Not long ago, obtaining health care insurance was fairly straightforward for most American workers. You signed up for fee-for-service insurance (also known as indemnity insurance) through your employer, went to the doctor, filled out claims forms, and were covered for just about any medical problem.
But that process began to grow more complicated in the 1980s with the emergence of health maintenance organizations (HMOs). Employers and insurers liked the idea of managed care because it meant lower costs. For their part, many employees also embraced this new kind of insurance, largely because it seemed easier than indemnity coverage: there was little or no paperwork to fool with and there were no complicated deductibles and coinsurance.
Now that managed care has been around a while, however, people have grown increasingly unhappy with these medical plans, largely because of their coverage restrictions, and many state and federal politicians are calling for increased regulation of the industry. Is this a good idea?
Mark Pauly, Bendheim Professor and Professor of Health Care Systems and Public Policy and Management at Wharton, and Marc L. Berger, M.D., a health policy researcher at Merck & Co. Inc., argue that regulation aimed at ensuring that consumers receive information about managed care is a good idea. What are unnecessary, in their view, are laws that would mandate specific types of care or regulate quality of care.
"Regulation intended to improve the flow of information to insurance consumers is unequivocally desirable, based on either equity or efficiency grounds," the authors write in a paper titled "Why Should Managed Care and Managed Care Insurance Be Regulated?"
Consumer information is vital since managed-care insurance is actually, in many ways, more complex than old-style indemnity insurance. For instance, in addition to estimating how frequently illness will strike and what their needs will be when they do get sick, buyers also have to estimate how much care they will be allowed to have each time they become ill.
Strong legislation to regulate the type and quality of care that should be provided by employers may be unwarranted, the authors say, when buyers are well informed and when they have real choices among different plans. Informing people about managed care is critical because they typically know little about the subject. It has been estimated that employees spend no more than half an hour choosing among the health plans offered by their employers.
The kind of information that Pauly and Berger have in mind includes measures of the performance and quality of services provided by managed-care plans, along with information on the incentives provided to providers. This would include information on a plan’s practice patterns, since such data would allow people to analyze the relationship between incentives and the care that is delivered.
"Developing uniform sets of performance measures that would provide benchmarks and promote the development of both standards for both quality and incentives would help," the authors write, noting that the development of the Health Employer Data Information Set (HEDIS) is an important first step. HEDIS provides a limited but important set of measures of differences in the rates at which members of HMOs use key services, such as pediatric immunization and blood-pressure screening.
In addition to providing information about specific products, the government could also require that providers make available general advice about managed care. It could, for example, require providers to alert consumers to the fact that, by purchasing less-expensive managed-care insurance instead of traditional, fully paid Blue Cross insurance, they get less, not more, coverage.
"Managed care has suffered as much from being oversold by its advocates as being criticized by its opponents," Berger and Pauly write, "and a welcome relief would be to make available to all the opening paragraph of a true consumer report that tells consumers to expect to have to give up something to get lower premiums."
It would also be helpful if the government mandated that providers inform consumers that there is a fundamental trade-off involving managed care: workers receive employer payments for health benefits in lieu of wages and other benefits.
In their wide-ranging analysis of the factors that have led to dissatisfaction with managed care, the authors assert that the federal tax subsidy for employer-related health care may lie at the core of the consumer’s unhappiness. By having the employer use part of the worker’s compensation to pay the premium, that part of compensation can be shielded from the income and payroll taxes. In contrast, if the employer paid equivalent money wages and the employee chose the same coverage, the employee would have to pay full taxes on those wages. The consequence: this subsidy encourages most people to obtain health insurance in connection with their jobs, rather than buying it directly as they do other products and services. Pauly and Berger believe this tax policy distorts consumers’ expectations and choices with regard to managed-care insurance and thus adds to the perception that the government must get involved in regulating the quality of managed-care insurance.
"[T]his government policy [of subsidization] is harmful not only because it leads some consumers to make choices which then need regulation to (imperfectly) correct," the authors write, "but also because it leads many more consumers to the belief that their situations are not the best and that regulation could improve matters -— even if in reality it could not."
There may be better alternatives, the authors argue. The current policy of tax subsidization could be replaced with a tax credit of predetermined value that would be made available to everyone who buys insurance, whether through employers or elsewhere. Pauly and Berger say such a measure would not, as some may suspect, lead to the wholesale demise of group insurance. But it might lead some small companies that offer only group insurance because of the tax policy to change that policy and give their employees cash and choice instead. It also may encourage organizations that offer group life and pension insurance, such as the American Association of Retired Persons, to offer group health insurance to such employees.
