A Closer Look at Distant Relatives of Managed Competition

A primary reason may be that in all three programs most employees have joined plans that are primarily competing in the general market for health insurance. In the federal program, for example, more than 70 percent of enrollees are in fee-for-service plans,90 and most of those are in one of two plans operated by Blue Cross, which also sells health insurance to people outside the federal system. Most employees, therefore, have joined plans that are primarily in the business of selling health insurance services in a wider market, rather than just selling medical services to federal employees. If the market for insurance were effectively abolished and everybody were forced into managed competition, we would expect more dramatic changes in the quality of care delivered.

"Public employee plans already confirm the predictions of economic theory."

For this reason, the so-called operational examples are probably better described as distant relatives of managed competition, thus affirming the Congressional Budget Office conclusion that "managed competition [is] an approach that has not been tried anywhere in the world."91 Nonetheless an examination of these relatives isrevealing.

Evidence from the Federal Employees Health Benefit Program (FEHBP) and the Public Employee Plans in California and Minnesota.

More recently, the Blue Cross and Blue Shield plan in the Washington, D.C., area unveiled a PPO93 for federal employees that excluded more than 40 percent of the area doctors who had previously been under contract. Blue Cross also is limiting the number of specialists. In deciding whom to exclude, the insurer relied on a computer program that rejects "higher-cost" doctors. For example, a physician who is more likely to order an MRI scan in the presence of certain symptoms might be rejected by the plan. Proponents of the approach contend that the program identified the most cost-effective physicians. Critics claim that the choices are based solely on cost and ignore quality. There is some evidence that area physicians with excellent credentials are being rejected by Blue Cross and other insurers.94

Furthermore, health insurers in the FEHBP often try to limit or avoid coverage that can result in ongoing expenses such as mental health care, custodial care and long-term care. The insurers’ philosophy might be summed up as, "If it can’t be cured, don’t call us."95 To counteract these tendencies, FEHBP staff responsible for oversight of the program scrutinize every benefit change. Advertising is also monitored to make sure that no insurer is trying to appeal to the best risks. For instance, one insurer cannot compare itself with another in the program. Even so, insurers might advertise that office visits to a primary care physician are only $5 in an effort to appeal to those who are focused on primary care services, or they might show pictures of young healthy families in their advertisements - but no plan ever advertises that it has the best specialists.96

"There is only one system-wide fee-for-service insurer left in the federal employees’ system."

There are numerous other examples of opportunistic behavior on the part of plans that are competing to attract good risks and avoid bad ones. For example, two plans " the Beneficial Association of Capitol Hill Employees and the Secret Service plan " limit enrollment to employees and exclude retirees.97 It is amazing that the Office of Personnel Management allows this practice, considering that about 40 percent of FEHBP enrollees are retirees98 and those not covered by Medicare are several times as costly as the average employee.99 In addition, a number of employee association indemnity plans pay poorly for services associated with chronic conditions. In this way, they are attempting to dump their sicker patients on other plans, in what Alain Enthoven calls "a textbook for how to create a risk-selecting scheme."100 Similar efforts have been spotted in the CalPERS system in California.101 Another prediction that is borne out by the federal employees’ plan is the tendency to monopoly, at least in the provision of fee-for-service medicine. In recent years, the decline in the number of fee-for-service plans available to any federal employees has been dramatic:102

• Between 1987 and 1991, the number of fee-for-service plans available somewhere in the country dropped from 35 to 19.
• The number of such plans available in the Washington, D.C., area fell from 33 to 17.

As noted above, all but one of these plans are available only to particular groups of employees. The only systemwide fee-for-service insurer left is Blue Cross. Yet the demise of a plan does not necessarily mean that it was not well managed. For the reasons given above, random chance can cause plans to fall victim to adverse selection. As one observer commented, among the "unfortunate consequences [of the FEHBP is] the demise of well-managed, low-cost plans that suffered a death spiral from adverse selection."103 Perhaps because Blue Cross is a fee-for-service plan and because it is the only general fee-for-service plan, we have not seen anything like the deterioration in quality that economic theory predicts. In general, sick people will choose fee-for-service plans over HMOs; and those most likely to leave HMOs are people who get sick.104 Having found the physicians they want to treat them, these patients know they can continue to see them under a fee-for-service arrangement. By contrast, even if the same physicians are on an HMO panel, there is no guarantee they will not leave the panel during the patient’s course of treatment.

"Each plan trys to attract the healthy and avoid the sick."

Blue Cross, therefore, tends to attract the less profitable patients in the federal system. But because of its monopoly position, Blue Cross can also offer a low-option plan (now called a standard-option plan), attract healthier people and use the premium income to cross-subsidize its high-option plan. Ironically, managed competition works as well as it does for federal employees precisely because it is characterized by monopoly rather than competition.105 A similar development has occurred in the Minnesota state employees’ program, where Blue Cross operated the fee-for-service option until cost increases forced abandonment of the plan and its replacement by a Blue Cross PPO.106 Monopoly, however, is not what the proponents of managed competition are advocating. As we shall see below, they recommend a number of regulatory measures to keep competition alive.

Evidence that the FEHBP is not nearly as competitive as it could be is that the premiums charged by various plans often do not reflect their true actuarial value. As a dramatic example:107

• Actuaries calculate that there is virtually no difference between the value of the high-option and standard-option plans Blue Cross offers to federal employees.
• Yet the premium for single people in the high-option plan is almost four times as high ($2,040 vs. $540 in 1993).

Interestingly, there is very little movement among plans even during the annual open season. Only 5 percent of enrollees switch plans each year, and that figure includes movement out of plans that drop out of the system.108

Enthoven argues that there is not enough competition in the FEHBP because there is too much product differentiation.109 If all the competing plans were forced to offer exactly the same package of benefits, people (or at least healthy people) could focus exclusively on price. As we shall see below, managed competition purists almost always want a same-benefit-for-all regulation, and this approach has been adopted by Clinton, Cooper and Chafee. Given a free hand, they could no doubt make the FEHBP much more competitive than it is now - but the competition, of course, would be dominated by perverse incentives and the losers would be the federal employees.

Evidence from the State of Washington.

"No plan ever advertises that it has the best specialists."

Evidence from Other Countries.

Israel already has a modified form of managed competition, although it contains too many imperfections to pass muster with Enthoven and other managed competition purists. The country’s health system is dominated by four HMO-type organizations called sick funds. The oldest, Kupat Holim Clalit, is controlled by the trade unions and covers 70 percent of the population. It runs perpetual deficits, has lengthy waiting lines for services and is experiencing quality-of-service deterioration. As a result, healthier and wealthier enrollees are switching to other plans, including Maccabi, which is reputed to have no waiting lines for primary services and the best heart facilities.113 Because plans do not have to accept sick (or high-risk) patients from each other, however, labor’s plan is being selected against.114 Under the system about to be adopted, however, the plans will be required to offer the same benefits, charge community-rated premiums (with subsidies from government for low-income families) and accept all applicants regardless of health risk.115 To assess what these rules are likely to mean, a soon-to-be-released government study investigated why people switched health plans. The answer: enrollees were relatively insensitive to price differences and very sensitive to quality differences among the plans.116 These results are the opposite of what Alain Enthoven anticipates, and they are devastating to the case for managed competition. Enthoven wants patients to be primarily sensitive to price because he wants health plans to compete based on their ability to manage health care costs.117 If instead they compete primarily on the basis of quality, all of the dire predictions made in this report are more likely to come true. The Netherlands also is in the process of implementing a full-scale system of managed competition. In an attempt to avoid the adverse effects of competition based on risk selection, the government proposed a system of risk-adjusted premiums. But Dutch health economists were able to show how easily health plans would be able to reap huge profits by cream skimming, and the government has backed away from its risk-adjustment scheme. Unfortunately, the health plans now will have even worse incentives.118

"In Britain, Israel and the Netherlands, some advocates of managed competition are having second thoughts."

Five years after managed competition reforms began in Britain, things are not going well for some patients:119

• A student with a kidney infection waited in agony for 23 hours for a hospital bed; while she waited, one administrator urged her to "go private" and receive immediate treatment.
• An 87-year-old with bone cancer sat for 5 1/2 hours on a chair while nurses searched desperately for a bed.
• As hospitals in London close, there are numerous reports of seriously ill patients being kept on stretchers in hallways because of a shortage of beds.

Because incidents like these occurred routinely under the previous system, it is hard to be sure that managed competition is to blame. The reforms do appear to have made British medicine more efficient, notably so for people without serious medical problems. Quality of care for the truly sick may have declined, however.

The Politics of Medicine.

Research conducted by the authors for more than a decade and a half convinces us that in every country there are strong political pressures to divert funds from the sick to the healthy. Spending 50 percent of a country’s health care budget on 4 percent of its population may make good medical sense, but it makes no political sense. In a democracy, the 4 percent (who may, after all, be too sick to vote) simply can’t compete against the other 96 percent. That’s why governments of other countries tend to restrict expensive lifesaving technology and to overprovide services to the healthy.120

We would expect similar results when global budgets are imposed on the private sector, as they would be under the Clinton plan and in Washington state. The politicians who must implement the controls will face the same pressures that politicians in other countries face. Moreover, it is worth remembering that even without global budgets and price controls, the so-called HIPCs and alliances under most managed competition proposals will be governmental entities. For that reason, they will be subject to all of the influences that arise from the politics of medicine.