Table Of ContentTHE ECONOMIC EVOLUTION OF AMERICAN HEALTH
CARE
THE ECONOMIC EVOLUTION OF
AMERICAN HEALTH CARE
FROM MARCUS WELBY
TO MANAGED CA RE
David Dranove
PRINCETON UNIVERSITY PRESS
PRINCETON AND OXFORD
Copyright © 2000 by Princeton University Press
Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press,
3 Market Place, Woodstock, Oxfordshire OX20 1SY
All Rights Reserved
Library of Congress Cataloging-in-Publication Data
Dranove, David.
The economic evolution of American health care : from
Marcus Welby to managed care / David Dranove.
p.cm.
Includes bibliographical references and index.
eISBN 978-1-40082-468-7
1. Managed care plans (Medical care)—Economic aspects—United
States. 2. Medical care—Economic aspects—United States.
3. Public health—Economic aspects—United States. I. Title.
RA413.D73 2000
338.4¢73621¢0973—dc2100-039975 CIP
This book has been composed in Bauer Bodoni
The paper used in this publication meets the minimum requirements of ANSI/NISO
Z39.48-1992 (R 1997) (Permanence of Paper)
www.pup.princeton.edu
Printed in the United States of America
1 3 5 7 9 10 8 6 4 2
Contents
Acknowledgments
Introduction
PART ONE: THE RISE OF MANAGED CARE
Chapter 1. Marcus Welby Medicine
Chapter 2. The Origins of Managed Care
Chapter 3.The Government Steps In
Chapter 4.Managed Care Takes Over
PART TWO: THE MODERN HEALTH ECONOMY
Chapter 5. The Business of Health Care
Chapter 6. Merger Mania
Chapter 7. Quality
Chapter 8. Fulfilling the Promise of Managed Care
Notes
Bibliography
Acknowledgments
I WOULD like to thank Paul Biondi and Madeleine Shalowitz for conducting extensive
background research. I am especially grateful to my wife for letting me bounce ideas off
of her, no matter how serious or silly. Lastly, I owe a deep debt of gratitude to Alain
Enthoven, who twenty years ago encouraged me to use the lens of economics to bring
some clarity to the way we think about health care. I hope this book fits the bill.
THE ECONOMIC EVOLUTION OF AMERICAN HEALTH
CARE
Introduction
FOR THE PAST two decades, I have researched the role of market forces in health
care. As a graduate student, I was privileged to study under Alain Enthoven, one of the
leading architects of the managed care revolution. Since then, I have been on the faculty
of two outstanding business schools. I have always been a big believer in the benefits of
competition.
In this book I use an economic lens to examine the historical development of managed
care. The starting point for this analysis is the "shopping problem." Economists have long
recognized that it is very difficult for patients to shop for medical care. Patients have
poor information about what care is needed and where to buy it and also have muted
incentives to shop for the best price. The result is that patients are unlikely to be cost-
effective medical decision makers. The evolution of the health economy, from the
traditional system centered on autonomous physicians, through government planning efforts
to today's managed care organizations, represents an ongoing effort to help patients solve
the shopping problem.
When I started to write this book, I fully expected it to be a sweeping endorsement of
managed care. Indeed, I find a lot of evidence that managed care is working. By one
credible estimate, managed care is saving patients over $300 billion annually. At the same
time, there is no systematic evidence that managed care has harmed quality. Finally,
managed care has clearly won the market test, with the vast majority of privately insured
patients enrolled in some type of managed care plan. But managed care has utterly failed
to win the trust of American patients and is a favorite target of politicians on both sides
of the political spectrum. Piece by piece, politicians may legislate managed care out of
existence.
Patients do not trust managed care because they see it as an unnecessary intrusion into
the traditional physician-patient relationship. One of my goals in writing this book has
been to detail the strengths and weaknesses of the traditional relationship. Another is to
refocus the public debate about managed care. The current, simplistic view is that
managed care is a cost containment mechanism run amok. The simplistic solution is
regulation. I believe that the market forces unleashed by managed care offer opportunities
to vastly improve upon the traditional health economy by simultaneously improving quality
and containing cost.
In the eighteen months since I began this book, my optimistic view of managed care's
potential has wavered. I accept the possibility that managed care will never fulfill its
promise. But the problems with managed care come mainly from the outside. I have no
doubt that market forces can enable patients to obtain the highest quality care at low
prices, while encouraging providers to be efficient and innovative. But I see several
hurdles, largely beyond the control of managed care organizations, that must be overcome
before we reach this state of health care nirvana:
•Markets have to remain competitive, free of the power struggles emerging between
large buyers and providers. This will require vigorous enforcement of antitrust laws.
• There will need to be substantial improvements in health care data.We need better
outcomes measures and must be able to link patient- level medical records across
providers. This may necessitate government intervention, both to coordinate the
collection of data and to establish a confidential patient "identifier."
• Providers must accept that quality varies and must actively engage in quality
measurement. Quality measurement is imperfect and unfair to many providers, but
providers should rally behind the quality movement because patients stand to benefit.
• Patients must become consumers, willing to shop around for the best managed care
plans and the best providers. Patients have much to gain by doing so, perhaps their
very lives.
It seems to me that these are all necessary conditions for managed care to be
successful. If even one hurdle remains standing, patients will fail to realize the full
potential of a truly competitive health economy.
While this seems like a lot to overcome, I remain cautiously optimistic. Despite ongoing
merger activity on both the provider and the buyer sides of the market, most urban health
care markets remain competitive, and antitrust agencies continue to fight against blatantly
anticompetitive combinations. There are massive public and private sector efforts to
create sophisticated health care data systems. Providers are gradually getting used to
quality evaluation, and patients are increasingly using quality data. We can expect to see
more and better data in the future.
My optimism is tempered by the knowledge that improving data and changing attitudes
will not happen overnight. In the meantime, patients are growing impatient with
organizations that seem to do a better job of managing costs than managing care. Seeking
to appeal to angry voters, legislators will enact laws that undo the potential of managed
care.
Part One
THE RISE OF MANAGED CARE
