The unraveling of managed care: recent trends and implications.

During the past two decades, managed care has become the dominant form of health care in the United States. The justification for managed care was that it would reduce costs without sacrificing the quality of care (Dranove, 2000). In recent years, however, a backlash has developed against managed care, with many observers raising questions and concerns about its impact on quality (Randel, Pearson, Sabin, Hyams, & Emanuel, 2001). After moderating during the 1990s, health care inflation has accelerated, calling into question the ability of managed care to control costs (Altman & Levitt, 2002; Altman, Tompkins, Eliat, & Glavin, 2003). On many fronts managed care now seems in retreat. BACKGROUND For much of the 20th century, physicians in the United States practiced what Dranove (2000) called "Marcus Welby" medicine, in which general practitioners worked in individual offices, and patients selected their own practitioners, who diagnosed problems and prescribed treatment. Providers billed patients or insurers after the fact, or retrospectively, on the basis of services rendered. Under this "Marcus Welby" or fee-for-service, system, insurers played a relatively peripheral role. They had no "influence" over "the patient's choice of physician" and did not "negotiate fees, second-guess the appropriateness of the therapy, or seek to improve the quality of the care provided" (Robinson, 1999, p. 65). Many observers argued that the fee-for-service approach was inefficient. One problem was what economists called "moral hazard." According to conventional wisdom, moral hazard occurs when individuals have no need to assume responsibility for their actions and fail to behave in a rational manner, at least as defined by the market. Under the fee-for-service system, because insurers paid the bill, consumers could afford to be disinterested in or lackadaisical about the cost of health care. In short, they had no economic incentive to forgo unnecessary care or shop for the best price (Dranove, 2000). Moral hazard also affected the behavior of providers. Because insurance companies reimbursed providers for whatever the latter charged, providers had an interest in prescribing more rather than less care (Roberts & Clyde, 1993). This does not mean that all providers deliberately engaged in a conspiracy to inflate prices. The phenomenon of induced demand can be much more subtle. Given the difficulty in diagnosing many medical problems and the lack of evidence supporting many forms of treatment, the fee-for-service system gave providers an incentive to err on the side of caution by providing more care than necessary (Dranove, 2000). According to Dranove, although researchers disagree about the extent to which providers oversupplied care, most researchers accept that providers did induce demand. During the 1930s and 1940s, Henry Kaiser, the well-known industrialist, brought attention to the inefficiencies of "Marcus Welby" medicine. Kaiser hired his own physicians and paid them a salary to provide medical care to his work force. After World War II, Kaiser opened this system to the public under the name Kaiser-Permanente (Roberts & Clyde, 1993). Organizations such as Kaiser-Permanente seemed to have an advantage over the "Marcus Welby" system. To gain access to more expensive and specialized care, patients needed a referral from a primary care physician, who received a salary and had no interest in recommending unneeded services or treatment (Roberts & Clyde). Because prepaid plans were responsible for the total health of their patients and physicians were reimbursed on a capitated basis, the plans had a stake in not only treating patients after they became sick, but also preventing them from becoming sick (Roberts & Clyde). In 1973 Congress, at the urging of the Nixon administration, enacted legislation aimed at stimulating the development of prepaid plans, or what Nixon called health maintenance organizations (HMOs) (Moniz & Gorin, 2003). …