[BETA] Fortnightly

The meltdown of the Clinton health reform plan suggests a return to competition-that managed care, capitated payment, and regional alliances will assume leading roles in the delivery of health service. But that conclusion may prove premature. Missing from the debate is a discussion of the true costs and implications of these emerging health alliances and health management organizations (HMOs).

Managed care may not offer the expected panacea for containing health costs. The nation's health alliances are already segmenting the marketplace. Hospitals and physicians are forming powerful oligopolies in almost every metropolitan area. Huge managed care plans create monopolies that force out weaker firms and stifle competition. Most of the remaining competitors must be satisfied as small niche players. These factors point eventually to a more regulated environment-obviously inconsistent with the political shift to the right. The surprise is that these forces may persist despite the Republican takeover.

Will the health field fall prey to tightening governmental controls, even as long-regulated industries like electric and gas distribution move away from traditional, cost-plus, franchise-based regulation?Managed Care: No Panacea

Compared historically with traditional fee-for-service insurance, HMOs and other managed care plans have achieved only modest results: HMO patients experience somewhat lower inpatient admission rates with slightly shorter average hospital stays. But those enrolled in managed care plans make as many or more physician office visits. Capitated payment plans encourage HMO members to use fewer expensive procedures and examinations. We find a somewhat lower satisfaction level with HMO services, counterbalanced by the perception that managed care costs less than fee-for-service plans.

By micromanaging services, managed care plans have achieved over several years a 7- to 10-percent overall cost reduction. Though sizable, this amount roughly equals one year's inflationary factor of our nation's health expenditures. In comparison, based on the most recent projections, Medicare, Medicaid, and Social Security are expected to consume all federal revenues by 2012, unless we raise taxes or reduce benefits or achieve some of both.

As HMO enrollment proliferates, hospitals and physicians will encounter more un- or underinsured patients. Smaller employer groups will witness cost shifting first hand, when Congress makes further cuts in Medicare and Medicaid reimbursement. Concurrently, the managed care plans and the regional networks will continue to face difficulty in providing health services to inner-cities and poor rural areas, where most poorly insured patients reside. To pick up that slack, we can expect to see more for-profit managed care plans formed specifically to collect premiums and deliver limited care to inner-city patients eligible for Medicaid and Medicare. Managed care plans and regional networks claim they are forced to establish panels of physicians and hospitals to ensure quality care and lower costs. What is so worrisome is that too many managed care plans and alliances will select low-quality, low-cost providers. And the professional loyalties of such providers may be dominated more by the fiscal imperatives of the third-party payers, who assure them of a steady revenue stream, than by the desire to protect their patient's best interests. Furthermore, physician-patient ratios at HMOs hover around 1 per 800, as compared with 1