Ivan J. Miller, Ph.D.

January 7, 1999

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The managed health care experiment has failed. The time has come for America to develop a new health care system — a pro-consumer system that can control costs, offer access to all citizens, and efficiently provide ethical, quality care. The process of replacing managed care begins with realizing that managed care is not the only choice. Ending the managed care experiment does not mean going back to the past; it means that America can design an improved health care system. There are viable reform proposals available now, and some of these are described below. Beginning with these proposals, America can start a national debate about how to build a better health care system.

The Single Payer system, the most commonly proposed alternative to managed care, deserves to be mentioned first. In this health care model, the needs of all of the citizens are provided by a single, government-funded program. Although this proposal is often described as the Canadian system, many countries have designed and implemented single-payer health care systems. An American model does not need to be limited to the ideas in the Canadian system.

Advantages of a Single Payer system

The Single Payer proposal is the primary proposal for addressing the needs of the millions of uninsured and has several powerful arguments supporting it. The current system, multiple payers of health insurance, leaves more than 40 million Americans without insurance, and the number is growing. A government plan that guarantees coverage to all is the most feasible way of extending coverage to the uninsured.

A Single Payer system is also the major proposal that addresses insurance industry discrimination against the ill and disabled. Insurance companies lose money every time treatment costs more than the monthly premium. Therefore, insurance companies refuse to cover pre-existing conditions, seek out groups that have young and healthy patients, and use underwriting examinations to exclude people vulnerable to illness. As a result, the people who need insurance the most, the chronically ill and disabled, are left out of most private insurance plans. In a Single Payer system everyone is covered, including the ill and disabled.

Finally, a Single Payer system saves enormous amounts of money by eliminating marketing expenses, underwriting costs, and corporate profits. It is capable both of streamlining administration and controlling expenses. By comparing American health care costs to that of countries with single payer systems, proponents of this system believe that it can provide for most of the health care needs for all citizens with no increase over the current health care expenditures.

Single Payer opponents point out that single payer systems have problems. These systems may restrict freedom in ways that violate the values of many Americans. (Restriction of freedom is also one of the problems with managed care.) Government policies may limit treatment choices, ration treatment, or create waiting lists. Because the Single Payer system pays for all care, professional fees may be set unreasonably low by a government bureaucracy, and this removes the incentive for professionals to develop additional services to meet patients' needs or to improve the quality of care. Additionally, patients may not be allowed the choice of paying their health care professional for treatments or additional services that are not approved by the Single Payer regulations.

Single payer systems do not prevent the use of managed care techniques. One common managed care technique is to pay a professional a flat (capitated) fee for the treatment of a patient regardless of the quality or length of treatment. In this system the professional makes more money by the early discharge of patients, and consequently has a conflict of interest with providing extended treatment. Medicare, America's single payer system for the elderly, pioneered the use of financial controls to limit treatment with their Diagnosis-Related Groups program. Often when Single Payer advocates are questioned about how they will respond if health care advances lead to more treatment expenses than the system can afford, they talk about controlling expenses by using managed care techniques such as utilization review and financial incentives for inexpensive treatment. These are the methods that caused managed care to be so destructive.

Examples of government run programs are not promising either. CHAMPUS, the insurance for military personnel, is considered one of the most difficult insurance programs; Medicare, the insurance for the elderly and disabled, has such poor coverage and complex regulations that many professionals refuse to work with it; and Medicaid, the insurance for the poor and disabled, is subcontracting health care services to the worst of managed care companies.

Many Single Payer advocates believe that this system must have one tier that provides everyone's health care. The alternative is a two-tiered system — a Single Payer, safety-net system for everyone and a better system for those who can afford private care. The single-tier advocates argue that it is essential to have everyone on one tier to create the political pressure necessary to adequately fund the system.

The two-tiered system may blend the Single Payer with private funding. The resulting system could be compared to the public and private education systems in this country. In education, everyone is entitled to a decent public education; however, public education is often supplemented with private pay tutors, classes outside the school system, and private schools. It can be argued that the reality of a free enterprise system is that the wealthy will always be able to purchase higher quality services, and a two-tiered system is inevitable. Indeed in most countries with Single Payer systems, supplemental insurance is common to cover the shortcomings of the government based system.

The Single Payer proposal deserves a central place in the health care debate because it addresses the uninsured and the insurance industry discrimination against the chronically ill, but this proposal has potential problems that need to be fixed. The national debate needs to decide the place of a Single Payer system, how the potential problems in a Single Payer system can be fixed, and the pros and cons of one or two-tiered systems.

Medical Savings Accounts (MSAs) are another prominent proposal for replacing managed care. MSAs work by combining a high-deductible, catastrophic insurance policy with a Medical Savings Account that can be used to cover expenses below the deductible. Money put in the MSA is tax deductible, just as the money employers spend on purchasing insurance is tax deductible. Patients, not the insurance company, control how the money in the MSA is spent, and all of the MSA expenses contribute to meeting the deductible. Once the deductible has been satisfied, the catastrophic insurance pays for medical expenses. Money not used by the end of the year can be transferred to the next year. Theoretically, the high-deductible catastrophic insurance is so much less expensive than traditional insurance, the difference in costs goes a long way toward filling the savings account.

Advocates of Medical Savings Accounts (MSAs) argue that MSAs are desirable because: they give individuals the same tax benefit as employers enjoy when they purchase health insurance for their employees; the services purchased through the savings account offer greater privacy than those that are reported to insurance; and individuals have the freedom to make their own health care decisions without the control of an insurance company. Advocates report that consumers with MSAs watch expenses carefully and purchase wisely because they are spending their own money. To show that MSAs are practical, proponents of MSAs note that Singapore provides for most of its health care expenses through mandatory MSAs.

Opponents of MSAs have a valid criticism. The MSA is most desirable to the healthy person with no annual medical expenses and least desirable to the chronically ill person who has large expenses every year. They fear that if everyone is given a choice, the healthy will select MSAs and the chronically ill will be the only ones left under traditional insurance. In addition, the poor are unable to afford a high deductible. In a pro-consumer system there needs to be some safeguards to keep the healthy and wealthy from exploiting the MSAs without contributing to sharing the cost of health care with the less fortunate.

These objections can be partially controlled by a good design of MSAs. If an MSA is limited to the size of the deductible, the healthy person who had no insurance expenses would only evade a small amount of taxes. To respond to the objection that MSA plans are unfair to the chronically ill, some proponents of MSAs have proposed supplementing the savings accounts of those with chronic illnesses.

Dr. Robert Bear Smith has developed "Autonomous Care," which includes a way to use MSAs for the poor. In his proposal, a low income person or person on disability income is given an allowance on paper for medical expenses. The insurer would pay these expenses and deduct them from the annual allowance. At the end of the year, if any of the allowance remained, the patient may be paid a portion (perhaps 20%) of the unused allowance or Medicaid patients may be allowed to transfer a portion of the unused funds to a regular MSA once they are out of Medicaid. This payment to low income consumers gives them an incentive to be smart buyers and control their own health care expenses. Because the patient is cost conscious, the managed care administration can be discarded which will theoretically save more than a 20% payment to the patient.

Managed Cooperation (Responsible Freedom) Plan is an idea designed by Dr. Karen Shore, and it is particularly appropriate for outpatient psychotherapy. In this plan, the insurer pays a fixed reimbursement that is below the usual fee for service, and the patient makes a copayment to cover all expenses above the fixed payment. The size of the copayment may vary from one professional to another. For example, if the insurance plan paid a fixed payment of $60 per hour for psychotherapy, and if the professional charged $100 per hour, the copayment would be $40. If the professional charged $80 per hour the copayment would be $20. In this plan, professionals are encouraged, but not required, to see some low income patients on a sliding scale for a smaller copayment or no copayment at all.

This plan has several cost-control advantages over traditional benefit designs. First, in traditional insurance, copayments are a percentage of the fee and consequently, patients do not watch fee increases as closely as they would when responsible to pay all of the fee increase as they are in the Managed Cooperation Plan. Second, because the portion of the fee paid by insurance is fixed, the insurance company's costs are limited. Third, although patients ordinarily do not want psychotherapy to continue longer than necessary, the copayments of Managed Cooperation assure employers and insurers that therapy will not continue longer than necessary. And fourth, because the patient manages the length of treatment, the managed care expenses of monitoring treatment (which can be more than the actual cost of treatment) are eliminated.

The criticism of the Responsible Freedom Plan is that for the chronically ill patient, the copayment may be a formidable barrier. To respond to this criticism, patients with chronic illnesses or severe mental illnesses should be given higher level of reimbursement so that a copayment is not an unreasonable barrier.

AMERICARE, designed by Dr. Art Kovacs, is a proposal that combines traditional insurance and reform proposals in a way that overcomes the shortcomings that each health care system has when it stands alone. By taking the best of each system, AMERICARE shows that the current options are capable of being combined to create a much improved health care system.

In AMERICARE, Basic Health Care (BHC) is provided for every person through a government funded, Single Payer, and two-tiered system. The annual budget for BHC is set by Congress, and extent of coverage is limited and determined by a Board that represents the American people. The Board strives to reflect America's values. In addition to BHC, people could purchase a variety of health insurances to supplement their BHC coverage.

AMERICARE has the following features:

Insurance and managed care have squandered health care dollars on excessive CEO salaries and bloated bureaucracies, have created hidden policies that invisibly ration patient care, and reveal so little accurate information that the free market cannot distinguish good policies from bad ones. Because some form of health insurance will probably continue, insurance reform is needed. Complete Health Insurance Disclosure proposes solving insurance industry abuses by requiring full disclosure of financial records, of policies that influence health care, and of data about the services actually provided. For practical reasons, only a small amount of this disclosure would need to be publicly dispersed, but more detailed disclosure could be obtained upon request by consumer advocates.

This is a more extensive type of disclosure than is usually required by law. If only a partial disclosure is required, many companies find ways of manipulating or "gaming" the disclosure. With complete disclosure evidence of problems will probably show up somewhere in the disclosed information in spite of efforts to game the data. As a result, irresponsible practices will be much more difficult to hide. Once disclosed, insurance company actions and services will be subject to the corrective forces of the marketplace.

The rationale for Complete Disclosure is threefold. First, because insurance is prepaid and money is entrusted to insurance companies to be returned in time of need, the company should disclose how the entrusted funds are managed. Second, it is unethical to secretly manipulate a patient's treatment, and therefore the actions of insurance companies that affect treatment should not be secret. And third, the effective functioning of a free market requires that consumers and their advocates have access to accurate and relevant information about the service purchased.

There are many cost-control methods that are clean because they do not violate American values. These methods can be used in a new pro-consumer system.

If a procedure saves insurance companies money and increases the inconvenience and suffering of the patient, patients can be offered financial incentives for the less expensive procedure. For example, if early discharge from the hospital is possible with good home care, why not offer the patient a payment for an early discharge if the physician approves the discharge plan? Each patient could evaluate the relative benefits of discharge and receiving the payment versus the increase in pain, suffering, and inconvenience.

Professional education has been the primary method for improving or economizing patient treatment. Although this method is sometimes slow, it also avoids the mistake of rushing to inexpensive new treatment techniques based on too little evidence, an error that is common in managed care.

Patients and professionals can be educated when there are less expensive treatment options. Most of the movement to outpatient surgeries has been the result of improved techniques that have been taught to surgeons in their normal professional education programs. When patients are educated about natural childbirth, exercise programs to lower blood pressure, and dietary changes to lower cholesterol, many patients change behavior. If less expensive treatments are desirable, insurance companies can educate patients and/or professionals about these options, and education does change behavior.

More types of medical treatment have been developed than any country can afford for all of their citizens. Money is limited, and there will be some treatments that each system of insurance must deny. It is not wrong to limit benefits or even to ration treatment. For example, if mechanical hearts are developed that cost a half million, most people would agree that insurance may not be able to pay for one for every patient who had heart disease

Managed care is unethical because it promises comprehensive treatment services but maintains hidden policies that invisibly ration treatment. It is the deception of hidden or invisible rationing that is unethical. As long as insurance policies are honest and specific about limitations on treatment and rationing procedures, these policies are ethical.

Under some circumstances, denying a treatment based on utilization review can be justified. Although having a third party involved in a personal health care decision is the least desirable cost-control option, it may be necessary for expensive and questionable treatments.

Third-party treatment reviews should pass four tests: (a) the reviewer should be a person with the same or superior credentials as the treating professional, (b) the review should be thorough enough to fully consider the individual and personal circumstances, (c) all of the information about how cost effectiveness is calculated should be open to the public, and (d) all of the specific scientific criteria and rationale for denial should be open to the public. If these criteria are met, at least there will have been thorough consideration and consumers will be assured that any criteria used by insurance companies must be sound enough to withstand public criticism.

Inpatient psychiatric hospitalization is an example of an area in which utilization review may be justified. In the 1980s, for-profit behavioral health care corporations developed many programs which unnecessarily hospitalized mental health patients until their insurance was exhausted. These programs were highly profitable, but for most of these patients, outpatient treatment would have been the treatment of choice and more cost-effective. Many of these programs were a thinly disguised method for defrauding insurance companies. Utilization review could have been used to prevent this abuse.

The three central features of managed care are that: (a) a third party, the managed care company, has the right to make or influence personal treatment decisions, (b) this third party operates primarily in secrecy, and (c) the third party or its representatives increase their profits by taking money away from treatment. Such a system is immoral. No one but the patient and the patient's chosen professional should have the right to make treatment decisions. In addition, such a third-party system for controlling patients and professionals is inherently bureaucratic and inefficient, and the attempts to control treatment undermine patient privacy and patient-professional relationships.

Each of the proposals in this paper returns the control of treatment to patients and professionals and eliminates the use of managed care in all but the rarest of circumstances. Consequently, they are all good proposals that should be included in the national debate over how to best replace managed care.

Many legislative reform efforts to control the managed care industry have been defeated by the power and wealth of the industry. If managed care is replaced, consumers and professionals will be big winners, but insurance and managed care will be big losers. Consumers will win because they will gain access to affordable health care and regain control over their personal health care decisions. Professionals will win because they offer a valuable service for which consumers will pay a reasonable fee. Insurance and managed care will lose because a pro-consumer health care system will not allow these industries to take a huge portion of the health care dollar. Because reform will be so devastating to these industries, they will fight as if their lives depended on it.

Attempts to find a solution agreeable to the insurance industry are unwise. This industry will want to keep more of the wealth and power than Americans believe that it deserves. The reality is that to meet the needs of the American people, the insurance industry must be divested of much of its wealth and power.

A populist movement is needed

The replacement of managed care will not be led by business, government, or health care economists. Business has benefited directly by managed care cuts in health care expenses, and it has consequently allied itself with the managed care industry. While some politicians are leading the battle to replace managed care, most politicians are wary of confronting the power of the wealthy insurance industry. Most of the jobs in health care economics are tied to the insurance and managed care industry who hire economists to direct the centralized control of health care. As a result, most economists believe in finding reasons to continue managed care operations and support centralized control rather than patient freedom.

True reform must come from the people. All of us need to demand that America build a pro-patient, pro-consumer, pro-quality health care system. As this demand grows, the power of people can outweigh the power of the insurance industry that wants to maintain the status quo, and legislators will join the populist movement.

The time to replace managed care has arrived. Managed care is the worst possible system. It is inefficient, unfair and immoral. While reform advocates fight among themselves, managed care continues its destructive invasion of health care. All of the proposals here are good proposals and should be included in the debate over how to replace managed care. To end managed care's stranglehold on the American people, all of the advocates for reform need to join together to create the pro-consumer health care system. Rescue Health Care Day, April 1, 2000, is a day that reform advocates can participate in teach-ins and protests to educate America about the possibilities for replacing managed care. Let us begin telling America that change is possible and let us find the best solution.

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