|This site maintained by: Aomar Boum. Site last updated in June, 2001.||
Journal of Political Ecology:
Case Studies in History and Society
VOLUME 8 (2001)
The Economic Evolution of American Health Care: From Marcus Welby to Managed Care by David D. Dranove. Princeton: Princeton University Press (2000), 211 pp.
Reviewed by Merrill Eisenberg, College of Public Health, The University of Arizona, Tucson.
For all of you who are wondering just exactly how
our health care system came to be so dreadful, David Dranove has the answers.
Dranove was a student of Alain Enthoven, the Stanford based health care
economist who was one of the architects of managed care as we know it
in the US today. His book The Economic Evolution of American Health Care,
tells the story of the recent paradigm shift in health care that has taken
place over the past two decades. This book is not a critical analysis
of the changes that have occurred Dranove is a champion of paradigm.
The book is an informative narrative an emic description from an
industry insider of how business and economic concerns rose to ascendancy
and now control health care in the US. It is written for the lay reader
and does an excellent job of explaining how we got to managed care and
the issues that drive its continuing development.
Dranove, like his mentor Enthoven, is a champion of
market forces. He not only explains, but celebrates the economic rationale
for what appears to many Americans to be the erosion of both access to
and the quality of basic health care services that has accompanied the
transition to managed care in the US. From a market perspective, the problem
with the traditional fee for service medical care system is the "shopping
problem" (pp. 8-14) - the consumer has no incentive to shop for the
best value in health care, since a third party is footing the bill. While
he acknowledges that empirical evidence for improvement in health care
quality and efficiency under managed care is largely equivocal, he defends
the market approach with a fervor that borders on the religious.
Dranove traces the history of managed care back to
the 1890s, when fraternal organizations and associations of workers created
prepaid medical lodges to provide health care to members for a cost of
$1-$2 per year per member. At that time, more than one third of all families,
mostly in low-income brackets, were covered by these lodges. Dranove follows
the development of health care reimbursement schemes throughout the 20th
century, touching on prepaid plans for work-related injury and illness
in the 1920s, and the emergence of Blue Cross and Blue Shield in the 1930s.
The Kaiser system was created in the 1940s, providing complete coverage
for ten cents per day, per employee. These early third party reimbursement
systems were small, and by 1950, only 10% of heath care costs in the US
were paid by third party payers. It wasnt until the 1950s, when
antibiotics and anesthetics lowered the mortality rate in hospitals, that
demand for hospital insurance began to rise. By the 1960s, the majority
of working adults were covered by health insurance, which paid 21% of
medical costs. During the early 1960s, states began to provide coverage
for the elderly and poor and in 1965 the federal Medicaid and Medicare
programs were established. It is then that health care costs began to
rise precipitously as a percentage of gross domestic product, with hospital
costs being the largest component of overall costs.
Government attempts to curb the rate of health care
cost increase during the 1970s and early 80s are described. Dranove downplays
efforts such as community based planning, rate setting, and certificate
of need requirements, calling them "a waste of time and effort"
(p. 63). However, the political power of the health care industry ensured
that regulatory health care cost containment efforts were attempted only
half-heartedly in all but a handful of states, primarily Connecticut,
Rhode Island, Massachusetts, Maryland and New Jersey. In those states,
costs were indeed contained. As one veteran Connecticut regulator told
me, the "
quality of the leadership and determination to duke
it out with the industry" are what made the regulatory approach successful
in these states. For example, in Connecticut, a strong rate-setting program
resulted in health care costs that were $300 million lower over a seven
year period of time than they would have been if costs had increased with
the national average. (Forand, personal communication, May, 2001). Hadley
and Swartz (1989) studied hospital costs in 43 large standard metropolitan
statistical areas and found that hospital regulation was the single most
important factor leading to the slowdown in the rate of increase between
1980 and 1984. In Dranoves opinion, these efforts were misguided
and useless, and in some cases, "did more harm than good." (p.
63). He states that "the failure of government cost containment efforts
forced businesses to seek their own solution" to rising health care
costs (p. 65).
Managed care to the rescue! Dranove describes how his
mentor, Alain Enthoven, along with Paul Ellwood and Harold Luft "began
spreading the word about HMOs" (p. 66) in the 1970s and 1980s. We
learn about how these pioneers in the movement enlisted the support of
local business groups, and how business leaders were invited to Ellwoods
vacation condo in Jackson Hole to map out the principles of "managed
competition" in conjunction with Bush administration officials. Dranove
credits HMO "evangelists" (p. 67) with increasing HMO enrollment
from 9.1 million in 1980, to 33.6 million in 1990, and applauds the fact
that today, more than 80% of working Americans are enrolled in some type
of managed care plan.
Dranove does a good job of describing different forms
of managed care organizations (MCOs) that have emerged, delving into the
alphabet soup of HMOs, IPAs, and PPOs as well as explaining the difference
between a staff and group model HMO and other industry buzz words. He
clearly outlines the strategies that MCOs use to curtail health care costs,
including selective contracting (demanding large discounts from providers
in exchange for steering a large volume of patients to that provider),
using "innovative incentives" for primary care gatekeepers (creating
incentives for providers to withhold treatment), and instituting utilization
review (allowing the payer, not the doctor, to determine the appropriate
course of treatment).
After reviewing the research Dranove concedes that
there "there is clearly no best way to use incentives to balance
concerns about cost and quality. There are always trade-offs" (p.
76). He also concedes that there is no definitive evidence that utilization
review affects either cost of quality. Nevertheless, he is not ready to
give up on these strategies and asks for more time for the industry to
tinker with these approaches in order to find the optimal strategy.
Dranove cites evidence that MCOs have reduced health
care costs by selective contracting and by reducing the acquisition and
use of costly technologies. However, he states that the effect of managed
care on quality is "ambiguous" (p. 87). He dismisses patient
perceptions of poor care as misguided because patients do not define quality
properly. "Unless and until consumers take a more sophisticated view
of quality, HMOs will necessarily look bad in comparison with traditional
fee-for-service medicine" (p. 89). He admits that the US public does
not trust MCOs, and blames the newspapers for publishing accounts of MCO
"horror stories" (pp. 89-90).
He explains that managed care has caused providers
to contain costs by shifting many procedures from inpatient to outpatient
settings, and by cutting back on uncompensated care and research. With
regard to the latter, he says the public will just have to accept this
situation or the government will have to start funding it. In a market
based health care system, medical research and health care for the uninsured
are someone elses problem.
Dranove describes other strategies for cutting costs
while improving quality that have become popular in the industry, including
the institution of continuous quality improvement (CQI) programs to eliminate
mistakes in existing processes, and reengineering by introducing new systems,
making major organizational changes, and adopting treatment guidelines
and disease management programs. He is especially hopeful about the development
of disease management guidelines, telling us that their development has
become "an opportunity to make a profit" (p. 99) and that many
consulting organizations have taken advantage of this opportunity.
While applauding the fact that efforts to improve quality
and efficiency have spawned new business opportunities, Dranove reviews
the research and concludes that there is not strong evidence that either
CQI or reengineering have had an impact on cost or quality. He nevertheless
believes that disease management guidelines have a great potential for
eliminating inappropriate variations in medical practice.
Dranove moves on to describe how hospitals and hospital
networks use the competitive system to maximize their revenues, how physicians
have been forced to get business educations, and how this new efficient
system has created a need for a whole new class of professional services
- physician practice management and pharmacy benefits management. He reviews
the importance of data for strategic planning in a market based health
care system and how generating those data is now yet another new and lucrative
business opportunity. A competitive system also requires providers to
make substantial investments in marketing so they can "evaluate their
competitive position, attempt to differentiate themselves from the crowd,
and price accordingly" (p. 102). That money is being diverted from
direct service into these new industry support systems is evidently not
A long chapter is devoted to the intricacies of measuring
quality of care. In a competitive system, consumers should have information
about quality in order to make informed choices. Various measures, their
strengths and shortcomings are described. Dranove concludes that not only
are better measures necessary, but consumers and providers must change
the way they think about quality.
Competition among MCOs is addressed and as with many
other topics in this book, Dranove states that there is no direct evidence
that competition has resulted in cost savings for consumers. Competition
has, however, led to a wave of mergers and acquisitions involving not
only MCOs, but hospitals, physicians, and other types of providers as
well. Systems have also merged vertically with hospitals, nursing
homes, outpatient clinics and diagnostic facilities, and physicians being
reorganized under one umbrella. This is the point where Dranove starts
to get nervous about the direction in which economic incentives are driving
the industry. He cautions against mergers that do not "create value"
(p. 129) and is especially fearful of provider mergers because when providers
band together there is less competition in the marketplace and MCOs lose
their negotiating advantage. Dranove favors using antitrust laws to keep
this from occurring.
In the end, Dranove tells us that managed care has
saved us millions of dollars, but that it must continue to evolve to remain
economically viable. He calls for continued investment in outcomes research
to enable MCOs to identify cost-effective approaches to treatment and
disease management, and quality research to develop information so that
patients can make informed choices about providers and MCOs. Dranove is
optimistic about the future of managed care as long as markets remain
competitive and information is available for patients and MCOs to make
As one of those uninformed consumers, I fail to see
how I have any choice or how I have benefited from the market-based health
care economy. My state offers University employees one HMO "choice",
and I have had four primary care physicians in four years because of mergers,
closings, and HMO errors. My rates have gone up, I wait months for routine
appointments and days for sick ones, I must arrive at the pharmacy on
a particular day to refill prescriptions, and getting a new prescription
filled takes several phone calls between the doctor and pharmacist to
identify a drug my policy will pay for. On a personal level, I am clearly
conceptualizing quality health care from the old paradigm. Dranoves
book provides the mental map of those who have conceptualized and implemented
a new paradigm. Its an interesting, informative, and maddening read.
Hadley J, and Swartz, K. 1989. "The impacts of hospital costs between 1980 and 1984 of hospital rate regulation, competition, and changes in health insurance coverage." Inquiry 26:35-47. .