Parsing the Managed Care/HMO Difference

"[Shannon Brownlee] thinks that managed care has the potential to be more efficient than our current fragmented system. Fine. But as an economist, I am inclined to ask why the market has not evolved toward managed care." --Arnold Kling, TCS Daily

Words matter in health-care politics, and the confusion around the terms "managed care" and "HMOs" (health maintenance organizations) perfectly illustrates why. I don't think managed care has a prayer of being more efficient than our current fragmented system. I do think HMOs are superior, and any serious student of American health-care policy, and Arnold Kling is clearly one of them, needs to know the difference.

There are only a few real HMOs in the U.S., the best known being Kaiser Permanente, which is based in Northern California, and Group Health of Puget Sound, in Seattle. A cousin of the HMO, the salaried group practice, is only a bit more common, with notable examples including the Mayo Clinic in Rochester, Minnesota, and the Marshfield Clinic in Marshfield, Wisconsin. These two types of organizations share several key qualities. First, their physicians are salaried, though they differ in how they get paid. HMOs are "prepaid" -- they are provider and payer rolled into one. Group practices bill insurers as if they were fee-for-service providers, but they divvy the receipts among their salaried physicians, thus insulating physicians to some degree from the financial incentive to overtreat patients.

Aside from their different methods of receiving payment, HMOs and group practices have several key characteristics -- characteristics that insurers failed to emulate when they created managed care, and that make HMOs and group practices distinct in both motivation and health quality from their managed care successors. First, HMOs and group practices are multi-specialty groups -- there are different kinds of doctors practicing within one organization. Second, the physicians who join these practices do so knowing they will be expected to cooperate with one another when it comes to caring for an individual patient. Third, they willingly submit to "utilization reviews," which monitor their individual practices and encourage the use of the best medical evidence. As a result, group practices and HMOs tend to do a better job of delivering needed care and avoiding care that won't help the patient -- which is a pretty good definition of quality.

Managed care, on the other hand, was simply a payment system created by the health insurance industry -- a system doctors and patients alike came to hate, often for good reason. Way back in the 1970s, the insurance industry realized that group practices and HMOs were more efficient than indemnity insurance. In other words, the HMO-group practice model produced higher quality care for lower cost. So the industry figured it could save money, too, simply by giving doctors in private practice incentives to act a little bit more like they were members of group practices.

It didn't quite work out that way. The insurance industry treated the organizational structure of the group practices and HMOs a little like a Chinese take-out menu, taking a little from column A, and a little bit from column B, rather than truly reverse-engineering how the different aspects of a successful salaried group practice work together. Then they imposed the resulting, somewhat inchoate, mess on doctors, the majority of whom were in solo practices or very small groups of less than three physicians. For instance, managed care told primary care physicians it wanted them to be the "quarterbacks" of patient care, the gatekeepers who were supposed to manage complex cases in order to cut down on unnecessary referrals to high-priced specialists. Then it cut reimbursements to primary care doctors, thus driving them to increase the number of patients they saw per hour and making it difficult to spend the time necessary to manage those complex cases.

The result was angry doctors and angry patients. It turns out patients don't like being told they have to see a different doctor every time their employer changes insurance carrier. And you can't just throw a bunch of doctors in private practice together into a virtual group and expect them to coordinate care like physicians do in a real group practice or an HMO. Physicians who work in true HMOs and group practices are a self-selected bunch of do-gooders. Most HMOs and group practices were founded by idealists, and many of the systems they use to ensure high-quality care -- like utilization review, and coordinating care through primary care physicians -- don't sit well with the more entrepreneurial types in private practice.

Not surprisingly, managed care replicated neither the culture of true group practices nor their ability to control costs, and its failure to deliver on its promises of lower costs and greater efficiency should make it clear why the market hasn't fostered its spread. But why hasn't the market encouraged the proliferation of HMOs and group practices? Or to rephrase Arnold Kling's question, if the group practice-HMO model is so great, why aren't there more of them?

I'm no economist, but I think a central tenet of economics is, "You get what you pay for." The reason group practices and HMOs haven't flourished is that the market isn't set up to pay them. There isn't an insurer in this country, including Medicare, which consistently pays doctors and hospitals for the quality of care they provide. They pay for quantity. They pay for the volume of individual services provided, not for the value of those services to the patient. As Michael Hillman of the Marshfield Clinic recently put it, our current payment system "is like buying a car based on how many parts it has and how long it takes to make it, without considering how well it runs.'' So even though HMOs and group practices have in effect built the equivalent of a better car, the market doesn't give a rip.

Patients don't care either, partly because they are insulated from the cost of medicine, so they have little stake in getting good value for their dollar. But they also have a bias against HMOs and group practices because the American Medical Association has spent the last century telling them that HMOs and group practices offer inferior care. The AMA's rallying cry has been the almighty "doctor-patient relationship." This might sound like a motto based on the needs of patients, but what it has meant in practice is the AMA has trumpeted the rights of individual doctors in private practice to treat patients as they see fit, without interference from the government or their peers, and more importantly, to charge whatever price the market will bear. According to the AMA, anything that resembles organized medicine, including group practices and Medicare, is a Commie plot to saddle us with socialized medicine -- and constrain physician incomes.

So some attitude adjustments are in order. In the meantime, there are ways to get the market to pay more attention to quality. Medicare is experimenting with a demonstration program that is sharing savings with group practices that show they can simultaneously deliver higher quality care than the rest of the system at a lower cost. And the press is finally starting to let the American public in on medicine's best-kept secret: When it comes to health care, more isn't necessarily better, but being more organized is.

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