Neither of the two competing visions for market-driven health care — “managed competition” or consumer-led purchasing of medical services — are without challenges, as two recent papers make clear. Proponents of competitive solutions in health care should consider what might be done to improve both models.
The architects of the managed competition framework — Alain Enthoven and Paul Ellwood — based their reform ideas on the promotion of fully integrated health plans. In this model, consumers don’t shop for individual medical services. Rather, they select a health plan that provides both their insurance coverage and an organized system of care delivery. It is up to the health plan, not the consumer, to find the most efficient ways of providing needed services to patients. The consumer’s role is to select from among the competing health plans based on the premiums they charge for coverage and quantifiable measures of their quality. HMOs that can offer high-quality care while also charging a low premium should be able to prosper in the managed competition reform model.
The other vision for competition in health care puts individual consumers in charge of shopping directly for medical care. This version of competition features the use of Health Savings Accounts (HSAs) and high-deductible insurance plans rather than HMOs. There are many studies showing that when consumers spend their own money on medical care, they spend less than is the case when an insurance plan, public or private, is paying all of the bills.
Both of these approaches should be considered market-based approaches to reform. Both rely on consumers to make cost-conscious decisions, which then forces those providing services to them to become more productive and efficient over time. But the two approaches differ significantly in their assumptions about how the provision of health care will become more cost-effective.
Proponents of managed competition do not think individual consumers will ever be sufficiently informed to make good, independent decisions about where, when, and from whom to get medical care. They believe patients would rather defer to their physicians to make decisions about their care.
Advocates of consumer-driven reform believe managed competition would stifle innovation because of its extensive regulation. They believe that the market will respond with better options when enough consumers have the incentive to seek lower cost care.
Enthoven recently teamed up with Laurence Baker to provide an updated look at how managed competition is faring in California, where the concept has been taken up with more enthusiasm than anywhere else in the country.
In the managed competition framework, consumers play their role in the medical marketplace by choosing from among integrated health plans that have strong incentives to deliver high-quality care at the lowest possible cost. Enthoven and Ellwood have consistently argued that, with the right incentives, organized systems of care delivery will find new and better ways of delivering services at less cost, in much the same way that other industries in the U.S. economy have become more productive over time.
Managed competition requires a number of design features for it to work optimally. First, it requires the full integration of insurance and medical care delivery in the health-plan offerings made available to consumers. The managed competition model works best, and the competition is the most intense, when consumers are choosing from among plans with non-overlapping networks of hospitals and physicians. When hospitals and doctors are affiliated with just one plan, they have a strong financial interest in keeping their costs down in order to attract plan enrollment. In most markets, including in California, insurers build loosely affiliated networks, and hospitals and physician groups get paid by multiple insurance plans. The competition among the suppliers of medical services is therefore very weak because the hospitals and doctors get paid no matter what plan a consumer is enrolled in.
A second important requirement of managed competition is the standardization of benefits offered by competing insurers. Enthoven and Ellwood have always argued that consumers will only be able to make informed price and quality decisions when they don’t have to factor into their assessments differing benefit designs.
A third, crucial feature of managed competition is, of course, cost-conscious consumers. For the model to work, consumers must be forced to pay more for enrollment in more expensive health plan options. For instance, if the average cost plan in a market has a $500 per month premium, consumers selecting a plan with a $600 per month premium must be required to pay the additional $100 per month themselves. In Medicare the federal government provides a larger subsidy when the consumer selects unmanaged fee-for-service, even when less costly privately-managed alternatives are available. Similarly, the tax subsidy for employer-provided coverage is open-ended and increases commensurately with the expense of the plan. Consequently, managed competition isn’t really being tried anywhere in the U.S., including California, because so many consumers get their coverage through insurance systems that do not require the enrollees to pay for the added premium of high-cost coverage.
Consumer-driven reform, built on enrollment in HSAs and high-deductible insurance, also has some challenges. A recent paper by Michael Chernew and his co-authors provides a window into why surging enrollment in high-deductible health plans has yet to translate into more efficient care-delivery options for patients. They examined the claims experience of tens of thousands of patients nationwide who needed an MRI to assess the condition of a lower leg. This is the kind of medical intervention that lends itself to comparison shopping because there is no real quality difference among the facilities providing such MRIs. It shouldn’t matter to the patient where they get this diagnostic procedure done; what should matter is the price.
But Chernew and his colleagues found that consumers paid almost no attention to the prices of the MRIs they were receiving, even though they were given access to a comparison tool that would have readily identified the lowest cost options in their markets. Instead, the patients got their MRIs wherever their orthopedic surgeons told them to go, which very often meant an expensive hospital-owned facility. The typical patient passed six less expensive MRI facilities on the way to the facility recommended by their doctor, and then spent an average of $89 more than the lowest-priced option among those six facilities.
A better environment for market-driven improvement of health care is unlikely to emerge spontaneously. The forces that make it hard for managed competition or consumer-driven care to get more traction are deeply embedded in current practices and existing public policies. The federal government will need to take the lead in jump-starting a more effective marketplace.
Two policies would make a difference.
First, both Medicare and employer-provided coverage should move toward more defined contribution support rather than open-ended subsidies. In Medicare, the beneficiaries should receive fixed federal support toward enrollment in coverage based on the premiums charged by competing insurance options in their market areas (this is the so-called “premium support” model of reform, built on managed competition principles). Similarly, today’s open-ended federal tax subsidy for employer coverage should be capped, which would force workers to pay for higher-cost coverage with after-tax dollars. This shift toward a defined contribution philosophy would inject much needed cost discipline into the two largest sources of insurance coverage in the country.
Second, the federal government should help enrollees in HSAs and high-deductible insurance plans become more effective consumers of medical services by creating standardized clinical services with transparent pricing. In the Chernew et al. paper, many patients probably did not know that there is no quality difference among the facilities providing lower-leg MRIs. For this diagnostic procedure, the only things that really matter are convenience and price, despite what doctors might say. The federal government can help consumers become more confident shoppers of medical care by defining a large number of standardized medical services and interventions that, like a lower-leg MRI, involve fairly standardized clinical protocols. When getting these kinds of interventions and services, the patient should have the confidence to compare prices because what they will get from those providing services to them should be basically the same from a clinical perspective. The government should require all providers participating in Medicare (basically all hospitals and physicians) to disclose the prices they will charge to all HSA enrollees who come to them for one of the interventions on the government’s list of standardized clinical services. With the government taking the lead, consumers would have more confidence that they can compare the prices of the competing suppliers of services without unknowingly getting substandard care in the process.
The marketplace for medical care operates differently than do other markets, in part because of the imbalance in information between suppliers of the services and the consumers. It is hard, if not impossible, for most consumers to have the self-confidence to navigate the system on their own without a trusted person or institution acting on their behalf.
In the managed competition model, consumers put their trust in integrated health plans to hold down costs for them without compromising the quality of the care they receive. The plans are held accountable based on required reporting of key measures of patient health outcomes. Consumers with HSAs and high-deductible plans need assistance too, and that will only come if the federal government makes it much easier for patients to compare the prices charged by competing suppliers of standardized clinical interventions. Consumers could then use their growing power as purchasers to secure lower prices for the care they need.
Proponents of market-based reform of health care are rightly skeptical that the federal government could control costs without also harming the quality of care patients receive. They believe a functioning market would produce better results. That is true, but market failures mean consumers very often find it hard to distinguish between necessary and wasteful medical expenditures. Consumers are more than willing to cut their costs. They just need some reassurance from trusted institutions that selecting lower-cost options does not mean getting lower quality care.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.
