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President's Column

Competition in health care: a look at what went wrong

From the March 1999 ACP-ASIM Observer, copyright © 1999 by the American College of Physicians-American Society of Internal Medicine.

By Harold C. Sox, FACP

A well-known ethicist has said that he has yet to see any benefits from a market-driven health care system in the United States. Indeed, the environment for giving and receiving care has deteriorated under the market-based system.

In this article, I will explore a root cause of this failure: Health plans have little incentive to compete on the basis of quality of care, and most have become too large and heterogeneous to do so. I will draw on an article by Robert A. Berenson, FACP, director of HCFA's Center for Health Plans and Providers, from the November/December issue of Health Affairs.

The market-driven model posited that competition between organizations should drive health care costs down while maintaining high quality. Employers and other large-scale purchasers would choose among bids submitted by competing health plans, looking for a blend of low cost and high quality, to make their choice. Health plans would control the content of care or risk losing business.

So far, this system has controlled costs. For the last five years, medical costs have risen approximately 2% per year in the private insurance sector, much lower than in Medicare. The price, however, has been angry patients and despairing doctors. The health plans are hurting too, and many have disappeared, either because of bankruptcy or mergers.

Lack of incentives

Three reasons underlie the lack of incentives to compete on the basis of quality of care. For one, employers are part of the problem because most choose one health plan for their employees, principally or solely on the basis of low cost. They offer employees a choice between different products of one health plan. Employees have no opportunity to choose between health plans on the basis of the plans' ability to provide high quality care. In effect, employers make important choices for their employees, an attitude that reflects the days of the company town.

A second reason is patients' strong desire to freely choose a physician, which, paradoxically, can also undermine competition on the basis of quality of care. Health plans used to be highly selective in choosing physicians to join their network, presumably to get a team of the best doctors and perhaps also to keep the network to a manageable size. It wasn't long, however, before patients gave the health plans a wake-up call. They wanted a wide choice of physicians, presumably to guarantee that their doctor would be on the panel of the health plan chosen by their employer.

Employers' decision to favor health plans with large networks discourage plans from competing on the basis of having the best doctors. Large physician networks also make it difficult to implement innovative clinical programs to manage cost and quality. As a result, health plans have found it much easier to use tough, inflexible rules and bureaucratic hassles to control clinical practice and keep costs down.

A third factor that discourages health plans from competing on the basis of quality is the fungible nature of health care innovation: You can't patent innovative programs. Good ideas disseminate widely, removing a competitive advantage for health plans that invest heavily in developing good ideas to improve quality.

Why are these issues important to physicians? Competition on the basis of cost alone is bad for both physicians and patients. Health plans are managing care by using rules that create barriers to care. Instead of competing by improving the practice of medicine, health plans compete by making practice less efficient and more burdensome.

Of equal importance, health plans, lacking incentives to do otherwise, invest too little energy in structuring practice to encourage quality. Just imagine the outcome if plans spent half of the effort they put into cost control on measures that would improve patient care!

Solutions

What can be done to put this situation right?

First, those who pay for health care must offer employees a choice of health plans and allow patients to make choices that may mean paying more for better quality care. Employers stifle competition on the basis of quality when they choose one health plan for their employees.

Second, employers must require health plans to provide prospective enrollees with information about the quality of services that they provide. Plans should provide outcomes information and results from patient surveys.

Third, innovation will thrive in smaller physician networks. If employers allowed employees the choice of several health plans, each of which had a relatively small network, patients would still have access to a large number of physicians and could choose by weighing cost, quality and access to a preferred physician.

Many will agree that a market-based, competitive health care system has brought nothing but trouble. Indeed, some are beginning to wonder what form the health care system will take when market-based health care finally fails. Perhaps the failure of the competitive, market-based system is the result of using the wrong measures for decision-making. If employers trusted their employees, who comprise the true marketplace, to discern quality in health care, the situation could change for the better.

On that optimistic note, kind reader, I end my term as your correspondent in these pages. Please welcome my successor, Whitney W. Addington, FACP, whose columns will appear in this space beginning next month.

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