In May 1974, a committee appointed by the newly founded Institute of Medicine ("IOM") of the National Academy of Sciences published a report on health maintenance organizations ("HMOs") entitled HMOs: Toward a Fair Market Test. (1) That report was notable as an early endorsement, by an organization somewhat representative of the health care establishment, of HMOs as desirable additions to the health care scene. Perhaps more significantly, the report went beyond merely embracing HMOs as promising alternative vehicles for financing and delivering health care, and emphasized the potentially bracing effects that HMO competition might have on the health care system as a whole. (2) The use of the word "market" in the report's title was another precursor of the new departure that would occur in American health policy in the late 1970s, in the direction of greater reliance on competition and consumer choice. In retrospect, one might see the IOM report, with its suggestive title, as helping to launch a quarter-century -long natural experiment to determine the value not only of HMOs and other forms of managed care (3) but also of free-market principles in caring for people's health. (4)
END OF AN EXPERIMENT?
If one were in fact to view the last two and a half decades as an experimental trial of managed care and market mechanisms in the health care sector, the measured results of that "fair market test" would appear moderately encouraging. In the 1990s, when managed care finally became dominant in many health care markets, the rate at which health care costs in the United States rose, relative to other costs was, for the first time in modern history, brought into line with the growth of gross domestic product ("GDP"). Thus, from 1993 through 1998, the share of GDP devoted to health care stabilized around 13.6%, after having claimed more than a quarter percent more of GDP, on average, in each of the twenty-eight years since 1965. (5) Although GDP itself grew especially fast in the period from 1993 to 1998 (making it easier to absorb the increases in health costs that did occur), (6) inflation-adjusted health spending was under unprecedented restraint, growing less than 3% each year from 1995 to 1997; premiums for p rivate health coverage rose only 2.8% in 1995, 3.3% in 1996, and 3.5% in 1997, after growing at double-digit. rates in most of the 1980s. At the same time that cost increases were seemingly under effective control, (7) studies of industry performance detected no net adverse effects of managed care on the outcomes of health care or on other measures of overall quality. (8) To be sure, one might have expected increasingly hands-on management of the health care enterprise to yield net quality improvements as well as cost control, rather than merely holding the line against deterioration. (9) But the objective evidence at least reassures us that the money saved in the experiment with managed care probably came without a net lowering of quality.
Notwithstanding these promising results from two decades of experimentation with market mechanisms, recent market and policy developments make it seem that managed care flunked its "fair market test." (10) The role of managed care has been, or is currently being, drastically curtailed as both employers and government take action to limit the tools that managed care firms can use to resist cost increases. On the one hand, some employers, responding to employee perceptions and complaints, have begun to question the methods employed by health plans and to press plans to adopt less restrictive arrangements. (11) On the other hand, the greatest restrictions on health plans are not those imposed voluntarily by the industry's customers but the mandatory ones increasingly found in state and federal legislation, including pending federal patient protection legislation. (12) The latter bill not only would impose new regulatory requirements at the federal level but would also lift some previous bars to state authority o ver employer-sponsored managed care plans. …