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The US health care financing and delivery system serves the public poorly. It costs far more than in any other country, does not produce better health outcomes, and leaves millions uninsured.1 A 2019 report estimated that approximately 25% of US health care spending is wasted.2 Health policy will be a dominant domestic issue during the pursuit of the Democratic presidential nomination and in the 2020 election. The extent and form of insurance coverage, such as Medicare for all, a single-payer health system, and other proposals, will be prominently discussed and debated. However, another important health issue, containment of costs, will probably be neglected. It has not been a focus of discussion in recent debates. Control of health care costs has major implications for the federal budget deficit; for the ability of state and local governments to fund education, infrastructure, and other essential services; and for the lives and financial security of most US families. All candidates, regardless of what health care system they support, have an obligation to address how costs can be controlled.
Over the years, managed care, defined as patient-centered coordinated care provided under payment incentives that reward achieving cost and quality measures, and managed competition, a market designed to create incentives for managed care organizations (MCOs) to reduce cost and improve quality and patient satisfaction, have demonstrated a potential to control costs without any sacrifice of quality. For example, spending per patient per year in the Medicare Shared Savings Program from 2012 to 2015 was $474 lower for physician group managed care accountable care organizations (ACOs) and $169 lower for hospital-integrated managed care ACOs.3 In California, a state with a high percentage of MCOs, the total cost of care in 2017 was $161 per member per year less for full risk-bearing MCOs than fee-for-service based organizations and $73 per member per year less for MCOs bearing professional risk only than fee-for-service–based organizations.4
Managed care increases efficiency of care delivery within individual health plans. Managed competition creates a structure within which health care plans compete with one another. The 2 are complementary and synergistic, and have several advantages over reforms that require government-initiated transformation of all medical care. Managed care and managed competition are private, voluntary, and incremental, and the pace of adoption can differ between and within different regions of the country. These models offer the possibility of controlling costs without government price controls, which could be a consequence of the continual increase in health care costs, particularly when the United States faces another possible recession.
Landmark reports from the Institute of Medicine, such as To Err Is Human and Crossing the Quality Chasm, have documented the shortcomings of the US health care system. The essential message is the need to change the way health care is paid for and delivered. Managed care, a concept that addresses both payment and delivery, has a long history, beginning with Kaiser Permanente in the 1940s and including passage of the Health Maintenance Organization Act of 1973 and current interest in risk bearing ACOs. Managed care, fully or partially implemented, is now a widespread form of health care in most parts of the country, with 16% of all insured workers enrolled in full risk-bearing health maintenance organizations (that may gain or lose payments depending on costs) and an additional 49% enrolled in partial risk-bearing or discounted fee-for-service preferred provider organizations (that are not at risk if costs exceed targets).5
MCOs have the following basic features: (1) hospitals and physician groups assume some degree of financial risk for the cost of care, including sharing savings from a predetermined expenditure target and responsibility for downside losses in caring for a defined population of patients; (2) patients are usually required to receive care from a designated group of physicians and hospitals or pay out of pocket if they go outside the group to receive care; (3) specified quality standards and measures must be met; and (4) they have leadership and organizational capabilities to redesign care to eliminate waste and patient harm in achieving coordinated care for patients across conditions, physicians, hospitals, and other settings of care over time.
While MCOs have moved beyond the “proof of concept” stage, there are challenges to reaching their potential. Many physicians and institutions are reluctant to change behavior that continues to be rewarded through fee-for-service payment. As the Centers for Medicare & Medicaid Services and commercial payers continue to move toward full risk-bearing payments, physicians will be more likely to move toward managed care arrangements that provide them with data analyses and other infrastructure support needed to succeed. An additional challenge is that many health care plans have overlapping hospital/physician networks, thus mitigating the potential influence of competition among them. However, 2019 data suggest that more physician organizations are owned or strongly affiliated with a specific hospital/health system, reducing to some extent the overlap of physician networks.6 Another challenge involves redesigning care for the increasing number of patients with multiple chronic illnesses, including the need to address the social determinants of health (eg, housing and transportation). MCOs will need to forge partnerships with community-based organizations and use telehealth and new digital technologies to succeed. This will occur more quickly and spread more widely across the country in areas in which there is competition among MCOs.
The fundamental cost problem with traditional medical care and insurance is that the incentives involving most patients, physicians, and hospitals point in the direction of spending more, with the cost to the system often exceeding the benefit to the patient. Managed competition is a market design intended to create incentives for health care financing and delivery systems to reduce cost, improve quality of care, and increase patient satisfaction.7 Alternatively, it is meant to align the incentives of physicians and hospitals with the interests of patients for better health, better care, and lower cost. The managers are employers that are large enough to offer choices of several health care financing and delivery plans and that set the rules and disburse the money that supports health insurance purchases or regional exchanges sponsored by the ACA or employees of local, state, or federal governments. The competitors are health care financing and delivery plans based on managed care or traditional open-ended fee-for-service systems. In managed care, the physicians and hospitals have a significant interest in and ability to control the costs of care. For managed competition to succeed, it must lead to the transformation of US health care from traditional, open-ended, uncoordinated fee-for-service systems to efficient MCOs.
Key concepts of managed competition include (1) full consumer responsibility for premium differences between plans, so consumers who choose more costly alternatives pay the full premium difference; (2) standard coverage contracts to facilitate consumers making comparisons to focus competition on price and quality and prevent market segmentation and biased risk selection from nonstandard contracts; (3) risk-adjusted payments to compensate plans if they enroll patients with greater expected costs and minimize the incentive to select low-risk patients; (4) enrollment through a neutral agency rather than directly by plans so that plans cannot select lower risk patients in the enrollment process; (5) competition for informed, cost-conscious consumer choice among comprehensive care organizations that offer annual memberships for a fee set in advance rather than for individual items of service; and (6) choice of plan at the individual level, rather than plans competing to serve whole groups.
Approximately 18 million individuals in the United States receive their health insurance through managed competition arrangements, including employees, retirees, and dependents of the federal government; the states of California and Wisconsin and some local governments; a private exchange and 2 universities in California; and the Affordable Care Act's marketplaces. The Federal Employees Health Benefits Program is based on some, but not all, of the principles of managed competition, and could be a starting point for design of a universal health insurance program.
What inhibits the spread of managed care and managed competition across the country? One possible answer is that their principal contribution is to control costs, and the demand for cost control is not as strong as most policy experts think it should be. Most industries, including health care, want an increase in their revenue, not a decrease. But what about the public? A 2019 National Opinion Research Center General Social Survey8 asked a sample of the general public (59 000 respondents) what change they wanted to see in the level of health care spending. Sixty-nine percent favored an increase and 10% favored a decrease. Paradoxically, a Gallup survey9 of 1000 US adults reported in April 2019 that health care costs were the most important financial issue facing families.
The same public that in other contexts complains about the cost of care indicate they would like an increase in spending. One possible explanation is that the 17% of respondents in the Gallup survey who named health care costs the most important problem are a narrow segment with low income, very large medical care expenses, or both. Alternatively, most of the public mistakenly perceive that overall spending can increase without higher costs for them. Media discussion of “employer-provided care” and promises from politicians about “giving people health care” contribute to this misperception.
When an economic or health care crisis comes, cost control will have priority, but crisis solutions are rarely the wisest. Managed care and managed competition are not panaceas. As is true of all types of medical care interventions, clinical or organizational, not every individual attempt will succeed; however, managed care and managed competition have a good record of success in controlling costs and maintaining quality without resorting to price controls, the principal alternative.
Corresponding Author: Victor R. Fuchs, PhD, Stanford Institute for Economic Policy Research, Stanford University, 366 Galvez, Stanford, CA 94305-6015 (email@example.com).
Published Online: November 7, 2019. doi:10.1001/jama.2019.17147
Conflict of Interest Disclosures: None reported.
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Enthoven A, Fuchs VR, Shortell SM. To Control Costs Expand Managed Care and Managed Competition. JAMA. Published online November 07, 2019. doi:https://doi.org/10.1001/jama.2019.17147
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