Managed Care Is Inherently Unethical and Should Be Scuttled

Robert P. Gervais, MD


Dear Dr. Spaeth:
I was pleasantly surprised to receive your letter which briefly discusses the ethical concerns I have about the managed care organization (MCO) philosophy. The theoretical underpinnings of the MCO concept are wrong on both utilitarian and moral grounds. Having made such a sweeping assertion, let me attempt to explain my position which many regard as extreme but others view as simple common sense.

My critical thesis of the MCO philosophy hinges on what I have chosen to label the premium-claim problem. I define a claim as a payment mechanism or a fee paid by patients either directly or indirectly which by its very nature allows patients and providers to engage in mutually beneficial exchanges. I will define a premium as a payment mechanism or a fee paid by a consumer to prepay for the consumption of health care which, by it's very nature, precludes patients and providers from engaging in mutually beneficial exchanges.

All successful economic exchanges must confer to each participant a mutual benefit. In other words, both participants in an economic transaction must believe that a positive gain will result from their exchanges. In order to facilitate mutually beneficial exchanges a fee is used.

Both health care systems --- classical (claims as payment) medicine and managed care (premium as payment) --- collect a fee for providing their services. It is from this different fee (i.e., claim and premium) that profits are distributed to each member of the health care team and, it is this difference in the payment mechanism which assures the difference between both systems. But the mechanism of payment experienced by a particular provider is not the important factor to consider when discussing which system will deliver continued quality health care. The key factor to analyze is the fee from which profits are derived because it is the latter which will direct the allocation of health care resources and ultimately guide the behavior of providers.

Because a MCO provider derives profits from premiums, the profit motive will alter the behavior of the MCO provider such that over time the latter will belong to a different profession from that of the classical provider. Restated, if a provider ultimately derives a livelihood from a premium, the latter ceases being a member of the classical medical profession in order to become a de facto member of the insurance industry.

It is obvious that a classical physician and a MCO provider must adopt diametrically opposite mindsets. This is so because the classical provider hopes to prosper financially by submitting claims after attempting to cure the sick (i.e., mutually beneficial exchange) while the MCO provider seeks to gain financially not only by collecting premiums from healthy clients but by also avoiding the sick (the antithesis of a mutually beneficial exchange).

A simple thought experiment will be used to illustrate my point. When a classical provider walks into a waiting room filled with treatable sick patients, the classical provider is pleased because profits are likely. But, when a MCO provider walks into a waiting room filled with the sick, the latter is stricken with angst if not with acute depression because a financial loss is inevitable.

Before critics succeed in diminishing my arguments they must prove that human nature is not what it is, that incentives don't matter, that mutually beneficial exchanges are irrelevant, and profits have no economic function.

In my view, proper incentives matter. If providers are financially rewarded for adopting the mindset of the insurance executive they will alter their behavior in order to serve the needs of the insurance industry rather than the needs of the sick. The old German folk saying brought to us by the economist Ludwig von Mises sums it up thus: Wes brot ich ess das lied ich sing, which translates as "Whose bread I eat, his song I sing." Proper incentives are essential to assure the continued excellence and entrepreneurship which were the hallmark of American medicine.

In my view, a MCO provider cannot engage in a mutually beneficial exchange with a sick patient. Why? Because a MCO provider profits by having access to a healthy client list but loses financially by curing the sick. For a mutually beneficial exchange to occur, the patient must expect to gain by having a disease cured and the provider must expect to gain by being paid for curing the sick. Let me add that without the preservation of mutually beneficial exchanges, the patient-doctor relationship of trust is impossible.

Why did economists and insurance executives, etc., concoct the MCO concept? I disagree with those who maintain that the primary goal of MCOs was to decrease physician incomes. I contend that economists were cognizant of the fact that reducing all physician incomes to zero would yield savings approximately 5 percent of the health care pie (after subtracting taxes and overhead expenses). Some economists felt compelled to devise a new system which would yield meaningful savings. Real savings could be assured, it was correctly reasoned, by devising a system which placed providers at financial risk not only for providing their services but also for admitting patients to hospitals, for ordering diagnostic tests, and for being entrepreneurial. Personally, I can't conceive of a better system to extinguish the entrepreneurial spark than the MCO system. I would venture to guess that modern cataract, knee, hip, and heart surgery would not have seen the light of day if MCOs had dominated health care since 1950.

So far, this lengthy discussion has persuasively argued that the managed care philosophy must fail on utilitarian grounds. But, can it be moral? I contend it cannot because the contract which the consumer signs when joining a MCO is fraudulent. Why is this so? Because the MCO contrives to keep patients ignorant of the fact a MCO provider regards the sick patient as a liability rather than an asset and there is no genuine mutually beneficial exchange.

Let me conclude by stating I am in complete agreement with you, "the problem is in us." Physicians must shoulder much of the blame for allowing the managed care juggernaut to achieve its position of dominance in health care. Physicians should have recognized the Faustian bargain thrust upon them for what it is and summarily rejected it.

I remain adamant: Managed care is wrong on both utilitarian and moral grounds and cannot be fixed. It should be scuttled and allowed to sink to the depths whence it came.


Dr. Gervais is an ophthalmologist in Mesa, Arizona.

Originally published in the Medical Sentinel 1999;4(1);34-35. Copyright ©1999 Association of American Physicians and Surgeons (AAPS).