Sunday, March 14, 2010

Health Reform: A Return to Managed Care?

A New York Times op-ed today by Tyler Cowen argues that whether a health reform bill passes or not, whether health care is public or private, we face more managed care. The medical cost trend is unsustainable, and therefore the system will need to say no to more service requests, essentially rationing care. Managed care to Mr. Cowen means managing the over-use of services.

While this may be true for Medicare because it does little to address over-utilization, many commercial health plans actively manage the way services are used and do not view over-use as a key factor in the trend problem. Far more important is the insistence of purchasers and consumers on products that include every hospital and physician, the result of which has been a relentless increase in the price, not necessarily the use, of services.

Why? Consider: When limited hospital and physician networks were tolerated by buyers, a health plan could negotiate a reasonable price with even the largest, heavily branded hospital or physician group because it was understood that the plan might be able to live without them. Now the same hospitals and physician groups understand that the health plan cannot live without them or lose customers to a competitor. This realization alone is enough to unbalance negotiations, overly strengthen already strong brands, hasten provider market consolidation, and raise prices.

In addition to more managed care in our future we should expect efforts to control the unit price of services. These may take the form of a renewed willingness on the part of employers and individuals to live with limited provider networks, more aggressive enforcement of anti-trust laws, and/or government rate regulation


  1. Great post! I was just wondering if there is a trend of regulating the price of drugs and medical device? The profit for the pharma/Biotech sector is astonishing and I am wondering which is causing more waste: inefficiency of the hospitals or the redundancy of the drugs we have.

  2. Juan: I actually think the drug story is more positive than the hospital/physician story. The combination of the three-tier drug benefit, which has stimulated generic use, and aggressive PBM pharmacy contracting has tended to neutralize the impact of manufacturer pricing. It also helps that there have not been many new blockbuster drugs. A tiered or limited network hospital/physician benefit would have similar impact, but for some reason employers and individuals won't tolerate it.

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  4. Bruce: Thank you for your comment. Tiered hospitals is a great idea! The only thing is that is it feasible to set up a scale measuring the performance of individual hospitals? Due to the differences in physiology, patient A treated at hospital 1 may take twice as much time to recover than patient B treated at hospital 2, but is it justified to say hospital 2 is better than 1? A sensible way to measure would be doing statistical analysis of all the patients at both hospitals but I doubt the hospitals would let us do that

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