Managed Competition: Less Choice and Competition, More Costs and Government in Health Care

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Managed Competition: Less Choice and Competition, More Costs and Government in Health Care

June 29, 1993 43 min read Download Report
Peter J.
Distinguished Fellow

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948 June 29,1993 MANAGED COMPETITION LESS CHOICE AND COMPETIIION By Peter J. Fe rrara Senior Fellow INTRODUCTION while the Clinton Administration continues to shape its health care proposal, several key Members of Congress-in both parties-have been developing comprehensive health care reform proposals loosely based on the concept of managed competition.

These lawmakers are drawn to managed competition because they believe that market in centives and competition, rather than government regulation and bureaucratic control are the best means for addressing Americas health care problems. Some also see man aged competition as a middle ground between government-financed national health insur ance and consumer choice health care proposals. But, in reality, managed competition would involve so much heavy-handed, unnecessary, government regula tion and control that it would evolve into the bureaucratic system its advocates wish to avoid.

As a result, rather than solving Americas health care problems, adoption of managed competition as the basis of reform would create many new problems, seriously harming the nations health care consumers First, it would sharply restrict consumer choice and control over health care. This would happen in several ways. It would effectively require almost all consumers to buy a one size-fits-all package of benefits determined by the federal government. It would force most workers to buy their health insurance f r om insurers chosen by government-run re gional cooperatives rather than from any insurer of their choice on the open market. It would in practice force consumers into health maintenance organizations (HMOs) and other similar managed care systems. These ne t works of designated providers would preempt consumers choice of alternative physicians and hospitals. Ultimately, under the raft of restrictions and controls inherent in managed competition, consumer choice of doctors, services, and treatments would be gr eatly curtailed.

Second, it would mean less competition. Ironically, managed competition would sharply restrict competition between health insurers, effectively leaving consumers in each area to face a cartel which would be dominated by a few large insurer s operating man aged care systems. With such restricted competition, insurers would be able to use the power of their managed care systems to deny consumers access to some of the care they want and ultimately to reduce the quality of care to save costs. T h e introduction and availability of new technology and innovative procedures, for example, would be retarded Third, many Americans with good coverage would be dumped into inferior plans. Employ ees of large companies with generous corporate health plans to d ay are likely to be reas signed by their employers into the same regional managed care systems as other work ers, sharply reducing their current broad access to the highest quality care. Moreover many of these workers would be forced to pay higher deducti bles and copayments for inferior coverage Fourth, the proposal would not significantly reduce health costs. Indeed, managed competi tion likely would accelerate, rather than reduce, todays skyrocketing health care costs.

Managed competition proposals would do little or nothing to address the root cause of rapidly rising health costs-the third party payment problem. Because of the way most plans are designed and paid for today, consumers, doctors, and hospitals are left with little incentive to control cost s because a third party insurer is paying all of the bills, no matter how large or small the claims. Managed competition, in fact, would preclude plans with higher deductibles as well as medical savings accounts and other ap proaches to reduce third party p ayment. Instead, it would force even more consumers into virtual fmt-dollar third party coverage, adding to the problem Fifth, there would be more bureaucracy. Managed competition would add several new fed eral and state bureaucracies and regulatory burde n s, further increasing costs. Most damaging of all, the single, standard plan of coverage specified in detail by the federal government, through the political process, inevitably would cover numerous expensive benefits supported by politically powerful int e rests, whether or not individual consum ers wanted to purchase such additional benefits. These benefits likely would include abortion on demand, open-ended mental health counseling, drug and alcohol treat ment, open-ended treatment for AIDS and similar di s eases, prescription drugs, dental benefits, and possibly long-term care. The addition of such politically driven benefits would make the standard health policy for most Americans under managed competi tion more costly, adding to the financial burdens on e m ployers and employees, and raising national health care expenses 1 Stuart M. Butler, A Policy Makers Guide to the Health Care Crisis, Part I: The Debate Over Reform, Heritage Foundation Talking Points. February 12, 1992; Edmund F. Haislmaier, A Policy Mak e rs Guide to the Health Care Crisis, Part III: Whats Wrong With Americas Health Insurance Market? Heitage Foundation Talking Points August 14.1992 2 Sixth, managed competition would destroy jobs. Because employers would face extra costs in hiring labor, so me workers would lose their jobs. Under one version of the proposal as many as one million jobs in small firms could be lost.

While failing to solve Americas health care problems, managed competition would be successful in adding more government to health care. Managed competition plans also would sharply increase taxes, and use those funds to expand spending through increased means-tested subsidies for the purchase of health coverage by low-income recipients.

At the same time, these proposals include no b roader reforms to ensure that welfare in creases would not add to the counterproductive effects of Americas welfare system. Be cause managed competition envisions a standardized benefits package for every Ameri can the managed competition system would mak e it easier for special interests to suc ceed in mandating private spending on their favored activities by pressing Congress to add items to the standard, government-specified health plan, with the premiums that vir tually everyone must pay for the plan ef f ectively used as a tax to fund the benefits Finally, managed competition would establish a new regulatory framework that would make adoption of a full-blown Canadian-style national health system much easier, with the rationing and decline in quality that would result.

Instead of managed competition, Congress should build upon the principles of genuine consumer choice and market competition, principles present, though imperfectly realized in their own federal employee health care system, and developed more thoroughly in the Heritage Foundations Consumer Choice Health Plan?

The Heritage Plan, in contrast to managed competition, would put the consumer at the center of power and control over health care decision-making and funds, rather than in surance compani es, the government, or doctors and hospitals. It would allow workers to direct the funds their employers currently pay for health insurance into any competing health plan of their choice. Workers would, in addition, receive a substantial tax credit for an y direct out-of-pocket expenses as well as for any insurance premiums or medical savings account contributions they paid, encouraging workers to reduce reliance on third party coverage for routine medical care.

Workers also could direct funds into a medica l savings account. Contributions would be eligible for the same credit. These so-called medisave funds could be used to purchase a low cost, high deductible catastrophic insurance policy, or any other degree of cover age. Unused funds would remain in the account, tax free, to pay directly for any future uncovered medical expenses.

As a result, the Heritage plan would greatly expand consumer choice and control, forc ing sharper competition among insurers and providers. It would maximize access to and qualit y of care, allowing consumers to purchase services and quality they prefer. At the same time, it would reduce costs most effectively by directly addressing the third party 2 See Stuart M. Butler, A Policy Makers Guide to the Health Care Crisis, Part II: T h e Heritage Consumer Choice Health Plan, Heritage Foundation Talking Points, February 28, 1992 3 WHAT 1 payment problem-giving consumers direct market incentives to control costs, and creat ing cost competition among insurers, providers, and innovators to s atisfy this new con sumer cost sensitivity 3 MANAGED COMPETITION The concept of managed competition has been developed and advanced most promi nently by Professor Main Enthoven of Stanford University and Dr. Paul Ellwood, a phy sician and leader of a grou p of scholars called the Jackson Hole Group.3 A bill based on the concept (H.R 5936) was introduced last year in the House of Representatives by Rep resentative Jim Cooper, the Tennessee Democrat, who is a prominent member of the Con servative Democratic F orum, an informal caucus of conservative Democrats In the Sen ate, managed competition has been embraced by Senator John Chafee, the Rhode Island Republican and chairman of the Senate Republican Task Force on Health Care Reform.

The task force is said to b e developing legislation based on managed competition. The Clinton Administration's health care reform proposal is said to be based loosely on the concept of managed competition, although statements by Administration officials sug gest thewhite House is l eaning toward a system with features more like Canada's.

Among the key elements of the managed competition idea 1) A standardized benefits package would be determined by a national board.

Under the managed competition concept, Congress would establish a n ew federal Na tional Health Board. This board is meant to be independent of the general public, like the Supreme Court or the Federal Reserve Board. The Board would determine the benefits to be included in a standard health insurance policy that everyone i n the country would be required to obtain. The Board would specify these required benefits in detail, including what treatments and conditions would be covered, and the amount of the deductible and co-insurance payments in the standard plan. In one versio n of managed competition, all health insurers would be prohibited from offering any insurance policy that did not in clude all of the specified benefits and provisions in the standard government plan. In an other, buyers would bear heavy tax penalties for p urchasing such a plan. Moreover, insur ance policies that offered additional benefits besides those in the standard government plan would, at a minimum, not enjoy the tax advantages available to standard plans. Simi larly, if a patient directly purchased a service not in the standard plan, that patient would have to pay in after-tax dollars. Under the Cooper bill (employers purchasing policies for their workers that offered benefits beyond those in the standard government plan would be subject to a 34 perc e nt tax on the cost of those benefits 3 See, inter alia, Alain Enthoven The History and Principles of Managed Competition Health Again, Supplement 1993, Vol. 12, pp. 37-39 Managed Competition and Its Potential to Reduce Health Spending," Congressional Budg e t mice, May 1993 4 H.R. 5936, Section 101 4 2) Cooperatives would organize plans in each area Managed competition envisions a Health Insurance Purchasing Cooperative (HIPC usually pronounced hippic either for an entire state or for each specified geograph i c area within the state. Under the Cooper bill, these HIPCs would be public, government run, not-for-profit corporations. Insurers selling the government-specified standard insur ance policy and otherwise acceptable to the government would be allowed to o f fer such policies to the public through the HIPCs. These standard government-licensed plans gen erally have become known as Accountable Health Plans (AHPs Professor Enthoven and other managed competition advocates would grant each HIPC additional discreti o n to accept or reject insurers who wanted to offer health insurance through the HIPC 3) Employees would be assigned to a HIPC, or their company might become its own HIPC All small employers would be required to arrange for the purchase of health insur anc e by their employees through the HIPC Small is defined in H.R. 5936 as employ ers with 1 ,OOO employees or less, which would cover about 60 percent of all workers.

Other proposals would set the level much lower. Under H.R 5936, each state would have the op tion to increase the requirement to participate in HIPCs to employers with up to 10,OOO employees. Small businesses that fail to comply with this requirement would be subject to fines of up to 500 per day.5 Employees of these small businesses could choose only among the insurance compa nies offered by their HIPC, each of which would be offering the same government-speci fied, standard insurance plan. The choice would be on the basis of price, method of deliv ery of benefits, and quality. Employers thus cou ld not pick a plan with a different set of benefits if they wanted such an alternative.

Employers would not necessarily be required to make any contribution to the plan cho sen by each employee. The employees would have to accept whatever contribution their employer did make. Each employee would have to cover the remaining premium of their c hosen plan This amount, along with employer contributions, would all be paid to the HIPC covering the area. The HIPC would then distribute the funds to the insurance plans chosen by each worker.

Self-employed workers and individuals not actively employed s imilarly would have to buy any health insurance policy through the HIPC in their geographic area, in order to re ceive a tax deduction for their health insurance. If they wanted an alternative plan more to their liking, they would have to pay for the enti re plan in after-tax dollars This would amount to a potentially crippling cost on the purchase of any other plan.

Larger employers and their workers would not have to purchase insurance through the HIPCs. They could purchase their coverage from government- approved Accountable Health Plans outside the HIPCs, but they still would have to buy the same government specified, standard insurance plan from these insurers. Thus, in effect, these large employ ers would be their own HIPCs. Under H.R. 5936, employers c ould purchase supplemen tal benefits for their workers besides those in the standard government plan. But as indi 5 H.R 36, Section 105 (i 5 How "Managed Competition" Would Work Individuals Small Businesses Federal Govem ment pays part of premium for thos e with low incomes Join cooperative to cut administrative costs and spread risk AHPs cannut base rates on medical history or pre-existing conditions All AHPs must offer the same basic bendts Large Businesses Buy insurance directly from AHP I I I I 1 Overse e health market Standardize accounting and paperwork Provide consumer infonnation on the quality of AHPs Adjust for risks among AHPs Source: Conservative Democratic Forum 6 cated above, employers still would have to pay a 34 percent tax penalty on the cost of those benefits. In some versions of managed competition, employees would not receive a tax exclusion for any payments made for such benefits above the standard level 4) Most Americans would obtain care through managed care networks Managed competition i s designed to steer or force all consumers into managed care systems, like Health Maintenance Organizations (HMOS Managed care means that a family obtains its care through an organized network of hospitals and physicians, rather than by picking their own doctor or facility. Thus their care is managed by the net work. In HMOs, families pay a monthly fee to the HMO, and normally receive care with out any additional payments for treatments or physician visits.

For all employers and all individuals, managed co mpetition would cap the tax deduc tion for health insurance at the lowest premium offered by any insurer in the HIPC for their geographic area. Inevitably, only HMOs or similar managed care programs would be able to charge this lowest premium as they have direct control over who gives what care to their patients, and can even deny a patients request for a treatment or service when the HMO believes it is not necessary. Since traditional insurance allows consumers to choose their own doctors and services for medically treatable conditions, these plans almost always would cost more.

Under managed competition, therefore, employers and employees would receive a tax deduction only for the lowest cost HMOs and similar managed care programs. For other traditional i nsurance programs, with broader choice of doctors and services, only part of the premium would be deductible 5) Accountable Health Plans would have to accept all families at the same price.

Under managed competition, insurers must accept everyone who appl ies for coverage during certain open enrollment periods each year. Generally, plans would not be allowed to exclude coverage for pre-existing conditions-although H.R. 5936 would allow insur ers to exclude pre-existing conditions for the first six months o f coverage. The pricing of plans would be based on community rating. This means that insurers would be re quired to charge the same community rates or premiums for all applicants within certain age and family categories? This means sicker individuals would be undercharged, in the sense that their premium costs would be consistently below the cost of the medical care they received. Meanwhile, healthier and low-risk individuals would be overcharged, in that insurers would have to charge them higher premiums t h an the predicted cost of their health care. Experience rating, which allows insurers to raise rates for those who have been sicker and have filed more claims, would be prohibited. Insurers also would not be allowed to drop coverage for anyone based on the ir claims or health experience. Insurers refer to this provision as guaranteed renewability 6 7 See, Congressional Budget Office, op. cif pp. 7-8,25-26.34-35.39

41. See also Enthoven, op. cif H.R. 5936, Section 105.

See Haislmaier, op. cif., and Edmund F. Haislmaier, A Policy Makers Guide to the Health Care Crisis, Part IV: The Right to Health Insurance Reform, Heritage Foundation Talking Points, November 5, 1992 7 A complex formula, to be determined by the new National Health Board, would be used by each HIPC to take some of the premiums for its plans that have signed up lower risk consumers and redistribute them to plans on its menu that have signed up higher risk consumers. Each HIPC thus would have enormous financial responsibilities. It should be note d that all of these enrollment, pricing, and regulatory restrictions, even if they were desirable, could be adopted without including the rest of the managed competition frame work.

Insurers and health care providers also would be required under managed co mpetition to participate in a new, nationally standardized system of reporting concerning their costs, quality performance, medical outcomes, consumer satisfaction, and financial stand- ing. This information would have to be collected by each insurer and h ealth care provider and reported to the regional HIPCs and the National Health Board. All this reporting and information collection is meant to help the government decide which services and treat ments should be covered by the standard, government-require d health plan, and to aid consumers in choosing among insurers and provider networks Additional Bureaucracies. The managed competition infrastructure would include other new government bureaucracies besides the National Health Board and the HIPCs in each s t ate. Under H.R. 5936, for instance, a new national Health Benefits and Data Standards Board would be created to provide expert advice to the National Health Board on what benefits, treatments, and services should be covered by the national, standard gover n ment-specified health plan. It would also provide advice on establishment and op eration of the new, national, performance reporting system. In addition, a national Health Plan Standards Board would be created to advise the National Health Board on the re g u lation of HIPCs, insurers, and provider networks, as well as on the formulas for the redis tribution of premiums from the lower risk insurers to higher risk insurers. Professor En thoven would incorporate similar boards in his managed competition propos al.

Professor Enthoven and other managed competition advocates also would adopt a legal mandate requiring everyone to purchase the government-specified standard health plan, through some combination of payments from employers and employees and public 8 tax es, thereby providing universal coverage. H.R. 5936 would not include such a man date. In addition, under these proposals, a new government program would provide subsi dies to the poor to purchase such insurance. These new subsidies likely would require s u bstantial tax increases. Under H.R. 5936, a new federal program, replacing Medicaid would pay the premiums for the standard govemment-specified health plan for all poor Americans. This would be financed by capping the tax exemption for employer-provided h ealth coverage, eliminating the current cap on wages subject to the Medicare (HI) pay roll tax, and leavin the states full responsibility for financing current Medicaid subsidies for long-term care.

The theory behind managed competition is to limit competi tion to the price of the stan dard health plan, and the capabilities of the different managed care systems in providing services covered by the plan. Competition over other factors, such as variations in cover 6 8 9 Enthoven, op. cir pp. 41-42; CBO, op. c ir pp. 1 1-12,21-23.

H.R. 59

36. Sections 21 I, 221, and 23 1 8 age, is to be eliminated or minimized. This is thought to focus competitive attention on cost. Consumers would be steered into managed care systems so that these systems could use their power and control over services to reduce costs. The current tax exemption for health insurance would be limited to the lowest priced managed care plan in each area to further focus consumer concern over the cost of each plan. The purpose of the HIPCs is to co ntrol this competitive structure. All of this is thought by managed competition advo cates to be the most effective means for reducing health care costs.

Managed competition advocates are to commended f or recognizing that only a market system, rather than government price controls and budget limits, can ultimately be effec tive in reducing costs while maintaining quality care for consumers. But managed compe tition itself is so heavily regulated and con t rolled that it ultimately fails to create any thing like a true market and open competition in health care services and insurance. As a result as discussed in detail below, managed competition would not reduce costs and would create many new intractable p r oblems in health care, seriously harming health care consumers SIX WAYS CONSUMER CHOICE Is RESTRICTED UNDER MANAGED COMPETITION Proponents of managed competition argue that the purpose is to introduce market forces into the health care system, including w i der consumer choice. But when examined closely, managed competition sharply restricts consumer choice, and effectively deprives most consumers of direct control over their health care resources and services, particu larly when compared with open market re f orm alternatives, such as the Heritage Con sumer Choice Health Plan discussed below Restriction #1 :All Americans would be required by tax policy and a legal mandate to buy the same health insurance policy, which would be specified by the federal governme n t Given open enrollment and community rating, where everyone is charged the same pre mium regardless of risk, managed competition would legally require every family to pur chase the single, government-specified benefit plan for the system even to function . Oth erwise, it would be irrational to buy insurance coverage until one became sick, since in surers would be forced to accept a person who then applied and charge the same standard premium. Insurers would then be unable to spread risks and survive financ i ally Restriction #2: With a standardized health plan, a federal government board rather than individual consumers, chooses what illnesses, services, treatments and types of providers would be covered This government board, rather than individual consumers , woulddecide what services are considered cost-effective and to be covered, and which are not. The board would also choose the uniform deductibles, co-payment fees, and stop-loss limits for everyone.

The national board set up under managed competition wou ld be a kind of Supreme Court of Health, in that it would be independent of Congress and yet would have enor mous powers over the health care provided to every American. In theory, nothing would stop Americans from buying additional care above that specif i ed by the board. But the 9 purchase of supplementary coverage would not, in most instances, be feasible under man aged competition. Few employers, for instance, would purchase more than the standard board-specified plan without a full tax deduction for th e firm or the exclusion of the health benefits from the workers' incomes. The employer or the worker in either case would be better off with the payment of the equivalent amount in wages instead. If open enrollment and community rating applied to such supp l ementary benefits as well, as under H.R. 5936, it would be irrational to buy such coverage until an individual became sick. But if this were permitted, the health market would be unable to function. More over, many managed competition advocates argue that such supplementary coverage should be legally banned in any event, to ensure the maximum incentives and competi tion to reduce costs under the standard government plan.'o be covered under the government plan An additional issue is that treatments might be covered that families do not want to pay for but would be forced to buy. Given current political pressures, the standard government-specified plan probably would include open ended coverage for abortion on demand, generous mental health counseling, drug a n d al cohol treatment, and treatment for AIDS and for other diseases that may result from drug or alcohol abuse or sexual promiscuity. The addition of such benefits would likely make the standard government-specified plan quite costly. Moreover, many consu m ers may not want such benefits for themselves, and may have a conscientious objection to being forced to subsidize such services for others The issue is not only what provisions that individual consumers might want would not Restriction #3: Most, if not v i rtually all, workers would be forced to buy their health insurance from the insurers chosen by their HIPC, rather than from an in surer of their choice on the open market Employees of larger companies that might be exempt from the HIPCs would, like today, still have only the plan or choice of plans picked by their employers, rather than an open market choice If these employees changed jobs, they would normally lose their current health insurance plan as under the current health care system, and have to par t ici pate in the health care arrangements established by their new employer. All other fami lies would have to choose from among the HIPC plans Restriction #4: The entire system is designed to force consumers into HMOs and other similar managed care system s, effectively preempting their choice of alter native systems.

A full tax exemption would be available only for lower-priced managed-care systems with only a partial exemption for alternatives. The state HIPCs also could limit the avail ability of alterna tive systems, if they include any such alternatives at all. Thus a HIPC might require all plans to be managed care networks. Moreover, with the highly favored managed care systems signing up doctors and facilities for their networks, little scope may rema in for alternative, open choice, insurance or health care delivery systems in any event. 11 10 CBO, op. cif pp. 9-10, 12.20-

21. Sex also pp. 15,21-23,28-29 10 Restriction #5: Under managed competition, a family's choice of doctor would be greatly curtaile d Consumers would be able to choose only among doctors affiliated with their managed care network. And even here they may be subject to restrictions imposed by their man aged care plan concerning which among the network-affiliated doctors they may consult .

Americans would have to get used to limits of this kind As Senator John Chafee, a strong proponent of managed competition. explains Managed care, by its very definition, limits choice of health care providers S]ome regulation is going to have to come int o the lives of our constituents who are currently enjoying fee for service type of medical care where they can go to any doctor they want to any hospital they want to. That to a great extent, will no longer be possible. 19 Restriction #6: A family's choic e of services and treatments also would be greatly curtailed.

Under the dominant managed care model, doctors would lose the freedom to provide services and treatments that they and their patients thought desirable. Instead, insurers and government boards w ould have the power to restrict services and treatments in order to save costs.

The managed care insurers, having received a fixed fee from an enrollee for the entire year, ultimately would choose what services and treatment its doctors would provide in r eturn. Doctors effectively would be on the staffs of the managed care plans and would be subject to their policies and ultimate control. The government would get into the act as well. The National Health Board and its related federal agencies would study h ealth treat ments and services, using data from its health care reporting system. The Board then would seek to control what doctors provided to their patients through federal practice guidelines, restricted coverage in the national health plan, and other m eans. These deci sions would be based on the judgment of these federal bureaucracies, rather than the judgment of doctors and the preferences of patients. For instance, surgery might be more cost-effective in a certain instance. But for work-related or qu a lity-of-life reasons, a pa tient may strongly want an alternative form of treatment managed competition issued in May 1993, concludes that under such a system Consumers would probably have less choice, more limited access to many providers, fewer services , and slower access to new technologies Consumers would have less choice about the range of services covered by insurers as well as about the providers from whom they could receive care For many of these same reasons the Congressional Budget Office, in a m a jor study of 14 11 Indeed. Mr. Cooper has stated that, under managed competition my guess is that fee-for-services medicine will be discouraged and mostly die out Managed Competition: Wave of the Future AAPS News, February 1993. p. 1 12 Enthoven, the lead i ng theorist of managed competition. in fact disparages "free choice of doctor by the patient" because it leaves insurers with no bargaining power with the doctor. Enthoven, op. cir p. 25 13 Congressional Record, March 11,1993, p. S-2710 14 CBO, op. cif 11 The bottom line: Despite being portrayed as vigorous consumer choice, managed com petition is not really a system based on consumer choice and control. Rather, employers managed care planners, and government-appointed boards in reality would wield the pow e r and control ENSURING LESS COMPETITION Managed competition would also greatly restrict competition between insurers. This is ironic, because proponents of the concept claim such competition to be one of its central features. Yet insurers within each HIPC would be legally protected from competition by insurers outside the HIPC. Since new plans would need the permission of the HIPC be fore they could be offered to consumers, the HIPC for each geographic area would consti tute an artificial barrier to market entry by new competitors. In practice, the well-estab lished large insurers likely would dominate each HIPC, just as heavily regulated indus tries often capture their regulators and use regulation to frustrate new competitors.

Thus existing health insurer s would seek to use the HIPC to close off entry by new insur ers or to thwart innovative, alternative health care delivery systems In addition, under the managed competition model, there would only be one HIPC for each geographic area.

As a result, there would be no competition between HIpcs and their affiliated insurers, and a cozy relationship would develop. Thus consumers in each area would face what amounted to a cartel of insurers, each selling exactly the same in surance policy.

Further, managed competition would eliminate or sharply reduce one of the main fea tures of competition between insurers-alternative and innovative patterns of coverage.

Insurers would each be required to offer the same, standard policy, with supplemental variations sharply curtailed or eliminated. This would further reduce the opportunity for many competitors to find a market niche and offer new services to the consumer Crowding Out Small Insurers. Over time, the number of insurers competing within each HIPC would in all pr o bability be limited to a few large insurers. The largest insur ers, who would be big enough to organize a managed care network staff of doctors and health facilities, would dominate the system. In signing up the available doctors and facil ities, these in s urers would leave little room for other insurers to compete, whether by de veloping their own managed care systems, or using any other insurance model. Small and moderate size insurers would be less able to develop full managed care systems of their own, a nd would tend to disappear. Ultimately, the thousands of health insurers now competing across the country would likely be reduced to a handful of large, powerful in surers in each geographic area. Consumers would have no choice but to accept the car tels 1 5 Indeed, as Robert Moffit of the Heritage Foundation noted, the HIPCs, as state-run institutions, would be highly politicized. In Maryland, you would now have the William Donald Schafer H[I]PCs; in New Jersey the Jim Florio H[I]PCs; in Virginia, the Doug l as Wilder H[I]PCs; in New York, the Mario Cuomo H[I]PCs, Republican-appointed H[I]PCs and Democratic-appointed H[I]PCs. Robert E. Mofft, Overdosing on Management: Reforming the Health Care SystemThrough Managed Competition Heritage Lecrure No. 441, Februa r y 23,1993, p. 3 12 A decline in options for consumers, and a contraction in the number of suppliers, is projected by the Congressional Budget Office (CBO In its recent study on managed competition, the CBO said Specifically, to be effective in reducing th e growth rate of spending on health care, a managed competition system would need to result in a relatively small number of insurance organizations that had substantially non-overlapping networks of affiliated providers If a managed competition policy cont a ining these elements were adopted and price competition among insurers increased the number of insurers would probably be significantly reduced. Most primary care providers a d some specialists, would be affiliated exclusively with one insurer 16 This con centration of insurers would be most acute in rural areas with little capacity to support competing managed care networks.

A recent study published in The New En gland Journal ofMedicine found that 29 percent of Americans live in areas that could not suppo rt as many as three separately functioning managed care networks, even assum ing they shared hospital facilities and many specialist services. Only 42 percent of Ameri cans, according to the study, live in areas that could support three fully independent man aged care networks.

As a result, managed competition would not be what Americans envision in the term competition-a market where the consumer is king. It would mean instead a market dominated by a cartel of a few giant, dominant insurance companies, ag ain backed by government regulation. As Representative Pete Stark, the California Democrat, says of managed competition, Were not going to have a Canadian System, were going to have a HIPC system, and King HIPC will make the decisions.18 17 REDUCED ACCESS AND QUALITY OF CARE Managed competition also would inevitably produce reduced access to medical care and reduced quality of care for most consumers.

The method of reducing costs under managed competition is to give insurance comp a nies the effective power, through HMO and other managed care models, to deny services to consumers in order to save funds. Consumers pay the managed care insurer an up front fee for medical care during the year, and after that the managed care insurer d e ter mines what services and treatments its doctors will provide the patient, based ultimately on the insurers judgment rather than the judgment of the patient and his or her chosen doctor. Doctors would be affiliated with particular managed care insurers a nd would be subject to their policies and control in order to receive their incomes. If they did not agree to this, they would be frozen out of the health care cartel. So doctors would in prac 16 CBO. op. cit p. xi 17 Richard Kmnick. David C. Goodman, Joh n Manberg, and Edward Wagner, The Marketplan in Health Care Refom The Demographic Limitations of Managed Competition. The New England Journal of Medicare, Vol. 328, No. 6 January 14, 1993 pp. 148-192; see also CBO, op. cit pp. 4041 18 Hilary Stout. Proposa l for Health Care Cooperatives Draws Criticism as Some See Growing Regulatory Role, The Wall Street Journal. May 10, 1993, p. A12 13 tice be employees on the payroll of the insurers rather than independent professionals re sponding to patients.

Insurance c ompanies consequently would be further inserted into the relationship be tween doctor and patient with the dominant power to determine what services the doctor may provide. Doctors wou1.d lose their traditional freedom and control over their own practices to give consumers the care they think best in their own professional judgment.

Doctors instead would be responding to the interests and preferences of insurance compa nies, rather than patients, because it would be insurers, rather than patients, who woul d dominate and control the flow of funds and payments to doctors and hospitals. Consum ers would no longer have the power as under the current system, to determine which doc tors receive payment and for which services. Rather the managed care insurer woul d make those decisions.

Managed care systems work well today, and are a preferred option for millions of Americans. But this is all dependent on one critical factor-if managed care systems go too far today in denying care to consumers, the consumers can ea sily leave the system and opt for alternative coverage. Managed competition, however, is not based on such open consumer choice and market competition As discussed above, managed competi tion is designed to force consumers into managed care systems under the control of insur ance companies and the government. Moreover, through its restrictions on competition among insurers, managed competition would ultimately leave a cartel of a few, large powerful insurers in control of each geographic area.

Under this s ystem, managed care insurers would have far greater power to deny con sumers the care they may prefer. With just a few dominant managed care insurers essen tially all denying care under the same general practices, consumers would not have any where else t o turn. Indeed, with such greatly restricted competition and alternatives, in surers would be more able to cut comers, at the expense of quality, in order to save costs.

They could also slow the adoption of new technology and innovative treatments. The few large insurers controlling each area could even collude to adopt these practices and in flate their profits Less for the Sick. The managed competition framework, moreover, would include ad ditional incentives for the managed care insurers to deny care to consumers most in need.

Since the insurer must charge the same premium to all consumers regardless of their health, under the system known as community rating the insurer has no financial incen tive to give the best treatment to the most sick, since the i nsurer would not receive addi tional compensation for doing so. To the contrary, the plan would bear the added costs of maintaining top quality facilities for the most sick and treating them, but would receive no compensation for such costs.

Consequently, the managed care insurers would tend to limit their facilities and capa bilities for treating the sickest patients. Their facilities for treating cancer or heart disease or AIDS, would in 211 probability become increasingly inadequate and out of date ove r time. They will lack sufficient cancer specialists or heart surgeons on their staffs, which they will insist they just cannot find. They will move slowly in acquiring new technolo gies and facilities for treating these diseases over time. Indeed, they wo u ld even be eager to let the public know of these inadequacies so the most sick would choose and impose their costs on other insurers 14 Managed care networks generally work well in todays markets. But managed competitions combination of steering consumers into managed care systems, limiting competition to a cartel of a few, large dominant systems in each area, and imposing on these systems the incentives of community rating, is a prescription for a health care disas ter for the sick and the elderly who mos t need the best and most sophisticated health Care Less Alternative Care. Managed competition would result in reduced access and quality in other ways as well. Patients of one managed care network would, of course not have access to the providers and facil ities of other managed care networks, which they may prefer at different times. Consumers who live in one geographic area and work in another may find themselves limited to a network of providers in one area or another.

For example, a worker who lives in Maryland but works nearby in the District of Colum bia may find that he can only have a managed care network with providers in the District.

Moreover, patients would lose access to practitioners of alternative, non-establish ment medicine. Under a governme nt-regulated system, insurance companies are unlikely to bear the cost of retaining practitioners of, say, holistic medicine on their managed care staffs. Specifically, they are unlikely to cover practices or therapies that do not have the imprimatur of e s tablishment medicine. Yet, medical conditions are sometimes cured and lives saved only by turning to alternative renegades, whose methods may one day be come part of the standard practice of establishment medicine Less Innovation. Innovation would be slow e d under managed competition, because new technologies and treatments would be subject to long delays. The reason: the politi cal, bureaucratic process to get coverage in the single, standard, national health plan. The result would be similar to the effect s of the len thy and time-consuming drug approval process of the Food and Drug Administration. Moreover, the bureaucrats overseeing this process would face strong political pressure from insurance companies and employ ers to keep costs down, but little pre ssure from a general public unaware of possible new medical technologies and innovations. Averse to accepting risk or change, like any bu reaucrats they would tend to slow or reject such new developments.

The centralized managed care providers would raise an additional barrier to such inno vations. Reluctant to absorb the costs of a new technology, and not pressured by stiff competition or by clients-who would normally be unaware of cutting-edge medical pos sibilities-the plans would have little incentive t o incorporate the latest medical technol ogy unless it cut costs. The uncertainty of ever gaining approval for new procedures, new treatments, or new technologies through this slow and bureaucratic gauntlet would dis courage many innovators from even tryi n g to develop breakthroughs h the first place Loss of Benefits. Employees of large companies with generous health plans also would lose the rich benefit packages they currently enjoy. Given the tax penalties for of fering more than the standard plan, emplo y ers would likely limit their health insurance contributions to the maximum tax-exempt amount, which would be equal to the lowest 6 19 Paul Rubin. Regulatory Relief or Power Grab: Should Congress Expand FDA Enforcement Authority. Heritage Foundation Backgr o under No. 900, June 1 1,1992; Sam Kazman. The Food and Drug Administrations Real Problem Drug Unavailability, Heritage Foundation Backgrounder Update, No. 112, October 4, 1989 15 cost managed care plan in their respective HIPCs. This would mean a sharp re d uction in the benefits in many current corporate plans. Even if the employers were to give back the savings to the employees in increased pay, the employees could not purchase replace ment coverage without first bearing the burden of paying full federal, s tate, and local in come and Social Security taxes on that income, sharply increasing the cost of obtaining the same benefits they enjoyed previously In fact, these large employers would have strong incentives to dump their employees or retirees into the H I PC for their area, rather than providing insurance themselves. They would save administrative costs as a result, and if they are not going to pay more than the maximum tax-exempt amount for the lowestcost HIPC plan anyway, they would have no reason not to do so. Large employers with an older or sicker work force could gain substantially by paying the community rating premiums of the HIPC plans, rather than organizing their own insurance plans, requiring higher insurance rates to cover their greater risks. T he currently generous benefit plans for employees of these corporations would consequently be replaced by the much less generous and heavily controlled man aged care plans offered by the HIPC. This means other businesses with healthier employ ees would be a r higher costs by having to share through the community rating premiums the higher costs of the older and sicker work forces, and retirees, in many large corpora tions WHY MANAGED COMPETITION WOULD NOT CONTROL COSTS Managed competition is advanced first a n d foremost as a system that will control and reduce rapidly rising health costs. But the system fails to address the basic cause of rap idly rising health costs. Indeed, it includes many elements that ultimately would increase rather than reduce costs sup p orted, employer-based third party payment system. Because some third party-in surers, or the government through Medicare and Medicaid-pays most health bills, both consumers and medical providers lack incentives to keep costs down. So they do not shop for t he lowest cost care or seek to avoid unnecessary care, and demand services even where costs greatly exceed the benefits. Because consumers are not concerned about direct costs, moreover, providers and innovators do not compete to keep costs down The root cause of rapidly rising medical costs has been universally identified as the tax 20 Managed competition would do nothing to address this third party payment problem.

Rather, it would perpetuate and extend it. In fact, it would expand third party coverage t o everyone through a universal mandate. One authoritative study estimates that expanding third party coverage to the uninsured would alone add $30.6 billion per year to national health costs because of increased utilization under the incentives of third p a rty cover age2l At the same time, managed competition would limit or preclude health plans with 20 For a general discussion of this problems, ste Butler, Talking Points 1, op. cit 21 John F. Sheils, Lawrence S. Lewin, and Randall A. Haught Potential Publi c Expenditures under Managed Competition." Health Affuairs, Vol. 12, Supplement 1993, p. 233 16 high deductibles that reduce third party coverage and expand direct consumer incentives.

It would also preclude medical savings accounts an innovation that woul d encourage higher deductibles by allowing families to establish tax-exempt accounts to cover direct purchases of medical care. Instead, managed competition would impose a single, stan dard health plan on everyone that, because of the political process, m o st likely would in clude only a modest deductible. Indeed, many people likely would have even lower de ductibles in the standard plan under managed competition than they do under their insur ance plans today, again adding to the third party payment proble m Direct Consumer Incentives Needed. Managed competition seeks to rely on competi tion among insurers and their managed care networks to reduce costs. But that is only one part of the overall system of incentives that would control costs in an open market.

Just as important would be direct incentives for consumers to control costs when they seek care, translating as well into direct-on-the-spot incentives for providers to control costs as well. Studies show that expanded cost sharing through high deductible s and co payments is nearly twice as effective in controlling costs as managed care systems alone22 Without such direct incentives, any system to control costs would always be fighting a losing battle against the current incentives underlying the demand o f millions of consumers and their doctors, who would still be largely insulated from the economic consequences of their daily decentralized health care decisions.

Managed competition would directly increase costs in numerous ways as well. The leading propo sals would establish three new federal bureaucracies: the National Health Board, the Health Benefits and Data Standards Board, and the Health Plan Standards Board. The proposals would also require a new HIPC bureaucracy in each state. This added bureaucra cy would necessarily drive up costs. Managed competition also would re quire a new detailed reporting and data collection system by all health providers nation wide. This system would involve substantial new paperwork and costs as well.

But the biggest fac tor driving up costs under managed competition would be its reli ance on a single, standard plan of health coverage for every family. Chosen through the political process, it would ultimately end up covering numerous expensive benefits sup ported by polit i cally favored interests. Even now, as the Clinton Administration contem plates a standard benefits package, there is pressure to include open-ended mental health counseling, drug and alcohol treatment, open-ended treatment for 'AIDS, prescription drugs, d e ntal benefits, and even long-term nursing home care. Mandating inclusion of such benefits necessarily would drive up national health costs, just as state insurance mandates have driven up local insurance costs.23 Besides the general benefits, numerous spe c ialty practitioners, such as chiropractors or acupuncturists or osteopaths, would lobby heavily to have their treatments covered under the standard national plan as well. Such groups already are campaigning to be included 22 MarkV. Pauly. "Killing with Ki n dness: Why Some Forms of Managed Competition Might Needlessly Stifle Competitive Managed Care," paper delivered at American Enterprise Institute conference on Health Care Expenditure Controls Political and Economic Issues, April 21-22, 1993, p. 9 23 John C . Goodman and Gerald L. Musgrave Freedom of Choice in Health Insurance National Center for Policy Analysis, Policy Repon #134, November 1988 17 in the Clinton benefit package. They will rightly see such coverage as essential to the prosperity and possibly even survival of their practices. Most, therefore, would fight hard for such coverage. Many would doubtless succeed.

Adding on a Christmas tree of benefits would make the standard plan under managed competition very costly. And extending full third party coverage to all of these benefits would likely spur a rapid acceleration of national health care expenses. Employers who think that managed competition would reduce their costs are sorely mistaken. What they would discover is a loss of control over what t hey must pay for. And they would be stuck with costs driven by a political process far more sensitive to interest groups than to em ployer concerns over health care costs.

Some proponents of managed competition claim that these pressures to raise costs cou ld be constrained by price controls and a fixed national budget for all health care. But this is an admission that managed competition would not be successful in holding down costs. Indeed if price controls and global budget limits are the factors to cont r ol costs under a managed competition framework that would otherwise increase costs, then what is the point of adopting managed competition? Significantly, Enthoven, Elwood, and other originators of managed competition reject price controls and global budg e t limits as inconsistent with managed Competition. Indeed, Enthoven compares global bud ets to bombing from 335,000 feet, where you don't see the faces of the people you kill!4 And well they should, for managed competition is based on the idea of creating a price compe tition among managed care plans, and a price competition is not possible if the govern ment is setting prices then that would result in further reductions in access to and quality of care, as these mechanisms would arbitrarily starve the hea l th system of funds to reduce c0sts.2 25 In addition, if price controls or global budget limits are added to managed competition A TROJAN HOWE FOR BIGGER GOVERNMENT Managed competition would add to the nation's health care problems, rather than solv ing th em. It would also prove to be the vehicle for a huge expansion of government.

Managed competition would mean'a major tax increase by capping the tax exemption for health insurance in each geographic area at the premium level for the lowest cost plan in tha t area's HIPC. It would also involve a major increase in welfare spending because the government would pay large, means-tested subsidies to everyone at lower incomes to pay for premiums of the standard, government-specified health plan. Under H.R. 5936 fo r instance, the government would pay full premiums for everyone in poverty, and con tinue some subsidies at income levels up to 200 percent of the poverty level. The poverty 24 Enthoven made the comment during a recent conference on health cam reform, as r e ported in Health News Duily January 11, 1993, p. 2 25 Stuart M. Butler The Contradictions in the Clinton Health Plan Heritage Foundation Backgrounder No. 924, January 12, 1993 26 Edmund F. Haislmaier Why Global Budgets and Price Controls Will Not Curb Hea l th Costs Heritage Foundation Backgrounder No. 929, March 8,1993 18 level for a family of four in 1992 was close to $14,000, meaning subsidies would con tinue for four-person families up to almost 28,000 in income. At the same time, the pro posals include n o broader reforms to ensure this increased welfare spending would not add to the counterproductive effects of the current system in encouraging non-work, fam ily breakup, and long-term dependency. Paying full health care premiums for everyone below the po verty line would substantially increase the reward for not working, and phas ing out these added subsidies would add to the effective marginal tax on work effort.

Any increase in health care subsidies for low-income recipients should be adopted in the context of broader welfare reforms to ensure that these added subsidies do not add to the counterproductive effects of Americas welfare system as well.

But that is only the beginning. Managed competition would also be used to fund many other big government so cial programs. Lawmakers could do this simply by adding long sought benefits to the standard, government-specified health plan that almost everyone would effectively have to buy. The premiums for that health plan paid by almost every one would then effect ively serve as a tax to finance these big benefit programs.

Consider the promotion of elective abortion. Adding unlimited abortion on demand to the standard health plan would finance, at a shake, free unlimited abortions not only for the poor, but also for everyone else, effectively using the standard health plan premiums as a new tax for funding by general taxpayers. Consider also expanded drug rehabilita tion programs. Adding drug and alcohol treatment to the standard health plan would pro vide such bene f its for everyone without limit, again financed by the premium tax that everyone must pay for the standard health plan. Open-ended, unlimited treatment for AIDS and other sexually-related diseases is another example of services that could be fi nanced thro u gh this premium tax as well, again by adding such treatment to the standard health plan. The same would be true for long-term care. Overall, through this process congressional liberals could obtain massive new social spending increases in new off budget s pending and taxes, effectively hiding the financial impact of this spending on Americas taxpayers.

A Back-Door Canadian System. Finally, with a highly regulated managed competi tion framework in place, it would be much easier to impose a full-blown Canadia n-style national health system on America. Such a system would result from just a few simple changes in the managed competition structure 1) The premiums paid to state-run HIPCs would be replaced by a uniform federal tax such as a payroll tax 2) The HIPCs would then distribute these funds to the established managed care net works through a formula based on their expected utilization, and advise residents in each state to choose among these networks for their care, similar to the process in the Canadian pro v inces 3) The government would then impose an expenditure limit on these networks, equiva lent to the funds they received from the HIPCs-again, just like the Canadian medi cal budget caps 19 The resulting system would be indistinguishable from the Canadian national health care system, and would have all of the same negative effects, such as waiting lines, de lays in treatment, and the tragic loss of the current expansive access to high quality so phisticated medical technology enjoyed by the average America n 2 JOB LOSSES UNDER MANAGED COMPETITION If managed competition includes a mandate that employers purchase a health ackage for their employees, that would destroy jobs by raising the cost of employment? H.R 5936 includes no such mandate, and thus would not lead to a universal health system.

One recent study estimates that the employer mandate advocated by Enthoven and the Jackson Hole Group would cause the loss of about 1 million jobs in small businesses of less than 500 e~nployees The study also estimates t hat about 16.3 million workers, or almost 25 percent of all small business employment, would face the risk of prolonged layoffs, lost benefits, and plant closings THE ALTERNATIVE-REAL CONSUMER CHOICE Instead of government-regulated managed competition, wh a t is needed is open compe tition, with consumers making the central decisions over what their benefits will be. That would be provided under the Heritage Foundation Consumer Choice Plan.30 Legislation based on the Heritage proposal was introduced last yea r by Senator Orrin Hatch, the Utah Republican.

Under the Heritage plan, unlike managed competition, there would be no requirement for every American to have the same coverage through a comprehensive standard health insurance policy, only the minimal regula tion that families must obtain catastrophic cov erage-to protect society from "free riders" who could afford coverage but would 27 28 29 30 Edmund R. Haislmaier Problems in Paradise: Canadians Complain About Their Health Care System, Heritage Foundation B u ckgrounder. No. 883, February 19,1993; Edmund F. Haislmaier Northern Discomfort: The Ills of the Canadian Health Care System Poficy Review,Vol. 58, October 1,1991; Edmund F. Haislmaier, "Perception v. Reality Taking a Second Look at Canadian Health Care," Heritage Foundation Bu&rounder N0:807, January 31,1991; John Goodman Beware of National Health Insurance Herituge Lecture No. 276, August 1,1990; Michael Walker Why Canada's Health System is no Cure for America's Ills Heritage Foundation Infem'onuf Bri

ng No. 19, March 13 1989.

Edmund F. Haislmaier The Mitchell Health America Act: A Bait and Switch for America's Workers Issue Bulletin No. 170, January 17,1992; Stuart M. Butler, "Why 'Play or Pay' National Health Care is Doomed to Fail Herituge Lecture No. 329, August 14, 1991.

CONSAD Research Corporation, "The Employment Impact of Proposed Health Care Reform on Small Businesses,"

May 6,1993.

In addition to the Heritage studies cited earlier, see Stuart M. Butler and Edmund F. Haislmaier, eds A Nutionuf Health Systemfor Americu (Washington, D.C The Heritage Foundation, 1989 Stuart M. Butler, "Assuring Affordable Health Care for All Americans Herituge Lecture No. 218, October 1,1989; Stuart M. Butler Using Tax Credits to Create An Affordable Health System," Heritage Foundation Bu c kgrounder No. 777, July 26,1990; Robert E. Moffit Consumer Choice in Health: Learning from the Federal Employee Health Benefits Program Heritage Foundation Buckgrounder No. 855, September 23,1991; Stuart M. Butler Why Conservatives Need A National Health P lan Heritage Lecture No. 442, March 23,1993 20 choose to rely on taxpayers to pick up the tab if they or their dependents had a serious ill ness. Beyond these minimal requirements, consumers would be free to purchase what ever additional provisions or cov e rage they preferred. To help them pay for coverage families would receive tax credits and any money now being spent on coverage by their employer 31 Families would receive tax credits for three kinds of health care purchases 1) health insurance 2) payment s they made directly to a doctor, hospital, pharmacist, or other provider 3) contributions to a medical savings account, which would be a special account set aside The Heritage Plan would not require consumers to purchase their insurance through a HIPC, bu t would allow them to buy their coverage from any insurer in the open market that they preferred. Consumers and businesses could voluntarily form and join HIPCs to purchase insurance if they preferred to do so, and legal restrictions against such collec ti ve purchasing would be removed. Families also could buy a plan through some other or ganization, such as a union, church, or farm bureau, and obtain the tax credits.

Unlike managed competition, the Heritage plan does not establish any requirement or instit utional bias forcing consumers into managed care systems. These systems would compete on the open market on the same terms as everyone else. Such a free market would allow for the development and marketing of alternative health care delivery op tions, ena b ling entrepreneurs to take advantage of new technologies and new systems of health care delivery to patients without timeconsuming bureaucratic delays trol. Consumers would make the decisions, and have ultimate control over the funds and where they go. Th e entire health care system, therefore, would be forced to respond to them, rather than to employers, insurers or the government, as under most other propos als. Consumers also would have maximum freedom of choice regarding all aspects of their health care , including services, treatments, providers, coverage, and insurers.

Unlike managed competition, the Heritage plan would also maximize, rather than re strict, competition among insurers and all health care providers. The Heritage Plan would also maximize, rather than restrict, access to and quality of care, allowing consumers to purchase the services and quality they prefer. It would create a competition among insur ers to keep costs down as they vied for consumer favor. But it would also maximize mar ket i ncentives for consumers to control costs by avoiding unnecessary or overly expen sive care. This in turn would result in stiff competition among providers and innovators to meet this newly-heightened consumer concern by reducing costs. At the same time th e Heritage plan avoids the added costs of unnecessary additional bureaucracy and regu lations imposed by managed competition. The Heritage Plan would consequently reduce rapidly rising health costs in accordance with consumer preferences for future out-of- p ocket medical expenses The Heritage plan consequently would place consumers at the center of power and con 31 Low-income families not paying taxes would receive "refundable" credits, equivalent to vouchers 21 CONCLUSION Health care policy makers only have two choices in designing reforms to reduce health care costs while achieving universal coverage. Either they can establish true markets in health care, with market incentives and competition to reduce costs. Or they can adopt some regulatory scheme where the government attempts to reduce costs by arbitrarily ra tioning and denying care through one system or another. Managed competition does not involve some sort of third way that enables policy makers to avoid this choice.

Managed competition would involve so much heavy-handed, unnecessary government regulation and control that it would ultimately fail to create true open market competition and effective market incentives to control costs As a result, it would ultimately fail to re duce health care costs. I ndeed, because it would extend and perpetuate the third party payment problem underlying the health care cost explosion, add new political pressures to the system to expand benefits favored by politically powerful special interests, and en shrine costly r egulatory requirements and new bureaucracies, it would likely increase rather then reduce costs.

Along the way, managed competition would greatly restrict consumer choice and con trol. It would also greatly restrict competition among insunk, ultimately lea ving consum ers to face a cartel of a few larger, dominant managed care systems in each area. In the end, such a system would produce sharply reduced access to and quality of care for the average American. It also would produce higher taxes, more special interest spending more government regulation and control, more government bureaucracy, and a short term way station to a full-blown Canadian system after managed competition inevitably fails, resulting in the ultimate tragedy for American patients.

The Her itage Consumer Choice Health Plan shows how to establish true open market competition and incentives. It would consequently solve Americas health care problems slashing runaway costs increases, while achieving universal coverage. It would accom plish this precisely through expanding consumer choice and control, and market competi tion, maximizing along the way the access to and quality of care that Americans desire.

Managed competition, by contrast, would be a seriously harmful, heavily restrictive fail ure 22


Peter J.

Distinguished Fellow