Managed care did the temporary fix we asked it to do. It broke spending inflation. But now it's clear most of those savings were one-time costs. In the end, industry consolidation may have had more to do with the cost cutting than anything the managed care plans concocted. In a recent article in the journal Health Affairs , one economist attributed the slowdown in health care premium increases in the mid-1990s to health plan and hospital mergers that led to price competition.
Many insurers set prices well below actual costs to gain market share.
Now those same insurers are increasing rates rapidly to catch up. It is becoming clear that no amount of managerial organization or information technology is going to curb health care costs. As former New York Sen. Daniel Patrick Moynihan, a friend of Dr. Baumol's and a great admirer of his theories, noted in an editorial published in the Washington Post, technological advances in medical care have been spectacular and costly, but labor-saving innovations are harder to come by because of the inherently handicraft nature of medical activities. The amount of time a physician spends per patient visit or per illness may have marginally declined, but only marginally, and it can't get any shorter. This, Moynihan writes, is the heart of Baumol's disease.