Health Care Costs and Financing

More restrictive laws and consumer and investor anxiety have had an effect on managed care cost-cutting strategies

A combination of class-action, malpractice, and employee-benefits lawsuits peppered the health care industry during the 1990s, eventually eroding the legal shield health maintenance organizations (HMOs) claimed under the Employee Retirement Income Security Act. Yet it was commercial, not legal, concerns that moved HMOs away from aggressive practices, according to Gregg Bloche, M.D., J.D., of Georgetown University, and David M. Studdert, L.L.B., Sc.D., M.P.H., of the Harvard School of Public Health.

In a recent article, they note that Federal courts and State regulators have remade the rules of the medical marketplace, restricting the methods available to managed care organizations to control costs. Legal conflict, however, has had a larger effect through its influence on market actors' perceptions and expectations.

In anticipation of adverse legal outcomes and in response to consumers' and investors' anxiety, health plans changed business strategies, backing away from aggressive cost management, according to the authors. Today, aggressive utilization management, selective contracting with caregivers, and financial incentives to physicians to limit care play much less prominent roles in health insurance business strategy than they did in the mid-1990s.

Today, Americans with health insurance have more freedom to choose among doctors and hospitals and to obtain costly tests and treatments. Market pressures from angry and anxious consumers have been the main force behind health plans' retreat from tightly managed care. Investors' fears and health care providers' resurgent bargaining power have also been important factors. Nevertheless, the managed care industry continues to prosper, with stock values soaring in the past year. Managed care is giving insured consumers more of what they want but charging accordingly, conclude the researchers. Their work was supported in part by the Agency for Healthcare Research and Quality (K02 HS11285).

See "A quiet revolution: Law as an agent of health system change," by Drs. Bloche and Studdert, in the March 2004 Health Affairs 23(2), pp. 29-42.

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