Why managed care cannot contain hospital costs--without rationing.

Abstract

Managed care has long been considered by many health policy analysts as a mechanism that can contain costs without intrusive governmental regulation or sacrifice of medical benefits. Indeed, managed care is the centerpiece of current efforts by business, Congress, and the Bush administration to slow the rise in health expenditures as well as the focus of the Winter 1991 volume of Health Affairs. We believe that this optimism is misplaced. While managed care providers historically have had significantly lower costs than other insurers, the rate of increase in their costs has been virtually indistinguishable from that of the fee-for-service sector. This is because managed care is subject to the same upward pressure on costs-resulting from a flow of new technology and rising wages-that other providers face. Unable to control these forces, managed care providers have instead kept costs below those of fee-for-service providers by using fewer hospital days. For example, health maintenance organizations (HMOs) traditionally have used some 30 percent fewer days than fee-for-service providers. During the 1980s, the growth of managed care, the introduction of prospective payment, and other efforts to contain costs caused a reduction in hospital days throughout the entire hospital sector roughly equal to that traditionally associated with HMOs. The result was a brief slowing in the rate of increase in community hospital costs. But this very success has made it unlikely that any conceivable further reduction in unnecessary days can have more than a slight, brief effect on the cost spiral. Indeed, despite the rapid diffusion of managed care in recent years, few additional days have been saved. In this Commentary, we argue that neither managed care nor fee-for-service providers will be