Why Managed Care Has Failed To Contain Health Costs

Prologue: Many legislative proposals to reform the health care system promote expansion of managed care as the best current hope to control health care costs. Private employers have in fact embraced managed care as their preferred approach to moderating the growth of employee health insurance premiums. Given the demonstrated potential of managed care plans to reduce costs, the expansion in their number of enrolled members over the past years seemingly should have resulted in a reduced rate of increase in national health care spending. Clearly there are other forces at work. In this paper Alain Enthoven examines the forces that have affected “ elasticity of demand,” or consumer responsiveness to changes in price. He argues that certain factors — including employer coverage practices, the existing tax code, and the number of standardized coverage options per purchasing group — reduce purchasers 1 sensitivity to price differences among plans and thereby decrease the plans' incentives to cut costs. Several of the possible solutions that he advances are tenets of the Jackson Hole Group's managed competition plan, which he coauthored with Paul Ellwood and Lynn Etheredge. “Some say that competition has failed,” he writes in this paper. “I say that competition has not yet been tried.” Enthoven, a champion of marketplace efficiency in a variety of fields, became interested in health care economics while serving as president of the medical products division of Litton Industries in California. As a consultant to Kaiser Permanente, the country's largest HMO, he began to develop the ideas that would form the backbone of his own proposal for health care reform. It is generally believed that the Clinton administration s eventual health care reform bill will rely substantially on Enthoven s ideas. Enthoven is a professor at Stanford University's Graduate School of Business; he received his doctorate in economics from the Massachusetts Institute of Technology. Abstract: Much evidence points to the fact that managed care plans (health maintenance organizations and preferred provider insurance) reduce costs and offer value for money. Yet they apparently have not helped to slow national health expenditures. One explanation is that the practices of purchasers (including government and employers), the tax laws, and other market imperfections have reduced the demand for real cost containment, depriving managed care plans of an adequate incentive to cut cost and price. These market conditions can and should be corrected; the managed competition proposal being discussed at the national level is a comprehensive plan for doing so.