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Economic and Quality of Life Outcomes: Managed Care Perspectives

Economic and Quality of Life Outcomes: Managed Care Perspectives

A variety of economic factors have created a growing demand for health care reform and the rapid expansion of managed care plans. Absence of a clear, commonly accepted definition of managed care constitutes one of the major difficulties in constructing a useful dialogue about managed care and its likely effects. This paper defines basic managed care models and outlines for each the degree of financial risk and reward to the provider and of internal (vs external) control of care. This transfer of risk to the provider is a key aspect of managed care and brings with it an increase in the physician's freedom to choose appropriate care for patients. The potential impact of managed care on quality of life measures is also discussed.


Managed care has expanded beyond an experimental process that combined insurance and delivery of care to become a major component of much of the health care service delivery market. Fundamental changes in the incentives facing every participant in the health care delivery process call into question the potential impacts of managed care upon cost and quality dimensions of outcome. Even if the incentives are ignored, the new organizational forms of service delivery that arise around managed care organizations make inadvertent lapses in quality a potential.

On the other hand, many have argued just the opposite [1,2]: The integrated nature of the managed care organization makes for higher quality care. Having physicians work in a group setting with constant peer review creates the potential to identify poor quality practices more rapidly. Because providers/insurers in the managed care system have a strong incentive to "maintain health," they have an incentive to examine how care is delivered, what care is delivered, and which type of provider is "best" for providing that care.

The empirical evidence on quality of care within managed care organizations is generally favorable [3], but the results contain significant uncertainty. Managed care appears to use fewer health care resources in treating patients (primarily hospital care), to use more preventive services, and to have mixed results with regard to outcomes. There are exceptions to these generalizations in terms of special populations, and some managed care populations and entities have yet to be competently studied. The results primarily apply to commercial enrollees in health maintenance organizations (HMOs). The nonclinical aspects of quality have been particularly ignored. Patient satisfaction has received relatively little attention as an outcome until recent years. Further, quality of life outcome comparisons between managed care and fee-for-service medicine have not been made.

As managed care organizations experiment with alternative organizational forms to achieve favorable cost and quality outcomes, they impose different levels of financial incentives and managerial controls on providers. This paper examines the implications of these changes generally and briefly applies them to quality of life and cancer care. The paper will address three interrelated questions:

1. What are the economic, social, and political changes that are motivating transformation of the health care system?

2. What are the fundamental characteristics of managed care that influence the financing and delivery of health care services?

3. What are the economic and quality of life implications of managed care for the care of cancer patients?

This paper provides a background of the managed care movement, reviews the economic and political environments changing the health care delivery system, defines managed care and discusses the economic motivations causing its growth, discusses the transfer of financial risk to providers under managed care systems, and explores the impact of managed care on quality of life.

Setting the Stage

As we move into the era of managed care, it is important to understand the current health care system and how that system has contributed to the changes being proposed. This section describes selected aspects of the health care financing and delivery system that are particularly relevant to managed care, and then briefly highlights problems or issues that we face that are motivating change in the system.

Third-Party Payment

The financing and delivery of health care services in the United States are characterized by a number of features that have contributed to rapid cost increases in the system and, thus, have led to the interest in managed care as a means of controlling those costs. Figure 1 presents a simplified schematic of the relationships among consumers/patients, providers (hospitals, physicians, and others), and insurer. Unlike the relationship that exists between the consumer and provider for most goods and services, health care services are characterized by the presence of an active "third party," the insurers. The demand for and effects of insurance have been well documented [4]. The problem with having insurance intervene between consumers and providers at the time that the decision to seek and apply care is made is that the normal discipline of the market is reduced.

From the consumer's perspective, health insurance is an important and valuable product because the need for services is highly uncertain. That lack of predictability and the financial risk consumers face yield an important benefit of insurance [4]. However, once insurance is purchased, the price of health care services to the consumer (patient) falls and the "moral hazard" effect induces individuals to consume more services than if they had paid full price [5 ].Once heavily insured consumers become sick and need services, the cost of those services is essentially zero. Therefore, these patients have no incentive to demand an efficient quantity of services from a social perspective. As long as additional services generate some value to the consumer (no matter how small), those services are demanded.

Similarly, providers have no financial incentive to limit or manage care because they are generally paid based on the quantity of services delivered. This payment system, called fee-for-service for physicians and billed charges for hospitals, rewards providers financially for delivering more, not fewer, services. Consequently, the incentives of both providers and consumers (patients) are in line. Naturally, professional ethics prohibit totally inappropriate care, but if there is ever a question of the value of services, both providers and patients have the incentive to order more services [6].

The traditional role of the insurer is to collect premiums from consumers (the patient, firm, or government) and pay the provider for delivery of services. It would seem that insurers would be concerned about the quantity and cost of services provided. However, premiums adjust for the experience of the insured population to minimize the risk to the insurance entity. Insurers can essentially pass medical expenses on to purchasers. The passive role played by insurers when paying for care and raising premiums to cover their "average" cost facilitated the rapid expansion of health care costs. Only in recent years have the purchasers and, as a result, the payers begun seriously objecting to the payment increases and looking for ways to control costs. These relations have allowed some of the problems discussed below to exist and form the basis for the proposed role of managed care.


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