Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. D. Major changes in purchaser preferences may appear.


As purchasers encounter rising premiums, concerns about liability, a need to customize benefits to respond to a diverse work force, and a desire to promote more cost conscious consumption, they will experiment with new approaches to health benefits. There appear to be two principal directions in which purchasers may go in the future if they decide to give up on conventional managed care. One is to bypass existing managed care organizations and engage in direct provider contracting arrangements without the traditional middleman. The most notable current prototype in this realm has been the Buyers Health Care Action Group (BHCAG) in Minneapolis-St. Paul. BHCAG was established as a sophisticated model of contracting with provider- sponsored “care systems” that are liberated from having to carry out most administrative functions which remain lodged with the buyers’ group65. This model appears to have both garnered and sustained strong employer support. But many suggest that it is a model uniquely fitted to the Twin Cities market given the extensive managed care experience found in the purchaser and provider communities as well as within health plans there.

Despite the durability and apparent success of the BHCAG model to date, direct contracting by individual employers has remained remarkably underdeveloped, as have employer group purchasing coalitions. Correspondingly, despite much talk in the provider community about the virtues of “direct sales” the supply side of the direct contract market also has not flourished. Observers suggest a variety of reasons for the failure of direct contracting to thrive66. Most employers do not want to become engaged in the insurance business, nor accept the responsibility for extensive direct interaction with providers and the complex world of health care. Successful direct contracting arrangements would also entail building or buying a significant amount of administrative capacity. Some employers worry that these arrangements might heighten their liability for problems their employees might encounter with their health services. Providers have likewise proven to be tepid about these opportunities when they have been presented with them, for many of the same reasons they have struggled with risk-based payments from health plans and management of care across a full continuum. Thus, while neither party seems to like the prominent role of the managed care plan as middleman, the prospects of replacing them has not been enthusiastically embraced.

For some employers, the principal alternative to direct contracting on behalf of its employees is to give these workers a defined contribution, or a voucher, that would be designed to enable them to buy the equivalent health benefits that are currently being purchased on their behalf67. Though these models also remain underdeveloped, and mostly speculative, they could soar in use if employers begin to leave the health benefits buying arena because of rising costs or expanded liability due to federal policy changes. Critics caution that there are many uncertainties associated with individual insurance markets, as well as very limited consumer information to support informed choice-making. Consequently, it is unclear just how accessible coverage might be and how much the defined contributions might buy in this market rather than in a group health insurance market. Many tax policy questions would also have to be addressed. Health plans express concern that this model is a recipe for adverse selection as persons with expected costs will migrate to comprehensive products and individuals with good health will seek to cash some out their benefits while buying only catastrophic coverage.

Proponents suggest that entrepreneurs will rise quickly to either aggregate individuals into purchasing cooperatives analogous to mutual funds for buying stocks; or to provide other modes of exchange where cost-conscious consumers might shop for health services. A novel example of the latter is the newly formed HealthMarket, Inc.68 which attempts to link, through its website, consumers who pay membership fees with providers who are willing to have their bid prices for procedures posted on the website.

  1. T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
  2. K. Hallam, “A Big Problem for Health Plans: Some Providers Won’t Play the Managed Care Game,” Modern Healthcare, June 5, 2000, pp: 48-52.
  3. Pacific Area Business Group on Health, website.
  4. G. Harris, M. Ripperger, and H. Horn, “Managed Care at a Crossroads,” Health Affairs, 19(1):157-163, 1999.