Competition Health Plans: Managed Care and the Use of Case Managers

Most countries view the U.S. health care system as being very market oriented and competitive. Some of these nations look to the U.S. approach for alternatives to total government regulation. The preference in Canada and Western Europe is for some degree of private management of the national health service or national health insurance plan. In the United States, physicians and administrators who distrust regulatory approaches have advocated the injection of more competitive relationships between health care providers. However, not all physicians have a truly procompetitive bias. Many hospital managers and doctors who have had experience with competition and are now facing declining patient volume dream of returning to a less competitive era. Nobody likes competition in what he or she produces, but we all like competition in what we buy. Physicians searching for fiscal security are increasingly working with their local managed-care plans ( American Hospital Association [AHA] 1990).

Over 34.7 million Americans, 13.4 percent of the population, were in HMOs in 1990 ( table 5.1 ). HMOs have obvious incentives to curtail hospital utilization and specialist referrals ( Clancy and Hillner 1989). The model of the incentivebased physician as a "gatekeeper" places the clinician under some financial risk. For example, secondary resource pools (funds) are set up, and if the primary physician needs to refer, the cost comes out of his or her pocket up to a certain point ($1,500, $2,000). After that point, reinsurance kicks in, but the gatekeeper is still liable for enough financial risk to discourage inappropriate referrals. Some specialists argue that this creates restricted access to some appropriate referrals. Advocates of gatekeeper HMOs argue that underutilization is not a major problem and that specialists desire a continued supply of inappropriate referrals to guarantee their target incomes. Short-run profit taking may not lead to long-run inefficient referral patterns, assuming ethical clinician behavior. At the end of the year, if there is any money left in the primary pool, the primary-care physician gets a share. However, physicians realize that failure to make appropriate referrals often results in failure to obtain early diagnoses, resulting in more costly (and more frequent) inpatient expenses (and withdrawals from their risk-pool fund; Wrightson 1990).

In staff-model HMOs the primary-care physicians are salaried. Capitated or salaried "gatekeepers" lack the direct financial incentive to improve earnings by restraining costs. They may still prove effective as gatekeepers for reasons of professional pride, preventive medicine, and long-run concern for balancing service and solvency in their HMO. However, in an understaffed staff HMO, the gatekeepers may refer too many inappropriate cases to the specialists, especially if they are very busy (or uncompensated for working any harder). Under no circumstances do HMOs offer an incentive to overhospitalize ( Seaman 1990).

The basic rationale behind the competitive model is to keep the insurance companies, and hopefully providers, under constant pressure to find the means to provide care at lower costs ( Atkinson and Eastaugh 1984). Third-party payers and HMOs will on occasion make management mistakes, create long patient queues, or provide unacceptable patient-care conditions, but the strength of competitive markets is that the good-quality, lower-cost operators will grow. Advocates of competition recognize consumer ignorance, insured consumers' indifference to costs, and strong physician influence on demands as three strong arguments for regulatory activity ( Enthoven 1980; Hreachmack and Stannard 1990; Kirkman-Liff 1989).

The public policy question is not simply one of whether to allow competition or regulation, but rather, what the proper balance of regulation and competition is and how much price and nonprice competition should be encouraged. As we have observed in chapters 1-3, the strongest argument for regulatory limits on competition--significant economies of scale leading to excessive monopoly power--does not exist in the medical sector.

A number of barriers impede competition in the health field. While there is sufficient time to shop for maternity care, there is seldom enough time to shop in most hospital "purchase" situations. Conventional analysis says that there is seldom a real "purchase" choice to be made, since the consumer, acting with minimal knowledge of medicine, goes to the doctor and says "save me." The doctor acts as the patient's agent. One might counterargue that an economist who purchases a jacuzzi has less knowledge of the equipment than the typical high-school graduate has concerning medicine. Yet the economist, with the aid of Consumer Reports, can make an intelligent purchase decision. The ignorance problem does not preclude competitive markets in the case of high-technology consumer goods. However, this problem is compounded in the medical sector when "rival" providers and hospitals act in a collusive fashion--for example, when they restrict advertising or quality-disclosure activities.

Source: Health Economics: Efficiency, Quality, and Equity