Evolution of the Concept of Managed Competition

For example, Enthoven argued that because of perverse government tax subsidies, employers and their employees have an incentive to buy too much insurance. Where employees have choices, they tend to pick overly generous plans because they do not bear the full cost of their choice. Moreover, when employees enter the medical marketplace, they make wasteful choices and overconsume health care because their employer " or some other third party " is paying the bill. Finally, just as employees have an incentive to overuse the health care system, physicians have an incentive to encourage overconsumption because it increases their incomes.

When Enthoven published his ideas, physicians considered them radical. The medical literature of the time was dominated by the notion that economic incentives did not or should not motivate the behavior of doctors or patients. All medical schools tended to encourage budding physicians to ignore costs in prescribing treatments, and there were virtually no classes on medical economics.45 Today things are very different. Health economists and other health policy analysts readily accept an economic diagnosis of the problem. However, many do not endorse Enthoven’s recommended cure.

Alain Enthoven’s Consumer Choice Health Plan (CCHP).46

The Jackson Hole Group.

The Jackson Hole philosophy had considerable appeal for some of the largest health insurance companies. These firms had long ago ceased selling anything resembling real insurance. They had left the market for small group and individual policies and specialized instead in managing health care costs for large employers. The prospect of replacing a market for health insurance with a market for managed care was quite consistent with their financial interests. As a result, they sent representatives to the Jackson Hole meetings and backed the group financially.

"Despite the Clintons’ attacks on insurance companies, the president has adopted the plans of the large insurers."

The national media have underreported the extent to which Bill Clinton’s health care plan has been shaped and molded by a reform package backed by the nation’s largest health insurance companies. Some might suppose that the full-page advertisements in which the "big five" tout managed competition are simply a show of support for the president. In fact, it’s the other way around. The president has endorsed the plan of the large insurers, who are convinced that under managed competition most of their small competitors will be pushed aside and they will be able to carve up the market among themselves.47 Indeed, at a Jackson Hole meeting last year, following Ira Magaziner’s presentation of the Clinton plan to a modest gathering of insurance industry executives,48 Paul Ellwood is reported to have said, "I’d say you have in this room 90 percent of those who are going to be in the managed competition business."

Yet despite insurance industry influence, the Jackson Hole Group appears to have underestimated the problems that will arise because of adverse selection. And they apparently have paid little attention to the even more serious economic problems discussed below.

Left-Wing Version of Managed Competition: The Clinton Plan.

"Bill Clinton proposes to merge managed competition with price controls and global budgets."

Enthoven and Ellwood were outraged. Ellwood cried "foul" in a Wall Street Journal editorial: "White House planners never fully embraced the managed competition reform model the president endorsed during the campaign."51 His sentiments were echoed by Enthoven, who complained that the Clinton plan "will cause more problems than it solves."52 Until recently, Enthoven believed that the defects in the Clinton plan could be remedied by Congress, but now he’s changed his mind. "The first thing Congress should do is delete pages 1 through 1,342 of Clinton’s 1,342-page bill," he says.53

Centrist Versions of Managed Competition: The Cooper-Grandy and Chafee Bills.

"Conservative and moderate versions would have fewer regulations."

Yet despite Cooper’s promise to rely on competition rather than regulation, as more details came out more regulation emerged. For example, Cooper now insists that everyone must have the same basic benefit package and that deductibles and copayments must be the same for everyone. Another new twist is a risk adjustment process in which funds would be shifted from plans that attract healthier to those that attract sicker people. And although Cooper and other major cosponsors have expressed support for Medical Savings Accounts, it now appears that the artificial markets created by the Cooper plan would be too fragile to allow individual patients even the bit of freedom that MSAs would provide.55 Conservative Versions of Managed Competition.56 A number of conservatives have also modeled health reform proposals on the federal employees plan. Although Senator Nickles objects to the term "managed competition" and Barron’s has called it "unmanaged competition" " the Nickles-Stearns bill is often described as promoting consumer choice and free enterprise " it is not significantly different from other versions of managed competition and in some respects calls for even more regulation than the Cooper-Grandy and the Chafee bills.

• In contrast to Cooper-Grandy, Nickles-Stearns would require every individual to purchase a basic health insurance policy - a mandate that would inevitably invite government regulation of the entire health care system.57
• And unlike Cooper-Grandy, Nickles-Stearns would outlaw many of the most important cost control techniques being implemented by large employers.58

The Nickles-Stearns bill does allow Medical Savings Account (MSA) contributions of up to $3,000,59 but it limits the deductible on the required health insurance plan to $1,000 for an individual and $2,000 for a family. Thus, even though people are allowed to have MSAs, Nickles-Stearns significantly reduces their use in the purchase of medical care.