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The Lethal Side Effects Of Managed Care


Economic Viewpoint

THE LETHAL SIDE EFFECTS OF MANAGED CARE

Opponents of President Clinton's health plan charged that it would increase paperwork, limit freedom of choice, and interpose bureaucrats between patients and doctors. The plan was defeated--yet these dire predictions are all coming true anyway. Regulation via private managed care is at least as onerous as a universal health system with managed competition.

Since the 1960s, most Americans have grown accustomed to first-class health coverage. Most working people got insurance through their employer; the retired had Medicare, the poor Medicaid. Nearly everyone had free choice of doctors and hospitals. Some people had no insurance, but the government required that hospitals not turn anybody away, and hospitals simply shifted costs onto paying customers.

This system, however, has an inflationary bias. In an ordinary market, the person who buys the service pays the bill and is cost-conscious; the entrepreneur maximizes profits by minimizing costs. A patient, however, is not a typical consumer. When your life is at stake, money is no object. Patients generally trust their doctor to diagnose and treat and the health plan to pay the bill. Thus, doctors and hospitals maximized their incomes by maximizing treatments (as well as costs) and billing the insurer. Hospitals overbuilt. Expensive technology proliferated. Besides, people are living longer. New procedures, drugs, and medical devices keep being invented, all of which inflate costs.

REVERSED TIDE. For decades, the forces of cost containment kept losing to the forces of cost inflation. However, in the past two years, the rate of medical inflation has began to slow, mainly as a result of cost-cutting initiated by the private sector. In 1994, according to the Labor Dept., the health bill paid by employers actually declined by 1.1%. Indeed, many observers now think the premise of health reform--that efficient cost containment requires universal coverage--was wrong. The free market is solving that problem.

With managed care, fewer health plans allow doctors and hospitals to pursue treatments without insurer review. More consumers are in prepaid health-maintenance organizations that sharply limit benefits. Acquisitions, mergers, and consolidations by for-profit hospital chains are squeezing out excess capacity and putting hospitals and doctors under real competitive pressure for the first time. Insurance plans and HMOs with market power are negotiating contracts that shift the financial risk for the cost of treatment to doctors and hospitals.

All of this ratchets down costs. But is the private sector pursuing the right economies? Ironically, the free-market solution drastically limits personal freedom for doctors and patients alike. Individuals are usually stuck with whatever plan their employer provides, and doctors find reimbursement schedules and treatment protocols imposed on them.

LOCKED IN. Moreover, as HMOs and insurance plans limit what they will cover, more costs are simply being shifted onto patients. This is fine for the few who can pay out of pocket but a problem, indeed, for people who must choose between health care and food or rent. Many of the other concerns that first stimulated public support for reform have only worsened. People with preexisting conditions still suffer from "lock-in" to their existing health plan and run the risk that if they lose their job, they will lose health coverage entirely.

And nearly 40 million Americans still have no insurance. Such people go without preventive care, leading to more costly treatments later on. Patients still show up for treatment in emergency rooms--the most expensive venue for routine care--when they should be treated in clinics. And as market norms drive out professional norms, hospitals at risk for financial costs resist providing unreimbursed care to the medically indigent. So cost containment under private auspices only worsens the crisis of the uninsured.

Finally, the system is still an administrative mess, with hospitals needing armies of clerks to process claims and doctors spending hours on the phone with insurance reviewers. The shift to managed care hasn't solved this administrative burden--it just shifts the locus of conflict and paperwork.

Certainly, some version of these cost-containment pressures would apply to a universal system. But there would be more of a voice for patients and doctors, more choices, and less windfall to middlemen, and coverage would be universal and portable. The defeat of universal coverage didn't resolve any of the difficult dilemmas of how to reconcile care with cost. It only rationalized them in a fashion convenient to private managed-care providers and burdensome to doctors and patients.BY ROBERT KUTTNER


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