Creating an Artificial Market for Medical Services

Sound silly? It is. And managed competition in health insurance is equally silly. It is no accident that most advocates of managed competition also advocate managed care. Unless most people are going to be in managed care programs, there is no reason whatsoever to have managed competition.143

Managed Care.

"Managed competition would make no sense unless most people were in HMOs."

The most common setting in which managed care is fully implemented is a prepaid plan, or HMO, in which patients pay virtually nothing at the time they consume medical services (e.g., no deductibles or copayments). Since these patients perceive medical care as "free," they have incentives to overconsume it. The HMO bureaucracy must institute barriers to keep that from happening. Just as managed competition creates an artificial market for health insurance, managed care creates an artificial market for medical care in which the price system is almost completely suppressed.

Outcomes Research and Practice Guidelines.

Currently, the American Medical Association and the Rand Corporation are working on national practice guidelines, and Congress has mandated that the Department of Health and Human Services do the same. The resultant computerized protocols will tell physicians what to do when they confront certain patient symptoms and conditions.146 These protocols are expected to play a major role in health care under the Clinton plan, and they are a key component of other managed competition proposals as well.

Will the guidelines work? That’s not clear. Many people believe they will be a waste of money. Some argue that they take so long to develop that medical science will have outpaced them by the time they are available. In other words, computerized protocols will always be years behind medical advances. Others object that computerized protocols can not determine correct medical procedures. And in fact, one test compared the judgments of general practitioners to three different computerized protocols in the treatment of patients with abdominal pain. The GPs outperformed the protocols in every test.147

If workable computerized protocols were available, they might prove valuable as tools. A physician could consult the computer, then substitute his own judgment where appropriate. Less complicated protocols might allow patients to ask their home computers whether to see a physician, for example.

On the other hand, if computerized protocols and practice guidelines were used to control the behavior of physicians and patients, they could threaten the quality of medical care. And, unfortunately, that threat is real. Researcher Robert Brook has argued that the Rand Corporation’s techniques can be used to ration health care under the Medicare system, if Medicare funds run short.148

"The danger of computerized protocols is that doctors will be forced to practice ‘cookbook’ medicine."

Lurking behind the public discussion of practice guidelines is a fundamental difference of philosophy that is rarely discussed in print. The bureaucratic view of health care is usually also a technocratic view. Its more extreme proponents are fundamentally antiphysician and antipatient in the sense that they believe the attitudes and judgments of individuals are largely irrelevant. Ultimately, the technocrats do not see the computer as an aid to physicians and patients but as a substitute. They envision medical practice for the country as a whole being literally dictated from Washington.

Although the discussion of practice guidelines frequently is couched in terms of helping physicians make good decisions, the technocrats also see the guidelines as a means of exerting control. In their view, physicians who substitute their own judgment for the computer’s should have to prove that they are right, which would require them to use cumbersome and costly bureaucratic procedures. As a result, failure to follow the guidelines would become rare.

Do HMOs Control Costs?

On the other hand, because HMOs make services "free" to patients at the time they are consumed, they face the problem of overconsumption.150 The NCPA/Fiscal Associates Health Care Model indicates that the nation’s annual health care bill could be reduced by as much as 15 percent by substituting less expensive for more expensive therapies. This gain would be more than wiped out, however, by the increased consumption that would occur if out-of-pocket spending were reduced, say, from 21 percent to 10 percent of total health care costs.151

Even if HMOs do result in cost reductions, those reductions tend to be one-time events. After an initial drop, managed care costs grow at the same rate as costs in other types of health care delivery systems - if not faster.152 The reason managed care is not able to reduce costs significantly is that it has not come to grips with the primary problem of the health care industry: when consumers enter the medical marketplace, the vast majority are spending someone else’s money. Economic studies and common sense confirm that we are less likely to be prudent shoppers if someone else is paying the bill.153 Ultimately, if costs are to be controlled, someone must choose between health care and other uses of money.

"There is no evidence that HMOs ultimately control costs."

This is the opinion of William Schwartz (University of Southern California) and Daniel Mendelson (Lewin-VHI), who argue that managed care has already achieved most of the savings that are achievable by reducing hospitalization. The only way for managed care to control the long-term rise in health care costs, they say, is to deny people access to expensive but useful technology.154

Do HMOs Lower the Quality of Care?

If quality does suffer, it is more likely to do so in those areas where there are not clear standards of medical practice and where the exercise of discretion on the part of physicians can save money for the managed care organization. For example, lacking any clear guidelines from the medical community, an HMO will realize considerable savings if it fails to take so-called heroic measures to save premature, low-weight babies.

The treatment of leukemia patients varies, depending on the preferences of physicians. At one level of care, the cancer may go into remission - thus prolonging a lingering death. Yet at a lower level of care, the patient may die and treatment costs cease. Bypass surgery for a man in his 60s can often be postponed - perhaps to the age of 65 when Medicare, rather than the HMO, will pay the bill. And, as we show below, physicians have considerable discretion in deciding how much to spend on the care of the chronically ill.156

A major difference between managed care and fee-for-service medicine is in the use of diagnostic tests. For example:157

• According to the National Ambulatory Medical Care Survey, HMOs and other managed care programs are less likely to authorize expensive diagnostic tests, and for MRI and CAT scans the difference is a factor of at least two to one.
• As a consequence, patients with diseases such as cancer are likely to have their conditions detected at a later stage, making treatment more difficult.

The pressure to lower quality derives from the pressure to lower costs. Surveys of corporate buyers of health care show that employers are more concerned about price than about quality. And that preference is reflected in the attitudes of managed care organizations that cater to corporate needs. For example, a Foster Higgins survey of managed care organizations found that employers rated price over quality by a large measure.158

"There is anecdotal evidence that HMOs threaten the quality of care."

The Texas Medical Association (TMA) has identified 2,100 complaints related to the rationing of health care services by managed care organizations in Texas since 1990.159 In some cases, the TMA has filed suit against the third-party payer. It is not alone. In one case a California jury awarded $89 million in damages to the family of a woman who died after her HMO refused to pay for a bone marrow transplant. The jury was impressed by the fact that the HMO’s medical director pressured the woman’s physician to recommend against the treatment.160 The medical literature is full of testimonials from physicians describing subtle and overt ways in which HMOs pressure physicians to skimp on quality to save money.161 Even more frightening, managed care organizations are finding more physicians already predisposed to the HMO philosophy - thus obviating the need for pressure from HMO managers.162

Patients are also beginning to complain. Jan Gribbon, for example, who ruptured a disk in her back, had to wait two weeks for her HMO’s physician gatekeeper to refer her to a specialist. Then she had to wait several more weeks to get back the results of two tests which her physician later explained were ineffectual but were ordered because the HMO did not have access to the test she needed. When her doctors finally verified her ruptured disk and scheduled her for surgery, it was six months after the injury, the last two of which she was in pain, on her back and out of work. Then her surgery was flawed. As a result, she now relies on "nerve blocks" to stop her pain and has been told she will need surgery again in a few years.163 It would be nice if Jan Gribbon’s case was rare. In the future it may not be.

Case Study: Chronic Illness.164

• Although HMOs and fee-for-service plans tend to adopt the same method of treatment where norms are well-defined, where norms are vague the prepaid plans provide significantly reduced levels of treatment.165
• Mental health expenditures, for example, are one-third to one-fifth as large under prepaid plans as they are under fee-for-service plans, other things beingequal.166

One problem that arises is the HMO’s practice of using primary care physicians as gatekeepers. These physicians often lack the expertise to identify certain chronic conditions. For example, physicians generally detect depression only about half the time, and prepaid physicians detect depression less often than fee-for-service physicians.167 This may be partly due to the fact that prepaid physicians have a financial self-interest in not referring patients to a specialist.

"Patients with chronic illnesses are the ones at greatest risk."

Another problem is that HMOs that specialize in the treatment of chronic illness tend to provide more care and better care than HMOs that see chronic patients infrequently.168 Yet such specialized HMOs are unlikely to exist under managed competition. As we saw in the case of the federal employees’ plan, the very nature of managed competition discourages competitors from specializing in chronic conditions, because the community-rated premiums will be lower than the cost of care.