Can Managed Care Plans Control Health Care Costs?

Prologue: Ever since Adam Smith published The Wealth of Nations, economists have lauded the benefits of free, competitive markets. Even today the basic idea underlying much of Smith's thought—that the good of society is promoted when individuals are free to pursue their own interests—holds enormous appeal. Astute though he was. Smith could not have anticipated the complexity and the powerful interests that compose the U.S. health care system. To be sure, market structure plays a key role in determining the specific nature of competition; this in turn determines specific effects on various stakeholders. Over the past twenty years growing concern over rising health spending has prompted several states to try promoting price competition in order to control costs. In this paper Jack Zwanziger and Glenn Melnick describe the dynamics of health care competition and review recent evidence on its effects on costs in California and Minnesota. The early returns are promising. Nonetheless, in an increasingly familiar refrain, the authors state that cost reductions might be coming at the expense of quality and access. Zwanziger and Melnick have been studying the effects and determinants of competition in California for more than a decade, and their findings grace the pages of a number of respected journals. Zwanziger is an associate professor at the University of Rochester in New York, where he heads the doctoral program in health services research. He has been a consultant to RAND since 1983. Melnick is an associate professor and head of the international program for health financing and policy at the University of California, Los Angeles, School of Public Health. He is also a RAND consultant. This paper was presented at the invitational conference,“The New Competition: Dynamics Shaping the Health Care Market,” conducted by the Alpha Center and sponsored by The Robert Wood Johnson Foundation, 9 November 1995, in Washington, D.C. Abstract: The health insurance sector has been transformed in the past fifteen years, with managed care replacing indemnity insurance as the norm. This transformation was intended to change the nature of competition in the health care system so that market forces could be used to control costs. Empirical studies have shown that this objective has been met, as areas with high managed care penetration have tended to have much lower rates of increase in their costs. Creating a more efficient health care system will require additional efforts to produce useful measures of quality and to maintain competitive markets.

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