Dealing with Moral Hazard: Managed Care

Managed Care

Pre-commitment in healthcare

Managed care contracts have incentives and constraints that reduce the quantity of care and shift to lower-cost alternatives when more than one treatment choice is available.

Cost sharing

Prices paid by patients set separately from price paid to providers

Insurance

Provider

Patient

Cost sharing

Demand side cost sharing: patients pay a portion of their healthcare expenses.

Supply side cost sharing: health providers bear a portion of the burden of the healthcare expenses.

What is managed care?

Managed care is a broad term referring to health plan strategies to affect utilization and quality through demand- and supply-side cost sharing.

The story of Kaiser Permanente

The Kaiser managed care plan began as a communal insurance pool for workers in California shipyards during World War II.

Henry Kaiser realized it would be cheaper to provide medical care for his employees directly, rather than paying for it at outside hospitals.

In the decades after Kaiser Permanente was founded, more insurers began offering managed care plans.

Customers and policymakers alike took notice of their apparent cost savings.

The rise of managed care

A 1973 federal law established the term health maintenance organization (HMO) to denote vertically-integrated managed care organizations like Kaiser Permanente.

Another type of managed care option is the preferred provider organization (PPO).

A PPO is a less restrictive version of an HMO that does not integrate insurer and provider.

U.S. consumers and employers have gradually migrated from expensive fee-for-service insurers toward cheaper managed care HMOs and PPOs

Types of supply side cost sharing

Capitation contract: a flat fee is paid to provider per enrollee

Prospective payment: where payment to a provider is based on the classification of a person or episode rather than on the cost of services provided

Selective contracting: in-network and out-of-network providers

Utilization review: requiring authorization

Gatekeepers: primary care physicians, who must approve if the patient wants to see a specialist

Typical Premium Allocation of a $500 Premium under a Capitated Contract

Utilization Review

More than 90% of health plans use some form of utilization review to control costs

Many managed care plans require second surgical opinions before surgery can be performed

Two mechanisms are used to control utilization:

Authorization review

Second opinion

Does managed care work?

How would you study this?

What metrics would you be interested in?

Cost saving

Quality of care

Does managed care work?

Percent using hospital Percent outpatient care Total Cost ($)
HMO experiment group 7.1 87 439
HMO controls 6.4 91 469
Fee-for-service with C=0 11.1 85 609
Does managed care work?

Gottfried and Sloan (2002) find that there is no systematic difference in health outcomes between managed care organizations and fee-for-service plans.

Although outcomes are worse for vulnerable populations (poor, sick, disabled)

Managed care organizations do keep costs lower.

In general, managed care patients are hospitalized less often and undergo fewer expensive tests.

There is also evidence that managed care has slowed the proliferation of expensive technologies like MRI machines.

Does managed care work?

One important caveat is that managed care plans tend to attract healthier customers due to adverse selection.

If this is the case, managed care might be reducing costs simply because their customers are healthier.

An interesting side note is that academic researchers who study managed care professionally are less likely to personally enroll in managed care plans themselves.

Managed Care and its Public Image

Although there is a lack of evidence suggesting poor quality of care, the public image of managed care is poor; many have a negative HMO story to tell

Another cause may be the diversity of managed care arrangements

And among medical providers, managed care is unpopular

The Future of Managed Care

Depends on the Affordable Care Act, which encourages the development of the accountable care organization (ACO):

“an organization of health care providers that agrees to be accountable for the quality, cost and overall care of [a group]”

Physicians would have to use evidence-based protocols to treat patients, but few are willing to give up clinical autonomy

Patients must be more engaged in their treatment

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