Despite a once-in-a-generation opportunity, the Clintons are poised to slam the door on single payer national health insurance and embrace a corporate welfare approach with the oxymoronic name: "Managed Competition."

Managed Competition would:

  • Use tax penalties to push all but the wealthy into stripped down, basic group health plans.
  • Deprive most patients of the right to choose their own doctor and hospital, completing the transformation of American medicine from one-on-one doctor-patient relationships to a medical system controlled by enormous corporate bureaucracies.
  • Assure a multi-tiered health care system, separate and unequal.
  • Perpetuate the private health insurance industry, the principal cause of the crisis
  • Fail to contain costs.

Originally proposed by Stanford Business Professor Alain Enthoven, versions of Managed Competition have been endorsed by Bill Clinton, George Bush, the New York Times (in no less than 23 editorials), several business and insurance organizations, the American Hospital Association, and even some liberals like Paul Starr. This powerful coalition, conspicuously lacking grass roots support, hopes to broker a deal: protect insurers and the most powerful providers, and shift costs from big business to small business and workers.

If You Can't Convince 'em, Confuse 'em

Managed Competition proposals differ in details, but all are complex, and for most people incomprehensible. This opacity obscures the central theme - find a way to keep insurance giants such as Aetna and Prudential at the heart of health care.

Under most Managed Competition proposals government would define a standard minimum benefit package. Large employers would contract for this coverage for their employees, and Health Insurance Purchasing Cooperatives (HIPCs) would contract with private insurers on behalf of small employers, the self employed and unemployed (including current Medicaid recipients). Tax deductions for employer-provided health insurance would be capped at the cost of the cheapest plan (presumably a bare-bones HMO), creating a steep financial penalty for choosing costlier alternatives. Thus, for all but the wealthy Managed Competition would circumscribe the patients' choice of doctor and hospital to a narrow list prescribed by their employer or their HIPC.

Managed Competition theory ascribes the soaring cost of health care to overinsurance. Americans, too insulated from the costs of care, are choosing to be profligate health care consumers. Hence they must be forced to be more cost conscious in purchasing insurance (by taxing employer-provided coverage), and aided (through the HIPCs) in bargaining with insurers. The powerful HIPCs would lean on the insurance companies/HMOs to lower premiums. They, in turn, would discipline doctors and hospitals by denying contracts to any who refused to comply with insurance company cost-cutting directives. Since a few managed care plans, giants like Aetna and Prudential, would enroll virtually all patients in a region, providers denied contracts would be forced out of business/practice, as would small insurers and HMOs. The belief in overinsurance remains unshaken by data showing that Americans pay the world's highest out-of-pocket costs, while receiving fewer doctor visits, hospital days, and even transplants than do Canadians or people in several other nations with much lower health care costs.

Various proposals offer different wrinkles on the basic Managed Competition structure. Enthoven would require all employers to pay for 80% of the cheapest available coverage (or to pay a tax to the HIPC), and suggests lowering the minimum wage 8% to cushion the impact on employers. More liberal versions of Managed Competition offered by California Insurance Commissioner John Garamendi, Senator Bob Kerrey and Paul Starr, aim to eliminate most employer-based coverage. Instead, HIPCs would contract with private insurers for virtually all coverage, with most funding from payroll taxes. Employer contributions toward the extra cost of better plans would be taxable under all of these proposals.

The Heritage Foundation's rendition would omit requirements that employers contribute to coverage. It would eliminate all tax deductions for employer-paid coverage, encouraging a shift of benefit dollars into wages. Government would stimulate the formation of HPICs, provide subsidies for the poor, and require all individuals to purchase coverage.

Subscribe to The American Prospect


Managed Competition has never worked anywhere. Its pro-managed care, pro-competition strategy represents merely an intensification of government and corporate policies that commenced with Richard Nixon's HMO act of 1973. Indeed, Paul Ellwood, convener of the Jackson Hole Group that is leading the Managed Competition charge, coined the term "HMO" in the early 70s, and personally sold Nixon on the concept as a counter to Ted Kennedy's single payer national health insurance proposal. Despite 20 years of failure, Managed Competition advocates see light at the tunnel's end, and suggest that we press on.

The rapid expansion of HMO's in the past two decades (about 40 million people are now enrolled in HMOs and more than half of all employees are covered by some form of managed care) has coincided with unprecedented cost increases. One-third of all Californians are enrolled in HMOs, and more than 80% of all employees are covered by some form of managed care. Yet costs there are 19% above the national average and rising more rapidly. Massachusetts and Minnesota, the second and third highest HMO penetration states, have similarly undistinguished cost records. Nationwide, premiums for HMOs are rising at virtually the same rate as traditional Blue Cross and other indemnity insurers' premiums.

Over the past decade a growing number of big employers and state Medicaid programs have engaged in the kind of hard bargaining envisioned for Managed Competition's HIPCs, with no noticeable effect on health care costs. The Federal Employee Health Benefits Program (FEHBP), touted by the Heritage Foundation and others as a model for Managed Competition, has averaged double digit rate increases since 1984; its costs rose faster in the 1980's than overall health care costs. Furthermore, because the FEHBP fixes the government's contribution and requires employees to bear the full extra cost of better plans, the predictable income gradient has emerged in coverage; higher income workers have better health plans. Similarly, the California Public Employees' Retirement System (CALPERS), Enthoven's current favorite exemplar of Managed Competition, had cost increases exceeding the national average for three of the last five years. Moreover, CALPERS' lower premium increases in the past two years may just mean that costs were shifted to employees via higher out-of-pocket costs, or to non-CALPERS insurance purchasers.

This catalog of failure has been assembled mainly in urban areas, a setting where Managed Competition theory is at least plausible. But in smaller cities and rural America, population is too sparse to support even a semblance of competition. A town's only HMO or hospital cannot compete with itself. The minimum feasible size of a comprehensive HMO is 200,000 to 300,000 enrollees. Only 50% of the U.S. population lives in metropolitan areas able to support two or three HMOs, ie. with populations greater than 600,000. Yet even this population density does not guarantee real competition. Two or three HMOs that dominate a market will be tempted to collude in raising prices, enlarging the pie of health care dollars rather than fighting for the biggest piece. Hence, in much, perhaps most of our nation the price competition fundamental to Managed Competition is inconceivable. A single-payer, regulatory approach is the better cost-containment mechanism.

Managed Competition would be further undermined by insurers' efforts to attract healthy enrollees, so-called risk selection. Since 10% of the population consumes 72% of health care, the easiest way for insurers/HMOs to undercut their competitors' prices is to quietly avoid enrolling sick people in the first place, and drive away the chronically ill by offering unsatisfactory care. Immense financial reward accrues to insurers that successfully avoid risk, assuring extraordinary efforts to circumvent regulatory bans on risk selection. Although managed competition in principle requires open enrollment, such requirements for open enrollment. Place sign-up offices on upper floors of buildings with malfunctioning elevators. Refuse contracts to providers convenient to neighborhoods with high rates of HIV (an example of medical redlining). Structure salary scales to assure a high turnover among physicians; the longer they're in practice, the more sick patients they accumulate. Assure the easy availability of services for the worried well, and inconvenience for those with expensive chronic illnesses. In Medicare's HMO Demonstration Project regulatory oversight did not avert even flagrant abuses. Predictably, the HIPCs' efforts to adjust the capitation fee for predictors of health risk will be no match for the creative and subtle means devised by unscrupulous insurers/HMOs to avoid the sick. Millions will be spend on consultants who assist in targeting the most lucrative sub-markets. In a competitive environment, insurers that lower their costs by effectively dodging health problems are sure to succeed, those that tackle them are likely to fail.


According to the General Accounting Office, a Canadian-style, single payer system would save enough on administrative overhead to cover all of the uninsured and eliminate all co-payments and deductibles. The single payer approach would sharply cut the $50 billion spent annually on insurance overhead by eliminating marketing costs, efforts at selective enrollment, stockholder's profits, executives' exorbitant salaries, and lobbying expenses. In contrast, Managed Competition is likely to increase insurance overhead costs (as Enthoven forthrightly stated in the past). Current Medicaid enrollees would be shifted from a public program with overhead of 3.5%, to private insurance where overhead averages 14% (Canada's program runs for less than 1% overhead). All of the new coverage would be purchased from wasteful private insurers, and administrative costs in managed care plans are no lower than in other forms of health insurance. Prudential's managed care plan in New Jersey employs 18 nurse reviewers and 5 physician reviewers; 8 provider recruiters; 15 sales representatives; 27 service representatives; and 100 clerks to administer a program enrolling 110,000 people.

Moreover, Managed Competition would add yet another layer of bureaucracy-the HIPCs. Instead of buying coverage directly from an insurer/HMO, most businesses and individuals would contract with a HIPC, who would contract with insurers, who would contract with doctors and hospitals. The pattern familiar from each attempted reform of the health insurance system over the past quarter-century seems likely to recur. New bureaucrats will join rather than replace their predecessors.

Starr argues that administration can be cut by winnowing the insurance industry to a few mega-firms, mandating electronic billing, and consolidating small group and individual policies that have traditionally had high overhead costs. But big insurance firms' overhead is as high as small ones'. Electronic billing saves little for insurers, who are already largely computerized, and only a pittance for hospitals and doctors (Bush's HHS Secretary, Sullivan, claimed potential savings totaling only $8 billion over 5 years). The larger insured-group size may indeed save insurance company overhead but only because the HIPCs have taken over the task (and expense) of assembling the groups. Overall, Managed Competition would strengthen the position of insurance companies by greatly increasing their leverage over providers. Only wishful thinking can project that insurance firms will use their increased power to lower their rakeoff, viz. overhead costs.

The single payer approach would save additional billions on hospitals' and physicians' billing-Managed Competition, virtually none. The Canadian system pays hospitals on a lump sum basis, like a fire department in the U.S., eliminating per-patient billing, and hence the need to attribute costs for each aspirin tablet to individual patients and insurers. As a result Canadian hospitals spend little on billing and internal cost tracking, and less than 10% of their total budgets on administration; U.S. hospitals spend more than 20%. Winnowing the number of insurers to a handful, as promised under Managed Competition, would save little on hospital billing, and nothing on internal cost tracking. Most savings come in the move from two insurers to one. Moreover, intensifying insurers' oversight of clinical practice, as promised by Managed Competition, would increase the bureaucratic burdens for most hospitals and doctors. The Mayo Clinic already employs 70 full time people just to talk on the phone with managed care utilization reviewers.

Because it bypasses administrative savings that would be available under a Canadian-style system, Managed Competition can only expand access by increasing health spending. Enthoven estimates that his approach would require about $25 billion (in 1992 dollars) in new spending in the first year. Clinton's health transition team was demoted for saying this estimate was too low.


Stripped of rhetoric, Managed Competition is a plan to save the biggest private insurance companies, and sacrifice patients' rights to choose their doctor. It would ensconce a highly bureaucratic health care system, rigidly stratified by income. Its theoretical precepts are irrelevant to rural America and to small cities--to half of our nation.

The rosy image of universal coverage under clones of today's best HMOs is hardly germane. Managed Competition cannot mean top quality consumer-responsive plans like Group Health Cooperative of Puget Sound, nor even Kaiser, for everyone. Even these HMOs produce one-time savings, but they haven't slowed the rate of growth of health costs. Managed Competition means far more stringent limits on care. Massachusetts' Bay State HMO offers a more realistic future glimpse. Facing financial failure, the plan suddenly fired hundreds of psychiatrists. Their patients were instructed to call the HMO's 800 number and describe their psychiatric difficulties; a new mental health provider would be assigned. Under Massachusetts Medicaid's Managed Competition-style selective contracting, mental health services are covered. But in Springfield contracts were denied to all Spanish speaking providers, and even to those with translators. From Cambridge, an alcoholic in withdrawal must travel at least 40 minutes for Medicaid-financed care, passing a dozen hospitals en route.

Managed Competition has powerful appeal to big insurance firms, and to all whose inner voice whispers the same answer for every question: "the marketplace." But no poll or survey shows a trace of grass roots support. Bill Clinton's pollster, Celinda Lake, summarized her focus groups' views of Managed Competition: "laughable." According to Harris polls (and many others) seventy percent of Americans favor the single payer approach covering all equally, and most understand that the higher taxes would be entirely offset by lower premiums.


Senators, Congresspeople, and Washington policy wonks privately whisper: "Of course single payer would be best, but its unrealistic." First of all, they argue, people won't put up with the new taxes (even though, for most, their total cost of health care - taxes + premiums + out-of-pocket costs - would go down). Second, the opposition from powerful interest groups is insurmountable. In 1993 health care is a $939 billion cash cow for insurers, drug companies, doctors and hospitals. A single payer system would virtually wipe out the $300 billion a year health insurance industry. It means confronting the drug firms with a single purchaser with the clout to drive prices down. For doctors it means an end to soaring incomes; negotiations with government to set their fees and total receipts (though also an end to most of their paperwork and bureaucratic hassles); for hospitals, a capped global budget (though also huge administrative savings from eliminating the need to bill for each patient). Paradoxically, managed competition would also antagonize many doctors and hospitals, but can promise neither relief from bureaucracy nor a durable solution to the health care crisis.

To do the right (and popular) thing, politicians must betray their financial patrons; the health and insurance industries are among the largest campaign contributors. Politicians' aversion to the tax increases needed for a single-payer system ignores the fact that most Americans support a tax-based system, and easily comprehend that a $1000 tax (that would preserve their freedom to choose their doctor) is not more odious than a $1000 insurance company premium (with sharply restricted choice). Ironically, Clinton ran (rhetorically at least) against the insurance industry; has already floated the idea of a progressive (though ageist) tax on the elderly to finance health care; is signalling an attack on drug firms for price-gauging on vaccines and other drugs; and seems poised to follow Starr's advice and combine Managed Competition with price controls and budgetary caps - a combination more disturbing to doctors than the single payer approach that would similarly limit their incomes, but not force them to become insurance company employees. Unfortunately, Clinton's feather ruffling that extends to drug companies, hospitals, doctors, and even to small insurers (who would be wiped out by Managed Competition), stops short of the insurance giants who would run Managed Competition - an ommission that utterly sabotages the whole policy. Managed competition is an interest-group deal. Varnishing this unfortunate truth with populist rhetoric discredits liberalism and the surest way to disappoint a citizenry whose hopes have been raised, and to elect Jack Kemp in 1996.

You may also like