Sot. SC;. Med. Vol. 38, No. 2. pp. v-vii, 1994 Printed in Great Britain

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EDITORIAL

LET’S THINK SERIOUSLY ABOUT MANAGED COMPETITION

Other social scientists and active participants in health care delivery are less prepared than economists to contemplate using financial incentives and markets to achieve health care goals, as against the alternative of professional and administrative allocation of resources. Until recently the performance of such markets as exist-notably in the United States- has provided considerable justification for their scepticism.

Opposition to the introduction of market com- ponents into the health care system has rested on three main arguments:

(a) Adverse consequences for equity and/or quaIity : The simplistic version of this argument is simply that financial incentives are inconsistent with equity and that, reduction of input costs will diminish quality of care. More sophisti- cated versions postulate absolute trade-offs be- tween efficiency and both equity and quality.

(b) Market failure, associated with information in-

(c)

equality between patients and service providers, adverse selection and cost shifting: The essence of these criticisms is that conditions which are basic to the achievement of efficiency in com- petitive markets do not apply in the market for health services. Unequal bargaining power be- tween providers and users is conducive to monopolistic exploitation, and government regulation to promote equity provides incen- tives to ‘gaining’ in the form of cream-skim- ming and cost shifting by third parties and providers. Private service provision and risk pooling are injutionary: Multiple funders are unable to apply global limits to health care funding in the same way as governments, and competitive private insurers incur higher administrative costs than public monopolies. International comparisons of health expenditures over the last decade provide convincing evidence on these points.

On the other hand, all is not well with many existing health schemes. There is a sense of malaise and growing dissatisfaction in most developed countries about their capacity to deliver an adequate level of useful services to their populations within budgets which taxpayers will support. These feelings reflect steadily increasing real costs of ‘state of the art’ health care running up against lower actual and prospective rates of economic growth. The resulting

constriction of health budgets has resulted in lengthening waiting lists for hospital admission and other forms of overt rationing which are irksome to patients and providers alike.

In the context of a worldwide tendency to political conservatism, this has led in several countries to public expression of the previously unthinkable prop- osition that universal access, in the form of public underwriting of all needed services can no longer be afforded for the whole population. Various proposals to limit public benefits and to encourage private health insurance have been advanced. While these lilies are gilded by promised advantages such as freeing more services for the needy and generating the injection of new private funds into the health care system, they would lead to significant deterioration in equity, efficiency, and cost control.

Most governments and health bureaucrats recog- nise this, but are also finding that the classical strategy of incremental change-in other words, muddling through-offers a diminishing prospect of controlling either the problem or its political conse- quences. Nor do raising taxes and spending more on health services offer a way out, for reasons that do not simply reflect political fashion or inexpediency. There is wide agreement that current levels of health expenditure in developed countries are adequate to provide all services which produce marginal health benefits at least equal to their marginal costs, so that increased expenditure would reduce allocative efficiency in the economy as a whole.

In these circumstances, the obvious policy direction is to look for ways of increasing efficiency within the health system, so as to increase the health outcomes from the currently available level of resources. Advo- cates of freer markets have pointed with some justifi- cation to the widespread occurrence of ‘government failure’ as the counterpart of ‘market failure’ cited by their opponents. Public ownership and control has been challenged with respect to the production and distribution of many goods and services and there is no intrinsic reason for exempting health care from this reappraisal. Efficiency, in the sense of lower unit costs of outputs-i.e. getting more for less-is as unequivocally good in relation to health services as to any other product, all other things being equal. This prompts a further look at the arguments cited above against competitive markets in health care.

First, the portrayal of a simple trade-off between efficiency and equity/quality is misleading, even in theoretical terms. It is only true at what economists

vi Editorial

call a “production possibility frontier”, when all technical and organisational opportunities have been exploited. In all other cases, it is possible to make arrangements pushing the production process closer to the frontier. by which it would be possible to have tnore efficiency without sacrifice of equity, or even more of both. In the real world, examples of un- necessary, ineffective and needlessly elaborate care are widespread. Their elimination and other steps to increase public sector efficiency would tend to benefit the less wealthy, since it is they who bear the brunt of most forms of rationing. With regard to quality, a recent Rand-UCLA study has demonstrated that, provided adequate quality assessment procedures are implemented, financial incentives resulting in more efficient use of hospital beds does not impair the health outcomes of inpatient treatment [I. 21.

Secondly, various kinds of market failure evident in unregulated competition have, until recently, fur- nished grounds for public regulation and centralised allocation of health care resources, especially in the hospital sector. However, a number of related con- ceptual and technical advances during the last 20 years have transformed the competitive agenda. The unifying concept is ‘managed competition’. which combines a regime of pro-competitive regulation and a balanced market for services, in which the pur- chasers are not powerless individual consumers but a new category of substantial and cost-conscious agencies, created for the purpose [3]. Other advances which have made the concept potentially operational include the development of quantifiable output measures, especially for hospital care [4]; the formu- lation of sophisticated risk adjusters capable of making cream-skimming unprofitable [5]; and a revo- lution in information technology which has massively increased the capability and reduced the cost of transaction processing and statistical analysis. Taken together, these innovations have severely weakened the force of the ‘market failure’ arguments.

The third argument against the competitive ap- proach--that it is inflationary. as compared with the expenditure control exercised through centralised budget ceilings- is not so easily countered. Managed competition will not by itself contain total health expenditure but it provides a structure which extends the ability of governments to cap total expenditures [6]. On this view, managed competition might be described as a system of decentralised and efficient allocation of health care resources. within a publicly imposed global budget constraint.

Consequently-at least in principle-managed competition offers the prospect of adding increased efficiency to the access, equity and cost constraint which most developed countries have attained through national health and health insurance pro- grams. On the other hand, it is a largely untested concept, which will incur substantial transitional costs and few short-term benefits. Moreover. the projected benefits will only be secured through pro-

found changes in the structure and culture of the health care system. It therefore arouses considerable concern among those whose interest would be di- rectly affected and widespread lack of enthusiasm from those who find the concept unfamiliar and/or the benefits doubtful.

What, then. is the case for supporting managed competition or. at the very least. for putting it high on the list of strategic options for national health policy? Why not continue to muddle through. cs- pecially as it would be, at best. a medium-term solution for non-critical problems?

The case is twofold. The first argument has been alluded to. One reason for supporting managed com- petition is to avert ill-considered privatisation initiat- ives which have some intuitive appeal in the tougher and more pessimistic world of the 1990s. It is not enough simply to deny the proposttion that devel- oped countries can no longer afford universal pro- grams. Nor is it enough to cling to all aspects of existing programs in the fact of widespread belief (true or false) that they are in deepening trouble. The first Icg of the cast for managed competition is that the likely alternative to it is not the maintenance ol the SIN/I~S yc40, but something much worse.

The second argument involves recognising an (m- portant element of truth in the marketeers‘ criticisms of regulation and centrally directed allocation. This is that. over long periods- which may hc counted in decades rather than years the absence of rational financial incentives (which usually tncans the opcr- ation of perverse incentives) erodes innovation and etficiency. and conducive to reduction of &or-t and the protection of privilege. This is no Icss real for being a gradual process. Most of our health in- surance, benefit and subsidy systems arc now decades old, and their age IS showtng. They wcrc implcmcntcd when output measurement was undcvclopcd. when simpler technologies made contra1 allocation easier. and when national rcsourccs seemed to he continu- ously expanding. In the 1490x none of thcsc con- ditions applies and the time has come to think harder about structural changc.

In this context managed competition is an idea whose time. If it has not already come. IS rapidly approaching. While there arc sceptic> among econ- omists (at the ends of the political spectrum rather than in the middle). non-economists may find much to commend in terms of its capacity to cnhancc dccentralisation of decision making. diversity In styles of dclivcring health scrviccs. the widening of con- sumer choice in areas where that choice makes sense, and comprehensiveness in health care delivery and organisation.

The message is that all participants m health care systems might now set aside preconceptions drawn from observation of unregulated competition and consider how they might influence the development of managed competition agendas in their respective countries. since managed competition is not a rigid

Editorial vii

model, more a generic term describing a range of possible models. Models already proposed encom- pass systems as diverse as the British NHS and the extreme pluralism of the United States. Differences include the scope of services included, the identity of budget-holding purchasers, the extent of competition between them, the degree of price competition be- tween providers, the roles of public and private sectors and the pervasiveness of regulation. Within the broad parameters necessary for viable provider markets, there is ample scope for tailoring managed competition systems to accommodate structural and cultural characteristics of individual countries, as well

competition concept. The proceedings will be pub- lished in a special issue of this journal.

REFERENCES

I. Kahn K. L., Keeler E. B., Sherwood M. J. er al. Comparing outcomes of care before and after im- plementation of the DRG-based prospective payment system. JAMA 264, 1984, 1990. _ . _

2. Rogers W. H., Draper D., Kahn K. L. et al. Quality of care before and after implementation of the DRG-based prospective payment system: a summary of effects. JAMA 264, 1989, 1990.

as to achieve different national mixes of health and 3. Enthoven A. C. The history and principles of managed

social goals. competition. Hlfh Affuirs 12, Suppl. 24. 1993.

This process will be taken a stage further at a 4. Fetter R. B. et al. Case mix definition by diagnosis

conference organised by the Dutch/Flemish Associ- related groups. Med. Care 18, Feb. Suppl. I. 1980.

5. Van de Ven W. P. M. M. and Van Vliet R. C. J. A. How ation for Health Economics entitled ‘Forming and can we prevent cream skimming in a competitive health

Reforming the Market for Third-party Purchasing of insurance market?: the great challenge for the 90s. In

Health Care’ to be held on 26 November next, at Health Economics Worldnjide (Edited by Zweifel P. and

which a distinguished cast of speakers will be headed Frcch H. E.). Kluwer. Amsterdam, 1992.

6. Altman S. and Cohen A. B. The need for a national by Professor Alain Enthoven, author of the managed global budget. HIth A.&airs 12, Suppl. 194. 1993.