Managed Competition: The Future, Not the Past

There’s more than one way to skin a cat, but all are not equally good. Is it time for another look at managed competition?
Martin Sipkoff

Resourcefulness, fairness, and a feeling of déjà vu emanate from Professor Alain Enthoven’s managed competition model. His vision of large regional health plan exchanges that encourage competition among physicians has been part of health care theory for nearly 20 years, an intellectual run that probably contributes to his exasperation when he talks about other ideas.

“What’s being called consumer-driven health care is really no more than a high deductible,” says the Stanford University economist. “It’s catching on because employers are getting desperate. CEOs are beating on their HR people to come up with a plan.” It’s not that alarm isn’t justified.

For Enthoven, for almost everybody, the current system is failing. But shifting costs to beneficiaries isn’t the answer, he says. “Costs are out of control. Employers have no effective strategy to deal with this. They must think strategically about fundamental change…. Employers should create exchanges through which they can offer employees wide, responsible, individual, multiple choices among health care delivery systems and create serious competition based on value for money. Recently introduced technology can assist this process,” writes Enthoven in “Employment-Based Health Insurance Is Failing: Now What?” in the May 28, 2003, issue of Health Affairs.

The idea behind managed competition is for employers — who really don’t know much about health care — to get out of the way and allow the demand for health care to be elastic and drive the price. Employment-based health insurance is antithetical to elasticity. Worse, it’s killing provider efficiency and effectiveness, says Enthoven. “Market conditions are hostile for a health care system that wants to market cost effectiveness,” he says.

The employer-based system leaves out people whose employers do not provide health insurance, the self-employed, and the unemployed who are not poor, says Enthoven. “The market for individual insurance is extremely vulnerable to risk segmentation, adverse selection, and high administrative costs.”

Worst of all, he adds, there is virtually no market incentive for provider efficiency. That’s because most private-sector employers (nearly 80 percent) offer employees only one source of health insurance, because employers subsidize the most costly plans by paying most or all of the premiums of any plan an employee chooses, and because most self-funded plans favor preferred-provider organizations, which favor fee-for-service reimbursement. “PPOs can extract reductions in fees, but they do not reward providers for the more crucial job of finding less costly ways to care for patients,” said Enthoven in Health Affairs. “To motivate continuing improvement, delivery systems must be rewarded … for reducing the cost of care.”

The best way to accomplish that, in Enthoven’s view, is for employers to band together to form regional exchanges that establish rules of equity, select participating plans, manage the enrollment process, and manage risk selection. Employers would make fixed contributions to employees to purchase health care, but that’s really where the similarity to “consumer-driven” health care would end.

The exchanges — not employers — would offer employees choices among plan designs. Consumers — not employers — would make choices based on cost. Through the demand elasticity that adjusts the cost of new cars and fresh fish, low price plans would be rewarded by a larger market share.

Plan designs within an exchange would be standardized, “or at least managed,” so that they are not a tool for selecting risks or creating inelastic demand, says Enthoven. (Inelastic demand is when consumers do not respond to price, such as in the purchase of cigarettes, gasoline, or coffee.)

Premium payments to carriers would reflect demographic risk and the health status of the people that actually enroll in a particular plan. But — and Enthoven stresses this is crucial to the success of managed competition — prices are adjusted so plans with sicker patients would be subsidized by other plans.

The National Center for Policy Analysis, a think tank in Dallas, is critical of the managed competition concept for that reason, calling the concept “an artificial market for health insurance in which individuals choose among competing health plans that are forced to charge the same premium to every applicant, regardless of expected health care costs.”

“Because of this one-price-for-all rule, the premiums sick people pay would be well below the expected cost of their treatment, while the premiums of healthy people would be substantially higher. The incentives are for plans to avoid sick people and attract healthy ones,” says NCPA President John C. Goodman.

That criticism demonstrates misunderstanding of how managed competition works, says Enthoven. The exchange would use data collected from all member plans to adjust risk.

“It would be the price a plan pays for favorable selection,” says Enthoven, stressing the crucial concept of equity. “The idea is to get risk selection out of the process. We want plans that do an excellent job of caring for people with chronic conditions not to suffer in the market place for attracting sicker people.”

Diagnosis-based risk adjustment is a comparatively new idea, says Enthoven, but it’s an idea whose time has come. He says Medicare is adopting it for Medicare+Choice and, eventually, “this will make it the standard for all carriers to meet.”

All this would be good for medicine because under the current system of managed care, most medical groups deal with a dozen or more different carriers, multiple drug formularies, multiple policies for services and technologies, and many different sets of clinical policies — “All with organizations that are adversaries,” Enthoven says. The result is ineffectiveness in the promotion of quality, and no encouragement of cost control.

In the managed competition model, low-price plans would have more patients, make more money, and be encouraged to reward efficient and effective medical practices through selection. Practices would, therefore, be encouraged to seek ways to meet the requirements of low-price plans. They could, for example, form regional technology centers to share costs with other groups and invoke disease management principles for their chronically ill patients. “The point is to create competition among delivery systems, not just carriers,” he says. “Patient loyalty to doctors is a significant factor in the market, but it is generally overstated, especially among younger people, and people move around a lot these days.”

Equity first

It sounds simple enough, like Adam Smith’s Invisible Hand. But it is not simple, and it is not a free market, says Enthoven. “Managed competition uses market forces within carefully drawn rules,” he says.

The rules begin with five principles of equity: First, every eligible person is covered or offered coverage on terms that make it attractive, even for persons with low expected medical claims, at moderate cost. Health plans accept all eligible persons who choose them.

Second, every eligible person has subsidized access to the lowest-priced plan meeting acceptable standards of quality and coverage. Employer contributions would not exceed the lowest price plan, so as to “always be sure low-price plans can get the largest market share,” says Enthoven. Consumers choosing a plan priced above the lowest priced plan would pay the full premium difference with their own money.

Third, coverage is continuous. Once a person is enrolled, coverage cannot be canceled barring nonpayment of premium or serious noncompliance with what Enthoven calls “reasonable norms of patient behavior.”

Fourth, community rating would be established, whereby the same premium is paid for the same coverage regardless of the health status of the individual or small group. “This might be blended with, for example, age rating if it is felt that pure community rating requires excessive subsidies of the old by the young.”

Fifth, pre-existing conditions would be covered.

Attention to quality

All that talk about equity sounds good but lacks an emphasis on the quality of care, says Karen Davis, executive director of the Commonwealth Fund, a research organization in Washington. She is a strong advocate of controlling health costs by encouraging fundamental changes in the supply side.

“We need to shift our attention to reducing errors, eliminating waste and duplication in clinical care, modernizing and streamlining administration, promoting transparency and accountability for performance, and aligning financial incentives for physicians, hospitals, and other health care providers to produce high-quality and efficient care,” Davis said in recent testimony before the Senate Appropriations Committee.

Enthoven is off the mark, she says. “We have the same goal, but different means of getting there. We both talk about improved outcomes, but he lapses into talking about the cheapest care. If you really look at what he’s talking about, it’s the growth of integrated delivery systems. But it’s too indirect a system. It puts too much burden on patients; most employers don’t want to work together because they think they can do better on their own in negotiating with health plans; and plans don’t want to be part of cooperatives for basically the same reason.”

Enthoven recognizes that managed competition has a “collective action problem.”

“One or even a few employers alone can’t transform the system, and institutions mostly don’t exist to broker multiple choice efficiently. It’s a chicken-and-egg problem. There won’t be many cost-effective delivery systems if employers do not create the market conditions that support them,” he says.

That’s because for managed competition to be successful, insurers need to be linked with specific, geographically overlapping delivery systems. “If a critical mass of employers do this in a specific market, they create conditions in which efficient delivery systems could enter, market their superior value for money, and achieve economies of scale,” says Enthoven. He defines critical mass as meaning that enough competitors could grow to a point that they achieve economies of scale, on the order of 1 million people in a metropolitan area.

Information technology

Technology is making those market conditions a reality, says Enthoven. An exchange manages the presentation of choices to employees and enrollment and payment transactions; it consolidates billing and reconciliation of payments. All of this can now be done electronically. For long-term success and appropriate incentives, an exchange must offer risk-adjusted premiums. There is software that can do this.

When the Clintons wanted to implement a form of managed competition, today’s technology was not available, says Enthoven. Moreover, “They hijacked managed competition. They turned it into socialized medicine, too highly controlled by the government, basically a form of price control.”

There is a role for government in managed competition, of course. Business leaders should lobby Congress to enact strong incentives for employers to create and join multiemployer, multicarrier exchanges. One method would be to make the tax exclusion for employer-paid health benefits conditional on participation in such an exchange.

These efforts would be for the common good, says Enthoven in Health Affairs. The managed competition model creates an environment that welcomes cost-reducing innovation, creates price-elastic demand and effective market forces, maximizes consumer satisfaction by offering a range of choices to suit different preferences, and removes a major cause of the backlash against managed care because nobody is in an HMO involuntarily. The net result, he says, is better, affordable care.

Martin Sipkoff is a freelance writer who specializes in health care. He lives in Gettysburg, Pa.

Managed competition at a glance

Under managed competition, employees choose from an array of health insurance plans in employer-sponsored programs called exchanges. An employer’s contribution is fixed, and employees pay the balance of the premium for the plan they choose. If employees choose a more expensive plan, the extra cost comes out of their pocket. Employees are therefore more conscious of price and encourage insurers to be more competitive by holding down the cost of their plans, according to managed competition advocates. Insurers adopt community rating, charging the same premium to every applicant, or to every applicant of the same age and gender (modified community rating). They agree to accept all applicants regardless of health conditions, but are protected by a risk adjustment provision. Insurers are therefore forced to compete based on their ability to provide health care and manage its cost.

Managed competition exists today

Managed competition exists in today’s market, says Alain Enthoven, the Stanford University professor of economics who has been promoting the model for more than 20 years. “Many employers, undaunted by administrative costs and other barriers, practice managed competition, or a tolerably good approximation,” writes Enthoven in “Employment-Based Health Insurance Is Failing: Now What?” in the May 28, 2003, issue Health Affairs.

Managed competition exists primarily among government employers and universities because they have large enough concentrations of workers to make it practical, says Enthoven. The largest and best known managed care model is the Federal Employees Health Benefits Program (FEHBP), he says, covering more than 8 million employees, retirees, and dependents. The plan markets 131 carriers nationally.

FEHBP exemplifies four basic features of managed competition. First, federal employees in most places can choose from 8 to 12 competing health insurance plans. Second, the government contributes a fixed amount that can be as much as 75 percent of each employee’s premium. Third, the extra cost of more expensive plans must be paid by the employee. Fourth, the plans are forced to use community rating.

A second example provided by Enthoven is the California Public Employees Retirement System (CalPERS), which covers 1.3 million people, the employees, retirees, and dependents of more than 2,500 different public-sector employers, through eight health plans. The four managed competition elements present in FEHBP are present in CalPERS, and both models have been in successful operation since 1960.

“Neither program practices risk adjustment of premiums or a pure fixed-dollar contribution, but they could and ought to,” says Enthoven.

Similar programs for state employees are in operation in Oregon, Washington, Minnesota, Wisconsin, and Massachusetts. Some private sector employers, such as Wells Fargo and American Management Systems, practice managed competition, as do some universities, including Stanford, Harvard, and the University of California. Some states, such as California and Florida, have sponsored multiple-choice exchange models for small employers.

A new exchange system sponsored by health plans, Benu Inc. (for “benefits” and “menu”), is available in Washington State. Enthoven describes Benu as innovative because rather than a wide menu of carriers, employees are offered a choice of three Group Health Cooperative plans and three Cigna plans; premiums are adjusted for risk after enrollment so that each carrier is paid for the risk actually enrolled; and administration is performed by Benu so that employers have the simplicity of a single source.