Costs and price competition in California

Critics of health care reform proposals that incorporate managed competition contend that it has never been broadly implemented. However, insurance plans that combine insurance with the provision of care have been widely implemented and have been tested most extensively in California. This DataWatch explores California’s experience with health maintenance organizations (HMOs) and preferred provider organizations (PPOs), the introduction of which was followed by overall reductions in hospital costs. These reductions were larger in competitive markets. If implemented on a national scale, such selective contracting could be expected to reduce the growth of hospital costs even more rapidly than occurred in California. Several health care reform proposals rely on managed competition to control costs. This approach envisages multiple levels of competition. Large health insurance purchasing pools would be created and would provide their members with information needed to rank competing insurance plans along several dimensions, such as price, coverage, and quality. Workers would be encouraged to be price-sensitive in their purchase of insurance by a requirement that the costs for services beyond those included in a standard minimum benefit package be paid for out of pocket. Insurers would compete vigorously for enrollees by trying to offer the most attractive combination of prices and plans. Insurers would play a critical role in a managed competition-based system by contracting with providers that offer the best prices, locations, and quality, thereby transmitting competitive pressure from the insurance market to health care providers. Providers would organize themselves into entities that could absorb the risk of contractual obligations that specify costs (and possibly quality) in advance. In combination, these changes are designed to provide all parties-beneficiaries, insurers, and providers-with incentives for cost-effective behavior. A major criticism of managed competition is that it is largely a theoretical construct, with little or no experience or empirical evidence to support its effectiveness. Although this is the case for some elements of the current health care reform proposals-particularly, forming purchasing pools and Jack Zwanziger is an assistant professor at tk University of Rochester and consultant at RAND. Glenn Melnick is an associate professor at the University of California, Los Angeles, and resident consultant at RAND. Anil Bamezai also is a consultant at RAND. on S etem er 6, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom