Academic journal article The Cato Journal

Defined Contribution: From Managed Care to Patient-Managed Care

Academic journal article The Cato Journal

Defined Contribution: From Managed Care to Patient-Managed Care

Article excerpt

After more than a decade of extraordinary turbulence in the financing and delivery of health care, it is sobering but probably accurate to anticipate even greater challenges in the near future. Indeed, one commentator has ventured that health care is heading for its own "perfect storm" (Miller 2001). After years of increasingly desperate attempts to centralize control over medical decisions and dollars, the next phase may take us "forward into the past" in ways that will finally reunite patients with their own health, health care, and health care dollars.

A bit of history will suggest how this is likely to play out. Lavish health care funding beginning in the mid-1960s led to decades of unrestrained spending, followed by desperate but unsuccessful attempts to contain costs. In the 1990s managed care introduced business concepts hitherto largely alien to the world of health care. The result was a much-needed taming of expenditures, but at the price of denials, delays, and inconveniences that sometimes were medically, personally, politically, and even economically counterproductive. Although health care clearly needed business discipline, many of the tools of managed care came from people who had considerable experience with businesses such as insurance, but relatively little experience with the clinical nuances of health care.

Managed care's most notorious tactics quickly faded, partly via public backlash and partly as the late 1990s economic boom required employers to lure and keep good workers with generous health care benefits alongside hefty salaries. This phase, too, was short-lived, as the most recent economic slowdown now prompts yet another reexamination of the ways in which health care is financed and delivered.

Promising changes are afoot, particularly via "defined contribution" plans that bring patients into closer contact with the costs of their care and thereby into greater control over the content of their care. This development provides an important opportunity to address important, longstanding flaws in the U.S. health care system.


U.S. health care has several fairly distinct eras that need only brief summaries here (Start 1982, Butler and Haislmaier 1989). Prior to World War II, health care was not costly because physicians had relatively little to offer. It was the era of Modest Medicine. But during the wartime years of the 1940s and continuing throughout the postwar era, first-dollar insurance coverage became a standard benefit. Workers and their families came to expect that health care should never cost anything out of their own pockets. At the same time, several factors spurred a rise in health care costs that placed health care beyond the reach of most people's pockets.

The 1965 enactment of Medicare and Medicaid brought large additional populations within the fold of the fully insured and, in the process, made standard some insurance practices that ensured ongoing price inflation. Retrospective fee-for-service (FFS) reimbursement paid for virtually any service rendered, as insurers were reluctant to challenge providers' judgments about what care should be provided. At the same time, physicians and hospitals that were now paid according to "usual, customary, and reasonable" (UCR) fee schedules quickly discerned that health care could be very lucrative if they usually, customarily, and ever-so-reasonably charged very high fees (Roe 1981; Delbanco, Meyers, and Segal 1979). As private insurers quickly adopted the same reimbursement practices, health care came to be financed by an Artesian Well of Money in which physicians and patients could do virtually whatever they wanted, safe in the knowledge that money was no obstacle. Moreover, by deeming virtually any new drug, device, or procedure "medically necessary" and thus a covered benefit as soon as it received either government approval or physician acceptance, those insurance policies also fueled the furnaces of technology. …

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