Managed competition doesn’t work the way its advocates think it works. Despite glowing descriptions of the Federal Employee Health Benefits Program (FEHBP) by Alain Enthoven and equally effusive praise from some of our friends on the right, the FEHBP is deeply flawed. The versions created for state employees and many college and university employees have these same flaws. Managed competition in Medicaid also shares those flaws – even though it may still be an improvement over traditional Medicaid.
A Kaiser study of the Florida Medicaid program found that:
- About three in ten enrollees were not aware they needed to choose among competing private health plans.
- Over half of those who were aware had difficulty making a choice.
- Four in ten enrollees appear to have been assigned to a plan by the state rather than choosing one on their own.
Had Kaiser investigated the FEHBP or any of the various state and university health systems they would have discovered similar lack-of-information and lack-of-understanding problems. Kaiser researchers seem to think (1) they are studying a consumer choice model and (2) they have found flaws in that model. They are wrong on both accounts.
In Florida Medicaid, private plans are not competing for enrollees based on price. Enrollees don’t pay any premium and the plans get the same payment from the state, per enrollee, regardless of the services they are expected to use. Moreover, since the plans aren’t competing on price, they don’t compete on quality either.
What incentives does a Florida health plan have to improve its diabetic services and seek out and recruit diabetic patients? It has a negative incentive. The diabetic is likely to incur above-average costs, which means that each diabetic enrollee is likely to generate losses rather than profits. Indeed, if the plan thought it could get away with it, its economic incentive is to advertise that it is a lousy plan for diabetics and for anyone else who expects to have above-average health care costs. Thus, all of the normal benefits we expect from market competition are absent.
Whether it’s Florida Medicaid, or any other managed competition system, health plans do not communicate with, seek enrollment of, or otherwise compete for patients with special health problems. If anything, they compete to avoid the sick and enroll the healthy. (See our treatment in Lives at Risk here.)
The exception is the Medicare Advantage program, where Medicare pays a risk-rated premium that reflects the patient’s expected costs. In this program, special needs plans specialize in the treatment of patients with multiple chronic conditions, and they actively seek their enrollment.
The lesson: Competition, consumer choice and markets work in health care, provided they are not saddled with perverse incentives.