The Failed Managed Care Experiment
We’ve got overwhelming problems with healthcare. It’s about cost, and it’s all over the world. One of the possible answers was “managed care.”
The idea of managed care seemed to make sense when I first heard about it thirty years ago. Managed care involved the concept that each of us would put our health insurance dollars into a common fund administered as something called a Health Maintenance Organization (HMO) or Managed Care Organization (MCO). The idea was to have the HMO’s experts focus on making sure that we all stayed healthy but the HMO would pay for our healthcare if we got sick. It seemed to make some sense.
We must remember that the whole concept of health insurance is relatively new. The idea essentially grew out of wage and price controls initiated during World War II. Businesses sought ways to make one company more attractive to employees than another without being able to offer higher wages. Some companies started offering to pay for certain employees’ healthcare, and they sought insurance companies to help underwrite these expenses. In this manner, health insurance was born in the United States.
Until health insurance, the doctor/patient relationship was similar to any other merchant/consumer relationship. The consumer would seek the best healthcare they could afford, and the deal was always between the doctor and the patient. But with the advent of health insurance, the dynamics of the deal changed.
For the first time, the payer and the consumer of healthcare was not the same person.
In fact, the payer wasn’t even a person anymore. The purchaser of healthcare was an insurance company which, in turn, was being paid by the employer!
This radical transformation in the healthcare payment system resulted in a number of significant changes. First, the human bond between the provider and the purchaser of the doctor’s services dissolved and the payment arrangement became purely one of business between the provider and a third-party payer. Second, health insurance companies based their reimbursement system on a simple principle; they paid the bills and charged their policyholders (employers) whatever it costs in the form of insurance premiums. The insurance companies started paying those employee healthcare bills using a simple formula which eventually became known as “cost plus.” The cost-plus system reimbursed the doctor or hospital for services based upon their cost plus a reasonable profit.
This cost-plus system included no motivation for anyone to reduce costs. In fact, there were incentives to increase costs. If the hospital purchased a $1.00 box of Kleenex for the inflated price of $2.50, they could then sell it to the insurance company for $5.00 which would cover their cost plus a sum of money to pay the hospital’s overhead (including executive salaries) and shareholder profit in private hospitals. In this manner, the wholesaler who sold the Kleenex for more than twice the normal price made money, the hospital made money to pay inflated salaries, the shareholders made money in the form of corporate profits, and the patient was happy because the bill for the Kleenex was paid. In addition, pharmaceutical and medical equipment companies were quickly rewarded for developing new and expensive drugs and technologies. Everyone was happy except for the folks who ultimately paid the bills: business and government.
During these same years, Medicare, born in 1964, was expanded as an entitlement program. Medicare also worked on the cost-plus system, as did medical assistance (Medicaid). As a result, government expenditures for healthcare costs also exploded, and by the 1980s, legislators were desperate for respite from a costly healthcare system, which seemed to be draining the coffers of both business and government. After all, in 1952, healthcare costs represented only 4% of the gross national product, but by 1993, this cost had escalated to 14%. In 2018, it was 18.2% and growing.
With the price of healthcare rapidly rising each year, something had to be done. We could not spend all of America’s money on healthcare; some part of our budget had to be saved for food, clothes, housing, roads, schools, etc. And that’s when the managed care companies began the big push. Managed care executives promised, if given the power and the opportunity, to reduce the cost of healthcare while increasing quality. Of course, business and government leaders fell all over themselves to pass this hot potato to the MCOs. During the 1990s, managed care companies grew to the point where the majority of healthcare was being provided through MCOs.
By 2005, managed care companies were paying for most of the healthcare in America. What did this radical shift in the provision of healthcare accomplish? For a while, the cost of healthcare was held relatively stable, but they began moving upward again. In addition, there was increasing evidence that managed care was adversely affecting quality. Some objective research found indications that managed care significantly reduced the quality of healthcare, particularly in patients with serious disorders.
Subjectively, professionals working in hospitals can testify to significant reductions in staff and programs as the result of managed care’s diminishing reimbursement rates. At the same time, there has been an exponential increase in demands for greater documentation through the use of electronic databases and other approaches. Healthcare worker burnout has been significantly correlated with these demonic documentation demands. Health care workers are increasingly dissatisfied with their chosen career. Few psychologists, physicians, and nurses are encouraging their children to enter any healthcare profession. It has become so unpleasant that the suicide rate among physicians is now double that of the general population.
Outpatient practitioners have seen their patients lose access to healthcare and experience reductions in both treatment quality and availability. This too is a very real cost, although not a financial one. I have never met a psychologist, physician, or nurse who was employed by a managed care company and thought managed care improved the quality of healthcare.
Managed care has begun to decimate professional training in psychology, medicine, and nursing programs by eliminating their financial support system. A small part of the “profit” in traditional reimbursement systems was expected to be used to support the training of students and that funding is now gone. As a result, these programs are finding themselves increasingly strapped for funds, and students are being shortchanged or dropped.
Therefore, another hidden cost of managed care has been a reduction in the number of well-trained health professionals, and major shortages are beginning to develop. By the time the problem becomes a crisis, the current class of HMO executives will have taken their windfall profits and left the field with their winnings.
Typical market-driven approaches will never be either appropriate or effective in relation to the provision of healthcare. Health insurance companies in America have been demanding double-digit premium increases to help them move toward profitability, which is pushing the cost of healthcare beyond the reach of many individuals and businesses. The whole HMO experiment has turned into a national mess.
So what are we to do? How do we rescue ourselves from this sinking ship?
On one hand, we must somehow control raging inflation in healthcare costs; on the other hand, we have to find a way to deliver quality healthcare to the people in our society.
Obviously, there are a number of possible solutions, but none are perfect.
Any solution must avoid the involvement of outside investors, whether it be venture capitalists or stockholders, who would hold healthcare companies accountable for the financial bottom line with minimal concerns about quality.
The solution chosen by every other industrialized nation in the world is the Single Payer System. In this healthcare model, a single, government-funded program pays for the healthcare needs of all of the citizens. Another option is the Medical Savings Account (MSA). MSAs work by combining a high-deductible, catastrophic insurance policy with a Medical Savings Account that can be used to cover expenses below the deductible but, although this concept has appeal, it does not seem to be a realistically effective response.
Serious healthcare and insurance reform is desperately needed in the United States and we should not be afraid to consider models that have worked well in other countries. We know that the HMO experiment is a failure and the current system is collapsing.
Let’s try something else. We can do better.