The Economic Evolution of American Health Care: From Marcus Welby to Managed Care

The Economic Evolution of American Health Care: From Marcus Welby to Managed Care

The Economic Evolution of American Health Care: From Marcus Welby to Managed Care

The Economic Evolution of American Health Care: From Marcus Welby to Managed Care


The American health care industry has undergone such dizzying transformations since the 1960s that many patients have lost confidence in a system they find too impersonal and ineffectual. Is their distrust justified and can confidence be restored? David Dranove, a leading health care economist, tackles these and other key questions in the first major economic and historical investigation of the field. Focusing on the doctor-patient relationship, he begins with the era of the independently practicing physician--epitomized by Marcus Welby, the beloved father figure/doctor in the 1960s television show of the same name--who disappeared with the growth of managed care. Dranove guides consumers in understanding the rapid developments of the health care industry and offers timely policy recommendations for reforming managed care as well as advice for patients making health care decisions.

The book covers everything from start-up troubles with the first managed care organizations to attempts at government regulation to the mergers and quality control issues facing MCOs today. It also reflects on how difficult it is for patients to shop for


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 costeffective 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 . . .

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