Managed Care in the USA: origins, HMO ... - Wiley Online Library

Journal of Public Affairs J. Public Affairs 7: 357–371 (2007) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/pa.274

Managed Care in the USA: origins, HMO strategies and the marketing of health services Daniel Simonet* Nanyang Business School, Nanyang Technological University, Singapore

HMOs appeared in the 1970s in a context of increasing health-care expenditure. These organizations now provide care to an increasing share of the general population, offering cost/effectiveness studies and sophisticated cost-control mechanisms directed at care providers and patients. The following article reviews the history of Managed Care organizations, details the service they offer, discusses the current difficulties that have forced them to withdraw from some market segments and considers what prompted the government to intervene to protect patients’ interests. The paper also describes the growing hostility of patients and physicians to Managed Care. Copyright # 2007 John Wiley & Sons, Ltd.

Managed Care: an historical approach As in other western countries, the United States has faced an increase in health-care spending because of progress in medical technology, aging populations and extension of health-care coverage, be it proposed by a private employer or by the government (Medicare and Medicaid programmes). To reduce health-care expenditure, the American government encouraged the development of Managed Care organizations. With the vote of the Health Maintenance Organizations (HMO) Act in 1973, Congress granted fiscal advantages to HMOs; since then, these organizations have offered care to a defined population in exchange for a fixed monthly sum, paid in advance. In the second half of the 1980s, cost *Correspondence to: Daniel Simonet, Nanyang Business School, Nanyang Technological University, Singapore. E-mail: [email protected]

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reduction strategies by Managed Care Organizations gained the attention of major companies, entrusted with the health coverage of their employees at the expense of ‘traditional’ insurers with Fee For Service (FFS) payment. Subsequently, the government turned to HMOs to cover army veterans.1 In the 1990s, the growth rate of membership in Managed Care organization attained 10 per cent a year. The number of insured under the Managed Care regime reached its climax in 1999 with 80.5 million, compared with 38.8 million in 1992, 40 million in 1990 and 11.6 million in 1982 (Marion Merrell Dow, 1993) (Table 1). Currently, approximately 78 million individuals are enrolled in Managed Care plans. Concurrently, new types of Managed Care organizations appeared (Table 2). Some are referred to as Preferred Provider Organization 1

TRICARE Senior demonstration of military managed care—DOD; notice of demonstration project. Fed Regist 1998; 63: 38 558–38 559.

Journal of Public Affairs, November 2007 DOI: 10.1002/pa

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Table 1. HMO membership (1992–2001) Years

Number of insured (millions)

Growth rate (%)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

38.8 42.1 47.1 53.4 63.3 72.1 78.6 80.5 78.9 78.0

6.3 8.5 11.9 13.4 18.5 13.9 8.9 2.6 2.0 1.1

Source: HMO Industry Report 12.1. Part II. InterStudy Competitive Edge Series. Donneés du 1er juillet 2001.

(PPO) or Point of Service (POS), and offer more flexibility to the insured in return for a co-payment. The American health-care system presents certain characteristics. First, and contrary to widespread belief, it is not dominated by the private sector: in 1994, 47 per cent of health-care expenditure (US$950 billion then) stemmed from the government (through Medicaid and Medicare programmes, public coverage of federal employees), 26 per cent

from the patient, 21 per cent from the employers and 6 per cent from charitable organizations (Himmelstein and Woolhandler, 1999). Coverage is partial: indeed, 44 million were individuals are still excluded from health-care coverage, that is 16.3 per cent of the total population; made up mostly by anyone who cannot afford medical coverage, but whose income is too high to be eligible for Medicaid (two-thirds of the people without insurance have employment). Furthermore, health services do not cover every care need. For example Medicare patients, although covered by a public programme, had to pay for drugs themselves. This however has changed: the Centers for Medicare & Medicaid Services has implemented the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), which now provides prescription drug coverage to all people with Medicare, improved health-care access for rural Americans and preventive care services, such as flu shots and mammograms. Even better, in 2006, Medicare Advantage plan choices, which replaced Medicare þ choice, will offered drug coverage.

Table 2. Distribution of medium and large firm employer-sponsored health insurance enrolment by type of plan (1988–2001)

Source: Employer Health Benefits, Annual Survey. The Kaiser Family Foundation and Health Research and Educational Trust. 2001.

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Managed Care in the USA

Control of health-care costs After a strong increase in the 1980s, growth of health-care expenditure slowed down from 1990 to 1996, in parallel with the development of Managed Care (the lowest growth rate in the last 37 years was in 1996 at 4.4 per cent). The portion of health-care spending in the national GDP remained at an identical level (between 13.1 and 13.4 per cent from 1992 to 1996, then 13.1 per cent from 1997 till 2000 inclusive, despite a sharp increase in 2001 at 13.9 per cent) (Kaiser Family Foundation, 2003). In California, in particular, Managed Care organizations slowed down the hospital expenditure growth rate (1983–1993): hospital expenditure increased less rapidly in markets characterized by strong HMO penetration (44 per cent less rapidly, and on this total, 28 per cent was because of a decline in services, 6 per cent was due to a decrease in bed capacity and 10 per cent due to a drop in service intensity) (Robinson, 1996). Other studies have confirmed these figures: while per capita hospital expenditure increased by 54 per cent in the United States between 1980 and 1991, this increase was only 27 per cent in California alone, where Managed Care enjoyed a steady development (Melnick and Zwanziger, 1995). Consultation and drug expenses increased respectively by 82 and by 65 per cent nationally against 58 and 41 per cent in California alone. Also, growth in hospital expenditure in HMO-invested areas was lower (Gaskin and Hadley, 1997). The consumer benefited from the competition between HMOs as it slowed down premium growth. However, HMOs might not be the only source of saving as Elizabeth Chamorand (1996) outlined in 1996: ‘The spending curve bent in the same way from 1977 till 1980 to discourage any possible regulation or reforms’. President Clinton’s Health Security Act (1993) could have had the same restraining effect on costs, limiting the role of these organizations in controlling health-care expenditure. Finally, the health system remains expensive: health-care expenses (which should reach 16.3 per cent of GNP this decade because of retirements of the ‘baby Copyright

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boom generation’2) are higher in the US, in value and in percentage of the GNP, than in other member countries of the G7, while care quality (in terms of accessibility, hospital care, pharmaceutical consumption) is either comparable, or even lower (e.g. life expectancy, infant mortality).

Medical practice and the monitoring of care delivery Under the Managed Care regime, medical practice has experienced two major changes. The first concerns the development of cost/ efficiency studies on proposed treatments to assist practitioners in choosing between multiple therapies that are available to them. With this intent, care providers, mostly hospitals and insurers (Managed Care organizations), have resorted to varied processes: clinical guidelines, outcome studies, disease management programmes, utilization profiling and analysis of prescription patterns. The second change concerns the creation of standards to regulate medical practice. For example although US$11 billion is spent annually to treat end-stage renal disease, costs vary widely from one state to another (US$82 000 per operation on average). Comparisons (also referred as Benchmarking) between providers under the umbrella of Managed Care organizations and hospitals should impose standards, thus standardize medical intervention and service. In practice, however, difficulties in considering specific medical cases may decrease care quality for certain patient categories, such as the severely ill patient or those who are more fragile due to associated non-medical problems (e.g. alcohol, poverty). However, case management programmes that recommend closer monitoring and follow-up of vulnerable patients should address those concerns. Managed Care organizations have also proposed a set of services intended to ration the offering of care. This includes consulting a limited network of providers, implementing utilization review 2

‘A right to sue’. The Economist. 1999: 62–63.


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programmes which authorize re-examining care provided to patients to ensure its necessity and suitability and using a gatekeeper (mandatory pre-authorization) to decide if patients should consult a specialist or need extra care (more complex, thus more expensive medical procedures). In a survey on HMO networks, every provider resorted to gatekeeping for specialty care, in particular, for certain tests, and sophisticated procedures (95 per cent for IRM requests, 53 per cent for lung tests) (Kerr et al., 1995). In more than 75 per cent of medical practices, authorizations were rarely refused (fewer than 10 per cent of requests). Since then, other HMOs gave up this sort of pre-authorization procedure on the ground that control of medical activity could be more expensive than savings resulting from denying certain expensive treatments. For instance, United Health Group (Minnesota) decided to leave such treatment decisions to the doctor. This decision, welcomed by the American Medical Association, should be followed by other HMOs, all the more as United Health Group was, with 15.4 million insured, the second biggest US HMO after Aetna (19 million insured) (Silbert, 1999). These controls have also reached patients, hospitals and pharmacies. Patient contributions have increased, for instance, in emergency services and in psychiatry (Selby et al., 1996; Simon et al., 1996). The decision to increase patients’ contribution results from two theories often associated in health-care economics: moral risk and adverse selection (Dionne, 1981). Moral hazard is defined as the attitude of those who are ill and hide information regarding their health status from their insurer, or those who adopt risky behaviours because they are fully insured (i.e. they know their medical fees will be paid in case of an accident). These two categories tend to consume more health services than those who are in good health and those who do not adopt risky behaviour. Consequently, increasing patient co-payments should increase patient responsibility. Adverse selection refers to individuals that are ‘bad’ risks and will have to bear the costs of higher premiums. Those who Copyright

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know they are very likely to fall ill (referred to as ‘bad’ risk individuals) usually purchase medical insurance. Those who believe their risk of illness is low tend not to purchase insurance coverage. Consequently, as basic insurance rates increase, the incidence of low risk individuals purchasing insurance decreases. Thus the ‘bad’ risk individuals carry an ever increasing financial burden. If moral hazard legitimizes the existence of public coverage, that coverage is partial, as there is a patient contribution that shall limit moral hazard. HMOs have also encouraged hospitals to reduce the patient’s length of stay, a strategy that does not inevitably translate into a deterioration of their health. Finally, in an attempt to save on medical drugs, local pharmacies have worked in partnership with HMOs to develop drug compliance programmes. Under the HMO umbrella, pharmacists also intervene in hospitals (Yee et al., 1997).

Physician participation in Managed Care plans At the beginning of the 1990s, practitioners’ conditions of employment under the Managed Care regime were rewarding. Their earnings were not lower under this system and they could continue to practice in an independent physician group while being associated with, or employed by, an HMO (which offers regular working hours). Managed Care organizations eased fee collection from employers. And as, at that time, a high number of practitioners were unemployed, they could not ignore the job opportunities that Managed Care organizations offered. Thus, while in 1990 only 1 doctor out of 10 joined one form or another of Managed Care Organization (be it an HMO, a PPO, or an ‘Independent Practice Association’—IPA), there were about 8 in 10 belonging to such organizations in the early 2000s, a phenomenon that more often concerns city-based physicians than those who practice in rural areas. The percentage of practitioners who joined Managed Care organizations jumped from 61 per cent in 1988 to 91 per cent in Journal of Public Affairs, November 2007 DOI: 10.1002/pa


1999, whereas the share of physician practice incomes originating from Managed Care organizations increased from 23 per cent to 49 per cent over the same period (Table 3). New modes of physician payment appeared in the form of a contract with a fixed premium (or ‘capitation’) (Perneger et al., 1996). In this case, the practitioner, playing the role of the Managed Care organization treasurer, receives a sum per patient (the sum is fixed and does not depend on the duration and intensity of care). Financial penalties exist for practitioners who exceed a cap on prescriptions or medical acts. Indeed, when an HMO uses a withholding contract, it retains, at the beginning of the contract, a fraction of the fees (15–25 per cent) normally paid to the provider, be it a solo practitioner or a physician practice. At the end of the withholding contract, comparisons are made with regard to an initial cap on healthcare spending or consumption (of hospital care, tests, medical prescriptions). If these are lower than the cap, the sum that had been withheld is then returned to the care provider. Should the opposite occur, the HMO keeps the remaining sum for itself. In this frame, the physician’s lack of autonomy in clinical decision-making due to financial penalties is a source of concern. While medicine rests on a tacit agreement between the doctor and his

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patient to determine the best possible service, financial agreements that tie practitioners to Managed Care organizations are so strong, they may dissuade physicians from giving optimal care to his patients. The likelihood of care restriction is higher if physicians receive a bonus from the HMO for restricting access to care or to expensive procedures. Patients are generally unaware of these agreements and the situation leaves them more vulnerable. The physician-induced demand theory by Evans (1974) and Fuchs (1986) suggests the medical profession may favour the demand for care to secure an income, and has legitimized those interventions in medical practice. Also corroborated by more specific studies, rates and consumption of care are higher in areas that support many practitioners (Cromwell and Mitchelle, 1989). An aggravating factor is that the patient, being more aware that care is available (due to increased publicity for medical products and growing media attention on medical issues), and that medical progress is fast, demands more care. This the doctor can barely refuse or he risks losing part of his income. Developing capitation contracts and pre-authorizations, aimed at reversing the physician’s temptation to increase the number of medical procedures to secure an income for himself, can encourage the conversion to

Table 3. Source of physicians’ revenues

Source: Trends and Indicators in the Changing Health Care Sector. Kaiser Family Foundation, May 2002.

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for-profit status, urging practitioners to be thriftier (Pauly et al., 1990).

Quality of care and federal interventions Mixed results have been observed in care quality. A synthesis of 15 studies comparing care quality between HMOs and the traditional regime (FFS) reveals an equivalent number of improvements and degradations of patient health, whichever the insurer (Miller and Luft, 1997). Another survey showed similar patterns (Miller and Luft, 2002). In psychiatry, Managed Care has caused a degradation of care quality: compared to patients who remained in the traditional system with FFS payment; the most seriously ill patients fare worse after their transfer to Managed Care (Rogers et al., 1993). In oncology, post-operative survival rates for patients suffering from breast cancer were reduced in a hospital run by an HMO (Lee-Feldstein et al., 1994). As for gatekeeping, although doctors judge that care quality the gatekeeping physician provides is comparable to care without a gatekeeper, this mechanism appears inappropriate in dermatology (there is a lack of experience among generalists when it comes to evaluating skin lesions, and in this field, an oversight can be fatal to the patient) (Gerbert et al., 1996) and in emergency medicine (Uva, 1996; Halm et al., 1997). Finally, other investigations underline that the health of vulnerable patients (Medicare patients suffering from chronic diseases, the deprived and severely ill patients) degraded under HMO regime3 (Ware et al., 1986, 1996; Miller and Luft, 1997). Exclusion of patients at risk have frequently been reported. Managed Care organizations recruit first and foremost patients who present a lower health risk, and exclude fragile individuals, as they are likely to generate higher medical costs on the long term4 (Morgan et al., 1997) (i.e. 10 per cent 3

Managed Care Squeezes Research Funds and Charity Health Aid, Studies Find. New York Times, 1999. 4 Report finds Medicare HMO members are younger, healthier and lower cost than FFS seniors. Public Sect Contract Rep 1997; 3(11): 174–175.

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of patients represent 70 per cent of health expenditure). When insurance is covered by the employer, the patient is more vulnerable as this coverage can be intermittent. A period of unemployment means no coverage and a change of employer may create discontinuity in care. In a survey by the Vermont Health Care for All Association on causes of contract breaches with HMOs, 74 per cent of respondents said their insurer switch was caused by a change of employer, 17 per cent said it was due to the purchase of a less expensive insurance contract and only 9 per cent said it was in order to get better quality of care.5 To tackle these flaws, patient protection laws were voted. President Clinton proposed the Consumer Bill of Rights, voted in by the Senate in July 1999, which allows a patient to visit an emergency department without the preliminary authorization of the insurer, to make an appeal in a case of a treatment denial, and to consult a specialist outside the Managed Care organization if the latter does not have one in its panel of specialists. Certain restrictive principles set up by Managed Care organizations were set aside, such as Drive Through Delivery. Indeed, in the middle of the 1990s, 24-hour stays in maternity wards became more frequent, notably on the West coast. To reduce costs, Managed Care organizations had supported this practice. However, practitioners were worried about its affects on newborn’s health. This quickly voted consumer rights law, officially known as the Figueroa Bill (AB38), obliged HMOs to finance a 48-hour stay in the maternity wards. It was met with rapid success: while the state of Maryland was the first one to adopt it, before the end of 1995, five other states had also embraced it. Less than a year later, 24 other states had voted for similar laws. However, if doctors, patients and politicians welcomed this law, the law was insufficient, as it did not give information about care or tests that a newborn should receive during this supplementary day in hospital. Another law, the HMO gag clause, became 5

Health Care Facts. www.vthca.com/new_and_views. htm



a symbol of Managed Care organizations’ intrusion in the doctor–patient relationship, and was abandoned in nearly every state. Because it forbade the practitioner to discuss available treatments with the patient, it constituted a threat in the confidence the public granted to the medical profession. Other patient protective measures were elaborated: they softened the limits promulgated by HMOs to dissuade the insured from showing up at the emergency department (Tintinalli, 2000). These laws have not, however, always been fully enforced (Seaberg et al., 2000). These measures highlight the recently recognized central role of surveillance and regulation agencies under Managed Care. Indeed, to manage physicians’ behaviour, HMOs experimented with sophisticated mechanisms of control and surveillance such as guidelines for medical practice (clinical recommendations), or a lump sum for prescription spending, or bonuses for thrifty practitioners (D’Aspremont and Gerard-Varet, 1979). However, despite such arrangements, setting an optimal contract between insurers and practitioners is still impossible: not all foreseeable contingencies are covered. An optimal contract that, according to Williamson’s transaction cost theory, envisages in priori all the possible actions, their results and the compensations in case of an opportunistic behaviour of any contractor. Such an optimal contract supposes the absence of information asymmetry between agents. As there is asymmetrical information between agents (e.g. the physicians always know more than the patient), mechanisms that supervise/monitor these agents are necessary (Williamson, 1975; Brousseau, 1993). Thus, third parties, for example, accreditation and quality control agencies such as the Health Care Financing Administration (HCFA), the joint Commission on Accreditation of Healthcare Organizations (JCAHO) or other professional associations, were urged to exert stricter control on Managed Care organizations. Managed Care’s ability to satisfy individual patients (rather than population subgroups such as the vulnerable and the uninsured) have led to a status quo, and, thus delayed reforms. Copyright

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However, attempt of reform must be focused and incremental: for instance, the prerogatives of MCOs to withdraw coverage from high-risk patients must be limited; the use of profit to reward cost-control by service providers must be checked; quantification efforts, the coding of acts and pathologies in particular and the development of a culture of evaluation (clinical recommendations, patient satisfaction measurements) must improve transparency; abuse and illegitimate practices that burden tax payers must be curbed (Liberman and Rolle, 1998). The complexity of existing regulations in the health-care sector is a factor, because policy makers are reluctant to immerse themselves into an administrative tangle. Nonetheless Managed Care organizations made some headway: development of tools measuring care quality and improvement of preventive care, notably for children and the elderly (cancer screening tests, inoculations)6 (Frye, 1998; Malin et al., 2000). From 1999 to date, HMOs have undertaken the financing of clinical trials (evaluation of medical drugs) and experimental medical procedures. Prior to this, patients and practitioners blamed HMOs for refusing to integrate their insured into clinical trials because of their experimental nature. In 1998, the American Association of Health Plans (AAHP), an association which groups and defends Managed Care organizations’ interests, negotiated an agreement with the National Institute of Health (NIH). Participating HMOs pledged to include a higher number of their patients in clinical trials, as soon as the trials received NIH approval. HMOs dashed into developing medicines. For instance, United Healthcare Corporation (Minnetonka) paid for the costs of clinical trials for cancerous patients. Also, United (13 million individuals) finances the clinical trials led by the Coalition of National Cancer Cooperative Groups, an association of 12 000 cancer researchers. 6

Public Sect Contract Rep. Focus on proactive care management to improve quality, produce savings in Medicaid risk. 1998; 4(4): 57–61.


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Consolidation of the HMO sector Despite an increase in the number of insured, HMOs, including the largest ones such as Aetna/US Healthcare, Pacificare, Cigna Oxford Health and Kaiser Permanente, reported losses in the second half of the 1990s. In 1998, nearly one quarter of Managed Care organizations were, according to Standard and Poors, in a fragile situation and, according to a study by Modern HealthCare on 29 HMOs, nine recorded losses in 1996 (only 5 out of the 16 that made a profit recorded a profit increase compared to 1995).7 With the growth of the US economy, employers became more demanding and HMOs have not been able to build bargaining power when negotiating the payment of health-care premiums with employers. Also, employers often join another provider to cover their employees’ health during calls for tender. These agreements between employers also increases their negotiating power with HMOs: employees can then force prices down or ask for more services from the HMO. Added to this unfavourable market power are other disturbing factors such as increasing administrative costs and a rising number of patient complaints. Further proof of the HMOs difficulties is the withdrawal from certain markets, for example, the elderly and the rural areas.8 At the end of 1998, HMOs of 30 American states announced their withdrawal from the Medicare programme (Medicare Managed Care), which they viewed as unprofitable (patients who lose their Medicare coverage usually return in the FFS regime, despite its higher costs and their limited resources, or integrate another Managed Care organization. However, in certain states, this option may simply not be available.). On the whole, it is a setback for those firms that years ago openly entered the Medicare Managed Care market with huge publicity and considerable support from the federal government. The market withdrawal has been observed in New York, New Jersey, 7

Crain’s New York Business: 46; 1998. Despite Medicare þ Choice changes, rural providers cautious about risk. Public Sect Contract Rep 1998; 4(10): 149–152. 8

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Colorado, Connecticut, Delaware, Maryland and Florida. Finally, with Managed Care reaching maturity, HMO expansion opportunities have shrunk in the United States (the great majority of employees of major American companies are already affiliated to a Managed Care plan) and overseas (Canada criticizes it widely). As a consequence, the sector has been consolidating: to realize economies of scale and scope, an increasing number of HMOs have merged (Given, 1996). Consequently, according to a 2003 survey (National HMO Financial Database), released by InterStudy Publications, the number of HMO plans has dropped dramatically, from 500 early 2002 to 454 early 2003. Total HMO enrolment has dropped to 74.2 million in 2002, an all-time low, mainly due to these plan closures, mergers and acquisitions. However, that consolidation has contributed to a restoration to profitability: half of the nation’s HMOs reported profits of 1.7 per cent or more in 2002.

Patients’ and practitioners’ hostility There has been a significant loss of confidence from consumers and health-care professionals in HMOs. In the USA where, unlike the UK, patients have long experience of direct access to specialists, attempts to redefine conditions of access to care, which are perceived as entitlements, have created hostility. As early as the 1990s, the first opinion surveys on patients and practitioners underlined the increasing unpopularity of Managed Care organizations, and other studies have since confirmed this (Blendon et al., 1992; Taylor, 1994). According to a Harvard and Kaiser Family Foundation survey (1997), 76 per cent of individuals below 65 years and covered by the FFS regime perceived their insurer favourably, whereas 66 per cent of Managed Care patients share the same view. Twenty five per cent gauged the services of Managed Care organizations to be inferior. The most often reported elements of dissatisfaction were time spent with the doctors, availability of specialists and Journal of Public Affairs, November 2007 DOI: 10.1002/pa


quality of care. Only 30 per cent of Managed Care patients trusted their insurer (55 per cent for FFS patients). Most supported an intensification of state control to prevent Managed Care spill over effects. In 1999, an inquiry by the Washington Post/ABC revealed that 30 per cent of those interviewed had a good opinion of HMOs and 52 per cent a bad opinion; 43 per cent thought that HMOs did not treat patients fairly.9 Media contributed to this stigmatization: according to the Kaiser Family Foundation, while two-thirds of the 2100 elements of information diffused in newspapers or on the television gave a neutral image of Managed Care, one quarter criticized it (Brodie et al., 1998). And while, at the beginning of the 1990s, Managed Care was presented under a favourable light, this trend has since reversed, because of, among other reasons, delays in care delivery, and excessive salaries of HMO CEOs (Stephen Wiggins, the boss of Oxford Health Plans, received about US$30 million in 1996) (Families USA). A possible reason for such media backlash is that HMOs have failed to adequately promote their achievements to the public. However, it is still hard to assess the influence of the medical profession in fuelling patient anxieties. Practitioners have also become wary of HMOs. An increasing number of them have joined trade unions, created specialty groups and networks to improve their bargaining power with HMOs and to propose their services to employers. These initiatives received support of the main employers (Motorola), willing to reduce their costs by contracting directly with health-care providers without resorting to Managed Care organizations (Kennedy and Jennings, 1998). Physician practices are banding together and others have been acquired by hospitals. Independent general practitioners often act as intermediaries, referring patients directly to hospitals, thus forming a captive clientele of patients that are independent of HMOs (Burns et al., 2000). Practitioners’ discontent also results from research difficulties under this new regime: indeed, due to a 9

A right to sue. The Economist. 1999: 62–63.

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decrease in HMO payments, university hospitals worry about their capacity to pursue their research effort and education mission (while the cost of training physicians is still very high). Medical students’ poor exposure to Managed Care (mostly through inadequate training in medical economics) was not enough to prevent suspicion towards HMOs. Other flaws have appeared: insurer insolvency, practitioners’ exclusion from HMOs, deterioration of employment conditions, tense relations with patients, professional dissatisfaction. Finally, HMOs are reluctant to invest in costly medical technologies. Thus, the introduction of new procedures may slow down. While HMOs are well implanted in California, the historic cradle of Managed Care and in urban and populous states of the northwest Pacific areas (Oregon and Washington), they are uncommon in certain rural (Montana) and western states (North Dakota, South Dakota, Idaho, Wyoming) which support only scattered populations. Now when HMOs penetrate a new market, they aim at improving the profitability of hospitals they control. Donors, however, then feeling a decline of the charitable mission of these non-profit institutions, become less generous (Arnould et al., 2000). In particular, specialists when they begin their career, are, more often than non-specialists, reluctant to practise in zones where Managed Care penetration is high (Escarce et al., 1998). Care management mechanisms and strained fee negotiations with HMOs drive them to set up their practice where the HMOs negotiating power is lower, to protect their income.

Lessons learnt and future orientations Because of the unwillingness of individuals to exert restraints in the use of health care, there was a need for a system that could control costs drastically: Managed Care was thus the response of a society who refuses to sign a blank check to subsidize health care for all, because of the tax burden it entails. Under that system, health-care players became concerned Journal of Public Affairs, November 2007 DOI: 10.1002/pa

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about payment. Cost-control became a priority: employers and health-care plans consolidated to increase their bargaining power and cut costs; care providers merged to achieve economies of scale. Some closed non-performing units, which resulted in fewer available beds. Fears of lawsuits have aggravated cost concerns. Choice and access to services were restricted. However, a lot of money was invested in high-end technologies rather than technologies that simplify medical practices, or ease the treatment of more common diseases that require less sophisticated devices, though technology use for some conditions is at a point of diminishing marginal returns (i.e. high level of spending only led to marginal improvements in health status) (Porter, 2004). Competition on cost and price has become prevalent. However, price competition may work well for commodity products because providers are similar and products are standards, but cost competition might not work well in the health-care sector because medical procedures are not commodity items: the increasing specialization of technologies and knowledge make health-care services more prone to customization than commoditization. Because of cost/price competition in health care, few value gains have been observed (Porter et al., 2004). Employers’ influence grew stronger in the 1990s, as they joined one another to negotiate with health-care plans and hospitals, and they focused on costs rather than quality. From now on, one must convince them about the necessity to put the emphasis on value rather than costs, and to pay providers for performance. That should enhance quality and efficiency (cost/effective treatment, compliance with best medical practices) and prompt care providers to develop areas of expertise. Unfortunately, employers have so far put little effort into looking for providers that offer the best value in care. The economic crisis has prompted them to put more emphasis on costs than value. Restoring value-based competition will be easier in a period of economic growth, and with valuebased competition, providers will have to excel at treating particular conditions, which Copyright

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will encourage the adoption of niche strategies on specific disease (heart, kidney, cancer). However, Managed Care saw a growing number of hospitals offering widespread service lines rather than narrower more-effective disease-centred services. Care providers still have to find the therapeutic areas they are good at. That will foster adoption of technological advancements while preserving patient choice. The latter is a key issue and shall not be sacrificed. Any attempt of reform that imply restricting choice is doomed to fail, because patients fear health-care rationing and expect minimal controls on either availability or use of care.

The need for patient empowerment Compared with the FFS regime, a patient under an HMO loses his ability to make choices. In front of an HMO that is supposedly better informed about the quality of health-care services, he is no longer the best judge of the resources he may spend on health care. But could it be otherwise? Indeed, the notion of ‘sovereignty’ takes shape only if a patient can make rational choices, for example if he can examine the advantages and the risks associated with his decisions, and, second, if he bears their costs. With increasing information asymmetries that benefit HMOs, and the increasing complexity of medical knowledge and technology, these conditions are rarely present. Under this regime, the HMO is granted the role of an agent: the employer entrusts the HMO to source for the optimal providers (information collection). Furthermore, the HMO bears the costs associated with monitoring and supervising the players (mainly health-care providers and patients). The influence of HMOs could be countered if only patients had an access and an understanding of that information. However, information has focused more on patient satisfaction than disease outcomes. Efforts must also be put into developing an information base on the relative performance of health plans, providers and their clinical outcomes. Journal of Public Affairs, November 2007 DOI: 10.1002/pa


However, there is still a long way to go: satisfaction surveys have little impact on providers, because patients are not knowledgeable enough to assess outcomes of medical procedures and, thus cannot compare care providers. The huge literature on report cards that provide clinical outcome data shows that patients are not rational when it comes to buying health care: most patients rely on word of mouth, on advice from friends and family and their own previous experience rather than outcomes indicators when choosing a healthcare plan or a care provider (Marshall et al., 2000): according to the Kaiser Family Foundation, just over a quarter (27 per cent) of insured had access to information comparing providers. And although 90 per cent consider that this information is useful, fewer than 10 per cent asserted that they would use it if necessary (Kaiser Family Foundation, 2002). Since influence of independent associations (e.g. National Committee on Quality Assurance) is weak, employers should play a more discerning role when purchasing health care: as payers of premiums, they have strong incentives to look for the best value-for-money plan. In addition, information on price should become more transparent and simplified (because complex billing practices contribute to cost-shifting strategies and make price/value comparisons more difficult), which will also strengthen patient pressure on health-care plans and care providers. Just as in any other innovative industry, patient empowerment will also improve quality, widen choices and increase differentiation among health plans (a single insurer will then offer restricted but cheaper health coverage as well as more open and more expensive health coverage) (Herzlinger, 2002). Differentiation will be based on individuals’ financial means. Those who want immediate care and unrestricted access to medical resources will pay higher premiums. Eventually, the needs of the whole gamut of patients, from the most to the least thrifty, will be met. However, the move toward large provider networks lessens the ability of patients to perceive differentiation strategies (in terms of costs and quality of care). Copyright

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Marketing and health services: a difficult coexistence In the context of social marketing—that is how marketing can be used to change people’s individual behaviour for a public objective–– there have been many suggestions that marketing could be applied to healthcare (Zaltman and Vertinsky, 1971; Naidu and Narayana, 1991), that it should escape its narrow definition in the business field to embrace more ‘human’ and ‘societal’ values (Kotler, 1972). However, the US Managed Care experience shows that this is a fallacy. Marketing concepts stress that the patient is king (Svensson, 2005), but fails to mention that hospitals and Managed Care organizations must secure a profit, which will eventually put certain population subgroups at the mercy of care providers and insurers. What if the patient is unable to pay for an emergency? What if a woman needs an additional day at the maternity ward? The marketing concept does not address those issues. In fact, it leaves those issues to the government, charities or physicians (e.g. uncompensated care). Managed Care organizations’ drastic cost-cutting measures have increased patient exclusion from the chain of care (e.g. patient dumping from the emergency departments). That has weakened societal values such as equity and solidarity, and breached a common principle of medical ethics, physicians shall support access to medical care for all people (AMA, 2001). The increased commercialization of health services that appeared in the wake of Managed Care has been unable to address the specific needs of the destitute and other vulnerable population subgroups (e.g. the sick elderly) and failed to respond to a persistent inadequacy of US health care: the high number of US citizens without an insurance, for example those who are too poor to buy an insurance but too ‘rich’ to be granted Medicaid coverage. Attempts to expand the Managed Care concept to Europe and Asia have failed precisely because of these inadequacies. Despite much media interest for Managed Care in Europe in Journal of Public Affairs, November 2007 DOI: 10.1002/pa

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the early 1990s, few Managed Care mechanisms have been adopted (e.g. fundholding physician practices in the UK, physician networks in France, a handful of HMOs in Switzerland) (Simonet, 2005). In Asia, rising criticism from physician medical associations, particularly in Hong Kong, Indonesia and Malaysia, has reiterated calls for the creation of a national Trust Fund, and the launching of a single payer system offering coverage to every citizen. Managed Care have led to the same side effects wherever it was adopted: in South America, as Go´mez-Dante´s (1998) stated, ‘previous experiences in countries like Chile show that for-profit insurance plans and Managed Care organizations tend to successfully implement mechanisms to avoid the enrolment of the elderly, the chronically ill and the disabled, in spite of the opposing and expensive efforts of the regulatory bodies’. Marketing concept cannot guide health services, if so it can only aggravate certain injustices forcing the government to respond by taking legislative action that recognize that patients are more than the bill they are prepared to foot. Main legislative actions include the Patient Protection Act (1997), the Drive Through Delivery law and the EMTALA that prevent EDs from rejecting patient for ‘improper economic motives.’ None of these laws were new however (e.g. in 1946, the Hospital Survey and Construction Act forced federally funded hospitals to set aside some resources for patients who would otherwise be dumped), suggesting that Managed Care did not solve the exclusion problem. These laws merely attempted to respond to patient exclusion that escalated with Managed Care development. Compared with sectors where the law of supply and demand applies, marketing might not work in sectors dominated by non-market forces where societal values such as ethics and compassion prevail, in sectors where setting a price is difficult (e.g. what is the value of life?), where there are other competing social services or public goods (retirement pensions, subsidies to the jobless, state-subsidized education) that too consume scarce resources Copyright

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and in communities ridden with poverty that would fare better under a compensatory system (Bonnici, 2007). Worse, marketing is about increasing consumer demand, but Managed Care has been about decreasing demand through care rationing (e.g. HMO gatekeeper, utilization reviews). Besides, the marketing of health-care services encourages the view that a hospital is just another health-care player acting on a stand alone basis rather than an integral part of a safety net that remains critical in preserving social cohesiveness. Marketing is difficult to apply in health care because information asymmetry favours care providers over patients’ interests (Karlinsky, 1987), because medical information, though widely available, is too complex to be mastered by a patient even with the help of his physician. Even balanced score cards designed to evaluate hospital services cannot redress this imbalance. Patients have difficulty navigating the system because their illness impairs their ability to make informed judgments, and the destitute are more likely to fare worse under that system because of compounding factors (e.g. language problems, geographic distance to care providers). Patients who need urgent care are in a worse situation as they do not have time to compare treatment options available to them. The for-profit status of most Managed Care organizations increases insolvency risks and contradicts the aim of equitable access to care, particularly access to care for the poor. From a management point of view, the marketing of health services and the subsequent surge of MCO have served the interest of employers who wanted to outsource the management of their employees’ health-care costs. It also met the Government and States’ decision to withdraw from the financing of public health services (e.g. Managed Care entry into Medicare and Medicaid programmes in the mid 1990s). The other stakeholders in health care were at the losing end: patients felt shortchanged and physicians alienated. Employer and government efforts to economize on health which they viewed as a private commodity were at the expense of the common welfare (Bonnici and French, 1988). Journal of Public Affairs, November 2007 DOI: 10.1002/pa


Biographical notes Daniel Simonet was a post-doctoral fellow at the Wharton School, the Joseph L. Mailman School of Public Health (Columbia University), a visiting faculty and consultant in Asia and Middle East and a researcher with the University of Venice (Italy). He is an assistant professor of Strategy with the Nanyang Business School (Singapore).

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