Managed Competition = Managed Decisions


The following is an analysis of Alain Enthoven's Managed Competition model using his paper titled, "The History and Principles of Managed Competition".   Enthoven's definition of managed competition begins on page 6.  Everything prior is simply a combination of history (biased) and "justification" for why his managed competition is needed. 

My recommendation would be to read "The History and Principles of Managed Competition" clear through before you read my analysis of it.  Get as much as you can out of it first and then go through my analysis side by side with Enthoven's paper.  

I would welcome any productive critique of my analysis that shows me where my thinking went wrong if it did. 



Competition (Enthoven's description).  The word competition as used by economists, if not qualified by some phrase indicating the contrary (such as nonprice competition), means price competition.  When there is price competition, suppliers compete to serve customers who are using their own money or are otherwise motivated to obtain maximum value for money. Price competition does not mean that price is the only factor influencing the customerís choice. Quality and product features also enter in. It simply means that price is one of the factors. Perhaps value-for-money competition would be a more apt phrase.

Sponsor :  A sponsor is variously described as the group representative and negotiator for the purchase of health insurance (and/or direct purchaser of health services).  It might be an employer, state or federal insurance administrator, Medicare Administrator, etc.  It might also be an association like AARP that negotiates for Medicare Supplemental policies.  But in the introduction and later in the paper, it becomes clear that the word 'Sponsor' is used to describe a third-party intermediary 'regulator/referee/aggregator of subscribers' that will in effect, "manage the competition". 

Price-elastic demand:  Enthoven's definition.
           Inelastic demand - when the seller can increase revenue by raising the price
           Elastic demand - when the seller increases revenue by reducing price   



Managed Competition Defined

Managed Competition is a purchasing strategy with price being an annual premium for "comprehensive health  services".   (It's a "per head" annual price for a pre-defined set of routine, allowable services - not individually priced).  

The objective of managed competition is to divide providers into competing economic units to "motivate them to develop efficient delivery systems".

Enthoven says that "it is compatible with copayments and deductibles for individual services that can influence patients to do their part in using resources and that are 'price signals' patients can understand and respond to".  

 Sponsors -

Set the rules for competition (Enthoven uses the term "rules of equity".  A more clear definition would be to say that the sponsor negotiates the terms of the contracts with all parties and provides the administrative interface functions with the insurer.  But with managed competition, the negotiation begins after a minimum threshold of terms.)

  • Every eligible person is covered
  • Every eligible person has subsidized access to the minimum, required package of coverage
  • People choosing a better plan must pay the difference from their own pockets
  • Coverage can't be canceled except for non-payment of premiums OR "serious non-compliance with reasonable norms of patient behavior"  (WHOA!)
  • Re-enrollment is guaranteed.
  • Community rated premiums regardless of health status (but he allows for age-rated increases
  • No exclusions for pre-existing conditions.  Enthoven's qualifier:  "Obviously, some of the principles may have to be compromised with other practical considerations, depending on the circumstances".    In other words, these are the rules - but really, there are no rules because we can change the rules.

Market Manager aka (Market Maker)

Enthoven:  "A health insurance cooperative (HIPC) serves as the gatekeeper for much or all of the market in a geographic area."

That is a very, very important element in the game of managed competition (decisions).  This is the paragraph where he said it in context - which does not change the fact of what he was saying:

Sponsors select participating plans. The freedom of the sponsor in selecting participating plans will depend on the circumstances. A private employer will have more freedom of action then a public employer. And a public employer will be able to exercise more freedom than will a health insurance purchasing cooperative (HIPC) that serves as the gatekeeper for much or all of the market in a geographic area.


Enthoven: Sponsors create price-elastic demand. Next, the sponsor must seek to create price-elastic demand. (A seller faces inelastic demand if the seller can increase revenue by raising price, and elastic demand if the seller increases revenue by reducing price.) For there to be an incentive for health plans to cut price, demand must be so elastic that the additional revenue gained exceeds the additional cost of serving more subscribers. Managed competition is about creating such price elasticity.14

The above is absolutely classic in terms of the intellectual fraud practiced by Economists.  The only way to increase revenue while reducing price would be to pressure suppliers to reduce their price which forces suppliers (providers in this case) to reduce quality since the minimum level of services is fixed.  The only alternative for the insurers is to increase the price on the premium benefit plans that subscribers must pay for personally.  Ultimately, this will cause the insurance companies to raise the prices for the premium plans until the point when the attrition level of subscribers exceeds the necessary level of subscriber base to make the plan economically viable.  In other words, it's a squeeze play to cause the phase out of health insurance as we've known it.   At that point, the "competition" would be on the base level of services which would force a decrease in quality of service.    And that's why I called this the "managed decision" system - not managed competition.

On Page 9 of Enthoven's paper, under the section of price-elasticity, he describes the "tools" for accomplishing price-elasticity.  In those paragraphs, he says some very notable things concerning his "game".

(2) Standardized coverage contract.  Standardization should deter product differentiation, facilitate price comparisons, and counter market segmentation.   (Deception again - if there is no product differentiation then the subscribers will have to choose based on image of the facilities because that's the road the providers will take.  They will create the illusion of quality while "going cheap" on the internal costs of operation.   On the issue of the market segmentation that he wants to "combat" the goal is eliminate subscriber choice in terms of covered benefit options so that the only decision will be on price.  That's why this is a "managed decision" system and not managed competition.   His last reason for requiring standardization was very difficult to parse so I had to write it out as a complete thought and then translate it:

This is his exact statement: "The fourth is that biased risk selection can reduce demand elasticity for health plans that enroll a favorable mix of risks."  

Rewrite:  The reason for as much standardization as possible is that biased risk selection selection of subscribers based on health status can reduce demand elasticity the ability of health plans to increase revenue while reducing price for health plans that enroll a favorable risk mix all persons without regard for pre-existing conditions.

His use of the term "biased risk selection"  is misleading.  A normal translation of biased risk selection would be that the insurance companies exclude people with pre-existing conditions because they already know that their costs would increase if these people were offered insurance so the bias is against people with health problems.   He is using the term "biased risk selection" in the sense the bias is in favor of people with health problems - which means actually unbiased risk selection on the part of the insurers.   And he did the same kind of inversion on the "favorable risk mix" phrase.  Favorable to whom?  In this context, favorable would mean the unbiased offer of insurance to all eligible applicants.  

In effect, what he is saying in that very brief statement is that the reason for standardization is so that the insurance companies won't get hurt by taking all applicants without regard to pre-existing conditions.  Implicit in what he said is that the standard package of benefits will be on the "sure thing" services.  Those services would be the "wellness" services.  The annual physical, the pap smear, vaccinations for the kiddies, etc.   And I know that's true from my 2008 research on the Healthy Americans Private Insurance (HAPI) Plan and the Healthy Americans Act (HAA!) both of which were incorporated into the last health care reform package that was passed.

What the rules for managed competition (decisions) will do is to cause provider groups to shift patients with chronic conditions to specialty providers for the care of specific chronic conditions.  Examples would be diabetes, asthma, obesity, etc.  This aggregation of patients by condition is a kind of pre-sort isolation of patients that will facilitate their use as guinea pigs for genetics research which is being billed as "personalized medicine"

(3) Quality-related information. People will be reluctant to switch from Plan A to Plan B to save $20 per month if they have no information that Plan B is safe for their health. The Jackson Hole Group proposes creation of a national Outcomes Management Standards Board that would set standards for outcomes reporting.15 Sponsors should play a role in making such information accessible to the local market. Sponsors are also the appropriate agencies to survey their sponsored populations regarding experience with health plans and to publish the results for consumers.             

Control of information is control of perception.  The survey's will be meaningless because for most people, their encounters will be for the "wellness" services.  With the triage of patients with serious conditions and the "Outcomes Management Standards Board"  setting the standards for reporting, it's pretty safe to assume that "the standards" won't include any information on the services of the chronic condition specialties that are external to the "wellness" providers.  If they do include information, the information will be limited in scope and content.

Page 9 - Choice of plans at the individual level & Sponsors manage risk selection.  

These two "features" of managed competition need to be analyzed together.

(4) Choice of plans at individual level. Sponsors should structure the market to offer annual choice of plan at the individual subscriber level, not the employment group level. Limitation of choice to the group level is a major barrier to price-elastic demand. (Effective managed care plans are linked to specific doctors. Because some people have strong attachments to their doctors, it is much harder to persuade a whole group to change plans and doctors to obtain lower premiums than to allow individuals who are willing to change to choose to do so.)

There are other opportunities for sponsors to exercise ingenuity in making demand curves for health plans more price elastic. For example, an alert sponsor might create a system to inform all patients of primary care physicians who contract with more than one health plan about which plan has the lowest premium so that patients can switch to the lowest-priced plan covering their doctorís services. Combined with standardized benefits, this could greatly increase peopleís willingness to switch plans to save money.

Finally, current income and payroll tax laws create a heavy tax on cost containment. These laws must be changed so that a health plan that cuts its premium by a dollar sees the full dollar transmitted to the subscriber, as an incentive to select that plan. This gives the health plan the full marketplace reward (more subscribers) for cutting price. Thus there must be a limit on tax-free employer contributions at a level that does not exceed the premium of the lowest-priced plan. This is beyond the scope of the sponsor and is mentioned here only for the sake of completeness.

The first paragraph makes no sense if the definition of "sponsor" is the employer as Enthoven originally defined it.  It only makes sense if the sponsor is a third-party under contract with employers.  An example of a third party - and I believe what Enthoven had in mind, would be a group insurance cooperative, the HIPC.   In effect, what Enthoven is suggesting is that the "group model" of insurance be broken - replaced by an "individual model" as packaged and managed by the HIPC with the employer simply being a 'pass through'.  This conclusion is supported by the third paragraph in which he notes that the income tax laws have to be changed to allow an employer deduction only for the standard benefit package and the elimination of the tax-free insurance benefits to employees over and above the standard benefit.     

The second paragraph is really key to decoding Enthoven's objectives.  Specifically, "opportunities for sponsors to exercise ingenuity...  an alert sponsor might create a system to inform patients of primary care physicians who contract with more than one health plan about which plan has the lowest premium so that patients can switch to the lowest-priced plan".  If the sponsor is an employer, they aren't going to do that.  There is no percentage in it for them.  A group insurance cooperative (HIPC) that is interested in steering patients towards a specific provider group however, would have incentive to do it. So effectively, the HIPC is the logical sorter - steering individuals towards one plan or the other which squares with the next element of Enthoven's managed decision system:

[Enthoven] Sponsors manage risk selection. Finally, in managed competition, the sponsor must manage the problem of biased risk selection. The goal here is to create powerful incentives for health plans to succeed by improving quality and patient satisfaction, not by selecting good risks and avoiding bad ones. This is a crucial and complex issue. Here I describe the general outlines without getting into technical detail.

An employer can't manage risk selection.  The only entity that could manage and distribute risk would be a third party intermediary that has information on the pools of risk and the distribution of high risk among the health plans and consequently to the provider groups.  So that is conclusive proof that Enthoven's plan is for the HIPC's to be the insurance market managers.  This is further supported by the "coordinated strategy for the sponsor to follow:

(1) Single point of entry. Subscribers notify the sponsor of their choice and the sponsor notifies the health plan. The health plan must accept all enrollees...

(2) Standardized coverage contract. Coverage contract features can be a powerful tool for selecting risks.

(3) Risk-adjusted premiums. The general idea is as follows. Health risks are likely to fall differently among the different plans, either by design or by accident. The characteristics of the population enrolled in the different plans (for example, age, sex, family composition, retiree or disability status, and diagnosis) should be measured and translated into estimates of expected relative medical costs, independent of plan. Each plan can be assigned a relative risk index, for example, 1.01 for a plan with unfavorable selection that makes its expected costs 1 percent above the whole group average. Then a dollar value is assigned to one percentage point of risk. For example, that might be 1 percent of the premium of the lowest-priced plan or the average-priced plan. This is a policy choice; there is no single mathematically correct answer. Surcharges are then applied to premiums of plans that received favorable selection; subsidies are given to plans that received unfavorable selection, to compensate for risk selection. This takes selection out of the competition.17

This is very insidious.  It's the key to the "managed competition" model. It gives dictatorial power to control the market to the third-party sponsor.  The power to adjust premiums based on some nebulous calculation of pooled risk to mitigate subscriber choice is the power to steer subscribers (patients) to select specific plans and it's the power to dictate to both the insurers and providers via price-control mechanisms of reward or punishment - behind the scenes.

Since the idea of the Sponsor is also to have the function of the cooperative to act as purchasing agent for individuals, it will allow them to define the plans of coverage, to select the providers, set the price and the risk adjustment factor.  Together, all of which means they are actually managing the health insurance market and the providers.               

Take note of the paragraphs that follow the risk-adjusted premiums paragraph.  Enthoven describes risk adjustment models based on diagnosis (the avoidance of which is supposed to be one of the objectives of managed competition)  and extra payments to providers on behalf of people with costly diseases but with the source of funds for those extra payments are not discussed.  But if one factors in the possibility (I believe probability) that the real intent of this overly complex "game" design is to facilitate the creation of population pools by disease category for steering into particular HMO's for the purposes of applied genetics research, then the third-party sponsor - manager of the distribution and market makes sense because the population pool could be distributed in such a way that the research can be carried on surreptitiously with nobody the wiser.  Who would make the extra payments?  The pharmaceutical companies and the national laboratories could use their research grants - and again, nobody would be the wiser. 

[Enthoven] Health Insurance Purchasing Cooperatives

In this section he states that large employers can be their own sponsor or they can cooperate with other large employers but actually, it's clear from the preceding paragraphs that the objective of managed competition is to break the model of the employer-supplied health insurance group; to be replaced by the purchasing cooperative and individual subscribers which ultimately will be the demise of the health insurance system as we've known it.    And it's because of this section of managed competition model that we know that Enthoven's plan is being implemented: 'HHS awards $22.5M in contracts to health info exchanges'. 

[Enthoven] HIPCs would select the participating health plans. Some would favor a rule that a HIPC must offer all health plans that achieve federal certification and that wish to be offered in the HIPCís territory. Whether or not market forces would resolve the problems arising from this arrangement is a
debatable proposition about which reasonable people can differ. I would prefer to see that HIPCs have some authority to select and drop health plans. The presumption should favor competition. Thus it would make sense for a HIPC to encourage participation by all provider groups in the territory, but some discretion might be appropriate for the following reasons.

In the above paragraph, Enthoven slips in that he starts by talking about health plans - but then he goes to provider groups.  That means that what he has in mind is HMO's which squares with the idea that the purpose of Enthoven's game is to eliminate health insurance as we've known it.   

[Enthoven] HIPCs would administer health benefit contracts. The HIPC should act like a competent, effective employee benefits office servicing beneficiary inquiries and complaints. It should interpret the contracts for beneficiaries, stand behind patients in disputes with health plans, and resolve disputes on terms that are fair to beneficiaries. This should be much more efficient than taking disputes to litigation. The HIPC also should monitor what is happening in the health care settings. It should survey consumer experience and make the information available for consumers. It should investigate
complaints and should aggregate complaint data to identify problem areas. HIPCs should not bear risk. Health plans should bear all risk for medical expenses,

Role of Organized Systems Of Care  

Managed competition is not based on a mere hope that the market will somehow generate better models of care. It is based on demonstrations of successful, high-quality, cost-effective, organized systems of care that have existed for years. To date, the strongest evidence of their economic superiority relates to prepaid multispecialty group practices. For example, the RAND Health Insurance Experiment found that Group Health Cooperative of Puget Sound cared for its randomly assigned patients for a cost 28 percent below that for comparable patients assigned to a fee-for-service plan whose care was paid for entirely by insurance or with 25 percent coinsurance (up to an annual out-of-pocket limit of $1,000).22  The evident marketplace success of Kaiser Permanente, now serving over 6.5 million people, reinforces this finding. Successful large-scale HMOs based on individual practice styles have emerged in recent years. These HMOs carefully select participating physicians and arm physicians and management with strong information systems about practice patterns.

The above is the real objective of Enthoven's game of managed competition - to eliminate independent health care providers and fee for service.  The system that Enthoven and Ellwood want is the HMO model where the HMO will have total control over your health care decisions.  The rest of his paper is devoted to justifications for his system of managed-decisions so this is the end of analysis.