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A Primer on Managed Competition

Varieties of Managed Competition

Under all four bills before Congress, people would choose among competing health care plans. These plans would be required to charge everyone the same premium (community rating) and to take all comers (guaranteed issue). As a result, people in need of expensive medical care would be choosing not among insurers, but among providers of medical care, and the premium they paid would be well below the cost of their treatment.

For the reasons given in the text, all four systems would be extremely unstable, and competitive pressures would induce the health plans to underprovide care to the sick and overprovide care to the healthy. The designers of these proposals are generally confused about how competition works. For example, when competitors have proper incentives, less regulation is normally a good thing. However, under managed competition, competitors have perverse incentives that will produce disastrous results if not counteracted by regulation.

The Clinton Proposal.

All health plans would be forced to offer the same basic benefit and have the same patient cost sharing, a practice that would increase competitive pressures by encouraging people to focus only on premiums and quality. People could switch health plans once a year, more frequently for "good cause." In an imperfect attempt to counteract the perverse incentives the plan creates, premiums would be risk adjusted, so that plans with sicker enrollees would get more income. The alliances regulating the system would also have considerable power to try to avert adverse risk selection. Everyone would be required to join, and employers would pay at least 80 percent of their employees’ premiums. Premium controls and global budgets would almost certainly drive fee-for-service plans from the market and intensify the downward pressure on the quality of care received by the sickest enrollees.

The Cooper-Grandy Bill.

To gain favorable tax treatment, small business employers would be required to make federally certified health plans available to their employees. Like the Clinton plan, this bill would require the same benefit package and the same patient cost sharing. Premiums would be risk adjusted. Unlike the Clinton plan, participation would not be mandatory. Perverse incentives would be reduced somewhat because of modified community rating - premiums could vary by age. Instability would be enhanced, however, by the farmer’s market approach in which the health plan purchasing cooperatives (the regulatory body) would interfere very little in the competitive process.

The Chafee Bill.

All individuals would be required to purchase a standard benefits package. As in the other bills, there would be subsidies for low-income families. There also is a provision for Medical Savings Accounts. Unlike the Clinton and Cooper proposals, participation in an alliance would not be mandatory, and alliances would not have monopolies over geographical areas. To limit responses to perverse incentives, a national commission would devise a risk-adjustment scheme.

Conservative Proposals.

Like the Chafee bill, the Nickles-Stearns bill has an individual mandate and calls for modified community rating. The Medical Savings Account provision is much stronger than under the Chafee bill and deductibles can range as high as $1,000 per individual and $2,000 per family. To counteract perverse incentives, premiums would be risk adjusted by state governments. A pass-back provision would allow income shifts between plans when patients switch plans. Nickles objects to the term "managed competition," and Barron’s calls the bill "unmanaged competition." He also is considering dropping the mandate and raising the allowed deductible. This plan has the least regulation of the four - for example, it has no provision for alliances. But for that reason it is the most potentially unstable.

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 tricting tax subsidies to employer-provided coverage.15 All four also would provide more generous tax relief to lower-income families, in contrast to the current system of giving the most generous subsidies to higher-income families.16 And in contrast to the current system of subsidizing generous and even wasteful employer-provided health insurance, Nickles-Stearns would limit the tax subsidy (depending on family income) and the Cooper-Grandy and Chafee bills would limit the amount employers could deduct to the cost of a basic plan.17 All four bills also would give Medicaid enrollees an opportunity to become full participants in the private health insurance marketplace and give Medicare beneficiaries an opportunity to participate as well. Elsewhere, we have argued that each of these reforms is desirable, whereas global budgets, price controls and mandates are not.18

"The idea is backed by the largest health insurance companies and other powerful interest groups."