NCPA - National Center for Policy Analysis

Managed Care Options Running Out

May 10, 2001

Out of concern for rising costs, in the 1990s the health care industry moved from traditional fee-for-service insurance to managed care. The idea was to make physician compensation independent of the amount of service delivered, either by putting doctors on salary, or through "capitation," a per-patient payment unrelated to the amount of services delivered. Now, says a report in Health Affairs, companies are looking for new cost-containment options because they are again facing double-digit inflation in premiums despite managed care.

The rush to managed care was based on a fundamental misunderstanding of the causes of health care inflation.

  • Fee-for-service didn't cause inflation, third-party payment did; the fact someone charged a high fee didn't mean he could get it, because patients had the option of taking their business elsewhere.
  • If a third party was paying, however, there was no incentive not to go to the most expensive provider and get all the extra services.
  • Eventually costs got out of hand, and the third parties decided to pay providers a fixed amount per patient, giving them an incentive to do as little as possible.
  • Thus, fee-for-service is only inflationary when a third party is paying the bill. If the consumer pays directly, reluctance to part with money controls costs.

Meanwhile, third party payers -- employers, insurers or government -- limit costs by restricting the supply of services to consumers: limiting the number of licensed providers, using waiting lists, rationing services, denying services they deem medically unnecessary or preventing certain groups, such as the elderly, from receiving certain services, such as transplants.

That's why new efforts are being made to put more control of health care resources and responsibility in the hands of consumers through medical savings accounts, defined-contribution benefits, vouchers for Medicare and personal health accounts.

Source: Greg Scandlen (NCPA), "Patient Power: Cut Out the Health-Care Middle Man," National Review Online, May 9, 2001; James Maxwell, Peter Temin, and Corey Watts, "Corporate Health Care Purchasing Among Fortune 500 Firms," Health Affairs, May-June 2001.

For Health Affairs text (free)


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