Health Policy Seminar 
January 28, 2000 
Lawrence D. Brown, Ph.D. "Can Managed Care Be Managed?" 
A Summary

Can managed care be managed? Lawrence D. Brown, Ph.D., Professor of Public Health Policy at Columbia University's School of Public Policy thinks it can. In a ninety-minute talk at the Leonard Davis Institute, he discussed managed competition as the cornerstone of the future of managed care. Dr. Brown argues that what currently exists is a "non-policy" of "unmanaged competition," that risks turning managed care into an "organizational contradiction in terms." The solution, according to Dr. Brown, lies in developing a cooperative arrangement between the market and the public sector that would manage competition among managed care plans, while at the same time avert market failure.

The question of whether managed care can be managed is not new. Policies to develop workable managed care solutions for the problem of rising health care costs can be traced back to the Nixon era. Since that time, the development of managed care has hinged on a seemingly paradoxical promise of offering quality care that is accessible, while at the same time keeping costs within prescribed budget constraints. According to Dr. Brown, this paradox in the context of unmanaged competition has led to market failure. He cites the Harvard Pilgrim Health Care Plan in Boston, Oxford Health Plan in New York and Kaiser Permanente as examples of failure in the managed care industry. Although each of these plans was successful in the early days of managed care, they have failed to keep up in the modern setting of unmanaged competition.

Dr. Brown's argument centered on what he termed the three "imperatives" of the current managed care industry. The first imperative is that plans must expand and enlarge their marketing service area and enrollment in order to counter competition and secure market share. However, growth into new areas breeds new styles and patterns of consumption that make it difficult for plans to predict their costs and to deploy their resources effectively. In this sense, managed care organizations are gaining market share at the expense of efficiency.

The second imperative is that plans must innovate ceaselessly and differentiate their products in order to please consumers. Yet, continuous innovation can lead to less organizational control, less stability and less ability to predict costs. For example, when plans continually alter physician payment systems they lessen their ability to predict costs accurately.

The third imperative is that plans must set premiums competitively. However, this can lead to risky accounting in the form of pricing below costs or not paying physicians on time. Essentially said Dr. Brown, competitive pricing "puts the market at the risk-taking psychology of organizational entrepreneurs." An example of the downfalls of competitive pricing is the metro-Boston area market, where plans are suffering as employers are having a "feeding frenzy" because of rock-bottom premium prices induced by unmanaged competition.

While these strategies are imperative for a firm to stay competitive, taken together they "jeopardize the whole managed care experience," by inducing market failure. Market failure can be attributed to many causes, but the prime suspect, he said, is "cherry picking" by managed care plans. The growing number of uninsured Americans also indicates market failure. Although the economy is booming and health care is more affordable, the number of Americans without health insurance continues to increase. The solution for market failure, argues Dr. Brown, is cooperation between the market and the government. The government can help to avert market failure by providing standard benefit packages, community rating and information on health plan quality. Essentially, said Dr. Brown, we need to use "our management knowledge to make a better managed care system and rely less on market forces."

From a political perspective, the time may be right for some level of cooperation between the government and the market. Dr. Brown alluded to the ill-fated Clinton health plan, and remarked that the "legacy of government debacles is coming to an end." The current political climate makes it possible for the government to take up the cause of health care reform once again. Indeed, managed care reform is a hot topic in all branches of the government, at both the state and federal levels. Most states have passed patient bills of rights in recent months, and are looking for legislative solutions to problems caused by mismanagement of managed care organizations.

Dr. Brown also commented on the successes and failures of managed care and managed competition in Europe. In health care systems that provide universal coverage, such as the British and the Dutch systems, he noted the difficulty those countries have had in "getting market elements off the ground." He noted that both Britain and Germany have tried to introduce competition into their health systems, with mixed results. Recently, the Labor government in Britain enacted reforms that stress cooperation among providers and purchasers, rather than competition. For more information please see the October 1999 edition of the LDI Issue Brief, "Managed Competition: Lessons from Britain" by Donald W. Light, Ph.D.

The results of competition are less clear in Germany. In 1993 the German government began to experiment with managed competition by passing legislation that gave Germans the right to choose among the various sickness funds (insurers), and required sickness funds to compete for market share. While some have credited competition with keeping health care costs down, Dr. Brown remarked that it is competition under highly structured conditions set by the government. For more information, please see Dr. Brown's article, "Manacled competition: market reforms in German health care," in the May-June 1999 issue of Health Affairs.

Biosketch:  Lawrence D. Brown

Lawrence D. Brown, is a professor in the Division of Health Policy and Management at The Joseph L. Mailman School of Public Health of Columbia University.  He received a Ph.D. in Government from Harvard University.  Before coming to Columbia in 1988, Mr. Brown was a Senior Fellow in the Brookings Institution's Governmental Studies Program, and a professor at the University of Michigan's School of Public Health, where he directed the PEW Trust Health Policy Program.

Mr. Brown is a member of the National Advisory Committee of the Robert Wood Johnson Foundation's Investigators Program, the United Hospital Fund's President's Council, and the board of the Community Services Society.  He serves on the Committee on Medicine and Society of the New York Academy of Medicine and as a research advisor to the Center for Studying Health Systems Change.  From 1984-89 he was editor of the Journal of Health Politics, Policy and Law.

Mr. Brown is author of Politics and Health Care Organization:  HMOs as Federal Policy, (Brookings, 1983) and various monographs and articles.  He writes on competitive and regulatory issues in health, on the politics of state and national strategies to achieve affordable universal coverage, and on the uses of policy analysis in the policy process.  Current research projects include:  an assessment of the institutional capacities of the states to pursue health reform, the implications of managed care in Medicaid, the political prospects for universal health coverage for children, patterns of cooperation between managed care plans and academic medical centers, and the diffusion of health policy innovations between the United States and other nations.

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