Subject: Managed Competition -- Too Little Competition 
Date: Published: 1/7/93 (154 lines)
Source: Wall Street Journal. Copyright Dow Jones & Co. Inc.

    Managed Competition -- Too Little Competition
    ----
    By John C. Goodman

    From the campaign trail to the Little Rock Economic Seminar, Bill
 Clinton has repeatedly said that health care reform is one of his
 top priorities.
    So what's Mr. Clinton's answer?  It's called "managed
 competition."  The New York Times is for it.  So is the American
 Medical Association and the U. S. Chamber of Commerce.  Some of the
 largest health insurers back it.  And it has growing support in
 Congress.
    Why has managed competition become so popular?  The reasons are
 not hard to find.  Claiming to avoid the polar extremes of socialized
 medicine and free markets, the advocates of managed competition say
 they have found a workable middle ground -- capturing the benefits
 of competition and solving social problems at the same time.
    Can managed competition really deliver on this promise?  There are
 good reasons to be skeptical.
    Managed competition means different things to different people,
 but it almost always means introducing more competition into the
 medical marketplace, including the market for health insurance.
 Currently, most employer-provided health insurance plans suppress
 competition.  Employees rarely have a choice among health plans, and
 when they do have a choice they almost never know the real cost of
 any of the options.
    Under managed competition, an idea developed by the prominent
 Jackson Hole Group, employees would choose from an array of
 competing plans.  The employer's contribution would be a fixed sum,
 and the employee would pay the balance of the premium out of his own
 pocket.  This would make employees price-conscious and encourage
 health insurers to hold down the costs of their plans to make them
 attractive.
    Reforms would also make health insurance personal and portable,
 so that employees would not lose coverage when they changed jobs.
 And insurers would not be able to arbitrarily cancel policies or
 single out sick people for unfair premium increases.
    So far so good.  Indeed, how could any red-blooded American
 object?  The problem is that the advocates of managed competition
 want government to manage it.  Without even waiting for the market to
 work, they have already decided that everyone should be in a managed
 care program.  They also want price fixing for health insurance
 premiums.  And they advocate such heavy regulation of the health
 insurance industry that for all practical purposes insurers would be
 forced out of the insurance business as traditionally understood and
 into the business of managed care.
    The term "managed care" has been applied to all sorts of
 activities.  Increasingly, however, it means the kind of limited
 services offered by health maintenance organizations and HMO-type
 plans.  The details vary, but the net effect of such arrangements is
 often a disturbing interference in the doctor-patient relationship.
 The choice of physician or hospital would be limited, and access to
 expensive procedures curtailed.
    Even without HMOs, patients have good reason to be concerned
 about choices being made for them.  A patient in a hospital these
 days can receive drugs and not be told -- and perhaps never learn --
 that there are better, more expensive drugs that will not be used
 because an insurer did not want to pay for them.  Under managed care,
 things would be worse.  The intrusion of insurers into the practice
 of medicine would become a matter of public policy, as would
 controls on health insurance premiums.
    An ideal insurance market is one in which risk is priced
 accurately.  Each person entering an insurance pool is charged a
 premium that reflects the expected cost and risk that person brings
 to the pool.  In an ideal insurance market, people pay for what they
 get.  Managed competition, however, would force insurers to charge
 the same price to all buyers (community rating), or to all buyers in
 the same age group.  Thus, a person who has cancer or AIDS would be
 able to purchase health insurance for the same price as someone who
 does not.  As a result, insurers would be forced to overcharge
 low-risk (healthier) people in order to undercharge high-risk
 people.
    One consequence is that healthier people would be discouraged
 from becoming insured.  After all, why buy health insurance today if
 you know you can buy it in the future, after you get sick?  According
 to one estimate, less than 1% of Americans are uninsurable.  Yet in
 an attempt to make health insurance accessible for this tiny number,
 many reformers would impose price controls and raise premiums for
 the other 99%.  Unless health insurance is made mandatory (as some
 managed competition reformers advocate, though they have yet to
 suggest a feasible plan to accomplish this objective), the result
 would almost certainly be a larger number of people who are
 voluntarily uninsured.
    The effect of this arrangement is anything but competitive.  Since
 insurers would have to charge the same premium to all takers, they
 would not be able to compete on their ability to price and manage
 risk.  Instead, they would be forced to compete on their ability to
 manage health-care costs.  This is similar to insisting that auto
 insurers get into the business of managing automobile repairs.
    And it won't work.  To illustrate the problem, imagine several
 health-insurance plans offering identical services.  Because they
 must take all applicants at the same premium, each has an incentive
 to attract healthy people and avoid people who are likely to
 generate high costs.  Companies that are less successful in avoiding
 sick people will have higher costs, which will require higher
 premiums, which will result in fewer customers, etc.
    For these reasons, any plan that includes a one-price-for-all
 rule is inherently unstable.  To keep the market from disintegrating,
 proponents invariably propose a complex government bureaucracy
 designed to (1) redistribute funds from profitable to unprofitable
 insurers and (2) regulate the content of health insurance policies,
 preventing insurers from offering higher deductibles or other
 features that are likely to attract healthier subscribers.
    A real-world example of one type of managed competition is the
 Federal Employee Health Benefits Program (FEHBP).  During the 1980s
 the federal government's spending on employee health benefits grew
 at a rate that was more than a percentage point faster than that of
 employer-provided health insurance generally (11.2% vs. 10%).  When
 spending is adjusted for the number of employees, the federal
 employees' plan grew more than 25% faster than private-sector plans.
    One reason the FEHBP has not held down costs is that deductibles
 are quite low.  Even though most private employers are increasing
 their deductibles, Blue Cross's FEHBP "high-option" plan has a
 deductible of $200 and its "standard-option" plan has a deductible
 of $250.  Why so low?  Because the Office of Personnel Management
 won't allow Blue Cross, or any other insurer, to raise its
 deductibles or its copayments.  The reason?  Plans with greater
 patient cost-sharing are less expensive, in general, and are likely
 to attract younger, healthier employees rather than older, less
 healthy ones.  In fact, OPM rigorously reviews every tiny change in
 plan design to make sure that it does not favor good risks over bad
 ones.
    Even with all of this oversight, outside analysts say that
 virtually all the competition that exists is competition for good
 risks.  Presumably, this is not the kind of competition that
 proponents of managed competition have in mind.  But adverse
 selection is precisely what results when insurers, regulated by
 government, cannot price risk accurately.
    By alerting us to the need for market-based reforms, the
 advocates of managed competition have performed a valuable service.
 The problem is that they promise too much management and too little
 competition.
    What is needed is not managed competition but real competition.
 We should allow individual people, rather than bureaucrats, to
 choose health insurance benefits in the face of market prices and
 make their own decisions about the desirability of managed care.
 Competitive markets can perform quite well without the heavy hand of
 government.
    ---
    Mr. Goodman is president of the National Center for Policy
 Analysis in Dallas and the author, with Gerald L. Musgrave, of
 "Patient Power:  Solving America's Health Care Crisis" (Cato
 Institute).
    (See related letter:  "Letters to the Editor:  Federal Health Plan
 A Cost-Control Success" -- WSJ Feb. 8, 1993)

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