What Is Managed Competition?

Creating an Artificial Market for Health Insurance.

"Insurers would be forced to manage care instead of managing risk."

When Insurers Manage Care Instead of Managing Risk.

Rethinking the Bias against Insurance.

Suppose there were no such thing as private or public health insurance. How would our health care system be different? Without insurance, individuals would have to fund from their own resources such expensive procedures as bypass surgery, organ transplants and state-of-the art treatment for cancer and AIDS. And since many " perhaps most " patients would not be able to pay for these procedures, the market for them would be very thin. In fact, it might be so thin that the technology would never be developed in the first place.

"Most advocates of managed competition want to abolish the market for health insurance and replace it with a market for managed care."

By providing funds to pay for the treatment of catastrophic illnesses, health insurance has helped to make possible the development of expensive procedures that most people could not pay for on their own. Without health insurance, much of what medical science makes available to us today would have been lost. As we show below, that loss is likely to befall us in the future if we adopt managed competition.

Prototype of Managed Competition: The Federal Employees Health Benefits Program (FEHBP).

Despite glowing descriptions by its defenders,26 however, the FEHBP has few of the desirable characteristics of a competitive system. Most people familiar with the FEHBP have concluded that it needs reform.27 This is the opinion of the Office of Personnel Management (OPM), which oversees the program, and of other analysts inside and outside of government.28 And although there is some disagreement over the issue, the program does not appear to have succeeded in controlling costs.29 For example:

• During the 1980s, the federal government’s spending on employee health benefits grew at a faster annual rate than employer- provided health insurance generally (11.22 percent versus 10.01 percent).
• Adjusted for the number of employees, the federal employees’ plan’s spending grew more than 25 percent faster than spending for private sector plans.

One reason why the FEHBP has not controlled costs is that buyers never confront prices that reflect the real cost of services they intend to use. For the sickest patients " those likely to comparison-shop most carefully " the expected benefits of treatment are so much higher than the premium payment that quality of care rather than price tends to govern choices. And for the healthiest patients who are being overcharged, competition induces insurers to create additional services, thus adding to total cost.

Other problems result from regulations designed to prevent adverse selection. For example, while most private employers are increasing their deductibles, Blue Cross’s FEHBP "high-option" plan has a deductible of only $200, and its "standard-option" plan has a deductible of only $250. Why are the deductibles so low? Because OPM won’t allow Blue Cross or any other plan to raise its deductibles or copayments, fearing that plans with greater patient cost-sharing and cheaper rates would attract younger, healthier employees. OPM rigorously reviews every attempt to tailor the plans to the employees’ needs in order to make sure that no plan appeals more to good risks than to bad ones. For example, OPM will not allow a plan to include coverage for teeth cleaning but omit coverage for dentures, on the theory that such a change would make the plan more attractive to young people.30

"The federal employees’ health plan is seen as a prototype for managed competition."

Even with this regulatory micromanagement, outside analysts say that for the most part competition is for good risks and does not approach what managed competition advocates imagine.31 Indeed, it is precisely because they attracted too many bad risks that Aetna recently left the FEHBP, leaving Blue Cross as the only systemwide fee-for-service insurer.32

Other Prototypes of Managed Competition.

"Public employee plans are distant cousins of managed competition."

The concept of managed competition is also gaining interest internationally. For example, the health care reforms initiated by Margaret Thatcher are generally described as a movement from socialized medicine to managed competition.38 And both the Netherlands39 and Israel40 are about to adopt managed competition nationwide. Below, we briefly consider some of the problems these countries are having.

How Managed Competition Differs from Conventional Employer Plans.

The main difference is that employees who have choices are mainly choosing among insurers who are offering insurance services, not health plans offering medical services. In order to convince an employer to offer its plan, an insurer must show that it will adequately cover a broad range of illnesses. To get a contract, therefore, an insurer must appeal to the entire group of employees rather than to selected employees with particular health needs. Similarly, in negotiating with insurers, employers act on behalf of the group as a whole.

Under managed competition, employers will no longer act on behalf of employees. They will make individual choices instead. And insurers will no longer offer insurance services. They will offer medical benefits instead. This distinction will become clearer below. But in order to better appreciate it at this point, consider that under pure managed competition there would be no need for insurance companies. Health plans could just as easily be operated by hospitals or physicians’ groups. Indeed, physicians and hospital personnel are likely to have a competitive advantage over insurance companies in a very important respect: their "hands-on" relationships with patients would put them in a much better position to encourage the least profitable enrollees to move to some other plan. Thus the existing plans " both public and private " that allow choice and competition among insurers tell us very little about what would happen if the market for insurance were effectively abolished under managed competition.41 "Existing plans tell us very little about how managed competition would work."