The Rise and Fall of Managed Care: A Predictable 'Tragic Choices' Phenomenon

Abstract

Once touted as the answer to defects in fee-for-service health care insurance, managed care has seen its fortunes rise and fall over the past decade. Initially, managed care techniques became widespread, and they slowed the growth in health care costs. Indeed, premiums for health care insurance went from double-digit increases in the late 1980s to a less than two percent increase in 1996. More recently, however, public dissatisfaction with managed care has led insurers to jettison key cost-containment strategies of managed care, including closed panels of doctors, primary-care gatekeeping and pre-admission authorization. As insurers abandoned these hallmarks of managed care, health care costs have resumed their rapid growth.

Scholars have attributed the fall of managed care to a number of factors, including imperfections in the market for health care insurance, the use by some managed care plans of egregious strategies for cutting costs, and a lack of consumer choice or voice in the operation of managed care.

This article offers a different explanation for the rise and fall of managed care. Managed care has failed not because of market imperfections, a bad design, or because its design was poorly executed. Rather, the United States's experience with managed care illustrates what happens when society tries to ration health care resources, regardless of the mechanism used for rationing. In this view, problems with the health care market or the design and implementation of managed care might have affected how quickly managed care failed, but they did not affect whether managed care would fail. As a method for making the "tragic choices" involved in health care rationing, managed care's failure was inevitable, as predicted by the analysis of Guido Calabresi and Phillip Bobbitt in their book, Tragic Choices.

Calabresi and Bobbitt explain that the difficult life-and-death choices entailed in rationing can only be made by hiding them from public scrutiny. Managed care provided a method for disguising rationing. However, when the hidden "tragic choices" were exposed, the method for making those choices became discredited, and the public had demanded a new method for allocating health care.

JEL Classification: I1, H4