile and homeowners insurance, people share financial risk by paying some expenses out of pocket and relying on insurance only for catastrophic losses. These markets don't work perfectly. But they work better than managed care.

Zelman and Bereson do not consider the possibility that individual patients could manage a share of their own health care dollars through Medical Savings Accounts. The fact that physicians are serving as agents of third-party-payers rather than agents of their patients seems not to concern them. That physicians are being paid to deny care is of only passing interest. Physician complaints are generally dismissed as self-interested. Patients' insistence on choosing their physician (described as the "cult of choice") is treated as a problem rather than as part of a solution.