Studies show that, at their outset, managed care programs such as HMOs save money by substituting less expensive for more expensive therapies. For example, physician therapy and drug therapy are both less expensive than hospital therapy. However, William Schwartz (USC) and Daniel Mendelson (Lewin-VHI) 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.

This observation is consistent with the evidence. Studies show that the adoption of managed care techniques should lead to a one-time reduction in costs of about 10 to 15 percent. But after that initial drop, managed care costs grow at the same rate as costs in other types of health care delivery systems - if not faster. 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.

"After an initial drop, managed care costs grow at the same rate as costs in the rest of the health care system."

Instead of waiting to see if managed care can outcompete the alternatives, some want government to simply declare it the winner. In other areas of economic life, we subject ideas to the market test and allow competition to determine which ones survive. This is a good practice to follow in health care as well.

A natural extension of the concept of managed care is the establishment of "practice guidelines," which could be used by public and private sector bureaucracies to dictate the standard-of-care therapy for any given diagnosis. Proponents want medical professionals to conduct "outcomes research" in order to determine the most effective medical treatments. They argue that such practice guidelines will help physicians deliver quality care and prevent them from ordering unnecessary tests or procedures.

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 confronting certain patient symptoms and conditions.

In a competitive marketplace, practice guidelines might prove useful. Clearinghouses for information on prices and quality could be valuable to patients. With greater information at their disposal, patients and physicians could make better decisions. However, if they are imposed by third-party bureaucracies, the same guidelines could discourage new and innovative therapies. They could also inhibit the use of unconventional therapies that sometimes save time, money and lives.