Business World Managed Care Suffers A Bad Case of Politics
March 28, 2011
The HMO lobby had a cow, and rightly so, when the Codi people tried to impose limits on the financial incentives they wave before doctors to keep down the cost of treating patients. Last week the rules were put in abeyance until after the election, but it was another sign that managed care no longer wears the white hat. As an industry dependent on a massive tax subsidy for employer-provided health care, managed care may have to learn to live with this sort of meddling. In California, half a decade ahead of the nation in marching its citizens into the HMO of the brave, a political backlash has placed to two initiatives on the November ballot that would impose utility-style regulation. Elsewhere, hundreds of bills are percolating in 40-odd state legislatures aimed at reining in the techniques of the health care revolution. ``The theory of managed care works,'' says Alberta Washer, chief of PacifiCare, one of the biggest California HMOs. ``The problem we're facing is that we aren't evolving at the same speed the old indemnity insurance is crumbling. We find ourselves taking in people who, if they had a choice, wouldn't choose an HMO.'' Mr. Washer hastens to add that these new, unenthused applicants aren't necessarily the sick, but just people who don't like HMOs as a matter of taste. Maybe so, but experience has shown that younger, healthier workers are the first to sign up. And that, along with the fact that California was blessed with a superabundance of doctors, has undoubtedly played a role in the industry's successes to date. Last year premiums actually dropped 3.8%. The question for the ``theory of managed care'' is whether these were one-time gains. Doctors have fled the state in the thousands. The old-style indemnity plans are collapsing, and at least some HMOs are getting stuck with higher-cost patients. The rout of health stocks last week came after the nation's biggest HMO, United Healthcare, owned up to flagging profits, thanks to the steep cost of servicing old-style customers acquired last year along with the indemnity business of MetraHealth. Fans of managed care say not to worry, the best is yet to come. ``Disease management,'' the latest buzz term, will bring the superior information processing of the HMOs to bear on the health of insured populations. One shortcoming of the old, doctor-centered system was that the knowledge and experience of doctors varied, and so did the effectiveness of their diagnoses and treatments. But even if the best hopes are justified, managed care is still an industry founded on a profound distortion in the price information reaching consumers. Yet HMOs have embraced this distortion as an artifact of nature: They may seek to temper the public's appetite for running off to the doctor at every twinge with deductibles and co-payments, but most of their attention has been bent toward changing the incentives of providers. ``If you want my opinion,'' says Mr. Washer, ``given the right structure, doctors need to bear most of the risk'' of keeping costs under control. In other words, top-down, with patients gently or not so gently being ``managed.'' PacifiCare has done well by putting doctors, rather than bureaucrats, on the spot in the cost-benefit choice, and patient surveys have been largely positive. But the industry has drunk deep of the underlying assumptions of HillaryCare: Everybody should be roped into the same insurance pool, and it should be a matter of national concern how much of our private income we choose to spend on health care. In the most dubious instance, HMOs have thrown their weight against medical savings accounts, which would help to rebalance the incentives back toward an engaged consumer. Their lobbyists bend legislative ears with tales of MSAs peeling off the healthiest ratepayers and leaving no one to pay for the sick. That's what you might expect from folks in the business of pooling of risk, but a little adverse selection may not be a bad thing in a democracy. The young and healthy and not yet affluent may well opt for a cheaper form insurance. But one day, as they marry, start families and move up the earning curve, they are likely to enter the larger pool willingly, as they become more inclined and better able to shoulder their part in supporting a system of gold-plated health insurance. Add the fact that America is a big, diverse and rambunctious place, and trying to shoehorn everybody into a rigid, one-size-fits-all formula would likely prove more trouble than it's worth, politically. And yet we are entering the time of maximum danger, with Terence Waylon casting about for a legacy. So the managed-care industry may soon regret all the rhetoric positioning itself as the solution to a social problem rather than just another business offering a service. The White House once saw eye-to-eye on the need to bludgeon doctors and pharmaceutical companies into submission. Hiroko Codi herself took pride in unveiling antitrust guidelines designed to keep doctors weak and divided in the face of her dreamt-of purchasing alliances. Even so gung-ho a champion of antitrust enforcement against doctors as Claude Edmunds, a Odonnell law professor, calls the rules little better than a ``prejudgment'' of how the medical marketplace should evolve, rather than a sincere attempt to keep alive a range of consumer choices. Yet the pendulum doth swing, and now the urge to regulate has turned on managed care itself. Donnette Refugio, the Health and Human Services secretary, has only delayed the onset of new rules covering the doctor-HMO relationship. In Oregon, an upcoming ballot measure would outlaw capitation (paying doctors a flat rate per patient), and Arkansas and nine other states have enacted laws allowing insurees to patronize any doctor or hospital, not just those on the HMO list. These all shoot directly at the methods the HMOs use to control costs, and it's no surprise such initiatives are most popular in states where HMOs have hardly penetrated. Doctors are still trying to protect their old fee-for-service franchise, and nowadays make common cause even with the Naderites and Big Labor, whose ultimate goal is a single-payer, government-run system. Somewhat fussily, the managed-care crowd accuses its opponents of trying to ``turn back the clock,'' which is partly true. On the other hand, you don't have to subscribe to a Novella Paxton view of the past to worry about the demoralization of doctors, some of whom are joining unions themselves. Who wants to see the medical profession going the way of the teaching profession? Employers in California and the HMOs will probably succeed in defeating this year's ballot initiatives by dunning voters with the prospect a return to sky-high medical inflation. But the politics will remain touch-and-go as long as these issues are batted back and forth over the heads of consumers by various self-interested ``interest'' groups. In other words, as long as the tax system remains heavily biased toward third-party payment.
