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November 7, 2019

To Control Costs Expand Managed Care and Managed Competition

Author Affiliations
  • 1Stanford University, Stanford, California
  • 2Stanford Institute for Economic Policy Research, Stanford University, Stanford, California
  • 3Division of Health Policy and Management, University of California, Berkeley School of Public Health, Berkeley
JAMA. Published online November 7, 2019. doi:https://doi.org/10.1001/jama.2019.17147

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.

Managed Care

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.

Managed Competition

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.

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Article Information

Corresponding Author: Victor R. Fuchs, PhD, Stanford Institute for Economic Policy Research, Stanford University, 366 Galvez, Stanford, CA 94305-6015 (vfuchs@stanford.edu).

Published Online: November 7, 2019. doi:10.1001/jama.2019.17147

Conflict of Interest Disclosures: None reported.

Papanicolas  I, Woskie  LR, Jha  AK.  Health care spending in the United States and other high income countries.  JAMA. 2018;319(10):1024-1039. doi:10.1001/jama.2018.1150PubMedGoogle ScholarCrossref
Shrank  WH, Rogstad  TL, Parekh  N.  Waste in the US health care system: estimated costs and potential for savings.  JAMA. 2019;322(15):1501-1509. doi:10.1001/jama.2019.13978PubMedGoogle ScholarCrossref
McWilliams  JM, Hatfield  LA, Landon  BE, Hamed  P, Chernew  ME.  Medicare spending after 3 years of the Medicare shared savings program.  N Engl J Med. 2018;379(12):1139-1149. doi:10.1056/NEJMsa1803388PubMedGoogle ScholarCrossref
Shortell  SM, Scheffler  RM, Anand  S, Arnold  DR. Sustaining universal coverage: lessons from California’s integrated delivery system. Health Affairs Blog. https://www.healthaffairs.org/do/10.1377/hblog20190621. June 26, 2019. Accessed October 30, 2019.
2018 Employer health benefits survey. Kaiser Family Foundation website. https://www.kff.org/health-costs/report/2018-employer-health-benefits-survey/. Published October 3, 2019. Accessed October 30, 2019.
Furukawa  MF, Machta  RM, Barrett  KA,  et al.  Landscape of health systems in the United States  [published online January 23, 2019].  Med Care Res Rev. doi:10.1177/1077558718823130PubMedGoogle Scholar
Enthoven  AC.  The history and principles of managed competition.  Health Aff (Millwood). 1993;12(suppl 1):24-48. doi:10.1377/hlthaff.12.Suppl_1.24PubMedGoogle ScholarCrossref
Smith  TW, Son  J; National Opinion Research Center. Trends in national spending priorities, 1973-2018: general social survey. http://gss.norc.org/Documents/reports/social-change-reports/SC63%20GSS_Trends%20in%20Spending_1973-2018.pdf. Accessed October 30, 2019.
Norman  J. Healthcare once again tops list of Americans’ worries. Gallup website. https://news.gallup.com/poll/248159/healthcare-once-again-tops-list-americans-worries.aspx. Published April 1, 2019. Accessed October 30, 2019.
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    4 Comments for this article
    Now simplify the messages here and share with patients, families, employers.
    George Karahalis, MHA, LFACHE | Retired from CMS and formerly hospital CEO
    To achieve results from your efforts you'll need to help greater numbers of people understand your direction and its impact on them. Aim the messages at the college-level. Break it into short pieces for publication in a series, like "fireside chats." Use simple graphics of key points, and summaries. Let's get more people and communication channels committed to the task of reaching out to illuminate a path to a better health future. You three are the best positioned to achieve results.
    You Are Absolutely Right!
    Linda Bergthold, Ph.D | Researcher
    Yes, I realize these arguments are not new, that we went through this 20 years ago with the Clinton reform effort, but the issues are still unresolved. We need to address cost and quality, and our candidates are not doing that. Promising people free care means nothing more than promising expensive and unnecessary care. Please, let’s address why our care costs more than any other country but doesn’t deliver better outcomes. Managed care is the American version of cost control, but it can also be our own version of better quality. Thank you for reminding us of this!
    Physicians Reimbursed for Value Creation Easily Outperform Billing Clerk-Controlled Schemes
    George Anstadt, MD FACPM FACOEM | U of Rochester
    US intermediaries get 50% of US healthcare dollars, which is justified in the name of value. This "big lie" has created the world’s worst value: poor population health created at a 2x cost (The Price We Pay- M Makary). Ah, but this new group of intermediaries, the managed competition gang, promise to be different! Not. DOCTORS need to be both professionally and economically accountable for value. Following the money in an outcomes-data-driven system leads to high quality care, not denials. Only doctors, not cookbook billing clerks, can create good outcomes. Only doctors know when, why, what and how much to spend to get good outcomes at low cost. The US now has enough good IT capability and patient outcomes data to affordably measure good health outcomes of patients and pay doctors for the value they create. In a heartbeat, the Docs doing balloon dilatations of the sinuses (a very profitable and so increasingly common procedure that rarely improves outcomes) will stop doing something that does not create value, and so is no longer profitable to their practice. Insurers' billing clerks, managed care organizations, and especially managed competition orgs cannot inspect quality into businesses (Dr. W. Edwards Deming). The builders of widgets, especially healthy human widgets as variable as snowflakes, must own the quality. To do so, our regional health information systems must extract each doctor’s risk-adjusted patient outcomes and give the docs good tools to understand their own quality and costs, so they can learn what they are doing well and what they must fix- no doctor is doing it all right. Reimbursement will be based on their value creation. This will restore value, innovation, fairness, transparency, and fun to medical practice; improve the health of the nation; and dramatically decreasing the administrative burden imposed by “value police” intermediaries. Importantly, the improved health of our workforce will increase the economic competitiveness of US business and decrease disability costs for our taxpayers. And yes, it will decrease the drudgery of physician documentation by 5 or 10 minutes per patient visit, creating a slice of time for the art of medicine. Physicians, are you ready to be paid based upon the outcome data your practice creates? Or, do you want to trust this new gang in Dodge, the Managed Completion Bunch?
    Misuse of ACO research
    Kip Sullivan, Juris Doctor | Healthcare for All Minnesota
    The misuse of data from reports on Medicare ACOs has become way too common. A common error is the presentation of gross savings/losses with no mention of the net savings/losses to Medicare. Net savings to Medicare is the gross minus the bonuses CMS pays out to the ACOs that achieve gross savings. An even more common error is not to mention the net loss to society, which is Medicare's net minus ACO start-up and overhead costs.

    Enthoven et al. committed both errors. They claimed an article by McWilliams et al. found "spending per patient per year in the
    Medicare Shared Savings Program … was $474 lower for physician group … ACOs and $169 lower for hospital ... ACOs." The fact is, McWilliams et al. did not report that "spending … was lower" by these amounts. These figures were gross savings only. The net savings reported by McWilliams et al. was $256 million for physician ACOs and negative for hospital ACOs (hospital-run ACOs lost money for Medicare).

    Enthoven et al. aggravated this error by assuming that whatever it is ACOs do is done by humans who work for free using facilities and equipment that cost nothing. This assumption obviously defies common sense. The limited research on ACO overhead suggests it swamps the tiny bonuses a minority of ACOs have received from CMS. To sum up, it appears that MSSP ACOs are only breaking even from Medicare's perspective, and are probably raising total health care spending from society's point of view.

    Enthoven has long demanded "cost consciousness" among doctors and patients (1). He and his co-co-authors use the phrase "informed, cost-conscious consumer choice" in this article. But "cost consciousness" is not a standard they applied to themselves in this instance. They gave readers no hint that they were reporting only gross ACO savings and ignoring the costs CMS and the ACOs incurred in order to achieve the tiny savings reported by McWilliams et al. In so doing, they badly misled their readers. How are JAMA readers supposed to make "informed, cost-conscious" decisions about ACOs if authors refuse to reveal any information on the costs ACOs and Medicare incurred?

    Let me offer an analogy. What would the authors say if a drug company committed the same errors? What if a drug company (a) claimed that if all Americans with high blood pressure took its drug, US health "spending" would drop by 2 percent, but (b) the drug company conveniently neglected to point out that putting all Americans with hypertension on its drug would raise total spending by 3 percent? Would the authors find this acceptable? I assume not.

    I urge JAMA's editors to insist that the authors they publish report the net savings/losses of ACOs and other managed care experiments. If net figures are not available, authors should at minimum have to tell readers the numbers they report are gross figures only and, consequently, they have little or no idea whether the ACO/ HMO/medical home/bundled payment program/ etc. is raising or lowering "spending."


    1. https://www.nejm.org/doi/full/10.1056/NEJM198901053200106