Managed Competition and California's Health Care Economy

Prologue: More than any other single figure, Alain Enthoven is responsible for establishing and promoting the ideas that are the intellectual underpinnings of America's rapidly transforming health care system. But the system has evolved in ways that Enthoven and his colleagues did not initially envision. They proposed a world in which organized health care delivery systems, paid on a per capita basis, would compete on price and quality. The delivery systems would be mutually exclusive, each would be marketed by its own health plan, and providers could attract more subscribers by cutting cost and price. Profits would flow back into the delivery systems that generated them, financing the expansion of the most efficient systems. What has evolved in California, and nationally, is quite different. Publicly owned, for-profit health maintenance organizations, what Enthoven and Sara Singer label “carrier HMOs,” have increasingly come to dominate managed care, particularly in California. These HMOs contract with multispecialty group practices and individual practice associations (IPAs) using various risk-sharing arrangements. Many providers have made the transition to managed care reluctantly and only because carrier HMOs created the competitive market that required them to do so. In this paper Enthoven and Singer discuss the current status of health insurance competition in California. The growing dominance of managed care has led to lower insurance premiums for large and small employment groups. That may not imply reductions in total spending, because of government programs. Enthoven is the Marriner S. Eccles Professor of Public and Private Management at the Stanford Graduate School of Business. Singer, who holds a master's degree in business administration from Stanford, is Enthoven's special assistant. During the health care reform debate, Singer worked for Rep. Mike Andrews (D-TX). Abstract: There is evidence in California of a broad decline in health care costs to employment groups adopting managed care and managed competition—premium reductions up to 10 percent. National comparisons and utilization data generally confirm the beginning of lower costs. Large California medical groups and health systems have responded to pressure by finding ways to reduce costs and improve quality. While examples are encouraging, there is room for improvement. Two levels of competition have emerged and continue to evolve: carrier competition and delivery system competition. Each model has strengths and limitations, but the existing mix is driving down costs.