Stanford Professor Alain C. Enthoven was the architect of the health-care concept known as “managed competition” back in the 1970s, when he served as a consultant to President Jimmy Carter’s administration.

In two seminal papers published in The New England Journal of Medicine in 1978, the economist proposed a health-care market full of one-stop-shops modeled on the Kaiser Permanente system. 

Each would have physicians, hospitals, labs and pharmacies together in one system so patients could get most of their care in one place. These organizations wouldn’t be paid for each test, visit or procedure, but instead would get a fixed amount per member each month, while their doctors would earn a salary instead of being paid by the service.

Enthoven, PhD, MPhil, argued that traditional fee-for-service payment rewards doctors and hospitals for doing more—more tests, more visits, more procedures—whether patients need them, thereby driving up costs.

Managed competition, he maintained, would set up the conditions for these systems to grow, and have them compete for members. To win customers, each one would seek to offer better care at a lower price, and patients would come out ahead.

Though parts of the concept were proposed by the Clinton administration and adopted in Obama's Affordable Care Act, the strategy never really took off.

In a perspective published in Medical Care Research and Review, Enthoven and Sara J. Singer, PhD, MBA, explore how managed competition once seemed so promising—and what held it back.

“Despite great promise, managed competition remains largely unrealized in the United States today,” writes Singer and Enthoven, the Marriner S. Eccles Professor of Public and Private Management, emeritus, at the Stanford Graduate School of Business (GSB), and senior fellow emeritus (by courtesy) at the Freeman Spogli Institute for International Studies (FSI).

“We offer potential paths forward for policymakers and purchasers that could create favorable market conditions, including market structures supporting managed competition, such as health insurance marketplace exchanges, which could enable integrated delivery systems to compete on value and thrive,” writes Enthoven and Singer, professor of health policy and of medicine, as well as professor of organizational behavior (by courtesy) at the GSB, and a senior fellow (by courtesy) at FSI.

The Potential

When Enthoven introduced the managed competition strategy, it was a different market. Most physicians in the 1970s still practiced alone or in small groups and were paid a fee for service. They treated their patients in hospitals that were typically independent and saw doctors as their main customers and insurers paid for care from any doctor or hospital. The main exception was Kaiser, which ran its own facilities and physician groups, required members to get care within its system, and was prepaid a fixed amount per member. 

Managed competition envisioned a set of integrated delivery systems (IDS) modeled on Kaiser: each would provide a broad range of care within a single system, be paid per member per month through an integrated insurance arrangement, and pay physicians salaries. 

“Although this payment arrangement raised concerns regarding maintaining physician productivity, many preferred salary to the cost-increasing incentives associated with fee-for-service payment for aligning with purchaser and consumer goals (Robinson, 2001),” Singer and Enthoven said. “Managed competition aimed to provide a structure within which such organizations would develop, and simultaneously, competition among them would lead to beneficial outcomes for consumers.”

The strategy depended on three conditions that would align insurers and providers with the interests of consumers and purchasers:

• Consumers must have a choice of health plans.
• Consumers who choose a more costly plan must pay the full difference in premium.
• And plans must compete on price and quality—not by cherry-picking healthy customers or avoiding competition.

At the time, managed competition felt promising and the model was adopted by prominent purchasers, including the Federal Employees Health Benefits Program (FEHBP), the Health Benefits program of the California Public Employees Retirement System (CalPERS), and prominent employers like the University of California and Stanford University.

The Barriers

“Despite its apparent promise, managed competition was often imperfectly applied,” the co-authors write. “Widespread adoption of managed competition faced numerous barriers to success. Some of these barriers stemmed from failures of regulation, while others reflect failures of purchasers or of delivery systems.”

The researchers concede that geography also played a role as not all communities were large enough to support competing health-care organizations.

One of the key barriers to a healthy managed competition market today, Enthoven and Singer write, is the unlimited tax exemption for employer contributions. 

“In this way, the tax code subsidizes the choice of the more costly plans, attenuating both cost consciousness and the marketplace reward to IDS for offering a lower-priced plan,” they write. “Attempts to correct this have failed politically.”

Other roadblocks to success include: 

• Government programs like Medicare Advantage have shifted toward paying health plans a fixed amount per member and rewarding quality, as Enthoven had envisioned, but employers and private insurers still largely pay for each service, which blunts the incentive to deliver care more efficiently.
• Integrated systems can only grow if people can choose them, through exchanges such as Covered California or the federal employee health program, or through employers that offer several plans. But few employers offer that kind of choice, so most Americans never get the chance to pick a more efficient system.

• Left alone, health insurers design confusing plans that lure healthy people in and drive away sick ones, so fair competition requires standard contracts that people can easily compare.

   

The Path Forward

Enthoven and Singer acknowledge that establishing the necessary conditions for managed competition to be a viable strategy would be “a daunting task.” 

“The health insurance mandates are the political prizes of the interest groups that fought for them and would surely be fiercely defended,” they write. “If there were the will and general understanding of these issues, paths forward for expanding managed competition might involve increased action by government, employers, and delivery systems.”

The two recommend applying managed competition rules to the ACA marketplaces—which already exist and often feature the limited provider networks the model relies on—and gradually opening them to larger employers. 

For managed competition to work at private companies, employers would need to be smarter shoppers by doing the following:

• Using standard plans that are paid a fixed amount per member, with payments adjusted for how healthy or sick each plan's members are.
• Giving employees a real choice of plans with different doctor and hospital networks.
• Contributing a set dollar amount toward coverage, so employees who pick a cheaper plan keep the savings.
• Paying closer attention to which plans employees choose and how well those plans perform.

Even with the right market rules, however, integrated systems can still fail without strong leadership and a healthy culture. Enthoven and Singer say these systems need to build teamwork, invest in primary care so every patient has someone overseeing their care, and run efficiently enough to grow while keeping prices competitive.

“A host of policy, purchasing, and delivery system changes could enable managed competition,” the two conclude in their perspective. “The most promising opportunity for applying managed competition principles today may be by supporting and expanding the Affordable Care Act and other insurance exchanges to more groups.”

Beyond that, they said, expanding fixed per-member payments, improving risk adjustment and strengthening consumer protections could help integrated systems attract the money and leadership they need to grow.