Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. II. Turbulence in general health care market


The conversion of most private health insurance to network-based managed care arrangements has been characterized as a purchaser revolution.1-3 Disgruntled with steeply rising prices in the 1980s and disappointed by their inability to capture the attention or concern of health care providers, buyers revolted. As with political revolutions or coups d’etat, they attempted to topple the dominant provider regime and in the process establish themselves as the ruling party. To accomplish this transformation, buyers of health insurance turned to managed care organizations to help them pursue better value for the money they were spending. Managed care organizations came from two diverse worlds. One group included what had once been counter-culture prepaid group practice that had become “health maintenance organizations (HMO)” in the 1970s.4 The other group came from the traditional health insurance industry, which had provided coverage through unmanaged products for these same purchasers. Many of these latter organizations entered into managed care by developing preferred provider organizations (PPO) and then later developed HMOs.5

The growth in enrollment in the principal forms of network-based managed care—HMOs and PPOs--was extraordinary during the 1980s and 1990s (Figure 1). HMO enrollment grew from about 12 million to 80 million from 1982-99 and PPO participation shot up from virtually nil in the early 1980s to 110 million lives by 1999. Taken together, as of the year 2000 nearly 200 million people receive their health benefits from providers participating in network-based managed care organizations (MCOs).

Figure 1. Managed Care Organization (MCO)Participation 1982-99

Managed Care Organization (MCO)Participation 1982-99

Sourse: AAHP

Throughout much of the 1990s there was a strong sense among buyers that their efforts to reconfigure the health care world had paid off. Premiums seemed to move inversely to managed care enrollment. By the mid-1990s the year to year changes were so low to suggest that price inflation in premiums had been stopped, at least in part, because of the efforts of managed care organizations. However, an inflection point occurred at about this time, both in terms of financial success of the managed care organizations and in premium trends for purchasers. Profits in the industry plummeted—among both for profit and not-for-profit plans-- and premiums started to rise as plans tried to return themselves to profitability. Plans made strategic withdrawals from selected markets and product lines to shore up their finances and to reduce some of the uncertainty that cast doubt on their investment appeal or even their long-term viability.6 By 2001, rates of premium increase were expected have returned to the double- digit levels of 1992 and 1993 (Figure 2).

Taken a whole, these developments suggest to many that managed care, or managed care-as-we-have-known-it, has run its course.7 What was designed to be a solution has become a source of problems in its own right. Its capacity for cost savings seems to have diminished rather than intensified over time. The promise of improved outcomes has yet to be delivered upon. Resistance to managed care models among consumers has strengthened rather than softened over time as more have experienced them. Relationships between health plans and their network providers seem to have deteriorated rather than improved, as managed care has become more widespread and pervasive. Consequently, many purchasers are no longer sure whether the gain from a managed care strategy is worth the pain it has evoked.

Figure 2. Trends in HMO Premiums 1988-2000

Figure 2. Trends in HMO Premiums 1988-2000

Source: AAHP and Mercer

  1. R. Hurley, “The Purchaser Driven Reformation in Health Care,” Frontiers of Health Services Management, 9(4):5-35, 1993.
  2. T. Bodenheimer and K. Sullivan, “How Large Employers are Shaping the Health Care Marketplace (2 Parts), New England Journal of Medicine, 338(14):1003-1007 and 338(15):1084-1087, 1998.
  3. J. Thompson, D. Draper, and R. Hurley, “Revisiting Employee Benefits Managers,” Health Care Management Review, 24(4):70-79, 1999.
  4. T. Mayer and G. Mayer, “HMOs: Origins and Developments,” New England Journal of Medicine312(9):390-394.
  5. D. Ermann, G. deLissovoy, J. Gabel, and T. Rice. “Preferred Provider Organizations: Issues for Employers,” Health Care Management Review, 11(4):29-36.
  6. Salomon Smith-Barney, Managed Care and Hospital Management Overview, New York: Salomon Smith-Barney, 1999.
  7. G. Savage, K. Campbell, T. Patman, and L Nunnelley, “Beyond Managed Costs,” Health CareManagement Review,, 25(1):93-108, 2000.