Health Care Markets Research Paper

1. Origins

‘Health care markets’ is a relatively new term, framed by economical, structural, and social forces. It hardly existed 25 years ago but rose to prominence in response to the years of recession and high inflation (‘stagflation’) in the 1970s. The costs of social and welfare programs, such as health care, kept rising as revenues stagnated, prompting a ‘crisis in the welfare state’ (Esping-Andersen 1994). In addition, there were increasing complaints about government-run programs and about hospital-based specialists running up large bills without regard to the needs of payers or the population (Bengoa and Hunter 1991). In response, health economists recommended that payers (governments, employers, and insurers) apply the well-established principles and techniques of price competition theory to health care in order to constrain costs, increase efficiency, and make providers more responsive to the priorities of payers. This constituted a historical shift from professional dominance to buyer dominance among the countervailing powers of providers, purchasers, patients, and the state, over the control of power, costs, information, and the distribution of risks (Light 1995a).

1.1 Problems Of Market Failure

Applying price competition theory to health care was unprecedented, for medicine had long been regarded by leading economists as lacking the basic qualities for markets (Arrow 1963, Fox 1979). The idea of health care as a commodity to be traded in a market was anathema to them. Clinical medicine is rife with uncertainties and too often contingent on diagnosis and response. Thus ‘products’ often cannot be defined, and property rights may be unclear. Physicians vary substantially in how they treat the same problem. Good market information is poor and highly asymmetrical. The absence of these requirements for beneficial competition can mean that competition is harmful to patients and society.

1.2 Managed Competition As A Possible Solution

These serious misfits between the attributes of clinical medicine and the requirements for competition led Enthoven 1988) to develop the theory of managed competition. To overcome these forms of market failure, Enthoven emphasized competition between comprehensive health care plans and stipulated several requirements for a fair and beneficial market, such as universal health insurance or access, coverage of a common set of benefits, risk-adjusted contracts and good comparative information on quality, efficiency, and costs. He also held that health care markets had to be actively managed, because providers had proved so clever in manipulating or circumventing rules. This he called ‘managed care’ rather than ‘regulated competition.’

Managed competition won critical acclaim and spawned international efforts to proselytize it as the ‘only practical solution’ to soaring costs, though the model had serious flaws. It assumed that some people (managers) can be trusted and others (physicians) cannot; it did not solve the problems of uncertainty or contingency but rather tucked them inside the health plans; and it led to oligopolies, which minimize price competition (Light 1995b). New businesses and a new industry developed to create health care markets and varieties of managed competition by monitoring services and bills, changing clinical behavior, and organizing providers into ‘preferred provider organizations’ and ‘network HMOs.’

1.3 Proliferation And Variations

A signal event occurred when Prime Minister Margaret Thatcher decided in 1989 to transform the world’s largest health care organization, the National Health Service, from an administered service to a market model of competitive contracts between purchasers and providers. Other governments, notably New Zealand and the Netherlands, followed suit. By the mid-1990s, however, most had pulled back from implementing markets in health care, as they came to realize that price competition could cause service dislocations, cost shifting, increased inequality, reduced choice, reduced care, and increased costs over government-run programs (Light 1997, Social Science & Medicine, special issue 2001). Some countries such as the United States did little to prevent adverse selection, service dilution, and cost shifting. In the meantime, important European variations on American models developed such as ‘planned markets’ and ‘quasi-markets’ (LeGrand and Bartlett 1993, Saltman and von Otter 1992). Behind them was the realization that markets themselves are never ‘free’ but rather structured and regulated to reflect a society’s values and judgments about the limits of competition.

2. Performance Assessment

It has proven difficult to assess the performance of health care markets and different competitive schemes because changes are introduced wholesale with no controls, or markets are introduced simultaneously with changes in coverage. American employers, for example, have simultaneously shifted costs to employees, increased forms of risk-rating and exclusions in policies, used policy churning and within-group underwriting, reduced the amount of service or reimbursement in areas like mental health, and limited access to specialty services and then credited the savings to ‘competition.’ Most stakeholders do not seem interested in well-functioning markets like the one developed by Enthoven. They want to save or make money, as the case may be. Reflecting a policy bandwagon more driven by conviction than scientific evaluation, the most systematic external analysis of research on US health care markets found that among hundreds of research articles, only a small percent systematically compared HMO performance to some alternate delivery model (Robinson and Steiner 1998). Evaluation of the market reforms in New Zealand also found the measures seriously flawed, efficiency no greater, health gain no greater, and fewer services leading to greater unmet need (Ashton 1999).

Operationally, the best tracking system in the United States reported that ‘few private employers offer employees a choice of plans, give employees financial incentives to choose economical plans, or provide information so that employees can evaluate the quality of the care they receive—three hallmarks of managed competition’ (Long and Marquis 1998, p. 1). The well-designed studies showed that managed care organizations reduced the high utilization rates and prices found in the United States, but there were no controls for better health status of enrollees which could explain lower utilization. Reinhardt (1996) summarized the American scene as employers hiring corporate health plans as ‘bounty hunters’ to reduce costs—no questions asked. Buyers have paid little attention to effects on quality. Zelman and Berenson (1998), two of the architects of managed care markets, concluded that the corporations took early large profits by selecting healthier and wealthier markets and patients, while compromising on quality. Now that most of the excess has been squeezed out of prices and utilization, it is unclear how corporate health plans will reward investors. Stung by widespread criticism and political backlash, competing plans have eased up on managing utilization to such a degree that they resemble the open choice of fee-for-service that originally prompted the development of health care markets and managed care organizations (Freudenheim 2000).

In other countries, Hsiao (1994) evaluated the impact of introducing health care markets in several Latin American and Asian systems and reported higher costs, reduced access, increased inequality, and profiteering. Evans’ (1997, p. 427) international assessment concluded that ‘… greater reliance on the market is associated with inferior system performance—inequality, inefficiency, high cost, and public dissatisfaction …’ Stocker et al. (1999) reported that market-based reforms in Latin America are driven largely by American health insurance or other corporations who have taken the early profits out of American markets and now seek high profits in new countries by buying government support. Meantime, backlash to health care markets in the UK and New Zealand led to ousting the ruling party that installed health care markets, and substantially dismantling the health care markets in order to foster cross-sector partnerships and develop community-based programs that integrate public health with clinical services. Competitive markets are regarded as inherently anathema to community and public health.

A central challenge posed by health care markets is that they are costly to start up and operate. Good market information, contracting, monitoring, and managing together cost about 10 percent of revenues, so that comparable savings on clinical services must be achieved just to stay even. Another problem, related to what Hsiao found in several other systems, is that proper markets are often not set up with the necessary information and safeguards against inefficient but profitable strategies.

2.1 Contributions

In response to criticisms, market-oriented research has made a number of contributions. Health care markets evolved earliest and most extensively in the United States, as employers self-insured and began to ask new questions such as, ‘Which services are most costeffective? Which providers have the lowest costs and prices?’ To answer such questions, new statistical techniques, methods, and theory were developed to measure effectiveness and efficiency, identify low-cost providers, estimate risk adjustments, and compensate for imperfect information (Folland et al. 1997). Accountability, performance, consumer satisfaction, and quality have become much more visible and have led to serious efforts to measure them. Health care market thinking has spawned a new and wide range of strategies for delivering more cost-effective care, even if those strategies do not themselves entail much market-like behavior. The major reports from WHOEurope and the London School of Economics, for example, describe new developments in priority setting, contracting, capital formation, performancerelated pay, decentralized management structures, and consumer involvement that would not have occurred without the radical challenge posed by market-like thinking (Saltman et al. 1998, Mossialos and LeGrand 1999).

2.2 Limitations Of Health Care Markets

Restructuring clinical services into markets of corporations bent on growth and profit is likely to drive up costs in the long run, abetted by the important natural advantages of sellers (providers). They diagnose, prescribe, and treat. They control the clinical record that determines charges. They also have the patient’s loyalty, if not dependency. A second structural problem in many health care markets is that each insurer or plan contracts with most of the providers in a given market in order to offer subscribers the widest choice possible. But that means no real competition is possible, because each provider in effect ‘competes’ against himself. This practice can lead to the third limitation, that there are so many plans and policies that no one can identify or evaluate real differences. In a sample of 2,277 patients, Grembowski et al. (2000) found there were 189 different provider organizations and 755 different policies. Behind so many policies and plans are high costs for designing, marketing, and managing them, and such numbers far exceed what one finds in real competitive markets.

At a micro-, empirical level, Rice (1998) has summarized studies documenting several practical problems. First, the preferences of patients and employers are not fixed but are affected by prior experience, current interactions, and advertising. This poses ‘a very big problem’ for researcher and competitors as well as for economic theory, as do problems posed by uncertainty and contingency. Second, consumers’ choices do not necessarily reveal their preferences and may be poor judges of them. Third, Rice observes, consumers have poor market information, and fourth, when they are given it, studies find they sometimes ignore the most relevant data. Finally, a majority of users are also unable to understand basic labels, instructions, and policies (Parker et al. 1999). What, then, actually takes places in health care markets, especially when ‘consumers’ do not consume or buy, even though standard texts characterize them that way (Follard et al. 1997, p. 21)?

3. Casting A Wider Research Net

Studies reviewed by Rice indicate there are variables not now being captured in economic models and research. These have been the focus of the burgeoning field of economic sociology, which attends to the influence of affiliations, networks, institutions, and culture, as well as to the role of power, hierarchy, and the past in shaping ‘path-dependent’ behavior (Smelser and Swedberg 1994). In a classic article, Granovetter (1985, p. 481) showed how economic behavior and institutions ‘are so constrained by ongoing social relations that to construe them as independent is a grievous misunderstanding.’ What passes for ‘rational decision-making’ differs substantially from one nation to another (Dobbin 1994) and even from one corporation to another.

Economic behavior begins with cognitive and cultural categories that get combined into scripts which actors routinely use in deciding what they value, buy, or sell (DiMaggio 1997). These scripts allow actors whose capacity for rationality is bounded by their ability to filter, sort, and apply what they know through ‘selective attention’ (Lindenberg 1998). The sociology of microeconomics, or actual market behavior closely observed, looks more like a negotiated construction of a reality that the parties can live with, even if front-stage behavior conforms to the scripts and symbols of market competition (Hughes et al. 1997). Institutionalized routines, once established, define paths which others follow, making future actions ‘path dependent.’ Most industries (and certainly health care) are ‘oligopolies guarding carefully differentiated niches through strategies that aim to preserve rents by avoiding ruinous competition’ (DiMaggio 1998, p. 700).

Key dimensions for analyzing economic interactions in health care are: (a) the relative frequency of transactions; (b) their relative complexity; (c) their relative specificity; (d) their relative size and risk; (e) their relative quality of information; and (f ) the degree of social relationship over time. Each of these continua must be assessed in terms of each major party affected. Sociological dimensions of the relationships between parties in an economic transaction include: (g) the degree of autonomy vs. mutual obligations between the; (h) the degree of tightness or looseness in the network or organization; (i) the size of the organizations or networks; and ( j) the structure of power relationships. This approach is likely to deepen our understanding of health care markets in the future.

At a second level, the concept of ‘health care markets’ and its recent rise to dominance in certain countries, but not others, needs explaining. In a historical study of the ‘conceptions of control’ that prevail in a given industry from one period to another, Fligstein (1990) has described how a crisis in an industry prompts its leaders to construct or select a model of their business and its realities that will provide them with a coherent account of what went wrong and how to succeed in the future. The theories of price competition and managed competition in the late 1970s and 1980s seemed to have been embraced by payers for these reasons. Fligstein notes that the prevailing conception is interpreted as suits individual leaders, an observation that conforms to the selective and partial ways in which corporations and governments implement theories for how to have costeffective models of health care markets. As a result, health care markets has become an international business and policy movement, spurred by international consulting firms, even as some countries have spurned them. The World Bank, the International Monetary Fund, and other major lenders began to require, or strongly urge, scores of developing countries to restructure their services into health care markets as a condition for receiving financial help with their economies (World Bank 1993, Stocker et al. 1999).

Selective and partial implementation probably ex-plains why managed care and managed competition have not resulted in greater efficiency or better services in some countries and why they have held cost increases at bay in the United States for only a few years. As the crisis of sharply increasing costs during the 1980s resumed in 2000, employers were concluding that health care markets as a ‘conception of control’ could not hold down costs and were losing faith in it (Freudenheim 2000). Like leaders in some other countries, they may start to search for a new conception of control, one that will explain why the health care markets of the previous 20 years were only partially successful and how to manage costs more effectively.

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