The Rise of Managed Care --- Is Capitalism to Blame?

David T. Springer, MD

Managed care has been appropriately criticized for overt and hidden restriction of medical care conflicts of interest, invasion of the doctor-patient relationship, and greatly diminished confidentiality. Observing the increasing corporate takeover of medicine, many blame capitalism for the rise of managed care practices.

Critics, however, fail to recognize health care today has few characteristics of a free medical marketplace. The practice of medicine is, in fact, constrained by an extraordinarily high number of regulations, making informed and free economic exchanges between doctor and patient a rarity. Distortions in the system include Medicare and Medicaid price controls and regulations, tax-advantaged employer provision of medical insurance, mandated insurance benefits, community rating laws, coding regulations, and ERISA legislation favoring managed care, to name a few. Many of these well-intended policies have had the unfortunate result of cost-shifting, causing expensive insurance premiums and creating large numbers of uninsured.

These regulations have set up distortions in the marketplace making it impossible to ascertain the true cost of services. The rise of third party employer-provided insurance is illustrative. It began when the federal government established wage and price controls during World War II. Employees wanting a raise, but limited by the wage freeze, were allowed to receive medical insurance as a tax-free benefit. The self-employed, however, were not granted the same tax treatment. This created a situation, over time, in which tax-free medical insurance benefits became an expected part of one's wage package, instead of paying for the same benefits after tax. Workers demanded low out-of-pocket expenses and succeeded in being offered comprehensive low-deductible insurance. In this environment, the cost of medical services became disjointed from free market forces.

Managed care became attractive to employers by promising to provide acceptable levels of care while saving them money. Their concept of acceptable levels of care diverged significantly from that of doctors and patients, yet employers were the ones making the decision as to what kind of insurance to buy. Initially, the number of complaints were small, in part, because HMO enrollees were generally healthier than the general public and only a small percentage of people got significantly ill in a given year. Over time, more HMO patients began to get ill, and managed care, trying to protect their bottom line, responded with more restrictive policies. As patients began to feel the impact of these restrictions in larger numbers, complaints increased dramatically and managed care companies were then forced to modify some of their practices (although the core methods remain unchanged).

Free market critics also blame managed care's pursuit of profits as destructive to the field of medicine. It is actually managed care's taking advantage of the distortions in the marketplace that is so distasteful. Condemning profits, per se, is tantamount to criticizing a free society. To paraphrase Friedrick Hayek, the free market is essentially the collective actions of free people interacting with each other in a spontaneous manner. For example, relatively few price controls and regulations, and almost no third-party payers, have allowed food to be plentiful and affordable for almost the entire population. How do producers, suppliers, wholesalers, and retailers cooperate effectively? They are all motivated by profit.

A truly free medical marketplace, not one that uses distortions for gain, holds the best promise for the future. Purchasers of insurance, however employed, would choose medical insurance depending on need, cost, risk tolerance, and value. Insurance would be individually owned and, thus, fully portable. The market would determine the price of medical services.

It is likely that prices would go down, as commonly occurs in markets where price controls and regulations have been removed. Patients would be more likely to opt for Medical Savings Accounts (MSAs). By paying their doctor directly, cost-consciousness, honest informed consent about treatment options, and confidentiality would be restored to medical practice, while reducing the possibility of fraud.

The free market seems "cold and uncaring" to those who hold onto the belief that social and economic engineering works. In fact, the excessive regulations, subsequent distortions, and unintended consequences of health care policy were the result of well-meaning and "caring" people. Those critical of capitalistic principles in medicine are usually desirous of a free market when it comes to other services or industries, yet medicine cannot escape the force of the market. Currently more regulations are being proposed in Congress to fix the old regulations that created the problems in the first place. No doubt more distortions and unintended consequences will follow. It is worth re-examining the characteristics of a truly free market in medicine to avoid another round of corporate socialism.


Dr. Springer is Assistant Professor of Psychiatry at Allegheny University in Media, PA.

Originally published in the Medical Sentinel 1999;4(4):144. Copyright©1999 Association of American Physicians and Surgeons (AAPS)